DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, October 9, 1996

Russian Federation

Politics

Luzhkov Censures Political Rivals

· In a lengthy interview with Komsomolskaya Pravda, published Tuesday, Moscow Mayor Yuri Luzhkov leveled criticisms at political rivals Aleksandr Lebed, Viktor Chernomyrdin, Anatoly CHUBAIS, and Gennady ZYUGANOV in an apparent attempt to present himself as a potential alternative leader. Although LUZHKOV also denied that he plans to seek the presidency and proclaimed his support for President Boris YELTSIN, he did not rule out the possibility of becoming a presidential contender when YELTSIN leaves office.

Luzhkov blasted Lebed for suggesting that Yeltsin should step down at least temporarily in light of his impending heart surgery "It is just beyond me what moral right this man has to state his claims to power, a man who of his own accord consented to be part of the presidential team." He also reiterated objections to LEBED's Chechen peace plan, calling it an agreement dictated by bandits. LUZHKOV criticized CHERNOMYRDIN for lack of leadership skills. "First, [he lacks the] ability to reach strategic aims. There is no strategy for the country or the economy," he said. "Second, although he has the ability to be objective, [he has] an unaccountable liking for and connivance with the fuel and energy complex." He attacked CHUBAIS for his privatization polices, which were "a giant speculation and a defeat of the new Russia in the transformation of this economy." Moreover, LUZHKOV suggested that CHUBAIS' ambitions to power were `dangerous.' Communist leader ZYUGANOV was condemned for trying to gain power while the president lies ill.

With this interview, Luzhkov is placing himself squarely in the middle of the political fray. In addition,

another major political player, Yabloko party leader Grigory YAVLINSKY, who has kept a low profile since his poor showing in the June presidential poll, was heard from this week. He warned that the Kremlin power struggle has left the nation without an effective government. Instead of dealing with Russia's problems, the dominant political "clans" are concerned with "recarving spheres of influence and getting access to budgetary funds and revenues," reported today's Financial Times.

Fyodorov Charges Korzhakov with Extortion

· Former chairman of the National Sports Foundation Boris Fyodorov has lodged a complaint with the Russian Prosecutor-General's Office accusing former presidential bodyguards chief Aleksandr Korzhakov of extortion, Aleksandr Zvyagintsev, senior assistant to the prosecutor-general, told Itar-Tass today. According to Fyodorov, Korzhakov demanded that he pay him $10 million in cash and that $30 million be transferred to a secret bank account. Zvyagintsev stressed that the allegation will be investigated directly by the Prosecutor-General's Office, with assistance from investigators of the Moscow prosecutor's office, who are now investigating a June attempt on Fyodorov's life. FYODOROV previously aired allegations of corruption against KORZHAKOV in the press, but this is apparently his first official complaint to law enforcement.

Today's Izvestia published a set of materials gathered by its reporters during their efforts to investi

Today's News Highlights

Russia

Fed. Council on Chechnya

Dubinin in New York

Foreign Investment Figures

Intercon Special Feature

Insider's Outlook: An Eye on Russia's Political Future

European Republics

Zatulin on CIS Efficacy

Ukraine Share Tenders Planned

Lukashenko to Compromise

Politics-Economics-Business

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Wednesday

October 9, 1996

Intercon's Daily

gate the corruption charges made by Fyodorov during an interview with Russia's NTV on Sunday. The newspaper suggests that Fyodorov's accusations against Korzhakov were prompted by nothing but a desire to wreck an emerging alliance between Korzhakov and Security Council chief Aleksandr Lebed. Meanwhile, according to today's Moskovsky Komsomolets, KORZHAKOV soon plans to take the offensive by bringing libel charges against FYODOROV, adding that the former bodyguard's evidence will prove more substantial than the former sports fund chairman's. MK also says that Fyodorov's charges are aimed at destroying a LEBED-KORZHAKOV alliance, while suggesting that presidential chief-of-staff Anatoly CHUBAIS is behind the effort. Today's Moskovskiye Novosti concurs with this viewpoint, but does not believe that CHUBAIS' effort will succeed.

Federation Council OKs Chechnya Peace

· In contrast to the State Duma (lower house of parliament), which harshly criticized the peace initiative in Chechnya, Russia's Federation Council on Tuesday adopted a resolution endorsing the cessation of hostilities in the separatist republic. The resolution recognized the documents signed by Russian Security Council chief Aleksandr Lebed and Chechen rebel leaders in Khasavyurt, Dagestan, on August 31 as "confirmation of the readiness by the sides to solve the conflict peacefully," reported Xinhua. In line with recent official declarations on maintaining Russia's territorial integrity, the resolution emphasized that the government should move forward with the peace process, but at the same time must ensure that Chechnya does not secede from the Russian Federation.

Economy

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

Ruble = 5,425/$1.00 (CB rate)

Ruble = 5,420|5,430/$1.00 (buy|sell rates)

Dubinin on Russian Economy

· Russian Central Bank chairman Sergei Dubinin addressed the US-Russia Business Council in New York Tuesday, stressing that new mechanisms are being created to attract foreign investment and bring Russia's banking system to international standards, reported Itar-Tass. He pointed the reduction in infla

tion as the Bank's major achievement this year. "After several years of hyperinflation, we managed to bring money supply under control. Now, we can say with confidence that this year's inflation rate will not exceed 20_24 percent," said Dubinin. Annual inflation will not exceed 10 percent in 1997, according to official forecasts. Dubinin estimated that the Russian economy will grow by two percent next year. "This is a moderate increase, but it symbolizes a new stage in Russia's economic development after a hard crisis caused by the beginning of reforms. I am confident that the new stage opens broad opportunities for the development of cooperation with foreign investors," he said. Countries with favorable economic conditions, reliable business partners, and political stability receive the most investments, noted Dubinin. Therefore, Russia must abide by contracts under any circumstances and guard against insolvency by closely regulating banks, he said.

Dubinin encouraged foreign banks to open offices in Russia. The capital of all foreign banks in Russia currently comprises three percent of country's aggregate bank capital, he said. Dubinin said foreign banks' active participatation in the Russian banking system will help develop sound competition. According to DUBININ, Russia's hard currency reserves fell from $14 billion at the beginning of the year, to $13 billion, as of October 1. He attributes the drop to Central Bank intervention on Russian currency markets last summer. The reserves include about 300 tons of gold worth about $3.6 billion.

Foreign Investment Tops $9 Billion

· Cumulative foreign investment in Russia rose above $9 billion as of July 1, according to Russia's State Statistics Committee, reported today's Journal of Commerce. This figure does not include money received by monetary and credit regulators and the banking sector. Of this total, $2.005 billion was invested in the first half of 1996, nearly three times the $702 million invested during the same period last year. Credit from non-direct investors was the main source of this year's growth. Direct investments in company and joint venture charter capital accounted for 28 percent of all investment, at $566 million. One-third of foreign investment, $669 million, was channeled into industry, while $300 million was spent on government treasury bills, and $20.4 million on stocks and bonds.

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Politics-Economics-Business

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Wednesday

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Intercon's Daily

Intercon Special Feature

Insider's Outlook:

An Eye on Russia's Political Future

by Oleg D. Kalugin

squabbling may be disconcerting, and even scary, it is in fact a healthy sign of a patient coming out of lethargy, bracing himself for a major thrust forward.

This optimistic assessment is inspired by the spectacle of young Russians making their way to positions of power in the economic and political life of the country. True, in the early days of YELTSIN's rule there were GAIDAR, CHUBAIS, and other young enthusiasts—"lab assistants" as CHERNOMYRDIN used to call them. But all of them came to serve the fledgling democracy penniless, relying solely on their youthful initiative, brains, and vision of a resurrected Russia. The new wave of youth is a different breed. They have accumulated millions of dollars in the process of privatization and have developed their own solid financial connections and backing. They don't look to their superiors for approval; they want to be masters themselves. Most of them view western economic and political institutions as a model for Russia. But in their bold quest for power they are not averse to compromises and deals with people like retired General LEBED. Actually, POTANIN has already made some friendly gestures toward LEBED, although he is restrained in his moves by his ties to CHUBAIS who sees LEBED as his adversary.

It's a paradox of Russia's political life at this stage: CHERNOMYRDIN, CHUBAIS, and LEBED are in a triangle. The first two want to get rid of the third. And yet they would probably hate to see him go now.

The idea of LEBED resigning and joining the opposition is sending shivers through the ranks of his present associates in the Kremlin. For as long as LEBED is in, CHUBAIS and CHERNOMYRDIN can work against him as a team. They need each other badly to put up effective barriers to LEBED's relentless drive toward the presidency. However, if LEBED walks away, the shaky alliance of the former Gazprom manager and market-oriented politician will crumble. Neither CHERNOMYRDIN, nor CHUBAIS have a chance to defeat LEBED in an open contest. However, each will try to undercut the other and gain supremacy while YELTSIN is in charge, albeit in name only.

As for LEBED, he will emerge as a formidable leader compared to whom Communist ZYUGANOV will look like a collaborator. With his electorate of disgruntled millions and the newly-acquired support

The bitter jostling around the Kremlin succession had barely subsided, pending the resolution of Boris YELTSIN's health problems, when another conflict—this time inside Viktor CHERNOMYRDIN's government—burst into the open, raising anew the question: is Russia under any authority after all?

The rupture occurred after Rem VYAKHIREV, powerful chairman of Gazprom, made a blistering attack against the government over its decision to freeze the assets of the giant natural gas monopoly due to its failure to pay millions of dollars in back taxes.

For years the Russian government was identified with Gazprom, and with VYAKHIREV, known as a loyal friend of CHERNOMYRDIN. And while this new scuffle may look like just another sign of a deteriorating apparat, where personality clashes often overshadow the conflict of ideas, we are actually witnessing a painful process of choosing Russia's future economic course: whether the country continues to decline as an ersatz market, quasi-socialist state, or musters enough strength to develop as a genuine free market democracy.

It is now abundantly clear that two influential groups have emerged within the government which adhere to opposite philosophies on the content and method of economic policy. The first group represents seasoned bureaucrats of the Soviet era with CHERNOMYRDIN as its nominal head, and his first deputy Aleksei BOLSHAKOV as its chief spokesman. The second is led by another first deputy, Vladimir POTANIN who has recently visited Washington to meet IMF officials and whose advent to the Russian political scene was engineered by presidential chief of staff Anatoly CHUBAIS.

Two months ago, when an ailing YELTSIN was hiding from public view in a hunting lodge, the catchword for state affairs in Russia was "paralysis of power." Today, we may speak about the "fragmentation of power," whereby each of the governing structures is jockeying for position ahead of the resolution of the power crisis. While this kind of

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Wednesday

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Intercon's Daily

from the humiliated, but influential, former cronies and subordinates of YELTSIN—like chief bodyguard KORZHAKOV—LEBED may indeed become unbeatable.

Whether LEBED will lend support to the young turks in the government remains to be seen. The General's views on many issues of political and economic life are still in the process of formation. Hopefully his first exposure to the West and meetings with NATO officials in Brussels will speed up the process. Perhaps one day he will agree with what POTANIN said at the recent IMF conference: "We need to become like every place else where it's more lucrative to put money into stocks."

Ukraine Share Tenders Planned

· Ukraine's State Property Fund has announced plans to sell off a 26 percent stake in both the country's largest newsprint producer and its only bus maker. The Ukrainian government recently designated 208 companies to be privatized through strategic foreign investment. The Zhydachivsky paper company's authorized capital is estimated at 22 million hyrvnia (about $13 million), reported Reuters. Investors will be offered a 26 percent stake, while 51 percent will remain in state hands, 11 percent is owned by workers' collectives, and the remainder will be privatized through vouchers held by citizens.

The Lviv bus factory has estimated capital of 4.8 million hryvnia, said Reuters. The company recently began building electric-powered trolleybuses, and plans to increase overall production by 2,000 to 5,000 buses. The plant is only expected to produce about 1,200 buses this year, compared with output of 2,148 in 1995. Workers have not been paid for two months. Under the rules of the tender, investors are required to upgrade the factory and make it profitable within a designated period. A 26 percent stake will be sold to strategic investors, while the state will retain a 25 percent stake, 26 percent will be sold through voucher privatization, five percent is held by management, and another 18 percent is owned by workers' collective and two other companies.

Lukashenko Prepared to Compromise

· In an apparent reversal of his previous stance, Belarus President Aleksandr Lukashenko announced on Tuesday that he is ready to find a compromise with the parliament over their differences on the constitution, reported Xinhua. He told the heads of some Belarus media that he will suggest a compromise to legislators on Thursday or Friday.

Lukashenko and the parliament are at odds, and the battle has been acrimonious, over proposed changes to the country's constitution, the holding of a by-election to fill about 60 empty parliament seats, and the date of a referendum on the constitution.

European Republics

Zatulin Criticizes CIS Efficacy

· The Director of the Institute of the New Abroad Konstantin Zatulin told reporters Tuesday that, five years after the breakup of the Soviet Union, multilateral cooperation within the framework of the Commonwealth of Independent States (CIS) is experiencing an acute crisis, reported Itar-Tass. "Over 600 joint documents have been signed for these five years, the majority of which have not been implemented partly or fully," he said. Zatulin believes that the majority of the 12 member-states regard the CIS as a round table: "its participants choose what they like and reject what is required from them." He also noted that leaders of the former Soviet republics had met very seldom lately, while "intensify[ing] contacts outside Russia and without Russia."

Zatulin then charged that Ukraine, with support of the West, "tries to set up an organization to counterbalance Russia inside the borders of the former Soviet Union, thus establishing two centers in the post-Soviet space," said Itar-Tass. The first international scientific conference, devoted to an analysis of the consequences of the disintegration of the USSR and the formation of the CIS, will be held in Minsk on December 9-10.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Managing Editor

Alycia S. Draper, Rebecca Martin, Contributing Editors

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