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

Monday, November 18, 1996

Russian Federation

Politics

US Successfully Uncovers Penetration

· After the embarrassment of the GALKIN incident, US intelligence forces have redeemed themselves with the rapid arrest of a penetration agent, who was selling CIA secrets to the Russians. Saturday's capture of Harold NICHOLSON, a career CIA officer, was the result of a solid investigation and close cooperation between the CIA and FBI. "Clearly the post-AMES analysis and detection mechanisms the CIA and FBI put in place succeeded in the identification of NICHOLSON and his alleged espionage activities on behalf of the Russian intelligence service," said CIA Director John DEUTSCH in a press release issued today.

Nicholson came to the attention of the US intelligence community when he failed his polygraph examination. He previously served abroad as station chief in Romania, deputy station chief in Kuala Lumpur, and a trainer at "the Farm." Most recently, he served at the CIA counterintelligence center where he was caught photographing top secret information. He was arrested as he attempted to board a plane to meet his Russian handler in Switzerland. He was arraigned in Virginia today.

Duma Wants Campaign Money Scandal Probed

· The Russian State Duma on Friday voted 267-3 to urge President Boris Yeltsin to instruct the Prosecutor-General to step up investigation of a case against two YELTSIN campaign aides, initiated in June. The aides were detained by the Federal Security Service (FSB) on June 19, trying to leave the Kremlin with $500,000 in cash. The case was mentioned Friday in a transcript of a tape leaked to the Russian press, which allegedly featured presidential chief-of-staff Anatoly CHUBAIS, who also

lead the re-election campaign, talking about delaying the investigation of the case.

In the resolution proposed by the Yabloko faction, the Duma asked Yeltsin "immediately and unambiguously to lay down his position on illegal activities by state and private special services, involving complete eavesdropping, corruption of senior officials, and opening of criminal cases against them," according to Itar-Tass.

CHUBAIS made a rare TV appearance over the weekend and denied that such a conversation took place. "The article is part of an orchestrated campaign to discredit presidential power after the successful operation on Boris YELTSIN," he told Interfax. CHUBAIS said that former presidential bodyguard Aleksandr KORZHAKOV was behind the tape.

KORZHAKOV denied involvement, pointing out that he was dismissed from his Kremlin post two days before the tape was allegedly made. "Even then, the presidential re-election campaign camp looked like a courtyard open for everyone to pass through, including Americans," he told Interfax. "If there was a recording it could have been made by anyone."

Yeltsin's Daughter Rejects Governor's Poll

· Tatyana Dyachenko, the daughter of Russian President Boris Yeltsin, has turned down a request by a women's group to run for governor in the central Russian Tula Oblast, reported Untied

Today's News Highlights

Russia

Regional Election Results

Govt. Orders Eurobond Sale

Mars Spacecraft Crashes

Telephone Rates to be Cut

ADA Settles w/Roskomdragmet

McDonald's Buys Russian Milk

European Republics

Moldova Election Inconclusive

Anti-Lukashenko Resistance

Foreign Investment in Ukraine

Politics-Economics-Business

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Monday

November 18, 1996

Intercon's Daily

Press International (UPI) on Friday. She treated the offer with "gratitude on the one hand and humor on the other," chief presidential spokesman Sergei Yastrzhembsky told reporters. "She is not and has not been thinking" of running for office, he added. Had DYACHENKO decided to run, she may have ended up competing against former Security Council secretary Aleksandr LEBED, who hails from Tula, and is also being tapped for the governor's race. DYACHENKO, who assisted in her father's re-election campaign and is said to be his closest confidante, has been dubbed "The Kremlin Princess" by the Russian media.

Results of Sunday's Regional Elections

· Results were conclusive in four of seven Russian regional gubernatorial elections on Sunday, with only one incumbent earning re-election. Three other regions will need to hold runoff elections.

Incumbent Governor Nikolai Poluyanov won re-election in the Komi-Permyak autonomous district on Sunday with some 70 percent of the vote. Turnout was about 56.6 percent.

In the second round of elections in Stavropol Krai, Communist State Duma deputy Aleksandr Chernogorov won with 55 percent of the vote, according to preliminary results. Incumbent Pyotr Marchenko received 40.14 percent of the vote.

Lawyer Valentina Bronyevich became the first woman regional administration head in Russia on Sunday when she was elected head of the Koryak autonomous district. According to preliminary returns, she won over 46 percent of the vote, while incumbent governor Sergei LEUSHKIN received on 21 percent. The Koryak district is located on the northern part of the Kamchatka Peninsula.

In the Ust-Orda Buryat autonomous district, state farm manager Valery Maleyev won with 39.4 percent of the vote, beating incumbent Aleksei Batagayev who received 23.4 percent. Some 59 percent of the electorate turned out.

Incumbent Governor Lev Korshunov, who received some 43 percent of the vote in Sunday's Altai Krai elections, will face local legislative chairman Aleksandr Surikov (who won 47 percent) in a runoff election in two weeks.

Murmansk Oblast also failed to elect a governor in the first round of voting Sunday. The front-runners in the poll were incumbent Yevgeny Komarov with 31.9 percent of the vote, and former legislative assembly chairman Yuri Yevdokimov who got 20.45 percent. A second round of voting will take place on December 1.

The Kamchatka Oblast elections were also inconclusive. Incumbent Vladimir Biryukov overwhelming defeating his nearest rival, gaining 48 percent of the vote to 11 percent received by Boris Oleinikov, the rector of a naval academy school. The runoff will be held on December 8.

Economy

Ruble = 5,489/$1.00 (NY rate)

Ruble = 5,486/$1.00 (CB rate)

Ruble = 5,481|5,491/$1.00 (buy|sell rates)

Government Orders Sale of Eurobonds in 1996

· The Russian government has issued a resolution instructing the country's first Eurobond to be issued in US dollars in November-December this year, Prime-Tass reported today. The resolution said the bond issue will run at "up to $500 million." The interest and redemption payments on the Eurobond will be made in dollars, it said.

Russian Finance Ministry officials are currently conducting a road show for the Eurobond in the major financial centers of Europe, Asia, and the US. Finance Minister Aleksandr Livshits told Prime-Tass on his return from the London and Frankfurt presentations that investors were showing a "robust appetite" for the new securities. Reuters reports that attendance at the presentations has been "amazingly high" and the bond price is expected to be 300 or 335 basic points over US Treasuries.

Mars Probe a Failure for Russia

· The Russian space industry was dealt a major blow today with the fall to earth of the much-touted Mars-96 spacecraft carried by a Proton-K booster rocket. The ship was unable to break out of the earth's orbit when the fourth stage of the rocket booster failed to ignite, and it dropped into the southern Pacific Ocean, west of Chile. It was launched Saturday by Russia's military space forces from the Baikonur cosmodrome in Kazakhstan.

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Intercon's Daily

Mars-96, an international space research project involving 23 countries, was to land two small autonomous stations and two penetration probes on Mars. The failed launch cost Russia about $122 million, while the 22 other countries had supplied a total of $180 million worth of scientific equipment. Deputy Director of the Russian Space Agency Yuri Milov told Itar-Tass that the probe was not insured.

The immediate monetary loss could represent only a fraction of the cost of the failure. Several unmanned launches by the Russian space program have failed this year, and future launch business could be lost if Russia's record does not improve. A pair of Mars probes launched by the Soviet Union in the 1980s failed, and Mars-96 was to mark the recommencement of Russian exploration of the planet, with a follow-up mission tentatively planned for 2001.

Telephone Rates to Be Cut

· International telephone rates in Russia will be cut beginning January 1, 1997, the Communications Ministry said Friday, reported RIA Novosti. Telephone calls placed between 8:00pm and 8:00am, on holidays, and on weekends, will be priced at an off-peak rate, while peak rates will be cut by 70 percent. Calls using automated international lines which last over five minutes will cost 20 percent less.

Business

US ADA Settles with Russia on Diamonds

· The Russian government and San Francisco's Golden ADA company reached an out-of-court settlement on Friday for the company's remaining assets to be turned over to Russia's State Committee on Precious Metals and Stones (Roskomdragmet), reported the Associated Press (AP). Russia charged Golden ADA with stealing some $164 million in gold and precious stones. Russian diamonds were sent to San Francisco for polishing and were supposed to be returned to Russia. However, many of the stones never made it back to Russia, and authorities claimed that they were sold by Golden ADA and the proceeds used to buy luxury goods and real estate.

Friday's agreement called for the immediate transfer of ADA's assets, which now mostly consist of Northern California real estate valued at some $50 million, to be put in trust for Roskomdragmet. "The committee's delighted. It's as close to 100 cents on the dollar as

we could expect given the dissipation of assets several years ago," Roskomdragmet's lawyer Mark Beck is quoted by AP as saying. However, the agreement is subject to the approval of the US Internal Revenue Service, which seized the company's assets last year, and has been liquidating them to pay off tax arrears.

The current ownership of Golden ADA was absolved of criminal responsibility under the agreement, but the company's former owners, including Andrei Kozlyonok, still face lawsuits. Intercon reported in February that Russian President Boris YELTSIN fired Yevgeny BYCHKOV from his post as Roskomdragmet chairman for "poor discipline," in connection with the Golden ADA scandal.

Russian Trade w/Central Europe Up

· Russia is still one of the major trade partners of central Europe and trade between the two sides has shown a sharp recovery in recent years, according to a report of the Czech Industry and Trade Ministry, cited by Xinhua said today. Report figures show that in 1995, Russia's trade volume with the six central European countries—the Czech Republic, Bulgaria, Hungary, Poland, Romania and Slovakia—totaled $12 billion, an increase of 33 percent compared with 1994. The turnover, which includes $9 billion in exports and $3 billion in imports, accounted for 12.7 percent of in Russia's total foreign trade volume in 1995. The figure in 1994 was 11.6 percent.

The report found that oil and natural gas accounted for 67 percent of Russia's total exports to these central European countries, while foodstuffs were the main Russian import, accounting for 38 percent of its total in 1995. Trade between Russia and central Europe fell dramatically in the early 1990s, when Communism fell and Central Europe turned westward for trade. However, the trend began to reverse itself in 1994 when trade volume between Russia and central Europe rose by 1.1 percent.

McDonald's Buys Local Milk

· US McDonald's has signed an agreement with Russia's Vimm-Bill-Dann to supply milk for McDonald's 11 Moscow and St. Petersburg restaurants, reported RIA Novosti. Sterilized 3.5 percent milk will now be available at McDonald's in 200 gr. packages. McDonald's also plans to open restaurants in Nizhny Novgorod and other Russian cities.

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Monday

November 18, 1996

Intercon's Daily

European Republics

Runoff to be Held for Moldovan Presidency

· Incumbent President Mircea Snegur beat his opponents in the first round of presidential elections in Moldova on Sunday, but fell short of the 50 percent of the vote needed to win the poll outright. SNEGUR received nearly 39 percent of the vote, far above the 27 percent of his closest opponent, parliamentary chairman Petr Lucinski. The two will face each other in a runoff on December 1. Unexpectedly, Communist Party chief Vladimir Voronin came in third place, with 10.3 percent of the vote, while anti-reform Prime Minister and Agrarian Party leader Andrei Sangheli won just 9.2 percent of the vote. Democratic opposition leader Valeriu Matei polled 8.8 percent, and five other candidates received less that two percent of the vote apiece.

Situation Heating up in Belarus

· Belarus President Aleksandr LUKASHENKO's efforts to gain more power were met with serious resistance this weekend, and today the parliament asked him to step down. The opposition is reacting to a constitutional referendum, scheduled for November 24, that would increase LUKASHENKO's powers and extend his term in office. The parliament, constitutional court, head of the electoral commission, and others have called for the referendum to be canceled, but LUKASHENKO has been defiant. On Friday, he fired Central Electoral Commission chairman Viktor GONCHAR for refusing to validate the results of the referendum, and then sent police to block him from entering his office.

Several thousand anti-LUKASHENKO demonstrators clashed with riot police in Minsk Sunday. Police used tear gas against the demonstrators to keep them away from government buildings, but only minor injuries were reported. The anti-Lukashenko rally began peacefully when several hundred supporters of the Belarussian Popular Front with white-red-white nationalist flags and slogans in Belarussian and English gathered in protest.

Early today, Prime Minister Mikhail CHIGIR threatened to resign unless political and economic tensions ease. LUKASHENKO, who must accept the resignation, responded by accusing parliament of pressuring CHIGIR and the Cabinet to resign, reported Interfax.

Deputies spent the weekend at the parliament building fearing that they would be blocked from entering their offices as GONCHAR was on Friday. An extraordinary plenary session of the parliament was held today and some 75 percent of deputies voted to ask the president to step down or face impeachment. It seems unlikely that LUKASHENKO will comply, despite the fact that his support in the country is clearly slipping.

Water Treatment System to Lithuania

· Dallas-based J. Bailey Company will export a $1.2 million drinking water treatment system to Kedainiai, Lithuania, with insurance from the US Export-Import Bank. Until this sale, the residents of Kedainiai were drinking well water without a disinfectant system. The insurance is Ex-Im Bank's first medium-term policy in Lithuania. Bailey is a division of FMI International.

Foreign Investment in Ukraine Up in `96

· Foreign investment in Ukraine totaled $375.6 million for the first nine months of 1996, reported Reuters, citing the Ukrainian State Statistics Ministry. Figures were not given for the same period in 1995. Total aggregate investment in independent Ukraine is only $1.223 billion. Analysts blame the low level of investment on excessive bureaucracy and unclear laws. The US is the largest investor, followed by Germany, Russia, the Netherlands, and Britain.

World Bank Loan for Ukraine

· The World Bank will extend a $300 million loan to Ukraine for the agricultural sector, reported Xinhua, citing Ukraine's Foreign Ministry. The money will be used to promote agricultural reform, strengthen competition in the commodity market, encourage privatization and attract investment in agriculture.

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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