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, November 21, 1996

Russian Eurobond Issue Ready

· Russia today launched a $1 billion, five-year Eurobond, the country's first international bond issue since 1917, reported Reuters. JP Morgan and SBC Warburg are acting as joint lead managers. The Eurobond will be priced to yield 345 basis points more than five-year US Treasury notes. The yield target was expected, but the size of the offering is well above the $500 million previously suggested by Moscow. However, dealers say that "Russia has real rarity appeal" and believe the issue is likely to be heavily oversubscribed, according to today's Financial Times.

Russian Finance Ministry officials pushed the Eurobond issue during a two-week promotional tour of 14 major financial centers from Tokyo to New York that wrapped up on Wednesday. This offering is expected to pave the way for Eurobonds to be issued by other Russian borrowers, including major cities and companies.

Duma Forwards New View of Privatization

· Russian State Duma privatization committee chairman Pavel Bunich told reporters today that a new privatization law with a "social orientation" will be introduced in parliament on Friday, reported Itar-Tass. Those who wish to purchase an enterprise will be obligated to continue in the same line of production activity and guarantee the same or even larger number of jobs, he said. Other social obligations include concern about the environment and assistance to

Russian Federation

Politics

Lebed in US to See "True Democracy"

· In his first American press conference, former Russian Security Council secretary and presidential candidate Aleksandr LEBED said he came to the US to meet with as many political figures as possible. "I came to see what true democracy looks like," he is quoted by the Associated Press (AP) as saying. "What I am going to see is how we are going to live in the not-too-distant—I hope—future."

LEBED told reporters that he may seek to make a political comeback soon by running for governor in his home region of Tula. The post would give him much-needed administrative experience and automatic membership in the Federation Council (upper house of parliament). "Now I am creating the scientific structure of a political party, and by mid-December a decision will be made." The job would also allow him to maintain political visibility until the next presidential election, he told the Wall Street Journal in an interview published on Wednesday.

He also accused Interior Minister Anatoly KULIKOV, whose allegations that LEBED was forming his own army hastened his ouster from the government, of being the virtual godfather of Russian organized crime groups, said AP. "As long as there is a criminal minister of the interior, it is under his roof that the mafia is hiding," said LEBED, "And those who are supposed to combat it organize it instead."

Economy

Ruble = 5,496/$1.00 (NY rate)

Ruble = 5,492/$1.00 (CB rate)

Ruble = 5,487|5,487/$1.00 (buy|sell rates)

Today's News Highlights

Russia

New Privatization Law Drafted

Russian Reserves Down

Saatchi Raided by Tax Police

Yamal Pipeline to Open

Off-shore Zone Conference

Intercon Investment Spotlight

European Republics

Update on Belarus Pol. Crisis

Coca-Cola Plant #2 in Ukraine

Estonian Government Crisis

Politics-Economics-Business

Page

Thursday

November 21, 1996

Intercon's Daily

health care providers, among other things, said Bunich. He said that all of the most important enterprises will only be sold off to private owners after screening by the State Duma.

He noted that the new concept of privatization is based on the assumption that the investor wants to acquire a well-run enterprise. This means that, prior to the sell-off, the government will have to ensure that it is in good shape. If this proves impossible, the enterprise must be liquidated.

Bunich also told the press conference that work is underway on a new law concerning insolvency. It will be introduced in the Duma in mid-December. BUNICH said the new insolvency legislation sets forth "a fairly soft version of the unpleasant procedure." Before an enterprise is declared bankrupt, all possible measures will be taken to remedy its financial situation. Only if its managers fail to accomplish the task will the enterprise will be shut down and put in crisis management. However, all of its employees must be guaranteed pay for 12 months.

Russian Reserves down to $3.2 Billion

· Russia's gold and hard currency reserves have fallen to $3.2 billion, reported today's Nezavisimaya Gazeta. Sales since the end of presidential elections in early July reduced the reserves by 30 percent, or by $1.3 billion, as of early October. The newspaper notes that during the presidential campaign, Russia's reserves halved from $8.7 billion to $4.3 billion.

Business

Foreign Companies Targeted by Tax Police

· The Moscow office of UK-based advertising agency Saatchi & Saatchi has been raided by Russian tax police as the government's crackdown on tax evasion spreads to include foreign companies, reported today's Financial Times. About 20 armed police participated in the October 29 raid, seizing documents and videotaping the company's offices. Saatchi & Saatchi is accused of owing 33 billion rubles (about $6 million) in taxes and fines. According to the police, the debt was accrued by Zoom Media, a Frankfurt-based company which they allege is operating on behalf of Saatchi & Saatchi. Moscow tax police official Aleksandr BORISOV told the Financial Times that an investiga

tion into Saatchi between June and August had revealed "the hiding of revenues from taxation in unusually high amounts." Westerners in Moscow are worried that foreign companies are being targeted because of their greater ability to pay and "susceptibility to pressure" than Russian enterprises.

Gas Starts Flowing Through Yamal Pipeline

· Russia will start exporting natural gas through the first stage of the Yamal pipeline to Europe this month, reported today's Journal of Commerce. "On November 28, the first 107-kilometer [Polish] segment of the pipeline will come on line," Russian gas monopoly Gazprom official Nikolai BELYI told a London conference.

The newly-completed section links Poland's gas system to Germany's. The $10 billion, 2,500mile pipeline, which will run from the Yamal Peninsula in far northern Russia across Belarus and Poland to western Europe, is due to be completed by 2010.

Ingushetia Becomes Off-shore Business Zone

· The first international conference and exhibition devoted to the establishment and development of off-shore business opened in London on Wednesday. The conference is being attended by representatives of 38 countries, including a Russian delegation led by State Duma deputy speaker Mikhail Gutsiriyev and Republic of Ingushetia President Ruslan Aushev. The conference, Off-Shore 2000, and the exhibition, Shorex-96, will last three days. On Friday, Aushev is expected to address the conference about the operation of Russia's first off-shore zone in Ingushetia and on general prospects for off-shore operations in the country.

European Republics

Update on Belarus Political Crisis

· Rebuffing international and internal protests, Belarus President Aleksandr LUKASHENKO has categorically refused to cancel the controversial constitutional referendum, scheduled for Sunday. The parliament, which opposes the referendum and begun impeachment proceedings against LUKASHENKO, has indicated that it is ready to compromise, but the president has refused to budge. On the contrary, he traveled to the western city of Brest today to promote his referendum among voters.

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

November 21, 1996

Intercon's Daily

Intercon Spotlight: Foreign Investment In the New Russia

Foreign capital is a crucial component in the process of economic restructuring in Russia that has followed the breakup of the Soviet Union. Foreign investment levels have been disappointing, however, largely because the Russian government's efforts to attract foreign financing have been insufficient. The YELTSIN administration has failed to remove the legal and financial obstacles that act as deterrents to foreign investors. Three different mechanisms have been used by foreign companies wishing to invest in Russian enterprises: joint ventures, direct investment, and portfolio investment. Each of these methods has had its problems.

In the early 1990s, joint venture formation was the primary method of investment, according to an October 29 article in Nezavisimaya Gazeta. Most of these became trade intermediaries based in Moscow. With small capital, these organizations were more successful in attracting foreign goods than major financial resources to the Russian market. Many retail trade ventures eventually closed due to high customs tariffs on a number of goods especially cars and textiles, and a government ban on sales for hard currency. Those that survived reoriented their business, putting an emphasis on things such as food, cosmetics, and travel.

Foreign direct and portfolio investment in Russian enterprises has been relatively low compared with investment in joint ventures. Analysts estimate that foreign direct investment (FDI) in Russia has not exceeded $800 million, said Nezavisimaya Gazeta. Major western European and US investors point to the excessive tax burden and difficulties surrounding privatization as some of the barriers holding investment at low levels. They cite outdated accounting methods and "double-accounting" often practiced at Russian enterprises, which do not allow foreign investors to keep track of cash flows.

Portfolio investors face these same problems and others as well. Because these investors are outsiders, accounting intricacies can cause friction in relations between foreign and domestic shareholders. Shareholders filed several suits in arbitration court this year against company management on the shareholders' right to exercise control over management decisions. The situation is somewhat better for large western traders who work with Russian enterprises in their respective sectors. In this case, traders can assert their rights by being directly involved in production, marketing, and supply.

Overall, western European countries have led the US in investment in Russia. Major US investments in Russia have involved trade and the services sector. Food and tobacco companies (Phillip Morris, MasterFoods, Pepsi) made the US the leader in FDI in 1995, followed by Switzerland and Germany. This Swiss participation is due mostly to the partial repatriation of Russian capital which had left the country illegally through the Swiss banking system.

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

November 21, 1996

Intercon's Daily

So far, Russia's attempts to mediate the executive-legislative dispute have failed. This could be due to Moscow's mixed feelings about Belarus. On one hand, LUKASHENKO is a close ally, sharing Russia's desire for reintegration. On the other, his policies have brought Belarus near political and economic collapse and it is not in Russia's interest to have such an unstable, poverty-stricken partner. Russian officials will try again, however, with Prime Minister Viktor CHERNOMYRDIN reportedly flying to Minsk tonight to meet with LUKASHENKO.

Meanwhile, Belarus' other neighbors are becoming increasingly alarmed as the situation has continued to deteriorate and the possibility of violent conflict looms ever closer. The presidents of Ukraine, Lithuania, and Poland on Wednesday issued a joint statement calling on the president and parliament of Belarus to resolve the political crisis, which is threatening to destabilize the country.

Moreover, the conflict in this small nation of about 10 million people has attracted the attention of the US and western Europe because the country possesses nuclear missiles, left on its territory from the Soviet era. The 16 SS-20s remaining in Belarus were to be transferred to Russia, but LUKASHENKO has ceased their withdrawal. This fact, combined with LUKASHENKO's virulent anti-Western and anti-NATO rhetoric, has alarmed the West. His increasingly dictatorial and unpredictable actions suggest that he could become a major threat.

On Friday, the Belarus Constitutional Court will discuss the parliament's petition for the impeachment of LUKASHENKO for alleged abuse of power, a move likely to infuriate the president.

Coca-Cola to Build Second Ukraine Plant

· Coca-Cola Amatil, an affiliate of the Coca-Cola Co., began construction Wednesday of a $120 million bottling plant in the town of Brovary, Ukraine, its second in the country, reported United Press International (UPI). The plant, located near Kiev, will

more than double Coca-Cola Amatil's production capacity in Ukraine when it begins operating next August, Mukhtar Kent, general manager of Coca-Cola Amatil Europe told UPI. The company's current annual production capacity in Ukraine is 150 million liters of Coca-Cola, Fanta and Sprite, and the new plant will eventually produce 200 million liters of those products every year.

Coca-Cola Co. owns 37 percent of Coca-Cola Amatil, which holds the exclusive right to produce, bottle, distribute, and sell Coca-Cola products in 16 countries. Coca-Cola Amatil built an $80 million plant in the western city of Lvov in 1994, but KENT said the company is not making a profit in the Ukrainian market. "For every dollar we invest in production, we spend an equivalent amount in logistics and retail. We don't expect to make a short and quick return," he said. "We have a long-term approach."

Kent said the company plans to build another plant, in eastern Ukraine, within the next five years.

Estonian Government in Crisis

· A political crisis is brewing which threatens to bring down the coalition government in Estonia. Six Estonian Reform Party ministers resigned en masse on Wednesday to protest an agreement between Prime Minister Tiit VAHI, of the Coalition Party, and the opposition Center party, reported today's Financial Times. Those resigning include Culture Minister Jaak AAVIKSOO and Foreign Minister Siim KALLAS.

The dispute originated after October 20 municipal elections when VAHI signed an agreement giving Center members a larger role in the administration. The Reform party, junior partner in a coalition government with VAHI's Coalition Party, was angered by what they see as VAHI's "going behind their back" to include the Centrists in the government, and gave the premier until Wednesday to scrap the agreement. Reform members will decide today whether to leave the government altogether. The current government is the sixth for independent Estonia.

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

Politics-Economics-Business

Page