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, November 26, 1996

Russian Federation

Politics

Secret NATO Report Warns of Russian Threat

· A secret NATO report, obtained by a Spanish newspaper, concludes that Russian weapons pose a growing threat to the Alliance, reported Reuters. NATO report number MC 161/96 listed "a combination of factors such as weak exports control, hundreds of scientists specializing in building chemical, bacteriological, and nuclear agents, the high degree of corruption, and the deliberate exchange of nuclear technology" indicate that "the potential threat to NATO stemming from Russian arms proliferation could increase," said Spanish daily El Mundo. The leaked document is entitled "The general intelligence estimate—strategic overview" and labeled "NATO Secret." The leak comes one week before a European security summit in Lisbon next Monday at which Western nations will most likely address Russian fears of NATO enlargement.

Lebed Wows Washington

· Former Russian Security Council secretary and presidential candidate Aleksandr LEBED wrapped up his first US tour on Friday, having impressed US analysts and officials with his political savvy and potential to make a comeback in Russian politics. LEBED confidently told his American audience that he would be the next Russian president, saying that this US trip was one step on his election path.

The ex-general told the US-Russia Business Council in Washington that to prepare for his presidential bid he would need to develop an organizational and financial base. "I must do some [political] party-building, drawing on the support of former colleagues" in the military and many of the 11 million Russians, who voted for him in the first round of presidential elections in June, the Associated Press

(AP) cited him as saying. LEBED said major Russian bankers and businessmen were prepared to back him, but were concerned that he might scare the West, said Reuters. "I hope that after this trip they will stop portraying me as an unpredictable monster."

LEBED's next trip will be to China, according to William SAFIRE in Monday's New York Times. SAFIRE, who encountered LEBED at a reception in Bethesda, was apparently unimpressed by LEBED's attempts to remake his image in America. He suggested that if this "work in progress" eventually takes power in Russia, the US might be disturbed to discover the real LEBED.

Tula Duma By-Election Heating Up

· Controversial former presidential bodyguard Aleksandr KORZHAKOV will face another questionable figure in his bid to win an open Tula Oblast State Duma seat in a by-election, scheduled for February. The new candidate proposed for the race is Yelena Mavrodi, the wife of notorious Russian businessman Sergei Mavrodi, whose MMM investment company collapsed in the summer of 1994, robbing thousands of Russians of their savings, reported Itar-Tass. The election will fill the seat left vacant when Aleksandr Lebed gave up his parliamentary position to become Security Council secretary.

In May 1995, Mrs. Mavrodi ran in another by-election, to fill the seat Sergei Skorochkin, who was murdered in 1994 in the city of Kolomna outside Moscow, but she lost to cosmonaut

Today's News Highlights

Russia

Eco. Coop. Forum in Moscow

Tsarist Debt to France

Rus. Banks & Telecom Merger

Cadbury Opens Russian Plant

US-Russian Science JV

European Republics

Lukashenko Claims Victory

Nukes Out of Belarus

New Estonian Foreign Minister

Foreign Investment in Moldova

Politics-Economics-Business

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Tuesday

November 26, 1996

Intercon's Daily

Tuesday Tidbit

tion in Europe, taking place in Moscow this week, he said that the Central Bank's bank register contains 2,067 entries, including 800 Moscow institutions. DUBININ estimated that only 38 percent of banks can be relied upon throughout Russia, with the percentage showing broad regional variance. This share was highest (51 percent) in Moscow and the Moscow region, and lowest in the Russian Far East—14 percent. DUBININ also announced that his office and the Finance Ministry were planning to issue a document allowing mergers and takeovers in the banking sector.

European Bank for Reconstruction and Development (EBRD) vice-president Ronald Freeman told forum participants that 8,000 loans were extended to Russian businesses over the past three years and

only two percent of grantees were in default. He noted that this low percentage was unprecedented for such enormous country.

Freeman also said that another $60 million will be given to local businesses through two investment plans, worth $30 million each. The EBRD is targeting companies with less than 5,000 employees and small businesses with up to 50 staffers.

Tsarist Debt to France Addressed

· Russia will pay off Tsarist-era bonds, now worth about $30 billion, held by France, said Prime Minister Viktor Chernomyrdin upon his departure for a working visit to Paris, according to Interfax. CHERNOMYRDIN will hold a summit meeting with his French counterpart Alain JUPPE this week. The former USSR defaulted on the French-held bonds, issued by Russia's Tsarist government, but made partial payments to holders in other countries.

However, Deputy Finance Minister Aleksandr Kasyanov emphasized that Russia will not cover the debt directly, but will include the issue in broader negotiations with France. The Russian side is expected to bring up the issue of Tsarist gold still held in France during the bond compensation negotiations, said today's Financial Times.

Business

Russia Banks Take Over Telecom Merger

· In another sign of the growing political influ

The effort to

promote the cult of personality

of Turkmenistan President Saparmurat

NIYAZOV has been extended to national

handicrafts. This week, Turkmen weavers unveiled an enormous carpet bearing the visage of the

Turkmenbashi, or leader of all the Turkmen, as NIYAZOV likes to be known. Billed as the largest carpet in history,

it is 266 square meters in size and weighs one ton,

according to Komsomolskaya Pravda. More than

likely, the carpet will grace the walls of the

presidential palace, ensuring that the

Turkmenbashi will not be

trampled underfoot.

German Titov. According to various estimates, there are 20,000_50,000 MMM investors in Tula.

Nine other candidates are also vying for the seat, including world chess champion Anatoly Karpov, and local Duma deputy Nikolai Novikov, who ran his previous campaign for a seat in the Tula legislature while he was in prison under investigation. Novikov, who is head of a local sports club and leader of the regional Fatherland Revival party, was accused of five crimes, including racketeering. So far, Korzhakov is the only candidate that has officially registered. Competitors must hand in lists of supporters' signatures by December 15.

KORZHAKOV has an advantage in that he was endorsed by LEBED, who received twice as many votes as his competitors when he won the seat in December 1995. However, KORZHAKOV's shady reputation is not helping him and his chances of victory grow smaller with each new candidate that enters the race.

Economy

Ruble = 5,497/$1.00 (NY rate)

Ruble = 5,500/$1.00 (CB rate)

Ruble = 5,495|5,505/$1.00 (buy|sell rates)

Economic Cooperation Forum in Moscow

· Russian Central Bank chairman Sergei Dubinin pointed out on Monday that the Russian banking sector has became more stable, despite the fact that 500 banks have failed this year, reported Itar-Tass. Addressing an economic forum on regional coopera

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November 26, 1996

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ence of certain Russian banks, Western advisors were ousted from major Russian telecommunications merger and privatization scheme. The Russian State Property Committee announced today that London-based investment bank NM Rothschild had "completed" its work on the privatization of Russian telecommunications holding company Svyazinvest, reported Reuters and the Financial Times today.

Russian privatization officials announced on November 14 a plan to merge primary state carrier Rostelekom with Svyazinvest, and then sell off a portion of the new company. The merger, which would effectively recreate a telephone monopoly in Russia, was expected to make the two firms' more attractive to foreign investors. The proposal was worked out in conjunction with Rothschild and a consortium of Western banks, which were to lead a $1 billion tender for a stake in the new state firm.

According to the Times, a group of Russian banks, led by Vladimir GUSINSKY's Most Bank and Petr AVEN's Alfa Bank, will take over Rothschild and Co.'s role. The banks were two of the largest contributors to President Boris YELTSIN's re-election campaign and are part of huge financial and media holdings, controlled by the two men. Most and Alfa bank explained that the telecom deal would be a purely domestic transaction in which they will be major investors, as well as advisors, said the newspaper. "In the opinion of [the Committee] and the Telecommunications Ministry, the shares of the `renewed' Svyazinvest will be more attractive to portfolio investors on the one hand, and on the other, privatizing them will not have a damaging effect on national security," Reuters cited a Russian government statement as saying.

Comment: The replacement of Western with Russian investment advisors indicates a growing trend against foreign investors, while showing the concomitant rise in influence of Russian financiers, particularly those close to the president. The re-election of YELTSIN with the help of private Russian money seems to have ushered in a new era of bankers and businessman as power brokers. This circumstance was vividly illustrated in the recent appointment of LogoVAZ chairman Boris BEREZOVSKY to the post of Security Council deputy secretary.

Cadbury Opens Russian Candy Factory

· Cadbury, a unit of Britain's Cadbury-Schweppes Plc., has opened a chocolate factory in Russia's Novgorod Oblast, reported Interfax today. The company invested $120 million in the plant, Cadbury's largest outside Britain, which is expected to produce 45,000 tons of chocolate bars a year. Russia is the third largest European market for Cadbury.

US-Russian JV Develops New Process

· US-Russian joint venture Synmatix Corp is working with researchers from New Mexico's Los Alamos National Laboratory and three scientific institutes in Russia to develop and commercialize a new process for producing exceptionally strong materials, said a Synmatix press release. The Russian method stresses, squeezes, and breaks down microscopic "nanopowders" and could improve orthopedic materials, including bone implants, and produce stronger parts for cars, airplanes, and spacecraft, as well as improve the performance of many conventional materials.

The process is the first practical method of making high-strength biomechanical and industrial components from useful amounts of ultrafine metal, ceramic, or composite powders, according to Dr. Emil STRUMBAN, general manager of Synmatix. Some of the funding for the work comes from the US Department of Energy's Industrial Partnering Program, which seeks to reduce the risk of knowledge proliferation by engaging weapons scientists from the former Soviet Union in cooperative research projects with commercial potential.

European Republics

Lukashenko Claims Victory

· Belarus President Aleksandr Lukashenko claimed victory for himself and Belarus after voters on Sunday overwhelmingly supported constitutional amendments expanding his power and extending his term in office. Voter turnout for Sunday's controversial referendum was reportedly 84 percent, of which over 70 percent voted in favor of LUKASHENKO's draft constitution. The results were unsurprising in light of LUKASHENKO's tight grip on the media in the country and his extensive efforts to drum up support for his referendum questions, including a lengthy TV appeal on the night before the poll.

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LUKASHENKO also pronounced that the election was binding and he would begin to exercise the powers afforded him by the new constitution, including the formation of a new bicameral legislature. He said that the current parliament would be transformed into the new lower house and the upper house would be chosen by him. On Monday, many members of parliament who previously opposed LUKASHENKO and the referendum, went over to the president's side, effectively splitting the legislature. Some 112 deputies are now reportedly supporting LUKASHENKO and meeting apart from 50-70 opposition deputies, who occupy the parliament building, but do not have a quorum.

It appears that LUKASHENKO has won yet another battle for power against his increasing numbers of opponents. But he has not come through the war unscathed. Belarus parliamentary speaker Semyon SHARETSKY, who led the drive against the president's constitutional changes, today acknowledged that he was powerless to influence events. "We have the strongest force there is—the moral right is on our side," Reuters quoted him as saying.

More important even than LUKASHENKO's lack of moral high ground, however, is the growing perception that his actions have no legal basis. His repeated disregard for constitutional court rulings, parliamentary resolutions, electoral commission decisions, international objections, and basic democratic principles have caught the attention of the world.

Furthermore, they have raised the ire of Russia, with which Belarus is supposed to be forming a "community." LUKASHENKO essentially ignored Russian efforts to mediate the legislative-executive conflict. Moscow's perception that he is unmanageable and destructive could prove problematic for his poverty-stricken country, particularly in light of the fact that LUKASHENKO has now alienated the US, European Union, Council of Europe, the Organization for Security and Cooperation in Europe, neighboring countries, and international financial institutions.

Belarus Nukes Transferred to Russia

· Belarus has transferred to Russian the 18 remaining nuclear warheads, inherited from the former Soviet Union, as scheduled. Russian Strategic Missile Forces commander Viktor Yesin told reporters on Monday that Russia "has fully fulfilled the measures connected with the withdrawal of nuclear warheads" from former Soviet republics, including Kazakhstan, Ukraine, and Belarus, reported the Associated Press (AP). Belarus President Aleksandr LUKASHENKO warned recently that Belarus would keep the missiles, if NATO expansion went forward. Belarus did retain the Topol missile launchers employed to carry the warheads, but it is not clear that this gives Belarus nuclear capability. A Missile Forces spokesman said the launchers would be transferred to Russia by the end of this year.

New Estonian Foreign Minister Named

· Estonian Prime Minister Tiit Vahi on Friday appointed Riiv Sinijarv as acting Foreign Minister to replace Siim Kallas, who resigned last week, reported Xinhua. KALLAS was one of six Reform Party ministers to quit last week to protest a cooperation agreement signed between the Coalition Party, led by Vahi, and the opposition Center Party. Estonian President Lennart Meri accepted Kallas' resignation Friday, but has not yet decided on the resignations of the other five. Sinijarv, has been Ambassador to Britain and Foreign Minister.

Foreign Investment in Moldova

· Foreign investment in Moldova totaled $99 million in the past five years, including the formation of about 519 joint ventures and establishment of 252 wholly foreign-funded enterprises in Moldova, reported Xinhua on Sunday, citing Moldovan officials. Gheorghe Gaber, head of the National Bureau for Promoting Foreign Investment, said the sectors that receive the most foreign capital are energy, retail, and processing industries, especially food, beer and soft drinks. During the first half of 1996, exports by foreign-funded enterprises amounted to $18 million, which is about five percent of the total export volume.

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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