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 7, 1996

Russian Federation

Politics

Yeltsin Reassures Russia of his Recovery

· Russian President Boris YELTSIN distributed a written address today saying he has "returned to work" two days after heart surgery, and plans to make national unity a top priority of his second term in office. Doctors reported the president was able to walk around and eat solid foods today, but cautioned that he should not move from the cardiology center to the Central Clinical Hospital until Friday.

"Dear people of Russia, I am gratified to inform you that the bypass operation went off successfully. I have resumed working. As I promised you, the situation in the country was under control [during the operation]," said the president's statement. He thanked his doctors and supporters and stressed the importance of unity. "We have got one Russia and we must keep together."

Revolution Day Becomes Day of Accord

· Despite the breakup of the Soviet Union five years ago, November 7—the anniversary of the October Bolshevik Revolution—is still a holiday in Russia. From his hospital bed today, Russian President Boris YELTSIN signed a decree changing the name of the holiday from Revolution Day to the Day of Accord and Reconciliation. The new holiday is designed to mark the end of the social disagreements that have plagued Russia over most of the 20th century, said presidential spokesman Sergei YASTRZHEMBSKY on Russian television. The decree also calls for organizing a contest for the best monument commemorating victims of the revolution, civil war, and STALIN-era repression.

Meanwhile, demonstrations were held in several Russian cities by leftists commemorating the revolu

tion and the communist era. In Moscow, 15,000-20,000 people demonstrated along with Communist Party leader Gennady ZYUGANOV, who called for YELTSIN's resignation.

The holiday means that no currency trading will occur today or tomorrow and newspapers have suspended publication.

Galkin Arrested in US on Old Spy Charges

· Russian Vladimir GALKIN, a former agent of the Foreign Intelligence Service (SVR), who was detained by the FBI upon his arrival in the US on October 29, has been arrested and is awaiting transfer to Massachusetts to face six-year old espionage charges. GALKIN is accused of trying to purchase information about the US strategic defense initiative (SDI or Star Wars) during 1990-91. According to a recently-unsealed Justice Department indictment, GALKIN is charged with paying one Subrahmanyam M. KOTA, who was born in India, but resides in Massachusetts, to obtain classified documents on SDI. GALKIN met with KOTA in Cyprus several times, but never travelled to the US. The SVR has protested GALKIN's arrest and threatened retaliation against current and former US intelligence agents entering Russia, if he is not released.

Comment: As more information becomes available about the detention and arrest of Vladimir GALKIN, it is becoming increasingly clear that this action is inappropriate. Mr. GALKIN never visited the United

Today's News Highlights

Russia

GRU Director Speaks Out

Kulikov on Crime Control

Response of Sakha Diamonds

Russian Inflation Chart

US Steel Cos Allege Dumping

European Republics

Newbridge Networks in FSU

Polish Bank to Open in Lithuania

Crime & Corruption in Ukraine

Ukraine Lamp Co. Sell-off

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Thursday

November 7, 1996

Intercon's Daily

Thursday Tidbit

one of the GRU's top priorities is military-related economic and technical espionage to help prevent Russia from "falling into the ranks of third-rate countries," said LADYGIN. He also admitted that his agency is suffering from funding problems along with the rest of the military, saying his staff only recently received their pay for August.

In related news, last week's issue of Moskovskiye Novosti (No. 43) reported that a rumor was circulating that Ladygin, who has been head of the GRU since Soviet times, will be removed from his position before the end of the year.

Economy

Ruble = 5,455/$1.00 (NY rate)

Kulikov on Crime Control

· Russian Interior Minister Anatoly Kulikov told reporters on Wednesday that crime in Russia is "becoming more and more organized, aggressive, and tough," while at the same time insisting that police are holding back "the wave of crime" and guaranteeing "public security and social stability in society," reported Itar-Tass.

Kulikov noted that the main problem facing his ministry is solving crimes with the solution rate currently at slightly over 10 percent. A total of 450 contract murders were reported to the Interior Ministry over the first 10 months of 1996. More than 40 of them have been handed over to courts and about 200 have a good chance of being solved, he said.

Speaking about economic security, Kulikov said that over 13,000 cases involving abuse of office and about 5,000 bribery cases were reported in the first 10 months of the year. He believes that the number of crimes in 1996 will be over 2.5 times the 1993 level.

Business

Sakha Diamond Co. Respond to Tax Cttee

· Vasily VLASOV, the prime minister of northeastern Siberia's Republic of Sakha (Yakutia), on Wednesday denounced a report by the special temporary tax commission which alleged "very serious financial violations by Russia's main diamond producer Almazy Rossii-Sakha. "The new scandal about the Almazy Rossii-Sakha joint stock company

Two American doctors,

in Moscow for a conference

before President Yeltsin's surgery,

were warned about discussing confidential

matters in the hotel due to possible "bugs,"

recounted Paul Harvey on WMAL radio. Once in their room, the two doctors decided to play James Bond and began looking for hidden listening devices. Searching the room, a hump was discovered on the carpeted floor. Beneath the carpet was a plastic cap, which covered wiring and a nut.

Believing they had discovered a bug, they

removed the nut and suddenly heard a

loud crash as the chandelier in the

room below collided

with the floor.

States during the period of time that the alleged espionage was conducted by Mr. Aluru J. PRASAD. Meetings occurred in Cyprus between GALKIN and KOTA, who was collecting data on SDI at the behest of PRASAD. During that period, Mr. GALKIN was a serving intelligence officer for the USSR. It appears that when Mr. GALKIN applied for his visa to the United States, he properly identified his previous employment in the intelligence service. It is understandable that the FBI might have attempted to obtain Mr. GALKIN's cooperation in an ongoing criminal prosecution of which he had knowledge. However, it is inappropriate for the State Department to approve his visa and the FBI to arrest him for his failure to cooperate in its prosecution of Mr. PRASAD. While the prosecution of Mr. PRASAD should go forward vigorously, GALKIN should be immediately released. Arresting former intelligence officers for espionage undertaken in their past, outside of the US, is not the type of precedent that the American government should be making.

GRU Director Speaks Out

· In a rare interview, published in Tuesday's Komsomolskaya Pravda, Colonel-General Fyodor LADYGIN, head of the Russian army's Main Intelligence Directorate (GRU), suggested that: "Despite all their assurances of friendship, the developed countries do not want Russia to be a strong power and are undertaking decisive measures to weaken it," reported Wednesday's OMRI. Because of this,

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is a purposeful provocative step by certain circles trying to control its activities," he told Itar-Tass. The Sakha government believes that "certain state bodies are involved into the activity of some powerful behind-the-scenes organizations" eager to "control diamond sales," he added.

In addition, Sakha President Mikhail NIKOLAYEV dismissed a statement by Finance Minister Aleksandr LIVSHITS that the commission had instructed him to fire regional officials responsible for the diamond company. "I have not received any telegrams concerning this," NIKOLAYEV is quoted by Itar-Tass as saying.

Meanwhile, officials at South Africa's De Beers are now expecting the further postponement of its long-awaited marketing deal with Almazy, slated for signing this month, as a result of the new controversy. "If ARS [Almazy] is distracted by government investigation, it could lead to more delays," De Beers director Tim CAPON told the Financial Times.

NatWest Markets, Almazy's investment banker, said that if Almazy does not sign the marketing agreement with De Beers, it won't be able to raise $500 million in loans needed to finance exploration and mine development, reported today's Wall Street Journal.

US Steel Cos. Allege Dumping

· Two US companies, Geneva Steel and Gulf States Steel, announced on Tuesday that they have filed anti-dumping petitions with the Department of Commerce and the International Trade Commission against imports of cut-to-length carbon plate from Russia, Ukraine, China, and South Africa, said a press release from the two companies.

The petitions also set forth the injury to the US industry caused by these dumped imports. Imports of cut-to-length plate from the countries subject to the petitions have quadrupled from 245,545 tons in 1993 to 967,412 tons in 1995. Imports from the subject countries comprised 17.5 percent of the total US cut-to-length plate market for the first eight months of 1996 and almost 30 percent for August 1996. Imports from the four countries represent approximately 75 percent of all cut-to-length plate imports during 1996.

Cut-to-length plate products are used in, among other things, road, bridge, and building construction,

as well as in the manufacture of ships, barges, and industrial equipment. Cut-to-length plate is often sold through steel service centers.

Following the dissolution of the Soviet Union, the European Union established quotas on cut-to-length plate from Russia and Ukraine. These quotas limit imports to approximately 80,000 tons per year, less than the total number of imports to the US in just two weeks during August. Press reports suggest that these quotas will likely be extended for at least an additional five years. Canada has also imposed dumping margins on Ukrainian plate.

European Republics

Newbridge Networks Inroads in FSU

· Canada's Newbridge Networks today announced a series of contracts in former Soviet republics, strongly positioning the company for additional business as communications infrastructure projects are initiated, said a company press release. Newbridge has concluded deals for various types of networks with two Russian companies, as well as enterprises in Latvia and Uzbekistan.

Northern Russia's Kolenergo, a unit of Unified Energy Systems (UES), has awarded Newbridge a contract for the creation of an integrated high-speed

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digital backbone network. The network is comprised of the Newbridge(R) 3600 MainStreet(R) Bandwidth Manager, a flexible, intelligent networking system that combines the functions of a digital cross-connect, an intelligent channel bank, an integrated voice and data multiplexer, and a frame relay packet switch as well as 3630 MainStreet Primary Rate and 3612 MainStreet Narrowband Multiplexers.

RUSNET, a high-capacity data network for scientific and educational organizations in northwest Russia, has selected a Newbridge switch for the first ATM network in Russia. Upon completion of this network, Newbridge and RUSNET expect to enter into agreements to expand the network to provide coverage for the entire northwestern portion of Russia.

Lattelekom, a joint venture between Latvia and an international consortium of companies which includes Britain's Cable & Wireless and Telecom Finland, has awarded Newbridge the first digital communication service in Latvia and the Baltics. The digital access backbone network will consist of the Newbridge 3600 MainStreet Bandwidth Manager. Lattelekom is the principal provider of public telecommunications services in Latvia.

The Central Bank of Uzbekistan has selected the Newbridge 3600 MainStreet Bandwidth Manager for the deployment of a digital data backbone network to provide frame relay service to the financial services industry of Uzbekistan.

Since 1993, Newbridge has partnered with the Moscow Local Telephone Network through a joint venture called Golden Line to provide high-speed, point-to-point, digital voice and data channels to international customers with offices in Moscow.

Polish Bank to Open In Lithuania

· The Lithuanian central bank today approved the application of Poland's Kredyt Bank to open a branch in Lithuania, making Kredyt the first foreign bank accorded this right, reported Reuters. The Lithua

nian parliament lifted a ban on foreign banks in June, after a December banking crisis in the country sparked by the closure of two top banks. Kredyt expects its Lithuanian branch will handle roughly half of the accounts stemming from Polish-Lithuanian trade, which rose 35 percent last year to $260 million.

Crime is Down and Corruption up in Ukraine

· Crime in Ukraine decreased by five percent so far this year, but corruption has risen dramatically, reported Wednesday's OMRI, citing Ukrainian television. Interior Minister Yuri KRAVCHENKO told the country's parliament that the violent crime rate had decreased by seven percent, but Security Service chief Vlodomyr RADCHENKO said the number of investigations of government officials for corruption had risen by 32 percent.

RADCHENKO recommended that the parliament retain capital punishment for violent crimes at least through the second wave of privatization of key Ukrainian firms, said the report. He claimed to have evidence that foreign criminal groups are planning to take control of some of these firms.

Ukraine to Privatize Lamp Co.

· Ukraine's State Property Fund has named four companies as advisers on the privatization of the Poltava Gas Lamp Factory, marking the launch of a second phase of privatization, reported today's Financial Times. The advisors are international accountancy Ernst & Young, Vienna investment boutique EPIC, Kiev bank Kinto Investments & Securities, and US law firm Squire, Sanders and Dempsey. The advisors will help the Ukrainian government find a buyer for a 51 percent stake in the lamp factory.

The Poltava plant, which has 3,500 employees and produces street lights and luminescent lamps, is the first to be put forward out of 208 companies slated for sale in this phase of privatization. Other strategic enterprises up for sale include an automaker, an alumina plant, a pulp and paper mill, steel companies, and a bus manufacturer.

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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