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

Wednesday, January 15, 1997

Russian Federation

Politics

Impeachment Plans Deemed Legally Shaky

· Russian State Duma security committee chairman Viktor ILYUKHIN today vowed to go forward with an impeachment motion against President Boris YELTSIN, despite being advised to drop the matter. The Duma legal department says that no legally binding effort to dismiss Yeltsin can be made until a law clarifying the process of impeachment on medical grounds is passed. The Russian Constitution essentially allows YELTSIN decide for himself when he it too sick to rule. Nonetheless, ILYUKHIN insisted that the impeachment drive continue and wants the debate to begin on Friday.

Presidential chief-of-staff Anatoly CHUBAIS today described as "political farce" ILYUKHIN's attempts to force YELTSIN's resignation for health reasons. "The absurdity of this initiative was obvious from the very beginning, both from the legal and the common sense point of view," he is cited by Interfax as saying.

Lebed Claims Clinton Invite

· Russia's most ambitious politician Aleksandr LEBED told reporters in Bonn today that he had accepted an invitation from US President Bill CLINTON to come to Washington for the inauguration, reported United Press International (UPI). White House spokesman David JOHNSON denied that CLINTON had issued an invite to LEBED, but said he was welcome to attend the festivities like anyone else. The administration is "not denying admission to the inauguration to anyone. There are plenty of places to watch along the parade route," he said.

Head of Moscow Bank Killed

· Yuri REPIN, head of the Moscow-based Kutuzovsky Bank was shot several times and killed

near his home in western Moscow on Tuesday night, reported Interfax, citing the Moscow police. Contract killings of major Russian businessmen seem to have slowed in recent months since the November murder of US businessman Paul TATUM.

Economy

Ruble = 5,599/$1.00 (NY rate)

Ruble = 5,599/$1.00 (CB rate)

Ruble = 5,592|5,606/$1.00 (buy|sell rates)

Pistol-Packing Teller Foils Bank Robbery

· A female bank teller turned the tables on three would-be bank robbers in Russia today, reported Interfax. The cashier took out a revolver and began shooting at the men as they held up a state savings bank branch in the central Russian city of Vladimir. One of the robbers was killed in the shooting and the other two were detained soon after fleeing the scene. Both have criminal records and are unemployed.

Russian Arbitration Courts in 1996

· Veniamin Yakovlev, the chairman of Russia's Supreme Arbitration Tribunal, told a news conference on Wednesday that some 400,000 lawsuits were filed with Russian arbitration courts last year, up 20 percent from 1995, reported Itar-Tass. Yakovlev said the number of disputes resolved by the courts grew by about 20 percent.

The bulk of the disputes taken to court—some 51 percent—concern settlements for merchandise, goods and ser

Today's News Highlights

Russia

Air Traffic Control Problems

OPIC Harkin to Visit Moscow

AssiDoman in Karelia

Continental Works w/Aeroflot

Lukoil May Join Tengiz Project

European Republics

Belarus C. Bank Head Arrested

EBRD Delays Ukraine Projects

Transcaucasia & Central Asia

Kyrgyz to Privatize Energy Cos.

Politics-Economics-Business

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Wednesday

January 15, 1997

Intercon's Daily

vices, he said. The share of lawsuits over credits has increased to seven percent in the overall volume of court cases. Compared with 1995, the number of leasehold disputes grew three-fold (alone in the first half of 1996 as many as 4,814 cases were filed). According to Yakovlev, a new type of litigation appeared last year, which involves disputes over protecting the business reputation of legal entities.

Russia's arbitration courts failed to meet the deadline for some four percent of all cases, largely as a result of poor funding and inadequate resources, he said. In addition, the courts are understaffed by 24 percent and they had been struggling to deal with a growing number of cases.

Air Traffic Control System in Trouble

· Russian Federal Aviation Service director Anatoly Zaitsev told a government meeting on Tuesday that the country's crumbling and outdated air traffic control system must be modernized as the aviation safety situation is worsening, said today's Nezavisimaya Gazeta. Two-thirds of the equipment used by Russian air traffic controllers was designed decades ago, he said, warning that "in five years' time the risk of accidents in the Russian air space will increase by several times." After poor safety standards on the aircraft, another major cause of accidents is the aging radio and lighting equipment at airports.

Aviation officials have been tasked with drawing up a plan to modernize the country's air traffic control system within one month. One plan calls for the formation of a single air traffic company overseeing both civilian and military traffic. At Tuesday's meeting, the government decided to restructure defense industry enterprises, separating out aviation companies that will concentrate exclusively on the manufacturing of civilian production.

Harkin Heads to Moscow

· Overseas Private Investment Corporation (OPIC) President and CEO Ruth HARKIN will stress the achievements of OPIC-supported investment in Russia and discuss the need for new legislation with business and government leaders in Moscow January 15-17. At a press conference in Washington Tuesday morning, HARKIN said that her trip to Moscow will include discussions with presidential chief-of-staff Anatoly CHUBAIS, First Deputy Prime

Minister Vladimir POTANIN, and members of the trade and defense Ministries, as well as US and Russian business leaders. On this, her 10th trip to Russia, Ms. HARKIN will not lead a business delegation, but instead will set the groundwork for the upcoming GORE-CHERNOMYRDIN Commission meeting in February and the CLINTON-YELTSIN summit in March.

During the trip, Ms. HARKIN will tour an OPIC-sponsored sausage making and packaging plant outside of Moscow, operated by Minnesota-based VG Enterprises. She highlighted the important role of small- and mid-sized businesses in OPIC's Russia portfolio. She stressed that OPIC can be part of Russia's economic recovery, job growth, and entry into the global market, but important reforms in Russian legislation are necessary to encourage foreign investment. These changes include tax reform, enforcement of arbitral awards, production-sharing agreements, and a bilateral investment treaty. In 1996, OPIC had its most active year in Russia, with some 47 new projects and over $1 billion in combined project financing and political risk insurance.

Business

AssiDoman Takes Control of Karelian Paper

· Swedish forestry group AssiDoman announced today that it has taken over operational responsibility for Russia's largest paper bag producer Segezhabumprom, said a company statement. AssiDoman says it controls 57 percent of the shares in Segezhabumprom, located in the northwestern Republic of Karelia. Intercon reported in June 1996 that AssiDoman had acquired 50 percent of Stratton Paper Holding Co., which had taken control of Segezhabumprom, earlier in 1996.

AssiDoman said it will complete negotiations, begun last year, with the European Bank for Reconstruction and Development (EBRD), the World Bank's International Financial Corp. (IFC), and other financial institutions for a $100 million investment program. The program will modernize the Segezhabumprom plant to raise productivity, improve product quality, and lessen the environmental impact. The plant has a capacity of 450,000 tons of bag paper and one billion bags per year, and employs 6,000 people. In 1995, however, it ran at only 20 percent of capacity.

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Continental to Fly to Moscow w/Aeroflot

· US Continental Airlines announced on Tuesday that it will begin flights from New York/Newark to Moscow on August 30, 1997, said a company press release. Daily DC_10 flights will provide service between Newark and Sheremetyevo airports.

Continental's decision to begin flights on the Moscow route this year was prompted by growth in US-Russia travel and was made possible by a recent accord with Aeroflot Russian International Airlines. Under the agreement, the two airlines will each be responsible for marketing approximately half the seats on the flights. The Russian carrier will put its "SU" code on the Continental flight and will market the service throughout the CIS.

The new service is subject to government approval, which is anticipated. The two airlines are evaluating further cooperation that is expected to result in Continental placing its "CO" code on Aeroflot's Airbus A_310 flight between Miami and Moscow.

Lukoil Seeks Stake in Tengiz Project

· Russian oil giant Lukoil is near final agreement with US Chevron Corp. to buy a stake in the Tengizchevroil oil project in Kazakhstan, reported Reuters. "Today we came close to reaching a final agreement with Chevron and we hope within a week to sign a final contract to buy five percent of their [total] stake in Tengiz," Lukoil President Vagit ALEKPEROV told reporters in the Moldovan capital of Kishinev on Tuesday. Chevron owns a 50 percent stake in the $20 billion Tengiz oilfield project, while US Mobil and the Kazakh government each own 25 percent. The venture plans to increase output to 180,000 barrels per day by the end of this year.

ALEKPEROV also said that Lukoil hoped to sign an agreement in February with Baghdad to revive a stalled billion-dollar project to develop oil reserves in Iraq's Western Kurna oilfield. Lukoil holds a 70 percent stake in a stalled production-sharing deal with two Russian firms, Zarubezhneft and Mashinoimport, to develop Iraq's Western Kurna and Northern Rumeila fields. The deal was originally set up in July 1995. One of the Russian partners had completed the first stage of investments in the project before the UN imposed economic sanctions on Iraq after the 1991 Gulf War.

European Republics

Belarus Central Bank Chairwoman Arrested

· Belarus President Aleksandr Lukashenko on Tuesday dismissed National Bank chief Tamara Vinnikova for "abuse of power" and she was subsequently arrested by police for inflicting "gross economic damage on the state," reported Belarus national radio. She is expected to be formally charged this week for financial misconduct related to her previous position as head of a commercial bank, as well as possibly for real estate machinations since her appointment as head of the central bank.

The president appointed VINNIKOVA to head the central bank in February 1996 without submitting the selection to a parliamentary vote, although the bank was legally under parliamentary control. Former liberal central bank head Stanislav BOGDANKEVICH quit in September, refusing to approve a LUKASHENKO-organized merger to create the country's largest commercial bank. Bogdankevich had opposed the merger of the State Savings Bank and BelarusBank, which was then headed by VINNIKOVA, saying it violated state legislation.

BOGDANKEVICH criticized VINNIKOVA's performance in office and said she had a long record of mismanagement, reported the Associated Press (AP). "VINNIKOVA has never shown a firm will, simply following orders from the top, and the banking system is now in ruins," he said.

On the same day, the presidential press service announced that Finance Minister Pavel DIK had resigned and LUKASHENKO had named Nikolai RUMAS to replace him, reported Reuters. There was no indication that DIK's departure was related to VINNIKOVA's dismissal.

On Monday, Belarus' newly-formed upper house of parliament held its first plenary session and Pavel Shipuk was elected as the body's chairman, reported Interfax. Shipuk, 49, is a former chairman of the executive council of Gomel province. The leader of the Belarussian Women's Association, Tamara Dudko, was elected deputy chairperson.

The upper house also approved the appointments of several judges and other officials, nominated by

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Lukashenko. The appointments include Procurator-General Oleg Bozhelko, Constitutional Court chairman Grigory Vasilevich, Supreme Court chairman Valentin Sukalo and Central Electoral Committee Chairman Lidiya Yermoshina.

EBRD Suspends New Lending to Ukraine

· The European Bank for Reconstruction and Development (EBRD) has delayed new private sector lending to Ukraine until the government makes a greater effort to combat corruption and improve the country's investment climate, reported Tuesday's Financial Times. "We are having some difficulties with the bureaucracy, either because the laws are unclear or because bureaucrats have substantial power to interfere," Jaroslav KINACH, the EBRD's representative in Kiev, told FT. After several EBRD projects in Ukraine became bogged down in red tape, the Bank's management decided to postpone approval of six new loan projects, but the approval process could be restarted as early as this month.

Reportedly, the main impetus behind the EBRD decision was the problems encountered by Kiev Atlantic, a small US-German agribusiness, which provides farmers with seeds and oil in exchange for grain. The company took a substantial loss when the Ukrainian government suddenly impounded last year's poor grain harvest to ration its distribution, said FT. Kiev Atlantic has also been hindered in its attempts to build an oil storage facility and had faced harassing tax inspections and personal threats.

The EBRD is an investor in Kiev Atlantic, having acquired a $3 million equity interest in the company and provided a $3.9 million loan for its agricultural center south of Kiev. EBRD president Jacques de LAROSIERE toured the facility in 1995 and Bank protests against Kiev Atlantic's problems prompted Ukrainian Premier LAZARENKO to issue a decree reimbursing the company for part of its losses.

Western officials told FT that the EBRD plays a critical role in promoting foreign investment in

Ukraine's difficult economic climate, a role which is insignificantly appreciated in Kiev. "If they don't carry the reforms forward there will be a backlash in the international business community that will lead investors to flee rather than flock to Ukraine," said US Treasury Undersecretary David LIPTON.

Transcaucasia and Central Asia

Kyrgyz Economy Improves in 1996

· Kyrgyzstan's gross national product (GNP) increased by 5.4 percent in 1996over 1995, according to the National Statistics Bureau, reported Xinhua. Industrial output rose by 10.8 percent and agricultural output by 13.1 percent. Inflation rate stood at 37 percent in 1996. Also, Kyrgyzstan's foreign trade deficit increased from $50 million in 1995 to $300 million last year.

Kyrgyzstan to Privatize Energy Sector

· Kyrgyz President Askar AKAYEV has signed a decree ordering the government to draft a plan by April 1 for privatizing the country's energy sector, reported Reuters. The decree said that corporate management was being imposed on the state energy company Kyrgyzenergoholding as a first step. A board of directors is being set up for the company and Vice President Kudaikul ABASBEKOV has been appointed as its acting chief executive.

The Kyrgyz energy sector could become an attractive investment. Kyrgyzstan's 19 hydroelectric and two thermal power stations annually produce 12-14 billion kilowatt/hours of electricity, which represents only nine percent of their energy potential, estimated at 142.5 billion kwh. During 1994-96, it exported 4.7 billion kwh to Kazakhstan and one billion kwh to Uzbekistan, earning a total of $179.4 million.

The decree exempted from privatization five hydroelectric power plants located on the mountainous Toktogul cascade of the Naryn river.

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on Monday, January 20, 1997, for Inauguration Day.

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Alycia S. Draper, Rebecca Martin, Contributing Editors

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