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

Friday, January 17, 1997

Russian Federation

Politics

Bomb Kills Businessman Linked to Zhirinovsky

· A bomb exploded shortly before noon today in central Moscow, killing businessman Gennady DZEN and injuring his two bodyguards, reported the Associated Press (AP). DZEN, the director of Roskontraktpostavka trading firm, was killed as he got out of his jeep upon arriving at work.

According to the Moscow police, the remote-controlled bomb, equivalent to 500 grams of TNT, was planted in a drainage pipe outside of a building on Mantulinskaya Street that houses a district administration and police headquarters and the offices of several companies.

DZEN carried documents identifying him as a member of Vladimir ZHIRINOVSKY's Liberal Democratic Party, said police. ZHIRINOVSKY's office confirmed to AP that DZEN had worked as a volunteer. Interfax quoted Moscow police criminal investigations chief Viktor GOLOVANOV as saying that police had several possible explanations for the attack, including what he called "financial-criminal disagreements."

Duma on Army Reform, Ethics Committees

· The Russian State Duma today agreed with a proposal by President Boris Yeltsin to set up a commission to finalize a federal bill on military reform, reported Itar-Tass. The parliament decided to elect a commission of 15 legislators and to appoint deputy Duma speaker Artur Chilingarov as its chairman. The Duma suggested that the president, the Federation Council (upper house), and the government should send representatives to participate in the commission's work. The commission must complete work on the bill and submit for the parliament's consideration by February 15.

State Duma speaker Gennady Seleznyov said today an ethics committee will be set up in the lower house, reported Itar-Tass. He said the Duma council had instructed the committee on rules of procedure to initiate the creation of a body which would protect parliamentarians from those who commit ethical violations. Many Duma deputies have insisted on the formation of an ethics committee. Sergei Ivanenko complained that ultranationalist leader Vladimir Zhirinovsky "has been insulting his colleagues for three years" without any punishment for "his slander and lies," according to the news agency.

Economy

US Trade Deficit w/Russia Down

· According to figures released by the US Department of Commerce today, the US trade deficit with Russia dropped from $125 million in October to $39 million in November. During January-November 1996, the US trade deficit with Russia totaled $65 million. These figures cover trade in goods, services are not included.

Business

Promstroibank to Open New York Office

· The grand opening of the New York office of Russia's Promstroibank is scheduled for January 23, Promstroibank spokesman Sergei Abdura-khmanov told Prime-Tass on Thursday. According to the spokesman, Promstroibank

Today's News Highlights

Russia

Credit Suisse Launches Funds

Ericsson in Samara Deal

European Republics

CIS Premiers Meeting Opens

Ukraine Defense, Security

New Belarus Central Bank Head

Transcaucasia & Central Asia

Abbot Gets AIOC Contract

Chevron Sells to Lukoil

Kazakh Govt. Buys Banks

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January 17, 1997

Intercon's Daily

Ruble = 5,601/$1.00 (NY rate)

Ruble = 5,605/$1.00 (CB rate)

Ruble = 5,599|5,611/$1.00 (buy|sell rates)

November 1996, but only about a half a dozen have been set up so far.

"The competition is relatively modest and we feel that after the MMM debacle there was a need for this type of product," Credit Suisse chairman Rainer GUT told FT in Moscow. "It has been welcomed by the authorities." Credit Suisse, which has a staff of 350 in Moscow working on various banking operations, has already launched two Russian investment funds aimed at money markets and short-term government bonds, which have raised $28 billion rubles ($5.3 million).

Ericsson System in Samara

· Swedish telecommunications giant LM Ericsson Telefon has signed a contract with Bee Line Samara to digitalize and expand the AMPS wireless communications network in the south-central Russian region of Samara, said an Ericsson statement released today. Ericsson will supply and install a full size Mobile Switching Center and seven new RBS 884 Radio Base Stations starting in February. Network improvements will enable Bee Line Samara to increase subscribers from 2,000 to 7,000 by May. Samara's wireless phone subscriptions cost some $5,500, among the highest rates in the world.

Bee Line Samara is 50 percent-owned by Moscow-based CIS Vimpelcom, Russia's largest wireless communications provider, and the other 50 percent by local partners.

Aug Sep Oct Nov Dec Jan

ranks among Russia's top ten banks and will be the first to have an office operating in the US.

Promstroibank (Industrial and Construction Bank) was registered in December 1991. The bank's assets totaled 7.4 trillion rubles as of October 1, 1996 and its authorized capital amounted to 100 billion rubles (about $18 million). Promstroibank has 70 affiliates in a majority of Russia's industrial regions. It also has representative offices in Great Britain, Germany, and Switzerland.

Credit Suisse Launches Russia Unit Funds

· Swiss financial group Credit Suisse is planning to enter the infant retail savings market in Russia and reinvest domestic capital into Russian industry through the creation of a series of investment funds, reported the Financial Times today. Credit Suisse initially plans to launch three unit investment funds—modeled on US mutual funds—providing investors with a range of secure investment options.

Russians are estimated to be holding on to more than $20 billion in savings, afraid to invest in local funds after being taken in several pyramid schemes, such as the notorious MMM investment fund, during the last few years. Russia's Federal Securities Commission began regulating investment funds last year, but allowed the introduction of new unit investment funds, provided they obtain government licenses. Boston-based Pioneer Group became the first to launch a licensed unit investment fund in Russia in

European Republics

CIS Premiers Meeting Opens

· "Under new conditions of sovereign development, our strength is in unity," Russian Prime Minister Viktor Chernomyrdin told a meeting of Commonwealth of Independent States (CIS) heads of government in Moscow today, according to Itar-Tass. "Our integration is a mandatory prerequisite for a gradual movement of all Commonwealth participants forward."

Meeting participants discussed draft guidelines for integration, to be signed during a CIS leaders summit later this month, but only eight of 12 CIS premiers signed the document, reported Reuters. The prime ministers of Georgia, Azerbaijan, Turkmenistan, and Uzbekistan decided not to sign the draft.

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A large number of accords have been signed since the CIS' inception five years ago, but few plans have actually been implemented, earning the CIS the reputation as a highly ineffectual body. "The gap is still great between proclaimed intentions and the actual situation of affairs, and questions are raised too often to one another concerning implementation of obligations," noted CHERNOMYRDIN in his opening statement, said Itar-Tass.

According to Russian Trade Minister Oleg DAVYDOV, the economic environment in the CIS has not been profitable for Russia so far. "There is no clear free trade zone or Most Favored Nation system in the Commonwealth, but rather a mixed-up, indefinite system of trade relations drawn up for political reasons," he is quoted by Interfax as saying. Specifically, DAVYDOV said Russia had suffered losses from imports of cheap vodka from Ukraine and other Russian officials have complained that CIS members don't even try to pay for energy supplies from Russia.

Ukraine Defense Budget, Security Doctrine

· Ukrainian Defense Minister Aleksandr Kuzmuk said Thursday that the 1997 budget has allocated the ministry only one quarter of the money it needs, forcing him to launch major reforms in the armed forces, reported Xinhua. The ministry must lay off 1,000 generals and officers this year as a result of sweeping budget cuts, he said. Some 500 military units and organizations will also be scrapped. Given its limited funds, the ministry will focus on developing medium-sized bombers, fighters, and missiles.

The Defense Ministry has even been forced to sell military assets to raise money. In 1996, it received some 32.6 million hryvnias (about $17.6 million) from such sales. Some 70 percent of the money was used to modernize weaponry and military technology and 30 percent to build housing.

In related news, the Ukrainian parliament on Thursday approved a National Security Doctrine which has been in the works since the country gained independence in late 1991, reported Xinhua and Itar-Tass. The doctrine stresses the protection of national interests, particularly from separatist tendencies in certain regions of the country, as well as from the aggravation of inter-ethnic conflicts. The doctrine clearly sets out the jurisdiction of all depart

ments involved in national security, as well as methods for democratic and civil supervision of the military. It also defines information expansion as a factor endangering the national security of the state. The passage of the doctrine will allow the parliament to consider a draft law on the Council for National Security and Defense, a military concept, as well as the bases of economic and information security.

The doctrine also stipulates that Ukraine can join international security organizations. Defense Minister KUZMUK told reporters on Thursday that he saw no obstacles to Ukraine's joining NATO by 2010, reported Itar-Tass. A similar statement was made by the chairman of the national security and defense council Vladimir Gorbulin on Wednesday.

New Belarus Central Bank Head Named

· Belarus President Aleksandr LUKASHENKO has appointed Gennady ALEINIKOV, former manager of the Minsk city office of the State Bank of the Soviet Union, as chairman of the National Bank of Belarus, reported Prime-Tass on Thursday. ALEINIKOV was head of the Foreign Economic Bank before his appointment. He will replace former Bank chair Tamara VINNIKOVA, who was dismissed earlier this week and subsequently arrested for alleged abuse of power. The appointment is subject to the approval of the parliament.

New Latvian Finance Minister Named

· The Latvian parliament on Thursday appointed Vasily MELNIKS as the country's new Finance Minister, reported Interfax. MELNIKS, 30, who is the youngest minister in the Latvian government, has served as acting Finance Minister since October 1996, when former Finance Minister Aivars Kreitus resigned. MELNIKS founded the first construction cooperative in Latvia in 1988 and was elected councilor for Riga in 1994. Latvian daily Diena has claimed that MELNIKS contravened the anti-corruption law by simultaneously chairing the board of Riga Shipyards and serving on the Riga port administration, according to Thursday's OMRI. The ruling parliamentary coalition supported his candidacy, however, because they feared his rejection would lead to a government collapse.

KREITUS quit the government after the Latvian parliament, led by the Saimnieks faction, voted to

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remove his wife, Ilga KREITUSE, from the chairwomanship of the legislature, and stripped KREITUS himself of membership in the party.

Transcaucasia and Central Asia

UK KCA Drilling Wins AIOC Contract

· Britain's Abbot Group announced today that its wholly-owned subsidary KCA Drilling Ltd. has been awarded a contract by the Azerbaijan International Operating Company (AIOC) to conduct a drilling study on three fields in the Caspian Sea, reported Reuters. Abbot is conducting the study along with a unit of Canada's Dresco Energy Services Ltd. for the next phase in the development of the Chirag, Guneshli and Azeri fields.

Chevron Sells Tengiz Stake to Lukoil

· US Chevron Corp. announced on Thursday that it has reached an agreement in principle to sell 10 percent of its interest in the Tengizchevroil joint venture in Kazakhstan to Russian oil company Lukoil, said a Chevron press release. At the conclusion of the sale, Chevron will retain a 45 percent share, compared with its previous 50 percent ownership, and Lukoil will hold a five percent stake. A definitive agreement will be concluded in the coming weeks.

Financial terms of the sale were not disclosed. The Tengiz field is estimated to hold proven reserves of more than six billion barrels of oil.

The recent signing of the Caspian Pipeline Consortium (CPC) restructuring agreement puts the development of the Tengiz field on an even faster track, said Dick Matzke, president of Chevron Overseas Petroleum Inc., which runs the Tengiz venture. Chevron (15 percent) and Lukoil (12.5 percent) are the largest oil company shareholders in CPC, which should increase oil exports from the Russian Black Sea coast by 1.5 million barrels per day.

Chevron and the Kazakh government entered into the $20 billion, 40-year joint venture in April 1993, forming Tengizchevroil to operate the Tengiz field

near the northeastern shore of the Caspian Sea. Last year, Kazakhstan sold half of its stake to US Mobil Corp. After this agreement, equity ownership will be Chevron—45 percent; Kazakhstan and Mobil—25 percent each; and Lukoil—five percent.

Kazakh Gov. Takes Over Banks in Crisis

· The government of Kazakhstan made use of a new law to temporarily nationalize the Turan and Alem banks this week in the latest attempt to resolve a liquidity crisis facing the economy, reported today's Financial Times. A law passed last month allows the Kazakh National Bank to purchase shares of problem banks for a minimal sum, provided there is an investor prepared to take possession of the shares and recapitalize the bank. In this case, the investor is the Kazakh government. The banks will eventually be sold to private investors. Before the action, Turan bank had been fully privatized, while Alem bank was 53 percent government owned.

Together, the banks account for 20 percent of the Kazakh bank sector's loans. Fifty-four percent of Turan's and 80 percent of Alem's loan portfolios were classified as "non-standard," which means repayment is uncertain. Bad loans in the Kazakh banking sector are a symptom of a payment crisis in the overall economy. In many cases borrowers default as they are owed money which they cannot collect. Haphazard privatization has exacerbated the non-payments problem.

The government has now merged the two banks to save on operating costs. Deputy central bank head Anvar SAIDENOV told FT that the government has set aside eight billion tenge (about $105 million) in the 1997 budget to recapitalize the bank.

The merger will be closely watched by international lending institutions, which will welcome the move as long as it leads to privatization, a European Bank of Reconstruction and Development official told FT.

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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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