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, January 2, 1997

US State Department spokesman John DINGER told reporters Tuesday that they were awaiting the results of the New York City police department probe of the incident before issuing an apology. "The Department of State takes any incident of that type seriously. We will watch the investigation as it develops closely," he is quoted by Reuters as saying.

Economy

Ruble = 5,747.13/$1.00 (NY rate)

Russia 1996 Trade Up Five Percent

· Russia's foreign trade turnover reached $133 billion in 1996, a 5.2 percent increase over 1995 trade, reported Prime-Tass, citing preliminary estimates by the Russian Trade Ministry. Russia's 1996 trade surplus was nearly $40 billion. Exports totaled about $86.5 billion, up 8.3 percent from 1995, while imports remained relatively unchanged at $46.6 billion. Countries outside of the Commonwealth of Independent States (CIS) accounted for 80 percent of Russian exports. The majority of exports were raw materials, particularly oil and natural gas. The import total did not include goods bought abroad and resold by Russia's thousands of shuttle-traders.

Business

De Beers Ends Deal w/Russia

· As threatened, South African diamond giant De Beers on Wednesday broke off a $1.2 million diamond marketing agreement with Russia, ending a 35-year-old business re

Russian Federation

Politics

Russia Demands Apology From NYC Police

· The Russian Foreign Ministry on Tuesday filed a protest with the US Embassy in Moscow, demanding an apology from America in connection with the alleged beating of a Russian diplomat by New York City police. According to the Russian side, Boris Obnosov, first secretary of Russia's permanent representation at the UN, was pulled out of his car and beaten up by policemen on Sunday. His arm was broken, his glasses smashed, and his clothes torn, it said. Despite showing his diplomatic identification, he was handcuffed, taken to a police station and detained there for 30 minutes. The Russian government has demanded an apology from the US charge d'affairs in Moscow and asked for disciplinary action against the police officers involved in the incident.

New York officials present a radically different version of events. Police Commissioner Howard Safir say that New York police tried to prevent OBNOSOV and Yuri Orange, an official of Belarus UN mission, from driving while intoxicated. The police officers said they were ticketing Obnosov's car for being parked in front of a hydrant, when he and ORANGE returned to the car in an inebriated state and attempted to drive away. When the police pulled OBNOSOV from the car, he was drunk and abusive and refused to show his driver's license. ORANGE jumped out of the car and punched an officer. The two were released from the police station when their diplomatic credentials were established.

New York Mayor Rudolph Giuliani suggested the diplomats should be recalled to their countries. "They are not doing any good for their country other than creating a bad reputation," he is quoted by United Press International as saying.

Today's News Highlights

Russia

Lukoil Forecast for 1997

GAZ Gets Tax Breaks

Baltic Shipping Ruled Bankrupt

Regional Election Table

European Republics

Ukraine Generals Investigated

Ukraine-Daewoo Alumina Deal

Transcaucasia & Central Asia

Iran-Turkey Oil Pipeline Deal

Kazakhs Want Alcohol Controls

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Thursday

January 2, 1997

Intercon's Daily

lationship, reported today's Financial Times. Frustrated by Russian officials delay in signing a new marketing agreement, De Beers warned on December 18 that it would cancel that planned agreement if Russia did not sign it by the end of the year, reported Intercon. The previous five-year agreement, which obligated Russia to market 95 percent of its rough diamond exports through De Beers' Central Selling Organization, expired in December 1995, but De Beers continued to honor the terms of the contract while a new one was being negotiated.

De Beers and Russian diamond producer Almazy Rossii-Sakha agreed on a new contract in September, which apparently fell victim to bureaucratic infighting as the government never approved it. De Beers' decision to abandon the contract means that it is no longer committed to purchase Russian diamonds at a predetermined price, regardless of market conditions. De Beers will continue to buy rough diamonds from Russia, but price and quantity will now be determined by market forces. Russia produces some 20 percent of the world's diamonds.

Diamond traders differ on the likely consequences of agreement's termination, but the main casualty of the decision is likely to be Almazy Rossii Sakha's plans to raise capital from Western banks, said the Financial Times. The situation could be temporary, however, as both Russia and De Beers have said talks on a new marketing agreement will continue.

Lukoil Expects 1% Output Rise in 1997

· Russia's largest oil company Lukoil predicts only modest growth in output, revenue, and profit next year as an expected investment shortage will cut into capital spending, reported Dow Jones on Monday. "The indicator will be better," Lukoil vice-president Leonid FEDUN told reporters. "Not a lot better, but better." Crude oil output is forecast to increase by one percent in 1997 over last year, totaling about 57.5 million metric tons, including joint venture production.

In 1997, Lukoil plans to launch a borrowing program to raise $300 million with short-term unsecured notes and 5-8 year secured bonds. The securities will be aimed at foreign investors, said FEDUN, without providing further details. FEDUN also confirmed Lukoil's plans to place a global issue of at least 100

million shares in 1997, worth more than $1 billion at current prices, according to Dow Jones. He said that Lukoil expects to formally apply to US regulators by the end of the second quarter to place an issue of level-three American Depositary Receipts in the US.

Automaker GAZ Receives Tax Breaks

· The Russian government will give a tax break to the Gorky Automobile Factory (GAZ) to help it upgrade its main car model, the Volga sedan, reported today's Wall Street Journal. The order, published Tuesday, allows GAZ to delay its tax payments for the third quarter of 1996. GAZ's tax liability will be converted into a loan payable over five years at an interest rate equivalent to one-fourth of the Central Bank's refinancing rate, which now stands at 48 percent. The total value of the loan is unknown.

One of Russia's largest automakers, GAZ is located in central Russian Nizhny Novgorod Oblast, a leading area of reform in the country. The Nizhny Novgorod regional government has agreed to guarantee the federal government loan to GAZ.

GAZ plans to shut down its main auto assembly line in early March to install new equipment for producing an updated model, the GAZ-3110.

The GAZ tax deal is an innovative arrangement for financing the modernization of the plant. It is also interesting as it comes at a time when Russian officials have been clamping down on tax payments by major Russian companies. Apparently, it is an effort to reward and encourage a relatively healthy and progressive Russian company.

In June 1995, GAZ boasted 11 major auto plants and over 400 dealers, was entirely privatized, and was the only Russian automaker not receiving government subsidies. Intercon reported in February 1996 that production at GAZ seemed to be recovering after three years of decline. In 1995, GAZ increased its output and earned 1.3 trillion rubles in profit, according to GAZ president Nikolai PUGIN. Output rose 10 percent compared with 1994 and sales grew by 12 percent. GAZ reported that in 1995 the factory produced 200,292 cars and trucks.

Total output at GAZ increased by 4.3 percent in 1996, according to Itar-Tass. Truck production was up 3.7 percent overall, while output of the popular

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Gazell light truck grew by 31 percent. Car production rose 4.6 percent to 124,000 units. In 1997, GAZ plans to increase overall output by 12 percent and car production by nine percent.

Baltic Shipping Ruled Bankrupt

· Russia's Baltic Shipping Lines was declared bankrupt last week by the St. Petersburg regional arbitration court, which appointed an outside manager for the company, reported the Associated Press (AP). Former company head Mikhail ROMANOVKSY has been appointed receiver. Baltic Shipping, Russia's only shipping company operating in the Baltic Sea, owes approximately $420 million to foreign creditors and 540 billion rubles ($97.3 million) to creditors in Russia. Nineteen of its 53 vessels are being held in foreign ports for unpaid debts.

The court's decision will allow the company to postpone debt payments by 18 months. ROMANOVKSY told Interfax that after paying its debts, the company will be left with no more than 40 ships, with 15 at most under its full control. The company is also expected to reduce employment by more than half to about 4,000-5,000 employees.

Russia to Drill for Oil in Birobidzhan

· The Russian 1997 federal budget will allocate two billion rubles to Russia's Far Eastern Jewish Autonomous Oblast (Birobidzhan) for the geophysical prospecting of gas and oil deposits, regional governor Nikolai Volkov told Itar-Tass on Tuesday. According to Volkov, several Russian and foreign companies are ready to make substantial investments into the development of the promising oil and gas fields in the region.

European Republics

Ukraine Pres. Admin. Head Named

· Ukrainian president Leonid KUCHMA last week named Yevgeny KUSHNAREV as his new chief-of-staff, reported Xinhua. KUSHNAREV, an ethnic Russian who hails from the eastern city of Kharkov, is a leading figure in the Political Committee of the People's Democratic party, and chairman of the New Ukrainian Association. He replaces Dmitri TABACHNIK who was dismissed in mid-December for alleged abuse of power. The parliamentary Anti-Corruption Committee had accused TABACHNIK of cooperating with Russian secret services, said

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Xinhua. TABACHNIK had been the presidential chief-of-staff since KUCHMA took office in July 1994.

Ukraine Generals Linked to the Mafia

· Fifteen Ukrainian generals are being investigated on charges of involvement in organized criminal activities, reported Xinhua on Monday, citing a local newspaper. The report said the generals and 85 field officers were connected with 49 organized criminal groups. The accused all work in the financial departments of the Defense Ministry and the Air Force. "The armed forces have been drowned by bribery waves which are flooding outside barracks," said Anatoly Beliayev, deputy director of Ukraine's National Security Bureau.

Daewoo Alumina Credit for Ukraine

· Ukraine's Nikolayev alumina plant will sign a five-year, $40 million loan deal with South Korea's Daewoo, said Ukrinform news agency. The money will be invested in new technology for the production of sandy alumina. This product will increase annual total output at the plant from 1.2 to 1.5 million tons.

Transcaucasia and Central Asia

Iran and Turkey Plan Caspian Oil Pipeline

· In an indication of the growing closeness between Turkey and Iran, the two countries have agreed to build an oil pipeline to transport Iran's Caspian Sea oil to Turkey's Mediterranean Sea port of Ceyhan, reported the Associated Press (AP) on Wednesday, citing an Istanbul-based newspaper. The agreement, reached in Tehran Saturday during the visit of Turkish Energy Minister Recai KUTAN, also calls for the pipeline to carry natural gas from Turkmenistan through Iran to Turkey.

Relations between Iran and Turkey have improved since Turkey's Islamic-led government took power in June. Recent economic and trade deals between the two have caused concern in the US, as well as in Russia and Georgia, which had hoped to be used as transit routes for Caspian oil.

Last year, Turkey proposed the construction of a pipeline from Baku through Georgia and Turkey to Ceyhan to transport Azerbaijan's Caspian oil, but the idea was rejected by the international consortium developing a major Azeri deposit.

Comment: A corruption scandal which exposed links between organized crime and government security officials has rocked Turkey over the last two months. It has already led to the resignations of the interior minister and the Istanbul police chief, and has widened to implicate Deputy Prime Minister CILLER and her husband. The scandal threatens to uproot CILLER and her party, which supports the West's anti-Iranian stance. This could allow the further ascendancy of Islamic political forces in Turkey, leading to even stronger relations with Iran that would have far-reaching implications in the region, especially for Caspian oil.

Kazakhstan to Control Vodka Production

· Kazakh President Nursultan NAZARBAYEV told reporters on Monday that he would impose state controls over alcohol production in the country to clamp down on rampant smuggling, reported Reuters. He estimated that 40-50 percent of wines and spirits for sale in Kazakhstan were contraband. He said that authorities had confiscated 1.62 million liters of smuggled alcohol in the last quarter of 1996. NAZARBAYEV said, however, stricter state controls did not mean vodka producers faced nationalization.

Updates

Chechnya: Chechnya's Central Electoral Commission today registered 16 candidates to compete in the January 27 presidential elections, reported Itar-Tass. All 16 candidates will meet today at Commission headquarters to make of formal pledge of allegiance to Chechnya. The five main candidates, including rebel leader Zelimkhan YANDARBIYEV and rebel military commander Shamil BASAYEV, will meet later this week to discuss putting forward a single candidate.

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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