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

Tuesday, January 21, 1997

Russian Federation

Politics

Yeltsin Released from the Hospital

· Russian President Boris Yeltsin was discharged from Moscow's Central Clinic Hospital on Monday and will recuperate further at his dacha in Gorky-9, located some 20 kms southwest of Moscow. The president was hospitalized with double pneumonia on January 8. YELTSIN will do paperwork and hold a few important meetings from his dacha this week, said top presidential spokesman Sergei Yastrzhembsky. No mention was made of when he will return to the Kremlin, but several major meetings scheduled to begin at the end of next week have not been canceled. The president is expected to preside over a summit of CIS heads of state in late January in Moscow, to meet with French President Jacques Chirac in Moscow on February 2, and to travel to the Hague in early February.

Prime Minister Viktor Chernomyrdin, however, will represent YELTSIN at the World Economic Forum in Davos, Switzerland on January 29-30. Reportedly, presidential chief-of-staff Anatoly CHUBAIS will also attend the Davos meeting.

Deputy Ilyukhin Goes After Chubais

· Russian State Duma today decided to debate a motion, forwarded by security committee chairman Viktor ILYUKHIN, to ask President Boris YELTSIN to investigate his chief-of-staff Anatoly CHUBAIS on corruption charges, reported Reuters. ILYUKHIN, who last week called for the Duma to impeach YELTSIN on grounds that he is too sick to rule, said CHUBAIS may have violated laws barring officials from earning money privately.

The new motion is likely related to new allegations in the Russian media that CHUBAIS received sub

stantial payments during YELTSIN's re-election campaign and after he was appointed to head the presidential administration in July, as well as to a strong desire by the Communists to oust him from the Kremlin. ILYUKHIN distributed in the Duma photocopies of what was purported to be a credit card statement for an account belonging to CHUBAIS, saying it proved that he had received substantial funds. He likened the receipt of large payments "for activity not linked to the fulfillment of his direct responsibilities as a civil servant," to taking bribes.

CHUBAIS responded quickly to the Duma's decision, denying all of ILYUKHIN's charges. "I appreciate the attention paid to me by the Duma council. Unfortunately, I am forced to disappoint the respected deputies—I paid taxes on my 1996 income in full, in line with Russian law.... Incidentally, the sum I paid was 515 million rubles. I call on comrade ILYUKHIN and his colleagues to follow my example—pay your taxes and tell society about it," Interfax quoted him as saying. CHUBAIS said most of his income came from lecture and consultations before he joined the president's campaign staff.

Finance Minister to Resign Due to Health

· Russian Finance Minister Aleksandr LIVSHITS is expected to resign in the next few days because of failing health, reported today's Segodnya. LIVSHITS was admitted to Moscow's Central Clinic Hospital on January 8 with flu symptoms, but it has since come to light that he has heart problems as

Today's News Highlights

Russia

Lebed at the Inauguration

IMF to Release Two Tranches

New Tax Laws in Effect

Logovaz/Lotte Business Center

OPIC Raises Insurance Limit

South Caucasus & Central Asia

World Bank Loan for Azeri. Agr.

Monument/Mobil in Turkmen

Iran/Turkmen Gas Pipeline

New Kaztelekom Tender Planned

Politics-Economics-Business

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Tuesday

January 21, 1997

Intercon's Daily

well. LIVSHITS is 50 years old. LIVSHITS, a former presidential aide, was appointed finance minister and deputy prime minister in August following YELTSIN's re-election.

Segodnya cited government officials as saying that LIVSHITS was told that he must cede his post if he is to resume treatment, which will likely include bypass surgery. The newspaper suggested that presidential chief-of-staff Anatoly CHUBAIS is seeking to take advantage of LIVSHITS' departure to bring the Finance Ministry under Kremlin control. Aleksei KUDRIN, the head of the Kremlin main auditing department and a close ally of CHUBAIS, is viewed as a likely successor to LIVSHITS.

Former Moscow Amb. to State Dept.?

· The Associated Press (AP) reported Friday that former US Ambassador to Russia Thomas PICKERING is a front-runner for the number three policy position at the US State Department, undersecretary of state for political affairs. Intercon sources indicate, however, that PICKERING may be offered the number two spot at State, the post being vacated by Strobe TALBOTT, which may be appropriate considering his status and experience. PICKERING left Moscow and a distinguished foreign service career on November 1 to head the Washingtonbased Eurasia Foundation.

Lebed at Inauguration Thanks to Sen. Roth

· Russia's most ambitious politician Aleksandr Lebed, in Washington to attend the inauguration of President Bill Clinton, said in today's New York Times that he feels "white envy" at the United States' 200 years of "conflict-free change of supreme power." It turns out that LEBED, who caused a stir last week when he told reporters in Germany that he had been invited by CLINTON himself, was actually invited by Senator William Roth (R-Del.) at the request of "an anonymous constituent" who runs a business development group.

Lebed met Monday with Senator ROTH, who is president of the North Atlantic Assembly, an organization of legislators from NATO countries, and Sen. Gordon Smith (R-Ore.). ROTH said that he found LEBED "much more flexible on the issue of NATO enlargement than some of his colleagues in Moscow," according to the Times.

LEBED and his wife attended the swearing-in ceremony for CLINTON, the parade, and an inaugural ball, as well as having dinner with former national security advisor Zbigniew BRZEZINSKI, whose son is ROTH's foreign policy aide. LEBED went to Wilmington, Del., today to meet with Du Pont executives and will travel to New York for meetings with executives, such as Donald TRUMP and Morgan Stanley's Mahmoud MAMDANI, before departing for Russia on Wednesday.

Results of Primakov-Solana Meeting Unclear

· What are likely to be lengthy negotiations on a special relationship between Russia and NATO began in earnest on Monday with a five-hour meeting between Russian Foreign Minister Yevgeny Primakov and NATO Secretary-General Javier Solana in Moscow. Both sides seem committed to agreeing on a "new relationship" before the July NATO summit in Madrid at which some central and eastern European countries will be invited to join the Alliance. SOLANA would not comment on the talks following the meeting, but a NATO spokesman said that PRIMAKOV and SOLANA are expected to meet again "very soon."

A Russian Foreign Ministry official told Interfax that Moscow considers the talks "the beginning of practical work with NATO," but he cautioned against "exaggerated expectations" that Russian ire over NATO's eastward expansion could be assuaged in a single day.

Economy

Ruble = 5,612/$1.00 (NY rate)

Ruble = 5,610/$1.00 (CB rate)

Ruble = 5,605|5,615/$1.00 (buy|sell rates)

IMF to Release Two Tranches to Russia

· An International Monetary Fund (IMF) mission in Moscow said Friday that two $340 million payments of a $10.2 billion loan to Russia will be released later this month, reported Interfax. The IMF suspended release of the November and December tranches last year, citing Russia's failure to meet revenue targets. The IMF mission in Moscow is reviewing the state of the Russian economy since the second half of December 1996 as well as discussing the country's economic program for 1997

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with Russian officials. IMF deputy managing director Stanley FISCHER met with Russian Prime Minister Viktor CHERNOMYRDIN on Friday.

New Tax Laws Take Effect

· New legislation came into effect today imposing taxes on earnings from government securities and bank deposit interest, and setting firm excise rates on alcohol, tobacco, and oil, reported Prime-Tass. A 15 percent income tax will be imposed on private deposit interest, if the interest rate exceeds the refinancing rate fixed by the Russian Central Bank (currently 48 percent in rubles or 15 percent in foreign exchange). Also newly taxed will be insurance payments, if they exceed the insurance premiums contributed by an individual. In addition, a tax must be paid on soft credits, if the interest rate is lower than two-thirds of the refinancing rate or 10 percent in foreign currency. Another law sets a 15 percent tax on earnings from government securities, issued after January 21.

Business

Logovaz/Lotte Plan Moscow Bus. Center

· Russia's Logovaz company and the Japanese-South Korean industrial and trade group Lotte signed a contract in Seoul Monday to establish a joint venture that will build a large shopping-and-hotel complex in downtown Moscow, reported Itar-Tass, citing a Lotte head office spokesman. The complex will include a hotel, a business center, video game arcades, restaurants, a big department store, and a lot of shops.

"We hope that the realization of our project will promote not only the development of foreign tourism and trade in Russia but also a stronger economic cooperation between Russia, South Korea, and Japan," the spokesman told Itar-Tass.

The spokesman said the total cost to build the complex, which will be located on Novy Arbat street, is estimated at $500 million. Half of the amount is to be invested by Logovaz, 20 percent by the Japanese branch of Lotte, and 30 percent by the South Korean branch of the corporation. Before the middle of this year, Lotte and Logovaz intend to register a joint venture in Moscow with a charter capital of $20 million. The JV will begin construction of the 51-story complex in mid-1998. A plot of land with an area of

about 230,000 square meters is supposedly to be allotted for the complex, which is to be completed during 2001.

OPIC Raises Insurance Ceiling for Russia

· Overseas Private Investment Corporation (OPIC) president Ruth Harkin said Friday that her organization will offer full insurance coverage for currency inconvertibility in Russia to US businesses up to $200 million per project, reported today's Journal of Commerce. The new ceiling, which replaces a limit of $5 million per project, brings the coverage for Russia equal to that offered for other countries.

HaRkin said that the recent approval of political risk insurance for a joint project for the redesign of Russian rocket engines, between United Technologies' Pratt & Whitney division and Russia's NPO Energomash, brings OPIC-supported projects for defense conversion in Russia up to $500 million.

OPIC is currently examining around 300 proposals to insure or finance investment projects in Russia, said HARKIN. The total cost of these projects exceeds $300 billion. She said that OPIC expects that 1997 support for investment projects in Russia will increase from 1996, when cumulative US insurance and financing of 43 long-term projects in Russia totaled about $3 billion.

South Caucasus & Central Asia

World Bank Agr. Loan to Azerbaijan

· The World Bank on Thursday approved a $14.7 million loan to Azerbaijan to help finance a Farm Privatization Project designed to support the government's program for land privatization and farm restructuring, said a World Bank press release. The five regions of Barda, Lenkoran, Salyan, Udjar, and Xachmaz have been selected for this pilot project, which calls for the development of new models of farm restructuring.

The project consists of the following four components: farm privatization support services ($20.3 million), rehabilitation of irrigation water supply and drainage works ($5.52 million), community development ($1.04 million), and project management ($2.23 million). The total project cost is $28.82 million. The International Fund for Agricultural Development will loan Azerbaijan another $9.3 million for the project.

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Monument/Mobil Sign with Turkmenistan

· Britain's Monument Oil and US Mobil Corp on Monday signed a memorandum of understanding with the government of Turkmenistan for exclusive rights to negotiate a production sharing contract for the country's main hydrocarbon producing region, reported Reuters. Under the agreement, the two companies will start negotiations with state-owned Turkmaneft for a contract to explore and further develop existing oilfields in a 20,000 km region in the western Turkmenistan along the Caspian Sea. It covers most of the country's oil producing territory.

Mobil is expected to lead and operate any new project. Monument currently operates the small Nebit Dag production-sharing concession in northern Turkmenistan.

The decision to bring in foreign companies comes after Turkmenistan's repeated failures to meet ambitious production targets, set by President Sapurmurad NIYAZOV. Turkmenistan produced about 110,000 barrels per day of oil and gas condensates last year and is aiming to double output by 2000. The consortium's executives describe the potential production of the fields as "significant," according to today's Financial Times.

Turkmenistan-Iran Gas Pipeline Plans

· The Turkmen government hopes to complete a natural gas pipeline linking western Turkmenistan with the gas distribution system in northern Iran by October, reported today's Financial Times. It will be the first new gas export line from the Caspian Sea to bypass Russia. It will also be a main factor in proposals to export large volumes of Turkmen gas to Turkey—one of the world's fastest growing energy markets—and the rest of Europe via Iran.

Two billion cubic meters of gas are expected to flow though the pipeline in its first year of operation, with exports potentially climbing to eight billion cubic meters within four years. The pipeline will have a capacity of 12 billion cubic meters annually.

Tehran has funded 90 percent of the $190 million cost of the line in Turkmenistan. This loan will be paid off over three years with Turkmen gas. Initial flow through the pipeline will be consumed by Iran, but a new link will be added enabling Turkmenistan to negotiate gas sales directly with Turkey. Some observers believe Iran is anxious to secure an early role in Turkmen energy development after US diplomatic pressure limited Iranian involvement in other Caspian littoral states, said the Times.

Kazakhstan Plans a Census Taking

· The government of Kazakhstan has decided to conduct a national census from January 14_21, 1999 which will cover the entire population as well as foreign nationals in Kazakhstan at the time and residents without citizenship, reported Itar-Tass on Saturday. The action is prompted by large scale changes in the structure of the Kazakh population. An estimated 16 to 17 million people have migrated to and from the country in the last few years.

The information collected during the census, however, will be confidential. It will be available exclusively to the National Statistics Agency, which will use the data to draw up various reports and forecasts, in particular about income sources, education and housing conditions. The officials who will conduct the census have been prohibited from sharing the information.

New Tender Planned for Kaztelekom

· The government of Kazakhstan announced on Monday that a new tender will be held on February 21 for a 40 percent stake in state telecommunications firm Kaztelekom, reported today's Financial Times. Intercon reported on January 6 that Deutsche Telekom had backed out of a deal, set up through a tender last year, to purchase 49 percent of Kaztelekom for about $512 million. Nearly half of the money for the shares was to be used to repay a 1991 loan to Kaztelekom from a German export credit agency. The new tender is to be structured similarly to the agreement with Deutsche Telekom.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Managing Editor

Rebecca Martin, Charles Lawrence 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 1997, Intercon International, USA.

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