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 22, 1997

In addition, KULIKOV said that his Ministry is continuing an investigation into corruption in the aluminum industry. The ministry is working to identify persons who misappropriated funds from Russian aluminum exports. It is cooperating with Interpol and law enforcement bodies in the US, UK, and Canada.

The investigation has so far revealed that the Transseas Commodities company signed several contracts with Russian aluminum plants, including those in Bratsk, Krasnoyarsk, and Novokuznetsk, and the Achinsk alumina plant in 1992, said Itar-Tass. The company paid the contracts with money it received in illegal operations. According to testimony and confiscated documents, the company was represented by Lev ChernyY.

This month, the Itogi program on Russian public television NTV ran a three-part series on corruption in the Russian aluminum sector, which implicated former First Deputy Prime Minister Oleg Soskovets. During part three, the program complained that no one in the Interior Ministry's economic crimes department had contacted them after the first two parts of the series, according to OMRI's Daily Digest.

Prison Building Corruption Probe

· Top Russian presidential spokesman Sergei YASTRZHEMBSKY said Friday that the head of the Interior Ministry's technical and military supplies main administration and 30 other officers had been dismissed for misappropriation of funds, including the siphoning

Russian Federation

Politics

Yeltsin Appears, Impeachment Bid Fails

· The recuperating Russian President Boris YELTSIN arrived unexpectedly at the Kremlin today, making his first public appearance since January 6, when he was admitted to the hospital with pneumonia. Changing the venue of his planned meeting with Prime Minister Viktor CHERNOMYRDIN from his dacha outside Moscow to his Kremlin office was an apparent attempt to impress on the parliament and the people in Russia that he is well enough to lead.

The Russian State Duma was due to vote on a motion to impeach the president for health reasons, but the legislature agreed only to postpone the decision until next month for further discussion. It is unclear what affect YELTSIN's early return to work had on either the Duma or public sentiment, but as one of many actions against doctor's orders, it can't be helpful to the president's recovery.

Livshits Denies Resignation Rumors

· Russian Finance Minister Aleksandr LIVSHITS today denied reports that he would resign, saying he would return to work on Monday, reported Interfax. LIVSHITS pointed out that he has been the subject of resignation rumors in the past, yet is still in office.

Kulikov on New Laws, Aluminum

· During a news conference on Friday, Russian Interior Minister Anatoly KULIKOV said his organization was pushing for the soonest possible adoption of a law against money laundering and a law on mandatory income declaration, reported Saturday's Moskovsky Komsomolets. The minister feels that if Russia's "nouveaux riches" cannot explain where they got their money, their property should be immediately confiscated by the state.

Today's News Highlights

Russia

1996 Production Figures

Gazprom & UES Reorganization

New Price Waterhouse Russia

Searle in Russian Factory JV

Promstroibank Opens NY Office

European Republics

Ukraine Bank Shut Down

Latvian Prime Minister Resigns

Latvia Gets S&P Ratings

Lithuanian Prosecutor Resigns

Politics-Economics-Business

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Wednesday

January 22, 1997

Intercon's Daily

off of funds earmarked for salaries and prison construction, said the Associated Press (AP). Investigators learned that money intended to rebuild prisons in 17 regions was used instead to buy cars, office equipment, and computers. The spokesman said several officials are facing "material and disciplinary responsibility" for the misuse of prison construction funds, intended to help Russia fulfill a pledge to the Council of Europe to improve prison conditions.

On the same day, Interior Minister KULIKOV told reporters that 10,000 Interior Ministry employees were brought to trial on corruption charges in 1996, and 128 high-ranking officials were dismissed, said Itar-Tass. Of the total, 3,500 cases were for "criminal offenses" and 418 were for bribery.

Traffic Police Avenge NY Diplomats

· In retaliation for what it views as the harassment of its diplomats in New York, the Russian government is cracking down on foreign drivers in Moscow. On January 15, Moscow's traffic police (GAI) launched "Operation Foreigner," issuing more than 200 traffic citations to foreigners in the first day of a two-day operation, reported Interfax. The majority of those stopped were Americans.

Russia alleges that New York City police beat up one of its UN diplomats on December 29 and is angry that no apology for the incident has been forthcoming. New York authorities allege that the Russian and a Belarussian diplomat were drunk and disorderly. Moreover, last week the car of Russia's Ambassador to the UN Sergei LAVROV received three tickets in one day, causing the Foreign Ministry to accuse New York officials of harassing its diplomats.

Meanwhile, another ugly incident involving diplomats and driving occurred Tuesday. A car driven by a Japanese diplomat struck and killed a Russian man crossing the street in central Moscow.

Economy

Ruble = 5,607/$1.00 (NY rate)

Ruble = 5,613/$1.00 (CB rate)

Ruble = 5,608|5,618/$1.00 (buy|sell rates)

Major 1996 Production Figures Released

· Russia experienced its fifth consecutive year

of economic decline in 1996 with gross domestic product (GDP) falling by six percent, compared with a four percent drop in 1995, according to the State Statistics Committee (Goskomstat).

Industrial production fell by five percent, with output in light industry dropping by 28 percent, building materials—25 percent, machine-building—11 percent, and petrochemicals—11 percent. The decline in production in the fuel and energy sector was only 2-4 percent, while output in non-ferrous metallurgy dropped by four percent and in ferrous metallurgy by five percent.

Russian oil output in 1996 totaled 293 million tons, a decrease of two percent from 1995. Coal production dropped by three percent to 255 million tons, while electricity production fell to 847 billion kw/h, a drop of two percent from 1995. Growth was reported in natural gas production by one percent (up to 575 billion cubic meters) and oil-gas by two percent.

Economists argue that the overall decrease in GDP does not accurately reflect the economic situation in the country. The figures do not include trade in services or the substantial "black" and "gray" sectors of the economy. Moreover, in contrast to Soviet enterprises, many Russian companies underreport production to avoid paying taxes.

Government to Reorganize Gazprom and UES

· Russian Economics Minister Yevgeny YASIN announced today that the government has worked out plans for major reorganizations of natural gas monopoly Gazprom and electric utility Unified Energy Systems (UES), reported Interfax. YASIN promised that the changes would not harm the interests of outside investors in the mostly state-owned companies. The plans are likely to be approved in the next few months, he added.

The long-awaited Russian government movement towards restructuring the country's energy monoliths is clearly connected to the recent visit to Moscow of an International Monetary Fund (IMF) mission. The IMF has been pressing Russia to break up these "natural monopolies" for some time and the Russian government convinced the mission this week to release two tranches of the $10 billion IMF stand-by loan in January.

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January 22, 1997

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Business

Price Waterhouse in New Moscow Venture

· US Price Waterhouse announced last week that its Management Consulting practice in Moscow has formed a joint venture company in Moscow with leading Russian IT consultancy and integrator LVS, said a PW press release. LVS/Price Waterhouse Business Solutions, with 300 employees, is the largest management consulting organization in the former Soviet Union (FSU). The new company will provide information technology, change integration, and related management consulting services to enterprises in Russia. It will be managed by Juan Carlos ACebal, head of Price Waterhouse's Moscow office, and LVS head Leonid Boguslavsky.

LVS, one of Russia's biggest information technology companies, was founded in 1990 with private Russian capital. Based in Moscow with offices across Russia and the FSU, LVS has provided systems integration services for government, and municipal, finance and banking, manufacturing, oil and gas, telecommunications, transportation, and utilities firms. Its more than 200 major clients include the Russian Central Bank, Gazprom, the State Duma, AvtoVAZ, Russian Central Telegraph, Exxon, Sprint, Phillip Morris, and Reebok.

Searle to Open Factory in Russia

· Skokie, IL-based Searle, the pharmaceutical subsidiary of Monsanto Company, announced today that it has signed a joint venture agreement with the Biopreparaty/Russian Research Center for Molecular Diagnostics and Therapy (RCMDT) to build a pharmaceutical facility outside Moscow that will manufacture 40 to 50 different medical products, including cardiovascular and anti-infective medicines, said a Searle press release. The agreement is supported by the US Agency for International Development (USAID) with the full cooperation of the Russian Ministry of Health. The 65,000-square-foot facility will be constructed in Izvarino, a village in the Moscow Oblast, and is expected to be completed in the second quarter of 1999.

Under the terms of the $32 million agreement, Searle will provide cash, equipment, and construction, engineering and design services as well as product and equipment technology, training, and other assis

tance for building and operating the plant. The deal was made under the auspices of the GORE-CHERNOMYRDIN commission.

Promstroibank Opens NY Rep. Office

· Russia's Promstroibank on Tuesday announced the opening of its representative office in New York City on Park Avenue, making it the first Russian bank to be permitted to open a representative office in the US, said a company press release. Promstroibank is licensed by the New York State Banking Department and received approval from the Federal Reserve Board to conduct operations in this country. "The opening of a representative office by Russia's oldest and leading banking institution signifies a major step in US-Russian business relations," said Promstroibank chairman Yakov Dubenetsky.

The Bank's customers include many of the largest companies in Russia and represent the energy, telecommunications, mining, metals, transportation, communications, computer, and defense industries. Promstroibank has business and correspondent relationships with such major US banks as the Chase Manhattan Bank, Bank of New York, Republic National Bank, Bank of America, and Bankers Trust Company.

Despite pressure from US businesses, the Federal Reserve Board has been slow in deciding whether to let Russian banks open US offices. Russian commercial banks Inkombank, Rossiisky Kredit, and Promstroibank applied to the Fed for permission to open representative offices in New York in 1994, but only Promstroibank was accepted for processing. A representative office cannot accept deposits or conduct other customeroriented activities, but allows the Russian bank to develop US contacts for business to be conducted in Moscow.

European Republics

Ukraine Agroindustrial Bank Seized

· Several officials of the agroindustrial bank Ukraine have been arrested and $2.8 million in accounts have been frozen, reported Itar-tass today. The bank managers are accused of building expensive cottages with the bank's money. Ukraine is one of the largest share-holding commercial agroindustrial banks in the country. It was founded in September

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1990 as a successor to the Soviet Agroindustrial Bank. It has over 500 branches throughout the country and serves 225,000 agroindustrial enterprises and has one million individual clients.

Ukraine Privatization Results for 1996

· Ukraine exceeded its privatization target for small businesses in the first 10 months of 1996 by 22 percent , reported Xinhua on Monday. The privatization of large state-owned enterprises was less successful, however, with sales 25 percent below the 1996 target. The government aimed to privatize 12,225 small businesses in 1996 through auctions, buy-outs, and leasing, but the State Property Fund (SPF) sold nearly 15,000 enterprises by November 1. "Small businesses and the service sector are completely out of government hands," Xinhua quoted SPF advisor Miron Vasilik as saying.

The privatization of large state-owned enterprises will continue in 1997. The SPF had sold only 2,650 large businesses, against a target of 3,505, by the beginning of November 1996. Vasilik said that 80 percent of the goal for large-scale privatization will have been met when the annual statistics are calculated. More than 70,000 small, medium, and large enterprises have been sold off since the early 1990s.

Latvian Prime Minister Resigns

· Latvian Prime Minister Andris SHKELE resigned suddenly on Monday in a dispute with President Guntis ULMANIS over a nominee to head the finance ministry. Meanwhile, several coalition government parties have called for the popular SHKELE to stay in his post, reported Reuters today. Finance Minister Vasily MELNIKS, approved by parliament on Thursday despite the president's opposition, has now himself resigned. SHKELE recommended MELNIKS for the finance post, but ULMANIS objected when the nominee came under fire in the media for alleged corruption while he was in business.

SHKELE's resignation has shocked the country. Many Latvians believe he helped guide the country

through the difficulties resulting from a December 1995 banking crisis and credit him with speeding up economic reforms. He served as prime minister since late 1995. ULMANIS has been discussing the premier's resignation with political parties and parliamentary factions, but has not yet made any response.

S & P Ratings for Latvia

· Standard & Poor's (S&P) on Thursday assigned a triple-B rating to Latvia's long-term foreign currency debt and an A-minus rating to its long-term local currency debt, said an S&P press release. It also assigned A-3 short-term foreign currency and A-2 short-term local currency ratings to the country. The outlook on the long-term ratings is stable.

Lithuanian Prosecutor Resigns

· Lithuanian Prosecutor General Vladas NIKITINAS resigned on Monday in the middle of a new government campaign to combat organized crime. "Fresh forces are necessary who probably might undertake a new approach and find new ways to stabilize the situation of expanding crime," NIKITINAS told Reuters. Interfax on Monday reported allegations that the prosecutor's office has been infiltrated by criminal networks. NIKITINAS became prosecutor in 1994.

This new campaign against the mafia was sparked by the Christmas Eve shooting of gang members in the town of Panevezys. Twelve men were sent to extract a year and a half worth of protection money from a shop owner who had previously refused to pay. As they advanced on him, he pulled out a gun and opened fire, killing four men and wounding four others. The newly-elected conservative government was angered when the wounded men were allowed to check out of the hospital without being detained by local police. The government then launched an investigation into the local police force in Panevezys and a nationwide anti-crime campaign. As part of the effort, a group of law enforcement agencies met on Saturday to draft a new bill to fight organized crime. The bill is expected to go before parliament by February.

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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