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

Thursday, January 23, 1997

Russian Federation

Politics

Fed. Council Calls for Berezovsky Ouster

· Russia's Federation Council (upper house of parliament) today called for President Boris YELTSIN to dismiss Security Council deputy secretary Boris BEREZOVSKY for supporting a law to allow southern Russian Cossacks to create armed units. The body voted 103-3, with four abstentions, to pass a non-binding resolution that "strongly condemns" BEREZOVSKY for "his instigatory, provocative appeals for arming of the Cossacks and the readiness expressed by him to work for this, using his official position," reported RIA Novosti. "If we arm the civilian population, there could without a doubt be a second Caucasus war," Council speaker Yegor STROYEV is quoted by Interfax as saying.

Cossack demands are currently a hot issue. Last week, the State Duma instructed its legal committee to work out amendments to a law on weapons that would allow Cossack organizations to be armed. BEREZOVSKY has suggested that armed Cossack units could help patrol the area around the Russian-Chechen border. Interior Minister Anatoly KULIKOV and Ingushetia president Ruslan AUSHEV strongly oppose the idea, while Security Council secretary Ivan RYBKIN has suggested that instead of allowing Cossacks to form their own units, they be attached to the region's regular army units.

It is common knowledge, however, that the Cossacks already possess weapons and that any legislation would only legitimize this ownership rather than allow their arming. Moreover, the Cossacks apparently do not feel the need to wait for sanction before forming armed units. Following a meeting on January 15, the Council of southern Russian Cossack Atamans announced plans to create self-de

fense units for the protection of ethnic Russians in Stavropol and Chechnya, reported OMRI. In addition, the Council is demanding the return of three districts, which formerly belonged to Stavropol Krai, but were included in the territory of the Chechen-Ingush Republic upon its restoration in 1957. (STALIN dissolved the republic in 1944.)

Although President YELTSIN has supported the development of Cossack communities in Russia, no government official (including BEREZOVSKY) has endorsed any transfer of Chechen territory to Stavropol and the administration is unlikely to back any change of internal borders. If Chechnya makes further moves toward independence, however, the issue could receive new attention and cause new friction between the government and legislature.

Comment: Usually, attacks on YELTSIN aides or the government have come from the lower house, the State Duma. Several liberal deputies recently complained that the Duma's frequent attempts to oust YELTSIN and CHUBAIS make it appear ridiculous and only serve to give the impression that it does no real work. In the past, the Federation Council was stacked with YELTSIN appointees, ensuring that its decisions were largely favorable to the administration, unlike those made by the Communist-dominated Duma. The recent regional elections, which brought many independent and opposition members to the Federation Council apparently means that the upper house will be joining the political fray.

Today's News Highlights

Russia

US Proposes New Nuke Treaty

Mil.-Ind. Complex in Crisis

Agr.-Ind. Complex in Crisis

Khrunichev Gets Loan

Skoda Production in Russia

DuPont Production in Russia

European Republics

Ukraine Telecom JV News

Transcaucasia & Central Asia

ADB Grant for Kazakh Agri.

Politics-Economics-Business

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Thursday

January 23, 1997

Intercon's Daily

Thursday Tidbit

interests of its state, cannot ratify not only the START-II treaty but also START-III, of which there is so much talk in the West and in the headquarters of the North Atlantic alliance," he said. Bezborodov said negotiations on cutbacks in nuclear weapons should nonetheless be continued.

Economy

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

Ruble = 5,615/$1.00 (CB rate)

Ruble = 5,610|5,620/$1.00 (buy|sell rates)

Military-Industrial Complex in Crisis

· Russian Defense Industry Ministry official Vitaly Vitebsky estimates that the total output of Russia's military-industrial complex enterprises in 1996 declined by 27.1 percent, compared with 1995, reported today's Nezavisimaya Gazeta. Weapons production last year was only 12.8 percent of the 1991 level, he said. Also, the average monthly wage at military-industrial complex enterprises was 579,000 rubles, compared with 965,000 rubles for Russian non-defense sector industrial workers.

Agro-Industrial Complex in Crisis

· Three-fourths of Russian farms, including private, cooperative, and state-owned, are unprofitable, according to a report by the Russian Agriculture Ministry, cited by Itar-Tass on Monday. According to the Ministry, the sector lost nearly 16 trillion rubles in 1996. Out of 89 Russian regions, only farms in the southern Krasnodar and Stavropol Krais and the Republic of Bashkortostan in the southern Urals were profitable. The number of loss-making farms tops 90 percent of the total in 25 regions, including the Novgorod, Pskov, Kostroma, Kirov, Tambov, and Kamchatka Oblasts, Primorsky Krai,and the Republics of Udmurtia, Tuva, and Yakutia.

Ministry experts believe the main reason for the poor situation in the agricultural sector is the exorbitant growth in production costs. While in 1995, expenses amounted to 137 rubles per 100 rubles of gross output in 1994 prices, the figure grew to nearly 200 rubles in 1996. This situation was exacerbated by the continuing disparity between prices for inputs needed by the farmers and for the food they produce. In addition, budget subsidies and compensations for farmers fell by 37 percent in 1996.

Strapped for funds,

a factory in the Russian city of

Volgograd has been paying its workers in

kind, a move which has left workers feeling angry

and unsupported. Workers at the Armina bra factory

went on strike this week because not only are their salaries drastically low—130,000 to 150,000 rubles

($23-26) per month—but they were not even paid in

cash, reported Izvestia. Each worker, male and

female, receives seven to nine bras a month

to dispose of as he or she

sees fit.

US to Propose New Nuke Treaty w/Russia

· The Clinton Administration is studying the possibility of seeking a treaty with Russia for further cuts in strategic nuclear weapons that go beyond the 50 percent reduction over a 10-year period called for in the START-II Treaty signed by Russia and the US in 1993, reported today's Washington Post. Unidentified senior US officials told the newspaper that the Defense Department is currently conducting a secret study on the military consequences of ordering the elimination by both sides of as many as 1,000 to 1,500 additional nuclear warheads. This could create a ceiling of as few as 2,000 weapons.

The Pentagon study is expected to be finished before a March summit in Washington between President Clinton and Russian President Boris Yeltsin. Serious negotiations on START-III cannot begin until START-II has been ratified by both sides. Some US officials see proposals for specific new cuts in nuclear arsenals as a way to persuade the Russian parliament to ratify the 1993 agreement, said the Post.

Although the call for a 2,000-warhead ceiling may satisfy some Russian objections, another strategic issue has cropped up to hinder ratification efforts—NATO's eastward expansion. Russian State Duma defense committee deputy chairman Nikolai Bezborodov told Itar-Tass today that NATO's eastward expansion plan forces Russia to reconsider the ratification of the START-II treaty. "I am of the opinion that the relationship of the ratification of the START-II treaty to NATO's expansion is direct, and for this reason the Duma, standing for national

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In related news, Russia's Federation Council (upper house of parliament) on Wednesday decided to urge the government to set up a farm subsidies policy for 1997, complaining that the government ignored its previous proposals on agriculture and its negligence has led to the underfunding of the spring harvest campaign.

The legislature's ruling came after a report from Deputy Prime Minister Aleksandr ZAVERYUKHA who noted that although demand for agricultural products has increased, prices have decreased, hurting farmers. "Since recently, the [domestic] food market has started to change towards greater sales of and demand for domestic products.... Russia's average prices for vegetable oil and sugar dropped by 15 percent and for potatoes by 10 percent from 1995. But in today's situation, this is a blow on farm product manufacturers which are directly dependent from prices for agricultural produce," the minister is quoted by Itar-Tass as saying.

Upper House Votes on Tax Laws

· Russia's Federation Council today adopted an amendment to the law "On the customs tariff," which exempts from customs duties equipment, parts, and units that are imported by Russian companies using credits granted by foreign countries and international financial institutions within the framework of international agreements.

The Federation Council also vetoed a law that would have introduced a 0.5 percent tax on the purchase of foreign currencies. The law was passed by the State Duma in late December 1996. The Council rejected the law on the grounds that it would harm the rights of individuals and leave Russian regions with no share of the new revenue. Moscow Mayor Yuri Luzhkov called the law "unacceptable" in that the new tax would encourage "the creation of a powerful potential for the black currency market operating in a tax-free regime," according to Itar-Tass.

The Federation Council's budget committee will set up an arbitration commission to negotiate with the Duma on a new version of the law. The draft 1997 federal budget, which will be debated by the Duma on Friday on the fourth reading, projects 2.3 trillion rubles in revenues from the proposed tax on foreign currency purchases.

Pres. Decree on Transportation Const. Cos.

· Russian President Boris YELTSIN has signed a decree prolonging by three years state ownership of majority stakes in transportation construction companies, reported Russian television RTV today. YELTSIN said these companies are strategically important because they affect Russia's security.

Business

Domestic Bank Loan to Khrunichev

· Russia's Moscow International Bank on Tuesday granted a $35 million loan to the Moscow-based Khrunichev aerospace company, the first domestic bank loan for a project in Russia's struggling space industry, reported RIA Novosti. Khrunichev director Anatoly KISELYOV said the two-year credit will fund its foreign satellite launch program and the construction of a cargo section for the Alfa international space station.

Khrunichev will also invest in the completion of the ground segment of a $500 million global satellite communications system. The project has already received $80 million in financing. The system's first satellites are scheduled to be put in orbit in the first quarter of this year.

In 1995, Khrunichev signed a $190 million agreement with US Boeing Co.'s Defense and Space Group for the development and launch of the first module of a new international space station.

VW Plans Skoda Production in Russia

· Czech carmaker Skoda Automobilova AS, a subsidiary of Germany's Volkswagen, has confirmed plans to manufacture cars in Russia, reported today's Wall Street Journal. Skoda confirmed on Wednesday that it had signed an agreement with an unidentified industrial partner in Smolensk to assemble Skoda cars from kits, beginning this spring.

Production volume will be low at first, probably only "a few hundred" compact Skoda Felicias, but the company hopes to repeat the success of a similar facility in Poland, which produced 16,000 Skodas in 1996. "Last year, we sold almost 5,000 cars [in Russia] and couldn't meet demand," a Skoda official told the WSJ. "This year we're planning to sell 10,000 and our dealers tell us they could sell much more." Several major automakers including GM,

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Ford, BMW, Renault, Toyota, and Kia, are positioning themselves to take advantage of an expected boom in demand for cars on the Russian market.

DuPont Plans Factories in Russia

· US DuPont Corp. is planning to invest $150 million dollars in Russia in 1997, reported Prime-Tass today. DuPont Russia president Karl Neinaber told the news agency that DuPont will launch production of the company's famous teflon-coated cookware at three Russian factories that have already been licensed by the company. The company's share of the Russian market for certain cookware items is an estimated 25 percent and DuPont hopes to expand this share to between 40 and 45 percent in 1997, he said.

announced that it will grant Kazakhstan $1.2 million in technical aid designed to strengthen the country's agriculture sector, reported Xinhua. The grant will be used to conduct a study on investment opportunities and challenges facing the Kazakh agriculture sector, said the Manila-based ADB. Under the aid program, a project will be prepared for possible Bank-financing that will build upon farm and agribusiness privatization, promote direct investments in the agriculture sector, and increase rural incomes.

Agriculture accounts for about 15 percent of the country's gross domestic product (GDP), 17 percent of employment, and 10 percent of export earnings. Kazakhstan produces wheat and livestock in the northern and central regions, and cotton and rice in the south. However, only a single crop each year is produced because of the country's dry climate and short growing season. Farm privatization has not yet stimulated improved agricultural performance.

Updates

Chechnya: Russian Public Television (ORT) has appealed to the Chechen leadership to find two of its reporters, who disappeared in Chechnya three days ago. Roman PereveDentsev and Vladislav Tibelius on Sunday left Grozny for Nazran, the capital of neighboring Ingushetia, to relay their footage to the station in Moscow, but never reached their destination. In addition, ORT called on all Russian television stations to impose a blackout on the Chechen elections unless the reporters are found.

RIA Novosti reported today that sources in Russia's Federal Security Service (FSB) believe the reporters are being held by Chechen field commander Khattab, who is the citizen of an unidentified Arab country. Another RIA Novosti report said that Chechen Interior Ministry forces were carrying out an operation today to free the reporters from an unknown position in Chechnya. According to Interior Minister Kazbek MAKHASHEV, the ministry received a tip last night about the whereabouts of the men.

European Republics

Ukrainian Cellular JV to Invest $400 Mln.

· Ukrainian Mobile Communications (UMC) joint venture said Tuesday it plans to invest $400 million over the next three years to develop a cellular telephone network, reported Interfax. UMC General Director Martin DIRKS said the company has already invested $90 million in Ukraine to set up a NMT-450i-standard cellular network and will bring its investment up to $1 billion over the next 10 years.

UMC is a joint venture between Ukrainian state telecommunications firm Ukrtelekom (51 percent stake) and Dutch PTT Telecom, Denmark's Danske Telecom, and Germany's Deutsche Telekom (16.33 percent each). The company sells, rents, and services mobile and car telephones. It has focused on developing a cellular phone network and has almost doubled its subscriber base over the last year. The network already covers 80 Ukrainian cities and 3,000 km of highway.

South Caucasus & Central Asia

ADB Grant for Kazakh Agriculture

· The Asian Development Bank (ADB) today

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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