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 31, 1997

weapons of mass destruction; the development of a breeding ground for terrorism and organized crime; and a high probability of large scale environmental disaster."

He contends that the "semi-criminal oligarchy" running the country is both unable and unwilling to adequately confront these dangers. "The new ruling elite is neither democratic nor communist, neither conservative nor liberal, neither red nor green. It is merely greedy and rapacious," wrote YAVLINSKY. This elite will only address short-term problems that directly impinge on its interests, rather than tackling "grave security threats." In fact, its lack of attention to institutional reform has meant the country's "economic potential is squandered," which has helped to heighten these threats.

YAVLINSKY asserts that to avert a catastrophe, real market reforms must be implemented. The most important actions that are required include breaking up the oil and gas monopolies, a radical decentralization of power, land reform, free trade, the creation of a civil society, savings and insurance funds, etc.

He calls on the Russian people and Western leaders to "abandon their complacency" about the lack of market reform undertaken by the YELTSIN regime and recognize that there is a common interest in overcoming these menaces.

Intercon sources have learned that the dismal lack of adequate communications throughout the Russian nuclear

Russian Federation

Politics

Chernomyrdin on Russia and NATO

· Speaking at the World Economic Forum in Davos, Russian Prime Minister Viktor Chernomyrdin called NATO's planned eastward expansion an "unproductive military and political design," saying that Russia seeks a Europe that is both secure and free from ideological, economic, political, and military barriers, reported Itar-Tass on Thursday. "To seek NATO's enlargement means to overburden our continent with new suspicions and contradictions."

Russia is prepared to work for the development of cooperation with NATO under the Partnership for Peace program, he told a press conference in Davos today, but "Russia will never sign any formal document that would determine its attitude to NATO or to its member-countries," according to Itar-Tass. He also said that Russia wants the NATO Council to change the current 16-plus-1 format to a 17-member body so that Russia would become its full and equal member with the right to vote.

Meanwhile, the next meeting between Russian Foreign Minister Yevgeny PRIMAKOV and NATO secretary-general Javier SOLANA to discuss NATO-Russian relations has been set for February 23 in Brussels, reported Reuters on Thursday. A first round of talks was held near Moscow on January 20.

Yavlinsky Points to New Dangers in Russia

· Liberal Russian parliamentary Grigory YAVLINSKY warned Western leaders that new menaces are facing both Russia and the West as a result of the negligence of Russia's ruling elite. An Op Ed published in today's Financial Times, points to three main threats emerging in Russia: "the loss of control over nuclear weapons, nuclear materials, and other

Today's News Highlights

Russia

Chechnya Pledges Oil Safety

Population Decline Worsening

Aviation Situation Deteriorating

Hydrogen Car Engine Built

Sokol to Produce Civilian Planes

Russian Ship Numbers Falling

European Republics

EIB Loan for Litho. Railways

New Hotels in Ukraine

Updates Chechnya

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Friday

January 31, 1997

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Ruble = 5,634/$1.00 (NY rate)

Ruble = 5,632/$1.00 (CB rate)

Ruble = 5,627|5,637/$1.00 (buy|sell rates)

the Russian Black Sea port of Novorossiisk, in August 1997.

Maskhadov has also agreed that repairs to the Chechen section of the pipeline should begin immediately, said SHATALOV, predicting that pipeline will be fully operational in March or April. Swift repairs and safety guarantees would make the Chechen pipeline more attractive to the AIOC than the alternative route through Georgia, which needs more reconstruction. However, it is unclear that MASKHADOV will be able to keep poverty-stricken Chechens from siphoning oil from the pipeline or recalcitrant rebel groups from sabotaging it.

Russian Population Decline Worsening

· Russia's population shrank by 475,000, or 0.3 percent in 1996, the sharpest drop in five years, reported Prime-Tass today, citing the State Statistics Committee (Goskomstat). The national death rate in 1996 was 1.6 times the birth rate. In seven European Russian regions, death from natural causes ranged from 10 to 13 per 1,000 persons. In only ten regions—four Caucasian republics, Altai and Tuva in Russian Asia, far-northern Sakha, Chukhotka in the Far East, and Siberia's Tyumen Oblast—did the number of births exceed deaths.

Emigration was greater than immigration by 95,000 last year, down from a difference of 110,000 in 1995

Some 90 percent of the 97,500 Russian citizens who left the country permanently went to Germany, Israel, and the US. Immigration, according to preliminary estimates, fell by almost a third from 1995, to 349,500, and offset natural deaths by about 40 percent. Most immigrants arrived from former Soviet republics. As of January 1, 1997, the Russian population stood at 147.5 million.

Russians Holding Lots of Dollars

· In 1996, Russians bought $40-45 billion worth of hard currency, of which $30-35 billion was taken out of the country by small "shuttle-traders" and tourists, while the other $10-12 billion remained inside Russia, reported Vek (No. 2). According to various estimates, Russians are holding a total of $30-50 billion in cash.

Aviation Situation is Deteriorating

· Russian civil aviation officials speaking at the annual board meeting of the Federal Aviation Ser

Sep Oct Nov Dec Jan

industry makes it impossible for any central authority to monitor safety and security at individual locations. European Union documents clearly describe the abysmal state of the industry. Currently, a proposal has been forwarded to create a modern data communications network which could collect nuclear safety information and be used for security purposes. However, the problem once again is lack of financial resources. This is the type of proposal which should be urgently acted upon by the US and EU governments. YAVLINSKY criticized Western leaders in this opinion piece, calling previous efforts to assist nuclear and other security problems "misdirected."

"We all need to worry about the common menaces we face and the criminal state that is emerging from the ruins of the Soviet Empire," said YAVLINSKY.

Economy

Maskhadov Guarantees Oil Thru Chechnya

· Russian Deputy Fuel and Energy Minister Anatoly Shatalov told a government meeting today that newly-elected Chechen president Aslan MASKHADOV has guaranteed the safety of oil shipments through pipelines running through Chechnya, reported United Press International (UPI). A pipeline through Chechnya is one of two early oil export routes chosen by the Azerbaijan International Operating Company (AIOC) consortium developing fields in the Azeri sector of the Caspian Sea. Oil from the project is expected to begin flowing to the West, via

When you need to know it as it happens

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vice (FAS) presented a bleak picture of the sector in 1996 and warned that serious measures must be taken to improve air traffic safety.

FAS director Gennady ZAITSEV, presenting a report on the sector in 1996, noted that "it was a very difficult year for Russian civil aviation," according to Reuters. The report showed that Russian airlines lost $220 million last year and more than 100 carriers went out of business because fewer Russians could afford to fly in 1996 than in 1995.

The poor financial results, which followed a profitable 1995, were due to a 15 percent drop in passenger numbers. Domestic traffic fell to 26.9 million passengers last year, from 31 million in 1995, largely because of an increase in ticket prices, he said.

ZAITSEV said that 118 Russian carriers had lost permission to operate in 1996 and 58 more were in danger of being shut down. Currently, 328 airlines have the right to operate regular and charter flights in Russia, compared to 520 carriers three years ago.

Some airline officials said high fuel and landing fees hurt them last year, as did non-payments from tour operators who leased their jets for charter flights.

Russian Transport Minister Nikolai Tsakh sharply criticized the FAS, noting that the state of affairs in the Russian civil aviation had deteriorated in 1996, according to Itar-Tass. He noted that the sector was unprofitable and the FAS owes the federal budget 501 billion rubles.

"I think," said TSAKH, "that the euphoria of independence within many air companies will soon die down, and it will become necessary to work out a single strategy in the interests of Russia's civil aviation as a whole." The minister feels that it is time to strengthen existing airlines by means of strict certification and, primarily, by toughening control over flight safety.

Tsakh also warned that the air traffic system needs to be modernized, and urged board members to suggest concrete ways to lift the Aviation Service out of its current "deep disarray." He also stressed the need for investment programs, more effective interaction Russian regions, the opening of credit lines for the Russian aircraft-building industry, and the establishment of a special fund to ensure air traffic safety.

Aeroflot director general Yevgeny Shaposhnikov said on Thursday that all existing Russian airlines should be thoroughly investigated for safety and solvency and those found wanting should be shut down. "Checked first of all," he is quoted by Itar-Tass as saying "should be the capability of an air company to ensure the flying safety. Today, many private, semi-private, and joint-stock companies are doomed, because they have no means for further development." The Russian government and the Federal Air Service must, essentially, "help these companies die. Otherwise they will begin to die together with passengers on board."

Business

Combat Plane Producer Attempts Conversion

· Russian jet fighter producer Sokol is seeking certification for two light civilian aircraft by the end of the year as part of its defense conversion program, reported Interfax. The Nizhny Novgorod-based Sokol is currently testing the M_101T Gzhel seven-to-eight-seater and the F_15F Excalibur four-seat trainer.

The company hopes to begin selling the Excalibur in Europe and North America this year. Sokol's European partner, Eurospace, has already ordered 25 of the planes, which were designed by Procaer of Italy. Sokol is also conducting flight and certification tests for its Dingo Hovercraft, three prototypes of which have been constructed.

Businesses Being Fitted with Fiber Optics

· Moscow-based information technology company IT has announced that its fiber optic division, which was founded just 18 months ago, has installed over 50 kilometers of information networks, reported Newsbytes on Thursday. According to IT officials, the company's fiber optic networks are now in active use at companies such as Novomoskovskbytkhim (the Russian division of Procter & Gamble), the Moscow flour mill, Krasnodartabakprom (the Russian division of Philip Morris), the Krasnoyarsk aluminum factory, and several other industry majors.

Russians Develop Hydrogen-Powered Engine

· Russian scientists have developed a car engine system that runs on hydrogen power, reported Thursday's Rossiiskaya Gazeta. The hydrogen, held in a tank similar in size to a normal gas tank, reacts with oxygen in the air through a special

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electrochemical dynamo, turning the hydrogen into electricity to power the car. Therefore, the new car engine emits vapor instead of exhaust. Scientists say that in addition to being "clean" and environmentally friendly, the engine would also be much cheaper to run than normal car engines.

Russian Ship Numbers Dropping

· Russia has decommissioned some 300 cargo ships in the past two years, replacing only 60 of them, said Federal Sea Shipping Service head Valery BYKOV, reported the Associated Press on Thursday. The situation has caused a significant drop in Russian transports. An additional 80 ships will be decommissioned this year, causing another 18 percent drop in transports. Meanwhile, two-thirds of Russian transports are already carried by ships sailing under foreign flags.

BYKOV said President Boris YELTSIN signed a decree three years ago on the revival of the Russian merchant marine fleet, but the money received by shipping companies since then hasn't been enough to build even one modern vessel.

More New Hotels Planned for Kiev

· Austria's Chakman and Swiss Palma Groupe will each build a new luxury hotel in Kiev, reported Interfax on Thursday. Chakman will help finance the $50 million St. Sophia, a new 220 room, five-star hotel in the downtown area. US Holiday Inn is a candidate to operate the hotel.

Palma Groupe will invest $150 million to build a four-star hotel. The company plans to give the city $500,000 to provide the facility with the gas, water, and electricity supply lines it needs, and has offered to relocate people who live in the construction area.

The projects are expected to be completed before the 1998 EBRD annual meeting which will bring about 4,000 visitors to Kiev. Intercon reported on January 9 that work on the Teatralnaya and Grand Hotels was to begin at any time. In addition, South Korea's Daewoo in December signed an agreement to invest $194 million in renovation of the city's Bessarabian Quarter, building a hotel and a business and trade center.

Updates

Chechnya: Newly-elected Chechen President Aslan MASKHADOV has already begun forming a new government for the region (before final election results have been announced) and will reportedly offer rivals YANDARBIYEV and Shamil BASAYEV Cabinet positions. According to Thursday's OMRI, however, both men will refuse. BASAYEV said that he plans to return to his pre-war career as a computer salesman, while Zelimkhan YANDARBIYEV, a well-known writer, plans to resume his literary career.

Outgoing Chechen President Yandarbiyev today announced plans to form a political movement, Path of Dzhokhar, reported Russian television RTV. He said the movement will unite all those seeking independence from Russia. He rejected MASKHADOV's statement that Chechnya needs Russia's economic help to rebuild before it can become independent.

European Republics

EIB Loan for Lithuanian Railways

· The Luxembourg-based European Investment Bank (EIB) has announced a credit of ECU 22 million (about $27 million) to Lithuanian state railway company Lietuvos Gelezinkeliai to upgrade the country's railway system, reported Itar-Tass and the Journal of Commerce today. The funds are to be used to reconstruct the railway tracks on the Sumskas-Klaipeda and Kasedoris-Kibartai railway sections, to modernize signaling equipment and telecommunications, and to purchase rolling stock.

According to EIB Vice-President Wolfgang Roth, the railway which links Belarus, the Lithuanian port of Klaipeda, and the Russia's Kaliningrad region, is of all-European importance, said Itar-Tass. Work on the railway is expected to be completed by 2001.

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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