DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Monday, January 6, 1997

Russian Federation

Politics

Yeltsin to Kohl: `No' to NATO

· At a meeting with German Chancellor Helmut KOHL near Moscow this weekend, Russian President Boris YELTSIN strongly and definitively reiterated Russian objections to NATO's planned eastward expansion. YELTSIN said that he wanted a legally-binding commitment from the Alliance to involve Russia in formal consultations with NATO on all issues including enlargement, Western diplomatic sources told Reuters today. He told KOHL that this mechanism must be in place before Russia would consider changing its stance on NATO eastward expansion. One source told Reuters that these demands had dashed hopes that Moscow would adopt a more reasonable stance toward NATO expansion in 1997. NATO is expected to hold a summit in July to invite some East European countries, probably Hungary, Poland, and the Czech Republic, to join the Alliance. It had planned to offer Russia some sort of special relationship to assuage its security concerns, but had not decided on the character of the relationship.

Nonetheless, KOHL told reporters that he was optimistic that some means could be found to ease Russian fears over NATO enlargement. He said he had discussed a few ideas with YELTSIN and would now discuss them with Western leaders.

President and Top Officials Meet on NATO

· Russian President Boris YELTSIN met today with his aides to review the weekend's meeting on NATO with German Chancellor Helmut KOHL and draft a Russian position for upcoming summits with the French and British leaders, reported Interfax. Deputy head presidential advisor Sergei Shakhrai told Itar-Tass that NATO expansion could render

unrealistic the ratification of the Strategic Arms Reduction Treaty (START-II) by the Russian State Duma. He believes that NATO's eastward expansion would actually relieve Russia of some of its commitments under the arms reduction agreements which become pointless in the new situation. This specifically relates to the open-sky and CFE flank limitations agreements, said Shakhrai.

Shakhrai also suggested that the integration of Russia and Belarus could become the most effective response to an expanded NATO. "The unification of the two countries meets their strategic interests, rallies society, consolidates power, and facilitates the growth of Russia's authority in the international arena," Itar-Tass

He also stressed that Russia would not be drawn into a new arms race because of NATO expansion. The growing awareness among the West European taxpayers of the fact that they are paying for the growth of American influence in Europe could become a powerful argument against admitting new members to the NATO, he suggested.

Presidential spokesman Sergei YASTRZHEMBSKY announced today that YELTSIN has postponed several meetings over the next few days because he has "a heavy cold." The president has a slight temperature, but it is not connected with his recent heart surgery, said the spokesman. Kremlin doctors have advised the president to rest at home.

Today's News Highlights

Russia

Solzhenitsyn on Rus Democracy

Annual Inflation at 21.8%

New Import Tariffs Readied

Airline Ticket Sales Down

Russia's Top 7 Businessmen

European Republics

Lukashenko Appoints Courts

Transcaucasia & Central Asia

Armenian Premier in the US

Mitsui in Uzbek Telecom Deal

Politics-Economics-Business

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January 6, 1997

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Yeltsin to the Hague Next Month

· Russian President Boris Yeltsin will visit the Hague early next month, his first trip abroad since his return to work in the Kremlin two weeks ago, according to chief presidential spokesman Sergei Yastrzhembsky. On Saturday, German Chancellor Helmut Kohl told reporters at Russia's Vnukovo-2 airport after his talks with Yeltsin that the Russian president would meet with European Union President, Dutch Prime Minister Wim Kok, for talks in the Hague on February 4.

Communist Wins Mari El Presidency

· Communist Vyacheslav Kislitsyn, 33, was elected president of Russia's Mari El Republic in a runoff election held on Sunday. According to the preliminary results from the republican Central Electoral Commission, he received 59 percent of the vote, compared to only about 36 percent for his challenger, Leonid Markelov, a member of the State Duma from the Liberal Democratic Party (LDP). Turnout was 67 percent. About three percent of voters cast their ballots against both candidates. Mari El is located in central Russia, just north of Tatarstan, and has a population of about 750,000.

Center Contests Republican Constitutions

· Sources at the Russian Justice Ministry told Itar-Tass on Sunday that the fundamental laws (constitutions) of 19 out of Russia's 21 constituent ethnic republics do not conform with the Russian constitution, which poses a threat to Russian federalism and territorial integrity. "The time for persuasion has gone. It is time to act," said the sources referring to a presidential order on unifying regional and federal laws.

The president instructed his chief-of-staff Anatoly Chubais, Justice Minister Valentin Kovalyov, and Prosecutor General Yuri Skuratov to prepare proposals on punishing regional officials who block the abolition of unconstitutional legislation.

The central government is concerned that the replacement of YELTSIN-appointed regional governors with popularly-elected administration heads will lead to a loss of control over the Russian provinces. CHUBAIS has been leading a drive to ensure that the regions maintain a close allegiance with the center, rather than seeking greater autonomy.

Solzhenitsyn on Russian Democracy

· World-renowned Russian writer Aleksandr Solzhenitsyn strongly criticizes contemporary Russian power structures as well as excoriates the West for assuming that democracy has now become solidly established in Russia, in an essay entitled "What Kind of `Democracy' is This?" that appeared in Saturday's New York Times.

"What is known today as Russian democracy masks a government of a completely different sort.... Democracy in the unarguable sense of the word means the rule of the people...a system in which the people are truly in charge of their daily lives and can influence the course of their own historical fate. There is nothing of the sort in Russia today," writes SOLZHENITSYN.

"The Constitution of 1993, which was passed hastily and not in a manner to inspire confidence, groans under the weight of the president's power. The rights it allocates to the Russian legislature are exceedingly constrained," said SOLZHENITSYN. He contends that Russia's regional legislatures are entirely subordinated to regional governors, which in turn are under pressure from the central government, in a strictly hierarchical structure that does not include accountability to the people.

"The destructive course of events over the last decade has come about because the government, while inept at imitating foreign models, has completely disregarded the country's creativity and particular character as well as Russia's centuries-old spiritual and social traditions. Only if those paths are freed up can Russia be delivered from its near fatal condition," concludes SOLZHENITSYN.

Since his return to Russia in 1994 after some 20 years of exile in the US, SOLZHENITSYN has been a strident critic of the Russian government and the course of economic and political reform of the country. The writer has repeatedly called for the revival of the zemstvos, a pre-revolutionary system of local self-government, and has been an advocate for Chechen independence and protection for Russians in the former Soviet republics. He hosted a weekly talk show on Russia's Channel 1 for several months, but in general has been unable to influence the Russian government or people.

When you need to know it as it happens

Politics-Economics-Business

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Economy

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

Ruble = 5,573/$1.00 (CB rate)

Ruble = 5,553|5,593/$1.00 (buy|sell rates)

Annual Inflation in 1996 at 21.8 Percent

· Russia registered monthly inflation of 1.4 percent in December, leaving total annual inflation at a post-reform low of 21.8 percent, according to State Statistics Committee figures. Annual inflation was 130 percent in 1995 and this year's figure represents the success of the government's tight monetary policies, worked out in conjunction with the International Monetary Fund (IMF).

Some observers, however, note that the decline in inflation has come at the expense of workers and the elderly who have suffered as a result of months of wage and pension delays. Analysts also say that serious structural reforms are still needed to bring about an economic recovery.

More Protectionist Measures Planned

· The Russian Trade Ministry is drafting proposals to protect domestic TV producers based on the increased imports of color TV sets with 37 and 54 centimeter screens, reported Prime Tass. Draft government resolutions on imports of refined sugar and some categories of electric bulbs have also been prepared. Experts are collecting information on seven more commodities whose unjustifiably large imports have negatively affected Russian producers.

Business

Russian Airline Ticket Sales Down in 1996

· Russian airlines sold only 28 million tickets for domestic flights in 1996, down from 31 million in

1995, reported Interfax, citing Russia's Federal Aviation Service. The continued economic downturn led to lower ticket sales, while higher prices for fuel and other resources drove up ticket prices. The Service said that the airlines' financial problems are partially caused by the obligation to offer reduced rates to many passengers, including servicemen and people who live in the Arctic and other remote areas. Ticket prices rose by 25 percent last year, but airlines ran up a total debt of 1.5 trillion rubles ($273 million).

Russia's largest airline Aeroflot posted losses of 140 billion rubles ($25.5 million) last year, while KrasAero lost 115 billion rubles, Baikal airlines lost 75 billion, and Vnukovo airlines ended the year 15 billion rubles in the red.

Airlines deducted three trillion rubles for depreciation but, according to the Aviation Service, the money was not always spent on capital investment. During January-November 1996, the airlines spent just 597 billion rubles, or 22 percent of depreciation deductions, on capital investment.

Eighty-two airlines came near insolvency last year and the number of employees fell by 4,700 to 270,000, said Interfax. The number of airlines in Russia has fluctuated wildly since the Soviet Union broke up in late 1991, with some 400 airlines in operation in 1994, most of them offshoots of the former Soviet state carrier Aeroflot.

On a more positive note, international ticket sales increased to 10 million, up three million from 1995 sales. This increase was attributed to the addition of new routes by existing international airlines and the gaining of international status by new airlines and airports.

Russia's Seven Biggest Businessmen

· Izvestia on Sunday published a Vox Populi public opinion poll which named Russia's seven most influential businessmen—Rem VYAKHIREV of Gazprom, Boris BEREZOVSKY of LogoVAZ, Vladimir GUSINSKY of Most, Vagit ALEKPEROV of Lukoil, Aleksandr SMOLENSKY of Stolichny Bank, Mikhail KHODOROVSKY of Rosprom, and Andrei KAZMIN of Sberbank.

The newspaper points to the recent presidential elections as "graphic proof" that Russian business

When you need to know it as it happens

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Intercon's Daily

has grown strong enough to affect political processes in the country. Noting that number eight on the list would have been Vladimir POTANIN of Oneximbank, if he had not been appointed deputy prime minister, Izvestia contends: "Today, the business elite do not have to stew in the politicians' waiting rooms. They can delegate their representatives to any power structure. Is this good or bad? Time will tell."

Monetary Fund. He will also meet with US government and legislative officials and with Armenian-American community leaders.

Mitsui Wins Uzbek Telecom Tender

· Japan's Mitsui Co. should begin work early this year on an 11.3 billion yen ($97.4 million) contract to improve Uzbekistan's telecommunications system, reported Reuters. Mitsui won an Uzbek government tender to purchase and deliver equipment necessary to install exchanges with a capacity of 251,000 lines in the Karakalpakstan, Bukhara, Navoi, and Khorezm regions. The company will also provide equipment for the laying of over 1,700 km (1,000 miles) of fiber optic lines.

Intercon reported on August 8 that twelve foreign companies were competing in the tender to upgrade Uzbekistan's telecommunications system. Japan's Overseas Economic Cooperation Fund has loaned the Uzbek government 12.7 billion yen to help pay for the project. Germany's Teleport Sachsen-Anhalt has won the tender to manage the systems provided by Mitsui.

Kazakh Encourages Shuttle-Traders

· The Kazakh government has reduced customs tariffs for small volumes of industrial goods and foodstuffs carried by individuals, reported Itar-Tass. Individuals can now import 70 kilograms of goods duty-free and an additional 270 kilograms at customs rates that are much lower than the previous levels.

The Kazakh Customs Committee said that the new legislation is mainly meant to benefit the Kazakh businessmen engaged in shuttle trading. Kazakh authorities apparently view shuttle-traders as providing a useful service by meeting domestic demand for food and consumer goods, which reduces some of the social tension brought on by the economic transition. An opposing view of shuttle-traders is taken by the Russian government, which increased tariffs on individual imports in order to discourage the practice and collect more tax revenues.

European Republics

Lukashenko Appoints Courts

· Belarussian President Aleksandr LUKASHENKO has appointed political allies to head the country's two highest courts, reported Reuters on Sunday. Grigory VASILEVICH will head the Constitutional Court, which rules on presidential decrees and parliamentary laws, while Justice Minister Valetin SUKALO will chair the Supreme Court, overseeing the country's legal system.

VASILEVICH has been a member of the court he will now head, and is described by a leading political observer as "the only judge who always backed LUKASHENKO." He maintained this support during a time when the court ruled 19 presidential decrees unconstitutional. Seven of the court's 11 judges resigned last month to protest LUKASHENKO's policies. SUKALO, as a member of the Central Electoral Commission, backed LUKASHENKO's dismissal of Commission chair Viktor GONCHAR when GONCHAR ruled illegal a November referendum which greatly extended the president's powers.

In another decree, LUKASHENKO reappointed Mikhail MYASNIKOVICH as his chief-of-staff.

Transcaucasia and Central Asia

Armenian Prime Minister in Washington

· Armenian Prime Minister Armen Sarkisyan arrived in Washington on Sunday for talks with officials at the World Bank and the International

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

Alycia S. Draper, Rebecca Martin, Contributing Editors

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