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, February 19, 1997

earlier this week, ALBRIGHT said that Russia will have a voice, but not a veto, in the expanded NATO.

Russia May Ratify Energy Charter

· The Russian State Duma is expected to ratify the European Energy Charter by May, said a statement issued by the Energy Charter Secretariat in Brussels today, said Futures World News (FWN). The parliament began the ratification process at a meeting on Monday, chaired by First Deputy Fuel and Energy Minister Anatoly Shatalov. Although the meeting participants agreed on the value of the Charter for improving the climate for direct investment in Russia, there were some concerns that Russia would become a "raw materials backyard of the West," said the statement. Shatalov responded that without foreign investment the country's energy industry could not be developed. "Russia and the other CIS members need international standards and reliable legislation to fight economic decline and to participate in global markets," he said.

Intercon reported in December 1994 that Russia had signed the European Energy Charter, which is aimed at establishing a legal basis for investment and trade in the energy sector between Western organizations and Eastern Europe. Specifically, the Charter hopes to guarantee current Western investment in the oil and gas development of eastern Europe and the former Soviet Union and increase new investment by arranging for complying signatories to treat foreign energy firms on an equal footing with national ones.

Russian Federation

Politics

Yeltsin-Rodionov Agree to Troop Cuts

· During a meeting with Russian President Boris Yeltsin on Monday, embattled Defense Minister Igor Rodionov agreed to reduce the Russian armed forces by 200,000 men in 1997. The current strength of the Russian armed forces is 1.7 million. The president's plan calls for the Russian government to finance the reduction and provide social security benefits for decommissioned servicemen, said the presidential press service. Military reform after 1998 will aim at even further downsizing.

Parade of Officials to Moscow re: NATO

· A string of top level Western visitors continues to arrive in Moscow trying to assuage Russia's fears over NATO's planned eastward expansion and to work out a deal on a special relationship between Russia and the Alliance as partial compensation for the move. This week, German Foreign Minister Klaus Kinkel and Italian Foreign Minister Lamberto Dini are meeting with their Russian counterpart Yevgeny PRIMAKOV to discuss the NATO issue.

On Thursday, US Secretary of State Madeleine Albright will arrive for a three-day visit to offer the Russians various proposals for cooperation with NATO. It is unlikely that she will be as well received in Moscow as in the other European capitals because the Russians, used to dealing with her at the UN, expect ALBRIGHT to be extremely rigid on the issue of NATO expansion.

According to the State Department, ALBRIGHT has two main proposals for Moscow: the creation of a joint NATO-Russia troop brigade and the drafting of a political agreement between the two sides, a NATO-Russia Charter. Speaking about the Charter

Today's News Highlights

Russia

Energy Enterprises Struggle

Motorola in Novosibirsk

No Sale of Norilsk Shares

Russian Short Takes

European Republics

New Litho. Finance Minister

McDonald's in Ukraine

Transcaucasia & Central Asia

Georgia-Azerbaijan Accords

Nestle in Georgia Water Deal

Politics-Economics-Business

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Wednesday

February 19, 1997

Intercon's Daily

Economy

Ruble = 5,662/$1.00 (NY rate)

Ruble = 5,662/$1.00 (CB rate)

Ruble = 5,654|5,670/$1.00 (buy|sell rates)

Energy Sector Enterprises Struggling

· The snowballing crisis of non-payments is the main reason for the complicated financial situation with the enterprises of the Russian fuel and energy sector, Minister Pyotr Rodionov told a high-level ministry meeting today, according to Itar-Tass. The meeting examined the results of the sector during the past year and mapped out prospects for development in 1997. The overall debts of the fuel and energy sector nearly doubled since the beginning of 1996 to 356 trillion rubles in December.

The greatest volume and the fastest growth rate of debts was recorded at the large monopolies—Unified Energy Systems (UES) electricity company and Gazprom. Both companies are prohibited from discontinuing supplies of energy and natural gas to a large group of insolvent customers, including all government enterprises. According to RODIONOV, the power-generating and natural gas industries account for 78 percent of the total amount of debts accumulated by the fuel and energy sector as a whole. He said that in conditions of massive non-payments, the enterprises in the sector had to resort to non-traditional forms of settlement for deliveries of energy resources. These non-traditional methods, mostly barter, have been used to settle 80 percent of all accounts.

As a result, energy sector enterprises are experiencing a serious shortage of cash which they need to make payments to the federal and local budgets, extra-budgetary funds, and their workers, said the minister. As of the beginning of 1997, fuel and energy sector enterprises owed 25 trillion rubles to the federal budget, nine trillion rubles to the Pension Fund, and about eight trillion rubles to pay salaries.

Teachers on Strike Again

· About 326,000 teachers from 69 Russian regions entered a third day of strikes today, reported Russian television RTV. The teachers are demanding up to six months worth of salary arrears. The government owes some seven trillion rubles to Russian teachers.

Business

Motorola Wins Novosibirsk Contract

· Arlington Hills, Ill.-based Motorola International Cellular Infrastructure Group (ICIG) on Tuesday announced it won a $6 million contract to deploy Advanced Mobile Phone Service (AMPS) and Narrowband Advanced Mobile Phone Service (NAMPS) cellular systems in Novosibirsk, Russia, said a company press release. As part of the contract with Novisibirsk Cellular Company, Motorola deployed its HDII base stations in the city and oblast of Novosibirsk. The system is in commercial operation.

IBM and HP Computers for Russian Rail

· US computer makers IBM and Hewlett Packard have supplied the hardware for a $17 million project to computerize Russian rail freight shipments by the summer of this year, reported Interfax. The two companies have supplied a total of 1,736 workstations and 207 servers for $8 million to equip about 100 regional and 17 central agencies in the newly-established Center for Commercial Transport Servicing (CCTS).

Communications officials at the Russian Railways Ministry said they will establish a special computer system that will enable them to determine car availability, make automatic orders for cars and routes, and keep track of freight en route. CCTS will run the system. The Ministry is now expected to order peripheral and network equipment for the system.

Duma Forbids Sale of Norilsk Shares

· The Russian State Duma today voted to prohibit the sale of share in metals group Norilsk Nikel to prevent the company from falling under foreign control, reported Russian television RTV. Earlier this year, a consortium of Russian banks bought a controlling stake in Norilsk from the government at well below the shares market value and later sold the shares at a substantial profit.

According to the RTV report, the consortium sold the shares to foreign investors. The Duma is apparently worried that more shares will make their way to foreign investors, giving one a seat on Norilsk's board of directors thus allowing a foreigner the opportunity to block the decisions of this strategically-important company.

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

February 19, 1997

Intercon's Daily

RUSSIA SHORT TAKES

n Some 6.89 million Russians were unemployed in January, up 90,000 from December 1996, according to the State Statistics Committee. The unemployment rate, which stood at 8.8 percent at the outset of 1996, rose to 9.3 percent by the end of the year. Currently, Russia has a workforce of 72.6 million, or 49 percent of the total population.

n Russian Interior Minister Anatoly Kulikov told reporters on Tuesday that there is no need for emergency measures to provide economic security for Russia. He pointed to the security of Russian businesses and foreign investors, as well as the repeal of state privileges to enterprises, as the main conditions for Russia's economic security. He said that only 16 percent of Russian companies fulfilled their tax obligations last year.

n Three Russian companies and one Zambian one have formed a 50-50 joint venture drilling company to exploit the emerald potential in Zambia with an initial investment of $500 million. One of the Russian enterprises involved is the Urul Gold and Platinum Company.

n The Software Publishers Association (SPA) has recommended that Russia be placed on the US Trade Representative's (USTR) Priority Watch List countries because it has estimated that more than 90 percent of business application software used in Russia in 1996 was illegal.

n Russian oil company NK Surgutneftegaz will hold a tender for the right to construct an oil port at Batareinaya Bay, in the Gulf of Finland, and foreign firms will be allowed to participate, said a Leningrad Oblast official. The port, expected to cost $200 million to build, will have an annual capacity of 15 million tons. Oblast authorities also plan to attract investors to build rail and automobile roads to the port.

n The World Health Organization's World Health Statistics Annual indicates that life expectancy rates have reverted to 1980 levels in all 15 former Soviet republics. Russia is the worst with men living to only 57.4 years in 1994. Former Soviet republics top the worldwide lists for male and female deaths caused by circulatory diseases, respiratory diseases, motor vehicle accidents, and suicide.

European Republics

Ling Approved as Permanent PM

· The Belarussian parliament today overwhelmingly approved the president's nomination of Sergei Ling as the country's prime minister, reported Itar-Tass. Ling has served as acting prime minister since November 1996, when Prime Minister Mikhail CHIGIR resigned amid a political conflict between the president and parliament. Ling, 60, is an agronomist by training with a long career as a Communist Party functionary.

New Lithuanian Finance Minister Named

· Lithuanian President Algirdas Brazauskas today appointed economist Algirdas Semeta to the post of finance minister, said Itar-Tass. Semeta, 34, has been chairman of the republican securities commission since 1992. He does not belong any party, but is a member of group that supports the ruling Conservative Party.

McDonald's to Open in Kiev in May

· US McDonald's fast food giant plans to open its first restaurants in Ukraine this year, starting with three in Kiev in May, and adding four more by the end of the year, reported the Associated Press (AP). McDonald's Ukraine general director Karl FRITZ said the company hopes to open 85 restaurants across the country by 2000, investing $120 million.

These plans come amidst allegations that widespread corruption and red tape are stunting business growth in the country. Ukrainian President Leonid KUCHMA said that investors, "now look at corruption as an integral part of life in Ukraine," according to AP. "Corruption has infected a large part of the state apparatus," he added. Many blame this corruption and punitive tax and licensing laws for the lack of foreign investment in the country. Aggregate foreign direct investment (FDI) in Ukraine has been just $1.4 billion since the late 1991 breakup of the Soviet Union.

Many hope the McDonald's move will jump start foreign investment in Ukraine. McDonald's Ukraine denies encountering any serious obstacles in the country, but Ukrainian media reported last year that the company delayed opening because of resistance from Kiev's ex-mayor Oleksandr KOSAKIVSKY.

When you need to know it as it happens

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Wednesday

February 19, 1997

Intercon's Daily

South Caucasus & Central Asia

Shevardnadze Signs Accords in Azerbaijan

· Georgia and Azerbaijan signed more than 20 cooperation agreements on Tuesday, including two key accords on gas supplies and oil transport, during a three-day visit of Georgian President Eduard Shevardnadze to Baku. One agreement covered the transport of gas from Kazakhstan and Turkmenistan to Georgia and Turkey, while another concerned the construction of an oil pipeline from Baku, across Georgia, to the Black Sea port of Supsa.

The pipeline, which will carry "early oil" produced in the Azeri section of the Caspian Sea by the Azerbaijan International Operating Company (AIOC), will be an alternative to a northern pipeline from Baku to the Russian Black Sea port of Novorossiisk. Construction on the Baku-Supsa line will begin in March 1997 and be completed in December 1998.

In addition, the AIOC is planning a third "strategic pipeline" to transport Caspian oil to western markets in the long term. "It's possible routes are now under study, but I believe that it will certainly cross Georgia," Azeri President Geidar ALIYEV is quoted by Interfax as saying.

The agreement also calls for closer cooperation between the two countries' state oil companies and for Azerbaijan to ship 600,000 metric tons of oil by rail through Georgia this year, said Dow Jones. In addition, Georgia's Deputy Minister for Fuel and Energy Revaz Arveladze told reporters that the sides were discussing the establishment an integrated energy system by Turkey, Georgia, and Azerbaijan, said Itar-Tass. The project for the system is being drafted under the EU's TACIS program.

Nestle to Invest in Georgian Mineral Water

· Switzerland's Nestle plans to invest $12 million in a project to restore the image and the output of Georgian mineral water, reported Interfax today. During a recent trip to Paris, a Georgian government

delegation reached a tentative agreement on the investment with Pierre De Vitte, a Nestle subsidiary, said Mamuka KHAZARADZE, president of Georgian commercial bank TBC-bank. He told the news agency that he will soon visit Paris to work out project details.

Experts believe that Georgia's mineral water industry has even more potential that its tea, wine, and citrus industries combined, said Interfax. The country in 1996, however, produced only 30 million bottles of three brands of mineral water, including the well-known Borzhomi. This is just a tenth of the output level achieved during the 1980s, when Georgia exported water all over the Soviet Union and abroad.

The industry began to recover late last year when the Dutch firm VCI set up a joint venture, Georgian Glass and Mineral Water, with the Tblisi Business Center. The venture won the right to manage the two Borzhomi bottling plants in Georgia for five years in return for an investment of $10 million. The venture aims to increase output at the plants from 25 million bottles in 1996 to 200 million in 2001.

Georgian Glass and Mineral Water also holds an 82 percent stake in Georgia's biggest glassworks, located in Khashuri, where it has invested about $4 million to develop new bottles.

Armenian Budget Emphasizes Defense

· The Armenian parliament adopted a $325 million 1997 federal budget on Tuesday which allocates nearly 20 percent of total expenditures to defense spending, reported Reuters. Out of total expenditures of 151.9 billion drams, 30.5 billion are to be spent on defense needs, most of which apparently stem from the unresolved conflict with Azerbaijan over the territory of Nagorno-Karabakh. Social spending is planned at 16.8 billion drams, while the targeted annual inflation rate is 10.5 percent. An envisioned deficit of 33.9 billion drams will be covered almost entirely by international lending and aid agencies. The current exchange rate is 468 drams to the US dollar, according to Reuters.

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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