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, February 20, 1997

Russian Federation

Politics

New Constitutional Court Chairman Named

· Russian Constitutional Court judge Marat Baglay was elected chairman of the Court today and proclaimed that the Russian Constitution does not need amending. He captured the votes of 12 out of the Court's 19 judges and will serve a three-year term. He replaces the previous chairman, Vladimir Tumanov, who retired from the post late last month. President Boris Yeltsin has suggested Mikhail Fedotov, Russia's representative at UNESCO, to fill the seat left vacant by TUMANOV. The nomination must be approved by the Federation Council.

At a press conference today, Baglay said that the introduction of amendments to the Constitution "should not take place under any conditions," reported RIA Novosti. "The Constitution is an icon which should not be changed," he said.

Various politicians, from the Federation Council's Communist chairman Yegor STROYEV to liberal Duma deputy Grigory YAVLINSKY, have been calling for changes to the Constitution to transfer some powers from the executive to the legislative branch. These efforts are generally believed to be related to the possibility that YELTSIN's poor health will necessitate early presidential elections. Fearing that Aleksandr LEBED would win such an election, legislators wish to reduce the power of the presidency in relation to their own. However, the process of introducing constitutional amendments is lengthy and complex and, finally, would require the endorsement of the Constitutional Court.

The position of Court chairman, therefore, is significant for the resolution of legislative-executive conflicts. The chairman "often draws everybody's atten

tion, since he is capable of becoming either a catalyst of top-level political clashes, or an instrument for containing hot-heads who are unable or do not wish to work fruitfully in compliance with the present Constitution," said today's Nezavisimaya Gazeta.

Duma Passes Aviation Laws

· The Russian State Duma on Wednesday passed the federal Air Code on its third and final reading. Under the Code, planes, airports, and airfields may belong to the state, to municipal authorities, and to private legal entities, reported Itar-Tass. The Code also says that Russia has "full and exclusive sovereignty with regard to air space over its territory." The document stresses that "all the users of [Russian] air space have equal rights."

In addition, the Duma adopted in principle a law on the development of the country's aviation industry. Under the new law, when Russia concludes international agreements, "foreign legal entities and natural persons cannot be given preference in comparison with Russian ones," according to Itar-Tass. At the same time, "privileges and advantages may be granted to foreign countries, if they do not run counter to Russia's international agreements and promote the strengthening of its positions on the world market."

The bill also calls for the restructuring of the industry and the creation of large consortiums of design offices and aircraft plants, said Russian television (RTV). One such consortium—including

Today's News Highlights

Russia

CB Chairman on Gold Reserves

US-Russia 1996 Trade Stats

Int'l Space Station Problems

Russian Truckers Overtaxed

Sun Microsystems-Soros Deal

Transcaucasia & Central Asia

FDI Up in Kazakhstan

Vivant in Kazakh Edible Oil JV

Gold Mining in Tajikistan

Updates Chechnya

Politics-Economics-Business

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Thursday

February 20, 1997

Intercon's Daily

the Beriev design office in Taganrog, the Sukhoi design office in Moscow, and three aircraft plants in Novosibirsk, Irkutsk, and Komsomolsk-na-Amure—has already been set up by the plants' directors.

Anatoly BELOV, deputy director of the Irkutsk aircraft plant, told RTV that the large consortiums will help eliminate competition in the domestic market and ensure the equitable division of contracts among the plants.

Economy

Ruble = 5,663/$1.00 (NY rate)

Ruble = 5,665/$1.00 (CB rate)

Ruble = 5,658|5,672/$1.00 (buy|sell rates)

CB Chairman on Gold Reserves, Policy

· The Russian Central Bank's gold reserves stood at an estimated at 377 tons as of January 1, 1997, Bank chairman Sergei Dubinin told a session of parliament on Wednesday. Dubinin said that the bank has increased gold reserves by purchasing gold from the Finance Ministry and commercial banks. As of January 1, 1997, the Central Bank's gold and foreign exchange reserves total $15 billion, which is enough to cover the roughly 290 trillion rubles ($51.5 billion) currently in circulation in Russia. At the session, the Duma approved a record of the Central Bank's financial activities in 1995.

Dubinin told Itar-Tass today that a joint statement on the monetary policy of the Russian government and the Central Bank will be published in early March. Negotiations on the future course of Russian monetary policy are currently being conducted with the International Monetary Fund (IMF). Under a three year agreement with the IMF, the Russian government and the Central Bank publish joint statements on monetary policy every year.

US-Russian 1996 Trade Figures

· The US considerably reduced its trade deficit with Russia in 1996 to $221 million from $1.209 billion in 1995, according to figures released by the US Department of Commerce on Wednesday. Last year, the US imported $3.561 billion worth of goods from Russia and exported $3.34 billion, while in 1995, US imports totaled $4.035 billion against exports to Russia of $2.826 million.

Intl. Space Station in Jeopardy

· Following a meeting with Russian space officials in Moscow, three American Congressmen said today the international space station project is in jeopardy because Russia has failed to fulfill promises to provide vital components. Anatoly KISELYOV, head of Moscow's Khrunichev space center, showed the Americans the Alpha space station's unfinished "service module," which will act as the living quarters for the new station, which is meant to replace Russia's Mir permanently-orbiting station. "If we don't get at least $10 million by the end of February, I won't be able to keep to schedule," KISELYOV told reporters, according to Reuters.

House Science Committee Chairman James Sensenbrenner, who led the US group, noted that construction of the module is already more than six months behind schedule and complained that "the entire program has been placed in jeopardy. He has been a strident critic of Russia's contribution, telling officials in Moscow that, "The time has come for the cash to flow," according to United Press International (UPI). NASA has announced it is studying a plan to provide an interim control module, if the Russian one is not ready next year.

The other international partners—the US, Canada, Japan, and the European Space Agency—have already invested more than $27 billion, while Russia has not met its obligations to pay for its share of the project. The Congressmen were to meet with First Deputy Prime Minister Aleksei BOLSHAKOV to discuss government guarantees to fund the project.

Russian Truckers Losing Market Share

· Russian truckers' market share of domestic freight transport has declined over the last five years to 27 percent in 1996 from 75 percent in 1991, according to Yuri SUKHIN of the Russian Association of International Truckers (ASMAP), reported Segodnya on Wednesday. Russian truck fleets carried 3.69 million tons of freight last year, a 15 percent increase over 1995 levels. But foreign truck companies' volumes rose 27 percent from 1995, to 9.3 million tons of freight in 1996. According to one long-term forecast, Russian market share could drop to 15 percent by 2000 if current trucking policies remain in place, said SUKHIN.

When you need to know it as it happens

Politics-Economics-Business

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Thursday

February 20, 1997

Intercon's Daily

The ASMAP cites unbalanced and inconsistent tax policies of the European Union (EU) and Russia as one of the main reasons for the problems of Russian truckers. For example, European truckers pay 700 ECUs in taxes per truck to the EU each year, while their Russian counterparts pay 8,000 ECUs to Russia. This disparity between EU and Russian taxes leads to operational costs that are 60 percent higher for Russian truckers. Deputy Russian Transport Minister Anatoly NASONOV said his ministry shares the ASMAP view and is trying to solve the entire range of issues with a more streamlined tax policy.

Moscow to Issue Eurobonds

· The city of Moscow will issue $400 million worth of Eurobonds by March 15, Moscow Deputy Mayor Iosif ORDZHONIKIDZE told Interfax. CS First Boston and Nomura Security will manage the issue.

In addition, the deputy mayor told French business representatives at a meeting in Moscow Wednesday that a bank syndicate is being formed for long-term work with the Moscow administration as a "first-class borrower." He said that the city has already signed agreements with France's Societe Generale, Germany's Deutsche Grenfell, and Britain's West Merchant Bank.

ORDZHONIKIDZE also told the French that Mayor Yuri LUZHKOV plans to hold numerous meetings before May 1 with business representatives from every country in the Group of Seven operating in the

Moscow region. The Mayor plans to hold similar meetings each spring to promote investment by providing direct contacts with city officials.

Currently, over 35,000 foreign companies and 18,000 joint ventures are operating in Moscow. Germany leads other countries in foreign investment in Moscow with 60 percent of the total, followed by Austria and Italy.

Business

Sun-Soros Partnership for Russia

· US Sun Microsystems announced on Wednesday that it has signed a three-year contract with George Soros' Open Society Institute (OSI) to provide Ultra Enterprise servers to help connect 32 Russian universities to the Internet, said a company press release. The universities, located in regions across the country, are all part of the Russian University Internet Center (UIC) initiative begun by OSI in 1996.

Within the Russian UIC, three centers, located at Yaroslavl State University, Novosibirsk State University, and Dalnevostochny State University (Vladivostok) have already opened with an additional 10 planned to open in 1997. Sun's education unit is already working with universities in countries around the world and operates the Sun SITE (Sun Software Information Technology Exchange) at Moscow State University.

Politics-Economics-Business

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Thursday

February 20, 1997

Intercon's Daily

South Caucasus & Central Asia

Foreign Investment Leaps in Kazakhstan

· The volume of foreign direct investment (FDI) in Kazakhstan more than doubled to $3.24 billion in mid-1996, compared with the level in early 1994, said a new report from the UN Economic Commission for Europe (ECE). US investors accounted for 66 percent of the total in early 1996, with $1.8 billion worth of direct investments in Kazakhstan, mainly in the oil industry. According to the report, the country has more than 800 foreign investors, up from only 14 in 1992. More than 27,000 Kazakhs now work for foreign companies or joint ventures, compared with about 6,000 in early 1993, it said.

Canada-Kazakh Edible Oil JV

· Canada's Vivant and Kazakh APTK Santex have formed a joint venture, Vivant Oil Ltd., to process and bottle non-refined Canola oils in PET bottles, said a Vivant press release. The new company will also produce PET preforms. The venture is 80-percent owned by Vivant and 20 percent by APTK Santex with net income (after lease and operational expenses) to be distributed on a 50-50 basis.

The Vivant Group is a global food and beverage company actively involved in exports, overseas production, and consulting/project management. Santex, which is run by former First Deputy Minister E. GUKASOV, has a significant and long- standing JV with Cargill Ltd. in Kazakhstan. Under the agreement for the new Vivant venture, Santex will provide the preparation of the plant, engineering, marketing, sales, and a partial guarantee of lease payments.

Vivant will provide operational expertise and source the equipment financing. The equipment has been sourced from Germany at preferred rates and guaranteed (40 percent by Santex). The financing is being negotiated with a German company for $5-10 million with final approval within 60 days. The financing will be insured by third parties to minimize the risk to Vivant.

This operation provides for a guaranteed market for processing of 16 million liters (representing 13 percent of the market) of non-refined Canola oil and bottling into one liter PET bottles, which currently sell for over $2.20 in Kazakhstan at retail. Currently, 70 percent of packaged, edible oils are imported into this country. The Vivant Group recently sourced the Canola oil from one of the largest Canola processing plants in Alberta and can secure a long term supply contract at a competitive rate. Additionally, the operation calls for guaranteed production of 40 million PET preforms (minimally) at a net price of $0.15 each. These preforms will be used for a Canola oil, water, and soft drink bottling operation that Vivant will issue information on shortly.

UK, Canada in Tajik Gold Projects

· Three joint venture companies are mining for gold in Tajikistan and hope to produce three million tons of gold this year, all of which will likely be exported, reported Interfax. The Tajik government has a joint venture with Canada's Nelson Gold, called the Zerafshan Gold Company, another with Britain's Gold & Mineral Excavation, called Darvaz, and a third with Canada's Gulf International Minerals, called Aprelevka. All the gold extracted in Tajikistan is refined at the Vostokredmet plant in Chkalovsk and all is expected to be exported because neither the country's Finance Ministry nor the central bank can afford to buy it.

Updates

Chechnya: Chechen President Aslan MASKHADOV has chosen former information minister Movladi UDUGOV to head a new commission that will negotiate a treaty between Chechnya and the Russian central government, reported Interfax on Wednesday. The task of the commission is "to bring the situation to the point where the top officials of Chechnya and the Russian Federation sign a full-scale interstate treaty," said MASKHADOV. The six-member commission includes government officials and the president of the Southern Oil Company.

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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