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

Tuesday, February 25, 1997

nomics Minister Yevgeny Yasin and Finance Minister Aleksandr Livshits are seen as most likely casualties of the impending purge. Other good candidates for scapegoat are First Deputy Prime Minister Viktor ILYUSHIN, Deputy Prime Minister Vladimir BABICHEV, Pension Fund head Vasily BARCHUK, State Tax Service chief Vitaly ARTYUKHOV, and the head of the State Customs Committee Anatoly KRUGLOV.

The Cabinet changes are expected to be announced on March 6 during a government session that plans to review last year's economic and social policy and the prospects for 1997, reported Interfax, citing government spokesman Igor SHABDURASULOV. The session will follow YELTSIN's annual address to the parliament, scheduled for the same day.

Dismissals, however, are unlikely to improve the situation in the Russian economy, particularly the salary and pension arrears problem. A top official on Friday essentially admitted that the government was simply unable to pay off these arrears in 1997 unless there is a production turnaround. Speaking to a meeting of the tripartite commission for social and labor relations, Deputy Finance Minister Izosim MOLCHANOV said that "until industry in the country starts working again and the corresponding reforms take place, we will never put an end to debts in salaries and pensions," reported Nezavisimaya Gazeta.

According to MOLCHANOV, tax nonpayment reached 110 trillion rubles (about

Russian Federation

Politics

Yeltsin Meets Moldova's Lucinschi

· Russian President Boris Yeltsin met today in the Kremlin with Moldovan President Petru Lucinschi to discuss bilateral issues, particularly the situation of Russian troops in Moldova's separatist Dnestr region. The two leaders agreed to boost political and economic contacts between the two countries and to work together to settle the conflict between Moldova and Dnestr.

Yeltsin said Russian troops should be pulled out of the region because the Moldovan Constitution does not allow foreign troops to be deployed in Moldova. He also suggested that Moldova grant the Dnestr region a special status without harming the territorial integrity of Moldova and promised that Russia would help mediate the settlement.

Duma Backs Down From Yeltsin

· The Russian State Duma Committee on Legislation and Judicial Reform on Monday turned down the draft law submitted by Viktor Ilyukhin, the Duma's Security Committee chairman, on procedures for receiving medical records for President Boris YELTSIN and calling on the president to step down for health reasons, reported Itar-Tass. The decision came a day after YELTSIN shook his fist at the Duma on national television and warned deputies that he was a "fighter" and they would "pay" for an attempt to remove him from power.

Possible Cabinet Changes to Come

· Russian President Boris YELTSIN's public criticism of Prime Minister Viktor CHERNOMYRDIN on Sunday for the government's inability to pay wages, pensions, and other debts and his call for personnel changes have set off a storm of speculation. Eco

Today's News Highlights

Russia

1997 Budget to Be Signed

Lukoil Reserves Audited

Aussie Co. in Urals Gold Deal

Amax Gold Success at Kubaka

Personal Computer Market

AvtoVAZ Offers Stake to Opel

European Republics

CIS Aluminum Output

Estonian Premier Resigns

Updates Chechnya

Politics-Economics-Business

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Tuesday

February 25, 1997

Intercon's Daily

$19.4 billion) by December 1 and increased to 138 trillion ($24 billion) by February 1, 1997. Total taxes collected in January constituted only 46 percent of the amount projected in the 1997 budget.

The government's debt to the pension fund has also been growing steadily and now totals about 60 trillion rubles ($11 billion). MOLCHANOV told the commission that it should acknowledge that the best the government would be able to do is secure current payment of pensions, according to NG.

Economy

Ruble = 5,669/$1.00 (NY rate)

Ruble = 5,672/$1.00 (CB rate)

Ruble = 5,666|5,678/$1.00 (buy|sell rates)

1997 Budget to Be Signed This Week

· Chief presidential spokesman Sergei YASTRZHEMBSKY said today that President Boris YELTSIN will sign into law the 1997 federal budget sometime in the next few days, reported Russian television. The budget was approved by the State Duma on January 24 and by the Federation Council on February 12.

The Russian government's Working Center for Economic Reform has estimated that 1996 budget revenue totaled 279 trillion rubles ($49 billion, or 12.4 percent of GDP) and expenditures were 353 trillion rubles (15.6 percent), reported Monday's OMRI. The budget deficit reached 74.3 trillion rubles (3.3 percent of GDP), up from three percent in 1995, but still lower than the expected 3.85 percent. Under IMF methodology, the deficit was estimated at 174 trillion rubles, or 7.7 percent of GDP, compared with an expected 6.8 percent. Some 55 percent of the deficit was financed via domestic borrowing, through the sale of short-term securities, while the remaining 45 percent came from external borrowing.

Audit Puts Lukoil Reserves at 10.7 Bln

· Russian oil giant Lukoil has reserves of 10.77 billion barrels of crude oil, according to an audit conducted by US Miller & Lents, reported Interfax. The audit put the company's proven European reserves at 2.85 billion barrels, and those in Lukoil's main fields in Western Siberia at 7.927 billion barrels. Total reserves were 3.108 billion barrels and 14.27

billion barrels, respectively. Natural gas reserves in European Russia totaled 1.0878 trillion cubic feet.

Business

Australian Co. in Chelyabinsk Gold Deal

· Australia's Eurasia Mining will form a joint venture with Russian gold producer Yuzhuralzoloto to develop the Svetlinskoye gold deposit in Chelyabinsk Oblast, reported Interfax. An agreement which will give Eurasia Mining a 49 percent stake in the Svetloye joint venture might be signed by the end of March, Konstanin STRUKOV, the newly-appointed general director of Yuzhuralzoloto, told the news agency. The deposit has estimated reserves of 80 tons of gold and 30 tons of silver.

Eurasia Mining is not the first foreign firm to become involved in the Svetlinskoye project. RGM Gold Ltd., a company registered in Cyprus, which owns 29 percent of the Russian firm, backed out of the Svetloye venture because of Yuzhuralzoloto's debts. The company currently owes 40 billion rubles in taxes and 15 billion rubles to the Chelyabenergo power company for electricity.

Britain's RTZ company owned 55 percent of the Svetloye venture, but pulled out of the venture in May 1996. Eurasia Mining has estimated the cost of the project at $80 million, compared with $150 million quoted by RTZ, said Interfax.

Amax Gold Retrieves Gold From Kubaka

· Denver, Colo.-based Amax Gold Inc. announced on Monday that the Kubaka gold mine poured its first dore bars in the Magadan Oblast of Russia's Far East, said a Amax press release. The mine is currently 50 percent-owned by Cyprus Amax Minerals Company and 50-percent owned by a group of Russian partners. Amax Gold managed the project through construction for Cyprus Amax and the company's shareholders have approved the acquisition of Cyprus Amax's interest in the mine. Amax Gold expects the transaction to be completed in the first quarter of this year.

"The successful pouring of gold at Kubaka marks the first time a US company has participated in producing gold in modern Russia," said Cyprus Amax and Amax Gold Chairman and CEO Milton Ward.

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Tuesday

February 25, 1997

Intercon's Daily

RUSSIA SHORT TAKES

n The Russian State Statistics Committee (Goskomstat) last week forecast that monthly inflation in February would total 1.5 percent. In December 1996, the inflation rate was reported at 1.4 percent, while it was 2.3 percent in January 1997.

n The Norilsk Nikel metals group includes six companies, which produce 99.8 percent of Russia's platinoids, 96 percent of the country's cobalt, 90 percent of the nickel (more than 20 percent of total world production), and more than 50 percent of its copper. In 1996, the Norilsk group produced 177,185 tons of nickel, 340,000 tons of copper, and 3,151 tons of cobalt.

n In Russia, some 41,000 industrial companies, 50 percent of banks, and over 80 percent of joint ventures are believed to have criminal connections, said Finansoviye Izvestia on February 18. The shadow economy is estimated to account for up to 40 percent of the Russian economy.

n The head office of regional Sberbank in the city of Ryazan warned last week that high quality counterfeit $100 dollar bills are circulating at city retail outlets and at the bank's branches. Forged bills were discovered by head office personnel who said the notes were two millimeters longer than the real ones, but otherwise looked perfect. Police suspect that the counterfeiting was done by an illegal printing shop using the offset method.

n According to figures released by leading sugar trading house C. Czarnikow, world output of raw sugar will be 123.477 million metric tons (MMT) during 1996-97 against 124.372 MMT projected last November. Czarnikow's new 1996-97 production forecasts (with previous forecasts in brackets) are Ukraine—2.935 MMT (2.825) and Russia—1.845 (1.800). The company's 1995-96 estimates include Ukraine 3.788—MMT and Russia—2.240.

n Russia's Aeroflot airlines will resume regular flights to Bishkek, the capital of Kyrgyzstan, next week after a five-year break. Under an agreement reached with Kyrgyz officials, Aeroflot will fly to Bishkek's Manas airport once a week, on Mondays, departing from Sheremetyevo airport in Moscow and returning to Bishkek on Tuesdays.

The open-pit Kubaka mine is expected to produce an average of about 350,000 ounces a year over its seven-year mine life. Assuming the acquisition is completed in 1997, Amax Gold and its Russian partners will participate in a $4 million exploration program this year in the Magadan Oblast that will be funded through rebates of royalty payments made to the Russian government.

Personal Computer Market Growing

· An International Data Corp. (IDC) report on personal computer markets in Europe, the Middle East, and Africa, released on Monday, showed sales growth in western Europe was far slower than the rest of the region in 1996, reported Futures World News (FWN). PC sales rose 15 percent in eastern Europe compared with 1995, while western Europe experienced only a seven percent rise in PC sales.

For the first time, more than one million PCs were shipped to Russia last year, making it one of the top five markets in Europe—on par with the Netherlands. However, vendors report that selling into the Russian market can be a hit-and-miss affair.

US Hewlett-Packard jumped to the No. 2 position in the fourth quarter of 1996 in Russia, thanks to a huge contract with the Russian state savings bank Sberbank, giving it a 7.2 percent market share. Sales to homes in Russia accounted for 23 percent of the entire PC market in the fourth quarter. Overall, the Russian market rose 15 percent in 1996.

ServoComp to Market New System

· Russia's Open Technologies company has announced it is teaming up with Germany's ServoComp GmbH to develop the Signator/2000 automated funds investment system for the Russian marketplace, reported Newsbytes on Monday. Under the deal worked out earlier this month, ServoComp will license Open Technologies to produce and sell its automated integrated information system for investment funds, financial companies, and fund departments of banks.

According to Open Technologies, the system will automate most of the paperwork associated with securities. The company claims that Signator/2000 can also be used in organizations of almost any size and with any kind of securities. Open Technologies also claims that the system allows the user to create

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Tuesday

February 25, 1997

Intercon's Daily

any new types of securities. The Signator/2000 system, which is based around Oracle's relational database management system (RDMS), was developed specifically for the Russian market.

AvtoVAZ Offers Majority Stake to Opel

· Russian automaker AvtoVAZ has offered to sell a majority stake to Adam Opel AG, the German unit of US General Motors Corp. (GM), for an appropriate investment in the Russian company, reported Reuters. This is the first time the Russian company has put a majority stake on the table. AvtoVAZ President Vladimir KADANNIKOV also raised the possibility that Opel would produce cars at an AvtoVAZ plant in Togliatti that now makes Lada and Niva cars.

Opel is reviewing the offer but has no concrete plans to sign it. A spokesman said more solid talks are being held with Finland's Valmet on building a factory to make Opel cars in northwest Russia.

Meanwhile, South Korea's Daewoo said on Monday that it has no intention of making a bid to buy a majority stake in AvtoVAZ. Daewoo outbid GM for a stake in Poland's major automaker, and is bidding against the US company for Ukraine's AvtoZAZ. But Daewoo Chairman KIM Woo-Chong said he does not believe Russia is ready for outside investors to buy into its auto industry, reported Reuters.

0.2 percent. Output at Sayansk was 28,000 tons, up 1.1 percent and Irkutsk smelter produced 21,600 tons, up 2.9 percent.

Alumina production in the Commonwealth of Independent States (CIS) in January totaled 372,300, a drop of 2.7 percent from last year. Of that total, Russia produced 183,00 tons, or 5.9 percent less than it did in January 1996. Ukraine's Nikolaev alumina refinery produced 81,000 tons in January 1997, on par with last year's output, while the Zaporozhye refinery produced 16.300 tons, down 6.9 percent. The Pavlodar aluminum plant in Kazakhstan produced 92,000 tons in January, 2.8 percent more than the previous year.

Estonian Prime Minister Resigns

· Estonian Prime Minister Tiit Vahi today formally submitted his resignation to President Lennart Meri, reported Itar-Tass. The premier is stepping down in light of revelations that he used his official position as a Tallinn city assembly chairman in 1994 to obtain an apartment for himself and his daughter in the privileged old Tallinn center.

MERI now has 14 days to choose a successor to VAHI. A likely candidate is Mart Siiman, the head of the parliamentary faction of VAHI's Coalition Party. SIIMAN was a television and radio manager both in the Soviet and post-Soviet era.

Updates

Chechnya: Italian photojournalist Mauro Galligani was abducted by unidentified armed men in Chechnya on Sunday, but there is no word so far on the kidnappers or a ransom. The journalist, who worked for the Italian weekly Panorama, was seized on his way from the airport to Grozny. Italian and Chechen authorities are working to obtain his release.

Over 350 people were kidnapped in Chechnya in the past three years, according to today's Financial Times,making abduction one of the war-torn republic's few growth industries.

European Republics

CIS Aluminum Output in January

· Russia produced 244,500 tons of primary aluminum in January, a 1.7 percent increase from the same period in 1996, reported Reuters, citing producers' group Kontsern Alyuminy. Ukraine produced 7,700 tons of aluminum in January, up 0.4 percent from 1996. Tajikistan had output of 15,800 tons in January, down 13.7 percent from 1996.

January output at Russia's Bratsk smelter, the world's largest, was about 68,000 tons, an increase of 5.8 percent from January 1996, while output at Krasnoyarsk smelter was about 66,000 tons, a decrease of

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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