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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, February 26, 1997

Today's Moskovskaya Pravda speculates that YELTSIN could name Chubais or GaIdar to be premier, whose candidacy would then be rejected by the State Duma three times, prompting YELTSIN to dissolve the legislature.

Corruption in the Pacific Fleet

· The former commander of Russia's Pacific Fleet, who currently serves as Chief of Staff of the Navy, is being investigated for corruption and financial misconduct in connection with his previous post. The Russian Pacific Fleet prosecutor's office has instituted criminal proceedings against Admiral Igor Khmelnov on charges of "abuse of office with grave consequences," Pacific Fleet Prosecutor Major General Valery Suchkov told Itar-Tass today.

Khmelnov was commander of the Pacific Fleet, based in Vladivostok, from August 1994 to February 1996. During his tenure in office, two aircraft carriers—the Novorossiisk and the Minsk, were sold to South Korea. At that time, Admiral Khmelnov said that the $9 million proceeds from the sales would be used to provide housing for naval officers. A total of 64 warships were decommissioned and sold to India and South Korea, while Khmelnov was the commander.

During this period, a total of 273 families of naval officers were provided with housing, according to the financial departments of the Pacific Fleet. An investigation by the prosecutor's office, however, reportedly found

Russian Federation


Rumors of Chernomyrdin's Removal

· Despite the protestations of the Kremlin spokesmen, the Russian press has let fly a barrage of rumors that Russian Prime Minister Viktor Chernomyrdin will be ousted in an upcoming Cabinet reshuffling, ordered by President Boris YELTSIN on Sunday. The president publicly criticized the premier for the government's poor performance on economic matters and called for personnel changes. CHERNOMYRDIN obediently announced on Tuesday that he was preparing a shakeup, promising that the changes "will not be merely cosmetic."

Today's Izvestia suggested, however, that CHERNOMYRDIN would be the main casualty of the latest purge. The paper sees his likely successors as Federation Council chairman Yegor Stroyev or presidential chief-of-staff Anatoly Chubais, as well as predicting that former Prime Minister Yegor GAIDAR could join a new government.

Moskovskiye Novosti (No. 8) cited an unidentified Duma deputy as saying that Yeltsin decided as far back as mid-February to remove CHERNOMYRDIN. The main motives for the firing, according to the deputy, is the poor state of the economy and the premier's recent strengthening of ties to the leftists in the State Duma.

The deputy suggested two possible scenarios for the premier's successor. In the first one, the prime minister's place is taken by Stroyev, with Chubais appointed as his first deputy. In this case, Vladimir Shumeiko would become the presidential chief-of- staff. The second version includes Shumeiko becoming premier, but failing to be approved by the Duma and so staying on as acting premier.

Today's News Highlights


Well-Known Editor Murdered

Moody's Rates Nizhny Novgorod

Pepsi to Invest $165 Mln

European Republics

Kuchma Fires Four Ministers

Ukraine Banks in Trouble

South Caucasus & Central Asia

Azeri Parl. Ratifies Oil Deal

Nortel Expands in Uzbekistan

Loan for Kazakh Ispat Steel




February 26, 1997

Intercon's Daily

that the housing was distributed mostly among friends and relatives of the commander, including his son, who never served in the navy. Khmelnov also promoted the misappropriation of Pacific Fleet funds by affiliated agencies, said the prosecutor's office.

According to Suchkov, the investigation into Khmelnov's activities will be completed within two months, after which the case will be referred to the court and the Military Collegium. It appears that the military has become the first real target of a crackdown on official corruption in Russia, in part, orchestrated by Interior Minister Anatoly KULIKOV.

Well-known Editor Murdered

· Vadim Biryukov, the 64-year-old editor of a prominent business magazine and former KGB employee, was found dead on Tuesday in an apparent robbery-related slaying. He was found in his garage, with his hands tied behind his back, beaten, and with a fatal blow to the head, according to Russian television. His Nissan car was missing and Moscow police do not believe his death is connected to his work as a reporter. BIRYUKOV has been deputy editor of Dyeloviye Lyudi (Business People) and chief editor of the magazine's English language edition since 1995. He joined Dyeloviye Lyudi in 1990, prior to which he worked for the Soviet TASS news agency for 13 years.


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

Ruble = 5,674/$1.00 (CB rate)

Ruble = 5,668|5,680/$1.00 (buy|sell rates)

Yeltsin Signs 1997 Budget

· Russian President Boris Yeltsin on Tuesday signed into law the 1997 federal budget, which forecasts a budget deficit of 3.5 percent of gross domestic product (GDP). The budget foresees revenues of 434.4 trillion rubles, spending of 529.8 trillion, and a deficit of 95.4 trillion. It envisions an annual inflation rate of 12 percent, down from about 22 percent inflation in 1996. The 1997 budget has been criticized by many, including top government ministers, for overestimating revenues.

US-Russian Talks on Chem. Arms Disposal

· Russian and US officials held talks in Moscow

Tuesday on a plan that calls for the US to help pay for the destruction of chemical weapons stockpiles, reported Dow Jones. Russian Defense Council secretary Yuri BATURIN and US Arms Control and Disarmament Agency head John HOLUM discussed a plan for the US to allocate $76.3 million in 1997 to build a chemical weapons dismantling plant in the village of Schuchye in southern Russia's Kurgan Oblast. "Its important that this aid be of a long-term nature, and that the money granted be invested directly in the construction of facilities for eliminating chemical weapons," BATURIN is quoted as saying.

Nizhny Novgorod Governor in the US

· Nizhny Novgorod Oblast Governor Boris NEMTSOV will arrive in the US this week to seek support for his region's upcoming Eurobond issue, reported Prime. Nemtsov will discuss the Eurobond plans at a conference on investment in East Europe in Vail, Colo. on Thursday.

The region plans to place $75-100 million worth of Eurobonds for 3-5 years. The region plans to use funds raised by the issue to finance investment projects, which will be selected at a special tender. Dutch bank ING Barings has been appointed lead manager on the region's Eurobond issue.

Moody's Rates Nizhny Novgorod

· Moody's Investors Services has assigned a Ba2 foreign-currency rating to the forthcoming Eurobond issue of the Russia's Nizhny Novgorod Oblast, reported Futures World News (FWN). Nizhny Novgorod is located in central Russia and has a population of about 3.7 million. The rating is at the level of Russia's foreign-currency rating ceiling.

The rating reflects Nizhny Novgorod's highly autonomous status as a regional government of the Russian Federation, as well as the recent good track record of the region in carrying out its responsibilities and in managing its resources.

As another positive element, Nizhny Novgorod's government has been in the forefront of the privatization effort in Russia, said Moody's, and it is expected to remain committed to meaningful economic reform for the foreseeable future. Moody's will soon release a detailed report on its rating and credit assessment of Nizhny Novgorod.

When you need to know it as it happens




February 26, 1997

Intercon's Daily

four ministers at a cabinet meeting on Friday. LAZARENKO himself had been under heavy criticism for the economic situation in the country, particularly unpaid wages. The country's parliament discussed a motion to oust Lazarenko and his deputy Viktor Pynzenyk on Tuesday, but it failed to come to a vote.

The Ukrainian government owed 4.2 billion hyrvnia (about $2.3 billion) in wage arrears at the beginning of this year and the country's gross domestic product (GDP) dropped by 10.4 percent in January, compared with the first month of last year, according to Reuters. The shadow economy in Ukraine is currently estimated at 40-50 percent of output.

Ukrainian Banks in Debt Trouble

· Ukrainian banks have been caught in a deep financial crisis because of unrecoverable loans, reported Ukraine-Interfax today. The banks have extended 59 percent of their long-term credit to state enterprises, most of which could not be recalled because Ukraine's guaranty law has never been properly implemented, said the report. The total amount of the banks' unpaid credit was not given.

Of the 229 banks registered in Ukraine, some 75 percent cannot operate normally because of financial problems. So far, 22 banks have declared bankruptcy, while another 20 have been banned and six more have been ordered to stop commercial activities. The Ukrainian Association of Banks estimated that the country's banks currently have total capital of 3.6 billion hryvnia (about $1.9 billion).

South Caucasus & Central Asia

Azerbaijan Ratifies Caspian Oil Deal

· The Azeri parliament voted 87-4 on Tuesday to ratify a $2 billion contract with a consortium of foreign oil companies to prospect and develop the Dan Ulduzu and Ashrafi oil fields in the Caspian Sea, reported Itar-Tass and Reuters. The deal is for a production-sharing agreement lasting 25 years, the first three years of which would involve exploration of a 453 sq. km area. Azerbaijan will receive a signing bonus of $75 million.

The consortium, led by US Amoco North Apsheron Ltd., with a 30 percent interest, includes US Unocal


Pepsi to Invest $165 Mln

· US Pepsi Cola General Bottlers Inc. will invest $165 million before the year 2000 to expand its presence in northwestern Russia, including St. Petersburg, Novgorod, Murmansk, the Kaliningrad region, as well as in the Baltic States and Belarus, reported the Associated Press (AP). Pepsi Cola General Bottlers signed a contract on January 1 with Pepsi company on developing its business in the region. Pepsi-Cola General Bottlers is 80 percent owned by Whitman Corp. of Rolling Meadows, Ill.

The bulk of the investments, about $125 million, will be used to develop the production and distribution network in Russia's northwest region, including the construction of a bottling plant in St. Petersburg. The plant would cost $30-50 million and have a capacity of 30-50 million 12-liter containers a year.

European Republics

Kuchma Fires Four Top Ministers

· Ukrainian President Leonid Kuchma has dismissed four top ministers in an apparent attempt to quell parliamentary criticism of the government's handling of the economy. On Tuesday, he removed Finance Minister Valentin Koronevsky for "serious inadequacies in his work," Statistics Minister Alexander Osavulenko for bad management, as well as transferring Economics Minister Vasily Gureyev and Machine-building and Military-industrial Sector Minister Valery Malev to other posts, said the presidential press service. Earlier this month, KUCHMA dismissed the country's agriculture minister and the deputy transport minister.

The firings are believed to be connected to Ukrainian Prime Minister Pavel LAZARENKO's criticism of the



When you need to know it as it happens


February 26, 1997

Intercon's Daily

International Exploration with a 25.5 percent stake, Japan's Itochu Oil Exploration with 20 percent, and Saudi Arabia's Delta Nimir with 4.5 percent. Azeri state oil company SOCAR holds a 20 percent interest in the deal. SOCAR officials say each of the fields are estimated to contain reserves of 60 million tons of oil and 30 billion cubic meters of gas.

The new contract is the fourth oil production-sharing agreement with international firms to be ratified by the Azeri parliament. The country expects to receive $18 billion in foreign investment from these deals.

Nortel Expands in Uzbekistan

· Canada's Northern Telecom (Nortel) has signed a $8.4 million contract with cellular service provider Uzdunrobita, a joint venture between ICG, Inc. of Perry, Georgia, and the Uzbekistan Ministry of Communications, to double the size of its AMPS/TDMA wireless network in Uzbekistan and add a variety of advanced digital subscriber services, said a Nortel press release. "Our network now will feature nationwide coverage and the very latest digital services available on the market," said Uzdunrobita chairman D.B. Christie.

Subscriber capacity will be doubled—to 20,000—and service coverage will be extended throughout the 10 largest metropolitan areas of Uzbekistan. Subscribers will be able to roam throughout the country as well as some parts of Russia and Central Asia. Nortel also will upgrade the Uzdunrobita network to include advanced digital services such as TDMA IS-136, voice and fax mail, and CCITT/ISUP.

Loan for Kazakh Ispat Steel Company

· ABN Amro Bank Kazakhstan announced today that it has arranged a $45 million revolving credit facility for the country biggest steelworks, Ispat Karmet Kazakhstan, reported United Press International (UPI). Participants in the facility include ABN AMRO Bank NV, ING Barings, Credit Suisse, J.P. Morgan, Royal Bank of Canada, and Japan's Sumitomo Bank.

Ispat Karmet, formerly the Karaganda Metallurgical Combine (Karmet), is managed by Britain's Ispat International. ABN Amro Kazakhstan bank is owned by the Dutch ABNAMRO Bank (51 percent), Kazakhstan's commercial Kramds Bank (29 percent), and the International Finance Corporation (20 percent).

"The company has been financing its operations from shareholders funds. This financing facility will meet additional working capital needs as we further increase production to meet our higher target of six million tons of liquid steel per year by the end of this century. We have so far increased liquid steel production in excess of 20 percent to 3.1 million tons in 1996," Ispat International finance director B. Agarwal is quoted by UPI as saying.

He also said that the company will seek financing for future investment projects from the European Bank for Reconstruction and Development (EBRD) and the International Finance Corp. (IFC).

Ispat Karmet is the biggest steel plant in Kazakhstan and third biggest in the former Soviet Union. The plant once accounted for 10 percent of Kazakhstan's GDP. Revenue for the financial year 1996 was $711 million and gross operating profit was $50 million. The plant supplies steel to the CIS, China, Southeast and Central Asia, Iran, and Turkey and says it has made inroads into North America.

New Kazakh Criminal Code

· A new Criminal Code of Kazakhstan has been finalized and submitted to the parliament for approval, reported Itar-Tass. The new Code departs from previous practice in that it provides for fines and community service, instead of imprisonment for some types of crimes. The death penalty remains, but it can be applied only for three types of crimes, all involving murder. Moreover, the court and the president have the right to commute the death penalty to life imprisonment. If approved, the new Code will enter into force on January 1, 1998.

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

Rebecca Martin, Charles Lawrence, Contributing Editors

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When you need to know it as it happens