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 27, 1997

Russian Federation

Politics

Def. Minister Rodionov's Days Numbered?

· Russian President Boris Yeltsin admonished Defense Minister Igor Rodionov to stop complaining about problems in the military and get on with reform measures. "The president of the Russian Federation does not approve of remarks made by the defense minister on February 23," said a statement released Wednesday by the presidential press service. "The president knows how difficult it is now for the people in epaulettes. But whining will not help matters, concrete actions are needed." The president then suggested that the Defense Ministry and Defense Council coordinate their position on army reform and cooperate to implement it.

Since he was appointed Defense Minister in July 1996, RODIONOV has become increasingly strident about the poor state of the military and the need for greater and more timely government funding. His negative statements about combat readiness, nuclear security, and the conditions faced by Russian troops have, in the past, prompted rumors that he would be ousted. This is the first time, however, that the president has voiced public disapproval of RODIONOV's leadership.

Meanwhile, speculation about RODIONOV's imminent dismissal, as part of the upcoming Cabinet reshuffle, was fueled by Yeltsin's summoning this week of a regional military commander to Moscow. The president met today in the Kremlin with Colonel-General Viktor Chechevatov, the Commander of the Far East Military District.

Chechevatov, a career military officer, has served as the Far East Commander since 1992. According to Itar-Tass, he had planned to run for the presidency

in December 1995, but later withdrew his candidacy in favor of Boris Yeltsin.

Izvestia reported today that President YELTSIN has already decided to replace Rodionov with CHECHEVATOV, having placed him on a short list of candidates for Defense Minister after a meeting with him in April 1996.

The recent developments suggest that RODIONOV has lost the battle with Defense Council chairman Yuri BATURIN over the course and character of army reform. BATURIN has maintained that troops cuts will help improve the army's funding problems, while RODIONOV has argued that specific financing for army reforms is needed. BATURIN, like YELTSIN, has insisted that RODIONOV is overstating the poor state of the country's military, particularly the problems in the strategic forces. Reportedly, it was BATURIN who informed Chechevatov that YELTSIN wanted to meet with him.

Yeltsin Purges SBP of Korzhakov Cronies

· Russian President Boris Yeltsin has fired some 12 employees of the Presidential Guards Service (SBP), apparently for celebrating the election of their former boss, Aleksandr KORZHAKOV, to a State Duma seat in a Tula Oblast by-election, reported Wednesday's Moskovsky Komsomolets. Among those fired were Dmitri Sokolov, who had served as the president's personal photographer since 1987; SBP chief-of-staff Zorkin, who organized all the

Today's News Highlights

Russia

Trade Unions Call Strike

Taxman Drops Diamond Suit

Rosgosstrakh Sell-Off Delayed

Russia/Chechnya Pipeline Prob.

Most Banks are Unstable

European Republics

Ukraine Min. Appointments

Ukraine Health Care in Crisis

EU Mission to Belarus

Estonian Premier Named

Politics-Economics-Business

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Thursday

February 27, 1997

Intercon's Daily

president's trips abroad; and the man who carried the briefcase containing the country's nuclear weapons launch codes.

According to MK, upon hearing that a wild party was held in one of the SBP offices immediately following KORZHAKOV's victory in Tula, YELTSIN ordered all those present at the party dismissed. KORZHAKOV was ousted as head of the SBP in July 1996, at which time he become an outspoken critic of the president and his regime.

Israel's Netanyahu to Moscow

· Israeli Prime Minister Benyamin NETANYAHU is planning to make a two-day visit to Moscow, beginning on March 10, reported United Press International (UPI). NETANYAHU is scheduled to meet with President Boris YELTSIN on his first trip to Russia, since being elected premier in May 1996.

Economy

Ruble = 5,667/$1.00 (NY rate)

Ruble = 5,676/$1.00 (CB rate)

Ruble = 5,668|5,684/$1.00 (buy|sell rates)

Trade Unions Call for General Strike

· The General Council of Russia's Federation of Independent Trade Unions (RTUF) adopted a resolution today to stage an nationwide strike on March 27, the RTUF press service told Itar-Tass today. The strike could be joined by over four million people from 26,000 enterprises in 70 Russian regions. The RTUF General Council appealed to President Boris Yeltsin to disband the government since it has been unable to contain the growth of salary arrears.

By the end of January, salary arrears had totaled 9.4 trillion rubles, and during January and February, strikes were held at 14,536 Russian enterprises to protest nonpayment of wages, said the RTUF. The resolution to stage a general strike was backed by the Yabloko faction in the State Duma and Communist Party leader Gennady Zyuganov.

Taxman Drops Suit Against Diamond Giant

· Russian tax authorities have dropped an investigation into Russian diamond company Almazy Rossii-Sakha (ARS), an ARS spokesman told Prime-Tass on Wednesday. An investigation, begun in November 1996 by the General Prosecutor's Office,

alleged that ARS was involved in large-scale tax evasion and illegal foreign currency transactions. It was abandoned because of lack of evidence.

The freeing of the ARS from the tax collector's vise may help move forward a stranded marketing agreement with South Africa's De Beers. Interfax quoted Finance Minister Aleksandr LIVSHITS today as saying that his ministry has completed its review of the agreement and forwarded it for approval to the presidential administration.

Rosgosstrakh Privatization Postponed

· The sell-off of Russia's largest insurance company Rosgosstrakh has been suspended by the Moscow Arbitration Court until March 25 when the court will take a final decision on a suit brought by a group of depositors at the state savings bank Sberbank, reported Reuters. The group is seeking a suspension claiming the company owes about 24 billion rubles in 1992 prices to its depositors. The debt represents money that Rosgosstrakh collected prior to the onset of economic reforms in 1992, when it was the country's only household insurance company. Rosgosstrakh claims that a 1995 law and a 1996 presidential decree transferred its debts to individuals into state debts and it is no longer liable.

Russia, Chechnya Disagree Over Pipelines

· Russia and Chechnya are still unable to finalize arrangements for the transport of oil and gas through Chechen territory, including transit of Caspian Sea oil from Azerbaijan, based on documents signed last November. Russian Security Council Secretary Ivan Rybkin said on Wednesday that "there exist two variants" on an agreement proposed in November on the transport of hydrocarbons via Chechnya, reported today's Financial Times. Two outstanding issues connected to the agreement remain to be settled and the status of the safety guarantee made by Chechnya requires clarification, he said. RYBKIN is heading up cooperation talks with Chechen officials in Moscow this week.

Even if these problems are settled, looming on the horizon for oil companies involved in the Caspian is the possibility that Chechnya will declare independence. This would enter a new country into the oil transportation equation, complicating plans for long-terms exports to Europe.

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Thursday

February 27, 1997

Intercon's Daily

RUSSIA SHORT TAKES

n The US Department of Agriculture (USDA) announced this week that export credit guarantees available to the Russian private sector through the GSM_102 program have been increased by $20 million. The action raises the fiscal 1997 allocation for the Russian private sector to $70 million.

n Russia's draft tax code will include a tax on interest on private bank deposits, said Deputy Finance Minister Sergei Shatalov. The tax on interest will be introduced in phases over several years, he said. The 15 percent tax is to be levied in 1997 on interest which is above the Russia Central Bank refinancing rate, which is currently 42 percent.

n The Russian government has finally resolved the question of territorial subordination of Russia's largest airports. It has placed the Sheremetyevo_2 and Vnukovo international airports under the jurisdiction of the Moscow Mayor's Office, while the Domodedovo airport is subordinated to the Moscow Oblast administration.

n According to the data from the first nine months of 1996, Switzerland ranks first ($968 million) among countries investing in the Russian economy; the Netherlands—second; the US—third; and Cyprus—fourth, said Ekho Moskvy radio. Many Russian analysts believe that the phenomenon of small countries emerging among the investment leaders is linked to the return of capital flight from Russia. The Cyprus Information Agency (CIA) points out that Cyprus is a base for over 2,000 Russian off-shore companies and 17 banks.

n The Nizhny Novgorod branch of Inkombank has financed 23 projects for about $1 million within the European Development and Reconstruction Bank's assistance program for small and mid-sized businesses. Several projects involve the production of medical equipment and consumer goods.

n Russia plans to inaugurate a new space launch site, called Svobodny, in the Amur Oblast of the Far East on March 4. Russian Military Space Forces will launch a Zeya satellite on a Start_1 booster rocket. Svobodny will be the third launch site after Plesetsk in northern Russia and Kazakhstan's Baikonur, which is leased by Russia.

Russians Withhold Savings from Banks

· Only 35 percent of Russian banks are stable, according to Association of Russian Banks executive vice president Vyacheslav ZAKHAROV, reported Interfax. Speaking Wednesday at an international seminar in Moscow, ZAKHAROV said that the population trusts neither the banks nor the government's banking policies, pointing out that only one-quarter of the hard currency purchased by Russians in 1996 was deposited in bank accounts.

The main causes of instability in Russian banks are "poor management, the critical state of the country's economy, and the tough monetary policy of the government and the Central Bank of Russia," Interfax cited ZAKHAROV as saying. As of January 1, 1997, there were 2,008 banks in the country, with 5,131 branches, excluding the 34,000 branches of state-run savings bank Sberbank. Last year, 289 banks had their licenses revoked, and last month another 13 banks joined them, said ZAKHAROV.

ZAKHAROV also pointed out that most bank failures are taking place in remote regions, not big cities. He called the trend alarming, as establishing new banks in these areas is "practically impossible." Two-fifths of all Russian banks are in Moscow, while in many regions there are "simply no banks whatsoever."

Business

Vienna Conference Discusses CPC

· An international conference on the construction of oil and gas pipelines on the territory of the former Soviet Union is being held this week in Vienna, reported Russian television (RTV). Participants include industry experts, company executives, and bank representatives. The conference is focusing on sources of investment for pipelines and ways of ensuring their security.

One major project under discussion is the construction of a pipeline from Kazakhstan's Tengiz oilfield to the Russian Black Sea port of Novorossiisk. The project involves the Caspian Pipeline Consortium (CPC)—the governments of Russia, Kazakhstan, and Oman, and a consortium of oil companies led by US Chevron and Russia's Lukoil. Before the restructuring of CPC ownership to include private companies, the project had been bogged down since 1992 over political differences and financing difficulties.

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European Republics

Kuchma Appoints New Ministers

· Igor MITYUKHOV, a former Ukrainian deputy prime minister and currently the representative to the European Union, has been named to the difficult post of Finance Minister. Yuri YEKHANUROV, head of the state property fund, will take up the position of Economics Minister, while retaining his privatization post. They will replace two ministers who were fired by President Leonid KUCHMA earlier this week for failing to solve Ukraine's economic and fiscal problems. The fired Economics Minister Vasily GUREYEV was appointed to replace the Minister of Machine-building and the Military-industrial Sector, whose fate is unknown.

Personnel reshuffling is not a substitute for actual policy-making and implementation. Ukraine lags behind Russia in its market reform efforts and its economy won't improve until KUCHMA and his government find the political will to make real changes.

Ukraine Health Care in Crisis

· Millions of Ukrainians are chronically ill and the country's crumbling health care system is unable to cope because of lack of funds, according to Ukraine's Health Minister Andrei Serdyuk, reported Xinhua. Six million Ukrainians, nearly one in nine, suffer from cardiovascular diseases, 800,000 have cancer and tumor-related diseases, 760,000 have tuberculosis, and 700,000 are alcoholics, he said. Some 1.2 million people are mentally ill and 1.2 million are disabled. The number of people suffering sexually-transmitted diseases and AIDS is also rising rapidly.

SERDYUK also warned that thyroid diseases among the victims of the Chernobyl nuclear accident in 1986 are increasing and more and more children are suffering from congenital diseases, indicating a worrying change in the population's genetic coding.

The high rate of sickness and poor health care have led to 1.2 million extra deaths over the last six years

and experts warn a further 1.2 million people will die if the health care system is not improved, said Xinhua. Nearly one in four Ukrainians are considered aged, the highest rate in Europe, according to the minister.

The Health Ministry has drafted a law on medical insurance aimed at improving the health care system and is trying to raise funds for health care to supplement the state medical subsidies, which are equivalent to $19 per person a year. The law will also require employers to offer their staff medical insurance. This will be difficult for Ukrainian employers, most of whom haven't even paid salaries for six months. Serdyuk said that only a healthy economy could secure a sound health care system.

EU Plans Another Belarus Mission

· The European Union (EU) will send a second fact-finding mission to Belarus to look into the political situation, reported RFE/RL on Tuesday. One of its tasks will be to inform President Aleksandr LUKASHENKO that the EU disapproves of the November 1996 constitutional referendum that expanded his powers and the subsequent dismissal of the democratically-elected parliament.

In addition, World Bank representative to Belarus Chris WILLOUGHBY this week blamed the Belarus government's indecisiveness for the Bank's suspension of loans to Belarus for the past three years, said Wednesday's OMRI, citing Belarussian TV. He said that to achieve economic growth Belarus must attract foreign investment, maintain a tight budget, complete privatization, and create a competitive market environment.

New Estonian Prime Minister Named

· Estonian President Lennart MERI has named Mart SIIMAN as the country's new prime minister, reported Reuters today. SIIMAN, head of the ruling Coalition Party's parliamentary faction, has 14 days to choose a new government and submit it to the parliament for approval.

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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