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

Friday, February 28, 1997

20-21 summit in Helsinki. A White House spokesman said the two leaders agreed on a three-part agenda for the summit, focusing on European security and NATO expansion, arms control efforts, and economic issues.

OSCE Chief to Visit Moscow

· Organization for Security and Cooperation in Europe (OSCE) Secretary General Giancarlo Aragona will visit Moscow for the first time from March 3-5, reported Itar-Tass on Thursday. He will meet with Russian Foreign Minister Yevgeny Primakov, the leadership of the State Duma, Security Council Ivan Rybkin, as well as hold talks with members of the presidential administration and address teachers and students at the Diplomatic Academy at the Russian Foreign Ministry.

Real Reasons Behind Firing of FSB's Trofimov?

· The Russian press has apparently exposed the real reasons behind last week's firing of Anatoly TROFIMOV, the head of the Federal Security Service (FSB) Moscow branch. The official reason for his dismissal was "gross violations" related to an audit of his department. It now seems, however, that the firing was related to the illegal activities of men under TROFIMOV's command and is part of a crackdown on corruption in the Moscow FSB by the Interior Ministry.

Ekho Moskvy radio and several Russian newspapers, led by Izvestia, have reported that TROFIMOV was fired because several officers were involved in drug trafficking and

Russian Federation

Politics

Yeltsin Address Focuses on Budget, Military

· Russian President Boris Yeltsin today gave a short radio address to the nation that touched on the 1997 federal budget, which he signed into law on Tuesday, and military reform. The president criticized the budget, calling it "bad," and reaffirmed his intention to end conscription, but did not mention the army's funding problems.

Yeltsin said he signed the budget "grudgingly" to ensure political stability, but complained that the government had done a poor job preparing the budget. It contains "a number of unrealistic provisions," he said. The parliament further ruined it, according to the president, by adding amendments that appealed to populism and lobby interests. "The main conclusion for the future is the president has to control the process of drafting the budget for 1988 far more thoroughly," he said.

The president avoided directly criticizing his prime minister, who is rumored to be headed for dismissal, and when speaking about army reform, he did not mention his defense minister who he reprimanded earlier this week.

"Russia will have a professional army," he said, reiterating a goal first expressed in May 1996 to end conscription by the spring of 2000. "Only this will enable us to maintain the combat ability of the armed forces and the potential for nuclear deterrence in the 21st century."

Clinton, Yeltsin Discussed Upcoming Summit

· US President Bill CLINTON had a 20-minute telephone conversation with Russian President Boris Yeltsin today as part of preparations for a March

Today's News Highlights

Russia

Parliamentary Aide Murdered

500,000 Ruble Note Ready

Chevron Gets Sidanko Contract

Ford Holds Talks in Russia

European Republics

Latvian Finance Minister Named

South Caucasus & Central Asia

Euro-Asian COrridor Accord

OPIC Loan for US-Uzbek Mine

Karimov on the Uzbek Economy

Politics-Economics-Business

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Friday

February 28, 1997

Intercon's Daily

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

Ruble = 5,679/$1.00 (CB rate)

Ruble = 5,671|5,687/$1.00 (buy|sell rates)

500,000-ruble banknote on March 17, Bank first vice-president Arnold Voilukov told a news conference today. Currently, the 100,000-ruble note is the largest denomination in circulation, but it is worth less than $20 at current exchange rates. The new banknote will feature the city of Arkhangelsk and a monument to Peter the Great against the background of a sailing ship and a sea port.

Major Oil Merger Pending?

· Russian Izvestia reported Monday that the Fuel and Energy Ministry is planning the unification of four large Russian oil companies. The alleged plan would join Rosneft, Slavneft (a Russian-Belarussian joint venture), Eastern Oil Company, and Sibur (the Siberian-Urals Oil and Gas Chemicals Company) into one company which would remain in state hands for three years. The new company, possibly to be called Nefteprom, would have a combined annual production of 36.5 million tons. Izvestia said the four companies together sit on two billion tons of reserves, but did not say to what extent these are commercially recoverable.

Izvestia does not see the new company as having any major commerical advantages and suggested it is being created for political, rather than economic reasons. It further posited that Prime Minister Viktor CHERNOMYRDIN will become head of the enterprise after his dismissal, which is expected as part of next week's cabinet reshuffle.

Business

Chevron Received Sidanko Contract

· Russian oil company Sidanko has announced the selection of Chevron's isocracking technology for use in its largest and most advanced refinery in Angarsk, Russia, said a Chevron press release on Thursday. The Angarsk Hydrocracker Project was awarded by Sidanko to the alliance of Chevron Products Co. and Switzerland's ABB Lummus Global, who jointly market Chevron's isocracking technology worldwide.

The project includes the installation of a new two million metric tons per annum (MTA) hydrocracker and other associated units to convert heavy vacuum gas oil and other heavy oil fractions into high quality gasoline, diesel, and jet fuel. The technology removes 60,000 MTA of sulfur and nitrogen from the oil

Oct Nov Dec Jan Feb

had ties to organized crime gangs. These FSB men were reportedly investigated and arrested by the Interior Ministry.

The Russian press presented this story as a rare example of the Interior Ministry gaining the upper hand over the FSB. Usually, the arrest of FSB officers would not have become publicly known, but Interior apparently leaked the news and then it confirmed the reports. These arrests and the subsequent media attention are clearly the work of Interior Minister Anatoly KULIKOV. He was promoted to Deputy Prime Minister last month and must not have been exaggerating when he claimed that he was given "carte blanche" by President Boris YELTSIN to root out official corruption.

Parliamentary Aide Murdered

· Yevgeny SHKLYAYEV, an aide to a hardline Russian State Duma deputy, was found shot to death on a bank of the Moscow River on Thursday, the victim of an apparent contract killing. According to documents found on his person, SHKLYAYEV worked for Sergei SHASHURIN, a member of the one of the national-patriotic parties in the Duma. When asked about SHKLYAYEV on Russian television, however, SHASHURIN said he did not recognize his name, noting that he has over 100 aides.

Economy

CB to Introduce 500,000 Ruble Note

· The Russia Central Bank will issue a new

Politics-Economics-Business

When you need to know it as it happens

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Friday

February 28, 1997

Intercon's Daily

RUSSIA SHORT TAKES

Russia's Ingosstrakh insurance group, which brings together more than 30 insurance companies in Russia, the CIS and foreign countries, collected about two trillion rubles in insurance premiums in 1996. It paid out and reserved for future insurance payments almost one trillion rubles. Russia currently has almost 2,500 insurance companies, 10 percent fewer than in 1995.

According to Russian Agriculture Minister Viktor KHLYSTUN, three-quarters of Russian farms lost money last year. Federal and regional government subsidies have kept production relatively steady in recent years, but are insufficient to solve the long-term problems faced by farmers. Deputy Premier Aleksandr ZAVERYUKHA said that labor productivity in agriculture fell 40 percent in the past few years.

Some 91 percent of all cargo shipped to Russia passes through the Baltic Sea ports of Latvia and Estonia. This requires Russia to pay about $10 billion in customs duties to Latvia and Estonia. However, Russian companies have begun underwriting the construction of new ports in the Leningrad Oblast in order to bypass the Baltics.

The Russian government has approved a list of banks authorized to finance state programs, service the revenue accounts of the federal government, and carry out transactions related to the federal budget and international lending agencies. These include Promstroibank, Gazprombank, MDM-Bank, and International Commercial Bank.

According to a recent report by the UN Economic Commission for Europe (ECE), aggregate foreign direct investment (FDI) in Russia reached $6.6 billion by the beginning of 1996. Western Europe accounted for 70 percent of FDI in Russia.

Moscow telephone company MGTS has hired CS First Boston and Salomon Brothers to lead manage its debt Eurobond issue, with AO Guta-Invest and AFK Sistema managing the sale in Russia. Proceeds from the Eurobond sale will be used to finance the upgrading of the company's Moscow City telephone network, including overlaying a digital network and setting up a modern system for metering local calls. Coopers & Lybrand is currently preparing an audit of MGTS operations for 1995 and 1996.

and converts these pollutants into marketable products. The first phase of the new hydrocracker unit will provide one million MTA of hydrocracking capacity and is expected to be operational by the year 2001.

Financing for the project was developed by ABB Project & Trade Finance and includes loans totaling $160 million under the US Export-Import Bank's Oil and Gas Framework Agreement (OGFA) program.

Angarsk is the second hydrocracking technology award in Russia for the Chevron/Lummus alliance after receiving an award in 1994 for Surgutneftegaz' Hydrocracker Project at the Kirishi Refinery near St. Petersburg. The Chevron/Lummus alliance jointly markets a full range of refining technologies in Russia at all major refining sites.

Ford Considering Russian Assembly Plant

· US Ford Motor Company is holding talks with several Russian auto firms about setting up a car assembly plant in Russia, Olga FYODOROVA, public relations manager for Ford in Russia, told Reuters today. "We are at the negotiations stage with several plants, which are not big ones, now monopolies. It is the Ford strategy to start small or medium-sized production in a country like Russia," she said.

Ford has not yet decided what models they will produce in Russia, she said, but it is unlikely to make Transit or Escort models because they will be assembled in neighboring Belarus. The Belarus joint venture is scheduled to begin assembly later this year with an initial capacity of 6,000 cars a year, but capacity could be increased to 20,000 annually, if there is sufficient demand.

Moscow Tender for Landmark Renovation

· Moscow officials are planning an international tender for a $7 million contract to renovate a 19th-century tea shop in downtown Moscow, reported Interfax on Thursday. The president of the Moscow international tender center Anatoly ROMANOVSKY said the renovation will involve an enormous amount of exterior and interior stucco modeling. Restoration of the facades alone is expected to cost at least $1 million. The tender winner will own 40-60 percent of the building on Myasnitskaya street, while the Moscow city government will retain ownership of the historic tea shop.

When you need to know it as it happens

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Friday

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Intercon's Daily

European Republics

Latvia Names New Finance Minister

· The Latvian parliament on Thursday named Robert ZILE, a Western-trained economist and chairman of the Latvian parliament's budget committee, as the country's new Finance Minister, said today's Financial Times. The country has been without a permanent finance minister since October 1996, when former Minister Aivars KREITUSS resigned.

The previous appointee, Vasily MELNIKS, was mired in controversy, bringing down the Latvian government last month. Prime Minister Andris SHKELE resigned when President Guntis ULMANIS rejected his nominee, following media reports that linked MELNIKS with corruption. He was then reappointed premier and formed a new eight-member coalition government.

ZILE, a member of the rightist Fatherland and Freedom Party, is respected for his role in getting the balanced 1997 budget through parliament and his nomination was welcomed by Riga's financial community, said FT.

South Caucasus & Central Asia

Georgia-Azeri Accord on Euro-Asian Route

· Intercon has obtained a copy of an important agreement, signed in Baku last week between Georgian President Eduard Shevardnadze and Azeri President Geidar Aliyev, on the development of a Euro-Asian Transport Corridor. The 13 articles of the agreement discussed not only the continuing development of the oil and gas industry, but also emphasized the importance of strategic planning for the long-term economic relationship between the two countries. The treaty will initiate a Cooperation Committee responsible for resolving any potential conflicts related to the Corridor and will engage in creating and promoting future projects in the fields of telecommunication, transportation, and natural resources. The agreement also addressed the neces

sity of raising the environmental and health standards in the oil industry.

Georgia has been vigorously pursuing the development of transport links to connect the countries of Europe with Asia and the Middle East and has already signed agreements with such states as Uzbekistan and Turkey to promote the idea.

OPIC Loan for US-Uzbek Mine

· The Overseas Private Investment Corporation (OPIC) announced today that it will provide $200 million worth of political risk insurance to Denver-based Newmont Gold Company for its Zarafshan-Newmont gold recovery project in Uzbekistan, said an OPIC press release. The insurance will cover Newmont's recent $40 million capital injection into the project. With this investment, Newmont can introduce state-of-the-art technology and environmental systems for the mining project.

OPIC President Ruth HARKIN also announced that US businesses have registered with OPIC for projects which could mean more than $500 million in new US investment in Uzbekistan. The projects are in a range of sectors, including banking, natural resources, and telecommunications.

OPIC has approved more than $200 million in finance and political risk insurance to US ventures in Uzbekistan. In addition to these projects, six OPIC- backed investment funds, with a total capitalization of $1.2 billion, are designed to invest in Uzbekistan and other former Soviet republics.

Karimov on Uzbek Economy in 1996

· Uzbek President Islam KARIMOV told a government assembly this week that 1996 was a "year of economic and financial stabilization," reported RFE/RL on Wednesday. Last year, the budget deficit did not exceed 3.5 percent, inflation was cut in half (no figures given), the national currency gained strength, and foreign trade was over $9.3 billion, he said. KARIMOV called for 1997 to be a "year of human interests" and social security for all.

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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