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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

Monday, February 3, 1997

Russian Federation

Politics

Yeltsin Energetically Meets with Chirac

· Russian President Boris YELTSIN on Sunday met for three hours with French leader Jacques CHIRAC, who said he "was very much impressed with the speed of his [YELTSIN's] recovery," reported the Associated Press (AP). According to chief presidential spokesman Sergei YASTRZHEMBSKY, YELTSIN reiterated his opposition to NATO's eastward expansion. Nonetheless, CHIRAC told reporters that he is confident an agreement on a special relationship between the Atlantic Alliance and Russia can be forged before the July NATO summit. The French leader has said that NATO must not "humiliate" Russia by admitting its neighbors in eastern Europe as members without consultation. CHIRAC said he would return to Moscow for a full-fledged summit on September 25-27.

YELTSIN did not hold a press conference following the meeting, but brief television footage of the two leaders talking was shown. The meeting took place at a dacha outside Moscow, where YELTSIN will reportedly remain this week drafting his annual state-of-the-nation speech to parliament.

Albright to Moscow at Month's End

· US Secretary of State Madeleine Albright will visit Moscow on February 20-21 to hold talks with Russian Foreign Minister Yevgeny Primakov, said a Ministry spokesman on Saturday, reported Dow Jones. The Ministry did not give details on the agenda for the talks, but NATO's planned eastward expansion is expected to be the main topic. Russian First Deputy Foreign Minister Igor IVANOV told Interfax on Friday that the Ministry will work with ALBRIGHT "in the same constructive fashion as with her predecessor."

Economy

Ruble = 5,628/$1.00 (NY rate)

Ruble = 5,634/$1.00 (CB rate)

Ruble = 5,629|5,639/$1.00 (buy|sell rates)

Russians Speak out at Davos

· For Russia, this year's World Economic Forum in Davos, Switzerland, takes place against a backdrop of political uncertainty resulting from YELTSIN's health problems, concern over NATO expansion plans, the growing realization that economic reform efforts have slowed considerably, and disappointment over the lack of economic growth in 1996. Russian participants in 1997 include Prime Minister CHERNOMYRDIN, Economics Minister YASIN, parliamentary leader SHOKHIN, and presidential chief-of-staff CHUBAIS. The most interesting Russian official to attend, however, is the head of the Federal Security Service (FSB) KOVALYOV. Russian intelligence service chiefs have not attended the Forum in the past, but KOVALYOV will apparently attempt to reassure participants about the country's efforts to stem the growth of organized crime. Other Russian attendees include Menatep Bank president Khodorovsky, Unified Energy Systems (UES) director Dyakov, Nizhny Novgorod Oblast governor NEMTSOV, and Russia's most ambitious politician LEBED. Several Russian representatives used the forum to voice opposition to NATO's planned eastward expansion, but most concentrated on trying to attract investors to the country's needy economy.

Today's News Highlights

Russia

Russian Officials in Davos

Tax Police Raid Diamond Co.

ICBM Dismantling Project

New Valley in Russia Real Estate

European Republics

Kuchma in Paris and Davos

Ukraine Plans Tax Reform

Maersk in Ukraine

Belarus Parl. Passes Budget

Updates Chechnya

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Monday

February 3, 1997

Intercon's Daily

KOVALYOV: FSB director Nikolai Kovalyov told Forum participants on Saturday that organized crime hampers economic development and efforts to counter it should be well coordinated, reported Itar-Tass. He said it would be an exaggeration to compare the power of Russian criminal groups with the strength of the Italian mafia, but praised cooperation between Interpol and the Russian law enforcement bodies. Kovalyov said that the topic of the "Russian mafia" is being deliberately stirred up, suggesting that some of the hype is merely an effort by foreign secret services to justify increasing their budgets. He said, however, that the FSB understands the need for joint anti-crime measures and signed cooperative agreements with over 30 countries.

In an interview with Itar-Tass in Davos, KOVALYOV said that 38 Russians have recently been caught spying for foreign intelligence services and the FSB exposed more than 400 foreign intelligence agents in the last year alone. "We are noting a flurry of activity of practically all intelligence services of the world. They are working in our territory, sometimes working impudently, crudely.... We will counteract the activity of secret services of different countries as toughly as previously, and where cooperation is possible it will be developing," said Kovalyov. He cited the fighting of terrorism, organized crime and drug trafficking as fields of possible cooperation.

SHOKHIN: State Duma first deputy chairman Aleksandr Shokhin said in Switzerland Saturday that the main precondition for a Russian economic boom by 2000 was not the enactment of new laws, but the enforcement of existing laws. "A system is emerging which bypasses both the courts and their decisions. In the west, they call it the Mafia," he is quoted in the weekend edition of the Financial Times as saying. Asked about discrimination against foreign investment, SHOKHIN said that the Duma would soon discuss drawing up an extensive list of sectors barred to foreign investors. "He claimed the list was largely based on US practice, and was designed to assist foreign investment," said the FT.

YASIN: Economics Minister Yevgeny YASIN, addressing the meeting on Friday, said Russia must steadfastly pursue a planned three-year package of government spending cuts or the economy will worsen. "If we manage to implement our new reform

program, we could achieve a growth rate of five to six percent by the year 2000. But if we fail, we will be faced with the prospect of an extended depression," he is quoted by Reuters as saying.

NEMTSOV: Nizhny Novgorod governor Boris Nemtsov told Davos that Russia must change from a "vast, vast country of social welfare," where 80 percent of the population gets subsidies to a country of selective social benefits, where only the needy receive support, according to Itar-Tass. He said the tax structure must also be reformed so tax dodgers are punished because most Russians now hide their true income. It is well known that such reforms must be brought about, said Nemtsov, but he emphasized that politicians currently lack the will and the courage to do so. If the government doesn't act, he said, another government will come to power.

Last year at Davos, the Russian delegation was besieged with questions on possible impact of the Communist victory in the December 1995 parliamentary polls and possibilities for the upcoming presidential elections. Communist Party leader ZYUGANOV, who was seen as the frontrunner for presidency at the time, was a main attraction. He reassured Western leaders and investors that his party would not seek to overturn market reform efforts either as parliamentary majority or as potential president. This year, ZYUGANOV has been replaced by LEBED as the likely face of the future Russian leadership. LEBED has said that he will address the Forum and the Swiss said room could be made for him, but it is still unclear when he will appear.

Russian Police Confiscate Diamonds

· Russian tax police said they raided the Moscow office of diamond trading company Imperial Diamond and seized almost 400 gemstones to cover most of $7 million owed in back taxes, reported today's Wall Street Journal. Imperial buys diamonds for export from Russian diamond producer Almazy Rossii-Sakha, which has been accused of tax fraud.

According to tax police, Imperial is one of 127,000 businesses in Moscow that have refused to pay taxes. Of the total, about 400 of these companies owe more than $175,000 to the government. Raids and asset seizures are becoming common tactics of the increasingly aggressive Russian tax police.

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	Monday		February 3, 1997
	Intercon's Daily
	Business Russia-Ukraine ICBM Dismantling Project · A group of leading Russian and Ukrainian aerospace enterprises announced on Friday the formation of a joint venture space company that will convert SS_18 Intercontinental Ballistic Missiles (ICBMs) into launch vehicles for the deployment of commercial satellite systems, according to Businesswire. The International Corporation for Space Transport Systems was formed to convert and deploy a multi-purpose launch vehicle, called Dnepr, based on the SS-18 missile. The main partners in the joint venture include the Russian Space Agency (RKA), Ukraine's National Space Agency (NKAU), Rosobschemash (part of Russian company ASKOND), and Ukraine's Yuzhnoye state design bureau. RKA head Yuri Koptev and NKAU head Aleksei Negoda have already signed a Memorandum of Cooperation to develop the Dnepr launch vehicle and to carry out the project. The joint venture is in the process of being registered in Russia. Rosobschemash and Yuzhnoye, on behalf of the JV, are conducting negotiations on commercial uses of the launch vehicle to provide launch services to interested companies, including US Teledesic Corporation. The companies have agreed that Teledesic satellites and Dnepr launch vehicles are technologically and operationally compatible, and that project schedules are mutually acceptable. The companies are in negotiations to use Dnepr for at least 22 launches of two Teledesic satellites each. New Valley Expands Russian Real Estate · US New Valley Corp. announced on Friday that it has acquired BrookeMil Ltd., a real estate development company in Russia that owns a major Moscow office project, from Brooke Group Ltd. for $55 million, said a company press release. New Valley paid $21.5 million in cash and $33.5 million in a nine percent promissory note for BrookeMil, due within one year. BrookeMil is developing a three-phase complex on 2.2 acres of land in downtown Moscow, for which it has a 98-year lease. In 1993, the first phase of the project, Ducat Place I, a 46,500 sq. ft. office building, was successfully built and leased. Tenants include	Citicorp, the G-7 Group of Nations, and the European Bank for Reconstruction and Development (EBRD). In 1995, BrookeMil began construction of Ducat Place II, a 150,000 sq. ft. office building. Ducat Place II has already been pre-leased to a number of leading international companies including Motorola, Lukoil-Arco, and Morgan Stanley. The third phase, Ducat Place III, is planned as a 400,000 sq. ft. mixed-use complex, with construction set to begin in 1998. New Valley also announced that it is currently negotiating a joint venture with the Moscow city government and Donald Trump for a $175 million renovation of the Moskva Hotel. The renovation of the Moskva, which plans to create 600 guest rooms, 200 private condominiums, a convention center, banquet halls, retail shops, and extensive public space, is expected to be completed within 18-24 months. New Valley and its partners would have majority ownership of the Moskva Hotel, with the City of Moscow receiving a minority of the equity. The New Valley investor group would finance the project through equity contributions and debt financing.
		European Republics Kuchma in Paris and Davos · Ukrainian President Leonid Kuchma said Friday that his country wishes to establish a special relationship with NATO, if it cannot join the military alliance in the near future, reported Agence France-Presse (AFP). KUCHMA, who was visiting Paris, told French President Jacques Chirac that Ukraine supports the eastward expansion of NATO, and that Kiev wants to be treated by Brussels on the same terms as Moscow. He said Ukraine was ready to sign an agreement on a special relationship with NATO before the July NATO summit in Madrid. "We have largely convergent points of view, first of all on a new architecture of European security, and agree that the enlargement of NATO could be made within the framework of a general agreement...with Russia and Ukraine," AFP cited CHIRAC as saying. Speaking at a press conference at the World Economic Forum in Davos on Saturday, KUCHMA reiterated that Kiev does not feel threatened, but warned against attempts to divide Europe into two blocs again, adding that "the positions of both Russia and Ukraine should be taken into account," according to

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Monday

February 3, 1997

Intercon's Daily

Itar-Tass. He stressed that his country "does not want to become some kind of a buffer zone between NATO and the Tashkent bloc."

Asked about relations between Ukraine and Russia, Kuchma described them as "amorphous." He said that relations depend on the "political temperature in Moscow" which "goes up and down," according to Itar-Tass.

"We must—and we have no alternative—have normal relations with Russia.... Russia is our strategic partner and that's it, no matter what politicians may say or what high-sounding words they may use," said Kuchma.

Ukraine Plans Tax Reform

· Ukrainian Deputy Prime Minister Viktor Pynzenyk has sent a government tax reform package, which calls for drastic changes to the tax system in 1997, to the parliament for approval, reported Xinhua. Under the current tax regime, a long list of businesses, economic sectors, and even regions are exempt from taxation. In addition, a large number of businesses operating in Kiev, which have registered in the Chernobyl zone, have avoided taxation.

David Snelbecker, an advisor to the Ukrainian government from the Harvard Institute for International Development, said that the current tax system encourages businesses to operate in a shadow economy or, at least, practice imaginative accounting, according to Xinhua. Ukraine's untaxed shadow economy is estimated to account for 30-50 percent of all economic output. Snelbecker argued that the proposed tax cuts will not bring businesses out of the shadow economy, but said tax reform represents a step in the right direction.

One new proposal is for the government to cut the average personal income tax from the current 51 percent to 32 percent. The parliament recently rejected a plan for a corporate property tax which would bring in about $2.1 billion a year.

Maersk Rail From Black Sea to Kiev

· Danish Maersk Inc. will expand its operations to Ukraine, instituting rail service from the Black Sea port of Ilyuchevsk to Kiev, reported today's Journal of Commerce. "The rail option offers shippers several advantages: added security and safety for valuable products, higher payloads, and greater reliability," a Maersk statement was quoted as saying. Maersk has offices in Kiev and Odessa.

Belarus Passes 1997 Budget

· On Friday, the upper house of the Belarus parliament unanimously approved the draft 1997 budget for the country, reported Xinhua. The budget projects revenues of 36.01 trillion Belarussian rubles ($1.64 billion) and expenditures of 44.05 trillion rubles (about $2 billion). Belarus acting Prime Minister Sergei Ling told the legislators that the country plans to double all "economic norms" this year, according to Xinhua. The Belarus lower house passed the budget on January 16.

Updates

Chechnya: The Chechen Central Election Commission on Sunday published the official results of the January 27 presidential elections. Former Chechen rebel chief of staff Aslan Maskhadov received 59.3 percent of the votes, followed by rebel field commander Shamil Basayev with 23.5 percent, and rebel president Zelimkhan Yandarbiyev with 10.1 percent. Maskhadov will be inaugurated in Grozny on February 12, after the end of the Muslim holy month of Ramadan.

Chechen Interior Minister Kazbek Makhashev on Saturday offered a reward of 10 million rubles to any law enforcement official providing information about the whereabouts of two missing Russian television reporters or rescuing them. Russian Public Television (ORT) reporters Roman PereveDentsev and Vyacheslav Tibelius disappeared between Grozny and Nazran on January 19.

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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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 for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1997, Intercon International, USA.

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