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

Wednesday, February 5, 1997

Russian Federation

Politics

Chirac Proposes Five Power NATO Meeting

· French President Jacques CHIRAC, backed by Germany, has suggested that a five-power summit be held in Paris to discuss a future security system for Europe in which Russia and an expanded NATO could coexist, reported Reuters today. The summit—between representatives of France, Germany, the US, Britain, and Russia in April—would seek a broad outline of a special arrangement with Moscow in return for acceptance of NATO's planned eastward expansion. Russia would be offered security guarantees, arms control concessions, and an enhanced overall relationship with the West, said Reuters. The summit lay the groundwork for the July NATO summit in Madrid, where the Alliance will discuss accepting members from eastern Europe.

Security Services Integration Planned

· Russian weekly Moskovskiye Novosti (No. 5) reports that rumors are circulating in the Kremlin to the effect that presidential chief-of-staff Anatoly Chubais is forwarding a plan for the Federal Security Service (FSB) to be placed under the jurisdiction of the Interior Ministry. The purpose of the move is apparently to "create a single police structure capable of actively upholding the ruling authority should the internal political situation become aggravated."

It is expected that this "aggravation" would be a result of the further deterioration of President Boris Yeltsin's health and the deepening of social problems in the spring. Moskovskiye Novosti suggests that if the security services consolidation plan is realized, Russia will lose its counterintelligence agency, while the Interior Ministry "will turn into a monster like the Stalin-era KGB."

The concept of such a consolidation is made more significant by the fact that Interior Minister Anatoly KULIKOV was this week promoted to deputy prime minister in charge of the tax police and customs service, while retaining his position as head of the Interior Ministry.

An article in today's Segodnya suggests that CHUBAIS did not play a role in KULIKOV's promotion, calling it highly "improbable" that he would "seriously think that Anatoly Kulikov is a necessary or suitable person" to combat corruption. Meanwhile, today's Moskovsky Komsomolets compares KULIKOV with late KGB chief Lavrenti BERIA suggesting that the only difference between the two is that BERIA controlled not only the interior ministry, but the state security organs.

Comment: It should be noted, however, that Segodnya is run by former Most bank head Vladimir GUSINSKY, a very close ally of CHUBAIS. This calls into question the article suggesting CHUBAIS' lack of involvement in KULIKOV's promotion. An alternative view is that the promotion, as well as the possible consolidation of the FSB and Interior Ministry, could serve a very important political purpose—to counterbalance the threat of Russia's most ambitious politician, former General Aleksandr LEBED, who is extremely popular in the power ministries , particularly among the military. KULIKOV is the man who ousted LEBED from his government post earlier this year and his ministry, plus the FSB and

Today's News Highlights

Russia

January Inflation at 2.3%

Trade with US and China

New Fiber Optic Line Planned

Civilian Plans to Be Scrapped

IFC Starts Russia Index

Transcaucasia & Central Asia

Parker in Kazakh Oil Deal

Kazakh Stock Market Dev.

Turkmen Agriculture Crisis

Updates Chechnya

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other enforcement organs, may present the only effective force against a political, or other, threat from LEBED and his allies.

In Russia, as in the Soviet Union before it, decisions related to personnel changes in, or the reorganization of, the power ministries are made for political reasons, not for practical results. In recent years, the Interior Ministry and the FSB have shown an inability to stem the tide of crime and corruption. With a weak president in the Kremlin, however, the preservation of the current power structure takes precedence over such considerations.

Economy

Ruble = 5,639/$1.00 (NY rate)

Ruble = 5,640/$1.00 (CB rate)

Ruble = 5,635|5,645/$1.00 (buy|sell rates)

Inflation Up to 2.3 Percent in January

· Russian inflation reached 2.3 percent in January, the highest monthly increase in the consumer price index since last March's 2.8 percent, said the State Statistics Committee (Goskomstat). Food prices rose three percent, while non-food prices increased by 0.9 percent and services grew by 2.3 percent.

Russia-US/China Trade in 1996

· The trade turnover between Russia and the US totaled more than $7.5 billion in 1996, compared with $6.9 billion in 1995, according to Russian Trade Ministry figures, cited by Itar-Tass today. The US is Russia's third largest trading partner after Ukraine and Germany. Russian exports to the US exceeded imports by about 1.5 times.

Over 90 percent of Russian exports to the US were raw materials. Russian aluminum accounted for

more than 25 percent of the total value of exports. Ferrous metals account for about 25 percent of exports, chemical goods and fertilizers for over 17 percent, precious metals and stones—eight percent, whereas oil and oil products—seven percent.

The bulk of US imports to Russia were machines and equipment (about 40 percent) and foodstuffs and unprocessed agricultural products (42 percent).

The trade turnover between Russia and China totaled $6.84 billion in 1996, up 25.3 percent from the year before, according to Chinese customs statistics, cited by RIA Novosti today. Russian exports to China were $5.15 billion, an increase of 35.6 percent from 1995, while imports from China were $1.69 billion, up only 1.6 percent. The number does not include goods moved across the border by so-called shuttle-traders, which conservative estimates put at an annual volume of $500 million to $2 billion.

Some 80 percent of total Russian imports were food products and consumer goods. Chinese officials hope to increase the volume of Russian-China trade to $8-10 billion this year by increasing exports of Chinese computers and electronics to Russia.

Russian Plans New Fiber Optic Line

· Russian Communications Minister Vladimir Bulgak said Tuesday that Russia is considering the possibility of laying a fiber-optic line under the Arctic Ocean, reported Prime-Tass. BULGAK said the new line would link Russia and other European countries with the US and Canada. According to Bulgak, Russia now has 6,000 international phone lines, compared with only 1,000 in 1991.

The second major direction in the development of telecommunications in Russia, apart from making them global, is to embrace the largest possible number of domestic users, said the minister. The problem of local telephone communication still exists in Russia, although the number of installed telephones has increased considerably since 1990. The Communications Ministry has set a target of adding about three million telephone numbers a year.

Telephone Access Expanding

· Russian companies shelled out over 37 trillion rubles ($6.6 billion) to local telecommunications

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firms in 1996, up from 25 trillion rubles ($4.4 billion) in 1995, according to the State Statistics Committee. Meanwhile, total household usage value rose 63 percent to 11.2 trillion rubles ($2 billion).

The number of residential telephone lines increased by 5.3 percent last year with President Boris YELTSIN's People's Telephone program responsible for 800,000 new household connections. Corporate lines, however, dropped 1.7 percent. Pay phone numbers increased by 3,200, or 1.7 percent.

High-tech telecommunications systems boomed in 1996, with cellular telephone subscriptions rising from 90,000 to 200,000 and the number of pagers growing from 143,000 to 250,000.

Russia to Begin Retiring Aircraft

· Russian airlines will begin writing off obsolete planes this year, a Russian government official told Interfax. The Tupolev Tu-154 and Tu-134, Ilyushin IL-62 and IL-86, Yakovlev Yak-42, and other aircraft designed in the 1960s and 1970s, account for 95 percent of all civil aircraft operating in Russia.

"[The planes] are inefficient and not competitive as their fuel consumption is 50 percent to 100 percent higher than modern Western models and they fail to meet international standards for noise and atmospheric pollution and air navigation," said the official. Three-quarters of these planes will be retired.

Replacing the planes is problematic, however, as Russian airlines don't have the money to purchase new planes. Moreover, output in the aviation industry has dropped 70 percent over the last five years with production of civil aircraft down 50 percent and warplanes down 84-90 percent. Defense research and development work is down over 90 percent.

Business

IFC Starts Russian Investable Index

· The International Finance Corporation (IFC), an arm of the World Bank, on Monday launched an IFC Investable Index for Russia, said an IFC press release. The inclusion of the Russian market into index coverage is expected to enhance both domestic and international portfolio investment in Russia, as it indicates the market is comparable to other leading emerging markets.

South Caucasus & Central Asia

Kazakh Plans Viable Stock Market

· Grigory MARCHENKO, chairman of the Kazakh National Securities Market Commission, told reporters on Tuesday that the government is taking steps to create the infrastructure necessary to have a workable stock market capable of attracting foreign investment. "I think Kazakhstan's securities market will start developing rapidly in the second half of this year," Reuters quoted him as saying. The country's central bank and stock exchange are currently working to set up a central depository of securities compatible with international standards. In addition, the parliament is currently debating legislation on the securities market, investment funds, and the registration of securities transactions, he said.

The priority for the market will be to attract foreign investors as the domestic population is not ready to make this kind of investment. "In the first stage...foreign investors will be the main source of investment on our market of corporate securities," said MARCHENKO, according to Reuters. "It would take up to two years before local private persons region confidence in the state, take their savings from under their mattresses, and start investing in Kazakh corporate paper."

More than 50 large local companies have been selected to become Kazakh "blue chips" and have their shares offered to foreign investors. These companies are mainly involved in natural resource extraction and processing, energy provision, or telecommunications. The government has ordered the companies to bring their accounts in line with international standards and order international audits for 1996. In conjunction with the International Finance Corp. (IFC) and the European Bank for Reconstruction and Development (EBRD), the government will hold an international seminar in June for the heads of these companies to meet with potential investors.

Parker Drilling Gets Kazakh Contract

· Tulsa-based Parker Drilling Company on Tuesday announced that it has received a five-year contract to expand operations in Kazakhstan, said a company press release. The new agreement creates a broad alliance between Parker and Tengizchevroil, the developing operator of the mas

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sive Tengiz oilfield in western Kazakhstan. Tengizchevroil is a joint venture between the Kazakh government, Chevron Overseas Petroleum, and Mobil Oil Company.

As a partner in the alliance, Parker will operate and maintain Tengizchevroil rigs as the venture expands operations to include a deep development drilling program. In addition, Parker will manage the customer's warehouse, drilling base, and mud plant. The company will also provide local and expatriate drilling crews, as well as maintenance personnel for Tengizchevroil's mobile equipment fleet. A broad-based training program will also be an integral part of Parker's participation.

Turkmen Agriculture Problematic in 1996

· Turkmenistan's cotton production declined sharply in marketing year (MY) 1996/97 because of the lack of adequate incentives for farmers to plant, grow, and harvest cotton, said a report from the US agricultural attache in Ankara, cited by Futures World News (FWN). In general, as a result of the disappointing wheat and cotton harvests, the Turkmen government now candidly admits that agriculture is in a crisis.

In December 1996, officials met to review current production policies and decided to initiate a system of land privatization aimed at providing increased incentives for producers. Additionally, sources indicate the government of Turkmenistan is planning to shift 100,000 hectares from medium staple cotton to extra-long staple (ELS) cotton, effective this coming planting season, in order to capture what they see as a significant premium for ELS production. Officials believe they have adequate inputs and processing equipment to accomplish this shift which, if successful, could have a major impact on world ELS markets.

For the MY 1996/97 crop, the Turkmen government is expected to sell about 100,000 MT to international cotton shippers via negotiated, prefinanced contracts and the remainder will be retained for the

domestic industry. Since the cotton is sold to intermediaries, rather than exported directly, trade statistics are not available. Shippers report they export the cotton both to European and Far Eastern markets. Significant portions are now exported via Iran.

Following disappointing MY 1996/97 wheat and cotton harvests, the Turkmen government has decided to reform its current centralized production system by privatizing state agricultural holdings. But no reforms in input supply, processing, or output marketing are envisioned at this time. Officials hope a system of direct responsibility and direct payment will provide the missing production incentives.

Updates

Chechnya: Tim Guldimann, the head of the Chechnya mission of the Organization for Security and Cooperation in Europe (OSCE) was expelled from Chechnya on Tuesday, reported Interfax. GULDIMANN, a Swiss diplomat, was compelled to leave Chechnya after acting Chechen Foreign Minister Ruslan Chimayev declared him persona non grata, said Interfax. The action was related to a recent public statement to the effect that Chechnya is a part of the Russian Federation.

Guldimann went to the neighboring Republic of Ingushetia, but other OSCE delegation members are remaining in Chechnya. Guldimann has headed the OSCE mission in Chechnya for about a year. His statements during the two-year Chechen conflict have often been controversial, but usually it was the Russian authorities who were critical, believing that he was favoring the Chechen rebels.

Russian officials expressed anger over the Chechen move, saying that the region did not have the authority to expel GULDIMANN. "Chechnya is part of the Russian Federation and has no right to make anyone persona non grata. This is an exclusive prerogative of the federal center," Interfax quoted Deputy Foreign Minister Boris KOLOKOLOV as saying.

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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