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

Tuesday, March 11, 1997

Russian Federation

Politics

Yeltsin Orders Major Govt. Reorganization

· Russian President Boris YELTSIN signed a decree today ordering a major reorganization of the government, indicating that all ministers, except Prime Minister Viktor CHERNOMYRDIN and First Deputy Prime Minister Anatoly CHUBAIS, could face dismissal. The decree calls for some government ministries and departments to be abolished or restructured, including stipulating that the number of first deputy prime ministers be reduced from four to one, and the number of deputy prime ministers also be cut. It gives CHERNOMYRDIN and Chubais one week to submit proposals for a new government.

This decree, and the naming of CHUBAIS to the government on Friday, are the surest signs yet that YELTSIN has recovered his fighting political spirit. He appears ready to allow the unpopular CHUBAIS and his youthful clique to resume the radical economic reform course that was begun in 1992, but stalled in 1996. The retention of CHERNOMYRDIN is likely an attempt to maintain some stability as well as to make major government personnel changes without confirmation from the parliament.

Yumashev Named Presidential Chief of Staff

· Russian President Boris Yeltsin today appointed Valentin Yumashev, a former journalist who helped the president write two autobiographies, to be his new chief-of-staff. Yumashev replaces Anatoly Chubais who was named First Deputy Prime Minister on Friday.

Yumashev, 39, worked as a reporter for Moskovsky Komsomolets and Komsomolskaya Pravda, and as editor-in-chief of Ogonyok, before becoming a presidential aide after YELTSIN won re-election.

YUMASHEV told Interfax today that he plans to retain the current presidential administration personnel, except those aides that might be brought into the government by CHUBAIS.

As YUMASHEV does not have significant policy or government experience, his appointment may indicate that the post of presidential chief-of-staff will revert to a simple administrative support position, rather than the powerful policymaking post it become under CHUBAIS' leadership.

Also today, Yeltsin appointed Yuri Osipov, president of the Russian Academy of Sciences, to be a member of the Russian Security Council, said the presidential press service.

In addition, YELTSIN has named Yevgeny SHAPOSHNIKOV, the director of Aeroflot International Airlines and a former Soviet Defense Minister, to be a presidential advisor, reported RFE/RL today. It is likely that SHAPOSHNIKOV will advise the president on national security issues, which could mean that current national security advisor Yuri BATURIN will be tapped for a government post. SHAPOSHNIKOV will probably now have to step down as director of Aeroflot.

US-Russia Discuss Cooperation on Crime

· Russian Interior Minister Anatoly Kulikov met US Charge d'Affaires John Tefet on Monday to discuss cooperation in the area of law enforcement, re

Today's News Highlights

Russia

Netanyahu in Moscow

Company Tax Breaks Cut

German-Russian Cooperation

Focus on Unemployment Law

NIS Short Takes

South Caucasus & Central Asia

McDonald's to Open in Georgia

Uzbek-Canadian Gold JV

Kazakh Premier in Trouble

AT&T Sued Over Kazakh JV

Politics-Economics-Business

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Tuesday

March 11, 1997

Intercon's Daily

ported Itar-Tass. Kulikov informed Tefet about the current social and political situation in Russia and measures being taken by the government to combat crime, said the Interior Ministry press service. He noted that the number of crimes against US citizens in Russia remains relatively low—slightly more than 100 a year, mostly thefts of goods and cars.

Israel's Netanyahu in Moscow

· Israel Prime Minister Binyamin Netanyahu, on his first trip to Russia since taking office, met with President Boris YELTSIN in the Kremlin this morning. "Our countries and their leaders have finished a period of biased attitudes and have energetically moved toward each other," Interfax quoted YELTSIN as saying. "This regards political, economic and trade relations." The president noted Russian trade with Israel was currently about $500 million and was expected to increase.

Moscow re-established ties with Israel in 1991 after a long period of non-relations. According to NETANYAHU, Israel currently has some one million Russian-speaking residents, the biggest concentration outside the former Soviet Union, said Reuters.

NETANYAHU also met today with Foreign Minister Yevgeny PRIMAKOV and Prime Minister Viktor Chernomyrdin to discuss the Middle East peace process and bilateral relations. The Israeli premier was expected to ask PRIMAKOV to pressure Syria into resuming peace talks and express Tel Aviv's concern over deliveries of Russian weapons to Syria and Iran, and Russian nuclear cooperation with Iran.

The two premiers signed an agreement on customs cooperation and discussed a project for the supply of Russian gas to Israel through a pipeline running across Turkey and then under the Mediterranean Sea to the Israeli port of Ashdod, reported Itar-Tass.

The overall cost of the project is estimated at $3 billion. According to the Financial Times, Israel is seeking a natural gas contract to broaden its energy base and reduce dependence on vulnerable supplies of coal and oil. But a spokesman for the Infrastructure Ministry told the newspaper that no deal was likely to be concluded this week, adding: "We may consider some memorandum of understanding, but we are keeping all our options open."

Economy

Ruble = 5,683/$1.00 (NY rate)

Ruble = 5,697/$1.00 (CB rate)

Ruble = 5,689|5,705/$1.00 (buy|sell rates)

Govt. Cancels Some Company Tax Breaks

· A Russian government resolution canceling a number of tax and other concessions for individual companies was signed last week. First Deputy Prime Minister Vladimir POTANIN told Interfax on Friday that the resolution cancels a reduction in the value-added tax (VAT) granted to domestic television producers and the concessions granted to Norilsk Nikel metals group for credit guarantees, and adjusts the restructuring of the debts of subsidiaries of the Yukos oil group in line with general rules.

German-Russian Trade Cooperation Growing

· Russian Economics Minister Yevgeny Yasin told a German-Russian investment conference in Frankfurt on Monday that Russian Finance Minister Aleksandr Livshits will arrive in Frankfurt on March 12 to attend a presentation for Russia's second Eurobond issue, reported Reuters. Another presentation for the Deutschemark-denominated bonds will take place in Zurich on March 11.

Germany's Deutsche Bank announced on Monday that it had been mandated by Russia's Vneshekonombank to arrange a DM1 billion ($585 million) credit package to finance German goods exports to Russia. The package has two components: a tranche backed by Germany's Hermes export credit guarantee agency to cover 85 percent of the investment goods deliveries and another tranche, which will not be backed by Hermes, will cover the remaining 15 percent.

Russia Tackles Unemployment Law

· Russian Deputy Labor Minister Marina Moskvina told a government commission today that "unemployment benefits failed to stimulate the jobless to look for jobs" and suggested that unemployment policy be reconsidered, reported Itar-Tass. In 1996, Russia spent 7.2 trillion rubles (about $1.4 billion) on unemployment programs. The funds used to pay unemployment benefits prevented spending on an active employment policy in regions where the level of unemployment was particularly high, she said.

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

March 11, 1997

Intercon's Daily

NIS SHORT TAKES

n Estonia's foreign trade deficit fell to 1.17 billion kroons ($88 million) in January from two billion kroons in December, said the State Statistics Department. Imports totaled 3.61 billion kroons, of which 55.2 percent came from EU countries, and 17.7 percent from CIS countries. Exports were worth 2.44 billion kroons, 48.9 percent of which went to the EU and 24.2 percent to the CIS.

n Kyrgyzstan's Kumtor Operating Company and the Kara-Balta state refinery have signed an agreement under which all gold extracted from the Kumtor deposit this year will be refined at the Kara-Balta complex. Kumtor is a joint venture between the Kyrgyz government and Canada's Cameco. Some 12 tons of gold are expected to be refined at Kara-Balta this year. Cameco estimates the deposit contains about 514 tons of gold.

n Washington has threatened to impose an embargo on Turkish state oil company Botas if it goes ahead with a deal to transport Turkmen natural gas to Turkey across Iran, reported AFP. The US has also declared its support for an alternative plan to transport gas beneath the Caspian Sea to Turkey and European markets via Azerbaijan and Georgia.

n The Moldovan government plans to sell a 51 percent controlling stake in the countries only tractor maker, Trakom, to Russian timber equipment maker DeKo. Under the proposed contract, DeKo will pledge to supply Trakom with all the components and materials it needs to maintain tractor production for domestic consumption and help it to sell tractors on the Russian market.

n In 1996, Ukraine's armed forces didn't receive a single new piece of combat equipment. Last year, the military was allocated only about 30 percent of the budget funds it requested and even the promised funds were not always available. As a result, the Ukrainian army was forced to sell weapons and equipment to buy fuel and spare parts.

n The 1997 federal budget, adopted by the Armenian parliament, allocates 30.5 billion dram ($66 million), out of total expenditures of 152 billion dram, to defense spending. Because of the large military budget, Armenia must use international assistance to cover its budget deficit.

In 1996, the share of spending on active employment programs shrank to 17.7 percent of the total, compared with 26.4 percent in 1995, and a number of planned programs could not be fulfilled. At the same time, unemployment benefits arrearsgrew.

Moskvina said proposals had already been submitted to the government and the State Duma with changes and amendments to the law on employment. The changes concern tightening the criteria for the recognition of individuals as jobless, as well as the amount of unemployment benefits. Currently, an unemployed individual is entitled to benefits equalling 75 percent of the last wage received. Under a new law, the unemployment benefit will not exceed the poverty level of the region. According to MOSKVINA, the cost of creating a job ranges from 2.5 to 22 million rubles, depending on the region.

South Caucasus & Central Asia

McDonald's to Open in Georgia

· McDonald's has signed an agreement pledging to invest $9 million to build five restaurants in Georgia over the next 19 months, Timur CHKONIYA, president of Coca-Cola Bottlers Georgia Ltd., told Interfax today. Three McDonald's will be build in Tblisi, one in Batumi, and one in Kutaisi within 19 months, with the first two restaurants opening in Tblisi before the end of this year.

Locally-made products are expected to account for 70 percent of supplies for the McDonald's and the local packaging industry, particularly the plastic works in Kutaisi and the Inguri paper plant, will help supply the restaurants, said CHKONIYA.

Tblisi will be the site of McDonald's main office in the Caucasus, said CHKONIYA. The company is expected to open restaurants in Azerbaijan in 1998 and Armenia in 1999, he said.

Canada-Uzbek Gold JV Mining Formed

· The Uzbek government and RUX Resources, a unit of Canada's Williams Resources Inc., have set up a 50-50 joint venture, called UZ-CAN, to prospect and mine for gold in Uzbekistan, reported Reuters, citing Uzbek State Geology and Mineral Resources Committee official Aleksandr OGARKOV. The new venture will work in the Kairagach and Tashek regions, as well as the silver-bearing Aktepe area.

Politics-Economics-Business

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Tuesday

March 11, 1997

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RUX is currently conducting a feasibility study on the project, which will be complete by 1998, but required initial investment in the gold regions is expected to be $50 million.

New Kazakh Economic Chiefs Named

· Kazakh President Nursultan Nazarbayev has appointed Zeinukka Kakimzanov as the new deputy chairman of the country's Supreme Economic Committee (SEC), reported Xinhua. Kakimzanov previously served as chairman of the board of the People's Savings Bank.

In addition, former SEC Deputy Chairman Erdzhan UZHembaev was named director of the newly-established National Strategic Planning Office (NSPO) and Galymzhan ZHakiyanov, head of the Semipalatinsk region, has become director of the newly-established National Strategic Supervision Office (NSSO).

The SEC, which was set up in April last year and is headed by Nazarbayev himself, mainly serves as an advisory body for the president on economic and social development strategies, as well as national security. The two new organizations—the NSPO and the NSSO—were created last Tuesday as part of a major government restructuring effort and put under direct presidential control.

Kazakh Premier Put on the Spot

· Kazakh President Nursultan NAZARBAYEV on Monday threatened to dismiss Prime Minister Akezhan KAZHEGELDIN if he fails to deal with the country's huge wage and pension arrears problem, reported Reuters. "I give April 10 as the deadline and he should by then tell how he will resolve this problem—or leave," NAZARBAYEV told an expanded government meeting. The premier was not at the meeting.

KAZHEGELDIN, a former businessman who became prime minister in October 1994, has recently made many powerful enemies as a result of his economic reform plans, particularly in the oil and gas

sphere. Rumors of his imminent dismissal have been circulating around Almaty for months, according to Reuters, and several of the officials appointed in the recent government restructuring are his opponents.

Kazakhstan to Barter Away Gas Debt

· The Kazakh government has agreed to pay off its $24.3 million debt for Turkmen natural gas supplies by barter, reported Monday's OMRI. The Kazakh Ministry of Power and Coal will send the equivalent of the debt in asbestos, phosphorus, lead, rolled copper, and other unspecified goods. Kazakhstan also had a barter deal with Kyrgyzstan, exchanging Kazakh coal for Kyrgyz hydropower. The Kazakh government has also permitted local officials in the northern part of the country to barter for energy shipments with Russia, usually trading grain for electricity.

Lawsuit Against AT&T Over Kazakh JV

· Two Texas telecommunications companies, Telecom 21 LLC and Telecom 21 Ventures LLC, have filed a lawsuit against Lucent Technologies Inc. and AT&T Corp. in a Dallas state court, alleging fraud and breach of fiduciary duties in connection with a joint venture in Kazakhstan, said a press release issued Monday. The plaintiffs allege that they entered into a joint venture with AT&T to build and operate a wireless telecommunications system throughout Kazakhstan with its major teleport at a former Soviet strategic nuclear missile defense site in Kazakhstan.

The lawsuit alleges that the two companies "seeks redress for wrongful conduct" by AT&T which signed a NUNN-LUGAR cost-sharing contract with the US government for development of the telecommunications teleport. It also alleges that AT&T refused to finance the project as promised, blocked its partners from obtaining third party financing, and "shirked its duties" as prime contractor. AT&T made financial projections for a 10-year period, which valued the joint venture at well over $6 billion at the end of the period, said the plaintiffs.

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

Svetlana Korobov, Contributing Editor

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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