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

Friday, March 14, 1997

the actions of Albanians should serve as an example to the Russian people.

LEBED also took the opportunity to criticize President Boris YELTSIN for renaming Anatoly CHUBAIS to a Cabinet post. "The appointment of CHUBAIS to a key position in the government is a further...clumsy and confrontational step by the president after which you understand the full meaning of the expression `the court is playing the king'," he is quoted by Reuters as saying.

Tax/Customs Breaks Committee Formed

· The Russian government has set up a commission to exercise control over tax and customs privileges, with Deputy Prime Minister/Interior Minister Anatoly Kulikov as its head, reported Prime-Tass on Thursday. The commission includes Federal Tax Police head Sergei Almazov, State Tax Service head Vitaly Artyukhov, Federal Security Service head Nikolai Kovalyov, State Customs Committee head Anatoly Kruglov, Labor Minister Gennady Melikyan, head of the Russian Federal Department for currency and exports control Oleg Pavlov, and Deputy Finance Minister Sergei Shatalov.

Economy

Second Eurobond Launched

· Russia has launched a seven-year Eurobond worth DM2 billion, the second Russian Eurobond issue since the Bolshevik revolution in 1917, with a nine percent interest

Russian Federation

Politics

Lebed Inaugurates New Party

· Russia's most ambitious politician Aleksandr Lebed presided over the first congress of his Russian People's Republican Party (RPRP) today in Moscow, proclaiming that it should become "a party of truthful and honest power," reported Dow Jones. "Our main task is to come to power by legitimate means," he said.

Lebed claimed that the party already had a membership of 10,000 and said that the RPRP would find support throughout Russia because "there isn't a single home in Russia where people aren't unhappy with the [current] power," according to Dow Jones.

The former Security Council secretary said Russians are fed up with the "corrupt and failing government" and the faltering economy and warned that a general strike, called by the Federation of Independent Trade Unions for March 27, could turn violent, leading "to chaos and anarchy in the country."

He suggested that the government would use the strike as an excuse to attempt to introduce some kind of martial law, but predicted that this action would backfire. "Little is needed for a few provocateurs to be introduced into any crowd during peaceful protest actions on March 27—broken shop windows, arson attacks, looted kiosks," LEBED is quoted by Reuters as saying. "One victim and that's it. The authorities have their hands free to introduce a state of emergency...and it is already the first step toward a suicidal civil war. We, of course, would win it but we don't need that kind of war, even for free."

LEBED pointed to Albania as an example of a society reacting with force to woeful leadership and said that

Today's News Highlights

Russia

Ruble Chart

S&P's Rates Eurobond

US Aid to Russia Disputed

Russia Short Takes

New Urals Gas Co. Created

Russian Fannie Mae Planned

European Republics

Belarus Opp. Head Detained

GSM Licenses Given in Ukraine

Ukraine Gas Official to US

Politics-Economics-Business

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Friday

March 14, 1997

Intercon's Daily

Ruble = 5,699/$1.00 (NY rate)

Ruble = 5,703/$1.00 (CB rate)

Ruble = 5,695|5,711/$1.00 (buy|sell rates)

Oct Nov Dec Jan Feb Mar

rate, reported today's Financial Times. The offering which became the largest emerging market bond issued in D-marks, was priced 3.7 percentage points higher than equivalent German government bonds. Unlike Russia's debut $1 billion Eurobond issue in November 1996, the issue managers were unable to sell the entire offering on the day of the launch.

Investor demand was dampened, however, by worry that US interest rates would rise after the next Federal Reserve meeting on March 25, said the paper. "Considering how unluckly the timing was for Russia, the issue actually went quite well," one syndicate manager told the FT. Russia plans another $2 billion Eurobond issue later this year.

Standard & Poor's Rates Eurobond Issue

· Standard & Poor's (S&P) on Thursday assigned its BB- long-term rating to Russia's DM2 billion Eurobond, citing the government's short economic management track record and the political and administrative difficulties it faces raising tax revenues, reported Futures World News (FWN). The outlook on the rating is stable, it said.

Other key factors constraining Russia's foreign currency rating mentioned were the persistence of the wage arrears problem, seen by a planned nationwide strike by unpaid state workers on March 27, and a weak legal system, "including lax enforcement that continues to foster widespread corruption, discourages foreign investment, and acts as a drag on overall economic activity."

S&P's also noted that President Boris Yeltsin's "prolonged illness, now apparently at an end, created a serious power vacuum that undermined the authorities' efforts to deal effectively with tax evasion, corruption, and payment arrears." It expressed optimism that YELTSIN's planned government reshuffle demonstrates a renewed desire to tackle these problems. "It remains to be seen, however, whether the new administration will have the political will necessary to resolutely pursue reforms.

Key elements supporting the ratings include: The policymakers' strong commitment to disinflation; moderate general government debt, estimated at 47 percent of GDP at end-1996, in line with that of similarly-rated sovereigns; and a manageable external debt service profile.

US Government vs. Congress on Russian Aid

· During US congressional hearings this week, the Clinton Administration asked Congress to increase aid to Russia by nearly 150 percent in the next fiscal year (FY), bringing it to $241 million in FY98 from $95 million in FY97. The Administration also wants a 44 percent increase in appropriations for the Newly Independent States (12 former Soviet republics, or all but the Baltics) next year, asking for $900 million in FY98, up from $625 million in FY97.

The Republican-controlled US Congress, however, seems unlikely to approve of an aid increase for Russia. "There is a strong disappointment among some members of Congress that our policy toward Russia does not seem to be serving American interests as well as it should," House International Relations Committee chairman Benjamin Gilman (R-NY) said at the hearings, reported Thursday's Journal of Commerce. He used as examples Russian sales of nuclear technology to Iran and reports that Moscow is developing chemical weapons.

The Congress may consider boosting the appropriation for other former Soviet republics in 1998. Ukraine was the darling in the 1997 fiscal year, but recent revelations that high-level corruption has been acting as a serious impediment to foreign investment may cool the US ardor for it next year.

Small republics, such as Georgia, which is strategically-located and have shown a commitment to democracy building, are beginning to be noticed.

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Politics-Economics-Business

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Friday

March 14, 1997

Intercon's Daily

RUSSIA SHORT TAKES

n Rossiiskiye Vesti recently carried information about thefts of gold in the far eastern Amur Oblast where 27 percent of Russian gold resources are located. In 1988, local police seized 642 grams of stolen industrial gold, while in 1996, that figure had reached 4,600 grams.

n A Central Security Department has been set up within the Russian Finance Ministry. The newly-established department will be headed by KGB major general of the reserves Leonid Katsubin. The department's primary tasks will include combating crime in the banking and finance sphere, ensuring the Finance Ministry's financial security, and guarding senior Ministry officials.

n The top ten destinations for US cigarette exports, which accounted for nearly 83.7 percent of all US shipments in 1995, included: Japan (27.8 percent of total); Belgium (25.3 percent); and Russia (7.0 percent), according to data from the US Department of Commerce.

n Russians consumed 13-14 liters of alcohol per capita in 1996, an increase of almost 30 percent more than was consumed per person in 1990.

n Russia and Taiwan have agreed to launch regular air service between Moscow and Taipei. An agreement on this is expected to be signed by Taiwan's China Airlines and Russia's TransAero in the near future. Flights between Taipei and Moscow are expected to begin in two months.

n Russia Military Space Forces are planning to launch eight communications satellites with the help of the Russia's Proton heavy booster rocket rockets from Baikonur cosmodrome in Kazakhstan this year. Six of these will to be stationed in geostationary orbit: TelStar_5 of AT&T (May), PAS_5 of PanAmSat (July), Astra_1G (August) and Astra_2A of SES, Luxembourg (October), and Sky_1 of MSI company (September).

n The Progress helicopter maker and Rosvooruzhenie arms export company are negotiating a contract on the sale of six KA_50 (Black Shark) combat helicopters to Slovakia. The estimated $80 million contract is expected to be signed in March.

During talks on Capitol Hill this week, Mitch McConnell, chairman of the Subcommittee on Appropriations, told visiting Georgian parliamentary chairman Zurab ZHVANIA that the Congress wants to nearly double—to $75 million—the allocation for Georgia from the $41.9 million requested by the CLINTON Administration.

Decree to Create New Urals Oil Co.

· Russian President Boris Yeltsin has signed a decree that transfers to state ownership 38 percent of the shares of two Sverdlovsk Oblast oil joint-stock companies, reported Itar-Tass on Thursday. The decree gives the Sverdlovsk regional government control of the 38 percent stakes in Sverdlovsk-nefteprodukt and Ekaterinburgnefteprodukt to found a new joint-stock company to be named Uralnefteprodukt. The decree eliminates the two companies from the list of joint-stock companies whose output is vital for Russia's security.

Business

Russian Fannie Mae to Be Created

· The Russian government has released the first 225 billion rubles ($40 million) of an $80 million allocation to establish a secondary mortgage facility similar to Fannie Mae, the US's largest source of home mortgage funds, according to a press release from Fannie Mae and the Urban Institute. The Institute, a private, nonprofit policy and research organization based in Washington, and Fannie Mae have been working with the Russian Ministries of Construction and Finance and about 30 Russian banks for several years under a US Agency for International Development (USAID) contract to create a mortgage lending system in Russia.

The new Russian agency will stimulate private bank lending for residential construction and home purchase as part of a concerted government effort to address the country's significant housing shortage, said the release. Although the new agency is formally a joint stock company, it initially will rely solely on government capital. The agency will purchase qualifying mortgages and sell mortgage-backed securities. These securities will carry a government guarantee but no tax advantages.

"The agency will help solve two problems plaguing the emerging housing market," said Grigory

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March 14, 1997

Intercon's Daily

Litvinov, a member of Russia's Board of Management Agency for Mortgage Lending. "It will reduce the liquidity and interest rate risk problems faced by Russian banks making mortgage loans; and it will bring order to the industry by setting standards for the loans it purchases."

LITVINOV is part of a Russian delegation currently in Washington to negotiate the contents and schedule of a $1 million USAID-funded technical assistance package that will help launch the agency. Fannie Mae will take the lead in providing this assistance with help from housing finance experts at the Urban Institute and its Russian counterpart, the Institute for Urban Economics. Assistance will continue through the first full cycle of purchasing mortgages and selling securities.

Ukraine Awards GSM Licenses

· The Ukrainian government on Tuesday awarded three licenses to run the country's GSM cellular network, opening the way for millions of dollars worth of investment in the country's wireless telecommunications sector, reported Thursday's Wall Street Journal. Ukrainian Radio Systems, Ukrainian Mobile Communications, and the Kiev Star newspaper won a tender held by the Communications Ministry. The three companies will pay the government undisclosed sums for the licenses in compliance with their bids. Radio Systems is 49 percent owned by US Motorola and Mobile Communications is a consortium, which includes Deutsche Telekom, and Dutch PTT Telecom, and Denmark Telecom, but the third company is an unknown entity with no known operational experience in communications.

Ukrainian Gas Official to Washington

· Yulia TYMOSHENKO, the president of United Energy Systems of Ukraine (UESU) and a member of parliament, will visit Washington on April 13-19 to meet with energy leaders and foreign policy exports, said UESU press release. She will speak to the Center for Strategic and International Studies (CSIS) and the US Chamber of Commerce's American Business Alliance for the Transition Economies of Eurasia (ABATE), as well as meet with members of Congress and interested natural gas trade associations and reporters.

TYMOSHENKO said the key to Ukraine's future economy is energy independence. Currently, Ukraine imports two-thirds of their energy and 90 percent of that comes from or passes through Russia. UESU supplies natural gas and electricity to Ukrainian consumers and serves as a coordinator of a cooperative, comprised of 2,000 production companies who make products such as metallurgy, railway equipment, and gas pumping units. The cooperative sells these goods in the Russian market and uses the money to buy natural gas. This import/export system has helped Ukraine pay for imported gas in 1996 and is credited with helping stabilize the economy.

European Republics

Belarussian Opposition Head Detained

· One of the leaders of the opposition Belarus Popular Front, Yuri KHODYKO, was detained by police last night as he was preparing a major anti-LUKASHENKO protest rally to coincide with Constitution Day on Saturday, reported Reuters.

According to a Popular Front spokesman, a scuffle broke out when a group of uniformed and plain-clothed police raided the Front's offices and one person was injured. About 100 people were detained during an anti-Russian protest in Minsk on Monday.

Ukraine Govt. Pay Docked on Performance

· Ukrainian Prime Minister Pavel Lazarenko authorized the Finance Ministry on Thursday to suspend the salaries of all Cabinets members and their staff, both and Kiev and the regions, until work on the first quarter of 1997 budget plan is complete, reported Xinhua. The Ukrainian government's 1997 budget plan is still waiting for approval from parliament. President Leonid KUCHMA ordered a plan for the budget's first quarter to be completed before March 10.

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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