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

Monday, March 17, 1997

Prime Ministers Vladimir POTANIN, Aleksei BOLSHAKOV, and Viktor ILYUSHIN. CHERNOMYRDIN suggested, however, that POTANIN and BOLSHAKOV will be offered other positions.

In addition, CHUBAIS has reportedly been made Finance Minister, as well as First Deputy Prime Minister, which apparently means that Aleksandr LIVSHITS is out.

CHERNOMYRDIN said that some ministerial positions are still vacant and more appointments will be announced within a week.

Clinton's Knee Delays Helsinki Summit

· The planned summit meeting in Helsinki between US President Bill CLINTON and Russian leader Boris YELTSIN has been postponed for one day because of CLINTON's knee surgery and will now take place on March 20-21.

In an interview with three television networks—Russia's state VGTRK television, US NBC television, and Finland's MTV3—in advance of this week's summit meeting with Clinton, YELTSIN said plans to allow eastern European nations to join NATO raise economic as well as military issues. An expanded NATO would amount to a "blockade of Russia on the part of the West, something that we can never allow" and create "an economic belt around the immediate approaches to the border of Russia," he said. Yeltsin also suggested that NATO's eastward

Russian Federation

Politics

Nemtsov Tapped for Cabinet, Reshuffle Begins

· Boris NEMTSOV, the well-known liberal governor of central Russia's Nizhny Novgorod Oblast, has been asked to join the Russian government as First Deputy Prime Minister in charge of social policy, the restructuring of natural monopolies, and housing.

"Two young men—you and Anatoly Chubais—create a fresh young team in the government—from scratch," Yeltsin was quoted by Interfax as telling NEMTSOV.

NEMTSOV, 37, turned his region into a laboratory for economic reform and it is considered to be at the forefront of market changes in Russia. Accepting the appointment, NEMTSOV said, "Only dramatic changes are needed," adding that the government will be doomed if no real progress is made within the next few months, according to Itar-Tass.

Also today, Prime Minister Viktor CHERNOMYRDIN announced that the new government will have six deputy prime ministers: (1) Yakov URINSON, who is being promoted from Deputy Economy Minister, will be Economy Minister and head of the State Property Committee; (2) Alfred KOKH, promoted from State Property Committee head; (3) Anatoly KULIKOV will retain his position as Deputy Premier; (4) Valery SEROV, who is Deputy Prime Minister in charge of CIS relations, has kept his post; (5) Vladimir BULGAK is being promoted from Communications Minister and will be in charge of technology policy; and (6) Oleg SUSUYEV, Mayor of the city of Samara, is the only real outsider brought into the government.

These changes would suggest the ouster of Economics Minister Yevgeny YASIN and First Deputy

Today's News Highlights

Russia

Economy Grows in Jan-Feb

Tax Collection Problems Persist

Volga-Dnepr Airlines Expanding

Insider's Outlook: An Eye on

the Government Reshuffle

European Republics

10,000 Demonstrate in Belarus

Belarus Bars Entry to Soros

Belarus Opens Cellular Tender

Ukraine Economy Contracts

Politics-Economics-Business

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Monday

March 17, 1997

Intercon's Daily

expansion would "disrupt the balance" of military power in Europe.

The Russian President, however, hinted that he expected that some agreement could be reached between Russia and NATO on the expansion issue. Yeltsin said he and President Clinton will be looking for a compromise that will protect the security of Russia, the rest of Europe and the US.

Yeltsin Sees Merger with Belarus

· Russian President Boris YELTSIN told a group of Russian newspaper editors on Friday that Belarus may merge with Russia. "Maybe after all, this will be a single state," he is quoted by United Press International (UPI) as saying. Yeltsin will meet Belarus President Aleksandr Lukashenko on April 2 to discuss steps to integrate the two countries, according to Kremlin officials.

Duma Rejects Death Penalty Ban

· The Russian State Duma on Friday voted 176-75, with six abstentions, to reject a bill that would suspend capital punishment in Russia, reported the Associated Press (AP). "With crime soaring, we can't introduce a moratorium on the death penalty," Communist deputy Oleg MIRONOV is quoted as saying. Russia pledged to abolish the death penalty when it joined the Council of Europe in January 1996.

Economy

Ruble = 5,710/$1.00 (NY rate)

Economy Looks Good in Jan.-Feb.

· Russia's main economic indicators all showed improvement over the first two months of the year, but analysts warn that it is too early to predict that the Russian economy has stopped contracting, reported the Associated Press (AP). During January and February, gross domestic product (GDP) increased by 0.5 percent, industrial output rose 0.9 percent, and retail sales grew two percent.

Tax Collection Problems Persist

· A Russian Finance Ministry report on budget fulfillment in January-February 1997, presented to the State Duma on Friday, indicates that Russia is still having difficulties collecting taxes for the federal coffers, reported Itar-Tass. According to preliminary figures, the federal budget received 34.1 trillion

rubles (54.6 percent of planned revenues) and spent 39.6 trillion rubles (50.4 percent of planned expenditures) in the first two months of this year.

The government failed to collect 29.5 trillion rubles worth of taxes, including some 12 trillion rubles worth of value-added taxes (VAT) and 8.6 trillion rubles worth of excise taxes. Moreover, the continued use of barter arrangements between regions is a break on potential tax revenues. The country is, therefore, unable "to finance federal budget spending in due amounts," said the report.

The Finance Ministry said it gives priority to budget expenditures to pay salaries, pensions, and entitlements, which were due in 1996, and the financing of current spending. The debt to state workers and institutions has continued to increase, however, and social tensions, caused by delayed payments in many Russian regions and territories, has not eased, concluded the report.

Business

Cargo Airline to Expand US Operations

· Russia's private Volga-Dnepr Airlines plans to lease more Antonov_124 planes and expand its heavy cargo operations in the US this year, reported Reuters on Friday, citing company chief executive Aleksei ISAIKIN. The Ulyanovsk-based company set up aircraft maintenance posts last year in Sharja, United Arab Emirates, and in Shannon, Ireland.

Volga-Dnepr currently operates seven Antonov_124 planes, each with a capacity of 120 tons, these Ilyushin_76s, one Antonov_12, and one Antonov_32. The company also operates a regular passenger route between Ulyanovsk in central Russia and Moscow, using a Yakovlev_40.

Volga-Dnepr increased sales in 1996 to $111 million from $87.2 million in 1995, carrying 45,100 tons of cargo last year, compared to 39,633 tons in 1995.

European Republics

10,000 Demonstrate in Belarus

· Some 10,000 demonstrators marched through Minsk on Saturday to protest the policies of President Aleksandr LUKASHENKO, defying a ban on demonstrations decreed last month. The march

Politics-Economics-Business

When you need to know it as it happens

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Intercon's Daily

Intercon Special Feature

Insider's Outlook:

An Eye on the Government Reshuffle

by Oleg D. Kalugin

CHUBAIS-style has been bungled and brought about mainly the enrichment of a very few, including CHUBAIS himself, and the impoverishment of almost everyone else.

Inflation has been suppressed by non-payment of $8 billion to Russian workers, teachers, the military, scientists, and pensioners. The US government could have balanced its budget that way very easily had the people of this country agree not to be paid their wages for six months or more.

As to YELTSIN's political comeback from near disaster at last year's polls, it's the money of the new Russians, like banker Boris BEREZOVSKY et al, that produced this miracle.

What is undeniable is CHUBAIS' organizational skills and his overall pro-Western economic philosophy. Today, five years after the demise of the old Empire, Russia is still groping its way toward a definition of self interest. Nationalism, currently in vogue both with the government and the opposition, may well replace communism as an ideology of sorts, but just like communism it leads nowhere except to division, bigotry, and bloodshed.

In this context, the emergence of a pragmatic, market-oriented bloc inside the Russian ruling elite presages an intensified political struggle on all fronts. CHUBAIS' elevation alone will certainly bring together otherwise unlikely allies ranging from the nationalists to the liberals. Communist leader Gennady ZYUGANOV has publicly branded CHUBAIS a "thief in law" and called on the people of Russia to disobey his orders. With the approaching nationwide strike on March 27, emotions may fly even higher and to many the specter of Albania's havoc is already looming in the not distant future.

By choosing CHUBAIS and company, YELTSIN is gravitating toward options based on confrontation with his opponents, rather than conciliation which was his declared political goal.

If CHUBAIS weathers the brewing storm, he will have an excellent chance to prove that he indeed can work magic, but he will also need to prove that he can re-animate the Russian economy and make the country move again.

It looks as if President YELTSIN's recent pledge to drastically overhaul the Russian government has hit a snag. Rumors circulating in Moscow indicate that the major, behind-the-scenes conflict which has been simmering between reform-minded CHUBAIS and his conservative boss Viktor CHERNOMYRDIN, has finally come to a direct clash.

Supported by the powerful Gazprom gas monopoly, the communist-dominated Duma and its sympathizers in the power ministries, particularly those controlled by Interior Minister and his deputy Army General Anatoly Kulikov, Chernomyrdin appears determined to stand his ground and put up a fight for the continuation of his course and his own political survival.

But Chernomyrdin's chances do not look too good this time. By picking up Nizhny Novgorod governor Boris Nemtsov as a running mate with Anatoly Chubais, President YELTSIN has, in effect, significantly bolstered the liberal wing inside the future government. The Moscow rumor mill suggests that General Kulikov's position may also be appreciably undercut with his replacement as the Interior Minister by Yevgeny Savostyanov, another reformer, who was purged from the Federal Security Service several years ago by YELTSIN's notorious bodyguard Aleksandr Korzhakov. At the end of the reshuffle, CHERNOMYRDIN may well end up as the Premier in name only.

CHUBAIS, the reinstated first deputy, has been lauded in the West as a true reformer, the one who is to complete the shift of Russia to a market economy. He is credited with at least three achievements in the course of his career: the privatization of state-owned property, curbing inflation, and the re-election of President YELTSIN.

But to most Russians, as well as some Western observers, CHUBAIS' record is not as glitzy as its portrayal outside his own country. Privatization

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marked Constitution Day by showing opposition to the constitutional amendments, passed by referendum in November, which expanded LUKASHENKO's powers and effectively disbanded the parliament.

The march followed a smaller rally on Friday, during which about 2,000 young protesters clashed with police brandishing truncheons. Some 100 protesters were arrested including two Americans, two Germans, and several reporters. The four foreigners were released after a few hours, apparently because of the intervention of US and German Embassy representatives, reported Interfax.

The US State Department on Friday issued a statement calling on the Belarus government to exercise restraint during the planned political demonstrations marking Constitution Day. Spokesman Nicholas BURNS noted that the US has adopted a policy of "selective engagement" with Belarus because of its "human rights problems and its failure to implement political and economic reform."

Belarus Bars Entry to US Soros Dir.

· Belarussian authorities today refused re-entry to Peter BERN, the executive director of the Minsk office of the Soros Foundation, accusing him of supporting the political opposition and interfering in the domestic affairs of Belarus, reported United Press International (UPI), citing Belarus state television. Arriving in Minsk after attending a meeting in Budapest, BERN was detained at the airport and is expected to be placed on a plane to Frankfurt later today. The US-based Soros Foundation has invested about $13 million in Belarus over the last two years, mostly through grants for various educational and scientific establishments.

NATO Parliament Cuts Ties to Belarus

· The North Atlantic Assembly (NAA), the interparliamentary organization of NATO members, has said it will freeze all ties with Belarus, reported RFE/RL on Thursday. NAA President and US Senator Bill ROTH said the suspension will last until a formal decision is made on Belarus' NAA member

ship status in April. He said that the decision was taken because President LUKASHENKO's policies have undermined the rule of law and the democratic legitimacy of the country's legislature.

Belarus Opens Cellular License Tender

· The Belarus Communications Ministry has opened an international tender for the right to a single GSM-standard operating license, reported M2 Communications on Friday. Interesting bidders must have a reasonable tariff policy, profitable conditions for developing a network, and sufficient knowledge of the Beltelekom state telecommunications company to meet the requirements of the business plan, said the report. In addition, bidders must purchase an information package on the tender for $5,000 and produce a $5 million bank guarantee. Winners will be determined by December 1997.

Ukrainian Economy Contracts Further

· Ukraine's economy worsened in the first two months of the year with production decreasing by 6.8 percent, compared with the same period in 1996, reported today's Journal of Commerce, citing the Ukrainian Statistics Ministry.

Delayed IMF-Lithuanian Deal Signed

· The International Monetary Fund (IMF) and the Lithuanian government have signed a memorandum on cooperation, originally scheduled to be concluded last month, reported Interfax. In accordance with IMF recommendations, the Lithuanian government has agreed to cut import duties for agricultural commodities and to phase in a softer exchange rate policy, it said. Lithuania currently pegs its litas currency to the US dollar at four to one.

Updates

Chechnya: Former Moscow-backed Chechen President Doku ZAVGAYEV has been named Russian Ambassador to Tanzania, reported Reuters. ZAVGAYEV, who won the presidency in the December 1995 presidential elections in Chechnya, was considered a puppet ruler by the Chechen rebels.

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

Svetlana Korobov, Contributing Editor

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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