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

Tuesday, March 25, 1997

Russian-Ukrainian Diplomacy Moving Ahead

· Relations between Russia and Ukraine have been unstable since the breakup of the Soviet Union, largely because of seemingly-insurmountable differences over the division of the Black Sea Fleet. Other areas of disagreement include transit fees and payments for oil and gas, among other economic conflicts, and concerns over NATO's planned eastward expansion and security issues. Diplomatic actions are planned this week, however, after a period of minimal contact and public squabbles.

Ukrainian Defense Minister Aleksandr Kuzmuk will arrive in Moscow on Wednesday for a meeting with Russian military leaders. KUZMUK told reporters today he plans to discuss with his Russian counterpart Igor Rodionov issues surrounding the division of the Black Sea Fleet and prepare proposals for signing by the presidents of the two countries.

Also today, Russian government spokesman Igor Shabdurasulov announced that Russian Prime Minister Viktor Chernomyrdin plans a working visit to Ukraine in the near future to prepare for a presidential trip to Ukraine, reported Itar-Tass.

"Chernomyrdin's visit to Kiev, in the course of which the final solution of the Black Sea Fleet problem should be found is one of the conditions of Russian President Boris Yeltsin's trip to Kiev," he is cited as saying. However, the spokesman said the date of the premier's visit had not been fixed yet.

Russian Federation

Politics

Chernomyrdin Plans Big Press Conference

· The Russian government announced today that Prime Minister Viktor CHERNOMYRDIN, along with First Deputy Prime Ministers Anatoly CHUBAIS and Boris NEMTSOV, will hold a news conference on Wednesday to reveal how the new government plans to pay wage and pension arrears. The troika is also expected to announce further Cabinet changes.

Yabloko to Back Nationwide Strike

· The liberal Yabloko faction in the Russian State Duma will support the demands of Russian workers during a national protest action scheduled for March 27, reported Itar-Tass today. The Yabloko movement considers the nationwide protest to be "an attempt by despairing people to make known their worst problems and secure compliance with the obligations assumed by the government for the payment of wages and pensions to the Russian people," faction sources told Itar-Tass. Yabloko said that not only will it support the protesting workers, but it also intends to support government efforts to pay wage and pension arrears.

Nationalist Leader Wins Duma Seat

· Dmitri ROGOZIN, head of the nationalist party Congress of Russian Communities, was elected to the Russian State Duma during a by-election on Sunday in Voronezh Oblast, reported Tuesday's OMRI. ROGOZIN fills the seat vacated by Ivan RYBKIN when he was appointed Security Council secretary in October 1996.

Also on Sunday, Nikolai SHAKLEIN, the head of the Kirov Oblast Justice Department, won a by-election to fill the Duma seat vacated by Communist Vladimir SERGEENKOV, elected governor of Kirov last fall.

Today's News Highlights

Russia

IMF Director to Moscow

Budget Fulfillment in 1996

Spotlight on Housing Reform

Study See Shareholder Rights

Ferane Drug. Co. - New Plant

European Republics

Ukrainian Arms to Indonesia

South Caucasus & Central Asia

Azeri Aliyev in Ukraine

IMF Loan for Georgian Reform

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March 25, 1997

Intercon's Daily

Currently, "the sides are coordinating their positions" on the whole range of issues in preparation for Yeltsin's visit to Kiev to sign a comprehensive friendship and cooperation treaty between Russia and Ukraine, said the spokesman.

Economy

Ruble = 5,714/$1.00 (NY rate)

Ruble = 5,719/$1.00 (CB rate)

Ruble = 5,712|5,726/$1.00 (buy|sell rates)

IMF Director to Moscow

· International Monetary Fund (IMF) Managing Director Michel Camdessus will visit Moscow from April 1-3 for talks with Prime Minister Viktor Chernomyrdin and First Deputy Premier Anatoly Chubais and, possibly, President Boris Yeltsin, reported Prime-Tass today. Fund officials are continuing their negotiations on Russia's macroeconomic goals for 1997.

Meanwhile, an IMF mission will arrive in Moscow on Wednesday for its regular monitoring of the Russian economy. In particular, the mission will look at the fulfillment of the budget thus far, focusing on the success of tax collections efforts.

Budget Fulfillment in 1996

· The Russian State Statistics Committee (Goskomstat) has released a report outlining the fulfillment of the 1996 federal budget, reported Kommersant-Rating (No. 3). According to Goskomstat figures, the 1996 budget deficit totaled 74.3 trillion rubles, which was equivalent to 3.3 percent of gross domestic product (GDP).

The 1996 budget deficit was financed 55 percent by domestic sources (mainly through the sale of state

securities) and 45 percent by external sources (mainly through loans from international institutions).

Budget revenues in 1996 totaled 281.9 trillion rubles (12.5 percent of GDP) and expenditures reached 356.2 trillion rubles (15.8 percent of GDP), said Goskomstat. Both revenues and expenditures were down nearly 20 percent from 1995 figures.

Spotlight on the Housing Sector

· Russian television (RTV) pointed out on Monday that the planned reforms in the housing and sector, particularly the withdrawal of state subsidies for rent, are among the most painful changes facing the Russian population. Currently, Russian pay only 30 percent of their housing and utilities costs, with the rest being covered by government subsidies.

According to RTV, the average salary has not risen from the level of Soviet times when housing and utilities were essentially free. Therefore, if housing and utilities subsidies are removed, salaries must be increased accordingly.

The Finance Ministry has recommended that incomes rise by 14 percent by 2000, but this increase is insufficient to cover the remaining 70 percent of housing and utilities costs, said the TV report. Housing subsidies reform could result in social unrest and prove an extremely politically unpopular move for the new Russian government.

Another Gas Pipeline Route Discussed

· Slovenia and Russia are discussing the possibility of laying of a 300-kilometer natural gas pipeline to Italy via Slovenia. Speaking at a press conference on Monday, Slovenian Economics Minister Metod Dragonja said that he is currently discussing the pipeline project with officials of Russian gas monopoly Gazprom, according to Itar-Tass. The pipeline construction is expected to cost $500 billion.

Intercon sources report that Gazprom has engaged in private talks with Georgia to build a gas export pipeline through Georgia to Turkey.

Business

Study Finds Shareholders Rights Trampled

· Russia's biggest companies openly violate

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March 25, 1997

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shareholders' rights by issuing free shares to insiders and blocking the appointment of outside directors, exhibiting "extremely serious problems of corporate governance," according to a new research study, cited in today's Financial Times. Based on a sample of 24 large Russian companies, the study found that 17 percent of companies illegally maintain their own shareholder register, while 44 percent had bought back and resold their own shares to insiders, rather than retiring them.

The research was led by Professor Joseph BLASI of Rutgers Univ. and published in Kremlin Capitalism: Privatizing the Russian Economy, Cornell UP.

The study found that ownership of Russia's biggest companies is widely dispersed among domestic and foreign shareholders, while small- and medium-sized companies are overwhelmingly controlled by inside managers, said FT. Of the top 100 Russian firms, private Russian investors on average own 39.1 percent, foreign investors—15.7 percent, the state—20 percent, and managers and employees own about 22 percent.

The study also took stockbrokers to task for failing to explain to investors all the risks and potential pitfalls of investing in the Russian market, which is often portrayed as one of the world's most promising emerging markets. "Russia is not the kind of market where passive portfolio investment is going to work well," FT cites BLASI's report as saying. "The liquidity-driven market will yield to people who are more interested in the fundamentals."

Ferane to Open New Pharmaceutical Plant

· Russian pharmaceutical giant Ferane announced plans to open a new $60 million in Moscow this June, reported Interfax. Plant production will focus on oral medicines that meet international standards, said Ferane technical director Aleksandr POLSTYANOV. The 7,000-square meter facility will have annual production capacity of five billion tablets and capsules, of 150 types of drugs, with a total value of $8-10 million.

According to POLSTYANOV, equipment for the plant will be supplied by leading foreign manufacturers, including Italy's IMA and Germany's Glatt. The new plant is expected to increase Ferane's output by more than 50 percent to 120 billion rubles this year.

Ferane currently manufactures nearly the entire range of drugs that the Russian government purchases for its diabetes, tuberculosis and cancer programs, said Interfax. Intercon sources report, however, that Ferane has been merely repackaging foreign-made generic products for sale in Russia.

The company is headed by former presidential candidate Vladimir BRYNTSALOV, who has lobbied the government heavily to protect domestic pharmaceutical industry, claiming it could satisfy 90 percent of the country's demand. By some estimates, however, Russia produces only onefifth of the 10,000 drugs permitted for use in the country. In general, Russian pharmaceutical companies lack the necessary funds to both develop new drugs and buy patents for new drugs.

European Republics

Ukraine Sells Arms to Indonesia

· Ukraine will begin deliveries of armored personnel carriers and engines for them to Indonesia in April, reported Itar-Tass. Under a contract signed at the IDEX-97 arms exhibition in Abu Dhabi last week, the first batch of military hardware will be sold for $610,000, Ukrainian Defense Minister Aleksandr Kuzmuk told reporters on Monday.

Lithuania's Ignalina Deemed Unsafe

· A group of international nuclear experts declared Lithuania's nuclear power station at Ignalina unsafe because of its poor safety standards, reported Monday's Financial Times. The plant's two 1,500MW Chernobyl-style reactors produce more than 80 percent of all electricity in Lithuania, which satisfies 65 percent of country's needs.

The experts' report insists on shutting down both reactors and spending $130 million on each unit for necessary improvements during the normal maintenance period. Two major problems were found at Ignalina: a lack of the containment systems normally found in Western reactors and an absence of a "safety culture" in the management of the plant. The report was published by the European Bank for Reconstruction and Development (EBRD).

Lithuanian officials refuse to acknowledge the seriousness of the situation at the plant for economic reasons, maintains the report. They feel that shutting

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down the reactors would be prohibitively expensive but the experts point out that in case of a disaster, the economic damage and the cost to human life would be immeasurable.

South Caucasus & Central Asia

Azerbaijan's Aliyev in Ukraine

· Azeri President Geidar ALIYEV concluded a two-day visit to Kiev on Monday, signing a package of 17 cooperative agreements with his Ukrainian counterpart Leonid Kuchma, reported Xinhua. The accords included a declaration on the deepening of relations between the two countries and a memorandum on cooperation in the oil and gas industry.

Other documents include intergovernmental agreements to encourage and protect investments, on military and technical cooperation, to train military personnel, on cooperation in the fields of customs, railway transportation, medicine, health, culture, mutual transfer and payment of pensions, standardization, metrology and certification, and extradition of criminals. The foreign ministries of the two countries signed a consular convention, and the chambers of commerce and industry, and the justice ministries signed agreements on cooperation.

Aliyev noted that Ukraine and Azerbaijan have build a sound legal basis for expanding their bilateral relations, enhancing the two countries' independence and facilitating their economic reforms.

According to RIA Novosti, Aliyev told reporters that Azerbaijan has begun building a second oil pipeline to the Black Sea port of Supsa via Georgia and, when the pipeline is completed in 1998, it will transport Azeri oil to Ukraine. Aliyev also invited Ukraine to participate in Caspian Sea projects.

IMF Backs Georgia Reform Plan

· The executive board of the International Monetary Fund (IMF) on Monday approved a $76 million loan to Georgia to support the country's 1997 economic

reform plan, reported today's Journal of Commerce. The program aims to consolidate gains made under the 1996 reform plan and ensure a real gross domestic product (GDP) growth rate of 8-10 percent this year. It also targets an annual inflation rate of 10-12 percent for 1997. The Georgian government will also take measures to cut the current account deficit to about seven percent of GDP from eight percent in 1996 and to reduce the budget deficit to 3.5 percent of GDP from 4.4 percent in 1996.

Turkmen-Israeli Natural Gas Negotiations

· Turkmenistan vice-president Boris Shikhmuradov has arrived in Israel as a guest of the Merhav industrial and financial conglomerate, reported to United Press International (UPI) today. Sources close to Merhav director Yosef Maiman said the goal of the visit was "to examine the possibility Israel might be a customer for Turkmenistani natural gas, working with the Americans and the Russians to facilitate exports," according to Israel's Globes business newspaper.

Turkmenistan is seeking to transport natural gas to Israel and other markets, but lacks an export route. One possibility is to move the gas through Iran and Turkey, then to Europe and Israel, but the US opposes trade activity via Iran.

The newspaper report also said Israeli businesses were examining the possible laying of a two-way underwater pipeline to import natural gas to Israel. The pipeline would link Israel, Egypt, and Turkey and join an overland pipeline delivering gas from Russia to Turkey.

If gas importation from Turkmenistan to Israel is made possible, however, Merhav will be the project's main partner, said Globes. Merhav has invested $1.1 billion in Turkmenistan, including a $500 million upgrade and expansion of the Turkmenbashi refinery and a hospital renovation in the city of Ashgabat. Maiman himself has a close relationship with the country's president, said the report.

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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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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