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, April 14, 1997

Russian Federation

Politics

Yeltsin Denies Knowledge of Armenia Arms

· The Kremlin announced today that neither the President Boris Yeltsin nor the Russian government authorized large deliveries of weapons to Armenia during 1994-96, reported Itar-Tass. An investigation was conducted by the State Control Directorate and the documents were examined by the president and passed on to the prosecutor's office. The investigation established that some of the deliveries that were made violated procedures defined in presidential decrees.

On Friday, the Russian State Duma adopted a rather tame resolution on the illegal delivery of Russian arms to Armenia, despite revelations last week that $1 billion worth of weapons were transferred, reported Saturday's Kommersant-Daily. The resolution, which did not bother to condemn the deliveries, called on the General Prosecutor to "look into instances of violation of the law in the process of supplying weapons, military hardware, and military equipment to foreign states, as well as of abuse of office by military officials." It also urged the Russian president to "take the necessary steps to avert possible interstate complications."

The newspaper noted that the Duma was careful not to mention Yerevan in the resolution, refraining from casting any blame or asking for the weapons back. In addition, it relieved YELTSIN from responsibility by "writing everything off to abuses by the military." Although it is very dubious that the Defense Ministry would have ventured to transfer such an amount of weapons without the consent of the "first person."

Comment: While it does sound dubious that major arms shipments would have been made without

YELTSIN's approval, the scenario does fit in with other revelations that multiple policies are being carried out by the Russian military and arms leaks are not unusual.

Intercon sources report that the weapons were delivered to Armenia through Iran. Observers are concerned that these shipments may have been used to cover additional, more troubling, shipments of missiles to Iran.

Economy

Ruble = 5,734/$1.00 (NY rate)

Ruble = 5,748/$1.00 (CB rate)

Ruble = 5,739|5,757/$1.00 (buy|sell rates)

World Bank Preparing $6 Bln Loan

· World Bank President James Wolfensohn told a press conference in Moscow today that the Bank may appropriate $6 billion in credits to Russia in 1997-1998, reported Prime-Tass. About $4 billion will be earmarked to support structural changes in the Russian economy and the other $2 billion will be used to finance some investment projects.

Following a meeting between Wolfensohn and First Deputy Prime Minister Boris Nemtsov on Saturday, NEMTSOV told reporters that the World Bank will provide about $3 billion to support social reform in Russia this year, according to Itar-Tass. The money will be used to support low income citizens as

Today's News Highlights

Russia

Money for Space Station

Goskomstat Says GDP Up

Coal Miners Strike Planned

Airline Traffic Down in Q1

Russia at EBRD Meeting

US Co. Gets Equip. Order

European Republics

Ukraine Begins Anti-Corruption

Moldova-Dnestr Settlement

Updates Chechnya

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well as reform the pension system, pay child allowances and carry out housing and energy saving projects. Nemtsov and Wolfensohn also discussed a World Bank loan to finance housing and utilities reform in Russia.

Following a meeting with WOLFENSOHN on Friday, First Deputy Prime Minister Anatoly Chubais welcomed the World Bank's decision to provide credit guarantees for a $100 million loan to be issued by a consortium of US banks to the Russian space rocket design bureau Energiya.

Chubais described the move as "a certificate of quality for the investment situation in Russia from the World Bank" which for the first time will insure political risks under a project involving a Russian company without additional government guarantees, said Itar-Tass.

The guarantees will cover a loan from a consortium, led by Chase Chemical, to finance the Sea Launch project which involves US Boeing (which owns a 40 percent stake in the project), Energiya (25 percent), and Norway's Kvaerner and the Ukrainian design bureau Yuzhnoye (17.5 percent each). The $100 million credit will allow Energiya to make rockets to launch 18 commercial satellites from a platform in the Pacific Ocean.

Also on Friday, representatives of the Russian government, the World Bank and the Sea Launch project signed memorandums on indemnity in the event of political upheavals in Russia, said CHUBAIS. The World Bank is expected to provide a $100 million credit guarantees to Ukraine's Yuzhnoye

Yeltsin Promises Money for Space Station

· Russian President Boris Yeltsin pledged on Friday that his government would resume funding for its main component of the international space station, reported the Associated Press (AP). During a meeting with Russian Space Agency chief Yuri Koptev, the president confirmed that 800 billion rubles ($139 million) would be allocated for the project this month, with another 700 billion ($122 million) to follow in May.

Russia is months behind schedule in building the service module for the space station because they did not receive the needed government funding.

Goskomstat Proclaims Economy is Stable

· The Russian State Statistics Committee (Goskomstat) today triumphantly announced that Russia's gross domestic product (GDP) grew by 0.2 percent in the first quarter of 1997, compared to the same period, reported Prime-Tass. During January-March, industrial production increased by 0.4 percent.

"The great decline in the Russian economy over the last decade has practically ended," Goskomstat head Yuri YURKOV told reporters, according to Reuters. While admitting that the numbers did not mean the economy was growing, he suggested that it had stabilized.

But independent economists, both within Russia and abroad, suggest that Goskomstat is presenting too rosy a picture of the state of the Russian economy. They say the agency's method of calculating GDP was skewed because of the weight given to the shadow economy.

Northern Coal Miners Plan Strike

· Russian coal miners plan to begin protest action today aimed at forcing the government to pay wage arrears. Pickets are planned in Moscow and the far northern mining city of Vorkhuta, with trade union leaders threatening to shut down mines beginning May 1, if their demands are not met, reported United Press International (UPI).

In Vorkhuta, workers plan to picket the offices of the Vorkutaugol coal mining company, while in Moscow union leaders will press for a meeting with First Deputy Prime Minister Anatoly Chubais.

Airline Traffic Down in Q1

· The Russian Federal Aviation Service has released statistics showing that Russian airlines carried 4.6 million passengers in the first quarter of this year, one million fewer passengers than in the same period of 1996, reported Interfax. Passenger and cargo turnover declined by 16 and 12 percent, respectively. Overall shipments of mail and cargo for January-March fell 11.3 percent from 132,360 tons to 117,350 tons.

The declines can be attributed to Russians citizens inability to afford the increasing price of an airline ticket and airline companies increasing inability to pay for fuel and air traffic services. The Service

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blamed the Russian government for its failure to formulate a coherent civil aviation policy.

Business

Russia Center of Attention in London

· The annual meeting of Board of Directors of the European Bank for Reconstruction and Development (EBRD) opened today in London with EBRD officials stressing that although the countries of the former Soviet Union and Eastern Europe had made significant progress in transforming to market economies, much work was still to be done. EBRD chairman Ruairi QUINN said that the bank could not achieve its objectives unless the components of a modern civil society emerged in the 26 countries in which is operates.

EBRD President Jacques de LAROSIERE noted that legal uncertainties, taxation systems, and crime and corruption were still major obstacles facing investors. "There is corruption, crime, and the arbitrary interference of some officials in private sector business activities," he is quoted by Reuters as saying. "Although these are far from being the rule, they remain a source of concern and have, in some cases, complicated or even compromised the bank's own operations."

At a business forum over the weekend that preceded the EBRD meeting, Russian Central Bank Chairman Sergei Dubinin said that the key priorities of the Bank are to curb down the inflation and develop the fiscal market, reported Itar-Tass. He predicted that annual inflation this year will be 12 percent, down from 22 percent in 1996.

DUBININ said that the Central Bank is working on a resolution to enable non-residents to purchase Treasury bills on the Russian fiscal market. "In order to do this we have to settle the problem with exports of revenues," he said. DUBININ said he expects a solution can be found in the near future and foreign investors would be able to buy T-bills for rubles, exchange their revenues for hard currency, and dispose of the proceeds as they like.

The most interesting appearance at the weekend conference was that of former Russian Security Council chief Aleksandr Lebed, who was invited to

attend the conference by the Dow Jones and the Wall Street Journal. LEBED, who was supposed to offer an opposition viewpoint of the Russian economy, confused participants with his analysis, according to the Financial Times. He contended that the key to Russia's future was integration into the global economy, "while keeping its national soul and characteristics and the specific economic features determined by its size, its powerful energy and resource base and its land."

Further, LEBED believes that Russia's partners "must stop demanding blind obedience to economic programs in a non-standard situation and take calmly developments which reflect our national characteristics," according to FT. The paper noted, however, that it is precisely the lack of standard characteristics, such as enforceable contracts and transparent corporate management, in the Russian economy that is keeping foreign investors from investing there.

US Company Gets Equipment Order

· US Stewart & Stevenson Services Inc. announced on Friday that its Petroleum Equipment Division received two orders totaling $14 million, said a company press release. One order is from Russian gas monopoly Gazprom for coiled tubing and nitrogen pumping equipment which will be operating in the western Siberian oilfields. The other order is from China. Stewart & Stevenson makes diesel and gas turbine engines.

US Company to Advise Russia Securities Org.

· US State Street Global Advisors has been named technical advisor to the government-licensed firm that provides custody and administrative services to the Russian equivalent of mutual funds, reported Dow Jones. State Street Global was chosen by the First Russian Specialized Depository, which serves as a fund administrator and transfer agent for Russian unit investment funds. State Street Global said the initiative will be part of SSgA Global Alliance, headed by John R. SNOW.

"Our joint work will no doubt increase the effectiveness of all specialized depositories servicing Russian unit investment funds by raising overall standards in the industry and thus providing better investor protection," Julia ZAGACHIN, general director of the First Russian Specialized Depository, is quoted by Dow Jones as saying.

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Russia's Federal Commission on Securities and the Stock Market, which licenses First Russian, is working to strengthen fiduciary oversight within the unit fund industry. State Street Global said is will also offer assistance to the Federal Commission in its efforts to educate Russian investors.

who will also oversee Kuchma's anti-corruption program.

Moldova-Dnestr to Sign Peace Accord

· Following Moscow-brokered talks, Moldova and its separatist Dnestr republic agreed to sign a final peace agreement that would allow for the withdrawal of some 5,000 Russian troops from the region, reported the Associated Press (AP). Russian Foreign Minister Yevgeny PRIMAKOV announced the agreement on Friday after all-night talks in Kishinev. "The stalemate in negotiations has been broken, and this will help move toward a final settlement," PRIMAKOV is quoted as saying.

PRIMAKOV said that Moldovan and Dnestr leaders had agreed to sign a memorandum pledging to peacefully settle the conflict and hold future talks. He said a key compromise that permitted the breakthrough was agreement to resolve the conflict "within the framework of a single state" and within Moldova's Soviet-era borders. The mostly-Slavic Dnestr region tried to break away from Moldova in 1991. Fighting ceased in 1992, when Russian troops entered the region, but the two sides reach a political accord.

The new settlement agreement envisions a special status for Dnestr within Moldova. As part of the agreement, Russia will pull its troops out of the region. The signing ceremony for the memorandum is scheduled for May 15 in Moscow.

Updates

Chechnya: According to a statement released by the Italian Foreign Ministry, Mauro Galligani, photojournalist for the Italian weekly Panorama, was released from captivity in Chechnya late on Saturday. He was taken hostage by unknown kidnappers in Chechnya on February 23. The Italian press, citing sources in Dagestan, say that the kidnappers wanted $1 million for the release of the Italian hostage. Italian diplomatic sources, however, insist that Galligani was freed without payment of any ransom.

European Republics

Ukraine Plans Anti-Corruption Drive

· In an apparent response of recent Western criticism, Ukrainian President Leonid Kuchma on Friday signed a decree on an anti-corruption program, reported Xinhua. Justice Minister Sergei Golovaty said that program calls for the investigation of all public officials before October 1, and the dismissal of those found to be related to corruption or criminal groups.

In addition, a review on how all senior government officials implement the country's Anti-Corruption Law will be completed before August 1, 1998, Golovaty told a press conference. Ukraine's Anti-Corruption Law, adopted in October 1995, so far has shown no teeth. Some international organizations have already expressed concern about the situation.

World Bank President James Wolfensohn complained about corruption in a letter to Kuchma last year and raised the issue again when he met the Ukrainian president in February at the World Economic Forum in Davos. Upon returning to Kiev from Davos, Kuchma kicked off a "Clean Hands" campaign against graft. The 13-page program signed on Friday is the first official document from Kuchma's anti-corruption drive.

The new decree does not inspire a lot of confidence, however, noted Xinhua. According to Interior Ministry statistics, only 3,000 people have been punished for job-related crimes since 1991, and none of them held a top-level position in government. Golovaty said in March that the main base of corruption is the officials who are now running the government and

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

Svetlana Korobov, Contributing Editor

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