DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, April 4, 1997

the three new nerve agents could be made without using any of the precursor chemicals which are banned under the 1993 Chemical Weapons Convention.

Economy

Govt. Institute Forecast Gloomy

· The Center for Economic Forecasting under the Russian government has predicted that industrial production in Russia will decline by 3.6 percent in the first quarter of this year, but will level off at an increase of 1.4 percent by the end of the year. These figures are at variance with State Statistics Committee (Goskomstat), which said that gross domestic product (GDP) had increased by 0.5 percent in the first two months of the year, while industrial output had grown by 0.9 percent, and retail sales were up by two percent. The Goskomstat figures were criticized by foreign economic analysts who claimed that the agency was misrepresenting the economy.

Russia-De Beers Accord Expected Soon

· A final decision by the Russian government on a three-year, $1.8 billion sales and marketing agreement between Russia's Rossii-Sakha Almazy company and South Africa's De Beers will be made on April 15, reported RIA Novosti. The Russian company referred to a promise by First Deputy Prime Minister Anatoly CHUBAIS, who is now overseeing the negotiations with De Beers.

If the government approves the agreement on the 15th, a presiden

Russian Federation

Politics

Rodionov Quits as Fuel and Energy Min.

· Russian Fuel and Energy Minister Petr RODIONOV resigned today in order to return to his former job as the director of Lentransgaz, a regional subsidiary of Russian gas monopoly Gazprom, reported RIA Novosti today.

According to Interfax, Prime Minister Viktor CHERNOMYRDIN has offered the ministerial post to Aleksandr SAMUSEV, senior vice-president of Rosprom-YUKOS oil company, who "is thinking over the offer." SAMUSEV served as deputy fuel and energy minister in 1991 and as deputy finance minister in 1994.

Le Monde Withdraws Article on Cherno.

· The French daily Le Monde on Thursday retracted a report published on March 29 that Russian Prime Minister Viktor CHERNOMYRDIN was super-rich, holding some $5 billion worth of shares in gas monopoly Gazprom, reported Russian Public Television (ORT).

Le Monde said it had mistakenly attributed the information to former CIA Director John DEUTCH and FBI Director Louis FREEH. In fact, the allegation was made in a question asked by a US Representative during a congressional hearing on April 30, 1996, to which no affirmative answer was given.

Russia Producing Chemical Weapons?

· Russia has developed a new variant of the anthrax toxin which is completely resistant to all known antibiotics, reported Reuters, citing Jane's Land Based Air Defense 1997-98 publication on Thursday. Jane's said that the new toxin, as well as three new nerve agents, was developed in Russian military research laboratories. The publication said

Today's News Highlights

Russia

Aircraft Output Insufficient

Russia Dependent on Oil Equip.

US Cos. Sign Airline Res. Deal

Lukoil to Invest in Caspian

Kvaerner Wins Arctic Contract

Reebok-Russia Olympic Deal

South Caucasus & Central Asia

Foreign Firms Vie for Pipeline

Kazakhstan Eyes Oil Investment

Kazakh Oil Refinery Stake Sold

Politics-Economics-Business

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Friday

April 4, 1997

Intercon's Daily

Ruble = 5,741.75/$1.00 (NY rate)

Ruble = 5,737/$1.00 (CB rate)

Ruble = 5,730|5,744/$1.00 (buy|sell rates)

Business

US Cos. Sign Airline System Deal

· US SABRE Group, IBM AT&T Tridom, and International Technological Corporation-Sirena of Moscow today signed a $140 million contract to create Sirena-3, a suite of products that will help modernize airline management technology for the airlines of Russia and other former Soviet republics, said a SABRE press release. Sirena-3, which Sirena will market to CIS airlines, will improve the way airlines book reservations, manage fares and pricing, revenue accounting, passenger check-in, and yield management.

IBM will provide information technology, services, computer processors, and software to run applications provided by SABRE Decision Technologies. AT&T will provide a VSAT satellite telecommunications system for networking between the Sirena-3 central processing complex outside Moscow and 800 satellite dishes to be located throughout Russia and other countries. Sirena will manage and operate Sirena-3 system, which will service as many as 60 million passengers a year when fully operational.

The deal was made possible by an announcement on Thursday by the US Export-Import Bank that it will provide a $90 million loan guarantee to support the sale. The New York branch of Commerzbank AG will provide the majority of the funds for the project. Llama Company of Arkansas contributed to the deal by granting a private loan for $4.6 million.

"Three US companies will be able to make sales that could not have happened without Ex-Im Bank's guarantee. The transaction also will enable Aeroflot and new private carriers in Russia and the former Soviet republics to achieve aviation service consistent with international standards," said Ex-Im Bank Director and COO Julie BELAGA in a Bank press release.

Lukoil to Invest $60 Million in Caspian

· Russian oil conglomerate Lukoil plans to spend $60 million this year to explore for oil and gas in the Russian section of the Caspian Sea, reported Interfax. Lukoil President Vagit ALEKPEROV told a press conference in Baku Wednesday that the company has a license to explore and develop oil and gas in the northern Caspian. Lukoil spent $24 million on

Oct Nov Dec Jan Feb Mar

tial decree on it could be signed in late April or early May, said the diamond company.

Russia Aircraft Production Insufficient

· Russia's former Deputy Defense Industry Minister Viktor Livanov told Itar-Tass today that Russia will need 660 new airliners to renovate its aircraft pool by the year 2005. He noted that, in 1990, Russian airlines carried 125 million passengers, but last year the number had dropped to only 27 million.

He predicted the continuing stagnation of the national air service market will mean that the number of passengers will increase by no more than two percent over the next decade. Therefore, Russia will not have to replace its entire fleet of obsolete aircraft, which now numbers about 10,000. According to Livanov, Russia aircraft companies will only be able to produce 70 planes annually in the years before 2005.

Russia Seeks to Cut Oil Equipment Imports

· Russian Fuel and Energy Ministry official Vladimir Kurashov said on Thursday that Russia's energy industry plans to curtail imports of oil equipment and reduce its dependence on foreign deliveries, reported Xinhua. Speaking to reporters before the international Oil and Gas 97 exhibition which starts in Moscow on Monday, Kurashov said that some of Russia's $6-7 billion a year in equipment imports could be substituted with domestic goods, as many defense companies have now converted to producing equipment for the oil and gas industry.

When you need to know it as it happens

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Friday

April 4, 1997

Intercon's Daily

offshore exploration in 1996 and could invest as much as $240 million for exploratory drilling in the northern section over the next three and a half years. A first exploratory well will be drilled in October of this year, he said.

ALEKPEROV also said that Lukoil had submitted a bid for the right to develop a major deposit in the Kazakh sector of the Caspian and is already in negotiations for a production-sharing agreement.

The company is still deciding whether to become involved in developing the Inam deposit in the Azeri section of the Caspian and has also asked Azerbaijan for copies of exploration documents on the Yanam block in the northern part of the Azeri sector, as well as on two other blocks, he said.

Kvaerner Wins Arctic Oil Contract

· Norwegian engineering firm Kvaerner has been selected to oversee the development of the Tedin oilfield in the Timan Pechora basin of the Russian far north, reported today's Financial Times. The Polar Bear consortium developing the field includes Britain's Northern Petroleum, the Arkhangelsk regional geology company Arkhangelskgeoldobycha, and Geoid, another Russian company.

Phase one of the project will cost an estimated $50 million, which includes initial production facilities and pipeline linking the site to the main export line from the region. The partners are expected to rely on project finance from multilateral agencies for about 70 percent of the project's cost. Northern is expected to make a placing in the summer to raise the remaining funds.

Reebok-Russian Olympic Deal Extended

· Stoughton, Mass.-based Reebok International and the Russian Olympic Committee today announced the continuation of their sponsorship agreement, said a Reebok press release. The new agreement ensures that the relationship between Reebok and the ROC, begun in 1993, will continue through the 2000 Summer Olympic Games. The agreement calls for Russia's top athletes across a variety of sports to continue training and competing in Reebok performance footwear and apparel.

"Sponsorship of the Russian Olympic Committee was at the foundation of Reebok's marketing pro

RUSSIA SHORT TAKES

n Since June 1996, independent cellular telephone operators in Russia have been granted permission to run 50 AMPS, 10 GSM, and 25 NMT_450 licenses. The Russian cellular market has expanded from 6,000 users in 1992 to 200,000 by the end of 1996, and further explosive growth is predicted.

n Russia currently spends just under $20 billion per year on defense, with an army of approximately 1.4 million men and thousands more uniformed personnel on the frontiers or in special security forces. In comparison, the US, with fewer people in uniform, spends about $260 billion.

n Teachers in the Kuzbass, a coal-producing region in Western Siberia, have taken hostage the head of the regional education authority and are demanding payment of their wages which have not been received since last July.

n Russia's foreign trade turnover in January-February 1997 totaled $21.8 billion, down one percent from the same period last year, according preliminary data of the Russian State Statistics Committee. During the first two months of this year, Russian exports grew by six percent ($13.2 billion), while imports fell by 10 percent ($8.6 billion).

n Chechen criminal groups control a large part of the republic's oil industry. Some 3,000 tons of crude oil bypass official channels (go to the underground mini-plants controlled by the criminal groups) every day, while the daily supply of crude oil to the Grozny oil refinery amounts to as little as 15 tons. It is rumored that former rebel commander Salman Raduyev controls a number of oil rigs in the Gudermes district.

n The Economic Cooperation and Development Organization (ECDO), has predicted that Russian demand for steel will increase 20 percent in 1997.

n Moscow Mayor Yuri LUZHKOV reported that the total foreign investment in Moscow for 1996 totaled $2 billion. The mayor also said that 35,000 foreign companies are currently operating in the city. He reported that 30 percent of revenues for the federal budget are supplied by the city.

When you need to know it as it happens

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gram for last summer's Olympic Games in which Reebok outfitted nearly one-third of all competitors," said Reebok Senior Vice President John Boulter.

apparently trying to play both sides of the fence. Two years ago, Turkmenistan awarded Bridas the right to conduct a feasibility study for the route two years ago, but then assigned Unocal the exclusive right to the same project a few months later, said the newspaper. Since then, Bridas has been locked in arbitration and court battles with both Unocal and the Turkmen government.

Unocal estimates that each of the oil and gas pipelines it plans to build would cost about $2 billion, take two years, and could eventually involve other countries in former Soviet Central Asia.

Kazakh Expects Huge Oil Output

· Kazakhstan needs massive foreign investment in its oil industry in order to reach its potential as one of the world's biggest oil producing countries, the head of the country's state oil company said on Thursday. "By 2008-2010 we plan to achieve the level of 170 million tons a year, which will make Kazakhstan the world's sixth largest oil producer," Kazakh Oil chairman Nurlan BALGIMBAYEV is quoted by Reuters as saying. "But this amount of oil is unobtainable without a massive influx of investment.

In 1996, Kazakh oil output totaled 23 million tons, but production is expected to increase to 26.5 million tons this year. Foreign investment in the Kazakh oil sector has been about $2 billion to date, but BALGIMBAYEV said investors had already committed to another $40 billion. "Work in the [Kazakh sector of the] Caspian Sea shelf could bring in another $100 billion of foreign investment," he said.

Kazakh Oil Refinery Stake Sold

· A tender for a 53.1 percent stake in Kazakhstan's Atyrau oil refinery was won by little-known independent company Essex Refinery Corporation, which is registered in the British Virgin Islands, reported the Economic Intelligence Unit (EIU). Essex pledged investment of over $1 billion in the refinery—$105 million over the next two years, another $260 million by 2004, and a further $650 million by 2005.

South Caucasus & Central Asia

Western Firms Vie for Afghan Pipeline

· Two major Western oil companies— Argentina's Bridas and a joint venture between US Unocal and Saudi Arabia's Delta—are competing for the right to build oil and gas export pipelines across Afghanistan from Turkmenistan, reported the Financial Times today. Delegations from the two companies are currently negotiating with the radical Islamic group Taliban, which has taken control over much of western Afghanistan.

Both oil companies are seeking to build pipelines from Turkmenistan to gas markets on the Indian subcontinent and to an oil export terminal to be built near Karachi, Pakistan, without crossing Russia or Iran. "This is how desperate everyone is for a southern pipeline route which avoids Iran," Julia Nanay of the Washington-based Petroleum Finance Co. told FT. "To do this one, you need a company that likes to take very, very bid risks."

One major difference to the two sides approaches to Afghanistan is clear. According to the newspaper, Bridas has not made the cessation of hostilities in Afghanistan a precondition for beginning work on the a pipeline, while Unocal is reportedly waiting for a "stable representative government" to be established in the country.

Cash-strapped Taliban appears ready to sign a contract with anyone who will start building soon. Taliban official Maulavi Ahmed Jan told the FT that the group "would like to sign an agreement with any oil company which can start work immediately."

The instability in Afghanistan is not the only wrinkle in the pipeline plan, however, the government of Turkmenistan has been confusing the issue by

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

Svetlana Korobov, Contributing Editor

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