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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, May 23, 1997

YELTSIN's favor since last year's election campaign when he greeted the president with a full military parade upon his arrival in the Far East.

Yeltsin met separately with acting Russian Defense Minister Igor Sergeyev and named him permanently to the position. SERGEYEV, who headed the country's Strategic Missile Forces since 1992, has the intellectual ability to look after "the technical and scientific aspects of military reform," according to National Security Advisor Yuri BATURIN. One of the reasons for the dismissal of former Defense Minister Igor RODIONOV was his inability to agree with BATURIN over the details of military reform.

"The armed forces of the Russian Federation must be compact but effective, totally corresponding to economic possibilities of the state, and ensure reliable security of the country," Yeltsin is quoted by the presidential press service as saying.

New Security Council Appointees

· Russian President Boris Yeltsin on Thursday named First Deputy Prime Ministers Anatoly Chubais and Boris Nemtsov, and presidential chief-of-staff Valentin Yumashev, as members of the Security Council, reported Reuters. The Council is an advisory body, responsible for decisions on major domestic and foreign policy issues.

Sestanovich Named US Ambassador to NIS

· US President Bill Clinton on Thursday announced his intention to nominate Stephen R. Sestanovich

Russian Federation


Russia-Belarus Sign Union Charter

· At a Kremlin ceremony today, Russian President Boris Yeltsin and Belarus President Aleksandr Lukashenko signed a union charter, pledging political, economic, and military cooperation, and then they kissed each other three times. The charter formalizes a plan to more closely integrate the small state of Belarus (with a population of 10 million) with its giant neighbor Russia, with 150 million people.

YELTSIN caused a stir last week when he announced the accord would create a single state, a proposal that even the hardline LUKASHENKO rejected. Today the Belarus president insisted that the treaty was not an attempt "to resurrect the past."

The charter calls for the two countries to coordinate economic reforms and military activities, create joint energy and transport systems, and possibly introduce a common currency. A Supreme Council of top leaders from both countries is to outline joint policies.

Sergeyev in, Chechevatov—Wrong Man

· Russian media reports on Thursday about the appointment of the Far Eastern Military District commander Viktor Chechevatov to the post of chief of the General Staff have turned out to be incorrect. President Boris Yeltsin met today with North Caucasian Military District commander Anatoly Kvashnin and named him General Staff chief, signing a decree to that effect in his presence.

According to Itar-Tass, the president did offer Chechevatov the General Staff post, but apparently he declined. The news agency speculated that Chechevatov could be named a first deputy defense minister. CHECHEVATOV has enjoyed

Today's News Highlights


Duma Postpones Budget Vote

Government Issuing Credits

Shadow Eco. in the GDP

Deutsche Bank in Russia

Globalstar Deal w/Rostelekom

European Republics

McDonald's Opens in Ukraine

South Caucasus & Central Asia

Albright on Aid to Azerbaijan

Oil Group Eyes Kazakh Caspian




May 23, 1997

Intercon's Daily

Ruble = 5,754/$1.00 (NY rate)

Ruble = 5,771/$1.00 (CB rate)

Ruble = 5,750|5,792/$1.00 (buy|sell rates)

Instead, the Duma passed a resolution calling on the government to try harder to increase tax revenues and asked it to present a detailed report on the country's economic situation by June 1.

Practically, the parliament has little authority to stop the YELTSIN government's planned budgetary changes. In fact, the Cabinet has already begun to unilaterally implement its budget reduction proposal.

Today's delay of the Duma vote on the budget is essentially an admission of defeat by Russian legislators. A strong statement of opposition to the government's sequestration plan would at least have officially registered the parliament's position against the changes. Postponing the vote merely shows that legislators are unorganized and indecisive, as well as powerless.

Government Still Giving Out Credits?

· Despite the Russian government's pledge to discontinue the unsound practice of providing state guarantees for loans made by commercial banks, Prime Minister Viktor Chernomyrdin recently ordered to the Finance Ministry and the Vneshekonombank to sign documents with German bankers on a DM66 million credit to finance purchases of equipment by the All-Russia Institute of Light Alloys, reported Izvestia. The newspaper pointed out that this Institute is actually a private joint-stock company, which is heavily indebted to both the budget, the State Pension Fund, and several creditors from whom it borrowed money. Izvestia believes that the burden of the repayment of this loan will eventually be shouldered by the taxpayers.

Shadow Economy Is One-Fourth of GDP

· The shadow economy accounted for 25 percent of Russia's GDP in the first four months of this year, up from 22 percent in the same period of 1996, according to Valery Dalin, first deputy chairman of the State Statistics Committee (Goskomstat), reported Prime-Tass. Dalin estimated that about 40 percent of the wine and spirits sold in Russia are produced illegally. He also said the black market accounts for 50 percent of the trade sector.

Other estimates suggest that Goskomstat has underestimated the size of the shadow economy. Andrei NESHCHADIN, managing director of Russia's

Dec Jan Feb Mar Apr May

as Ambassador-at-Large and Special Adviser to the Secretary of State on the New Independent States (NIS), according to US Newswire. SESTANOVICH will apparently replace James COLLINS.

Dr. Sestanovich is currently vice president for Russian and Eurasian affairs at the Washington-based Carnegie Endowment for International Peace, where he oversees the Endowment's new policy research center in Moscow and its program of post-Soviet studies in Washington.

Prior to joining the Endowment in 1994, Dr. Sestanovich was Director of Russian and Eurasian studies at the Center for Strategic and International Studies 1987_94; Senior Director for policy development at the National Security Council 1984_87; Member of the Policy Planning Staff at the Department of State 1981_84; and Senior Legislative Assistant for foreign policy to Senator Daniel Patrick Moynihan 1980_81.


Duma Postpones Budget Vote

· The Russian State Duma today decided to postpone until next month the debate on the government's proposed cuts to the 1997 federal budget cuts. The government had asked the parliament to approve 108 trillion rubles in spending cuts, claiming that the original budget was unrealistic and revenues were far below forecasted levels.

When you need to know it as it happens




May 23, 1997

Intercon's Daily

Expert Institute, estimated that the criminal economy accounts for 50 percent of Russia's GDP, reported Executive and Legislative Newsletter (No. 20). NESHCHADIN said his estimate was based on extensive polling of Russian workers and managers. He predicted that the GDP's share of the shadow economy is growing and will reach 60 percent.

Other Russian and Western economists have put the overall share of the shadow economy in Russian GDP at 30-40 percent.

TACIS Bureau to Open in Western Siberia

· The European Union (EU) will open a regional bureau of the TACIS (Technical Assistance to the Commonwealth of Independent States) in Novosibirsk at the end of May, reported Itar-Tass. The office, which will cover Novosibirsk, Tomsk, Tyumen, and Kemerovo region and Altai territory, will help improve the effectiveness of TACIS projects in the region.


Deutsche Bank Plans Russia Office

· Germany's Deutsche Bank, one of world's 10 largest banks, plans to set up an affiliate in Russia, reported Russian television (RTV) on Wednesday. Deutsche Bank president George Krupp said the decision was prompted by the stability of the ruble and the political situation in Russia.

Globalstar in Deal with Rostelekom

· Global consortium Globalstar and Russian state telecommunications firm Rostelekom on Thursday signed an agreement to form a joint venture company that will provide Russia with access to advanced telephony services through Globalstar's worldwide mobile satellite system beginning in late 1998, said a Globalstar press release. The joint venture, called GlobalTel (Globalstar Space Telecommunications), will act as the exclusive provider of Globalstar services in Russia. GlobalTel will be responsible for interconnecting the Globalstar system with Russia's existing wireline and wireless infrastructure. GlobalTel will be majority owned by Rostelekom.

GlobalTel expects to serve more than 150,000 subscribers in Russia by the year 2002. Russia's telephony penetration rate is currently less than 20 percent. Some 40,000 rural Russian communities need improved telecommunications services.

Russia's initial Globalstar gateway will be located at a site near Moscow, and is due to be fully operational by the start of Globalstar service in Russia in late 1998. The Globalstar system will allow Russians to make or receive calls using hand-held, vehicle-mounted and fixed-site terminals. The Globalstar system will also provide data transmission, messaging, facsimile, and position location services.

Globalstar, led by US Loral Space & Communications Ltd., is a partnership of telecommunications service providers and equipment manufacturers, and includes AirTouch Communications, Alcatel, Alenia, DACOM, Daimler-Benz Aerospace, Elsag Bailey, France Telecom, Hyundai, QUALCOMM Inc., Space Systems/Loral, and Vodafone.

European Republics

McDonald's Opens in Ukraine

· US McDonald's opens its first restaurant in Kiev on Saturday, making Ukraine the 102nd country where Big Macs are available, said a company press release. The first McDonald's in Kiev will be located in Lukyanovska, a section of the city with a heavy industrial base. The second restaurant will open in Sevastopolska Square near Kiev's airport and close to commercial and residential areas. Both restaurant openings happen during "Kiev Days," a traditional holiday in which more than two million people visit the city from the countryside.

McDonald's currently has restaurants in the former Soviet republics of Russia, Latvia, Estonia, Lithuania, and Belarus.

Swedish Scania AB buys Estoscan

· Swedish truck maker Scania AB, today signed a contract to purchase AS Estoscan, a company which currently imports Scania trucks into Estonia, reported Reuters. Estoscan has been operating in retail sales and importing Scania trucks since 1992. In 1996, Scania had 38 percent of the market share in Estonia. It registered 57 heavy trucks out of 149 total in the market.

South Caucasus & Central Asia

Albright Opposes Rules on Aid to Azerbaijan

· US Secretary of State Madeleine ALBRIGHT told the Senate Appropriations Foreign Operations

When you need to know it as it happens




May 23, 1997

Intercon's Daily

subcommittee on Thursday that the CLINTON administration objects to a provision to an existing law which bars foreign aid to Azerbaijan. "The administration continues strongly to oppose section 907 of the Freedom Support Act of 1992, which undermines US influence and policy flexibility in the Caucasus region and Azerbaijan," she is quoted by Dow Jones as saying.

The Freedom Support Act governs aid to the new independent state (NIS). Section 907 bans all foreign aid to Azerbaijan, but allows a presidential waiver for humanitarian aid. Azerbaijan is the only former Soviet republic restricted from receiving aid.

According to the State Department the law is hampering its efforts to mediate in the Nagorno-Karabakh conflict between Armenia and Azerbaijan because US policy is perceived as unbalanced.

"Assistance to the strategically-located and energy-rich democracies is strongly in our national interest," ALBRIGHT told the Senate subcommittee.

ADB Loan for Uzbek Agriculture

· The Manila-based Asian Development Bank (ADB) announced today that it has approved a $1.07 million grant for Uzbekistan for its agricultural sector, reported Xinhua. Uzbekistan will use the ADB grant to assess the constraints facing the country's agricultural sector and identify opportunities for future progress, said the bank.

Bakrie in Uzbek Oil Deal

· A $600 million contract was signed today in Tashkent between Indonesian energy company Bakrie and the government of Uzbekistan to develop local oil and gas fields, said Reuters. This will be the Bakrie's largest investment in Uzbekistan to date. The funds will contribute to oilfield rehabilitation, oil production, and gas and gas condensate output in Uzbekistan. The details on an oil field to be developed remain undisclosed. Robert Sutrisno, Bakrie's director for Uzbekistan, stated that the

output will be sold both domestically and on the international market.

Caspian Consortium Has New Prospects

· An international consortium of seven major energy companies said today that it is in talks with the Kazakh government for a production-sharing agreement covering several areas in the Caspian Sea, reported Dow Jones. The consortium consists of Italy's ENI SpA, British Petroleum, British Gas, US Mobil Corp., Royal/Dutch Shell, France's Total SA, and Kazakhstankaspishelf. The group has already done the testing on the area and has found 12 areas "with high potential," said the report.

KazMinCo Completes Feasibility Study

· The UK's Kazakhstan Minerals Corp. (KazMinCo) on Monday announced the completion of the pre-feasibility diamond drilling program totaling 27,000 meters on the Samarskoye copper-gold porphyry deposit in central Kazakhstan, said a company press release. The study identified an initial open-pit containing about 90 million tons that could support an economically viable operation at a production rate of between 20,000 and 30,000 tons of ore per day.

Commercial terms have recently been agreed with the Government of Kazakhstan for the development of the deposit over a 20-year period, which is extendible to 25 years. To mark this agreement and the approval of the deposit reserves outlined to date by the State Committee for Reserves, Samarskoye has been renamed the Nurkazgan deposit; KazMinCo holds an 88.5 percent interest in the deposit.

The pre-feasibility study will be completed for the copper-gold deposit by the third quarter of 1997 and then infill drilling for final feasibility will commence.

KazMinCo has 10 active joint ventures with Kazakh partners in which the company has controlling interests. In addition, KazMinCo has received a positive pre-feasibility study for its Varvarinskoye gold-copper project in northern Kazakhstan.

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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