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

Thursday, May 29, 1997

ity for weapons of $1-1.5 billion. Russia's share of this market currently equals $100-120 million or to about 10 per cent of the total.

Economy

Ruble = 5,761.5/$1.00 (NY rate)

Ruble = 5,773/$1.00 (CB rate)

Ruble = 5,756|5,790/$1.00 (buy|sell rates)

Luzhkov Touts Moscow Investment Potential

· "In the forthcoming 5-7 years one will be able to make enormous profits in Moscow. Hurry to report it, Mr. Ambassadors," Moscow Mayor Yuri Luzhkov told ambassadors from some 20 European and American countries who were attending the "Investments, Construction, Real Estate `97" exhibition in Moscow today, reported Itar-Tass. According to Luzhkov, some investment projects may bring 300 percent profits annually.

"At present Moscow is a generally recognized leader of the investment process in the world, but the saturation regime will come in about 5-7 years, and investment hunger will be satisfied," boasted Luzhkov.

"A total of $4.29 billion were invested by foreign investors in the economy of the city in 1996 alone, which accounts for 66 percent of foreign investments in the Russian economy," he said.

LUZHKOV mentioned tourism as one of the fastest

Russian Federation

Politics

Russia Gets 20-year Lease on Sevastopol

· Russia and Ukraine on Wednesday signed three agreements governing the division of the Black Sea Fleet, including a lease accord which pledges Russia to pay $98-100 million annually to Ukraine to lease the Black Sea naval base of Sevastopol. The lease agreement is for 20 years with the possibility of an extension. According to Russian First Deputy Foreign Minister Boris PASTYUKHOV, part of the rent will be taken from Ukraine's debt to Russia for oil and gas supplies, which amounts to $526 million, said Interfax.

Russia has also pledged not to station nuclear weapons as part of the fleet on Ukrainian territory.

Russian Prime Minister Viktor Chernomyrdin and his Ukrainian counterpart Pavel Lazarenko signed the three Fleet accords, along with eight other documents on cooperation in economic, trade, and other areas.

Chilean Defense Minister in Moscow

· Chilean Defense Minister Edmundo Perez Yoma arrived in Moscow today for a five-day trip to meet with Russian defense ministry and military-industrial complex officials, reported Itar-Tass. The visit will seek to build on the good relations between the two countries built up during the visits to Russia by Chilean Foreign Minister Jose Miguel Insulza in March 1997 and by the commander-in-chief of the Chilean air force in October 1995.

The Russian defense industry is actively seeking to increase its presence in the promising Latin American armaments market. Itar-Tass estimates that Latin American countries have a purchasing capac

Today's News Highlights

Russia

Lukoil in New Caspian Oil Deal

Potanin Heads Oneksimbank

Bentley Drugs Gets Russia OK

European Republics

Ukraine-NATO Accord Ready

KIA Motors in Ukraine Deal

South Caucasus & Central Asia

Shevardnadze on Abkhazia

Turkmen Caspian Tender

German Min. in Uzbekistan

Politics-Economics-Business

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Thursday

May 29, 1997

Intercon's Daily

growing industries in the capital, estimating that the number of three-star hotels in the city will increase five-fold during the next several years.

Since guests will come to Moscow mostly by air, he continued, "we are now holding talks with the Russian government about turning over to Moscow the Sheremetyevo-2 Airport, after which we shall start its rebuilding," according to Itar-Tass.

Foreign Trade Down Slightly

· Russia's foreign trade turnover totaled $47.3 billion during the first four months of the year, down two percent from the same period in 1996, said the State Statistics Committee (Goskomstat). Exports increased by 0.5 percent to $27.8 billion, while imports fell by four percent to $19.5 billion. The foreign trade surplus for January-April 1997 was $8.3 billion, an increase of $1.1 billion from last year.

Russian exports to countries outside the CIS increased by three percent to $21.9 billion dollars, and imports rose by two percent to $14.5 billion. The trade turnover with CIS countries totaled for $10.9 billion, with exports falling by eight percent to $5.9 billion and imports down by 20 percent to $5 billion.

Business

Lukoil in New Caspian Oil Deal

· Russian oil conglomerate Lukoil on Wednesday signed a memorandum with Azeri state oil company SOCAR to begin talks on joint exploration and development of the Yalama offshore oilfield in the Azeri sector of the Caspian, reported Reuters. Lukoil President Vagit ALEKPEROV said the memorandum launches a 90-day negotiating period during which Lukoil and SOCAR will draw up a formal production- sharing agreement.

Recoverable oil reserves at the Yalama field, which straddles the Russian and Azeri sectors of the Caspian, are estimated at up to 50 million tons.

Lukoil has a stake in three other joint projects with SOCAR to develop offshore Caspian fields. It is currently in talks with US Chevron on forming a consortium with SOCAR to develop the Zeinalabdin Tagiyev field, which lies about 120 km south of Baku. SOCAR estimates reserves in the field at 115 million tons of oil and 425 million cubic meters of gas.

Potanin Renamed Oneksimbank President

· The newly-appointed board of directors of Oneksimbank, one of Russia's leading commercial banks, on Wednesday elected Vladimir Potanin as the bank's president. POTANIN was the bank's first president in 1993, but stepped down to become first deputy prime minister in August 1996. He lost his government post in the March reshuffling and returned to the bank.

The board met following an annual meeting of shareholders, during which the bank's 1996 annual report was presented by board chairman Mikhail Prokhorov, reported Prime-Tass. At the meeting, shareholders passed a resolution calling for an increase of Oneksimbank's capitalization from 1.002 trillion to five trillion rubles. Capital will be made up of one million ordinary shares in five-million ruble denominations.

Bentley Drugs Gets OK From Health Min.

· Tampa, Fla.-based Bentley Pharmaceuticals, Inc. on Wednesday reported that the Russian Ministry of Health has granted registration to Bentley's Spanish subsidiary, for the 5mg and 20mg dosage forms of its product Controlvas, said a company press release. Sales are expected to commence during the third quarter of 1997. Controlvas, which is a cardiovascular drug used to treat hypertension and congestive heart failure, is one of Bentley's leading products with annual sales in 1996 of approximately $1.5 million.

"This venture represents the initial entry into an exciting new marketplace for Bentley," said Bentley Pharmaceuticals chairman and CEO James R. Murphy. "Bentley enters this market with the intention of establishing marketing and promotional agreements with pharmaceutical distribution companies in Russia."

Upcoming Events

Regional Approach to Industrial Restructuring

in the Tomsk Oblast

June 3-5, 1997

Tomsk, Siberia

Organized by: the Organization for Economic

Cooperation and Development (OECD),

the Tomsk Oblast Administration,

and the Institute for Advanced Studies (Vienna)

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May 29, 1997

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European Republics

Freedom House Eyes Political Freedom

· New York-based think tank, the Freedom House has completed a new study on the political and economic reform processes in the former communist countries of Europe. The research was financed by the US Agency for International Development (USAID). The main conclusion of the 400-page study is that the greatest economic strides were observed in those countries which have had the most progress in democratization, according to Itar-Tass.

Among former Soviet republics, the study found that major changes have come about in Russia, Ukraine, and Moldova. Belarus, Tajikistan, Uzbekistan, and Turkmenistan are referred to as countries, which have made the least progress both in the political and economic spheres, it said.

Ukraine-NATO Agreement Ready

· Ukraine and NATO have finalized an agreement governing relations between the two in light of the Alliance's planned eastward expansion. NATO Secretary-General Javier Solana initialed the agreement today with Ukrainian Foreign Minister Gennady Udovenko. The agreement will be signed during a summit in Madrid July 8-9 at which the Alliance is expected to issue invitations to Poland, Hungary, and the Czech Republic, as well as possibly Romania and Slovenia.

The announcement comes just two days after NATO signed a special agreement on relations with Russia. The charter with Ukraine lays out the broad principles on which relations will be based and establishes a joint commission to discuss security and other matters. The commission is less powerful than the one created between NATO and Russia, which give Moscow a strong voice in alliance issues.

KIA Motors in Ukraine Deal

· South Korean automaker KIA Motors plans to assemble cars in a shipbuilding plant on Ukraine's Crimean peninsula. Crimean deputy prime minister Andrei SENCHENKO told Reuters on Wednesday that KIA would assemble three models—Clarus, Topic, and Besta—at the Morye shipbuilding plant in the Black Sea port of Feodosiya. Morye produces passenger and cargo ships.

SENCHENKO told Reuters that KIA and the local Interprivatizatsiya investment fund had created a joint venture to run the project, which is expected to cost $350 million. The first cars are scheduled to roll off the assembly line at the end of this year.

During the first stage of the project, the plant will produce 10,000-20,000 cars a year. Annual production is expected to grow to 50,000-60,000 cars in the next few years.

KIA launched an operation in the Russian exclave of Kaliningrad earlier this year to assemble 30,000 cars year. Annual output at the Kaliningrad plant is expected to reach 80,000 cars in 3-5 years.

South Caucasus & Central Asia

Talbott Steps Up Karabakh Diplomacy

· US Undersecretary of State Strobe TALBOTT will travel to Armenia, Azerbaijan, and Nagorno-Karabakh during May 30-June 1 in an attempt to restart stalled peace negotiations on the Karabakh conflict, reported Wednesday's RFE/RL Newsline. Russian and French diplomats will accompany TALBOTT during the talks.

Georgia Warns Abkhazia on Renewing Conflict

· Georgian President Eduard SHEVARDNADZE held a press conference on Wednesday and warned Abkhazia that the Georgian army would not suffer a second defeat against the separatist region, if the conflict were re-ignited. "The armed forces of Georgia are not the same as we had in 1992-93. If the Abkhaz open fire, then that means suicide for them," he was quoted by Reuters as saying.

This assertion follows a military parade in Tblisi earlier this week to celebrate Georgian independence day. Abkhazia, backed by Russia, won a 1992-93 civil war against Georgian forces, but the two sides have failed to reach a final settlement to the conflict.

SHEVARDNADZE also called on the Abkhazian side to renew peace negotiations immediately. He has threatened to ask the some 2,500 Russian peacekeepers guarding the border between Georgia and Abkhazia to leave when their mandate expires at the end of July, unless they agree to expand their role in the region.

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SHEVARDNADZE said that even if the peacekeepers leave, Georgia would not attempt to retake the region by force. Many people in the region think that fighting will break out in the absence of the Russian peacekeepers.

The Abkhazians are among those worried about a renewal of the conflict and are employing their own tactics to put pressure on Georgia. Last month, the Mission of Abkhazia in the US sent a letter to a number of major US oil companies—Amoco, Exxon, Chevron, and Unocal—warning them about a possible resumption of conflict in the region and making veiled threats about the security of oil interests should this occur.

The letter suggests that because of the intransigence and hostile behavior of the Georgian side, "hostilities may resume at any time." The Abkhazian mission offers a considerably less glowing assessment of Georgian military might than SHEVARDNADZE. "If this [hostilities] should occur, your company must be aware that the outcome for the Republic of Georgia will be dismal in that it will surely end in another military defeat, cripple its economy and may ultimately lead to a complete dismantling of the Georgian republic," said the letter.

Despite the posturing by the two sides, both must be well aware that renewed fighting can only be disastrous for all involved.

Bomb Found Near Russians in Abkhazia

· Russian peacekeeping troops in Georgia's separatist region of Abkhazia this morning defused a powerful explosive device planted near the health resort of the Moscow Military District in Sukhumi, reported RIA Novosti, citing an Abkhazia Interior Ministry spokesman. The mine was discovered in a flower bed by a cleaning woman.

The bomb was set to go off at noon, at which time a convoy of tankers carrying fuel for Russian peacekeepers was due to drive by.

Another bomb exploded at noon in Komsomolskaya street in Sukhumi, killing a passer-by.

Germany Seeks to Invest in Uzbekistan

· German Minister for Economic Cooperation and Development Karl Dieter SPRANGER arrived in Tashkent on Wednesday to discuss $1 billion worth of investment projects, reported Interfax. He will hold talks with the Uzbek government and meet with President Islam KARIMOV on Friday.

SPRANGER will tour several Uzbek-German joint ventures producing equipment for the engineering industry and building materials.

Germany is a leading investor and trade partner with Uzbekistan. Forty major German companies have opened representative offices in Tashkent. Trade turnover between the two countries reached over DM1 billion in 1996. The German government has extended several loans to Uzbekistan since 1992 including a DM125 million loan for the development of its financial system.

Uzbekistan Seeks US Assistance

· Uzbek President Islam KARIMOV met with visiting US congressmen on May 26 and requested that the US take an "active role" in settling the problems in both Afghanistan and Tajikistan, reported Wednesday's RFE/RL Newsline. KARIMOV told the congressmen that there was still much room for "closer cooperation" between his country and the US, said the report.

Turkmen Caspian Oil Tender Planned

· Turkmenistan has set up a government commission to organize a tender to explore for and produce oil and gas reserves in the Caspian, reported Interfax. Deputy Premier/Oil and Gas Minister Batyr SARDZHAYEV will head the commission. The commission will coordinate the work of the presidential foreign investment agency, the Oil and Gas Ministry and other relevant bodies during the tender, whose results are due to be announced by February 1998.

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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