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

Wednesday, May 7, 1997

Russian Federation

Politics

Yeltsin on Army Reform

· Russian President Boris Yeltsin said that army reform has moved much too slowly and further reductions in the country's huge military machine must be made. In an interview with the military newspaper Krasnaya Zvezda, published today, he said that Russia must enhance the military's combat effectiveness by making up for the reduced armaments with better weapons, training, and education.

"I still believe that we must consistently move toward a professional army. No matter how unrealistic this might seem because of current financial shortages, we must set ourselves this difficult goal and do our bets to attain it," he told Krasnaya Zvezda.

Marking the fifth anniversary of the Russian armed forces, the president said Russia will make every effort to ensure its own security and minimize the potential consequences of NATO's eastward expansion. He pledged that Russia will continue to integrate with other member-states of the Commonwealth of Independent States, primarily Belarus, and strengthen cooperation with neighboring countries, "first of all China."

Land Committee Head Named

· Russian Prime Minister Viktor CHERNOMYRDIN has appointed Ilya YUZHANOV as the new chairman of the State Committee for Land Resources and the Use of Land, reported Itar-Tass today. The 37-year-old YUZHANOV is considered a reformer and has done much to improve land relations in the country, a government source told the news agency. He will replace Nikolai KOMOV who has been named as the Committee's second first deputy chairman.

Yeltsin-Luzhkov Compromise on Housing

· Russian President Boris Yeltsin has agreed to exempt the city of Moscow from participation in the government's new reform plan for housing and public utilities, reported Itar-Tass. Moscow Mayor Yuri Luzhkov met with YELTSIN this morning and apparently persuaded him to "grant special powers to the Russian capital" to follow its own course of reform in this area, Luzhkov's press secretary Sergei TsoI told reporters.

TsoI stressed that the reform of the housing and public utilities sector would be implemented in Moscow thoroughly and without shock therapy. A decree on the subject will be drafted soon and signed by President YELTSIN, he said.

Last week, LUZHKOV publicly criticized the government's planned housing and public utilities reform program and vowed that the city of Moscow would follow its own course of reform, reported Nezavisimaya Gazeta. Moscow has diverged from the government policy lines in other areas of market and social reform, most notably in the privatization.

Prospective CIA Chief on Russia

· During a US Senate confirmation hearing on Tuesday, Central Intelligence Agency (CIA) director nominee George TENET expressed concern that the US may have shifted too much of its intelligence efforts away from Russia, reported Reuters. TENET said that he was committed to "closing the door

Today's News Highlights

Russia

Yeltsin Approves Budget Cuts

Oil Exports Up in March

Mosbusinessbank Gets Loan

Rosneft Chairman Reinstated

European Republics

New Ukraine Energy Ministry

GM, Daewoo in Ukr. Car Deal

US Eyes Aid to Ukraine

World Bank Loan for Latvia

Metromedia in Estonia

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May 7, 1997

Intercon's Daily

on the Cold War" to focus more sharply on transnational threats such as drug trafficking, nuclear proliferation, and terrorism.

However, the US "cannot afford complacency about the unfinished transformations under way in countries like China and Russia, as long as there is any question about their future direction or even the slightest doubt about the ultimate fate of the nuclear weapons they control," he is quoted as saying.

In an interesting contrast to TENET's view that the US has withdrawn too much of its espionage activities from Russia, some Russian officials are complaining that the US has significantly stepped up its intelligence efforts in the country.

In an interview with today's Moskovsky Komsomolets, Nikolai VOLOBUYEV, the chief of the Russian Federal Security Service's (FSB) counter-intelligence department, said that the CIA, the US Defense Department's intelligence division, and other US secret services are his agency's most power opponents today. He claimed that several CIA assets operating in Russia have been arrested "of late."

VOLOBUYEV said that he is also "seriously concerned" about the activities of US non-governmental organizations (NGOs) in Russia, citing the Soros, Ford, and Carnegie foundations. "The current situation provides our adversaries with virtually unlimited opportunities. Foreigners can roam all over Russia as they please. There also exist a lot of foreign public organizations in the country."

Economy

Ruble = 5,755/$1.00 (NY rate)

Yeltsin Approves Budget Reduction Plan

· Russian President Boris YELTSIN today expressed support for the government's plan to cut spending out of the 1997 federal budget in the wake of revenue shortfalls, reported Dow Jones. "The budget crisis is deep and serious," said the president, describing the spending cuts as "forced" by the government's lack of incoming funds.

YELTSIN also ruled out the possibility of printing more money, as has been suggested by some opposition legislators.

The new budget proposal calls for cutting spending this year by 108 trillion rubles, or about 20 percent of originally planned expenditures for 1997. The plan is expected to be debated on May 21 in the State Duma, but is unlikely to be approved by the communist-dominated legislature.

Oil Exports Up in March

· Russian oil exports in March totaled nine million tons—worth $1.1 billion—an increase of 970,000 tons from February, reported Interfax. Russian oil conglomerate Lukoil registered the highest exports, sending 1.7 million tons abroad, followed by Surgutneftegaz with 943,000 tons, Tatneft with 873,000 tons, Yukos with 778,000 tons, and Sidanko with 697,000 tons.

The top exporting joint ventures were Varyneganneft and Polar Lights with 210,000 and 110,000 tons, respectively.

Russian oil exports for the first quarter of 1997 totaled 26 million tons, worth $3.5 billion.

Business

Moscow Bank Receive Large Loan

· British finance house London Forfaiting on Tuesday agreed to extend a $80 million loan facility to Mosbusinessbank, one of Russia's largest commercial banks, reported today's Financial Times. The deal is the latest in a series of syndicated loans to Russian companies by London Forfaiting.

According to director Victor PAPADOPOLOUS, London Forfaiting will have arranged $500 million in financing for Russian companies by this summer. London Forfaiting has arranged short-term loans to several Russian banks, including Tokobank, Mezhkombank, and Rossiisky Kredit, as well as major companies such as Gazprom.

"The requirements for capital in Russia are massive whether it comes from the sovereign borrower, or corporations, or municipal authorities," the director told FT. "We believe the economic fundamentals in Russia are beginning to come right."

Rosneft Head Reinstated

· Following an outcry from board members of state oil holding company Rosneft and the company's

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Russian Short Takes

n A World Wide Web site, established in December 1996 with the help of US IBM, offers interactive access to a database of more than 350,000 legal documents collected from the federal and local governments in Russia and other countries in the Commonwealth of Independent States. The address is <http://www.scli.ru/>.

n Russian construction companies attracted $1.5 billion worth of foreign capital in 1995 and $3 billion in 1996. According to specialists in the construction sector, Some $12-20 billion in foreign capital will be invested in Russia by 2000.

n The refurbishment of Moscow's Moskva and Rossiya hotels will require at least $485 million in foreign investment. In recent years, as many as 20 of the capital's best hotels were established with foreign investment.

n Russian Health Care Minister DMITRIEVA recently told representatives of foreign pharmaceuticals and medical equipment companies that the health ministry is ready to assist foreign investment in Russia's health sector. She stated, however, that the Ministry would insist on resuming centralized purchases of medications. "Our main task is not to purchase medicines abroad, but to begin producing them ourselves," she said, adding that the Ministry will do everything possible to provide the maximum support for domestic producers of equipment and medicine.

n Britain's Boots pharmaceutical firm announced last month that it was introducing its best-selling Nurofen painkiller onto the Russian market.

n The Russian Central Bank lowered its discount rate from 42 percent to 36 percent, as of April 28.

n Georgy Ter-Gazaryants, board chairman of the Russian Authorship Society, believes that the new Criminal Code and Russia's accession to the Bern intellectual property rights convention provides sufficient tools to enforce and protect intellectual property rights in Russia. Royalties collected in Russia increased from 8.5 billion rubles in 1994 to 32.5 billion in 1995 and 48 billion in 1996. Ter-Gazaryants claims that this is only half of the amount due Russian authors.

foreign partners, the Russian government has brought Aleksandr PUTILOV back into the leadership of the company, reported Interfax. Last week, the government replaced PUTILOV in his posts as Rosneft president and board chairman with former Industry Minister Yuri BESPALOV.

As a result of a meeting between First Deputy Prime Minister Boris NEMTSOV, Rosneft managers, and representatives of foreign companies working on major projects with Rosneft, PUTILOV was reinstated as chairman of the board of directors of the company. NEMTSOV was apparently convinced that PUTILOV's dismissal could disrupt three major Rosneft projects that involved international consortia—the Sakhalin-1 development project, the Timan-Pechora project, and the Caspian Pipeline Consortium project.

BESPALOV will retain the position of company president. BESPALOV's appointment is believed to be aimed at helping speed up the process of privatizing Rosneft.

European Republics

Ukraine Establishes Energy Ministry

· Ukrainian President Leonid Kuchma today signed a decree setting up the Energy Ministry, the presidential press service told Itar-Tass. The new ministry is expected to improve control over the country's energy-industrial complex. It will merge two ministries, which are being liquidated, the Ministry of Energy and Electrification and the State Committee for the Use of Nuclear Energy.

The Ukrainian State Department on Nuclear Energy Matters is being set up as an executive body subordinated to the Energy Ministry.

Kuchma appointed Yuri Bochkarev, the former Minister of Energy and Electrification, to head the new ministry.

GM, Daewoo to Form Ukrainian Auto JV

· Ukrainian Prime Minister Pavlo LAZARENKO announced on Tuesday that US General Motors Corp. and South Korea's Daewoo Corp. would form a joint venture to produce cars at the AvtoZAZ plant in Zaporozhye, reported United Press International (UPI). Ukraine has been holding negotiations with

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foreign firms concerning AvtoZAZ for over a year and has repeatedly delayed the selection of a tender winner for the privatization of the plant.

The choice of both companies, instead of one as expected, appears aimed at bringing two countries' investors into the country and offending no one. A similar split decision was made this week when state carrier Air Ukraine announced it would purchase planes from both US Boeing and Europe Airbus.

LAZARENKO said that both foreign companies would own a stake in the AvtoZAZ plant, Ukraine's only automaker. Through the planned joint venture, GM will produce 35,000 Opel Vectra cars a year within four years and Daewoo will manufacture 150,000 Tico, Nexia, and Espero models a year, according to LAZARENKO. AvtoZAZ will to produce 70,000 Tavria cars year. The Ukrainian model will be updated with the help of both GM and Daewoo.

US Eyeing Aid to Ukraine

· US Ambassador Richard MORNINGSTAR, who coordinates aid to the former Soviet republics, told legislators on Tuesday that the US should reduce aid to Ukraine if its government cannot push forward stalled reforms and improve the investment climate, reported Voice of America (VOA). Testifying on Capitol Hill, MORNINGSTAR also complained about corruption and bureaucratic roadblocks that have hurt US investors.

"If these concerns are not addressed concretely, we should consider scaling back assistance in certain sectors where backtracking on reform has been a problem. The ultimate issue…is that Ukraine's future and all that they've achieved in the last five years is at stake," he is quoted as saying.

The Ukrainian government indicated that it is well aware of its image problems with foreign governments and investors through a recent public relations effort, led by Prime Minister Pavlo LAZARENKO. At a press conference on Tuesday, the premier

defended himself and his country against allegations of corruption, reported today's Financial Times. He also criticized western media coverage as "not objective" and "negative," maintaining that it was ruining his and Ukraine's image abroad. The press conference was organized by a Washington-based public relations company and aimed at easing concern among Ukraine's western allies over corruption and delayed reform efforts, said the newspaper.

World Bank Loan for Latvia

· The World Bank on Tuesday approved a $18.1 million loan to help finance a Welfare Reform Project in Latvia, said a Bank press release. The project will help Latvia establish a modern, fully affordable social insurance and old-age security system and will assure delivery of social assistance to the most needy segments of the population, such as the poor, handicapped, and single mothers.

Latvia has become the first country in central and eastern Europe to embark on a major reform of its public pension system, said the Bank. The Bank-assisted project aims to support the implementation of that reform in the public and private sectors. The project has four main components: social insurance development, regulation of privately-managed pensions, social assistance administration, and monitoring and evaluation of social policy.

Metromedia Buys Estonia Radio Stake

· US-based Metromedia International Group Inc.'s Metromedia International Inc. unit acquired a 49 percent stake in A.S. Trio LSL, which owns seven FM radio stations in Estonia, reported Dow Jones. In a press release, Metromedia said Heino RAIVET, an Estonian citizen and Metromedia International Inc.'s partner in its Estonian radio paging operations, acquired an additional two percent.

Metromedia International Group is a communications, media, and entertainment company with several holdings and partnerships in eastern and central Europe and the former Soviet republics.

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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