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

Friday, May 9, 1997

Russian Federation

Politics

Russia Celebrates Victory Day

· Some 5,000 cadets marched today in the traditional military parade on Red Square, marking the 52nd anniversary of the Soviet Union's victory over Nazi Germany. Addressing the troops, veterans, and invited guests, President Boris Yeltsin said: "The Victory Day military parade on Red Square is a symbol of the faithfulness of Russian soldiers to the glorious traditions of the heroes of the Great Patriotic War [WWII]. It is the sacred duty of the Russian Army to maintain and expand these traditions."

Meanwhile at former KGB headquarters on Lubyanka Square, some 70,000 people gathered for a rally, sponsored by the Communist Party. Addressing the crowd, Communist Party leader Gennady ZYUGANOV accused the YELTSIN regime of betraying the Soviet victory in WWII and warned that an attempt to disband the State Duma will be made soon.

Zhirinovsky Causing Trouble

· Russia's Liberal Democratic Party leader Vladimir ZHIRINOVSKY caused a commotion on Thursday outside the Kremlin, after he was refused entrance to a ceremony marking the victory over Nazi Germany. Angered because presidential bodyguards had barred him from a wreath-laying ceremony at the Tomb of the Unknown Soldier (apparently he was late), ZHIRINOVSKY and his bodyguards attacked two television camera crews.

First, ZHIRINOVSKY grabbed the microphone of a Moscow TV correspondent trying to film him, threw the microphone to the ground, and twisted the woman's wrist. He pushed her into his car where his guards tried to take away documents she was carrying. She managed to break free and run away.

Then, ZHIRINOVSKY and his guards roughed up a cameraman for Moscow's 2x2 TV channel, who was trying to film the incident with the correspondent. The cameraman suffered bruises to his face.

The ultranationalist leader is well known for engaging in brawls and other scandalous incidents on the floor of the parliament and elsewhere. Russian television today showed scenes of past ZHIRINOVSKY violence including a fight in the parliament, when he grabbed a woman lawmaker around the neck and pulled her hair, and a live television debate during which he threw orange juice in the face of then-Nizhny Novgorod Governor Boris NEMTSOV, who is now First Deputy Prime Minister.

Economy

Energy Crisis in Vladivostok

· The Russian far eastern city of Vladivostok declared a state of emergency on Thursday, after a continued energy crisis forced a shutdown of electricity to the city for 12 hours a day, reported Associated Press (AP). As a result of the shutdown, factories and food processing plants are closed and city workers are warning of possible disasters, such as a backed up sewage system. Emergency measures will include increased police patrols around power stations.

The crisis began on May 1, when the Primorskugol coal mining company stopped supplying coal to the region's monopoly energy producer Dalenergo because its owes

Today's News Highlights

Russia

Oil JVs See Profits Fall

Globus Signs Russia Deal

Nizhny-UK Telecom Deal

De Beers Bids in Arkhangelsk

European Republics

US Investment in Lithuania

Moldova-Dnestr Accord Signed

South Caucasus & Central Asia

SOCAR VP in Abu Dhabi

UN Sec. Council on Abkhazia

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May 9, 1997

Intercon's Daily

Ruble = 5,753/$1.00 (NY rate)

The average cost of transporting a ton of crude oil from West Siberia to Russia's main export outlet of Novorossiisk nearly doubled between 1993 and 1996, according to AssoSPneft estimates. The net profit on a ton of oil exported from Russia based on a sale price fob frontier of $120/ton fell to $16.8/ton in 1996 from $31.1/ton in 1993, it said.

Joint ventures produced a total of 22 million tons of oil in Russia last year, representing about 7.5 percent of total production of 293 million tons. In 1992, joint ventures produced only 10.3 million tons of oil, or less than three percent of total crude output. Joint ventures share of oil exports, reaching 12 million tons in 1996, or 11 percent of exports outside of the CIS.

AssoSPneft has urged the Russian government to make oil output from marginal Russian fields easier and more profitable. Project manager Aleksei KOCHESHKOV said joint ventures are the best enterprises for developing these fields, but existing tax and economic conditions prohibit recovery of oil from these smaller, harder-to-develop fields.

"The government could reduce the tax burden on marginal fields. This does not only mean the excise tax, but also a reduction in royalties and resource base taxes, said KOCHESHKOV. He suggested that higher production from marginal fields could play a key role in reversing the decline in Russian oil production of the last decade.

Globus Deal with Food Distributor

· US Globus International Resources Corp. announced on Thursday that its subsidiary, Globus Foods International Inc., has signed an agreement with Russian food wholesaler Estrella to distribute the company's Belgian products in Russia and the Commonwealth of Independent States (CIS), said a company statement. The agreement calls for the distribution of Belgian confectionery products, baked goods, meats, coffee, and butter. It is estimated that the contract will initially provide Globus with annual revenues of more than $1.5 million.

"We are extremely excited about our relationship with Estrella. Their distribution network will allow us to establish a foothold in new areas of the former Soviet Union as well as enhance our reputation with suppliers in Belgium," said Serge PISMAN, President and CEO of GIRC.

Dec Jan Feb Mar Apr May

payment for several months worth of coal deliveries. Dalenergo officials say they are unable to pay because the city of Vladivostok owes the company $37 million for energy supplies. Vladivostok's mayor said there is not enough money in the budget to pay for electricity.

The city plans to send a delegation to Moscow this weekend to meet with Fuel and Energy Minister Boris NEMTSOV. The Far East has suffered from chronic energy shortages for the last few years as its remoteness makes supplying the region with fuel difficult and expensive.

Business

Oil JVs Sees Profits Falling

· Joint venture oil companies in Russia have found that steadily rising transport and production costs have meant increasingly less profits over the last four years, according to report on the economics of the Russian oil industry, reported Reuters. The Association of Enterprises with Foreign Investment in Oil Production and Refining (AssoSPneft), a non-governmental organization grouping nearly 30 joint ventures in Russia, produced the report.

The report says that joint ventures are responsible for a growing share of Russian crude production, although overall production has been declining. "As for all oil producing companies [in Russia], an aggregated proportion of taxes, transportation tariffs, and other charges in JV revenues increases consistently from year to year," Reuters cited the report as saying.

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Globus International Resources Corp. is a wholesale distributor, exporting goods from US and Western European manufacturers into the CIS. Its wholly-owned subsidiary Globus Foods International Inc. supplies dairy products, meat, seafood, and various other consumer and food products. Its other subsidiary, Shuttle International Corp., supplies construction material, automotive parts, and western-style clothing and apparel.

Nizhny-UK Telecom Venture

· In late May, a joint venture between British telecommunications equipment maker GPT and the Gorky Railway will begin assembling Realitis DX mini-telephone exchanges from GPT components at a defense plant in the central Russian city of Nizhny Novgorod, called Lazuri, reported Interfax. Gorky Railway, which holds a 36 percent stake in Lazuri, signed a contract on the JV in December 1996.

Gorky Railway spokeswoman Irina SUKHINA told Interfax the exchanges would initially be installed on the fiber-optic cable between Moscow and Nizhny Novgorod that the railway is laying along its line using GPT cable. By the start of 1997, the railway had laid 35 kms of cable. The cable will eventually stretch for 500 kms and will have three main and 20 mini ATX. The contract is worth $4.5 million.

The cable will enable the Railway to provide a wide range of commercial services including telephony and high-quality data transfer, said SUKHINA. In the future, the Railway plans to string optical fiber along 3,500 km of track, install large digital switches at about 14 hub stations, and another smaller 200 switches at intermediate stations. The whole program is expected to cost $70-80 million.

De Beers in Northern Diamond Project

· South Africa's De Beers may become a strategic investor in a project to develop a diamond deposit in Russia's northern Arkhangelsk region, reported Prime-Tass on Wednesday. De Beers representatives met with regional administration and business people in Arkhangelsk to offer a bid to buy into the region's Lomonosov deposit. An interdepartmental commission will make a decision after reviewing all investment bids.

De Beers said it is ready to finance the mining of diamonds, provided it acquires a 50 percent stake in

the charter capital of Severalmaz which obtained development rights on the deposit in 1993. Discovered in 1980, the Lomonosov deposit is considered one of the richest and promising in the Russian north. Its reserves are estimated to be worth over $12 billion. The deposits' share of jewelry- and non-jewelry grade diamonds exceeds 60 percent, whereas this indicator is just 25 percent for diamonds mined in Siberia's Sakha Republic and a mere five percent for Australian diamonds, said the report.

In December 1996, De Beers signed a contract with the Russian mining company Terra to prospect for diamonds at two sites in the Arkhangelsk region, but no positive results have been obtained so far.

European Republics

NATO's Solana to Ukraine

· NATO Secretary-General Javier SOLANA arrived in Kiev on Wednesday for talks with Ukrainian officials on NATO's planned eastward expansion. SOLANA brought with him a draft accord on a special relationship between NATO and Ukraine meant to ease the country's anxiety at being sandwiched between a new NATO and Russia. The agreement could be signed at the July NATO summit in Madrid.

US Becomes Top Investor in Lithuania

· The US has surpassed Germany as the biggest foreign investor in the Lithuanian economy, reported Itar-Tass, citing Lithuania's Statistical Service. US investors have sunk a total of 663 million litas (about $165.7 million) into Lithuania, while German investment has reached 301 million litas. Sweden has invested 275 million litas, Great Britain—178 million litas, and Luxembourg—110 million litas.

Russia is in last place among Lithuania's top ten foreign investors. Foreign investment in Lithuania had totaled 2.287 billion litas by the beginning of 1997. According to the Service, the bulk of foreign investment went into food, alcohol, and tobacco production, communications, and financial services.

Moldova-Dnestr Accord Signed

· Moldovan President Petru Lucinschi and Dnestr Republic leader Igor Smirnov on Thursday signed a memorandum of understanding on the normalization of ties between Moldova and the separatist Dnestr region, marking a breakthrough in

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Intercon's Daily

settling the some six-year-old internal conflict. The accord was signed in Moscow with the participation of Russian President Boris Yeltsin, Ukrainian President Leonid Kuchma, and Organization for Security and Cooperation in Europe (OSCE) chairman Niels Helveg Petersen.

The memorandum says that Moldova will remain a single state within its Soviet-era borders, but envisions a special status and large degree of autonomy for Dnestr. LUCINSCHI had insisted on the statement proclaiming Moldova's territorial integrity, when he was elected in December 1996. The agreement also paves the way for the withdrawal of some 5,000 Russian peacekeeping troops from Dnestr.

The memorandum calls for further talks between the two sides to reach a final settlement to the Moldova-Dnestr conflict.

South Caucasus & Central Asia

Azerbaijan Seeks Closer Ties to Arab States

· Azerbaijan is seeking greater participation from Arab nations, particularly the United Arab Emirates, in its emerging oil industry, reported Compass news agency on Thursday, citing the Khaleej Times. In an effort to increase trade and business ties with the Middle East, the country has plans to open an embassy in Abu Dhabi, a consulate in Dubai, and a trade office in the Emirates that will coordinate cooperation in the oil industry and promote trade.

Visiting Abu Dhabi this week, Azeri state oil company SOCAR vice president Ilgam Aliyev said that Dubai has emerged as one of its top trading partners. However, he said that the UAE has not participated in Azerbaijan's oil exploration industry, which is currently dominated by Western oil consortiums.

Most of the equipment for the oil industry, however, is transshipped via Dubai. "This has emerged as the easiest route. We benefit from this," said Aliyev. "But as far as direct participation is concerned, we do

not have this from the UAE yet. We invite them to do so. We have discussed it with the UAE minister of foreign affairs during our current visit."

Aliyev said corporations from the US, Britain, Italy, France, and Japan, have been given contracts for five major oil projects, involving investment of more than $20 billion over the next 5-6 years. He noted that Saudi Arabian companies are involved in two of the projects, but that their participation is limited to two percent in one and 5-6 percent in the other.

"We would like to invite companies from the UAE to participate," he said. "We want to expand the number of companies from the Arab world involved in our oil industry."

Emirates Airline will soon introduce regularly-scheduled flights to Baku three times a week, said the report. Meanwhile, Azerbaijan has become the fourth largest re-export destination for cargo handled by the Dubai Cargo Village.

UN Pledges Involvement in Abkhazia

· The UN Security Council on Thursday announced that it fully supports strengthening UN involvement in the peacekeeping process in Georgia, reported Xinhua. The statement was a formal response by the Security Council to proposals made by Secretary-General Kofi Annan in an April 25 report.

One of the proposals is to appoint a resident Special Representative and to strengthen the political element of the UN Observer Mission in Georgia, which now has about 120 military observers. ANNAN also suggested convening a meeting between the Georgian and Abkhaz sides to map out areas where concrete political progress can be made.

"The Security Council reaffirms its full support for a more active role in the United Nations, with the assistance of the Russian Federation as facilitator, aimed at achieving a comprehensive political settlement," Xinhua cited a Council statement as saying.

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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