DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, June 12, 1997

further loss of control over the Far East and likely lead to challenges from other regions.

Duma Dissolution Controversy Heats Up

· Russian Communist Party leader Gennady ZYUGANOV said on Monday that he will demand a parliamentary investigation into an alleged plan to dissolve the Duma, reported RFE/RL Newsline. The pro-communist newspaper Sovetskaya Rossiya on Saturday published extracts from a document, allegedly circulated among President Boris YELTSIN's advisors, that suggests waging a media campaign to discredit the Duma's activities and seeking "moral support" for disbanding the Duma from foreign leaders at the upcoming G-8 summit in Denver. The document also advocates filing appeals in the Constitutional Court to undermine the Duma's legitimacy and eventually issuing a presidential decree saying new parliamentary elections will be held only if the government has enough money, said RFE/RL.

Rumors have circulated around Moscow for some time that a "blueprint" for dissolving the Duma had been prepared. This is the first indication that such a document may actually exist, although the seriousness of it as a contingency plan remains unclear.

Suicide in the Military Alarmingly High

· The head of the administration of Russia's General Staff Lt.-Gen. Vladimir KULAKOV announced on Tuesday that there were 36 suicides for every 100,000 soldiers in the Russian armed forces last

Russian Federation

Politics

Nemtsov on Situation in Far East

· Stepping off a plane from Vladivostok today, Russian First Deputy Prime Minister Boris Nemtsov told Russian public television (ORT) that the situation in Primorsky Krai was unbearable and something must be done. In contrast to other government officials, however, NEMTSOV suggested that the holding of new gubernatorial elections in the region were the only way to solve the problem.

On Wednesday in the Far East , NEMTSOV suggested that Vladivostok Mayor Viktor Cherepkov and Primorsky Krai Governor Yevgeny Nazdratenko are both engaged in political battles to the detriment of the local population and they should step down, reported Itar-Tass. NEMTSOV was addressing citizens of Vladivostok at the cinema hall Okean, while people in the street outside the theater chanted "Down with Nazdratenko!"

The election idea forwarded after he returned to Moscow seems to be NEMTSOV's alone. President Boris YELTSIN, First Deputy Prime Minister Anatoly CHUBAIS, and others seem to be more intent on forcing NAZDRATRENKO out, apparently with a view toward installing Moscow's man as head of Primorsky Krai.

While it is possible YELTSIN will accept NEMTSOV's proposal, it would be a very risky move for the central government. NAZDRATENKO himself has suggested that new elections be held because it is likely, despite the crisis situation in the region, that he would win. Should a new election be called and NAZDRATENKO prove victorious, he would surely begin to even more strenuously thumb his nose at Moscow. This extra legitimacy for the governor would mean the center's

Today's News Highlights

Russia

Eco. Statistics for May

Duma Passes Land Code

S&P's Rates SBS-Agro Bank

Greenspan on Russia

Aeroflot Enters Fare Wars

South Caucasus & Central Asia

Armenia Cabinet Reshuffle

Georgia-Turkey Railway Plan

Georgia-Russia Fiber Optic Plan

Georgia-Greek Fiber Optic Deal

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Thursday

June 12, 1997

Intercon's Daily

year, reprted Interfax. This contrasts with a suicide rate of 15 soldiers per 100,000 in 1991 among the USSR armed forces. Two-thirds of the suicides were committed among inductees during the first six months of service, said KULAKOV.

Russia Celebrates its Independence Day

· Russia is on holiday today celebrating the anniversary of the republic's independence from the Soviet Union. On June 12, 1991, Boris YELTSIN was elected to be the first president of the Russian Republic and declared Russian sovereignty within the Soviet Union. Today, Yeltsin proposed that June 12 be known herein as Russia's Day.

Economy

Ruble = 5,759.5/$1.00 (NY rate)

Economic Statistics for May Uninspiring

· The Russian economy continued to contract in May, dampening any euphoria that arose after news of slight growth in the first quarter of the year and bolstering predictions that the recovery will wait until next year. According to the State Statistics Committee (Goskomstat), Russia's gross domestic product (GDP) declined by 0.2 percent during the first five months of 1997, compared with the same period last year. Services continued to make up the bulk of GDP (50.6 percent), while goods accounted for 37.8 percent.

Out of 10 industries monitored by Goskomstat, seven reported a production decline and only three reported growth. However, overall industrial production grew by 0.5 percent in the first months of 1997, including non-ferrous metallurgy by three percent.

Inflation continued to slow this year with the year-on-year rate hitting a record 14.6 percent in May. Russia's Institute of Transitional Economic Problems forecast that inflation will be 0.6-0.9 percent per month in June and July.

Duma Passes Land Code, Mortgage Law

· The Russian State Duma on Wednesday voted 285-10, with six abstentions, to pass the draft Land Code. "Land is used and protected in the Russian Federation as a basis of the life and activity of peoples inhabiting their respective territories," Itar-Tass cited the preamble to the code as saying.

The code says that land owned by Russia and its constituent republics and regions are state property. It prohibits the purchase/sale of agricultural land, but allows trading in municipal land. Russian citizens can come into the ownership of land by way of inheriting and leasing land, or through limited or unlimited use of the land. Land can be leased for no more than 50 years.

The code stipulates that foreigners, stateless persons, foreign legal entities, and foreign countries can acquire land only under lease.

The mortgage of agricultural land is regulated by the law "On Hypothecary," which was also passed by the Duma on Wednesday. The law allows the mortgage of land owned by individuals and their associations, legal entities, and provided for the purpose of horticulture, husbandry, the construction of individual houses, summer houses and garages, and vegetable-growing.

S&P's Rates SBS-Agro Bank

· Standard & Poor's on Wednesday assigned its single-'B'-plus long-term counterparty rating to SBS-Agro Bank, said S&P's CreditWire. The rating outlook is positive.

The single-'B'-plus rating reflects the high risk of operating in the nascent Russian financial sector. Russia is still in the early stages of recovering from a severe recession and a period of hyperinflation that followed the disintegration of the old command economy. Russian banks must operate in an environment of tight liquidity, an untested legal system which could make the collection of bad loans difficult, a general lack of a credit culture and poorly developed accounting standards.

Standard & Poor's believes, however, that SBS-Agro Bank is the best positioned bank in Russia to gain market share in retail banking from the near-monopoly of the State Savings Bank of Russia (Sberbank). It had been developing a retail banking infrastructure on its own, but the acquisition of Agroprombank has provided it with a meaningful branch presence throughout Russia, which no other commercial bank has. Not only are prospects favorable for earnings growth from this business, but it renders SBS-Agro Bank's funding base more stable than competitors', who are mostly wholesale funded.

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The near-term risks of the Agroprombank acquisition are however considerable. Management will be stretched to integrate the large branch network and retrain workers. Integration expenses will also be high over the next few years.

The bank has achieved some positive results in working out some of Agroprombank's bad loans and has also received guarantees for some bad loans from local authorities and expects to be eligible to have the remaining bad loans replaced by federal government notes according to new legislation regarding centralized credits. In addition much of the portfolio is covered by reserves and capital. Future loans to the agricultural sector will be made under government guaranteed programs.

Unlike many other Russian banks, SBS-Agro Bank does not face the issue of having provided funding for, or even taking equity stakes in formerly state-owned industrial companies. It does, however, have considerable lending risk in its loans for small and medium sized companies. Its capital and reserves are considered sufficient to cover such risks.

The near-term risks for banks operating in the Russian economy are many, including a poorly developed legal and accounting infrastructure. In addition SBS-Agro Bank faces considerable managerial risks of integrating Agroprombank. However, the long-term prospects of this bank are positive. It is well-positioned to take advantage of the growth of retail deposits which must occur for the Russian economy to succeed and grow, said S&P's.

Business

Greenspan on Property Rights in Russia

· US Federal Reserve Board Chairman Alan Greenspan said on Tuesday that the concept of property ownership is not embedded in Russia's culture and is one reason the transition to a free-market society has not been smooth, reported Futures World News (FWN). "In the West and especially under British common law and its derivatives, the moral validity of property rights is accepted, or at least acquiesced in, by virtually the whole of the population," Greenspan explained during a speech to the Woodrow Wilson International Center for Scholars in New York.

"Certainly, if generations of Russians have been brought up on the Marxist notion that private property is `theft,' a breakdown of the Soviet central planning infrastructure is not going to automatically alter the perceived moral base of its social system," he is quoted by FWN as saying.

Only a small number of contracts are enforced through Russia's court system. Moreover, a large number of contracts are oral, and therefore non-binding. Reform in this area is needed in order for a market economy to function effectively. Another requirement is the widespread dissemination of timely financial information, said Greenspan.

Aeroflot Deal with Amadeus Booking

· Russia's Aeroflot International Airlines has signed an agreement with Amadeus of Madrid, a developer of computer systems for airline ticket bookings, to form a joint venture to promote the Amadeus booking system among Russian tourist agencies, reported Interfax. The joint venture, called the National Marketing Company, will enable Aeroflot to distribute real-time information about seat availability through the Amadeus system.

Aeroflot general director Valery OKULOV said the partnership agreement would help the airline to provide a much higher level of service passengers in Russia and abroad.

More than 42,000 travel agencies from around the world use the Amadeus systems to book 440 airlines, 55 car rental firms, and 38,000 hotels.

Aeroflot Enters the Fare Wars

· In another sign of Russia's Aeroflot International Airlines efforts to become globally competitive, the airline announced a promotional rate of $220 for all its international flights between June 16 and July 6. The special fare, aimed at winning market share away from major Western airlines, is not valid for Aeroflot's domestic, CIS, and Baltic states routes or the company's cargo flights. Aeroflot offers regular scheduled flights from Moscow to 94 countries around the world.

Aeroflot has been striving to overcome its Soviet-era image of having poor service as well as the more recent perception of Russian airlines as unsafe.

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South Caucasus & Central Asia

Partial Government Reshuffle in Armenia

· Armenian President Levon TER-PETROSYAN signed a decree this week consolidating some of the government's economic ministries and making some personnel changes.

The Economy Ministry was merged with the Finance Ministry to become the Economy and Finance Ministry. Economy Minister Vakham AVENESYAN was dismissed and Finance Minister Armen DARBINYAN will head the new Ministry.

Also the Trade Ministry was merged with the Industry Ministry to create the Ministry of Industry and Commerce with Trade Minister Garnik Nenagulyan as its head. Industry Minister Ashot SAFARYAN was dismissed.

In addition, the Ministry for Privatization and Foreign Investment was renamed the Privatization Ministry.

ALso this week, Armenian parliamentary speaker Babken ARARKTSYAN tendered his resignation after the legislature adopted a law on extending military conscription that he strongly opposed, reported Reuters. However, he later decided not to resign at the urging of the president.

Georgia-Turkey Railway Line Tender

· Turkey's State Minister for Economic Relations Ayfer YILMAZ announced today in Tblisi that a proposed new rail link between Turkey and Georgia will be put up for tender in September, reported Reuters. The proposed $300 million link will connect Kars in eastern Anatolia and Tblisi. Construction would take about a year. A working group will discuss the main conditions of the tender at the end of June,

"The construction of this route should become the main incentive for the further development of our bilateral trade relations," the minister is quoted as saying. The railroad is considered a key part of a

proposed Euro-Asian transport corridor that will connect Europe to Asia via the Caucasus.

YILMAZ said that Turkey was interested in long-term investment in Georgia, noting that her government was seriously considering joint projects in natural resource development, agriculture, and construction. "We intend to evoke the interest of our businessmen in joint projects in different branches of the Georgian economy, such as the banking system, energy sector, light industries, and the food industry, YILMAZ was quoted by Reuters as saying.

Poti-Sochi Fiber Optic Line Planned

· Representatives of Georgia and Russia signed an agreement on the construction of an underwater fiber optic communications line to be laid between the Georgian Black Sea port of Poti and the Russian port city of Sochi, reported Itar-Tass today. The document was signed at the Telecom Asia `97 exhibition in Singapore.

According to Russian State Committee for Communications and Information Science deputy chairman Naum MARDER, who signed for the Russian side, the communications line is to be financed through private investment or international agencies, rather than with public funds.

Georgian-Greek Fiber Optic Deal

· The Greek telecom organization OTE and Hellascom have signed a $14 million contract with Fortnet of Georgia for the installation and operation of fiber optic networks in that country, reported M2 Communications on Wednesday. The networks will connect the biggest cities in Georgia and will also be part of the intercontinental fiber optics network TAE. OTE will fully fund the contract with a 10-year loan, while Hellascom will undertake the construction.

Last year, Hellascom signed an agreement with Armenia on building a fiber optic communication line from Yerevan to the Iraqi border, which was meant as part of the EuroAsian TAE network

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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