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, June 19, 1997

This week the Daily Report on Russia will

present guest articles from the embassies of the

Newly Independent States (NIS) in the US .

The Road to a Market Economy

In addition to political stability and an educated labor force, potential investors in Azerbaijan are also interested in progress toward a free market economy. Azerbaijan has received a head start in this respect as a result of the arrival of Western oil companies and other supporting businesses, which bring with them a great deal of knowledge and experience in free market economics.

Azerbaijan's parliament has already passed numerous laws to promote a free market economy, including those dealing with the privatization of land, protection of foreign investment, and privatization of state property. Azerbaijan has adopted its own currency, the manat, and last year inflation was held below six percent. Moreover, in the first quarter of this year average monthly inflation was 0.8 percent.

Last year was a turning point for the economy of Azerbaijan. If in 1995 overall domestic production declined 12 percent, in 1996 it increased by 1.3 percent. A downturn in agriculture was averted in 1996 for the first time. Agricultural production in 1995 declined seven percent, but last year it rose 3.3 percent, commodity turnover rose 25 percent, freight transportation¾two percent, and services¾35 percent. Investments in Azerbaijan grew 74 percent during the past year.

The Azerbaijan government's stabilization and economic reform program receives support from the International Monetary Fund and World Bank. They are helping the government of Azerbaijan to establish a policy and institutional framework for the development of the petroleum sector, to formulate and implement an economic reform program, and strengthen the capacity for macroeconomic management. Azerbaijan successfully meets the obligations of the World Bank and IMF.

INTERCON SPECIAL REPORT:

FOCUS ON AZERBAIJAN

Today's contribution is from the Embassy of the

Republic of Azerbaijan in Washington, D.C.:

Azerbaijan: The Growth of a Democratic Republic

Azerbaijan is a new, independent democratic republic born out of the collapse of the Soviet Union. Prior to 1991, Azerbaijan had only known two years of independence in its entire history¾a brief period after World War I before the Soviets took over.

Now that we have achieved permanent independence, Azerbaijan is poised to become one of the leading economic powers the region. This is in large part due to our abundant natural resources. President Geidar Aliyev has signed more than $15 billion worth of oil contracts over the past three years, and within 2-3 years Azerbaijan will be supplying hundreds of thousands of barrels of oil per day to the industrialized countries of the world. Some experts believe Azerbaijan will become the next Kuwait.

But the presence of oil alone would not be enough to make Azerbaijan a potential economic power. The government of Azerbaijan is probably the most stable in the Caucasus, in part because of the institution of democracy. We have had two presidential elections and one parliamentary election. There are numerous opposition parties and opposition newspapers and the media is flourishing. This has created a climate of democratic pluralism and stability. We also have a very educated and eager labor force. The literacy rate is more than 98 percent, a record unmatched in many industrialized countries.

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This is not to say that Azerbaijan does not have problems. Nowadays, the biggest problem for our country is the conflict with Armenia and separatism of ethnic Armenians in the Azeri region of Nagorno-Karabakh. As a result of the conflict, Azerbaijan currently has about one million refugees and 20 percent of our territory is under military occupation. But a cease-fire has been in effect for three years and the international community is bringing increasing pressure in favor of a negotiated settlement. This is no longer a localized ethnic conflict, it is a conflict of international significance, as seen by the fact that Russia, France, and the United States now co-chair the peace process sponsored by the Organization of Security and Cooperation in Europe (OSCE). Hopefully, significant progress will be made before the end of this year.

Azerbaijan will also play a major role in the geopolitical development in the region. It is bordered of the north by Russia, on the south by Iran, on the west by Armenia, Georgia and Turkey, and the five new Central Asian republics are just across the Caspian Sea. Major issues involving Azerbaijan will include decisions on oil pipeline routes from the Caspian Sea to the Mediterranean, and the spread of democracy and free markets throughout the region.

Azerbaijan has friendly relations with all of its neighbors except Armenia, and hopefully that will change soon. Azerbaijan is a strong supporter of its independence. It is the only former Soviet republic, other than the Baltics, that has no foreign troops on its soil. It has opposed all efforts to institute a radical fundamentalist government.

Azerbaijan has opened itself to the West. Relations between the United States and Azerbaijan have improved tremendously over the last few years, as we have worked together on such issues as oil and gas development, Armenian-Azerbaijan conflict resolution, and geopolitical security concerns. Also increasing numbers of student exchange programs are being implemented. This growing relationship will be highlighted later this summer when President ALIYEV meets with US President Bill Clinton at the White House.

What Azerbaijan would like to see is the institution of democratic free-market principles throughout the

former Soviet Union, with respect for the independence and territorial integrity of all the new republics. The key to the future of all these republics is to replace empire with independence, conflict with commerce, autocratic rule with democracy, and managed economies with free markets.

The Ambassador

Hafiz Pashayev has served as the Ambassador of the Republic of Azerbaijan to the United States since February 1993. Prior to his appointment as Ambassador, Dr. PASHAYEV taught physics at Baku State University and served as Director of the Metal Physics Laboratory in the Institute of Physics at Azerbaijan's Academy of Sciences. In 1984, he was named full professor at the Academy of Sciences of Azerbaijan.

Ambassador PASHAYEV received a degree in physics from Baku State University in 1963, and a Ph.D in solid state physics in 1971 from the Institute of Atomic Energy in Moscow. From 1975 to 1976, he conducted research at the University of California at Irvine. He is the author of more than 100 scientific articles and books, and speaks Azerbaijani, Russian, Turkish, and English.

Azeri Oil Sector Leads Growth

The importance of the largely untapped oil fields the Azeri sector of the Caspian Sea is growing aggressively in the international energy market, said a recently released report by the European Bank for Reconstruction and Development (EBRD). The discovery of Azerbaijan's huge potential oil reserves have attracted many of the world's major oil companies and led the country to be dubbed the next Kuwait. Azerbaijan, the largest country in the Caucasus with a population of 7.2 million, has the advantages of relative political stability and a government that is actively seeking foreign investment. Its main handicap is a lack of export outlets.

The EBRD report predicted that by 2010 total investment in Azerbaijan's oil and gas industry could reach $23 billion, which will make Baku, the capital city, a "world class boom town." In addition, "foreign investment in Azerbaijan rose five-fold in 1996 to $342 million, mostly in the oil sector," said the report.

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International oil companies are accelerating the process of exploration and development in the Caspian Sea region and are seeking improvements in the region's pipeline network. The investors are also making an effort to raise the quality of the Azeri crude for the global market.

Currently, five international oil consortium have signed a $15 billion worth contracts with the Azeri government to develop Caspian sea oil fields. The largest of these is the Azerbaijan International Operating Company (AIOC), which is led by British Petroleum and Norway's Statoil. The consortium negotiated an $8 billion contract to develop the Chirag, Azeri, and deep water Guneshli fields in the Caspian sea. The three fields are estimated to contain 500 million tons of oil and 555 billion cubic meters (bcm) of natural gas.

Azerbaijan expects to sign a number of major contracts with foreign oil firms before the end of this year. (1) A deal is planned with US Exxon, Mobil, and Chevron on three deep water fields, designated D-3, D-9, and D-38, located 50-100 km offshore in the South Caspian. Estimated recoverable reserves are 100 million tons of oil. (2) Another deal would involve Chevron and the Zienalabdin-Tagigev field, about 80 km offshore, the field has estimated recoverable reserves of 115 million tons of oil and 420 billion cubic meters (bcm) of gas. (3) Another deal with Mobil involves the Oguz and D-30 sites in the South Caspian. The fields have estimated crude reserves of 40 million tons of oil and 20 bcm of gas. (4) A consortium of Japanese firms including Itochu, Indonesia Petroleum Ltd., Japan National Oil Co., and Japan Petroleum Co., Ltd.—are involved in a oil project to develop the Yanan Tava, Ateshgakh-3, and Mugan Deniz sites, which cover 500 square km in the South Caspian.

USAID Assistance

US aid to Azerbaijan has been limited by Section 907 of the Freedom Support Act (FSA), which restricted any US assistance to the Azeri government until it ceases the "offensive use of force and lift its embargoes against Armenia" that have resulted from the Nagorno-Karabakh conflict. However, US funds can support organizations and individuals not associated with the Azeri government, such as charities assisting Azerbaijan's refugees and internally dis

placed persons (IDPs). The assistance is channeled through US private voluntary organizations and consists of clothing, food, shelter and medicines.

USAID's 1997 Congressional Presentation said that this year's assistance request for Azerbaijan was $22 million. The funds would be allocated between the citizens' participation programs ($5.5 million), which aim to increase citizen's participation in political and economic decision-making, and crises management programs ($16.5 million), which are designed to reduce human suffering and crisis impact during the conflict with Armenia.

Today's News

Politics

LAZARENKO Dismissed

• Today, Ukrainian Prime Minister, Pavlo LAZARENKO, was removed from his post by presidential decree, according to Reuters. The decree, signed by Ukrainian President, Leonid KUCHMA, cites LAZARENKO's illness as the cause of this action. First Deputy Prime Minister, Vasyl DURDYNETS, has been appointed to the post of acting prime minister.

Lately, there was much speculation that LAZARENKO would be removed from his post. However, corruption and inefficiency, not illness, were cited as the most probable reasons for his departure. When asked about his illness, an aide to LAZARENKO said he was in good health, reports Reuters.

Senate Allocates $800 Million for NIS

• Yesterday, the Senate Appropriations Foreign Operations Subcommittee allocated $800 million for the Newly Independent States. The assistance includes significant changes in the conditionality of assistance, the amounts and foreign policy.

Assistance money for Russia is contingent upon the Clinton administration declaring that Russia has stopped supplying nuclear weapons and other assistance to Iran. The assistance package also includes $225 million for Ukraine but also with set conditions. Half of this amount will be held until March 1998 when the US Secretary of State must certify that key conditions have been met. These conditions include the resolution of commercial dis

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putes with American firms and the enforcement of an anti-corruption decree.

Georgia received special recognition and increased aid for its economic and political reforms. The subcommittee increased aid to Georgia from $25 to $100 million. During the subcommittee meeting, Senator MCCONNELL explained that "Given the tough challenges and remarkable results...President SHEVARDNADZE and the parliament have turned the country around in the last two years and deserve our support to asssure they can make permanent the reforms they have put in place.

Efforts to have Section 907 of the Freedom Support Act lifted, which banned aid to Azerbaijan, have been unsuccessful until recently. The Senate bill included an exemption to 907 that would allow funding for "Democracy and Government Assistance Program."

Economy

Ruble = 5,760.5/$1.00 (NY rate)

Ruble = 5,782/$1.00 (CB rate)

Ruble = 5,760|5,804/$1.00 (buy|sell rates)

Details of the Turkish-Ukrainian Oil Deal

• Yesterday, Ukraine's Anatoly Minchenko, state minister for industry policy and energy, and Turkish energy minister, Recai Kutan, signed an agreement in Ankara to build a Mediterranean-Black Sea pipeline, reported Reuters. "We have not decided on whether the pipeline should be a single one or a twin pipeline," said KUTAN. "If a pipeline that will carry 40 million tons of oil annually is built at the first stage, the costs will be $650 million. A second one to be built next to it with a 30-million-ton capacity will mean another $450 million in investment," he added. It is still undecided whether the construction will involve a single or a twin pipeline, depending mainly on its capacity. The total capacity per year is expected to reach 70 million tons of oil. The pipeline will carry only in one direction - to Ukraine.

Turkey's Botas and Ukraine's Ukrzakordon-naftogazbud companies will set up a joint venture to

carry out the project. Passing though theTurkish towns of Kayseri, Sivas and Tokat, the contract includes a set transit fee of $5 per ton. This will bring $75 to $225 million in revenue to Turkey. KUTAN also mentioned that the pipeline will not interfere with the international consortium developing Caspian and Kazakh oil fields or other plans to establish a pipeline from Baku to Ceyhan.

China and Russia: Anticipated Energy Accord

• According to Russian diplomats, China and Russia are expected to finalize a $7 billion "framework" agreement on the exploitation of Siberian natural gas and oil reserves. The agreement includes the construction of pipelines to China, reports the FT today. The accord will most likely be signed during a meeting between Russian Prime Minister Viktor Chernomyrdin and his Chinese counterpart Li Peng in Beijing on June 27. CHERNOMYRDIN will be accompanied by Gazprom officials.

The project will require developing a number of pipelines from gas and oil fields in Irkutsk, Krasonyarsk and Yakutsk. The pipelines will pass through Mongolia en route to China's Yellow Sea. The project will allow 20 billion cubic meters of gas to flow annually.

By the year 2000, China's accelerating economic growth will almost double the country's demand for energy. Depending on coal for almost 80 percent of its energy, the Chinese government is looking at natural gas as an alternative source of energy. Officials estimate China's oil imports at 50 million tons by 2000, representing a 28 million-ton increase from last year. China`s domestic oil output reached 157 million in 1996. Worldwide, 1996 experienced strong growth in energy demand, increasing 4.7%.

Since the 1960 break up between the two countries, Sino-Russian relations have been steadily improving. Beijing projects a total trade to reach $8-10 billion this year, and $20 billion by 2000. Some experts fear that these trends will increase pressures on the Center to influence events in the Russian Far East. This could includes uccessionist demands.

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

available for non-profit institutions.

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 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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