DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Friday, June 6, 1997

Russian Federation

Politics

Yeltsin Lashes Out at Regional Corruption

· During a radio address today, Russian President Boris YELTSIN warned regional and local officials that they are not too far away from Moscow to avoid the government's anti-corruption campaign. "I know, there are many bosses who were given sweeping powers and had their pockets wide open," he is quoted by the Associated Press (AP) as saying. "They don't feel any shame or fear, thinking that being far away from Moscow allows them to escape all control. This is their mistake."

The president said that all officials, even those in far flung areas, must comply with a new government order to submit income and property declarations.

Yeltsin Suggests Referendum on Lenin

· Russian President Boris Yeltsin today suggested that a nationwide referendum be held next fall to decide what should be done with the dead body of Vladimir Lenin, currently laying embalmed in a Mausoleum on Red Square.

"Let the nation decide whether he should be buried according to Christian traditions or things should be left unchanged," Yeltsin told a session of the Presidential Council for Culture and Art at the State Russian Museum of St. Petersburg.

The Communist-dominated State Duma is strongly opposed to calls to remove LENIN from the Mausoleum. In April, the Duma passed a resolution denouncing as "vandalism" proposals to remove LENIN's body from Red Square and bury him.

Russian Journalists Released from Chechnya

· Four Russian journalists, held hostage in Chech

nya for three months, have been freed and returned to Moscow today. The four— Itar-Tass correspondent Nikolai Zagnoiko and Radio Rossiya staffers Yuri Arkhipov, Nikolai Mamulashvili, and Lev Zeltser—are reportedly unhurt after their ordeal.

Chechen Interior Minister Kazbek MAKHASHEV said that the release was the result of the "successful operation of all the republic's law enforcement agencies," reported the Associated Press (AP). He would not discuss details, but insisted that no ransom had been paid.

Some Russian news agencies reported that the kidnappers demanded a $2 million ransom, but while it is unclear if any money was paid, it is known that the kidnappers have not been arrested.

A three-member Russian NTV television crew, kidnapped in Chechnya on May 10, is still missing.

Chernomyrdin Conducts Business from Sochi

· Russian Security Council deputy secretary Boris Berezovsky and the head of Chechnya's southern oil company (Yunko), Khozh-Akhmed Yarikhanov, flew to Sochi today to meet with Russian Prime Minister Viktor Chernomyrdin who is vacationing there. The three men will discuss the details of the agreement on the transportation of Caspian Sea oil from Azerbaijan to the Black Sea port of Novorossiisk via Chechen territory. The agreement had been expected to be signed this week.

Today's News Highlights

Russia

Chubais on Income Gap

State to Sell 15% of Lukoil

S&P Rates St. Petersburg

Big Order for Vyborg Shipyard

European Republics

Ukraine to Do Major Sell-offs

Ukraine Parl. OKs Draft Code

South Caucasus & Central Asia

Unocal on Afghan Gas Pipeline

World Bank Loan for Kyrgyzstan

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Friday

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Intercon's Daily

Ruble = 5,767.5/$1.00 (NY rate)

Ruble = 5,777/$1.00 (CB rate)

Ruble = 5,758|5,796/$1.00 (buy|sell rates)

gap between the have and have-nots in Russian society, CHUBAIS told a presidential political advisory council meeting.

CHUBAIS noted that the government is now faced with a difficult choice: to pay wages or preserve welfare benefits. If these benefits are not cut, there will not be enough money to pay the salaries of state employees. "There is no reason and no justice behind this arrangement. It merely shows that certain politicians are out to make political dividends on it, or to avoid responsibility," he is quoted by RIA Novosti as saying.

State to Sell 15 Percent of Lukoil

· Russian privatization minister Alfred KOKH announced Thursday that the government will sell a 15 percent stake in Russian oil conglomerate Lukoil, reported Dow Jones. The placement will come in the form of options, as well as an investment tender, he said, but refused to provide details. The government owns 33 percent of Lukoil.

The state will also sell stakes in six smaller oil companies next week through specialized cash auctions, at which bidders deposit cash for participation and a share price is set to ensure that all bidders get at least one share. KOKH said there are no restrictions on foreign participation in the auctions.

Russia-Cuba Oil-for-Sugar Swap Set

· The Russian government has decided to import 3.25 million tons of raw sugar from Cuba in 1997 in exchange for 9.75 million tons of oil, reported Prime-Tass today. The deliveries must be financed from non-budgetary sources, said the decision.

A tender will be held by the Interdepartmental Tender Committee, headed by Russian Deputy Trade Minister Vladimir Karastin, to choose the organizations that will take part in the deal.

S&P's Rates St. Petersburg Debt

· Standard & Poor's on Thursday assigned its double-'B'-minus long-term foreign currency debt rating to the City of St. Petersburg's $300 million bonds due 2002, said S&P's CreditWire. The rating is constrained by the double-'B'-minus foreign currency sovereign rating of the Russian Federation. The outlook is stable.

Jan Feb Mar Apr May Jun

Israeli Infrastructure Minister Ariel Sharon is scheduled to fly to Sochi this evening to meet with Chernomyrdin.

Duma Ratifies Russia-Belarus Treaty

· The Russian State Duma today voted 363-2, with 19 abstentions, to ratify the Belarus-Russia Union Treaty, signed in Moscow on April 2, and the Union's Charter, which was signed on May 23. It will now have to be approved by the Federation Council and signed by the president.

The lower house of the Belarus parliament unanimously ratified the Treaty and Charter on May 30. The Belarus upper house will consider the ratification law on June 11.

Economy

Chubais Says Income Gap Narrowing

· Russia First Deputy Prime Minister Anatoly CHUBAIS said Thursday that the gap between rich and poor Russians has narrowed for the first time in five years, reported RIA Novosti. The averages incomes of the richest 10 percent of the population exceeded the poorest 10 percent 13-fold in January 1997, compared with a 16-fold gap in January 1996. Twenty-two percent of the population had incomes below the subsistence level in January of this year, down from 35 percent at the beginning of 1996.

These statistics support the contention of government experts that lower inflation has narrowed the

When you need to know it as it happens

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St. Petersburg's rating is based on: (1) Tempered growth due to ongoing restructuring of inefficient heavy and military-related industries, restrained development of service and financial sectors, and large hidden economy and tax arrears restricting revenue growth; (2) An evolving intergovernmental system and reevaluation of tax allocations and expenditure responsibilities as part of Russia's need to meet its budgets; (3) Low income levels on an international scale (approximate average annual wage per capita of $1,980); (4) Although actively being addressed by the city, continued demand for high levels of subsidization of housing, utilities, and transportation (largely determined by federal regulations) burdens the city's finances; (5) Untested capacity of city districts to manage spending priorities and fiscal reform; (6) Restricted revenue flexibility because of federal control over tax rates and allocations; and (7) Large capital expenditure requirements in transport, housing, infrastructure modernization, and health care.

Supportive factors include: (1) Low current and forecast indebtedness (direct debt equals 40 percent of 1997 budgeted revenues and under seven percent of GDP (Eurobond proceeds are to be used to restructure the current debt portfolio, thereby reducing annual debt service); (2) The city government's comprehensive fiscal and economic policies, which are at the forefront of Russian regional reforms; (3) The city's importance and growth potential as a cultural center, strategic transportation hub, home of leading Russian research and higher education institutions, and as the second largest city in Russia; (4) Second largest recipient of non oil and gas-related foreign direct investment after Moscow; (5) The city's relative fiscal strength, reflected in its net contributions as one of 10 donors to the federal budget; and (6) Good budgetary management resulting in operating surpluses in volatile and difficult tax collecting and interest rate environment, anticipation of overall balanced budgets starting in 1998, plans on developing financial reporting which currently remains unaudited, and good treasury management.

Although the City of St. Petersburg will be challenged by further restructuring of its industrial base, its significance as a cultural center and its strategic location should enable the city to grow in line with the

national average. Management is expected to pursue its ambitious plan of restraining net new borrowings, said Standard & Poor's.

Business

Lukoil President to Jordan & Iraq

· The president of Russian oil conglomerate Lukoil, Vagit Alekperov, left for Jordan today and from there he will travel to Baghdad where he is to meet Iraqi President Saddam Hussein, reported Itar-Tass. Alekperov and Hussein will apparently discuss the decision of the UN Security Council to extend for another six months, beginning on June 8, the oil for food scheme which allows Baghdad to export $2 billion worth of oil.

Another likely subject of the talks will be the contract signed in March 1997 on the participation of Russian oil companies in the development of Iraq's largest oilfield West Qurna_2, which will begin after international sanctions imposed on Iraq in 1990 are lifted.

Lukoil holds a 52.5 percent stake in the West Qurna_2 project. Two other Russian oil companies, Mashinoimport and Zarubezhneft, own 11.25 percent stakes. Iraq's stake in the project is 25 percent.

Oil reserves at the West Qurna_2 deposit are estimated at over one billion tons and the annual output at 35 million tons beginning 8-10 years after tapping.

The total investment in the project is put at $3.7 billion. Alekperov told Itar-Tass that the West Qurna_2 development project would "become a first step on the way of Russian companies back to Iraq" after the sanctions are lifted.

Kvaerner-Russia Shipyard Wins Order

· Norwegian shipbuilding and engineering firm Kvaerner ASA announced today that the Vyborg Shipyard in northwestern Russia has won a 500 million krone (about $70 million) contract to build 10 standby vessels for Summer Wind Navigation Inc., reported Reuters. Kvaerner said the vessels would be delivered during 1998 and 1999.

A Kvaerner official said the deal would enable the company to lay the foundations for developing Vyborg into a modern shipyard and to provide a bridgehead for Kvaerner into Russia.

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In September 1996, Kvaerner increased its stake in Vyborg Shipyard to 75 percent of voting shares. Kvaerner said at the time that its investment in the yard to date totaled about $7.75 million.

now or this may be a dry hold [if the fighting continues]," Unocal vice-president Martin Miller is quoted as saying. But Unocal is in it for the long haul and is "willing to risk a considerable sum of money" on developing the project.

Unocal officials today ended two days of meetings with a working group of Pakistani and Turkmen officials, said United Press International (UPI). The group is to meet again in Ashgabat on June 24. Miller said the working group has begun "tough" negotiations over the gas price, which will fall somewhere between the high cost of imported fuel and the low price of domestically produced Pakistani gas.

World Bank Farm Loan for Kyrgyzstan

· The World Bank on Thursday approved a $16 million Rural Finance Credit to the Kyrgyz Republic, said a World Bank press release. The goal of the project is to provide financial support and to establish a necessary institutional system to further maintain the services to the undeveloped rural sector of Kyrgyzstan during the next three years.

The initiation of a commercially sustainable banking system is expected to stimulate the privatization process and provide financial services to the rural population in the longer term.

The World Bank project consists of three components: Kyrgyz Agricultural Credit Cooperation (KAFC)¾a replacement in the failing Agroprombank, which will enable the corporation to provide credit on commercial terms to support the ongoing process of farm restructuring and agribusiness enterprise privatization; Small Farmers' Credit Outreach Program (SFCOP)¾the establishment of an institutional framework for providing rural financial services on a commercially sustainable basis in the long-term; Institutional and Policy Component technical assistance under KAFC and SFCOP and promotion of institutional, legal, and policy changes or innovations which will directly enhance successful achievement of the project objectives.

European Republics

Ukraine Plans Major Privatizations

· The Ukrainian parliament this week approved a plan to privatize 4,222 large- and medium-sized state enterprises in 1997, reported RFE/RL Newsline, citing Interfax-Ukraine. The companies, some of which will be restructured before they are privatized, will be purchased either with cash or with the privatization "vouchers" passed out to every Ukrainian. The vouchers were given to citizens to compensate them for financial losses during the years of hyperinflation immediately following the country's independence from the Soviet Union in late 1991.

Ukraine Parliament Backs Civil Code

· The conservative Ukrainian parliament on Thursday approved the country's draft civil code on its first reading, reported today's Financial Times. "This is the most important step the parliament has taken since passing the Constitution," Justice Minister Sergei GOLOVATY is quoted as saying. "This is a big step in our progress towards market reforms and legal reforms."

The code will be reviewed by a parliamentary commission during the summer and will return to the parliament for a second reading in October. If passed, the code could become a significant force in stabilizing Ukraine's business environment, said the FT.

South Caucasus & Central Asia

Unocal Plans Pipeline after Stability

· US Unocal Corp. will delay building a $2 billion natural gas pipeline from Turkmenistan to Pakistan via Afghanistan until a "stable, internationally recognized government" is in place in Afghanistan, reported Dow Jones, citing a Unocal official. "That may be the end of this year, next year, or three years from

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Managing Editor

Svetlana Korobov, Contributing Editor

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