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

Monday, June 9, 1997

Russian Federation

Politics

Former Tula Governor Arrested for Corruption

· One day after Russian President Boris YELTSIN warned regional officials that they were not outside of range of the federal government's latest anti-corruption campaign, the former governor of Tula Oblast Nikolai Sevryugin was detained on bribery charges. A police source told Itar-Tass that Sevryugin and his son, an executive at a Moscow commercial bank, were arrested and taken to an investigation ward on Thursday.

The Tula region prosecutor's office confirmed that the former governor, who was in the office during 1991-1997, and his son, were arrested for bribery. Sevryugin is reportedly charged with receiving a bribe worth $100,000 and for abuse of office to the advantage of a number of commercial structures. SEVRYUGIN lost the governor's seat to a Communist rival in a March election in Tula.

In February of this year, Sevryugin's deputy and chairman of the Tula region property management committee Boris Shapovalov was sentenced to six years in jail for the abuse of office and misappropriation of state property and his assets were confiscated. A criminal case was also filed against Shapovalov's aide Valery Salnikov, who headed a regional fund for the protection of deceived depositors, on charges of "misappropriation and embezzlement of property."

New Presidential Appointments

· Russian President Boris Yeltsin today signed a decree appointing Boris Agapov, vice-president of Russia's Republic of Ingushetia, as a Security Council deputy secretary, said the presidential press service. Agapov's appointment is apparently con

nected with the role he played in the settlement of the Chechen conflict.

Agapov, 51, is a graduate of the Frunze Military Academy, serving in Afghanistan during 1987-1989 and as deputy commander of border troops and head of the Main Operations Department in 1991-1993.

In April 1993, he was elected Ingush vice-president. On May 15, 1997, the Ingush parliament abolished the post of vice-president, but AGAPOV was to remain in his post until the next presidential elections in 1998.

Yeltsin on Friday signed a decree appointing Aleksei Ogarev as a new deputy chief of the presidential staff, said the presidential press service. OGAREV will report to presidential administration head YUMASHEV.

Russian Officers Seen Likely to Quit

· Many officers in the ailing Russian armed forces are planning to quit when their contracts expire, reported Interfax on Sunday. "This intention is prompted by their miserable existence and lack of any prospects for the future," Interfax quoted an unidentified Defense Ministry expert as saying. The expert was citing the results of a recent sociological study conducted by the Ministry.

Most Russian army officers signed five-year contracts in 1992 when post-Soviet Russia set up its armed forces. These contracts will begin expiring later this year.

Today's News Highlights

Russia

Russian Officers to Quit

The Week's Happenings

World Bank Loans Multiply

New Baltic Terminals Planned

European Republics

Ukraine-Iran Cooperation

S&P's Rates Lithuania

South Caucasus & Central Asia

Kazakh-Trans World Project

Kazakh-Iran Oil Trade Deal

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Monday

June 9, 1997

Intercon's Daily

This Week's Happenings

¨ Russian First Deputy Prime Minister Boris Nemtsov will visit Japan on June 8_11 to discuss trade and economic issues, but said he will not touch on the issue of the disputed Kuril Islands during the trip.

¨ Scientists from Russia and the US studying the natural and cultural resources of the Kamchatka peninsula of the Russian Far East will meet at Columbia University June 8_11 to expand cooperation and develop collaborative projects. Sponsored by the Center for Environmental Research and Conservation and the Harriman Institute at Columbia, the four-day meeting will bring together leading environmental scientists, anthropologists, and other researchers. Until 1991, Kamchatka was closed to foreigners by the former Soviet Union.

¨ On June 9, Russian Federal Securities Commission chairman Dmitri VasilIyev will travel to the US to hold talks with World Bank officials on a proposed loan to Russia for the development of the stock market.

¨ On June 10, Russia's Federation Council will discuss state regulation of the economy and vote on extending the mandate of Russian peacekeepers in Georgia's separatist region of Abkhazia.

¨ Azeri President Geidar Aliyev will visit Almaty on June 10_12 to discuss, among other issues, a proposed undersea pipeline to link Azerbaijan and Kazakhstan across the Caspian Sea.

¨ Russia will launch a roadshow of its dollar-denominated third Eurobond issue from Seoul on June 11 to be completed in New York on June 18. The new issue is expected to match the previous one of DM2 billion.

¨ The first session of the Parliamentary Assembly of the Union of Russia and Belarus is to take place in Brest tentatively on June 12_14. The Assembly consists of members of both houses of the Russian and Belarussian parliaments.

¨ Ukrainian Prime Minister Pavlo LAZARENKO will visit Canada from June 12_16 to meet with his Canadian counterpart Jean CHRETIEN.

The study showed that 61 percent of the officers are suffering from chronic financial problems and 29 percent are living below the poverty line, said Interfax. A Russian army colonel earns less than $200 a month and soldiers are often not paid for months.

Economy

Ruble = 5,764.5/$1.00 (NY rate)

Ruble = 5,778/$1.00 (CB rate)

Ruble = 5,758|5,798/$1.00 (buy|sell rates)

World Bank Sees $6 Billion for Russia

· The World Bank on Friday announced the approval of a new country strategy for Russia under which Bank lending will be substantially expanded in support of Russia's ambitious reform program, said a Bank press release. As a first step in implementing the strategy, the Bank also approved six loans totaling $884.6 million to Russia to help strengthen economic stability and foster improvements in education, health, economic analysis, enterprise restructuring and the wholesale electricity market. The Bank's financing is aimed at helping Russia overcome delays in public and private sector reforms needed to unleash rapid growth and improve living standards.

The World Bank's funding includes a $600 million loan for Structural Adjustment, which will help the government focus on a range of sectoral reforms to promote renewed economic growth while maintaining economic stability.

A $71 million loan is earmarked for an Education Innovation Project that will improve higher and secondary educational systems through improved social science curriculums and textbooks.

A $66 million loan for a Health Reform Pilot Project is expected to improve public heath services in maternal and child care, and help promote cardiovascular health in two regions—Kaluga and Tver— providing information to enable the national adoption of specific reforms.

A $22.6 million loan for a Bureau of Economic Analysis Project which will improve economic research capabilities to ensure the effectiveness of market-oriented policies.

When you need to know it as it happens

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A $85 million for an Enterprise Restructuring Services Project that is aimed at improving the performance of private enterprises and their access to financial markets and contribute to the development of Russia's consulting industry.

And finally, $40 million for an Electricity Sector Support Project that will fund advisory services to help the government increase the efficiency and reliability of the electricity supply and will enhance the sectoral financial viability.

"Russia is at the crossroads of its economic reform program," Johannes LINN, Bank vice-president for the Europe and Central Asia region, is quoted as saying. "We have a tremendous window of opportunity to help accelerate Russia's economic recovery. Both Mr. WOLFENSOHN and I traveled to Russia this spring, where we witnessed profound improvements in our work program: the percentage of satisfactory projects has increased from 39 to 65 percent, disbursement levels for investment loans have tripled from $294 million in January 1996 to $1.027 billion as of March 1997. As long as the government pushes ahead with accelerated reform efforts, we are prepared to expand our assistance to $6 billion over the next two years. These six loans will firmly lay the groundwork for the first phase of our future financial and advisory assistance to Russia."

Business

New Cargo Terminals to Punish Baltics

· Russian President Boris Yeltsin signed a decree on cargo transit via coastal areas of the Gulf of Finland in St. Petersburg Friday, reported Itar-Tass. The decree provides for construction of three cargo terminals in Primorsk, Ust-Luga, and the Batareinaya bay, the Gulf of Finland, said presidential spokesman Sergei Yastrzhembsky. One of the terminals will be used for oil, the other for petroleum products, and the third for dry cargo.

The spokesman noted that Russia will be now able to avoid transit via the Baltic republics "which should think over their policy on Russia."

The former Soviet Union had nine Baltic ports with a capacity of about 87 tons of petroleum products, but independent Russia has only four terminals with a capacity of 22 million tons. Today, Russia has to

use foreign ports for cargo transit and loses about $600-700 million in the transshipment of 50 million tons of petroleum products abroad, he said.

European Republics

Ukraine-Iran Economic Agreement Signed

· Ukrainian Foreign Minister Gennady UDOVENKO and his Iranian counterpart Ali Akbar VELAYATI signed an economic cooperation agreement in Kiev today, reported Reuters. "The main goal of this treaty is to give a boost to trade and economic cooperation," UDOVENKO told reporters.

VELAYATI told the press conference that the two countries would hold talks on Ukraine buying oil from Iran during an upcoming visit to Tehran by Ukraine's state minister in charge of energy Anatoly MINCHENKO.

Standard & Poor's Rates Lithuania

· Standard & Poor's today has assigned its triple-'B'-minus rating to the Republic of Lithuania's long-term foreign currency debt and its triple-'B'-plus rating to Lithuania's long-term local currency debt, said S&P CreditWire today. Standard & Poor's also has assigned its `A-3' short-term foreign currency and `A-2' short-term local currency ratings to the republic. The outlook is stable.

Lithuania's ratings reflect: (1) The government's commitment to market-based economic reforms, and its plans for accelerating the second phase of privatization in an environment more favorable for foreign equity investment; (2) The country's achievements in fostering the growth of the private sector (estimated to account for 68 percent of GDP) and expanding foreign trade while reducing dependence on countries of the former Soviet Union; (3) Broad support for ongoing fiscal reforms and prudent monetary management, including a cautious plan to unwind the existing currency board, which has been

instrumental in building credibility in the local currency (the litas) and dramatically lowering inflation; and (4) The flexibility provided by the country's low government debt (23 percent of GDP in 1996) and net external debt (6.5 percent of exports) burdens, though their rates of increase have been high relative to those of Lithuania's peers.

The ratings are constrained by: (1) The risk that further delays in the privatization process and/or

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When you need to know it as it happens

Monday

June 9, 1997

Intercon's Daily

persistent administrative difficulties will still inhibit foreign direct investment flows and lead to more rapid increases in the external debt burden than exhibited by sovereigns at similar stages of development; (2) Low, albeit rising, income levels, an oversized inefficient energy sector that suffers from arrears (which are declining), low capacity utilization, and accounts for a large trade deficit; and (3) Pressure in the banking system, which benefits from strengthened regulation and supervision, but is still restrained by asset quality problems and low financial intermediation, and can only gradually finance higher investment and faster economic growth.

The higher local currency rating reflects the government's success in deficit reduction, and in monetary management The credibility engendered by the currency board has led to sharply lower inflation estimated at 12 percent (average basis) in 1997. A growing T-bill market (with rates falling and maturities lengthening) also supports the local currency rating and underpins ongoing development of the still narrow capital markets.

Accelerated privatization and restructuring of large enterprises, along with conservative fiscal and monetary policies, should lead to faster output growth over the remainder of the decade. The cost of restructuring the energy and banking sectors could result in some slippages in fiscal and external performance, but downward ratings pressure is unlikely, given the buffer provided by low government debt levels. The political commitment to privatization, deficit reduction, and a cautious pace in moving away from the currency board suggest that any deterioration would be limited, said S&P's.

South Caucasus & Central Asia

Kazakh-Trans World to Built Smelter

· Kazakhstan and British metals trading firm Trans-World Group announced on Saturday the start of a $1.2 billion project to build Kazakhstan's first aluminum smelter and increase alumina output in the

country, reported Reuters. Kazakh President Nursultan NAZARBAYEV was present at the ceremony to begin construction of the plant near Pavlodar, about 1,500 km north of Almaty. The new smelter, which is expected to take three years to complete, would have an annual capacity of 200,000 tons.

US Bechtel, which specializes in the construction of aluminum smelters worldwide, is currently conducting a feasibility study for the new plant.

Trans-World chairman David RUBIN told Reuters that his company would invest $200 million in the project and the remainder of the cost would be raised from international financial institutions. The plant is expected to cost $720 million to build, while some $190 million would be spent to increase alumina output and open several new bauxite mines.

The project aims to increase alumina output at Kazakhstan's only alumina plant near Pavlodar by 400,000 tons to 1.5 million tons. The alumina plant is controlled by White Swan Ltd., a British-registered company cooperating with Trans-World, which bought a power plant in the area last year.

Kazakhstan has bauxite reserves estimated at 150 million tons, but processes it only into alumina, or raw aluminum, which is sold to smelters in Russia.

Kazakh-Iran Oil Trade Begins

· Iran has exported 67,500 tons of crude oil on behalf of Kazakhstan under an oil swap arrangement between the two countries, reported the Islamic Republic News Agency (IRNA). The agreement calls for the Kazakh state oil and gas company to deliver crude oil to Iran via northern Iranian ports on the Caspian Sea. In turn, Iran will export the same amount of oil on behalf of Kazakhstan via the Gulf.

Under the deal, Kazakhstan would offer two million tons of its crude to international markets via Iran. The volume would gradually increase to six million tons per year. Kazakhstan has said that it will export one million tons of its crude oil via Iran this year.

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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