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, July 10, 1997

Russian Federation

Rokhlin Forms Army Support Movement

· In an interview with Ekho Moskvy radio today, Russian State Duma defense committee chairman Lev Rokhlin denied that his recent letter to President Boris Yeltsin and to army officers sought either a political end or the army's disobedience. The letter blamed Yeltsin for the war in Chechnya and accused him allowing the deterioration of the army through neglect and of ignoring threats to Russia's national security. However, the letter, published in the Russian press in late June, also called for the formation of a pan-Russian movement in support of the army and the military-industrial complex and this movement has followed closely on its heels.

The organizing committee for the movement had its first meeting on Wednesday, reported Itar-Tass. The board of the new movement is already in place and is made up of former army and KGB leaders, and members of the radical communist opposition.

The organizing committee includes General Valentin Varennikov, who helped lead the 1991 coup against Soviet President GORBACHEV; former Defense Minister Igor Rodionov; former KGB chairman Vladimir Kryuchkov, who also led the 1991 coup; and Leonid Shebarshin, a former senior KGB official.

The movement's program was authored by Rokhlin, Rodionov, General Albert Makashov, the military leader of the parliamentary uprising in October 1993, and Stanislav Terekhov, the leader of the nationalist Officers' Union.

The new movement "on no account will be politicized," Rokhlin said in the radio interview. "This is impossible. The sole slogan now is protection of the army, the military, the defense industry," he said,

adding that he will never allow himself to be led by "any adventurer." He flatly denied the possibility of his movement's backing any candidate in the next presidential election, scheduled for the year 2000.

Despite ROKHLIN's denials, it is difficult to see how this new movement can obtain its objectives without entering the political fray in Russia. In fact, the only clear alternative to political action, would seem to be military action. Given the composition of the movement's organizing committee, one can certainly imagine that a coup is being considered.

Interior Ministry Troops Commander Quits

· The commander of Russia's Interior Ministry troops, Colonel-General Anatoly Shkirko, announced on Wednesday that he was resigning because of poor health, reported Itar-Tass. Shkirko commanded federal forces in Chechnya from October to December 1995.

Ruble = 5,775/$1.00 (NY rate)

Ruble = 5,784/$1.00 (CB rate)

Ruble = 5,773|5,795/$1.00 (buy|sell rates)

Two Major Russian Banks Merge

· Two of Russia's largest, richest, and most well-connected investment banks, Renaissance Capital Group and Mezhdunarodnaya Finansoviye Kompaniya (MFK) have announced a 50-50 merger to create MFK-Renaissance, reported the Associated Press (AP) on Wednesday. The new bank will

Today's News Highlights

Russia

Two Major Russian Banks Merge

WaveRider Gets Russia Contract

South Caucasus & Central Asia

Georgia Deals w/For. Adoption

WWM Stops Uranium Exports

UK-Spain Co. to Explore for Oil

Intercon Special Report

Guest Article from the Embassy of the Kyrgyz Republic:

Kyrgyzstan Rediscovered

Politics-Economics-Business

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Thursday

July 10, 1997

Intercon's Daily

have assets of more than $2 billion, about $1 billion under management, and about 600 employees.

Boris Jordan, a US citizen of Russian descent who heads Renaissance Capital, will become the president and chief executive of the new bank. Jordan opened CS First Boston's Moscow office in 1992, making millions for the company in the early years of economic reform and privatization, and establishing himself as a pioneer foreign investor in Russia. In 1995, JORDAN left CS First Boston to form Renaissance with the backing of Russian commercial bank Uneksimbank. Jordan said in a press release that MFK Renaissance will be a key player in linking Russian and international markets.

Uneksimbank president Vladimir Potanin will become the chairman of the board of directors of MFK-Renaissance. MFK was founded by Uneksimbank in 1992 and has acted as a financial and brokerage arm for the bank in a number of transactions.

Uneksimbank is Russia's third largest bank in terms of assets and POTANIN has impressive government connections, even having served a short stint as a first deputy prime minister. He was appointed in August 1996, following President YELTSIN's re-election, and removed in the Cabinet reshuffle of March 1997.

Uneksimbank has been criticized for its role in the controversial shares-for-loans program, through which it gained large stakes in such major Russian companies as Norilsk Nikel and the Novolipetsk Metallurgical Combine. MFK-Renaissance has already announced plans to bid in a tender for a 25 percent stake in state telecommunications holding company Svyazinvest, according to RFE/RL.

WaveRider Wireless Gets Russia Contract

· Canada's Major Wireless Communications Inc., a wholly owned subsidiary of WaveRider Communications Inc., announced on Tuesday the signing of a $33.625 million distribution contract with telecommunications service and products company Elkatel of Moscow, said a WaveRider press release. The contract covers an initial term of 24 months for the distribution of the Major Wireless Last Mile Solution™, a communication technology utilizing spread-spectrum modems as an alternative to Telco-provided local loops and dedicated lines.

South Caucasus & Central Asia

Georgia Seeking Solution to Adoptions

· Georgian President Eduard SHEVARDNADZE will soon announce the formation of a presidential commission to govern issues related to the adoption of Georgian babies by foreigners until legislation on the issue can be instituted. The Georgian parliament last month passed a new adoption law in the first reading, but left for summer recess before the law could be submitted for final approval.

Adoption problems in Georgia were highlighted in a June 29 New York Times article that reported that several US couples were in Tblisi awaiting the release of promised infants. Following complaints last year within Georgia of fraud and corruption surrounding foreign adoptions, SHEVARDNADZE in December suspended foreign adoptions until legislation governing the process could be passed.

The moratorium caused problems with adoptions already in progress and strained US-Georgian relations, but the President is expected to take steps toward resolution in conjunction with his visit to the US next week. Intercon sources in Georgia suggest 12 children waiting to be adopted by US parents will be released in the near future.

WWM's Kazakh Uranium Exports Suspended

· Canada's World Wide Minerals Ltd. said on Tuesday that it has not yet received the necessary export permits from the Kazakh government allowing it to export uranium to the US, reported Dow Jones. The company is trying to complete a sales contract for 340,000 pounds of uranium to be delivered to a US nuclear power utility by late 1997.

Because of the delay, the company has temporarily suspended operations at the TGK mines and mill.

World Wide said the permit was required under a 1993 agreement between the US and Kazakh governments which settled an earlier anti-dumping action brought against Kazakhstan, Russia, and Uzbekistan. The agreement set up a quota system, which expires in 2000, allowing only 1.4 million pounds of Kazakh uranium to enter the US each year.

The company said that under its agreement to manage, with the option to buy, the TGK uranium

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project, it is entitled to export all the uranium produced at the mine, if it obtains the required licenses.

World Wide said an unnamed previous purchaser of uranium from KATEP, a Kazakh government agency, claims that KATEP has granted it the exclusive right to market Kazakh uranium in the US and make full use of the quota. World Wide believes it is entitled to an export license for a share of the quota and is working on the issue with the Kazakh government.

UK-Spanish Group in Kazakh Oil Deal

· A consortium of Spanish oil firm Repsol and Britain's Enterprise Oil Plc signed an agreement with the Kazakh government on Wednesday to explore and produce oil at the Baiganinsk deposit, reported Reuters. Repsol holds a 60 percent stake in the consortium and Enterprise has the remaining 40 percent. The two companies expect to invest $25 million in the contract over the next six years.

Today's Kyrgyz Republic has much to offer international businessmen. Foreign investors are rediscovering the country once known as a key trading center between Eastern and Western markets, and finding a market again rich in potential growth and investment opportunities.

For all those reasons and many more, Kyrgyzstan has been acclaimed by President Clinton¾who warmly received President AKAYEV when he visited Washington in May 1993¾and by Vice President Gore, who visited Kyrgyzstan in December 1993.

The United States has officially expressed its commitment to devoting significant resources to Kyrgyzstan and to encouraging and supporting American private investment there. Indeed, during the five years of its independence, Kyrgyzstan has received special attention from the United States whose continued support is of colossal importance to the Kyrgyz people.

For all those reasons, American corporations and competitors in many other nations are focusing more and more attention on the opportunities in Kyrgyzstan. The upcoming visit of President AKAYEV to the US on July 10-15 will be especially aimed at the promotion of the US-Kyrgyz business cooperation.

Investment Climate

n Strategic location at one of most important junctions of the legendary Silk Road

n Skilled, educated, and adaptable labor force

n Political and economic stability

n Low inflation, and stable, freely convertible national currency

n Long-term, competitive financing for large and small investment projects

n Favorable tax system

n Nearly completed program of privatization

n Development opportunities in agriculture, manufacturing, electronics, mining, energy, tourism, telecommunications, and transportation

Kyrgyzstan, among all of the countries of the former Soviet Union, has instituted rapid institutional reforms and a reasonable tax regime favoring foreign investment. Individuals or legal entities enjoy unrestricted trade with Kyrgyzstan, although they must complete a customs declaration.

INTERCON SPECIAL REPORT:

FOCUS ON KYRGYZSTAN

Today, the Daily Report on Russia & the FSU

presents a guest article from the Embassy of the Kyrgyz Republic in Washington, DC.

Kyrgyzstan Rediscovered

The Kyrgyz Republic is a stable and contemporary country which offers strategic opportunities in a newly opened market. Many economic and political changes have occurred during the five years since the republic secured its independence and ended more than 70 years of Soviet rule¾new financial legislation, institutional restructuring, and the development of a private sector.

The transition to a free-market economy has not been without its trials, but the successful results of an earnest reform program are evident: World Bank membership¾1992; the first former Soviet republic to break from the ruble zone with the introduction of its own currency¾1993; Asian Development Bank membership¾1994; observer status with the World Trade Organization¾1996; membership in the United Nations, the European Bank for Reconstruction and Development, and the Islamic Development Bank; and many regional economic cooperation and integration agreements. And the list goes on.

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Foreign investment in legal entities such as commercial partnerships, limited and unlimited liability companies, open and closed joint stock companies, or production cooperatives¾if such investment exceeds 30 percent of an enterprise's capital fund or the total sum earmarked for cooperative activities¾has no tax on profits for a set period of time: five years for manufacturing and construction enterprises; three years for mineral extraction or processing, agriculture, transportation or communication enterprises; and two years for trade, tourism, banking, or insurance enterprises.

After the expiration of the initial tax free period, taxes on profits are reduced by 50 percent if reinvested, by 25 percent if half the output is exported or is derived from imported raw materials, or if at least one-fifth of the profit is spent on professional training.

Kyrgyzstan offers particularly advantageous opportunities for investors in hydroelectric power, coal, minerals, and mining, electric machinery, wool processing and textiles, food processing, tourism, and transportation.

Kyrgyzstan's Civil Code went into effect on June 1, 1996, and is the basic document setting forth the legal principles of the new free market system. This remarkable document guarantees equality of persons in their relationships under civil law, and equal protection for individuals and property (including private property, including protection¾within specified limits¾from interference with private property by state entities). It guarantees the rights of persons to transfer property, and even more significantly, the freedom to conclude contracts between citizens and foreigners, with broad rights for participation in commercial enterprises.

At the end of June, the Kyrgyz Parliament adopted a new Law on Foreign Investment. In terms of overall structure, the law closely follows the "OECD Basic Elements for Foreign Investment Legislation for CIS Countries." Accordingly, the thrust is upon providing

investors with the full range of assurances against investment risk. Guarantees include national treatment, non-discrimination, expropriation, currency, convertibility, profit repatriation, and against ultra vires actions by officials. The guarantees, moreover, are given considerable "bite" through a provision in the Law which prevents any legislative act from worsening the legal regime for foreign investment, established by the new legislation. The compensation regime in the event of expropriation is well articulated and consistent with OECD and World Bank guidelines.

The Kyrgyz economy has stabilized over the past few years with important progress seen in key economic indicators. According to the National Statistics Committee, gross domestic product (GDP) grew by 5.6 percent in 1996, compared with 1995, amounting to 22.5 billion soms (more than $1.5 billion).

The budget deficit fell both in real terms and as a percentage of GDP. Industrial output increased by 10.8 percent and agricultural output by 13.1 percent. Annual inflation in 1996, however, remained at about 34 percent, compared with 32 percent in 1995.

President AKAYEV's main goals for the economy in 1997 are to cut inflation to 17 percent, reduce the budget deficit, balance the budget, and increase employment.

The Ambassador

Baktybek Abdrisaev has served as the Ambassador of the Kyrgyz Republic to the United States since November 1996. He worked as a scientific fellow and conducted research at the Bishkek Polytechnical Institute from 1980 to 1987. Abdrisaev worked as a scientist at the National Academy of Sciences from 1988 to 1992. He joined the International Relations Department of the President's Office in 1992 and the next year became a head of this Department. He is a graduate of the Bishkek Polytechnical Institute with a specialization in automatics and electronics.

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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