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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

Tuesday, July 15, 1997

Russian Federation

Politics

Vavilov Denies Guilt in Bank Scandal

· Former First Deputy Finance Minister Andrei VAVILOV today said that he approved the transfers of federal funds to commercial banks in full compliance with the law, reported RFE/RL. Russian Central Bank chairman Sergei Dubinin recently accused Vavilov of complicity in two fraudulent deals which misappropriated over $500 million in government budget funds.

In addition, the International Financial Co. (MFK) bank press service told Prime-Tass on Monday that Vavilov is currently in Moscow and is employed as the bank's president. Recent reports said that Vavilov was abroad and had left MFK.

It was announced last week that Vavilov would step down as MFK president after the bank merges with Renaissance Capital. However, the merger will not be complete until January 1 and VAVILOV will reportedly remain in his post until that time.

Uneximbank president Vladimir Potanin, who made the announcement that Vavilov would not work in the new bank to be produced by the merger, said Vavilov might become president of the financial-industrial group Interros after the merger.

Russia-Chechnya Security Services Accord

· Russian Federal Security Service (FSB) director Nikolai Kovalyov and Chechen security chief Abu Movsayev signed a provisional cooperation accord today in Yessentuki, a spa town in the North Caucasus. FSB senior spokesman Aleksandr Zdanovich told Itar-Tass that the accord foresees the cooperation of Russian and Chechen security services in combating terrorism, sabotage, recruit

ment of mercenaries, hostage-taking, economic crimes, arms and drug trafficking, and in the search for kidnapped people and for the graves of victims of the 21-month conflict.

Kovalyov and Movsayev also agreed on exchanges of information, inquiries of criminal proceedings, and assistance in investigation.

Economy

Ruble = 5,770.5/$1.00 (NY rate)

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

Ruble = 5,771|5,797/$1.00 (buy|sell rates)

Russia Considers Currency Denomination

· The Russian Central Bank is studying other countries' experiences in denominating their inflation-ravaged currencies to eliminate excess zeroes, but has not decided whether to make any adjustments to the ruble's value, reported Dow Jones. "We need to evaluate the economic situation in the country and decide where we need to conduct a denomination at all, since the new generation has already gotten used to operating with this money," Bank chairman Sergei DUBININ is quoted as saying.

The ruble has fallen in value to about 5,784 to the US dollar now from being worth about 1.6/$1.00 during Soviet times.

Russian Central Bank officials have examined the experience of Ukraine, which replaced its karbovanets currency with the hryvnia at a rate of 100,000:1.

Today's News Highlights

Russia

Port Defies Outside Control

Three Russians Make Forbes

Warburg-Brunswick Form JV

AssiDomain Seeks Control of JV

S&P's Looks at Banking Industry

South Caucasus & Central Asia

Major Sell-Off of Georgia Cos.

McDonald's Plans for Georgia

New Kazakh Dep. Eco. Min.

Kazakh Execs. Train in US

Politics-Economics-Business

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Tuesday

July 15, 1997

Intercon's Daily

Port Fights Off Outside Owners

· The general director of Russia's far eastern Vostochny Port Gennady Zhebelev has written to the Russian government, requesting that it prevent a controlling stake in the port from falling into the hands of US CS First Boston, reported Itar-Tass. This threat emerged, according to Zhebelev, after 20 percent of the port's shares, belonging to the state, were transferred by the Nakhodka city property fund to the federal property fund. The transfer was made to prepare for the sale of the stock, he said.

The most probable buyer of the stock is CS First Boston, which already holds a 21 percent interest in the Eastern Port.

Business

Three Russians Make Forbes Rich List

· Three Russian businessmen were included in Forbes' magazine's list of the Richest People in the World, which excludes dictators and royalty who have no direct role in managing businesses, published in the July 28 issue, reported the Associated Press (AP).

Russian Security Council deputy secretary Boris Berezovsky ranked 97th on the list and was estimated by Forbes to be worth $3 billion. BEREZOVSKY was head of the LogoVAZ auto group and a member of the board of Russian Public Television (ORT), among other business interests.

Mikhail Khodorovsky, president of Menatep bank, which controls the Yukos oil company and a number of other major enterprises, is worth $2.4 billion, ranking 133rd on the list.

Russian oil conglomerate Lukoil president Vagit Alekperov ranked 194th and is believed to be worth $1.4 billion. Lukoil is Russia's biggest oil company in terms of production and has a number of interests abroad.

Warburg, Brunswick Form Securities JV

· SBC Warburg and Brunswick Investments of Russia announced on Monday that they had created a joint venture, Brunswick Warburg, to specialize in the Russian banking and brokerage market, reported Dow Jones. SBC Warburg, the investment banking division of Swiss Bank Corp., will have a 50

percent stake in the venture. Brunswick, Russia's largest independent stockbroker, and its management will own the rest. Other financial terms were not disclosed.

The new joint venture will focus on investment banking and equities. Brunswick currently employs about 130 people in Moscow and New York, while SBC Warburg has a Moscow office of 10 people. The venture joins the deep-pocketed Warburg with the locally experienced Brunswick.

According to SBC Warburg chairman of emerging markets Rodney WARD: "We felt that Russia has the most potential of all European emerging markets, and it would take too much time to build up a business there ourselves in a market that is moving extremely rapidly," reported the Financial Times.

AssiDomain Seeks to Control Paper Venture

· Swedish pulp and paper group AssiDomain plans to acquire a controlling stake in Segezhabumprom, the Russian pulp and paper bag company that it manages and partially owns through a joint venture with Daventree, a Cyprus-based investment group, reported today's Financial Times.

AssiDomain plans to buy Daventree's 50 percent holding in Stratton Paper, which is jointly owned by the two groups and which boudhg a 57 percent stake in Segezhabumprom last year. AssiDomain paid $40 million last year for its 50 percent stake in Stratton.

The transaction is expected to allow production at Segezhabumprom to resume after a four-month shutdown. Operations were suspended after bureaucratic problems with the local Karelian and central governments prompted lenders to withdraw a planned $100 million loan for plant modernization.

AssiDomain said that most of the problems, relating to tax debts, pension fund payments, and land rights, have been resolved, according to FT.

The company plans to raise money to increase productivity at the paper plant through a new share issue to be held in conjunction with the European Bank for Reconstruction and Development (EBRD), the International Finance Corp. (IFC), and the Karelian government, which owns about a 20 percent stake in Segezhabumprom.

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	Tuesday		July 15, 1997
	Intercon's Daily
	S&P's Looks at Russian Banks · While Russian banks still face a relatively risky operating environment, some will be better able to adapt to the challenges than others, according to a report in Standard & Poor's CreditWeek. The report provides a general overview of the evolving Russian banking system and the challenges it faces, as well as the financial profiles and strategic strengths and weaknesses of the rated banks. "The risks of the Russian financial system are in many ways similar to those of other transition economies," said S&P's analyst Tanya Azarchs. Challenges facing Russian banks include: a brief track record of operating on a commercial basis; shortage of seasoned management expertise; tight liquidity conditions; difficulties in analyzing the condition of borrowers; a shortage of creditworthy borrowers; and, a general distrust among depositors wary of placing their savings in Russian institutions. Despite the challenges, Russian banks have made great strides in coping with the environment. Systems infrastructure has improved, International Accounting Standards audits are in their second or third year, credit departments are maturing, and security departments have become more effective in blocking access to criminal elements, said Azarchs. "The era of easy money, when banks were able to live off the wide spreads on government bonds, is over," she said. "The time has come when banks must begin in earnest to do what banks everywhere are ordained to do—which is lend money." Falling interest rates in Russia should spur loan demand, said Azarchs. To be able to fund demand for loans, banks are turning to Western capital markets. They began with syndicated loans and are preparing for Eurobond issues. Commercial paper may eventually be in the works. The client franchise will be a key determinant of success in the new world of intensified lending efforts, said Azarchs. Competition for "blue chip" customers is intense, and the "blue chips" cluster around a limited number of banks considered to be the most trustworthy. Increasingly, larger banks are members of formal or informal financial-industrial groups (FIGs).	The speculative grade long-term counterparty ratings and outlooks assigned to the Russian banks—Alba Alliance (single-'B'/stable), Alfa Bank (single-'B'/stable), Rossiisky Kredit Bank (single-'B'/stable), and SBS-Agro Bank (single-'B'-plus/positive)—reflect each bank's financial condition in the context of the Russian banking system's risks, said S&P's. The ratings are not constrained by Russia's double-'B'- minus sovereign rating for foreign currency obligations. Although they face many of the same risks, the banks rated are widely divergent in strategies and in client franchises.
		South Caucasus & Central Asia Georgia Plans Major Sell-Off · Georgian President Eduard SHEVARDNADZE issued a decree on June 27 authorizing the privatization of 273 medium and large scale state-owned enterprises through no minimum price auctions, according to the US Embassy in Tblisi. The sell-off is aimed at completing the process of privatization, which was carried out through a mass voucher program that ended in 1996, through sales of shares to workers in the enterprises being privatized, and through cash auctions. In response to a call by SHEVARDNADZE for further economic reform and privatization, the Georgian parliament on May 30 passed a law which requires that no minimum price auctions be held in order to complete the privatization of enterprises unsuccessfully sold through the cash auctions. After the no minimum price auctions, the government must to re-value the share prices of remaining state enterprises and another cash auction will be held. The new law also authorizes the government to make direct sales to foreign investors. The auctions will be held from July 21 through August 31, 1997, by the Georgian central bank and the property ministry. The shares will be divided among the bidders in proportion to the amount of the bid. If there is only one bidder, they will receive 100 percent of the shares. The Embassy provides a list of all 273 enterprises slated for sale, arranged by region. The list includes a number of food processing enterprises, dairy and


When you need to know it as it happens
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Tuesday

July 15, 1997

Intercon's Daily

poultry farms, construction firms, factories, auto services companies, and more.

McDonald's Pushes Plans for Georgia

· US fast food giant McDonald's has signed an agreement with Georgian company Coca-Cola Kavkasioni, a local bottler of Coca-Cola beverages, to open several restaurants in Georgia, reported Reuters on Thursday. McDonald's International president Jim KANTALUPO told reporters that his company would invest several million dollars in the Caucasus country.

The restaurants will take 12-18 months to open and the first will be in Tblisi. McDonald's sees Georgia as a base from which to extend later into Armenia and Azerbaijan, said KANTALUPO.

Investment Conf. in Tajikistan

· An international conference on problems of reformation and the attracting of investments into the Tajik economy opened in Dushanbe today, reported Itar-Tass. Leaders of a number of government ministries, as well as international organizations—OSCE, the World Bank, the International Monetary Fund—and diplomats accredited in Tajikistan are taking part in the conference. The US Embassy in Tajikistan participated in organizing the conference.

New Kazakh Deputy Trade Minister Named

· Kazakh President Nursultan NAZARBAYEV has appointed Umirzak SHUKEYEV as deputy minister of economics and trade, reported RFE/RL. The appointment is aimed at helping develop small- and medium-sized businesses, which account for only 6-7 percent of industrial output and employ only some 500,000 out of a total national workforce of 9.2 million people, according to NAZARBAYEV. The 33-year-old SHUKEYEV is a graduate of the Moscow Economics and Statistics Institute.

Kazakh Securities Market Training in US

· High-level government and business officials from Kazakhstan will be in New York City and Boston

from July 12_26 to participate in a USAID-sponsored training program on the US securities markets, reported M2 Communications, citing Bruce Reznik, president of Legal Technical & Advisory Services (LTAS), the training provider.

LTAS, headquartered in Washington, D.C., specializes in developing and providing training programs on legal and commercial topics to government and business officials of former command economies. This program is administered by the Global Training for Development project of the Academy for Educational Development (AED).

"This mission is timed to coincide with the public tender of shares of 32 select state-owned enterprises of Kazakhstan," Reznik is quoted as saying. "The caliber of the organizations meeting with this delegation is indicative of Kazakhstan's tremendous potential and the investment opportunities it offers."

In New York, the Kazakh delegation will meet with officials of the following financial institutions and international law firms: JP Morgan; Salomon Brothers; Morgan Stanley Asset Management; Bear Stearns; The Bank of New York; CS Boston; Citibank; Scudder, Stevens & Clark; Cross Border Enterprises; AIG Silkroad Asset Management Fund; Columbus Advisers and Multilateral Funding, Inc.; Winthrop, Stimson, Putnam & Roberts; LeBouef, Lamb, Greene & MacRae; and Patterson, Belknap, Webb & Tyler.

In Boston, the delegation will meet with officials of Fidelity Research and Management, The New England Funds, State Street Bank, Dalbar, Inc., The Colonial Group, and the Central Asian-American Enterprise Fund.

Reznik explained that the purpose of this delegation is for delegates to become better acquainted with US and international investment practices and to meet US money managers and service firms with a potential interest in Kazakhstan.

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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