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

Wednesday, July 16, 1997

Russian Federation

Politics

Chernomyrdin on Military Reform

· Russian Prime Minister Viktor Chernomyrdin told a commission on military development on Tuesday that at least two-thirds of the economy and finances of Russia are dependent on military reform, reported RIA Novosti. The commission "will examine urgent steps to reform the departments, which are not part of the armed forces but are related to military development," said Chernomyrdin. Among other agencies, he was referring to the railway troops, the Ministry for Emergencies, as well as the Federal Agency for Government Communications and Information (FAPSI).

Economy

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

Ruble = 5,785/$1.00 (CB rate)

Ruble = 5,774|5,796/$1.00 (buy|sell rates)

1st Half Economy is a Mixed Bag

· Russia's State Statistics Committee (Goskomstat) said Tuesday that the country's economy contracted by 0.2 percent during the first six months of this year, compared with the same period in 1996. However, industrial production increased by 0.8 percent, the first rise in six years.

The growth in industrial output is mainly attributed to the increase in production by small firms and joint ventures. Production by large- and medium-sized enterprises fell by 0.9 percent.

The output of the pharmaceutical industry rose by nine percent, the highest growth rate among all industries, while production in the chemical, petrochemical, non-ferrous, metallurgical, machine build

ing, and metal processing sectors increased by 0.7-2.0 percent. But production in several other sectors—power generation, fuel, steel and iron, forestry, building materials, foodstuffs, and light industry—dropped by 0.8-7.0 percent.

During January-June, the country generated 423 billion kilowatt hours of electricity, produced 147 million tons of oil and 282 billion cubic meters of natural gas, mined 125 million tons of coal, and produced 18.6 million tons of steel products, 460,000 cars, 71,000 trucks, and 63,000 personal computers, said Goskomstat.

Foreign trade decreased by three percent to $59 billion in the first five months of 1997, but the trade surplus grew by $2.2 billion to $11 billion. Imports fell eight percent to $24 billion, while exports rose by 0.4 percent to $35 billion.

The worst news of the day related to the attraction of foreign direct investment. While foreigners have been investing heavily in the Russian stock market, direct investment in manufacturing is dismal. Finance Ministry economist Viktoria KOTOVA recently estimated that 1997 foreign direct investment would be a mere $2.7 billion, reported Reuters.

"We have to get used to the fact that the battle for foreign investment is always tough and at time completely without rules," minister without portfolio Yevgeny YASIN is quoted by Reuters as telling an investment

Today's News Highlights

Russia

New Marriott to Open in Moscow

Toyota Considering Moscow JV

European Republics

New Ukraine PM Confirmed

New Ukraine Investment Fund

South Caucasus & Central Asia

IDA Loan for Georgia

Frontera in Azeri Oil Project

Kyrgyz President Meets Gore

Chevron in New Tengiz Deal

Politics-Economics-Business

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July 16, 1997

Intercon's Daily

forum. "Despite certain progress by Russia in this area, our competitors, including Eastern Europe, have gone farther and offer investors more preferable conditions."

Business

Gazprom Included in Fortune's Global 500

· Russian gas monopoly Gazprom was ranked 146th in Fortune magazine's most recent Global 500 list of the world's largest companies in terms of by revenue, reported the Associated Press (AP). The list will appear in Fortune's August 4 issue. In late June, Gazprom placed second on Business Week's list of 200 leading companies.

New Marriott to Open in Moscow

· The five-star Moscow Marriott Grand Hotel is scheduled to open in late summer, reported today's New York Times. The second Marriott in Moscow, the hotel will have three restaurants, a health club with indoor pool, 24-hour room service, limousine service, a business center, and a conference hall with a capacity of 350 people.

Toyota Considers Manufacturing in Russia

· Japan's Toyota Motor Corp. is considering establishing a joint venture to produce commercial vehicles in Russia, possibly in 1999, reported Kyodo news today. Later this month, Toyota will begin a feasibility study with the Moscow city government, of a 10 billion yen project to turn an idle munitions factory into a plant to assemble vans. The factory would assemble 3,000-4,000 vans a year, with most of the parts to be initially imported from Japan.

Toyota, which exports about 2,000 vehicles to the former Soviet Union annually, will become the first Japanese car manufacturer to undertake production in Russia. The Moscow city government approached Toyota about the project and the two sides reached a basic agreement on the project during a recent visit to Russia by Toyota executives. If it decides to go forward with the project, Toyota will open an office in Moscow in March 1998.

Metromedia to Take Over Kosmos TV?

· Aleksandr LAPSHIN, the general director of Russia's Kosmos TV, today criticized plans by US holding company Metromedia to acquire a controlling stake in the company by buying up shares owned

by the Russian Radio and Television Broadcasting Center, reported Interfax. "One American firm cannot exercise a monopoly on the biggest multi-channel satellite television broadcasting network in Moscow and the Moscow region," he is quoted as saying.

Kosmos TV was formed in 1991 as a 50-50 joint venture between the Russian Radio and TV Broadcasting Center and US International Telset (ITI), a member of the Metromedia holding company. It was re-registered as a joint stock company in 1994.

Kosmos TV broadcasts 20 satellite and two of its own channels 24 hours a day to subscribers in Moscow and the surrounding region. LAPSHIN said the company plans to increase the number of channels to 100 within two years.

Russian Radio and TV Broadcasting Center head Vyacheslav MISLYUNIN told Interfax that he had received no official offers to buy Kosmos TV shares. He suggested that LAPSHIN's statements come from a ITI decision in late June to dismiss him "on ethical grounds." MISLYUNIN said that the Center had not yet approved the decision.

European Republics

Estonia Invited to Join the EU

· Estonia was among five former Communist countries—the Czech Republic, Poland, Hungary, and Slovenia were the others—that the European Commission today officially proclaimed ready for talks on joining the European Union (EU). The final decision on whether the countries will hold EU entry talks early next year will be made at a summit of EU leaders in Luxembourg this December.

Estonia is the only one of the three Baltic states to be approved for membership talks. A country of only 1.5 million people, Estonia's GDP per capita is only 23 percent of the EU average. However, the EC was impressed with the country's economic reform efforts, particularly the liberalization of its external trade system and privatization. The EC also noted that Estonia needs to take measures to deal with competitive pressures and reduce its trade deficit.

The former Communist states rejected for EU membership at this time were Latvia, Lithuania, Slovakia, Bulgaria, and Romania.

Politics-Economics-Business

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Some analysts have expressed concern that Russia would oppose Estonian inclusion in the EU, but on the contrary, Moscow announced this week that it supported Baltic membership. Russian Foreign Ministry spokesman Gennady Tarasov said on Tuesday that although Russia opposes NATO's expansion into the Baltic republics, it has no objections to these states seeking membership in the European Union or other European economic and political structures, reported Itar-Tass.

Pustovoitenko Confirmed as Ukraine PM

· The Ukrainian parliament today overwhelmingly approved the appointment of Valery Pustovoitenko as the country's Prime Minister. Prior to his nomination by President Leonid Kuchma, Pustovoitenko served as minister without portfolio and president of the Ukrainian Soccer Federation. Before joining the government in Kiev, PUSTOVOITENKO was mayor of Dnipropetrovsk, KUCHMA's home town.

New Ukraine Investment Fund Closed

· UK Societe Generale Emerging Europe Asset Management Ltd. and US Ladenburg Thalmann International Ltd. announced on Monday the closure of a $90.5 million Ukraine investment fund, said a Ladenburg press release. The Societe General Ladenburg Thalmann Ukraine Fund will invest in both public and private equities based in Ukraine.

Fund shares will be listed on the Irish Stock Exchange and were sold at an initial price of $100 per share. Both institutional and individual entities invested in the Fund, which had a minimum investment of 100,000, it said. The seven-year, closed-end fund is incorporated in Guernsey, and will be administered by the Bank of Bermuda. Societe Generale will act as the Fund's investment manager and Ladenburg Thalmann's Ukraine office will serve as the Fund's investment adviser.

The Ukraine Fund will focus on private investment opportunities in Ukraine, with about 60 percent of assets devoted to private equity investments in unlisted companies. The remaining 40 percent of assets will be invested in publicly traded companies and Ukrainian government debt. The Fund plans to target a variety of industries including energy, telecommunications, consumer goods, and agriculture.

"There are tremendous business opportunities in Ukraine for those with an on-the-ground presence and a true understanding of the country and its economy," Alexis BEDOE, president of Ladenburg Thalmann International, is quoted as saying. "This fund is the first of its kind. It will strategically combine investments in both public and private companies, as well as government securities, in order to maximize returns for investors. With inflation under control and a stable currency, we believe that the Ukrainian economy is poised for a strong recovery."

Cabinet Changes in Belarus

· Belarus President Aleksandr Lukashenko on Tuesday appointed Vladimir Zametalin as Deputy Prime Minister, reported Interfax. In addition, Deputy Prime Minister Vladimir Rusakevich was transferred to the post of first deputy director of the presidential administration.

South Caucasus & Central Asia

IDA Loan for Georgia Local Government

· The World Bank on Tuesday approved a $20.9 million loan to Georgia in support of a Municipal Development and Decentralization Project aimed at strengthening local governments by helping to improve their organizational, management, and financial base, said a World Bank press release. The project, financed by funds from the International Development Association (IDA), the Bank's concessional lending arm, will improve access to public services and help to raise living standards.

The project's specific objectives are to: (1) accelerate the decentralization of the decision-making process; (2) stimulate the capacity of local government to efficiently program, finance, manage, and main facilities and deliver public services; (3) support urgent local investments, particularly in municipal infrastructure; and (4) generate jobs.

Frontera, Baker Hughes in Azeri Oil Project

· Houston-based Frontera Resources Corp. today announced the formation of a strategic alliance with Baker Hughes Solutions to develop oil and gas exploration and development opportunities in the onshore Kura Basin in Azerbaijan, said a Frontera press release. Frontera will serve as operator. "Baker Hughes' technical abilities and Frontera's project

When you need to know it as it happens

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development skills complement each other," Frontera president and CEO Steve C. Nicandros is quoted as saying. "Frontera is already in discussions with the State Oil Company of the Azerbaijan Republic (SOCAR) regarding the development of onshore projects. Teaming up with Baker Hughes will permit us to expand our horizons."

Frontera is the operator of a 1.4-million-acre Kura Basin block in Georgia, on that country's border with Azerbaijan, straddling the route of the early oil pipeline built by the Azerbaijan International Operating Company (AIOC) to the Black Sea.

"Frontera's activities in Georgia and Azerbaijan will help pave a new energy road to the Black Sea coast of Georgia. We believe that onshore resources in the South Caspian region can contribute substantial new proved reserves, with the best export potential within the former Soviet Union," Frontera chairman of the board Bill White is quoted as saying.

Turkey Delays Diplo. Relations with Karabakh

· Turkey has warned that it will not establish diplomatic relations with Armenia until the settlement of the Nagorno-Karabakh conflict, reported Itar-Tass, citing a statement made by Turkish President Suleiman Demirel in Ankara on Tuesday. "When Armenia became independent, we voiced our intention to be friends with it and to establish good relations. But Turkey cannot do that in conditions, when a quarter of the territory of Azerbaijan has been invaded, and 1.5 million people have become refugees," said DEMIREL.

Kyrgyz President Meets Gore, US Eximbank

· Kyrgyzstan President Askar Akayev met with US Vice President Al Gore in Washington Tuesday and discussed a variety of bilateral and regional issues, including the importance of continuing political and economic reforms in Kyrgyzstan, US assistance to Kyrgyzstan, and stability and security in Central Asia, said a White House press release. Vice President Gore visited Kyrgyzstan in 1993.

During his visit to Washington, Akayev also met with World Bank president James Wolfensohn to discuss Kyrgyzstan's progress on 13 World Bank projects, worth a total of $264 million.

Kyrgyz Finance Minister Taalaibek Koichumanov told journalists at the National Press Club that one

of the main purposes of the Kyrgyz delegation's visit to the US was to strengthen economic contacts with US companies. He noted that Kyrgyzstan recently signed an accord to buy tractors and combines from Case Corp. and is in talks with US mining companies Newmont and Phelps Dodge, which are prospecting for gold, non-ferrous and rare metals in the country.

On Monday, Kyrgyz officials signed a Project Incentive Agreement with the US Export-Import Bank that will make possible the financing of US exports to Kyrgyzstan. The PIA provides a framework for financing US sales to Kyrgyzstan where repayment is based on export revenues from the project, rather than a sovereign guarantee of the debt by the host country government, said Eximbank. Repayment of loans will be facilitated through the establishment of offshore collateral accounts.

Chevron Signs New Tengiz-related Deal

· Tengizchevroil, a joint venture between Chevron, Mobil, and the government of Kazakhstan, today signed a $250 million agreement with Bechtel and Turkey's ENKA to increase crude oil output at the venture's Tengiz fields in western Kazakhstan, reported Reuters. The agreement covers engineering, purchasing, and construction activities at Tengiz.

Under the deal, Bechtel and ENKA will build an operations center which will incorporate equipment to separate gas and oil and distribution systems. An ENKA official said that $100 million will be invested this year and the other $150 will be spent in 1998.

The Tengizchevroil venture targets an increase in production to 700,000 barrels per day (bpd) by the year 2010 from about 100,000 bpd in 1996.

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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