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 17, 1997

Russian Federation

Politics

Yeltsin Signs Decrees on Army Reform

· Russian President Boris Yeltsin on Wednesday signed decrees to reorganize and reform the Russian armed forces, cutting troop numbers and decentralizing power to cut costs and promote efficiency. YELTSIN announced the measures after a meeting with Prime Minister Viktor Chernomyrdin in the northern Russian Republic of Karelia, where he is vacationing.

The decrees calls for the Russian armed forces to be cut by 500,000 men to a total of 1.2 million servicemen by the beginning of 1999. YELTSIN has said previously that he hopes to eliminate conscription and create a professional army by 2000.

In addition, the Strategic Missile Forces and the Military Space Forces would be merged into a single Missile Forces agency. The Air Force and air defense forces would also be consolidated. Another decree places the railroad troops under the jurisdiction of the civilian Federal Road Service.

The decrees also abolished the Ground Troops command and transferred its functions to the some 25 military districts, which divide the country administratively. The reforms will also give military districts "operational and territorial functions," said YELTSIN. In addition, military districts will get day-to-day control over air defense and aviation, previously subordinated to the Ground Forces commander.

The president also set a limit on funds the Defense Ministry can spend on maintaining its central apparatus in Moscow, putting it at not more than one percent of the annual defense budget, which means that it will have to be almost halved.

Rosvooruzheniye Charging, Being Charged

· The director general of Russian state arms export agency Rosvooruzheniye, Aleksandr Kotyelkin, on Tuesday accused its foreign and domestic competitors of conducting regular campaigns aimed at sabotaging Rosvooruzheniye's new contracts, reported Itar-Tass. "Propaganda campaigns against Rosvooruzheniye…usually surface on the eve of signing major contracts," KOTYELKIN is quoted as saying. "Their initiators are Russia's competitors abroad and corrupt structures at home who are trying to take control of the export of promising Russian military high technology."

The US, KOTYELKIN charged, has sought to take advantage of Russia's political and economic crises to gain a greater share of the international arms market. In a recent interview with Nezavisimaya Gazeta, he said that Washington was trying to persuade other countries, including Colombia, South Korea, and Cyprus, not to buy Russian arms.

KOTYELKIN's statements come on the heels of several articles in the Russian press accusing Rosvooruzheniye of corruption and of trying to push domestic competitors out of the market. A recent article in the weekly Novaya Gazeta charged that Rosvooruzheniye conducted illegal arms sales and diverted proceeds to a secret fund for President Boris YELTSIN's re-election campaign last year, said Reuters.

On Tuesday, Yeltsin instructed Prime Minister Viktor Chernomyr

Today's News Highlights

Russia

Senate Angry at Religion Law

DOE's Pena to Visit Russia

Wages to Go to Nuke Workers

European Republics

Ukraine Promises to Pay Wages

South Caucasus & Central Asia

Shevardnadze at OPIC

Azeri Economy Good in H1

Kazakh Oil Negotiations

Tajik Gold Mining Deal

Politics-Economics-Business

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Thursday

July 17, 1997

Intercon's Daily

din to oversee the work of the Rosvooruzheniye, government spokesman Igor Shabdurasulov told Itar-Tass.

US Threatens Russia Aid Over Religion Law

· The US Senate on Wednesday attached a second amendment to the 1998 foreign aid bill which would cut off a planned $200 million in assistance to Russia. Senators voted 94-4 to cut off aid to Russia, if President Boris YELTSIN signs a law restricting religious freedoms in the country, reported the Associated Press (AP). The foreign aid bill already includes an amendment that would condition Russian aid on the country's termination of a nuclear cooperation program with Iran.

A draft law, "On freedom of conscience and religious associations," was passed by the Russian State Duma and the Federation Council last month and has been submitted for YELTSIN's signature. The law restricts the status and activities of essentially all religions, except Russian Orthodoxy, Judaism, Buddhism, and Islam.

"We need to get their attention. What they're doing is outlawing…basically most of the Christian religions and organizations," Sen. Don Nickles (R-Okla.) said during the Senate debate.

Pope John Paul also weighed in on the Russian religion law, writing to YELTSIN to warn about its possible negative effects on Catholicism in Russia. "This text…would constitute for the Catholic Church in Russia a real threat to the normal development of its pastoral activities and even its survival," Reuters cited the Pope's letter as saying.

Economy

Ruble = 5,791/$1.00 (NY rate)

Ruble = 5,782/$1.00 (CB rate)

Ruble = 5,777|5,797/$1.00 (buy|sell rates)

DOE's Pena to Travel to Russia

· US Energy Secretary Federico PENA will visit Russia on July 19_23 to hold high-level meetings with Russian energy officials, reported Dow Jones, citing DOE officials. The purpose of the trip is to help Russia with its energy conservation and production strategies, discuss new energy technologies and opportunities for additional US private investment,

said DOE. The trip will also focus on atomic energy issues, including the Russia nuclear arsenal.

PENA is scheduled to meet with Russian Fuel and Energy Minister Boris NEMTSOV and Nuclear Energy Minister Viktor MIKHAILOV.

Wage Arrears Pledged to Nuclear Workers

· Russian First Deputy Prime Minister/Fuel and Energy Minister Boris Nemtsov today promised protesting nuclear power plant workers that the government would remit 123 billion rubles in wage arrears this month, reported Itar-Tass. Nemtsov announced that he would take the nuclear power industry under his control and ensure that the government repays 300 billion rubles in wages to nuclear plant workers each month during the fourth quarter of this year.

Over 100 workers from the Smolensk nuclear plant and over 50 workers from other Russian nuclear plants, as well as researchers from nuclear centers in the Moscow Oblast, arrived in Moscow today after a 400-km protest march to highlight the wage arrears problem. Nemtsov is continuing talks with representatives from the nuclear power industry trade unions in Moscow.

President Boris YELTSIN today summoned Nuclear Energy Minister Viktor MIKHAILOV to the government resort in Karelia where he is vacationing to discuss the labor situation in the sector.

Russia Plans Rail Connection to Singapore

· Russia may become a part of a giant project to build a transcontinental railroad from Singapore to Europe, reported Wednesday's Rossiiskaya Gazeta. The project was discussed at a meeting this week between Russian Railways Minister Nikolai Aksenenko and Malaysia's Minister of Transport Ling Liong Sik, the project's coordinator.

The idea to build the railroad was first voiced at the March 1996 Bangkok summit. The plans envision the use of the railroad network of the Southeast Asian countries and China. From the network, three potential routes exist: Beijing-Mongolia-Trans-Siberian railroad, Beijing-Druzhba-Kazakhstan-Trans-Siberian railroad, or Beijing-Druzhba-Kazakhstan-Turkmenistan and on via Iran and Turkey, circumventing Russia.

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Thursday

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Intercon's Daily

The project involving a railroad from Europe to Southeast Asia has direct bearing on Russia's economic interests, said the newspaper. The inclusion of the Trans-Siberian railroad into the project would promote trade and economic relations between Asian regions, including Siberia and the Russian Far East.

told some 50 US business executives today that the most profitable sectors for investment in the Georgian economy are energy, transport, agriculture, food processing, communications, and tourism. Speaking at the Overseas Private Investment Corp. (OPIC) in Washington, he noted that the Georgian economy has strongly recovered from the period of civil war and economic crisis that followed the country's independence from the Soviet Union and it is taking measures to attract foreign investment.

SHEVARDNADZE pointed to a recently passed foreign investment law and the creation of a Foreign Investment Council as important steps toward opening his country to foreign capital.

OPIC acting President and CEO Mildred O. CALLEAR announced that OPIC has been asked to develop a $45 million Caucasus Investment Fund that will take equity stakes in ventures in Georgia, Armenia, and Azerbaijan. "The Fund will be an important vehicle to move investment capital into this important region," CALLEAR is quoted in an OPIC press release as saying.

US investors have registered for OPIC support in Georgia for more than a dozen projects, worth over $1 billion, in a variety of sectors including telecommunications, transportation, manufacturing, oil and gas, and tourism, said the press release. Companies attending the OPIC meeting included Bechtel Corp., Bob Walsh Enterprises, Chevron, FMC, McDermott, Riggs Bank, Sea Land, and Southern Cal-Edison.

Azeri Economy Looks Good in H1

· The Azeri economy showed signs of a strong recovery in the first half of this year with gross domestic product (GDP) increasing by 5.2 percent, compared with the same period last year, reported Interfax. Azeri state adviser on economic policy Vahid Ahyndov told reporters in Baku that output growth took place in several industrial sectors.

The budget deficit was kept to 1.6 percent of GDP and the foreign trade situation improved greatly during the first five months of 1997, he said. The trade surplus reached $53 million during this time, compared with a trade deficit of $150 million last year, and foreign investment rose by 45 percent over the same period last year. Real income rose by 35 percent, compared with the first half of last year.

European Republics

Ukraine Promises to Pay Wage Arrears

· Ukrainian Finance Minister Igor Mityukov told parliament on Wednesday that that government will pay all back wages by November 1, if it can secure sufficient foreign loans and financial assistance, reported Xinhua. "I am sure that if the cabinet receives all the foreign loans it has expected, all back wages will be paid off. Current budget revenues are sufficient to pay current wages, but not enough to pay off back wages," he is quoted as saying.

Ukraine is seeking a $2.5 billion loan from the International Monetary Fund (IMF), but payment of wage arrears is one of the IMF's conditions for an agreement on the loan.

Ukrainian state enterprises owed employees 5.25 billion hryvnias ($2.85 billion) in back wages as of July 1, while the state owed pensioners 1.47 billion hryvnias ($800 million), said Mityukov.

Lateral Vector in Ukraine Oil JV

· Canada's Lateral Vector Resources Inc. on Wednesday announced the completion of its feasibility study of the Burguvativske oilfield in Ukraine and plans to proceed with the finalization of joint venture and license agreements, said a company press release. The field is located near the city of Kharkhov in northeastern Ukraine.

Lateral Vector said it has prepared preliminary documentation for the establishment of a joint venture with state oil company Ukranafta, which holds the current production license for the Burguvativske field. The company proposed that the joint venture will earn incremental oil production from the rehabilitation of the oil field using western technologies.

South Caucasus & Central Asia

Shevardnadze Addresses OPIC

· Georgian President Eduard SHEVARDNADZE

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When you need to know it as it happens

Thursday

July 17, 1997

Intercon's Daily

Azerbaijan Given Observer Status in WTO

· The World Trade Organization (WTO) on Wednesday granted Azerbaijan observer status and said it will begin negotiations on granting it full membership, reported RFE/RL. Membership talks are expected to take 2-3 years to complete.

Pakistani Foreign Minister in Azerbaijan

· Pakistani Foreign Minister Gohar Ayub Khan arrived in Azerbaijan Wednesday on a two-day working visit, during which he will meet with Azeri President Geidar Aliyev and Foreign Minister Hasan Hasanov, reported Itar-Tass. The two sides will discuss a number of new cooperation initiatives including the use of a $10 million credit provided by Pakistan to Azerbaijan.

Khan said his country is interested in the transportation of Caspian Sea oil and gas to world markets through its territory. He stressed that a pipeline project proposed by US Unocal has attracted the interest of Russia and some Central Asian countries, including Kazakhstan and Uzbekistan.

EBRD Credits for Kazakhstan

· Kazakh Deputy Prime Minister/Finance Minister Aleksandr Pavlov announced on Wednesday that the European Bank for Reconstruction and Development (EBRD) would soon extend a $60 million loan to the country to help improve its stability and development, reported Xinhua, citing the Kazakhstan Telegraph Agency. Pavlov met with EBRD officials who said that the Bank would also help his country develop small and medium enterprises.

New York Negotiations for N. Caspian Project

· Foreign oil firms, led by Royal/Dutch Shell, have pledged to maintain a concerted approach in negotiations with the Kazakh government in New York and are "hopeful" that a deal can be worked out by August, reported Dow Jones. "The foreign partners involved in this are more united than ever," said a spokeswoman for the North Caspian Project, a consortium of Italy's Agip SpA, a British Petroleum/

Statoil partnership, British Gas Plc., Mobil Corp., Shell Corp., and France's Total SA.

Last year, the consortium identified some 200 blocks on the Kazakh Caspian shelf and is reportedly trying to negotiate a production-sharing agreement for 12 of the blocks.

Harambee in Tajik Mining Project

· Canada's Harambee Mining Corp. on Wednesday said it had signed an agreement with Kaizen Business Corp., as agent for Societe Alliance Minerales, for the exclusive right to search for, prospect, and commercially exploit two gold deposits and one silver deposit in Tajikistan, said a company press release. Kaizen Business was granted these rights by the Tajik government in agreements dated October 3, 1995 and May 28, 1997.

Harambee said it has agreed to pay Kaizen total cash payments of $85,000 and issue Societe Alliance Minerales 1,500,000 common shares in the capital of the company, subject to the acceptance of the Vancouver Stock Exchange. In addition, the Harambee is required to spend a minimum of $30,000 on initial exploration during 1997 and to continue yearly exploration expenditures to keep the three Tajikistan deposits in good standing.

The three deposits are the Rangkul gold and Akjilga silver deposits, located in the Murgab district and the Western Pshart gold deposit in the Lurgabsky District, all in the Gorno-Badakhstan Region.

The Company has commissioned Rescan Engineering Ltd. of Vancouver, British Columbia, to prepare an independent geological report on the Tajikistan deposits, which the Harambee expects will support the share issuance described above.

All of the previous work conducted on the Tajikistan deposits was conducted by the Tajik government's Main Geological Department (Tajikglavgeology). Tajikglavgeology has prepared and made available its reports and data to Rescan.

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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