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, July 7, 1997

Russian Federation

Politics

Lenin Protectors Threaten Moscow Monument

· A Russian extremist group planted a massive bomb under the huge statue of Tsar Peter the Great in Moscow on Sunday to protest Russian government moves to bury the body of Soviet Communist leader Vladimir LENIN. A group calling itself the Revolutionary Military Council claimed responsibility for planting more than two kilograms of TNT at the base of the statue and for the blowing up of a Moscow statue of Tsar Nicholas II on April 1.

"The goal of the action was to carry out an explosion as retribution, and warn the unprincipled politicians who have initiated disgusting debates of whether the body of the leader of the world proletariat Vladimir Ulyanov Lenin should be buried," said a message faxed to Interfax.

The group said it didn't detonate the seven packs of plastic explosives, which were defused by police, because it did not want to harm innocent Muscovites.

Russian President Boris YELTSIN has advocated removing LENIN's body from the mausoleum on Red Square and burying it and recently called for a national referendum on whether to bury it. Communist legislators vehemently oppose to the burial of LENIN and recently passed a resolution calling on citizens to defy any efforts toward this end.

The unfinished Peter the Great statue stands 60 meters high on the bank of the Moscow River. The monument, by well-known sculptor Zurab Tsereteli, has provoked a great deal of controversy because of its enormous size, great cost, and depiction of a Tsar associated with Petersburg, rather than Moscow. A commission formed to ad

dress public opposition to the monument decided that the city should go ahead with its construction.

Tsereteli noted that the provocation is, above all, "spearheaded not so much at me as at the policy of the Moscow city government and Mayor Yuri Luzhkov, according to Itar-Tass. The monument is to be unveiled on the 301st anniversary of the Russian fleet on October 20.

Two British Aid Workers Taken in Chechnya

· Two British aid workers were kidnapped by masked gunmen in Grozny on Friday, the latest in a string of abductees in Chechnya, reported the Associated Press (AP). Camilla Carr and John James work for the Center for Peacemaking and Development helping to treat Chechen children suffering from post-war trauma.

Chechen authorities have detained the couple's two bodyguards and the Center's deputy director Adlan Adayev for questioning.

Meanwhile, three Russian policemen abducted by gunmen on the Chechen border with the Stavropol region on Saturday were exchanged today for three Chechens who were detained in Stavropol last month for illegal possession of arms, said Itar-Tass.

Sergeyev Outlines Army Reform Plans

· In a speech to Russia's Federation Council on Friday, Defense Minister Igor Sergeyev outlined the government's plans for reform

Today's News Highlights

Russia

Russian Military Reform Planned

This Week's Happenings

Russia's Forex Reserves Up

Uneksimbank Sells Norilsk Stake

Chemical Co. Stake for Sale

UES to Issue Bonds

Brunswick Launches New Fund

Fracmaster Up Russia JV Stake

New Oil JV in Tatarstan

S&P's Rates Lukoil

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July 7, 1997

Intercon's Daily

ers; cutting 300,000 civilian staff; streamlining central management by the year 2000; cutting the number of military districts to six in 1999-2000; concentrating the best equipment in small, battle-ready units, and investing in weapons R&D.

The Defense Ministry proposals proceed from the assumption that any large-scale aggression against Russia "is practically excluded" in the visible future, while the possibility of local conflicts may even increase, said SERGEYEV. The ministry has estimated and justified all key aspects of the optimization of the armed forces structure, he said.

Economy

Ruble = 5,789.5/$1.00 (NY rate)

Ruble = 5,783/$1.00 (CB rate)

Ruble = 5,775|5,791/$1.00 (buy|sell rates)

Russia's Foreign Reserves Up

· Russian Central Bank chairman Sergei Dubinin announced last week that the Bank's gold and currency reserves increased to $23.8 billion in the first half of 1997, reported Prime-Tass. Reserves as of January 1 were about $15 billion.

The gold and currency reserves are expected to grow slower in the second half of the year, but to remain "at a sufficiently high level," said Dubinin. The operating cash and mandatory reserves of commercial banks have increased by 24 percent in the first six months of 1997, with an inflation rate of 8.4 percent over this period. Dubinin said that Russia's cash in circulation had built up by 34 percent during January-June and its proportion in the money supply increased from 35 to 38 percent.

Uneksimbank to Sell Norilsk Nikel Stake

· Russian commercial bank Uneksimbank will sell its 38 percent stake in metals group Norilsk Nikel. "We are offering 38 percent of the shares through a commercial tender. The results will be known on August 5," Uneksimbank spokesman Sergei CHERNITSYN is cited by Reuters as saying.

The stake represents 51 percent of the voting shares of the financially troubled metals giant, which produces 90 percent of Russia's nickel, 80 percent of its cobalt, 75 percent of its copper, and 100 percent of the platinum in the country.

This Week's Happenings

¨ Beginning July 7, Russian First Deputy Prime Minister Anatoly Chubais will go on vacation, traveling across scarcely-populated areas of Denmark and Norway by car with his wife. He will return from his holiday on July 26.

¨ Ukrainian President Leonid Kuchma and NATO Secretary-General Javier Solana will sign a charter on a special relationship at the Madrid NATO summit, which opens on July 8.

¨ Azeri President Geidar ALIYEV will attend the NATO meeting in Madrid on July 8_9, as well as hold talks with Spanish officials

¨ Pakistani Foreign Minister Gohar Ayub Khan will make a working visit to Russia on July 8_9.

¨ US Secretary of Defense William Cohen will visit Ukraine on July 11_12. During the visit, COHEN will view the NATO Partnership for Peace (PfP) exercise, "Cooperative Neighbor," currently under way in western Ukraine.

¨ US Secretary of State Madeleine Albright will pay a working visit to St. Petersburg on July 12_13. Albright and Russian Foreign Minister Yevgeny Primakov are expected to discuss the adaptation of the Conventional Force Treaty (CFE) and issues concerning antimissile defense and strategic offensive weapons.

¨ A runoff gubernatorial election will be held on Sunday, July 13, in Nizhny Novgorod Oblast. The vote will pit Nizhny Novgorod mayor Ivan Sklyarov against local Communist candidate Gennady Khodyrev.

ing the country's military, reported Reuters. Immediate action is necessary because "the armed forces of the Russian Federation are in critical condition and continue to deteriorate," he said.

The reform plan calls for the armed forces strength will be cut to 1.2 million in 1998. The strategic missile troops and the air defense troops will be consolidated and the army command reorganized.

Other measures outlined by SERGEYEV included: selling off commercial organizations, such as suppli

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Chemical Plant Stake for Sale

· Russian President Boris Yeltsin has signed a decree allowing the sale of 38 percent of government-held shares in the Kirovo-Chepetsk chemical plant, reported Itar-Tass on Saturday. The decree said the decision was made in order to "improve the structure of the country's chemical industry, accelerate the privatization of its enterprises, and increase budget revenues." The decree also removes the plant, located in the Kirov region, from the list of joint stock companies established through privatization which are deemed to be of strategic importance.

The Kirovo-Chepetsk chemical plant, built in 1943, employs over 15,000 people and makes fluoroplatic, fluorine rubber, latex, mineral fertilizers, and liquid and gaseous nitrogen and oxygen.

In 1994, the plant was reorganized into an open joint stock company with a charter capital of 1.314 billion rubles. Thirty eight percent of its shares are owned by the government, 40 percent by its workers, and 22 percent by the IATs Analyse LLP.

UES to Issue $1.25 Billion in Bonds

· Russia's Unified Energy Systems (UES) on Thursday announced plans to issue $1.25 billion worth of convertible bonds later this year as part of a government sponsored restructuring program. The three-year issue will be backed by a 2.7 percent government share package. UES president Boris Brevnov told at a Russian government meeting that the company also plans to issue Eurobonds.

UES operates 27 of Russia's 34 big power plants and hold stakes in 27 regional power utilities, which produce about 75 percent of total Russian electricity.

However, the company suffers from a massive backlog of unpaid bills, with customers owing it some 102 trillion rubles ($17.6 billion). UES was recently authorized to cut off consumers that do not pay for electricity.

Business

Brunswick Launches New Russia Fund

· Brunswick Capital Management has launched another $125 million Russian equity fund, seeking to take advantage of the boom in the Russian stock market, reported today's Financial Times. In August

1996, Brunswick, part of the London-based Brunswick grouped launched an open-ended investment fund for Russia, which attracted $120 million. The launch of this second fund, which is fully-subscribed and closed-ended, underscores growing investor interest in the Russian market. This new fund, the Russian Capital Appreciation Fund, will focus mainly on less liquid, second-tier stocks, which still appear relatively undervalued.

Fracmaster Increases Stake in Russian JV

· Canadian Fracmaster Ltd. announced on Thursday that it has increased its stake in Russian oil joint venture Samotlor Services from 25 to 50 percent, said a company press release. Fracmaster said it has agreed to purchase all of PanCanadian Petroleum Offshore (Cyprus) Ltd.'s 25 percent interest in Samotlor Services.

The remaining 50 percent interest is owned by Samotlorneft company, a principal production subsidiary of the Tyumen Oil Company. Samotlor Services is located in the Tyumen region of Western Siberia. Using Fracmaster's oil well stimulation technology, Samotlor produces incremental oil and provides well treatments on a fee-for-service basis. The current gross production of the joint venture exceeds 15,000 barrels per day.

New Oil JV Formed in Tatarstan

· Several Russian companies and Britain's Aminex have founded EdelOil, a joint venture to exploit new oil deposits in Russia's Republic of Tatarstan, reported Radio Mayak. Aminex will finance the project which will be operated by regional oil company Tatneft, which owns 20 percent of the venture.

S&P's Rates Oil Conglomerate Lukoil

· Standard & Poor's on Friday assigned its double-'B'-minus foreign currency issuer credit rating to Russian oil company Lukoil, said S&P's CreditWire. The outlook is stable. The rating reflects the company's standing as Russia's largest vertically integrated oil company, in a sector that is essential to the country's economy, fiscal balance, and exports.

However, the rating is negatively impacted by: (1) the absence of financial information that conforms to international standards; (2) the general operating and financial risks associated with the Russian oil industry, including fiscal terms and regulation; (3)

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Russia's depressed economy and limited solvent demand for oil products; and (4) the company's need for considerable investments going forward.

In future years, however, credit quality will benefit from: (1) the company's efforts to improve operational performance; (2) its consistent strategy to further integrate and internationalize operations, thereby mitigating the risks linked to operating in Russia and enhancing cash and foreign exchange earnings generation; and (3) a sound situation in terms of taxes due and financial debt outstanding.

Lukoil is Russia's largest upstream oil company by: reserves (proven reserves of about 1.4 billion tons), all of which oil and located in Russia); production (58.5 million tons, or 19 percent of Russia's 1996 total); and exports (21.3mt of crude and 4.5mt of refined products in 1996). It is also among the country's largest refiners and marketers, with 488,000 barrels per day (bpd) of refining capacity and a third of 15.7mt home product sales being retail.

Lukoil's massive reserves are heavily concentrated in the relatively remote region of northwest Siberia (about three-quarters of proved reserves). In European Russia, reserves include a substantial amount of high-sulfur crudes. In recent years, drilling and production activities have suffered from a significant lack of investment, due to a cash shortage. However, with idle wells being increasingly reactivated, production should stabilize or increase moderately in the medium term.

The bulk of Lukoil's crude production flows through the dilapidated pipeline system of the Transneft state monopoly, with strongly regulated volumes and tariffs. Exports through pipelines and seaports are costly and cannot be significantly increased medium term. Regulated domestic crude prices are still highly volatile and currently are 40-50 percent below world prices. Longer term, Lukoil's upstream assets will benefit from higher capital spending, joint venture production, and growing overseas expansion.

Downstream, Lukoil has two refineries (with a 80 percent utilization rate in 1996, among the country's highest) which, because of their specifications and the structure of local demand, are skewed toward heavy products. Mitigating this negative factor are: the extensive modernization program currently underway; the low domestic crude prices and, consequently, high refining margins; and a substantial and increasing retail presence (850 service stations), which provides high margins. In addition, a third plant could be built in a very attractive location.

Lukoil's general strategy is to: increase production through asset upgrades and international ventures; improve operational performance and the reliability of control and reporting systems; and partly finance this through enhanced access to foreign capital markets. Standard & Poor's recognizes the merits of this approach in terms of increased efficiency, stronger ability to capture available margins, and improved diversification in and outside Russia. However, these benefits will take time to materialize because of a volatile environment and the considerable capital requirements involved.

Assessing the company's financial performance is very difficult because of an absence of International Accounting Standards. While mirroring the situation in Russia at large, the high level of receivables and noncash sales are further negative factors.

However, the company's willingness and ability to repay federal taxes sharply differentiates it from most other Russian firms. Foreign exchange earnings are constrained by tight export capacity and regulation and by Lukoil's insufficient refining capacity. Partially offsetting these factors is the government's strong reliance on the oil industry for tax, exports, and foreign exchange revenues, providing a strong incentive to stabilize its operating environment.

The Russian state's 36.4 percent stake in the company should decrease in the future. Lukoil enjoys a relatively high degree of access to equity markets.

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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