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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, July 8, 1997

Russian Federation


Violence, Kidnappings Continue in Chechnya

· Tensions increased in the North Caucasus today after eight Russian policemen were killed when their vehicle was blown up, a French aid worker was reported kidnapped, and five Chechens were taken hostage in the area. Several incidents of violence and kidnapping have followed a recent improvement in relations between Moscow and Grozny, leaving Chechen leaders scrambling to maintain order.

Radio Rossii reported that a remote-controlled bomb hit a truck carrying some 20 Russian policemen in Dagestan near the Chechen border this morning, killing nine. The bomb was hidden in the tree and was detonated as the truck was passing.

A spokesman for Medecins Sans Frontieres said today that unknown gunmen had taken Christophe ANDRE hostage from MSF headquarters in Nazran, Ingushetia, during the night of July 1, reported Reuters. He is the third foreign aid worker in the area to be kidnapped in a week. There is still no word on the whereabouts of two British aid workers, taken hostage last week in Chechnya.

Also today, five Chechens traveling in a bus from North Ossetia to Chechnya were taken hostage by masked gunmen apparently seeking the release of other hostages, reported Interfax. Chechen authorities are working on a plan to rescue them.

Yeltsin Orders Wage Arrears Paid

· Russian President Boris Yeltsin signed decrees today ordering the government to pay more than $2 billion in back wages to servicemen and workers by the end of the year, reported Dow Jones. Military personnel will receive back pay—about $800 million

in all—within the next two months and public sector workers will receive a total of some $1.5 billion before the end of this year.

"We must determine where to look for the funds, how to cut spending and raise revenues, where to lend money and what state assets or obligations to sell," YELTSIN is quoted by Interfax as telling First Deputy Prime Minister Boris NEMTSOV.


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TransRussia `97 Conference in Moscow

· Robert S. Arendal, Cargolux Airlines deputy CEO and past president of the International Air Cargo Association (TiACA), outlined the current status of the industry, and projected its growth and economic impact over the next 20 years, during a presentation at the 2nd Moscow International Freight Conference and exhibit held in conjunction with TransRussia `97, reported M2 Communications. "Air cargo is a big business," he said. "It improves the financial well-being of people in all nations and it's very important to the world economy."

Arendal also outlined the numerous current activities in Russia, the CIS, and Central and Eastern Europe that he believes will enhance air cargo potential there. These include new infra

Today's News Highlights


Russia to Open Waterways

Manezh Square to Sell Shares

Russia-Ukr.-Iran to Make Planes

European Republics

Ukraine to Issue Bonds

New Holland Expands in Ukraine

Ukraine June Inflation at 0.1%

South Caucasus & Central Asia

Turkmen-Azeri Row Over Oil

Georgia Security Min. Resigns




July 8, 1997

Intercon's Daily

structure projects that will attract substantial investment, foreign capital investment, improved power generation and transmission, privatization, private sector trading, airport improvements, stabilization of the political environment, more modern air traffic control, and improved telecommunication systems.

Inhibitors to growth, said Arendal, include imports in excess of exports; too few freighters in use; outdated customs formalities and related delays; and poor security that puts all shipments at risk. He added that the great potential for air cargo in the region will be directly proportional to the number of manufacturing relationships forged between companies in Russia, CIS, and Eastern Europe and others around the world.

Russia to Open Internal Waterways

· Russia will open its internal water routes to foreign ships by the year 2000 in keeping with its obligations assumed under an agreement with the European Union, Russian Deputy Transportation Minister Nikolai Smirnov told Itar-Tass on Sunday. According to the minister, 14 Russian ports on the Baltic and Caspian seas, the Sea of Azov, and the Amur River have already been opened for foreign ships. These ports have established joint border and customs control terminals.

The opening of the internal sea and river routes for foreign ships will considerably increase navigation between Azov and Astrakhan. This, however, will require serious modernization work on the Kochetovka system of shipping locks in the lower stretch of the Don river where Russia's first toll gates are planned to be built, said SMIRNOV.

Substantial work will also be required on the Volga-Don canal, he said. "It is a big industry—87,000 kms of shipping routes, 700 hydrofacilities, 126 major locks, 760 river marine vessels. Last year alone, 26.7 million tons of cargoes were transported, half of them for export," according to Smirnov.


Manezh Square Complex to Sell Shares

· Shares in Moscow's largest underground commercial complex, Manezh Square, will be sold on the London Stock Exchange by decision of the Moscow mayor's office, reported Profil (No. 24). A

first block of the complex's shares was purchased by the Moscow city government, while a second (totaling $30 million) was distributed via open subscription and is by now practically sold. The third block will be sold on the London Exchange.

Currently, the Moscow city government owns the controlling block of Manezh Square shares. Rossiisky Kapital bank and Techsoyuz company are also major shareholders.

The Mayor's office is the largest investor of the project, having put forward $110 million. Prime Minister Chernomyrdin personally helped the company receive a DM92 million credit from a German bank. Russia's Tokobank, Oneksimbank, and Moscow Bank also provided credits for the project. The approximate cost of the project is $338 million.

Russia-Ukraine-Iran Plane Making Venture

· Russia and Ukraine are expected to reach an agreement shortly on manufacturing medium-size Tupolev_334 passenger planes in Iran, reported Compass news, citing the Islamic Republic News Agency (IRNA). The project, which will produce some 100 planes a year, is expected to cost about $5 billion, said IRNA.

European Republics

Ukraine Plans Bond Issues

· Ukraine hopes to raise $700 million to $1 billion this autumn to reduce its budget deficit through two foreign bond issues, reported the Financial Times today. According the Deputy Prime Minister Sergei TSIPKO, the government wants to issue samurai bonds in September, with Nomura as lead manager. In October, Ukraine plans to launch a Eurobond issue with Deutsche Bank as lead manager.

According to the FT, the success of Ukraine's Eurobond debut could depend on the results of this week's talks with the International Monetary Fund (IMF). An IMF mission is currently in Kiev negotiating a $1.3 billion, three-year extended fund facility (EFF) loan. IMF disbursements to Ukraine were suspended this year because of the parliament's failure to pass the 1997 budget. Parliament finally approved the budget late last month and now the IMF is taking another look.

When you need to know it as it happens




July 8, 1997

Intercon's Daily

However, Ukraine may fall short as regards other economic reforms required for the IMF loan. Ukrainian reformers are moving quickly to push forward new reform efforts after the removal of much-criticized Prime Minister Pavlo LAZARENKO last week.

Deputy Prime Minister TSIPKO, presidential chief of staff Yevgeny KUSHNAROV, and Economy Minister Yuri YEKHANUROV are spearheading a new radical reform effort seen as essential to reversing the economic decline and combating corruption. Reform plans include: streamlining the bureaucracy by reducing the number of ministries and committees from 97 to 15; liberalizing foreign trade and domestic business activities, in part by cutting the number of business licenses from 87 to 34; introducing a tender system for all state contracts over $5,000; and having the treasury directly distribute state funds, rather than relying on individual ministries, said FT.

According to YEKHANUROV, the aim of these reforms is to reduce the size, cost, and power of the bureaucracy, thereby freeing Ukrainian entrepreneurs to flourish. "The most important thing for apparatchiks to understand is their job is to support business, not to kill it. More than anything else, I see my job as being a lobbyist for small business," he is quoted by FT as saying.

New Holland Expanding in Ukraine

· The Netherlands' New Holland N.V. today announced the opening of two new service centers in Ukraine to accompany the arrival of 91 twin rotor combine harvesters at the Ukrainian Black Sea port of Nikolayev, said a company press release.

"As we expand our presence into the Ukraine, New Holland believes the first step is to establish the after-sales support system," New Holland Vice President for Commercial Operations-Europe Franco Fusignani is quoted as saying.

New Holland has imported a total of 116 pre-sold combine harvesters into Ukraine this harvest season. The company expects to import another 60 units this year. The company's distributor in Ukraine, JSC Ukragrobusiness, has already sold 96 of these units for use by large grain producers and contractors in the southern and central portions of the country. The combines were manufactured at a plant in Nebraska.

Ukraine June Inflation at 0.1 Percent

· Inflation in Ukraine has been lower than anticipated so far this year, totaling only 5.3 percent in the first six months of 1997, which should bring the country in far below the forecast annual rate of 24.7 percent, reported Monday's Financial Times. Ukrainian Economy Minister Yuri YEKHANUROV said monthly inflation in June was 0.1 percent.

South Caucasus & Central Asia

Azeri-Turkmen Row over Caspian Deposits

· Turkmenistan is protesting an oil production agreement, signed between Russian and Azerbaijan last week, arguing that the Caspian Sea deposit to be developed is in contested waters. Moreover, Ashgabat is threatening to dispute in international court Baku's right to two other Caspian deposits, already being developed by a major foreign consortium. The protests highlight the continued battle over the legal status of Caspian resources and Moscow's apparent willingness to bow to commercial interests that diverge from its stated policy stance.

Last week during the visit of Azeri President Geidar ALIYEV to Moscow, the Azeri state oil company SOCAR signed a $1 billion preliminary agreement with Russian oil companies Lukoil and Rosneft to develop the Kyapaz oilfield, reported Reuters. SOCAR is to hold a 50 percent stake in the project, Lukoil 30 percent and Rosneft 20 percent. The field has estimated reserves of over 50 million tons.

On Saturday, the Turkmen Embassy in Moscow issued a statement, saying that Ashgabat protested the agreement and had called in Russia's Ambassador to Turkmenistan Vadim CHEREPOV and demanded that the agreement be annulled. The Turkmen Foreign Ministry insists that the Kyapaz area (called Serdar by Turkmenistan), earmarked for the prospecting and development, partially belongs to Turkmenistan and should be developed jointly.

On Monday, Baku received notification that Turkmenistan reserves the right to challenge in an international court the legality of Azerbaijan's actions to develop the Azeri and Chirag areas, two of three deposits on the Caspian shelf, which are now being developed with the 11-member Azerbaijan International Operating Co. (AIOC) international consor

When you need to know it as it happens




July 8, 1997

Intercon's Daily

tium. According to the Turkmen Foreign Ministry, one of the oilfields partially belongs to Turkmenistan, and the other is fully on its territory.

Also on Monday, Turkmen Foreign Minister Boris Shikhmuradov proposed that a joint Turkmen-Azeri commission be created to determine the dividing line between the two countries' sectors in the Caspian Sea, reported Itar-Tass. He suggested that Ashgabat's threat to contest the Chirag and Azeri deposits was based on Baku's refusal to consider a previous call for the formation of a bilateral commission to delineate Caspian resource zones.

Baku and Moscow have played down Turkmen objections to the oil development deals, both of which involve Russian companies. In the ongoing debate on the status of the Caspian, Azerbaijan and Kazakhstan view the Caspian as a sea to be divided into national sectors for development, while Russia, Iran, and Turkmenistan have argued that it is a lake whose resources should be developed jointly by the five littoral states. Despite Moscow's stance, it has allowed, and even encouraged, Russian oil firms to participate in deals to develop Caspian oil resources.

Santa Fe Drilling Gets Azeri Contract

· US Santa Fe International Corp. (SFIC) on Monday today announced that its affiliate, Caspian Drilling Co. Ltd., has entered into drilling contracts in the Azeri section of the Caspian Sea, said a company press release. The contracts call for the operation of the semi-submersible drilling units Dada Gorgud and Shelf 5 which are owned by the Azeri state oil company SOCAR.

The contracts, with Azerbaijan International Operating Co. (AIOC) for the Dada Gorgud and with BP Exploration (Shah Deniz) Ltd. for the Shelf 5, are for a combined term of up to 3,000 days. AIOC and BP are the initial parties to these drilling contracts under a rig sharing arrangement which also includes the Caspian International Petroleum Co. and North Absheron Operating Co. Ltd.

Caspian Drilling Co. was established in October 1996 by a subsidiary of Santa Fe International Corp. and SOCAR. SFIC indirectly holds a minority interest of 45 percent in the joint venture.

Bahrain Co. Forms Azeri Investment Firm

· Bahrain-based InterVest has been licensed as an investment company to operate in Azerbaijan, reported Compass news on Monday. InterVest, a firm of 30 independent investment consultants and tax planners, has a strong presence in the Gulf and has now set up an office in Baku.

"We have been visiting Azerbaijan for over 10 months assisting with a number of projects which now need our full time help," InterVest director Peter Ellery is cited as saying. "This is an exciting time for Azerbaijan, the speed of its development has created an immediate need for everything from health insurance through to pensions schemes, life insurance, investment planning, and venture capital."

"Many companies in the Middle East, and Bahrain in particular, are beginning to invest and trade in this region," InterVest chairman Harry Holt is quoted as saying. "InterVest is well positioned to offer local knowledge plus its expertise and connections to companies considering investing and trading in the region."

Georgian Security Minister Resigns

· Georgian President Eduard SHEVARDNADZE on Saturday accepted the resignation of Security Minister Shota KVIRAYA, reported RFE/RL Newsline. Opposition members of parliament and the Georgian press have accused the minister of black marketeering, shooting six men suspected of looting, tapping the phones of major newspaper editors, and harassing former Security Ministry staff. KVIRAYA has denied the allegations, but SHEVARDNADZE ordered the prosecutor's office to investigate.

On Sunday, SHEVARDNADZE named Deputy Security Minister Guram GAKHOKIDZE as acting security minister.

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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When you need to know it as it happens