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

Friday, August 1, 1997

Aleksandr VENGEROVSKY, Communist deputy Vladimir SEMAGO, and Duma Defense Committee chairman Lev ROKHLIN who have presented strongly differing views from their party leaders. SELEZNYEV said the Communist Party, Liberal Democratic Party, and Our Home is Russia factions support the change. Other legislatures in Europe with a proportional representation system do not allow parties to change their deputies at whim and Russia's adoption of such a rule would likely cause an uproar about anti-democratic behavior.

Svyazinvest Sale Still Not Final?

· Russian Prime Minister Viktor Chernomyrdin has instructed the State Anti-Monopoly Committee, the Justice Ministry, the Federal Security Service (FSB), and the Federal Service on Currency and Export Control to examine whether the recent auction of a 25 percent stake in Svyazinvest telecommunications company fully complies with existing legislation, State Duma sources told Itar-Tass today.

Economy

Russia Registers on Corruption Index

· Russia has been placed in the bottom five countries in the Berlin-based Transparency International's annual survey of corruption, which measures bribes, kickbacks, and nepotism around the world, reported the Associated Press (AP). The Corruption Perception Index is a "measure of lost development opportunities" because corruption discourages

Russian Federation

Politics

Yeltsin to Return to Moscow Next Week

· Russian President Boris Yeltsin said today that he will return to Moscow on Tuesday. He has been on vacation at the Volzhsky Utes residence near the city of Samara since July 18.

Duma's Abdulatipov Named Deputy PM

· Russian President Boris Yeltsin today appointed State Duma deputy Ramazan Abdulatipov as a new deputy prime minister in charge of regional affairs, local self-government, and development of the Russian Federation. The president announced the appointment following a meeting with Prime Minister Viktor Chernomyrdin in Samara.

ABDULATIPOV is the leader of the Russia's Regions faction in the Duma and a former Deputy Chairman of the Federation Council. YELTSIN's choice of a prominent Muslim politician and champion of the rights of Russia's minority nationalities may have been prompted by the recent troubles in the northern Caucasus between Ossetians and Ingushetians.

Factions Want Right to Revoke Mandates

· Russian State Duma speaker Gennady SELEZNYEV has advocated changing the parliament's procedural rules to allow the leaders of factions to revoke the mandates of some deputies who violate party discipline, reported RFE/RL Newsline, citing Kommersant-Daily. The proposed rule change would apply to the 225 Duma deputies who are elected from party lists using a proportional representation system.

The rule change would likely jeopardize the mandates of such deputies as former LDP deputy leader

Today's News Highlights

Russia

IMF to Release Another Tranche

Rosneft Privatization Plans

Aeroflot to Sell ADRs

European Republics

New US Ambassadors OK'd

Russia-Belarus Relations Worse

South Caucasus & Central Asia

Yeltsin on Georgia-Abkhazia

Aliyev in Washington

China in Kazakh Oil Deal

Politics-Economics-Business

Page

Friday

August 1, 1997

Intercon's Daily

Ruble = 5,810.5/$1.00 (NY rate)

Ruble = 5,800/$1.00 (CB rate)

Ruble = 5,790|5,810/$1.00 (buy|sell rates)

wrangling over the division of shares. The decision on the sell-off was impeded by a power struggle within the company between Rosneft's newly-appointed president Yuri BESPALOV, who represents the government's interests, and the chairman of the board and former president Aleksandr PUTILOV. The two men, along with other top level Rosneft managers and Privatization Minister Alfred KOKH and Fuel and Energy Minister Boris NEMTSOV, have been locked in a battle over control, loyalty, and the division of company shares. Several members of Rosneft's management resigned in July as a result of the row, but the sides finally seem to have reached an compromise and will sell off the entire company.

Rosneft employees on Wednesday approved the company's privatization plan, which calls for a 51 percent stake to be sold at cash auction, 7.6 percent of shares to be sold to the employees, and the remainder to be sold through investment tenders, reported Interfax. The plan was earlier approved by KOKH and the Rosneft board of directors.

Under current Russian legislation, foreign ownership in oil companies is limited to 15 percent. However, Reuters reported this week that the Rosneft management may seek Kremlin approval to circumvent the law.

Rosneft's total oil reserves are estimated at 10.82 billion barrels, about 11 percent of the country's total. Rosneft produced 13.1 million tons of crude oil in 1996. It owns 38 percent stakes in two major production units—Purneftegaz and Sakhalinmorneftegaz. Rosneft is also a partner in several production sharing deals with foreign companies, including the Sakhalin1 project with Japanese consortium SODECO and US Exxon and the TimanPechora Basin project with an international consortium led by US Texaco Corp. The company also holds a 7.5 percent stake in the Caspian Pipeline Consortium (CPC), which is building a pipeline to transport Kazakh crude oil to the Russian Black Sea port of Novorossiisk.

The privatization of Rosneft is expected to result in another major struggle between the country's big financial barons, but will hopefully will not lead to the ugly recriminations that occurred after the sale of telecom giant Svyazinvest. Financial interests con

Mar Apr May Jun Jul

foreign investment, according to Transparency International chairman Peter EIGEN. This year's index ranks 52 nations based on seven international surveys of business people, political analysts, and the general public.

The index scores countries on a one-to-ten scale, with Denmark receiving the highest rating of 9.94 and Nigeria the lowest of 1.76 rating. Russia was named the fourth worst country in terms of corruption, coming in below Pakistan with a 2.27 rating.

IMF Team to Recommend Tranche Release

· Russian First Deputy Prime Minister Anatoly Chubais said today that the International Monetary Fund (IMF) mission in Moscow will recommend that the IMF board release another $700 million credit tranche for Russia, reported Itar-Tass. The IMF mission has been in Moscow since July 22 examining how Russia was meeting its targets required to receive the $10.1 billion IMF loan.

According to CHUBAIS, the IMF team was convinced that "the main obligations assumed by Russia for the macroeconomic targets of the 1997 program, have been met." The IMF board is due to decide on the Russian disbursement on September 3.

Business

Rosneft Privatization Plans Set

· The plan for privatizing Russian state oil holding company Rosneft has apparently been set after long

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

August 1, 1997

Intercon's Daily

trolled by Boris BEREZOVSKY, which own oil company Sibneft and Uneximbank, whose president is Vladimir POTANIN, which controls Sidanko oil firm, are expected to compete for the Rosneft shares.

Aeroflot Planning to Issue ADRs

· Russian Aeroflot International Airlines plans to issue American Depository Receipts (ADRs) for 5-10 percent of its shares before the end of the year, reported Bloomberg news. Aeroflot has submitted documents to the US Securities and Exchanges Commission (SEC) and is preparing for the ADR issue in conjunction with the Bank of New York.

According to Bloomberg, foreign investors currently own over seven percent of common shares in Aeroflot. Three major US investment funds, including the Templeton Russia Fund, own 1.36 percent of the Russian airline.

Minsk viewed the delayed visit as an attempt to exert pressure on Belarus, charging that it directly contradicts international law and the principles of the Belarus-Russia Union. The president's men accused the Union's opponents in Moscow of being behind the action and demanded an explanation from the Russian Foreign Ministry.

South Caucasus & Central Asia

Russia Pushes for Georgia-Abkhaz Settlement

· On Russian television today, Russian President Boris YELTSIN invited Georgian President Eduard SHEVARDNADZE and Abkhazian leader Vladislav ARDZHINBA to come to Moscow for a "serious discussion" of the question of a Georgian-Abkhazian peace settlement.

YELTSIN added that, before such a discussion can take place, a protocol on resolving the Georgian-Abkhazian problems should be signed. "If they are successful in doing this and such a protocol or agreement will be signed, then we can approach the question of the withdrawal of our forces," YELTSIN is cited by Itar-Tass as saying. Russia doesn't want to keep its peacekeepers in Abkhazia indefinitely.

YELTSIN's personal interest in a Georgia-Abkhazia settlement is positive, but his statement leaves open some questions. Is the protocol that he refers to the one that was earlier proposed by Moscow, but rejected by Tblisi? And when YELTSIN said that he thinks Georgia and Abkhazia should establish relations based on a model of Russian center-republic relations, does he mean Moscow's relations with republics such as Tatarstan or its relations with Chechnya?

Moreover, Yeltsin's summoning of the head of state of a neighboring country to come and hold negotiations with a rebel leader is imperious to say the least.

Notes on Aliyev's Visit to Washington

· Azeri President Geidar Aliyev told about 100 US business executives in Washington on Thursday that his government planned to begin selling the state's telecommunications assets this year, reported Reuters. "Every foreign country can participate in the privatization," he said.

European Republics

Senate Cttee Confirms FSU Ambassadors

· The US Senate Foreign Relations Committee on Thursday approved several nominations for ambassadors to former Soviet republics. James COLLINS, who is currently ambassador at large for the New Independent States, was approved as Ambassador to Russia. Anne SIGMUND was affirmed as Ambassador to Kyrgyzstan, Keith SMITH as Ambassador to Lithuania, and Daniel SPECKHARD as Ambassador to Belarus.

In addition, the current Ambassador to Azerbaijan Richard KAUZLARICH was confirmed as Ambassador to Bosnia. The Committee's recommendations will now go to the full Senate for a vote.

Kaliningrad Gov. Delays Lukashenko Visit

· Relations between the two Slavic neighbors, Russia and Belarus, worsened further today, when the governor of Russia's Kaliningrad region Leonid GORbenko sent a telegram to Minsk asking Belarus President Aleksandr Lukashenko to reschedule his visit to the region, set for August 1-2. The governor said that he was worried the visit could not be fruitful because of the breakdown in relations between the two countries caused by the arrest of a Russian Public Television (ORT) crew in Belarus.

The Belarussian president spokesman said that

When you need to know it as it happens

Politics-Economics-Business

Page

Friday

August 1, 1997

Intercon's Daily

ALIYEV urged the businessmen not just to focus on the country's oil assets, noting that the US accounts for only five percent of the foreign companies doing business in Azerbaijan. Four major US oil companies are expected to sign agreement on oil development projects in Azerbaijan today.

ALIYEV stressed his country's favorable investment laws, including 10-year protections against changes that might affect long-term contracts an not barrier to taking profits out of the country.

The US Export-Import Bank said on Thursday it signed a Project Incentive Agreement with Azerbaijan, which would lay the foundation for possible financing of US exports to Azerbaijan. The agreement was signed by Azeri Finance Minister Fikret Yusifov and National Bank chairman Elman Rustamov, and Ex-Im Bank President and Chairman James Harmon.

The agreement provides a framework for financing US sales to Azerbaijan where repayment is based on export revenues generated by the borrower, rather than a sovereign guarantee of the debt by the host country government. Repayment of loans will be facilitated through the establishment of offshore collateral accounts. Ex-Im Bank recently signed similar agreements with Kyrgyzstan and Georgia.

Turkmenistan Persuades Russia on Kyapaz

· Russian Deputy Prime Minister Valery Serov today informed Turkmen President Saparmurat Niyazov that Russia has canceled the agreement with Azerbaijan on the development of the Kyapaz oil deposit in the Caspian Sea, reported Itar-Tass. On July 4 in Moscow, Russian oil companies Lukoil and Rosneft signed an agreement on the deposit with the Azeri state oil company SOCAR. Turkmenistan denounced the agreement as illegal, arguing that the deposit was located in a disputed area of the Caspian on the border of the Turkmen-Azeri sectors.

Russian and Turkmen officials have been holding talks for the last week, ahead of NIYAZOV's planned

visit to Moscow, scheduled for August 7. The Turkmen side has apparently persuaded Moscow of the wisdom of siding with Ashgabat over Baku on the issue of Kyapaz development. It is telling that the announcement came as Azeri President Geidar ALIYEV is in Washington drumming up US economic and political support, as well as US investment in the country's oil sector. Baku's efforts to warm relations with Washington seems to have driven Russia into the arms of Ashgabat.

China to Negotiate on Kazakh Oil Project

· The China National Petroleum Corp. (CNPC) has won the exclusive rights to negotiate with Kazakhstan to develop the country's second largest oilfield, Uzen, reported Reuters today. The two sides hope to reach agreement on basic conditions within a month and begin preparations to sign a contract, said Kazakh Finance Ministry official Birzhan MADIYEV. The sides plant to set up a joint venture on a production-sharing basis.

Uzen is located in western Kazakhstan near the Caspian and has been exploited since 1965. Over 260 million tons of oil has been extracted over more than three decades. Uzen's recoverable reserves stand at about 200 million tons.

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 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.

When you need to know it as it happens

Politics-Economics-Business

Page

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

available for non-profit institutions.