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

Monday, August 11, 1997

Russian Federation

Politics

FAPSI Fighting Information War

· The Russian Federal Government Communication and Information Agency (FAPSI) is the country's main force counteracting the global "information war" which is escalating in line with the development and closer interlinking of international communication networks, said FAPSI first deputy director Vladimir Markomenko, reported Itar-Tass today. Markomenko defined "information war" as the use of information technologies during warfare. He sees information warfare as a set of events and transactions performed in conflict situations, during which information is simultaneously a weapon, a resource, and an aim.

Each person, military or civilian, is involved in information warfare in one form or another , according to Markomenko. Every country must be able not only to conduct such events and operations, but also to counteract these actions by its opponents.

The use of "information weapons" began with the development and introduction of information technologies, first of all, in an effort to control the armed forces. As communication systems developed, more favorable conditions arose for conducting warfare with the use of "information weapons," which have won an increasingly significant role in a given army's total arsenal.

Markomenko believes that the destruction and disorganization of a country's information infrastructure is commensurate with the effect of the use of weapons of mass destruction in its impact on a country's government and economic potential. The General illustrated his statement with an example of the combat action against Iraq in the Gulf War.

"From the very beginning of the war and combat operations of the allied air forces, the allies started to systematically destroy the operational command systems of the Iraqi armed forces," Markomenko is quoted by Itar-Tass as saying. "The armed forces of Iraq had been trained and prepared for conducting warfare in a style close to that of World War II and had not been prepared for conducting information warfare." He suggested that this was a major reason why Iraq lost the war.

Economy

Ruble = 5,812.5/$1.00 (NY rate)

Ruble = 5,808/$1.00 (CB rate)

Ruble = 5,798|5,818/$1.00 (buy|sell rates)

Government Finds Norilsk Sale to Be Legal

· The Russian government's investigation into last week's auction for a 38 percent stake in metals giant Norilsk Nikel has determined that no laws were violated in the process of the sale, reported Interfax today. The probe, conducted jointly by the Prosecutor General's Office, the State Property Committee, and the Federal Property Fund, found that the tender was conducted in full accordance with existing legislation and that the price was in line with market levels, said a source close to the government.

Prime Minister Viktor Chernomyrdin attempted to halt the tender and then relented, but ordered an investigation to determine whether the sale had been rigged. A member of Russian finan

Today's News Highlights

Russia

Piracy Costing $1 Billion

Mil-Ind. Complex in Decline

European Republics

Kuchma Names 1st Dep Premier

Ukraine Sees Good Harvest

South Caucasus & Central Asia

Brown & Root in AIOC Contract

Czech Trade with Central Asia

Israel Co. in Kazakh Contract

New Unrest in Tajikistan

Politics-Economics-Business

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Monday

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Intercon's Daily

cial group Oneximbank won the tender with a bid of $620 million in cash and investment.

There is no word yet on the results of an investigation into the recent sale of 25 percent of telecommunications holding company Svyazinvest, also won by Oneximbank. This probe was also ordered by CHERNOMYRDIN and includes the participation of the Federal Security Service (FSB).

Piracy Costing Up to $1 Billion

· Copyright piracy has become rampant in Russia, costing the country about $1 billion in revenue in 1996 alone, reported Xinhua, citing a source at the Russian Interior Ministry. Pirated audio-visual products now account for 85 percent of the national market and 65 percent of the market in Moscow. While 145 offenses were discovered in 1994, the figure rose to 175 in 1995, 218 in 1996, and 138 in the first half of this year. The Ministry has closed many underground manufacturing and marketing operations and confiscated large amounts of pirated audio-visual products so far this year.

Russian Mil.-Ind. Complex in Decline

· The enterprises of Russia's military-industrial complex have suffered heavily as a result of the transition to a market economy. While some enterprises have converted partially or fully into civilian operations, even these are struggling with financial ruin because of a significant reduction in state support and state orders. The most recent blow was a presidential decree abolishing these enterprises' main representation within the government, the Defense Industry Ministry. Last year, the government paid the bills for barely 50 percent of state orders and 20 percent of civilian production at defense plants, reported Inter-Press Service (IPS).

Currently, the Russian defense sector has 1,700 enterprises with over three million employees. Of these, 41 percent are state-owned, 32 percent are mixed capital enterprises, and 27 percent are private companies. The decline in state orders has led to the bankruptcy of 450 out of 615 enterprises undergoing conversion.

Only 23 out of the planned 120 new civilian products are actually being manufactured at the defense plants, and only five of them meet international standards. Only 200 out of Russia's 1,700 defense

enterprises are still functioning, thanks mainly to export orders.

In the early 1990s, production of strategic missiles fell by 2.4 times, of aircraft by 1.8 times, and of munitions by 2.8 times. The purchase of military hardware fell by 70 percent, and the government's debts to the industries grew from 1,500 billion rubles in 1994 to 9,000 billion in early 1997.

The Russian electronics industry is shrinking as well, with 1996 production figures amounting to barely 15 percent of their 1990 level. Under the program for the development of electronic hardware in Russia, annual federal investments in research and development and capital construction were planned at 1.2-1.5 billion rubles, with a similar amount supposedly to be raised from non-state budget sources. In practice, barely 10-12 percent of the earmarked sum has been allocated.

In the late 1980s, Russia was the world's fifth largest producer of metal-cutting instruments. Today, it produces less than half of that produced by the average nation worldwide. In 1995, Russia's share of world instrument-making had crashed to just 0.78 percent. Its production of computer controlled lathes plummeted from 16,700 in 1990 to 230 in 1995.

Even high profile sectors like space engineering are suffering. Allocations to space projects decreased by a factor of 10 between 1989 and 1997. The approved allocations to the Federal Space Program amount to only 30 percent of the required sum. In the first quarter of this year, allocations for space industries were less than 40 percent of the planned figures and amounted to only 15 percent in some spheres.

The already modest plans for launching spacecraft are being slashed. In 1993_96, only half of the planned number of spacecraft were launched.

The situation of military satellite launches of is even worse. The orbiting craft have grown obsolete, including 80 percent of communications and TV broadcasting satellites. They have exceeded their design life and can break down at any time.

The production of boosters and spacecraft has plummeted. The production of engines for Proton boosters is being cut, and there is no money to repair

When you need to know it as it happens

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Intercon's Daily

the launch sites at the Baikonur and Plesetsk cosmodromes. Over 50 percent of the space rockets enterprises' equipment has been operating for more than 20 years.

Yuri Chervakov, a former official with the Defense Industry Ministry, says there is a widespread feeling that the crisis cannot be overcome in the near future. He explains that domestic orders have dried up, and many non-export defense enterprises have been hit hard. Even in cases where it is still placing orders with enterprises, the Russian military ends up paying for less than half of the equipment it receives. Even those companies that have converted their production to civilian goods are in trouble. Last year, their output fall by 24 percent, because of an inability to compete against cheap imports.

Chervakov is pessimistic about the government's promises to pay wage arrears and increase funding for 1997 defense orders. He predicts the abolition of the Defense Industry Ministry will disrupt sweeping defense industry reforms currently under way.

has issued a letter of intent to award a service contract to Brown & Root, reported Reuters. The letter of intent relates to a contract "to provide engineering design and procurement services for Phase 1 of the Guneshli Chirag Azeri (GCA) offshore fields in the Caspian Sea," a Brown & Root statement was quoted as saying.

The development is likely to focus on a single processing platform as well as two drilling and wellhead platforms for up to 80 wells, and the facilities will be capable of producing 300,000 barrels per day. The company's involvement in the project will also include design and procurement activities for infield pipelines to the Sangachal onshore terminal 200 km away and expansion of the onshore terminal. In addition, it will include upgrading existing export pipelines to the Russian Black Sea port of Novorossiisk and the Georgian Black Sea port of Supsa, said the statement.

Brown & Root is a subsidiary of energy services firm Halliburton Company.

Czech Rep. Eyes Trade with Central Asia

· The Czech Republic's trade with Kazakhstan, Uzbekistan, and Kyrgyzstan rose sharply last year and is expected to increase further this year, reported Xinhua on Saturday, citing the Czech Ministry of Industry and Trade. Trade turnover with Kazakhstan, Uzbekistan, and Kyrgyzstan in 1996 stood at $53.2 million, $70.4 million, and $12.4 million, respectively, representing increases of 19 percent, 14 percent, and 153 percent over the previous year.

Czech Prime Minister Vaclav Klaus is expected to visit the three countries in October to further develop trade relations.

Israel Co. Gets Kazakh ATC Contract

· Israel's NICE Systems Ltd. announced today that its NiceLog™ Digital Voice Logging System has been selected by Germany's Siemens AG and Kazakh air traffic control authorities for Almaty and Aktyubinsk ACCs, said a NICE press release. The system will be delivered during the second half of 1997 in cooperation with Siemens, the prime contractor for the project. The NiceLog system will be interfaced with the current radio and telephone infrastructure and the new voice switching system.

European Republics

Kuchma Names First Deputy Premier

· Ukraine's President Leonid KUCHMA on Friday named industrialist Anatoly GOLUBCHENKO as a new First Deputy Prime Minister, reported Reuters. GOLUBCHEKO, a member of the pro-KUCHMA Constitutional Center in parliament, was industry minister from 1992 to 1995. He formerly worked as deputy head of a big steelworks and as a member of the state metals committee.

Ukraine Expects Good Harvest

· Ukraine's Agro-Industrial Minister Yuri KARASYK said Friday that the country expects a total grain harvest of 37-38 million tons this year, an increase of 13-14 million tons from the 1996 crop, reported Xinhua. Harvesting has been delayed because of torrential rains, but a bumper crop is still expected.

South Caucasus & Central Asia

Brown & Root Wins AIOC Contract

· The Azerbaijan International Operating Co. (AIOC), an international consortium developing three major oilfields in the Azeri sector of the Caspian Sea,

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Monday

August 11, 1997

Intercon's Daily

Lenin Statue Stolen from Kazakh Park

· A bronze statue of former Soviet leader Vladimir LENIN weighing four tons was stolen overnight from a park in Taraz in southern Kazakhstan, reported Itar-Tass on Friday. The robbers left no evidence except the tracks of heavy vehicles around the pedestal of the statue.

Police ruled out a political motive for the theft, saying that the statue will probably be melted down and sold for scrap metal. Security has been stepped up at the park, where a number of statues of Lenin are currently on display in an exhibition of Soviet symbols, set up by town authorities.

Unrest Returns to Tajikistan

· Fighting erupted in Tajikistan over the weekend between warlords struggling for control of areas in the southern and western parts of the country. The factional violence mars the so far successful peace efforts of the country's government and the main opposition leaders, who have signed several agreements and have been implementing provisions aimed at national reconciliation.

Tajik President Emomali Rakhmonov on Sunday convened a Security Council meeting in Dushanbe to discuss the weekend's factional fighting, during which at least one person was killed and four others were wounded.

On Saturday morning, fierce skirmishes broke out in the north of Dushanbe between forces loyal to Sukhrob KasImov, commander of the Tajik Interior special task force unit, and armed supporters of Customs Committee chairman Yakub Saliyev, which involved heavy artillery and armored vehicles.

More clashes occurred throughout Saturday near the Fakhrabad mountain pass, located 40 kms south of Dushanbe, between a rapid deployment force unit led by Colonel Makhmud KhudoberdIyev and presidential guards led by Gafar Mirzoyev. Twice in the past, the Colonel has tried to capture the area.

Spotlight on Almaty Hotels

The growth of international business in Kazakhstan has increased the demand for refined hotel accommodations. Almaty, Kazakhstan's economic center, hosts 22 hotels and is in the process of building three more by 1998, reported the US Embassy in Almaty. Because of the high demand, the occupancy rate in existing hotels is about 70 percent on the average.

Currently, the best hotels in Kazakhstan are managed by joint ventures, such as the world-class Hyatt Regency Rahat Palace Hotel, managed by US-based Hyatt Regency and Kazakh-Austrian Rahat, and the Ankara Hotel, a Kazakh-Turkish joint venture. Nonetheless, the ongoing construction and expansion projects are not expected to satisfy the rising demand.

In addition, a number of international hotels are now exploring opportunities in Akmola, Kazakhstan's future capital.

Hotels in Almaty Price Range (in US$) Hyatt Regency Rahat Palace* 225-1500 Ankara Hotel* 175-575 Presidential Suite 1200-1500 Dostyk Hotel 135-600 Kazakhstan Hotel 104-308 Otrar Hotel 90-500 The Third Residence 100-200 Sonar Hotel 85-165 Astana International Hotel 175-575 Alma-Ata Hotel 87-200 * Five Star Hotel

Note: According to Kazakh law, all rates are subject to a 20 percent value-added tax (VAT).

Source: US Embassy, Almaty.

Today, the Tajik government announced that it had taken control of the western regions where fighting had broken out, including recapturing the town of Tursunzade, where the country's largest aluminum smelter is located. However, the fighting in the south with KHUDOBERDIYEV's men is still raging.

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.

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