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

Wednesday, August 13, 1997

Nemtsov's arrival on the scene and posturing as "a generally recognized heir apparent" upset the delicate balance between opposing government forces. "He introduced the unhealthy spirit of rivalry in what seemed to be a friendly team of Cabinet members," according to the paper.

In response, all sides have had to change their tactics. The most ambitious player is CHUBAIS whom the newspaper believes "is trying to set up a complete structure to replace the isolated groups which are lobbying their own interests." It is expected that members of the government not on the CHUBAIS team will attempt to oppose his ascendancy.

As a result of the renewed intra-government struggle, reform has again fallen by the wayside, lost in the battle for influence over President Yeltsin. The newspaper suggests that YELTSIN is pleased with the situation, enjoys watching the "system of restraints and counterbalances" and, possibly, encourages it by using Nemtsov as an "irritant."

Unlike in the past, when raged such conflicts as Gaidar vs. Soskovets or Filatov vs. Korzhakov where the rivals and their ideologies were clear, now it is difficult to determine "who [is] the motor of the reforms" and "who tried to slow them down," said the paper. In the current Russian government, it is nearly impossible to distinguish who is serving the interests of the Russian people and

Russian Federation

Politics

Russian Privatization Minister Resigns

· The head of the Russian State Property Committee Alfred KOKH has tendered his resignation and Maksim BOIKO, deputy head of the presidential administration, was appointed to replace him. The personnel change comes on the heels of two controversial government share auctions, the sales of stakes in telecom firm Svyazinvest and metals company Norilsk Nikel.

KOKH has served as director of privatization since September 1996 and was deputy head of the Property Commitee since 1995. He was also given the rank of deputy Prime Minister earlier this year, a position that will also be taken over by BOIKO.

BOIKO formerly worked as the head of the Russian Privatization Center.

Both KOKH and BOIKO are close allies of First Deputy Prime Minister Anatoly CHUBAIS.

Government Infighting Intensifying?

· The machinations surrounding the recent controversial privatization auctions for shares in Svyazinvest and Norilsk Nikel have made it "crystal clear" that the Russian government is divided into competing groups, according to Tuesday's Moskovsky Komsomolets. The main confrontation is between the so-called young reformers and so-called moderate conservatives, it said. The former group is led by First Deputy Premier Anatoly Chubais and the latter by Premier Viktor Chernomyrdin. However, the situation is not so simple as a confrontation between these two factions; it has been complicated, largely, by the introduction of Boris NEMTSOV into the government.

Today's News Highlights

Russia

Rutskoi Viewed Negatively

Soros to Visit Russia

National Share Register Planned

Aviation Safety Declining

Bank of Moscow Growing

Moscow Seeks Big Stakes

Banks Buying into Aviation

South Caucasus & Central Asia

McConnell in Georgia

AIOC Starts Drilling in Caspian

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who is only looking after the interests of his financial backers.

Moskovsky Komsomolets broke down government ministers into the following categories:

Young Reformers:

Anatoly Chubais, First Deputy Premier/Fin. Min.

Boris Nemtsov, First Deputy Premier/Fuel and

Energy Min.

Yakov Urinson, Deputy Premier/Economy Min.

Alfred Kokh, Deputy Premier

Oleg Sysuyev, Deputy Premier/Labor Minister

Moderate Liberals:

Vladimir Babichev, chief of the government's staff

Valery Serov, Deputy Premier

Vyacheslav Mikhailov, Nationalities Minister

Vladimir Kinelev, Education Minister

Yevgeny Yasin, minister without portfolio

Conservatives [category added by Intercon]:

Viktor Chernomyrdin, Premier

Yevgeny Primakov, Foreign Minister

Viktor Mikhailov, Nuclear Energy Minister

Sergei Stepashin, Justice Minister

Professionals in the Government:

Ramazan Abdulatipov, Deputy Premier

Nikolai Tsakh, Transport Minister

Nikolai Akseyenko, Railways Minister

Tatyana Dmitriyeva, Health Minister

Sergei Shoigu, Emergency Situations Minister

Yevgeny Sidorov, Culture Minister

Power Ministers:

Igor Sergeyev, Defense Minister

Anatoly Kulikov, Interior Minister

Nikolai KovalYOv, Federal Security Service (FSB)

director

V. Trubnikov, Foreign Intel. Service (SVR) chief

Rutskoi Governorship Viewed Negatively

· A number of political and financial scandals have recently come out of western Russia's Kursk Oblast with most revolving around the region's governor, Aleksandr Rutskoi, reported Tuesday's Komsomolskaya Pravda. RUTSKOI, the former Russian vice-president who challenged President Yeltsin along with the rebellious parliament in 1993, was elected governor in October 1996.

During his time in office, RUTSKOI has frequently disparaged the region, referring to it as a garbage dump, according to the newspaper. He has made dozens of foreign trips during the year—to Strasbourg,

London, Buenos Aires, and Spain—always promising to attract investment money from abroad. Instead, total investments have declined by one-third, compared with the same period of last year.

In addition, many of Rutskoi's aides are connected with the criminal world, said the newspaper, with some of them controlling the alcohol trade and other highly criminalized businesses in the region.

Soros to Pay Visit to Russia

· Billionaire philanthropist George SOROS will visit Russia during October 7_19, reported Interfax, citing the St. Petersburg office of the Soros Fund. His visit is planned to coincide with the 10th anniversary of the opening of the fund's branches in Russia. The Soros Fund provides assistance to former Soviet bloc countries making the transition to democratic market economies.

During the visit, SOROS will make stops in Moscow, St. Petersburg, Yekaterinburg, Kazan, Novosibirsk, and Novgorod. He is also expected to meet with some members of the Russian government.

SOROS made his first investment in Russia this month, joining a consortium led by commercial bank Oneximbank to purchase a 25 percent stake in telecommunications holding company Svyazinvest.

Economy

Ruble = 5,804/$1.00 (NY rate)

Ruble = 5,809/$1.00 (CB rate)

Ruble = 5,799|5,819/$1.00 (buy|sell rates)

Russia Creates National Share Register

· Russian Moscow Interbank Currency Exchange (MICEX) on Tuesday joined a group of Russian companies to create a single national share register and clearing house, reported today's Journal of Commerce. The central register could help increase the liquidity of Russian markets and spur reforms to improve conditions for foreign in

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vestors, it said.

MICEX President Aleksandr ZAKHAROV signed the agreement on the register with Depository Clearing Co., National Depository Center, the Russian Trading System (RTS), and the St. Petersburg Currency Exchange (SPICEX). He told reporters after the signing that the group of companies has the full potential to create a register which would be able to serve as a single national register.

MICEX serves as the sole trading floor for Russian government securities and recently began trading corporate shares and municipal bonds.

Russian Aviation Safety Declining

· Russian Federal Aviation Service head Gennady Zaitsev said Tuesday that Russia's civil aviation safety record worsened in the first half of this year, with 66 people killed in seven air crashes, reported Itar-Tass. The death rate is the highest in the last three years, he said. A total of 43 people died in five air crashes in 1995 and 35 were killed in four crashes in 1996. Errors by flight and ground crews and air traffic controllers account for 79 percent of all crashes.

Freight and passenger traffic continues to decline, according Zaitsev. The amount of air freight and mail fell by 11.3 percent in January-June 1997, compared with the same period in 1996.

Russian airlines carried a total of 10.8 million passengers in the first six months of 1997, 1.7 million people fewer than over the same period last year. Passenger revenue already had dropped by 7.6 percent in 1996, said ZAITSEV. He blamed low consumer purchasing power, higher ticket and fuel prices, and the lack of government support.

Moscow Bank Growing, City Enters Radio

· The Bank of Moscow, which is 51 percent owned by the Moscow city government, has become one of Russia's 10 largest banks in terms of assets, reported RFE/RL Newsline, citing Kommersant-Daily. During the last six months, the bank's assets have increased tenfold to 12.8 trillion rubles ($2.2 billion), largely as a result of deposits of city budget funds and proceeds from the city's recent sale of $500 million in Eurobonds.

In other Moscow news, a new radio station to be funded by the city government is scheduled to begin broadcasting on September 1, said RFE/RL, citing Segodnya. The radio station, like the recently established, Moscow-owned television network TV-Center, is expected to support LUZHKOV in the 2000 presidential election.

Moscow City Seeks Enterprise Shares

· Moscow Mayor Yuri Luzhkov has signed a resolution confirming a list of 27 enterprises in which the city administration wants to acquire large interests, reported Segodnya. Moscow is seeking to take possession of the following state stake: 69.79 percent of the Russian Exhibition Complex (former VDNKH), 51 percent of Sheremetyevo International Airport, 51 percent of the Kristall distillery, 49 percent of the Svoboda perfume factory, 38 percent of the Moscow Oil Refinery, 25.5 percent of the Moscow River Shipping Company, 25.5 percent of the Vnukovo Airport, 20 percent of Mosenergo, and 19 percent of the Moscow Nonferrous Metal Processing Plant. The shares are to be transferred into city's possession in payment for the federal debt owed to the city, said the report.

Business

Banks Buying into Aircraft Sector

· Major Russian commercial banks Oneximbank, Inkombank, National Reserve Bank, and Menatep Bank have substantial interests in the domestic aircraft industry, reported Finansist (No. 7).

Oneximbank currently owns 14 percent of the Sukhoi Aircraft Design Bureau. In addition, the Interros financial company, an affiliate of Oneximbank, owns 33 percent of Perm Motors, a large enterprise specializing in the manufacture of aircraft engines. Oneximbank has for some time been pressuring on Perm Motors Director V. Kinderknekht to give it the right to actively interfere in the company, said Finansist.

According to some of the paper's sources, now that Interros representatives have come to power in Perm Motors, the enterprise will probably resume business contacts with US Pratt & Whitney. The result of this renewed cooperation could be the prompt completion of the "long-suffering" PC-90a aircraft engine project or even the transformation of Perm Motors into an affiliate of Pratt & Whitney, it

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said. In the latter case, Perm Motors will produce only US-designed aircraft engines, suggested the paper.

Inkombank owns 25 percent of the Sukhoi Aircraft Design Bureau. In addition, Inkombank actively cooperates with the Sokol aircraft plant in Nizhny Novgorod which manufactures various kinds of the MiG warplanes. Sokol is a large shareholder of Inkombank and has its representatives in the Inkombank Business Monitoring Council. Sokol and Inkombank have established the Phoenix aviation company in Nizhny Novgorod.

The National Reserve Bank is currently involved (together with international accountancy Ernst & Young) in a project to obtain certification for the IL_96 airliner, which is produced at the Voronezh Aircraft Building Conglomerate.

Menatep has a cooperation agreement with the Kazan Aircraft Building Conglomerate. Menatep is trying to raise $540 million to finance the building 30 TU_214 airliners by the Kazan company. Plans call for the project to be completed by the year 2001.

capita, said MCCONNELL, who chairs the Senate Appropriations Foreign Operations subcommittee.

AIOC Begins Drilling in Caspian

· The Azerbaijan International Operating Co. (AIOC) began drilling its first oil well on Tuesday at the Chirag field in Azeri sector of the Caspian Sea, reported Itar-Tass. Chirag is one of Caspian offshore deposits to be developed under the $8 billion "deal of the century" which was concluded in 1994 between Azerbaijan and the AIOC, a consortium which includes Russia's Lukoil and British Petroleum, Norway's Statoil, US companies Amoco, Pennzoil, Unocal, McDermott, and others.

The contract, a production-sharing deal for three deposits—Azeri, Chirag, and Guneshli, projects an output of 511 million tons oil within 30 years.

The first well, to be 2,885 meters deep, is being drilled by a Canadian-German consortium. Experts expect the well to be ready in 45 days, with another five days earmarked for its development, a spokesman for AIOC told Itar-Tass.

The well is being drilled at a 120 meter depth in a Caspian area situated 180 kms southeast of Baku. The drilling is performed from an oil platform whose housing and production modules were renovated by the Western parties in the contract.

A total of 24 wells is to be drilled from the platform within three years, of which two are to be ready this year and six in 1998. The wells are to be drilled to meet contract-set targets of "early" or low-volume oil output of the three fields. About $1 billion dollars has been invested in the project to date.

Correction: Tuesday's Daily Report included Sen. Tim HUTCHINSON in a Senate delegation visting Georgia. In fact, it is Sen. Kay Bailey HUTCHISON (R-Tx.) who is in the Caucasus.

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South Caucasus & Central Asia

Sen. McConnell Praises Georgia

· Speaking at a state dinner in Tblisi, US Senator Mitch MCCONNELL (R-Ariz.) said that of all places he had visited in the world, he had never been to a country where the president made a concerted effort to showcase young leaders in the parliament. What makes Georgia unique, he said, is that President Eduard SHEVARDNADZE has faith in the country's young political leaders, some in their 20s and 30s, and tries to help them advance, instead of keeping the spotlight on himself. This shows the country has a bright future.

The dinner, hosted by Georgian parliamentary chairman Zurab ZHVANIA and attended by SHEVARDNADZE, was held for a US congressional delegation, led by Rep. Sonny Callahan (R-Ala.), and for MCCONNELL who is travelling around the Caucasus on his own.

On Monday, MCCONNELL met with Armenian President Levon TER-PETROSYAN in Yerevan to discuss economic aid and the situation in the country. Armenia receives the highest level of US aid per

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Managing Editor

Svetlana Korobov, Contributing Editor

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