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

Tuesday, August 26, 1997

Russian Federation

Politics

Bureaucrat to Blast Off into Space

· A senior Russian official is preparing for a possible trip to the Mir space station next year, reported Itar-Tass on Monday. Forty-eight-year-old Defense Council secretary Yuri Baturin is currently undergoing training at Star City to prepare for the trip.

Opposition Backs Rokhlin's Organization

· The All-Russian Movement to Support the Army, Defense Industry, and Military Research (headed by State Duma Defense Committee chairman Lev Rokhlin) convened an organizing conference on August 20, reported Kommersant-Daily. Commenting on the movement's prospects, Rokhlin remarked that it enjoys the support of a considerable part of the opposition, "beginning with Zyuganov and ending with Zhirinovsky," embraces more than 60 organizations, and has branches in 41 Russian regions. Rokhlin denied speculation that his movement is "a Trojan horse from the `party of power' designed to undermine the opposition from the inside."

New Anti-Monopoly Agency Head Named

· Russian President Boris Yeltsin on Monday named Natalia FonarEva as chairwoman of the country's State Anti-Monopoly Committee.

Meanwhile, the former deputy head of the Federal Bankruptcy Agency Petr Karpov on Monday went on trial in Saratov on bribery charges, reported Itar-Tass. KARPOV was charged in August 1996 with accepting a five-million-ruble bribe from a Saratov electronics company in 1994 when preparing a business plan for the enterprise. According to Karpov's lawyers, this was a "mere remuneration of consulting services."

Developments in Chechnya

· Russian President Boris Yeltsin told a meeting of the Russian Security Council on August 20 that he is worried by the increasing influence of the US in the Caucasus, traditionally Russia's sphere of interest. "The United States is already declaring the Caucasus its zone of interest," Yeltsin is quoted by United Press International (UPI) as saying.

"Our interest is weakening but the Americans are penetrating the zone and are not shy in declaring this," he told the meeting. "We must respond to the interests of our national security, and Russia has a right to expect an understanding on this from the international community."

Also last week, five Russian journalists who had been taken hostage in Chechnya were released. On August 17, two reporters from the VID television company were freed. The correspondents were kidnapped in Grozny on June 11.

The next day, three NTV correspondents, including well-known TV personality Yelena Masyuk, were released after 101 days in captivity in Chechnya.

Russian Security Council secretary Ivan Rybkin told Itar-Tass that 764 hostages and prisoners of war were released in Chechnya over the past 12 months, including 11 Russian journalists. However, kidnappers took hostage over 70 people since May 1 alone. Out of the total, 40 of these have been released.

Today's News Highlights

Russia

Govt OKs 1998 Draft Budget

Roslesprom to Be Privatized

CSFB Equities Head Quits

South Caucasus & Central Asia

IFC Invests in Azerbaijan

AIOC Project to Be Delayed?

Azeri-US Gold Mining Deal

Armenia Gold Mining Deal

Nazarbayev to the US

Texaco Joins Kazakh Oil Project

Politics-Economics-Business

Page

Tuesday

August 26, 1997

Intercon's Daily

Economy

Ruble = 5,820/$1.00 (NY rate)

Ruble = 5,821/$1.00 (CB rate)

Ruble = 5,810|5,832/$1.00 (buy|sell rates)

Government Approves 1998 Budget

· Russian Prime Minister Viktor Chernomyrdin on Monday signed the draft law on the federal budget for 1998 and sent it to the State Duma for approval, First Deputy Prime Minister Anatoly Chubais told reporters. Chubais said that for the first time the government offers a budget of economic growth. He promised that the government has worked out a budget which can and must be fulfilled.

CHUBAIS admitted that some components of the draft budget would likely face opposition in the parliament. Specifically, he pointed to a planned reduction in financial support for regions from 15 percent of total budget revenues this year to 13 percent in 1998. However, Chubais said he was hopeful that the government will be able to persuade the legislators to pass the proposed budget.

The 1998 draft budget forecasts a two percent increase in GDP, 2-3 percent growth in industrial output, and a three percent rise in agricultural output.

The draft budget calls for total expenditures of 472 billion new rubles (about $81.2 billion) and revenues of 340 billion new rubles (58.4 billion). Spending on defense will total 94.5 billion new rubles and the allocation for education is 16.3 billion new rubles.

The budget deficit is expected to total 4.8 percent of GDP in 1998, compared with 5.35 percent this year. Total foreign debt is expected to rise to $140.8 billion by January 1, 1999, and the inflation rate next year is expected to fall to 0.5 percent.

President Orders Sale of Timber Co.

· Russian President Boris YELTSIN has signed a decree on the privatization of Russian state timber producer Roslesprom, reported Interfax. Roslesprom will be converted into a joint stock company of the same name, in which the state will hold the company's golden shares for three years. The decree also orders the government to transfer Roslesprom's foreign assets, including securities and shares, to the State Property Committee.

Business

CSFB Moscow Head Quits

· CS First Boston Russian equities head Peter HALLORAN announced on August 19 that he is leaving the firm to start up his own investment fund, reported Reuters. HALLORAN joined CSFB in 1991 and took over as head of the Moscow office after Boris JORDAN left to form Renaissance Capital in 1995. He will be replaced temporarily by a four-member CSFB Moscow equities management team.

HALLORAN generated $8 billion in fixed income sakes last year and $1.6 billion in arranged corporate finance commitments, in addition to equity sales, company sources told Reuters. CSFB, part of Credit Suisse, is one of the oldest and most successful Western players in Russia.

HALLORAN will open the Pharos Capital Moscow-based equity fund. Pharos Capital Management Ltd. said in a statement that it intends to raise $150 million within one month and HALLORAN said it would focus on shares, but could invest up to 25 percent of funds each in direct investment and fixed income.

South Caucasus & Central Asia

Georgian Guerrillas Kidnap Peacekeepers

· On August 16, the Georgian guerrilla group White Legion took hostage three Russian peacekeepers in Abkhazia, but the group released them on August 22 in exchange for the dead bodies of two Georgian guerrillas killed in Abkhazia on August 13.

The release of the Russian hostages was secured through a joint effort between Georgian and Russian officials, including Russian Foreign Minister Yevgeny PRIMAKOV.

IFC Investment in Azerbaijan

· The International Financial Corp. (IFC) on Monday signed investment agreements with Baku Coca-Cola Bottlers Ltd. for $5.8 million—$3.5 million in debt and $2.3 million in equity—to a Coca-Cola bottling operation in Baku, said an IFC press release. This is IFC's first investment in Azerbaijan.

Baku Bottlers, a joint venture between Efes Investments of Turkey and the Azeri Ilchin Ltd., produces Coca-Cola, Fanta, and Sprite for the local market.

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

August 26, 1997

Intercon's Daily

AIOC Project Delayed by Pipeline Problems

· The Azerbaijan International Operating Company (AIOC), an international consortium developing three oil fields in the Azeri section of the Caspian Sea, said on August 21 that it may halt production at its first well, reported Dow Jones. Delays in the completion of the Northern pipeline route for exporting the oil from Azerbaijan to Russia's Black Sea port of Novorossiisk are forcing the consortium to consider the stoppage, it said. Problems between Russia and Chechnya are causing the delays.

The consortium began drilling its first well at the Chirag 1 platform on August 11 and targeted September 20 as an approximate date for the first oil flow.

Azerbaijan-US Sign Gold Mining Deal

· Azerbaijan's state gold mining company Azergyzyl and the US consortium RV Investment Group Services LLS on August 20 signed a $500 million contract to develop nine gold fields in the west and southwest of Azerbaijan. The Azeri company will hold 51 percent of the new joint venture, and the US partner holds the remaining 49 percent.

RV Investment Group will finance all exploration costs and Azergyzyl is expected to receive up to 80 percent of the revenues. Some $30-40 million will be spent for surveying and prospecting.

The contract forecasts the mining of 400 tons of gold, 2,500 tons of silver, and 1.5 million tons of copper within the next 15 years.

Three of the mines to be developed are located in areas occupied by Karabakh Armenian troops. This includes the Zod deposit, which is currently the subject of a joint production deal between Armenia and a foreign mining firm (see story below). Zod is located on the Azeri-Armenian border and is claimed by both countries.

RV Investment Group president Reza VEZIRI said on August 22 that his company will appeal to the UN International Economic Court, if it obtains proof that Armenia is mining gold in Azerbaijan's Kelbajar region, reported RFE/RL Newsline.

Armenia-First Dynasty Sign Gold Deal

· Canada's First Dynasty Mines Ltd., its affiliate Global Gold Armenia, and the Armenian Ministry of

Industry announced on August 18 that they expect to conclude a joint venture agreement which will give Global Gold Armenia a 50 percent interest in the Zod and Meghradzor mines on or before September 30, said a First Dynasty press release. The agreement should lead to expansion of the Zod and Meghradzor mines to initial production rates of about 200,000 ounces of gold per year, and construction of an associated refinery.

First Dynasty announced in February that it had agreed to invest in Global Gold Armenia, which is a party to a multi-stage joint venture, including restarting the Zod and Meghradzor mine, with the Armenian Industry Ministry and Armgold, the state-owned gold mining company.

First Dynasty has committed a loan facility of up to $1 million to the Armenian government to facilitate work required at the mines prior to signing the definitive agreement that it expected by the end of September. This work will include re-establishing access to much of the mine and stabilizing ground conditions.

Nazarbayev Invited to the US

· During a visit to Kazakhstan last week, US Permanent Representative to the UN Bill Richardson conveyed to Kazakh President Nursultan NAZARBAYEV an invitation to visit Washington during November 17-18 to participate in the work of the joint American-Kazakh commission, reported Itar-Tass. The commission will hold its regular meeting under the chairmanship Nazarbayev and US Vice-President Albert Gore.

Texaco Joins Karachaganak Oil Project

· US Texaco Corp. announced on August 19 that it has acquired a 20 percent stake in Kazakhstan's huge Karachaganak oil and gas field, said a company press release. Texaco's ownership participation, acquired from partners Agip SpA and BG Exploration and Production Ltd., has been approved by the government of Kazakhstan, it said.

Karachaganak is currently operating under an interim agreement, signed in March 1995, and under a 40-year license for the field's production. Texaco joins the consortium as it is negotiating a final production-sharing agreement, which is expected to be completed by the end of this year.

When you need to know it as it happens

Politics-Economics-Business

Page

Tuesday

August 26, 1997

Intercon's Daily

Karachaganak currently produces more than 50,000 barrels of condensate per day and 210 million cubic feet of natural gas per day. The field was discovered in 1979 and potentially holds recoverable reserves of more than two billion barrels of oil and condensate and 20 trillion cubic feet of gas.

Kyrgyzstan to Process Kazakh Uranium

· Kyrgyzstan plans to begin processing raw uranium from Kazakhstan in late 1998. An agreement was signed in Bishkek on August 15 between the Karabalt mining combine and Kazakhatomprom (Kazakhstan's Atomic Industry Ministry) to create a Kyrgyz-Kazakh joint venture, which will be registered by November 1. Kazakhstan will hold a 65 percent stake in the venture, with the Kyrgyz side holding a 35 percent interest. The Karabalt combine has a processing capacity of 2,000 tons of raw uranium annually. The deal represents the re-forming of a relationship that collapsed with the breakup of the Soviet Union.

ADB Loan for Kyrgyzstan

· The Asian Development Bank on August 21 approved a $12.5 million loan to Kyrgyzstan for a rural development project, reported Xinhua. The loan will help establish 280 rural credit unions in the country's six regions. Credit is urgently needed in the country's rural areas where the banking system has broken down and farming has deteriorated from commercial production to subsistence operations and barter exchange, said ADB officials.

World Bank Loan for Uzbekistan

· The World Bank on August 21 approved a $75 million loan to Uzbekistan in support of a Water Supply, Sanitation, and Health Project designed to reverse the severe health and environmental damage caused by the degradation of the Aral Sea, said a World Bank press release. The project will help improve the health of the rural population of Karakalpakstan and Khorezm, two of the poorest regions of the country, by investing in water and sanitation infrastructure.

New Fiber Optic Line in Uzbekistan

· A 187-km fiber optic line has been commissioned in Uzbekistan as part an international communications system linking Shanghai with Frankfurt. The new line links the fiber optic segments in the republics of Uzbekistan and Turkmenistan with the international communications system, Uzbek Communications Minister Abduvokhid Dzhurabayev told Itar-Tass on August 20. The new line gives Uzbekistan access to the Internet, allows communication with any country, and provides quality services as well as the opportunity to launch new television channels, said Dzhurabayev.

Turkmenistan to Develop Disputed Field

· Turkmenistan said on August 22 that it is planning to develop an oilfield on the Caspian Sea shelf that is claimed by Azerbaijan. The announcement, which underscores the differences between littoral states over Caspian resource development, has caused a sharp reaction from Baku, which also has plans to develop the deposit.

Azerbaijan signed an agreement in July with two Russian companies to develop the Kyapaz deposit (known as Serdar in Turkmenistan), which holds an estimated 50 million barrels of oil. Turkmenistan protested the deal, claiming that the field lay in a disputed area of the Caspian, and pressured Russia to withdraw.

Following meetings between Turkmen and Russian officials in August, Moscow announced that the two Russian companies were pulling out of the deal. Baku has rejected any Turkmen claims on the deposit, insisting that it is located in the Azeri sector.

Turkmen officials now say that are negotiating with the Iranian National Oil Company, an unnamed Russian company, and Royal/Dutch Shell on a joint development project for the Serdar deposit. Turkmenistan says Azerbaijan is welcome to join the project and has called for talks on the ownership of the deposit.

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

available for non-profit institutions.

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