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

Thursday, September 18, 1997

Russia OKs Oil Route Around Chechnya

· The Russian government has approved an oil pipeline route bypassing Chechnya that will run through Dagestan and Stavropol Krai, along Chechnya's administrative border, to transport Azeri Caspian Sea oil to the Black Sea port of Novorossiisk. Fuel and Energy Ministry spokesman Andrei Pershin also said the government had approved the preliminary estimates for pipeline construction and decided to hold a tender to chose a contractor. Funding was also discussed and a financing program is expected to be approved next week.

Chechnya Holds More Public Executions

· The Chechen government publicly executed two convicted murderers in Grozny's main square today, the second public execution this month. Russian Security Council deputy secretary Boris BEREZOVSKY said that the public executions are damaging the international reputations of both Russia and Chechnya, reported Russian television

Moscow has protested the holding of public executions, but admitted that it cannot stop them. However Chechen First Deputy Prime Minister Movladi UDUGOV said that today's executions will be the last in Chechnya.

FSB on Double Agent Prices

· A Russian Federal Security Service (FSB) officer, speaking on condition of anonymity, told Itar-Tass on Wednesday that recruiting a CIA man as a double agent costs $2 million,

Russian Federation

Politics

Yeltsin Speaks Out in Orel

· During a trip to the provinces today, Russian President Boris Yeltsin spoke out on both domestic and international issues. Arriving at the airport in Orel, about 400 km southwest of Moscow, he announced that Russia will halt borrowing from the International Monetary Fund (IMF) as of 1999, reported Russian television. After Russia has received all of a three-year, $10 billion IMF loan approved last year, it will rely only on its own resources, he said.

YELTSIN also said that, although he is not satisfied with the economic results of the government's work, he continues to support First Deputy Prime Ministers Boris NEMTSOV and Anatoly CHUBAIS who are "constantly" coming up with ideas on improving the economy. The president told reporters that he asked the country's leading bankers to lay off the young reformers, but also noted that the Ministers must get used to media attention. He cited CHUBAIS as saying that he gets alarmed if he does not see any criticism of his activities in the press every day.

During a meeting with the faculty of the Orel State University, YELTSIN took a swipe at the US, proclaiming that, "Russia comes out for a multipolar world without the dictate of any one country," according to Itar-Tass. The president said that he was planning to stress the idea that the "Europeans must take care of their security themselves" during the Council of Europe summit in Strasbourg in October.

"We wouldn't like the United States to get involved in Europe as they are currently involved," said YELTSIN, suggesting that the US is exerting much too much influence on problems of European security through NATO.

Today's News Highlights

Russia

Lebed on the Kuril Islands

The EBRD in Russia

Far East Gold Miners Strike

S&P's Rates Nizhny Novgorod

Bank of New York on ADRs

QUALCOMM in Chelyabinsk

South Caucasus & Central Asia

Canada Study of Supsa-Baku

Uzbek Telecom JV Accord

Krygyz Investment Legislation

Politics-Economics-Business

Page

Thursday

September 18, 1997

Intercon's Daily

while it is possible to buy the cooperation of a Russian spy for only $1 million.

Asked to comment on the statement, FSB spokesman Aleksandr Zdanovich smiled and suggested it was a joke invented to congratulate the CIA on its 50th anniversary marked this week, said Itar-Tass.

Zdanovich would not remark on whether the CIA has become more active in Russia of late, but he noted that the breakup of the USSR made it easier for foreign spies to work in Russia as the borders with other former Soviet republics are "transparent."

"It is to those countries that American intelligence officers have moved the most vulnerable part of their work which is the contacts with their Russian agents," Zdanovich is quoted as saying. He noted that it is harder for the FSB to trace such meetings abroad.

Lebed on Russia-Japan Relations

· Russia's former Security Council secretary Aleksandr Lebed on Wednesday proposed the holding of a referendum in Russia to resolve the dispute over Japan's claims to four of the Russian-held Kuril Islands in the Far East, reported Kyodo news agency. Speaking at a meeting in Tokyo, Lebed said the territorial dispute is the biggest problem between the two countries, but the Russian government is delaying negotiations on the issue with Japan because Russian public opinion is against a return of the islands.

Lebed said Moscow should actively address the issue by setting a timetable for dealing with it. However, he forecast that it will take two decades for the two countries to reach a resolution on the islands.

While in Japan, Lebed also met with Yoshiro MORI, chairman of the Executive Council of the ruling Liberal Democratic Party.

Economy

Ruble = 5,849.5/$1.00 (NY rate)

Ruble = 5,851.5/$1.00 (CB rate)

Ruble = 5,842|5,861/$1.00 (buy|sell rates)

Far East Gold Miners Strike

· Some 300 gold miners from the Nizhneamurzoloto gold company in Russia's far eastern Khabarovsk

Krai were in their third day of a 10-day protest strike today, demanding nine months worth of back wages, reported Itar-Tass. The enterprise owes its workers a total of 11 billion rubles in salary arrears. The company leadership had promised to cover all debts by September 15, but failed.

EBRD Is Largest Investor in Russia

· During the last five years, the European Bank for Reconstruction and Development (EBRD) has established itself as the largest single source of finance for the private sector in Russia. By the end of February 1997, the EBRD had 84 Board-approved projects in Russia for a total of $2.8 billion of loan and

equity financing, with a total project value of about $7.5 billion.

Russian Weapons for Sale on Internet

· Weapons used by former Soviet special services, including an underwater sniper rifle, are reportedly being marketed over the Internet, said M2 Communications on Wednesday. Reports say that Russian defense officials have offered the items to Western military officials, but details of the products and their suppliers are being supplied over the Internet from Russia's Tula Ordnance Plant.

Business

S&P's Rates Nizhny Novgorod Region

· Standard & Poor's on Wednesday assigned its double-'B'-minus long-term foreign currency debt rating to Russia's central Nizhny Novgorod Oblast for $100 million notes due in 2002, said S&P's CreditWire. The outlook is stable.

The rating is based on: (1) continued restructuring and conversion of the region's large military industries with corresponding pressures on employment; (2) evolving intergovernmental system and re-evaluation of tax allocations and expenditure responsibilities as part of the Russia's need to meet its budgets; (3) liquidity problems arising from tax arrears and trade creditors, resulting in delayed wage payments, which, though prevalent throughout Russia, severely restrict fiscal flexibility; (4) limited revenue flexibility stemming from federal control over tax rates, types, and allocation; and (5) large capital expenditure requirements throughout the region in transport, housing, environmental measures, and health care.

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

September 18, 1997

Intercon's Daily

Key elements supporting the rating include: (1) a low debt burden (including the notes, direct debt will equal 13 percent of budgeted operating revenues); (2) projected economic growth in 1998, in particular in Nizhny Novgorod (Russia's third-most populated city), as well as from some of Russia's largest industrial companies, which are located in the region (such as the automobile and truck manufacturer GAZ); (3) proactive economic reforms initiated by the government since 1992 that have substantially increased foreign investment into the region; and (4) satisfactory financial performance given the difficult economic and tax environment, although accounts remain unaudited.

Although Nizhny Novgorod Oblast will be challenged by further industrial restructuring, its growing diversification and state promotion measures should enable the region to grow in line with the national average. Fiscal policy is expected to be cautious and committed to tight monitoring of liquidity for debt service, said Standard & Poor's.

Oil Equipment Co. Launches ADRs

· The Russian oil and gas pipeline construction company Rosneftegazstroi (RNGS) has begun an American Depositary Receipt (ADR) program for up to one third of its shares, reported Reuters. The main reason for the level-1 ADR program is to increase the liquidity of the company's stock. Its shares, which currently trade on the over-the-counter market, are not listed on the Russian Trading System.

The ADRs, on ordinary shares, are listed in Berlin. RNGS preferred shares were listed in Berlin and Frankfurt earlier this year, having already traded for about a year in Vienna.

The Bank of New York is acting as depository for the ADRs. RNGS has a total of 23 million ordinary shares and the ADRs are being issued on the basis of two ADRs for every one ordinary share.

Rosneftegazstroi's current market capitalization is about $950 million. It has some 590 subsidiaries and a current and prospective order book worth around $26 billion, according to a recent report on the company, cited by Reuters.

Bank of New York on Russian ADRs

· Bank of New York vice president Tom Sanford

said on Wednesday that foreign investors had purchased $10 billion worth of Russian companies' American Depositary Receipts (ADRs), issued by the Bank of New York, over the first six months of this year, reported Itar-Tass. He said that Russian companies now account for four percent of ADRs on the world market, which is estimated at $250 billion.

Ten Russian companies have initiated ADR programs so far this year, bringing the total number up to 22. Companies placing ADRs this year include oil and gas company Rosneftegazstroi, telecommunications company Uralsvyazinform, Moscow's TsUM trading house, and Siberian utility Irkutskenergo.

Among the Russian ADRs in the greatest demand, Sanford named oil companies Lukoil and Chernogorneft, the Moscow utility Mosenergo, gas monopoly Gazprom, and cellular communications company Vimpelcom.

Vimpelcom remains the only Russian company to be quoted at the New York Stock Exchange. In May 1996, the company conducted a second ADR issue totaling $114 million.

American investors show increasing confidence in the Russian market, said Sanford. He noted that the Bank of New York issuing American Depositary receipts of Russia's major companies has never had any problems with Russian stocks.

He admitted that foreign investors are now buying more shares from Russian companies directly, which testifies to the efficiency of the local market. However, the mechanism of ADRs remains more reliable and popular with investors, because it is less costly and complicated, according Sanford.

He reported that the bank is currently working on a number of new programs involving ADRs for Russia's blue chip companies.

QUALCOMM in Chelyabinsk Wireless Deal

· San Diego, California-based QUALCOMM Inc. today announced a deal with Russia's Svyazinform of Chelyabinsk Oblast and South Urals Cellular Telephone Company to provide wireless service to the city of Chelyabinsk through a Code Division Multiple Access (CDMA) wireless local loop (WLL) system, said a QUALCOMM press release.

When you need to know it as it happens

Politics-Economics-Business

Page

Thursday

September 18, 1997

Intercon's Daily

"Telecommunications are developing very rapidly in the Chelyabinsk region. We are pleased the Chelyabinsk is the first city in Russia to offer CDMA to residents," Anatoly UFIMKIN, head of Svyazinform of Chelyabinsk, is quoted as saying.

QUALCOMM, a leading supplier of wireless local loop networks, has also announced CDMA WLL contracts with operators in Rostov-on-Don and Moscow.

of Commerce. He said that the pipeline was necessary to export the Caspian's huge oil resources without shipping it all through the Bosphorus. BOOGEARDT said he is certain that the project would be fully defined and ready for construction by the third quarter of next year.

New Telecom JV in Uzbekistan

· The Uzbek government, Italy's Stet, and Germany's Siemens AG on Wednesday signed a memorandum of intent to form a joint venture to provide Uzbekistan with digital international telephone service, reported Reuters. The venture, called Udinet, would be 50 percent owned by Uzbek telephone company Khalkaro Telekom, 42 percent by Stet, and eight percent by Siemens.

Stet has pledged to invest $150-200 million in the project, while Siemens would contribute about $50 million. The charter capital of the venture would be $420 million.

Uzbekistan's contribution would be the infrastructure and equipment of 15 international telephone stations across the country. Siemens plans to replace analog equipment at the Uzbek international telephone stations digital.

The signing took place during a visit of Italian Prime Minister Romano PRODI to Tashkent. During the visit, Uzbekistan and Italy signed a friendship and cooperation agreement and an agreement on mutual promotion and protection of investments.

Representatives of Italian oil company Agip SpA accompanied PRODI to hold talks with Uzbek state oil and gas company Uzbekneftegaz on possible cooperation in exploration of hydrocarbon resources.

Kyrgyzstan Passes Foreign Investment Law

· The Kyrgyz parliament on Tuesday adopted a law on foreign investments, reported Turkistan news. According to the law, all joint ventures and foreign companies operating in Kyrgyzstan will be taxed at preferential rates for the first five years of operation.

South Caucasus & Central Asia

SNC-Lavalin to Study Baku-Supsa Route

· Canadian engineering firm SNC-Lavalin has won a tender to conduct a feasibility study on the transport of long-term oil output from the Caspian through a pipeline running from Baku to Georgia's Black Sea port of Supsa, reported Interfax. The announcement was made at a trans-Caucasus conference in Tblisi on Wednesday by Nikolos GVAZAVA, deputy head of the Georgian International Operating Corp. (GIOC), the state company in charge of Georgian section of the pipeline route.

The Baku-Supsa pipeline is one of four options being considered as a strategic route to transport large amounts of Caspian oil to world markets during the next century. The route has already been chosen as one of two outlets to export "early" oil output.

"Georgia should be maximally prepared for negotiations with all participants in Caspian oil export, in the event the decision is made to transport the oil through Georgia," GVAZAVA is quoted as saying.

One proposal for a long-term export route through Georgia calls for it to be extended through Turkey to the Mediterranean Sea port of Ceyhan. Azeri President Geidar ALIYEV has already backed this option.

Speaking at the Tblisi conference on Wednesday, Royal/Dutch Shell international project manager John BOOGEARDT also endorsed the building of a major pipeline to Ceyhan, reported today's Journal

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.

Page

Politics-Economics-Business

When you need to know it as it happens

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.