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

Tuesday, September 30, 1997

Russian Federation

Politics

CSIS Report Calls Russian Mafia Global Threat

· A new report on Russian organized crime syndicates says that the mafia is not only a major force in Russia, but is wielding growing influence in some 50 other countries and poses a threat to US national security. The two-year study was presented on Monday by the Washington, DC-based Center for Strategic and International Studies (CSIS), a public policy research center.

"Left unchecked, Russia is on the verge of becoming a crime-dominated oligarchy, controlled by shady businessmen, corrupt officials, and outright criminals," Kyodo news cited the report as saying.

The report cites estimates by Russia's Interior Ministry that said 40 percent of private businesses, 60 percent of state-owned enterprises, and between 50 percent and 85 percent of banks are controlled by organized criminals in Russia.

Overall, the report suggests that some two-thirds of Russia's economy is "under the sway" of criminals.

The report estimates that "the majority of private enterprises and commercial banks in Russia are compelled, by force if necessary, to pay protection in the amount of 10 percent to 30 percent of their profits" to organized criminals, according to Reuters.

Those who do not cooperate are often eliminated. The report says that contract murders average 500 cases annually. "Protection rackets are also the reason that there have been far fewer small business start-ups in Russia than in the former communist states of Eastern and Central Europe," it is quoted by Kyodo news as saying.

The report said some 8,000 Russian crime gangs currently operate throughout Russia, with as many as 200 of them operating in conjunction with counterparts in 50 other countries. The CSIS obtained information on ties between Russian organized crime groups and other major international syndicates from Italy, Japan, the US, China, and South America to engage in drug trafficking, arms smuggling, money laundering, and counterfeiting.

In Asia, Russian crime groups are chiefly involved in drug trafficking between producer countries in Southeast Asia and consumers in other countries led by the United States and Europe.

In the US, 26 Russian groups have established their presence in at least 17 cities, where they have negotiated division of labor arrangements with American, Sicilian, and Colombian syndicates. Their ties involve drugs, gambling, extortion, prostitution, and fraud, said the report.

The report was prepared by the CSIS Russian Organized Crime Task Force, a panel of experts from the government, private sector, and academia. It was headed by William Webster, former director of the FBI and the CIA in the 1980s.

The CSIS Panel urged US President Bill CLINTON to publicly deem Russian organized crime a threat to US national security, notably because of the danger of losing control of its nuclear arsenal. Although the

Today's News Highlights

Russia

More on Organized Crime

Pipeline Proposal Ready

Fertilizer Privatization Reversed

Russian Population Falling

Fiat-Gaz-EBRD JV Planned

McDonalds in Moscow Busy

South Caucasus & Central Asia

New Kazakh Investment Fund

New Uzbek Defense Minister

ADB Loan to Kyrgyzstan

Politics-Economics-Business

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Tuesday

September 30, 1997

Intercon's Daily

report does not include evidence that Russian organized crime gangs are smuggling nuclear materials, it concludes that the gangs are making a nuclear-armed country less stable.

Yeltsin and Skuratov Discuss Crime

· Following a meeting with Russian President Boris Yeltsin on Monday, Prosecutor General Yuri Skuratov pledged that cases of official corruption in Russia would receive special attention so as not to be squelched through intervention by interested parties. Skuratov, who was ordered by YELTSIN to "launch effective surveillance over investigation into corruption cases," said regional and local prosecutors will be obliged to strengthen controls over such probes, reported Itar-Tass.

The prosecutor's office will reconsider all cases which were previously turned down or suspended, he said. He added that special investigation groups involving police, Federal Security Service (FSB) troops, and other law enforcement officers, will be sent to regions to combat corruption and prevent the tainting of corruption probes by local officials and law enforcement.

Skuratov said he will set up a system for notifying the Prosecutor's Office by all economic agencies, from the Central Bank to the State Property Committee, about any violations that are discovered.

Organized Crime Enveloping Russia

· Corruption, embezzlement of public funds, the sale of budget resources and privileged centralized credits, and evasion of tax and customs duties payments are all basic realities in today's Russia, according to an article in Monday's Pravda-5. Unlike in the US, where crime is concentrated around certain trades—like drugs, gambling, and prostitution—in Russia criminal groups want to seize and redistribute all branches of the economy.

Russia's organized crime gangs are active in foreign trade and in the financial system, and it has already obtained large pieces of property as a result of privatization.

In 1991, police detected 75 Russian criminal groups with international connections, but by 1995, the number had grown to over 360, said the newspaper.

Proposal on Bypass Pipeline Ready

· A working group of the Russian pipeline company Transneft has agreed with a design suggested by the government of Dagestan for a pipeline to transport Azeri Caspian Sea oil bypassing Chechnya. Narbek Adzhigaitkanov, deputy head of the Dagestan government and chairman of the commission for designing the Dagestan section of the pipeline told Itar-Tass the Dagestan section of the new pipeline will be 205 km long.

The design calls for the laying of an underground pipeline at a distance of no less than 25 km from the border with Chechnya and the connection with the Stavropol section near the village of Terskaya. The new pipeline will cost $260 million. "If the Russian government approves our project, we shall build the pipeline and make it ready for work within nine months," said Adzhigaitkanov.

Yeltsin Popularity Rising

· The approval rating of Russian President Boris Yeltsin has increased since spring, rising from 24 percent to 31 percent, reported Interfax. The All-Russian Center for the Study of Public Opinion Center (VTsIOM) polled nearly 1,600 Russians during September 19-22 and compared their findings with those of April.

The rating of Prime Minister Viktor Chernomyrdin grew from 26 percent in April to 33 percent now.

First Deputy Prime Minister Anatoly Chubais has gained seven percent and he now enjoys a rating of 22 percent.

However, the popularity of First Deputy Premier Boris Nemtsov fell from 58 to 51 percent.

NEMTSOV apparently is not too concerned about his popularity. He told the students of Moscow school No.1078 on Monday that he does not plan to run for president in the 2000 elections. "If I was eager to become president, I should have remained in Nizhny Novgorod, farther from the Moscow squabbles and from my current difficult duties," he said.

Moreover, NEMTSOV predicted that Communist Party leader Gennady ZYUGANOV, whose latest popularity rating was not available, is unlikely to win

When you need to know it as it happens

Politics-Economics-Business

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September 30, 1997

Intercon's Daily

the presidency in the next election. He said that the Communist Party had exhausted its leadership potential in Russia and had no chance of returning to power in the 21st century.

Economy

Ruble = 5,865/$1.00 (NY rate)

Ruble = 5,861/$1.00 (CB rate)

Ruble = 5,855|5,867/$1.00 (buy|sell rates)

Air Traffic Controllers' Strike Bears Fruit

· Russian air traffic controllers held a two-hour protest strike on Monday, halting the action after the Russian Federal Aviation Service (FAS) agreed to their demand for payment of wage arrears, reported Itar-Tass. FAS director Gennady Zaitsev and Federation of Air Traffic Controllers Trade Unions president Valery Yezhov immediately signed an agreement on the terms of the guarantees to clear the wage debt.

Under the accord, the FAS is to pay wage arrears to all air traffic controllers with regional trade unions by October 15. The FAS also promised to base wages, beginning from October 1, on Russia's minimum wage—83,490 rubles. The FAS had wanted to index wages to the minimum wage that existed before a recent increase takes effect.

Medical Personnel Picket in Vladivostok

· At least 100 medical personnel from Russia's Primorsky Krai picketed the city hall in Vladivostok over 160-billion ruble wage debt to the local health sector, reported Itar-Tass. Similar protest actions are held across the region, and in some towns medical staff announced that patients would only be seen after 3:00 pm. On average, medics have not been paid for five to seven months.

Some medical staff are ready to resort to extreme measures. In the Khankaisky district, 20 doctors and nurses are ready to announce indefinite hunger strike, said a trade union representative.

Russian Population Still Falling

· Russia's total population declined to 147.2 million as of August 1, reported Interfax. According to State Statistics Committee figures, 757,200 babies were born in the first six months of this year, while 1.211 million people died, for a net loss of 453,800 people.

The birth rate in the first half of this year fell by three percent and the death rate decreased by five percent, compared with the same period in 1996.

Business

Italy's Fiat and GAZ Plan JV

· Italy's Fiat, Russian automaker GAZ, and the European Bank for Reconstruction and Development (EBRD) on Monday signed a memorandum on a joint venture to produce Fiat model cars at GAZ's factory in Nizhny Novgorod. A final contract on the venture, which is expected to produce 150,000 cars annually, will be signed in Italy in February. The contract was signed during a visit of Italian Prime Minister Romano PRODI to Russia.

Under the memorandum, GAZ and Fiat will each own 40 percent of the joint venture, with the EBRD holding a 20 percent stake.

Total investment in the venture is estimated at $850 million of which Fiat is expected to invest $610 million. The venture would represent the largest investment by a foreign automaker in Russia to date.

The venture hopes to produce four different models of Fiats, with the first car to roll off the line in 1998. The cars would include at least 30 percent locally-made content.

Upcoming Events

Kazakhstan International Oil & Gas

Exhibition and Conference

October 1_4, 1997

Almaty, Kazakhstan

Info: ITE Energy Division (London)

Tel: 44-171-286-9720; Fax: 44-171-286-0177

E-mail: oil+gas.ITE-Group.com

International Exhibition-Fair "Bishkek `97"

October 4_10, 1997

Bishkek, Kyrgyzstan

Organized by: the Bishkek City Administration,

Chamber of Trade and Industry, Trade Ministry,

and Agriculture Ministry

Info: Shamil Irsaliev

Tel/Fax: 966 (3312) 21 16 32

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

September 30, 1997

Intercon's Daily

Court Reverses Oneximbank Share Buy

· The Moscow Arbitration Court has decided to reverse the results of an investment tender which sold 41 percent of a central Russian fertilizer plant to Oneximbank in the autumn 1994, reported Interfax. The Court returned a 41 percent stake in the Cherepovets Azot factory to the government, announced Russian State Property Committee chairman Maksim BOIKO on Monday.

The Federal Property Fund brought suit against Oneximbank on July 3, asking that the sales contract with the winner of the tender be annulled because its investment terms had not been met, said BOIKO.

The State Property Committee will continue to "resist those who do not want to play honestly," he said.

According to today's RFE/RL Newsline, the suit against Oneximbank for the fertilizer factory appears to be linked to media attention attracted after the financial group won a share auction for telecommunications holding company Svyazinvest.

An investigative report on Oneximbank's ownership of Cherepovets Azot was aired on Russian Public Television (ORT), the day after the Svyaznivest sale and appears to be part of the "bankers' war" waged in the media this summer. The ORT report alleged that Cherepovets Azot had transferred some $14 million abroad, but failed to pay its debts to the state budget, said RFE/RL.

McDonalds' Moscow Restaurant is Busiest

· McDonald's Corp. announced on Monday that its Pushkin Square restaurant in Moscow continues to be the world's busiest, said a company press release. Every year since it opened in January 1990, the 700-seat restaurant has earned the world's busiest designation. On average, 40,000 customers visit the Pushkin Square location each day.

Earlier this month, McDonald's introduced Chicken McNuggets, illustrating the technique of "McNugget

dunking" in the company's first-ever domestically produced television commercial in Russia.

Today, there are 21 McDonald's restaurants in Russia, including four in St. Petersburg and three in Nizhny Novgorod.

South Caucasus & Central Asia

New Kazakhstan Investment Fund Planned

· Britain's Peregrine Securities plans to launch the first closed-end fund specializing in Kazakhstan, reported today's Financial Times. The launch of the $90 million fund, which will invest in both listed and unlisted companies, will follow Kazakhstan's second Eurobond issue last week.

Peregrine said that the fund will confine its investment in non-listed companies to entities that are "capable of achieving a listing within three to five years." The fund, which will be listed in Dublin, will also participate in privatization issues.

Uzbek Defense Minister Replaced

· Uzbek President Islam Karimov on Monday issued a decree that dismissed Defense Minister Rustam Akhmedov, who had held the post since 1991, and then named him Minister of Emergency Situations, reported Itar-Tass.

A separate decree appointed the country's border guard chief, Shikmatula Tursunov, as the new Defense Minister.

ADB Loan for Kyrgyz Education

· The Manila-based Asian Development Bank (ADB) on Monday approved two concessional loans totaling $32.7 million to help Kyrgyzstan reform and strengthen its education system, reported Xinhua.

The first loan of $19 million will provide program support for key government reforms in education policy areas. The second loan of $13.7 million will be used for an investment project to assist the reform.

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

Svetlana Korobov, Contributing Editor

When you need to know it as it happens

Politics-Economics-Business

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