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

Wednesday, September 3, 1997

Russian Federation

Politics

Parliament Begins New Session

· The Russian State Duma convened its autumn session today, setting as its priority tasks the debate on the 1998 draft federal budget, the new tax code, and a package of legislation on social programs. The first reading of the budget is expected to take place around October 10.

The legislature's preliminary agenda includes over 400 draft bills. Over 250 draft bills have been submitted by deputies of the State Duma, 96 by the government, and 45 were suggested by the legislatures of various Russian regions. In addition, the president has submitted 29 draft bills, 19 draft bills were submitted by the Federation Council, and three draft bills were submitted by the Supreme Court.

Communist Party leader Gennady ZYUGANOV told Russian television RTR that he plans to concentrate on overturning presidential vetoes on over 15 pieces of legislation, including the law on religious organization and the land code.

Yabloko Party leader Grigory YAVLINSKY called the government's 1998 draft budget, "a budget of stagnation," reported Interfax. He said that a new strategy of allocating funds to regions and enterprises should replace the current emphasis on distributing funds through the federal budget.

The Yabloko Party has also submitted a large number of amendments to the tax code, he said. "We advocate a drastic reduction of taxes and expansion of the tax base. It's time we turned our eyes to the shadow economy and set very low taxes to make the sector legal and turn it into a permanent source of revenues in the future," Interfax cited him as saying.

Shokhin Nominated as New Our Home Head

· Russian Prime Minister Viktor CHERNOMYRDIN has nominated State Duma deputy speaker Aleksandr SHOKHIN as the new leader of the pro-government Our Home is Russia party. The party will now vote on the nomination, but there is little doubt that the premier's choice will be confirmed.

Former Our Home leader Sergei BELYAYEV resigned last week, citing differences with the course the party is taking and with CHERNOMYRDIN.

Economy

Ruble = 5,833/$1.00 (NY rate)

Ruble = 5,835/$1.00 (CB rate)

Ruble = 5,827|5,843/$1.00 (buy|sell rates)

Russia Proposes Division of Caspian

· The Russian Fuel and Energy Ministry has submitted to the government its proposals on a possible division of the Caspian seabed into economic sectors, Russian First Deputy Fuel and Energy Minister Sergei Kiriyenko told Echo Moskvy radio on Tuesday. The urgent need to resolve this problem is caused by the increasing oil production in the Caspian Sea, he said.

"While the Caspian status is unsettled, sea oil drilling platforms can be placed anywhere and this disturbs everyone," he is quoted by Itar-Tass as saying. However, this problem is political and must primarily be tackled by the Russian Foreign Ministry.

Today's News Highlights

Russia

Gore-Chernomyrdin Mtg Soon

EBRD Loan for St. Pete Airport

Pratt Whitney & Perm Motors

US Co. in Russia Oil Deal

European Republics

EU Aid for Chernobyl

South Caucasus & Central Asia

New US Karabakh Negotiator

DCR Rates Kazakhstan

Nazarbayev in Bahrain, Oman

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In August, the ministry started to draft a plan for the most rational division of the Caspian seabed, based on international law, on orders from Russian Deputy Prime Minister Valery Serov. The plan is based on the need to divide only the seabed, said Kiriyenko. He suggested that this could be done by drawing perpendicular lines from the middle line of the Caspian Sea to the shore. The plan should be discussed by all five Caspian littoral states, he said.

Gore-Chernomyrdin Mtg. Coming Up

· The ninth session of the USRussian Commission on Economic and Technological Cooperation (GORECHERNOMYRDIN Commission) will take place in Moscow from September 19_24. The biannual meeting will bring together US VicePresident Al GORE and Russian Prime Minister Viktor CHERNOMYRDIN, as well as a number of officials and businessmen from both sides, to discuss military and economic issues.

US Energy Secretary Federico PENA, who was in Russia as recently as July, will be part of the US delegation at the end of this month. DOE spokesman Bill WICKER said on Tuesday that PENA will hold discussions with his Russian counterpart on non-proliferation issues and ways to facilitate energy development, reported Dow Jones.

While he is in the region, PENA is also considering making stops in Azerbaijan and Turkey to discuss the Caspian Sea oil export pipeline routes and Turkey's energy needs, according to WICKER.

EBRD Loan for Petersburg Airport

· The European Bank for Reconstruction and Development (EBRD) has approved a loan of up to $120 million to help finance the construction of a new international terminal at St. Petersburg's Pulkovo Airport, said RFE/RL on Monday. The new terminal, in conjunction with the restructuring of operations, is designed to facilitate the rapidly growing international business and tourist flows into St. Petersburg.

The new terminal will be able to handle 1,200 passengers per hour, when it is completed in the year 2000. The airport company is owned by the St. Petersburg property committee and some American developers. The entire terminal project could cost as much as $200 million.

Business

Pratt & Whitney to Buy Perm Motors Stake

· US Pratt & Whitney Corp., a unit of United Technologies Corp., is going to purchase a 25 percent stake in Russia's Perm Motors engine maker, reported Itar-Tass today. Speaking at the Second International Aerospace Congress in Moscow, Perm Motors director general Vadim Isachenko said that the company's PC_90a airplane engine will be upgraded with the participation of the US company. Under a preliminary agreement, $120 million will be invested in the project within three years.

"With such a reliable and much-respected partner, we hope to find our own niche on the market of high-technology and science-intensive products not only in Russia, but also abroad," Isachenko is quoted as saying.

Bedford Holding to Buy Russia Oil Co.

· US Bedford Holdings Inc. announced today that it is completing negotiations to acquire 60.57 percent of AKI-ODIYR Oil Co., which is currently owned by VENCO, a privately held company in Russia, said a company press release. Bedford Holdings has contracted with an independent geological company located in the US to conduct numerous geological tests to further validate the value of the extensive property holdings of AKI-ODIYR. Bedford Holdings is expected to receive the study results next month.

"Early surveys of the oil reserves on the property for which we are negotiating had preliminary estimates of 300 million barrels of crude oil," commented Bedford president Leon ZAPOLL.

Bedford Holdings Inc., through its wholly owned subsidiary Allen & Pierce Securities, is a broker/dealer firm operating in the US. The company also has representatives operating in Russia who provide a broad range of services to diverse clients in Russia and eastern Europe.

European Republics

Ukraine-Daewoo Deal Expected Today

· South Korea's Daewoo was expected to sign an agreement today with Ukrainian automaker AvtoZAZ to establish a joint manufacturing venture, reported Xinhua on Monday. Daewoo has plans to invest

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$150 million to modernize AvtoZAZ and install a new assembly line. Under the terms of the draft agreement, Daewoo is required to reinvest its profits in the joint venture during the first ten years.

It is unclear that the deal went ahead, however, because Daewoo had conditioned the venture on the Ukrainian government's agreement to forgive AvtoZAZ's debts and exempt the plant from all taxes for ten years. Daewoo also urged the Ukrainian government to impose a 20 percent import duty and a 10 percent excise duty on vehicles produced by other foreign firms.

These conditions have not been fully met. The Ukrainian parliament has adopted a law writing off AvtoZAZ's debts, but declined to raise import and excise duties. The parliament also refused to exempt the joint venture from taxes.

EU Aid Package to Chernobyl

· The European Union Executive Commission today proposed a $110 million aid package to counter the threat of radiation leaks from the destroyed reactor at the Chernobyl nuclear power plant in Ukraine, reported Dow Jones. The funds would be used to stabilize the crumbling concrete "sarcophagus" that is containing the remains of the reactor.

The EU proposal follows a promise by the G-7 at the June Denver summit to provide almost half of the estimated $750 million needed to shore up the sarcophagus. "This is the Commission putting its money where its mouth is," EU spokesman Lousewies van der LAAN is quoted as telling reporters.

South Caucasus & Central Asia

US Names New Karabakh Negotiator

· US President Bill Clinton on Tuesday announced his intent to nominate B. Lynn Pascoe, a career member of the Senior Foreign service, for the rank of ambassador during his tenure of service as special negotiator for Nagorno-Karabakh.

PASCOE is the American co-chair of the Organization for Security and Cooperation in Europe's (OSCE) Minsk Group seeking to resolve the dispute between Armenia and Azerbaijan over Nagorno-Karabakh. He is currently special coordinator for regional affairs in the State Department's office dealing with the

Newly Independent States (NIS). Before assuming his current position, Pascoe served as a senior advisor in the Bureau of East Asian and Pacific Affairs and at the US Mission to the United Nations.

The special negotiator for Nagorno-Karabakh is the principal US government official responsible for US policy toward, and involvement with, the conflicts in the former Soviet Union. The incumbent will engage in systematic consultations with the Russian government and with European allies and their partners to garner their support.

DCR Gives Debt Rating to Kazakhstan

· Duff & Phelps Credit Rating Co. (DCR) has assigned its `BB' (Double-B) credit rating to the long-term foreign currency debt of the Republic of Kazakhstan and its `BB+' (Double-B-Plus) rating to the Republic's local currency (tenge) debt, said a DCR press release issued on Tuesday. DCR has also assigned its `D-4' (D-Four) rating to the short-term obligations of Kazakhstan.

The ratings reflect Kazakhstan's success in stabilizing the economy after a period of high fiscal deficits and hyperinflation following the dissolution of the Soviet Union. Annual inflation is expected at 17.5 percent in 1997, down from 2,300 percent in 1993, and government deficits have averaged 2.6 percent

in 1995-96, or about one-third the average for the previous five years.

The ratings are supported by a stable political environment conducive to the smooth transition of the formerly planned economy to a market-based economy and to the resumption of growth after several years of steep decline in GDP. Under Presi

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dent Nursultan NazarbaYev's strong leadership, the Kazakh government has accelerated structural reforms in the key areas of price and trade liberalization, privatization, and bank restructuring.

Also underpinning the ratings is a comparably low and favorably structured debt burden, with total public sector debt estimated at 15 percent of GDP in 1997 and public sector external debt at a modest 45 percent of export receipts. At an estimated 13 percent of exports in 1997, the debt service ratio compares favorably with similarly rated sovereigns. Modest current account deficits averaging 3.8 percent of GDP in 1995-96 are adequately financed by foreign direct investment in the energy sector.

The ratings are constrained by a deficient tax system, undermined by institutional weakness and poor compliance resulting in a sharp decline in tax collections to an estimated 11 percent of GDP in 1997. Limited progress in the area of enterprise restructuring and persistent asset quality problems in the banking system—with about 35 percent of doubtful loans in July 1997—also constrain Kazakhstan's credit standing. Mounting inter-enterprise, tax, wages, and pension arrears discourage saving and investment and inhibit the development of an incipient private sector economy.

The outlook on the ratings is stable. DCR said it will continue to monitor microeconomic reforms, and in particular the restructuring of banks and enterprises, as key indicators of a successful transition to a market-driven economy. The elimination of government arrears and the proposed reform of the pension system are seen as positive structural developments in the area of public finances, but poor tax collection will remain a key vulnerability to the credit, particularly as revenues from privatization decline over the next few years. The medium-term balance-of-payments outlook is greatly enhanced by Kazakhstan's sizable oil and gas reserves, which likely will translate into higher exports and increasing investment flows well into the 21st century.

DCR said, however, that it will monitor competitiveness trends in non-energy exports, as the development of the oil energy sector is likely to suffer sporadic setbacks associated with the development of transport routes, occasionally putting pressure on the country's current account.

Nazarbayev Seeks Financing & Friends in Gulf

· Kazakh President Nursultan NAZARBAYEV on Tuesday signed a trade and economic agreement, as well as agreements on mutual protection of investments and avoidance of double taxation, with Bahraini officials, reported Itar-Tass. At a press conference in Bahrain's capital Manama following talks with Bahrain's leader, NAZARBAYEV said the agreements will open the way for local capital to enter Kazakhstan's economy. The two sides have discussed investment projects, including in the fields of oil production, processing, and transportation.

Nazarbayev also met with representatives of Bahrain-based banks and asked them to participate in financing an oil and gas pipeline to the Gulf through Iran, reported Reuters.

The Kazakh president said he would post a Kazakh ambassador to Manama this year and Bahrain confirmed it is ready to open an Embassy in the capital of Kazakhstan in the near future.

NAZARBAYEV arrived in the sultanate of Oman later Tuesday for an official two-day visit, the last leg of his tour of Arab countries. Nazarbayev is due to hold talks with Sultan of Oman Quaboos bin Said on boosting economic cooperation, particularly in the field of oil and gas production, investments, agriculture, and livestock farming, as well as on strengthening political ties.

Nazarbayev will arrive in Moscow on September 5 to participate in the festivities for the 850th anniversary of the Russian capital. On the way to Moscow, the Kazakh president will stop over in Kazakhstan to participate in laying the foundation of the Aktau port on the Caspian Sea.

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

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