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, October 1, 1997

Russian Federation

Politics

Russian Mission Evacuated from Chechnya

· At midnight on Tuesday, a convoy of 20 vehicles drove Russia's representatives out of Chechnya, following a dispute over the Chechen vice president's use of Russian airspace. Vakha Arsanov, angry because he was denied flight clearance to fly to Baku in Azerbaijan, told the Russian mission to evacuate the republic by midnight.

ARSANOV also insisted that the Russian government apologize for not granting him clearance and offer guarantees that it would not happen again.

However, ARSANOV reportedly had planned to use the Askhat private airline, whose plane did not have a license for flights outside Russia, and permission was denied. The Russian mission has gone to Ingushetia temporarily.

This is the second such incident related to ARSANOV whose plane was forced to land for customs checks in May. He has been accused of connections with organized crime and smuggling.

The incident is the latest in a recent line of spats between Russia and Chechnya. Today Chechen President Aslan MASKHADOV requested a meeting with President Boris YELTSIN, but the Russian leader refused, saying he was too busy.

Chechnya's Raduyev Injured by Car Bomb

· Notorious Chechen field commander Salman Raduyev survived yet another assassination attempt on Tuesday, escaping with burns and other injuries after a bomb blew up his car in Grozny. One of his bodyguards was killed in the attack and another was injured.

This is the fourth unsuccessful attempt on RADUYEV's life since he led a group of Chechen rebels in a raid on the Dagestani town of Kizlyar in January 1996.

In May, RADUYEV publicly claimed responsibility for explosions at two Russian railway stations, but Chechen government officials denied his involvement in the incidents, calling him insane.

Raduyev told reporters today that Russian special forces were behind the attempt on his life, reported Russian independent television NTV.

Communists Planning Response to Budget

· Russian Communist Party leader Gennady Zyuganov told reporters on Tuesday that the Communist faction in the State Duma will hold a closed meeting on October 7 to decide on its stance on the government's 1998 draft budget report, reported Itar-Tass. Asked whether the opposition was likely to motion for a vote of no-confidence in the government, Zyuganov said his group would consider three options provided by the Russian Constitution for turning down the budget, including a no-confidence vote. He stressed, however, that "it is not so much the question of the government's resignation as of the change of course."

On Monday, President Boris Yeltsin said that he was dissatisfied with the work of the Duma, expressing anger over its rejection of a package of social welfare reform bills and its slow consideration of the 1998

Today's News Highlights

Russia

State Property Cttee Upgrade

Who's Running Vladivostok

World Bank Optimistic on Russia

Telephon Upgrade in Chukhotka

Gazprom Plans Bond Issue

European Republics

Lukashenko Angry at Russia Estonia Bank Buys Russia Bank

AIG Buys into Litho Insurer

American to Run for Litho Pres.

Politics-Economics-Business

Page

Wednesday

October 1, 1997

Intercon's Daily

budget bill and tax code, issuing a veiled threat to dissolve the Duma.

Commenting on YELTSIN's statements, Zyuganov said he saw the Duma's dissolution as quite likely. "Whether the Duma is dissolved is to us a secondary question," he said, adding that the president "cannot speak with the people in normal Russian language," instead resorting the "language of threats." He added that he does not fear early parliamentary elections, but a big war or terror.

The Communists have planned a number of anti-government rallies and special meetings over the next two months.

West Overstates Russian Crime Threat

· Russian presidential spokesman Sergei YASTRZHEMBSKY charged on Tuesday that the West has exaggerated the threat posed by Russian organized crime in order to keep Russia from obtaining the status of a market economy. He admitted that crime in Russia presented a danger, but "it is by no means a global one," according to Interfax.

The Washington, DC-based Center for Strategic and International Studies (CSIS) released a report this week that organized crime gangs had permeated Russian society and officialdom and were active in some 50 foreign countries as well.

Who's Running Vladivostok?

· A power struggle in the far eastern city of Vladivostok has left some question as to who is in charge of the city. Last week, the city legislature voted to remove Mayor Viktor CHEREPKOV from office while he away on a business trip. The legislature named CHEREPKOV's deputy, Yuri KOPYLOV as acting mayor. According to RFE/RL, KOPYLOV has set up an alternative city administration and is implementing his own policies.

When CHEREPKOV returned from his trip, however, he declared the legislature's move illegal and then he entered the hospital with an undisclosed problem. He appointed his other deputy, Nikolai MARKOVETS, to perform his duties until he is well again.

The confusion is likely to persist until a court rules on whether CHEREPKOV's removal was legal. The move was supported by Primorsky Krai governor

Yevgeny NAZDRATENKO who has long been trying to oust CHEREPKOV. He managed to remove CHEREPKOV in 1994, but the mayor regained his post in 1996 when, with support from Moscow, his removal was deemed unconstitutional.

State Property Cttee Gets Ministry Status

· Russian President Boris YELTSIN issued a decree on Tuesday transforming the State Property Committee into the State Property Ministry, reported today's RFE/RL Newsline. The Committee's chairman, Maksim BOIKO was appointed Property Minister and will also retain his position of Deputy Prime Minister. BOIKO said that he will reorganize the ministry over the next 2-3 months.

Russia Issues New Passports

· At a ceremony in Moscow today, Russian President Boris Yeltsin passed out new Russian internal passports to 30 Russian teenagers. The new passports have replaced the Soviet hammer and sickle with Russia's double-headed eagle.

The new documents are for domestic identity purposes only, replacing Soviet-era internal passports. Separate passports are needed for travel abroad.

The distribution of the new passports is not expected to be completed until 2006, when old passports will become invalid.

Economy

Ruble = 5,855/$1.00 (NY rate)

Ruble = 5,862.5/$1.00 (CB rate)

Ruble = 5,857|5,868/$1.00 (buy|sell rates)

World Bank Optimistic on Russian Economy

· Russia's five years of market reforms have brought about a major economic transformation, leading to a halt in declining production and a resumption of growth, according to Johannes Linn, World Bank Vice President for Europe and Central Asia, said a World Bank press release.

Speaking in Hong Kong at the First Russia-East Asia Investor Forum last week, Linn detailed Russia's economic progress and the challenges it continues to confront. After five years of reforms, more than 70 percent of domestic production now originates in the private sector; inflation has dropped to a manage

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

October 1, 1997

Intercon's Daily

able 15-16 percent; interest rates have fallen; basic price and exchange rate stability has now been achieved; and tax, customs and other regulatory systems are being overhauled.

However, Linn cautioned, Russia's economic performance has remained below its potential—the result of inherited inefficiencies and volatile economic policies. Output has fallen by 40 percent since 1992; four years (1992-1995) of high inflation had huge efficiency and social costs; and domestic investment continues declining in key sectors such as energy, infrastructure, and agriculture—with the bulk of real enterprise restructuring still ahead. And poverty, now affecting one in four Russians, has risen dramatically.

Linn outlined how Russia, with support from the World Bank, is undertaking both structural and sectoral reforms to reach broad-based and dynamic growth as the key to widely improved living standards. Top priorities include tax reform.

Privatization and private sector development are also critical, and it is important that future privatizations be more open and competitive than earlier "insider" privatizations. Another priority is strengthened banking regulation and supervision, along with the continued deepening of Russia's capital markets. Reforming Russia's huge and inefficient energy and infrastructure sectors remains a huge challenge.

Linn also discussed the World Bank's role. He noted that the Bank is Russia's single foreign source of long-term financing, and it is the Bank's largest borrower in terms of new disbursements. To date the Bank has made 36 loans to Russia, and total commitments around $8 billion have been approved, with close to $4 billion of this amount already disbursed. The number of active projects rated "satisfactory" by the Bank's internal evaluation department has risen from only 40 percent in 1996 to more than 80 percent today. Linn anticipated a substantial expansion in the Bank's Russia program, based on continued improvement in policy and project performance, with new commitments up to $3 billion annually over the next 2-3 years.

"The central goal of the World Bank's program and strategy for Russia is to support the reform agenda...

so as to help complete the transition to a market economy and lay the basis for sustained, private sector-led growth and better living standards for all," he stated.

Telephone Upgrade in Chukhotka

· The arctic Russian Chukhotka peninsula is to receive a satellite-aided telephone communications system, reported Itar-Tass on Tuesday. An inter-city automatic telephone exchange is being installed in Anadyr, the capital of the Chukhotka Autonomous District, to enable callers to contact any city in Russia without the aid of telephone operators. The exchange was purchased in Slovakia for $1 million.

Business

Gazprom Plans Convertible Bond Issue

· Russian gas monopoly Gazprom plans to launch a convertible bond issue later this year, reported today's Journal of Commerce. The size of the issue will be between $500 million and $1 billion, depending on investor demand.

The lead manager contract has yet to be signed, but has been awarded to Goldman Sachs, ABN Amro, and Dai-Ichi Kangyo Bank, a Gazprom source told the newspaper. Gazprom is likely to approve the deal in the next few weeks, when bond maturity and amount of ADRs to back the issue are set, it said.

European Republics

Belarus Accuses Russia of Blackmail

· Moscow "often" uses debts for energy deliveries to try to blackmail and pressure Belarus President Aleksandr LUKASHENKO, said an article in Tuesday's edition of the official presidential newspaper Sovietskaya Byelorussia. "What is most paradoxical is that several officials from the Russian Federation have joined this struggle," it said.

Also on Tuesday, LUKASHENKO told Belarussian Radio that Belarus only owes Russia $200 million for gas deliveries while it is owed $1 billion for border guard services and customs duties. And so LUKASHENKO's allegations that Russian reformers are trying to sabotage his regime continued, even as Russian Deputy Prime Minister SEROV was in Minsk to discuss Russian-Belarus integration.

When you need to know it as it happens

Politics-Economics-Business

Page

Wednesday

October 1, 1997

Intercon's Daily

This latest outburst may, in part, have been prompted by a statement from Russian First Deputy Prime Minister Boris NEMTSOV last week. In a interview with Byelarusskaya Delovaya Gazeta, NEMTSOV compared the economy of Belarus with those of Cuba and North Korea. LUKASHENKO responded by telling reporters on Tuesday that NEMTSOV's remarks were "childish," reported Interfax.

The Belarus KGB said on Tuesday that it had completed the investigation into the case of two Russian public television ORT journalists and concluded that they deliberately and illegally crossed the Belarussian-Lithuanian border. The results of the investigation into Pavel Sheremet and Dmitri Zavadsky are now at the Prosecutor's office. Moscow has repeatedly requested that Belarus drop the charges against the journalists and the conflict has strained ties between the neighbors.

LUKASHENKO refused to discuss the issue of SHEREMET with SEROV, during the Russian official's recent visit to Minsk. SEROV returned to Moscow only to confer with Russian leaders on talks so far and is due back in Belarus today.

Estonia Bank Enters Russia Market

· Estonia's third largest bank, Hoiupank, on Tuesday signed a contract to purchase a small Russian bank, FABA, for 7.17 million Estonian crowns (about $512,000), reported today's Financial Times. Hoiupank said its ownership of FABA was the first time a foreign entity had owned 100 percent of a Russian bank. It said it expected FABA to break even this year, but did not expect a profit next year. The article did not indicate FABA's location.

Hoiupank said it plans to invest 30 million Estonian crowns in FABA, depending on its development. The Russian Central Bank approved the purchase on September 18, said FT.

Pohjola, AIG to Buy Lithuanian Insurer

· Finnish insurance group Pohjola and US in

surer AIG will each buy a 45 percent stake in Lithuanian insurer Baltic Polis, reported Reuters. The remaining 10 percent will be held by Pohjola's and AIG's Estonian associate Seesam International. No financial details were disclosed.

"It [Baltic Polis] is a very small local company, with annual turnover of less than 500,000 litas [about $125,000]," a Pohjola representative told Reuters. "Baltic Polis has operating licenses in all branches of non-life insurance and has operated in Lithuania since 1993. …Pohjola and AIG plan to develop Baltic Polis into a leading Lithuanian insurance company to serve both foreign and local companies and households."

American Favored in Lithuanian Pres. Poll

· The official electoral campaign for the Lithuanian presidency begins on October 2 and an American of Lithuanian descent is favored to win. The election will take place on October 21.

According to a September 21 public opinion poll, conducted by the independent company Baltic Studies, Valdas Adamkus, who served in the US government environmental agency for some 20 years until the spring of 1997, would get 29.7 percent of the votes if the election were held now, said Itar-Tass.

Incumbent president Algirdas Brazauskas received 26.7 percent of the support of poll respondents. Arturas Paulauskas, the former prosecutor-general, would come third with 21 percent of the vote. Lithuanian parliamentary speaker Vytautas Landsbergis would get only 11.7 percent.

It is still not certain, however, that the Central Electoral Commission will allow Adamkus to run. According to the Constitution, a presidential candidate must live in Lithuania for no less than three years before the elections. Adamkus, who is registered as a resident of the city of Siauliai, has not actually been living in Lithuania, but merely visiting the country and paying taxes as a Lithuanian citizen.

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