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, October 14, 1997

Russian Federation

Politics

Government Challenges Duma on Vote

· The Russian government has been pressuring the State Duma over its plans to debate the passage of a no confidence motion in the Russian government on Wednesday.

Aleksandr Shokhin, head of the pro-government of Our Home is Russia faction in parliament, told Interfax today that Prime Minister Viktor CHERNOMYRDIN will resign if the Duma passes a no confidence vote. He said that the premier had informed Duma speaker Gennady SELEZNYEV of his decision on Monday.

However, Russian government spokesman Igor Shabdurasulov today flatly denied that Chernomyrdin would resign if the Duma passed a no-confidence motion. "Such resignation is out of the question," he is quoted by Itar-Tass as saying.

CHERNOMYRDIN would neither confirm nor deny the rumors of his planned resignation, but said that he was willing to hold a dialogue with the Duma on matters of disagreement.

Speaking to reporters at the Kremlin today, presidential spokesman Sergei YASTRZHEMSKY bluntly warned legislators against passing a no-confidence. "This is a constitutional right of the State Duma but is quote obvious that such a decision will bring no positive results and will not resolve any problems," he is quoted by Reuters as saying.

First Deputy Prime Minister Boris NEMTSOV warned that a vote of no confidence in the government may inflict huge economic damage on the country, according to Itar-Tass. He said that if the vote is

passed, the positions of Russian enterprises in foreign markets may be shaken and the value of their shares may fall. "It is particularly unpleasant that the Communists wish to provoke a government crisis at a time when shares of large petroleum companies are to be put on sale [in foreign markets]. This may lose many trillions of rubles for the budget," he said.

The Communist faction placed the topic on the agenda, but even a successful vote of no confidence would have to be followed by another no confidence vote in three months to bring down the government. Moreover, President Boris YELTSIN has hinted that he would dissolve the parliament before asking for the resignation of his government.

Borovoi Accuses Deputies of Corruption

· Russian State Duma deputy Konstantin Borovoi, an independent, told a conference on corruption in the Duma Monday that illegal lobbying is a threat to Russia's security, reported Itar-Tass. He said that large corporations, particularly state monopolies and military-industrial complex enterprises, gave "huge money" to Duma deputies to uphold their interests. Borovoi claimed that one unspecified company spent $3 million to buy deputies' support.

Borovoi singled out lobbying in the Russian aluminum industry as a particular problem. He said "a proposal of nationalization of the aluminum sector was thrown in, to which the world market responded by a 30 percent fall in metal prices." This set the stage

Today's News Highlights

Russia

Chernomyrdin on FDI

Lukoil Buys Smart Cards

S&P's Rates MGTS

US Gets Marriott Furn. Order

European Republics

Norsk Hydro to Sue Ukraine Co. Lukoil Gas Station in Ukraine

South Caucasus & Central Asia

Turkmenistan-Iran Talk Oil

Kazakh Securities Head Quits

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Tuesday

October 14, 1997

Intercon's Daily

for shares of the Norilsk Nikel metals giant to be purchased cheaply, according to him. Russian financial group Oneximbank recently won a tender for a large stake in Norilsk Nikel.

Luzhkov Says He Won't Run

· Moscow Mayor Yuri Luzhkov, speaking to reporters in Berlin, again insisted that he does not intend to run for the Russian presidency in the 2000, reported RIA Novosti on Saturday. Luzhkov was in Germany on a one-day visit to hold talks with Berlin Burgomeister Eberhard Dipgen. The two mayors discussed the deepening of cooperation between Moscow and Berlin in solving various problems of public services and utilities.

Economy

Ruble = 5,874/$1.00 (NY rate)

Ruble = 5,876/$1.00 (CB rate)

Ruble = 5,860|5,892/$1.00 (buy|sell rates)

Chernomyrdin Predicts Rise in FDI

· Russian Prime Minister Viktor Chernomyrdin told reporters on Monday that Russia hopes to attract $10 billion in direct foreign investment (FDI) by 2000 and is working to improve its investment climate, reported the Associated Press (AP). Following a meeting of Consultative Council on Foreign Investment in Russia, which includes senior Western businessmen, the premier noted that Russia must improve its legal and tax climate to become more attractive to investors.

Direct foreign investment in Russia for 1998 would total $6-7 billion, he said. Investment in the first six months of 1997 was $6.7 billion, with $2.2 billion of the total from direct investment.

According to the Consultative Council, total foreign investment in Russia as of July was $20.2 billion, including $9 billion in direct investment.

Russian Grain Harvest Above Forecast

· Russia Agriculture Minister Viktor Khlystun said Monday that the country has harvested over 90 million tons of grain in 1997, resulting in a net 84-85 million tons of grain in storage, reported Itar-Tass. Khlystun said that the crop exceeded the projected figures by 4-5 million tons despite financial problems and bad weather.

Farms have doubled the 1996 buckwheat and millet crop figures, but expect a slight drop in sunflower production. The sugar beet harvest is being hampered by pelting rains which bring down sugar beet production, but Khlystun said he expects no shortage of sugar in the country.

Business

S&P's Rates Moscow Telephone Co.

· Standard & Poor's has today assigned its double-'B'-minus foreign currency corporate credit rating to Moscow City Telephone Network (MGTS), said S&P's CreditWire. The rating is constrained by the foreign currency sovereign ceiling of Russia.

The rating primarily reflects MGTS' very strong market position as the owner and monopoly operator of the fixed-network in the city of Moscow and the company's majority ownership by the Russian government and the city of Moscow government. Other positive rating factors include a regulatory framework that is expected to be supportive, the company's location in the most developed Russian city and its very low leveraged capital structure. On the negative side, the rating incorporates the challenges posed by the need to substantially reconstruct MGTS' outdated and inefficient network, to drastically rebalance the company's tariff structure, and to considerably improve operating efficiency and make the company a more customer oriented organization.

MGTS is the largest of the 86 regional companies providing local telephony services in Russia. Long-distance and international services are provided by Rostelekom (foreign currency rating of double-'B'-minus) who pays a fee to the regional companies for interconnection to their networks. A majority state-owned holding company, Svyazinvest, owns stakes in all the regional companies and in Rostelekom. MGTS is 47 percent owned by Svyazinvest and 33 percent owned by a subsidiary of the Moscow government.

Given MGTS' strategic importance to Russia as the main provider of telecom services and infrastructure in the country's capital city and main economic center, considerable ownership support has been assumed in the rating. Moscow has a level of per capita income that is almost four times higher than the Russian average and the telephone penetration

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rate in the city, at around 40 percent, is much higher than the country average of 15 percent. Prospects for competition to MGTS are very limited and potential new entrants would likely be discouraged by the regulators who seem committed to maintain MGTS' position as the dominant provider of fixed-line telecom services in Moscow. Regulatory protection is crucial since MGTS' network is in poor shape and the company is currently starting a major network modernization program that will absorb all its efforts and funds for the next few years.

The company also needs to rebalance its tariffs to gradually reduce the traditional subsidy from corporate to residential users. The Ministry of Communications has stated its intention to permit considerable tariff increases to residential customers. MGTS is virtually debt-free and the company's cash-flow ratios are adequate with a sales ratio of 35 percent in 1996. Some debt will be put in place to help fund the intensive investment program but the company expects to be able to self-finance the bulk of investments and to maintain leverage at low levels.

Lukoil Implements SmartCards for Wages

· Russian oil conglomerate Lukoil has purchased smart card technology from ICL, a European IT systems and services company, to ensure the payment of wages to its oil workers in Siberia and Volgograd, reported M2 Communications on Monday. Lukoil plans to make 200,000 cards available to all its employees throughout Russia, it said.

Lukoil, and Russian oil producer Purneftegaz which also purchased ICL technology, wanted an efficient, cost-effective, and simple-to-administer cash alternative to safeguard its workers' payroll. The two companies found that the truck that brought wages to Siberia was regularly being hijacked by organized crime groups and oil workers were also being mugged for cash as they travelled to and from work, according to an ICL smart card consultant.

The new smart cards can be used in the stores of the three local cities and can be used to withdraw cash from especially adapted Automatic Teller Machines (ATMs) in major cities.

Virg. Co. Wins Moscow Marriott Order

· High Point, NC-based LADD Furniture, Inc. announced on Monday reported today its contract

furniture division, American of Martinsville, has furnished the guest rooms and suites of the new Moscow Marriott Grand Hotel, which opened last month, said a company press release. With 392 rooms, including eight suites, the Marriott Grand is the largest hotel in Russia and only the second full service hotel in the city of Moscow. The Moscow Marriott furnishings order was worth $1.6 million.

The design of the Moscow Marriott Grand Hotel was approved by Marriott International and the hotel itself is managed by Interstate Hotels of Pittsburgh. The hotel was built by Moscow construction company Mospromstroi, which also owns the property.

European Republics

Norsk Hydro to Sue Ukraine Over Contract

· Norwegian industrial conglomerate Norsk Hydro plans to sue a Ukrainian company for unfairly ousting it from a joint venture to build a terminal to load and unload phosphate for fertilizer in the Black Sea port of Yuzhny near Odessa, reported today's Financial Times. Norsk Hydro is the world's largest supplier of fertilizer and controls eight percent of the Ukrainian market.

"This is building into a major showdown," Odd GRONLIE, vice-president of Norsk Hydro's CIS Division is quoted as saying. "But I think the top management of Ukraine wants to change the reputation of the country. We feel support from the higher levels of the government."

Norsk was officially expelled from the joint venture in February 1996, after a year and a half of conflicts with its joint venture partners and local authorities. A representative of one of the partners, Transinvest, told FT that the reason for Norsk's removal was that it had not begun work on the terminal 20 months after signing the agreement. Norsk countered that it could not go ahead with the project because a stop order was issued by local authorities in Odessa after Norsk failed to receive a series of local permits, which were supposed to be obtained by Norsk's local partner.

In October 1996, an Odessa court nullified the management contract which gave Norsk control of the terminal, said FT. The main reason given was that the venture would constitute a monopoly on the export and import of phosphate.

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"This country has a huge potential for us. We would like to invest more in Ukraine," GRONLIE is quoted as saying. "But nobody can do business if they keep changing the rules."

Lukoil Opens Gas Station in Ukraine

· Russian oil company Lukoil has opened its first filling station in Ukraine, reported Itar-Tass. Lukoil president Vagit Alekperov, who attended the opening ceremony in the Crimean city of Simferopol on Saturday, said Lukoil is planning to open dozens of petrol stations in Ukraine by the end of this year, including five on the Crimean peninsula. The company also intends to participate in prospecting for oil in the Black Sea shelf off the Crimea, he said.

South Caucasus & Central Asia

Japan Gov't to Insure Georgia Projects

· The Japanese Ministry for External Trade and Industry announced on Monday that it has decided to resume insuring Japanese commercial and financial transactions in Georgia in view of the improving economic situation in the country, reported Itar-Tass. Following the breakup of the USSR, all the former Soviet republics, except Russia, were deprived of Japanese government guarantees, without which Japanese businessmen usually do not dare invest in "risky" countries. Japan has resumed providing state insurance for Kazakhstan, Uzbekistan, Turkmenistan, Azerbaijan, and Kyrgyzstan.

Update on Drilling of Karabakh Deposit

· US Pennzoil said on Friday that the KPS-1 well on the Karabakh block in the Caspian Sea has discovered the presence of natural gas, but has not found oil, said a Caspian International Petroleum Company (CIPCO) press release. KPS-1 is the first of three exploration wells scheduled to be drilled on the Karabakh block during 1997 and 1998.

Stephen Chesebro, President of Pennzoil Exploration and Production Company, said, "While we were expecting to find crude oil, so far we have only

found natural gas. Once the well is completed, the technical team will review all technical data and existing 3-D seismic for potential locations of a second exploration well."

CIPCO, the joint operating company exploring Karabakh, includes Russia's Lukoil (12.5 percent), Italy's Agip (five percent), the joint venture LUKAgip N.V. (45 percent), Pennzoil (30 percent) and the Azeri state oil company SOCAR (7.5 percent).

Turkmenistan, Iran Plan Oil Cooperation

· Turkmen President Saparmurat NIYAZOV has proposed to Iranian Foreign Minister Kamal KHARAZZI the creation of a joint Turkmen-Iranian Commission to explore and develop Caspian Sea oil and gas resources, reported Dow Jones on Monday.

Iran and Turkmenistan also restated their positions, shared by Russia, that the Caspian Sea should be developed by all five littoral states jointly

NIYAZOV and KHARAZZI also discussed export pipeline routes for Turkmen oil and gas via Turkey to Iran and to Persian Gulf, said Dow Jones.

Kazakh Securities Commission Head Quits

· Kazakhstan's National Securities Commission chairman Grigory MARCHENKO announced today that he was resigning out of frustration, citing the slow pace of the government's development of the stock market, reported Reuters. MARCHENKO said that the main reasons for his resignation were delays in taking a political decision on the full-scale launch of the stock market, delays in sending a bill to parliament on joint stock companies, and proposed changes to the structure of the securities commission which he said would undermine its independence. The stock market was formally launched last month with trading in one share.

MARCHENKO, the former chairman of the central bank, was the second leading reformer to leave the Kazakh government this week, following the resignation of Prime Minister Akezhan KAZHEGELDIN.

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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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.

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