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, October 16, 1997

and Federation Council speaker Yegor STROYEV to discuss the political conflict between the executive and legislature, reported Russian television. The leaders will set a date for a meeting with the heads of the Duma's seven factions and various deputy groups. The discussions will focus on the draft 1998 budget, the tax code, and other issues.

Hardliners to Try to Oust Zyuganov?

· Hardline leftists may attempt to remove Gennady Zyuganov as the head of the Communist Party and of the People's Patriotic Union at a closed Communist plenum scheduled for Saturday, an unidentified Union official told RIA Novosti today. The source said that an attempt could be made by certain "radicals" who are discontent with "Zyuganov's tolerance" toward the question of no-confidence in the government. The source also said that the site of the Communist plenum will be kept secret even from the members of the party until the day it will be held, although "two or three places" are being prepared.

Economy

Ruble = 5,877/$1.00 (NY rate)

Ruble = 5,878.5/$1.00 (CB rate)

Ruble = 5,861|5,896/$1.00 (buy|sell rates)

Russia Seeks Big Telecom Investment

· Russian State Communications Committee head Aleksandr KRUPNOV said today that the country hopes to attract some $30 billion in invest

Russian Federation

Politics

Communists Seek Chubais' Removal

· Russian State Duma deputy Viktor ILYUKHIN told Interfax today that the Communists may seek the removal of First Deputy Prime Minister Anatoly CHUBAIS and other concessions in exchange for canceling a no confidence vote in the government planned for next Wednesday.

Other Communist demands of the government include the reestablishment of state monopolies on the trade of oil, gas, and other "strategic" raw materials, a 1-2 year delay in raising energy prices, and greater media access for the Communists, said ILYUKHIN.

However, Prime Minister Viktor CHERNOMYRDIN today ruled out making any personnel changes in the government to appease the Communist lawmakers, saying that no Cabinet changes are needed now or in the near future.

Presidential spokesman Sergei YASTRZHEMBSKY supported the premier's stance. "The president does not see any need to discuss personnel changes in the government," he is quoted by Reuters as saying. He also criticized some Duma deputies for making "totally unreasonable demands."

YASTRZHEMBSKY also said that President Boris YELTSIN was ready to listen to proposals from the opposition and hold talks on important issues. However, the president is not willing to change the government's general reform strategy or make changes to the constitution and will not "accept discussions in a spirit of blackmail and pressure."

On Monday, YELTSIN and CHERNOMYRDIN will meet with Duma speaker Gennady SELEZNYEV

Today's News Highlights

Russia

Chubais Removal Sought

Zyuganov to Be Ousted?

Telecom Investors Sought

Loan for High-Speed Rail Line

Overview of Agricultural Reform

Benton Receives Financing

South Caucasus & Central Asia

Investment in Central Asia

AIOC Delays Output Again

Chevron to Send OIl to China

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October 16, 1997

Intercon's Daily

ment in the telecommunications sector over the next four years, reported Reuters. He is quoted by Interfax as saying that the Committee would stimulate the creation of new investment holding companies, like Szyazinvest, to attract investment to the industry. Svyazinvest holds a controlling stake in some 80 regional telecom companies.

KRUPNOV said that cellular telephone operators and other telecommunications companies, as well as competitors to long-distance provider Rostelekom, could make up part of such holding companies.

Over the next two years, the Committee is also planning to create a government holding company consisting of 115 government radio and television companies, he told reporters. The holding company would help solve the problem of tax indebtedness plaguing the industry.

High-Speed Rail Co. Receives $220 Mln Loan

· Two British investment banks have extended a $200 million credit to Russia's High-Speed Railway (VSM) company to build a high-speed railway line between Moscow and St. Petersburg, reported Itar-Tass. On Tuesday, VSM board chairman Vladimir Tulayev signed the credit agreement with British officials. The credit was issued against the guarantees of the British and Russian governments after 18 months of preparation.

VSM will build the rail line through a joint venture with Taylor Woodrow International and Skanska Construction. The first part of the project calls for the construction of a transportation terminal and a hotel with 350 rooms in the center of St. Petersburg.

Russian Agricultural Sector in Transition

· A recent report on the general outlook for Russian agriculture, prepared by the US agricultural attaché in Moscow, presents an overview of government reform efforts in the agricultural sector and how these changes, as well as the new conditions of market transition in the country, have affected farmers, reported Futures World News.

The report notes that Russian federal budget appropriations for agricultural have been decreasing steadily over the last few years. In real terms, 1997 federal budget outlays for agriculture fell by one percent, compared with 1996 outlays. Grants and

subsidies decreased by 18 percent in real terms, from $1,008 million to $828 million. Most of the funds were targeted at compensating temporary, seasonal needs of agricultural producers.

In addition, all but two of the special federal programs adopted in previous years have been discontinued. One is the "Development of the Baby Food Industry in 1991-1997" program and the other is the program "Stabilization and Development of the Agro-industrial Complex, 1996-2000." The federal programs usually receive funds left over after the obligations to agricultural producers to fulfill urgent seasonal needs have been met. The already limited 1997 budget focuses on providing subsidies to producers for purchases of fuel, fertilizer, and machinery repair.

The government also directly supplies food to certain sectors of the economy and to large cities. The Federal Food Corporation (FFC) was created in 1995 to procure food supplies for large cities, the far north, the armed forces, the interior ministry, and for emergencies. The Russian government also annually establishes measures to procure foodstuffs for Moscow. Lack of funding and mismanagement have seriously limited the FFC's ability to fulfill its mandate. In 1996, it was officially accused of misspending $460 million in its first year of operation.

The government's food procurement practices have been criticized in Russia's WTO accession talks, especially those regarding preferences for domestic suppliers, and Russian officials have been asked to demonstrate how procurement practices comply with WTO rules on state trading and procurement.

The government has also been undertaking regulatory changes. During the past 18 months, it has passed a series of food labeling laws. Earlier, it was unclear which government agencies were responsible for implementing these laws. In July 1997, the Russian government announced the current food labeling law. The law requires that food imported from foreign exporters have information about content, nutritional value, shelf life, conditions of storage, and use of the product. All of this information is to be in the Russian language. Under this law, the Russian importer is responsible for complying with the import labeling requirements, not the US exporter or supplier. The new law strengthens the State Committee for Standards' (GOSSTANDART) role in

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managing these requirements by providing instructions and other details. The state standard on labels for food products is a 35-page manuscript with two supplements, one of which contains references to 23 other obligations which already exist for certain food products. These state standards have been developed for all food products over many years.

The government has lagged behind on agrarian land reform. Current land reform is based on an October 1993 presidential decree, "On the Regulation of Land Relations and the Development of Agrarian Reform in Russia." Currently the government is trying to pass a more comprehensive and binding Land Code, but these efforts have been blocked by the conservative parliament, which does not want to allow the free purchase and sale of farmland.

In practice, the privatization of farmland in Russia has meant the government has been handing land over to the collective farms. These farms are then required to issue to each member a land share. This land share is a certificate, giving the share owner the right to an unspecified plot of land within the collective farm. The member can either retain the rights to their land share or return it to the collective farm in exchange for lifetime rent and services. The land may only be used for farming and may only be sold within the confines of the former collective farm.

Progressive leaders in the Nizhny Novgorod, Rostov, and Orel oblasts have been successful in truly privatizing former collective farms, but much of the privatization in the rest of Russia has been little more than the former collective farm changing its name to a Joint Stock Company. The head of the collective farm may have the land share certificates in his safe or a member may have the certificates and not know their value. Only six percent of Russian farmers have claimed their land share to start a private farm. The efforts of private farmers have been handicapped by a lack of access to credits and other inputs.

True land privatization in the Western sense will be impossible until two obstacles are overcome, said the attaché's report. First, agricultural land must be put into private hands, and individuals must clearly be given the right to buy, sell, mortgage, and inherit this land. Second, the peasant farms must be decollectivized. Not only must the farms be made

more efficient, but the social services provided by the collective must be transferred into private hands or to the local government.

Business

Benton Oil Gets Funding for Oil Project

· US Benton Oil and Gas Co. on Wednesday announced that its Russian joint venture Geoilbent Ltd. has received initial funding under a non-recourse loan agreement and has begun an aggressive five-year development drilling program in western Siberia, said a Benton press release. The venture was granted $55 million worth of seven-year reserve based project financing from the European Bank for Reconstruction and Development (EBRD). A similar five-year facility of $10 million has been arranged with the International Moscow Bank (IMB). The first tranche from these debt financings was drawn on October 15, 1997.

Geoilbent was established in 1991 by two Russian companies, Purneftegaz and Purneftegazgeologia, each of which own 33 percent, and Carpinteria, Calif.-based Benton Oil and Gas, which owns 34 percent. The venture is aimed at the further development of two western Siberian oil and gas fields.

Geoilbent plans to drill approximately 300 development wells in the North Gubkinskoye Field as part of a $329 million five-year capital spending program. This program will potentially increase production to an estimated 75,000 barrels of oil per day by 2002 from the current level of approximately 7,000 barrels per day. This six rig drilling program is expected to add approximately 60 wells per year over the next four to five years. Pipeline facilities to handle the increased volumes are already in place. However, infrastructure additions will be necessary.

The North Gubkinskoye field contains estimated recoverable reserves of 344 million barrels of crude oil and approximately two trillion cubic feet of gas.

Joseph C. White, Vice President of Operations for Benton Oil and Gas Co. since February 1993, has been appointed to the position of First Deputy Director General of Geoilbent and will assume responsibility for all operations in the North Gubkinskoye Field project. Yuri Kokaev of Purneftegaz has been named Chief Engineer reporting directly to White.

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South Caucasus & Central Asia

Central Asia--The New Focus of Oil Investors

· The rapid influx of investment by Western multinational corporations to develop the vast oil and gas resources of former Soviet Central Asian countries is a major topic of discussion at the 15th World Petroleum Congress in Beijing this week, according to Xinhua. Kazakhstan, Uzbekistan, Kyrgyzstan, and Turkmenistan are particularly attractive to Western investors because of increasing political stability in these newly independent nations, said delegates at the Congress.

Many contracts have been signed with these countries and countless more are in the works. Six Japanese and Turkish companies have signed contracts with the Turkmen government to spend $500 million during 1996-99 on oil refineries. A Malaysian oil company also signed an agreement to develop three oilfields in Turkmenistan along the Caspian Sea continental shelf. And a British company has invested $300 million in the development of three oilfields in western Turkmenistan.

More than 30 foreign companies also are involved in the development of oil and natural gas fields in Kazakhstan. Uzbekistan has received over $1 billion in direct foreign investment for processing and tapping energy resources.

AIOC Oil Production Delayed Again

· The Azerbaijan International Operating Co. (AIOC), a multinational consortium developing three large oilfields in the Azeri sector of the Caspian Sea, has delayed the start of production until October 25, reported the Associated Press (AP), citing a company spokeswoman. The AIOC had planned to begin production from its Chirag-1 oilfield on August 28, but had pushed its target date back to early October and then to mid-October.

The latest delay partially results from the October 2 crash of a helicopter, chartered by the Azeri state oil

company SOCAR, which killed 21 oil workers. A crane normally used to help pump oil was used to lift the helicopter from the Caspian Sea bed.

Meanwhile in Russia, Fuel and Energy Minister Boris NEMTSOV said that the first shipment of early Caspian oil output from the AIOC project could be transported through Chechen territory on November 7, reported Itar-Tass. He said Russian builders will finish the restoration of the Baku-Novorossiisk oil pipeline that runs through Chechnya within days.

Nemtsov said the exact date when early Azeri oil will flow through the pipeline is to be determined by Azeri President Geidar Aliyev. He also said work continues to design a new oil pipeline bypassing Chechnya, adding that it may go on line next year.

Chevron to Send Kazakh Oil to China

· Tengizchevroil, a US Chevron-led oil development joint venture in Kazakhstan, has agreed to send a test shipment of crude oil to China by rail, reported Dow Jones. The agreement between Tengizchevroil and China's Sinochem International Oil Co. is another attempt by the joint venture to find export outlets for its oil output and could lead to a long-term arrangement to send crude to western China.

A Chevron spokesman said the delivery to a Xinjiang province refinery from western Kazakhstan's Tengiz field will take place within a month. The first shipment by rail will be small scale. He said Sinochem will evaluate the quality of the crude and the costs of rail shipment before deciding on future orders, he said.

The Tengizchevroil venture is 45 percent owned by Chevron, with US Mobil and the government of Kazakhstan holding 25 percent each, and the remaining five percent is held by the LukArco joint venture between Russia's Lukoil and US ARCO.

Chevron has said it expects the venture to produce more than seven million tons of oil this year and 11 million tons by the end of 1999. Lack of access to export pipelines has hampered the project.

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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