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

Friday, October 17, 1997

Russian Federation


Yeltsin—Era of Political Intrigue Is Over

· In his regular weekly radio address today, Russian President Boris YELTSIN sought to reassure the people that the country is politically stable, despite the current conflict between the executive and legislature. The president suggested that such open political conflicts were normal in developed countries and will not necessarily lead to disaster.

YELTSIN admitted that Russia's political past is full of "intrigues, plots, and putsches," but said that the country is entering a new era. "People got accustomed over long years to authorities acting only in ways advantageous for them and treating the Constitution as scenery." He promised that these times have passed for good.

"We can say now that we have a stable system of political power. We rely on clear-cut constitutional procedures, precluding any surprises," said YELTSIN. "Whoever now calls on people to start mass riots, you should know: there are reliable and operating mechanisms for replacing power. They are legitimate, normal and peaceful."

The president said that a dialogue between the executive and legislature to search for compromises is necessary to overcome the crisis as soon as possible. He again confirmed his initiative to hold a roundtable of political parties and movements. "We can settle all disputable moments and remove all differences," said Yeltsin.

SVR Denies Any Involvement with Mafia

· Russia's Foreign Intelligence Service (SVR) has denied recent allegations that its agents are involved with organized crime, suggesting that the claims are

aimed at blocking Russia's entry into world markets, particularly the arms market, reported Reuters. In an interview in Thursday's Izvestia, SVR spokesman Yuri KOBALADZE said his agency was under tight parliamentary control and it would be impossible to hide financial ties with the mafia.

Earlier this month, FBI Director Louis FREEH told a congressional committee that former Soviet KGB agents were working closely with many Russian organized crime gangs, which are operating sophisticated scams abroad and selling weapons to Colombia and other countries.

In addition, German and English newspapers have published reports suggesting ties between Russian security services and mafia gangs. Germany's Der Spiegel said a study by the country's BND intelligence service had concluded that members of Russia's Federal Security Service (FSB) and other agencies effectively belonged to the mafia. "The exertion of influence of organized crime on individuals and groups within the intelligence services has become so extensive in some cases that one must speak of a partial penetration," Der Spiegel quoted the study as saying.

KOBALADZE said that the newspaper reports were part of an ongoing campaign to discredit Russia. "In the last few months Russia has begun to actively penetrate the European and world markets… especially in arms," he told Izvestia. "It is not the mafia but the

Today's News Highlights


US Sanctions Against Gazprom?

Yamal Governor to Visit the US

Sheraton Involved in Russia

Malaysia MiG Upgrade Deal

New Reuters Rus.-Lang. Service

European Republics

Lith. Def. Min. in Washington

South Caucasus & Central Asia

Azeri Oil Company Execs Out

Kazakh Stock Exchange Grows




October 17, 1997

Intercon's Daily

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

Ruble = 5,878/$1.00 (CB rate)

Ruble = 5,860|5,896/$1.00 (buy|sell rates)

convertible bond issue, underwritten by Goldman Sachs and Holland's ABN Amro, in the US.

Senator Alfonse D'AMATO has said he will hold Banking Committee hearings on Gazprom 's planned bond issue. D'AMATO wants to look into whether the funds raised by the bond issue will be used for the Iran project, but an article in today's Journal of Commerce suggests that at least part of the funds will likely be used to finance Gazprom's considerable commitments in Turkey.

Gazprom to Receive Large Syndicated Loan

· An international banking consortium, led by Deutsche Bank, has granted Russian gas monopoly Gazprom a credit of DM1.67 billion to finance purchases of piping for the Yamal-Western Europe pipeline, reported Bloomberg news. The credit was guaranteed by the German government and the Hermes insurance company.

The loan is one of several received by Gazprom to help finance a $24 billion pipeline from western Siberia's Yamal Peninsula gas fields to western Europe. Western European consumers are expected to begin receiving 75150 billion cubic meters of Russian gas through the Yamal pipeline by 2010.

The consortium offering the new loan includes Bayerische Landesbank Girozentrale, Bayerische Hypotheken und Wechelbank AG, Bayerische Vereinsbank AG, Berliner Bank, DG Bank, West LB, BFG Bank AG, and Kreditanstalt fur Wiederaufbau.

Russian Oil Region's Governor to the US

· Yamal-Nenets Autonomous District Governor Yuri Neyelov will travel to New York and Washington between October 22 and 25 to promote investment in his resource-rich northwest Siberian region. "I am not going to ask Americans for money. We shall manage by ourselves, and then we shall be able to grant credits to those who need them. Now the purpose of my reports will be to tell them about our territory, its prospects, and investment attractiveness," Neyelov told Itar-Tass today.

According to the estimates of foreign experts, Yamal accounts for 75 percent of Russia's prospected gas reserves (or one third of world gas reserves). Yamal accounts today for 90 percent of Russian gas output.

May Jun Jul Aug Sep Oct

Russian authorities who are selling Mi-8 helicopters to the Colombians. But for the Americans, these deals are the greatest irritant. They are accustomed to treating Latin America as their inner market."

KOBALADZE admitted that the mafia is a large problem, but noted that organized crime is "a headache" for many countries. He also acknowledged that his agency is worried about the possibility of mafia infiltration, but said that parliamentary monitoring made this unlikely.


US Considering Sanctions Against Gazprom

· US Ambassador to Russia James COLLINS told Russian gas monopoly Gazprom chairman Rem VYAKHIREV on Wednesday that Gazprom's role in an agreement to develop natural gas reserves in Iran could serve as grounds for imposing sanctions against the company. Gazprom, France's Total, and Malaysia's Petronas signed a $2 billion deal with the National Iranian Oil Company last month to develop the South Pars gas field.

Total and Petronas have also been threatened with sanctions, but US officials now appear to be focusing attention on Gazprom. The Congress and the CLINTON Administration are reportedly looking into the possibility of withdrawing some $750 million in authorized US Import-Export Bank credits to US companies for the sale of supplies to Gazprom and of blocking Gazprom's plans to launch a $1 billion

When you need to know it as it happens




October 17, 1997

Intercon's Daily

In addition, Yamal is one of the most promising mining areas of Russia for chromites, rare-earth metals, phosphorites, and gold, said the governor.

According to Neyelov, in 1998, the regional administration will be ready to consider proposals on 3-5 year investment projects for gas and oil processing, geological prospecting, and the modernization of oil-producing equipment and pipelines.


Sheraton to Open First Russian Hotel

· US ITT Sheraton Corp., a subsidiary of ITT Corp., on Thursday announced that it has signed 23 new management contracts or franchise agreements in eight countries, including its first hotels in Russia and Georgia, said a company press release.

Russia to Upgrade Malaysia's MiG's

· Russian companies signed a $34.4 million contract today in Kuala Lumpur with Russo-Malaysian joint venture Aerospace Technology Systems Corp. to modernize 18 MiG-29 jetfighters supplied to Malaysia in 1995-1996, reported Itar-Tass. The Russian side consists of the MAPO, the MiG plant, and the Rossvooruzheniye arms export agency. The Malaysian aircraft are to be provided with a mid-air refueling system and their ordnance load will be increased from two to four tons. The aircraft are to be armed with the newest Russian air-to-air missiles RVV-AE with a range of 50 kilometers.

Reuters Begins Russian-Lang. Service

· Reuters today launched a Russian-language version of its business information service, called Reuters Business Briefing, reported M2 Communications. The new product provides an inside view of Russian business, economics, and politics, with access to the world's largest Russian-language business information database.

The Russian-language version of Reuters Business Briefing currently contains 27 sources, including daily newspapers Izvestia and Segodnya, Prime-Tass, the economic service of Itar-Tass news agency, and the financial publication Kommersant. Some 100 Russian-language news stories from Reuters own domestic financial news service are added to the database daily. More sources will be added in the near future.

European Republics

Lithuanian Defense Minister in Washington

· Speaking today at a private Washington luncheon meeting, Lithuanian Defense Minister Ceslovas STANKEVICIUS indicated that Russia and Lithuania will shortly sign a treaty on borders which formalizes their 1991 agreement. However the question remains open if the Russian parliament will ratify it. Asked why Russia ready to sign the treaty after a six year hiatus, STANKEVICIUS speculated that it might be related to NATO expansion issues.

The Minister also said that cooperation with new NATO member Poland is proceeding at a fast pace. This includes bilateral parliamentary and governmental commissions. Also of importance is the creation of a joint Polish-Lithuanian brigade. Officer training is now underway and English will be the spoken language. A regional air traffic control system is now being created, to be based in Lithuania, for all the Baltics, as well as extending an additional 400 kilometers beyond their boundaries.

Lithuania is also prepared to create one NATO-capable division as a contribution to NATO membership. Currently its defense strategy is based on deterrence, which could eventually include a 200,000 reserve force. The Minister noted that large concentrations of Belarussian and Russian tanks along Lithuania's borders are of concern. Recent statements and actions by Belarus President LUKASHENKO have increased this concern.

South Caucasus & Central Asia

Aliyev Calls for Peacekeepers in Karabakh

· Azeri President Geidar Aliyev on Thursday called for the introduction of Organization for Security and Cooperation in Europe (OSCE) peacekeeping forces into Nagorno-Karabakh, reported Interfax. Aliyev made the remarks at the graduation ceremony of the air force's pilot training school.

The OSCE Minsk Group proposed a peace process consisting of two steps which will gradually withdraw Armenian forces from Azeri territory, repatriate refugees, and give autonomous status to Karabakh. Aliyev said that his government has agreed in principle on the OSCE proposal.

When you need to know it as it happens




October 17, 1997

Intercon's Daily

In an interview published in Thursday's Le Monde, Armenia President Ter-Petrosyan said that both Armenia and Azerbaijan have accepted the first stage of the OSCE peace plan as a basis for further negotiations, reported today's RFE/RL Newsline.

However, Xinhua reported on Thursday that Armenian presidential press secretary Levon Zubadryan said that the Karabakh government had rejected the Minsk group's initiative. Armenia will join in future talks for a peace plan acceptable to all parties involved in the conflict, said Zubadryan. And it will endorse any document signed by Karabakh, he added.

Azeri Oil Company Execs. Removed

· The Azerbaijan government on Thursday decided to dismiss Farman Velizade, president of Azerigas, and Sayad Ibragimov, first vice-president of the Azeri state oil company SOCAR, reported Itar-Tass. According to the government, the two managers are guilty of violations in their financial and managerial activities.

Specifically, large-scale repairs to the head office of the company, costing about a billion manats ($250,000), were ordered by Velizade. At the same time, Azerigas owed debts of hundreds of billions in manats, including wage arrears of as much as nine billion manats. It was also established that the funds for the repairs were spent with no designing estimates, no approval of the sums and financing sources, and with the labor and equipment costs purposefully overestimated, said the government.

As for Ibragimov, he allegedly showed an absence of due control over the structures he supervised, which caused regular shortfalls in natural gas output, bore-hole drilling, oil refinement, and brought about a general deterioration of the company's financial position, said Itar-Tass.

According to Azeri Prime Minister Artur Rasizade, the decision taken on the issue, should serve a

serious warning and a lesson to all the managerial personnel of the country.

The decision must be approved by President Aliyev

Kazakh Stock Exchange to Add Companies

· Kazakhstan's new stock exchange said Thursday that it will launch trade in seven major companies at the end of the month, significantly bolstering the exchange which currently trades only one stock, reported Reuters. The seven companies to be added to the exchange beginning October 28 are: the country's largest private bank Kazkommertsbank; the Ust Kamenogorsk titanium and magnesium enterprise; the Shymkent oil refinery; oil company Mangistaumunaigaz; telecommunications monopoly Kazakhtelecom; the Alyuminii Kazakhstana aluminum company; and the Kazkhrom chrome company.

Strategic investors have already purchased majority or large minority stakes in all these companies, except Kazkommertsbank, and Kazakh authorities hope that they will eventually become "blue chips." Currently the stock exchange, which opened last month, trades only in shares of Neftekhimbank.

The announcement of the broadening of the stock exchange is expected to help reassure investors worried by last week's resignation of the country's National Securities Commission head and the removal of the prime minister. Commission head Grigory MARCHENKO stepped down, in part, to protest the delay in the full-scale launch of the stock market.

Hong Kong Bank Opens in Kazakhstan

· Hongkong Bank, part of the HSBC group, has opened a branch in Almaty, reported Thursday's Financial Times. East Asia already accounts for a big share of Kazakhstan's trade and Hongkong Bank is assuming further development of trade once physical transport constraints are overcome. "You've got a resource-rich Kazakhstan, a resource-hungry China, and that is the strategic fit," Andrew DIXON, the bank's general manager, told FT.

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