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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Wednesday, October 22, 1997

Russian Federation


Zyuganov Criticized for Compromise

· This week's displays of compromise and reconciliation between some opposition legislators and the Russian government have deepened a growing rift between the mainstream Communist Party and hardline leftist organizations. Both the government and the Communists clearly see the maintenance of the status quo as in their interests, while it is widely believed that a dissolution of either the government or the parliament would benefit the radical left.

Communist Party leader Gennady ZYUGANOV met and negotiated with President YELTSIN and Prime Minister CHERNOMYRDIN on Tuesday, and today the State Duma withdrew a no confidence motion in the government at his initiative. Both sides adopted a cooperative stance in order to quell the growing conflict and political instability. Moreover, analysts predict that if new parliamentary elections were held as a result of the dissolution of the Duma, hardline groups would gain several seats.

ZYUGANOV has drawn fire from Working Russia, the Officers' Union, and other hardline communist and nationalist groups for abandoning his efforts to oust the government. The groups acknowledged that there is a split among opposition parties and pledged to continue to try to bring down the YELTSIN administration.

Iran Parliament Ratifies Russia Bill

· The Iranian parliament has approved a bill on trade and economic cooperation between Iran and Russia, reported Compass on Tuesday. The bill calls for promotion and expansion of bilateral economic and technical cooperation in energy, agriculture, fisheries, ferrous and non-ferrous metals, oil

and gas, machine building and transportation as well as in other fields of mutual interest.

US Strategic Commander to Russia

· US Strategic Command commander-in-chief General Eugene Habiger arrived in Russia today for a week-long visit, according to the Pentagon. Habiger, a four-star Air Force general, is scheduled to meet with senior Russian Strategic Rocket Forces officials in Moscow, tour a command post in Balabanovo, tour Vladimir Missile Army Headquarters, and visit garrisons for the SS-25 and SS-24 intercontinental ballistic missile systems.

Habiger visits at the invitation of Col.-Gen. Vladimir Yakovlev, commander of Russia's strategic rocket forces. The trip is part of a military-to-military contact program sponsored by the NUNN-LUGAR Cooperative Threat Reduction Program.


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

Ruble = 5,879/$1.00 (CB rate)

Ruble = 5,857|5,901/$1.00 (buy|sell rates)

US-Russian Trade in August

· Russia exported $365 million worth of goods to the US in August and imported $266 worth of goods from the US, resulting in a positive trade balance for Russia of about $98 million, according to US Department of Commerce figures. This compares to a $104

Today's News Highlights


Alfa Bank US Credit Facility

Lukoil Convertible Bond Offering

Aeroflot to Issue ADRs

EBRD $ for Petersburg Airport

European Republics

Customs Union Leaders Meeting

Ukraine Stance on Lenders

South Caucasus & Central Asia

CanArgo in New Georgia JV

S. Korean FDI in Kazakhstan




October 22, 1997

Intercon's Daily

million trade balance that Russia enjoyed with the US in July.

India Buys Russian Warships

· Indian Defence Minister Mulayam Singh Yadav said today that the government of India has approved the purchase of two submarines and three frigates from Russia, reported Itar-Tass. Each submarine is expected to cost about $800 million.

Magadan to Privatize its Airport

· Russia's far eastern Magadan Oblast has decided to privatize the airport of its capital city, Magadan, reported Itar-Tass today. A 24 percent stake in the airport will be sold through an investment tender, while the federal government will continue to hold a 51 percent controlling interest and 25 percent of shares will be distributed to airport personnel.

Proceeds from the tender will be used to rebuild the airport's runway, which will cost about $110 million. Mikhail Umansky, chief of the northeast regional administration of the Federal Aviation Service, wants airline companies that use Magadan as a stopover point to invest in the runway reconstruction.

Currently, some 30 international flights pass through the Magadan airport daily, but this number is expected to increase to 50 flights in the near future.


Aeroflot to Issue ADRs

· Aeroflot Russian International Airlines will issue American Depository Receipts (ADRs) this year and Eurobonds next year, but is asking the Russian government to delay selling its 51 percent stake in the company, reported Reuters and Interfax. Aeroflot first deputy Nikolai GLUSHKOV told Interfax that the airline's head Valery OKULOV plans to send a letter to the government requesting that the airline not be privatized.

The government previously announced plans to sell its Aeroflot shares by the end of 1998. The airline wants the government to sell its shares slowly and in pieces. "We are interested in a sale in stages, then we would see who is gathering up the shares and the government could control the process of who is the owner," Aeroflot official Sergei SHAKHMATOV told Reuters. The airline is worried about a foreign

competitor, such as Lufthansa, buying up the stake and then dismantling Aeroflot to win market share.

Besides the government stake, Aeroflot employees own 23.5 percent of the company, but the remaining 26 percent was bought up by outside investors and the company is not certain who holds all of them. The company has a list of nominal owners, but these are mostly Russian and foreign investment banks holding shares for others.

Aeroflot also wants to delay the share sale until it has gone forward with plans to attract capital. The company plans to issue level-one ADRs for up to five percent of its stock, or about 150,000 shares. Aeroflot will present its ADRs in New York and London on November 13 and 14.

The airline also wants to get a credit rating so it can issue Eurobonds next year. It is planning to invite bids in the near future from international companies in a tender to award it a rating, said GLUSHKOV.

Alfa Bank Has US Credit Facility

· Russia private bank Alfa Bank on Tuesday launched the first US commercial paper program by a Russian borrower, reported today's Financial Times. The proceeds of the $50 million facility, which attracted commitments from 27 US and overseas banks, will be used to support Alfa's trade finance activities. The facility was priced at a risk participation fee of 3.7 percent a year. The one-year letter of credit facility was arranged by Alfa Bank and the Bank of America. Alfa this year became the second Russian bank to issue Eurobonds, with a $175 million offering.

Lukoil Bond Offering Breaks Record

· Russian oil conglomerate Lukoil has made an offering of $350 million worth of seven-year convertible bonds on the London Stock Exchange, reported Itar-Tass today. SBC Warburg investment bank is the lead manager for the issue.

According to today's Financial Times, Lukoil on Tuesday broke international records by issuing its convertible bonds at a 64 percent premium to its current share price. "We rarely see a convertible bond with a conversion premium of more than 20 percent," an SBC Warburg official told FT. The offering was five times subscribed, said the bank.

When you need to know it as it happens




October 22, 1997

Intercon's Daily

Lukoil has market capitalization of $18 billion, higher even than Russian gas monopoly Gazprom. Tuesday's offering represents 1.9 percent of Lukoil's market capitalization.

STV Gets EBRD Loan for Petersburg Terminal

· STV International announced on Tuesday that the Board of Directors of the European Bank for Reconstruction and Development (EBRD) has approved a loan to finance the construction of a new international passenger terminal for the St. Petersburg Airport in Russia, said an STV press release. The financing, design, construction, and operation of the new international terminal will be performed by Strategic Partners (Holdings) Ltd., whose shareholders include STV International.

The development of the new international passenger terminal is the first privately financed transportation infrastructure project in Russia. The terminal is being developed by Russia's International Airport Terminal Pulkovo company, whose members include the City of St. Petersburg, Pulkovo state company, and Strategic Partners. Financing includes other lenders and investors, as well as the EBRD. The estimated project cost is $175 million.

The two-phase Petersburg development program will expand the International Terminal complex to accommodate more than six million passengers per year. Phase I entails the construction of nine gates, a parking lot and a two-level roadway. Phase II, expected to start in 2006, will include construction of up to eight additional gates.

The terminal development is a joint venture with the City of St. Petersburg and Pulkovo state company, the operator of Pulkovo Airport and Pulkovo Airlines.

STV International is a subsidiary of US STV Group, an international consulting engineering, architectural, planning, and construction management firm.

Strategic Partners (Holdings) Ltd. is a developer of worldwide airport and seaport projects. Other shareholders of Strategic Partners include American International Underwriters Overseas, Ltd., an affiliate of the American International Group, Inc., Deutsche Morgan Grenfell, and DUMEZ- GTM, a member of the Lyonais Group.

Other participants in the St. Petersburg terminal development project include Aeroports de Paris, the operator of the Paris Airport System and Skanska AB, one of the largest civil engineering and building contractors in Europe.

European Republics

CIS Summit of the Four Opens

· The presidents of Russia, Belarus, Kazakhstan, and Kyrgyzstan, which make up the CIS Customs Union, met in Kishinev today, ahead of the full CIS heads of state summit. Russian President Boris YELTSIN told reporters after the meeting today that 13 resolutions had been adopted by the Union.

One resolution elected Kazakh President Nursultan Nazarbayev as chairman of the Interstate Council of the Customs Union, replacing Belarus President Aleksandr Lukashenko whose term as chairman has ended.

Ukraine Changing Stance Toward Lenders?

· A leading government think tank in Ukraine has proposed that the country limit its cooperation with foreign lenders, suggesting that the government's ties with international financial institutions is a danger to Ukraine's economic security, reported Xinhua on Monday. This viewpoint was forwarded in a

Upcoming Events

American Business and Strategic Priorities

in the Caspian Region:

Oil, Security and Democracy

November 5, 1997

University Club, Washington, DC

Organized by: Caspian Crossroads Magazine,

the US-Azerbaijan Council

and the University Club of Washington, DC

Speakers: Jayhun Mollazade,

Editor-in-Chief, Caspian Crossroads Magazine;

Graham Fuller,

Senior Political Scientist, RAND Corp.;

Paul Henze,

Research Consultant, RAND Corp.

Tel.: (202) 862-1400; Fax: 202-371-2299;

E-mail: US Azerbaijan Council <75403.2004@compuserve.com>

When you need to know it as it happens




October 22, 1997

Intercon's Daily

report, titled Economic Security of Ukraine, which was unveiled recently by the National Institute for Strategic Studies (NISS), an agency under the National Security Council.

The report argues that accords with foreign lenders place inappropriate and harmful burdens on the Ukrainian economy and "prevent the country from pursuing independent policies and seeking internal resources for financing economic reforms." It suggested that the Ukrainian government should have the final say in the wording of memorandum agreements with such institutions as the International Monetary Fund (IMF) and the World Bank.

The report comes as the IMF and World Bank have been curtailing lending to Ukraine because of its failure to meet agreed-on economic targets. In July, Ukraine failed to secure a $2.5 billion loan from the IMF and the Ukrainian government was denied the second and third tranches of a $542 million stand-by credit by the IMF. In addition, the World Bank recently announced that it may end funding for three of its projects in Ukraine, denying Kiev another $400 million on credits.

On Tuesday, however, an IMF mission arrived in Kiev to evaluate Ukraine's implementation of the stand-by loan agreement and consider releasing further tranches.

South Caucasus & Central Asia

CanArgo in New Georgian JV

· Canada's CanArgo Energy Inc. announced on Tuesday that it has signed a joint venture agreement with Terrenex Acquisition Corp. and Creative Energy Systems Inc. for a pilot project to provide independent electric power production in Georgia, said a company press release. The joint venture, called C.E.S. Georgia, will be managed by Creative Energy Systems Inc. of Edmonton. C.E.S. Georgia will initially be owned 20 percent by Creative Energy and 40 percent each by Terrenex and CanArgo.

Subject to further due diligence, C.E.S. Georgia plans to initially install a 2.4 megawatt gas turbine powered generator to provide electricity to field operations with the surplus power sold to the local market in Georgia. Plans are to fuel the turbine from currently flared associated gas from the Ninotsminda field, which is operated by a subsidiary of CanArgo Energy Inc.

The flared gas from the Ninotsminda field exceeds that maximum required for the generator. In addition, the neighboring field, Samgori, is also producing gas. A study will be made regarding the potential to add more generation capacity based on the results of this pilot project.

"This joint venture is a big step toward the establishment of independent power generation in Georgia. The Georgian government has been encouraging this for some time and this project will further enhance CanArgo's reputation in Georgia, as we as progressing its activities in the broader energy sector," CanArgo chairman David ROBSON is quoted in the release as saying.

S. Korea is Largest Investor in Kazakhstan

· South Korea was the largest investor in Kazakhstan during the first six months of this year, with Korean companies accounting for $396 million, or 52.4 percent of total direct foreign investment of $756.3 million, reported Reuters. Indonesian companies were the second largest investors in Kazakhstan putting in $80 million, followed by the US with $79 million, and Britain with $66.8 million.

Direct foreign investment in independent Kazakhstan exceeded $4 billion by the beginning of this year, including $1.638 billion in 1996. Kazakhstan ranks second among former Communist states in FDI per capita, after Hungary.

The biggest foreign investment deal in Kazakhstan to date was the purchase of 40 percent of Kazakhtelekom for $1.37 billion by Daewoo in June.

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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