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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 23, 1997

According to YELTSIN, the summit took a decision to extend the mandate of the Russian peacekeeping force in Abkhazia to the end of this year. Georgian President Eduard SHEVARDNADZE was expected to demand the withdrawal of the peacekeepers because of their failure to fulfill the mandate to repatriate Georgian refugees to the region. According to today's RFE/RL Newsline, SHEVARDNADZE has met with representatives of Georgian refugees who threatened to demand his resignation and launch a campaign of civil disobedience, if he did not refuse to extend the peacekeepers' mandate. SHEVARDNADZE agreed to the demand, but warned that it could not be implemented immediately.

YELTSIN was also expected to hold a special meeting on the Trans-Dnestr conflict with Moldovan President Petru LUCINSCHI and Dnestr leader Igor SMIRNOV, but SMIRNOV failed to show up, reported Russian television. Moldova and Dnestr signed a peace agreement in May 1996, but disputes remain over the status of the separatist region and the withdrawal of Russian peacekeepers.

Russian Prime Minister Yevgeny PRIMAKOV told reporters that several CIS leaders had criticized a Moscow-backed plan to create a committee on resolving conflicts within the CIS. "I would say that most countries have not supported it," he said.

YELTSIN insisted that despite the problems encountered by the CIS, the body is viable and will live, according to Itar-Tass. Following the summit, he

Russian Federation

Politics

Yeltsin Accepts Blame for CIS Failings

· Speaking to reporters after the CIS summit in Moldova today, Russian President Boris Yeltsin admitted that Russia is partly to blame for the problems experienced by the CIS—the divisions between countries and the lack of progress in resolving civil conflicts. "Each [state] noted its own role. But Russia as [CIS] chairman is to blame for the fact that the CIS has worked irrationally and ineffectively," he is quoted by Reuters as saying.

YELTSIN also said that: "Russia is responsible for the dragging out of the issue of conflict zones in Dnestr, Abkhazia and Georgia, and Nagorno-Karabakh," according to Reuters. He stressed that Moscow strongly supports a "united and indivisible Moldova, Georgia, and Azerbaijan," reported Itar-Tass. "On the other hand it is up to the leadership of a republic to decide what autonomy to grant to some or other part of an appropriate republic," the president added.

The heads of state of the 12 CIS states, with the exception of Turkmen President NIYAZOV who is recovering from heart surgery, held a longer-than-expected closed door meeting in Kishinev. The summit agenda included discussions of priority areas of cooperation within the CIS, the setting up of a common agricultural market, the settlement of internal and regional conflicts, and the problems in implementing Commonwealth decisions.

An agreement on the gradual establishment of a common agrarian market was signed today at the CIS summit by 10 of the member countries. Uzbekistan and Azerbaijan did not accede to it, Russian Deputy Prime Minister Valery Serov told Itar-Tass.

Today's News Highlights

Russia

Smith&Wesson Russia Deal

S&P's Rates SBS-Agro Bank

MES Eyes Italian Bank Shares

Oneximbank in Depository Deal

European Republics

Ukragaz in Talks with Shell

Lithuanian Oil Conference

South Caucasus & Central Asia

Azerigaz to Increase Capacity

Kazakh-Iran Oil Swap Sours

Politics-Economics-Business

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Thursday

October 23, 1997

Intercon's Daily

noted that although there was criticism of Russia, the CIS chairman, and the CIS as a whole, none of the summit participants called for the body's dissolution. Interfax reported that several leaders gave speeches criticizing the work of the CIS, with Uzbekistan's KARIMOV and Moldova's Lucinschi saying that they would not seek closer ties with the group.

The date for the next CIS summit, which will discuss the reorganization and renewal of the Commonwealth, was set for January 23, 1998.

Kovalyov Goes to Germany

· Russian Federal Security Service (FSB) director Nikolai Kovalyov arrives in Bonn today for a four-day visit to hold talks with German security officials on cooperative efforts to combat organized crime and terrorism, reported Russian television. He will meet with his German counterpart Berndt Schmidbauer who visited Moscow in May 1997, as well as the heads of the interior ministry, the federal agency for protecting the constitution, and the federal reconnaissance office.

Seismologist Support Earthquake Report

· Two Columbia University seismologists wrote in the British journal Nature this week that an August 16 seismic event north of mainland Russia was an earthquake, not a secret Russian nuclear test, as US officials suspect, reported United Press International (UPI). The scientists say their study shows the need to revise the current US mechanism for evaluating such "problem events" since a misinterpretation could have global political repercussions.

Economy

Ruble = 5,882/$1.00 (NY rate)

Ruble = 5,880/$1.00 (CB rate)

Ruble = 5,857|5,903/$1.00 (buy|sell rates)

Russian Grain Harvest Up 25 Percent

· Russian State Statistics Committee figures show that Russian agricultural enterprises, farmers, and individuals harvested a total of 94 million tons of grain (initially registered weight) by October 20, an increase of 26.3 percent from the 1996 harvest. Sugar beet output, as of October 20, is 7.8 million tons and sunflower output—1.2 million tons, declines of 40.3 and 34.9 percent, respectively, from 1996 figures.

Japan to Finance Irkutsk Medical Center

· Japan will extend an $18 million credit to Russia's Irkutsk region in southern Siberia to build a medical center, reported Itar-Tass today. Vladimir Yakubovsky, acting mayor of the city of Irkutsk, said that $5 million would be used to finish the construction of the medical center building, which was originally intended as a trade center.

The remaining $13 million will be used to purchase medical equipment for the center, which is expected to begin operations in about a year, said Yakubovsky.

Lukoil Wins Kalmykia Oil Tenders

· Russian oil conglomerate Lukoil has won the first of the four tenders to prospect for oil in Russia's southern Republic of Kalmykia, reported Itar-Tass. The only other bidder, Canada's Trident Company, failed to arrive for the tender in time.

The tender commission, chaired by Kalmykian Premier Valery Bogdanov, granted Lukoil the right to prospect and extract oil in sector No. 1 of the republic's Maloderbetsky District. Lukoil specialists will begin seismic prospecting immediately after they get the required license. Drilling of an almost 5,000-meters-deep well will begin in a year.

Oleg Brazhnikov, head of the Lukoil prospecting department, believes that there are from 200 to 500 million tons of oil in that sector.

Business

Smith & Wesson in Russia Deal

· Major Russian arms manufacturer Izmash, located in the Urals city of Izhevsk, has signed an agreement with US Smith & Wesson on the production of Russia Saiga-12 and Bizon-3 carbines in the US and American small arms in Izhevsk, reported Interfax. Izmash director Vladimir GRODETSKY announced the deal at a news conference on Wednesday, but offered no details.

GRODETSKY also announced plans to launch the manufacture of high-precision arms at the plant. "We plan to become the main supplier of high-precision arms in Russia and other countries in two to three years," he said.

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	Thursday		October 23, 1997
	Intercon's Daily
	S&P's Rates SBS Agro Bank Loan · Standard & Poor's on Tuesday assigned its single-'B'-plus bank loan rating to SBS-Agro Bank's $75 million 364-day term loan, said S&P's CreditWire. The bank's single-'B'-plus counterparty credit rating was affirmed, as was the single-'B'-plus senior debt rating on SBS-Agro Finance BV's $250 million Eurobond issue (guaranteed by the bank). The rating is based on SBS-Agro's position as the best placed Russian bank to gain market share from the State Savings Bank Sberbank, which has traditionally held a near monopoly position. Its recent acquisition of Agroprombank has given it a significant nationwide presence, which no other private sector bank competitor can currently match, and is part of its strategy to diversify away from the increasingly competitive wholesale corporate sector. This acquisition has improved prospects for earnings growth, as well as rendering its funding base more stable than its competitors, which are largely dependent on wholesale deposits. These advantages are partially offset by considerable risks in the bank's loan portfolio to small and midsized companies, as well as near-term potential pitfalls from integrating the acquired extensive branch network, which will likely stretch management resources. The rating also reflects the risk of operating in the immature Russian financial sector, which includes tight liquidity and an untested legal system that complicates bad debt collection, as well as a lack of experience with credit cycles. The early stages of recovery from a period of severe inflation and hyperinflation is a further constraining factor. Russia's MES May Buy into Italian Bank · Russia's International Economic Cooperation (MES) private trading company is currently negotiating the possibility of buying shares in one of Italy's largest banks—Banco di Roma, reported Prime-Tass on Wednesday. According to a MES spokesman, the main aim of the deal is to "strengthen Russian-Italian trade and economic ties, as well as to attract more foreign investments in Russia and raise the level of integration of the Russian business into the world economy." MES, which specializes in the export of oil and petrochemical products, financial and investment	activity, and construction, is a holding comprised of about 20 companies with an average annual turnover of over $2 billion. According to an Itar-Tass correspondent in Rome, representatives of the Italian state-run Istituto per la Ricostruzione Industriale (IRI), which controls Banco di Roma, have confirmed that MES has made an offer to buy bank shares. Currently, the IRI holds 13 percent of shares in Banco di Roma and 35 percent of shares in the holding. Italian information agency ADN-Cronos reported that the Russian company offered the IRI $1 billion for the whole package of shares in Banco di Roma and the holding which manages the bank. Through its offer, the Russian company is apparently trying to establish control over Banco di Roma. Oneximbank Signs Depository Deal · Russian private bank Oneximbank has signed an agreement with the Depository Settlement Union (DSU) in an effort to become a dominant force for clearing stock trades in Russia, reported the St. Petersburg Times this week. The deal, signed in conjunction with the Moscow Stock Exchange, will give Oneximbank and DSU clients access to each other's exchange without going in through the expensive process of re-registering shares. "This infrastructure allows market participants, independent of whose client they are, Onexim depository or DSU, to be served at any trading place without additional expenses," Oneximbank deputy board chairman Mikhail ALEKSEYEV is quoted as saying. Under the current system, the 450 clients of Oneximbank, which services the Moscow International Currency Exchange (MICEX) and the Russian Trading System (RTS), must re-register shares with DSU if they wish to trade on the Moscow Stock Exchange, paying a significant 0.24 percent of the transaction in fees. DSU's 440 clients must do the same to trade on the MICEX or RTS exchanges. The new system will allow clients of both to avoid the re-registration procedure and could save investors up to $40 million, said ALEKSEYEV.

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Thursday

October 23, 1997

Intercon's Daily

European Republics

Ukraine Gas Co. Denies Shell Sale

· Bogdan KLYUK, the chairman of Ukraine's Ukrgazprom state gas company, has denied allegations that a block of shares in the company was transferred to Royal/Dutch Shell, reported Interfax. Shell had offered $1.5 billion in investments in return for 50 percent of Ukrgazprom shares, he said. However, the company considers this sum insufficient. "Neither Ukragazprom nor the government will accept such a deal."

Ukragazprom is seeking investments of at least $20 billion in exchange for a share of the company, he said. The Ukrainians are now considering new proposals from Shell, he added.

KLYUK also said that he hoped that the parliament would soon adopt laws allowing the attraction of major foreign investment projects in Ukraine.

Lithuania Oil Sector Conference

· A three-day international conference, "Possibilities of Investments and Businesses in the Lithuanian Oil Sector," opened in the Lithuania's port city of Klaipeda on Tuesday. Opening the forum, Lithuanian President Algirdas Brazauskas called on foreigners "to be more bold in their investments in the oil industry," reported Itar-Tass. Specifically, he mentioned the construction of a Butinge oil terminal near Klaipeda, the reconstruction of the Mazeikiai oil refinery, and other projects.

The president said that Lithuanian laws guaranteeing protection of investors' rights, revenues, and prospects for oil extraction on Lithuanian territory. The main guarantees are "stability in the state and good relations with neighbor-countries which will remain unchanged," the president said.

Brazauskas stressed the importance of his official visit to Russia, which began today, noting that Lithuanian-Russian relations are developing well.

South Caucasus & Central Asia

Azerigaz to Increase Storage Capacity

· Under an agreement signed between the Azeri state oil company (SOCAR) and the Azerbaijan International Operating Co. (AIOC) international consortium, Azerbaijan will receive all of the casing-head gas produced at the Azeri, Chirag, and Guneshli deposits in the Caspian Sea for free, reported Delovoi Mir last week. As a result, in addition to the 6.6 billion cubic meters of natural gas to be received by SOCAR this year, Azerbaijan will get another 100-150 million cubic meters of gas from the Chirag deposit in 1997.

Casing-head gas production is projected to reach 12 billion cubic meters annually by the year 2005.

State gas company Azerigaz will store and sell the extra casing-head gas. The company plans to increase its gas storage capacity from 1.8 billion cubic meters to four billion by the year 2000. The company will use a portion of its profits from the sale of gas to households and industrial enterprises to finance the expansion of capacity.

Kazakh-Iran Oil Swap Suspended

· Kazakhstan and Iran have temporarily suspended a deal to trade crude oil because of Iranian complaints about the quality of the oil supplied by Kazakhstan, reported the Associated Press (AP). A group of Kazakh experts headed to Tehran today for talks on resolving the problem, said Interfax.

Under the deal, Kazakhstan shipped oil by tanker to Iranian refineries on the Caspian coast. Iran provided equivalent quantities of oil for export in the Persian Gulf. Shipments were expected to total 2-6 million tons annually.

After Iran received the first shipment of 70,000 tons of Kazakh crude, however, it suspended the deal. Iranian officials said refineries in Tehran and Tebriz were unable to process the crude because it was contaminated with chemicals, probably sulphur.

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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