DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL, USA, 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

Monday, October 27, 1997

Russian Federation

Politics

Primakov Denies Helping Iran with Missiles

· Russian Foreign Minister Yevgeny Primakov met with Israeli Prime Minister Benyamin Netanyahu in Tel Aviv Sunday and responded to Israel's concern over reports about the supply of military technologies to Iran with a denial. "Russia does not do anything either along governmental or non-governmental lines to help Iran acquire weapons of mass destruction and long-range ballistic missiles," he is quoted by Itar-Tass as saying.

Furthermore, PRIMAKOV was unapologetic about Moscow's close relationship with Tehran. "Russia does pursue and will continue to pursue the policy of the development of commercial, economic, and political ties with Iran."

Stroyev Wins Reelection as Orel Governor

· Russian Federation Council speaker Yegor Stroyev won gubernatorial elections in the Orel Oblast on Sunday, receiving 97 percent of the vote, reported Russian television. The only contender was Vera Yenina, head of an agricultural cooperative. Stroyev is a former member of the Communist Party, who now often supports President Boris YELTSIN and his government.

Duma Deputy Elected from Khakassia

· Communist-backed candidate Georgy Maitakov won over 19 percent of the vote in a Duma by-election in the Republic of Khakassia on Sunday, defeating 11 other contenders, reported Russian television. Maitakov was a career Naval officer before retiring in 1994 from the office of the chief of the Pacific Fleet intelligence service as Captain First Rank. Most recently, he worked as an economic adviser to the Khakassia cultural center.

MAITAKOV will take over the Duma mandate of Colonel Aleksei Lebed, the brother of presidential candidate Aleksandr Lebed, who was elected to head of Khakassian government in December 1996.

Freeh Planning Russia Visit

· FBI director Louis Freeh will visit Russia in early November to hold talks with Federal Security Service (FSB) director Nikolai Kovalyov, anonymous local sources told Itar-Tass on Friday. The main issues of discussion will likely be cooperation in fighting international terrorism, drug smuggling, organized crime, and the proliferation of weapons of mass destruction.

Economy

Ruble = 5,881/$1.00 (NY rate)

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

Ruble = 5,861|5,903/$1.00 (buy|sell rates)

Compromise Commission Redoes the Budget

· The tripartite working of Russian government, State Duma, and Federation Council representatives on Friday agreed on a revision of the main parameters for the draft 1998 budget, said today's RFE/RL Newsline. First Deputy Prime Minister Anatoly CHUBAIS said the commission decided to increase projected budget revenues to 367.5 billion new rubles ($62.5 billion) from the budget's original figure of 340 billion new rubles.

According to CHUBAIS, the new revenue projection "strains the limits of common sense" and cannot be increased any further.

Today's News Highlights

Russia

Freeh to Visit Russia Soon

1996 Budget Revision Complete

QUALCOMM in Rostov-on-Don

European Republics

USDA on FDI in NIS

South Caucasus & Central Asia

Baku-Novorossiisk Pipeline Up

UK Envoy on Azeri Corruption

Turkmen Gas Pipeline Group

Special Announcement

Politics-Economics-Business

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Monday

October 27, 1997

Intercon's Daily

Planned expenditures were increased to 499.9 billion new rubles from 472.1 billion in the original draft. The expected budget deficit is nearly the same in the two drafts at 132.4 billion new rubles.

The Duma is expected to consider the revised budget in the first reading on October 31.

Business

QUALCOMM in Rostov-on-Don

· California-based Qualcomm, Inc. on Friday announced the commercial launch of a Code Division Multiple Access (CDMA) new wireless local loop (WLL) network in the Russian city of Rostov-on-Don, said a company press release. The new network, operated by Elektrosvyaz of Rostov Oblast, will serve 2,000 people on launch but expansion calls for a 20,000 user system in the near future.

For Qualcomm, it is the third CDMA-based WLL network installed. The previous two are in New Delhi, India and Chelyabinsk, Russia , and were launched earlier this year.

sectors is growing, and was the third largest category for FDI in Russia in 1996. Based on Economic Research Service (ERS) data, FDI in the NIS and Baltic states is concentrated in three main areas: beverages (beer, wine, and non-alcoholic beverages), confectionery (candy, cookies), and tobacco processing. Strong domestic demand for these products, relatively high import protection, brand recognition, and limited domestic competition are reasons for investment in these sectors.

While the climate for investment in the NIS is improving, investors still face a daunting combination of political and economic risk, uncertainty, and a vast array of infrastructure and policy-related impediments.

In most NIS countries, an inconsistent regulatory climate, lack of transparency in the legal system, and conflicting rules increase uncertainty for investors. Laws are often vague and subject to wide interpretation, which invites corruption and inconsistent application. Moreover, in many NIS, especially Russia and Ukraine, regional and local governments often introduce measures that run counter to federal regulations, or don't enforce federal laws and decrees.

In addition to a vague or non-existent commercial code, many NIS have inconsistent and nontransparent tax laws, as well as numerous and high taxes. These costs of doing business not only increase risk or uncertainty, but they directly reduce the expected rate of return on an investment and usually require a higher rate of return to compensate for the additional fees and payments associated with it. Poor transportation and communication infrastructure also increase costs of doing business. Less obvious but also significant are lack of contract enforcement, effective dispute resolution mechanisms, and modern credit institutions, all of which raise the cost of doing business.

However, several factors point to improved long term (10 or more years) prospects for FDI in the NIS and Baltic states. Despite possible setbacks that could slow improvement in the investment climate, continued progress in market reforms and stabilization of the region's economic and political environment are expected to lead to increased growth in FDI. Membership in the World Trade Organization (WTO) and lending requirements of international organizations should also improve conditions for investment.

European Republics

USDA on FDI in the NIS

· Foreign direct investment (FDI) in the Newly Independent States (NIS) and Baltic states lags well behind FDI in other emerging markets, but has increased in recent years, said a summary of a new report by the US Department of Agriculture (USDA). According to the US government, FDI occurs when a firm in one country makes capital expenditures to either acquire assets of an existing firm in a foreign country or to establish a new firm. FDI is the acquisition of at least 10 percent of a foreign firm's assets.

In absolute terms, Russia is the largest NIS recipient, with accumulated FDI estimated by various sources at between $5 and $8 billion for the period 1989-96. Kazakhstan and Ukraine are the next largest destinations, receiving around $3 billion and $1 billion, respectively. The US is a top investor in the NIS and Baltic region, along with European and Asian (Japan, South Korea) countries.

Although FDI has been largest in natural resource sectors (oil, gas), investment in the food and related

When you need to know it as it happens

Politics-Economics-Business

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Monday

October 27, 1997

Intercon's Daily

South Caucasus & Central Asia

Baku-Novorossiisk Pipeline Inaugurated

· On Saturday, a ceremony was held to commission a pipeline to export both Azeri onshore and Caspian Sea oil output by the so-called Northern Route, from Baku to Novorossiisk, via Grozny and Tikhoretsk, reported Interfax. The ceremony, which was held near the end point of the Azeri section of the pipeline, was attended by Azeri state oil company SOCAR President Natik Aliyev who announced: "Today, Azerbaijan resumes the export of oil to Western markets after a break of 65 years, and resumes it in the most profitable and reliable way: by pipeline."

The completion of repairs to the damaged Chechen section of the pipeline has made possible the opening of the pipeline. The first 40,000 metric tons of Azeri oil, to be shipped through the pipeline, was bought by Russian oil conglomerate Lukoil at $130 per ton. SOCAR plans export 120,000 tons of crude oil before the end of the year, said Interfax.

The first Caspian oil from the Chirag offshore field being developed by the Azerbaijan International Operating Co. (AIOC) is scheduled to flow through a pipeline on November 12, one week later than previously announced, said today's RFE/RL Newsline.

British Ambassador Attacks Azeri Corruption

· Britain's Ambassador to Baku Roger THOMAS this week launched an attack on corruption and bureaucracy in Azerbaijan. Addressing a conference organized by the Baku chamber of commerce, THOMAS spoke of "the hijacking of assets and wealth by a few people while a large part of the country goes empty-handed," said Friday's Financial Times. He said that foreign companies were being "frightened away" from Azerbaijan by excessive and arbitrary taxation, and that corruption, in the form of "unofficial overheads," provided "a further disincentive to invest," said FT.

British Petroleum holds a major stake in a consortium developing three major Azeri Caspian Sea oilfields.

Consortium Formed for Turkmen Gas Pipeline

· Six international companies and the government of Turkmenistan formed the Central Asia Gas Pipeline, Ltd. (CentGas) in Ashgabat Saturday, said a consortium press release. The proposed gas pipeline would run from the Turkmen/Afghan border in southeastern Turkmenistan to Multan, Pakistan (790 miles), with a 400-mile extension to India under consideration. The estimated cost of the project is $1.9 billion for the segment to Pakistan and an additional $600 million for the extension to India.

The consortium includes: US Unocal Corp.—46.5 percent; Saudi Arabia's Delta Oil Company Ltd.—15 percent; the Turkmen government—7 percent; Japan's Indonesia Petroleum, Ltd.—6.5 percent; Japan's Itochu Oil Exploration Co., Ltd.—6.5 percent; South Korea's Hyundai Engineering & Construction Co., Ltd.—5 percent; and Pakistan's Crescent Group—3.5 percent. Also, Russia's Gazprom has indicated an interest in joining with a 10 percent share.

The proposed pipeline will carry gas from the Dauletabad field at a rate of up to two billion cubic feet per day. Dauletabad has proven reserves of more then 25 trillion cubic feet. The Turkmen government has guaranteed deliverability of 25 trillion cubic feet of gas exclusively for the Central Asia Gas Pipeline.

The project still faces significant economic, political, and commercial challenges, such as finalizing mutually acceptable commercial agreements and agreements with transit countries.

Announcement

Intercon is sad to announce the departure of Ellen Shapiro as principal editor of the Daily Report. Ellen's contribution to our publication has been considerable. Intercon wishes her all the best professionally and personally. Please welcome Jennifer M. Rhodes to our staff. Jennifer's Russian studies and language background will serve her well at Intercon. Also, we have decided to act upon the advice of some of our readers and return to the original three-page format of the Daily.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Principal 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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