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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

Tuesday, October 7, 1997

Russian Federation

Politics

Duma Not to Be Dissolved-Seleznyev

· Following a meeting with Russian President Boris Yeltsin on Monday, State Duma speaker Gennady Seleznyev said he is confident the president does not want to dissolve the parliament. YELTSIN warned on Friday that he might act against the Duma, if it did not pass the government's draft 1998 budget and other reform laws.

Seleznyev said he and YELTSIN had discussed cooperation between the executive and the legislature. "The meeting was necessitated by the tensions between the president and the State Duma. We had to talk face to face rather than exchange statements on television," he is quoted by Reuters as saying.

SELEZNYEV said he and YELTSIN agreed to establish a roundtable of political forces to discuss matters of disagreement, starting with the Land Code.

Other Duma leaders were less optimistic and cooperative than the speaker. Yabloko party head Grigory Yavlinsky told reporters on Monday that his faction will vote against the draft 1998 budget, said Russia's NTV. He also said Yabloko would support a no confidence vote against the government.

Communist Party head Gennady ZYUGANOV announced today that his faction will seek a no confidence vote against the government because of its "disastrous" economic reform program. He said that 146 Duma deputies had signed a petition to put a no confidence motion on the parliament's agenda and that the issue will be discussed next week.

Yeltsin Third Term Seen Possible

· Russian presidential spokesman Sergei

Yastrzhembsky told the Belgian newspaper Le Soir Tuesday that President Boris Yeltsin can legally run for a third term in the 2000 elections. He said that Yeltsin was elected for his first term under the old Soviet constitution, which makes his current term his first under the new constitution.

According to NTV, Yeltsin's entourage has been pushing the idea of his running in the next election.

Yeltsin ruled out the possibility of running for another term in September, saying that he will make way for younger candidates, but he backed away from this pledge last week.

Poll Shows Duma in Bad Light

· Only seven percent of Russians have a good opinion of the work of the Russian State Duma, while 23 percent said their attitude was negative, reported Interfax. This was concluded in a poll of 1,500 people living in 56 towns in 29 Russian regions, conducted September 27-28 by the Public Opinion Foundation.

Another 17 percent of respondents said their attitude toward President Boris Yeltsin was positive, while 26 percent said they had a negative attitude.

On their view of the government, 12 percent characterized it as positive and 24 percent as negative.

Asked about First Deputy Prime Minister Boris Nemtsov, 30 percent of respondents said they trusted him, while 36 percent said they did not. If the presidential elections were held

Today's News Highlights

Russia

More Shadow Economy Nos.

Sberbank Gets $200 Mln Loan

US Ex-Im Bank in Tatarstan

Honeywell, GSE Get Contracts

European Republics

Ukraine to Buy Boeings

Lateral Vector Ukrainian JV

South Caucasus & Central Asia

Chevron's Matzke in Baku

Kyrgyzstan Buys Airbuses

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Tuesday

October 7, 1997

Intercon's Daily

today, 17 percent of those polled said they would vote for Nemtsov, while 15 percent said they would not support him "under any circumstances."

Economy

Ruble = 5,868/$1.00 (NY rate)

Ruble = 5,869/$1.00 (CB rate)

Ruble = 5,857|5,881/$1.00 (buy|sell rates)

One-Fifth of Russians in Shadow Economy

· Vladimir Ispravnikov, head of the economic think tank Sophisticated Technologies and a former Soviet parliamentarian, has estimated that Russia's shadow economy accounts for at least 50 percent of the country's gross domestic product (GDP) and employs about 30 million people, reported RIA Novosti. ISPRAVNIKOV was speaking at a press conference to promote his new book, A Shadow Economy in Russia.

His book outlines how the top of the Russian economic pyramid is the so-called "black economy," which covers receipts from drug trafficking, arms trade, and embezzlement. Its share of the GDP is 5-20 percent. The rest is "gray economy," which is primarily made up of small entrepreneurs hiding their activities from the tax police. He suggests that the "white economy" is nonexistent in Russia, as it is necessary to seek a krysha (roof) in Russia and entangle oneself in the shadow economy in order to have a business.

However, Ispravnikov downplayed Western fears of the Russian mafia, expressed recently in reports from the FBI and a US think tank. He believes that Russia will be able to gradually make the economy "lighter," by integrating legal and shadow businesses. "Yes, the shadow economic and shadow capital in Russian has reached a critical mass," he is quoted by Reuters saying. "But we don't think we need to overdramatize the situation…rather we need to work out a wide-reaching program to shine light on the shadow economy in Russia."

This will inevitably require the investment into the Russian economy of $100-150 billion, now deposited in foreign banks, as well as $20-60 billion kept now "under mattresses," and $10-11 billion that is annually being smuggled abroad by "shuttle traders," he said, according to RIA Novosti.

Sberbank to Receive $200 Million Loan

· Russian savings bank Sberbank announced on Saturday that it will borrow $200 million from a group of Western banks, led by Britain's West Merchant and NatWest, reported Itar-Tass. Sberbank said that loan will bear an interest rate of just two percentage points above the London Inter-Bank Offered Rate (LIBOR). Loans to Russian banks earlier this year carried interest rates of four percentage points above LIBOR.

The loan to Sberbank is attributable to the increasing interest of Western investors in Russian securities and by the reliability of Sberbank.

The state owns a 59 percent stake in Sberbank, which has 50 million customers, 33,000 branches, and about 70 percent of retail bank deposits.

Britain Extends Export Credits to Russia

· During a visit to Moscow on Monday, British Prime Minister Tony BLAIR announced that Britain will make available a further £500 million ($810 million) in exports credits to Russia and expand the Export Credits Guarantee Department's capacity to insure Russian investments by US companies, reported today's Financial Times. BLAIR said the decision reflected Britain's increased confidence in Russia's economic achievements and prospects.

The new credits are for British capital goods and follow increased of $800 million in April 1993 and $250 million in December 1996. They bring the ECGD's total exposure to Russia to almost £2 billion.

Until now, all ECGD-supported contracts have been guaranteed by the Russian government. But the department said Monday that it would encourage businesses to go ahead without sovereign guarantees, according to FT.

Business

US Ex-Im to Open in Tatarstan

· The US Export-Import Bank has agreed to open a Regional Development Bank in Kazan, the capital of Russia's Republic of Tatarstan, reported RFE/RL Newsline today. The decision followed talks this week between an Ex-Im Bank delegation, Tatarstan Prime Minister Fari MUKHAMETSHIN and other republican ministers. Ex-Im Bank has been active in

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	Tuesday		October 7, 1997
	Intercon's Daily
	Tatarstan since 1994 and has invested about $220 million in the Tatneft and Nizhnekamskneftekhim oil companies. Black Sea Energy in Russian JV · Canada's Black Sea Energy Ltd. announced on Monday that it has finalized the registration of its third 50/50 joint venture company in Russia, Radonezh Petroleum, said a company press release. Russian company Tyumennedra is Black Sea Energy's partner in the newly formed venture. Tyumennedra is owned by three private shareholder groups one of which is the successor organization of the former national association of Russian petroleum geologists, which selected the highly prospective block in satisfaction of unfunded pension obligations by their former Soviet employer. The new Radonezh Project will hold the license to explore and develop a 1.3 million acre block. The project is located north of the southern Siberian city of Tyumen. The Radonezh block contains seven million barrels of proven oil reserves and estimated total recoverable reserves of 1.4 billion barrels based on an assumed recovery rate of 20 percent of the original oil in place. Black Sea Energy said that it is planning to fund $20 million of the cost of an exploration and development drilling program for Radonezh over the next two years This funding will go toward the drilling of six exploration wells, two production wells, and the acquisition of 900 kilometers of seismic. Fracmaster in Oil Service Company Deal · Canadian Fracmaster Ltd. and Russian oil company Yukos announced on Monday that their 50/50 joint venture, Uganskfracmaster (UFM), has acquired the assets of Intras, a wholly-owned oil services company of Yukos, effective October 1, 1997, said a company press release. This transaction combines the assets of the two service companies and positions UFM for further growth. UFM has a proven track record in combining and applying the latest in Russian and Western well stimulation technology in order to significantly increase Yukos production.	As part of the deal, UFM will have an exclusive right to perform fracturing services for Yukos in Russia for 15 years, while Canadian Fracmaster will have a preferred right to work for Yukos outside of Russia for the same period of time. Yukos is Russia's second largest oil company in terms of production (about 700,000 barrels/day) with proven reserves of some 1.4 billion tons. The bulk of Yukos oil reserves are located in Western Siberia. GSE Systems Gets Russia, Ukraine Contracts · US GSE Systems Inc. announced on Monday that its GSE Power Systems group has been awarded contracts worth $8.2 million to build and upgrade simulators in Ukraine and Russia, reported Dow Jones. The contracts are from Pacific Northwest National Laboratory under the US Department of Energy's International Nuclear Safety Program and from the Nuclear Regulatory Commission. Honeywell Wins DOE Russia Contract · US Honeywell recently announced in Moscow that the company has been awarded $160,000 from the US Department of Energy (DOE) to structure financing for district heating systems renovations in two Russian cities, said a company press release. The projects could total $15 million over the next 3-5 years. The $160,000 will come from the DOE's Office of Energy Efficiency and Renewable Energy. Under the agreement, Honeywell will develop financing requirements and strategies to improve district heating systems in Kostroma and Chelyabinsk. Honeywell's financing arrangements are scheduled to be completed in a year, with renovations beginning soon thereafter.
		European Republics Ukraine Plans to Buy Boeings, Airbus · The Ukrainian government has decided to buy two long-range Boeing 76-200ER and three medium-range Airbus 320-200 aircraft to modernize the fleet of state carrier Air Ukraine, reported Xinhua. The fact that two companies were named winners of a May tender to supply Air Ukraine defied expectations that only one supplier would be chosen. "Ukraine's aircraft fleet is already very old. It's almost impossible to penetrate the international market with


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Intercon's Daily

our outdated Tu-134s and Il-62s," Air Ukraine official Vasily Gusin is quoted as saying.

Because of the shortage of spare parts from enterprises in other CIS countries, Air Ukraine has grounded about 40 percent of its 250 aircraft, most of which are Illyushin-62s and Tupolev-134s produced in the days of the former Soviet Union.

Ukraine, which failed to inherit any Il-80s—a huge 350-seat jumbo jet made in the former Soviet Union, is still using Il-62s on international routes. They are very inefficient, consuming a great deal of fuel.

"One Il-62 consumes 150 percent more fuel than a similar-sized Boeing, which makes our current trans-Atlantic routes unprofitable," said GUSIN. "We can hardly attract passengers with the Il-62 aircraft. That is why we need the new planes."

Moreover, Il-62s do not meet safety standards of many countries, including the US, and face future prohibitions on landing rights.

Lateral Vector Forms Ukraine JV

· Canada's Lateral Vector Resources Inc. announced on Monday that its has established a joint venture, called Okhtyrka Energy Corp., with Ukrainian oil company UkraNafta, said a company press release. The new venture is 48 percent owned by Lateral Vector and 52 percent by UkraNafta.

Okhtyrka Energy will operate the Bugruvatiske field in the Sumy Oblast, about 60 km north of Kharkhov. The field currently produces 2,800 barrels of oil per day from 66 producing wells.

UkraNafta, which is 60 percent state owned, is the largest oil producer in Ukraine. It will provide facilities and infrastructure support as well as assisting Okhtyrka with their regulatory and marketing expertise. Saskatchewan-based Lateral Vector will be in charge of all technical enhancement operations. The deal is subject to regulatory approval.

South Caucasus & Central Asia

Chevron's Matzke in Baku

· US Chevron President Richard Matzke arrived in Baku on Monday to discuss plans to increase the transportation of oil, produced at the Tengiz oilfield in Kazakhstan, to Georgia via Azerbaijan, among other issues, reported Itar-Tass. In his meeting with Azeri President Geidar Aliyev on Monday evening, Matzke said that he considers the Baku-Batumi transportation corridor as the best transit route for Tengiz oil. This route provides for a combined oil transportation by sea, pipeline, and railway.

Matzke said that Chevron hopes to modernize and operate some Azeri pipelines for temporary use. He told Aliyev that he had held talks on this issue with the Azeri state oil company SOCAR.

The pipeline in question is a 120 km main running from Baku to Ali-Bairamly in the Shirvan steppe, which is a major hub handling Azeri exports to Georgia. The pipeline is expected to transport about 1.2 million tons of oil in 1997. About half of this has already been delivered by Azeri railways to the Georgian Black Sea port of Batumi.

Matzke said that Chevron hopes to increase transportation to 7-8 million tons a year. He suggested to Aliyev that an oil terminal be built in Baku's suburb of Dyubendi, from which oil would go to Ali-Bairamly. Currently, oil is delivered there in railway tanks, which is expensive.

Kyrgyz to Lease Three Airbus Planes

· Kyrgyzstan's national carrier Aba Zholdoru has signed an agreement with Germany's Daimler Benz to lease for 10 years, with an option to buy, three Airbus airliners, reported Reuters. The contract, worth some $100 million, calls for Kyrgyzstan to receive one Airbus A320 in 1998 and two A319s in the year 2000.

Daily Report on Russia & the FSU will not be published

on Monday, October 13, in observance of Columbus Day.

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.

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