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

Wednesday, October 8, 1997

open markets and remains optimistic at the prospects for continued reform in Moscow. But she said: "One should not dismiss the possibility that Russia could return to the patterns of its past. By engaging Russia and enlarging NATO, we give Russia every incentive to deepen its commitment to democracy and peaceful relations with neighbors, while closing the avenue to more destructive alternatives."

Previously, Washington insisted that the expanded NATO would focus on containing regional conflicts and expanding the European security network, while Russia has repeatedly objected to expansion on the grounds it was a veiled effort to contain Moscow.

Economy

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

Ruble = 5,870.5/$1.00 (CB rate)

Ruble = 5,858|5,883/$1.00 (buy|sell rates)

World Bank Loan for Russia

· The World Bank on Tuesday approved a $28.6 million Social Protection Implementation Loan (SPIL) to Russia in support of the longer term needs of the $800 million Social Protection Adjustment Loan, approved by the Bank's executive board in June, said a World Bank press release. The SPIL will specifically focus on providing technical assistance, training, and equipment to support reforms in the areas of pensions, social assistance, social protection, child allowances, and unemployment assistance.

Russian Federation

Politics

Chernomyrdin Fails to Satisfy Duma

· Ahead of a vote on the 1998 draft federal budget, Russian Prime Minister Viktor Chernomyrdin today reported to the State Duma on the country's economic progress so far this year and urged the deputies "not to get mixed up in a scrape" with the government by holding a no confidence vote, reported Russian independent television NTV. The premier asked deputies to avoid political confrontation at a time when Russia is facing the prospect of economic growth for first time since becoming independent. He presented a detailed report on budget implementation in the first nine months of this year and pledged that the president and the government are ready to cooperate closely with the parliament.

The Duma was unimpressed, however, and decided to hold a vote on no confidence in the government next week.

Should the parliament successfully vote no confidence in the government, it is more likely the President Boris YELTSIN would dissolve the Duma rather than disband the Cabinet.

US Admits NATO Expansion Aimed at Russia

· In an effort to win congressional approval for the costly eastward expansion of NATO, US Secretary of State Madeleine Albright said on Tuesday that NATO enlargement is a necessary hedge against Moscow's possible return to Cold War policies of aggression and expansion, reported United Press International (UPI).

Albright told the Senate Foreign Relations Committee that the Clinton Administration is "doing all it can" to keep Russia on a path to democracy and

Today's News Highlights

Russia

OECD Agrees to Admit Russia

VDC Merges with Wireless Co.

Central Bank Signs Equip. Deal

European Republics

Lukashenko Warns Businesses

ORT Reporter Freed in Minsk

South Caucasus & Central Asia

Shell Seeks Azeri Oil Stake

Kazakh-Turkey-US Oil Deal

S&P's Rates Kazakh Bank

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Wednesday

October 8, 1997

Intercon's Daily

The money will have to be spent on five concrete projects: pension reform, social assistance, social protection, child allowances, and unemployment assistance.

In related news, the Red Cross on Tuesday launched an urgent appeal for $15 million to help the most vulnerable segments of the population in Russia and the former Soviet republics to survive the winter. This year's appeal targeted the new rich in Russia.

OECD Agrees to Admit Russia

· Organization for Economic Cooperation and Development (OECD) secretary-general Donald Johnston announced in Moscow Tuesday that the OECD has agreed in principle to admit Russia but has not decided on when to grant the country membership, reported Xinhua. Johnston praised Russia's achievements in establishing a market-oriented economy, but said that country still has much to do and must complete all required reforms to standardize its economy before joining the OECD.

Also on Tuesday, OECD deputy director Val Koromzay conceded that his organization's optimistic predictions about the Russian economy over the last few year were wrong, admitting that the economy is not likely to recover until 1998, reported Dow Jones. "We have been successively—and I think all observers have been—disappointed by the failure of this bottoming out," he said.

In mid-1996, the OECD said Russia's gross domestic product would expand by one percent that year and three percent in 1997. A year later, the OECD forecast 1997 growth of two percent, followed by five percent in 1998. But according to Russian data, GDP contracted five percent in 1996 and Moscow expects zero growth this year and two percent in 1998.

Business

VDC Acquires Russian Wireless Co.

· Bermuda-based VDC Corp. Ltd. announced on Monday that it has signed a Memorandum of Understanding to merge with NovoComm Inc., a privately held company that, through its affiliates' partnerships, holds licenses and/or operates systems in wireless telephony, FM radio, and paging both in Russia and the Ukraine, said a VDC press release.

NovoComm has entered into a definitive agreement which, when concluded, will provide it with a right to operate portable, mobile, and fixed wireless telephony and paging services throughout Russia, it said. The wireless telephony systems are currently operating in 10 Russian cities on a pre-commercial basis, providing primarily mobile telephony services to about 1,000 total customers.

In paging, NovoComm affiliates have systems operating in five cities, four commercial and one pre-commercial, and their licenses cover both Russia and Ukraine. Kiev, its first capital city system, is in a pre-commercial phase, but has more than 150 subscribers. It is expected that this system will begin soliciting subscribers by late October.

In FM radio, NovoComm has five stations operating in Russia and Ukraine, with additional stations in preparation or planned. NovoComm is a developmental stage company and to date has not generated any material revenues from its operations.

Central Bank Buys Communications Equipment

· Canada's Memotec Communications Inc. announced on Monday it has reached an agreement with the Russian Central Bank to purchase $3-5 million worth of Memotec's advanced Frame Relay equipment, said a company press release.

Part of the Bank network will cover 12 regions and over 200 branches, and will use Memotec's CX1000 multiport central-site switches and new CX900e access switches to transport voice, TCP/IP and X.25 applications, taking advantage of the unique switching capabilities of these products to integrate the Bank's existing X.25 networks.

"Memotec has been present in Russia for a long time," said Memotec President and CEO Louis Lagasse. "Russia's first Frame Relay network, serving now about 300 commercial banks and installed by our in-country partner InComA, was built with Memotec's Frame Relay products in 1994. We are pleased to see the Bank of Russia turn to us as a provider of cost-effective, networking solutions."

Full integration of Memotec's CX1000 and CX900e Frame Relay products into the Central Bank's network will be completed over the next six months.

When you need to know it as it happens

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European Republic

Lukashenko Threatens Businessmen

· Belarus President Aleksandr LUKASHENKO has blamed local businessmen for the explosion that killed his friend, Mogilev regional official Yevgeny MIKOLUTSKY, reported Interfax-West. Speaking at MIKOLUTSKY's funeral, the president gave Mogilev businessmen one week to turn in the names of those responsible for his friend's murder, threatening to sic the tax police on them.

LUKASHENKO early suggested that MIKOLUTSKY's murder was part of a campaign to remove the president himself by force, according to Reuters. One businessman who asked not to be named told Reuters that: "It seems this is the start of a `red terror,' which LUKASHENKO, supporter of the Soviet Union, has taken out of the archives of Stalinist days. The guilty have already been named—they are of course businessmen and bankers."

ORT Reporter Freed from Belarus Jail

· Belarussian police have released Russian Public Television (ORT) reporter Pavel Sheremet, escorting him to his Minsk apartment in handcuffs just before midnight on Tuesday night, Belarussian national radio announced this morning. He was freed after two months in custody, after promising not to try to leave the country until he faces trial.

SHEREMET was arrested in July and charged with illegally filming and trying to cross the Belarus-Lithuanian border. His detention caused a public battle between Russian President Boris YELTSIN, who requested his release, and Belarus President Aleksandr LUKASHENKO, souring relations between the two countries.

Last week, YELTSIN barred LUKASHENKO from a planned trip to Russia to show his dissatisfaction with the SHEREMET situation. It is unclear that the Russian president will be appeased as long as criminal charges still hang over the reporter's head.

Update on Lithuanian Pres. Elections

· Of the four major contenders for the Lithuanian presidency mentioned in a recent public opinion poll, only one—former Deputy Prosecutor-General Arturas PAULAUSKAS—is currently clear to run in the De

cember 21 election. According to the poll, conducted in September, PAULAUSKAS was in third place with an expected 21 percent of the vote.

Valdas ADAMKUS, a 71-year-old US citizen of Lithuanian descent, placed first in the poll with the support of nearly 30 percent of Lithuanian voters. However, the Lithuanian Supreme Electoral Commission ruled recently that ADAMKUS may not run for the presidency because he does not meet the constitutional requirement whereby a candidate must live in the country for three years before registering for the elections, reported RFE/RL Newsline. ADAMKUS has reportedly appealed the Commission's decision.

Meanwhile, incumbent Lithuanian President Algirdas Brazauskas, who placed second in the poll, announced on Monday that he has decided not to seek a second term in office.

The position of Vytautas Landsbergis, a former president who currently serves as parliamentary speaker, is uncertain as accusations that he collaborated with the KGB are under investigation. A special commission of the Lithuanian parliament investigating the possible collaboration said on Monday that it will transfer all materials concerning LANDSBERGIS' "connections" with the former Soviet KGB to the Prosecutor General's Office. LANDSBERGIS has insisted that the accusations are false and are meant to ruin his chances to retake the presidency.

South Caucasus & Central Asia

Shell Seeks Azeri Oil Project

· Royal/Dutch Shell announced on Tuesday that it is seeking a stake in a major Azeri Caspian Sea oil project, reported Itar-Tass. Following a meeting with Azeri President Geidar Aliyev, Shell managing director Phil Wats said his company was negotiating to acquire a 25 percent stake in the $2.5 billion Kyurdashir project in the southern Caspian.

Last month, Azeri state oil company SOCAR signed a deal with Italy's Agip giving it a 25 percent stake in Kyurdashir, while SOCAR took 50 percent.

The Kyurdashir oil field consists of three deposits named Kyrdashir, Araz-deniz, and Kirgan-deniz. Experts estimate their reserves at a minimum of 30 million tons of oil.

When you need to know it as it happens

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Kazakh-Turkey-US Major Oil Deal Signed

· The government of Kazakhstan has signed a $750 million oil development deal with the Turkish state oil company TPAO and US Amoco Corp., reported Reuters. The deal calls for the foreign companies to explore an area in the northwestern Aktyubinsk region near the Caspian Sea for four years with initial production estimated to last another 25 years.

Under the contract, TPAO and Amoco will set up a 50-50 joint venture to finance and implement the contract jointly. According to Kazakh officials, TPAO will pay the Kazakh government $3 million as a signing bonus and another $2 million toward the cost of building the new Kazakh capital in Akmola.

S&P's Rates Kazkommertsbank

· Standard & Poor's on Tuesday assigned its single-'B'-plus long-term counterparty rating and its single-'B' short-term counterparty rating to Kazkommertsbank, Kazakhstan's biggest commercial bank, said S&P's CreditWire. The outlook on the ratings is stable.

The ratings reflect the specific characteristics of the current operating environment for banks in Kazakhstan, where the economy is recovering from a period of hyperinflation and severe recession that followed the disintegration of the old command economy. Kazakh banks must operate in an environment where the legal system is new and untested; the economy remains in the throes of a payments crisis; the banking system is in a perilous, if improving, state; liquidity is tight; information risk is high and credit skills undeveloped and there is a general dearth of modern risk management tools.

The ratings of Kazkommertsbank are based on its strong position in the nascent Kazakh market; its comfortable level of capitalization and the high likelihood of institutional support for the bank, should the need arise. These positives are balanced by the fragility of the environment in which the bank operates; the potential for problems arising from the

bank's proposed sharp increase in lending; and the level of currency risk at the bank.

Following a highly successful international capital raising operation in July 1997, Kazkommertsbank became the largest bank in Kazakhstan when ranked by equity and it currently enjoys a risk-adjusted capital ratio of around 37 percent. It is the leading private commercial bank in a system characterized by banks that are either in crisis or too small to make a difference. It has quickly moved from its roots in trade finance to developing a close relationship with the Kazakh government and the corporate sector.

Though between 1995 and the first half of 1997 in dollar terms Kazkommertsbank's loan growth has been rather muted, to date the bank has taken a very prudent approach to problem loans with good reserve coverage and write-offs when appropriate, which augurs well, a sharp increase in medium-term credits is anticipated during the second half of 1997. S&P's believes that this is likely to pressure asset quality, as it did when the bank expanded rapidly in 1995. Also, S&P's has some concerns with respect to the remarkable level of foreign exchange trading profits which have been reported over the last few years, which appear to be large in relation to the bank's modest absolute level of capital.

Moody's Investors Service has assigned a Bank Financial Strength Rating (BFSR) of E+ to Kazkommertsbank, B2 and Not Prime to its long- and short-term foreign currency deposits. "The ratings of Kazkommertsbank reflect its strong capital base and good profitability as well as management's determination to build, in a short time, a bank which performs with internationally accepted quality standards. ... In addition, the bank has a potentially volatile, albeit improving funding base and, despite its significance in the Kazakh market, it is very small in size by international standards. It has closely held private ownership, and the loan portfolio is concentrated to a relatively small number of large borrowers," Moody's is quoted by Futures World News as saying.

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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