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, November 18, 1997

Russian Federation

Politics

Discusses New Income Tax Legislation

· The Russian government submitted for the consideration of the Russian State Duma a new scale for the income tax, which reduces the tax burden of Russian citizens. The government said the minimal 12 percent income tax should be imposed on an annual income under 40 million rubles, instead of the current level of 12 million rubles. An annual income of 40 million rubles is liable to a 30 percent tax. The tax rate of 16 percent is suggested for the annual income of 70 million rubles. The income over 48 million rubles is liable to the maximum 35 percent tax. The government suggests that the maximum tax rate should be applied to the incomes which exceed 150 million a year. Incomes ranging from 70 to 150 million a year will be liable to a 20 percent tax. The cabinet of ministers does not plan to change the current rate of the value-added tax (VAT). At present the VAT rate amounts to 20 and 10 percent (10 percent is a privileged tax rate).

Russia's Position on Caspian Sea

· First Deputy Prime Minister of Fuel and Energy Boris NEMTSOV confirmed intentions to hold a meeting on the status of the Caspian Sea. "I am going to devote the meeting to this just tomorrow. I think we certainly shall allow there neither the US Sixth Fleet nor any major exercises, much less military clashes," said NEMTSOV. Meaning, Russia will not allow the United States to strengthen its position in the oil zone in the Caspian Sea. He said Russia should act as a leading member in the sea. "If we do not get down to solving the issue of the status of the Caspian now, we shall be not leaders but outsiders here." He added Russia, "should be more active in the Caspian," as "to resolve the problem of the status of the Caspian is a key issue."

Referring to the oil exploitation in the Caspian, he indicated that Russia had missed an opportunity and allowed the United States to lead a joint venture oil exploration with Azerbaijan. Russia can only make up for the losses by developing Iran's oil fields, NEMTSOV said. As one of the five littoral states, Russia believes the Caspian natural resources should only be equally explored by the littoral countries.

Economy

Ruble = 5,903/$1.00 (NY rate)

Ruble = 5,905/$1.00 (CB rate)

Ruble = 5,898|5,912/$1.00 (buy|sell rates)

Investor Protection

· President Boris YELTSIN signed a decree on Friday regarding changes in the make-up of the state commission for protection of investor rights on the Russian financial and stock markets. Yeltsin also signed a decree on changes in, suspension of and expire of some of his decrees in connection with the law on the federal budget for 1997. This is a further measure to promote investment in the Russian Stock Market in hopes of making up the 40 percent loss during the Asian market quakes.

Business

BP -Sidanko Oil Deal JV

· In a deal signed by BP Chief Executive John BROWNE and Unexim Bank President Vladimir POTANIN, BP agreed to buy the 10 percent equity

Today's News Highlights

Russia

Slavneft Shares Sold

Know-How Program in Moscow

European Republics

QBE in Ukraine

New Regional Revival Party

South Caucasus & Central Asia

US Military in Caspian?

Turkmen-Iran Electric Line

US-Kazkhstan Agreements

Politics-Economics-Business

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Tuesday

November 18, 1997

Intercon's Daily

stake in AO Sidanko, which is 51 percent owned by Unexim Bank, for $571 million. British Prime Minister Tony Blair said it was one of Britain's biggest investments in Russia to date. The holding will add 40,000 barrels of oil to its daily output and 300 million barrels to its reserves, but more importantly it will provide the two companies with a strategic base from which to develop a major joint exploration and production business in West and East Siberia. Under the terms of the agreement the British Petroleum is offered one seat in the Board of Directors of the Sidanko company and is entitled to nominate candidates to key posts in the company, including heads of a financial department.

BP will additionally acquire 45 percent of Sidanko's interest in Russia Petroleum, an Irkutsk-based company with major oil and gas discoveries in East Siberia in which Sidanko has a 60 percent stake. To earn this interest, BP will meet $172 million of the costs of appraising Russia fields. Russia Petroleum has a license for the development of the Kovyktinskoye, Irkutsk region, gas condensate deposit which is one of Russia's biggest, with the reserves of 1.5 trillion cubic meters of natural gas and condensate.

Sidanko petroleum company, founded in May 1994, includes the Varyeganneftegaz joint-stock company, Kondpetroleum, Chernogorneft, Saratovneftegaz and Angarskaya petrochemical joint-stock companies, Udmurtneft and the Saratov oil refinery state-owned enterprises, the Khabarovsk oil refinery, 12 sales companies and three specialized enterprises of the petroleum industry.

Slavneft Shares Sold

· A Russian State Property Fund statement reported that shares in Russian-Belarussian oil company Slavneft were sold for 2,272.73 rules each at an action, which is 4.55 times the starting price. 2.17 percent of the firm's capital (103,401,316 shares) were sold. The buyers consisted of 96 companies and 402 individuals. The total value of the sale was 232 billion rubles ($39.3 million). Russia will sell 9.68 percent of the company in an investment tender, with bids closing December 17. Slavneft produced 2.61 million tons (248,000 barrels per day) of oil in the first half of this year, down five percent on levels covering the same period last year.

Know-How Program in Moscow

· The presentation of a new program of the Russian branch of the British Know-How Foundation took place on Monday at the British Embassy in Russia. The program for assistance to non-state organizations in a number of regions of Russia began in 1991, hopes to provide grants in non-commercial cooperation and presupposes assistance amounting to up to £50,000 to Russian and British organizations which cooperate with each other. The Foundation has allocated £170 million for projects in Russia. Cooperation must cover the exchange of experience with a view to refining legal and social contacts of Russian organizations in the sphere of activity corresponding to their specialization. Along with the work with non-governmental organizations, the Foundation tackles matters concerning the restructuring of enterprises, training in management, land privatization, health care, the energy sector, and improvements in governmental structures operations, and the media.

European Republics

Gazprom Threatens to Cuts Gas to Belarus

· The Russian gas monopoly Gazprom informed the Belarussian government that it is going to reduce gas deliveries to the nation by 50 percent, starting from December 1, if the payment for the already consumed gas is not increased, reported Itar-Tass. Beltopgaz, Belarus gas distributing company reports that consumers currently pay for 38.9 percent of all received gas. The main gas consumer, Belenergo, pays only for 35.1 percent of deliveries. Belarus's debt to Gazprom amounts to $120 million.

QBE JV in Ukraine

· Ukrgazprombank representatives, Vladimir MAKEYENKO and Oleg SLOVSNOSKY, Ukrainian presidential chief of staff Serhiy BURYAK, along with QBE executives signed an agreement forming a joint venture between the two companies. Retiring QBE's managing director John CLONEY said QBE is, "very pleased to be the first foreign company invited to participate in the emerging insurance market in Ukraine." He added that Ukrgazprombank is an "ideal partner" to develop insurance business in a market which is, "...likely to produce many opportunities that would be mutually beneficial to the joint venture partners."

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

November 18, 1997

Intercon's Daily

Foreign Investment in Ukraine Still Slow

· The flow of foreign investment into Ukraine is still slow and its level of investment is far below Ukraine's eastern European neighbors. First Deputy Economy Minister Vasyl SHEVCHUK said the government has registered 1,369 foreign investments from January to October. All these investments amount to $328.8 million. This brought per capita investment in the Ukrainian economy to $32, or a total of more than $1.6 billion since independence in 1991. Individual investments in the Ukrainian economy remain on a small-scale, SHEVCHUK said, adding that most investors are entrepreneurs making small investments for quick profits.

New Regional Revival Party in Ukraine

· Donetsk Mayor Vladimir RYBAK announced the new movement of the Regional Revival Party, which will promote the protection of economic and political interests in Ukrainian regions. The party's goal is to give more independence to Ukrainian regions in tackling all problems without exception, including financial ones. According to RYBAK, elected party chairman, many other Ukrainian mayors could be regarded already as activists of the Regional Revival Party. Their names will be announced, after the first congress of the party meet in Kiev next Saturday.

South Caucasus & Central Asia

US Military in the Caspian?

· According to a story in USA Today Pentagon officials are reportedly working to determine whose "area of responsibility" the Caspian region should be a part of: European command (which includes the Middle East) or the Central command (which includes the Persian Gulf). Up until now, Central Asia has been dealt with on an ad hoc basis. According to Pentagon information, the goal of the Pentagon is to decide which region is responsible and then begin to create regular military contact between the US and Caucasus military, specifically Kazakhstan and Uzbekistan. This story appears to have originated from an earlier Itar-Tass story. That story emphasized that such contacts would be very important if one of those existing conflicts in the Caucasus will ever become a threat to US economic interests in the Caspian region.

Georgian President Eduard SHEVARDNADZE was asked about this during his weekly radio broadcast last Monday. The interviewer commented on an Itar-Tass article reporting that the Pentagon is interested in opening regular military contact with the military's of the region for the purpose of protecting American interests in the region, especially the multi billion dollar investments being made by American oil companies. SHEVARDNADZE responded, "I could not confirm this, however Itar-Tass is generally reliable. But, everyone in Georgia and Russia realizes that it is necessary to reach a resolution of these conflicts. Everyone should realize that those who can solve these problems should do it now. If they can't solve them, then other forces will become involved in resolving these conflicts. In any case, those problems should be solved, a just peace should be established, refugees should be returned, territorial integrity should be restored. This is the firm will of the international community and accordingly to this will, the mandate to act in the region will be given to those who will solve these problems of establishing a just peace more successfully. Everyone should realize this."

SHEVARNADZE has been trying to engage Russia to take a leading role in solving regional problems which are within their grasp. Opinions are growing that Russia would rather prolong these conflicts. This is especially clear after Russian Prime Minister CHERNOMYRDIN eased import curbs on citrus fruits and foodstuffs which were imposed after CIS action to pressure Abkhazia into a negotiated settlement with Georgia. "Mr. Chernomydrin has decided to set up a greenhouse for the separatist, and in doing so has godlessly ignored all of the well known CIS decisions. Apparently he has this type of attitude to the CIS in general." SHEVARDNADZE's sharp criticism drew an odd response from Moscow that this decree only concerned citrus fruit and tea and that the blockade was still in effect. Since these are Abkhazia's only real exports the justification rang hollow in Tblisi. These events and statements again underline the Russia's basic contradiction and lack of clear policy in the Caucasus. Yesterday's Geneva meeting among the Russian, Abkhaz and Georgian representatives appeared once again to have made no progress.The Abkhazian leader ARDZIMBA, while in Geneva, did not attend yesterday's meetings.

When you need to know it as it happens

Politics-Economics-Business

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Tuesday

November 18, 1997

Intercon's Daily

Peacekeeping Replacements in Abkhazia

· A Russian Defense Ministry spokesman said that a replacement of peacekeeping troops has begun in the zone of the Georgian-Abkhazian conflict. Two battalions of the 27th Guards Motorized Rifle Division of the Volga Military District has been dispatched to the area. Peacekeeping units from the famous division showed good performance in the Dniester Region, Abkhazia and South Ossetia. This time, however, the peacekeeping operation is going to be a serious trial for them.

Turkmenistan Electric Lines in Iran

· Turkmenistan plans to export electricity through a new high voltage electrical transmission line through northern Iran to eventually export it to consumers in Armenia and Turkey. An official from the energy and industry ministry told Reuters, "The line, with potential annual capacity of 200 to 500 megawatt-hours, will become operational by the New Year." The 320 km (200 mile) line would stretch from Nebit Dag in western Turkmenistan to Aliabad in northwestern Iran. Turkmenistan's electrical output was 6.5 billion kilowatt-hours in the period January to September.

Armenia-Georgia Relations Continue to Improve

· Georgian President Eduard SHEVARDNADZE and Armenian Prime Minister Robert KOCHARYAN are meeting in what SHEVARDNADZE believes is, "a very important step on the way to the establishment of just and stable peace in the Southern Caucasus." Armenian-Georgian relations are based on full mutual understanding and accord: some 50 documents signed on the summit level during the past five years. The current visit including executives of the power sector, finances, transport etc. is evidence of the leaders' intention to make better use of the two countries' potential.

US-Kazakhstan Agreements

· US Vice President Al GORE and Kazakhstan President Nursultan NAZARBAYEV met on Monday to discuss agreements to be signed today covering issues including economic and political reform in

Kazakhstan, defense cooperation and non-proliferation, investment, trade and commercial cooperation, and environmental concerns in the former Soviet Union. Monday, President CLINTON approved an agreement with Kazakhstan allowing cooperation in non-military uses of nuclear energy. The deal, to be signed today by NAZARBAYEV and GORE, offers specific US help in guaranteeing the safety of Kazakhstan's nuclear reactors. GORE supports Kazakhstan's quest to build multiple pipelines bringing gas to markets in the west and east, there by ending its reliance on Russian pipelines.

Also today, NAZARBAYEV will sign a production sharing agreement for Kazakhstan's Karachagank gas field with Texaco Inc., British Gas (BG) and Italy's Agip SpA. The project which may include a refinery and pipeline east to China is expected to cost around $10 billion over 40 years. This will give Texaco a 20 percent stake, Agip SpA and BG 32.5 percent each and Russia's LUKoil 15 percent.

Kumtor's Gold Production Ahead of Schedule

· Kumtor Operating Company President Gerhard GLATTES announced that the Kumtor Gold Project surpassed its planned gold production on November 6 for the 1997 year. The total gold amount of poured gold was 410,638 ounces. "We have known for some time that our gold production figures were far better than anticipated. But to be able to fulfill our production plan seven weeks ahead of schedule is very gratifying. Our success certainly would not have been possible without the support of Kyrgyzstan's President Askar AKAEV and his government for our operations," said President GLATTES. Kyrgyzstan is now the third largest gold producer in the CIS, surpassing the Republic of Kazakhstan's gold production. Kumtor Operating Company began commercial production at the mine May 1, 1997, after the commissioning of its mill. The Kumtor gold project is owned two-thirds by the government of Kyrgyzstan and one-third by the Canadian Cameco Corporation.

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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