DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, November 20, 1997

Russian Federation

Politics

Chubais- Nemstov Relieved Ministerial Posts

· President Boris YELTSIN continues to reshuffle the government ministry positions in the wake of the CHUBAIS book scandal and pressures from the Communist party to not vote on the 1998 draft budget while CHUBAIS remains in power. YELTSIN approved a decree on Wednesday which will bar senior officials from holding two cabinet posts simultaneously. This decision immediately effects Anatoly CHUBAIS and Boris NEMSTOV and may mark the end of the young reformers power. Anatoly CHUBAIS has been relieved of his duties as Finance Minister, but will retain his post of First Deputy Prime Minister. Boris NEMSTOV has been relieved of his duties as Fuel and Energy Minister, but will retain his position as First Deputy Prime Minister in charge of structural Reforms. The new decree may also effect Deputy Prime Minister Yakov URINSON, who is also Economic Minister, Deputy Prime Minister Oleg SYSUYEV, who is also Labor Minister, Deputy Prime Minister Viktor KHLYSTUN, who is also Agricultural Minister, and Deputy Prime Minister Anatoly KULIKOV, who is also Interior Minister.

Sacking the two young reformers continues to bolster Prime Minister Viktor CHERNOMYRDIN, who has battled in the past with CHUBAIS as to who would sack whom first. In this case, YELTSIN did the sacking and CHERNOMYRDIN recommended replacements. "Everybody should know that structural and personnel decisions concerning government members are the prerogative of the President of Russia. Of course as chairman of the government I have my own proposals and I will put them forth to the president," CHERNOMYRDIN said. Trying to calm fears of personnel changes effecting policy reforms, he said, "The strategy of the government's work will

not depend on any personnel or structural changes within the Cabinet, at least as long as I am the chairman of the government of Russia. There are a lot of misinterpretations...everybody has decided that everything is changing, that it is bad and that a disaster is imminent. Nothing of the kind will happen...the government's policy will not change, no matter what changes may occur in the structure or composition of the Cabinet or who leaves or joins the government."

CHUBAIS is to be replaced by Mikhail ZADORNOV, a liberal reformist from the Yabloko political movement who now heads the Duma budget committee. ZADORNOV stressed that currently the finance minister works for the Deputy Prime Minister. NEMSTOV is to be replaced by first deputy energy minister Sergei KIRIYENKO. However, whether CHUBAIS will survive in his remaining position to the New Year remains very uncertain. Without credibility chances are he will submit his own resignation.

Economy

Ruble = 5,912/$1.00 (NY rate)

Ruble = 5,908/$1.00 (CB rate)

Ruble = 5,902|5,915/$1.00 (buy|sell rates)

Tokyo Bank Guarantees to Boost Investment

· Moscow believes that Tokyo's decision to recognize the guarantees of 11 Russian commercial banks for private Japanese investments in the

Today's News Highlights

Russia

Mitinoku Bank Opens in Moscow

Russian Plane Attracts Iran

European Republics

Odyssey Termniates Agreement

South Caucasus & Central Asia

Kazakh-Iran Pipeline on Hold

Caspian Oil Conference

Nagorno-Karabakh

Politics-Economics-Business

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Thursday

November 20, 1997

Intercon's Daily

Ministry to open the Moscow branch. Mitinoku, whose headquarters is in Aomori, has total assets of about 1.7 trillion yen, or about $13.7 billion, and 111 branches in Japan.

GPT JV Opens Network in Moscow

· M2 Communications, Russian operator Comstar, GPT's Moscow joint venture company has opened a new network which will provide customers with the highest data transmission capability in the Russia. The network launch comes shortly after GPT's announcement of a GBP 21.7 million agreement to provide equipment for a new expansion program, extending the Comstar network to other major Russian cities. "Comstar has grown to be the largest digital network operator in Moscow with over 35,000 subscribers," said Jim DOLCE GPT's Regional Director for the CIS.

"With this new technology [SDH transmission technology], Comstar will be able to offer its customers bandwidth-on-demand, with the ability to pull down whatever they want from the transmission network. For GPT, the new Comstar SDH network is an opportunity to prove our latest and most advanced transmission technology," said Jim DOLCE. GPT, Britain's largest telecommunications manufacturer, markets communications products and services to meet the customers needs in every continent.

Russian Plane Competes with Boeing

· Russia's TU-204-120 medium- range passenger plane, worth $36 million, is likely to challenge US Boeing in the Asian and Arab markets, as it gains popularity at the international air show in Dubai. Tupolev aircraft design bureau chief Igor SHEVCHUK said, "There are grounds to believe that the new Russian plane TU- 204-120 may take the niche of Boeing modifications which are growing obsolete." Talks are under way with a dozen of airlines in China, South Korea, India, Iran and some Arab countries. SHEVCHUK said that the TU-204-120, featuring Rolls-Royce engines, modern Western avionics and the luxurious interior, is cheap and economical. A Russian delegate to the air show told Itar-Tass that Iran is more interested than ever in cooperating with Russian on aircraft opportunities.

Iran intends to discuss prospects for launching a joint production of the TU-134 and engines for them, as

Russian economy will boost direct capital investments. Russian President Boris YELTSIN and Japanese Prime Minister Ryutaro HASHIMOTO sent messages to the Russian-Japanese and Japanese-Russian committees for economic cooperation joint meeting stressing the importance of the development of investment cooperation.

Prior Tokyo recognized only government guarantees in deals with Russia. Arkady VOLSKY, head of the Russian-Japanese committee for economic cooperation said that beginning this month, "ten biggest Russian banks, plus one more which will be established with the help of a contest," will provide guarantees for the investments of private Japanese companies in Russia. In his opinion, the initial stages of Japanese participation may be providing guarantees for credits on fuel and energy projects and the development of natural resources. The Japanese project package also includes proposals on cooperation in the development of conversion, city transport and the production of electronic goods.

Russian trade representative in Japan Robert RUZANOV said that, when setting the terms for providing guarantees for Japanese investments, Russian commercial banks will set their own terms and evaluate the degree of the risk involved. The governments of the two countries will have nothing to do with fixing interest rates for those credits.

Business

Mitinoku Bank Opens in Moscow

· The Japanese regional bank Mitinoku today announced its plan to open a Moscow credit branch.

The bank's leaders received a protocol of intentions was signed with the Central Bank of Russia. Mitinoku will open its Moscow office in June or July after necessary procedural paperwork is done. The bank's Moscow branch will be a landmark event, as only two of Japan's major banks, the Export-Import Bank and Tokyo-Mitsubishi, have Moscow offices which do not carry out banking operations.

Mitinoku's officials said the bank's office in Moscow was inconceivable two-three years ago. However, with Tokyo's policy of trust, mutual benefit and long-term prospect, announced by HASHIMOTO in July, the bank was cleared by the Japanese Finance

When you need to know it as it happens

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Intercon's Daily

well as for acquiring a license to make such planes. The Iranian delegation in Dubai also took interest in the TU- 204-120 and did not rule out the possibility of purchasing several planes for servicing domestic and international flights.

Armenia-Azeri Ambass. on Nagorno-Karabakh

· Armenian Ambassador Rouben SHURGARIAN speaking at US Russia Business Council's Conference on Caspian Pipelines described the willingness of Armenia to settle the Nagorno-Karabakh conflict through compromise. While stating that peace should be the product of mutual compromises he also indicated that Armenia is waiting for compromises from Azerbaijan. When asked the question when will peace come, the Ambassador responded, "Peace will be close when Azerbaijan engages in direct negotiations with the elected leaders of Nagorno-Karabakh." The Ambassador of Azerbaijan Hafez PASHAYEV responded to an Intercon question that "This is precisely why there is no peace between our nations. How can Armenia, expect us to negotiate with separatists which the international community does not recognize? Only when all parties accept the international communities requirement that the territorial integrity of Azerbaijan is restored, can peace come to the region."

Presently a two-stage plan advocated by international mediators is under active discussion with the Minsk group. First, Karabakh forces would give up six regions of Azerbaijan which they captures. Then international peacekeepers would move in, leaving the status of Nagorno-Karabakh to be decided later. The Karabakh government wants the question to be resolved simultaneously. The shortest proposed major pipeline routes to bring Caspian oil west would cross the Nagorno-Karabakh region. Arkady GUKASYAN, leader of the disputed enclave of conflict region said, "I don't rule out that talk about a possible pipeline from Baku to Cheyhan has played a role. We will not be used to solve someone else's problems."

Ambassador SHURGARIAN seemed to indicate that pipelines cannot bring peace but may help preserve the peace and promote regional stability. On the trans-Eurasian pipeline route and Armenia as a partner in general, Armenian Ambassador Rouben SHURGARIAN said Armenia is the natural transportation route for Central Asian countries to the West because of its rail links with Turkey.

Caspian Oil Conference Begins to Heat up

· Differing opinions concerning transportation through the Bosphorus were advanced by Russian

European Republics

Odyssey Terminates Agreement

· Odyssey Petroleum Corporation announced on Wednesday that it has terminated its agreement with Trident (88) Exploration Ltd. of Calgary, Canada. Under the agreement, Trident (88) was to transfer to Odyssey the right to negotiate an agreement with the Ukrainian national oil company, UKRNAFTA, to explore and develop the Dolina field, western Ukraine. Odyssey determined that the protocol between UKRNAFTA and Trident (88) is not valid.

Odyssey is continuing negotiations directly with UKRNAFTA, with the goal of entering into a joint venture agreement covering the entire Dolina region. Odyssey, a Canadian-based energy resource company, is engaged in the exploration and development of oil and gas projects on an international basis, and in the production and distribution of ethanol, primarily in the western US.

South Caucasus & Central Asia

Azeri-Iran Relations

· Iranian Minister for the Affairs of Cooperatives Morteza HAJI, who also co-chairs the Iranian- Azerbaijan interstate commission for economic, trade and cultural cooperation, met with Azerbaijan President Geidar ALIYEV of late on Tuesday. During the meeting, HAJI stressed that Iran wants Azerbaijan to be a strong and prosperous state. Touching upon bilateral economic ties, the Iranian minister noted the role the joint commission, which is currently holding its third session to discuss transportation routes, taxation, and cooperation in the agricultural sphere.

ALIYEV promised to render all possible support to the activity of the bilateral commission and described its work as very important. Iran is one of Azerbaijan's major partners, accounting for a third of its foreign trade turnover. Via Iran, Azerbaijan maintains contacts with Nakhichevan, which was cut off its territory after the Armenian-Azerbaijan conflict.

When you need to know it as it happens

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and Turkish speakers. Russian Valeri GARIPOV yesterday claimed that Turkish concerns over ecology and safety of the Bosphorus were artificially created to advance the Cheyhan option. He asserted that the Bosphorus problems could be solved by modern navigation systems. If this was done the Russian option would be 2.5 times cheaper than Cheyhan routes. Russia is also considering seven pipeline options around Chechnya. GARIPOV also indicated that he was not pleased with Energy Secretary PENA's remarks on US support for the Cheyhan option. However many believe that this clearly articulated position of the US government will positively contribute to a lessening of the political gamesmanship throughout the reason.

Turkish representative and Chairman of the Board for Tekfen Holding Company Nihat GOKYIGIT today pleaded for consideration of the great pressures placed on the Bosphorus and the 3000 year old city of Istanbul. Approximately 50,000 vessels pass through the Bosphorus each year or approximately 140 vessels a day. He conveyed that the Black sea is a ecological disaster area; there are inadequate ports on the Black Sea; vessels are very old which operate there; and the time and cost to upgrade any bypass would be prohibited. He stressed that these problems were real, serious and not manufactured.

GARIPOV continued to point out the difficulties of southern and western routes (laying pipelines on the bottoms of the Caspian and Black seas and quake-prone mountainous areas), he preferred the northern route through Russia. "We want the economy to march ahead of politics," the deputy minister added. Indeed, many representatives are in support of having economic factors ahead of political issues.

"The AIOC's decision on the long-term pipeline route will be a shipper driven pipeline that will maximize opportunities for upstream development in Azerbaijan. International politics will play a part, but the solution must be commercially driven," said Greg RICH executive vice president of AIOC. However,

most speakers indicated that the cost differences are not far apart and had differing advantages and disadvantages. Ilham ALIYEV, First Vice President of SOCAR, reminded the attendees at lunch today, that they should not forget that this oil "...is Azeri oil" and that "...the best transportation route is what is best for Azerbaijan." He also cautioned that regional cooperation will be impeded if tensions are created (tactically) by disputes over ownership of the Caspian oil fields. He also mentioned the negative effects of section 907 and the one million refugees from Nagorno-Karabakh.

President of the Kaztransoil company Nurlan KAPPAROV pointed out that there is an eastern version of oil transportation through China and Asia-Pacific countries. He called the transportation of Kazakh oil to world markets "the main headache."

Kazakh May Place Iran Pipeline on Hold

· President Nursultan NAZARBAYEV of Kazakhstan said on Wednesday that his country may drop plans for a possible pipeline through Iran if the United States could finance the alternative route, through Azerbaijan, Georgia and Turkey to the Mediterranean Sea, by next October. "We'd support the project that can be implemented in the quickest way," NAZARBAYEV told reporters at the end of his visit to the US. "And if work on that US-proposed line could in fact start after October 1998, we are willing to cease work on these other projects and make that our pipeline choice." The US supports multiple pipelines to get Caspian Sea oil to the West but opposes routes that involve Iran, which it tries to isolate by sanctions.

US Energy Secretary Federico PENA said that the US government would not provide funding for the proposed trans-Caspian oil pipeline route to Turkey. "These are private-sector investments," PENA said referring to the US preferred route. This may in fact push Turkmenistan to reconsider its positions on the Caspian Sea's legal status and its negotiations with its neighbors in the region.

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

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