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

Monday, December 1, 1997

Economy

Ruble = 5,951/$1.00 (NY rate)

Ruble = 5,921/$1.00 (CB rate)

Ruble = 5,879|5,963/$1.00 (buy|sell rates)

EU-Russia Trade Opportunities Increase

· The agreement on partnership and cooperation between Russia and the EU which came into effect today opens new opportunities for trade and interaction to individuals and enterprises, reported Itar-Tass. The partnership and cooperation agreement calls for a maximum recruitment of the partnership potential of the two integration centers and contribution to the new European architecture without divisive lines. Forty percent of Russia's export is to the EU and 38 percent of Russian imports are from the EU. European firms are major investors in Russia, but German Deputy Chancellor and Foreign Minister Klaus KINKEL believes this potential is far from exhausted. KINKEL deems the idea of a free-trade zone expressed in the treaty important. "We shall come out in favor of the talks on this matter being started in 1998, as is envisaged by the agreement."

European Union leaders Jacques SANTER, Hans VAN DEN BROEK and Luxembourg Foreign Minister Jacqueas POOS described the agreement as an important political and juridical basis for the huge potential of relations between the uniting Europe and new Russia. Chairman of the European Union Council Jacqueas POOS said the EU leadership would as

Russian Federation

Politics

American Businessman Detained For Spying

· Richard L. BLISS, Qualcomm Co. employee, was detained by Russian Federal Security Service (FSB) officers in Russia's Rostov region on November 25 for suspicion of espionage. The FSB sources said BLISS was caught using special satellite receivers illegally brought into Russia to conduct topography-and geodesy survey work. Criminal proceeding have been brought against BLISS under Article 276 of the Criminal Code of the Russian Federation. Comment: This appears to be a continuation of the spy-mania that has been whipped up in the media recently. The description of the equipment being used appears to be commercially relevant for setting mobile communication antennas and repeaters to ensure adequate communication coverage. It is unlikely this case has anything to do with espionage.

Russia Fears US High-tech Weapons

· Head of the Chief Department for International Military Cooperation Leonid IVASHOV on Friday expressed Russia's deep concern over the high precision conventional weapons being developed by the United States. He further warned that the US move may lead to a new round of arms race between

the two nations. "While agreeing to the reduction of nuclear weapons, the United States is increasingly exerting efforts to produce high-precision and high-tech systems of conventional armaments, is working on sixth generation systems."

Due to its current economic difficulties, Russia is now unable to keep apace with the United States arms productions. IVASHOV stressed that Russia would be drawn, against its will, into a new arms race spiral if the situation continues without further arms reduction talks, which the US is unwilling to entertain.

Today's News Highlights

Russia

Rosneft Board Split

DeBeers in Perm

European Republics

EBRD Invest in Ukraine

IMF Loan to Ukraine

Belarus-Tatar Oil Interest

South Caucasus & Central Asia

Three Presidents on CIS

Russian Embassy in Armenia

Kazakh-German Agreements

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Monday

December 1, 1997

Intercon's Daily

sist Russia to be included on the list of countries eligible for loans from the European Investment Bank with the proviso of meeting a set of economic criteria. Russia is not a candidate for EU membership.

EU Admits Russian Banks

· The European Union banking federation on Friday admitted the Association of Russian Banks to be a corresponding member, reported Itar-Tass. Only banks from the EU countries or members of the European association of free trade may be full members of the banking federation, made up of 3,000 European banks. The decision to admit the Association of Russian Banks emphasizes the acceptance of the Russian banking system as one that is based on free market principles and is capable of influencing world economic processes, the Association's president Sergei YEGOROV said. Russian banks see advantages of integration and their participation in the EU banking federation will allow for more active steps to enter world financial markets and integrate into the world banking community conforming with generally accepted standards and technologies and, "... speak the same language with European bankers," YEGOROV said.

Business

Rosneft Board Split May Disrupt its Sale

· The Russian government plans to sell off Rosneft, the last big Russian oil company to be privatized, may be overshadowed by the continued split of Rosneft board members. Rosneft President Yuri BESPALOV asked for the government's support as he accused two senior board members of theft. "They're picking the government's pocket," he said. Last Tuesday, however, Chairman of the Board Alexander PUTILOV urged the government to remove BESPALOV, stating that BESPALOV was not acting on the company's behalf. The conflict follows the trend in Moscow of the various industrial barons backing board members in hopes of gaining control of the company. BESPALOV has been linked to Boris BEREZOVSKY, the powerful business tycoon and former security council member. Others on the board have been linked to BEREZOVSKY's rivals.

A repeat clash between arch-rivals Boris BEREZOVSKY and Vladimir POTANIN, who earlier bitterly bid against each other for Svyazinvest telecom, is expected for the Rosneft sale. POTANIN

heads Uneximbank, which controls SIDANKO oil group. Royal Dutch/Shell and British Petroleum along with different Russian partners have also expressed interest in Rosneft. The government expects to raise $1 billion for the sale of Rosneft, funds which are badly needed to pay off wage arrears.

Moscow-Taipei Airoute to Open in Spring

· Direct air service between Moscow and Taipei, Taiwan, will open at the end of March next year. Legal aspects of a respective agreement which remained unsettled delayed the opening from 1996. The Taiwanese air company China Airlines plans to have two flights a week on the Moscow-Taipei air route, which will be also served by liners of the Russian Transaero Company. The Moscow-Taipei air route will be served by private air companies. Planes, operating along the route, will not bear any official symbols and crews will use the uniform and logos of only non-state companies.

A Russian Foreign Ministry official stressed that Moscow believes Taiwan is an integral part of China. Further the official added that Russia's relations with Taiwan are regulated by a Presidential decree dated September 15, 1992, to which, "... such contacts must be of unofficial and non-governmental nature."

Diamonds Cutting into Perm's Economy

· The world's largest diamond producer DeBeers opened a diamond-cutting factory called Kama-Kristall in the Perm region to cut diamonds extracted on the river Vishera. DeBeers provided equipment for the factory and specialists to manage its production processes.

Perm region governor Gennady IGUMNOV said, "Kama-Kristall could cut all diamonds extracted on the Vishera. However, we have yet to persuade the Russian government to give us an opportunity to do that. So far we have not been able to convince it to allow the Perm administration to acquire all uncut diamonds extracted on its territory." Perm extracts only 0.2 percent of Yakutia's diamond production. If the region is not permitted to cut all diamonds, the factory will operate in the red because it buys diamonds from the extracting enterprise at a market price. IGUMNOV said the new factory could increase the region's tax payments to the federal budget by 1.5-2 times, about $3 million.

When you need to know it as it happens

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EBRD and Ukrainian Prime Minister Valery PUSTOVOITENKO discussed the bank's investment in the two generating sets, in the Rovno Nuclear Power Station and Khmelynitsky Nuclear Power Station. The building of the generating sets are precondition for Ukraine to close down the Chernobyl Nuclear Power Station before 2000. The bank is now planning 56 projects for Ukraine with $2 billion in investment. Half of the fund will be channeled through Ukraine's banking system. Ukraine has moved up within 1997 from the seventh position to the fifth among debtors to the bank.

Kiev will host the EBRD annual conference in May 1998. The EBRD will provide $50 million to renovate the capital's hotels and airports. Approximately 5,000 people are expected to arrive in Kiev for the event. The meeting will bring Ukraine business opportunities and a tourism boom, the Ukrainian official said.

Ukraine Sells Pakistan Tanks

· Ukraine has sold 320 tanks to Pakistan is the largest tank deal over the past 20 years in the world with a contract value of $600 million. Ukraine is also bidding for another contract to sell 5,000 tanks to Turkey. Chairman of the Committee on Defense and State Security of the Ukraine Vladimir MUKKIN, believes that it will most likely win the contract, which is worth nearly $10 billion. Ukraine is playing an important role in world weapons market, due to its great potential in military technology, MUKKIN said.

South Caucasus & Central Asia

Aliev, Shevardnadze, Lucinschi on CIS

· Azeri President Heidar ALIEV and Moldovan counterpart LUCINSCHI agreed that they do not want the Commonwealth of Independent States to collapse. ALIEV said that it is "an illusion" to believe that the CIS will be an effective international organization, while conflicts persist between its members. LUCINSCHI said the CIS will work only when member relations are "honest and sincere," reported RFE/RL Newsline. Georgian President Eduard SHEVARDNADZE said that the relationship between Georgia, Ukraine, Azerbaijan, and Moldova, "... does not contradict the interest of the Black Sea states or the CIS, and should not surprise anybody." This new alignment the three presidents stressed is "a consultative body."

European Republics

IMF Rescues Ukraine Economy with Cash

· The International Monetary Fund pleased with Ukraine's progress in reducing inflation and management of its economy granted $103 million as part of a standby loan on Thursday. Chairman of the Ukrainian National Bank Victor YUSHCHENKO said, "Overall, the verdict of the IMF was positive and the money was credited to our account today." An additional $47 million may be granted to Ukraine if it meets other economic goals. Finance Minister Ihor MITIUKOV said, "If Ukraine meets the additional targets we will get the next tranche in December." The funds arrived at a crucial time, as Ukraine continues to recover from the effect of global financial market turmoil.

Lukashenko on CIS

· Belarus President Alexander LUKASHENKO said that the future of the Commonwealth of Independent States depends on the consensus of its members and their sincerity in the organization. LUKASHENKO said the goals, announced in 1991 when the CIS was formed, have not be achieved. He speculated that some members were false in their hopes of reaching these goals. The goals include a united economic and tariff region, a strategic military area of common concern and an integral transportation and telecommunication system. LUKASHENKO believes that the responsibility of a solid CIS remains on Russia's shoulders and that Russia should play a special role in the CIS integration process.

Belarus-Tatar Oil Interests

· Belarussian President Alexander LUKASHENKO and Tatar Prime Minister Farid MUKHAMETSHIN on Friday discussed Tatarstan oil supplies to Belarus oil-processors. MUKHAMETSHIN stressed the need of giving a boost to bilateral economic cooperation. The Tatar Prime Minister stated that Tatarstan is interested in importing Belarus agricultural machines, textile and consumer goods. LUKASHENKO extended invitation to Tatarstan's President Mintimer SHAIMIYEV to visit the country.

EBRD Invests in Ukraine Economy

· A representative of the European Bank for Reconstruction and Development to Ukraine said on Wednesday that the bank will grant a record $220-240 million to Ukraine this year. Senior official of the

When you need to know it as it happens

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ALIEV and LUCINSCHI met in Baku to discuss Moldovia's participation in the TRASECA transport and cooperation in the oil sector. Moldova is building an oil refinery and is interested in buying part of Azerbaijan's Caspian oil.

Energy Sector Disappoints Shevardnadze

· Georgian President Eduard SHEVARDNADZE urged several leading energy sector officials to resign because of their failure to allocate foreign credits adequately in preparation for winter. He harshly criticized their irresponsibility. Energy Minister Davit ZUBITASHVILI announced that Russian gas monopoly Gazprom agreed to continue supplies of gas to Georgia, which had been cut because of non-payment of the $10 million debt. Russia warned that supplies would stop if the debt is not paid in 10 days, reported RFE/RL Newsline.

Serov in Georgia

· Russian Vice Prime Minister Valery SEROV will visit Georgia on December 8-9, to attend a session of the intergovernmental commission on trade, economic, scientific and technical cooperation. The two sides will discuss a wide range of issues, including in the energy sector and trade. SEROV noted that Russia is prepared to supply energy to South Ossetia on "humanitarian basis." But he pointed out that any humanitarian assistance has its limits and it is necessary to pay for electric power. SEROV noted that Georgia asked Russia to urgently prepare and sign an agreement on the protection of trade marks.

Armenia-Russian Relations: New Embassy

· Bilateral consultations between Russian delegation, led by Ambassador Vsevolod OLEANDROV, and Armenian delegations, headed by Deputy Foreign Minister Sergei MANASARYAN, ended on Friday in Yerevan. The sides focused on periods of ratification by the legislatures of the two countries of the Treaty of Friendship and Cooperation, signed by Presidents Levon TER-PETROSYAN and Boris YELTSIN in Moscow last August. They also dis

cussed several projects of economic cooperation and progress in fulfilling some earlier economic understandings. TER-PETROSYAN said on Friday that the Russian-Armenian Treaty of Friendship, Cooperation and Mutual Assistance is a real breakthrough in relations between the two nations.

In conjunction with the delegates' meetings, Russia opened a new embassy in Armenia. The Armenian President also noted that the opening of the new embassy building is not an ordinary event, but another step sealing the partnership relations which have developed over the past few years between the two states. Russian Deputy Foreign Minister Ivan SERGEYEV noted that the new building of the Russian embassy signifies new relations between the two countries.

Kazakh to Modernize Military

· Committee of National Defense Industry Chairman for the Defense Ministry Amangeldy KAZHIBAYEY said it is necessary for Kazakhstan to safeguard its independence with modern technologies in the military. As its economy improves, Kazakhstan will invest in the restoration of military enterprises and will also expand export of some conventional weapons. KAZHIBAYEY noted that a strong military force is one of the most reliable guarantees for national security. With it, Kazakhstan will have more options than depending only on foreign military aid when faced with a military threat. The number of Kazakh military enterprises dropped from 100 to 15 following the breakup of the Soviet Union.

Kazakh -German Agreements

· Germany and Kazakhstan signed five agreements last Wednesday covering finances, technology, transport, and an agreement to avoid double taxation. Kazakh President Nursultan NAZARBAYEV said the agreements, "... provide a legal foundation for raising Kazakh-German economic and political contacts to a new level." Germany is the major trade partner of the Central Asian region. There are over 80 German companies and 180 joint ventures in Kazakhstan.

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