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, December 2, 1997

Russian Federation

Politics

Russian- Swedish Visit First in 80 Years

· Russian President Boris YELTSIN is in Sweden to strengthen relations and discuss key European and world problems. A package of agreements is to be signed, which will cover rescheduling former USSR debt owed to Sweden, promoting cooperation in the safe use of nuclear energy for peaceful purposes, in space exploration, and in culture, science, and education. YELTSIN will speak with neutral Sweden about European security and Russia's Baltic defense pact. Sweden has stated it is not interested in any regional security pact and believes its position will not be swayed with the Russian visit. This is the first official head of state visit between the two nations in 80 years.

Economic cooperation will also be discussed. YELTSIN is accompanied by First Deputy Prime Minister Boris NEMSTOV, Central Bank head Sergei DUBININ as well as a delegation of Russian businessmen,including and heads of Gazprom, UES and Russian Space Agency, to create direct ties with Swedish businesses. Many joint venture deals are expected to be signed during YELTSIN's visit including Volvo and Ericsson AB telecom. YELTSIN noted that Russian-Swedish trade turnover had doubled over the last five years. He hopes that Sweden will put more investment to Russia.

Russian-Kuwait Accord

· Russia's arms manufacturer Rosvoorouzhenie Company and the Kuwaiti Institute of Scientific Research on Sunday signed an agreement aimed at financing joint research projects and obtaining up-to-date Russian industrial and oil technologies. Director of the Kuwaiti institute Abdel Hadi AL-OTAIBI said the agreement is also for training special ex

perts, sharing expertise and contacting with Russian information centers. Alexander N. SOUVOR of the Rosvoorouzhenie Company, said the Russian Center of Higher Education Inventions would supply the Kuwaiti institute with modern scientific technology.

Since 1992, the Kuwait's Offset Program requires foreign arms suppliers to invest, in the Gulf emirate or its ventures abroad, 30 percent of the value of any contract worth more than 1 million Kuwaiti dinars (about $3.3 million). Kuwait has received investment obligations of up to $1.3 billion under the program, but only a small fraction has materialized.

Can't the Group of 4 Get Along for Russia's?

· Russian Federation Council speaker Yegor STROYEV said that if the president, the prime minister and the speakers of both houses of parliament can work together effectively, they can prevent any further complications in the legislative process. "If the group of the four works, no major political cataclysms will occur. We will resolve even the sharpest issues to emerge in society," STROYEV stressed.

Speaking at a meeting of the upper house of the national legislature, STROYEV stated that base constitutional laws for the development of federalism and the land code remain a priority. Deputy Minister of Economics Zinovy PAK stressed the need for joint lawmaking work by executive and legislative branches, "...at the earliest stages of law-drafting efforts."

Today's News Highlights

Russia

CB Adjusts Lombard Rate

London Club Restructures Debt

Sino-Russian Technopark

European Republics

Rus-Belarus Union Meets

Kuchma Backs Act.Private Head

South Caucasus & Central Asia

Joint Pipeline Battalion Created

Investments in Goergia Increase

Armenian to Lower Inflation 1998

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20 Ballistic Missiles to be Destroyed

· Lieutenant-General Vyacheslav ROMANOV, head of the Center for the Reduction of Nuclear Threat said that under the START-I Treaty Russia plans to scrap 20 submarine-launched ballistic missiles by exploding them over the Barents sea in December. The missiles will be destroyed in the presence of US observers. The treaty limits the number of warheads on deployed intercontinental ballistic missiles, submarine-launched ballistic missiles, heavy bombers, undeployed mobile intercontinental ballistic missiles, and reentry vehicles used for testing and training to no more than 6,000. Russia has scrapped over 800 launching pads for intercontinental ballistic missiles and submarine-launched ballistic missiles, about 2,000 missiles, 20 nuclear submarines and more than 50 heavy bombers.

Russia-EU Relations

· The first session of the committee of Russia-EU parliamentary cooperation will be held today at the European parliament building. The meeting will be cochaired by first deputy speaker of the Russian State Duma Vladimir RYZHKOV and leader of the European Parliament delegation for relations with Russia Konstanze KRELLl (Germany). While celebrating the increase in trade cooperation, RYZHKOV thanked the EU for supporting Russia's membership to various international organizations. He noted however, that 15 types of competitive Russian goods cannot be sold in the EU because of anti-dumping customs duties. RYZHKOV and Russian Deputy Foreign Minister NIKOLAI stated that Russia is not against EU expansion to the East, but it wants open discussion of problems connected with this.

Economy

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

Ruble = 5,925/$1.00 (CB rate)

Ruble = 5,888|5,962/$1.00 (buy|sell rates)

CB Adjusts Lombard Rate to Stabilize Economy

· In an effort to stabilize the economy, the Russian Central Bank for the second time in less than a month lifted Lombard rates to 36 percent, but left refinancing rates unchanged at 28 percent. Yuri PLECHKO, a trader at Deutsche Morgan Gerenfell in Moscow said, "The Lombard rate is the more important one in terms of the day-to-day operations of Russian Banks," while the refinancing rate, "... is the more

political one." Irina YASINA a spokeswoman for the Central Bank said Monday's rate change would calm financial markets. "We hope the banks will end speculative operations on the foreign exchange markets and will stop using central bank credits lent at the Lombard rate for speculative purposes. We hope this will stabilize the GKO [T-bill] market." Since the turbulence in the world financial markets, the central bank has been supporting the currency by draining the ruble liquidity, mostly by offering to take deposits from primary dealers in the market, in hopes that banks would sell dollars.

Compounding market problems include the Russian government's poor collection of taxes, inability to pay wage arrears, and postponement of two major oil privatization which caused such critical financial difficulties that Moscow is seeking other sources of financial support. An IMF mission is in Moscow to reconsider its suspension of Russia's $700 million tranche of the $10 billion loan because of poor tax collection. Last week Central Bank First Deputy Chairman Sergei ALEXSASHENKO and first deputy chairman of the government administration Sergei VASILYEV met with the IMF and World Bank seeking additional funding with a new fiscal action plan. First Deputy Prime Minister Anatoly CHUBAIS said, "We are preparing an additional package of decisions whose purpose is to defend the Russian financial market from the threat of the world financial crisis." One plan according to a senior Russian commercial banker would be to have the most powerful banks and companies to contribute to a fund fund, which would be bail out the state. He suggested potential donors such as Russian state banks, Uneximbank and Menatep. But this and other plans may already be too late, as rumors of six major banks collapsing, including Alpha Bank and Most Bank, have already seeped into the media. Intercon sources report that the Central Bank is encouraging Sberbank to provide funds to shore up these banks in a defensive move. Comment: Prudently, the Russian government appears unwilling to repeat recent Asian mistakes by shoring-up its major financial institutions.

Restructuring of Soviet Debt by London Club

· The London Club plans to announce today the final closing of the deal between The London Club and the Russian delegation, led by Vneshekonombank Chairman Andrey KOSTIN for

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the restructuring and repackaging of the debt to commercial banks, inherited by Russia from the former USSR, for a period of 25 years. The agreement covers the main debt amounting to $24 billion as well as debt-servicing payments, estimated at $8 billion. According to Alexey AKINSHIN, head of the resources department of Vneshekonombank, Russia completed payment transactions in cash according to agreements, reached with The London Club. This should provide a boost to the Russian securities markets which have been experiencing declines.

1997 Net Grain Harvest at 85 Million Tons

· Agriculture Minister Chair Ivan GRIDASOV estimates that on the basis of preliminary data that Russia's 1997 net grain harvest will be about 85 million tons. The 1996 net harvest was 69.3 million tons. GRIDASOV said wheat output would be about 42 million tons against 34.9 million in 1996 and that bread-quality wheat would be 25-27 million tons versus needs this year of 17 million tons.

Business

Sino-Russian Technopark to be Built

· The Vice Mayor of the Chinese city of Harbin, SHANG Yunzin, has suggested a plan to build a

Sino-Russian technopark in the Nakhodka Free Economic Area (FEA). The technopark is to be based on Russian technologies and use Chinese labor and investments to build it. Harbin and Nakhodka are connected with a railway by which Chinese coal is transported in transit to Pacific Rim countries via Nakhodka ports. Deputy Chairman of the Nakhodka FEA Administrative Committee Viktor POKOTILOV said the proposals, "... have been accepted by Nakhodka FEA experts for consideration." More than 100 Chinese firms have been operating in Nakhodka for a long time and in December a "Chinese shopping street" with 47 shops will open.

MOROZ hopes that the visit would, "...confirm the intentions to strengthen Ukrainian-Russian ties and to develop bilateral dialogue in the direction expected by most people in both countries." He also believes that ratification the treaty could invigorate economic cooperation between Russia and Ukraine and consequently improve the quality of life for both Russians and Ukrainians and solve many of their problems, including linguistic ones. SELEZNYOV agreeing with MOROZ's beliefs decided to call for parliamentary hearings with the participation of Ukrainian lawmakers before the Duma discusses the ratification of the treaty. SELEZNYOV said he favors closer inter-parliamentary contacts on issues which concern both Russian and Ukrainian legislators, such as the Chernobyl nuclear power plant, NATO expansion to the East, interaction between Anti-NATO groups, the removal of customs and tax barriers, and the development of cooperation within the CIS. During the visit, the Ukrainian delegation will meet with Russian Federation Council chairman Yegor STROYEV and representatives of deputies' factions, Prime Minister Viktor CHERNOMYRDIN, and Moscow mayor Yuri LUZHKOV.

Kuchma Backs Acting Privatization Chair

· In a continuing power struggle between the Ukrainian President and the parliament over privatization, President Leonid KUCHMA praised the work of acting Chairman of the State Property Fund (SPF) Vladimir LANOVY. KUCHMA reassured LANOVY he would remain in his acting position. "LANOVY is a good professional, an honest and decent person carrying out his duties in keeping the law," KUCHMA said. The president's remark come less than a week after the parliament presented a resolution calling for a halt to privatization until KUCHMA names a full head of the SPF. The permanent head of SPF must be approved by parliament.

Latvian Parliament Delegation in Uzbekistan

· A Latvian parliamentary delegation headed by speaker Alfred CHEPANIS is arriving for a four-day visit in Uzbekistan on Monday. The Latvian delegation will hold talks with Uzbek parliamentary speaker Erkin KHALILOV on prospects for cooperation between the two countries' parliaments and meet with Foreign Minister Abdulaziz KAMILOV. Latvian parliamentarians will also meet with Uzbek Prime Minister Utkur SULTANOV and visit the Uzbek Ministry of

European Republics

Ukraine- Russia Interstate Treaty to be Signed

· Ukrainian parliament speaker Alexander MOROZ and Russian State Duma chairman Gennady SELEZNYOV expressed the hope that both parliaments will ratify the interstate treaty between the two countries by the end of the year. The two officials held talks in Moscow on Monday as part of the Ukrainian parliament speaker's visit to Russia.

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External Economic Relations to discuss issues of economic cooperation between Uzbekistan and Latvia. This is the first official visit of Latvian parliamentarians to Uzbekistan.

Russia-Belarus Union

· Russian Prime Minister Viktor CHERNOMYRDIN arrived in Minsk, Belarus, on Monday for a meeting of the Executive Committee of the Russia-Belarus Union to negotiate the Union's 1998 budget plan and to fill the Russian-Belarus mechanism with specific economic projects. Russian Vice Premier Valeri SEROV and his Belarus counterpart Vassili DOLGOLEV will outline the principles on establishing a mechanism for the implementation of the union treaty. During the visit, CHERNOMYRDIN will meet Belarus President Alexander LUKASHENKO and conduct inter-government negotiations.

South Caucasus & Central Asia

Ukraine, Georgia, Azerbaijan Join Battalion

· Ukraine, Georgia and Azerbaijan have agreed to create a join battalion to protect the transcaucasian transport corridor. Ukrainian Defense Minister Aleksander KUZMUK and his Georgian counterpart Vardiko NADIBAIDZE agreed to protect the railroad through Abkhazia. An Azeri new agency reported that if construction of the Baku-Ceyhan oil pipeline proceeds, a US reconnaissance aircraft will be deployed to protect the pipeline under an agreement between Turkey, Britain and US. The US fully endorses the Baku-Ceyhan pipeline route over any going through Iran.

Georgian Investment Increases

· The foreign investment department of the Ministry of Trade and Foreign Economic Relations release figures showing an increase in foreign investment for 1997. Foreign investment reached 5.7 million Georgian Laris (GEL) about $4.4 million, by 37 countries and 160 joint venture enterprises. The foreign capital is mostly invested in heavy and light industry, communications and transportation. Total

investment in Georgia reached $120.7 million. According to the Ministry of Finance, imports for 1998, are expected to increase by 20 percent worth 1.1-1.2 million GEL. Custom revenues are also expected to grow to 62 million GEL.

Armenia Predicts Lower Inflation in 1998

· Finance and Economy Minister Armen DARBINIAN believes that Armenia should be able to reduce inflation and boost economic growth. In the 1998 budget submitted to parliament the minister foresees a fall in inflation to nine percent from about 20 percent in 1997. He predicts gross domestic product (GDP) to grow 5.2 percent in 1998, up from an estimated 2.5 percent in 1997, reported Reuters. DARBINIAN blames this years inflation on economic reforms. "We cannot be fully satisfied with our progress this year. We implemented some structural reforms in our economy in energy, water supply, and telecommunication in parallel. We were forced to do this because it was impossible to implement market standards without cost-recovery schemes." He said the government has adopted a new law to increase cash privatization and reduce auctions for vouchers distributed to citizens. Armenia will sell off shares in some of its largest enterprises through international tenders, including telecommunications joint-venture Armentel and the Yerevan Cognac factory. "We need to have industrial growth based on investment programs in the country," DARBINIAN said.

Gold Prices Down Uzbek Looks to other Metals

· Uzbekistan, the Soviet Union's largest gold producer, is seeking to generate cash elsewhere in the metal industry, as the price of gold falls. Uzbekistan hopes to raise cash from the privatization of state companies, including the sale of 40 percent of Almalyk Mining & Metallurgical Combine. Almalyk was formerly the only copper refinery in the Soviet Union. Officials estimate $400 million in revenue from the Almalyk's sale. South Korea's Daewoo Corp. US Gerald Metals, Swiss Glencore, and Japan's Mitsui & Co. have expressed interest in the tender, set to take place at the end of the month.

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

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