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, January 21, 1998

Russian Federation

Politics

Rus-Ukraine Participate in "Peace Shield 98"

· Russian and Ukrainian troops will for the first time take part in a NATO international peace-making exercise. The maneuvers, code-named "Peace Shield-98," are to be held at Yavorov proving ground near Lvov, Ukraine August 15-30. They will be the seventh multinational maneuvers on the territory of Ukraine, held in keeping with the NATO Partnership for Peace Program. The Press Service of the Ukrainian Defense Ministry said that eighteen countries will take part in the exercise besides Russia and Ukraine. Almost 50 percent of the participants are NATO members or priority candidates to the alliance. Officers from the Baltic states, Bulgaria, Georgia, Moldavia, Romania, Russia and Belarus will come to Yavorov in addition to NATO men. A joint headquarters, including about 150 officers, will be set up. It will be headed by representatives from the military commands of the United States and Ukraine. Specialists believe "Peace Shield-98" is designed to achieve mutual understanding among staff officers.

Federation Coun. Visits Trans-Caucasian States

· A delegation from the Federation Council of Russia, headed by Chairman of the Council Yegor STROYEV arrived in Georgia today for its first of three official visits to the Trans-Caucasus region. STROYEV and Georgian President Eduard SHEVARDNADZE shared the opinion that difficulties which exist between the two nations can not be ignored. SHEVARDNADZE said, "We have no right to waste all the good thing we have had between our nations and what we have been proud of." The Council plans to discuss a broad range of issues concerning stabilization of the Caucasuses and the restoration of economic ties. "We would like to clear up on the spot some contradictions, connected, in

particular, with transportation of oil and gas," STROYEV noted. Russian President Boris YELTSIN instructed speaker of the Russian Federation Council Yegor STROYEV, "in detail on the goal of the visit, which is the further strengthening of the CIS integration, along the parliament lines included." They will discuss security matters and possibilities of stabilizing the situation in the region by joint efforts of Russia and the three Transcaucasian states. Talks will also focus on the development of economic cooperation within the framework of the Commonwealth of Independent States.

Touching on political problems of the region, Yegor STROYEV noted that, "some officials have a sort of a political itch to establish a Confederation of Transcaucasian peoples, including Turkey, Chechnya and probably other republics of the North Caucasus." Yegor STROYEV, however disagrees. He believes the cornerstone of the visit must be the observance of territorial integrity of Russia. The Russian delegation intends to meet not only with colleagues-parliamentarians but also with Georgian President Eduard SHEVARDNADZE, Armenian President Levon TER-PETROSYAN and Azeri President Geidar ALIYEV.

Russian Federalism Conference Ends

· The Russian Federalism Conference ended in Moscow on Tuesday, which met to discuss the development of Russian federalism. Those who think that all problems of state building have been solved are

Today's News Highlights

Russia

Military Leadership Shuffle

Russia to Import US Steel Sheet

European Republics

Ukraine Mud-slinging Intensifies

South Caucasus & Central Asia

Nagorno-Karabakh Discussions

Kazakh Stock Exchange Suffers

Battle of Turkmen Gas in Texas?

Russia Patrols Turkmen Border

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mistaken, Federation Council speaker Yegor STROYEV said. Russia, "has so far failed to create a concept of the state system." A genuinely federal state can be formed in Russia only after a unified legal framework is created and a general concept of state building is developed, STROYEV said. Although this problem is tackled by the Russian Constitution and there is a concept of Russian federalism, this has not helped consolidate the link between the federal authorities and the regional authorities, STROYEV said. He said there are many "reefs and undercurrents" in the development of federalism. Regarding three possible ways of the development of Russian state: unitarian, confederation and federation, STROYEV said that, "the country's future is undoubtedly linked with federalism." It is necessary to decide, however, "what kind of a federation is to be built," STROYEV said.

STROYEV noted that entire legislation must be in keeping with constitutional principles of federalism. All contradictions should be eliminated. STROYEV proposed to begin the drafting of a federal code which will "help preserve united and undivided Russia." As for the formation of local government institutions, he said financial and economic principles of their work have not been outlined by law-makers.

Tatarstan's President Mintimer SHAIMIYEV said, "The [Russian] Federation is not growing more loose-knit. And what would have become of Russia if there were no treaties with the republics?" he said. SHAIMIYEV added that he found constitutions of several republics do not quite fit into the Russian Constitution. "We are not mature enough to introduce amendments," he said, referring to Russian regions and the federal center. "One should first agree with regions and come to consensus and then simultaneously introduce changes to the constitutions of the republics and of the Russian Federation."

Military Leadership Reshuffle

· President Boris YELTSIN signed a decree appointing Colonel General Anatolii KORNUKOV, who has headed the Moscow district of the Air Defense Force since 1991, as commander of the combined Air Force and Air Defense Force. YELTSIN also issued a decree dismissing Petr DEINEKIN as commander of the Air Force. Military expert Aleksandr ZHILIN argued that DEINEKIN's dismissal is most likely connected not to plane crashes, but to an investiga

tion of commercial deals involving the Air Force. ZHILIN said KORNUKOV is highly respected as a "first-class pilot" and a principled officer.

Economy

Ruble = 6,001/$1.00 (NY rate)

Ruble = 6,005/$1.00 (CB rate)

Ruble = 5,970|6,040/$1.00 (buy|sell rates)

Urinson States Production Slump is Over

· Economics Minister Yakov URINSON said Russia's production slump is over for the first time in ten years. The 1997 gross domestic product increased by about 0.5 percent and industrial production showed a 2 percent rise. URINSON said, "production growth goes with some quickening of domestic demand and a decrease in export of goods...Increasingly more enterprises understand that money can and should be made in Russia.URINSON singled out as a positive result of 1997, Russia's retention of a positive balance of trade which was over $20 billion. The pick-up of production coexists with a further decrease in inflation which was only 11 percent in 1997. Russia's finance remains to be plagued by short tax returns. URINSON said, "revenue of the federal budget in 1997 made only 13 percent of gross domestic product, but, owing to restriction of the government spending, the budget deficit could be kept at 5.5 percent of gross domestic product." Direct investment in the Russian economy in 1997 declined by 6 percent compared with 1996 figures. Foreign investment in Russia grew by 70 percent in 1997.

Russian Incomes Grew By 2.5 Percent

· The State Statistics Committee released a report Tuesday showing that Russians' real income grew by 2.5 percent last year, after declining 1 percent in 1996. The average wage for the year was reported at $160 per month, which when adjusted for inflation increased 4.3 percent from 1996. 31 million Russians, about 21 percent of the population, lived below the subsistence level at $68 per person, according to 1997 figures reported by Interfax news agency. The average pension decrease 5 percent to $55 per month.

Business

Auto Industry To Boost Imports of US Steel

· Leading Russian automobile manufactures revealed that they will increase imports of US steel

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sheets for automobile production. Chairman of AvtoVaz, which manufactures the reliable Zhiguli and Lada models, Vladimir KADANNIKOV told the government that it must rely on imported steel sheets because the quality of the domestic product is substandard. AvtoVaz, which usually imports German steel from Thyssen and Krupp, discovered German suppliers would be unable to meet their demands. A Thyssen official confirmed this and added that, "a boom in European car production means that most of the capacity is fully utilized. To cover the requirements of the Russians is difficult," reported The Journal Of Commerce. US steel exporters welcomed the news. KADANNIKOV reportedly aims to more than triple out put of the newest Lada model, VAZ-2110, from 25,000 units in 1997, to 80,000 units in 1998.

budget calls for revenues of 21.1 billion gryvna (about $11.1 billion) and expenditures of 24.5 billion gryvna, resulting in a projected deficit of 3.3 percent of gross domestic product.

South Caucasus & Central Asia

Security Council Discusses Nagorno-Karabakh

· A meeting of the Security Council of Armenia (SCA) led by Armenian President Levon TER-PETROSYAN discussed settlement options for the Nagorno-Karabakh conflict on January 18. The Council meeting was attended by President of the self-proclaimed Nagorno-Karabakh Republic (NKR) Arkady GUKASYAN, NKR parliament chief Oleg YESAYAN, Prime Minister Leonard PETROSYAN and Defense Minister Lieutenant General Samvel BABAYAN. While no official details were released, it is known that the Nagorno-Karabakh leadership rejects the prospect for NKR's vertical subordination to Baku and favors equitable treaty-based relations with Azerbaijan.The consideration of a future status of Nagorno-Karabakh simultaneously with a withdrawal of Karabakh troops from the occupied Azeri territories is shared by Armenian Premier Robert KOCHARYAN, who until March last year held the elective office of NKR President. Unlike the Karabakh authorities and the Armenian Premier, Armenian President Levon TER-PETROSYAN believes the settlement should be stage-by-stage process.

Kazakhstan's Stock Exchange Suffering

· Executive Director of the National Securities Commission Azamat DZHOLDASBEKOV said, "By 1998, Kazakhstan has fully finished setting up the basic legislative and institutional infrastructure for the market in equities." The problem, however, is a deficit in equities which compounds the lack of trading. He said that more than 2,000 efficiently run companies out of 8,000 privatized in Kazakhstan may be soon listed on the exchange, providing variety to investors. The state is "passive" in brining some of the companies privatized by strategic investors to the stock market. DZHOLDASBEKOV said may brokers prefer to work with blue chip companies, ignoring the shares of second tier companies. President of the Kazakhstan Stock Exchange Azat NUKUSHEV that 14 out of 28 shares have been registered on the exchange. He reported that no transactions were held on Tuesday and no deals have taken place since December during trading

European Republics

Ukrainian Gov't Mud-Slinging Intensifies

· With upcoming Parliamentary elections in March, the mud-slinging between government officials has already intensified. The Ukrainian government angrily rejected legislators accusations against Prime Minister Valery PUSTOVOITENKO for financial violations in the reconstruction of the Ukraine Cultural Center. A parliamentary commission investigated the embezzlement of funds in the Cultural Center's reconstruction, which was supervised by PUSTOVOITENKO. The law-makers also recommended the government to dismiss Minister of Culture Dmitry OSTAPENKO and head of the Kiev administration Alexander OMELCHENKO, who were also responsible for the reconstruction. In a dacha for dacha tiff, the government accused former prime minister Pavlo LAZARENKO of illegally spending state money for repairs for his dacha. LAZARENKO launched a mud shot back that President Leonid KUCHMA, who ousted LAZARENKO, had spent state money building, "Ukraine's poshest dacha." Head of the Center for Political Research and Conflict Studies Mikhail POHREBYNSKY said, "The suggestion that some senior officials steal is not news to the ordinary voter." With Ukraine's currency facing topsy-turvy stability, Kiev must control its political battles to attract necessary foreign capital.

Meanwhile, KUCHMA signed the 1998 budget, which was passed by the parliament three weeks ago. The

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sessions held on Tuesdays and Fridays.

Battle Over Turkmen Oil in Texas Courts

· The battle over the rights to natural gas concessions in Turkmenistan between United States' Unocal Corp. and Argentina's Birdas Corp., which has been on going since 1995, has escalated into a bitter $15 billion lawsuit in a Texas courthouse scheduled for trial in March. Turkmenistan fields represent the fourth largest reserves of natural gas. Turkmen gas bids once sought after only by a few small investors are now being lobbied by major gas companies such as Unocal and Royal Dutch/Shell. Western firms are even seeking to appease tribal leaders along proposed pipeline routes through Afghanistan.

Following the collapse of the Soviet Union, Turkmenistan desperately sought to attract investors for their under appreciated world-class natural gas reserves. With poor negotiations skills and lack of experience, Turkmenistan in the early 1990's awarded its sole bidder Birdas Corp. the rights to explore the Yashlar and Keimir fields. In 1993, Turkmenistan and Birdas Corp. signed an agreement to export gas from Afghanistan to Pakistan through a 790 mile, $1.9 billion pipeline. However, in early 1995 following a Houston business conference, Unocal began to show interest in exporting Turkmen gas to Pakistan. From there both sides were pitted against each other in a battle for the Turkmen gas. Unocal brought Delta Oil Co., a private Saudi Arabian company, to deal with Muslim Afghans. Bridas created a partnership with Nigharaco Ltd., backed by Saudi Arabia's Prince Turki al-Faisal SAUD. From that time on, "every positive event for Unocal/Delta in Turkmenistan was followed by a negative events for Birdas," President of Birdas Mr. BULGHERONI testified in his deposition. By October 1995, Turkmen President NIYAZOV signed an exclusive deal with Unocal/Delta. Within days the government yanked Birdas Corp.'s license to export Turkmen oil, determined their agreements unacceptable, and shortened the length of previous contracts. Birdas struck back filing a $15 billion suit

against Unocal and Delta in Texas (where Unocal's international ventures are based), alleging that the two companies had illegally interfered in its talks with Turkmenistan, as reported in The Wall Street Journal. Unocal and Delta deny that allegation, and argue that Turkmenistan's sovereign affairs have no business being heard in a Texas court.

Turkmen gas also attracted the attention of Russia which sent Prime Minister Viktor CHERNOMYRDIN on January 13, to exert his influence over gas negotiations between Gazprom and Turkmenistan. His actions have been described by many as those of a man who is still uncomfortable recognizing Turkmen's independent sovereignty. Intercon sources report that, CHERNOMYRDIN offered to buy gas at $32 per 1,00 cubic meters, but President NIYAZOV insisted on selling the gas at $42 per 1,000 cubic meters. Adding to the Russia's poor offer, Moscow wanted to only pay for 30 percent of the contract in hard currency with 70 percent to be paid in industrial goods. The attention of Russia, which has in the past suspended gas joint ventures, sold Turkmen gas far below its worth, and denied access to European markets through Russia's pipeline, Turkmenistan may continue to develop stronger ties with the five Caspian Sea nations as well as China and Turkey. Comment: With more than seven years negotiating experience, interested foreign investors, and gas reserves still waiting to be explored, Turkmenistan possesses the tools to build a bright future for gas exports. It must explore opportunities for advancement with new partners, instead of repeating mistakes of the past.

Russian Patrol Boats to Guard Turkmen Border

· TheCaucasian Special Border District said that officials have reported the arrival of the Russian patrol boat Derbent to the Turkmen-Bashi port on the Caspian coast of Turkmenistan. Russia and Turkmenistan agreed that the boat will guard the Turkmen state borderin shifts. Comment: Clearly, this is part of Russia's continued efforts to retain influence in the affairs of former Soviet Republics.

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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