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 28, 1998

Russian Federation

Politics

Russia-EU Council Meet in Brussels

· At the first meeting of the Russia-European Union Cooperation Council on Tuesday, the Agreement on Partnership and Cooperation entered into force and bilateral mechanisms, including the Cooperation Council were launched. Russian Foreign Minister Yevgeny PRIMAKOV said, "In Brussels we managed to achieve the adoption of a specific program for 1998, instead of an amorphous protocol and outline our common striving to achieve the recognition of the Russian status as a country with market economy." This year the council will focus on problems such as lifting discriminative barriers on Russian exports, establishing a Free Trade Zone between Russia and the European Union (EU), and examining how the EU's eastward expansion will influence Russia's economic interests. He also noted the increasingly favorable conditions for the Russian joining of the World Trade Organization, prospects for the cooperation in the training of Russian managers, cooperation in science and measures against organized crime. Russia aims at a genuine cooperation with the EU in the solution of complicated international problems, both economic and political. Special attention was devoted to the protection of intellectual property, customs cooperation, standards and certification, and the upholding of the rights of consumers. The sides intend to cooperate in plan to improve the investment climate in Russia, including the taxation system, accounting standards, and the legal protection for investors. Goals have been set in cooperation in science and technology, including space research, environmental protection, nuclear safety and telecommunications.

Rus-German Defense Mins. Discuss Security

· Russian Defense Minister Igor SERGEYEV met

today with his German counterpart Volker RUEHE and Foreign Minister Klaus KINKEL in an effort to mend cold war wounds following the withdraw of Russian forces from East Germany. They discussed European security, bilateral relations, and military-technical cooperation. Germany and Russia continued discussions on a project to create a new transport plane from the Russian-Ukrainian Antonov An-70 plane. RUEHE said he saw, "great chances" for cooperation on the Antonov An-70 model. He added that the new plane could replace the Transall plane, a French-German product. He added that European members of NATO would require 300 new transport planes. Further meetings will take place next month in Moscow. SERGEYEV welcomed the interest showed by Germany, France, and Italy in the aircraft, which is in its final test phase. Germany will also offer its assistance to Russia's military reform.

Economy

Ruble = 6,047/$1.00 (NY rate)

Ruble = 6,023/$1.00 (CB rate)

Ruble = 5,995|6,051/$1.00 (buy|sell rates)

Economic Turn Around Starts Expansion Cycle

· Russian gross domestic product grew 0.4 percent for the first time in seven years; industrial production increased 1.9 percent; retail sales and incomes grew; the unemployment rate fell; these indicators show Russia's economic turn around, despite Asia's financial crisis. Anirvan BANERJI, co-di

Today's News Highlights

Russia

Economic Turn Around

Rus-Austrian Econ. Relations

Lukoil Increases Oil Exports

UES Boardroom Battle Resumes

European Republics

Ukraine To Sell Power Plant

South Caucasus & Central Asia

CanArgo-Fountain Oil Merger

Uzbek To Buy Boeing Planes

Kazakh Creates Intelligence Unit

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rector of the Economic Cycle Research Institute said, "This may be the beginning of the first business cycle expansion the Russian economy has ever experienced," reported The Wall Street Journal. Russia's new private sector has contributed to this turn around by developing a service industry. The Russian economy, now trading cash abroad instead of bartered goods, has been integrated into the world financial community. For Russia's economy to continue to expand and grow, both domestic and foreign investors must conquer many fears threatening its economic stability. Some investors fear that economic reforms may not outlast YELTSIN's presidential term. They fear the unpassed 1998 draft budget will languish in the government creating a higher deficit and destabilization of the ruble. Many hope that a tax reform code will alleviate government and inter-company debts.

Russian-Austrian Economic Relations Improve

· Deputy Economics Minister Yevgeny YASIN on Monday met with Austrian Economics Minister Johann FARNLEITNER to discuss progress in the development of trade interaction between the two countries. YASIN is in Vienna for a plenary session of the Russian-Austrian joint commission on trade and economic cooperation. The session focused on the implementation of the agreements signed during Austrian Chancellor Viktor KLIMA's visit to Russia and his meetings with Russian leaders. The session hoped to facilitate the strengthening of Russia's positions on the European and Austrian markets. Austrian entrepreneurs are entering the Russian market at a growing rate. At present there are about 500 enterprises established with the participation of Austrian companies.

Rus-South Korea Promote Small Businesses

· Chairman of the Russian State Committee for Backing and Promoting Small Businesses Irina KHAKAMADA and representatives from the South Korean Administration for Small and Medium-Size Business on Monday signed an agreement which will mutually enrich the legislative foundation of this promising economic sector. "It is important to make use of every chance to promote small businesses. Direct contacts between their representatives are needed. Against the background of the currency crisis, which has painfully hit the economy of South Korea, the leaders of that country are offering Russia to cooperate in the sphere of small businesses in

Siberia and in the Russian Far East," KHAKAMADA said. The sides have agreed to promote exchanges of technologies and to swap the results of studies in the sphere of marketing. The search for partners from crediting and financial organizations will increase in order to give them a chance to take part in the joint projects that will be implemented according to the agreement. Conferences, seminars, and workshops are planned for both nations.

New Quotation Range on Stock Market

Commission chairman Dmitry VASILYEV announced that the Federal Securities Commission has set a new range of quotations for Russian stock markets, Itar-Tass reported. If quotations prove ten percent below closing figures from the previous day, trading on stock markets would stop. The previous limit was 15 percent. In addition, the commission has established the upper limit of the permissible range of prices, with quotations not allowed to go more than 14 percent above the figure of the previous day. As for the price range in the course of one trading, it remains set at seven percent.

Business

Lukoil Expands Increasing Oil Exports

· Russia's giant oil company LUKoil said on Tuesday that it will quicken consolidation plans to expand its market and asset base in 1998. Chairman of the business development department Andrei KOCHETKOV told investors it will concentrate on high-profit exports and oil products sales while working to recapture the Eastern European market for Russia. "We are developing as an international company, with foreign profits no less than 30 percent. New divisions such as gas, products and transportation will contribute more and more to our profits." He said the company's main goal was to increase profitability. Due to the fall in oil prices, LUKoil plans to increase exports. "We will increase the export of oil and out efforts in refining." KOCHETKOV said. He revealed that although low prices make exports less profitable, selling oil abroad is a better option than selling oil on its domestic market. "Even if the price falls to $12 a barrel, LUKoil would still be a profitable company." LUKoil hopes to be listed on the New York Stock Exchange this fall.

Meanwhile, Boris JORDAN head of MFK Renissance, the investment banking arm of the Uneximbank group which own Sidanko said, "As of today an

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actual merger between LUKoil and Sidanko is not expected." He did say that Uneximbank group plans to restructure Sidanko, merging some of its production subsidiaries to make them more efficient.

UES Boardroom Battle May Oust Reformers

· In an after hours, unscheduled board meeting, Anatoly DYAKOV a Soviet-era boss of Unified Energy Systems (UES), attempted to oust reformer chairman Boris BREVNOV. Seven out of fifteen board members attended and voted to replace BREVNOV with DYAKOV. The decision, however, has no legal basis, reported The Financial Times. UES spokesman Sergei MEDVEDEV said BREVNOV could only be sacked by the government, which holds the controlling stake of the company. Former Fuel and Energy Minister Boris NEMTSOV appointed 28 year old BREVNOV last May to the position. Utilities analyst Dmitry VINOGRADOV said, "If BREVNOV was removed and DYAKOV made his replacement, it would be very bad news for reforms not just in the power sector, but for the government's reforms as a whole." The continued saga of what MEDVEDEV calls, "the battle of the old against the new," in UES's boardroom echoes the swing occurring in the cabinet. Prime Minister Viktor CHERNOMYRDIN, defining new duties for cabinet members two weeks ago, drastically reduced the roles of young reformers NEMTSOV and Anatoly CHUBAIS. The reformers in recent weeks have been losing ground to industrial lobbies. These lobbies include the powerful energy sector led by CHERNOMYRDIN. As political differences are played out by business and financial institution backed by rival players, production and profits will suffer as Russia continues to take two steps forward and one step back.

LUBR-Moscow Motor Oil Joint Venture

· J.T. Granatelli Lubricants, Inc. (LUBR) is finalizing negotiations with Forward Trading, Inc. of Los Angeles and Moscow to establish a joint venture to further market LUBR's proprietary motor oil additive package to Russian petroleum companies and refineries throughout the Commonwealth of Independent States (CIS). LUBR will offer a fifth generation motor oil to Russia which has bee using a substandard second generation motor oil for decades. LUBR's President D. Harry HIBLER explains, "Russian refineries utilizing our product within their oil will save billions of dollars that they would normally have to spend in

capital intensive retrofitting of their plants to provide the capability of producing a fifth generation oil." J.T. Granatelli Lubricants, Inc. manufactures, markets, sells, and distributes its proprietary line of motor oil, general household and motor vehicle lubricants, and contiguous products to the global marketplace. Forward Trading, Inc. is the largest private trucking, shipping, and forwarding company within the CIS, employing 2,300 people, and possessing major sources of distribution throughout the former USSR.

Renault's Exports to Russia Increase

· The French auto-maker Renault, negotiating a cooperation contract with Moscow's Moskvich Auto Factory, has increased car exports by 16 percent in 1997, said the company's press release. Renault said its total car sales had grown last year by 3.3 percent compare with 1996 figures, to 1.6 million cars, but domestic sales fell off by over 20 percent. In a joint venture deal to produce Megane-Classic cars, Renault corporation and the Moscow city government will provide investment funds of $350 million on a fifty-fifty basis. Corporation leaders expect that first Megane-Classic cars will roll off the line of Moskvich this year. Moskvich is to produce 2,000 Meganes during the first year after the contract is made. Megane was chosen as a basic model to be turned out by Renault's Moscow production. Megane, an up-to-date, reliable and economical car with a turbo-diesel 1, 870 cubic centimeter engine can develop a speed of over 180 kilometers an hour. The car can run 100 kilometers per 5.2 liters. Megane's price will be $15,000 to $20,000, comparable with other imported cars selling in the Russian market.

European Republics

Ukraine Seeks Organizers for Power Plant Sale

· Ukraine's state property fund on Tuesday said it will hold a tender on February 24 to select an organizer for the sale of 24 percent stake in Donbassenergo power utility. The Property Funds statement requires, "The organizer for the sale of shares in Donbassenergo can be either a resident or non-resident and must have experience in share markets for at least three years." The statement said that companies which want to compete should place their offers no later than February 23. The winner will be announced on February 26. The Ukrainian government decreed the privatization of 22 power companies. Kiev's Alfa Capital estimated

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Donbassenergo, one of four power generating utilities, in 1997 earned $15.65 million in profits.

South Caucasus & Central Asia

CanArgo-Fountain Oil Merger/ Georgian Projects

· CanArgo Energy Inc. announced on Tuesday that a letter of intent has been signed with Fountain Oil Incorporated for a 50/50 merger. According to a company press release, the combined company will be renamed CanArgo Energy Corporation and that Fountain's listings on the Nasdaq National Market System and the Oslo Stock Exchange be maintained. CanArgo and Fountain's preliminary business plans will concentrate on further development of CanArgo's Ninotsminda and West Rustavi projects in Georgia. The company will also pursue Fountain's Stynawske project in Ukraine and the Gorisht-Kocul project in Albania together with further exploration in Georgia. Chairman David ROBSON said, "The combined Company will seek to become one of the most profitable and successful independent companies in the oil, gas and energy sector in Eastern Europe, with its focus on the Caucasus and Black Sea area. The Company aims to achieve this by consolidating its current portfolio, focusing on cash flow and reducing costs while seeking and developing opportunities which promise good future potential." Canadian CanArgo's principal assets include a 55.9 percent interest in Ninotsminda Oil Company Limited, which holds a production sharing agreement for the Ninotsminda field, the West Rustavi field and the Manavi prospect, all located in Georgia. Fountain Oil has been developing oil and gas projects in Ukraine, Southern Russia and Albania.

Uzbekistan To Buy Boeing Airplanes

· The director of Uzbekistan's Khavo Yullari Airlines Arslam RUZMETOV said the state owned airline will buy two Boeing B-757s in 1999. He did not reveal how much the planes would cost. Khavo Yullari has already purchased two Boeing B-767s for $171 million. RUZMETOV commented that as his airlines replaces its aging fleet, Uzbekistan will buy

more Boeing B-757s and B-767s instead of Airbus Industries airplanes. As the airline plans to fly more international routes, the need to buy 10 to 15 Boeing airplanes increases.

Kazakhstan Creates New Intelligence Service

· Kazakhstan on Wednesday set up a new intelligence service, Barlau, to combat terrorism, religious extremism, and organized crime in the region. Zhenis RYSPAYEV was appointed head of the intelligence service which will concentrate on external threats to the country's security. He said, "We shall gather information form abroad and pass it on to the Committee for National Security and other state organs. The committee will be responsible for monitoring internal security." Kazakhstan has seen an increase in drug trafficking and arms smuggling since its independence from the Soviet Union. RYSPAYEV believes economic crimes represent the biggest threat to Kazakhstan's security. He added that Kazakhstan was co-operating with intelligence services in other countries, especially Russia.

Armenian-Russian Relations

· Russian President Boris YELTSIN and his Armenian counterpart Levon TER-PETROSYAN held a telephone conversation on Monday to discuss the development of bilateral economic relations, the presidential press service said. The two presidents expressed satisfaction with the ratification on Friday of the Russian-Armenian treaty of friendship, cooperation and mutual assistance. Federation Council speaker Yegor STROYEV stated the similarity of stances and a mutual support of Russian and Armenian lawmakers in the CIS Inter-Parliamentary Assembly and international forums help cement their relations. He hopes that the two nations will resume communication, including the railroad transportation. Armenia is cut off from the Russian market, and Russian regions are eager to develop trade and economic relations with Armenia and sell their merchandise on the Armenian market, STROYEV said. A similar wish to boost economic cooperation with Russia was voiced by the Armenian leaders.

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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