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

Tuesday, January 6, 1998

said more than 250,000 addicts are officially registered, which is three times more than five years ago. KULIKOV expressed concern over the fact that over the past five years the number of women addicts increased more than 6.5 times, and the number of teenagers under 20 who regularly use dope—by three times. The minister also pointed out that the abuse of heavy narcotics as cocaine, heroin and LSD is on the rise in Russia. He stated with regret that the law enforcement agencies have only been reaching the "last link in the chain"—the sale, leaving the production, delivery and wholesale of narcotics out of sight. According to the Interior minister's estimates, Russia's annual turnover of heavy narcotic drugs brings in over $1 billion in shadow revenues.

Ratification of Open Skies Treaty Possible?

· The ratification of the Open Skies treaty is expected to be a problem faced both by the legislative and the executive power in Russia in 1988, Colonel Mikhail BOTVINKO, member of the national center for lessening nuclear hazard, told Itar-Tass on Monday. He believes that twelve test flights performed in 1997 prepared Russian inspection groups for full-fledged control envisaged by basic provisions of the treaty. The procedure of observer flights has been tested and crews of reconnaissance planes and military observer personnel have been trained. "Conducting surveillance flights jointly with military experts of member-states—parties to the treaty we familiarized ourselves with their approach to implementation of provisions of the treaty and believe that the flights

Russian Federation

Politics

Nemstov Russia's Man Of The year

· Russian Opinion Research Agency polled 2,000 Russians in late 1997, to gain "collective impressions" as to who would represent Russia as Man and Woman of the Year. VTsIOM Director Yuri LEVADA announced that First Deputy Prime Minister Boris NEMSTOV and pop star singer Alla PUGACHEVA won their respective titles. NEMSTOV received 23 percent of the vote, followed by Moscow Mayor Yuri LUZHKOV with 14 percent and President Boris YELTSIN with 11 percent. LEVADA said that NEMSTOV's popularity is slowing but that, "other politicians get even less sympathy than the charming, smiling and curly-haired first deputy premier. NEMSTOV's popularity declined as a result of the book-fee scandal involving other reformers in the government took center stage, his removal from the Fuel and Energy Minister position, and the government's unsatisfactory performance in 1997. The polls for Man and Woman of the year have been conducted for the past ten years. PUGACHEVA won for the third consecutive year.

Crime Rate Down; Drug Addiction Up

· Russian Interior Minister Anatoly KULIKOV in a report to the government releases statistics showing the registered crime rate in Moscow fell by 20 percent. Russia hailed the falling crime rate as proof to the effectiveness of the law force and social stability. Some criminologists argue that Russia is following the trend of other Eastern European nations, where crime rates fall as economic growth rises. "Experts consider the level of crime in society depends on 200 different factors and the police can influence only 50 of them," The Financial Times reported KULIKOV saying. He also revealed that more than two million Russians are drug addicts. He

Today's News Highlights

Russia

Duma Continues Budget Review

Paper Mill Halts Production

Chernomyrdin to Visit Turkmen

European Republics

Ukraine Grynva Stable in 1998?

South Caucasus & Central Asia

5 CIS Nations Sign Agreement

Joint Air Defense Formed

Peace in Nagorno-Karakbakh?

Politics-Economics-Business

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Tuesday

January 6, 1998

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cannot be stopped, otherwise, we shall lose our skills," BOTVINKO said. The Open Skies treaty was signed by 27 states of Europe, the United States and Canada in 1992. It has been ratified by all countries, except Russia and Ukraine. The main purpose of the treaty is to exercise control over military activities from the air.

Duma Continues Preparation on 1998 Budget

· Specialized committees of Russia's State Duma continued to forge ahead on Monday with preparations for the third reading of the 1998 federal draft budget. After long discussions, the Duma passed the draft at the second reading in late December. Parliament regulations stipulate that lawmakers have four readings to pass the document. The main burden of the effort to summarize amendments and additions to the budget is the responsibility of the committee on budget, taxes, banks and finance. The committee also is largely responsible for preparing the draft for the third reading. The Russian government submitted the draft budget to the Duma last August. After a number of attempts, it was approved at the first reading only on December 5, when President Boris Yeltsin arrived to the Duma in person. In late December, lawmakers passed the budget in the second reading. The Duma is expected to hold the third reading in the second half of January. The final edition of last year's federal budget was approved on January 24, 1997. But lawmakers are unlikely to pass the 1998 budget before that date.

Chernomyrdin To Discuss Pipelines

· Russian Prime Minister Viktor CHERNOMYRDIN plans to meet with Turkmenistan leader Saparmurat NIYAZOV on January 14-15 to discuss gas development and transportation. He will be accompanied by a delegation of Fuel and Energy ministers, and heads of Gazprom, LUKoil, and energy company ITERA. During the discussions, CHERNOMYRDIN is expected to touch on the issue of transporting Turkmen gas through pipelines owned by Gazprom. Exports through Russia were sharply cut following the poor performance of the joint venture Turkmenrosgaz. NIYAZOV suspended the venture after ITERA, who held a small stake, ran up huge debts which were partially paid back. As Intercon reported on Monday, Turkmenistan and Iran opened a new pipeline breaking Turkmen's dependency on Russia to transport Turkmen gas to world markets.

Gazprom heads will also discuss a more ambitious pipeline project, in which it holds a 10 percent stake, to transport gas from Turkmenistan to Pakistan via northern Afghanistan. US Unocal is leading the $2 billion project with a 46.5 percent stake.

Economy

Ruble = 5,958/$1.00 (NY rate)

Ruble = 5,969/$1.00 (CB rate)

Ruble = 5,939|5,999/$1.00 (buy|sell rates)

AssiDoman Halts Production in NW Russia

· Swedish forestry group AssiDoman said on Monday it will halt production at its Segezhabumprom plant in northwest Russia beginning January 8, and will make no further financial commitments to the project. Segezhabumprom supplies 80 percent of Russia's paper sacks, has a capacity of 250,000 tons, and employs 5,500 people. The decision made by management followed talks with shareholders attempting to raise operating capital to continue the business and production. Capital disputes and legal action between its Russian joint venture partners, the Karelia State Property Company and Upak have plagued the mill since AssiDoman purchased 57 percent of the paper mill through its wholly-owned unit Stratton Paper Co. Segezhabumprom's general director Soren OBERG said, "The company's bank accounts are still blocked. Our contract with shareholders have not produced any new possibilities for Segezhabumprom to get necessary working capital, therefore, we will have no other option than to stop production." AssiDoman had been forced every month since July to supply working capital to keep the plant open. It hoped to receive $100 million of fresh investment from underwritten loans by the World Bank and the European Bank for Reconstruction and development. AssiDoman places the blame for lack of foreign investment in the industry on Russian bureaucracy and excessive tax laws.

Business

24 Percent Svyazinvest Telecom To Be Sold

· Following the approval of the Russian State Duma, Russia will sell 24 percent in telecoms holding company Svyazinvest in the second quarter of this year. Property Minister Farit GAZIZULLIN announced that sale, but failed to reveal whether or not foreigners would be allowed to bid at the sale. The original

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presidential decree in April required the sale to be opened to Russian participants only. Svyazinvest holds controlling shares in 85 regional telecoms and Rostelecom long-distance company. Alfa-Bank and Uneximbank have expressed interest in the second stake sale which according to MFK Renaissance Investment Bank could be sold for $3-4 billion. Uneximbank won the first sale of 25 percent plus one share of Svyazinvest last July for $1.88 billion. GAZIZULLIN plans to raise at least 8.1 billion new rubles (1.35 billion) from privatization sales in 1998.

VAZ Auto Factory Increase Production

· The Volzhsky auto factory of Togliatti today manufactured its first 2,700 cars in the new year. The factory began replacing its old equipment in the last days of 1997. This year's target is 748,000 autos. The factory has changed its production program to turn out the most popular brands. This year's target is the assembly of 100,000 newest models to include 5,000 cars with the Universal-type body. The factory will launch the production of VAZ 2112 cars with the hatchback body. Production of Lada-115 cars will increase ten times to meet the growing demand. This conversion of Lada-21099 will be put on the line to turn out 5,000 cars. Lada-21099, a reliable make familiar to Russians, will be the bulk of production, the target being 75,000 cars, reported Itar-Tass.

today, to sign a joint statement confirming their adherence to the deepening of regional cooperation. The sides resolved to consolidate their political and economic independence from Moscow by broad development of international ties on a bilateral and multilateral basis and mutual support in various international organizations and at various forums, the document says. They also discussed cooperation in communications, transport, aviation and petroleum industries.

The sides stressed the importance on the treaty on forming a common economic community between Kazakhstan, Kyrgyzstan and Uzbekistan. Tajikistan's hopes to enter this community as a full-fledged member was endorsed during the talks. Turkmenistan cannot participate in this form of cooperation because of its neutral status. Turkmen President Saparmurat NIYAZOV stated that Turkmenistan is ever ready to observe community meetings, promote mutually-advantageous projects, and participate in their implementation. Kazakh President Nursultan NAZARBAYEV said that increased economic unity will help lure more foreign investors to the remote but rich region. "More than 50 million people live on our combined territory. If we create a real economic space here then any investors can come to any of our states." NIYAZOV and NAZARBAYEV agreed to speed up plans for new pipelines to carry their oil and gas exports to world markets. NAZARBAYEV said, "We are ready to explore all options for the export of our resources in order to bolster our economic independence [from Russia]."

All five leaders agreed that there is little future in the Commonwealth of Independent States (CIS) which remains dominated by Russia. They believe each state should decide how to participate in the CIS basis on priorities of its internal development and international obligations. Uzbek President Islam KARIMOV said, "We are categorically against the CIS becoming a subject of international law [thereby usurping the sovereign status of its members]. Uzbekistan is also against the CIS being turned into a military-political organization," reported Reuters.

Uzbek-Tajikistan Resolve Debt Dispute

· Uzbek President Islam KARIMOV and Tajik President Emomali RAKHMONOV reached five accords on Sunday, in particular an intergovernmental agreement on mutual payments for the delivery of goods

European Republics

Ukrainian Currency Stable in 1998?

· A top Ukrainian economist Valery GEYETS predicted that the Ukrainian the gryvna may remain stable in 1998, depending on the lowering of the budget deficit to 3.3 percent compared to 4.8 percent in 1997. The 1998 budget law provides for a $3 billion loan to pay out the state debt and bridge the deficit gap. Exterior loans exert influence on the stability of foreign currency, but there are many other factors that should be considered, GEYETS said. If Ukraine's economic fall continues, the laws of the market will affect the currency market as well. What the nation currently has is not a stable currency but one moving towards stabilization.

South Caucasus & Central Asia

5 Central Asian Leaders Sign Joint Statement

· Presidents of Kyrgyzstan, Turkmenistan, Kazakhstan, Tajikistan and Uzbekistan met in Ashgabat

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and gas supplies in 1998 and Tajikistan's national debt, according to the Interfax news agency. KARIMOV told a press conference that the Tajik debt reached $180 by January 1, 1997. But now, "it is more a matter of mutual payments than of debt payment," he said. KARIMOV said the two sides had an understanding on all issues such as the internal settlement in Tajikistan, the situation on the Tajik-Afghan border, and the status of Russian troops and regional security. They also signed joint agreements on cooperation in public health, culture, humanitarian aid, science, technology and information.

Four CIS Nations Form Joint Air Defense Force

· Armenia, Georgia, Kyrgyzstan, and Uzbekistan are expected to enter on combat duty in the CIS united air defense system in 1998, a source in the press service of Coordination Staff of Commonwealth of Independent States Military Cooperation told Itar-Tass on Thursday. The four states' initial form of cooperation will include information exchanges about the situation in air space. Russia and Belarus have been protecting air space together since April, 1996, and Russia and Kazakhstan since May, 1996. Moscow and Minsk are setting up a joint air-defense unit in the context of the Russian-Belarus Union and the CIS united air-defense system. The united air defense system concept stipulates that air defense forces will be set up in Tajikistan in 1998, and a CIS combat duty united system is expected to be created from 1999 to 2005. Azerbaijan and Moldavia are the only CIS members who are not involved in the united air defense system.

Peace in Nagorno-Karabakh in 1998?

· Armenian President Levon TER-PETROSYAN said on Thursday the settlement of the Nagorno-Karabakh conflict will remain the highest priority of Armenia's foreign policy. In 1997, Azerbaijan and Armenia accepted a two-phase settlement plan following the principles worked out by the Minsk forum of the Organization for Security and Cooperation in Europe, which is a precondition of peace. However, Armenian leaders of Nagorno-Karabakh ignored

both the principles and the peace plan, insisting instead for independence. Azerbaijan Foreign Minister Gasan GASANOV told Itar-Tass the Minsk group's nearest goal is to eliminate these obstacles and bringing positions of the sides closer.

TER-PETROSYAN acknowledged that while the conflict remains unresolved the risks that Armenia will become more economically isolated are likely to increase. "The unresolved state of the Karabakh question is not in the interest of Nagorno-Karabakh or Armenia because its palpably hindering the economic development of Armenia," he wrote in an article. An American think-tank echoed this, "Armenia is becoming the loser in the region...They're being held hostage by the leadership in Nagorno-Karabakh which doesn't realize that it's vital to make a compromise so the country can move ahead," reported The Financial Times. Armenia is missing out on the benefits of the oil and gas investments made in conjunction with Azerbaijan. It will not be considered for an oil export route from Baku to major markets. As SOCAR President Ilham ALIEYEV reminded participates at the November Caspian Pipeline conference in Washington, this is Azerbaijan oil and they will have the final say as to where and how it is transported.

TER-PETROSYAN feels that the only option now is a compromise. But the president has been place in a tough position with the opposition which rejects the idea of any compromise. He can no longer count on public support as accusations of cheating in the last election marred his reputation. Furthermore, his own prime minister Robert KOCHARIAN, the former president of Nagorno-Karabakh, disagrees with the two-phase settlement. "The interest of Nagorno-Karabakh will not be protected if the principle of two-stage negotiations is accepted." Continuing the impass, could threaten the stability of the entire Trans-caucasus region. Some experts claim that the Armenian diaspara, especially in the US, is preventing settlement of the conflict by supporting KOCHARIAN's view and tying the hands of the Armenian President.

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

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