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, February 11, 1998

Russian Federation

Politics

Finance Ministry Reveal New Tax Code

· The Finance Ministry revealed its new draft tax code on Tuesday. Finance Minister Mikhail ZADORNOV said he expects the Russian State Duma and Federation Council to pass the new tax code by mid-year. He said, "Any further delay in tax reform is unacceptable." If not passed by summer, the tax code could linger, waiting approval for another two to two and a half years. The new plan reduced the overall tax burden to 30. 7 percent of the GDP, down two percent from this year. It also simplifies the tax systems and reduces the number of taxes. Under the new code the profit tax rate will be cut form the proposed 35 percent to 30 percent, The Financial Times reported.

US Ex-Im Bank Finances Medical Equipment

· The US Export-Import Bank Tuesday announced the approved a $70.5 million loan for medical equipment exports to Russia. The transaction was arranged by Lunceford Associates, Inc., Coeur d'Alene, ID., a marketing and medical engineering firm for the purchase of Setchenov's Moscow Medical Academy in Russia. The US General Electric Medical Systems is the primary supplier of diagnostic imaging system. Despite competition from European and Japanese suppliers, Lunceford won the contract to sell medical and surgical equipment to the academy which consists of more than 100 clinics and hospitals. This is Lunceford's fourth medical equipment sale to Russia with Ex-Im Bank financing.

Russia Assists in Chemical Weapons Clean-up

· Russia has offered technical assistance to Japan for the disposal of chemical weapons left in China by Japanese troops during World War II. The Japanese Foreign Ministry said Japan welcomed the offer as

a significant project for both nations. Japan is considering using Russia's technology in the clean-up. Japan estimates 700,000 chemical weapons remain in China. However, China maintains that two million poison-gas shells were left in the country by Japanese troops. Although Japan is obliged to eliminate all the chemical weapons within 10 years under the Chemical Weapons Convention which took effect in April last year, Tokyo lacks the technology to dispose of such weapons and therefore agreed with China to utilize technology from a third country. Japan and China have considered various ways to dispose of chemical weapons in nine fact-finding missions to the Chinese sites and by holding three joint working-level meetings. The two countries have so far agreed to build a small chemical-weapons disposal facility in China but have faced difficulties due to lack of special technology.

Economy

Ruble = 6,043/$1.00 (NY rate)

Ruble = 6,045/$1.00 (CB rate)

Ruble = 6,019|6,071/$1.00 (buy|sell rates)

US Officer Promotes Rus. Defense Conversion

· John NOWELL, a former US paratrooper and now manager of Defense Enterprise Fund, is seeking investors to back a $100 million venture capital fund targeted at military conversion projects in the former Soviet Union. The Defense Enterprise Fund is a US government sponsored fund designed to promote

Today's News Highlights

Russia

Digitcom Corp. Closer to JVs

Gedeon Richter Sales Increase

European Republics

New Econ. Strategy for Ukraine

South Caucasus & Central Asia

New Evidence Found in Georgia

AIOC Pres. in Georgia

Russia Halts Azeri Gas Flow

Armenian President. Candidates

Pakistan May Halt Turkmen Gas

Politics-Economics-Business

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Wednesday

February 11, 1998

Intercon's Daily

defense conversion in the region. Managing director of the fund's Moscow office Richard NORDIN explained that, "We have a mandate from the US government to help with the conversion of military enterprises into the private sector...But the only way to do this is to build good, strong, commercial companies employing increasing numbers of people," reported The Financial Times. Since the Soviet Union collapsed, Russia's massive defense sector which once held the bulk of the nation's resources and best of its brains, has been left in ruins as it meagerly tries to adapt to market conditions. One successful project cited is the commercial telecommunications laboratory run by Yevgeny KAMNEV a former Soviet communications expert. The fund invested $5 million in the laboratory, which employs former strategic missile specialists to design computer systems for traffic handling systems development and billing. NOWELL now faces the challenge of recruiting investors and multi national companies, particularly in the field of material science, information technology, and telecommunications sector, in the wake of the Asian financial crisis. He is confident in the fund and his ability to persuade investors. "Our philosophy is treat people right, share the wealth, and give something back to the community. We like to think we have a Russian soul and a western brain."

Business

Digitcom Corp. To Be Examined By ZNIIS

· Digitcom Corp. today announced the acceptance for examination by ZNIIS, the Central Science Research Telecommunication Institute in Russia, of the company's Internet telephone technology for certification in the Russian Federation, according to a company press release. This development clears the way for final joint venture contracts to be signed with Elektrosvyaz for deployment in Russia. Memos of understanding have also been signed with St. Petersburg National International Telephone and with Elektrosvyaz JS, Moldova. It is expected that each of these joint ventures will be finalized in the second quarter of this year. "Our negotiations with the second and seventh-largest telecom providers in Russia, St. Petersburg Telephone Network and Rostov Elektrosvyaz, are approaching finalization, keeping us on track to be the first Internet telephone service and equipment provider certified to do business in the Russian Federation," observed Digitcom Chief Executive Officer Jimmy CHIN. St. Petersburg

Telephone Network carries approximately 7 percent of Federation phone traffic, second only to Moscow GTS. Elektrosvyaz has separate operating companies in nearly all major metropolitan markets in the former Soviet Union, of which the Rostov unit carries more than all but their Moscow operating company. ZNIIS oversees national standards activities, acceptance testing and approval of equipment, as well as cooperation with non-Russian telecom companies and industry-wide planning and development for the Federation. Digitcom is an international telecommunications and data network company working with regional and national companies to establish international long distance networks.

Gedeon Richter Sales Increase- Russia

· Hungarian pharmaceutical company Gedeon Richter announced that net profits jumped from Ft 11.27 billion in 1996 to Ft 18.35 billion ($89 million) in 1997. The increase was distorted by inflation, but Richter said profits were up almost 40 percent in dollar terms, reported The Financial Times. Sales to Commonwealth of Independent States (CIS) and Russia increased 36 percent. Chairman of Richter Erik BOGSCH said this resulted form an increase purchasing power in Russia and Richter's marketing network. Gedeon Richter is setting up a plant south of Moscow for packing and in 1999 production of pharmaceutical goods.

Gazprom and ENI Sign $3 Billion Deal

· Russia's giant gas company Gazprom and Italy's Ente Nazionale Idrocarburi (ENI) signed an agreement worth more than $3 billion, which was the largest of six agreements signed between Russian and Italian companies today. The agreement will envisage joint geological prospecting works and the development of deposits in Russia and abroad, which provides for big investments. In addition, both companies plan to analyze prospects for cooperation on the oil and gas market, including gas transportation and the development of deposits in the Middle East and Far East. ENI will also acquire a stake in Gazprom which could amount to 3 percent. Head of Gazprom Rem VYAKHIREV said after the signing the agreement one can talk about "the Gazprom-ENI-Shell triangle." This strategic alliance is predicted to yield hundreds of contracts. Upon his return to Moscow, VYAKHIREV is planning to hold talks with ENI officers on specifics of cooperation.

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European Republics

New Economic Strategy for Ukraine

· Ukrainian President Leonid KUCHMA revealed on Tuesday that the government will work out a new development strategy for the next 10 to 15 years to revitalize the country's sluggish economy. Meeting with Ukrainian entrepreneurs, KUCHMA said part of the strategy is to strengthen the national currency so that the inflation rate can be reduced to between four and six percent. He added the strategy also includes proposals designed to further the market economy reforms such as the perfection of free competition mechanisms and the adoption of strict measures against various financial crimes.

US Concerned Over Ukraine Turbine Sale

· The US State Department spokesman James FOLEY said it has made clear its "strong desire" that Ukraine not provide turbines for an Iranian nuclear station, RFE/RL Newsline reported. Russia, despite Washington's objections, is helping Iran build a nuclear power station in the central city of Bushehr. The turbines needed to power the station are slated to be purchased from Ukraine. FOLEY said the US could compensate Ukraine for any losses if it scraps the deal. The Department added that it was not threatening Ukraine with a loss of aid if it completes the deal. Ukraine received $225 million in aid from the US in 1997.

South Caucasus & Central Asia

New Evidence in Georgian Attack

· Georgian President Eduard SHEVARDNADZE narrowly escaped a military style assassination attempt on Monday. Georgian security officials have found evidence believed to be linked with the escape of the attackers. Intercon sources report that a Chevrolet suburban was found along the roadside near the airport with explosives and weapons. Georgian Security Ministry spokesman Guga KVITAISHVILI said the weapons found in the care are similar to those used in the attack. Also at 10 am Tuesday morning, an airplane carrying ten soldiers left Russia's Vaziani Air Base. It is believed that ten to fifteen attacked the presidential motorcade with grenade launchers and then fled towards the Russian Airbase. An investigation is underway as to whether or not the aircraft's departure had been

approved by the Georgian government. The parliament has also ordered law enforcement officials to investigate Russian army bases for leads. It is widely believed Igor GIORGADZE, the accused attacker for the August, 1995 attempt on SHEVARDNADZE's life, escaped to Russia on a military transport plane. The two attacks are being compared for similarities. The Interior Ministry and security forces have set up check points around Tblisi and stepped up border controls. Georgian Security Minister Djemal GAKHOKIDZE told Interfax news agency that preliminary evidence proves the attack, "was organized by forces outside of Georgia."

Meanwhile international leaders, including Armenian Acting President, Prime Minister Robert KOCHARYAN, US President Bill CLINTON, Turkish President Suleyman DEMIREL, Russian President Boris YELTSIN, CIS Executive Secretary Ivan KOROTCHENYA, have strongly denounce the terrorist act. Russian Deputy Premier Ramazan ABDULATIPOV, however said, "I believe that this [assassination attempt] is connected above all with domestic processes that proceed with difficulty in Georgia, just as in many other post-Soviet states. The hints at Russia are absolutely groundless." Leader of the Georgian National Democratic Party Irina SARISHVILI-CHANTURIA countered, "There's is no doubt that this terrorist act was planned in Russia...It is impossible to overthrow the leaders of Georgia or Azerbaijan by peaceful means...They can only be physically exterminated."

When asked how SHEVARDNADZE felt, he laughed and said, "It happens so often that I'm already accustomed to it." SHEVARDNADZE appears to be even more determined to continue with democratic and economic reforms, oil negotiations, and corruption crackdowns. "I would like to tell the people that their President is in good shape and our fight for democracy and independence will be even greater."

AIOC President Arrives in Georgia

· The newly appointed president of the Azerbaijan International Operating Company (AIOC) David PRITCHARD arrived today for his first visit to Georgia. PRITCHARD and the accompanying Georgian officials, among them Gia CHANTURIA, president of the Georgian International Oil Company (GIOC), headed for Supsa where an oil terminal is under construction. The Supsa terminal is one of key

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facilities in the project to build a pipeline which will run across Georgia transporting oil from Azerbaijan to the Turkish Mediterranean port of Ceyhan. Washington prefers this route to other northern and southern routes, as it decreases the influence of just one country on the export of Caspian oil to Europe. PRITCHARD will meet with Georgian parliament chief Zurab ZHVANIA tonight and is scheduled to meet with Georgian President Eduard SHEVARDNADZE on Thursday. PRITCHARD's visit is a courageous step following this week's assassination attempt of SHEVARDNADZE. Apparently, Georgia and Azerbaijan relations have only strengthened in the face of the international terrorist attacks, which many believe are linked to Caspian oil pipelines.

Russia Halts Caspian Oil to Novorosiisk

· Russia has baffled oil experts by its recent move to block the flow of oil from Azerbaijan to Novorosiisk because of a failure to meet customs requirements, thereby reversing three years of work to secure the route. Just two weeks ago, Azerbaijan International Operating Co. (AIOC) announced the flow of oil across the Russian border, Moscow has now stopped the flow of oil. A consortium spokeswoman Tamam BAYATLY confirmed to The Journal of Commerce that there had been difficulty with customs documentation. Along with this controversy, there is some complication as to whether the oil has actually crossed the Russian border. BAYATLY said that no consortium oil had reached the border and denied Russia had stopped the flow. The information suggests that Russia is encountering complications with getting the oil through Chechnya and is stalling until a new agreement can be reached. Chechen President Aslan MASKHADOV said on February 6, that he would hold off on the transit agreement until Russia fulfills its promises. MASKHADOV's threat may earn Chechnya pipelines fees and more. Industry analysts say it is unclear whether the Chechens are still being paid. The terms of any extension would be an issue, because Russia disagreed with Chechen claims that it was actually paying a pipeline fee. If Russia pays a pipeline fee, would imply that Chech

nya is not a Russian entity but an independent state. Comment: This underlines the importance and power which governments have when pipelines run through their territory. The Chechen situation is precisely why prudence requires multiple pipeline routes for the Caspian oil, especially through independent emerging democracies like Georgia.

Armenian PM, Dashnak Candidates For Pres.

· Armenian Prime Minister Robert KOCHARYAN announced Monday he will run in the early presidential elections on March 16. KOCHARYAN was state defense committee chairman of Nagorno-Karabakh in 1992-97 and was elected president of the self-proclaimed Karabakh republic. He explained, "My first goal is the stabilization of the economic situation in Armenia, and to make it a democratic society with a market economy and legal reforms." He will compete with National Democratic Unions Vazgen MANUKYAN and Paruir AIRIKYAN of the opposition party Self-Rule. On Tuesday, Armenian officials released Vahan HOVANESYAN, a leader of the Dashnak Party.The Dashnak Party will choose its candidate soon; HOVANESYAN is likely to be a candidate.

Pakistan May Halt Purchase of Turkmen Gas

· After a recent discovery of huge gas reserves in Swan gas field, Pakistan's Prime Minister Nawaz SHARIF said Tuesday that Pakistan may not have to import Turkmen gas. A consortium of oil companies led by OMV AG of Austria announced last week that the Swan gas field is estimated to have gas reserves of nearly 1 trillion cubic feet. Pakistan meets its gas requirements by drawing on the Sui field in Baluchistan Province, but that field is expected to be exhausted in 2005. Because of that, Pakistan signed a memorandum with a consortium of eight companies led by Unocal Corp. to build, own and operate a pipeline from the Daulatabad field in Turkmenistan to Pakistan via Afghanistan.

The Daily Report on Russia and the Former Soviet Republics will not be published on Monday February 16 due to President's day.

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

available for non-profit institutions.

Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1998, Intercon International, USA.

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