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

Friday, February 13, 1998

Russian Federation

Politics

US Defense Secretary Cohen -Sergeyev Talks

· US Defense Secretary William COHEN today concluded his visit to Moscow after meeting with Russian Foreign Minister Yevgeny PRIMAKOV, Defense Minister Igor SERGEYEV, as well as secretary of the Defense Council, Andrei KOKOSHIN. COHEN had hoped to focus the talks on security issues between Russian and the US, including the ratification of START-II Treaty. But, talks quickly came to a head and shifted to the crisis with Iraq in a televised meeting with SERGEYEV. He warned COHEN that US-Russian relations will suffer if Iraq comes under military attack. SERGEYEV asked, "Is America ready for all the possible consequences? Does the uncompromising and tough stand of the United States on the issue of Iraq help to strengthen stability and security in the world?" COHEN warned of the dangers involved if Iraq continues to develop chemical and biological weapons. However, COHEN remains confident that relations between the two countries will prevail over circumstantial problems as they concern matters of global security. Despite conversations with Secretary of State Madeline ALBRIGHT, PRIMAKOV disagrees with the US on the need to use force against Iraq. Russia continues to insist that a diplomatic solution must be found.

Regarding the article in Thursday's Washington Post, Russia carefully refuted information and accusation of supplying biological warfare production equipment. PRIMAKOV said there were no deliveries of "dual-use" products to Iraq nor of any products that could be used for the manufacture of biological weapons. "I can say definitely that no deals of this kind have been struck," PRIMAKOV said. SERGEYEV also said, "there was no agreement. We had no plans to reach such an agreement." Comment: US-

Russian relations continue their downspin with no relief in sight . With the situation in the Caucasus heading toward an open conflict over pipeline routes, the resignation of TER-PETROSYAN in Armenia and the attack on Georgian President Eduard SHEVARDNADZE, disagreement with the US over Iraq policy, opposition concerning the to use force, and disagreements over NATO expansion, all do not bode well for US-Russian relations.

Chechen Temporary Status Proposed

· Russian Deputy Prime Minister Ramazan ABDULATIPOV on Thursday proposed the adoption of a law on the temporary status of Chechnya. That legislation, he said, would regulate the administrative borders between Chechnya and the rest of the Russian Federation as well as the interaction between federal and republican authorities, Itar-Tass reported. The law he hopes will expedite needed financing for the economic reconstruction of Chechnya. No funds have been allocated for Chechnya from the 1998 state budget. The Chechen government estimates the sum needed for restoring the Chechen economy at $800 billion. "Russia has no such funds and cannot have them," ABDULATIPOV said. During Moscow-Grozny meetings and talks it was established that Russia could allocate 16 billion rubles for the Chechen restoration program. However, these funds can be allocated "given political guarantees," the deputy premier said.

Russia Builds Radar Station in Belarus

· The Russian Strategic Missile Troops com

Today's News Highlights

Russia

Rostelekom To Trade on NYSE

Yava Gold Cigarette Success

ICN To Invest $300M in Russia

European Republics

Utel Earns $33M in Profits

South Caucasus & Central Asia

Geogria Calls Ukraine to Mediate

Texaco Bids on Azeri Oil Stake

Azer-US Oil Co. Begin Probe

Caucasus Sea Status Debated

Politics-Economics-Business

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Friday

February 13, 1998

Intercon's Daily

mander Colonel-General Vladimir YAKOVLEV, Thursday flew to Belarus for inspecting the progress of construction of a radar station in Baranovichi. The anti-missile early warning radar station is being built to replace the Russian radar station in Skrunde, Latvia. August 31 of this year ends an accord on renting the Soviet-period Skrunde station for an annual $5 million. The military does not expect the radar station to be operating by August 31 because of inadequate funding of the construction project. This leaves Russia in need to negotiate with Latvia an extension of the lease contract for another two to five years.

Duma Defense Committee member Roman POPKOVICH said, "we should pay special attention to appropriations for maintaining the reliable functioning of the missile attack warning system ensuring the control of the Russian strategic nuclear forces." Deputy Defense Minister Nikolai MIKHAILOV said in a statement that, "one ruble of investment in technological development of means of information and control systems in its effectiveness is equal to ten rubles of investment in quantitative build-up of warheads." Russia also has ground-based radar stations in Sevastopol, Ukraine; Mukachevo, Ukraine; Balkhash, Kazakhstan; Gabala, Azerbaijan, and in Murmansk, Pechora and Irkutsk in its own territory.

Economy

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

Ruble = 6,073/$1.00 (CB rate)

Ruble = 6,021|6,047/$1.00 (buy|sell rates)

Sep Oct Nov Dec Jan Feb

Economic Minister Puts His Job On The Line

· Deputy Prime Minister Yakov URINSON is putting his job on the line, as he is ready to resign if the Russian President Boris YELTSIN declares his work unsatisfactory at a full-scale session of the government scheduled for February 26. URINSON said that if so he would first of all thank the President for the opportunity to have worked in the government and effected reforms since 1991. "The meeting will sum up the results of the year 1997, outline the economic prospects for the year 1998, and the next three-year period," URINSON said. He stressed that the full-scale government meeting is not aimed at a Cabinet reshuffle.

Fitch IBCA Rates Krasnoyarsk Krai Currency

· The international Fitch IBCA rating agency assigned a BB-plus rating to long term foreign currency and B rating to short term in the Krasnoyarsk Krai, which accounts for 13.6 percent of Russian territory. These rating will apply to senior and unsecured debt issues, a Fitch IBCA press release said. Gross domestic product and exports per capita remaining above Russia's average, the industrial based economy, and a lower decline in production than other regions accounted for the ratings. However, Krasnoyarsk Krai has experienced a decline in revenue and an increases in tax arrears, especially from its main tax payer Norilsk Nickel.

Business

Rostelekom (ROS) To Be Traded on NYSE

· Russia's long distance telephone company Rostelekom will begin trading on the New York Stock Exchange on February 17. Rostelekom will be traded under the symbol ROS in the form of Level-2 American Depositary Receipts (ADRs), which will allow for conversion of existing shares traded domestically and makes foreign trade of stock easier. Finance director Kirill SKOKOV estimates that foreign investors own about 30 percent of the company's equity. Rostelekom has a stock market value of $2.3 billion. The company accounts for 85 percent of Russia's international telephone traffic and 95 percent of its long distance traffic. Rostelekom will be the first formerly state owned company and the second Russian company to list on the exchange. Cellular telephone company Vimpel-Communications (VIP.N) was the first in November 1996. This represents a significant move for Rostelekom from a state-

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owned entity to a western style corporation with international recognition. Merrill Lynch analyst Jan SUDUL said that, "The forthcoming availability of ADRs will likely broaden Rostelekom's universe of investors and further improve disclosure."

Yava Gold Cigarette Success

· British American Tobacco has invested over $1 billion in a project which has gone up in smoke and is catching on like wildfire. On August 19, 1997, the tobacco group launched its main product Yava Gold cigarette in Moscow. The cigarette has earned high marks from Muscovites, as one out of every five cigarettes smoked in Moscow is a Yava Gold. The tobacco group announced plans for the cigarette to be distributed in St. Petersburg, Nizhni Novgorod, Rostov-on-Don, Voronezh, Krasnodar and Yaroslavl. British American Tobacco invested over $100 million in the state-of-the art equipment and plans to invest more both in the century-old Yava factory in Moscow and other facilities. Yava General Director Leonid SINELNIKOV said, "Yava Gold is beginning its `golden' journey to Russia's cities. This is a big success for all of us. Our factory was the first to produce a truly Russian cigarette that meets international standards of quality and is based on the Russian brand Yava, with a nearly 100-year-long Russian heritage."

US Pharmaceutical To Invest $300M in Russia

· The ICN Pharmaceuticals corporation is planning to invest $300 million to expand its factories over five years. $47 million of the investment will provide for construction of a new pharmaceuticals factory in St. Petersburg which is to be commissioned in 2000. ICN Pharmaceuticals has already invested $120 million in Russia in the past three years. ICN President Milan PANIC stated that Russia will remain, "an investment priority" for the corporation. ICN's first joined with Oktyabr Factory in St. Petersburg. In 1997, ICN-Oktyabr's sales totaled $50 million. Last month the corporation included former Russian Foreign minister Andrei KOZYREV into its Board of Directors, a non paying position.

$33 million in profits in 1997, an increase from $27.4 million in 1996. Revenues reached more than $300 million, compared to revenues of approximately $263 million in 1996. Because of this year and the past five years of profits Utel has been placed on the top 15 most profitable companies in Ukraine, according to the Kiev-based investment publication Ukrainian Top 100. Utel's shareholders include Ukrainian state telecommunications corporation UkrTelecom (51%) and international telecommunications conglomerates AT&T (19.5%), Deutsche Telekom (19.5%), and PTT Telecom of the Netherlands (10%). In 1997, Utel handled 40% of all telecommunications traffic in Ukraine, representing 1.46 billion conversation minutes, an increase of 22% over 1996. Utel's future plans to expand its range of services include the introduction of Internet services, toll free "800" services, video-conferencing and other new technologies to the Ukrainian telecom market.

South Caucasus & Central Asia

Georgia Calls for Ukraine to Mediate in Abkhazia

· Georgian National Assembly Speaker Zurab ZHVANIA said Thursday that Georgia expects Ukraine to play a more active role in the mediation of the Abkhazian conflict. ZHVANIA expressed his nation's dissatisfied with the Russian mediation. He said the close ties between Georgia and Ukraine could become a model for cooperation among the members of the Commonwealth of Independent States. Ukrainian parliament speaker Alexander MOROZ said, "Ukraine is ready to make a contribution within its power to stabilizing the situation in Transcaucasia," MOROZ said at a joint news conference with ZHVANIA in Kiev.

Texaco to Bid For Stake in Azeri Oil Field

· Texaco Inc. has renewed its bid for a 25 percent stake in Azerbaijan's Kurdashi offshore oil filed in the Caspian Sea. According to Senior Vice President Robert BLACK who met with Azeri President Geidar ALIYEV, Texaco wants to play a key role in bringing the Kazakh oil to world markets through Azerbaijan and Turkey. He also added that Texaco can lead lobbying efforts in Washington to gain back aid for Azerbaijan, which the US Congress halted. Texaco's offer will be reviewed by Socar. Other bidders include Turkey's state oil company TPAO and Indian Oil Company.

European Republics

Ukraine's Utel Earned $33M in Profits

· Ukraine's leading provider of international and long-distance telephone services Utel Thursday announced that the company generated more than

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Azeri-US Oil Companies Begin Seismic Probe

· Azerbaijan and US oil companies have begun a seismic probe in the Caspian shelf 80 kilometers south of Baku, in an initial stage of an agreement on exploring oil reserves and subsequent development of a promising Nakhichevan field. The agreement between Azerbaijan's State Oil Company Socar and Exxon was signed on August 1, 1997. Each partner has a 50 percent stake in the $2.5 billion project. The seismic probe in the Nakhichevan field is conducted by the joint venture Caspian Geophysical.

Caspian Status Debated/ New Sides Develop

· Iranian President Mohammad KHATAMI has written to Turkmen counterpart Saparmurat NIYAZOV, to express his support for the agreement signed by the Azeri and Turkmen Foreign Ministers on dividing the Caspian Sea into national sectors on February 5th, Turkmen Foreign Minister Boris SHIKHMURADOV told Interfax new agency. KHATAMI said that the agreement does not contravene Tehran's principles for Caspian cooperation, but he added that Caspian decisions must be endorsed by all five littoral states. Iranian Foreign Minister Kamil KHARRAZI is expected to discuss the status of the Caspian during his visit to Moscow later this month. Earlier this week, KHARRAZI rejected Azeri-Turkmen accord. Jomhuri Eslami reported that KHARRAZI, "warned that foreign companies and outside countries have no right to undertake actions in the Caspian which would undermine the interests of other littoral states." Before today's announcement, Iran sided with Russia arguing that all Caspian projects should be developed jointly, while Kazakhstan agreed with Azerbaijan and Turkmenistan on dividing the water body into sectors.

Meanwhile, Russia and Kazakhstan have held consultations in Astrakhan to facilitate the signing of a convention on legal status of the Caspian Sea. The negotiating parties, "proceeded from provisions of the joint declaration made by the Russian and Kazakh Presidents Boris YELTSIN and Nursultan NAZARBAYEV on January 23," Gennady TARASOV

said. The declaration called for the rapid conclusion of a convention on legal status of the Caspian Sea, based on consensus of five Caspian states. The parties confirmed their commitment, "to strictly follow the accords reached by the Russian and Kazakh Presidents on equitable division of the bottom of the Caspian Sea and joint use of its surface to ensure free navigation, coordinated fishing regulations and environmental protection." Taking part in the talks are Russian First Deputy Foreign Minister Boris PASTUKHOV and Kazakh First Deputy Foreign Minister Erlan IDRISOV as well as representatives from several business establishments, including the LUKoil and Kazakhoil companies, the border guard service, and the Moscow Geodesy and Cartography University. Russian President Boris YELTSIN believes that resources of the Caspian Sea should be developed on the basis of its legal position approved by the five Caspian countries. Early this week, YELTSIN told Italian Corriere della Sera daily, "There was a time when the Caspian sea was Soviet-Iranian. And what are we to do now when new states Azerbaijan, Kazakhstan, Turkmenistan have emerged? I believe that if the sea is shared, then its resources should be developed on the basis of a legal status approved by all the five Caspian states." Comment: It is claimed that the Caspian Sea holds the second highest oil reserves in the world. This huge deposit and its related transport options are providing struggling former Soviet republics the means of attracting foreign investments. Because this type of power and influence surround oil and pipelines, littoral nations are eager to resolve the Caspian Status and develop both fields and pipelines which are beneficial to them. Recent events show how dangerous this business has become. Many believe Monday's attack on Georgian President Eduard SHEVARDNADZE is a result of a possible pipeline from Baku to Ceyhan.

The Daily Report on Russia and 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

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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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