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

Monday, February 2, 1998

Russian Federation

Politics

Yavlinsky Announces Candidacy for President

· Liberal economist Grigory YAVLINSKY on Saturday confirmed his candidacy for the Russian presidential elections in 2000. YAVLINSKY spoke critically of the government's policy, emphasizing that, "there are no signs of economic growth despite the positive results of 1997." Commenting on Russian President Boris YELTSIN's remarks regarding a possible reshuffle in the Cabinet, YAVLINSKY noted that his movement Yabloko will not offer its members to serve in the government. "I think the entire government should be changed," he said. YAVLINSKY also dismissed Prime Minister Viktor CHERNOMYRDIN and Deputy Prime Minister Anatoly CHUBAIS's optimistic economic outlooks. He called it, "forced optimism," which was designed to attract foreign investment. As a presidential candidate in the 1996 elections, YAVLINSKY won about seven percent of the vote in the first round.

Yeltsin- Kuchma Define New Relations

· Russian President Boris YELTSIN and Ukrainian President Leonid KUCHMA issued a joint statement Saturday following unofficial talks which covered a wide range of issues. Both leaders expressed satisfaction with the positive changes in bilateral relations, but concern over the settlement of some pressing issues. KUCHMA said the main problem, "for all these years was the Black Sea Fleet." The two countries' reached an accord on the Black Sea Fleet in Kiev in May 1997. Delays of the withdrawal of the Black Sea Fleet, both leaders agreed had been unjustified. Delays were due in part to the participation of Russian companies in privatization of Ukraine's refineries and in international arms markets. On the issue of European security, both presidents agreed that further development of Russian-Ukrainian rela

tions would be an important contribution to security on the continent. Referring to the development of the Commonwealth of Independent States (CIS), KUCHMA said, "this union is still needed," but its viability, "depends on ourselves and no one else." The main base for further development should be the "economic component," he said. YELTSIN and KUCHMA agreed to sign the Russian-Ukrainian economic cooperation program for 1998-2007 during KUCHMA's official visit to Russia in late February. Russia and Ukraine are already working on the project of the An-70 cargo plane. "We already have started serious work on this project, and I am glad that Boris Nikolayevich YELTSIN has played an important role in involving Germany and France in the project. If it will be a really European project, it has huge prospects," KUCHMA said.

KUCHMA said he has reached an agreement with YELTSIN on issues related to the transit of Turkmenistan gas across Russia to Ukraine based on terms of gas transit through Ukraine to Europe. He said that Russian shipments to Ukraine are insufficient and that Ukraine, "needs additional gas." Summing up the atmosphere of the talks, KUCHMA said, "The talk was very frank and trustful. The main thing is there is a prospect for bilateral relations."

Russia Seeks WTO Membership/ EU in the Future?

· WTO General Director Renato RUGGIERO, who is taking part in the Davos World Economic Forum said that Russia's admission to the World

Today's News Highlights

Russia

Crime Rates Higher Than Report

Foreign Investment Debated

Ford Chooses Production Site

European Republics

EU-Baltic Agreements in Force

South Caucasus & Central Asia

Rus-Georgian Top Priority

UN Extends Military Observers

Power Crisis in Armenian

Politics-Economics-Business

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February 2, 1998

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Trade Organization (WTO) remains an important priority. The WTO thinks that the world trade system cannot exist without Russia, therefore Russia is absolutely necessary for it and it is absolutely necessary for Russia, RUGGIERO said. He believes that the Russian economy does progress but not as quickly as they would like it to. Russian Prime Minister Viktor CHERNOMYRDIN confirmed the Russian choice for membership in the WTO in his Saturday report at the Davos World Economic Forum. "An economic growth in Russia is hard to be imagined without its active promotion on the foreign markets and fully-fledged participation in the multifaceted system of international trade," CHERNOMYRDIN said. RUGGIERO noted that one major obstacle is the lack of Russian proposals for access to its market. The WTO hopes to receive such proposals as soon as possible. RUGGIERO hopes for progress at the next round of the Geneva negotiations on the Russian membership in the WTO. Russian First Deputy Prime Minister Anatoly CHUBAIS said that although the negotiations, "are complicated we still stick to the idea of the Russian membership in the WTO."

Russian Crime Rate Higher Than Reported

· Russian Prosecutor General Yuri SKURATOV announced Friday that the real crime rate in Russia is three to four times higher than the official statistics. In the opinion of experts, the overall number of crimes committed last year is almost 10 million, SKURATOV said. At the same time, the Russian Interior Ministry registered only 2,387,000 crimes. "The double statistics" is explained with numerous refusals of the police to register crimes in order to keep the crime statistics low and the unwillingness of Russian residents to report on crimes. SKURATOV is alarmed with the inclination of Russians to take justice matters into their own hands without turning to the police for help. SKURATOV is concerned that over 60 percent of crimes, registered in 1997, were grave. Criminals have become more organized, professional and better equipped, and corruption has spread even larger. SKURATOV is optimistic about prospects for anti-crime measures.

Economy

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

Ruble = 6,029/$1.00 (CB rate)

Ruble = 6,003|6,055/$1.00 (buy|sell rates)

Foreign Investment Debated in Davos

· Prime Minister Viktor CHERNOMYRDIN addressed the World Economic Forum twice, briefing about 2,000 representatives of the world financial elite, heads of state and government and scientists on the current situation in Russia and encouraging them to invest more heavily. The interest in the Russian financial market increased especially after the Russian Central Bank on Friday raised refinancing rates from 28 to 42 per year. He said his government plans to bring foreign investments to $20 billion by 2000, half of which will be direct investments. The Prime Minister called on foreign businesses to put more money into the Russian economy. "The risk of failing and going bankrupt is beginning to give way to the risk of being too late with the adoption of strategic decisions," he said.

Russian business tycoon Boris BEREZOVSKY, believes that in present conditions Russia should not permit "strategic" foreign investment into important Russian industries. "In Davos, I have stated that I am at present against strategic foreign investment in strategic areas. Mind you, at present," BEREZOVSKY said. He supports this stance by stating that, "the latest financial crisis showed that foreign capital is sensitive to the slightest destabilization in Russia." As long as this risk level is maintains, strategic foreign investment in strategic industries, specifically the petroleum, gas and defense industries, is dangerous. "When differences in assessing risks lessen, such investment will be welcome. But in the event of the destabilization of the situation in Russia, foreign capital will now undoubtedly flow from Russia...Meanwhile, national capital is invested in Russia almost entirely and has nowhere to flow. We must and we will be upholding the course we have chosen," he said. The Central Bank said Friday that foreign investors withdrew $2 billion out of Russian government bonds in January.

BEREZOVSKY believes that the West wants to participate in Russian business due to its vast opportunities. However, it regards Russia as a strong competitor. "We have shown already that Russia not only has vast material resources, which has always been known, but that it also has unlimited human resources. Within a brief period of time, Russian business people virtually matched capitalist tycoons," BEREZOVSKY said.

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Business

Ford To Produce 25,000 Cars in St. Petersburg

· Ford Motor Co. will produce 25,000 Ford Fiesta models with a $150 million investment near St. Petersburg. Ford's marketing director in Moscow Nick SHORT said Ford, "wants production closer to the point of sale. That makes for a cheaper unit," reported The Journal of Commerce. The Fiesta is likely to sell for $10,000, which researches have determined to be the target at which Russians will switch to foreign made models over domestically produced. Ford is already producing cars for the Russian market at a new kit-assembly plant in Belarus. The company is hoping to negotiate import duties relief on components that will be imported from kit-assembly plants for the Fiesta. Domestic auto lobbyist are pressing the government to raise tariff protection against these imports from Ukraine, Uzbekistan, and Belarus. Lobbyist hope that this tariff will persuade foreign auto makers to invest in Russian production, rather than compete against them. A senior official from the Economics Ministry said that so far the government is satisfied with the operations of car plants on Russia's borders. However, he warns, "if conditions develop in these countries for flooding the market with cars at dumping prices, then it will face some resistance from our side."

Council, a joint meeting of the EU Council and Baltic foreign ministers, will be held on February 23 in Brussels. Estonia is the only Baltic republic invited to start official negotiations in May for membership.

South Caucasus & Central Asia

Georgia's Relations With Russia Top Priority

· Georgian President Eduard SHEVARDNADZE in a national radio address emphasized that deepening relations with Russia remains, "one of major priorities of Georgia's foreign policy." He stated that the visit of Federation Council Speaker Yegor STROYEV to Georgia at the end of January was, "useful and fruitful." This opinion about STROYEV's visit is also shared by the leaders of Azerbaijan and Armenia, he added.

UN Extends Military Observers in Georgia

· The Associated Press reports that the United Nations Security Council on Friday agreed to maintain unarmed UN military observers in Georgia until July 31. The UN condemns intensified violence in Georgia. The Council called for a review of the UN operation, which is working with Russian peace-keeping forces, before the new mandate for military observers ends in Georgia. Extension of the observer force enables the UN to maintain a foothold in the Black Sea region, while Moscow and Georgia attempt to resolve the conflict.

Resignations in Armenia Denotes Power Crisis

· The January 18th meeting of the Security Council of Armenia (SCA) led by Armenian President Levon TER-PETROSYAN and attended by Arkady GUKASYAN, President of the self-proclaimed Nagorno-Karabakh Republic (NKR), NKR parliament chief Oleg YESAYAN, Prime Minister Leonard PETROSYAN Defense Minister, Lieutenant General Samvel BABAYAN marks the beginning of a struggle for power and negotiations to resolve the Nagorno-Karabakh issue, which has caused the resignation of several political figures and resulted in "terrorist" attacks. The Council meeting failed to overcome differences between Yerevan and Stepanakert, as well as within the Armenian leadership, over the best way to resolve the Karabakh conflict. Armenian President Levon TER-PETROSYAN believes the settlement should be through a stage-by-stage process. His Prime Minis

European Republics

EU Agreements with Baltics Enter into Force

· The EU agreements with Latvia, Lithuania and Estonia entered into force on Sunday. The agreements were signed on June 12, 1995, ratified by all 15 EU member national parliaments, and replaced agreements on trade and economic cooperation valid in the EU-Baltic relations since 1993. The agreements include the free trade documents of 1995. European Commissioner Hans VAN DEN BROEK, in charge of external relations, said Friday, "The European Agreements are one of the key elements of the pre-accession strategy and will significantly broaden and deepen the already close cooperation between the European Union and Estonia, Latvia and Lithuania." The agreements create a solid legal basis for the Baltic republic's integration with the European Union. The first Association

When you need to know it as it happens

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ter Robert KOCHARYAN, who until March last year held the elective office of NKR President, along with Stepanakert favors the consideration of a future status of Nagorno-Karabakh simultaneously with a withdrawal of Karabakh troops from the occupied Azeri territories. The Nagorno-Karabakh leadership rejects the proposal for NKR's vertical subordination to Baku and favors equitable treaty-based relations with Azerbaijan. These three options have forced political leaders to take sides in the resolution process leading to political chaos.

The Pan-National Movement unequivocally supports the President's insistence on resolving the Karabakh conflict through compromise. Leading members of the Armenian Pan-National Movement, including its chairman Vano SIRADEGYAN say that they plan to call on President Levon TER-PETROSYAN to fire Interior and National Security Minister Serzh SARKISIAN and possibly the entire government. They argued that the "indifference" of Prime Minister Robert KOCHARYAN's government to the recent assassination attempts threatens to plunge the country into chaos. KOCHARYAN, Serzh SARKISIAN, and Defense Minister Vazgen SARKISIAN back the leadership of the unrecognized Republic of Nagorno-Karabakh in its rejection of the latest "phased" peace plan proposed by the Organization for Security and Cooperation in Europe.

During the days following the fateful Council meeting, "terrorist" attacks occurred on the head of the presidential security service, the chief of the internal troops, and the head of Yerevan's Avan district began. A bomb exploded under the Presidential motor car, fortunately no one was hurt. Presidential security chief Roman GHAZARYAN escaped unhurt when shots were fired on his jeep on the night of 18 January. Major General Artsrun MARKARIAN, commander of Internal Troops, was wounded in the legs when an unidentified gunman opened fire on him near his home on January 21st. He is said to be a protégé of Vano SIRADEGYAN. A Pan-National Movement official, Ruben HAYRAPETYAN, was

wounded by a hand grenade on 20 January. TER-PETROSYAN on 22 January called on Prosecutor-General Henrik KHACHATRIAN and Interior and National Security Minister SARKISIAN to take, "exhaustive measures" to preclude further attacks on senior officials, adding that he fears for the lives of senior government members. Parliamentary deputy speaker Ara SAHAKIAN suggested a connection between the shootings and the discord within the country's leadership. Defense Minister SARKISIAN charged that the Armenian Pan-National Movement stage-managed the three recent attacks on senior officials as a pretext for demanding the government's resignation. He added the three officials targeted had been warned in advance.

Now members of Parliament and key political leaders have resigned. The Yerevan Mayor, who is also the chairman of the ruling Armenian Pan-National Movement, and a keystone in restoration of public order in the capital, Vano SIRADEGYAN sent his resignation to the President Sunday. In the opinion of local observers, the event is of special importance bearing in mind the weight of SIRADEGYAN in the Armenian political life and he is considered to be close to President Levon TER-PETROSYAN. Today, the Foreign Minister Alexander ARZUMANYAN also resigned. Many feel, these resignations are linked with the aggravated political crisis stemming from uncompromising differences within the republican leadership which have surfaced during debates around Nagorno-Karabakh settlement.

It is not clear whether their resignations are connected to the "terrorist" attacks or loss of confidence in TER-PETROSYAN's stance on the Karabakh resolution. However, those with a western orientation appear to be the targets of the terror and are leaving government service during this critical time. The reaction of the President to the resignations is far from unknown. Regional sources report TER-PETROSYAN is on his way to Moscow. Some experts speculate that it is in Moscow that the strings of the crisis are being pulled.

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

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