DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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, May 13, 1998

Russian Federation

Politics

Russia Expressing Regret, Proposes Diplomacy

· Russia has expressed great concern over India's nuclear test, but feels that it can not join the group of countries, including the US, which plan to punish India with sanctions. The threat of further sanctions from the international community brought a sharp drop to the Bombay stock market and investors are reacting negatively by pulling out of the market. Russian President Boris YELTSIN criticized the tests, but insists that the world should confine its punitive reaction to diplomatic pressure. India is a traditional Russian ally cooperating in arms sales and construction of civilian nuclear reactions in India. Some experts had expected this and claim Russia is confirming its covert support of India's military nuclear program.

Russian Foreign Ministry's Asian Department Rashit KHAMIDULIN today responded that India's decision to carry out two more under ground nuclear test following tests conducted tow days earlier is cause for "deep sorrow." He said it shows that India, "has not listened to the calls of international community." A Russian Foreign Ministry official Vladimir RAKHMANIN told the Ekho Moskvy radio station that, "Our top-priority national interest is to help stop the proliferation on any weapons of mass annihilation...That is why we expressed our deep regret over the fact that friendly India had taken such steps. It is very important for us that such actions would not repeat in future." RAKHMANIN noted, "This is a global problem. Now there is a fragile balance between nuclear powers, and it is necessary to keep this balance, hence any changes in it may lead to the dominoes effect, which is very dangerous." Russian Foreign Minister Yevgeny PRIMAKOV has said he does not support a US

decision to impose sanctions on India. "I am not a supporter of Russia's announcing any sanctions with regard to any issues. We are very cautious about these measures which are sometimes counterproductive," He said. PRIMAKOV will use this to oppose Washington's leadership as a means of promoting Russia as a world diplomatic power which must be reckoned with, especially in the UN.

If Russia does not impose sanctions, it is sure to receive pressure to cancel a deal to provide India with a nuclear power plant. A senior official of the Zarubezhatomenergostroj organization, which builds nuclear power plants (NPPs) outside Russia admitted that the nuclear tests staged by India might delay the decision to by Russia build a plant. An agreement between the former USSR and India on the building of a NPP in the south of the country was signed in 1988. Talks for its implementation, postponed because of financial problems, have resumed in recent years. At present about all the technical aspects of the project have been settled, although an appendix to the agreement dealing with financial aspects, as well as the contract itself, have not been signed. Russian First Deputy Minister for Atomic Energy Viktor MIKHAILOV on Tuesday however said that the Indian nuclear tests should not affect bilateral cooperation of the two countries in the sphere of a peaceful use of the atomic energy.

G-8 Summit Recognizes Russia's Market Status

· The agenda of the G-8 summit opening in Birmingham, England on Fri

Today's News Highlights

Russia

Gov't To List Strategic Cos.

Oil Cos. Strained To Make $

Appraiser Chose For Sell-Off

European Republics

Ericsson Wins Ukraine Contract

Japan To Invest $2B In Ukraine

IFC Joins Vienna-Kiev Bank

South Caucasus & Central Asia

Georgia Finds More Evidence

Berezovsky Concludes CIS Tour

Politics-Economics-Business

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Wednesday

May 13, 1998

Intercon's Daily

day has been fully worked out and the format and the dates of its two key functions have been decided. Russian Presidents Boris YELTSIN, US President Bill CLINTON, and Japanese Premier Ryutaro HASHIMOTO plan to hold a trilateral meeting after the summit's opening on Friday. The negotiations will last for about one hour, and their participants will concentrate on prospects for the development of trilateral cooperation. YELTSIN is also expected to meet with the host of the summit Prime Minister Tony BLAIR. Leaders of Group of Seven (G-7) plus Russia will discuss how to react to India's nuclear tests during the summit, Canadian Foreign Minister Lloyd AXWORTHY said Monday. AXWORTHY, indicated they may choose to impose sanctions on India. He said it is important for the topic to be isolated from other issues and discussed separately as early as possible. Russia's status as a state with a market economy will be officially recognized during talks between YELTSIN, BLAIR, as chairman in the leading bodies on the EU, and Jacques SANTER, the head of the European Commission, a member of the Russian delegation said. The Birmingham meeting represents an important milestone on Russia's road toward becoming involved on an equal basis in the entire range of economic relations with Western states. The final document on prospects for overcoming the consequences of the financial and economic crisis triggered by the recent events in Asia, is to be adopted during Russia-EU meeting. Then the document will be referred for consideration of other G-8 countries. The Russia-EU meeting will also discuss the possibility of creating an "axis of stability" between Europe and Asia as an improvement of the financial and economic system in the Asian region is largely determined by Russia's participation in international programs. During an Internet interview, YELTSIN offered to host the summit of the world's eight major powers in the year 2000, instead of Japan. Chief of Japan's Cabinet Secretary MURAOKA said, "Russia has not conveyed any requests to Japan," He declined to comment further.

Economy

Ruble = 6,141/$1.00 (NY rate)

Ruble = 6,143/$1.00 (CB rate)

Ruble = 6,111|6,175/$1.00 (buy|sell rates)

Government To List Strategic Enterprises

· Deputy Prime Minister Boris NEMTSOV said the

Russian government plans to list 765 joint stock companies whose products are of importance for national security. According to Kommersant-Daily, some 3,000 enterprises are currently considered strategically important. NEMTSOV cited the Russian President's drafted decree which is to define criteria for selecting privatized enterprises of strategic importance. The governmental decree will lay down an inventory of companies that will be overseen through a group of governmental representatives. NEMTSOV said the list will include enterprises of natural monopolies in the energy and transportation sectors and companies handling defense orders or possessing knowledge of which could potentially threaten Russia's national security if revealed to outside forces. Strategically important enterprises may not be privatized pending the adoption of a special law on the matter.

Business

Oil Companies Strained To Make Profits

· Just a few years ago Russian oil barons bragged that their massive crude reserves would soon propel them to take over oil multinationals. Today, however, these same oil barons are struggling to squeeze out profits. The Russian oil sector has been battered by the decline in oil prices from a high of $25 per barrel in January 1997. Chief executive of British Petroleum (BP) John BROWNE said, "The whole Russian oil industry is having a hard time," the Financial Times reported. Western oil men say Russian companies will need to make deep cuts in their lifting costs per barrel to overcome low prices. Russians point to maintaining extensive social services as the cause for their inflated prices. Russian lifting costs can be as high as $8 to $10 a barrel, compared with an estimated $2.10 at western major oil companies such as BP. A report on Russia's oil sector by a Moscow based investment bank Brunswick Warburg explains that, "For many large companies, 1998 will be a shock...1996 and 19997 were periods of very high world oil prices, which camouflaged Russian companies' high production and transportation coast...as export prices have declined, margins have all but been eliminated." The latest evidence of these decreasing profits came last week when LUKoil said that groups profits would be 40 percent lower than the previous forecast of $900 million to $1 billion. The government has been bowing to the pressure of oil producers by halving oil transport charges and

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

May 13, 1998

Intercon's Daily

abolishing transport excise tax until the end of the year. However, there is a limit as to how much the government can help oil companies, especially since many still owe the government billions of dollars in taxes. Many analysts agree that the government's assistance should not go overboard as these shocks are healthy to an industry which must adapt to the changing world.

Metromedia Buys Up Russian Airwaves

· John KLUGE's Metromedia International Group, a collection of linked businesses and joint ventures, has over the past five years become a major telecommunications broadcasting Mongol in Russia by buying up Russia's airwaves in hopes of using them to market American communications technology, wireless telephony and cable entertainment at a healthy profit. Since 1991, Metromedia has invested approximately $5 million a year in Russia bringing their total investment to $30 million. The Journal of Commerce reported that Metromedia has acquired two paging companies is Nizhny Novgorod and St. Petersburg for an investment of less than $1.5 million; a radio station in Moscow for $3.6 million, Vladivostok for $170,000, St. Petersburg for $1.4 million and in Sochi for an undisclosed amount; a Black Sea resort for $303,000; a cable television in Moscow for $11 million, St. Petersburg for $2 million; and an urban television network, using a US developed radio signal technology known as a wireless local loop, in Moscow for an undisclosed amount. Metromedia purchased a 50 percent share in Moscow Telecom, but only after waiting for the price to fall. Metromedia hopes to buy up licenses for broadcasting frequencies in the main population areas across Russia and attract Russian partners to market a range of products. One project is to broadcast films from KLUGE's collection of Orion Pictures and Samuel Goldwyn Co. through its cable television stations. However, Metromedia's acquisitions have been met with legal battles and some rating struggles. Metromedia management had to battle in the Moscow Courts with the chief executive of its Moscow cable property Kosmos TV, Alexander LAPSHIN, for control of the station. LAPSHIN was ordered to be sacked after Metromedia discovered financial mismanagement and falling subscriber list. Metromedia's partnership with Soviet broadcaster Vladimir POSNER to rehabilitate Radio 7's programming. Metromedia's co-president Carl BRAZELL convinced the company to run a

format of Russian folk music, American pop, and classical music. Although BRAZELL thinks, "it is one of Moscow's most popular station," an independent study found that Radio 7 rating is 14th in the nation.

Appraiser Chosen For Svayinvest Sell-off

· Russia's State Property Ministry said on Tuesday that it has chosen American Appraisal Inc. to determine the starting value of a stake in telecom holding company Svyazinvest due to be sold-off later this year. American Appraisal Inc. was chosen because its asking price of 1.7 million rubles ($278,000) for the job was the lowest fee offered. American Appraisal Inc.'s estimation must sent to the State Property Ministry by June 2nd. Russia plans to sell off a 25 percent minus two shares stake in Svyazinvest, which owns controlling stakes in most regional telecommunications companies. The tender is open to foreign and domestic participants. Last July, a 25 percent stake in the company was sold to an international consortium, including billionaire financier George SOROS, Deutsche Morgan Grenfell and Russia's Uneximbank for $1.88 billion in a controversial deal accused of unfair practices. Many privatization sales in Russia have been accused of artificially high starting prices; most recently the controlling stake sale of Rosneft.

European Republics

Ericsson Wins Ukrtec and UkrtelecomContract

· Ericsson Cables has signed a contract with Ukrtec and Ukrtelecom, owner and operator of the fixed telecom network in Ukraine, to supply fiber optic cables and network products for the construction of a fiber optic transmission line, from Nikolaev in south eastern Ukraine to Sevastopol on the Crimea peninsula. The contract, worth about $4 million (SEK 30 million), includes fiber optic cables, equipment for jointing and termination and fiber splicing equipment. Ericsson Cables Export Sales Manager Goran HALLANDER said, "This is our first contract in Ukraine. There are reasons to believe that there will be additions to this contract, because the network needs to be completed." Ericsson Cables develops, manufactures and markets cables and related equipment for infocom and power networks. Ericsson, active in more than 130 countries, possesses expertise in fixed and mobile networks, mobile phones and infocom systems makes Ericsson a world-leading supplier in telecommunications.

When you need to know it as it happens

Politics-Economics-Business

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Wednesday

May 13, 1998

Intercon's Daily

Japan To Invest $2 Billion In Ukraine

· Japan's Mitsui company's finance director Tokao SUMITOMO said on Tuesday during a meeting with Ukrainian President Leonid Kuchma that Mitsui, having an annual turnover of $140 billion, intends to invest $2 billion into the Ukrainian economy. The company is primarily interested in joint construction of electric power stations and mineral fertilizing plants, as well as in the construction of bridges over the river Dnieper, SUMITOMO said. Mitsui is also interested in cooperation with Ukraine in oil refining. SUMITOMO proposed to set up joint ventures, promising low interests on Japanese funds.

IFC Joins Kreditanstalt-Ukraine Bank

· The International Finance Corporation (IFC), an arm of the World Bank, has joined founders of Vienna-based Kreditanstalt-Ukraine bank. The IFC signed an accord which entitles it to a 20 percent stake in the bank, worth $2.3 million. The IFC will issue to the new bank a five-year loan of $5 million. Kreditanstalt-Ukraine bank will specialize in loans to projects and corporations, treasury and trustee operations, currency exchange and services in international settlements. A co-founder is one of Ukraine's largest commercial banks. The International Finance Corporation specializes in lending to business development projects and analysis of economic statistics of developing nations.

South Caucasus & Central Asia

Georgian Investigators Find Terrorist Apt.

· The Georgian team which is investigating the February 9th assassination attempt on Georgian President Eduard SHEVARDNADZE has discovered another apartment used by the terrorists. The investigators have discovered a total of 12 conspirator apartments, as well as a bus, a vehicle and three cars used by the terrorists during the preparations for the attack. Georgian security services have arrested nine people in connection with the case and continue searching for other several people. Intercon sources

report that the Georgian prosecutor's office has been working with the US Federal Bureau of Investigations' (FBI) forensic laboratory on the evidence seized. This reportedly has produced impressive results and has contributed to the ongoing investigation positively.

Berezovsky Concludes His CIS Tour

· Newly appointed Commonwealth of Independent States (CIS) Secretary Boris BEREZOVSKY on Tuesday came to the Armenian capital Yerevan, after touring Moldova, Ukraine, Belarus and Azerbaijan. Berezovsky met with Armenian President Robert KOCHARYAN, Armenian Prime Minister Armen DARBINYAN, "the youngest of the CIS premiers," Armenian foreign minister, and other leaders to discuss the CIS transformation and conflict situations in the CIS republics. BEREZOVSKY described Armenia as possessing vast importance in the Russian empire, the former Soviet Union, and now in the CIS. He noted that much has been done to consolidate the CIS adding that all from CIS presidents to ordinary people feel that a huge potential remains untapped. This gives a cause for dissatisfaction, as all realize that much more could have been done. "The Armenian President and I absolutely agreed that the main problem faced by the CIS was economical issues," BEREZOVSKY said. Both men agreed that economic cooperation should take precedence over political integration. On the problem of Nagorno-Karabakh Berezovsky told the press that after speaking with both KOCHARYAN and Azeri President Geidar ALIYEV, "I can say that despite great differences in the approaches there is plenty of space for progress where mutual understanding can be reached." The CIS Executive Secretary stressed he did not want his department to have more functions than assigned by the CIS Rules. "However, the Rules do not say the CIS Executive Secretariat shall not deal with conflict situations," BEREZOVSKY noted. BEREZOVSKY did say that his experience mediating between Moscow and Chechnya could be of value to the Nagorno-Karabakh resolution.

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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