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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, June 4, 1998

Russia's foreign trade and France's foreign trade with Russia is under one percent of its total. Bilateral trade made about $3.2 billion in 1997 as against $2.8 billion in 1996. Russia's exports to France remain at the level of 1996, while imports have increased over 40 percent. Positive trade balance dwindled to $24 million in 1997. The negative trend is related to the pattern of Russia's exports, of which 70 percent are fuel, with natural gas making 30 percent and crude and petroleum products 40 percent proportion. Russia's metal exports to France have grown 18.6 percent in 1997. He believes that the potential is high for cooperation in the peaceful use of nuclear energy, in the space industry, aircraft construction and automobile manufacture. French Renault and the Moscow City government formed a joint venture Autoframos for the manufacture of Megane Classique automobiles. The Russian Space Agency together with a number of Russian firms and the French Alcatel are implementing a project to replace earth satellites that are in a critical state and to expand Russia's satellite communication system. This project ensures over $25 million in annual receipts to the Russian budget in the form of taxes. And just this week Germany, France and Russia are developing peaceful uses of plutonium from the dismantling of Russian nuclear weapons.

KIRIYENKO noted that there are a number measures that impede bilateral trade, including "traditional" problems as inadequately worked out Russian economic legislation, low competitiveness of Russian

Russian Federation


Kiriyenko To Encourage France-Rus Trade

· Russian Prime Minister Sergei KIRIYENKO and French counterpart Lionel JOSPIN today opened the fourth meeting of the Russian-French inter-governmental cooperation commission. The prime ministers and experts reviewed the progress of earlier economic, industrial and financial accords. KIRIYENKO said the goal of his visit to France is to show continuity of the Russian government's reform policies. "The pan-European process, in which France and Russia participate, rests on three main components. These are the foreign policy, European security and the economy. We are to shift the accent just to economic cooperation," he said. KIRIYENKO stressed that he, "does not have an aim of asking for additional credits." He held talks with JOSPIN and French President Jacques CHIRAC. KIRIYENKO said he was pleased with his talks with CHIRAC, "We discussed a wide range of issues, primarily, of course, those concerning Russian-French cooperation. The discussion of many of them will continue at a meeting of the Russian-French joint intergovernmental commission at the level of heads of government." CHIRAC expressed his confidence in Russia's ability to carry out successful economic reforms. CHIRAC believes that Russia should create a stable financial and legal system. It should also improve tax collection and modernize the banking system, making it transparent in order to regain the trust of investors, including foreign ones. The President noted that his country supported Russia's agreements with the International Monetary Fund (IMF) to overcome the current difficulties.

KIRIYENKO sets an ambitious goal to build up Russian-French trade at least two times in the nearest years. France accounts for two percent of

Today's News Highlights


Black Sea Econ. Conf. Meets

Rus. Issues $1.25B Eurobond

LUKoil Issues Pref. Shares

European Republics

Lithuanian Bank Sell-Off

Ukraine Telecom Sell-Off

South Caucasus & Central Asia

Peacekeepers To Withdraw?

Turkish JV In Kazakhstan




June 4, 1998

Intercon's Daily

goods and services and industrial output decline, but also by a number of problems depending on France. There are curbs on French imports of textile goods and products of ferrous and nonferrous metallurgy regulated by France's agreements with the European Union (EU). A package of bilateral agreements is expected to be signed on the results of the work of the Rus-French commission. It will allow eliminating the existing obstacles to a considerable extent.

Chechnya Establishes Banking Sector

· Head of the National Bank of the Chechen Republic (NBCR) Abdurashid ZAKAYEV announced that Chechnya has implemented a reformed banking system. "The financial and crediting institutions formed a two-level banking system, adopted in the civilized world," ZAKAYEV said. The first level includes NBCR and its branches, together with five cash centers in Grozny, Shali, Gudermes, Urus-Martan and the village of Shelkovskaya. The second level is made up of commercial banks which are closely tied to their regional cash centers. ZAKAYEV believes that this system stimulates the development of the network of crediting institutions in the republic and makes it possible to reliably control payment transactions. ZAKAYEV does not agree with the opinion that the strict rules of the new system curb the potentialities of Chechen commercial banks. He said that commercial crediting institutions can settle their payment transactions with Russian clients through NBCR and could establish direct ties with financial institutions in other countries. According to ZAKAYEV, NBCR may open its branches in Commonwealth of Independent State members and other countries.

Black Sea Economic Cooperation Meets

· Leaders of the Black Sea Economic Cooperation group (BSEC), which comprises Turkey, Russia, Ukraine, Greece, Albania, Bulgaria, Romania, Georgia, Azerbaijan, Armenia and Moldova, met in Yalta today to discuss a number of issues including Russia's economic crisis, Caspian Sea oil exports, and the Georgian-Abkhazia conflict. Turkish foreign ministry spokesman Sermet ATACANLI said, "The bilateral meetings are important, but for us the main target is to sign the charter." Member countries will sign a charter formally establishing the BSEC, founded in 1993 to promote stability in the volatile area through economic ties. Turkey, which was left out of European Union's first round of membership talks, is working vigorously to build its influence in the Black

Sea region. This region is a key route for the westward and energy-short countries like Ukraine, which wants to break their dependence on Russia. One planned route for oil export is to transport Azeri oil to Georgia's port of Supsa, which is expected to be ready by the end of this year. Ukraine is expected to propose, "one of the most economical options of oil transportation by the Baku-Supsa-Ceyhan pipeline with a 670 kilometer Odessa-Body pipeline added to it." The creation of a stalled BSEC bank, seen as the financial backbone of the group, will also be discussed. Greek officials said in April the bank would probably be inaugurated at the of this year.


Ruble = 6,167/$1.00 (NY rate)

Ruble = 6,168/$1.00 (CB rate)

Ruble = 6,142|6,194/$1.00 (buy|sell rates)

Russia Issues $1.25 Billion In Eurobonds

· In a surprise move, Russia used its cash Wednesday to reduce interest rates and launched a surprise international bond offering designed to retire some of its high-priced domestic debt. Goldman, Sachs & Co. sold $1.25 billion in new eurobonds for the Russian government. The five-year notes were priced at a $12.07 percent annual yield, or 6.5 percentage points above comparable US Treasuries. Some of the proceeds will go into general funds, while the remainder will most likely be used to retire short-term debt. The government had to repay $1.4 billion of existing debt, but sold only $950 million in bonds. Central Bank first deputy chairman Sergei ALEXASHENKO said the government used tax revenues and foreign financing to fill the gap. The net result was to reduce ruble denominated debt outstanding by $400 million and increase Central Bank reserves by $100 million to $14.7 billion. ALEXASHENKO noted that the use of tax revenues means that other government obligations will go unpaid. "It's the price of the crisis," he said. Finance Minister Mikhail ZADORNOV said that, "this flotation of Eurobonds once again proves investors' undiminished confidence in Russia and in its program of State borrowings." He said the flotation of the Eurobonds as well as a successful auction of State securities on Wednesday confirmed that, "Russia may successfully carry out substantial borrowings on international and domestic markets of capital."

One London bond official told the Financial Times

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June 4, 1998

Intercon's Daily

that, "This is a large bond issue, but it is not large enough to shore up Russia's foreign exchange reserves very effectively." Economic analysts warn that these moves are just short-term fixes and that an aid package from the International Monetary Fund (IMF) is needed. Portfolio manager at PIMCO Mike ROSBOROUGH said, "The fact they can raise financing gets them over the next few weeks or months, but it doesn't address the substantive issues, "referring to the need for better tax collection and lower fiscal deficit. So far this year, Russia has already floated two external bond issues. In March, the amount of the bond issue was 1.250 billion Deutsche Marks ($700 million) with a maturity term of seven years. The bonds were issued at 9.375 percent at annum with lead managers Deutsche Morgan Grenfell and the SVC Warburg banks. The other bond issue floated in April was 750,000 million Italian lire ($410 million) for a term of five years with a maturity date being April 30, 2003. The bond was distributed at 9 percent at annum. The Credito Italiano and the GP Morgan Banks acted as the general managers of the bond issue.


Lukoil Issues Preference Shares

· Russia's largest oil company LUKoil today during an annual meeting authorized 20 million preference shares. Vice President of LUKoil Leonid FEDUN said, "We are counting on using the 20 million preference shares to acquire certain oil assets, such as, for example Rosneft." LUKoil preference shares trade at about $5.50, making the total worth of the authorized shares about $110 million. LUKoil and its partners Gazprom and Royal/Dutch Shell expressed interest in the first sale of Rosneft, but failed to bid because of the high price of $2.1 billion. The new terms for a 75 plus one percent stake in Rosneft is a starting price of $1.6 billion and a required investment of $65.5 million. The bidding on this sale of Rosneft ends on July 16th. "Naturally, we are making preparations and have moved closer than everyone to acquiring Rosneft. But the three participants in our alliance will make a decision about participation in the tender a few days before the bidding ends.

JV To Sell Russian Engine Technology

· The Chief Group, a Russian high-tech holding company, said Monday it has set up a joint venture with a Japanese trading company to sell its environ

ment-friendly engine technology in Japan. Chief Group's President Yuri LEBEDEV said the joint venture between his company and Horie Kikaku will unveil the electric motor and wheelchairs that use the motor in Japan later this month. The motor, which uses a permanent magnet and runs on electromagnetism, can also be used for automobiles, he said. "A combination of Russia's intellectual properties and Japanese industrial power could bring the cost of an electric wheelchair and an electric vehicle in Japan down to one-third the current price," LEBEDEV said.

Technilab And Investors Form New Company

· Technilab Pharma Inc. at the end of last week in Kazan signed an agreement whereby Technilab, Tatchempharmpreparaty Tatarstan (TAT), an important Russian pharmaceutical products manufacturer, and International Information Academy, a group of private Russian investors, established a new company to produce and distribute pharmaceutical products throughout Russian and in other former Soviet Union countries. The new company, named Lesta, is one of the first in the Russian pharmaceutical industry to be established on an international co-ownership basis. Technilab Pharma will have a 45 percent equity position in Lesta while TAT and International Informatization Academy will respectively hold 45 percent and 10 percent of the new company. TAT, founded in 1977, manufactures and markets an array of more than 80 various pharmaceutical products. Sales reached $50 million in 1997. According to Jose M. LARREA, Senior Vice President and General Manager, "Lesta will provide us with access to a well-established pharmaceutical distribution network in Russia. Ten of our products are undergoing approval in that country. At the outset, Technilab will manufacture and ship these products in bulk to TAT which will ensure packaging and fulfillment services at its Tatarstan plant." Technilab Pharma Inc. develops, manufactures and sells pharmaceutical products. The company, Canada's leading manufacturer of generic drugs in liquid and topical dosage forms, markets about 90 prescription and over-the-counter products.

European Republics

Lithuania To Sell Key Bank

· On Wednesday, the Lithuanian government approved the terms and regulations for the sell-off of the state-owned Agricultural Bank, which is the third

When you need to know it as it happens




June 4, 1998

Intercon's Daily

largest bank in terms of assets. The 86 percent state-owned Agricultural Bank, whose sale is planned to be competed by year's end, has a share capital of 171 million litas ($42.8 million). The government rules state that financial institutions or consortia of banks and financial institutions will be allowed to participate in the privatization tender, which starts June 15th. The share capital of the bidder should be no less than 5 million ecu and the bank or financial institution must have met all the requirements of its institutions' management for over a year. Deloitte & Touche, in constorium with local brokerage Vilfima, is advising the government on the Agricultural Bank sell-off. The International Monetary Fund (IMF) and the World Bank have both urged Lithuania to hasten the privatization of state banks, which account for approximately half of the country's banking sector assets of 8.8 billion litas. The government will privatize the nation's largest bank, Savings Bank, after the Agricultural Bank stake.

Ukraine To Sell 26 Percent Stake Of Selma

· Ukrainian State Property Fund on Wednesday announced that it will sell a 26 percent stake of Selma, a telecommunications equipment manufacturer next month to the highest bidder. The stake, comprising of 40,540 shares with a face value of 0.05 gryvnias (2 cents) each, has a starting price of 1.84 million gryvnias. Selma also manufactures electronic measuring equipment. Selma has an authorized capital of 163,720 gryvnias. The winner of the tender will also be required to inject 4 million gryvnias in cash into the company within 60 days of winning, repay debts of 6.94 million gryvnias, and invest 2 million gryvnias in plant modernization.

South Caucasus & Central Asia

Rus. Threatens To Withdrawal From Abkhazia

· Russian First Deputy Foreign Minister Boris PASTUKHOV warned the Georgian government and Abkhazian authorities that Russia may withdraw its peacekeeping force from Abkhazia, if there is no progress in negotiating the conflict between the two

sides, and if they continue to spread rumors about the Russian peacekeeping force. In 1997, Russia spent 103 million rubles on the peacekeeping operation in the region. PASTUKHOV said a potentially large-scale war was prevented in May because of the presence of Russian peacekeeping troops. He stressed that only Russian peacekeeping posts provided shelter for people during the war. Peacekeepers have also assumed the function of patrolling the area with the participation of UN military observers and representatives of warring factions. Lieutenant General Alexander ARINAKHIN, an aide to the chief of the General Staff for peacekeeping affairs, said, "neither side likes the Russian peacekeepers. Therefore they act in the interests of the people who live there." ARINAKHIN said UN military observers, "did not leave their headquarters, stopped patrolling and did not have any influence on the events." On Tuesday, six Abkhazian police were killed by land mines in the Gali region. Both sides believe the incident was intended to undermine the peace agreement signed on May 25th. According to a Georgian Foreign Ministry statement the explosion was, "a pre-planned provocation by those who are eager to disrupt peace talks." The blast went off in a zone which is fully controlled by Russian peacekeepers and Abkhazian forces, the statement stressed. The mandate for the Russian peacekeeping force expires on July 31, 1998.

Turkish Joint Venture in Kazakhstan

· Turkey's leading supermarket chain Migros Turk TAS on Tuesday announced that it signed an agreement to establish a joint venture supermarket firm in Kazakhstan. The new joint venture will have a starting capital of $9,619,250. Migros is controlled by Turkish industrial conglomerate Koc. Koc will hold a 42 percent state in the joint venture. Koc's foreign trade arm Ram Dis Ticaret will own 28 percent and Kazakh Butya Holding will have the remaining 30 percent. Migros said the agreement was signed on Monday. Migros operates around 180 supermarkets, including five stores in Azerbaijan and one in Moscow, called Ramstore.

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

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