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

Thursday, July 30, 1998

Russian Federation

Politics

Sanctions Imposed On Nuclear Firms

· US President Bill CLINTON on Tuesday imposed economic sanctions on seven Russian research centers and companies for allegedly helping Iran develop missiles. The sanctions were issued in an amended executive order banning trade and assistance to INOR scientific center, Grafit and Ployus research institutes, Glavkosmos, Baltic State Technical University, Europalace 2000, and MOSO company. Most of the enterprises are privately owned, but some are associated with the Russian government. The sanctions are based on investigation reports by the Russian government that nine enterprises violated provisions on controlling weapons of mass destruction. The executive order expands CLINTON's authority to deal with the proliferation of chemical, biological, or nuclear weapons technology and missile deliveries permitting him to impose sanctions not only in cases where technology transfer has been carried out, "but also in the event of an attempt to transfer." CLINTON said, "Today's executive order will allow us to respond more effectively to evidence that foreign entities around the world, such as these Russian entities, have assisted in the transfer of dangerous weapons and weapons technologies." House Speaker Newt GINGRICH and Senate Majority leader Trent LOTT urged CLINTON on Monday to impose sanctions against nine Russian enterprises. They threatened a veto showdown with the White House, if CLINTON failed to issue the sanctions soon. The sanctions follow the latest nuclear test of medium-range ballistic missiles by Iran with the potential to reach Israel and Saudi Arabia. On Wednesday, Iran's Ambassador to Moscow Mehdi SAFARI denied any knowledge of Russian companies accused by the US for selling sensitive weapons technology to foreign companies. He

said, "The companies and organizations figured in CLINTON's directive, with the exception of the research institutes, are not even known in Iran." However, Russia's Security Council said they were not surprised by the sanctions. Wednesday, the Russian and Iranian customs services signed an agreement to improve controls over technology exports, especially technology that can be used for both civilian and military purposes.

Chechnya Criticizes Russian Military Exercises

· The Chechen Foreign Ministry issued a statement Tuesday denouncing Russia for conducting military exercises just outside the republic's borders. The exercises are, "an open demonstration of force which may destabilize the military political situation in the entire Caucasus region." According to Russia the exercises, which are to last all week, include training to fight terrorist attacks, kidnappers, and smuggling, the sort of violence on the rise in the region. Russia's Interior Ministry assumed that the Chechen Interior Ministry would participate in the exercises and called their lack of involvement a regrettable mistake. The Russian Interior Ministry believes that joint actions by the law-enforcement bodies of Russia and Chechnya could have a considerable effect on the criminal situation in the North Caucasus.

Economy

Ruble = 6.240/$1.00 (NY rate)

Ruble = 6.238/$1.00 (CB rate)

Ruble = 6.197|6.279/$1.00 (buy|sell rates)

Today's News Highlights

Russia

Fitch Downgrades To BB-

Military Sales To Raise Rb400M

Samsung Signs $20M Telecom

European Republics

Williams Buys Stakes In Oil Cos.

South Caucasus & Central Asia

Georgian- Russian Consultations

Us, Turkey, Turkmen On Oil

Azeri-Rus Sign Joint Statement

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Thursday

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Fitch Downgrade Debt Rating To BB-

· International rating agency Fitch IBCA has downgraded Russia's long-term foreign currency from BB to BB minus. The downgrade has been caused by Russia's fiscal problems. Fitch IBCA stated that the Russian government will face difficulties in improving its budget position to the degree required by the International Monetary Fund. Fitch IBCA lowered its ratings of seven Russian regions and two oil companies, Tatneft and Sibneft. The country's short-term foreign currency debt rating remains unchanged at B. On June 5, the agency placed Russia on rating alert with negative implications. "The 1999 budget is likely to be the subject of a bitter and destabilizing confrontation between the government and the Duma," according to a Fitch IBCA statement. Fitch IBCA said it expects the government to secure a 1999 budget that will satisfy the IMF, but noted its task would be easier if it didn't face opposition from the Russian State Duma. As a result of the Duma's rejection to parts of the government's reform package, the IMF cut the first disbursement under its emergency loan to $4.8 billion from $5.6 billion. Fitch IBCA said meeting the IMF's demand that the government improve Russia's primary budget position by at least three percentage points of gross domestic product will require, "a regime change in the collection of tax revenue and expenditure control."

Business

Military Sale to Raise 400 Million Rubles

· Speaking at a teleconference with territorial property funds on Wednesday, deputy state property minister Viktor PYLNEV said the Russian State Property Ministry plans this year to sell the most lucrative of redundant military property, such as aircraft, vessels, oil tank farms, non-ferrous scrap and partially real estate owned by the Defense Ministry. PYLNEV said the ministry expects to raise at least 400 million rubles from military asset sales in 1998. The ministry has already released 112 instructions concerning the sale of more than 1,200 facilities. In 1999, the ministry expects to transfer about one billion rubles from the sale of property to the Defense Ministry's accounts. The ministry has drafted a presidential edict allowing the sale of redundant military assets through commodity exchanges and the wholesale and retail trade system.

Samsung Signs $20 Million Telecom Deal

· Samsung Electronics Co. Ltd. has signed a $20 million contract to export of code division multiple access (CDMA) telephone handsets to wireless local loop operators in Vladikavkaz, Bryansk and Vladivostok, Russia. The handsets being exported to Russia are conventional cellular handsets that also feature the ability to be used on wireless local loop (WLL) networks. These cellular handsets, will enable the users to have telephone, voice mail and text data services on their network, which basic WLL handsets support. WLL systems use wireless telephone technology, similar to cellular or PCS systems, to connect homes and businesses in rural areas to the telephone network. By using wireless links, remote locations can be provided with telephone service without the expense of laying cables. Samsung said it expects additional orders from Russia as network operators expand their systems. The South Korean company expects expansion will add an estimated 10 million new subscriber lines over the next five years.

Conoco Buys 15.7 percent Stake In AGD

· Conoco, the oil and gas branch of EI duPont de Nemouts &Co. Tuesday bought a 15.7 percent stake in Arkhangelskgeoldobycha (AGD), a formerly state-owned geological company. It is believed that the total value of AGD is about $200 million and Conoco most likely purchased the stake from LUKoil, the largest Russian oil company. LUKoil owns more than 70 percent of AGD, while Rosneft Oil Company owns the rest. The value of Conoco's stake is estimated to be between $30 million and $50 million. Under the agreement Conoco is expected to bear some of the costs of AGD's capital investments in the North Territories. By the end of 1997, Conoco invested $500 million in Russia. Conoco's investment in AGD shows its long-term commitment to Russia, since the production share from the Ardalin field, 26,000 barrels per day, is not likely to make the company great profits. AGD has a stake in the $20 billion Timan Pechore oil prospect in western Siberia with LUKoil, Texaco Inc. Exxon Corp., Amoco Corp., and Norsk Hydro A/Sare.

Aircraft Modernization Plans Changed

· General Designer of the MIG Aviation Company Mikhail KORZHUYEV Tuesday said only three MIG-

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29 fighter jets will be modernized into MIG-29CMT this year despite the initially planned 10-15 aircraft. The Russian Defense Ministry decided to modernize 150-180 MIG-29 jets into MIG-29CMT in order to raise the combat ability of the Air Defense. It was planned to start the modernization in September at a military aircraft-repairing plant of Kubinka, the Moscow region, and the MIG company. The first 10-15 modernized aircraft, close to the fifth generation fighters on their characteristics, were expected to be adopted by the Air Force before the end of this year. The 1999 modernization plans were for 20-30 aircraft and 40 MIG-29 to be modernized every year starting from 2000. The modernization was to be financed from the budget of the Defense Ministry. However, the ministry has not received federal budget allocations for the purchase and modernization of materiel, armament head of the Russian Armed Forces Colonel-General Anatoly SITNOV said. Therefore, the aircraft modernization plans had to be changed.

South Caucasus & Central Asia

Georgia-Russian Consultations

· Georgia and Russia held consultation talks on the political, trade, cultural, humanitarian, military and border cooperation in Tblisi on Tuesday. The consultations were attended by staffers of the Georgian and Russian Foreign Ministries. The sides stressed their interest in the further strategic partnership and the course elaborated by the two presidents, according to a Georgian Foreign Ministry press report. They noted progress in several spheres of the bilateral cooperation and the emerging ways to settle problems. When discussing the political issues, the sides focused on settlement of conflicts. It was agreed to hold meetings of intergovernmental commissions on the economic cooperation in Moscow and Tblisi in the near future.

US, Turkey, Turkmen Discuss Pipelines

· US presidential special adviser on the New Independent States Richard MORNINGSTAR and Turkmen President Saparmurat NIYAZOV met Tuesday to discuss trans-Caspian pipeline routes. NIYAZOV stated that Turkmen supports the multiple pipeline routes to export gas to western markets. He called attention to the project of a trans-Iranian gas pipeline to Europe and the on-going negotiations with Russia to coordinate the conditions of the Turkmen gas transit to the traditional Ukrainian consumers. An ambassador at large of the Turkish Foreign Ministry undersecretary Yaman BASKURT, participating the meeting, said the American-Turkish demarche in countries, that took part in the creation of the Caspian pipeline system, was done to boost the projects.

MORNINGSTAR delivered to NIYAZOV a message from US President Bill CLINTON, who proposed a framework interstate agreement on projects of the Eurasian energy corridor and the development of the Caspian oil and gas fields. Transit and financial possibilities of pipelines from Azerbaijan, Kazakhstan and Turkmenistan are unlimited, MORNINGSTAR said. He expressed concern on the Azerbaijani-Turkmen confrontation over disputable oil fields. BASKURT said that the US proposal is fully supported by Turkish President Suleyman DEMIREL. The Turkish official described the trans-Caspian route as the safest and beneficial for Turkmenistan

European Republics

Lithuanian, Williams Sign $300 Million Oil Deal

· Lithuanian Economics Minister Vincas BABILIUS and Williams International Company President John BUMGARNER signed a letter of intent to sell Williams one-third of the nation's three key oil companies for $300 million. Under the agreement, Williams will pay $150 million for 33 percent of each of Mazheikiu Oil Refinery, oil pipeline Birzhu owned by Naftotiekis, and Butinges Nafta, an oil terminal still under construction. Williams will later invest $150 million, which will mostly be concentrated in the Mazheikiu Oil Refinery. BUMGARNER said, "We are counting on our cash and profits to fund that $500 million over a four to five-year period of time." Lithuania had valued the companies at $390 million, but agreed to exclude some $40 million worth of assets from Mazheikiu. BABILIUS said, "We have met Williams halfway. The price did not go up; we simply decreased the value of the objects by taking away some parts." He added that half of the $150 million in direct investments will be made when the final deal is signed and then the remaining $75 million will be invested over the five-year period. Williams will immediately assume operating rights, while the final deal is being worked out.

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and Turkey, and the trans-Iranian route as problematic for the US.

Azeri-Russia Sign Statement On Caspian Sea

· Azerbaijan and Russia ended their talks in Baku on Wednesday by adopting a joint statement on the Caspian Sea status. The talks Between Azeri President Geidar ALIYEV and Russian First Deputy Foreign Minister Boris PASTUKHOV lasted more than five hours. Most of the discussion was held behind the closed doors with the participation of the government delegations of the two countries and then between ALIYEV and PASTUKHOV in private. The joint statement on the status of the Caspian Sea reflects the progress on the sectoral division of the Caspian Sea reached during the talks. It also reiterates the two countries' desire to continue talks on the Caspian Sea. At the same time, the source said Russia and Azerbaijan failed to reach agreement on the division of the surface and the waters of the sea.

Russian Foreign Minister Yevgeny PRIMAKOV suggested the idea of a 45-mile zone under which all mineral resources within 45-miles of the coast belong to coastal state, while the middle of the Caspian remains common property, PRIMAKOV suggested the idea at a meeting of foreign ministers of Caspian states in Ashkhabad in November 1996. However, neither Azerbaijan nor Kazakhstan agreed to this, said Yuri MERZLYAKOV, head of the Russian Foreign Ministry's working group on the Caspian. "Kazakhstan believes that, except for territorial waters, only seabed should be subdivided, while water will remain in common use. Azerbaijan continued to insist on complete division as the Azeri constitution has an article on Azerbaijan's ownership of the Caspian sea sector and airspace over it," MERZLYAKOV said. Early July, Kazakhstan President Nursultan NAZARBAYEV and Russian President Boris YELTSIN signed an agreement on the delimitation of the seabed in the Caspian to exercise sovereign rights on the use of mineral wealth. However, this document will become effective only when

all littoral states reach a consensus on the status of the Caspian Sea and formalize it in an appropriate convention. This convention should also lay down the principle of demilitarization of the sea, proposed by ALIYEV, and take into account the interests of all littoral states concerning navigation, fishing and environmental protection. A division of the sea by the sectoral principle will give Azerbaijan 18 percent of the seabed, Iran 14 percent, Russia 16 percent, Turkmenistan 22 percent, and Kazakhstan 29 percent. PASTUKHOV warned that if the sea is divided, each state would use its own laws in its sector, which may later lead to territorial conflicts.

On Tuesday, PASTUKHOV announced plans for the deputy foreign ministers from the five Caspian littoral states to gather in Moscow on September 1st in an effort to expand contacts, both bilateral and multilateral, among the Caspian states. The meeting came out of talks with Turkmenistan Foreign Minister Boris SHAKHMURADOV in Teheran Monday and was the focus of talks in Baku on Wednesday. "We are thinking over how to reach consensus between all the Caspian littoral states," he said adding that it is not that easy to bring together five different opinions and reduce them to a common denominator. PASTUKHOV said that the talks would also touch on increasing economic ties, including energy, related to oil extraction and transportation.

Early on Wednesday, PASTUKHOV also met with Azerbaijan Foreign Minister Tofik ZULFUGAROV, and later with Azerbaijan Prime Minister Artur RASIZADE. PASTUKHOV was accompanied by co-chairman of the OSCE Minsk group on Nagorno Karabakh Yuri YUKALOV. His presence makes it possible to discuss the settlement of the Armenian-Azeri conflict and Russia's role in the settlement process. Prior to the talks PASTUKHOV noted Russia wishes that the dialogue between the Azeri and Russian ministries and agencies, also the foreign ministries, should not be broken off, should be permanent, and the main thing, should help strengthen friendship and mutually-advantageous cooperation.

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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