News round-up

17 - 24 August 1997


Azerbaijan: Completion of an oil pipeline from Azerbaijan through Chechnya to the Russian Black Sea port of Novorrosiisk came under threat this week, due to unresolved political issues between Chechnya and Russia. The Azerbaijan International Operating Co, the international consortium managing the US$8 billion off-shore oil project, is also threatening to cease production in the Caspian Sea Kyapaz oil field if the issues are not resolved.

Russia: The gap between rich and poor is closing in Russia, according to the latest report by the State Statistical Committee of the Russian Federation. Overall, real disposable incomes increased by 4.8 per cent in the first half of 1997, and the ratio between the incomes of the richest and poorest ten per cent of the population has dropped to 12.4 per cent, compared to 13.1 per cent for the same period last year.

The Rossisky Kredit Commercial Bank (RKCB) has signed a co-operation agreement with the administration of the Nizhnii Novgorod Oblast region. The bank will help finance local projects within the mechanical engineering, chemical and electronic sectors. It will also assist the local authorities in attracting foreign investment and developing a local stock market.

The St Petersburg region has been awarded a credit rating by IBCA, the European credit rating agency, for the first time. This follows various earlier awards of ratings to Russian cities and regions, including that to St Petersburg itself in March of this year. Similar to other Russian ratings, the region's creditworthiness on long term obligations was listed as BB+, while it was B-rated for short-term obligations.

The European Bank for Reconstruction and Development (EBRD) is to open an office in Novgorod, northwest Russia, to start operations in September. The Novogorod office will be the second EBRD branch in the region, and the fourteenth in Russia overall. It is expected to focus on the Small Business Lending and Microcredit programmes, which the bank launched in 1994.

The Russian Ministry of Finance has presented its draft budget for 1998 to Parliament. Total expenditure will be Rbs 472,000 billion (US$81 billion, 17.7 per cent of GDP). Among the items of expenditure listed in the budget are defence (Rbs 93,500 billion, $16 billion, 3.5 per cent of GDP), agriculture (Rbs 17,800 billion, $3.1 billion), education (Rbs 16,700 billion, $2.9 billion), fundamental space research (Rbs 13,500 billion, $2.3 billion, allocated to the Russian Academy of Science and the Space Agency), health care (Rbs 11,600 billion, $2 billion) and a special allocation for social development in the coal mining regions (Rbs 5,700 billion, $1 billion). Russia will borrow US$9.6 billion next year. Loans to finance contracts already under intergovernmental agreements will total $3 billion, and there are plans to issue Eurobonds to the value of $3.5 billion. Finally, Rbs 485 billion ($83 million) has been allocated to the Chechen Republic in order to activate the financial support programme there.

Slovakia: A new banking law lifting restrictions on foreign ownership was approved this week by the Slovakian Government. The law also makes it easier to get a banking licence in Slovakia, although central bank approval is still required for purchases of more than ten per cent of the shares in a bank. This step comes as part of the Slovakian bid to join the Organisation for Economic Co-operation and Development, and is aimed at further opening the Slovakian economy to foreign investment, levels of which are low compared to other Central and Eastern European countries.

Ukraine: An agreement to deliver 250,000 tonnes of Ukrainian sugar to the Moscow region has been signed between Russia and Ukraine in Kiev, the Ukrainian capital. Payment will be made according to a barter scheme, with Russia paying 50 per cent of the agreed price of US$533 per tonne in advance, to be split as 30 per cent cash and 20 per cent oil or oil derivatives. The other half will be paid on credit via a number of Russian commercial banks. The first delivery is expected in late August.


Bosnia: Biljana Plavsic, President of the Serb-controlled part of Bosnia, has announced plans to leave the Serbian Democratic Party (SDS) and set up her own party in time for the October elections. This move comes as a direct challenge to Radovan Karadzic, who Mrs Plavsic succeeded both as SDS Presidential candidate and as President. Dr Karadzic retains a great deal of support in Serb-controlled Bosnia, despite his loss of the presidency and indictment on war crimes charges. In recent weeks, Karadzic loyalists have been responsible for a number of beatings of state officials, including the kidnap and attempted forced resignation of the new chief of police in Banja Luka, Mrs Plavsic's stronghold.

Poland: The row between Polish Prime Minister Wlodzimierz Cimoszewicz and Polish Peasant Party (PSL) leader Waldemar Pawlak has intensified following last week's PSL-instigated vote of no confidence. Mr Pawlak accused Mr Cimoszewicz of refusing to accept a plan to prepay farmers for grain deliveries. Mr Cimoszewicz , a member of the reformed communist Democratic Left Alliance (SLD), stated that the 'grain issue' was a pretext for campaigning in the Parliamentary elections to be held in four weeks time, and that it would help the SLD eliminate the PSL as a coalition partner in favour of the pro-reform Freedom Union, led by former Polish Finance Minister Leszek Balcerowicz.

Russia: President of the Chechen Republic Aslan Maskhadov met with Boris Yeltsin on Monday, and stated that he was 'very pleased' with the result of their discussions. Mr Maskhadov, a former Soviet officer, was elected President in January this year, and is a strong supporter of full independence and sovereignty for Chechnya. Following the 1994-6 war against the Chechen separatists, Russia did not grant the rebel republic full and formal independence, but Mr Yeltsin has made it clear that he is prepared to negotiate a long-term political settlement. Other matters discussed in the meeting included Russian financial involvement in the Chechen economic restoration process and the rates for oil pipelines running across Chechen territory.

The Deputy Governor of St Petersburg Mikhail Manevich was shot dead last week while travelling to his Nevsky Prospect office. Mr Manevich was also a head of the city property agency responsible for the privatisation programme in St Petersburg. This is the latest in a long series of attacks connected to corruption scandals. In response to the murder, First Deputy Prime Minister Anatoly Chubais admitted that Russia is indeed struggling with 'growing organised crime'.

Russian President Boris Yeltsin has launched a programme to restructure the multi-billion dollar Russian arms trade and to reinforce Kremlin control over it. As part of the programme, Rosnvoruzheniye, the present state-owned arms-dealing monopoly, will be dissolved and replaced by new organisation with the same name. Two other state companies, Promexport and Russian Technologies, will also be given the right to export arms. Promexport will sell surplus stock belonging to the Ministry of Defence while Russian Technologies will trade in Russian military 'know-how'. The high revenues from the arms trade will now go directly to the Ministry of Defence and to the arms manufacturers, rather than to the Rosnvoruzheniye account.

Tajikistan: According to a spokesperson for the Tajikistani President, Tajikistan has crushed a mutiny in the south of the country, and the rebel leader, Colonel Makhmud Khudoyberdyev, has fled to neighbouring Uzbekistan. Since Uzbekistan and Tajikistan have an agreement covering such eventualities, it is expected that Colonel Khudoyberdyev will be arrested and returned to Tajikistan.

Ukraine: Justice Minister Serhii Holovatyi was sacked on August 21. Mr Holovatyi, a pro-western reformer, was part of a small group of Ukrainian ministers dedicated to re-starting market reforms in the country and changing the legal infrastructure in order to develop a free market economy. Mr Holovatyi was also very active in the anti-corruption campaign; his sacking is seen as a result of ongoing conflicts between him and various anti-reform post-Soviet figures in the Ukraine Government. His replacement will be Suzannah Stanyk, previously Minister for Family and Youth.


Kazakhstan: US oil giant Texaco has this week acquired a 20 per cent stake in Kazakhstan's Karachaganak oil and gas field from the field's present development partners, the UK's BG Exploration and Production and Agip of Italy, who now control 32.5 per cent of the company each. The remaining 15 per cent of the shares are controlled by the Russian gas company Gazprom. The Karachaganak field is estimated to hold approximately two billion barrels of oil and about 18,000 billion cubic feet of natural gas. As part of the 40 year production sharing agreement signed by Texaco, the US company will also gain access to the planned oil pipeline between the Caspian and the Black Seas.

Russia: Yevgeny Zyablov, Deputy Chairman of the Moscow Municipal Government, has announced that the city is to float up to US$500 million in Eurobonds on international markets by the end of this year. This follows an earlier issue of $500 million in Eurobonds in May this year.

Sibneft, one of the biggest Russian oil companies, has increased the size of its three year Eurobond offering from US$125 million to $150 million. This follows demand from international investors, who accepted a lower premium on the bond on the basis that Sibneft has no credit rating. The Sibneft bond was the first Russian corporate debt issue to enter the international capital markets, and was priced to yield four per cent over Libor. Other forthcoming issues include those from Gazprom, Lukoil, Moscow City Telephones and Mosenoergo, the Moscow electricity utility.

Confidence in Russian companies is higher than it was six months ago, according to a new survey of US investment institutions carried out by Broadgate Consultants of New York. The main risk factors cited are political risk, corruption, crime and the paucity of shareholders' rights. The survey also highlighted a problem with the disclosure standard of Russian companies, who are frequently unable to deliver precise financial and strategic information to shareholders. Other problems include poor legislation with regard to securities and a problem with the improvement of corporate governance.

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