There is some issue with Cyrillic names when creating new albums in Zenphoto 1.2.7 - the error "Album_name already exists" returned and album is not created. There are actually two issues - the interface and the characters transliteration for the album name.
I'll start from the second, the transliteration - I've found that plugin zenphoto-seo converts only accented characters and leaves a lot of others commonly used Unicode characters, including Cyrillic ones. I've made a new filter, based on zenphoto_seo, which transliterate such characters;
http://divan0.org.ua/web/zenphoto/filter-zenphoto_ascii.php.gz
There is also a possibilty to add these characters to the existing zenphoto_seo plugin, here is the patch:
http://divan0.org.ua/web/zenphoto/plugin-zenphoto_seo.diff.gz
The both ways works for me.
And first issue, the interface - in 1.2.6 there was an option to manually enter album's title and path before submitting. Now we have javascript-prompt with only one field - title, which is supposed to be tranliterated properly. But it doesn't. So, one of the solutions I see is to make changes in the interface to leave the possibility of entering path manually. Or, even better, prompt to enter path manually in case of error in transliteration).