bne IntelliNews monthly magazine July 2017

SPECIAL FOCUS: POLAND P.34

NLB float flop tarnishes Slovenia’s reputation among investors The strange death of Social Democratic Czechia July 2017

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An unlikely story: terror in Tehran Spotlight trained on Russia for 2018

Life after Putin becomes debatable p. 52

Can IT revive Russia’s economy? p. 53

Czech castles: to have and have not again p. 58

ISSN 2059-2736

China Rising

The 2nd Iranian Consumer Summit 2017 DATE: 21-22 SEPTEMBER, 2017 | VENUE: MERCURE PARIS PORTE DE VERSAILLES EXPO HOTEL, PARIS

MAPPING THE JOURNEY TO SUCCESS IN IRANIAN RETAIL MARKET ENTRY • UN-US-EU Trade Restrictions • Investment Guarantees • Currency Risks • Local Partnership

RULES & REGULATIONS

CONSUMER BEHAVIOUR

• Importation

• Buying Habits

• Local Production

• Marketing & Advertising

• Governmental Control

• E-commerce • Social Media

TRADE AFFAIRS

OPERATIONS

• Iran - UK, EU & US Trade Relations

• Company Registration

• Remaining Sanctions

• Business Law

• Banking

• Labour Law

• Fiscal Policy

RETAIL PROPERTY MARKET • Office Space • Shopping Malls • Setting up Stores

Key topics of interest: • How will your Go-to-Market strategy look and what is your approach to win the loyalty of sophisticated Iranian consumers?

• We will explore not only opportunities in Iranian retail and FMCG sectors but also provide a platform to discuss practical questions which will help your business to evaluate costs, risks and overcome challenges for the creation of a successful business plan • Key experts will share their knowledge and expertise regarding compliance, investments guarantees, business and labour law, fiscal policy, marketing and advertising techniques, importation and governmental control

• We will talk about successful trading models, e-commerce and the retail property market which is a must to know and understand in order to reach your customers faster and more effectively • US and Europe-Iran trade relationships In association with: bne IntelliNews Supported by: Department for International Trade Event Partners: Middle East Association Media Partners: Media Group, Financial Tribune, The Business year, Private Banking, Convention of Independent Financial Advisors, Credit Insurance News

For further information, please visit www.newspartaevents.net/ics2017 Snap-shot of 2016’s Iranian Consumer Summit Participating organisations:

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I Contents

bne July 2017

Senior editorial board Ben Aris (Berlin) +49 17664016602 editor-in-chief baris@bne.eu

16 20

James R Hammond (Boston) +1 6178525441 publisher jhammond@bne.eu Robert Anderson (Prague) managing editor

+42 0603517867 randerson@bne.eu

Clare Nuttall (Bucharest) news editor

+40 757369985 cnuttall@bne.eu

Nicholas Watson (Prague) contributing editor

+42 0731582719 nwatson@bne.eu

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Liam Halligan (London) +44 7801799279 editor-at-large LHalligan@newsparta.net Eastern Europe Nicholas Allen (Berlin) bureau chief Mark Galeotti (Prague) contributing editor

+49 15730395872 nallen@bne.eu mgaleotti@bne.eu

Central Europe Tim Gosling (Prague) bureau chief

+42 0720180811 tgosling@bne.eu

Central Asia Will Conroy bureau chief

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Advertising & subscription Elena Arbuzova (Moscow) +7 9160015510 business development earbuzova@bne.eu Design Olga Gusarova (London) art director

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Cover illustration by Illarion Gordon.

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6 THE MONTH THAT WAS

COMPANIES & MARKETS 10 NLB float flop tarnishes Slovenia’s reputation among investors 12 Banking convergence returns to Central and Eastern Europe, says RBI 13 FDI to Emerging Europe soars in 2016 15 Businesses move beyond early learning stage of blockchain 16 Mavi Jeans’ IPO overcomes the Turkish blues

Print issue: £4.50 /$6.75 /€5.90 . €499 / year

20 Eurasian eyes turn east 21 Russia China Investment Fund takes aim at Russia’s best equity stories 22 China stirs up Russia’s Central Asian backyard 23 China’s insatiable appetite for Central Asian oil and gas 25 Chinese investors compete for Bosnian coal projects 27 When sleeping giants meet

34 An economic test for Polish ambition

COMPANIES MENTIONED

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New Sparta Media | 27a Floral Street, 3rd Floor, London, WC2E 9EZ, UK

18 Russia's Asian pivot starts to pay off

SPECIAL FOCUS – Poland

Alrosa (Page 21)

bne Intellinews is published by Emerging Markets Direct Media Holdings LLC, a New Sparta Media Company

COVER FEATURE

Capital Economics 35-36 CEFC 27-29 China Development Bank 26 China Exim Bank 26 China Gezhouba Group 25 China Petroleum & Chemical 23

China Power Engineering and Consulting Group Corporation 26 CIC 21 Citi 45 Citic 24 CMEC 26 CNPC 24 Commerzbank 35 Comsar Energy 26

Dongfang 25-26 EBRD 36 Elektroprivreda Bosne and Hercegovine 25 Empresa 29 Erste Group 35 Eurasia Drilling Company 21 Exim Bank 25 Fitch Ratings 34-36

Deloitte 54 Detsky Mir 21

Global Source Partners 44-46

Contents

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48

55

OPINION

Polish coalmining enjoys its good times while they last 52

Life after Putin becomes debatable

53

Can IT revive Russia’s economy?

55 SOUTHEAST EUROPE

Re-empowered Rouhani still faces struggle to woo investors

Better than expected Turkish growth raises concerns

ARTS, CULTURE & PEOPLE

CENTRAL EUROPE 42

44

The strange death of Social Democratic Czechia

58

To have and have not again

62

NEW EUROPE IN NUMBERS

66

EVENTS

EASTERN EUROPE 48

Spotlight trained on Russia for 2018 World Cup dress rehearsal

58

EURASIA 50

An unlikely story: terror in Tehran extremism

Goldman Sachs 16-17 Guangdong Electric Power Design 25

KazMunaiGas 28 KTW 40 Lukoil 21

Hitachi 25 Hochtief 29

Mavi Giyim 16-17 Moody’s 36

Invia 29

RBI 12-13 RCIF 21 RDIF 21 RFP 21 RMU Banovici 25 Sinopec 24 SUEK 40 Travel Service 27

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NLB 10 JP Morgan 45-46 JSW 40 J&T Financial Group 28-29

Penta Group 29 PGG 40-41 PhosAgro 21

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Politics Central Europe The European Commission launched infringement proceedings against the Czech Republic, Hungary and Poland over their refusal to take part in the EU’s migrant quota scheme.

The Hungarian parliament defied international criticism and passed stricter rules against non-governmental organisations. The law forces civil society groups that receive foreign funding to register as such and advertise themselves as “foreign funded” on all public materials and appearances.

Czech Prime Minister Bohuslav Sobotka stepped aside as Social Democratic leader as the party’s opinion poll ratings remain in the doldrums just four months before the general election. Foreign Minister Lubomir Zaoralek will lead the party into the elections.

The Czech Republic is a standout in terms of tolerance of homosexuality amongst CEE countries, where 77% of young people under the age of 39 accept same-sex marriage and 58% of the over 40s do – well in excess of the regional median of 23% of those ages 18 to 39 who favour same-sex marriage, compared with 12% of those 40 and older, according to a recent Pew Research Center survey of adults in 18 CEE countries.

The Czech Republic will file a complaint at the European Union Court of Justice against the European Commission’s proposed revision of the Firearms Directive designed to tighten gun controls in order to combat terrorism. Interior Minister Milan Chovanec has proposed that gun laws should be relaxed so that citizens can use arms against terrorists. The Czech Republic has never experienced a terrorist attack.

Southeast Europe Romania’s senior ruling Social Democratic Party nominated

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Economy Minister Mihai Tudose to replace Sorin Grindeanu, after the prime minister fell out with the powerful PSD chairman Liviu Dragnea, who then orchestrated a vote of no-confidence in the party’s own nominee of just four months ago.

Albania’s governing Socialist Party won 48.8% of the vote in the country’s general election, giving it 73 seats in the parliament – two more than the 71 needed for a majority.

Ana Brnabic will become Serbia’s first female and first openly gay prime minister, after President Aleksandar Vucic gave her a mandate to form a new government.

the police moments after leaving his apartment. Most of the arrests were in Moscow and St Petersburg but there were also significant rallies in some 200 cities across Russia.

The State Duma, the lower chamber of Russian parliament, passed a controversial bill on a $5bn housing renovation project in Moscow. Under the scheme, more than 4,000 apartment blocks built in the 1950s and 1960s are to be demolished.

Eurasia Islamic State claimed responsibility for two deadly attacks in the Iranian capital on June 7 that targeted the parliament and the tomb of Ayatollah Ruhollah Khomeini, founder of the Islamic Republic, killing 17 and injuring more than 40.

Tajik President Emomali Rahmon has granted the post of state justice counsellor to his daughter Ozoda Rahmon, the head of the presidential administration.Rahmon has actively been shuffling his children among positions of power over the past few years.

Eastern Europe The US Senate overwhelmingly backed deeper sanctions against Russia, cementing into law measures imposed in 2014 as well as a widening of them to target Moscow’s controversial Nord Stream 2 gas pipeline to Europe EU leaders agreed to extend the sanctions imposed on Russia for its military aggression in Ukraine by another six months until January 2018.

Russia warned the US-led coalition in Syria that its aircraft would be regarded as targets after the US shot down a Syrian military aircraft. Tensions also rose between the US and Russia in the Baltic region after a series of aerial confrontations.

More than 1,500 people were arrested on June 12 during protests orchestrated by Russian opposition leader Alexei Navalny, who was detained by

Uzbekistan’s once-powerful but sidelined Deputy PM Rustam Azimov has reportedly been shifted to a middling post. The former political heavyweight and big player in economic reforms appears to have been pushed out of the country’s ruling triumvirate by Uzbek President Shavkat Mirziyoyev who is moving to consolidate his power.

The Georgian government faced assorted protests over its failure to protect Azerbaijani and Turkish dissidents. Protesters were upset that Azerbaijani journalist Afgan Mukhtarli was abducted from central Tbilisi and transported to a jail in Azerbaijan, while days earlier a court ordered Turkish educator Mustafa Cabuk to be handed over to Ankara. It claims he is connected to Fethullah Gulen, the US-based cleric it accuses of attempting to stage a coup.

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Economics Central Europe Polish retail sales grew 7.4% y/y at constant prices in May. The reading marks a pick-up in the pace of growth of retail sales over the 6.4% annual growth seen in April.

legislative amendments. Sarajevo will now have to start negotiating new conditions in order to save the deal with the institution.

Croatia's consumer prices rose 1.1% y/y in May, decelerating from a peak point of 1.4% increase in April, according to data from the statistics office.

Croatia's registered unemployment rate declined for the fourth consecutive month to a record low of 11.7% in May from 13.2% in April, preliminary data from the statistics office showed.

Polish core inflation gained 0.8% y/y in May. The reading – which is 0.1pp lower compared to April – shows core inflation slowing after four months of acceleration.

The headline CPI reading remained relatively subdued at 1.9% y/y in May. Polish industrial production returned to fast growth, growing 6.5% y/y in May when seasonally adjusted.

Polish unemployment fell 1.6pp y/y to 7.5% in May. The rate is lower that at any point since Poland shed the legacy of over-employment under communist rule and became a market economy in 1990.

Montenegro’s GDP expanded by a real 3.2% y/y in the first quarter, slowing from a 3.4% y/y growth in the previous three months, the statistics office reported.

Macedonia recorded zero GDP growth in the first quarter. The figure was expected bearing in mind the lengthy political crisis in the country, but growth is expected to revive later in the year following the appointment of a new government.

Czech unemployment fell a further 0.3pp in monthly terms to 4.1% in May, the fourth monthly drop in a row.

Slovak inflation accelerated once more in May as it pushed to 1.1% y/y. The annual rate of expansion in the CPI was 0.3pp quicker than in April. On a monthly basis, prices grew 0.2% m/m, double the rate of the previous month.

more than double the proposed amount of $3bn, according to the issue’s organiser VTB Capital.

Russia’s industrial output in May remained strong, jumping by 5.6% year-on-year compared with 2.3% y/y growth seen in April and 0.1% y/y in first quarter overall. The y/y growth in the reporting month was the strongest seen since February 2012.

Cash-strapped Belarus has successfully placed $1.4bn dual-tranche US-dollardenominated Eurobonds with five-year and 10-year maturities.

The National Bank of Belarus reduced its benchmark interest rate by 1pp to 13%. The regulator says the cut was possible due to positive inflation dynamics and favourable trends in the foreign exchange and deposit markets.

Eurasia

The growth of Bulgarian retail sales decelerated sharply in April, slowing to 2.1% y/y from a 6.0% y/y rise in March. The slowdown in growth was seen across the board in sales of food, non-food and fuel.

Slovak unemployment plunged to a record low in May. The unemployment rate fell 0.39pp m/m and 2.1pp y/y to 7.35%.

Turkey's calendar-adjusted retail sales volume index fell by 0.1% y/y in April after declining a revised 0.5% in March.

Southeast Europe

Eastern Europe

Bosnia will lose out on a new tranche of IMF funding, after it failed to adopt

Demand for the latest issue of Russia’s sovereign Eurobonds exceeded $6bn,

The Central Bank of Uzbekistan has decided to increase its refinancing rate by as much as 5 percentage points to 14%, changing the rate for the first time since January 2015.

The central bank said its decision was influenced by “growing inflationary risks” and the need to ensure stable consumer prices.

Foreign direct investment (FDI) to Georgia increased by 22% y/y to $1.64bn in 2016, the country's statistics agency Geostat said. On an adjusted basis, FDI rose by 5%.

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Business Central Europe

Eastern Europe

Volkswagen Slovakia will hand over a 14.1% pay rise to workers at its plant in Bratislava to end a strike.

Tensions have grown in labour relations over the last year or more across Central Europe as the region faces a worsening labour shortage.

Key assets of Russia’s multi-industry investment conglomerate AFK Sistema have been arrested under a €2.5bn lawsuit pursued by statecontrolled oil giant Rosneft in the court of the Russian republic of Bashkortostan. Sistema’s anchor asset Bashneft was effectively renationalised in 2014 by a court order, with the majority stake in the oil company being subsequently acquired by Rosneft in October 2016. Now Rosneft claims that Sistema extorted RUB170.6bn (€2.57bn) from Bashneft during its ownership.

Czech-based energy holding EPH expanded its UK asset portfolio by agreeing to buy two combined cycle gas turbine power stations from UK utility Centrica for £318mn. EPH will buy the Langage and South Humber Bank CCGT power stations, which have a combined capacity of 2.3GW. The first ever shipment of LNG from the US to CEE arrived in Poland on June 7. The cargo, which was loaded via the Sabine Pass terminal operated

by Cheniere Energy, remains for the moment a one-off purchase on the spot market.

Arbitrators in Sweden have rejected multi-billion ‘take-or-pay’ claims

by Russian gas monopoly Gazprom against Ukrainian state gas giant Naftogaz, signalling at least a partial victory for Kyiv in its longstanding energy dispute with Moscow.

Eurasia Southeast Europe Croatia’s Agrokor has secured €480mn worth of fresh financing from bondholders led by Knighthead Capital Management and domestic banks.

Sberbank, the struggling retail and food giant’s largest creditor, previously attempted to block the new loan deal by filing a lawsuit with a Zagreb court but this was rejected.

South Africa’s NEPI bought the mixed use Serdika development in Bulgaria for €207.4mn. The fund acquired the Serdika Center shopping mall and Serdika Office office building in Sofia from Austrian and German investors.

The biggest pharmacy chain in the Czech Republic and Slovakia, Dr. Max, is entering the fast growing Romanian market by acquiring Arta pharmacy chain and a drugs distributor.

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French oil major Total expects to sign a contract with Iran to develop part of the world’s biggest natural gas field. The deal on the Iranian part of the South Pars field – part of a giant gas reservoir which is shared with Qatar in the Persian Gulf – is expected to have an initial investment value of $1bn and would represent the Islamic Republic’s first investment by an international oil company since nuclear sanctions were dropped at the start of last year.

France’s Carrefour is closing its Almaty hypermarket in Kazakhstan just 15 months after opening it.

It blames poor market conditions.

Carrefour was the first truly global retail chain to arrive in Kazakhstan.

There was even a televised visit of Kazakh President Nursultan Nazarbayev to the store.

The Month That Was I 9

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Finance Central Europe

Southeast Europe

The Czech central bank will raise counter-cyclical capital requirements for banks as part of a campaign to temper hot credit markets. The CNB said that from July 1, 2018 banks must hold a buffer of 1% against domestic lending. The current counter-cyclical buffer, introduced at the start of the year, stands at 0.5%.

A Moldovan court has sentenced Ilan Shor, the main suspect in the $1bn bank frauds that surfaced in 2014, to seven and a half years in prison. In his capacity as head of the management board of Banca de Economii (BEM), Shor was found guilty of siphoning off MDL5bn ($360mn) from the bank in November 2014.

Investment into CEE commercial real estate is set to reach a new record in 2017, property consultancy CBRE predicted. In the past 12 months, €12.2bn was invested by investors into core CEE markets, reaching a new peak for four rolling quarters. That momentum is expected to continue through the year, the agency says, with 2017 volumes set to surpass the €11.3bn recorded last year.

Investment flows into Czech commercial real estate almost doubled in annual terms in the first quarter of 2017 to total €1.57bn, Colliers International research showed. Yields on the Czech market have been pushing to historic lows over the past couple of years, as cheap financing and the hunt for yield herds investors into CEE property.

A private equity fund controlled by a Hungarian oligarch regularly named as a proxy for the prime minister has agreed a deal to buy a 49% stake in MKB Bank. Once the deal goes through, Lorinc Meszaros – the mayor of Prime Minister Viktor Orban’s home village – will directly and indirectly hold 49% of the shares in MKB, further boosting his interest in the Hungarian banking sector. The former plumber previously raised his stake in state-owned mortgage bank FHB Jelzalogbank on April 21.

Slovenian Prime Minister Miro Cerer announced that his government has decided to give up on the IPO of the country’s largest lender Nova Ljubljanska Banka (NLB). The decision was made after his cabinet rejected €55 as the minimum bid price per share earlier in the day.

Eastern Europe The board chairman of Ukraine’s nationalised PrivatBank, Oleksandr Shlapak, tendered his resignation, just three days after national authorities said they will inject another UAH38.5bn (€1.3bn) of additional capitalisation to the country’s largest lender.

Russian Regional Development Bank (VBRR), a subsidiary of Russia's Rosneft oil major, now controls 99.99% in the capital of troubled "church bank" Peresvet, after acquiring an additional share issue of the bank.

This is Russia's first case of bail-in where the failed bank is supported with its creditors' funds. The Central Bank of Russia (CBR) pledged to provide RUB66.7bn (€1bn) to VBRR for covering holes in Peresvet's capital, while another RUB69.7bn was to be provided by creditors of the "church bank" by acquiring 15-year convertible bonds.

The Moscow court of arbitration has ruled that Russia's largest bank Sberbank should compensate state oil pipeline monopoly Transneft for

RUB67bn (€1bn) that was lost on currency hedging operations with the bank as a result of ruble devaluation in 2015. While the court argued on June 23 that Transneft was not fully informed of all the risks associated with the hedging instruments, Sberbank said it will appeal the ruling, calling it a dangerous precedent that would undermine the derivatives market and lead to massive banking losses.

Eurasia A group of creditors that has reportedly lent International Bank of Azerbaijan (IBA) $220mn objected in a US court to the lender’s debt restructuring plan saying it “runs roughshod over certain fundamental rights”. They include asset managers Fidelity Management & Research Company and Franklin Templeton Investment Management and hedge funds Promeritum Fund and VR Global Partner.

Second largest Kazakh lender Halyk Bank is to provide 185bn tenge (€520.5mn) to recapitalise largest lender Kazkommertsbank (KKB) after buying a 96.8% stake for a nominal sum. KKB’s bad loans problem stems largely from its takeover of failed bank BTA in 2015. The state will first buy up KZT2.4 trillion of KKB’s bad loans.

China’s Citic Bank and the investment arm of state-run China Tobacco have agreed to buy 60% of Kazakhsan’s Altyn Bank, owned by Halyk Bank, which will retain a 40% stake of Altyn Bank.

The Shanghai Stock Exchange is to acquire a 25.1% stake in Kazakhstan's new stock exchange, set to launch as part of the Astana International Financial Centre (AIFC), a financial services hub to be run as a free economic zone modelled on Dubai’s International Financial Center.

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Headquarters of Nova Ljubljanska Banka. AP Photo/Darko Bandic

NLB float flop tarnishes Slovenia’s reputation among investors bne IntelliNews

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he Slovenian government has scrapped plans for the IPO of the country’s largest lender Nova Ljubljanska Banka (NLB) after the ruling coalition failed to agree on the pricing of the offer.

The decision further tarnishes Slovenia’s reputation among investors, coming as it does after a series of aborted privatisations, including the high profile failure of the Telekom Slovenije sale in 2015.

It also leaves Ljubljana scrabbling for a way to comply with its commitment to the European Commission to sell off the wholly state-owned bank, while at the same time keeping the notoriously privatisation-averse population sweet ahead of the 2018 general election.

According to a statement from Prime Minister Miro Cerer, the main reason for dropping the IPO plans, which were already at an advanced stage, was a dispute over pricing; his cabinet had rejected €55 as the minimum bid price per share earlier in the day.

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This had been proposed by Slovenian Sovereign Holding (SSH), which manages state assets, and had recommended a price range of €55 to €71. The decision followed rumours of a rift between Cerar’s Modern Centre Party (SMC), its coalition partner the Democratic Party of Pensioners (DeSUS), and SSH. “The government has not approved the minimum price. Its key job now is to look for and find better solutions in cooperation with the European Commission,” Cerar told a press conference on June 8.

The other issue that scuppered the IPO was an ongoing lawsuit over Yugoslav-era deposits held by now-defunct Ljubljanska banka (LB), to which NLB is the successor, the government statement said. These deposits were repaid to Croatian savers by the Croatian state, which then authorised Croatian commercial banks to recover them in court. The liabilities are estimated at €350mn to €400mn.

There was already speculation that the IPO was dead in the water on May 29, when the government refused to provide

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state guarantees to shield investors from the bank’s potential liabilities to Croatian banks. This decision caused Finance Minister Mateja Vranicar Erman to tender her resignation in frustration, but Cerar refused to accept it.

By this time, divisions within the governing coalition were already growing. While the SMC remained broadly behind the plans to meet the European Commission’s deadline to sell off NLB, its coalition partners – DeSUS and the Social Democrats – were “increasingly reluctant to pursue unpopular privatisation ahead of the general elections in mid-2018,” wrote Teneo Intelligence CEE adviser Andrius Tursa in an analyst note.

NLB was one of several major Slovenian banks nationalised via an emergency capital injection in December 2013, when the government stepped in to bail out the banking sector. This state aid was approved by the European Commission on the condition that it later re-privatise the banks.

Slovenia had committed to sell 75% of the bank by the end of 2017. Initially the government planned to reduce its 100% stake to 25% plus one share via the IPO. However, on May 11 the European Commission endorsed a request from the Slovenian government for a more gradual sale of the bank: a 50% stake by the end of 2017 and a further 25% by end-2018.

With the IPO no longer taking place any time soon, the Slovenian authorities and the European Commission are considering future options for the bank.

“At the moment all we can say is we are in constructive contact with the Slovenian authorities and we cannot speculate further at this stage,” a spokesperson for the European Commission told bne IntelliNews. “Currently Slovenia is not in breach of any of its commitments under the state aid decision, so we need to talk about options but there no immediate problem at the moment.”

The Slovenian finance ministry is understood to be planning to explore possible compromises with the European Commission. One of the possibilities is an extension of the deadline for privatisation; Italy and Portugal secured similar one-year

x3 PER WEEK EDITOR'S PICKS

Companies & Markets I 11 extensions. Both NLB and SSH declined to comment to bne IntelliNews on potential plans.

Meanwhile, Vranicar Erman has warned that following the failure of the IPO, the bank could see its Balkan subsidiaries sold off – a worse outcome than the sale of the bank as a whole from the point of view of many Slovenians. "We are leaving all options open but are prioritising ensuring normal, stable operations of NLB in future and preserving NLB as a group," she said in a television interview.

Public sentiment against the sale of major state assets is strong in Slovenia, with planned privatisations like that of Telekom in 2015 and recent rumours of a sale of Luka Koper port bringing thousands of opponents out onto the streets. NLB, like the

“We made promises too many times in the past but nothing has come out of it” profitable Telekom, is a particularly sensitive case, since it is one of the country’s oldest institutions, with roots dating back to 1889 when the Ljubljana city savings bank was founded.

On the other hand, the decision to scrap the privatisation has resulted in dire warnings of the impact on investor sentiment.

Commenting shortly before the IPO was dropped but when problems were already apparent, Tursa noted that “Slow progress on privatisation could hurt investor confidence and threaten the stability of the cabinet”.

More recently, the chairman of the Ljubljana Stock Exchange Ales Ipavec stressed at a press conference that the failed IPO was not an isolated incident and could negatively affect further privatisations, STA reported. “It will be hard to convince investors that we really mean it this time in the event of future privatisations,” Ipavec told journalists. “We made promises too many times in the past but nothing has come out of it.”

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Banking convergence returns to Central and Eastern Europe, says RBI Robert Anderson in Prague

T

he banking downturn in Central and Eastern Europe (CEE) is over, with profitability surging last year, according to the annual CEE Banking Report by Austrian lender Raiffeisen Bank International.

The de-risking and capital strengthening drive forced by the 2007-08 global financial crisis is largely over, and banks are now increasing their assets above GDP growth, while profitability is covering the cost of capital. In short, banking convergence, or catch-up with Western Europe, has returned, the lender announced.

Return on equity (ROE) across the CEE region (which for RBI does not include Turkey or Eurasia) more than doubled to 10.5%, well above the 5-6% achieved in the Eurozone. Eight of the 15 CEE markets are now covering their cost of capital, compared to four in 2015. Looking forward, the bank predicts an average of more than 10% ROE. “All in all, the CEE region started to significantly outperform Western European banking profitability once again,” the

“2016 ended years of down-trending profitability in CEE banking” report said. “Therefore, the year 2016 ended years of downtrending profitability in CEE banking.”

Large Western players in the region are making even higher profits than the average, around 12-14% ROE. This could reawaken interest in CEE banks, and lead to an end to foreign banks' retreat from the region in recent years. “From now on the appetite is there once again from foreign players,” Gunter Deuber, RBI’s chief economist, tells bne IntelliNews.

Czech Republic and Hungary. This could be a problem for profitability going forward.”

The recovery was strongest in Russia, Romania and Hungary.

Southeast Europe continued its solid rebound, while Central Europe has already been growing strongly for a few years, though RBI said the Polish market has begun to soften.

The fast recovery of the Russian market was the big surprise of last year, according to Deuber, with ROE bouncing back to 10% after just 2.5% in 2015, and assets growing by 15% across the Eastern European region led by Russia.

Western players in Russia maintained a ROE of 18%. “Foreign banks have shown they can operate in the niches,” Deuber says. “Now they have proved this for a second year.”

On aggregate, Ukraine was the only loss-making banking market in 2016, according to RBI, because of massive one-offs related to the nationalisation of PrivatBank. Non-performing loans (NPLs), at an average of 30% of total lending, remain a serious problem across the sector.

Deuber also highlights Belarus as a worry because of the “substantial increase” in the NPL ratio to 12%, and the overall contraction in lending.

Apart from Russia, one of the main drivers for the overall improvement in banking profitability was the faster than expected progress in restructuring NPLs, which have stabilised at 8% across the region. As well as workouts by banks themselves, sales of NPL bundles have taken off, particularly in Poland, Romania and Russia, enabling banks to write back provisions.

CEE: Return on Equity in the subregions (%) 25 20

The market share of foreign lenders fell last year to the lowest level for a decade, mainly due to an increase in the market share of state-owned banks in Eastern Europe and growing local or state ownership in Central Europe, notably Poland and Hungary. But RBI expects this trend now to peter out.

In fact, the rebound in profits could have unwelcome repercussions if banks once again attract the attention of governments, Deuber says. “We must watch carefully how politicians and regulators react to the current situation. There could be certain claims on bank profits, for example in the

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2016

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“Now it is reasonable and feasible to sell NPLS at acceptable prices for all parties,” says Deuber, pointing out that some buyers of distressed debt had been reluctant to go into CEE before.

Across the region banks have benefited from strong growth in loans, and especially deposits. Assets are now growing strongly in euro terms after two years of setbacks, with growth once again higher than in the Eurozone. Asset growth was 11% in 2016, above the post 2007-08 crisis average of 6-7% and last year’s Eurozone average of 2-3%. Overall credit growth was 8%, above the post-crisis average of 6% and the Eurozone’s 1% last year. The bank predicts 7% growth in lending in local currency terms in 2017-22, though slightly slower in the more mature Central European market.

Going forward, RBI predicts that the market should be buoyed by the promising macro-economic outlook for the region, boosting lending, particularly in the retail segment. “Strong macro momentum should support retail growth,” says Deuber.

“There is still upside left on the banking side”.

Companies & Markets I 13 Unlike before the global financial crisis, this growth should be more balanced, with more local financing, and less lending in foreign currencies and aggressive pursuit of market share.

Loan/deposit ratios are already down to 86%, back to preboom levels.

The main problem for the banks now is what to do with all these deposits at a time when net interest margins are very narrow and are not expected to improve fast. “Banks are over liquid,” says Deuber. “They cannot accumulate deposits indefinitely.”

One way to use retail deposits, he said, was to invest in banks’ digital footprint, which can create new revenues and cut costs dramatically. “The CEE region is an ideal ‘testing field’ for cross-border digital banking solutions, as the size of some CEE banking markets is comparably small and the users seem to be quite open to accept new products and services as well as innovative retail and communications channels,” the RBI report said.

FDI to Emerging Europe soars in 2016 bne IntelliNews

I

nflows of foreign direct investment (FDI) to Emerging Europe soared by 45% y/y in 2016, with the recovery driven by Russia and the EU member states of Central Europe.

A report from the Vienna Institute for International Economic Studies (wiiw) shows that FDI recovered by 23% in Central Europe, while it expanded at an outstanding rate of almost 150% in the Commonwealth of Independent States (CIS-4) and Ukraine, with Russia in particular seeing a sharp upturn in investment.

The stars of what wiiw terms the Central, East and Southeast Europe (CESEE) region were the Czech Republic and Hungary.

In the Czech Republic real estate investments predominated.

2016 saw the largest ever real estate deal in the Czech Republic, with the sale of P3 Logistic Parks to Singaporean sovereign wealth fund GIC. The €2.4bn transaction was the largest on the European real estate market last year.

Meanwhile, Hungary saw more manufacturing sector investments, especially in the automotive and auto

components sectors. This increase in FDI came despite an overall decline in investment in the country reported by the local statistics office.

“Both [the Czech Republic and Hungary] received amounts that were the second largest since 2008, surpassing the 2015 slump by a wide margin,” the report noted, also pointing to higher FDI inflows in Romania, Croatia and Estonia.

Russia was another standout performer, with FDI veering sharply upward during the year, albeit to a large extent influenced by the murky sale of a 19.5% stake in oil major Rosneft for €10.2bn – one third of total inflows – to oil trader Glencore and the Qatar sovereign wealth fund announced in December.

Aside from the Rosneft deal, however, the recovery in Russian FDI was also a product of more positive economic trends.

“The decline of the economy levelled out and more FDI was attracted by reduced import competition into sectors affected by the sanctions (mainly food production),” the report said.

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FDI also edged upward in Ukraine, although wiiw pointed out that, “The elevated investment risk is reflected in the low FDI inflow compared with the size of the country.”

Going forward, the picture for the wider CESEE region is also a positive one, with FDI set to exceed the heights reached in 2016. “The trend in CESEE is expected to continue due to robust economic growth in the region and a somewhat lower but still stable growth in the major investing countries,” the report said.

“Economic growth in most of CESEE is bound to be more robust than in the previous year. Both consumption and investments recover and attract foreign companies in the EU-CEE and the Western Balkans,” it said. “These regions have maintained cost competitiveness, despite surging wages and occasional labour shortages, by benefiting from considerable productivity improvements.”

Yet the decline wasn’t uniform across the Western Balkans.

Serbia, its largest economy and top recipient of FDI, maintained inward FDI levels similar to the previous year, driven upwards by major inward investments like the Chinese HBIS’s takeover of its second largest exporter, the Zelezara Smederevo steel mill.

Albania was the second ranked recipient of FDI, with investments concentrated in the energy sector. Albania’s FDI inflows actually rose above the pre-crisis period, and Macedonia also – somewhat surprisingly – saw an increase in FDI in 2016, despite the political crisis that weighed on the country’s economy throughout the year. “Suppliers of the automotive industry and electronics make [Macedonia] unique in the region, with its high share of FDI in manufacturing,” the study explained.

On the other hand, Bosnia & Herzegovina “was less successful than in earlier years, probably on account of its increasingly segmented economic and regulatory environment”. Bosnia’s growing political divisions and the rifts among its two entities and central government are deterring foreign investors; in February German retailer Lidl was the latest to reportedly decide against entering the country due to its political instability.

Despite uncertainties in the international economic environment, these forecasts have been borne out by firstquarter developments in several key economies, in particular by the greenfield FDI projects announced in Hungary, Poland, Romania and Serbia.

In terms of the origin of investments, the top country sources are the Netherlands, Germany and Austria. Austrian investors have particularly targeted countries in their immediate neighbourhood, being the top source of investment for Slovenia, Bosnia and Croatia, and ranking second in Bulgaria, the Czech Republic, Romania, Slovakia, Macedonia and Serbia.

“The trend in CESEE is expected to continue due to robust economic growth in the region” However, it wasn’t all good news. Rising FDI in CESEE took place against the backdrop of falling global FDI, mainly attributed to lower foreign investment in China. And while Central Europe and the CIS-4 plus Ukraine regions powered ahead, Turkey reported a 30% decline in FDI, while a more modest 7% tailing off was seen in the Western Balkans. Notably, this was a reversal of the situation the previous year, when Turkey and the Western Balkans outperformed their peers to the north and east.

On the other hand, the region became notably less important for Austrian investors in 2016, accounting for only 31% of Austrian outward FDI stock in 2016, down from 36% in 2015 and 46% in 2012. “Overall Austrian FDI outflow turned negative in 2016 and continued its shift away from the CESEE countries, mainly in favour of Asia and the Netherlands,” the report said.

Aside from Germany and Austria, much of the investment in the region was from low-tax countries such as the Netherlands and Luxembourg, where many investments were concentrated in holding companies for tax reasons.

FDI inflows in the main regions of CESEE, EUR million Bank

2010

2011

2012

2013

2014

2015

2016

23,278

25,174

30,018

13,271

27,061

23,645

29,020

Western Balkans

3,473

5,675

2,806

3,568

3,503

4,406

4,098

Turkey

6,864

11,625

10,607

9,710

9,656

15,818

11,115

CIS-3 + Ukraine

14,790

18,208

18,174

13,031

8,206

7,974

12,318

Russia

23,875

26,476

23,483

40,196

22,037

10,664

34,012

CEESEE TOTAL

72,279

87,159

85,089

79,777

70,464

62,507

90,564

EU-CEE

EU-CEE: European Union – Central and Eastern Europe.CESEE: Central, East and Southeast Europe.

CIS-3: Belarus, Kazakhstan, Moldova. Data exclude Special Purpose Entities (SPEs).Source: wiiw FDI Database.

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bne:FinTech

Businesses move beyond early learning stage of blockchain Nicholas Watson in Prague

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usinesses in the US appear to be moving beyond merely learning about blockchain – a distributed ledger first developed to record bitcoin transactions but now regarded as having uses far beyond that – and are now increasingly interested in piloting projects using the technology, according to the Global Blockchain Business Council (GBBC), which in May hosted an event on the sidelines of the Berkshire Hathaway annual shareholder meeting.

Educating business about the opportunities and innovations surrounding blockchain is a main goal of the newly created GBBC, which in partnership with the Greater Omaha Chamber organized the “New Kids on the Blockchain” event in Omaha, Nebraska.

The two-day event began on May 4 with a gathering of senior executives from a variety of major companies headquartered in Omaha, such as Union Pacific, Mutual of Omaha and proxibid, to give an overview of blockchain technology and to hash out potential case uses for it.

This was followed by a larger event the next day that featured presentations and panels from industry players such as CME Group, IBM, EY and The Bitfury Group, a global full-service blockchain technology company, to a wider audience of company representatives numbering around 170. “It was standing room only,” says Mercina TillemannDick, executive director of the GBBC, adding that her organization had originally expected around 100 to attend.

“It was a special opportunity to be in the same room with all these major companies. Connecting blockchain experts and technologists with companies that are aware of blockchain, but don’t yet know how the technology works or how it might impact their companies is exactly why we formed the GBBC,” says Mercina Tillemann-Dick.

The companies that attended came from a variety of sectors

– freight, manufacturing, agriculture, financial services, insurance – suggesting the opportunities to apply blockchain technology will be widely spread across the economy.

The applications for blockchain are believed to be manifold and growing. The technology offers a way for people who do not know or trust each other to transfer nearly any asset using the same process, creating a record of ownership that compels the consent of everyone concerned. Given that no central authority or potentially malicious third party can tamper with it, everything from land registries, to stock

“There’s no reason this technology has to be based in Silicon Valley or Shanghai” markets, to financial services, to even airport security could use this technology to hold sensitive data, limit fraud and corruption, improve efficiency and maximise economic benefits to a broader section of society.

Since its launch in January during the Annual World Economic Forum Meeting in Davos, the GBBC has held a number of meetings around the world in places such as China as it expands to take in 39 members representing 30 countries so far. But what marked out the council’s first blockchain event in Omaha was the number of companies that showed interest in actually piloting blockchain projects, rather than just learning about the technology.

“This was very encouraging to us – by the end of our events and conversations in Omaha, companies were talking about piloting projects,” says Tillemann-Dick. “There was a huge emphasis on actually testing the technology, which was an

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exciting development. We usually engage with companies that are eager to learn more, but this was different.”

Indeed, this reluctance to enter the practical realm is something that sceptics of blockchain often point to, that it is still too early days to say whether the technology will be as revolutionary as its supporters claim and there will undoubtedly be growing pains before we see its use in everyday life.

However, Tillemann-Dick says the event gave an inkling into how unexpectedly and widely companies see its potential use. “In agriculture and supply chain, we see

bne July 2017

so many applications for the technology. The companies we met in Omaha were really innovative in their view of how blockchain might be applied,” she says.

Also, for those who raise their eyebrows at seeing such a revolutionary technology being touted in the Midwest, Tillemann-Dick believes there’s no reason this part of America can’t be the jumping-off point for blockchain.

“There’s no reason this technology has to be based in Silicon Valley or Shanghai. We’re seeing unconventional places like Omaha embrace blockchain – and these pioneers will likely have a competitive edge moving forward.”

bne:Deal

Mavi Jeans’ IPO overcomes the Turkish blues bne IntelliNews

M

avi Giyim, the Turkish jeans brand worn by celebrities such as actress Jessica Alba, model Adriana Lima, and singers Lady Gaga and Fergie, floated on June 12 in the largest IPO on the Istanbul bourse since 2013.

The fashion brand sold a 55% stake, raising around TRY1.2bn (€305mn) and valuing Mavi at around TRY2.14bn (€544mn), or TRY43 per share, at the bottom end of the range of TRY43TRY51 targeted by advisers Goldman Sachs. Shares in Mavi fell 2% between June 15, when the IPO was launched, and June 21, to TRY43.62 (€11.05).

The main owners – the Akarlilar family, together with the Turkven Private Equity Fund II – sold a combined 23.75mn shares for around TRY1.02bn, while the remaining 3.56mn shares were new.

The owners of Mavi (Turkish for blue) decided to go ahead with the public offering at a time when questions still linger over Turkey’s economic and political outlook. Indeed, the Mavi IPO in a way also represented a test of investors’ confidence in the country’s $857bn economy, which has suffered from a coup attempt last summer and a contraction in the third quarter of 2016 but has lately been showing signs of a mild recovery.

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Photo © Mavi

The political outlook in particular remains worrying. Turkey has been deeply involved in a potentially explosive conflict between Qatar and several Gulf nations amid the blockade being led by Saudi Arabia. The Syrian conflict still remains a destabilising factor for Turkey, posing some serious security threats.

Turkey is also seeking to improve its fraught relations with the EU, while Ankara has made good progress in restoring ties with Russia. Mavi last year generated TRY100mn and another TRY20mn in revenues from Europe and Russia operations, respectively.

On the upside, domestic political tensions have diminished considerably after President Recep Tayyip Erdogan claimed victory in the April 16 referendum, which introduced an executive presidential system.

Foreign institutional investors took up 73.9% of the shares in the Mavi IPO, including Singapore’s Temasek Holdings, US investment group Templeton, the UK’s Universities Superannuation Scheme, UK asset management companies Carrhae Capital and Charlemagne Capital, US-based investment manager Neuberger Berman, and the UAE’s Abu Dhabi Investment Authority (Adia), while 18.9% were sold

Companies & Markets I 17

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to domestic institutional investors, with 7.2% picked up by domestic individual investors.

a global store network of more than 5,600 points of sale.

It sells around 7.5mn denim items globally each year.

The public offering probably reflected the mood of foreign investors towards Turkey: risk perception in the short term, but strong potential in the longer run.

Its 2016 sales revenues in Turkey, where Mavi has 261 retail stores, 70 franchised stores and 436 wholesale doors, was TRY1.12bn. The company’s market share in Turkey is 24%.

It is also truly a global brand: its products are sold in 35 countries. In the US, Mavi generated TRY77mn in revenues last year through one retail store and 1,303 wholesale stores, while in Canada, where it operates four retail stores, its sales amounted to TRY40mn.

Despite all its troubles and the challenges it faces, Turkey still has a lot to offer and for foreign investors its market with a population of 80mn is too big to ignore. Central bank data show that there has been an inflow of $1.74bn

“The Mavi IPO represented a test of investors’ confidence in the country’s $857bn economy” into government debt securities, while inflows into Turkish equities have amounted to $919mn between April 21 and June 2.

Probably, due to short-term risk perceptions, the Mavi IPO price turned out to be rather disappointing; demand from international investors, on the other hand, underscored investors’ trust in the company and Turkey’s economy. This was pretty much what happened when Global Ports floated shares on the LSE last May. In the highly anticipated public offering, the floating price was too at the bottom range.

Mavi, founded in 1991, is a very successful company with a strong business model that combines good PR campaigns with

WEEKLY NEWSPAPER

Mavi products are available at well-known department stores such as Bloomingdale’s, Nordstrom, Peek & Cloppenburg, as well as through major online retailers Amazon, Zappos and Zalando.

Mavi says it enjoys “global brand awareness with celebrities and fashion icons as loyal followers” on social media.

It claims “a loyal customer base whose core segment is comprised of young, fashion-conscious women and men under 35, with benefits derived from attractive Turkish demographics, increasing spending power of millennial customers globally, and Mavi’s strong social media reach – 3.3mn followers in 2016.”

The fashion brand launched a loyalty programme in 2007 which now has 5.7mn loyalty card members, of which approximately 3.9mn are active users.

Goldman Sachs International acted as global co-ordinator for the offering, and, together with BofA Merrill Lynch, as joint international bookrunner. Is Yatirim was the domestic coordinator and domestic bookrunner.

Keep up to date with events in emerging Europe with the bne IntelliNews weekly newspaper, a collection of our best stories on the region, commentary and features, as well as highlighted corporate and economic news.

Follow us on twitter.com/bneintellinews June 16, 2017

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Spotlight trained on Russia for World Cup dress rehearsal Jason Corcoran in Moscow

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Content: 2 Top Stories 5 The Regions This Week 9 Chart 10 Central Europe 13 Southeast Europe 16 Eastern Europe 19 Eurasia 21 Opinion 23 Lists24 Lists

bne:Newspaper

The spotlight is on Russia as the country prepares to host its dress rehearsal ahead of next year’s football World Cup amid growing concerning about the readiness of the venues and safety of fans.

The Kremlin has boosted security measures and rushed to complete a controversial

Launch of the countdown from 1000 days until the 2018 World Cup begins in Russia.

$1.5bn stadium in St Petersburg as it banks on FIFA’s Confederations Cup to showcase its ability to host a successful World Cup in 2018.

The eight-nation tournament kicks off at the scandal-plagued St Petersburg stadium on June See page 2

The strange death of Social Democratic Czechia Robert Anderson in Prague Czech Prime Minister Bohuslav Sobotka’s resignation as Social Democrat leader on June 14 reflects the precipitous decline in CSSD support in opinion polls this year.

The party’s vote has sunk from regularly more than 30% in the noughties, to 20% at the 2013 election,

Bohuslav Sobotka resigned as Social Democrat leader but stayed on as Czech premier.

to a low of 10%, according to one recent poll.

It now looks all but certain now that the CSSD will be out of power – or at least a leading position – after the next election in October. The expected See page 3

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Russian President Vladimir Putin has held regular summits with Chinese President Xi Jinping. (Wu Hong/Pool Photo via AP)

MACRO ADVISER:

Russia's Asian pivot starts to pay off Chris Weafer of Macro-Advisory

R

ussia’s hopes that China would quickly fill the vacuum created by US and EU sanctions were initially disappointed. But over the past year the situation has changed and China’s investment into Russia is steadily rising and, more importantly, broadening away from the previous exclusive interest in hydrocarbon and extractive industries.

More importantly, having recovered from the economic crisis, Russia is now in a better position to get improved commercial terms for China investment than it was in 2014 or 2015, and to broaden its investor relationships.

The main danger to that improving position is that tougher US sanctions, which could also restrict some major EU companies from investing in Russian projects, would again shift the advantage to China and force Moscow to sell more of its prized assets on Beijing’s terms. The

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actions of US Congress will undoubtedly damage Russia’s longer-term recovery prospects as well as some major US and EU corporations. The only winner here will be China.

In 2014, as the EU, Europe and several other developed nations imposed sectoral sanctions and financial restrictions on Russia, the chant from nationalist politicians in the Duma was “Asia-pivot”.

The idea being to replace what they saw as a failed experiment to develop a mutually beneficial and respectful relationship with the West by making a sharp turn to Asia, to China in particular. It was assumed that China would be eager to fill the role vacated by the US and EU as, after all, Russia is the world’s biggest energy exporter and a significant exporter of industrial materials while China is the world’s biggest importer of most of these products.

It wasn’t just the politicians calling for the switch to a China focus. Ministers and state officials, looking for a financial lifeline against the uncertainty of sanctions and collapsing oil revenues, also tried to tap China. But, with the exception of interest in modern weaponry and access to energy projects, it seemed that China simply was not interested in bailing out its neighbour or in any sort of strategic relationship. Sberbank CEO, German Gref, famously said after returning from a China trip “we were in a long line of people looking for money and nobody called us to the front of the queue”.

So, has the hope for a stronger trade and investment relationship with China failed? Despite government optimism, is the country facing an uncertain future as US senators pass a bill aimed at making it more difficult for US companies to work in Russia, and the EU is expected

Cover Story I 19

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to keep existing sanctions at least until 2H18 or later?

It is very difficult to get exact figures for China investment into Russia but the fact that the volume has picked up strongly is clear enough. Russia’s Central Bank reports that direct investment from China in 2015 and 2016 was only $645mn and $350mn respectively. But reports from China say the total was $3bn in 2015 and rose to $14bn in 2016.

The reason for the difference is that the Central Bank only accounts for direct transfers from a China-located bank while the China-sourced figures take into account the reports of China investors from all sources. Anecdotally, given the announcements of individual deals, the higher figures also make more sense. What is not unclear is that the value of cross-border trade between the two countries has risen from $16bn in 2013 to almost $70bn last year and, with the completion of new projects under construction, is realistically set to reach $200bn early in the next decade.

The focus of investment is still overwhelmingly in hydrocarbon and extractive industries but we are seeing a shift away from direct investment into production and pipelines and into processing plants. The key hydrocarbon projects are still the Power of Siberia gas pipeline, which will pump 38bn cm of natural gas to China starting sometime in 2019, the Yamal LNG plant, in which Chinese investors own a 29.9% stake, will start to send LNG to China later this year, and the 2nd leg of the Eastern Siberia Pacific Ocean (ESPO) pipeline which will double direct crude oil exports into China’s heartland to 600,000 barrels per day when completed in 2018.

In addition, Chinese investors have proposed investing 6bn yuan ($880mn) into building a petrochemical complex on the Russian side of the border and sending the products to China. This is the latest phase of investment from China and reflects Moscow’s stronger negotiating position as the economy returned to growth, and investment from other countries is picking up; it no longer has to sell raw materials cheaply for process-

ing in China but is able to insist on valueadded processing in Russian territory before exporting the products.

Recently the Minister for Regional Development reported that Chinese investors have proposed plans for 13 separate projects in the Far East with a value of $11bn. These cover extraction and processing of minerals, agriculture and transport projects.

Moscow is certainly keen to attract Chinese investors into the Far East and is offering tax breaks and “administrative preference” for China-backed projects in the region, especially outside of extractive industries. The $3bn invested by Chinese investors into the Primorye 1 & 2 Transport Corridors, which helps Chinese exports use Russian port facilities on the Pacific Coast, is a tangible example.

The opening up of the One Belt, One Road network, which in February saw a 100-container train transit Russia from China to London in 18 days, is also a potential game-changer in terms of China investment. Officials in Beijing have stat-

had to make the tough choices, such as letting the ruble freely float, and saved itself. That is a lesson that the Kremlin has learned and it has shaped trade and investment and political relations since.

Russia is no longer interested in the sort of close and vulnerable relationship it once had with the US and EU, and which it nearly fell into with China in 2014.

Been there, done that, didn’t work out.

Today the policy is one of diversification.

India’s Prime Minister was prominent at the recent St Petersburg Forum and Japan’s Prime Minister has become a frequent visitor to Russia. According to FDi Monitor, Russia was the third most attractive investment location for EU investors in 2016, attracting $12.0 billion in deals, most from German companies. The November deal with Opec has greatly improved relations with Saudi Arabia and other Arab states and investment from that region is also picking up.

One example is the project to develop the former Tushino military airbase, in north-west Moscow, into one of the largest technology parks in Europe. The investors

“We were in a long line of people looking for money and nobody called us to the front of the queue” ed that they expect, and will encourage, a lot more investment along the network routes to take advantage of more efficient transport links and local resources.

In 2016 China investors created tens of thousands of jobs in such sectors as automanufacturing, food and tobacco and other consumer focused sectors. The number of individual projects was more than 30, up from 21 in 2015 and 12 in 2014.

But, as mentioned, Moscow’s perceived need for Chinese investment has changed since 2014. Partly this is because the economy is in relatively better shape and the widely predicted doomsday scenarios failed to materialise. A major reason for that is that Russia, faced with no easy way out,

in the project are the Russia-China Investment Fund (a 50-50 $2bn venture between the Russia Direct Investment Fund and the China Investment Corporation) and some Arab sovereign fund investors.

This project does also show how, on the one hand, Moscow has diversified its investor base and has a more confident position when it comes to deal structures, but of course it also shows how China has adapted its approach. The Tushino Park will be home to Rostec, the state company at the core of the military industrial complex and owner of many of the advanced weaponry that Beijing would still like to buy from Russia. Now they will be neighbours in a Moscow suburb. Somebody should tell US Congress that they should be careful what they wish for.

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than a threat. In the 1990s China’s trade turnover with Russia was steady at about $5bn-$7bn a year. However, it took off after Russian President Vladimir Putin took office in 2000, rapidly rising to a peak of $95bn in 2014. Trade took a hit in the “silent crisis” years of 20152016 that hurt everyone in the Commonwealth of Independent States but it is growing again this year and on course to top $80bn this year. Putin has set a goal of $200bn by 2020.

Leaders at the Belt and Road Forum in Beijing. (Lintao Zhang / Pool Photo via AP)

Eurasian eyes turn east Ben Aris in Berlin

W

hen China hosted the One Belt One Road (OBOR) summit in Beijing this May the list of attendees was a “Who’s Who” of emerging market leaders. With some $4 trillion of investment into roads, rail and air links on offer many eyes in Eurasia are turning away from the West and Russia and towards China.

The promise of inbound Western foreign direct investment had anyway largely failed to materialise in most of Eastern Europe. The accession countries that joined the European Union in 2004 have done well, but everyone east of them has done badly. Rather than the swashbuckling risk-takers Eastern Europeans expected, Western investors have proven to be cautious and slow moving. Worries over political risk and poor corporate governance were exacerbated by the global financial crisis and the political stand-off with Russia, which forced countries in the region to take sides.

In the midst of all this China has come of age and begun to invest the trillions of dollars accumulated from years of cheap exports.

The Chinese have been even slower to move but now they are, and because the country operates largely at a state level, the sums on offer are up an order of magnitude.

Moreover, China is investing in the things that Eurasian countries want the most: economic-multiplying infrastruc-

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ture and raw material resource development for the most part.

Western corporations are looking to produce and sell to the local markets; China wants to build a transport corridor from its domestic production base so it can carry its goods cheaper and faster to the rich markets of the West.

The Kremlin, strapped for cash by sanctions, a failure to reform and the collapse of oil prices, has been put in a weak negotiating position vis-à-vis China. And Beijing has had no qualms about using its leverage. In 2014 China’s General Secretary of the Communist Party Xi Jinping flew to Russia to sign off on a gigantic $400bn deal to supply Russian gas across the Siberian border to China’s underdeveloped northwest territories. But on the

The relationship with the Chinese state began as a trade deal, but it has become progressively more political. It was not for nothing that when Xi Jinping took office in March 2013 his first trip abroad was to Moscow.

To escape its blockade by the West, Russia has tried to shape the new emerging economies such as China into a rival global alliance. Many of the emerging economies share Putin’s objection to the unipolar world with the US as leader and would prefer to see a multipolar world with bodies such as the G20 sharing responsibility for global affairs. China has been a vocal and outspoken critic of the US sanctions on Russia, and it has been a willing partner in this drive, though it is more narrowly focused on its own national interests.

The BRICs have metamorphosed into a trade club and today is becoming a global political force. Various other political bodies have also emerged to provide new forums for these countries to coordinate their efforts such as the Eurasia Economic Union (EEU) for trade, the Shanghai Cooperation

“Russia is more and more seeing China’s push as an opportunity rather than a threat” way to St Petersburg he stopped off for a day in Ashgabat to sign the biggest gas deal ever with Turkmenistan to deliver up to 65bn cubic metres of gas a year that undermined the need to buy Russian gas.

Yet Russia is more and more seeing China’s push as an opportunity rather

Organisation (SCO) for security, or the troubled Trans-Pacific Partnership (TPP).

None of these bodies are especially powerful or influential as yet – indeed many, like the EEU, don't work very well. But they represent an attempt to set up new multinational bodies that do not include the old world.

bne July 2017

Cover story

Russia China Investment Fund takes aim at Russia’s best equity stories Ben Aris in Berlin

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ussia is hungry for investment but, because of its ugly standoff with the West, few investors have much appetite for Russian stocks – even if they are unusually cheap and dynamic at the moment.

But not so the Chinese, who are taking a longer view. China’s sovereign wealth fund has partnered with Russia’s, and since the start of this year they have been actively investing into the shares of some of Russia’s most interesting companies.

The Russian Direct Investment Fund (RDIF) was originally conceived as a way to coax Western investors into the country. The RDIF provided expertise, contacts and a measure of protection against political risk and aggressive oligarchs.

“The idea is eventually we will invest $1 out of every $10,” RDIF CEO Kirill Dmitriev explained to bne IntelliNews in 2011 when the fund was established.

But the fund has now dropped its Wall Street investment bank partners and has turned instead to Arab and Chinese sovereign wealth funds, which are slower to move, but invest big bucks once they do.

The RDIF and the China Investment Corporation (CIC), the Chinese sovereign wealth fund, created the Russia China Investment Fund (RCIF) in June 2012 with $2bn of capital as a general investment vehicle to support their cooperation and make some money in the process. It aims to make 70% of its investments in the CIS countries and 30% in China.

Today the RDIF still has its initial $10bn

of Russian capital, but has commitments for another $30bn from its partners – mostly sovereign wealth funds, including China, Qatar and France – and has achieved its target of contributing $1 out of every $10 in their co-investment deals.

Early projects included a bridge over the Amur river in Russia’s far east to physically link Russia and China, the purchase of a 42% stake in RFP Group (Russian forest products group), also in the far east, and an investment into the White City exclusive office complex at the top of Tverskaya, Moscow’s main thoroughfare.

RCIF’s activity than petered out in 2014 and 2015 as trade between the two countries plummeted during Russia’s economic downturn. There was some talk about investing into hightech industrial parks and setting up a $2bn agricultural fund but the real action only restarted this year, after Russia emerged from its recession.

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It also participated in the partial privatisation for the Alrosa diamond monopoly, which has been a rare example of an extremely successful privatisation.

RCIF also partnered with Abu Dhabi's state fund Mubadala in March to buy a stake in Russia's largest drilling company, Eurasia Drilling Company.

In May RCIF was mooting an investment into Yandex.Taxi, which has taken the market by storm. Yandex, the largest internet company in Europe and one of Russia’s best performing stocks so far this year, is looking to raise $150mn-$200mn from selling a stake of 12.5%-16.7%, according to bankers.

And there is more to come. The Russian government intends to transfer at least another $1bn to the RDIF this year from the National Welfare fund for infrastructure investments.

And at the same time international portfolio investors are getting interested in Russian stocks again; the market returned 50% in 2016, but has been one of the worst emerging markets (EM) performers in the first quarter. Now stock prices have fallen to the point where they are cheap again. With economic growth back these could turn out to be the vintage years for a private equity investor with a bit of patience to spare.

In February the RDIF formed a consortium of investors to participate in the SPO of equity market darling, the fertilizer producer PhosAgro. Together with the RCIF and leading funds from the Middle East, the consortium bought 3% from the 4.5% on offer, worth $200mn.

In the same month the RDIF cashed out some of its profits from an investment into Russia’s premier children’s store Detsky Mir during its IPO. RCIF held a 23.1% stake in Detsky Mir but sold up to 10% during the IPO for an estimated $35mn in cash – equivalent to an internal rate of return of more than 90% in dollar terms, a source close to the placement told Reuters.

Central Children's Store on Lubyanka.

Photo: www.shutterstock.com

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bne July 2017

China stirs up Russia’s Central Asian backyard Kanat Shaku in Almaty

A

n invisible wedge has been growing between Russia and its Central Asian neighbours since Russia seized Crimea from Ukraine in 2014. The unease is most particularly tangible in Astana. Any statements made by Russian officials that appear to put in question the statehood Kazakhstan gained after it was granted independence from the USSR prompt collective gasps.

At the same time, China has been on a charm offensive in the region to promote its “One Belt, One Road” (OBOR) nvision.

“The China-Kazakhstan political mutual trust has grown stronger. Our two countries respect each other's independence, sovereignty, territorial integrity and choice of development path,” declared a signed article released

by Chinese President Xi Jinping ahead of his visit to Astana in June. In itself, the statement is not remarkable in any way, but after Ukraine, Xi’s words are seen in Kazakhstan as part of a more reassuring approach to diplomacy.

The extent of China’s present-day role in Central Asia has so far not risen beyond the realm of economic expansion, and the Kremlin’s current official line is to welcome Chinese infrastructure investment, but already Russian media and experts have expressed concerns about Beijing’s steady encroachment on what has become known as “Russia’s backyard”.

Kazakhstan’s recent decision to begin a gradual transition away from the Cyrillic alphabet to a Latin alternative prompted Russian headlines such as “Kazakhstan’s transition to Latin alphabet is a signal for Moscow” and “By transitioning

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to a Latin alphabet Kazakhstan and Kyrgyzstan would enter China’s zone”.

Yuri Solozobov, a political analyst at Russia’s National Strategy Institute, has suggested in interviews with Russian media that the decision should alert Moscow since “the commonality of the cultural space was one of three [pillars], along with energy [and] defence, which linked, by invisible ties, all the CIS countries”. He ambiguously added that the transition is “not a reason for [Russia to] panic, but for reflection and decision-making”.

In an interview published by RFE/ RL, China expert Theresa Fallon remarked that “the Russians remain sceptical, in [my] view. Privately, Russians will tell you they are very concerned about [OBOR], but publicly they put on a very brave face”.

a multi-vector policy, that is, maintaining the balance of influence and participation of the external players.”

The Russian economy has in the past few years been struggling with the crippling effects of a double whammy – sanctions and low oil prices – which has led Central Asian nations to question the effectiveness of the Kremlin-led Eurasian Economic Union (EEU), a free trade bloc seen by some as a political tool. In Kyrgyzstan, the country’s economic difficulties have been accompanied by the failure of Moscow to follow up on its commitments to construct two key hydropower plants.

The only Central Asian country Russia has been improving relations with has been Uzbekistan, given that the Russians ceased importing Turkmen gas in favour of Uzbek supplies and have defended Uzbekistan’s hydropower interests over those of Kyrgyzstan and Tajikistan. As a consequence of taking Uzbekistan’s side in the dispute over the construction of Tajikistan’s Rogun Dam hydropower project, Russia has managed to push Dushanbe closer to Beijing.

Other analysts believe such worries and speculations are misplaced.

As Beijing’s investments in the region continue to grow, it is inevitable that the country will eventually engage in protecting its investments. This can be seen already in growing Chinese military cooperation across the region.

“Central Asian countries, including Turkmenistan, are not interested in getting into total economic (and in the future, political) dependence upon a single ‘centre of power’,” Ruslan Izimov, a China expert at the Central Asian

Clear signs of the policy are visible in Beijing’s increased military cooperation with Tajikistan. The two countries held counter-terrorism exercises on the Tajik-Afghan border in 2016 and the giant eastern neighbour has offered

“Privately, Russians will tell you they are very concerned about [OBOR], but publicly they put on a very brave face” Institute for Strategic Studies, told bne IntelliNews. “In this case, such concerns apply to, in the first place, China.

Thus, the countries of the region, first of all Kazakhstan, consistently pursue

to build several military outposts and facilities. China also formed a new group in 2016 with Tajikistan, Pakistan and Afghanistan to combat terrorism.

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Cover story

China’s insatiable appetite for Central Asian oil and gas

for about 25% of annual production, independent experts say China has about a 40% share in Kazakh oil,”

Kanat Shaku in Almaty

M

I 23

Kazakh independent oil industry analyst Sergey Smirnov tells bne IntelliNews.

China began shopping for Central Asian oil and gas in the late noughties, but the fall in world oil prices has provided an opening for Chinese buyers to expand their stake in Kazakh oil. The Russian giant Lukoil sold a 50% stake in a Kazakh oil producer to China Petroleum & Chemical for $1.09bn in 2015, as falling oil prices made production less attractive.

iddle Eastern countries and Russia have traditionally dominated the energy markets of Western Europe, leaving the little known but vast reserves of Central Asia neglected. That is, until China revealed its insatiable appetite for the region’s resources.

US giants Chevron and Exxon Mobil together hold a 75% stake in Tengiz, one of the country's largest oil fields, whereas Italy’s Eni is the leading shareholder of the giant Kashagan field, which launched in October 2016.

If China continues its current trend, the International Energy Agency estimates that half of Central Asia’s oil and gas exports could go east by 2020, in a marked shift from historic flows to Russia and Western Europe.

“The fall in world oil prices has provided an opening for Chinese buyers to expand their stake in Kazakh oil”

In Kazakhstan, the leading energy exporter in the region, the lion’s share of the country's oil production is still done by Western companies.

The Western grip on Kazakh energy is, however, a waning phenomenon.

“Although today, according to official figures, Chinese companies account

China’s expansion should be viewed as ongoing rather than recent,

Smirnov says, and it is not triggered by current low asset prices. On the contrary, China was “often acquiring shares of Kazakhstan’s companies

RUSSIA from Omsk

Samara

Pavlodar Orsk

KAZAKHSTAN Zhanazhol Kenkiyak

Atyrau Novorossiysk

Atasu Kumkol

Beineu

GEORGIA

Aktau

Khorgos

Almaty

Zhanaozen Zhetibay

Tbilisi

Shymkent

TURKEY

Alashankou

Aralsk

UZBEKISTAN AZEBAIJAN

Baku

Ceyhan

CHINA

Chardzhou

TURKMENISTAN

Kazakhstan-China oil pipeline

KYRGYZSTAN

TAJIKISTAN

Central Asia-China gas pipeline (CACGP)

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at prices [as much as] twofold above their real value”, Smirnov notes.

The three major Chinese companies operating in Kazakhstan are CNPC, Sinopec and Citic. CNPC owns stakes in CNPC-Aktobemunaigaz (94.4%), Mangistaumunaigas (50%), Buzachi Operating (50%), PetroKazakhstan Kumkol Resources (67%) and Kashagan (8.4%); Sinopec’s subsidiaries include Sazankurak (100%), Prikaspian Petroleum Company (100%) and Sagis Petroleum Company (100%); Citic retains a 50% stake in Karazhanbasmunai.

Chinese companies own several key oil fields close to the southern town of Kyzylorda and the western city of Aktobe. Even as some of the China-owned oil fields passed peak production or became unfeasible, it began investing into oil processing, including oil refineries in Chymket and Atyrau. Kazakhstan also transits oil and gas through the Central Asia-China Gas Pipeline (CACGP) from Turkmenistan and Uzbekistan.

“China will certainly keep trying to strengthen its influence in [Kazakhstan] in the long run,” Smirnov maintains. Kazakhstan has agreed to supply 5bn cm of gas to China in 2017, compared to yearly volumes of around 300mn cm. Line-C of the Central Asia-China gas pipeline is the most probable candidate for the transport route of the new volumes.

Turkmenistan exports its gas directly to China through Line-A and LineB of CACGP. The country delivered 35bn cm in 2016, head of state run

once it reaches full capacity in 2017, should carry 10bn cm of gas from Turkmenistan, 10bn cm from Uzbekistan and 5bn cm from Kazakhstan.

Turkmenistan plans to increase its natural gas exports to China to 38bn cubic metres (bcm) in 2017. It had planned to export 65bn cm by 2021, with the CAGP pipeline supplying 55bn cm of gas or one-fifth of China’s total consumption, but since construction of the final segment, Line-D, came to a halt in early 2017 because of the Chinese economic slowdown, these goals remain murky.

Uzbekistan also managed to secure a niche with its huge $15bn gas deal in 2013, and now exports around 4bn cm a year to China. Uzbek President Shavkat Mirziyoyev announced in June an agreement with China to boost Uzbek gas exports to 10bn cm. Beijing has also financed two refineries of Kara-Balta and Tokmok in Kyrgyzstan, supplied by CNPC-owned Kazakh oilfields and producing approximately 1.4mn tonnes oil products per annum.

China’s grasp has even managed to reach Tajikistan – the last country one would associate with hydrocarbon riches. China’s CNPC is one of the three foreign companies with a stake in the exploration of the barely known Bokhtar field. Bokhtar, covering an area of around 35,000 square kilometres, is seen as potentially transformational for Tajikistan, with the possibility to put the country on a par with countries like Kazakhstan or Russia in terms of oil and gas reserves per capita. In 2012, Tethys revealed that the field,

“China’s grasp has even managed to reach Tajikistan – the last country one would associate with hydrocarbon riches” Turkmengas, Myrat Archayev, said in May. That includes at least 13mn from the China-run Amu Darya Project at Turkmenistan’s Bagtyyarlyk field. In addition, the 1,300km-long Line C,

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based on an independent audit carried out by US-based Gustavson Associates, held estimated gross “unrisked” mean recoverable resources of 27.5bn barrels of oil equivalent (boe).

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SOUTHEAST EUROPE:

Chinese investors compete for Bosnian coal projects Clare Nuttall in Bucharest

N

o fewer than five new coalfired power plants, most of them potentially funded by Chinese state banks, are being considered in Bosnia & Herzegovina. Two of these projects – the seventh unit at the existing Tuzla plant and the brand new Banovici plant – are just 30km from each other, raising serious questions about their economic rationale.

From the Chinese side the rationale is clear: industrial over-capacity at home has forced its engineering conglomerates to seek out opportunities abroad, resulting in intense competition to build new power plants even in the small Balkan economies.

It’s less clear how Bosnia, population 3.8mn, which already produces more electricity than its needs, can afford the new power plants currently being promoted, even if only some of them get built. Its government is keen to invest into new capacity both to replace ageing infrastructure and to further increase exports. However, information on the economics of the new plants, especially taking into account carbon costs, as well as their environmental impact, has largely not been disclosed.

Neither Tuzla 7 nor Banovici is currently under construction but, after switching adherence from one project to the other for several years, the Bosnian authorities appear equally keen on both Chinese-funded projects.

A consortium comprising China Gezhouba Group and Guangdong Electric Power Design emerged as the preferred bidder for Tuzla 7 back in 2014, after Japan’s Hitachi withdrew from the race.

State power utility Elektroprivreda Bosne and Hercegovine (EPBiH) signed an engineering, procurement and construction (EPC) contract with the consortium followed by a framework loan agreement with Chinese Exim Bank.

Numerous questions surround the Tuzla 7 project, not least how the construction price was brought down from the original €785.7mn to the €722mn more recently stated by EPBiH director Bajazit Jašarevic. Hitachi dropped out, at least partly because of the lack of economic feasibility, though also because of the political upheavals in the country at that time.

Yet arguably the most serious problem facing Tuzla 7 is the plan for another

I 25

350MW plant at the nearby Banovici mine, also in the Bosnian Federation.

Another state company, RMU Banovici, is understood to want to build the plant to ensure there is a buyer for its coal, and signed its own agreement with China's Dongfang in 2015, as the company beat its compatriots Shanghai Electric Group Company and China Gezhouba Group Company for the deal.

Dongfang said at the time the agreement was signed that it would bring “impetus to the economic advancement of B&H as well as wellbeing to local people”.

However, the plans for the two almost adjacent projects were heavily criticised in a May 2017 Bankwatch report. “There appears to be a serious lack of energy planning and co-ordination between the Tuzla 7 and Banovici projects. It is very unlikely that two plants within just a few kilometres of one another can both be feasible, yet the [Bosnian Federation] government has so far supported both projects,” the report says.

The watchdog’s research coordinator Pippa Gallop describes the two as a “strange pairing”, telling bne IntelliNews, “There is no justification for having both”.

What’s especially perplexing is that both projects are backed by different Chinese companies, and have loan offers from two different Chinese policy banks, apparently acting in direct competition with each other. This is despite the fact that the so-called “policy banks” – banks that are state owned or state controlled – require top-level sign off for their investments.

“We are seeing fierce competition between these two projects, with two Chinese construction companies backed by different state loans from China … In such a little geographic area, we see a very high concentration of Chinese projects, often in competition against one another,” says Bankwatch public finance policy officer Wawa Wang, who notes that like many of the power plants planned in Bosnia and other Western Balkan countries “the numbers simply don’t add up”.

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Bosnia already has coal-fired power plants in Tuzla, Kakanj, Gacko, Ugljevik and Stanari, while generating around half of its electricity from hydropower. In addition to the Tuzla and Banovici projects, there are also plans for new units at Ugljevik, Kakanj and Gacko, although not all of these are moving forward at the moment.

Chinese investors are again involved.

The Ugljevik 3 unit in Republika Srpska is being promoted by Russian billionaire Rashid Sardarov's Comsar Energy, but, if it goes ahead, it would be built by China Power Engineering and Consulting Group Corporation (CPECC). Meanwhile, the recently completed Stanari lignite power plant was financed by the China Development Bank and built by Dongfang.

According to Pippa Gallop of Bankwatch, the plans are “completely out of scale with both energy demand and with what [Bosnia] could actually afford”. With the exception of Ugljevik, the new power plants would be built by state-owned companies and state guarantees for the loans would most likely be required.

Bosnia is the most extreme example of an intense concentration of coal power projects, but new coal power plants are being considered across the Western Balkans, despite requirements for would-be EU member states to curb emissions. They include the new Kostolac B3 lignite plant in northeast Serbia, financed by China Exim Bank and being built by China’s CMEC, and Pljevlja 2 in Montenegro, for which Podgorica is eyeing Chinese funding after the Czech Export Bank said it would not back the project. There are also plans for a new unit at the Rovinari lignite power plant in EU member state Romania.

Chinese banks have become virtually the only option for governments and state power companies in countries from the region hoping to find backers for investments in coal capacity, after multilateral development banks decided in 2013 to stop financing new coal-fired power plants. The lack of economic viability has, meanwhile, ruled out financing from commercial banks.

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bne July 2017

Chinese banks are not exclusively targeting coal projects; they are interested in a variety of potential investments across the energy and infrastructure sectors. Indeed, in 2016 China became the world's largest investor in renewable energy, putting to work a total of $102.9bn, including $32bn overseas, the Institute for Energy Economics and Financial Analysis (IEEFA) said in a January report. “Chinese companies and institutions are increasingly looking overseas for opportunities in renewable energy development,” the report noted.

However, with a strong impetus to look for investment opportunities abroad, and local actors eager to secure funding, within the Balkans Chinese banks have effectively become the financiers for coal projects by default. “Most concerning for the Balkan region and beyond is that the financing of state-owned energy companies focusing on coal projects is enabling a very unfortunate trend of Chinese financing dictating the fuel choice of those countries. Without [Chinese] money they wouldn't be able to develop those projects in the first place,” says Wang.

Even though Chinese banks are wooed by local governments and utilities, these investments – in the Balkans and elsewhere in the world – also have substantial benefits for Chinese companies.

With Beijing trying to tackle pollution at home, investments are increasingly being redirected towards renewables and away from more polluting fuel sources. The “war on pollution” has also led to the authorities ordering polluting plants to suspend work to allow them to meet tough emissions targets.

All this has left its engineering companies in need of new revenue sources, ideally from projects overseas. It’s also part of a broader trend for Chinese companies to seek opportunities abroad since the country’s gradual economic slowdown, as it can no longer rely on growth based on low-cost labour.

For this reason, according to Wang, Chinese interest in coal power plants even in the tiny Western Balkans economies is intense. “For each of these [coal

power plant] projects in the Balkans we saw nine to 11 Chinese companies competing against one another in the first round of the tender,” she says.

“That goes to illustrate there is a very urgent need for China to export its overcapacity especially in the power generation sector, considering China is reining in its own operation of power plants and coal mines … Obviously all this equipment needs to get built somewhere else.”

This is not limited to the Balkans, according to Wang, with Southern Asia (especially Pakistan), Southeast Asia and African countries “seeing a similar tend in countries with indigenous coal or coal ports, which allows very uneconomic projects to take place … Chinese coal projects are simply mushrooming in Pakistan – which relies on imported coal – after the signing of the ChinaPakistan economic corridor agreement.”

This is in contrast to the recent rhetoric from China of its commitment to fighting climate change and speeding up the shift away from fossil fuels, after President Donald Trump announced the US would withdraw from the Paris climate change agreement. The EU and China responded by affirming their commitment to the agreement, and on June 12 China even signed a lowcarbon agreement with the US state of California, bypassing Washington.

However, while China is investing in renewables and cutting back coal generation at home, state-controlled banks continue to fund new coal power plants abroad. “There is definitely a schism between what Beijing is saying on the record, and its financing and enabling the export of the coal industry and equipment overseas,” comments Wang. “We are not seeing [Chinese] statements and aspirations transposed into operational policies.”

It’s not clear if or when Beijing will act decisively to rein in financing for coal projects abroad, given its commitments to addressing climate change.

For now, the economic rationale for Chinese policy banks to invest into Balkan coal projects remains strong.

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I 27

CEFC bought a plethora of relatively small assets – including a brewery and several travel sector companies – in a frenzied bout of buying in 2015, with an estimated spend of more than €1bn.

As part of that drive, a 60% stake in Slavia was bought from Jiri Simane in September 2015. The local entrepreneur also sold the Chinese a stake in the Travel Service airline. The following November, CEFC raised its holding in the football club to 99.96%.

Slavia Praha's Eden Arena

CENTRAL EUROPE:

When sleeping giants meet Tim Gosling in Prague

"T

ady jsme doma!” (Here we are home!) was the cry in late May as Slavia Praha announced to the crowds lining the terraces in red-and-white that the Eden Arena, which sits on a busy crossroads in the down-at-heel Vrsovice neighbourhood of the Czech capital, is finally owned by the club.

Illustrating the dubious dealing that almost brought the club to its knees in 2015, no one knows from whom the shiny stadium, opened in 2008, was purchased. However, CEFC – the Chinese owner resurrecting the battered Czech football giant – made sure the whole country knew who it was that bought back the family silver.

Two weeks later, Slavia was celebrating a first league title since 2009.

Since the arrival of CEFC in 2015, when the club sat on the brink of bankruptcy, the revival of this bastion of Czech national independence is a clear signal to the wider public that the Chinese investor is a reliable guardian for the country’s treasures.

“Slavia Prague, together with Skoda car and the animation figure Little Mole, are brand names representing the Czech national spirit,” CEFC said in a statement following the title win.

“Spending tens of millions of euros on saving a sports club was not for profit making,” suggested Chairman

The energy and banking conglomerate has done little since to discuss the apparent randomness of its purchases with the media. The assumption is that the rescue of Slavia from years of shady owners and dodgy deals is meant to help pave the way to bigger deals.

“It’s a propaganda tool, or a way to establish funding in the Czech Republic,” suggests Jiri Pehe, a wellknown political commentator and lapsed Slavia fan. “If CEFC just turned up [to buy major assets] there would be a lot of suspicion. Investing in Slavia to win the league they prove themselves.”

While the terraces at Eden are largely happy with the performances on the pitch and the careful respect for tradition that the Chinese have shown, CEFC is just as shy with Slavia fans, says Ondrej Kreml, an editor at fans' forum www.slavistickenoviny.cz.

“Spending tens of millions of euros on saving a sports club was not for profit making” Ye Jianming, but an effort to “save a Czech traditional brand, and to show its respect to Czech soccer and culture”.

The mysterious investor, which over the past decade has emerged from obscurity to become the sixth largest private company in China, has shown without doubt that it prefers to let its investments do its talking for it. Encouraged by an effort to attract capital from the east led by President Milos Zeman,

“The fans know the Chinese are here to make themselves look good and prove they can build a Czech business, but we never hear from them.

Everything comes from Tvrdik.”

Former defence minister Jaroslav Tvrdik is viewed as having almost grounded flag carrier CSA during a stint at the controls. However, he is now the point man for the efforts of President Zeman to attract investment

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Jaroslav Tvrdik (third from left) is chairman of the club and head of CEFC's local office.

as China continues its push into Central and Eastern Europe. A long time Slavia fan, Tvrdik has become chairman of the club, as well as head of CEFC’s local unit, set up as a European HQ. Such a central role stems from his links to the controversial Zeman. The president is also commonly accompanied on trips to China by oligarchs

CEFC clearly wasn’t drawn to visit the country because it loves beer and football. Banking, and especially energy, have powered the company’s rapid rise, and remain its prime interests. Speculated to be close to the Chinese military or secret services, CEFC is said to be seeking to buy its first refinery at home as part of a drive to to become a second Sinopec.

“It’s a propaganda tool, or a way to establish funding in the Czech Republic” such as Petr Kellner – the richest Czech, who has a sizeable consumer finance business in China – and closelyheld Slovak/Czech group J&T. The push from Prague Castle for yuan has caused no little fuss at home. During his campaign, the loose cannon president has found himself at the centre of unsavoury events involving the Dalai Lama or assaults by ethnic Chinese on protesters with Tibetan flags as Chinese President Jinping Xi visited the Czech capital.

A follow up toadying letter signed by several senior Czech political figures provoked a storm of protest, amongst Prague liberals at least.

However, the approach is unlikely to change anytime soon; the Chinese plan is at an early stage yet.

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European service stations and oilfields in Africa and the Middle East have also been snapped up in recent months.

In the Central & Eastern European region, the major buy is not in the Czech Republic, but Romania, where CEFC has agreed to buy control of the country’s biggest refinery Petromidia from KazMunaiGas. In Central Europe, the company continues to try to acquire assets in the financial sector. It could also soon control 24% of the Czech refining sector via J&T Financial Group’s stake in Unipetrol.

Meanwhile, for Beijing the biggest prize is nuclear. Chinese companies are reported to be extremely keen to play a leading role in Czech plans to build €11bn worth of new reactors over the coming decades. CEFC has no nuclear experience, but cynical voices in Czech banking circles claim the name of the company doesn’t matter – if they’re Chinese, then Beijing is the ultimate power in the background.

"We are not here to grab the market and its resources. Instead, we come to make friends and seek mutual benefits and joint development," says Ye Jianming. The investment in Slavia “not only built credibility for CEFC China, it also gave additional credibility to other Chinese companies operating in the Czech Republic,” the company claims.

“Maybe this will set up a model of market entry,” suggests Pehe. “The Czech Republic is very dependent on foreign investment, and this could be copied.”

However, aside from the title-winning football club – CEFC is very happy with the PR gained, one source inside the club claims – the Chinese are less thrilled with the rest of the investments announced in 2015. Indeed, several are yet to be finalised.

“I doubt anyone will ever know who they bought it from”

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Cover story

Czech unit headed by the Slavia chairman taking control of the asset, rather than the Hong Kong unit the Shanghaibased management had planned.

Tvrdik is not short of ambition. The flamboyant former minister is now using his elevated status at Prague Castle and within the sport to lead a war against Roman Berbr, known as the grey cardinal of Czech football, and his grip on the Czech Football Association, says Michal Petrak, a journalist at isport.cz. Miroslav Pelta, head of the football association, was arrested in May on corruption charges.

A deal to for CEFC to raise its 9% stake to 50% in J&T Financial Group – one of the biggest investment groups to emerge from the privatisation chaos across the region in the 1990s – is stuck in the regulatory process. Perhaps most tricky for CEFC is that J&T’s ownership of Slovak banks puts the deal in front of the European Central Bank, which demands full ownership transparency.

However, it’s not just regulators giving the Chinese a headache.

A deal to buy travel portal Invia from a private equity fund featuring Kellner and J&T alumni – including Daniel Kretinsky, owner of closely-held energy holding EPH as well as Slavia’s bitter cross-city rival Sparta Praha – soon unravelled, with CEFC pulling back on the stake it agreed to take.

The Chinese company reportedly performed a similar about turn earlier this year over its purchase of 49% in Empresa media group. Meanwhile, talks on a buyout of at least part of Penta – a group with a very similar profile to J&T – have now lapsed, according to sources involved in the deal, despite having reached the due diligence stage last year.

CEFC is also understood to be struggling with local wheeling and dealing.

When the Chinese company handed J&T CZK7.5bn (€286mn) to buy the Florentinum real estate development in Prague earlier this year, a dispute with Tvrdik ended, according to sources, with the

Meanwhile, other Chinese investors complain that they are finding deals even harder to come by because Tvrdik has over-ridden the Czech-Chinese Chamber of Commerce, which he also heads.

With the purchase of Slavia and then the Eden stadium, CEFC at least has something in the bag. “It’s understandable that they wanted to get the stadium,” says Jan Machacek, a journalist for broadsheet Lidove Noviny. “That is very valuable real estate.”

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However, the lack of transparency and double dealing that has plagued Slavia over recent years remains a bug for the Chinese. Barely had the celebrations over the purchase of Eden finished when it emerged that German construction giant Hochtief, the contractor that built the stadium, launched a lawsuit over an attached plot on which it claims it has held a contract for years.

Should CEFC tire of the shenanigans, many liberal Czechs would likely welcome its departure. Andrej Babis, the oligarch that appears destined for the PM’s chair at October’s elections, has noted that his ally Zeman’s drive for Chinese investment has largely failed thus far.

There have been no greenfield investments or acquisitions followed by largescale expansion, he has noted. In short, the Chinese are not creating jobs for Czechs. However, that’s a standard model for Chinese investment. When there are jobs to be done, cheaper workers are often imported from home.

But not football players. Slavia is now competing with the big boys of Czech football again for the top players.

“There’s no plan B. What happens if the Chinese leave?”

“The Chinese had to be very careful to find out who to pay for the stadium,” points out a former press spokesman for Slavia. “It’s never been clear who owns the asset.” Rumours of Caymen Island outfits and mob ties abound.

“It was a bit of a miracle that they managed it,” he laughs. “I doubt anyone will ever know who they bought it from.”

“The club won the transfer race last season by offering strong – though not crazy – wages,” notes Petrak.

“That’s made the fans happy,” says the former press spokesman, “but we don’t really know who owns us. There’s no plan B. What happens if the Chinese leave?”

For more articles about Chinese investment in Central and Eastern Europe, go to www.intellinews.com/chinarising

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bne July 2017

CHINESE INVESTMENTS IN CEE Project title

Sector

Chinese partner

Project commencement

Value to be invested

Czech

Acquisition of 79.4% of Pivovary Lobkowicz brewery

Brewing

CEFC

2015

CZK1.9bn

Czech

Acquisition of Florentium office building in Prague

Real Estate

CEFC

2016

CZK7.5bn

Czech

Acquisition of Travel Service

Airline

CEFC

2015

–

Hungary

Acquisition of Invitel broadband and telecoms provider

Telecom

China CEE Investment Co-operation Fund

Jan 2017

€202mn

Hungary

Construction of €1.5bn high-speed rail line

Infrastructure

China Railway Group

Nov 2015

€1.5bn

Hungary

Acquisition of BorsodChem chemical plant

Chemicals

Wanhua Group

Feb 2011

€1.2bn

Hungary

Bank of China opens first CEE subsidiary in Hungary

Finance

BOC

Aug 2002

–

Poland

Acquisition of 89% of Krasnik Rolling Bearings Factory

Automotive

China Industry Development Agency and Chinese Xiangyang Automobile Bearing

2013

PLN300mn

Poland

Acquisition of civil part of Huta Stalowa Wola steel mill

Construction equipment

Guangxi Liugong Machinery Co

Jan 2011

–

Slovakia

Acquisition of a 50% stake in J&T Financial Group

Banking

CEFC

Awaiting regulatory approval

€980mn

Country CENTRAL EUROPE

SOUTHEASTERN EUROPE Albania

Purchase of Bankers Petroleum

Energy

Geo-Jade Petroleum Corporation

2016

CAD575mn (€388mn)

Bosnia

Construction of Stanari thermal power plant

Utilities

Built by Dongfang Group, financed by China Development Bank

Started operation 2016

€500mn

Bosnia

Construction of Banja LukaDoboj highway

Infrastructure

China Road and Bridge Corporation (CRBC)

Aug 2011

€400mn

Montenegro

Construction of Bar-Boljare highway

Infrastructure

Chinese Exim Bank

2014

€687mn

Romania

Acquisition of 50% stake in KMG International, including Petromidia refinery

Energy

CEFC

Deal due to complete end-June 2017

$680mn

Romania

Construction of two new reactors at Cernavoda nuclear power plant

Energy

China General Nuclear Power Corporation

MoU signed 2015; work not started yet

€4bn-€6bn

Serbia

Construction of BelgradeBudapest railway

Infrastructure

Chinese Exim Bank

$297mn loan deal signed May 2017

$2.9bn

Serbia

Construction of Corridor 11 highway from Belgrade to the port of Bar in Montenegro

Infrastructure

China Eximbank (loan), Shandong Hi-Speed Group (contractor)

Mar 2016

$301mn

Serbia

Construction of Kostolac thermal power plant and expansion of coal mine

Energy, mining

China Exim Bank (loan), China Machinery Engineering Corporation – CMEC (contractor)

Loan agreement ratified, but start of project delayed

$602mn

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Project commencement

Value to be invested

Zhejiang Jinke Entertainment Culture Co

Jan 2017

€1bn

Finance

China Development Bank

May 2017

€500mn (loan)

Bank of China gets licence to operate

Finance

Bank of China

May 2016

–

Turkey

Construction of two solar power plant projects

Energy

ET Solar

Dec 2015

–

Turkey

Acquisition of Tekstilbank

Finance

Industrial and Commercial Bank of China

Sept 2015

TRY668.8mn (€200mn)

Turkey

Acquisition of 64.5% stake in port operator Fina

Infrastructure

China Merchants Holdings International Co.

Sept 2015 (announced)

$920mn

Turkey

Acquisition of Osmangazi power grid

Utilities

China Machinery Engineering Corporation (CMEC)

Mar 2015

–

Belarus

Geely loan agreement

Automotive

Geely

July 2015

$158.7mn (loan)

Belarus

Loan to Belarus

Finance

–

May 2015

$7bn (loan)

Belarus

Construction of Greystone industrial and logistics park

Infrastructure

Export-Import Bank of China, China Development Bank, China CAMC Engineering, Harbin Investment Group

June 2014

$1bn

Belarus

Construction of Geely car plant

Automotive

Geely cars

Dec 2011

–

Russia

Acquisition of 20% of Rosneft's Verkhnechonskneftegaz Siberian oil and gas producer

Oil and Gas

Beijing Gas Group

June 2017

$1.1bn

Russia

Acquisition of 10% stake in gold miner Polyus Gold

Mining and Metals

Fosun International

May 2017

$887mn

Russia

Acquisition of Voentorg building in Moscow

Real Estate

Fosun Group and Guo Guanchana

June 2017

–

Russia

Acquisition of 4.5% stake in Phosagro

Fertiliser

RCIF and China Investment Corporation

Feb 2017

$200mn

Russia

Acquisition of 23.1% stake in children goods store Detski Mir

Retail

China Investment Fund RCIF

Feb 2017

RUB9.75bn ($133mn)

Russia

Construction of Amur bridge in Russia's Far East

Infrastructure

China Development Bank

Feb 2017

–

Russia

Acquisition of stake in Arc International glassware manufacturer

Consumer

RCIF

–

€250mn

Russia

China Construction Bank (CCB) sets up subsidiary

Finance

–

–

$144mn

Russia

Acquistion of 12.5% stake in potash producer Uralkali

Fertilisers

CIC

Nov 2012

$2bn

Russia

Acquisition of 42% stake in forestry company RDF

Foresty

RCIF

Oct 2013

–

Russia

Construction of car assembly plant in Lipetsk

Automotive

Lifan

–

$300mn

Country

Project title

Sector

Chinese partner

Slovenia

Acquisition of Outfit7

Online entertainment

Turkey

Turkcell loan

Turkey

EASTERN EUROPE

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Project commencement

Value to be invested

China National Petroleum Corporation (CNPC)

Oct 2014

$400bn

Oil and Gas

–

Sept 2014

–

Acquisition of 10% stake in Sibur

Chemicals

Sinopec

Dec 2015

$1.4bn

Russia

Acquisition of 9.9% stake in Yamal Liquefied Natural Gas

Oil and Gas

Chinese Silk Road Foundation (SRF)

Dec 2015

$1bn

Russia

NLMK steel plant loan

Metals and Mining

ICBC and China Construction Bank

Nov 2015

$400mn (loan)

Russia

Investment into Sukhoi plane producer

Aviation

RCIF

–

$1.4bn

Russia

Russia and China launch new $100mn investment fund

Finance

RCIF and Chinese company Tus-Holdings

–

$100mn

Russia

Acquisition of Rusal's Jamaican division

Metals and Mining

JISCO

July 2016

$299mn

Russia

Construction of third section of Russia's Central Ring Road

Infrastructure

Shandong High-Speed

July 2016

$1.3bn

Russia

Loan to Novatek for Yamal LNG project

Oil and Gas

China Export-Import Bank

Apr 2016

$12bn (loan)

Russia

Loan to Gazprom

Oil and Gas

Bank of China

Mar 2016

€2bn (loan)

Russia

Acquisition of 5.2% stake in Moscow Exhange

Financial

Chengdong Investment Corporation, part of Chinese Investment Corporation (CIC)

Feb 2016

–

Ukraine

Investment in Chernigov region

Agriculture

Fanda

Nov 2014

$58mn

Ukraine

Loan agreement to finance Air Express project

Aviation

Export-Import Bank of China

June 2013

$372mn (loan)

Ukraine

Loan agreement for grain purchases

Agriculture

Export-Import Bank of China

Feb 2013

$1.5bn (loan)

Road repair

Infrastructure

SinoHydro Corporation

Dec 2011

€74mn

Construction of Trans Anatolian Natural Gas Pipeline

Oil and Gas

AIIB

–

$600mn

Construction of Tbilisi bypass road

Infrastructure

AIIB

–

$114mn

Iran

Investment into TehranMashhad Railway electrification

Transport

China National Machinery Import and Export Corporation (CMC)

May 2017

€2.2bn

Iran

Construction of Iran-China Fertiliser Complex

Fertiliser

Wuhan Petrochemical

2017

$3.6bn

Iran

Establishment of Saic-Azico automotive joint venture

Transport

SAIC

2016

–

Iran

Construction of Chery automotive plant

Transport

Chery Auto

2016

$300mn+

Iran

Investment in fisheries

Infrastructure

Chinese Fisheries Organisation

2016

$3bn

Iran

Investment into automotve producer JAC

Transport

JAC

2016

–

Country

Project title

Sector

Chinese partner

Russia

Russia gas deal with China

Oil and Gas

Russia

Construction of Power of Siberia gas pipeline launched

Russia

EURASIA Armenia Azerbaijan Georgia

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Project title

Sector

Chinese partner

Project commencement

Value to be invested

Acquisition of 49% stake in Maad Iran Vehicle Manufacturing

Automotive

Chery Auto

2004

$300mn

Kazakhstan

Acquisition of Altyn Bank

Financial

China’s Citic Bank and the investment arm of state-run China Tobacco

June 2017

–

Kazakhstan

Loan agreement for KazMunayGas and Citic Group Polymer Plant

Chemicals

Bank of China

2010

$232mm (loan)

Kazakhstan

Loan agreement to SamrukKazyna Fund and ENRC chrome project

Metals and Mining

CDB

2011

$2bn (loan)

Kazakhstan

Loan agreement to DBK for petrochemical project

Chemicals

China Exim Bank

2011

$1.38bn (loan)

Kazakhstan

Loan agreement for Aktogay mine

Mining and Metals

China Development Bank

2011

$1.34bn (loan)

Kazakhstan

Investment in wind power plant in Pavlodar

Energy

China Development Bank

2013

$100mn

Kazakhstan

Loan agreement to Shymkent Pipeline Construction

Oil and Gas

CDB

2014

$700mn (loan)

Kazakhstan

Loan agreement to Kazakhstan Fund for industrial development

Industry

CDB

2014

$500mn (loan)

Kazakhstan

Loan agreement to Kazakhstan's KazTransGas for Gas Pipeline Construction

Oil and Gas

Chinese Development Bank

2014-2015

$700mn (loan)

Kazakhstan

Loan agreement to Kazakhstan for chemical production

Chemicals

CDB

2015

$100mn (loan)

Kazakhstan

Loan agreement to Chilik Corridor wind power plant

Energy

CDB

2015

$120mn (loan)

Kyrgyzstan

Loan agreement for modernisation of Power Transmission Line in Datka

Utilities

China Exim Bank

2011

$208mn (loan)

Kyrgyzstan

Construction of Datka-Kemin electric line

Utilities

China Exim Bank

–

$390mn

Tajikistan

Investment into Nurek Hydropower rehabilitation

Utilties

AIIB

–

$60mn

Tajikistan

Investment into Border road improvement

Infrastructure

AIIB

–

$27.5mn

Tajikistan

Investment for DushanbeKurgan railway upgrade

Infrastructure

China Exim Bank

–

$68mn

Country Iran

OIL FIELDS CHINA BOUGHT Country

Oil field

Chinese partner

Kazakhstan

CNPC-Aktobemunaigaz (94.4%)

CNPC

Kazakhstan

Mangistaumunaigas (50%)

CNPC

Kazakhstan

Buzachi Operating (50%)

CNPC

Kazakhstan

PetroKazakhstan Kumkol Resources (67%)

CNPC

Kazakhstan

Kashagan (8.4%)

CNPC

Kazakhstan

Sazankurak (100%)

Sinopec

Country

Oil field

Chinese partner

Kazakhstan

Prikaspian Petroleum Company (100%)

Sinopec

Kazakhstan

Sagis Petroleum Company (100%)

Sinopec

Kazakhstan

Karazhanbasmunai

Citic

Bokhtar field

CNPC

Turmenistan

Gas supply deal

–

Uzbekistan

Gas supply deal

–

Tajikistan

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An economic test for Polish ambition Tim Gosling in Prague

P

oland’s spiky PiS government likes a challenge; efforts to spark “revolution” within the EU or organise a huge Nato push in the neighbourhood to openly confront Russia are not short of ambition. However, Warsaw may have been uncharacteristically humble in targeting GDP growth of 3.6% this year.

With a healthy dose of luck on its side, the Polish government may be en-route to fulfilling its earlier grand promises to rekindle growth.

The economy let the side down badly last year, but a surge in GDP in the first three months of this year has many observers reassessing their stance on that score.

“GDP growth performance is benefiting from a mix of supportive factors that include accommodative fiscal and monetary policies, a strong labour market performance, gradual recovery in disbursements of EU funds and fairly

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supportive external demand,” says Arnaud Louis at Fitch Ratings.

The Polish economy surprised in the first quarter as it boomed 4% in yearon-year terms, and 1.3% quarterly.

The acceleration over the disappointing 2.7% gain recorded across last year is stark. The big question is whether the country can keep up the pace through 2017, and beyond.

Warsaw is delighted with the first quarter performance, but the populist PiS is walking a fine fiscal line. Having won power with promises of high social spending, the government has struggled to orchestrate revenuegenerating schemes to keep the deficit within the Stability and Growth Pact’s limit of 3% of GDP. Last year’s deficit looks solid at 2.4% of GDP despite the slowdown in the economy, but the details suggest one-off income from telecom frequency auctions

and a bit of accounting magic to shift advance VAT payments onto last year’s books helped. The government targets a budget gap of 2.9% this year.

That leaves little room for error; Poland needs to extend the heady first quarter economic performance through the year and beyond. While there are few major new spending schemes expected in 2017, a lowering of the retirement age that will come into effect in October will weigh down the 2018 budget by an estimated 0.4% of GDP. The first quarter surge in Poland was in line with similarly strong results across the Visegrad region. While the headline GDP growth offered a positive surprise, the details deflated the optimism somewhat. In particular, investment – the main drag on the economy in 2016 with a 5.5% year-on-year fall – remained subdued in January-March. In other words, private consumption was still left largely alone in the driving seat.

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The PiS government’s Family 500+ child benefit scheme has helped buoy household spending, while a labour market that has been tightening over the last three years or so has boosted consumer confidence. In other words, more jobs, higher wages and state benefits sent Poles flocking to the shops last year.

Private fixed investment is harder to gauge however. PiS has made confrontation with the EU a cornerstone of its domestic political support. With Brussels’ confidence rebounding following the French election, the tussle is likely to keep political risk in the international headlines.

It’s a trend that persisted in JanuaryMarch, but contrary to 2016, industry and investment are also doing their bit this year. PiS won’t want to shout about it, but the EU plays a central role in the revival.

More directly, policymaking in Warsaw remains erratic. The government will be tempted to seek new revenue generating schemes should economic momentum fade.

Activity and confidence is robust in the Eurozone, which provides the bulk of export demand for the relatively small and open economies in Visegrad. That has Polish industry driving hard; the sector’s output rose 7.1% y/y in the first quarter of 2017, compared with just 1.3% growth in the final three months of 2016.

However, it is EU structural funds that could start to help most this year.

Beset by a poor track record in absorption, Poland and its regional peers raced in 2015 to claim the last cash under Brussels’ 2007-14 budget. That left the country with few approved public projects last year, a situation some claim

An effort to introduce a progressive tax on large retailers was overturned by the EU last year, for instance. There is speculation that the plan to grab some cash from the country’s busy shops has not been abandoned altogether.

“Political risk will be a problem at least for the medium term,” admits Carson.

But with growth so strong, investors should remain bullish. “Inflows have really picked up on capital markets. The zloty has risen strongly and the stock market is gaining.”

However, in the longer term, the analyst suggests political risk is likely to become more of an issue. A potential flashpoint would be if the budget deficit crosses the

“Weaker predictability of fiscal policy since the 2015 election creates another risk” was antagonised by widescale personnel changes within the civil service as PiS took over the reins. Fixed investment nosedived 5.5% y/y in 2016.

The signs are that Poland is finally getting absorption on track again. The best indicator is the construction sector.

The lack of EU projects last year saw the industry slump, but between January and March output boomed 17.2%.

“Construction and investment have tended to move together. We expect investment to remain strong through the year,” says Liam Carson at Capital Economics. “It could easily add 1pp to the headline.”

EU’s 3% threshold, as many expect in the next three years or so.

For this year, the consensus is that Poland should just squeeze under the cap, but that crucially assumes growth remains on target. The first quarter data has analysts rushing to raise their forecasts for economic growth this year. But will it last?

Louis says Fitch expects GDP growth will accelerate to 3% in 2017 and 3.2% in 2018. However, he adds, “we might also take the opportunity to review our GDP growth forecasts” during a review of the ratings of the sovereign on July 7.

Carson, whose prediction sat at the upper end of the range at 3.5% at the start of the year, suggests 4% GDP growth now “doesn’t seem unreasonable”. At BZWBK and other Polish banks, revised forecasts are already under consideration.

Katarzyna Rzentarzewska at Erste says the pace of GDP growth in the first quarter “makes us revise the FY2017 GDP growth forecast from 3.3% to 3.8%”.

However, a cautionary note soon arrived.

While still suggesting healthy growth, industrial, construction and retail sales data for April showed activity was well below the surging numbers in March.

“The April data remind us that there are perils to extrapolating such a powerful trend too far into the future,” warned analysts at Commerzbank. “Polish growth could still remain healthy, but the acceleration of Q1 may not repeat. Retail sales data also send out the same message.”

Several other hints have followed. April data also suggested weakening wage growth and job offers, and PPI inflation moderated by more than expected, pointing to a lack of demand-powered inflationary pressure. The following month, business sentiment dropped for the first time in 2017.

At the same time, accounting issues look to have exaggerated the first quarter GDP data. Statistics office GUS recently reduced its reading for the first quarter of 2016, which created a low base to boost the year-on-year result. However, the readings for the remaining quarters of last year were raised, suggesting an opposite effect through the rest of the year.

“The growth dynamics are likely to ease in the coming quarters,” points out Rzentarzewska. The Monetary Policy Council noted that it expects the pace of GDP growth to fade through the rest of the year, as it announced on May 17 that it sees no development in the economy that would justify a rate hike for the record low 1.5% benchmark.

“Given Poland’s economic openness, the main risk to the outlook is weaker-than-

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GDP volume growth rate (corresponding period of the previous year = 100, constant prices of the previous year)

Consumption expenditure of the households sector

Gross domestic product

Gross fixed capital formation

expected external demand,” notes Louis at Fitch. “Increased domestic political tensions and weaker predictability of economic policy could affect Poland’s attractiveness as a place to invest and are another risk to the outlook, although its impact is difficult to assess today.”

The picture is also far from clear in the medium term. “CEE economies are now running at close to full employment,” says Carson. “While we think growth should be strong this year, rising core inflation will prompt tighter monetary policy than most expect, and growth will start to slow by 2018/19.”

For the moment, the strong growth revival is also pushing the rating agencies back into line, at least from Warsaw’s point of view. Standard & Poor’s surprised many when it handed Poland its first ever downgrade in January 2016. Many claimed the move was political, but S&P’s peers were quick to warn the government over fiscal discipline.

However, Moody’s raised its outlook on the sovereign’s ‘A2’ rating to stable from negative in May. The agency cited “reduced risk of loose fiscal policy and contained uncertainties stemming from government policies”.

On top of the forecast for a strong acceleration in GDP growth in 2017, the Polish government has set a tight deficit

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target 2.9% of GDP. That rise of 0.5pp on the gap last year reflects spending plans that will see the Family 500+ scheme cost around 1.2% of GDP and the retirement age cut another 0.1%. That leaves little room for error, but most assume Poland will just remain inside the 3% threshold above which member states risk entering the EU’s excessive deficit procedure (EDP).

That’s thanks to a mix of good luck, clever accounting, and discipline. PiS proved during its previous spell in office in 2005-07 to be a capable fiscal manager, while it seems that despite the party’s bitter dislike of Brussels, it knows which side its bread is buttered on economically. At the extremes, entering the EDP

favourable circumstances,” says Fitch’s Louis. “The closing of the negative output gap (the EU Commission forecasts it will be positive in 2017) is supporting government revenues. The government balance has also benefited from contained interest payments, thanks to the low rate environment, and decline in investment linked to the EU-fund cycle in 2016. It is also likely that the government’s strategy to increase tax compliance, in particular in reducing the VAT gap, has delivered some results.”

In short, it’s tempting to ask how much Warsaw is tempting fate. The first quarter of 2016 also started off optimistically, before economic activity gradually tailed off throughout the year. Challenged to find funding options for its spending plans, PiS has left the budget heavily reliant on strong GDP to support revenues, and will likely have to put off further populist expenditure for the meantime.

“Slower-than-expected GDP growth is the main risk to the forecast,” Louis sums up. “We expect no additional deficit-increasing policy initiative this year. However, weaker predictability of fiscal policy since the 2015 election creates another risk.”

The risk is summed up by the European Bank for Reconstruction and Development in its latest outlook published on May 10. The institution maintained its GDP growth forecast at 3.2% for 2017,

“In short it’s tempting to ask how much Warsaw is tempting fate” can result in fines, or a reduction in EU funds. That would dramatic for Poland, which is scheduled to benefit by €100bn in 2014-20.

Hence, ironically enough given Poland’s numerous political confrontations with Brussels, the EU’s EDP limits are seen as a major anchor for PiS. “Fiscal metrics have benefited from

based on recovering public investment and strong household consumption.

“Nevertheless, the generous social spending and rebounding public capital expenditure, coupled with a lower retirement age may lead to the breach of the 55% public debt ceiling by 2019,” the EBRD warns. “In which case the public finance law effectively mandates a very significant fiscal tightening.”

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Special focus I 37

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Polish retail sales growth accelerates to 7.4% y/y in May Polish retail sales grew 7.4% y/y at constant prices in May, the statistics office GUS announced on June 20.

for another good quarter in April-June, after GDP growth surged to 4% y/y in January-March.

The reading marks a pick-up in the pace of growth of retail sales over the 6.4% annual growth seen in April. It also shows that consumption, fuelled by the tightening labour market, continues to be a major driver of economic growth. Coupled with industrial production growth returning to a robust expansion pace in the fifth month, the Polish economy seems poised

Retail sales grew 8.4% y/y in current prices in April. In monthly terms, retail sales stayed flat in constant prices and fell 0.2% m/m in current prices. In the first four months of the year, growth came in at 6.9% y/y in constant prices and 8.5% in current prices.

Retail sales (inc. motor vehicles) y/y; n.s.a.

Retail sales change y/y

Poland retail sales y/y

Polish industrial production growth rebounds to 9.1% y/y in May Polish industrial production returned to fast growth, expanding 9.1% y/y in May, data from statistical office GUS showed on June 20. Hints of improving growth in investment have become clearer as well.

The reading follows a hiccup in April, when – due to fewer working days – industrial output contracted 0.6% in annual terms. The May result also beats expectations for an 8.6%

Poland industrial production

IP y/y

Industrial Production y/y

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expansion, confirming analysts’ conviction that the April fall was a one-off and that the underlying trend in industry is one of strong growth.

After seasonal adjustment, industrial growth came in at 6.5% y/y in May. Industrial production grew 5.5% m/m in unadjusted terms and 1.2% when seasonally adjusted.

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Polish core inflation eases in May Polish core inflation gained 0.8% y/y in May, the National Bank of Poland (NBP) announced on June 13.

The reading – which is 0.2pp below market expectations and 0.1pp lower compared to April – shows core inflation slowing after four months of acceleration. That will only strengthen the Monetary Policy Council's policy stance to resist any rate hike for the foreseeable future.

Core inflation has come into focus across the region as central banks have insisted that the recent surge in headline inflation is driven by erratic commodities markets and the low base in 2016. The headline CPI reading in Poland remained relatively subdued at 1.9% y/y in May, driven by price growth in the foods and fuels segments.

Poland inflation CPI vs PPI Inflation: CPI y/y

Inflation y/y %

Inflation: PPI y/y

OECD raises 2017 growth forecast for Poland Joining the majority of analysts, the Organisation for Economic Cooperation and Development (OECD) raised its 2017 forecast for Polish economic growth to 3.6%, the institution revealed in its latest economic outlook on June 7.

The 4% surge in the Polish economy in the first quarter of 2017 has promoted the revision of forecasts almost across the board. The OECD notes that its upgrade comes on the back of accelerating domestic demand and recovering public

investment – despite the latter's disappointing performance in January-March.

The organisation forecasts that public investment – which continued to fall in the first quarter, albeit at a slowing rate – will pick up as the use of EU funds improves. Private investment is expected to follow suit, supported by strong business sentiment and low real interest rates, the report suggests.

Poland GDP y/y (quarterly)

GDP y/y %

GDP y/y

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turn favourable compared to those offered domestically. Coal imports to Poland rose by an estimated 200,000 tonnes – or 3.5% y/y – to 5.9mn tonnes in January-October 2016, according to data from the state Industrial Development Agency (ARP).

The imported coal comes to Poland mostly from Russia. Currently, Russia is selling the bulk of its coal output to China. However, as soon as China’s plan to reduce coal consumption in the name of fighting global change takes off, the Chinese demand will fall, and Russian companies will start looking for other markets to sell to.

Polish coalmining enjoys its good times while they last

Russian coal company SUEK, for example, is already looking to double sales in Poland after increasing sales by 30% last year, it said in its 2016 annual report.

Russian coal is cheaper and – arguably – of better quality than its Polish equivalent. Russian companies are so confident they can beat Polish competition that some of them – such as another giant KTK – are taking part in tenders for coal supply organised by local authorities across Poland, energy sector analysis website wysokienapiecie.pl reported in late May.

Wojciech Kosc in Warsaw

P

olish coalmining is enjoying good times. The Law and Justice (PiS) government has fulfilled its promise to help mining companies by orchestrating the bailing out of the indebted and loss-making miners and pushing state-controlled energy companies to invest new capital in the sector.

The largely positive market environment, together with the financial restructuring, have enabled Polish miners to turn in decent results in the first quarter.

However, the question remains: can the good times last? Coal – a global commodity – comes under pressure from many sides. The obvious challenge is the international drive to clamp down on the polluting fuel in order to mitigate climate change. The resulting development of renewable energy and gas-fired power plants, as well

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as progress in energy efficiency, are a visible threat to coal demand already.

According to a recent study by the Polish Academy of Science, demand for coal to burn for power generation

If demand trends for domestic coal play out in line with forecasts, Polish miners are not only going to face problems with sales but also with finding money to invest in new supply. The investment plans are huge. PGG, for example, plans capex of PLN20bn by 2030.

“Polish miners still appear unprepared for the likely shape of the coal market in the near to mid-term” in Poland will diminish by 6.9mn-9.6mn tonnes by as early as 2020. That is 25% of production by Poland’s biggest miner PGG. There also is a more immediate pressure of volatile domestic demand that can shift to imported coal if its prices

Without new supply, Poland – if it wants to stick to coal as its staple fuel – will have to import more and more.

That runs counter to the government’s rhetoric of energy self-sufficiency.

It might also mean the incentive to develop renewable energy, gas or nuclear power will strengthen, though

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there is little to indicate that so far.

Renewables are stalled, while plans for Poland’s first nuclear power plant are still at too early a stage to discuss the likelihood of the project.

For now, however, thanks to the government’s efforts and to the relatively good situation on the coal market, the key companies – PGG and Warsaw-listed JSW – could boast improved results in the first quarter.

PGG posted a net profit of just over PLN59mn (€14mn) in the first quarter on the back of reduced costs, improved efficiency, and offloading superfluous assets to the state-owned restructuring vehicle SRK. The company managed to post positive results in spite of coal price trending down in the first quarter after China upped its domestic production, reducing demand and flattening prices.

JSW fared much better. The company produces coking coal for the steel industry. Unlike coal that PGG extracts for power generation, coking coal is

much less replaceable and as the global economy is accelerating, the price of coking coal rises accordingly. With the price of JSW’s coking coal surged 162% y/y in the first quarter, the company posted an operational profit of just over PLN1bn.

The PiS government wants to reinforce the position of coal in Poland not just because it still is the dominant energy source in Central Europe’s largest economy. The industry that employs some 85,000 people could, if stirred the wrong way, threaten political stability in next to no time. Warsaw’s putting a brake on the development of renewable energy’s most vibrant segment – wind power – was seen as an attempt to rid coal of a rival branch negatively affecting demand.

But Polish miners still appear unprepared for the likely shape of the coal market in the near to mid-term, and have yet to undertake any radical operational restructuring. Overmanning is still rife. For example, state coalmines produce around 600 tonnes of coal per

employee, versus 1,000-1,500 tonnes in privatised mines in Silesia and Bogdanka.

A taste of what is to come can be found, paradoxically, in a report by the state audit body NIK on the state of the mining sector in 2007-2015. The report said that Poland did not take advantage of a good situation on the coal market in the early 2010s, which led to rapid deterioration of miners’ standing after 2012, when sentiment soured.

Today, Polish miners are turning in profits again, talking about huge investments, and seem to disregard the signals of diminishing demand.

“The worsening of the sentiment that began in 2012 exposed the biggest producers’ inability to run business profitably and a total lack of preparation for a drop in the price of coal and in demand,” NIK said in the conclusion to the report that may well constitute a peek into the near future of Polish mining.

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Czech premier Bohuslav Sobotka speaks during a press conference in Prague, Czech republic, May 2, 2017.

The strange death of Social Democratic Czechia

By Robert Anderson in Prague

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zech Prime Minister Bohuslav Sobotka’s resignation as Social Democrat leader on June 14 reflects the precipitous decline in CSSD support in opinion polls this year.

The party’s vote has sunk from regularly more than 30% in the noughties, to 20% at the 2013 election, to a low of 10-11%, according to recent polls.

It now looks all but certain now that the CSSD will be out of power – or at least a leading position – after the next election in October. The expected electoral drubbing would be a body blow to the already heavily indebted party because it gets most of its funding from the state according to its vote.

The Czech Republic was once an island of stability and moderation in Central Europe. Now, with growing

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voter volatility and the looming collapse of its last strong traditional party, it looks as if will join its neighbours in embracing populism and picking fights with Brussels, with grave risks for its democracy and European unity.

“We face destruction of the whole party system,” Jiri Dienstbier, a former Social Democrat human rights minister, told bne IntelliNews earlier this year.

“The CSSD is now at breaking point. The next general election will decide whether it will survive as a mainstream party.”

Andrej Babis, the agro-chemicals billionaire who launched his own Ano party, is poised to seize power in October, with the open support of President Milos Zeman, a former Social Democrat and longstanding bitter enemy of Sobotka, whom he has worked ceaselessly to undermine.

Czech society is sleepwalking towards giving Babis the strongest political power since the restoration of democracy a quarter of a century ago. Voters are ignoring Sobotka’s warnings of the danger this could pose. “I would hate to see how the power pact between Babis and Zeman, and its extension into the future through the election, would start to turn Czechia into an authoritarian society,” the prime minister said in an interview with the Respekt weekly in May. Social Democrats have had a leading position in Czech politics for the last 20 years, winning most votes in all but one of the last five elections, and leading governments for more than half that period. The party should by rights have dominated the political scene after the 2013 implosion of its main rival, the rightwing Civic Democrats (ODS), after

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a series of corruption and spying scandals and a self-inflicted two-year recession caused by its austerity obsession.

Yet the party’s support base was a Potemkin village. The party’s huge poll ratings from the mid-1990s to the mid-noughties should be credited to its strong leaders – first Milos Zeman, then Jiri Paroubek – who mobilised a wide coalition of protest voters, using a populist style and aggressive campaigns against the ODS, targeting its corruption and the threat it posed to the welfare state.

When the party has been in government under progressive leaders – Vladimir Spidla (2001-2004) or Sobotka (2011+) – it has struggled to combine Western European social democratic values with the socially conservative and nationalistic instincts of its supporters.

The party’s support base remains the poorer, older and less-educated voters in shabby small towns and rust belts who have benefited little from the collapse of communism, rather than the young, educated urban supporters of social democrat parties in Western Europe.

Moreover, many of these voters, together with much of the party’s largely elderly and declining membership, and its strong regional barons, look back with nostalgia to the party’s halcyon days under Zeman, leader from 19932001 – something that the president has used to undermine his successors and try to bend the party to his will.

By doing so, he looks set to destroy the party he did so much to rebuild.

Sobotka’s agony over reconciling the party’s values with those of its voters is symbolised by the government’s changing stance on refugee quotas.

Initially, Sobotka successfully maintained a balancing act: he kept in good odour with Brussels and Prague’s liberals by accepting a few token refugees, while at the same time making noises against quotas that kept nationalist supporters on board and kept the Visegrad Group of Central European countries united. The party’s ambiguous stance

was epitomised by the liberal Foreign Minister Lubomir Zaoralek on the one side, with the more hardline Interior Minister Milan Chovanec on the other.

But it soon became clear that there was little to be gained electorally by making liberal gestures. The relatively small Prague liberal constituency remained put off by the party’s traditionalist wing, the persistent whiff of municipal corruption, and the CSSD’s failure to embrace modern issues such as environmentalism or gender politics.

Meanwhile, many of the party’s core supporters were being lured away by Babis’ populist sound bites against migration and Brussels, and his promise to root out corruption.

This year Sobotka changed tack, sacking Dienstbier, a leading liberal ally, and backing Chovanec’s populist opposition to receiving migrants.

Sobotka has also tried to shift the party leftwards, criticising multinationals and Brussels, and promising to raise taxes on the rich and big companies, impose a special tax on banks, and hike the minimum wage and benefits.

Yet however smart that might have been tactically, these twists and turns still looked unconvincing to voters.

Sobotka's main achievement has been to be the first premier since Zeman in 1998-2002 to complete a full term in office. By Central European standards he is a decent, clean, professional politician, but he is also sorely lacking in vision, leadership or charisma.

Ruling in a grand coalition with Babis’ personal party since 2010, the Social Democrats have steered the government programme and presided over a revitalised economy, with record low unemployment, but most of the credit has gone to Babis as finance minister.

Ano, backed by Babis’ private fortune, his media empire and a slick PR machine, is now 20 points ahead of the CSSD in the opinion polls and seems unassailable, even though it has no real party structure behind it,

and no ideology or programme, apart from its leader’s folksy populism.

Like Donald Trump, Babis is an elite, anti-elite populist. Babis grew up as part of the communist nomenklatura, and then after 1989 built an agrochemical business, funded initially by mysterious foreign partners and boosted by his close links with politicians.

The country’s second richest man makes the classic snake oil promises of the businessman populist: that he will run the country as a business, that he is rich enough not to bother to steal, and that, as he understands financial shenanigans, so he is able to stamp them out.

Whatever manoeuvres Sobotka has tried, they have failed to dent Ano’s poll lead. After attacking Babis’ clear conflicts of interest, his alleged tax evasion, and his dubious receipt of EU aid, in May Sobotka belatedly sacked him as finance minister, but this seems to have rebounded on him rather than the billionaire. Voters remain blasé about Babis’ financial affairs, and the probes by the Czech tax office and EU anti-fraud office OLAF will probably come too late to make a difference, if they are not shelved anyway.

Anointing Zaoralek as election leader and prime ministerial candidate on June 14, and making Chovanec acting party chairman, is the last gambit of a desperate man. But, like Sobotka’s previous moves, it is hard to see how this triumvirate can turn round the party’s fortunes, and it may just end up causing confusion in the election campaign. It looks more like Sobotka’s way of spreading the blame for the fiasco to come.

Zaoralek may just become a stopgap leader who takes the rap for the party’s collapse. This could pave the way for Chovanec to take over and push the party in a more socially conservative and nationalist direction, perhaps as a submissive junior partner in a Babis government, as Zeman seems to want. If this happens, then the fall of Czech Social Democracy would indeed be complete, and the party could be marginalised like its Polish and Hungarian sister parties.

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President Erdogan's government hopes to use mega infrastructure projects similar in scale to the Eurasia Tunnel – opened to traffic crossing the Bosphorous strait late last year – to give the economy a further boost.

Better than expected Turkish growth raises concerns bne IntelliNews

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urkey is accelerating away from the economic contraction it experienced in the third quarter of last year, but some analysts are sceptical that the growth trajectory has legs.

fuelled hopes that the country’s $857bn economy may be on the growth path again, having faltered following last summer’s attempt at overthrowing the government.

“Even the current growth boom, mostly driven by government spending and consumer expenditure, is not sustainable,” says Atilla Yesilada, an adviser at GlobalSource Partners. “The treasury has already jacked up its net borrowing ratio over 100%, while consumer and corporate leverage is increasing alarmingly. Deposit rates have shot above 15%, rendering credit very expensive.”

The better-than-expected GDP data has been hailed by ministers as a sign of investors’ retained confidence in the economy and as an indication that the stimulus programme introduced following the failed coup is working.

The official GDP expansion of 5% y/y in Q1, which was also driven by net exports, represented the best performance since the second quarter of 2016’s 5.3% y/y and followed Q4 2016’s rebound of 3.5%. It has

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The growth comes as a boost for President Recep Tayyip Erdogan, who on April 16 officially narrowly won the crucial referendum on expanding his powers under an executive presidency.

His next target is a decisive victory in the 2019 general election.

Encouraged by the first-quarter figures, the government appears to believe that

Turkey has put the major economic problems which surfaced last autumn behind it and that the strong growth trend will continue.

But analysts such as Yesilada continue to ask whether the government’s spending spree and consumer expenditure, which constituted the backbone of the economic rebound in Q1, will be sustainable in the longer run. They argue that the positive effects of the stimulus programme will eventually fade away, probably in the final quarter of 2017 or in early 2018.

TUIK data on the new growth show that government spending increased by 9.4% y/y in Q1, while household consumption, which accounted for 60% of the country’s national income, was up 5.1% y/y thanks to tax cuts introduced on certain consumer goods, such as white goods.

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Exports jumped 10.6% y/y due to stronger demand from Europe and imports edged up 0.8% y/y in the quarter, even though the lira weakened against the major currencies. But, worryingly, gross fixed capital formation increased by only 2.2% despite the Credit Guarantee Fund (CGF) scheme the government introduced in December last year to encourage investments.

Machinery investments plunged 10% y/y in the quarter, deepening from the 0.4% y/y and 3.9% y/y contractions registered in Q3 and Q4 last year.

On the supply side, agricultural production rose by 3.2% y/y, while industrial and manufacturing output moved up by 5% y/y and 5.1% y/y, respectively. The construction sector expanded at 3.7% y/y while the services sector registered 5.2% y/y growth across January-March.

Meanwhile, as one of the side effects of the spike in government spending, Turkey’s budget deficit has widened.

According to finance ministry data, the central government budget ran a deficit of TRY11.5bn in January-May versus the TRY9.07bn surplus in the same period of last year.

Analysts at the Institute of International Finance (IIF) and Citi are also cautious about growth prospects even though they admit that the country’s economic performance has been much stronger than they anticipated at the beginning of the year.

For instance, Ugras Utku and Yalcin Oney at the IIF argued in a June 12 report that the favourable impact of the CGF and the temporary tax cuts are expected to support the economy until the final quarter of this year. The IIF forecasts that Turkish economic growth will accelerate to 4.2% this year from last year’s 2.9%, but slow to 3.5% in 2018.

JP Morgan expects growth to remain relatively low at around 3% in the second quarter. The investment bank, however, maintained its growth forecast for 2017 at 3.3% after the data release.

Similarly, Citi thinks that it would be difficult for policymakers to continue to provide “a similar kind of stimulus next year and thereafter without undermining market sentiment”.

According to Citi, the government should also focus on reducing inflation, which is harmful to growth, and “avoid a further increase in the share of construction in the economy”.

The government set up a sovereign wealth fund last year to finance mega infrastructure projects that it believes can fire up the economy. In an interview in April, PM Binali Yildirim vowed to keep pumping money into large construction projects to boost economic growth.

“All in all, while the Q1 GDP outturn is encouraging, a growth rate of about 3.5% per annum can no longer be taken for granted without tackling the noted structural challenges and buttressing macroeconomic stability,” Citi wrote in a report published on June 12.

Flying in the face of sceptical assessments of the economic outlook offered by several analysts, Deputy PM Mehmet Simsek suggested that leading indicators point to stronger economic growth in the second quarter than in the first. Development Minister Lutfi Elvan, meanwhile, sounded more upbeat on the growth outlook, arguing that 2017 GDP growth could exceed the 4.4% target.

According to Yesilada at GlobalSource Partners, global risk appetite is the biggest driver of economic optimism. The IIF expects portfolio inflows to emerging markets to hit a three-year high in 2017.

“The central bank still retains a progrowth bias but a hawkish statement from the Fed FOMC [Federal Open Market Committee] and the decision by [opposition party] CHP chairman [Kemal] Kilicdaroglu to start a long protest march, which might be one of the factors that have modestly upset the currency market, forced its hand to remain tight,” Yesilada told bne Intellinews.

As universally expected, the central bank on June 15 left its policy rates unchanged.

The national lender kept its one-week repo (8%), overnight lending (9.25%) and borrowing (7.25%) rates on hold.

The late liquidity window rate, which has been used by commercial banks for about 90% of recent funding, was maintained at 12.25%.

“The monetary policy is moderately tight but not tight enough to contain inflationary pressures, which are only moderating because of a stale TRY,” according to Yesilada.

“Current inflows are not sufficient to trigger further TRY appreciation, meaning that the central bank will have to keep the effective funding rate at 12% for the foreseeable future.”

The lira gained more than 3% against the dollar between May 18 and June 16.

Turkey’s annual inflation rate edged down to 11.72% in May from the near nine-year high of 11.87% recorded for April. The central bank said it believed inflation may have already peaked and will only fall from now on this year.

“The Turkish growth spurt will peter out at the latest by Q4 2017” There has been an overall inflow of $3.06bn into Turkish government debt securities in the year to date while the total equities inflow tops $2.2bn, the central bank reported on June 15.

Following its monetary policy committee meeting on June 15, the regulator vowed to keep monetary policy tight until there is a significant improvement in the inflation dynamics.

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The central bank also appears to share politicians’ optimism that economic growth will further accelerate due to supportive measures and incentives provided by the government.

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TUIK’s data collection and estimation methods which overstate growth. In my book, year-on-year growth is no more than 3.5%,” he told bne Intellinews.

The government is encouraging local banks to support economic activity by offering cheaper loans. This is, however, widely seen as putting overt political pressure on the central bank to cut its rates, thus raising questions over whether it can retain its independence.

JP Morgan calculates that the strength of domestic demand is such that it reduces the need for monetary easing and supports the case for a more cautious stance. The investment bank expects the central bank to start easing in December, in the absence of political pressure for lower rates.

President Erdogan, who has declared himself “an enemy of interest rates”, on June 17 once again attacked high rates.

“We will continue to intervene in inter-

According to Yesilada, the Turkish government and regulators need to be mindful of 2018, a year when the Fed is to initiate its balance sheet tapering, while

“Europe is awash with money. Foreign capital will keep flowing into Turkey” est rates,” he said. Erdogan was probably suggesting by that that he would continue to criticise the central bank’s policies.

the European Central Bank possibly ends bond purchases. These moves would significantly tighten global financial conditions.

“In an environment of high interest rates, investment will stop and no new jobs will be created,” he added.

But, Bulent Gedikli, one of Erdogan’s aides, disagrees with this caution.

“Europe is awash with money. Foreign capital will keep flowing into Turkey, because for those funds there is nowhere else to go,” Gedikli told the Aksam newspaper on June 14.

The government is also anxious about unemployment. It has not fallen significantly despite the GDP expansions observed over two consecutive quarters. The ruling AKP wants to see higher growth and lower jobless rates before the 2019 election. That’s why it is asking the banks to pump more money into the economy through loans.

The year to date has been difficult for Turkey. Ankara’s relations with the US are strained over Washington’s support for the Syrian Kurdish YPG militia and the arrest warrants lately

issued for some of Erdogan’s security guards following the brawl that erupted outside the Turkish ambassador's residence last month during the Turkish president’s visit to Washington.

Moreover, the government is now deeply involved in the diplomatic crisis that has blown up between Qatar and several Gulf Cooperation Council (GCC) member states, led by Saudi Arabia and also supported by countries including Egypt. Another difficulty is that the Iraqi Kurds are preparing to hold a referendum on independence later this year, a move that could trigger tensions and hostilities across the region.

It is difficult to predict how all these conflicts will unfold and whether they will affect the Turkish economy.

Investors fear that so many domestic tensions and geopolitical risks may distract the government from the urgent structural reforms which are required to address deep-rooted problems such as labour market rigidities and the current account deficit, and put the economy on a sustainable growth path.

Erdogan on June 17 shrugged off concerns over the heavy influence of domestic consumption in securing economic growth. “Strong domestic demand is only an indication of people’s trust in the country and its economy. All indicators point to a swift recovery”, he said. Declaring that “the worst is over for the economy”, Erdogan called on the rating agencies to upgrade Turkey’s credit ratings in light of the latest GDP data.

Nevertheless, as the latest GDP data demonstrated, consumer demand and public spending are functioning as the main drivers of economic growth, not private investment.

“Credit-driven growth booms are not desirable or sustainable, ask China,” observed Yesilada.

He is also sceptical that growth is as robust as the state statistic agency has recorded. “First of all, there are serious errors in [state statistical institute]

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Selected headlines from past month: · Romania’s new government comes up with radically revised fiscal policy · New Serbian PM to continue juggling EU ambitions and relations with Russia · EU pursues “positive realpolitik” in the Balkans, says Hahn · Turkey struggles with the conundrum of Qatar

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Southeast Europe

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Spotlight trained on Russia for 2018 World Cup dress rehearsal Jason Corcoran in Moscow

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he spotlight is on Russia as the country hosts its dress rehearsal ahead of next year’s football World Cup amid growing concerns about the readiness of the venues and safety of fans.

The Kremlin has boosted security measures and rushed to complete a controversial $1.5bn stadium in St Petersburg as it banks on Fifa’s Confederations Cup to showcase its ability to host a successful World Cup in 2018. The eight-nation tournament kicked off at the scandalplagued St Petersburg stadium on June 17 when hosts Russia took on soccer minnows New Zealand.

President Vladimir Putin, who personally participated in Russia’s bid to host the World Cup, will be hoping the two-week competition

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goes without a hiccup as the country struggles to emerge from political isolation over his interference in conflicts in Ukraine and Syria.

Deputy head of the FSB intelligence service Alexei Lavrischev said security measures are being tightened for the tournament, which will run until July 2 in St Petersburg, Moscow, Sochi and Kazan. Some fans have declined to travel in the wake of a metro bomb in St Petersburg in April, which killed 14.

Construction and upgrading of many of the stadiums has been a massive financial headache for Russia, which is just emerging from a threeyear recession. The building of the 68,000-seater St Petersburg stadium has been a farce, with the budget jumping six-fold in its decade-long construction.

There are still concerns about the

state-of-the-art retractable pitch, which had to be re-laid just a month ago after cutting up during the first test game.

On June 14, Russian media reported that a significant fire had broken out at the Volgograd Arena. The stadium, which is earmarked for completion early next year, is supposed to be hosting eight World Cup games.

More damaging for Russia’s reputation has been allegations of “slave labour” and human rights abuses.

In a report released on June 14, Human Rights Watch (HRW) says it has documented cases in which workers were not paid, worked in dangerously cold conditions, and suffered reprisals for raising concerns. HRW claims at least 17 workers have died on World Cup construction sites in Russia, while

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other reports have emerged of 190 North Korean labourers being forced to work effectively as slaves in the building of the St Petersburg venue.

In February, the government said it had boosted its spending

ticket holders to apply for a personalised fan-ID, will ensure that fans are screened and hooligans are kept away.

Tickets for the World Cup itself have been priced from $105 to a record $1,050 – putting attendance out of

“I think there will be a last-minute rush to get the sponsors on board” on preparations for the event by RUB19.1bn (€300mn), bringing total spending on the event to around €10bn, including investments from the public and private sectors.

Confederation Cup games can be lightly attended as countries, like the reigning champions Germany, tend to send second-string teams. However, some fans have been deterred by the price of travelling and staying in Russia.

Tom Daly, a football fan from Liverpool, was the only one of his gang of friends who is braving Russia to attend the Confederation Cup. England fans have been warned in a BBC documentary that they are “100% guaranteed” to be the target for Russian hooligans at the 2018 World Cup and that the tournament will be “a festival of violence” for some locals.

“I am more afraid of the extortionists rather than the hooligans,” Daly, a media executive, tells bne IntelliNews after landing in Moscow. “I imagine the riot police will keep them in check.

I have been to Champions League matches before in Russia and the pitch was ring-fenced by soldiers.”

Since violent clashes between Russian and English football hooligans in Marseilles tarnished the European championship in France last year, Putin has introduced legislation that toughens punishments for violence at sporting events.

the pockets of many of the locals, who earn about $500 a month on average.

Western sponsors have also so far been slow to come on board due to sanctions and Russia’s growing international isolation. Both Sony and Emirates are believed to have backed away from packages.

"I think there will be a last-minute rush to get the sponsors on board," Sasha Goryunov, a pundit for Russia's Match TV and a regular on The Guardian newspaper's football podcast, tells bne IntelliNews. "Whilst other factors – such as politics – play a role, I think the general lack of organisation plays a part too and the fact that FIFA are in a permanent state of crisis at the moment."

Domestic football fans are not betting on Russia, now ranked a lowly 63rd in Fifa world rankings, to cover themselves in glory. The team has gone through three coaches in the past two years and recently lost a game to Qatar, relative nobodies in footballing terms. Putin even criticised the side after the Qatar loss.

The domestic game in Russia suffers from a lack of investment and is blighted by racism and hooliganism.

Alfa Bank, Russia’s second-largest private lender, was named a year ago as the “first of up to 20 regional World Cup sponsors”. Gazprom, the energy monopoly, has been on board as a partner since 2013, while Chinese conglomerate Wanda and smartphone maker Vivo have since stepped in as partners in recent months.

Alexander Zotov of the Professional Footballers’ Association says that players frequently go without any wages and cited the recent example of Voronezh, who haven't been paid for months despite earning promotion to the Premier League. “There’s about 3,500 professional players in Russia and most of them are not paid on time and they earn about an average of €500 a month,” says Zotov.

Western corporates have cited the excessive $150mn cost of sponsorship deals and the fallout from Fifa’s 2015 corruption scandal, which led to question marks about the selection of both Russia and Qatar to host the World Cup.

Zenit St Petersburg, backed by Gazprom, is the only team with a credible academy for young footballers and tends to snap up all the talent, according to Zotov. “But then they have no one to play against,” he says.

Find more Eastern Europe content at

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Selected headlines from past month: · Alexei Navalny: potent sideshow pony in Russia’s one-horse race · US-Russia tensions soar with sanctions and aerial brinkmanship · Why Trump-Poroshenko relations are no easy fix

The authorities say the Confederations Cup’s ticketing system, which requires

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National prestige was partly shielded by very slender state TV coverage of the terrorist incidents.

An unlikely story: terror in Tehran

By Will Conroy in Prague

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ran on the morning of June 7 found itself cast in the unlikely role of victim of terrorism. Unlikely, that is, to those who took Donald Trump at his word when – in Saudi Arabia of all places – he broadly condemned Tehran for being by far the Middle East’s most active sponsor of terror groups.

have funding and ideological roots, as well as many recruits, that experts trace back to Iran’s regional archrival Saudi Arabia. The two groups are, of course, sworn enemies of the Shiite Iranians, though until now neither had ever claimed to have staged a terrorist attack in Iran.

The twin gun and suicide bomb attacks on Iran’s parliament and the mausoleum of Ayatollah Khomeini – death toll so far 13, with 42 wounded – were something of a wake-up call to those who might think the Iranians are somehow entangled with groups who terrorise the West, such as Islamic State (IS) and Al-Qaeda. In fact, it was the former that quite quickly claimed responsibility for the attacks on two of the Islamic Republic’s most symbolic places, even posting gruesome video footage of a bloodied body lying amid the battle that ensued in the building of the Islamic Consultative Assembly in central Tehran.

Tehran, in fact, has not experienced a major terrorist attack in more than 30 years, meaning the bloody episode it has just gone through has rather unsettled Iranian society after its lengthy period of relative tranquillity – notwithstanding the series of phlegmatic selfies posted by Iranian MPs from the parliamentary chamber, while the terrorists, who gained entry to other parts of the building dressed as women, were being besieged.

Sunni Islamist IS and Al-Qaeda both

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The terrorism that Iran can be said to have faced in recent years amounts to attacks made by Sunni militant groups, and occasionally Kurdish militia, mostly in remote areas far from the capital.

One group, Jundallah, also known as the People's Resistance Movement of Iran (PRMI), and its successor group Jaish ul-Adl (Army of Justice), have been waging a deadly insurgency for almost a decade. The terrorist militants are based in Pakistan’s unstable province of Balochistan and make murderous raids into the poor Iranian southeastern province of Sistan and Baluchistan.

Iran sees Jundallah and Jaish ul-Adl as groups connected to the Taliban and their opium revenues, while officials often accuse Saudi Arabia of providing the militant terrorists with financial as well as ideological support.

In early April, a mid-ranking Iranian Revolutionary Guards Corps (IRGC) commander was gunned down in Sistan and Baluchistan, while in an April 26 ambush in the province, Jaish ul-Adl killed 10 border guards. That led to Tehran warning Islamabad that it would hit bases inside Pakistan if the government did not confront the militants.

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The region also suffered an attack on a mosque in 2010 that claimed 39 lives.

But most analysts pondering terrorism in Iran think back to the Mojahedin-e Khalq (MEK, or the People's Mujahedin of Iran), an Iranian political-militant organisation which called for a Marxist outcome to the ousting of Shah Mohammad Reza Pahlavi in 1979 and opposes the Islamic Republic in its current form. Now based in exile in Albania, the MEK waged a guerrilla bombing campaign against the forces of revolutionary father Khomeini, killing notables such as the second president of the Islamic Republic MohammadAli Rajai and former PM Ali Rajaei in 1981. The judiciary ultimately had 30,000 MEK members executed, while many of those not detained fled to Iraq. In more recent times, the MEK is said to have been utilised by Israeli intelligence for the assassination of Iranian nuclear scientists.

The red mist quickly descended on the IRGC. It wasted no time in blasting Riyadh for supporting IS in the attacks in Tehran and vowing revenge. Tying the terrorism to Trump’s May visit to Saudi Arabia, during which the American commander in-chief struck massive deals to deliver weapons to the Saudis, the Guards put out a statement which, according to semiofficial Fars news agency, read: "World public opinion, especially in Iran, sees the fact that this terrorist act was perpetrated soon after the meeting of the US president with the heads of one of the reactionary regional states that has always supported ... terrorists as very meaningful… It shows that they are involved in this savage action.”

The attacks came at a very sensitive time for the IRGC, seen as the protectors of the nation. The “Army of the Guardians of the Islamic Revolution”, which is battling IS outside Iran by arming and supporting militia who are trying to preserve Syria’s Bashar al-Assad regime and kick the Islamist terrorists out of Iraq, was rattled in mid-May by the thumping loss hardline candidate Ebrahim Raisi suffered at the hands of centrist President Hassan Rouhani.

Moreover, it is presently upping its state of readiness given the Qatar crisis. Tiny gas-rich peninsular Qatar goes against the grain by being a Gulf State that stays on relatively friendly terms with Tehran, but currently faces a land, sea and air blockade being led by Riyadh over a complicated dispute that again cuts into exactly who is funding whom in terrorism.

With the outside world praying nobody, including the IRGC, makes a rash move that could see the volatile Middle East hostilities spiral out of control, Iran in some ways has every reason to play down the attack. National prestige was partly shielded by very slender state TV coverage of the terrorist incidents, while Tehran’s determination to “Keep calm and carry on” – vital at a time when the country is at a crossroads in attracting post-nuclear sanctions era foreign investors – was evidenced by remarks from speaker of the Iranian parliament Ali Larijani. He referred to the events as a "minor issue,” adding in a statement: "As you know, some coward terrorists infiltrated a building ... but they were seriously confronted."

Not long after, Supreme Leader Ayatollah Ali Khamenei struck a similarly defiant tone, saying: "These fireworks have no effect on Iran.

They will soon be eliminated... They are too small to affect the will of the Iranian nation and its officials."

Gun ownership is heavily controlled in Iran, the people of Tehran are known as easygoing and the capital is far from an edgy environment when it comes to the chance of bullets flying around.

The government will be anxious to keep it that way. Security will inevitably be tightened to ensure the capital or country does not suffer a series of headline-

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grabbing terrorist strikes that could make investors or tourists – the tourism industry is another of Iran’s greatly untapped industries – think twice.

Nevertheless, given Trump’s unremitting hostility – hours elapsed before a statement of condolence was put out by the president’s administration and Trump later qualified the expressed sympathy by stating that "We underscore that states that sponsor terrorism risk falling victim to the evil they promote" – and some unusually aggressive sabre-rattling by the Saudis in recent weeks, there is a genuine heightening of nervousness among Iranians who worry that things could take another turn for the worse.

Assessing the attacks mounted by the Kalashnikov-wielding terrorists, Mokhtar Awad, a research fellow in the Program on Extremism at George Washington University, told the New York Times that they were an attempt

by IS to finally address “one of the biggest talking points used against it in jihadi circles”, namely its perceived inability to attack Iran. “They have been ridiculed for this for a long time,” Awad said. “This is going to help them reach out to a broader population of Salafis and jihadis who will now see that the Islamic State is genuinely fighting all the enemies of Islam.”

On winning re-election on May 19, President Rouhani declared that Iranians had chosen "the path of interaction with the world, away from violence and extremism". As Trita Parsi, president of the National Iranian American Council, said in a June 7 statement on the attacks: “The last thing Iran needs now – after Iranians voted for openness – is an excuse for hardliners to securitise the internal atmosphere.”

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Selected headlines from past month: · Uzbekistan’s reform agenda in question after Azimov’s demotion · Georgia struggles to balance regional realpolitik with EU ambitions · Kazakhstan’s KKB not expected to follow IBA into the abyss

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Once people begin to treat the tsar’s position as something that another could fill, then the power quickly can wane.

STOLYPIN:

Life after Putin becomes debatable

Mark Galeotti of the Institute of International Relations Prague

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n June 15 Vladimir Putin held one of his trademark ‘Direct Line’ television spectaculars, an annual marathon at which he answers (carefully-curated) questions from the Russian public. In part this is a symbolic act, the tsar speaking directly to his people, and in part an unashamedly political one, a reaffirmation of his effortless control of the system. It comes at a time when, despite Alexei Navalny’s anticorruption campaign and rumblings from the impoverished masses, he seems unassailable as he prepares for another coronation in the 2018 presidential elections. So why is there now so much more talk about life after Putin?

The media is sidling closer to this once-taboo topic, the question of who could replace the irreplaceable man now cloaked in discussion of who his next prime minister will be, or who will shape his post-2018 administration.

But most striking, if wholly subjective, were my own experiences recently in Moscow, where the kind of conversations once had around the kitchen table are now taking place publicly and openly. A question about Defence Minister Sergei Shoigu asked of a table of army officers segued quickly into a lively discussion about his presidential chances, even though several were still in uniform, and sitting in a crowded bar.

(Their conclusion: he probably wouldn’t want the job, and in any case is likely excluded as he is not an ethnic Russian, but

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that he’d make a strong prime minister to support a more economically-minded president.) Even Russian graduate students asked me, a foreigner, whom I thought was next in line.

Of course, I have no idea. It is probably a dangerous move in such a system to be touted as the next president, when the present incumbent has not yet indicated there is a vacancy opening up. Nonetheless, it has become a popular chattering class parlour game to speculate about the next president and his (and it always is his) likely prime minister.

The latter is of more immediate concern. Dmitry Medvedev is generally assumed to be a political dead man walking. He was promised another term as prime minister and so Putin – who may be willing to lie in his teeth about invading neighbouring countries but seems strangely old-fashioned about keeping his word to his own people – may let him limp along to 2018.

However, a combination of his own gaffes, Navalny’s masterful campaign and a simple decay in his credibility and support base have all left him with one last role, as scapegoat-in-chief once Putin finally decides to drive him from the political village.

The choice of successor will rightly be scrutinised for clues about Putin’s intent. If a pure technocrat such as Shoigu or central bank chief Elvira Nabiullina is chosen as Medvedev’s successor, then they are not being groomed for the Kremlin.

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If it is one of the younger, rising generation of politicians such as Minister for Economic Development Maxim Oreshkin or Energy Minister Alexander Novak, then the temptation would be to consider this only as a trial run. Putin, after all, will need a successor who is able to cope with a range of challenges, but who also appears “sound” on protecting both his legacy and also his personal future.

But if it is one of the existing heavyweights, such as First Deputy PM Igor Shuvalov, Deputy PM Arkady Dvorkovich, Duma Speaker Vyacheslav Volodin, or maybe even Moscow Mayor Sergei Sobyanin (is his current reconstruction campaign part of a deeper political strategy?), then the rumour mill will start grinding as never before. Even if Putin considers them no more than of prime ministerial calibre, he will be giving the impression that they could be presidential, and also granting them a formidable power base.

“Dmitry Medvedev is generally assumed to be a political dead man walking”

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or be able to last out to 2024 (by which time he will be 71)?

Nobody knows, or at least no one outside Putin’s closed and uncommunicative inner circle. But there is an extent to which such speculation becomes a self-fulfilling prophesy. Much of Putin’s authority and legitimacy, those 80%-plus approval ratings, comes not so much from anything he does, so much as what he is. Putin managed to make himself the avatar of Russia, a sacral figure rather than another squalid little politician scrabbling for votes.

This is the modern equivalent of divine right. Just as with the monarchs of the old order, once people begin to lose awe and faith, once they begin to treat the tsar’s position as something that another could fill, then the power can quickly wane.

We are nowhere near that point yet. Assuming Putin stands in 2018, there is no question that he will win, even without the massive use of so-called “administrative resources” to manufacture a triumph. But the very fact that people, even while accepting that, are already looking beyond then, to a post-Putin Russia, and beginning to have serious and open conversations about who should lead it and in what directions, suggests tectonic plates are moving.

Quite what this will mean neither we nor the brooding master of the Kremlin really know.

Underlying all these assumptions – and that is all they are – is a belief that Putin is running out of steam, that he has no new ideas and a diminishing enthusiasm for the job. Rightly or wrongly, many blandly assert that if he felt he had a viable and reliable successor ready, he would not even be standing in 2018. Others wonder whether he actually did himself a disservice extending the presidential term to six years: will he want

Mark Galeotti is a senior researcher at UMV, the Institute of International Relations Prague, a visiting fellow with the European Council on Foreign Relations, and the director of Mayak Intelligence. He blogs at In Moscow’s Shadows and tweets as @MarkGaleotti.

BEAR MARKET BRIEF:

Can IT revive Russia’s economy?

Aaron Schwartzbaum in Washington DC President Vladimir Putin did not offer much clarity in his discussion of IT at SPIEF.

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ccording to Russian Vice Premier Igor Shuvalov, Vladimir Putin is sick. Not with a disease, Shuvalov clarified, but with a desire to develop Russia’s digital economy.

The development of a high-tech economy, so officials hope, will be the engine that propels Russia out of stagnation and pushes its growth rate above the global average.

That hope was prominently on display at this year’s Saint Petersburg International Economic Forum (SPIEF), a pageant of business deals and tired pronouncements by well-meaning officials of the need for yet-undelivered ‘structural reform’.

Notably, Putin appeared with Russian-born developer Vitalik Buterin, founder of a Bitcoin-competitor Etherium. The forum

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also featured a panel on blockchain implementation, moderated by Sergei Gorkov, head of Vnesheconombank (VEB), that included the participation of ministers and foreign business representatives alike.

But how realistic are the hopes of a robust digital economy in Russia? Could IT prove a much-needed economic shot in the arm?

The Russian government’s plan to date is embodied in a draft programme entitled “Tsifrovaya Ekonomika” – the digital economy. For now it remains vague, encompassing a plethora of sectors and concepts including state management, IT infrastructure, R&D, personnel, education, information security, public policy, “smart cities,” and digital insurance.

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This is visible in the case of Buterin, but even better in the case of Pavel Durov, developer of social network vkontakte and the popular messenger app Telegram. Keeping this talent at home is another matter (Buterin resides in Singapore and Durov fled Russia several years ago), but Russia still has the brainpower to deliver growth in the tech sector and economy overall.

Worth noting as well is that there is significant marginal gain to be had from the implementation of technologies such as blockchain and crypto currencies in Russia. Why? Russia has issues with corruption, particularly in state procurement, limited trust in the rule of law, an oversized state burden on business. Blockchain, which in short involves the decentralised recording of transactions, would be hugely beneficial

Putin himself unfortunately did not offer much clarity in his discussion of the topic at SPIEF: “The digital economy is not a separate sector per se, but a framework that will allow the formation of quantitative models for business, trade, logistics, production, will change the format of education, healthcare, public policy, communication between people, and in turn, will create a new paradigm for the development of the state, economy, and society as a whole.”

“Russian authorities have held a sceptical view towards new technologies, tending to view them through a security lens”

Vagaries like the above aside, top officials are genuinely interested in the plan, evidenced by the presence of Arkadiy Dvorkovich and Andrei Belousov – influential officials with the political gravity to deliver on plans – at a meeting on the topic on May 30th.

to market regulators looking to eliminate corruption and embezzlement by cutting out the seemingly ubiquitous middle men – posredniki – involved in state procurement. The implementation of such technology seems quite feasible as authorities forge ahead on an electronic procurement system.

Local experts have little illusion about the plan’s lack of focus: in late May they heavily criticized the plan, calling for it to be “systematically reworked”. Why? For one, they noted that the plan appears at present more a collection of highlights from a number of state strategic initiatives. A presentation from the Russian government’s policy think tank lists digital economy plans in no fewer than three projections, seven road maps, four strategies, and two concepts. A local joke that strategic planning, much like baseball to America, is Russia’s national pastime, seems apt.

For a sense of the potential savings, last year Deloitte found that Russia’s state railroad monopoly could save some $2.2bn.

In the private sector, firms and individuals that trust neither each other nor courts may be more eager to do business knowing essentially ‘un-fudgeable,’ common records exist – trust, in essence, is rendered obsolete. And for business owners, the implementation of better state IT systems means relief from a large administrative burden: some 172 separate forms of documentation for individual entrepreneurs by one count.

The experts also complained that the plan lacks both a means of measuring progress on the development of a digital economy (much like Putin’s infamous May Decrees), as well as a baseline measure of where it stands today. While many of Russia’s strategic plans have failed to take root in reality, this one seems deficient on paper, too.

Russia’s technical know-how is undoubtedly a strength as it seeks to build a digital economy. The IMD World Digital Competitiveness Ranking for 2017 places Russia 42nd in overall performance – but an impressive 24th in the knowledge category. The country retains competitive technical education capacity – one of several beneficial Soviet holdovers – and Russians have grown both famous and perhaps infamous as well lately for their technological and computer abilities.

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However grand in its scope, the Kremlin’s plans to turn the IT sector into an engine of growth face what is in essence a chicken-and-egg problem. A report on the local venture capital market by the Russian Venture Capital Association (RVCA) found that while interest in IT among venture capital investors remains high, investments in terms of overall volume fell by 85% versus 2015, reaching only $128mn. An earlier report by AT Kearney and VimpelCom found investment in local startups beginning to flag in 2014.

Authorities, in short, are waiting for the digital economy to boost overall growth rates, while at the same time, the digital economy is waiting for overall growth rates to boost investment. One of those has to happen first, and it may fall on the state to provide that impetus with private investors still skittish on Russia’s real economy.

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A second issue concerns whether the establishment of a robust digital economy can benefit most Russians. A recent report cites the case of farmer Mikhail Shlyapnikov, who started his own crypto currency called Kolion, which saw $500,000 in investor purchases. For a country short on capital, the ability of Russians such as Shlyapnikov (or the town of Magnitogorsk, which recently earned $5.6mn in an ‘initial coin offering’) to raise money matters.

However, despite interest in crypto currency by both individuals and officials, the number of Russians who actually know of or use digital currencies is “between 10,000 – 20,000 people”, according to that story. The geography of investment is telling as well: per the RVCA, some 83% of total venture capital investments went to the Central Federal District, most probably to Moscow and the surrounding area, and not to poorer regions.

On a broader level, it would be highly optimistic to expect a population that has yet to fully adopt credit cards in daily use to rapidly embrace technology such as contactless payment, let alone crypto currencies. In other words, it seems more likely that large corporations, including or primarily those owned by the state, would be those who ultimately integrate the technology.

Despite the Bank of Russia’s recent softening on crypto currency issues, Russian authorities have by and large held a sceptical view towards new technologies, tending to view

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them through a security lens as opposed to as an economic opportunity.

The ‘securitisation of IT,’ as it might be termed, is perhaps best exemplified in the Yarovaya Laws, which mandate that telecom providers – some 10,000 in Russia – save metadata from communications for up to three years. The cost of this legislation for operators has been calculated anywhere from 3-10 trillion rubles ($50bn-170bln). Given that that overall sector revenue (not profit!) for 2016 was 1.675 trillion rubles, the scale of the burden becomes apparent. Though implementation – one that will involve state subsidies that add to the challenge of reducing the local deficit – remains a work in progress, the regulatory risk of future acts such as the Yarovaya Laws will not simply evaporate. For every new technology, there arises a new risk of its securitisation.

Ultimately, the digital economy may prove beneficial especially for state procurement and a number of large firms.

But there’s no sign yet that nascent digital technologies have the capacity to revolutionise the Russian economy, or that the state has the institutional flexibility to provide fertile soil for its taking root. The risk is that the benefits of a digital economy may both start and end with the state, leaving only indirect benefits for households apt to grow increasingly impatient with stagnation.

Aaron Schwartzbaum is the publisher of Bear Market Brief.

ALACO DISPATCHES:

Re-empowered Rouhani still faces struggle to woo investors Tom Laub of Alaco

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estern investors will have been encouraged by the re-election of reform-minded Hassan Rouhani as Iran’s president, but Iran’s powerful hardline forces will likely frustrate efforts to make the country more attractive for foreign investment.

Rouhani’s clear victory over conservative rival Ebrahim Raisi on May 19 is widely seen as public backing for his competent

management of the economy and engagement with the West following the 2015 nuclear deal. Although investors have been slow in coming, oil exports have surged, enabling Rouhani to point to significant economic progress. In the year to March 2017 Iran’s GDP grew by around 6.5%, its current account surplus rose to around 6% of GDP over the same period, and inflation has tumbled from a 2013 high of 45% to 7%.

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During his re-election campaign Rouhani sought to appeal to voters by pledging to lift remaining US sanctions, step up anti-corruption efforts. and increase trade. He secured 57% of the vote, 6 percentage points more than his share in 2013, by urging the electorate to choose “the path of interaction with the world, away from extremes”.

The message appealed to Iranians keen to put the impoverishment of international isolation behind them. Yet even with his considerable popular mandate, it seems that Rouhani is unlikely to dislodge the main barriers to foreign investment, central to the country’s future prosperity.

One of investors’ principal concerns in advance of the elections was that a victory for Raisi would encourage conservative hardliners to undermine the nuclear agreement, which they argue has failed to deliver the economic windfall Rouhani promised. But while fears about the demise of the accord may have been allayed for now, the president will find it hard to fulfil his campaign pledges to lift American sanctions.

This is because one of their main targets is the country’s arch-conservatives, the Iranian Revolutionary Guards Corps (IRGC), the elite and dominant branch of the security forces, which exerts considerable influence over the economy.

The US measures coupled with uncertainty about American sanctions policy on Iran have meant that Western investment has been thin on the ground since the removal of nuclearrelated measures 18 months ago. There have been a few exceptions, notably deals with Airbus, Boeing and French car producers.

Investor nervousness is understandable. The risk of breaching US sanctions – which include measures linked to human rights violations, ballistic missiles and fomenting regional instability – are a big deterrent. In March a $1.2bn fine was imposed on the Chinese telecommunications group ZTE for exporting US-produced components to Iran and North Korea.

Iran’s entrenched power structure means that Rouhani is unlikely to be able to persuade the hardliners to change their ways, in particular the IRGC’s support for insurgents in Syria, Lebanon and Yemen. The president and parliament, dominated by reformist and moderate conservative allies, have some scope to introduce economic reforms, which may include plans to restructure the banking and tax system and improve the business environment. But the conservatives, led by the Supreme Leader Ali Khamenei, determine security policy, as they control the police and the army.

During his trip to the Middle East last week, American President Donald Trump engaged in anti-Iran rhetoric and emphasised the US alliances with Israel and Saudi Arabia, both sworn enemies of Tehran. If Trump continues in this vein it will likely encourage the IRGC to maintain, if not bolster, support for allies in the region.

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At the same time, the hardliners will likely resist attempts

by Rouhani to introduce greater transparency into the Iranian economy in order attract investors. Many are put off by the high levels of corruption – much of it linked to the IRGC – and the risk of partnering with companies that may have connections with sanctioned IRGC entities or individuals. Under former Iranian President Mahmoud Ahmadinejad, the Revolutionary Guards became the largest commercial power in the country and now control up to 50% of the economy together with other conservative elements linked to the Supreme Leader.

These forces have little interest in the arrival of Western companies, which would present unwelcome competition, or in having their business affairs placed under greater scrutiny.

Rouhani attacked corruption in the IRGC and allied elements in Iran’s conservative-controlled judiciary during his re-election campaign. But it seems he cannot do much to curb their excesses and economic influence.

So while Rouhani’s election may have averted the re-imposition of nuclear-related sanctions, the significant limitations on his power means that he will struggle to tackle the issues that have deterred foreign investment.

Tom Laub is an analyst at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.

bne has a full roster of columnists and opinion-makers, among them:

Mark Galeotti

Liam Halligan

Suna Erdem

Chris Weafer

David Cecire

Ben Aris

Selected headlines from the past month: · Is Russia on the cusp of a green revolution? · Russian pipeline dispute escalates as US enters the fray · General election is do or die for Albania’s EU future · Will Kilicdaroglu’s long march unite Turkey’s opposition? · New language laws are not the next Ukrainian powder keg · Where did all the colour revolutions go?

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In Loucen Castle only the family portraits survived as they were placed too high on the walls for the casual looter to seize.

To have and have not again Stephen Weeks in Prague

Part I.

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n November 1989, after communism had been sent packing, the people of Czechoslovakia had to change attitudes overnight. All teachers of Russian were given the short Christmas break to convert to teaching English. For most of them, they would remain for some time only a very short head in front of their pupils. But in the ‘State Castles’ change happened more slowly – and in some cases, no change in attitude has been achieved at all in the past quarter of a century.

Even though the restitution of property acts came into force in 1992, many civil servants have actively conspired against the spirit of the laws, and have had a field day in tying-up restitution claims in bureaucratic red-tape. The National Heritage Institute (NPU) often dug its heels in, as its officers, who were very lowly paid, were jealous of foreigners turning up and being given back historic buildings.

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Bribery and theft were also rife. Thousands of valuable antiques ‘disappeared’ in this process. In one case (still before the courts), the NPU was very unwilling to release a castle, at which a huge visitor tour ticket scam was an attractive addition to staff wages.

The idea that former aristocrats and foreign exiles – the heirs of the owners of its castles before the second world war – could get back iconic buildings was an anathema to these old communist hacks. As late as 2008 the head of one of the districts of the NPU stated that “he’d rather see historic buildings be pulled down than fall into private hands”.

Winning restitution cases against the bureaucrats required good lawyers, connections, and patience. The return of the Lobkowicz Palace, part of Prague Castle, was once considered

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unthinkable. But the Lobkowiczs employed great legal skill in achieving this, and now it is the best museum and heritage attraction in the whole complex.

However, the restitution of the Kinsky Palace in Prague's Old Town Square was refused. This branch of the family had gone into exile to Argentina – where they had family connections – so it was easy for the state to drum up a story that they’d been hiding out as Nazis. Other famous Czech families – including the Schwarzenbergs and the Princes of Liechtenstein – were similarly accused wrongly of being German, and hence ineligible for restitution under the wartime decrees of president in exile Edvard Benes.

It has to be remembered that when Czechoslovakia emerged from communism at the end of 1989, its population had been subjected for 40 years to a barrage of negativity about its former aristocracy. Every year the TV Christmas special was a high-budget fairy story, always featuring an idiot king and his court of numbskull aristocrats as the butt of all the jokes.

The hero was always a young village lad who would manage to convince the blonde princess that it was far more enjoyable to make soup (with him) in a grubby cottage kitchen than to live in style in the castle that towered above their mean hovel.

In the State Castles (the 110 castles which had been confiscated when the Communists came to power on 1948 and which were open to the public as museums, usually with most of their original furniture), guided tours repeated a litany of calumnies against the people who had built the buildings and their successors, calling them villains and accusing them of being German or Nazi-collaborators – thus legally justifying the expropriation of their property.

The gentry and the aristocracy were almost the most reviled class of citizens – second only to priests of any Christian denomination. As in all totalitarian regimes, hatred was the major stimulation of the people. Some members of the gentry who had foolishly remained in Czechoslovakia after February 1948 – perhaps disbelieving that Communism really would happen – were quickly rounded up and sent to work in the uranium mines for indefinite sentences (many dying of the after effects of radiation). Luckier ones only got sent to the coalmines – where they were referred to as the ‘black barons’.

Senior servants and estate managers also got the same treatment after they had stated, under interrogation, that working for the wicked aristocracy had actually been quite pleasant, well-rewarded and very beneficial to the communities on or near to the nobles’ large estates.

Families who escaped prison were publicly humiliated. At Pardubice, the owners of a manor with 100 acres of market gardens were moved from their manor house to live in one room in the village, sharing a lavatory with others but with the use of a tap in the corridor.

Sadly, the chance to deflate the nobility and gentry, stirred

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up by Soviet agitators, was a windfall that millons revelled in after the 1948 coup. Villagers at Loucen, about 40 miles from Prague, for example – who had enjoyed the munificence of the Thurn & Taxis family for 200 years – were marched to the castle where they looted the rooms, threw furniture and pictures out of the first-floor windows onto the terrace and burned them.

In the currently restored Loucen Castle, apart from about a dozen pieces of furniture that were rescued by state conservators, only the family portraits survived as they were placed too high on the walls for the casual looter to seize.

In one of the castles of another branch of the Kinsky family, the family portraits were auctioned off for CZK5 or CZK10 (around €0.40 now) apiece (depending on size!). Many years later, one of the family tried to trace them. He even managed to find the man who had purchased them, all those years before. “I bought them frames for the glass,” he told the count, “my greenhouse needed fixing. The pictures I burned.”

Apart from bureaucratic and legal obstruction, reinforced by lack of public and political support, restitution of castles has been so difficult because of the confusion of ownership during the wartime years.

The origins of the modern seizure of castles go back as far as the Nazi occupation of 1938-45. The nobility who had signed a declaration in 1937 stating their allegiance to the Czechoslovak state in the face of the impending Munich crisis had their castles confiscated by the Nazis in 1939. Those who managed to hold on to their property were accused of being collaborators in 1945, making their castles forfeit.

“In 1992 the possibility of restitution often came out of the blue for many families, now dispersed across the globe” Those owners who were Sudeten German had their castles permanently confiscated at the end of the war under the Benes decrees, unless they could prove they resisted the Nazi occupation. Many of these disputes were still being argued before courts when the tragedy of communism arrived only three years after the war’s end.

The eventual restitution laws of 40 years later would state that restitution would apply to those who were listed as owning property on February 15th 1948 – the date of the communist coup. This meant, of course, that restitution could be argued to exclude those whose names were not in the land registeries on that date as their disputes were still in court. It also excluded those Jews who had somehow managed to survive the camps

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and had returned to Czechoslovakia to find others occupying their property and quite shamelessly not giving it up.

In 1992 the possibility of restitution often came out of the blue for many families, now dispersed across the globe. Some had lost or even destroyed the confiscation documents or the long lists of furniture, paintings, porcelain, clocks, armour, family photographs, and tapestries. Those lists had represented a loss that seemed could never be recovered and was best forgotten.

Also, the succession of owners was not even that clear. In an active family estate, typically one person succeeds not just to the title, but to the lands and castles. Every landed family knows the necessity of keeping the family possessions intact for future generations. In Britain an estate can be ‘entailed’, making it impossible for a wayward heir to sell it. A similar system existed in the Austrian Empire, called a ‘Fideicommis’.

Some of these systems have been reawakened, but in other cases restitution eventually has fallen to a galaxy of cousins and distant cousins, all with carefully worked-out percentages of the properties involved. This multi-ownership caused by restitution has been impossible to resolve, since by law there has to be a consensus for any decisions. In the centre of Prague there are still several empty notable buildings with dangerous falling stucco where families just can’t agree to sell, to repair, or to let out the properties.

Also Czech citizenship had to be proven, in order to stop any ethnic Germans (who had largely been expelled in 1945-6)

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from getting anything back. But many families had dropped their Czech nationality in the interim, or had had their citizenship revoked as a punishment for fleeing the country.

For some the issue of dual nationality also became an issue because Czech law required restituants to give up the joint nationality they’d shared with countries that had welcomed them in their exiles.

No compensation would be paid by the state for the wrecked condition of most of the buildings – so getting a lot of property back was a double-edged sword. Many manor houses had been deliberately debased by being turned into pig farms and the like.

A nobleman with whom I am acquainted got back a large apartment building in Prague with fifty flats, mostly let on old communist rents of about €15 a month. For the first 20 years of restitution these rents had to be maintained. My friend was often rung up at 2am or 3am in the night by a tenant complaining his tap needed fixing or some other trifling matter. The tenant just loved the idea of having a prince come round at his beck and call – and the more inconvenient the time, the better.

Restituants of castles were to face years of work either on the restitution of the buildings and the land underneath them (in separate registers), and in trying to trace the original contents, probably widely dispersed or ‘lost’, or in trying to put together a viable estate to make economic sense of it all. Only the resourceful and courageous ones managed to hang on.

Part II. Bettina Lobkowicz was sitting in the Czech prime minister’s office in the mid 1990s on a special mission. She had been tipped off that in his office there was a valuable piece of furniture taken from the medieval castle that her husband, Jiri, had won back from the state a few years earlier after the collapse of communism.

She quickly spotted, over the premier’s shoulder, the fine Renaissance cabinet, whose twin had already been given back with the fortress in 1992. The Lobkowiczs had won a court order for the return of the castle’s furniture but nothing was officially listed on the inventory about the cabinet’s whereabouts, although it was no doubt carefully accounted for. So, by luck more than anything, Bettina Lobkowicz reunited her cabinets, and they are both to be seen today on the Melnik Castle tour.

The Lobkowiczs’ problem was a common one for former aristocrats who had managed to outwit a hostile postcommunist bureaucracy and regain their castles. Restituants had to guess where the contents of their properties might be stored; they wouldn’t be told whether they were correct

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unless they asked. It forced restituants to become detectives – and their possessions could be in any one of hundreds of state institutions – or stolen or destroyed. The contents of the world-famous Roudnice Castle library, for example, had been shovelled out of the first floor window by Soviet soldiers onto waiting army lorries and taken to be ground up for potato fertiliser.

Many restituants also had to rectify the massive neglect, if not vandalism, of their properties that had often taken place during the 40 years of communism. Many castles were used for completely inappropriate purposes and adapted for their new role in tasteless and damaged ways. Some interiors were filled with communal bathrooms, while corridors were subdivided by ghastly glass-brick partitions.

Castolovice Castle had been partly used as a refrigerator repairman’s training school. Diana Sternberg-Phipps, its restituant, has made a great success of her restoration of the family seat; the rooms occupied by the refrigerator repairmen are now turned into imaginatively furnished guest rooms, supplementing the income from castle tours and special events.

bne July 2017

In Eastern Bohemia, Frantisek Kinsky has just completed work on the family chateau of Kostelec nad Orlici, where, helped by an EU grant, a totally derelict baroque palace has risen again to glory. I saw it at its worst, and although I am an optimist I had thought it was probably a hopeless case.

Frantisek’s father had stuck it out through communism, barred from living in his house and forced to watch its gradual decay from the adjacent stables – a not uncommon form of torture that was doled out to owners of fine buildings. Luckily, old Count Kinsky lived just long enough to see his son revive the house in which the old man had been born.

Melnik and Castolovice had – like many other grand State Castles – been used as museums, and so they are again.

Melnik, which has a noted vineyard, or Nelahozoves, which has a famous painting collection, are big draws today. But even less well known and heavily reconstructed chateaus such as Kostelec nad Orlici are run as successful businesses catering to tourists, weddings and conferences.

However, many returning owners in the 1990s who were faced with opening their castles for the first time or, in some cases, taking over badly run State Castles, found themselves poorly equipped for the task, with virtually no help available from the state. The returning owners had mostly not lived in historic

ARTS CULTURE & PEOPLE

I 61

houses in their two generations of exile, let alone castles with estates. The entire craft of owning, living in and also sharing an historic house with the public – and getting it to support itself financially – was alien to them.

After European Union accession in 2004, EU grants, under the Regional Operation Programme, have certainly helped revive several castles – and a revived castle, open for business as a heritage and cultural attraction, helps enormously to

“Restituants had to guess where the contents of their properties might be stored” regenerate the communities in which they stand. The UK’s National Trust has estimated that of the total money expended on a visit to see an historic house, 95% of it was not spent in the house and grounds but in the area – in lodging, in other activities, in restaurants and so on.

Stephen Weeks is a castle conservationist and author.

Melnik Castle.

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62

I New Europe in Numbers

bne July 2017

Passenger traffic at Croatia’s airports soars 33% y/y in April

Passenger traffic at Croatian airports

thousand persons

The number of passengers serviced by Croatia's airports rose 33% y/y to 570,000 in April, according to data from the statistics office, signalling a great start to this year's tourism season. Passenger traffic had contracted 3% y/y in March.

Jan

Feb

Mar

Apr

May June July

Aug

Sept

Oct

Fall in population (%)

Nov

Dec

Traffic at Croatian airports rose 13% y/y to a record high of 8.11mn in 2016 thanks to political uncertainty and security issues in rival destinations. To cope with a continuation of this trend, the government has started to upgrade works at the country’s main airports.

Moldova, Bulgaria, Poland, Albania and Latvia to lose more than 40% of their populations by 2100 Fifteen countries in Central and Eastern Europe are expected to see their populations contract by more than 30% by the end of the century, new UN data shows. Moldova, which has already seen an exodus of its citizens to find work abroad, will lead the decline, with its population forecast to drop by 51.8% by 2100. Over the next 13 years, the sharpest population declines in CEE are expected in Latvia (-10.4%), Bulgaria (-9.2%) and Croatia (-7.0%), with Ukraine and Romania also expected to see declines of more than 6%.

Turkey's Central Government Debt Stock

Turkish state’s annual debt stock grows 15% y/y in May The gross debt stock of Turkey's central government increased 15% y/y to stand at TRY806bn (€204bn) as of the end of May, the Turkish treasury said on June 20. On a monthly basis, central government debt rose 1.48% from TRY795bn at end-April.

Central government debt growth fell to as low as 3% in September last year but then began to accelerate in October, mainly due to the Turkish lira’s depreciation.

Annual debt growth reached the peak point of 17% in January and has stayed high since then despite slight declines. The main concern, however, is still the fast expansion of the private sector's external debt.

Russia GIR vs Reserve, National Welfare funds $bn

Russia has not touched its reserves funds this year, but it will Thanks to higher than expected oil prices Russia has not had to touch its rainy day reserves funds so far this year to prop up budget spending. But the `Ministry of Finance says it will have to dip into them in the second half of this year and expects to at least exhaust the $16.5bn National Reserve Fund.

Under the recently revised budget estimate, the plan this year still calls for withdrawing a total of about RUB1.7 trillion to cover the federal budget deficit.

The current plan sees draining the Reserve Fund entirely this year and funding most of the remaining deficit out of the National Welfare Fund. Siluanov expects the government to start dipping into fund assets sometime in the autumn.

The RUB1.7 trillion on call for budget spending is about twice what was in the National Reserve Fund (NRF) as of the end-May, but there is still plenty in the National Welfare Fund (NWF) if needed: the value of the NRF stood at RUB930bn ($16.5bn), while the NWF stood at RUB4.2 trillion ($74bn).

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New Europe in Numbers

bne July 2017

Foreign investors return to CEE bonds

I 63

Russia: Volume of new issues, $mn

bne IntelliNews Bond markets in emerging Europe are seeing good pick up of new issues by international investors. Russia in particular has doubled the number of foreign investors, who now hold a record 29% of all local sovereign bonds outstanding; Gazprombank calculates that foreign investors bought 80% of the new issues in the first quarter of this year. The number of issues doubled y/y to 28 in the first four months of this year, worth $12.3bn, according to Cbonds.

And there is more to come. The pressure on the Russian federal budget has eased to the point where the Ministry of Finance can cover the estimated 1.9% GDP deficit this year largely by issuing RUB1 trillion ($17.6bn) of local sovereign debt – twice as much as last year – as well as at least $3bn of Eurobonds on the international capital market.

However, with inflation falling and the Central Bank of Russia expected to cut rates again several times this year (the monetary policy rate was 9.25% in June) the appeal of Russia’s domestic sovereigns may start to wane this year.

Issues by the countries of Central and Eastern Europe are also up by a fifth year on year with 43 issues worth a total of $29bn. The biggest issue was a 20-year Turkish sovereign bond worth $1.75bn that yields 5.75%, as well as $750mn 10-year bond with a yield of 6.125% by Garanti Bank, one of Turkey’s biggest banks. Finansbank, another Turkish bank, also issued a $750mn 5-year bond with a 4.875% yield. Lithuania was the only other issuer from the region with two sovereign bonds worth €750mn and €550mn, with a 20-year and 10-year maturity respectively.

CIS: Volume of new issues, $mn

CEE: new bond issues $mn

Source: CBonds

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64

I New Europe in Numbers

bne July 2017

MACROECONOMIC INDICATORS MACROECONOMIC INDICATORS GDP, $mn GDP grows, local currency, %, y/y

GDP composition (%)

Budget deficit

Current Inflation (CPI) Unemployment Ind. prod. account

Country

Total (2015)

Annual (2016)

Quarter

2017 forecast

Per capita ($)

Agri.

Indus.

Serv.

% GDP

% GDP

Y/y

%

Y/y, %

Ind

Albania

11540

+3.5

+4.0

+3.5

4543

21.6

14.9

63.5

-4.0

-10.1

+2.0 May

14.6 1Q17

+13.4 1Q17

Alb

Armenia

10570

+0.2

-1.0

+2.7

3798

19.6

29.1

51.3

-4.1

-2.7

+1.6 May

17.4 4Q16

+20.0 May

Arm

Azerbaijan

54050

-3.8

-3.8

+1.2

6116

6.4

61.1

32.5

-1.2

0.4

+13.8 May

5.1 2016

-0.4 2016

Aze

Belarus

54610

-2.6

+0.3

-0.5

6159

9.2

40.9

49.8

1.8

-3.8

+6.1 May

0.9 Feb

+6.0 May

Bel

Bosnia & Herz.

15790

+2.0

+2.6

+3.2

4801

7.8

26.8

65.4

0.7

-5.6

+1.4 Apr

39.7 Apr

+4.4 Apr

Bos

Bulgaria

47170

+3.4

+3.4

+3.2

7612

5.1

27.5

67.5

-2.1

1.2

+2.3 May

7.6 Apr

+4.8 Apr

Bul

Croatia

48850

+2.9

+3.4

+2.5

13807

4.2

26.6

69.2

-3.2

4.2

+1.1 May

13.2 Apr

-0.6 Apr

Cro

4.1 May

-2.5 Apr

Cze

+9.5 Apr

Est

Czech Republic

181900

+2.3

+1.9

+2.5

21214

2.5

37.5

60.0

-0.4

1.2

+2.4 May

Estonia

22700

+1.6

+2.7

+2.5

17638

3.5

28.1

68.4

0.4

1.9

+3.3 May

5.6 1Q17

Georgia

14010

+2.7

+2.8

+5.2

4010

9.2

21.6

68.3

-3.7

-11.8

+6.6 May

11.8 2016

+22.6 1Q17

Geo

4.6 Apr

-3.0 Apr

Hu

12.3 4Q16

+14.6 1Q17

Kaz

+10.7 May

Kos

Hungary

120600

+2.0

+1.6

+2.6

14,517

3.5

31.8

64.7

-1.9

5.0

+2.1 May

Iran

387600

+6.6

+0.6

+5.2

5,937

9.3

38.2

52.4

-2.6

0.4

+12.6 Apr

Kazakhstan

173200

+1.0

+1.0

+2.2

10,617

5.1

33.0

61.9

-1.2

-3.2

+7.5 May

4.8 May

6355

+3.4

+3.0

+3.9

3,796

12.9

22.6

64.5

-1.3

-7.6

+1.5 May

32.9 2015

Kyrgyzstan

6650

+3.8

+3.8

+3.0

1,057

17.9

25.9

56.2

-1.5

-14.8

+3.8 May

2.4 Apr

+34.7 May

Lat

Latvia

27050

+2.0

+2.6

+3.1

14,321

3.3

23.2

73.6

-1.3

-1.9

+2.8 May

9.4 1Q17

+9.6 Apr

Lith

Lithuania

41270

+2.3

+3.2

+3.0

15,231

3.3

30.4

66.4

-0.2

-2.5

+3.4 May

7.3 May

+7.4 May

Ma

Macedonia, FYR

9922

+2.4

+2.4

+3.3

5,094

11.2

26.3

62.5

-3.5

-1.4

+1.2 May

22.9 1Q17

-1.9 Apr

Mo

Moldova

6414

+4.1

+6.5

+2.8

1,978

14.1

21.2

64.7

-2.2

-7.2

+7.4 May

6.3 1Q17

-9.3 Apr

Mo

Mongolia

11740

+1.0

+1.0

+2.0

3,946

14.6

35.1

50.3

-3.1

-4.8

+3.7 May

9.1 1Q17

+11.0 May

Mo

Montenegro

4039

+2.5

+3.4

+3.6

7,260

8.3

21.2

70.5

-7.0

-12.9

+2.3 May

22.1 May

-10.2 Apr

Pol

474900

+2.8

+2.7

+3.1

14,650

2.7

38.5

58.9

-2.6

-0.2

+1.9 May

7.7 Apr

+9.1 May

Rom

Kosovo

Poland

-4.8 1Q16

Kyr

177300

+4.8

+4.8

+3.7

9,531

3.3

35.4

61.3

-0.7

-1.0

+0.6 May

5.3 Apr

+5.5 Apr

Rus

Russia

1325000

-0.2

+0.3

+1.5

11,038

4.7

33.1

62.2

-2.4

5.9

+4.1 May

5.2 May

+5.6 May

Ser

Serbia

36510

+2.8

+2.5

+2.8

5,661

9.7

42.7

47.6

-2.9

-4.8

+3.5 May

14.6 1Q17

-2.6 Apr

Slo

Slovak Republic

86630

+3.3

+3.0

+3.0

18,643

3.6

31.6

64.8

-3.0

0.3

+1.1 May

7.4 May

-3.2 Apr

Slo

Slovenia

42770

+2.5

+2.6

+2.2

23,779

2.3

33.6

64.1

-2.9

6.9

+1.5 May

9.8 Apr

+7.8 Apr

Taj

Tajikistan

7816

+6.9

+6.9

+4.5

933

29.2

21.6

49.2

0.8

-5.9

+8.1 Apr

2.4 Apr

+16.5 Apr

Tur

Turkey

733600

+2.9

+3.5

+3.0

11,522

8.6

27.1

64.3

-1.2

-4.5

+11.7 May

11.7 Mar

+6.7 Apr

Tur

Turkmenistan

35680

+6.2

+6.2

+6.5

6,933

13.2

47.7

39.2

-1.0

-11.8

+6.2 Dec

10.0 2015

+6.6 4Q16

Ukr

10.0 4Q16

-6.1 Apr

Uzb

8.9 2016

+6.6 4Q16

Romania

Ukraine

90520

+2.3

+4.8

+2.0

2,826

14.4

26.3

59.3

-1.6

-3.6

+13.5 May

Uzbekistan

65680

+7.8

+7.8

+7.4

1,857

19.3

33.9

46.8

0.1

0.3

6/ Dec

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Development Bank; National Statistical Committee of the Republic of Belarus; Haver Analytics

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*All data are latest available official figures or independent estimates

New Europe in Numbers

bne July 2017

FINANCIAL FINANCIAL INDICATORS INDICATORS FINANCIAL INDICATORS

nt od.Ind. prod.

%

SOCIALSOCIAL SOCIAL

Stock market Stock market

Y/y, %

Index

Index

Month

Month 12-Month12-Month Ytd

Literacy Literacy Tertiary edu.

Tertiary edu.

Ytd 52-wk low 52-wk low 52-wk high 52-wk high

% adult pop. % adult pop. % pop.

% pop.

1Q17 Albania (-) +13.4 1Q17 Albania (-)

-

-

-

-

-

-

-

-

-

-

96.8

96.8 58.5

58.5

May (-) (-) +20.0 May Armenia Armenia

-

-

-

-

-

-

-

-

-

-

99.6

99.6 46.1

46.1

2016-0.4 2016 Azerbaijan Azerbaijan (-) (-)

-

-

-

-

-

-

-

-

-

-

99.8

99.8 20.4

20.4

May+6.0 May Belarus (-) Belarus (-)

-

-

-

-

-

-

-

-

-

-

99.6

99.6 66.4

66.4

Apr+4.4 Apr Bos/Herzegovina Bos/Herzegovina (SASE) (SASE)

-2.1

-2.1

-14.5

-14.5

-13.2

-13.2

600.2

600.2

732.7

732.7

98.2

98.2 23.2

23.2

(SOFIX) (SOFIX) Apr+4.8 Apr Bulgaria Bulgaria

4.4

4.4

53.9

53.9

16.6

16.6

447.6

447.6

689.1

689.1

98.4

98.4 92.8

92.8

Apr -0.6 Apr Croatia (CROBEX) Croatia (CROBEX)

0.0

0.0

13.4

13.4

-6.9

-6.9

1643.8

1643.8 2254.9

2254.9

99.1

99.1 63.0

63.0

Apr -2.5 Apr Czech Republic Czech Republic (PX) (PX)

-2.8

-2.8

20.0

20.0

7.2

7.2

770.5

770.5

1027.8

1027.8

99

78.0

78.0

Estonia (OMXT) Apr+9.5 Apr Estonia (OMXT)

1.4

1.4

16.5

16.5

5.3

5.3

945.8

945.8

1138.7

1138.7

99.9

99.9 33.0

33.0

+22.6 1Q17 Georgia (-) 1Q17 Georgia (-)

-

-

-

-

-

-

-

-

-

-

99.7

99.7 61.6

61.6

25126.4 25126.4 36168.6 36168.6

99

Apr -3.0 Apr Hungary Hungary (BUX) (BUX)

2.6

2.6

33.6

33.6

11.8

11.8

99.4

99.4 56.6

56.6

1Q17 Kazakhstan (KASE) (KASE) +14.6 1Q17 Kazakhstan

-1.7

-1.7

58.3

58.3

14.6

14.6

964.3

964.3

1638.4

1638.4

99.7

99.7 55.2

55.2

May +10.7 May Kosovo (-)Kosovo (-)

-

-

-

-

-

-

-

-

-

-

91.9

91.9 47.6

47.6

1Q16-4.8 1Q16 Kyrgyzstan Kyrgyzstan (-) (-)

-

-

-

-

-

-

-

-

-

-

99.2

99.2

May Latvia (OMXR) +34.7 May Latvia (OMXR)

-

-

13.3

13.3

50.6

50.6

28.5

28.5

542.7

542.7

968.8

968.8

99.9

99.9 69.9

69.9

Apr+9.6 Apr LithuaniaLithuania (OMXV) (OMXV)

1.7

1.7

16.4

16.4

6.2

6.2

498.6

498.6

596.3

596.3

99.8

99.8 66.3

66.3

May+7.4 May Macedonia, Macedonia, FYR (MBI10) FYR (MBI10)

-0.6

-0.6

36.4

36.4

6.6

6.6

1701.0

1701.0 2316.2

2316.2

97.5

97.5 41.2

41.2

-

-

-

-

-

-

-

-

99.1

99.1 38.4

38.4

Apr -1.9 Apr Moldova (-) Moldova (-)

-

-

(MSETOP)(MSETOP) Apr -9.3 Apr MongoliaMongolia

-1.2

-1.2

6.1

6.1

1.9

1.9

10617.1 10617.1 13323.6 13323.6

98.3

98.3 55.5

55.5

+11.0 May Montenegro May Montenegro (MONEX) (MONEX)

1.6

1.6

6.8

6.8

-3.8

-3.8

10273.4 10273.4 11970.8 11970.8

98.4

98.4 62.2

62.2

Apr-10.2 Apr Poland (WIG) Poland (WIG)

-0.1

-0.1

32.0

32.0

17.8

17.8

42813.0 42813.0 62666.5 62666.5

99.7

99.7 71.5

71.5

(BET) (BET) May+9.1 May Romania Romania

-2.0

-2.0

33.4

33.4

17.7

17.7

5900.0

98.6

98.6 51.5

51.5

Apr+5.5 Apr Russia (MICEX Russia/ RTS) (MICEX / RTS)

I 65

5900.0 8786.6

8786.6

-4.6 / -9.4-4.6 / -9.43.4/ 11.3 3.4/ 11.3 -16.7 / -14.8 -16.7 / -14.8 1774.6 / 885.2 1774.6 / 2294.0 885.2 / 1197.0 2294.0 / 1197.0

99.7

99.7 76.1

76.1

1624.2

98.2

98.2 56.3

56.3

327.8

327.8

99.6

99.6 53.6

53.6

676.4

806.3

806.3

99.7

99.7 84.4

84.4

-

-

-

99.7

99.7 24.4

24.4

94.9

94.9 7.98

7.98

-

99.6

99.6 79.3

79.3

285.1

285.1

99.7

99.7 78.9

78.9

-

-

99.5

99.5 8.87

8.87

Serbia (BELEXLIN) May+5.6 May Serbia (BELEXLIN)

-3.6

-3.6

14.1

14.1

-2.2

-2.2

1309.1

1309.1 1624.2

Slovak Republic (SKSM) (SKSM) Apr -2.6 Apr Slovak Republic

0.4

0.4

2.6

2.6

-3.4

-3.4

299.3

299.3

Apr -3.2 Apr Slovenia Slovenia (SBITOP) (SBITOP)

0.7

0.7

18.5

18.5

10.3

10.3

676.4

Apr+7.8 Apr TajikistanTajikistan (-) (-)

-

-

-

-

-

-

-

Apr Turkey (XU100) +16.5 Apr Turkey (XU100)

3.8

3.8

33.8

33.8

28.1

28.1

Apr+6.7 Apr Turkmenistan Turkmenistan (-) (-)

-

-

-

-

-

-

-

-

-

4Q16 +6.6 4Q16 Ukraine (PFTS) Ukraine (PFTS)

2.4

2.4

35.6

35.6

7.5

7.5

220.5

220.5

Apr -6.1 Apr Uzbekistan Uzbekistan (-) (-)

-

-

-

-

-

-

-

-

70426.2 70426.2 100106.8 100106.8

4Q16 +6.6 4Q16

Sources: Bloomberg; Capital IQ; InFinancials

*Official figure or independent estimate

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66

I Events

bne July 2017

Upcoming events 2017 Turkey Investment Summit 2017 5 July Haberdasher’s Hall London, UK www.newspartaevents.com/event/tis2017

The 2nd Iranian Consumer Summit 21 September Mercure Paris Porte De Versailles Expo Hotel Paris, France www.newspartaevents.net/ics2017

Eastern Economic Forum 6-7 September Far Eastern Federal University Vladivostok, Russia www.forumvostok.ru

Iranian Pharmaceutical Summit 26 October Frankfurt www.newspartaevents.com/event/ips2017

VIII conference «Syndicated Lending in Russia and CIS» 21 September Marriott Courtyard Moscow Centre Moscow, Russia http://cbonds-congress.com

Belarusian-European Economic Forum 27 October Luxembourg www.investinbelarus.by

5 – 8 July 2017 Corinthia Hotel Nevsky prospect, 57

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