bne IntelliNews May 2018

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Slovakia catching up with the EU economy faster than Czechia Turkey grew 7.4% in 2017: analysts warn of blowout dangers in “warp-speed” expansion

May 2018

Gloves off for Ukraine's health minister as a longawaited reforms begin

CEE real estate special report p. 26

Hungary's ruling party retains supermajority after sweeping election victory p. 42

Phosagro thriving in the time of sanctions p. 52

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Senior editorial board Ben Aris (Berlin) editor-in-chief & publisher

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21 Trump’s trade war brinksmanship pushes Turkish lira to fresh record low

11 Kazakhstan reportedly offers Royal Dutch Shell 10-20% stake in KazMunayGaz

23 RBI offloads Polish business to BNP Paribas

12 Leaked document shows EU’s initially hardline approach to Gazprom 13 Kazakh tenge clobbered 5% in a day as sanctions trip up Russia 14 Russia's ruble under worst selling pressure since January 2016

16 Russia's AFK Sistema places $1.5bn bid for Indian telecom assets as it resumes investment activity

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20 The Russian ICO frenzy continues

10 Avast to enter London bourse in bid to raise up to $1bn

15 PwC says "no basis" for Ukraine's $3bn PrivatBank lawsuit

Follow us on twitter.com/bneintellinews

19 Albania plans to float state-owned power distributor by end-year

17 Croatia's Agrokor strikes deal with creditors 18 Serbian government's takeover of Nis airport sparks local fury

24 Sberbank sets up trade-boosting website

SPECIAL REPORT: CEE Real Estate 27 Take up of office space in Moscow nearly doubles in 1Q18 28 Vacancy rates in Moscow’s retail stores are falling, but more slowly than the other categories 29 Russian foreign property investments grow for the first time in four years 30 Separating noise from reality in Russia’s real estate sector 32 Infrastructure investments create new real estate hubs in Bucharest 34 Residential real estate in Hungary set to grow 36 Romania risks losing its moment in the property investment sun

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23 COVER FEATURE 39 Russia's Bondageddon 40 Clearstream to hook Ukraine and Kazakhstan up to international markets

36 53 Gloves off for Ukraine's health minister as a longawaited reforms begin 55 Russia’s coal industry is blooming

EURASIA CENTRAL EUROPE 42 Hungary's ruling party retains supermajority after sweeping election victory 44 Slovakia catching up with the EU economy faster than Czechia 45 Huge crowds gather in Budapest to protest against Orban's new government

SOUTHEAST EUROPE 46 Turkey grew 7.4% in 2017: analysts warn of blowout dangers in “warp-speed” expansion 48 Macedonia defies illiberal trend in otherwise gloomy Freedom House report

58 No surprises as Azerbaijan's Aliyev wins fourth presidential term with landslide 60 Turkmen president appoints son as deputy foreign minister 61 Street corner traders disappear as Iranians try but fail to deal with unified exchange rate

OPINION 64 BALKAN BLOG: Divided, weak and doomed to fail 67 COMMENT: Whisper it – ‘Erdonomics’ could be driving Turkey to a meltdown 68 KRUK REPORT: Nadia Savchenko, Ukraine’s fallen hero

EASTERN EUROPE 50 INTERVIEW: Phosagro thriving in the time of sanctions

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70 NEW EUROPE IN NUMBERS

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Politics Eastern Europe The US Department of Treasury has released an update to the sanctions against Russia, with seven Russian tycoons, 12 major companies and 17 government officials added to the Specially Designated Nationals And Blocked Persons List (SDN List). Oligarch Oleg Deripaska was singled out for specially tough action.

The US Treasury Secretary Steven Mnuchin considers the so-called "nuclear option" of sanctioning Russian sovereign debt is still a bad idea, after a draft bill including the measure was introduced to Congress last week.

The US government has caused turmoil in the Russian securities with a new round of sanctions that some are calling a “game changer.”

Russia's agricultural watchdog Rosselkhoznadzor has threatened Belarus with a potato ban if it keeps re-exporting Egyptian-grown potatoes as its own in defiance of a trade ban imposed on Egypt by Russia.

Ukraine will impose sanctions against Russian oligarchs recently hit by US sanctions, the nation's President Petro Poroshenko told journalists during the joint briefing with Chancellor of Germany Angela Merkel following their bilateral talks in Berlin.

Smolensk, Russia. The crash killed then president Lech Kaczynski, his wife, and 94 other people, including top military brass and other officials.

A crowd of an estimated 55,000 people – mostly women – protested in Warsaw against apparent plans to push through an amendment to the current abortion law that would ban termination due to fetal abnormality.

Tens of other Polish cities and towns also saw protests in a demonstration of defiance to the conservative forces in power in Poland.

Slovakia's long-dominant political party Smer-SD party is dropping in opinion polls in the aftermath of the murder of Slovak journalist Jan Kuciak and his fiancée and the ensuing political crisis focused on perceived corruption in government. A recent poll by the AKO agency showed support had dropped from 24.7% in February to 20.7% in April.

The embattled Hungary-based Central European University (CEU) is planning a move to Vienna, having signed a memorandum of understanding on establishing a campus in the Austrian capital. Hungary tightened rules governing the operations of foreign universities in spring 2017.

Southeast Europe Central Europe Poland’s ruling Law and Justice (PiS) ended the monthly vigils to commemorate the 2010 plane crash in

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Serbian far-right leader Vojislav Seselj was sentenced to 10 years in prison for war crimes and crimes against humanity committed during the civil war caused by the breakup of Yugoslavia

in the 1990s. Seselj said after the verdict he was “proud of all war crimes”.

The Albanian parliament descended into chaos as opposition MPs pelted Prime Minister Edi Rama and other cabinet ministers with eggs and flour during a discussion of the arrests of protesters against the country’s first toll road. The toll, which local residents backed by the main opposition parties say is too high, has become one of the country’s most contentious issues.

Thousands of Moldovans rallied in support of reunification with Romania. The event marked 100 years since the unification of the region of Bessarabia, most of which was part of modern-day Moldova, with Greater Romania, in 1918.

The small HRAST party quit Croatia’s ruling coalition over the planned ratification of the Istanbul Convention. The decision leaves Prime Minister Andrej Plenkovic with a very fragile parliamentary majority.

Eurasia As expected President Ilham Aliyev won a landslide victory in the snap presidential election in Azerbaijan.

His fourth term will run until 2025 having been extended following the 2016 referendum.

Azerbaijan and Iran signed eight cooperation agreements during a meeting between presidents Hassan Rouhani and Ilham Aliyev. Their two Shi'a-majority countries have lately left some historical animosities aside. A recently built railway connection unites the Azerbaijani and Iranian railway networks and Rouhani and Aliyev presented a common front when it came to the Caspian Sea map.

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Economics Eastern Europe Consumer prices in Russia rose by 0.3% month-on-month in Russia in March 2018, in line with previously observed weekly inflation dynamics and bringing the annual inflation rate to 2.4% versus 2.2% seen in February.

Economists are expecting inflation to start rising again this year from historic lows set last year.

Russia’s manufacturing PMI put in a marginal rise in March up to 50.6 from 50.2 a month earlier and only just above the 50 no-change mark in the IHS Markit index, a composite snap shot of manufacturing actively based on a monthly survey.

The National Bank of Ukraine (NBU) will keep its key policy rate unchanged at 17% after four hikes of the rate, as "the current monetary conditions are sufficiently tight to bring inflation back to its mid-term target", the regulator said in a stateent on April 12.

Ukraine’s current account stood at a $9mn surplus in February compared to a $133mn deficit a year ago, the National Bank of Ukraine (NBU) reported on March 30. The goods trade deficit widened to $733mn from $527 in January. The deficit of trade in goods and services increased to $640mn in February from $467mn in January.

Ukraine's foreign exchange reserves declined by 1.2% month-on-month to $18.191bn in March, the National Bank of Ukraine (NBU) said in a statement on April 6.

Central Europe Hungary’s agricultural producer prices rose by 4.9% y/y in February, up from 2.1% growth in January, the statistics office KSH said. Hungary’s agriculture continues to be heavily dependent on EU farm subsidies.

Hungary’s jobless rate remained at a record low. The rolling average threemonth jobless rate was just 3.8% in the December-February period, unchanged from the previous three-month period.

Czech GDP rose by 4.5% in 2017, marking the biggest annual expansion in the last decade. The main drivers in the first half of the year were domestic consumption and foreign demand. In the second half of 2017, investment activities helped the strong economic boom.

In 2016 Chinese investments in Czechia reached less than one-fifth of the €3.7bn President Milos Zeman promised the country would receive during the year. The failure of Czechia to secure the sums of money promised

by Zeman has political as well as economic implications, as many Czechs are concerned about Chinese influence over their president.

Kosovo’s harmonised index of consumer prices (HICP) edged up 0.1% y/y in March, after being flat y/y in the previous month. The biggest annual price increase was registered for alcoholic beverages and tobacco (+1.9%).

Eurasia Teheran halted the spiralling descent in the Iranian rial’s (IRR’s) value by making open market trading unlawful and setting a unified official foreign exchange rate of IRR42,000 to the dollar. Anxieties over Iran’s economic future in the face of unrelenting hostility from Donald Trump were a major factor in driving the rial’s open market value to more than IRR60,000.

A year ago, the rate was IRR37,600.

The Lithuanian consumer price index (CPI) gained 2.7% y/y in March, shedding 0.8pp against the annual reading from the previous month, Statistics Lithuania said. The annual price growth in March extends the inflationary trend in the Lithuanian CPI to 27 months.

Southeast Europe A harsh winter and a decline in investments slowed growth in the Western Balkans in 2017, even though 190,000 new jobs were created in the first nine months of the year, a World Bank report said. An official from the development bank stressed that growth is highly vulnerable to both domestic and external shocks.

Bulgaria’s population continued its decline last year, numbering 7,050,034 people at the end of December, a decline of 51,825 people or 0.7% compared to a year earlier. A UN study projects a combination of low birth rates and mass emigration will erode Bulgaria’s population by 23.4% by 2050.

The Kazakh tenge weakened by 4.7% against the dollar in one day (April 10) in an unmistakeable reaction to the US sanctions assault on top oligarchs in Russia. The currency of Kazakhstan, a country with imperative trade and investment links to Russia, sank to as low as KZT334.

The Asian Development Bank’s Asian Development Outlook anticipates a general slowdown across Central Asia, with the exceptions of Uzbekistan, where it expects growth to rise, and Turkmenistan, where it forecasts a flat year on year growth level.

Armenia's indicator for economic activity rose by 7.3% y/y in February.

Growth of the index, narrower gauge for growth, showed from 10.2% y/y in January and 12.6% y/y in December.

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Business Eastern Europe Gazprom shipped a new record-high monthly volume of natural gas to Europe in March 2018 – 19.6bcm. The previous all-time monthly record high of 19.1bcm was posted in January 2017.

This continues Gazprom's extremely strong export performance after a new record-high year in 2017 when the company shipped 194.4bcm to non-FSU Europe (+8.4% y/y).

scores the dire lack of available skilled workers in the country.

back of the favourable macroeconomic environment.

Three large German companies have chosen to invest in Hungary's second-largest city Debrecen since Lufthansa launched its first direct flight two years ago. Lufthansa has seen strong growth in Hungary, with an 8% rise in passenger traffic to 1.75mn on its Hungarian routes last year.

Slovenian aircraft manufacturer Pipistrel started building a new factory in Jurong, China. Pipistrel is investing €350mn alongside its Chinese partner Kang Quai Group in a major $1bn development comprising an airport and an apartment complex as well as the factory.

Moldova plans to ban sales of farmland or forests to foreign citizens under a new draft law. Currently around 15% of Moldova’s farmland is owned by foreigners despite restrictions on land ownership by foreign firms.

The turnover of Russia's e-commerce reached RUB1.04 trillion ($18bn) in 2017, growing by 13% year-onyear, Vedomosti daily said on April 4 citing the data by the Association of Internet Trade Companies (AKIT).

World's largest beer brewer AnheuserBusch InBev (AB InBev) is merging its Russian and Ukrainian assets with Turkish brewing major Anadolu Efes, the company said at the end of March.

The united company will control 11 breweries and three malting plants in Russia, as well as three breweries in Ukraine.

Russia's largest carmaker Avtovaz completed a second stage of recapitalization by its main shareholders French car major Renault and state technology agency Rostec, the company reported on April 12. The recapitalization of Avtovaz has been on the agenda since 2016. The sales of cars in Russia grew by 22% y/y in January-March to 0.39mn units, as the recovery of the sector continues its strong growth.

Central Europe Skoda Auto agreed to a 12% wage increase for its workers, offered generous annual bonuses of CZK110,000 on average, and backed off from introducing Saturdays as full working days, averting the threat of a strike and bringing an end to lengthy negotiations. The deal shows the muscle of Czech unions amid a booming economy and under-

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Eurasia The Czech government chose a CzechToll and SkyToll tie-up to run the country’s highway toll system for 10 years starting in 2020. The consortium beat the current toll operator Kapsch with a CZK10.75bn (€424mn) bid.

Uzbekistan resumed exports of natural gas to Tajikistan for the first time since 2012. Uzbekistan is expected to supply around 126mn cubic metres of gas worth $15.1mn to its neighbour this year.

The former owner of two failed Baltic banks was reportedly arrested in Russia. Vladimir Antonov is the former co-owner of now-defunct lenders Snoras and Latvijas Krajbanka, which collapsed in 2011.

Bishkek is to privatise 51% of Air Kyrgyzstan. If the buyer is foreign, their stake must not exceed 49%, with 2% to be sold to other private investors.

Southeast Europe Car production at Romania’s Dacia plant increased by 2.1% y/y to 85,365 units in the first three months of the year, according to data from the Association of Automotive Manufacturers of Romania (ACAROM). Dacia, owned by France's Renault, is one of the country's biggest exporters.

Real estate transactions in Romania reached a record level last year, exceeding €1bn, at least 10% up compared to the previous year, a report from the Urban Land Institute (ULI) and PwC showed. The rise comes on the

Drought-stricken Iran banned the cultivation of rice in all provinces apart from those on the Caspian Sea coast.

Farmers in Isfahan province have been mounting protests to demand the government turn water supplies back on as much of the water of their region has been redirected to surrounding arid regions.

Hong Kong-listed Citic Resources is reportedly negotiating to sell a significant minority stake to Kazakhstan.

An unnamed Kazakh government entity is said to be planning to inject energy assets into Citic Resources in return for a stake in the company. The entity may be Karazhanbasmunai, which operates Karazhanbas oilfield, and is 50%-owned

by Citic Resources.

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Finance Eastern Europe Russia’s messaging service Telegram raised $850mn in an initial coin offering (ICO) launching its own cryptocurrency Gram and blockchain platform TON. Founded by Russian digital entrepreneur Pavel Durov, who fled Russia and lives in self-imposed political exile in London, this is the second ICO the company has held and has raised a total of $1.7bn.

Troubled Chinese private firm China Energy Company (CEFC) missed the April 1 deadline to pay a €1.5bn instalment for a 14.16% stake in in Russia's largest oil company Rosneft, Vedomosti daily reported on April 3. The deal of acquiring 14.16% in Rosneft is still on the table, as CEFC has been given a ten day extension to make the first payment and in China a decision has reportedly been taken "at the highest level" to complete and finance the deal from quasi-state Chinese funds.

Russian real estate developer Samolet Group plans to hold an IPO on Moscow Exchange (MOEX) by the end of 2018 or 2019, Reuters said on April 4 citing unnamed market sources.

Russian IBS IT Services confirmed its plans to hold an IPO on Moscow Exchange, which will consist in equal parts from existing shares and new issue, increasing the free-float after the offering to 35%, the company said in a press-release on April 4. Previous reports put the valuation of the planned IPO at $100mn.

Russian human resources major HeadHunter Group plans to raise $250mn in an IPO on NASDAQ. The deal will be organised by Goldman Sachs, Morgan Stanley, Credit Suisse, BofA Merrill Lynch, as well as domestic VTB Capital and Sberbank CIB. The company belongs to private equity fund Elbrus Capital, which bought it from Mail.ru for RUB10bn ($174mn) in 2016.

The head of Russian natural gas major Novatek Leonid Mikhelson acquired RUB100mn ($1.4mn) worth of shares of the company, increasing his stake from 0.718% to 0.723%, following a slump in the share price during the current market sell off. Novatek also resumed its buyback program.

company AVG, hopes to raise $200mn in primary proceeds from an IPO. Private equity investor Polish Enterprise Fund VII will buy Croatian baker and retailer Pan-Pek. The fund, managed by Enterprise Investors, signed an agreement to acquire a 65% stake in Pan-Pek.

Russia’s largest airport holding Novaport postponed its IPO plans to 2019 "at the earliest" the co-owner of the holding Roman Trotsenko said. It is not clear whether the decision to postpone the offering is related to the latest round of US sanctions against Russia.

The Central Bank of Russia (CBR) will recapitalize troubled Russian banks Trust and Rost Bank, which will cost the regulator RUB1.1 trillion ($19bn). The CBR will create a “bad bank” based on Trust Bank, with all the sound assets transferred to bail-out Financial Corporation Otkritie. Russia's ailing Promsvyazbank (PSB) will also get a total of over RUB240bn ($4bn) in capital injections.

Russia's largest bank Sberbank continued to post strong results in the first quarter, reporting 26% year-onyear earnings growth to RUB196bn under Russian Accounting Standards (RAS), making a return on equity of 23%.

Unconfirmed reports claimed that Russia's second-largest bank VTB could pay over 60% in IFRS profit for 2017, with a payout to minority shareholders increasing almost three-fold.

Swiss-headquartered software major Luxoft announced it will spend up to $60mn in a share buyback programme over the next two years.

Central Europe

Southeast Europe The Albanian government plans to float state-owned electricity distribution company OSHEE on the newly created stock exchange by the end of 2018. If the deal goes ahead, it will be the first ever IPO of shares in a major state-owned company in the country.

Montenegro successfully placed a €500mn seven-year Eurobond issue at a favourable interest rate of 3.375%, the finance ministry said. The new Eurobond is aimed at refinancing previous bond issues amounting to €362mn that are due to be paid in 2019, 2020 and 2021.

Turnover on the Macedonian Stock Exchange (MSE) turned to strong growth in March, reaching a value of MKD3.48mn (€56.6mn) from MKD357.6mn a month earlier, MSE data indicated. The turnover took a positive turn in March as the value of block transactions increased significantly, including transactions in Komercijalna Banka shares.

Czech-founded anti-virus firm Avast will list its shares on the London Stock Exchange. The company, which owns the popular consumer antivirus

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Avast to enter London bourse in bid to raise up to $1bn Jaroslav Hroch in Prague

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vast, which owns the popular consumer antivirus company AVG, will apply to list its shares on the London Stock Exchange in the hope of raising $200mn (CZK4.1bn) in primary proceeds from an IPO, the Czechfounded company announced on April 12.

The cyber security company hopes to get an additional $800mn in secondary sales, a well-placed source told Reuters, which would raise its market valuation to approximately CZK82bn ($4bn). The main aim of the listing is to get cash to pay down debts and finance growth.

“The company has grown amid a dramatic increase in the number and type of threats since it was founded in 1991, and thanks to its ability to stay ahead of the bad guys,” CEO Vincent Steckler said in a statement. “A listing on the London Stock Exchange is a natural fit, providing us wider access to capital markets and supporting the future growth of our business in the years ahead.”

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Avast already tried to float its shares once before, on the US Nasdaq exchange in 2012, but the offer was pulled due to poor market conditions.

“The cyber security company hopes to get an additional $800mn in secondary sales” BH Securities analyst Martin Vlcek said the fact that Avast now anticipates being included in the UK’s FTSE index could be a big plus, and that the timing is right. “The problems of the biggest companies in the sector like Facebook, Amazon or Alphabet is not affecting other technology companies, and the sector shows great promise for increased sales and profits from shares. So Avast can be a very interesting newcomer,” Vlcek said.

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J&T Bank analyst Milan Vanicek said that although London is still the financial heart of Europe and investment potential is significant there, it is a bit disappointing that Avast doesn’t aim to be listed on the Prague bourse.

Frantisek Bostl of Starteepo company, which helps companies list shares, expressed a similar view. “The timing couldn’t be better in relation to high pricing of the tech companies.

Avast, however, should count also with the option of listing in Prague and offer the domestic investors to participate in the future growth,” Bostl said, adding that Nasdaq could be a better choice due to uncertainty around Brexit.

Avast was taken over by CVC Capital Partners in 2014 and is looking to cash out some of the gains made since then.

Other minority investors include Summit Partners and Czech entrepreneurs Pavel Baudis and Eduard Kucera, who founded the company in 1991.

Avast bought Czech competitor AVG for $1.3bn in 2016.

Regarding turnover, Avast is the second biggest anti virus company in the world after Symantec, with 435mn users, out of which 260mn are PC users and 145mn mobile users.

The company had consolidated incomes in 2017 of $653mn, an annual increase of 91%. However, after making a profit of $25mn in 2016, in 2017 the company suffered a loss of $34mn. The operating profit increased four times to $124mn.

Avast employs 1,600 people worldwide, 1,000 of them in Czechia. It has 15 branches around the globe. The most significant markets are the US, Brazil, France and fastgrowing India.

Major competitors include Slovak-based ESET, US Malwarebytes and McAfee, UK Sophos and Kaspersky Lab of Russia.

Kazakhstan reportedly offers Royal Dutch Shell 10-20% stake in KazMunayGaz bne IntelliNews Kazakhstan’s sovereign wealth fund Samruk-Kazyna has offered Royal Dutch Shell the chance to buy a 10-20% stake in state-run oil company National Company KazMunayGaz (NC KMG), Reuters reported on March 13, citing two sources familiar with talks.

The plan is to IPO NC KMG in 2019 and make it more attractive to foreign investors. The most profitable Kazakh companies set to IPO in 2018-2020 are NC KMG, Kazakhstan Temir Zholy and Kazatomprom, where NC KMG was ranked second with a gross income of KZT104.5bn in 2017, down by 29.45% y/y. But these figures may change with the recovery of world oil prices.

While one source told the news agency the stake would stand at 10%, the second source noted Shell has been offered a chance to purchase a 20% stake.

Samruk-Kazyna holds a 90% stake in NC KMG, while the Kazakh central bank holds the remaining 10%. NC KMG moved to delist upstream unit KMG Exploration and Production (KMG EP) on January 22 needed to make a London-listing possible.

NC KMG accounts for almost a third of Kazakhstan’s oil and gas production. The company holds a 16.9% stake in the giant Kashagan oilfield in the Caspian Sea and a 20% stake in the neighbouring Tengiz field. Combined, they are seen as the world’s largest oil discovery of recent decades.

Kazakhstan’s ongoing $70bn privatisation drive, that includes 904 companies, is 71% complete and was originally set to last four-years to 2020. In 2016-2017, the country sold 367 companies and put up another 255 facilities for liquidation or reorganisation.

The government, which has contended with a plunge in oil revenues, has said it plans to sell stakes of at least 25% in 45 large state-owned companies. The transactions are to include at least seven IPOs, including the flotation of NC KMG. Air Astana and the world’s second largest uranium miner Kazatomprom are supposed to be sold by the fourth quarter of 2018.

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Leaked document shows EU’s initially hardline approach to Gazprom bne IntelliNews

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he European Commission had initially planned to adopt a hardline position on Gazprom’s allegedly “abusive practices” in selling gas to Central and Eastern Europe, a leaked document showed on April 11.

The document, made available by the Polish news website Biznes Alert, stands in contrast to the Commission’s current approach that appears to favour finding a settlement in the long-running dispute and possibly letting the Russian company off the hook without serious consequences.

That will be viewed in CEE as yet another example of favouring Russian interests over those of the eastern members of the bloc. There is a similar air to the ongoing dispute on whether

Gazprom headquarters, Moscow. Shutterstock.com

Gazprom and the Russian government, which controls it, have denied any wrongdoing, hinting that the case could be politically motivated. The relationship between the EU and Russia has been at a low since 2014 when Moscow annexed Crimea from Ukraine.

Russia also claimed that Gazprom’s contracts with CEE countries complied with EU regulations at the time, and questioning them now is retroactively applying new EU rules – the so-called Third Energy Package, adopted in 2009 – which Moscow finds unacceptable.

Gazprom still found itself under pressure, and in late 2016 tabled a set of measures to address the Commission’s concerns, most importantly, offering to allow cross-border sales.

“Germany benefitted from what it called a "sweetheart deal" with Gazprom”

That followed hints from Brussels and Moscow that a settlement was possible to end the dispute. A settlement would spare Gazprom some potentially huge fines and remove some pressure on the Russian company to conform to EU energy market rules.

to allow Russia to build Nord Stream 2, which would double Gazprom’s capacity to pump gas directly to Germany, possibly bypassing Ukraine.

A possible settlement would not go down well in CEE, especially in Poland and Lithuania, which keep calling on Brussels to remain tough on Gazprom. The EU executive is now likely to face even greater criticism for apparently dropping its original strategy to punish the Russian company for years of alleged market abuse.

The report also indicated, according to The Telegraph, that Germany benefitted from what it called a "sweetheart deal" with Gazprom. This gave Germany a "competitive advantage in gas costs at the expense of fellow EU economies and [left] front line states at the mercy of Moscow's strongarm tactics."

The Commission charged Gazprom in 2015 with using its market dominance to overcharge CEE countries and blocking cross-border gas sales in order to segment the CEE market to control what the Commission said was “excessive” pricing.

The charges were the effect of the Commission’s investigation into Gazprom’s business in CEE that began in 2011 after Lithuania filed a formal complaint.

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“A possible settlement would not go down well in CEE, especially in Poland and Lithuania” That said, Competition Commissioner Margrethe Vestager last year said she would rather focus on the future of Gazprom’s relationships to its state clients in CEE rather than the past.

“We found it was most helpful for citizens to have Gazprom’s future behaviour changed,” Vestager said in 2017, according to Politico Europe.

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Kazakh tenge clobbered 5% in a day as sanctions trip up Russia Nizom Khodjayev in Almaty

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he Kazakh tenge depreciated by 4.7% against the dollar on April 10 in an unmistakeable reaction to the US sanctions assault on top oligarchs in Russia, which has caused the Russian ruble to come under the worst selling pressure since January 2016.

As the chain reaction spread in a country with imperative trade and investment links to the Russian economy, exchange offices in the Kazakh commercial capital Almaty that were selling dollars at KZT321 in the morning were demanding KZT332 by the afternoon and KZT334 by 6pm local time. No signs of panic or long lines were seen at the exchange bureaux, but the few who noticed the rapid slide of the tenge quickly rushed into safer assets.

The tenge hit its lowest level in 11 months last October 6, reaching KZT345 against the greenback, but it recovered to KZT318 in March, before weakening slightly to KZT320.29 as of April 9. The sharp downturn arrived on April 10 as Washington slapped stringent new sanctions on some of Russia’s leading companies and businessmen as well as alleging Syrian President Bashar al-Assad had attacked civilians with chemical weapons in Syria. “The rate was at 328 tenge when I arrived here, but it grew to 329.7 tenge while I was waiting my turn,” a local woman told bne IntelliNews at an Almaty exchange office.

The tenge also toppled against the euro. On the day, it closed at KZT410, compared to the KZT393 recorded at the end of April 9.

A recent poll of analysts conducted by Reuters predicted that the tenge would remain stable or strengthen against the dollar during April due to expected strong oil prices, but that it would weaken over the next 12 months overall. But the unprecedented effect of sanctions on Russia may disrupt such

x3 PER WEEK EDITOR'S PICKS

forecasts. The relatively fast depreciation rate seen on April 10 might potentially spill over into a dollar-buying spree.

The Kazakh central bank, the National Bank of Kazakhstan (NBK), on April 9 reaffirmed its expectations that inflation may slow to below the lower band of the central bank's targeted 5-7% inflation range for 2018. However, the national lender may now find itself intervening to maintain the

“The NBK’s policy rate, cut twice this year by 0.75pp in all, stands at 9.5%” exchange rate, just as it did in the last four months of 2017 – if there is a sustained unexpected devaluation, tenge-price inflation might be pushed up – contrary to its expectations.

The NBK’s policy rate, cut twice this year by 0.75pp in all, stands at 9.5%. When making the cuts, the central bankers said they were aiming to direct inflation to their target range.

They had previously stated they were striving to maintain the policy rate at 4pp above the level of inflation. The inflation rate stood at 6.6% in March and at 6.5% in February.

Those looking for a brighter outlook might rate the chances of a continual rise in oil prices counteracting the effects of any panic caused by the ruble crash. Saudi Arabia was on April 9 reportedly pushing oil producers to aim for $80/barrel.

April 10 also saw the tenge strengthen against the Russian rouble, reaching as much KZT5, as opposed to the KZT5.77 rate seen the previous day.

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bne May 2018

Russia's ruble under worst selling pressure since January 2016 bne IntelliNews

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he Russian ruble came under the worst selling pressure since January 2016 during a rout on the Russian capital markets caused by the imposition of new US sanctions on Russia’s top businessmen.

“If the ruble moves to or above Rb65/$, it will likely start to have a long-lasting negative impact on the future prospects for economic growth, investment, inflation and the overall state of financial stability in Russia,” Tikhomirov says.

The falling value of the national currency may cause the Central Bank of Russia (CBR) to pause its easing cycle, say analysts. The central bank was widely expected to cut rates again at its next meeting at the end of April, which is needed to spur faster growth, but the drop in the ruble’s value puts that decision in danger.

The sharp fall in the Russian ruble on April 10 could have more serious economic consequences if the central bank halts its easing and fails to cut rates at the April meeting.

The ruble closed trading on the Moscow Exchange (MOEX) on April 9 at RUB60.66/$1 and RUB74.7/€1, posting daily losses of 4.3% and 4.7%, respectively – the ruble posted the worst daily performance for the Russian currency since January 21, 2016 when the ruble was hit by a major decline in crude oil prices.

This time around crude prices were actually rising, with Brent futures for delivery in July this year hitting $68.5 per barrel.

However, since the government reintroduced the so-called budget rule at the start of this year, the ruble has largely delinked from oil prices and has become more sensitive to fund flows in and out of Russia as well as politics.

“The ruble's recent performance is no longer driven by macro fundamentals; it is solely the result of major shifts in the political area. The way the political situation plays out in the next few days is hard, if not impossible, to forecast. That means that the ruble – as well as the wider Russian market – will remain hostage to politicians until perceived Russiarelated risks start to come down and investors turn their attention back to fundamentals,” BSC Global Markets chief economist Vladimir Tikhomirov said in a note.

According to Tikhomirov’s calculations, the ruble’s fair value is in the band RUB57-58/$1, but he believes it will take several trading sessions before fundamental valuations begin to reassert themselves. And there is a danger that geopolitical tensions will continue to rise as tensions are also being fuelled

by US accusations that Russia is behind a chemical weapons attack in Syria on civilians and the aftermath of the Sergei Skripal poisoning saga playing out in the UK.

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“The situation is in a state of flux and the outlook for interest rates will depend in part on whether US sanctions escalate. But as things stand, the shift in market expectations – investors are no longer pricing in any interest rate cuts over the coming year – looks like an over-reaction,” Capital Economics said in a note.

The ruble has lost more than 8% of its value against the dollar since the start of the month as of April 10, which is fuelling the expectation of higher inflation and possibly even an interest rate hike – although so far the CBR has said it will not hike rates and is letting the ruble find its own level. However, the weakening of the ruble is changing expectations.

“Markets now expect no further monetary easing over the next year, having previously expected about 75bp of rate cuts as recently as last week,” reports Capital Economics.

However, as with the equity investors, Capital Economics believes that currency traders have probably over reacted and expect the exchange rate to stabilise before moving back towards the RUB60/$1 rate that is widely expected for this year, as Russia’s fundamentals have not been affected by sanctions that largely target the companies belonging to oligarch Oleg Deripaska.

“First, headline inflation, at 2.4% y/y last month, is well below the central bank’s 4% target – the risk of inflation breaching target in the near term is low,” Capital Economics said.

“Second, history suggests that sanctions-related sell-offs in the ruble tend to be temporary. For example, when sanctions were first imposed in 2014, the ruble came under significant pressure and the central bank intervened heavily in the FX market. But this only lasted for a few days. Oil prices have, over the longterm, been the main driver of the ruble, and these would point to the currency recovering some ground.”

bne May 2018

Companies & Markets I 15

PwC says "no basis" for Ukraine's $3bn PrivatBank lawsuit Sergei Kuznetsov in Kyiv

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uditor PricewaterhouseCoopers does not believe there is any merit to the $3bn lawsuit brought by Ukraine's largest commercial lender PrivatBank that was nationalised in late 2016, according to a statement published by the Ukrainian operations of PwC. "We note that PwC Ukraine has not been served with any official documentation in relation to this claim and as such cannot comment in detail," the statement reads. "We do not believe there is any basis for this action and we will if necessary defend our position vigorously."

In late March, PrivatBank filed a lawsuit in the district court of Nicosia against Cyprus-registered PwC and its Ukrainian operations. The firm is the bank’s auditor and reported in 2016 that some 22% of the bank’s loans were to parties related to its owners. However, the National Bank of Ukraine (NBU), which was forced to take the bank over at the end of the year, later found that some 98% of the loans were to related parties and the bank was effectively bankrupt with a $5.6bn hole in its balance sheet.

The claim seeks compensation of $3bn from PwC as damages for alleged losses, which, "PrivatBank asserts it has suffered as a result of serious and extensive breaches by PwC of its duties and responsibilities," primarily in auditing financial statements of the bank, the statement reads from Privatbank, which is now owned by the state.

The government nationalised Privatbank in December 2016 after it failed to fulfil a three-year recapitalisation plan. The High Court of Justice in England ruled in March that a number of companies associated with former owners, Ihor Kolomoisky and Hennadiy Boholiubov, must provide details on $1.9bn worth of transactions which Privatbank’s funds received from other persons and froze billions of dollars of their international assets as part of the ruling.

Kolomoisky and Boholiubov have filed more than 400 counter lawsuits against the NBU claiming the bank was illegally nationalized. Former NBU governor Valeriya Gontareva threatened to bring criminal charges against the two owners if they did not return the stolen deposits by August last year, but

nothing has happened.

According to PwC, the firm performed its audit of PrivatBank’s 2013-2015 financial statements in accordance with international auditing standards. However, "the audit opinion on the 2015 financial statements included a qualification in respect of related parties. transactions", the firm's statement reads.

As disclosed in the 2015 financial statements, in early 2016 PrivatBank and its major shareholders had agreed with the NBU a comprehensive restructuring plan. The day before the audit opinion on the 2015 financial statements was issued, on June 30, 2016, the NBU confirmed in a meeting with

“We do not believe there is any basis for this action and we will if necessary defend our position vigorously” PwC Ukraine that this restructuring plan was on track. PwC Ukraine was not updated as to developments regarding that restructuring plan after the 2015 financial statements were signed," according to the auditor.

PwC added that the 2016 financial statements of PrivatBank show that to date the new management has not restated any numbers relating to 2015.

In the 2016 financial statements, management disclosed that in October and November 2016 (after the opinion for 2015 was issued) loans totalling UAH137bn were restructured – reflecting new currency, interest rates, repayment terms and collateral. An impairment charge of UAH135bn was recognised against these loans at the end of 2016, PwC added.

Earlier, Petr Krumphanzl, the new chairman of the board at PrivatBank, said that filing this claim against PwC is a logical and necessary step, in light of "the great responsibility" PwC

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Russia's AFK Sistema places $1.5bn bid for Indian telecom assets as it resumes investment activity

bne May 2018

had for auditing the bank’s financial statements.

"That firm failed absolutely to identify the ongoing operation of the huge fraud within the bank over many years which resulted in virtually the entire corporate loan book of the bank being non-performing and without any or any adequate security," Krumphanzl added. "It will now be for the Cyprus court to determine the claims being brought by PrivatBank against PwC in due course."

Vadim Dumes in Paris Russian private investment conglomerate AFK Sistema put in a $1.5bn bid to acquire the remaining assets of Indian Reliance Communications (RCom), Vedomosti daily said on March 26 citing Indian The Economic Times, as it resumes investing after a corporate war with state owned oil company Rosneft ended.

A separate report showed that Sistema is also planning to acquire 51% in a textile business in the Vologda region, while a sale in the children's goods retailer Detsky Mir is also on the agenda.

The revival of investment activity from Sistema comes after a damaging legal battle with state oil company Rosneft and its subsidiary Bashneft, that was previously nationalised and re-sold to Rosneft by the state.

In March Sistema paid the last instalment of a RUB100bn ($1.76bn) to Bashneft in an out of court settlement that ended its corporate war with Rosneft.

Now Sistema is eyeing RCom's international and data storage assets for $1.2bn, in addition to $300mn debt by the Indian telecom company to Sistema. Unnamed sources estimated the value of the assets at about $2bn, Vedomosti reported, while noting that Sistema could seek to consolidate a 100% stake in the company, of which it currently controls 10% through a telecom subsidiary SSTL. As for domestic Vologda Textile investment, it reiterates Sistema's previously stated interest in light manufacturing segments, and in particular the market for uniforms and working gear, now mainly imported from China.

In the meantime the Russian Fund for Direct Investment (RDIF) still sees the possibility for an SPO of Detsky Mir children’s goods retailer or an anchor investor deal in 2018, the head of the RDIF Kirill Dmitriev told the press as cited by Reuters on March 27.

The first attempt at an SPO of Detsky Mir was sabotaged by a court ruling initiated by Rosneft in December 2017.

Sistema controls 52% in the retailer and previously said it will make another attempt to SPO Detsky Mir in March, but this was also called off.

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The stealing of depositors' money by bank owners is a problem that has plagued banking sectors across the Commonwealth of Independent States (CIS), as bne IntelliNews reported in its long read “Russia’s daylight robbery,” and both Ukraine and Russia have started the laborious job of cleaning up their banking sectors with some success.

PrivatBank has instructed global litigation firm Quinn Emanuel Urquhart & Sullivan (UK) together with Cyprus law firms Antis Triantafyllides & Sons and Chrysses Demetriades & Co. to represent it in these proceedings against PwC. Currently, the Ukrainian operation of PwC is challenging the NBU's decision to withdraw the bank auditing rights of the company in a Kyiv court after the international firm failed to identify alleged improprieties that led to a multi-billion capital shortfall at Privatbank.

The NBU has removed PwC’s local unit from the register of accounting firms authorised to audit banks because of the operation's "verification of misrepresented financial information in the financial statements of [PrivatBank]".

While banks lending to the companies connected to their owners’ industrial groups is normal in Eastern Europe, PrivatBank’s loan book was clearly an egregious abuse and little more than a scam to steal the bank’s deposits, as bne IntelliNews reported in an award-winning cover story “Privat Investigations” in November 2016 that caused a scandal in Ukraine and lead to the nationalisation of the bank a few weeks later.

Meanwhile, US-headquartered forensic firm Kroll has revealed the non-conformity of an audit report of the Ukrainian operations of PwC with the real financial situation at PrivatBank, according to the NBU's statement published in January.

"The secret structure [in PrivatBank] carried out numerous operations of bank fraud and fabrication of reports by former management and directors of the bank under the leadership of former shareholders and in favour of former shareholders and a group of affiliated persons," the regulator's statement reads.

At the same time, according to Kroll, PwC's conclusions on PrivatBank's financial statements during 2007-2014 contained positive conclusions, and in 2015, the auditor provided a conditional-positive conclusion.

bne May 2018

Companies & Markets I 17

Croatia's Agrokor strikes deal with creditors Carmen Simion in Bucharest

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epresentatives of the interim creditors' council of Croatia’s heavily indebted food and retail giant Agrokor, the suppliers’ association and Russian lender VTB have signed an agreement in principle on the key elements of the debt settlement deal, Agrokor said on April 10.

One of the largest employers in the region, Agrokor is Croatia’s largest company and undergoing restructuring after a debt crisis pushed it to the brink of collapse last year. An audit report has shown that the Agrokor Group’s net loss in 2016 amounted to HRK11bn (€1.46bn), while the company’s liabilities amounted to HRK56.3bn.

The agreement represents a framework upon which the actual text of the settlement will be drafted, based on filed claims and their legal status, the retail giant added.

According to Prime Minister Andrej Plenkovic, Croatia has achieved the main objective of preventing an economic and financial crisis, which would have affected not only Agrokor, but the entire Croatian economy, suppliers, jobs and the state budget, a government statement said.

“All that was prevented with a quality and structured process, thanks to the law on the emergency procedure administration and thanks to the good will and responsibility of all stakeholders in the process,” the prime minister said.

Agrokor’s emergency administrator has proposed to the Zagreb commercial court to prolong the extraordinary administration procedure for another three months, since creditors requite additional time to complete the text of the settlement.

“We are proud that we came to the last phase of this very demanding and difficult process, involving almost 6,000 creditors, with over HRK57bn of claims. At the same time, the Agrokor system is stabilised, all operating companies are doing well and their operating profit increased, salaries are paid to all employees as well as current expenditures,” said Irena Weber, the deputy emergency administrator.

Also on April 10, Agrokor founder Ivica Todoric appeared at a London court for a hearing on Croatia’s extradition request.

The court is expected to announce a decision in 10 days' time.

Todoric has harshly criticised the legislation on the special administration at Agrokor – the so-called Lex Agrokor – and

“Agrokor is Croatia’s largest company and undergoing restructuring after a debt crisis pushed it to the brink of collapse last year” accused government officials of destroying the company he had built up. Lex Agrokor, which came into force in April 2017, was an emergency law on assistance to systemically important companies that cannot pay their debts, applying to companies with liabilities of more than €1bn that employ over 5,000 people. Todoric has claimed that by adopting this law, Croatia violated several provisions and fundamental principles of EU law.

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Serbian government's takeover of Nis airport sparks local fury bne IntelliNews

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bout 1,000 citizens of Nis, the largest town in southern Serbia, staged a one-hour protest against the transfer of the ownership of Konstantin Veliki Airport from the local government to the central government on April 10.

Nis’s airport was famous until 2015 as an airport without travellers. However, regular air traffic resumed in June 2015 after a 19-month break when Hungarian low-cost carrier Wizz Air started operating flights from Nis to Basel. The government now says it wants to further develop the airport, but its decision to take it over has proved controversial.

The protest was held on the day when the local assembly was supposed to back the March 30 decision of the Nis government to make the transfer. However, the rally, as well as loud resistance and criticisms from some of the local population, forced the assembly to postpone the vote for an undefined period of time, regional broadcaster N1 reported.

The number of protesters is small compared to the total population of the city, which numbers about 200,000 people.

Most of them (like most Serbian citizens) do not know what kind of change the transfer of the ownership to the central government would bring about in practice. However, for some of them it is a matter of decentralisation and “not giving anything else to Belgrade”.

Representatives and sympathisers of the National Coalition for Decentralisation also participated in the April 10 protest.

Speaking at the rally, representative of the coalition Milan Jovanovic said that Nis has been fighting against centralisation and for the town’s airport since 1986.

“When the town took over the airport in 2000 ... a tree was growing in the middle of the runway because the airport was bombed and destroyed [in the Nato bombing in 1999].

Nis’ priorities are to get donations and renew the airport,” Jovanovic told gathered citizens, N1 reported.

However, officials argue that the airport in Nis is not able to

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make any development move or investment on its own yet and badly needs help from the general government’s pocket. So far, it operates mainly thanks to donations from the general government budget. According to Minister of Construction, Transport and Infrastructure Zorana Mihajlovic, Serbia’s government has poured €3.6mn into the airport within the last three years, while Nis’ government invested an additional €2mn through subsidies, thanks to which the airport served 331,000 passengers last year. It also recorded net profit of RSD28.43mn (€263,941) in 2016.

Despite officials’ efforts to explain their decision, some Nis citizens announced at the April 10 protest that they don’t plan to give up their resistance to the transfer of the airport’s property.

“Today’s protest is not an end but the beginning of fight for Nis’s airport… They will try to take the airport but we have to be ready to get out to the streets every moment,” a protestor, Rastislav Dinic, said, N1 reported.

The protest was initiated by an individual, Milos Boskovic, whose main message to the rally was that only citizens of Nis can decide the airport’s destiny – not central government officials or even the president of the country.

While the council vote was postponed, protesters “voted” by hanging up pieces of blue paper with the word “against” written on them, N1 reported.

“They decided not to vote when they saw that their party’s dictate is not in accordance with decisions of the citizens of Nis,” Boskovic said, holding up a blue paper.

The issue has also become an emotive one on the other side of the debate. The Nis assembly told N1 it had canceled its session that day "because of the large amount of misinformation which has been told to the public by individuals and various interest groups, the credibility of the town of Nis has been destroyed”.

bne May 2018

Companies & Markets I 19

bne:Funds

Albania plans to float state-owned power distributor by end-year Valentina Dimitrievska in Skopje

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lbanian Prime Minister Edi Rama said on March 26 that the government plans to float state-owned electricity distribution company OSHEE on the stock exchange by the end of 2018, according to a government statement.

If the deal goes ahead, it will be the first initial public offering (IPO) of shares in a major state-owned company in Albania.

The Albanian Securities Exchange launched its operations as the country’s first privately-owned stock exchange at the end of February. At the time, only three banks, two with Albanian capital and shareholders, were listed on the exchange.

“We have launched work on an IPO and hopefully we will be ready to provide Albanian citizens the opportunity to participate as shareholders in the power distribution company by the end of this year,” Rama said during the presentation of the 2030 National Energy Strategy.

“Our ambition is for citizens to massively participate as shareholders so both the company and citizens will benefit,” Rama said. The Albanian prime minister added that it is necessary to take OSHEE to a “whole new level”.

Rama pointed out that the harmonisation of the Albanian internal energy market market with the regional and the European market is of great importance.

“This is not an easy process, a process which poses many challenges, but yet indispensable,” he said.

“To this end, advancing the liberalisation of the domestic market by ensuring full competition, high transparency and the encouragement of solar energy production or wind energy are sufficiently well described in the strategic document, both in terms of potential and the steps to be taken to use this potential,” Rama underlined.

The first bourse in Albania, the Tirana Stock Exchange (TSE), was opened in 1996 but it never became fully operational.

Initially, it was set up as a department of the central bank of Albania and later became a joint stock company. There was no trading in securities on the TSE. However, there are hopes that the launch of the new Albanian Securities Exchange will finally create a functioning market.

Claiming credit for the changes since his first government came to power in 2013, Rama pointed out that a few years ago the energy sector had been facing a complete breakdown, particularly at OSHEE, which was the main threat to the country’s economy. However, due to the reforms and measures taken by his government the distribution company went through a dramatic process of change and now is a profitable company.

“It might be enough to remind you that in order to maintain the power distribution system operational and to provide electricity supply to consumers, the state budget allocated an average of €150mn in subsidies annually to make up for the massive electricity theft and the grid losses,” Rama recalled.

The rate of electricity losses now has been cut from 50% to just 10%. Albania launched a tough anti-theft campaign in 2014 with prison sentences of up to three years for those found guilty of stealing power.

Among the wider plans to develop the energy sector, Albania also aims to fully liberalise its electricity segment by 2025.

Rama said that the government is convinced that liberalisation will “lead to exceptional improvements in all aspects of the power sector activity”.

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bne:FinTech

The Russian ICO frenzy continues bne IntelliNews

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he Russian initial coin offering (ICO) frenzy continued in 2017. Last year saw more than 130 ICOs and preICOs conducted by companies with Russian roots, some 10% of the global numbers, according to data collected

by ICObench and East-West Digital News (EWDN), with fundraising successes announced every week in a variety of fields, reports EWDN. In the latest development, BioCoin, which touts itself as “the first eco-cryptocurrency and international Blockchain-based loyalty platform,” announced earlier this week that it raised the equivalent of $16mn through its ICO, overreaching its initial target of $15mn.

The token sale, which ended on February 18, was held in partnership with Voskhod, which in September last year became the first authorised cryptocurrency platform in Russia.

“socially responsible businesses” across the world. Working together, these actors will contribute to accelerate “the adoption of organic agriculture, sustainable development and responsible consumption at the global scale,” reads Biocoin’s one-pager.

The initiative targets craftsmen, farmers, e-commerce sites, eco-entrepreneurs, associations, shops, restaurants, manufacturers and producers, among others.

The other Russian ICO successes announced recently include: Faceter, a blockchain project that aims to make video surveillance systems affordable to everyone. This startup claims to have raised the equivalent of more than $10mn in the first 20 seconds of its pre-ICO and reached $16mn as of February 22.

BioCoin was launched a mere six months ago by LavkaLavka, a network of small and mid-sized farms across Russia that says it offers fresh, natural, seasonal food. Under the slogan “Support the green economy” the BioCoin project consists of developing an “ecosystem of local communities” and

Play2live, an eSports platform that plans to deploy blockchain-based decentralised P2P networks to increase Internet speed and create “a new eSports economy”. Its founder Alexey Budyrko, a Belarusian serial entrepreneur, says his company attracted the equivalent of $16mn during the 12 days of its pre-ICO, which ended on February 6.

ICOs from CEE companies in 2017: Country Ranking

Simdaq, a community trading platform, claims to have raised the equivalent of $5mn in just a day in late January, reaching its hard cap target. The project aims to “democratise crypto trading” by providing a set of tools for trading strategies, including training on historical data, a framework to develop trading robots, and a space for sharing experience with others.

VRT World, a startup that aims to gather virtual reality content developers, consumers and related businesses on a global platform, announced a more modest record. Its token pre-sale brought in “just” $721,000 in late December and early January – but the company aims to raise as much as $16mn in the public phase of its ICO in March.

Number of identified ICOs and pre-ICOs conducted by companies from CEE or with CEE roots, based on company registration or factual origin.

SourceS: ICOBENCH, EWDN, company information

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International traction These and other companies with Russian roots usually manage

bne May 2018

to attract investors far beyond Russia. In the case of Play2live, “30% of the money came from China, about 20% from Vietnam, 15% came from South Korea, 8% came from the US,” Budyrko said, “while just about 10% came from Russia.”

As for VRT World’s investors, they came from no fewer than 21 countries, the company’s CEO Konstantin Negachev confirmed in an exchange with EWDN. AB-Chain, whose ad network platform – launched just two months ago – uses cryptocurrencies and smart contracts, had its latest pre-sale investor come from China.

Dbrain, a Russian-Belarusian blockchain startup that offers to “collectively build full-stack AI apps,” secured a $2.5mn pre-ICO seed round at the beginning of the year. The funding came from funds based in Moscow, New York, Singapore and Sydney, as well as from Russian business angels Eduard Gurinovich (CarPrice, CarMoney and mytime ) and Leo Batalov (DLA Piper), Dbrain CMO Ivan Gorshunov told EWDN. Legitimate projects, marketing fluff and unscrupulous scams In Russia as elsewhere, not all fundraising announcements correspond to reality. “The market, still largely unregulated, is infected by fraudulent ventures or simply dubious PR strategies. Some announcements just aim to create some

Companies & Markets I 21 buzz and attract naive investors,” notes a Moscow blockchain entrepreneur who wished to remain unnamed.

“That kind of thing could kill the market,” he fears, while conceding that there’s a number of fully legitimate projects, too, on the scene.

And on a completely different scale, Telegram – whose Russian founder Pavel Durov left his country a few years ago – is discreetly conducting a second private token sale, having raised

“Last year saw more than 130 ICOs and pre-ICOs conducted by companies with Russian roots” $850mn from 81 investors (including Silicon Valley funds Benchmark and Sequoia Capital) during the first one.

Telegram is already going down in history as the largest ICO to date, breaking the record set by Tezos last year ($232mn).

This giant ICO is controversial, too, with skeptics seeing it as just marketing fluff, while enthusiasts believe in Durov’s plans to create a new type of blockchain.

bne:FX

Trump’s trade war brinksmanship pushes Turkish lira to fresh record low bne IntelliNews

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he Turkish lira (TRY) tested a new record low of 4.0368 against the dollar during early trading hours of March 23 as anxiety over Donald Trump triggering a US-China trade war combined with existing concerns over worsening economic imbalances in Turkey’s economy.

The TRY also tested a record low of 4.9757 against the euro.

However, by close of trade on March 23 it had recovered to 3.9605 against the dollar and 4.8950 to the euro.

March 23 also saw the cost of insuring exposure to Turkish

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debt grow to very slightly short of the three-and-a-half month highs recorded earlier. Five-year credit default swaps (CDS) for Turkey rose 4 basis points from March 22’s close to 200 bps as Turkish assets sold off across the board, Reuters reported.

This was just shy of the 201 bps reached on March 20.

introduction of major tariffs against Beijing which has unsettled markets. The US president’s nomination for national security advisor of uber-hawk John Bolton, has added to worries over geopolitical tensions that could hurt demand for risky assets.

The TRY’s drop to an all-time low seen during Asian trading hours was probably due to stop-loss orders from Japanese retail investors holding TRY trades against the yen, Koji Fukaya, CEO of FPG Securities in Tokyo, told Bloomberg.

The Goldilocks scenario for emerging markets of synchronised global growth is under serious threat from Trump’s protectionist policies, Piotr Matys, an emerging markets currency strate-

Cemil Ertem, a top economic advisor to Turkish President Recep Tayyip Erdogan, said early on March 23 during a live broadcast on state-run TV channel TRTHaber that fluctuations in the TRY to more than 3.85 against the dollar were speculative and pushing the central bank for rate hikes to deal with temporary volatility in the currency would not be proper.

“The central bank has in the past six years employed rate hikes when the lira depreciated by around 10% over a three-month period”

The central bank has in the past six years employed rate hikes when the lira depreciated by around 10% over a three-month period, William Jackson, an economist at Capital Economics, noted, adding that he would not expect the regulator to intervene before the 4.25 level.

gist at Rabobank in London, told Bloomberg. “Escalated risk aversion is likely to further undermine already weak market sentiment toward the Turkish lira,” he said.

The annual compound yield on Turkey’s 10-year benchmark domestic bonds reached 12.73% from 12.42% at closing prices on March 22 while the benchmark 2-year bond yields rose to 14% from 13.81%.

Looking at the likely horizon for the TRY, it is not just Trump’s

WEEKLY NEWSPAPER

Stubborn double-digit inflation, a widening and big current account deficit, Turkey’s vulnerability to US Fed rate hikes, Turkish central bank reluctance to employ monetary tightening – with Erdogan in fact lately continuing to take an unorthodox path in calling for loosening – and Turkey’s high reliance on hot inflows of foreign capital are discomfiting investors.

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 March 2, 2018

www.intellinews.com

Putin promises guns and butter in state of the nation speech Ben Aris in Berlin

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Putin promised to increase the size of the economy by 50% in his next term of office.

Russian President Vladimir Putin gave one of the most aggressive speeches of his career on March 1, promising the population a lot more “butter” and explicitly targeting the USA with “guns” if Washington continued to bully his country with sanctions and threaten it with missiles.

case for the likely policies that will dominate his next six-year presidential term. Russia goes to the polls on March 18 in an election that Putin is expected to win without a significant challenge.

The speech was widely anticipated as the show-

See page 2

But no-one was expecting the multimedia presen-

Slaying of journalist sparks Slovak coalition crisis bne IntelliNews Pressure is mounting on Slovak Prime Minister Robert Fico after the murder of journalist Jan Kuciak, whose posthumously published article alleged mafia infiltration of his government.

Bela Bugar, the head of the junior coalition party Most-Hid, which holds three ministries in

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Content: 2 Top Stories 6 The Regions This Week 10 Chart 12 Central Europe 14 Southeast Europe 17 Eastern Europe 22 Eurasia 25 Opinion 28 Lists24 Lists

bne:Newspaper

Interior Minister Robert Kalinak has been attacked for his alleged links to controversial businessmen.

Fico’s government, called for the resignation of Interior Minister Robert Kalinak, who has been under fire over a separate tax fraud scandal, the Basternak affair. Most-Hid argues only a new interior minister can investigate Kuciak’s See page 4

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RBI offloads Polish business to BNP Paribas bne IntelliNews

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ustrian banking group Raiffeisen Bank International (RBI) has sold its Polish business Raiffeisen Polbank to French bank BNP Paribas for €775mn or 0.95% of the book value, RBI said on April 10.

The deal has been long in the making as the environment of low-interest rates and exposure to Swiss franc-denominated mortgages put RBI in a disadvantageous selling position. The half a million or so mortgages in the Swiss currency became

The deal will bulk up BNP Paribas’ business in Poland to the sixth largest on the competitive Polish market with nearly PLN113bn (€27bn) in assets. For RBI, it is a long-awaited exit from a difficult market.

“The deal will bulk up BNP Paribas’ business in Poland to the sixth largest”

“This transaction will strengthen our position amongst the largest banks in Poland bringing us much closer to the top five. We are glad to become an active participant in the consolidation of the Polish banking sector,” Przemek Gdanski, CEO of BNP Paribas in Poland, said in a statement.

Meanwhile, RBI CEO Johann Strobl commented that “This transaction represents a significant step towards optimising our group. By gaining capital, we create additional scope for strengthening our market position in relevant markets.”

BNP Paribas is not acquiring RBI’s entire portfolio in Poland.

The takeover will cover Raiffeisen Polbank’s corporate, retail, and private banking business without problematic items such as mortgages denominated in the Swiss franc or the portfolio of wind power that it had financed.

a risk after the zloty weakened against the franc in 2015 causing mortgage repayments to shoot up.

Poland has long hinted at reducing the banking system’s exposure to these loans, which in itself created uncertainty on the market and made the transaction difficult.

The Austrian bank concurrently tried listing 15% of the Raiffeisen Polbank's shares on the Warsaw Stock Exchange but that also proved a hard sell with potential investors.

The deal is expected to be completed in the fourth quarter of 2018, subject to regulatory approvals.

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bne:Tech

Sberbank sets up trade-boosting website Ben Aris in Moscow

Arsen Dumikyan, Executive Director at Sberbank

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“It’s simple economics. Trade is good for countries so the more you can encourage it – the easier you make it to do – the better off everyone is,” says Dumikyan enthusiastically.

wo men are playing ping pong next to the floor to ceiling glass windows on the atrium. The walls are a vivid burnt ochre with metre-high lettered lables on them and we wend our way through a transparent maze of curtained glass walled meeting rooms and soft chairs with high blinds between them so you can lounge at your computer while you work.

“I don't think anyone in this building is a banker,” says Arsen Dumikyan, the executive director and product owner of BestofPartners.com, Sberbank's new trade promotion platform.

Maybe all this has become a bit of a cliché in the business world. “It looks like Google’s offices,” remarks my colleague as we pass the kitchen that seems to be the busiest room on our 15th level floor.

But of course it is not. It is the work space of the Soviet era people’s saving bank, Sberbank, the state-owned retail banking king of Russia. This is the headquarters of Sberbank Agile just off Kutzovsky prospect, one of Moscow's huge “spoke roads,” the bank’s hub for technology and innovation as it sets out on the self-assigned task of bootstrapping Russia into the 21st century.

Whatever it is, it certainly doesn't look like a bank.

“We can do something useful for Russia,” says Dumikyan, a young man in a deep blue causal jacket sitting on the high stools that surround a high tech work station.

He reaches out and clicks a button his laptop, and the big screen on the wall by his head leaps into life.

Dumikyan is leading a project sponsored by Sberbank to create a cross border trade community. Sberbank is sponsoring this project – Best of Partners (BBP) – not investing into it, as there is no monetarisation angle and the bank’s logo is barely visible on the site. The idea is simple: to bring together people working in cross border trade and make it easy for them to connect.

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When pressed he admits that eventually Sberbank could make some money off the site by offering trade financing services, and as Russia’s largest bank about half any trade deals that need banking services will end up with Sberbank anyway, but that is not the point.

“Sberbank is a leader in most financial products and we know how to grow a market,” says Dumikyan, who is not a banker and came to Sberbank from Inbev, one of the world’s leading beer producers. “We are only trying to grow the pie now and a bigger pie will feed more people. Even if half the deals go to our competition we will still be happy as there will be more business for everyone.”

The site went live in November last year and got 300,000 visits in just the first months. Currently it has just over 9,000

“Sberbank is a leader in most financial products and we know how to grow a market” registered users that have made 5660 offers (the system doesn't track the number of deals that are actually completed).

And it is a mixed bag of participants. While you might expect the site to target big business, it is actually a tool for anyone in logistics and trade to use.

“We have a wide variety of users at the moment – everything from a photographer who lives near a port and will go down there to take a picture of your goods when they arrive as proof of delivery to big engineering firms in Germany looking to sell

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equipment in Russia and China,” says Dumikyan, who also set up Sberbank’s SME online portal that cut the time needed to open an account online from days to 5 minutes.

The site has no target country, but as it offers English, Chinese and Russian language translation for all its listings the

“We even have some Georgian companies making business with Ukraine that have nothing to do with Russia” majority of participants remain Russian for the meantime, although people from other counties have signed up too.

“We even have some Georgian companies making business with Ukraine that have nothing to do with Russia,” says Dumikyan, who built and released the BBP site in only two months. “That was the idea: to create a cross border tool that anyone anywhere can use.”

Dumikyan says that he will build on more functionality as the site grows in popularity – and if you type in “VED” in Cyrillic, the Russian acronym for trade and logistics, it already comes up at the top of the search list on the first page.

“Currently you can filter the results by, say, country of origin or type of services, but as it gets bigger it will add options like the value of the deal so that big business can find other similar businesses,” says Dumikyan.

One of the ways the site is already being used is by existing companies that are trying to solve specific problems. A logistics manager has a smallish, but important machine part that is

Companies & Markets I 25 stuck in Beijing and needs to get to Moscow to fix a broken compressor? Then Sergei Yugutov is your man. He offers a truck delivery service that will ship anything from the Chinese capital to the Russian capital starting from 30kg and costing from $1000.

Or there is Almig Industrial Equipment based in Germany, a Mittlestand maker of compressors. The contact there is Anatoly Tabakov and his name suggests that he is an ethnic Russian.

Although the firm is clearly German, all the marketing materials are in Russian. He has had 452 views and 4 offers so far.

And “I will pay your customs duties” is an extremely large category with a lot of people providing that service who have had a lot offers. For many logistics service companies the ability to hire someone to stand in line and deal with the paperwork that comes with bringing goods over the Russian border is clearly very appealing.

The rest is what is becoming standard online marketing.

Dumikyan has also set up a YouTube channel where they make short videos explaining their service.

“We covered all the obvious topics but we also look at the frequency of incoming search requests and then make videos to match the most popular,” says Dumikyan. “These videos are also the most popular in their category.”

The whole thing is produced in-house and Dumikyan has four developers, who between them speak Russian, English and two are fluent Chinese speakers. Dumikyan is trying very hard not to dictate to his audience. Before they start on each next stage of development he holds a vote on the company’s Facebook page to allow the users to say what they want to see improved next.

“We are a customer driven service. We don't make the decisions on where to go next. The users do.”

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Special Report: CEE Real Estate

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Take up of office space in Moscow nearly doubles in 1Q18

BRICKS & MORTAR:

Ben Aris in Berlin

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he take-up of new office space in Moscow nearly doubled (up 89%) in the first quarter of this year as Russia’s real estate market comes back to life on the back of the ongoing economic recovery, according to a report compiled by real estate consultant JLL. Some 312,000 square meters (sqm) of new space was taken up by clients in the first three months of this year – the highest volume of take-up since 2013 JLL said.

Trading companies surpassed the traditional leaders – banks and finance companies – in terms of the kind of client taking new office space and accounting for just over a quarter (28%) of the deals. In second place were manufacturing companies, with 20%.

Among the largest deals in the first quarter of 2018 were the X5 Retail Group purchase of the Oasis Business Centre (9,700 sqm), Stroytransgaz in Vereis-

Technology’s lease in the VEB Arena. If you include transactions that are still at the negotiation stage, we expect the overall 2018 take-up at about 1.4m sqm,”

"The take up of new office space nearly doubled in the first quarter of this year" kaya Plaza BC (8,800 sqm), Skylight BC (4,500 sqm), and Mistral in Poklonka Place BC (3,700 sqm).

“The declining vacancy [rates] and an expected start of rental growth this year support interest in relocations.

The second quarter has already started with the largest deals of the year such as oil distribution company Transneft

said Elizaveta Golysheva, Head of Office Agency, JLL, Russia & CIS. Russia’s economy is growing again, albeit at a very modest pace of 1.5%-1.8% but at a corporate level the best companies are doing very well as the process of consolidation continues, caused by tightening demand that favours large companies. And as the big companies

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Vacancy rates in Moscow’s retail stores are falling, but more slowly than the other categories Ben Aris in Berlin The vacancy rates in Moscow’s retail stores are following the general trend of improvement in the real estate sector, but not as fast as office and warehouses. Vacancy rates shrank in the first quarter of this year returning to the same level last seen at the start of 2017, says real estate consultant JLL. The vacancy rate on the main Moscow high streets declined to 8.4% in the first quarter of 2018, down by 0.6ppt q/q on the back of rising real income. Other surveys like Sberbank’s Ivanov survey suggest that Russians are starting to make bigger ticket purchases such as cars as well as trading up again from cheap Russian-made products to more expensive imported goods.

The strongest growth and most attractive locations were on the northern side of Moscow Garden Ring road – from Mayakovskaya metro station to Kurskaya metro station – that encircles the capital’s central business district, where vacancy rates were down 6.9pp to 13.2%, according to JLL. Beauty salons and small-format supermarkets were the most popular types of new tenants. Overall the vacancy rate on the Garden Ring fell from 11.7% to 9.5% over the first quarter of this year.

The other location that saw a conspicuous improvement was along Moscow's main thoroughfare and most expensive shopping street Tversakaya and the nearby Maroseyka street where vacancy was declining by 2.5pp and 2.2pp, to 5.8% and 10.0%, respectively.

“The main trend on the Moscow high street retail market is a rising share of food service tenants (to 33.5% in the first quarter of 2018 ), while the presence of fashion operators is declining. The share of fashion and footwear stores has been gradually decreasing over the past years, from 15% in 2015 to 10.5% in March 2018,” says Yulia Nazarova, Head of Street Retail in Moscow, JLL. On the demand side, restaurants and cafés remained the leaders on the Moscow street retail market, with 46% of leasing inquiries in the first quarter of 2018.

Fashion operators traditionally were the second most active with 17%, followed by supermarkets and grocery stores (9% of total inquiries), reported JLL. Overall vacancy rate dynamics

Source: JLL

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grow their demand for new space is also growing.

Vacancy rates falling The vacancy rate in Moscow continued to decline, reaching 13.1% at the end of the first quarter, down 0.7 ppt q/q and 2 ppt y/y, reports JLL. “Low completions and rising demand stimulate the vacancy rate reduction in all quality office segments except Class B-, where the vacancy rate has increased by 0.1 ppt Q/q and by 1.5 ppt y/y to 12.3%,” says JLL. In Class A the vacancy rate has dropped to 14% (by 2.4 ppt q/q and 3.6 ppt y/y).

In Class B+ the vacancy has reached the market average, 13.1% (down by 0.4 ppt Q/q and 3.2 ppt y/y).

The most activity has been seen in the capital’s most prestigious suburb of Moscow City, the “Canary Wharf” of Russia. There the vacancy rate declined by 1.1 ppt in the first quarter of 2018, which saw the largest annual decreases: the vacancy rate in Moscow City was down 7.5 ppt y/y to its lowest level since 2012 of 12.9% due to the activity of state banks and public authorities.

Only two years ago the vacancy rate in Moscow City was so high some landlords were turning their prime office space into backpacker hostels to make a little money.

Completions of new buildings low Falling vacancy rates have not yet spurred new construction and the falling rates is supported by the low supply of new buildings coming onto the market.

Supply of high quality real estate objects coming onto the market in the first quarter was still lagging well behind demand, reports JLL. Overall completions in the first quarter amounted to a mere 37,000 sqm and no new Class A buildings at all. All of the new office centres coming online were Class B+. Of these only one new business centre was in the central business district with the bulk of the others (nine out of ten) located outside of the third transport ring, many of them clustered around the Vnukovo airport and the

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Park of Legends multifunctional complex or part of the Faces residential complex near the CSKA metro station.

JLL expects another 213,000sqm to come online in the rest of this year which would mean the overall supply of new offices will be down 39% in 2018 y/y to a new record low, which will also support prices and drive vacancy rates down even further.

Sector recovering The trends in Moscow’s office market are mirrored by similar recoveries in other sectors of the real estate business.

Russia’s economic recovery is reach-

ing into the regions, where a number of new shopping mall projects have started – mostly in the 11 cities with more than one million inhabitants.

Almost half (48%, or 225,000 sq m) of the new shopping mall commissioning is happening in the Russian regions in 2018, real estate consultancy CBRE said.

High end residential property prices have also been climbing as wealthy Russians return home in fear of sanctions or arrest. Wealthy Russians living abroad increased the bids for premium class real estate by 21% in the first quarter of 2018.

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At the same time Russians exported just over $1bn for buying real estate abroad in 2017, up a quarter y/y as the middle classes and moderate well off look for a safe haven for their life savings.

Germany has been an especially popular destination.

But the most spectacular change has been in the warehousing subsector where sales and rentals of warehouses soared by 300% in the first quarter of this year. In addition to the general economic recovery, warehousing has received an extra boost from the explosive growth of e-commerce in Russia.

The Russian Central Bank has been publishing data on cross-border property purchases since 2009. Russian investment into overseas property grew by a quarter (25%) each year between 2009 and 2013. But the amount spent on international real estate rose 30% in the fourth quarter of last year, compared to the same period in 2016, up from $249mn to $324mn, the bank said.

Russian foreign property investments grow for the first time in four years BRICKS & MORTAR:

George Kachmazov managing partner of Tranio

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ussians spent €1.1bn on international real estate in 2017, up by a quarter (26%) y/y, and the volume of cross-border transfers topped $870mn, according to the Central Bank of Russia (CBR), reports international real estate agency Tranio.

“This means the volume of Russian investment in foreign real estate grew for the first time in four years, though it is still half the total of its peak in 2013 ($2.2bn),” says Svetlana Larionova, who heads up the Russian real estate division at Tranio.

The Cypriot banking crisis of 2012-2013 showed that most of the capital flight from Russia is not oligarch cash looking for a safe haven, but largely made up by Russia’s middle class looking for a safe home for their life savings as they still don’t trust the domestic banking sector.

Since the Cypriot banking sector blew up in those years, this money – many billions of dollars – has been looking for a new home and many Russians have decided to park their spare cash in real estate rather than bank deposits. The wall of cash has been so large that many international real estate markets have been affected: a large part of the rise in Germany’s property market has been ascribed to Russian purchases of apartments and commercial property in recent years.

The total amount of money sent abroad

by Russian nationals in 2017 was $31.3bn, which exceeds the 2016 figure ($24.8bn) by 26%. The most popular destinations to send funds to were Switzerland, the UK,

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Russian spending on international real estate, $ million

many, Spain, the UK and the US,” says George Kachmazov, Tranio’s managing partner.

As for property types, the most popular category is still apartments, which can be rented, whereas wealthier Russians are looking for commercial properties such as shopping malls and hotels, where the investment has a ticket size of $1mn-$5mn.

Source: Central Bank of the Russian Federation

Latvia and the US, according to CBR data.

In keeping with the trends from recent years, foreign currency deposit rates continue to decline.

“So Russian nationals are looking more actively for reliable alternatives for

capital maintenance and accumulation.

We believe that the volume of capital outflow from Russia for property transactions will continue to rise in 2018, largely through investment purchases.

The main investment flow will be aimed at the traditional market leaders: Ger-

“From our experience, 90% of investors buy property to lease it, while the other 10% consider more complex value added projects. The main motive is security: everybody wants to maintain their capital, guarantee a comfortable retirement for themselves and subsequently pass the property on to their children,” adds Kachmazov.

BRICKS & MORTAR:

Separating noise from reality in Russia’s real estate sector Tim Millard of JLL in Moscow

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Tim Millard, Regional Director, Head of Advisory Group, JLL

t is like 2014 all over again…

I have written three draft opinions in recent days – only for them to be overtaken by events. In the deluge of news and volatility I have but one message:

• Russia has the biggest population in Europe and has the highest per capita spending power and household wealth amongst developing nations

DON’T PANIC

• We have the sixth lowest level of national debt and sixth highest financial reserves in the world

I believe markets have overshot and will correct. We are already seeing the Russian stock market rise as investors see a buying opportunity. With so much noise it is worth remembering a few facts (with a nod to Macro-Advisory and Chris Weafer for some of the stats):

• Russia is the biggest supplier of extracted materials including oil and gas (although less aluminum than a week ago!)

• Russia has adapted to previous sanctions and is now expert at doing so

• Russia benefits from a higher oil price with the budget based on $41 per barrel

• There is political stability and the President is genuinely popular

• With the current oil price there will be a healthy budget surplus

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• More uncertainty is likely to drive the oil price higher, which would benefit the Russian economy • Inflation is historically low and sustainable • Despite recent ructions in the Forex market interest rates are likely to continue to fall later this year, making debt more affordable • GDP growth is accelerating, although it may now be under pressure for 2018.

For the real estate market the risks are less immediate. The occupational markets are now largely ruble denominated so ruble volatility is less of a problem.

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Geopolitical issues are unlikely to have much effect on Russian consumers.

Real wages will continue to rise as will consumer spending – and this will support the retail and warehouse sectors where supply is already starting to get tight.

Sanctioned business and government entities are not significant in the Russian office market, often being owneroccupiers. With economic growth, a rising oil price and a falling interest

“Sanctioned business and government entities are not significant in the Russian office market” rate business activity will also continue to pick up speed. Market conditions are positive for the office sector.

However, investment sentiment is likely to be affected by the noise and this may reduce capital markets transaction volumes.

Conversely, as Russian investors have fewer alternatives available to them internationally they may buy more at home.

Ignore the noise – play the fundamentals. The Russian market remains very good value.

Disclaimer – since writing this there is a real risk of an escalation in the standoff between the US and Russia in Syria – if the situation degenerates into a conflict all bets are off.

Tim Millard has been working in real estate market in Russia since 2003 and is director of Research, Strategic Consulting, Valuations and Hotels & Hospitality Group for JLL.

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“This is the first area that began modern development after the fall of communism in Romania – partly because of its positioning near Primaverii, Herastrau and Aviatieie residential neighbourhoods, well known since before 1989 as high-end areas where most of the elites of the previous regime lived and where most of the former embassies and diplomatic missions had headquarters,” Ponomarenco tells bne IntelliNews.

Infrastructure investments create new real estate hubs in Bucharest BRICKS & MORTAR:

Clare Nuttal in Bucharest

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ince before the collapse of communism, northern Bucharest has been the most popular area of the Romanian capital for developers, but as the city becomes increasingly congested, rival hubs are springing up in districts opened up by the construction of new metro lines and other infrastructure investments.

Demand for new office, retail and residential space is growing fast as Romania’s economy booms – it outstripped China with 6.9% growth last year and while this is set to moderate, Romania is forecast by the International Monetary Fund to expand by a still healthy 5.1% this year.

Leading the charge for quality office space are the multinationals that have flocked to the city in recent years.

Aside from those in the fast growing IT sector, there are also a mixed bag including Amazon, fast food chain Taco Bell, packaging company DS Smith and fashion retailer Forever 21, says Despina Ponomarenco, executive director of

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the Romanian Real Estate Club which represents developers. She says no less than 200 large international companies entered Romania in the last two years alone, and anticipates that “more are expected to follow into a very dynamic local real estate market”.

Northern metropolitan Bucharest remains the prime location for developers, with no less than €1bn worth of investments currently being made in the area, according to the Romanian Real Estate Club. These include office projects by NEPI Rockcastle, One United and

“Another reason for which the area was preferred by the investors was the extended surface of free land, accessible at low prices after the 1990s, suitable for large office and retail developments.”

New hubs emerge While the northern metropolitan area is “still preferred by AAA tenants”, according to Ponomarenco, several new hubs have emerged in recent years. Verdant north Bucharest is not currently well served by the country’s metro lines, meaning streets within the district and (even more so) those leading to and from the city centre, tend to be highly congested in rush hour. This has led to the emergence of new hubs typically close to newly opened – or imminent – transport infrastructure.

The Mark emerges among ramshackle housing near Bucharest's main railway station. The class A office building is under construction on Uranus Boulevard, which was completed in 2014.

“Large institutional investors have not made major shifts in marking their areas of interest. NEPI and Globalworth, the largest asset owners in Romania, are mainly active in the northern part of Bucharest,” says Ponomarenco. How-

"Demand for new office, retail and residential space is growing fast as Romania’s economy booms" Skanska, numerous residential projects adding up to over 5,000 apartments, as well as the new Metropolitan Hospital and a Courtyard by Marriott hotel.

ever, she adds that, “Shifts have been indeed registered in area preferences though, because of workforce preferences in the last two to three years.”

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These have boosted the Center-West district, which was opened up by the construction of the Basarab overpass, and is also close to the technical universities and several high-density residential areas meaning there is a substantial workforce on the doorstep of companies that set up there. AFI opened its AFI Cotroceni mall there and is completing its AFI Park office space, and now Forte Partners, CA IMMO, Ikea’s real estate arm Vastint and Skanska are all building offices in the area.

Meanwhile the Center-South area, conveniently close to the Timpuri Noi metro station, is the site of Vastint’s giant mixed use development, which when completed will deliver no less than 100,000 square metres (sqm) of offices and a further 50,000 sim of residential space.

Developers are excited about the completion of the long-awaited M6 metro line. Indeed several new lines are under construction, and are progressing despite various corruption scandals, but of most interest to developers is M6 which will run from Bucharest’s main railway station the Gara de Nord through the northern part of the city to Henri Coanda Airport. This will, for example, make the area around the event centre Romexpo – Expozitiei much more accessible, and it is already becoming the next development hub.

Portland Trust, GTC, Atenor and local businessman George Copos all have new office business parks under development in the area, while Impact is building a premium residential compound with 630 units.

Past and future Another incipient trend is the redevelopment of historic buildings. Until recently – with the exception of a few projects like The Ark events and office space in the former commodities exchange and the commercial centre at the old Cartea Romaneasca printing press – Romania’s architectural heritage has largely been neglected, with some of the city’s notable historic buildings allowed to fall into disrepair. However, a couple of recent announcements indicate this could be changing.

One United Properties and France-based retailer Auchan plan to invest €100mn in a new mixed-use development at the former Ford factory where the US automaker used to manufacture luxury cars in downtown Bucharest. The One Floreasca City project will see the factory, built in 1935, restored and turned into a contemporary retail space, which will be flanked by an office town and three apartment blocks.

The developers stressed that the project “gives back to the city and its community an area abandoned in the last 20 years”.

“To respect the heritage of the property, the investor will use for the interior design vintage Ford models, some of them produced in the inter-war years at Bucharest,” they added.

Meanwhile, earlier this year Lithuaniabased Hamer started work at the former Grivita brewery plant near the Basra overpass, where for the first time an industrial space will be converted into lofts. The firm also plans to build a 6,000 sqm co-working space for local entrepreneurs.

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Ponomarenco anticipates a “natural phenomenon of gentrification” in the coming years, where old, out-dated developments will be replaced by modern, class A buildings, though she notes that for the time being locations like One Floreasca City are the exception; “Brownfield developments are possible, only if investors are willing to take the risk of a major urban redevelopment.”

And if the interest in redevelopment does gather pace, all eyes will be on Bucharest’s oldest industrial building, the Assam Mill, which is still standing – just about. Fires partially destroyed the mill and its roof has fallen in, but its owners – two Cyprus registered companies – are not allowed to raze it and take advantage of rising land values. Instead, nature is being left to take its course. But despite what Ponomarenco describes as “severe degradation and destruction”, the mill stands on a 4.7 ha plot and is “ideally placed in a central position”.

Map of the Bucharest metro; solid lines represent existing lines, broken lines are under development.

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while prices of new-builds fell by 4%.

However, prices in 2017 have already exceeded pre-crisis levels by 4% among existing properties and by 30% among new-builds, according to the Hungarian Central Statistical Office (Központi Statisztikai Hivatal).

Property prices vary across Hungary.

The country is divided into 19 counties forming seven regions, with Central Hungary being the most expensive, with an average price of €1,140/m². Local property prices grew the most during the first three quarters of 2017 – by 15% from 2016. In the rest of the regions, residential property is twice or thrice cheaper, despite prices increasing by 8–10%.

Property prices in Hungary are rising faster than incomes

Residential real estate in Hungary set to grow

Property prices in the administrative centres of Hungary are growing twice faster than in small localities. The price per square metre is growing 25% faster in new builds than in the existing property market, according to the Hungarian Central Statistical Office.

Ben Aris in Berlin

The crisis affected the construction sector more severely. In 2008, about 17,400 residential facilities were built, compared to 3,100 in 2015. Construction volumes began recovering as late as in 2016. According to the latest data, during the first three quarters of 2017, 4,100 newly built residential facilities were listed for sale.

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nvestors believe that Hungary’s property market is a good investment and expect local residential property prices to continue rising for at least a decade. According to Hungarian media outlet Origo, every fifth property transaction in the country involves foreign buyers, who are mainly from China, Russia and Ukraine.

Growing prices, especially in central districts The 2008 global economic crisis had a negative effect on Hungarian property prices. Between 2007 and 2013, when prices bottomed out, prices of existing residential property fell by 22%,

Existing residential property prices across Hungary in Q1-Q3 2017

Hungary is a popular location among small companies and international corporations who want a base in Central Europe. The country has a strong labour base, and salaries are low compared to most European Union (EU) countries, reports the Tranio real estate consultant that specialises on Central and Eastern Europe (CEE).

The average annual wage in Hungary is just €6,700, or about four times less than France or Germany, according to Statista. But property in Hungary is cheap. As of February 2018, prices average €2,500/m² compared to €4,300/m² in Germany, €11,600/m² in Austria and €12,800/m2 in France.

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Source: Hungarian Central Statistical Office

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The volume of sales for existing property in Hungary is dozens of times more than for new-builds. During the first three quarters of 2017 92,400 residential facilities were sold in the existing property market, compared to 2,900

for home loans as of the second quarter of last year in Hungary is, according to Statista, 3.44%, whereas in 2013 it exceeded 11%. According to Balogh, cheap mortgages are also stimulating price growth.

"The 2008 global economic crisis had a negative effect on Hungarian property prices" new-build. Over the past decade, more new-builds have been entering the Hungarian property market than have been sold, except for 2015, when 3,100 units were built and 3,400 were sold.

In 2017, 38,000 construction units were issued, which is 20% more than in 2016, 14,600 of them in Budapest, according to official figures.

Incentives for market development Since January 1, 2016, a reduced VAT rate of 5% instead of 27% has been applied to new-build property sales. This has encouraged the demand for newly built residential property. In 2016, 44% more newly built residential units were sold compared to 2015. This, in turn, partly maintains price growth – new-builds were 7.6% more expensive in 2016 year-on-year and have risen in price by another 7.8% over the first three quarters of 2017.

The Hungarian government is raising energy performance requirements for buildings, making construction more expensive for developers. In 2017, the amount developers spent on construction was 1.5 times higher than in 2015, and by 2020 costs will rise by another 40%. In contrast, construction expenses rose by 5.2% in comparison to 2016, according to the Hungarian Central Statistical Office.

Hungarian apartments may be an attractive investment for those who plan to rent them out. Although the number of Hungarians renting residential property is small, it is growing gradually (from 3.6% to 5.2% between 2011 and 2017)

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as inhabitants of small localities move to cities in search of employment.

In particular, the growing number of international students in the country is raising the demand for rental property. According to Daily News Hungary, this number was 28,000 in 2017 and is expected to increase to 40,000 by 2023. At the same time, Hungary’s popularity among tourists is growing. In Q3 2017 the Hungarian Central Statistical Office recorded 18.7mn international arrivals, which is 5% more than during the same period 2016.

“It is relatively easy for a foreign national to buy Hungarian property. The payment is done in stages. First, the buyer puts down a deposit of about 1% of the property price, proving the seriousness of his/her intention. The buyer pays another 10–15% during the execution of the sales agreement. The local municipal authority must approve the purchase, which takes 6 to 8 weeks. After that the remaining amount must be paid.

Buying expenses constitute 5-6%, which includes the legal service charge (1–1.5%) and the purchase tax. After this is paid, the transaction is registered with the Land Registry. In Hungary, sellers pay the realtor's fee,” said Opalyuk.

Hungarian residential property sales and construction, thousand units

“However, cutting VAT is just a temporary measure. The Hungarian government plans on returning to the old rate of 27% on January 1, 2020. Analysts believe this would lead to a price increase of at least 20%,” says Inna Opalyuk, who is Real Estate Sales Manager for Hungary and Slovenia at Tranio.

According to Laszlo Balogh, the leading expert from property website ingatlan. com, property prices in Hungary are growing faster than locals can afford, which is causing the demand for loans and cheap property to grow. The total amount of residential loans issued in the first half of 2017 was €930mn, one-third larger than during the same period in 2016. Moreover, two of every three home loans are used to buy existing property. The average interest rate

Source: Hungarian Central Statistical Office

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I Special report

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Romania risks losing its moment in the property investment sun BRICKS & MORTAR:

Clare Nuttall in Bucharest

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nternational real estate investors including major European institutional investors are actively looking for opportunities in Romania, but the lack of high quality developments on the market is proving a problem.

Speakers at the SEE Property Forum in Bucharest on March 28 confirmed that they had been approached by “traditional” investors including German funds, and anticipated a window of 12-24 months ahead during the peak of the current growth cycle as a time when Romania real estate would become increasingly attractive as opportunities in the more mainstream markets of Central Europe start to dry up.

Markets like Poland, the Czech Republic and Hungary have been extremely active in recent years, but with yields now falling, and the small Hungarian market in particular rapidly running out of product, investors are looking at Romania as well as other Southeast European economies.

Thus far, said Robert Miklo, director of investment services at Colliers International, the boom seen in CEE in recent years “stopped on the doorstep of Romania” but he believes there is reason to be optimistic that the flow of investment will materialise in Bucharest in the near future.

Other professionals concur. They cite approaches from German funds, among others, though as Silviana Peter Badea, managing director – Romania at JLL, points out, while a lot is happening in terms of behind the scenes negotiations, “there is not a lot of hard evidence of transactions yet”. On the other hand, she anticipates that “this year we will see

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the right names coming here, the type of investors that put Hungary on the map. We've been waiting for this for a while, and we are now at the peak of the market. As investors are pushed out of Poland and the Czech Republic by falling yields, Romania is the next large market they can play with.”

Assets gobbled up The main problem that lies ahead, spanning the office, retail and logistics segments, is a lack of attractive product.

This is not peculiar to Romania; Lila Pateraki, chief investment officer at Zeus Capital Management, says it is evident in all the CEE markets, where her firm is finding it increasingly difficult to identify products that fit its strategy.

“The growth seen in Romania’s real estate sector stopped last year. There were a lot of transactions in 2014 and 2015 that took out of the market the majority of the available product. When investors come here trying to find product – not distressed but core assets – there is a handful if any.”

For example, Romania saw a mini-boom in logistics deals in the mid 2010s, with deals like CTP’s purchase of ProLogis’ Romanian logistic park. But those

pipeline,” says Ana Dumitrache, head of investment properties Romania at CBRE. “I think interest is finally coming this year, but if you look at what can be traded, we might see a spike in activity in office trading and there would definitely be interest in retail and industrial, but I think stock in shopping centres and industrial space is so tightly held, I don't see a lot of activity in these two sectors,” agrees Miklo.

The Romanian market is already dominated by two major investors – Globalworth and NEPI – and given the relatively low amount of available property, others may be deterred from entering a market where two players are so strongly established.

Lucrative niches This is not to say there aren’t opportunities. The conference took place at the Radisson Blu hotel in downtown Bucharest, which itself was the subject of a change of hands last year, in a rare transaction in the niche hotel sector.

Badea, whose firm advised on the deal, stressed that the transaction – the largest single deal in the history of Romanian real estate with a non-typical asset class – had brought in fresh capital (the buyer of the Radisson Blu and adjacent Park Inn hotel were Revetas Capital Advisors LLP and Cerberus Capital Management) and could be followed by more nice deals.

“We have asset classes not tapped into – residential, student housing like in Poland and Western Europe – there are classes that might become a product to answer a demand,” she says. “That’s

"Poland, the Czech Republic and Hungary have been extremely active in recent years, but with yields now falling" transactions gobbled up most of the available assets. “Now everybody is building because there is nothing left to be bought here, there is no acquisition

what we can take out of the Radisson transaction: there are new kids on the block as long as you offer them what they are looking for.”

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Other panelists highlighted potential opportunities outside Bucharest, such as retail and office developments in secondary and tertiary cities across the country.

Yet there are other obstacles. The increasingly unrealistic price expectations on the part of sellers is holding the market back. “I’m afraid that as inter-

Then there is the political situation. Corruption remains a problem despite the efforts of Romania’s National Anticorruption Directorate (DNA) to clean up the country, and with no less than three governments in the last year and numerous ad hoc policy and fiscal changes, it’s perhaps not surprising that some investors are wary of committing to Romania.

"The increasingly unrealistic price expectations on the part of sellers is holding the market back" est grows we might see a mismatch in demand and supply in terms of pricing, which might cause Romania to miss the cycle. We have already started seeing sellers’ expectations a little bit ahead of what the country allows,” warns Pateraki.

The best most speakers could say on this subject is that given the situation in Hungary and particularly Poland, whose right-wing governments have put them in direct conflict with the EU, Romania is starting to look no worse than some of its regional peers.

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No longer a black hole Should the ongoing property investment boom come to Romania, a couple of other SEE markets, while much smaller in terms of population, are not far behind.

Bulgaria saw a record year number of transactions in 2017, which added up to almost €1bn. Among them were the €253mn sale of Sofia’s biggest mall to NEPI. But the country faces some of the same problems as Romania – a small market and a high level of corruption, as highlighted by the ongoing scandal over Czech energy firm CEZ’s sale of its local assets to a small firm owned by a friend of the energy minister.

Serbia, while not an EU member yet, is also increasingly of interest having been a “black hole” for many investors previously, and there continues to be a lot of resort development along Montenegro’s Adriatic coast.

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I Cover story

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Russia's Bondageddon Ben Aris in London

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R

ussian assets are toxic nuclear waste again. On April 6 the US Treasury Department (USTD) released a new set of targeted sanctions aimed at some of Russia’s biggest businessmen and their companies, and unleashed chaos on the markets.

Russian assets were hot until the new sanctions, with foreign investors piling into Russia’s sovereign ruble-denominated debt as one of the best ways to make money in the global zero-interest world.

But the sanctions have hit not just those companies on the new US list, but all of Russia’s companies. A sword of sanctions is now dangling over everyone as those announced so far were directed in such a way is it is impossible to guess where it will fall next. This uncertainty has done far more damage than the actual sanctions which applied to a very small number of names.

Sanctions are not new and the April 6 list followed the “Kremlin Report” in February that listed everyone on the Forbes Russian rich list (in fact it was just the Forbes list, the US government later admitted) but didn't actually impose any penalties on anyone.

Despite the fears of a harsh new regime in the run up to the release of the Kremlin Report, ordered by the Countering America’s Adversaries Through Sanctions Act (CAATSA) law passed by the US congress six months earlier, no punishments were inflicted. Markets immediately shrugged the list off. The USTD made it clear that the report was not a sanctions list and investors said

that as a result it had no practical impact on the prices of assets.

Russian companies went back to business as usual. Credit Bank of Moscow (CBOM) issued a $500mn bond to high demand. Fertiliser giant Phosagro also got a $500mn bond away in February that was five-times oversubscribed.

PhosAgro CEO Andrey Guryev told bne IntelliNews at the time: “This placement represents a new benchmark for the company, enabling us to lower the average interest rate and significantly improve the structure of our debt portfolio. We saw strong demand from international investors during the deal, with over 90% of the orders coming from American and European investors.

We were happy to see major international funds and banks participating in this placement.”

And in the midst of the scandal surrounding the poisoning of former spy Sergei Skripal in March, state-owned gas giant Gazprom issued a €750mn bond in London to strong demand at exactly the same time as on the other side of town Prime Minister Theresa May was announcing the expulsion of 23 Russian diplomats for spying. Russia’s finance ministry followed up a few days later with a $4bn Eurobond issue, also to a strong market.

But the latest sanctions were different.

They hurt. All the previous sanctions imposed on Russian companies had only affected new securities – listings of new shares or bonds. Existing securities were unaffected.

Not now. The Specially Designated Nationals And Blocked Persons List (SDN List) released on April 6 not only sanctions those listed, it bans any investor with US exposure (European banks with US branches count) from doing any business with the sanctioned names. Investors were supposed sell all their stocks, bonds and debt within 30 days – i.e. before May 7.

Bond traders in London are pulling their hair out to comply, because the same rule that is forcing them to sell is stopping anyone else buying. One international institutional investor, who didn't want to be named, recounts a conversation he had with his compliance department a week after the sanctions were imposed.

Compliance: “Why do we still have that Rusal debt on our books? Don't you know it’s illegal to hold in three weeks time?”

Trader: “Well you try and sell it then. The problem is: don't you know it's illegal to hold Rusal debt in three weeks time?”

“We went to the USTD. You can’t sell this stuff even at 20c on the dollar. They said “That’s your problem”,” the same investor recounts.

It seems that the USTD didn't think its sanctions through and was assuming that the pain would be restricted to Rusal and Russia.

“Politics is more important than business now and this is a change that will last for years. The people that make politics think that politics is more important than finance,” says Stefan Benedetti,

Russia-dedicated bond fund flows, $mn

Cost of insuring Russian debt has surged

Source: EPFR Global

Source: Bloomberg

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Clearstream to hook Ukraine and Kazakhstan up to international markets

bne IntelliNews When Russia hooked its capital markets into the global financial system in 2012 it caused a revolution. Billions of dollars poured into the local government bond market from overseas and foreign investors now account for a record 34% of all the outstanding Ministry of Finance treasury bills, the so-called OFZ, or RUB785bn ($12.7bn) as of the peak this February.

The international settlement and clearing company Clearstream is hoping to repeat the experience by including more countries from the Eastern Europe into its system. Pilot programmes are already working in Armenia and Georgia and later this year the cash-strapped capital markets in Kazakhstan and Ukraine hope to join the party as well, says Clearstream.

As part of a comprehensive market reform that included merging the two largest exchanges – the dollar denominated Russia Trading System (RTS) and ruble denominated Moscow Interbank Currency Exchange (MICEX) into Moscow Exchange (MOEX) – as well as setting up a central depository (CSD), the key part of the reform was making the whole domestic system compliant with the two international clearing and settlement companies Euroclear and Clearstream. Adding these two companies meant that investors in London and New York can buy and trade local government debt without going to the cost and inconvenience of setting up accounts with local brokerages. OFZ trades appear on their terminals everywhere in the world with a trading floor.

Compliance departments love the new arrangement as at a stroke you get rid of a string of counterparty risks from banks and brokerages operating in someone else’s jurisdiction, not to mention the considerable costs savings that can be made. The local brokerages loved it less as it basically ended a business from which they earned lucrative fees, so the reform catalysed a trend that had already started – Russia’s private investment banks and broker/ dealers were rapidly taken over by Russia’s big state-owned banks and those that remained have shrunk in size and importance.

But for the government the shiny new capital market has been a godsend – especially in this time of sanctions. In the past the Russian government has issued some $7bn of Eurobonds a year to help finance the budget and Russian banks and companies have been even more active in tapping the long-term cheap money that can be found abroad. Now the domestic market is hooked up to London it has become even easier for all these players to raise money.

The Russian budget deficit is increasingly funded by foreign investors, buying ruble-denominated assets The Russian government is issuing up to RUB1 trillion ($16.1bn) of OFZ a year as international bond traders have largely ignored the political row between the Kremlin and the west. Russian OFZ have been the hottest emerging market bond for several years now as they pay hansom yields and are backed by Russia’s rock solid macro fundamentals. Drilling down into the ownership, and fully half of the fixed rate version of the OFZ are owned by foreign investors, according to MOEX.

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portfolio manager at Pioneer Investment. “This is going to be the biggest change in our lifetime.”

Not selling the SDN listed assets is not an option. Otherwise innocent investors in sanctioned assets now face huge fines for simply being unable to own these assets.

“Even eating the paperwork won’t help you,” one investor comments wryly.

There were clauses threatening bond holders with punishments in the CAASTA report issued in February too, but no one took them seriously.

“At first we ignored this clause as it was thought unlikely that it would be used. But people are not ignoring it now,” says David Stewart, a partner at the law firm Latham & Watkins. “We all use the same pipeline – Euroclear – and you can sell Rusal at 30c if you can find a buyer, and if the clearing houses will clear the deal, but none of that is a given,” says Stewart, who adds that the people on the SDN list are not being very helpful with trying to sort this mess out.

Even the settlement system Euroclear is in the crosshairs as the punishment doesn't just forbid holding the shares, it forbids doing any business with the assets at all. That means even if a trader finds a willing buyer in China, for example, they have no way of transferring the asset to its new owner.

Toxic nuclear waste In the wake of the 1998 crisis Adam Elstein, managing director of Bankers Trust’s Moscow office, famously said: “I’d rather eat nuclear toxic waste than invest in Russian securities.” The SDN list sanctions have made most Russian assets almost as unpalatable.

The other part of the sanctions that has done a lot of damage was the seemingly random way the names on the list were chosen.

Russian aluminium owner Oleg Deripaska, and the main target of the SDN List, is clearly a Kremlin insider. He is close to oligarch Roman Abramovich, who is widely thought to have hand-picked President Vladimir Putin for his current job, and is married to the daughter of Vladimir

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Yumashev, former president Boris Yeltsin’s chief of staff, who himself is now married to Yeltsin’s daughter Tatiyana. That makes him a member of the “Family” clan that ran Russia at the end of the Yeltsin-era.

But the other names on the list such as metals tycoon Viktor Vekselberg and Federal Council senator cum businessman Suleiman Kerimov are not obvious insiders. While any big businessman in Russia – and Vekselberg was an oligarch when Yeltsin was still president 18 years ago – needs their “kyrsha” or roof (close connections with the authorities), neither man got rich through the classic path of participating in rigged privatisation auctions or taking cheap loans from state banks to fund corporate raiding. They are both simply well-connected clever businessmen.

By adding these names to the list, the Kremlin Report list suddenly becomes relevant again: it means anyone on that list, anyone at all that is worth over $1bn, is now a potential sanctions target. The upshot is all Russian assets are toxic again.

“We always consider EM risk and if we think that the political risk is going up then we stay away. Russia is still now on our watch list: there are other markets where we can make money and we will wait until the situation in Russia stabilises,” says Adrian van der Bok, senior portfolio manager at Dolfin.

That’s a big change. Russia has a total of $176bn worth of Eurobonds outstanding and they are all affected as a result to some extent. In the first six months following the imposition of the Crimea sanctions, all Russian assets were toxic as investors were afraid of new sanctions and it was not clear if they would get worse.

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and the uncertainty of what will happen next means that compliance departments in the international capital markets just don't want to go there.

“In China [President] Xi [Jinping] has just been given unlimited rule. That means there is no political risk in China and he can concentrate on reforms. China could become the new Singapore. By taking the political risk off the table they have made the investment proposition simpler,” says van der Bok. “I don't want to stay up late worrying about headaches. I could buy non-sanctioned Russian bonds, but why bother? Buy Belarus and Ukraine instead. It’s simpler.”

Climbdown Many investors hope that April 6 was the last round of escalation, and if tensions ease the market will recover much of its losses.

“We need to wait two to three months to see if the tone of talks between Russia and the US improves – if it does the market will reopen. The previous sanctions have shown that if one company is sanctioned then others still appeal to investors after the dust has settled,” says Shota Zhvania, the director of debt capital markets at Raiffeisen International. “Bottom line is that Russian assets are financially much stronger than most of their EM peers.”

In a surprise move on April 23 – two weeks before the 30 day deadline was due to expire – the USTD did an about face and relaxed some of the sanctions on Rusal, going as far as suggesting that it would lift them completely if the company’s owner Deripaska sold his shares. The April 23 statement extended

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the deadline for companies to wind down dealings with Rusal by five months.

It seems that the message was getting through: these sanctions are as painful for US investors, maybe more so, as they are for Russia.

The climbdown will come as a relief for the market and is a big win for Putin, who has been arguing that Russia can’t be isolated as it is already too integrated into the global market. But the climbdown doesn't solve the basic problem: who will buy the sanctioned assets? One possible buyer is China as the US has little leverage on the mostly closed Chinese financial market.

“The pipe is open and we are all selling at 20c-30c on the dollar but people that are not impacted by the sanctions like the Chinese will buy these securities and it will be a good trade for them,” says Benedetti.

The market was already bouncing back before the USTD relaxed its sanctions on Rusal. Russia is much stronger than it was in 2014. Budget cuts and efficiency gains mean the budget breaks even at around $60 per barrel of oil, and oil has already touched $75 in the midst of the fracas. Russia Inc is back in profit. At the same time Russian corporates have massively deleveraged so they have relatively low exposure to the rest of the world.

But the uncertainty remains.

“The big question now is whether this is a huge buying opportunity or the new norm?

It depends on your perceptions over the question of if there will be more sanctions,” says Alexei Tchernitsev, head of fixed income trading at BSC Global Markets.

Structure of Russian Eurobond issuers

As it turned out there were more sanctions, however, each iteration was progressively milder, targeting generals that ran operations in Crimea and a few government officials. Investors relaxed and the equity market rallied strongly in 2016, rising by over 50% y/y while the spreads on bonds to US T-bills fell to only 180bp, as Russian assets were so cheap investors could no longer ignore them.

Now the game has been changed again

Source: Bloomberg, BCS

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Hungary's populist leader Viktor Orban wins sweeping majority. Northfoto / Shutterstock.com

Hungary's ruling party retains supermajority after sweeping election victory bne IntelliNews

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ungarian Prime Minister Viktor Orban will retain his position for the next four years after his ruling Fidesz party swept to a supermajority for the third consecutive time on April 8, beating most estimates as turnout was near record levels at 70%.

Orban’s latest landslide victory may not be good news for the markets. Analysts foresee further conflicts between an emboldened new Orban government and the EU, which may damage Hungary economically. With a two-thirds majority Orban can amend the Constitution.

A poll by Bloomberg showed fund

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managers favouring a slim (rather than a substantial) Fidesz victory, while Viktor Zsiday, head of fund manager Hold Alapkezelo, described a supermajority for Orban as a “dangerous scenario” that would enable his government to crack down on “what remains of democratic institutions”. This may well trigger responses that could hurt Hungary economically, he said.

Fidesz received 48.5% of the votes on the party list (votes are cast for party lists and in single-seat constituencies), up from 43% four years ago, with nearly 2mn votes cast for the incumbent party.

The win gives Orban's party 133 seats

in the 199 seat legislature, a two-thirds majority by a single vote.

The election map shows Hungary turning orange, the colour of the ruling party, which dominated the landscape everywhere, especially in smaller towns and rural areas.

The results show that Fidesz managed to efficiently mobilise its base due to its vast network of activists and huge database of supporters. Contrary to the expectations of many political analysts, they managed to turn a high turnout to their advantage.

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Opposition devastated Opposition parties suffered a major blow in the elections, winning only 15 of the 106 individual districts, most of them in Budapest.

They had previously been emboldened by the win of an independent candidate in a mayoral by-election in a Fidesz

Jobbik party leader Gabor Vona announced his resignation after the results came out, as the party failed to run a tight race with Fidesz and only managed to keep its base. On Sunday night, the head of the Socialist party also said he will quit. Analysts expect the blame game to start on the opposition landscape. LMP has already been

“The win gives Orban's party 133 seats in the 199 seat legislature, a two-thirds majority by a single vote.” stronghold in February, but they failed to reach a compromise on withdrawing their candidates in favour of the strongest rivals to Fidesz and running on a joint list, the only viable chance for them to unseat Fidesz MPs under the current election system.

After talks of wider cooperation between them failed, they pinned their hopes on a high turnout, as the polls showed the vast majority of the 1mn undecided voters favouring a change of government, but this hope proved to be unfounded.

The opposition parties failed to come up with a clear economic vision but more importantly, they failed to respond to the aggressive Fidesz campaign, and their message of widespread corruption in Hungary did not get through to voters, analysts said.

Right-wing Jobbik won 19.5% of the popular vote but got only 27 seats due to the structure of the election system.

Despite leaving its racist and anti-EU rhetoric behind, the party managed to win just a single new district.

The largest leftist opposition alliance, the Socialist-Dialogue, will have 20 seats in parliament after receiving 12.3% of the votes. Green opposition party LMP received 6.9% of the votes. Democratic Coalition (DK), headed by former prime minister Ferenc Gyurcsany, will be the fifth party to enter the parliament with 5.6% of the votes.

blamed for not withdrawing its candidates in Budapest, which gave Fidesz six mandates.

Nasty campaign The campaign was one of the nastiest ever as Fidesz has narrowed down its campaign message to the single issue of immigration, painting an apocalyptic view of the country if it accepted even a few thousand migrants. The government has spent hundreds of billions of forints on ads and billboards in the last couple of years.

Orban played successfully on the fears of Hungarians, especially those in rural areas, where people have few if any contacts with foreigners.

Orban said that at stake in the election is Hungary's sheer existence, and claimed the country would lose its identity if can-

immigrants live. Government propaganda said opposition parties would open up empty barracks and vacant homes to house migrants.

Uneven playing field Some 8mn people were eligible to vote in Sunday’s election in addition to the several hundred thousand votes by Hungarian nationals with no address in Hungary, who in previous elections overwhelmingly supported the conservative party.

Fidesz transformed the election laws before the 2014 election, reducing the number of seats in the one-chamber legislature from 386, replacing a tworound with a one-round system and redrawing the electoral maps in a way that favoured the incumbent.

The rules were also changed to allow non-Hungarian residents with Hungarian citizenship to vote. Ethnic Hungarians living in neighbouring countries could send their vote to a local constituency election office or to the National Election Office by April 7, while Hungarians working abroad could only cast their votes at foreign missions.

Voters who registered themselves elsewhere than their home addresses queued in front of polling stations in Budapest for hours after the polls officially closed at 7pm. This delayed the posting of results by the National Election Committee (NVI) for several hours. The NVI's website was not available for hours during the day and the website of the Socialist party came under attack by hackers.

“The opposition parties failed to come up with a clear economic vision” didates from opposition parties – whom he termed “Soros candidates” – won the election. They would turn Hungary into a “migrant country”, he said.

State-owned media, a mouthpiece for the government, ran stories of crimes committed by Muslims, and pointed to the situation in Western European countries, where a large number of Muslim

Delegates of opposition parties reported several cases of election fraud, such as the mass mobilisation of voters to polling stations in rural areas. In poor areas Fidesz MPs handed out food and drink, and in one village the local Roma population were threatened by the mayor of the village that they would lose their public work status if they didn’t vote for the ruling party.

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in Slovakia will employ as many as 6,000 people in its base of Nitra.

When measured in per capita terms, the countries are the top two producers worldwide in terms of production. “To the relatively high dependence on the car industry you can add the high share of this industry in the overall added value production. Both countries are thus at the mercy of the cyclical demand for new cars in Europe, which is at a peak right now,” added an analyst of CSOB Petr Dufek.

Slovakia is closing the gap with the rest of the EU faster than Czechia, although Czechia remains ahead overall / Shutterstock.com

Slovakia catching up with the EU economy faster than Czechia Jaroslav Hroch in Prague

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lovakia is closing the economic gap with the EU faster than Czechia, but still lags behind the Czech economy level in overall terms, a new CSOB study for the 25-years anniversary of the split between Czechia and Slovakia says, released to the media on March 29.

Czech GDP per capita was 88% of the EU average in 2017. This means that the Czech Republic narrowed the gap with the EU by 12 percentage points (pp) since 2015.

Slovak GDP per capita grew by 29 pp during the same period. However, it started from a lower position than Czechia: Slovak GDP per capita was 77% of the EU average in 2015.

Czechia and Slovakia entered the EU in 2004, but in 2009 Slovakia adopted the Euro, whereas Czechia has yet to do so.

“Not even during the most extreme outside economic pressure, which both countries were facing [during the

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global financial crisis], the adoption of the euro did not provide an undisputable economic comparative advantage,” said the chief economist of CSOB Martin Kupka.

The most common and also the riskiest feature of both countries is the dependence on the car industry. Slovakia and Czechia are producing over one million cars annually that accounts for 13% of the total EU car production.

Both countries also have problems with structural development in the regions. For example, the Bratislava region was the sixth most productive region in the European Union in 2017, at 184% of the European average GDP per capita production on a purchasing power parity (PPP) basis, according to the Statistical Office of the European Union (Eurostat). Czechia's Prague region was at 182% of the EU average and finished seventh. Both Prague and Bratislava have better results than Vienna, Bremen, East London and Stockholm.

However, what seems to be good result can easily go bad. Although the two regional capital cities are flourishing, other regions in both countries are significantly underdeveloped. The cause is that the capitals have too dominant a position, as well as corruption, the misuse of European funds and bad regional policies.

The Czech regions in the northwest and the northeast have the worst economic results – 63% of EU average and 72%

“The most common and also the riskiest feature of both countries is the dependence on car industry” The dominant brand in Czechia is Skoda.

For Slovakia, it is Kia, which celebrated 3mn produced cars from its factory in Zilina. Kia produced 335,600 vehicles and 539,987 engines in 2017. Another important carmaker is Jaguar Land Rover and its new production factory

respectively. Other regions are not much better – spread between 81% in the southeast and 75% in the MoravianSilesian Region.

The regions in Slovakia show the same sort of spread in productivity and prog-

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ress, but the gap between top and bottom is even wider. The west of the country was 72% of the EU average, mid-Slovakia 61% and the east only 53%.

“There is the situation when Slovaks are leaving and looking for work in Czechia, which is now essentially dependent on the influx of foreign workers,” added Dufek.

The biggest dissimilarity is in the labour market. The difference between Czech and Slovak unemployment is at least 4 pp. However, in a recent development, the Slovak labour market is catching up with the Czech one slowly and unemployment dropped to a historic low of 5.72% in February versus 3.7% in Czechia for the same month.

This will cause problems in the long term due to the reluctance of the Czech government to grant work permits to

On the other hand, Slovakia is facing both a high unemployment rate and a slow growth in job vacancies over the long term.

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each other and have almost the same language.

A final issue is the question of higher education system in Slovakia, as a lot of students are also leaving Slovakia to attend Czech universities. Slovaks can study for free in Czechia under a mutual

“The Bratislava region was the sixth most productive region in the European Union in 2017” the foreigners as well as strong antiimmigrant sentiments in part of society.

With Slovaks, the situation is different since both nations are very close to

agreement on education. However, only small portion of Czech students travel in the other direction for their education, which is creating tensions.

Huge crowds gather in Budapest to protest against Orban's new government Iulian Ernst in Bucharest

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ome 100,000 Hungarians protested in Budapest on April 14 against an unfair election system that gave Prime Minister Viktor Orban a landslide victory at the polls after a “hate campaign” against immigrants, claim the organisers.

“Viktor Orban has forgotten where he came from,” Ors Lanyi, one of the organisers, told the crowd, which booed whenever it heard the prime minister’s name.

Protesters marched from the Opera House, a 19th century Neo-Renaissance palace on a majestic downtown avenue, to parliament along the Danube River, waving Hungary’s tricolour flag and the European Union flag, accompanied by whistles and horns blaring. As demonstrators filled a large square outside the parliament, many were still walking on

main roads leading there, chanting: “We are the majority,” reported Reuters.

Orban won a third straight term in power in recent elections after his anti-immigration campaign message secured a strong majority for his ruling Fidesz party in parliament, giving him two-thirds of seats based on preliminary results.

Opposition leaders are calling for a recount of ballots, free media and a new election law, as well as more efficient cooperation among opposition parties.

The protest was among the biggest in Hungary in recent years, similar in size to a mass rally prompted by Orban’s plan

to tax internet use four years ago and a pro-government demonstration called

by Orban supporters shortly before the election.

The Organisation for Security and Cooperation in Europe has said the election did not offer opposition parties a level playing field amid a host of problems marring a vote that nonetheless generally respected fundamental rights.

In their Facebook post, the rally’s organisers said: “Fidesz’s election system and the government’s hate campaign have pushed the majority into a one-third (parliamentary) minority.”

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Turkey’s economy is growing at “wrap speed” say analysts

Turkey grew 7.4% in 2017: analysts warn of blowout dangers in “warp-speed” expansion Will Conroy in Prague and Akin Nazli in Belgrade

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ears that Turkey’s economy is overheating intensified on March 29 as 4Q GDP growth for last year came in at 7.3% y/y with the full-year 2017 expansion given as 7.4% after 3Q GDP was revised up 0.2pp to 11.3%.

Coming alongside high inflation, gauged as running at 10.26% y/y in February, the growth figures “will heighten fears that the economy is overheating,” William Jackson, senior emerging markets economist at Capital Economics, said.

“Picture this as the Starship Turkish Enterprise currently growing at warp speed,” commented Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management. The thrusters had been put on to get through a bit of turbulence – namely the downturn that followed the attempted coup in July 2016 – and Ash said he would “question whether

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the thrusters are going to overheat and blow out before the destination (early elections) is reached”.

With Turkey having become the fastestgrowing G20 nation, recording its biggest annual expansion in output since 2013, Ash added in a note to investors: “I guess most economists would question how sustainable this pace of growth is given the widening current account deficit (5.5% of GDP), double digit inflation (10.3% and double the central bank target) and the large exter-

Jackson further observed: “While the headline rate of growth is itself alarming, the breakdown also suggests that growth is increasingly unbalanced. In particular, strong domestic demand is leaking into imports, which expanded at their fastest pace since 2011. External vulnerabilities are rising.”

The Turkish lira (TRY) stood at TRY3.9701 to the dollar at around 1500 Istanbul time on March 29, strengthening from around the TRY4.0 level seen in early trading. Jackson estimated that it would

"Picture this as the Starship Turkish Enterprise currently growing at warp speed” nal financing gap ($220bn or 25% of GDP and double the FX reserves). Add in all the domestic political and then geopolitical concerns.”

probably have to reach around the TRY4.25 level to trigger a rate hike from the central bank. The currency lately touched a record low of 4.0375. It has

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fallen around 5% against the dollar this year, making it one of the worst performing emerging market currencies.

Growth momentum in Turkey appears to still be strong, Jackson noted, saying: “Indicators for the start of this year sug-

Ermut, president of the official Investment Support and Promotion Agency of Turkey, in which he said that the robust growth continued to be a "magnet" for foreign direct investment. "Pro-business and reform-oriented policies have been a key driver of economic growth in Tur-

"The recovery of the Turkish economy is very much debt-fuelled” gest that growth has remained strong.

Industrial production expanded by 12.9% y/y in January, up from 10.6% y/y in December. And while the manufacturing PMI edged down last month, it stayed close to a seven-year high.”

"Spectacular" Turkish economy minister Nihat Zeybekci reacted to the latest growth figures by saying they were a “spectacular achievement” and that all the indications are that growth will be strong in 2018 too.

The economy is creating investments, exports and jobs and is growing in a balanced fashion, he said. Turkey, now essentially in the same growth stratosphere as India and China, has a faster growing economy than any European state and things could stay that way for at least the next decade, Zeybekci said.

The Turkish economy achieved growth of 3.2% in 2016 and 6.1% in 2015.

Markets had expected 2017 growth of 7.25% compared to the 7.4% officially announced, according to a Reuters poll of economists.

key and the government is committed to continue these policies," Ermut added.

Despite the severe devaluation of the TRY in 2017, given the robust pace of nominal GDP growth last year (19%), Turkish GDP in USD only dropped from $863bn in 2016 to $853bn in 2017. Private consumption rose by 6.1% y/y in 2017, higher than the 3.7% recorded in 2016.

On the production side, the construction industry grew 8.9% y/y in 2017, outpacing the 5.4% annual growth achieved in 2016.

Industrial production also rose by 9.2% y/y, higher than the 4.2% posted for 2016.

The recovery of the Turkish economy is very much debt-fuelled. A substantial aspect of that has been the state’s TRY250bn (€63bn) credit guarantee fund (CGF) for backstopping bank loans to businesses.

The markets have grown increasingly worried about the double-digit infla-

tion and the sinking Turkish lira since last year. Since the beginning of 2018, overheating concerns have also been weighing on estimates of the Turkish economy’s likely future performance.

The Turkish government is targeting annual GDP growth of 5% for the years running from 2017 to 2020.

Earlier this month, the OECD raised its forecast for Turkish GDP in 2018 by 0.4pp, upgrading the forecast to 5.3%.

Last month, Moody’s Investor Services raised its growth forecasts for Turkey to 4% in 2018 and 3.5% in 2019, from 3.2% and 3.3%, respectively. However, on March 8, it cut Turkey’s sovereign credit rating further into junk, saying that the Turkish government – which has followed a strategy of injecting huge stimulus into the economy since the downturn that followed the attempted putsch – seems focused on short-term measures, undermining effective monetary policy and economic reform.

Turkey’s parliamentary and presidential elections – after which the country will switch to an executive presidency with the post of prime minister abolished – are scheduled for November 2019, but there is a substantial amount of speculation that Turkish President Recep Tayyip Erdogan will go for earlier elections, which may even be held this year, in an attempt at coinciding with a time when the economy is still humming.

Turkey's GDP Growth Looking further at the current account deficit – making Turkey vulnerable to external shocks as it relies on foreign capital inflows to finance the gap – Ash pointed to the Turkish economy’s “big net export drag, with exports up 9.3% and imports up 22.7% y/y which kind of shows the problems on the current account”. He added: “The annual data on the latter score is a bit better with exports up 12% and imports 10.3%, but there was a really marked deterioration from Q1 2017 onwards which is worrying”.

Reuters quoted a statement from Arda

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(SDSM) and its coalition partner, the ethnic Albanian Democratic Union for Integration (DUI), which just survived a no-confidence vote in the parliament on April 11.

With the exception of Slovenia, all countries in the SEE region are either Semi-Consolidated Democracies (yellow) or Transitional Government or Hybrid Regimes (orange).

Macedonia defies illiberal trend in otherwise gloomy Freedom House report bne IntelliNews

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acedonia was one of the few bright spots on Freedom House’s latest Nations in Transit 2018 report, which assesses democratic governance in 29 post-communist states.

Along with a handful of other Balkan nations, Macedonia showed an improvement in terms of democratic liberties last year. These were the first improvements in Macedonia’s score on the influential ranking since 2018, ending seven straight years of decline after a new government came to power in May. “The most promising chance for a democratic breakthrough in Europe today is in Macedonia. Although the country is small, the opportunity is big: Success in Macedonia would mean breaking up a decade of state capture

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and peacefully resolving bilateral disputes that have held back political and economic progress in the region,” Freedom House said.

Macedonia’s democracy score improved to 4.36 points on the index published on April 11, down from 4.43 points in the previous ranking. The index rates

There are some concerns about Macedonia’s future. The normalisation of parliamentary work, with full participation of both government and opposition parties, will most likely be a critical issue during 2018, says the report. The opposition VMRO-DPMNE party, which was in power from 2006 to 2017, has boycotted the parliament for months, only returning to take part in the no-confidence vote. In addition, interethnic resentments over the proposed law on languages, which will make Albanian a second official language, could also appear during the year, at the expense of already damaged ethnic relations, the report underlined.

On the whole, however, the recent progress in Macedonia is in contrast to several of its near neighbours as well as the wider Central and Southeast Europe region, which saw a speed of illiberal politics that, the report said, “undermines the foundations and prospects for democracy”.

“Illiberal politics are becoming the new normal in Europe,” commented Michael Abramowitz, president of Freedom House, in a statement.

“Government-led smear campaigns against civil society groups, journalists, and the political opposition were pioneered in Russia and Central Asia, but they are increasingly common across the region. This is no longer a

“The most promising chance for a democratic breakthrough in Europe today is in Macedonia” countries on a scale of one to seven, with one being the best score.

Looking ahead, 2018 is likely to be a test of the reform commitment of the Social Democratic Union of Macedonia

problem we can claim is limited to one or two countries. To protect democracy, leaders need to confront attacks on democratic principles, especially when those attacks are close to home.”

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The 2018 Freedom House report showed the widest reaching score declines in the project’s 23-year history, with a total of 19 countries seeing their democracy scores decline. As in 2017, there are now more Consolidated Authoritarian Regimes than Consolidated Democracies in the region.

With the exception of Slovenia, a Consolidated Democracy, the SEE region is split between SemiConsolidated Democracies (Bulgaria, Croatia, Montenegro, Romania and Serbia) and Transitional Government or Hybrid Regimes (Albania, Bosnia & Herzegovina, Kosovo, Macedonia and Moldova).

There was backsliding among the former frontrunners in the region, with Freedom House issuing warnings over the situation in both Romania and Serbia.

Serbia’s score continued its four-year slide, and as the consolidation of power under President Aleksandar Vucic continued, the country risks falling out of the Semi-Consolidated Democracy category.

“Last year, Vucic ‘castled’ himself from the prime minister’s seat to the presidency, then handpicked a new prime minister with limited powers … Such manoeuvres undermine constitutional order and the independence of national governing institutions,” commented the NGO’s senior researcher Zselyke Csaky.

The report also laments the end of a “positive trend” in Romania given the government’s “relentless attempts to weaken the justice system, sideline the anticorruption agency, and essentially legalise corruption”. It refers to the failure of mass protests in early 2017 to rein in efforts to amend legislation to protect top politicians from prosecution.

“Romania’s politicians will face protests as long as they insist on trying to weaken anticorruption institutions,” said Csaky.

“The fact that such protests are even necessary is a sign that the country has a long way to go in effectively combating corruption.”

The scores of Bosnia, Bulgaria and Montenegro also all worsened. While Bulgaria managed to reestablish political stability last year, the country’s media environment has deteriorated significantly, with an increase in hate speech and violence against journalists.

“Transparency of media ownership continued to be a serious problem, as was the fusion of media and politics, media monopolies, and lack of transparency of funding sources,” the report noted.

Bosnia’s score also worsened, with 2017 being “another year of wasted opportunities” in the country. “There was not a single aspect of life that was not polluted with inflammable rhetoric and cheap politicisation, all originating from the most influential political leaders. While disguising their own private agendas as mechanisms for

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Montenegrins went to the polls to elect a new president, but with a victory for the country’s top political figure Milo Djukanovic virtually a foregone conclusion, nothing is expected to change as a result.

On the other hand, while there were no changes on such a dramatic scale as in Macedonia, the situation in two other small Balkan countries, Albania and Kosovo, improved slightly.

Kosovo’s democracy score improved in 2018, with Freedom House citing some improvements in electoral processes and in the civil society sector. However, the fight against corruption stalled due to a lack of political will.

Albania’s score also improved, and Freedom House said that for Albania, 2018 holds the promise of improved

“Interethnic resentments over the proposed law on languages, which will make Albanian a second official language, could also appear” the protection of ethnic interests, and presenting them as issues of national importance, politicians in reality did nothing to improve citizens’ lives. It has become clear they do not have any sort of a long-term constructive plan for the country, and instead focus only on their current mandates,” the report noted.

The expectations for 2018 are also pessimistic as Bosnia will hold a general election this autumn, and ethnic tensions and political disputes are expected to characterise the whole year, with likely deadlocks in the decisionmaking process.

Meanwhile, Montenegro’s score worsened to 3.93 from 3.89 amid a persistent political crisis following the opposition’s decision to boycott parliament. This crisis, as well as persisting tensions between the opposition and the government characterised the political situation in the country in 2017 and are likely to continue dominating it in 2018.

governance – but it also warned of the danger of authoritarianism.

“With a comfortable majority in parliament, the ruling Socialist Party and its Prime Minister Edi Rama enjoy a genuine opportunity to carry out important reforms that have the potential to reduce corruption in the judiciary and bribery in the public administration while enhancing good governance,” it said.

On the other hand, the report warned that complete control that Rama has over the Socialist Party and the solid majority he enjoys in parliament, combined with a tight control over the executive, could give rise to authoritarian tendencies that can bring other state institutions under the premier’s control.

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Production of mineral fertilizers, lot № 1. From here, mineral fertilizers from Cherepovets are sent to customers all over the world. www.phosagro.com

Phosagro thriving in the time of sanctions

INTERVIEW:

Ben Aris in Berlin

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meet Andrei Guryev at Kuhlhaus in central Berlin, the venue for this year’s world chess competition and a typical Berlin venue: a former factory building with bare brick walls and heavy iron girders holding up the ceiling. It is thronged with chess geeks who have come to see the best in the world battle over the 64 black and white squares.

Both Guryev and his father (also Andrei) are keen chess fans, and sponsors of the world chess championship since 2014.

Despite the fall of the Soviet Union, Russia remains a force in the world of chess and several of the competitors are Russians. The father is the founder of Phosagro, Russia’s largest fertiliser producer that has made him a billionaire. The company has been on a tear, and is a favourite of both portfolio and bond investors. It is cash rich, has low debt and grows at a steady 10% a year irrespective of the shockwaves that have bombarded Russia in recent years.

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The small crowd of enthusiasts have flocked to Kuhlhaus and crowd the balcony overlooking the four boards in the darkened room. The venue has a gladiatorial feel and the hushed silence is broken only by the occasional click of the players’ clocks after they make their moves.

“Russians have chess in the blood. Soviet kids learnt chess in their childhood,”

sponsored, the first being in Sochi in 2014, and last year the tournament was held in New York. The next one will be in London in November.

“It’s part of our social contribution,” says Guryev, lounging on a sofa in the VIP zone. “We sponsor sports in Russia and have spent some RUB2bn [$35mn] on charity. But it is good for business too.

“Just look around at the facts. Boom boom boom, we have growth everywhere” says the younger Guryev, who took over the management of the company from his father while still in his thirties.

Guryev's father was a judo expert and junior is the vice president of the Russian chess association. This is the third world chess tournament Phosagro has

We invited our investors in New York to come along and watch.”

Phosagro has been growing in stature as its business grows, and Guryev says he spends a lot of time on the road talking to investors and at sector conferences.

Speaking constantly to investors interest-

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ed in Russia, he has become upbeat about the country’s prospects as well as his own business. The nine-year long crisis is receding and he becomes energised when he starts talking about the growth, arguing that reforms are happening which are taking the country in the right direction.

“Just look around at the facts. Boom boom boom, we have growth everywhere. And this in a country that has been living under a sanctions regime for four years,” says Guryev in a matter of fact tone.

Even the media frenzy that dogs Russia’s relations with the west is more noise than consequence. Guryev's name is one of the 210 oligarchs and politicians on the US Kremlin Report list issued in January. Guryev is dismissive of the list and says his inclusion has had no impact on his life or business.

“My name is on the US list. But my name is Andrei Guryev and my father’s name is Andrei Guryev so the question is which of us is on the list? Logic says it has to be him as the founder of the company, but everywhere it is my picture,” he says with a chuckle. “It was just the Forbes list [of rich Russian businessmen] and this list means nothing. I was in the US and meeting with top guys from US banks and there was no problem.”

Fertile fertiliser growth The last few years have been tough for everyone, Russia in particular, which went through a quiet crisis in 2014-2016.

The fertiliser business has also been hit after prices fell sharply at the end of last year, but Guryev is upbeat about the prospects for this year and the near future.

“Last year was tough for the fertiliser industry because we hit the bottom in terms of prices in October and November.

In the phosphates and nitrogen businesses some marginal producers went out of business – including in the US because of the rising cost of production. Exports from China fell twofold, and as China accounts for a third of the global trade this had a major impact on the market.

“Today we see a recovery in raw materials.

The cost of production for the Chinese is growing and they also need to restock

their strategic stores, which is about 5.5mn tonnes of phosphate,” says Guryev.

India has also been through the mangle and over the last two years was importing raw materials for fertilisers rather than the fertilisers themselves as costs for raw materials fell.

“Now they have a very low strategic stock of phosphate fertilisers. At the same time there is a significant increase in the price of phosphoric acid, which they buy [for example] from Morocco.

So the cost of production in India is growing significantly and they have gone back to importing fertilisers again,” says Guryev, who reels off statistics on world trade and production capacities of the various types of fertilisers with the ease that comes from constant use.

China’s production costs set the floor of prices in the business, but Phosagro is in a strong position even after the price of a tonne of phosphate fertiliser fell to $320 last year as it has the “lowest cost of production of any company in the world,” claims Guryev.

“Last year was tough for the fertiliser industry because we hit the bottom in terms of prices in October and November.,” says Guryev. “Demand for fertiliser is also expected to rise, especially from Latin America. The cost of commodities like soya and wheat is going up, which is driving demand for fertilisers. Big harvests last year means that farmers need to refuel the soil with fertilisers in Latin America and Russia too, which also had a record harvest.”

same level. And Phosagro held an SPO in February as some of the minority investors wanted to cash out some shares, although the Guryev family remains the majority shareholder in the company.

“The investors are completely ignoring the politics and they are just interested in the corporate story,” says Guryev, as a mix of Russian businesspeople and chess aficionados float in and out of the VIP area. “We as a company are growing every year at an average of 10% volumewise. Since the IPO, we have paid $1.9mn as dividend to our shareholders – about $5 per GDR – and the investors understand all these figures. Sanctions? The fact is money is still coming into Russia.”

Phosagro raised $538mn with a float in July 2011 on the London Stock Exchange.

Since then the company has been investing in its stock, and while Russia’s equity market indices were flat in 2017, Guryev says the fund managers and other investors he meets are well aware of the details of Russia’s leading corporates. “They know all our numbers off by heart.

“If the stock prices are low then the situation becomes interesting, and to sell stock or to come back is a one-day decision. Where else can you get such good dividend yields?” says Guryev, alluding to the fact that currently Russia is offering the highest dividend yields from all the stocks included in the benchmark MSCI EM index.

Russia’s leading bluechips remain in high demand amongst investors who are currently overweight in Russia’s leading

The two worlds of business and politics Phosagro’s success highlights Russia’s growing dichotomy between how investors see Russian business and the fraught geopolitical story that dominates the headlines.

The company reported revenues of $788mn, Ebitda of $231mn and net income of $125mn under IFRS in the third quarter of 2017, with the numbers coming slightly below analysts’ forecasts.

That led ratings agency Fitch to upgrade the company to investment grade before the sovereign rating was hiked to the

Andrey Guryev, CEO, OJSC PhosAgro

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names. Bond traders are equally keen on Russia: in the midst of the recent spy poisoning scandal in March, Gazprom and the Russian state got bonds away worth a total of $3.75bn in the same week as the UK government expelled 23 Russian diplomats.

Phosagro has also had a warm reception on the bond markets. “We just made a $500mn Eurobond deal with a historically low coupon yield for a non-energetic company – 25 years for less than 4% at a fixed rate. 41% of the investment came from the US, and that happened only a few weeks ago,” says Guryev. “The issue was five times oversubscribed. And all the banks that worked on the issue said they had never seen [demand like that] in their life.”

Another motive for the recent SPO was to get included in the MSCI benchmark index that has recently become a theme amongst leading Russian traded companies, which are increasingly interested in improving the attractiveness of their stock.

“It’s a good exercise to be included in the MSCI index as it gave us more liquidity to stock and brought a passive flow into our shares. Today we have 26% free float (30% in the index) and this gave us another inflow and the liquidity and daily trade volume went up. In Russia if you are bluechip then you have to be in the MSCI index,” says Guryev, who displays the interest in his share prices that is growing increasingly common amongst Russia’s top companies.

“It's a good market environment to do an IPO or SPO. I know there are a lot of companies in Russia that are thinking about this despite the political environment, despite the sanctions,” he continues. “The prices are recovering. Look at steel, coal, even oil and gas, they are looking at IPOs. In terms of operations and cashflow Russian companies are in very good shape.”

Russia is not a country for old men yet Phosagro is still growing but plans steady-as-she-goes organic growth going forward. It added new urea production facilities last year and continues to invest a steady RUB30bn a year, but capex is limited on principle to a maximum of half the company’s profits.

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Guryev says with the 12% growth in production volumes in 2017 and the 10% he is expecting to maintain in the coming years, the company will double in size over the next decade.

And Guryev is expecting more progress.

Now the presidential elections are over everyone is expecting a big government reshuffle, probably in May, and a new detailed long-term reform programme.

However, Russia’s economy is still volatile and prone to shocks and crises. In 2014 the ruble halved in value against the dollar, although Guryev says the devaluation was mitigated for Phosagro as fertiliser prices in Russia are de facto linked to the export price, which gives the company a natural hedge in its domestic business.

“I think that we have quite a clear picture of where to invest and what to do. The president and government know what are the steps and what are the problems.

We have very frequent discussions with the economic, industry and finance ministries and they really understand what should be done,” says Guryev. “And we have fantastic implementation. Today we have so many programmes that work.”

He then counts off a long list of state programmes to support export orientated businesses and the construction of new factories, and tax breaks to promote various economic goals.

“Ruble volatility is an issue, but the Russian government is very keen today to support export orientated companies.

They do a lot of tax reduction and special programmes. There is a central bank policy to prevent the ruble appreciating and fight against inflation. We are one of the countries that is winning against inflation – it is less than 2% – which has never happened before in Russia since

“It's a lot of stuff. Russia wants to be more competitive and [that involves] not just companies that will work on the

“The problem is not that interest rates are high.

The problem is the availability of money” the collapse of the Soviet Union,” says Guryev, who is also in constant talks with the Russian government on how it can improve the business climate.

On interest rates, Guryev complains the domestic cost of borrowing is still high after the Central Bank of Russia (CBR) made an emergency hike in rates during the 2014 collapse of the currency’s value, but falling now.

“The problem is not that interest rates are high. The problem is the availability of money. The central bank was fighting against inflation and limited the access to money. They were fighting against the bad banks and that is why the growth of the Russian economy was also questionable.

The availability of money is not there and is still not there,” says Guryev. “The central bank was tightening the liquidity and as a result inflation went down, together with economic growth. Today we need to understand what is happening: liquidity has to be given to business.”

domestic market, but those that will be competitive in the rest of the world too.

And the government is giving money; in agriculture the effective interest rate after all subsidies for a Russian farmer is 3% – its unbelievable. I tell this all to the foreigners but they don't believe it because they don't know.”

Guryev says the Russian government is simply becoming more professional as the crisis focused it on improving efficiency because it had to raise more revenues. He also points to the digitisation drive and, like many others interviewed by bne IntelliNews, highlights the revolution that has been the new tax authorities’ IT system. All this gives Guryev confidence in the future.

“Russia is going, it is growing. Look at me. We are the largest shareholder in Phosagro and we invest $500mn into the company every year. We are sure of what is going to happen and we know how to grow. We have confidence in the numbers.” Checkmate.

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But despite a general consensus on the pressing need to upgrade healthcare, pushback has been strong, due to political pressure, the influence of vested interests in the pharmaceutical business and the concerns of medical professionals. It took Ukraine’s reformist government almost four years to vote in new legislation on healthcare: adopted in October 2017, the reform implementation began on April 1st this year.

Since the country’s independence, healthcare has never ceased to be a sensitive political issue. In 27 years, Ukraine went through 22 Health ministers, with most attempts at change ending dead in the water.

Dr Ulana Suprun acting health minister of Ukraine

Gloves off for Ukraine's health minister as a longawaited reforms begin Fabrice Deprez in Kyiv

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hen the Ukrainian Health minister announced the start of the country’s most ambitious healthcare reform of its post-soviet history, 32 years-old doctor Svetlana Bulatova could not hide her anxiety. In the state polyclinic where she works – a moth-eaten building with an imperial façade and a large classical staircase in the centre of Odessa – talk of an imminent restructuring has left many wondering if they would still have a job in a few months time.

For the long-suffering health workers reform just adds another layer of uncertainty to an already difficult job: “Reforms are very suitable, especially for our patients,” Bulatova said. “But… it means we have to destroy everything in order to create something new, and every time this happens, things get very difficult for everyone.”

Uncertainty has been the key word as Ukraine attempts to overhaul its corrupt, inefficient, Soviet-era healthcare system.

Although the country spends about 7% of its GDP on healthcare (most developed countries spend between 9% and 12%; the US being the exception with 17%), Ukraine has among the lowest

Then in 2014 the revolution began. Dr Ulana Suprun was appointed as Health Minister and took over the ministry in July 2016. Her arrival was described by civil society as an unprecedented opportunity to transform the system. Suprun, a Ukrainian-American who first worked in 2014 with an NGO that distributed medical equipment to Ukrainian soldiers, certainly contrasts with the rest of Ukraine’s political class. The American accent, long blond hair casually falling over her shoulders, and her outsider status (she was never involved in Ukrainian politics before 2014) are all things rarely seen in a Ukrainian political office.

Talking to bne IntelliNews in late March, Suprun described a chaotic arrival at a ministry that had been largely vacated by the staff of the previous minister, Viktor Shafransky. Shafransky lasted only three months before being shown the door because of alleged corruption

“Reforms is very suitable, especially for our patients but it means we have to destroy everything in order to create something new” life expectancy in Europe (71 years, ten years less than the European average).

Abysmal vaccination rates have also lead to multiple epidemics, including a wave of measles that killed 8 people last winter.

by one of his deputies. “I walked into the ministry with no transition period at all, I didn’t even know where my office was or what documents I was supposed to sign,” Suprun said, calling it her “baptism of fire.”

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But even she hasn’t been immune from political boondoggling: she is still officially considered “acting minister” as disputes in the parliament prevented her from being duly appointed.

More money and less corruption The first component of the reform kicked off at the start of this month with the creation of the “family doctor” concept. Instead of the current system where Ukrainians can go visit any doctor, they will now have to choose one general practitioner who will follow them over the long-term.

This new relationship between doctor and patient also entails a new type of healthcare financing aimed at reducing corruption while raising doctors’

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of the total. […] It’s the most common way for doctors to make money.”

It’s also a major source of revenue for healthcare facilities. In Dynjak’s hospital, a naked concrete building in the outskirts of Kyiv, the pharmacy is the first thing patients see when entering.

Despite free healthcare being guaranteed by the Constitution, patients are systematically forced to pay for their medication, often at the hospital’s pharmacy.

Suprun argued this effort to reduce corruption in the healthcare sector was one of the main reason behind the opposition to the reform: “In the last years, we were able to decrease the price of medication by 40% using international

“For me, it’s like a canary in a coal mine. When attacks against me get stronger, I take it that we’re doing something right.” revenues. Doctors will now be paid UAH370 ($14) a year for each patient they treat, with a maximum number of patients capped at 2,000 for general practitioners. The scheme is currently limited to primary care doctors, but authorities plan to extend this to specialists and hospitals in the next three years.

This step is described by Ukrainian authorities as a way not only to enhance the quality of the healthcare but also to reduce corruption. In the current system, an average monthly salary of $200 for the doctors means the overwhelming majority of medical workers rely on bribes or shady deals with pharmaceutical businesses to complement their income.

The latter is very common according to Andrii Dynjak, an internal medicine doctor working in one of Kyiv’s state hospitals: “You prescribe some drugs to a patient for a couple of weeks, the patient spends maybe UAH3,000 or UAH4,000 on this, and at the end of the month the pharmaceutical company gives you 10%

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procurement. That’s money that someone in Ukraine is not making anymore,” she said.

And she is serious about tackling the issue. Suprun was recently approached

by Andriy Bohachyov, an aide to the controversial Radical Party leader Oleh Lyashko, who offered Suprun a new apartment in Odesa in exchange for assigning some expensive medical equipment to a particular hospital. She immediately reported Bohachyov to the National AntiCorruption Bureau of Ukraine (NABU) officers, the Kyiv Post reports. NABU launched a sting operations and Suprun played along, even going to inspect the apartment, all of which was secretly filmed. The video was released and aired on the TSN television channel on April 6 leaving Bohachyov to rapidly backtrack: he claims there was no connection between the apartment and the medical equipment and he was only trying to help Suprun out. Imported medical equipment is valuable and comes with money for maintenance that is often stolen, before the equipment is also stolen and sold.

Critics and fear Critics argue that the reform could leave millions of Ukrainians without proper healthcare as some services become more expensive. Olga Bohomolets, a doctor and Rada deputy from the Petro Poroshenko Bloc party as well as the head of the parliament’s healthcare commission, wrote on Facebook the vote for the reforms would lead to “the closure of hospitals, the reduction in the numbers of doctors, and the disappearance of rural medicine.” Ukraine’s Health minister promised subsidies for those unable to pay while the government announced a 12% increase in health spending this year, but details on the subsidies remain unclear.

Suprun, who only received Ukrainian citizenship in 2015 but is fluent in Ukrainian, has been heavily involved in communicating about the reform: the day she met with bne IntelliNews at the Health Ministry, she was chaining interviews with Ukrainian journalists in an attempt to counter the often negative narrative about the reform in local media. Her Facebook page is also filled with educational content, from explanations about the reform and myth-busting claims about the dangers of vaccines to calls for doctors to stop using photofluorography to diagnose tuberculosis.

Opposition to the reform has been fierce every step of the way, despite a recent poll claiming 65% of Ukrainians supported it. The bill on healthcare was voted in October 2017 after months of negotiations and heated debates, with Bohomolets writing the reform could lead to “genocide.”

In early January, as the launch date of the reform loomed closer, criticism of Suprun was ramped up. The issue was ostensibly about Suprun’s request to fire the rector of Kyiv’s medical university after she had reportedly failed to organize an exam. In response, a group of students organized a strike calling for Suprun’s resignation, which, according to some local media, received the support of the university. Suprun herself complained on her Facebook page of having received death threats.

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“For me, it’s like a canary in a coal mine,” Suprun said. “When attacks against me get stronger, I take it that we’re doing something right.”

In early April, two days after the launch of the reform, the healthcare committee in Ukrainian parliament called for Suprun to resign, claiming she had failed to uphold the 2016 procurement program.

Suprun declined.

Resistance is real at other levels too.

As money will now be flowing directly from the state budget to the healthcare facilities, the reform calls for the closure

Eastern Europe

of regional departments that have, until now, been tasked with distributing the state budget to local hospitals, clinics and doctors. “So they are not the most enthusiasts about the reform,” Suprun acknowledged.

For doctors, and despite official promises of higher salaries, anxiety in face of the scope of the reform is strong. Some aspects of the new legislation are largely welcomed, such as a drive to digitalize what remains a heavily paper-centric system thanks a brand new database called “e-Health.” Instead of thick stacks of papers, often hard to read and easy to

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lose, all the information about a patient will be stored in an electronic database.

But even then, issues remain: back in Odessa, Bulatova is supposed to start registering patients electronically by early April. But in her small cabinet, there is no computer… and no internet connection. “The government promised to help us,” she said, “but so far there has been no support.” After years of battling to get a legislation voted, the actual implementation of the reform will likely prove no less of a struggle for Ukraine’s health reformers.

By and large, extractive industries dominated the profit rankings: the aggregate net profit of those industries was up 17.9% in 2017. And of the highly profitable extractive Russian industries coal did best. Russian corporations involved in coal mining, and other related sectors, grew by a staggering 68% y/y in 2017, according to Rosstat.

Russia's coal exports soared in 2017

Russia’s coal industry is blooming Filip Brokes

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ussia’s corporate sector profits fell in 2017 by 8.7% year-on-year, according to Rosstat, which came as a surprise as the economy as a whole grew by 1.5%. Digging into the details it transpires that performance is extremely mixed. One of the biggest surprises is that Russia’s coal sector is a stand out performer and accounted for a disproportionate share of last year’s growth.

Coal is an old world commodity and not an obvious star performer in today’s world of nuclear power and renewable energy.

But it is also one of those Russia has in spades and has been a big winner from the ruble devaluation. Russia itself is replete in cheap and clean gas and hydropower, but it continues to export significant amounts of coals to countries less well endowed with energy resources than itself.

Russia’s coal exports were up 13% last year to a post-Soviet all time high of 185.5mn tons worth $13.5bn. The growing export numbers reflect increased rail and port capacity at Russia’s European and Asian coal terminals. At the same time, there is a strong demand for coal imports from both European and Asian buyers. With the unprecedented growth levels, Russia is now the world’s third largest coal exporter, surpassed only by Indonesia and Australia.

Beijing in need of coal The growing demand for coal has been pushing the prices up. Since the beginning of 2016, the price has doubled, from $50 to $100 per tonne.

A major role in that process was played by recent reforms carried out in the world’s largest coal user and importer – China. The Chinese government has been on a mission to improve its air pollution levels and upgrade its fossilfuel dominant energy structure by cutting coal consumption and boosting clean energy use.

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Apart from Beijing’s environmental concerns, the drive behind the reforms, initiated in 2016, has been the need to restructure China’s outdated coal industry. Small and largely uncompetitive coal companies are being shut down all over the country.

The plan aims to completely eliminate a total of 109 GW of coal-fired power capacity by the end of this decade and simultaneously keep its total installed coal-fired power capacity below 1,100 GW. For 2017, the plan was to decom-

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According to data from China’s General Administration of Customs, arrivals from Russia in 2017 surged 36.3% from 2016 to 25.3mn tons. The corresponding numbers for Mongolia and Australia were 27.6% and 13.4%, respectively.

Apart from China’s growing demand, the three countries largely benefited from China’s ban on coal imports from North Korea introduced in late February last year. In 2016, China imported more than 20mn tons of coal from North Korea, making it its fourth largest coal provider

“Russian corporations involved in coal mining, and other related sectors, grew by a staggering 68% y/y in 2017” mission or suspend 50 GW, which the government exceeded by 15 GW, according to a State Council announcement reported by Reuters. As of 2017, however, coal still remained the largest source of energy in China at just over 60% of its energy mix, though that has decreased from 80% in 2010.

The consumption of coal in China has been decreasing steadily since 2013.

However, 2017 was a departure from this trend, seeing a rise of 0.4%, according to statistics released by the National Bureau of Statistics reported the Financial Times. According to the FT report, the unexpected increase in Chinese coal consumption was caused by a 5.7% y/y increase in electricity demand due to a short term increase in heavy construction activity designed to boost the economy just before the October national congress in 2017. At the same time, last year saw hydropower productivity, which has been able to satisfy energy demand in recent years, drop by 40%.

Swapping import partners Given the already mentioned capacity cuts in its domestic mining sector, China had to bridge its coal demand through coal imports. The primary benefactors of the surprising upsurge in China’s coal demand were Russia, Mongolia and Australia.

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after Australia, Indonesia and Mongolia, a position North Korea quickly lost after the ban had taken effect.

“The majority of suddenly available market share was grabbed by Russia, as mining costs in Russia are cheaper than in China’s northeast region,” Cheng Gong, an analyst at the China National Coal Association told the South China Morning Post.

In 2016, Russia’s five largest companies accounted for 78.8% (223.3mn tons) of all coal production in the country, according to the Russian Fuel and Energy Complex report from 2017. Most of

Mechel, exports around 30% of its coal to China.

That said, even those companies profited greatly from the recent upsurge in exports to China and the subsequent increase in prices of the commodity so abundant in the Russian soil. The energy giant Evraz, traded on the London Stock Exchange, saw its shares double in value in 2017 alone, a steady growth, which so far hasn’t showed any signs of stopping.

Similarly, the Moscow traded Mechel has seen its shares triple in value since 2016.

Infrastructure is the key Incentivized by the growing demand from China, Russia is developing new coal production centers in the Far East of the country to further boost its energy production. More importantly, the Russian government is currently focused on improving the existing infrastructure connecting the coal production facilities, located mostly in the south, with the ports in Russia’s Far East.

In order to make the whole process, starting with mining and finishing with loading the ready-to-use-coal on cargo ships, more efficient, Russia is working on improving its key railway infrastructure, namely the Baikal-Amur Mainline (affectionately know as BAM in Russian) and the more internationally recognized Trans-Siberian Railway Network. These two railway networks have made Russia’s coal expansion to the markets in Asia-Pacific region possible. But now, after decades of a complete lack of any

“The primary benefactors of the surprising upsurge in China’s coal demand were Russia, Mongolia and Australia.” that coal (171.4mn tons) was exported to foreign markets. Exports to China, however, constituted only a small part 11%. This is due to the fact that energy conglomerates like Evraz, a multinational steel making and mining company headquartered in London, focuses on other markets, mostly Japan and South Korea. Another Russian energy giant,

maintenance, both railway networks are in desperate need of some serious revamping.

The government plan is to increase the throughput of both key railway networks six-fold to 180mn tons, over the next six years. According to a recent statement made by president Putin, cargo contain-

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ers will be delivered from Vladivostok to the western Russian border in just seven days. According to an estimate made last year by the Russian Railways State Corporation, the final price of the project will be somewhere between RUB500bn and RUB650bn ($8bn-$10.4bn).

In tandem with the government working to improve the railway infrastructure, private companies operating ports in Russia’s Far East are building new facilities to be able to service the rising demand for Russian coal.

A notable example is the construction of the third generation of a “specialized coal complex” by Vostochny Port, an

Eastern Europe

intermodal container port located at the eastern end of the Trans-Siberian Railway. With an investment of RUB32bn, it is the largest investment project in Russia’s Far East. The new terminal with full operational capacity will be opened in 2020, and it will increase the port’s

Find more Eastern Europe content at

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cargo turnover by 20mn tons to 40mn45mn tons of coal per year. The project is intended to increase Russia’s coal export potential to meet the growing demand from countries of the AsiaPacific region.

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Selected headlines from past month: · MOSCOW BLOG: Russio delenda est · Russian metal tycoon Deripaska caves in to US pressure · Poroshenko's popularity in free fall · Russian carmaker Avtovaz posts first profit since 2012

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Ilham Aliyev casts his vote in the snap presidential election. president.az.

No surprises as Azerbaijan's Aliyev wins fourth presidential term with landslide bne IntelliNews

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resident Ilham Aliyev won a landslide victory in the snap presidential election in Azerbaijan on April 11 in what was essentially a foregone conclusion.

His victory was made clear by preliminary results issued by the country's central election commission (CEC). Thus, Aliyev received 86% of the votes based on a count of 92% of the ballots, Mazahir Panahov, chairman of the CEC, announced in a press conference. Aliyev ran virtually unopposed. He has spent his past 15 years in office sidelining potential adversaries.

Aliyev will continue his presidency with an extended fourth term until 2025.

Following the results of a referendum in 2016, he now enjoys even greater powers than before, and is poised to appoint a family member, likely his son or his wife, to succeed him.

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Critics believe that the seven opponents that were allowed to run in the contest – the CEC did not accept the applications of seven other, better-known opposition politicians – are in essence puppets

In power since his late father passed away in 2003, Aliyev has ruled the country with an iron fist, centralising power in his hands and those of his family, ensuring that all the country's

“Aliyev received 86% of the votes based on a count of 92% of the ballots” affiliated with Aliyev and the government. None of them won more than 3.11% of the vote, according to preliminary results.

Over time, Azerbaijanis have accepted the fact that Aliyev is the only alternative, and even find excuses for him, blaming the widespread corruption in the country on those around him rather than on the president himself.

institutions come under political control, amassing a large amount of wealth, silencing critics – the use of ‘official’ online trolls and bots to harass journalists was on the eve of the election the subject of a report issued by the Committee to Protect Journalists (CPJ) – and promoting the country as a source of rich energy reserves externally.

The voter turnout was 75.14%, according to the CEC. In a televised

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speech, Aliyev praised himself for his accomplishments in office. He referred to salaries rising by a factor of eight in the last 15 years (though important professions, such as teachers, continue to earn as little as $100 a month) and a tripling of the size of the country's economy in the same timeframe. "We have had a decent path, a path of triumphs and success. I am confident that we will always move forward on the path of success. Towards new triumphs!” he concluded.

Country’s authoritarianism “more deeply entrenched than ever” In its most recent report on freedom in the world published on April 11, watchdog Freedom House gave Azerbaijan one of the worst possible scores – 6.93 out of 7 (with seven being the worst) for democracy, corresponding to a consolidated authoritarian regime.

In the report, Freedom House noted: "Authoritarianism in Azerbaijan became more deeply entrenched than ever in 2017, as the state apparatuses took a number of175x144unprecedented steps to limit OL.pdf 1 10/04/2018

freedom of expression, silence critics at home and abroad, and crack down on minority communities for political gain.

Rather than undertake long-needed governmental or economic reforms, the ruling elite responded to a persistently weak economy by further suppressing government critics, fighting behindthe-scenes battles over shrinking state resources, and emptying state coffers on international lobbying efforts."

Furthermore, Aliyev's appointment of his wife Mehriban as first vice president in February 2017 was an indication that his control over the country has strengthened considerably, the report noted.

"The consequences of this personalization of the state are already being felt: independent media outlets suspected that the March large-scale attacks on their websites, which eventually led to a complete blockade, were instigated by [Mehriban] Aliyeva’s displeasure at their coverage of her appointment."

as the 'Azerbaijani Laundromat', also unravelled last year, prompting Europe's human rights organisation, the Council of Europe, to conduct an internal investigation into how Azerbaijan bribed its members to win favourable votes.

Azerbaijan has given ever stronger indications that its leaders no longer care about international criticism, Freedom House concluded, which explains why Baku has overextended its reach and arrested journalists and bloggers in third countries.

Looking ahead, Freedom House expects Aliyev to resort to diversionary tactics, like an escalation in the territorial conflict with Armenia over the NagornoKarabakh region, in order to rally public support in 2018. Furthermore, while the Azerbaijani economy will benefit from slightly higher oil and gas prices and from the inauguration of a new gas pipeline, the improved economic activity is unlikely to trickle down to the population, its report concluded.

Several high-profile corruption scandals involving Azerbaijan, such 11:13 AM

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place of the Turkmen president was the Turkmen parliament’s chairwoman Akja Nurberdyeva, Nazarbayev’s decision to meet with Berdymuhamedov’s son instead of Nurberdyeva appeared to underline the scenario of Serdar being groomed to succeed his father, commonly referred to as Arkadag, or “protector”, and officially described as overseeing an era of “might and happiness”. Little is publicly known about Serdar, but it is established that he trained as an agricultural engineer and later studied diplomacy in Russia and Switzerland.

The parliamentary elections in Turkmenistan brought a festive time and also a predictable leap forward in the fortunes of the president's son Serdar.

Turkmen president appoints son as deputy foreign minister Kanat Shaku in Almaty

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urkmen President Gurbanguly Berdymukhamedov’s son Serdar has been appointed deputy foreign minister following the whopping 91.4% of the cast vote that he officially won to retain his seat in Turkmenistan’s 'rubber stamp' parliament, Turkmen state-run media reported on March 31.

Serdar Berdymukhamedov, 36, was appointed "by decree of the head of state", the announcement said. The development confirms the outlook of some Turkmenistan watchers who saw the parliamentary elections as a way to elevate Serdar’s status. Turkmen citizens voted for a new parliament on March 26 in an election dominated by three parties and some independents. However, all of the parliamentary candidates supported President Berdymukhamedov, thus presenting no real opposition.

Rumours about Serdar’s potential future as Turkmenistan's next president have long abounded among political analysts.

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Serdar has headed a parliamentary committee on legal affairs since March 2017. His recent meeting with Kazakh President Nursultan Nazarbayev at a rare summit of Central Asian leaders –

In January, the Washington-based Freedom House NGO assessed Turkmenistan as among the 12 “worst of the worst countries” for political freedom and civil liberties. None of the country’s previous elections have been deemed free or fair by Western monitors and Gurbanguly Berdymukhammedov, who has run the former Soviet Republic since 2007 while tolerating no dissent, won his third presidential term in February last year with 97% of the vote.

Most of the candidates in the election represented one of the three registered political parties. These are the Democratic Party of Turkmenistan (DPT, formerly the Communist Party), the Party of Industrialists and Entrepreneurs, founded in 2012, and the Agrarian Party, founded in 2014, which took part in an election for the first time. A small

“Freedom House NGO assessed Turkmenistan as among the 12 “worst of the worst countries” for political freedom and civil liberties” his father was away on visits to Kuwait and the United Arab Emirates (UAE) attempting to raise investment for Turkmenistan, currently in the midst of an economic crisis – provided more evidence that this eventuality would occur.

Prior to meeting with Serdar, Nazarbayev met with the leaders of each Central Asian country who attended the event. Considering that the official representative assigned to the event in

number of candidates were put forward by public initiative groups.

The parliamentary election took place with no sign that the country of six million’s worsening budget and economic predicament are improving. The budget woes have continuously mounted within recent months with alarm bells sounding over scarce hard currency.

The Turkmen government has adopted

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multiple desperate measures to rescue the country’s budget including completely suspending Visa cards; ending the era of discounted gas, water and electricity prices for citizens; making contributions to Turkmenistan’s Pension Fund by business owners mandatory from 1 January; and even imposing more fines on car owners and Turkmen fortune tellers, whose occult services are popular in Turkmenistan.

President Berdymuhamedov's trip to the Middle East secured a number of agreements, largely with the UAE. The

Kuwait part of the tour did not appear to bear much fruit.

Officially reported Turkmen growth in 2017 stood at 6.5%, although the real state of the Turkmen economy is likely worse than in recent years, as continuous reports about the depleted Turkmen budget have shown. The impact of low oil prices has taken a damaging toll on the monetary value of Turkmenistan's gas and oil exports, while a row over historical debts with Iran shut off one gas export route. That left the country with China as its sole

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major gas customer via a new pipeline, with Russia having stopped purchases of Turkmen gas in 2016.

A more optimistic assessment of Turkmenistan was lately issued by the International Monetary Fund (IMF).

Following an IMF visit to the country at the beginning of March, it said that Turkmen growth was “supported by rising natural gas exports, import substitution, and expansionary credit policies”.

Street corner traders disappear as Iranians try but fail to deal with unified exchange rate bne IntelliNews

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ranians of all stripes flocked to the exchange offices on April 10 following the previous day’s government announcement that, in the face of a spiralling devaluation that was undermining the Iranian rial (IRR), it was forbidden to trade dollars in the open market and the currency was pegged to the greenback rate at IRR42,000. However, many exchanges were refusing to sell at the official new unified price and street corner traders, fearful of the new directive, were conspicuous by their absence.

Exchanges complained they were yet to receive official instructions on how to conduct their newly regulated business.

Fears over Iran’s future in the face of unrelenting hostility from Donald Trump – who on May 12 could withdraw the US from the nuclear deal signed two years ago – were a major factor in driving the open market dollar value of the IRR to an all-time low of IRR63,000 in just three days of trading, with the currency also sunk by a lack of trading – independent forex outlets had reached the point where they were refusing to sell hard currencies.

On Ferdowsi Street, the centre of Iran’s forex market, several traders on April 10 were now refusing to sell dollars at the new official price of IRR42,000.

Pound sterling and euro rates, meanwhile, remained at much higher prices from the day before. However, word later came that the rates for these currencies had been officially set at IRR59,330 and IRR51,709, respectively.

On both sides of the street, traders declined to let go of their valuable greenbacks as they sought to cut their

"Last night on TV I heard it's 42,000 so I came here to buy some for my son who is overseas. I've checked every exchange, but I couldn't find any dollars," said Tahmoores Faravahar, a 71-year-old retired oil sector worker, who spoke to AFP on April 10.

Other people remained at home looking at their chosen bureau de change website; however, many seemed to be continuing with pre-announcement rates or were entirely offline for periods of time due to massive site access demand.

“Only 5% of Iran's hard currency is estimated to be in the form of notes for sale in banks and exchanges” losses following Vice President Eshaq Jahangiri’s late-night announcement the day before that any trading for unofficial rates had been made illicit.

Late on April 9, some traders had even resorted to listing their dollars on local second-hand sales website Divar.ir as the news broke about the collapse in their value.

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Officials in Iran have been at pains to point out that the country is not facing a currency crisis, but a crisis in accessing currency notes. Currency in the form of letters of credit is said to be relatively easily available to both the private or public sector. Only 5% of Iran's hard currency is estimated to be in the form of notes for sale in banks and exchanges. Iran reported a $17bn currency surplus for last year, with non-oil exports coming in at $47bn and oil exports recording $55bn.

Politicians and generals point fingers The frustration on the street was echoed early on April 10 in the country’s parliament when the summoned Central Bank of Iran (CBI) governor Valiollah Seif addressed MPs, only to find himself in the centre of a crowd of furious lawmakers shouting and cursing him live on state television. Speaker of Parliament Ali Larijani was seen to beg the representatives from several regions to take their seats, but the disturbance continued until other parliamentarians had to intervene.

After normal business in the Majlis (Iran’s parliament) resumed, Seif was quoted as saying by Mehr News Agency that there were “signs of neighbouring countries’ plots [in the currency slump]”.

He added: “In the United Arab Emirates and Saudi Arabia, plans are being made to disrupt Iran’s forex exchange market.

We need to keep calm and disappoint the enemies [from realising their plans].”

bne May 2018

Seif further stated that rumours spread by social messaging application Telegram Messenger were part of the issue as channels with hundreds of thousands of followers were disseminating information on a minute by minute basis.

Around half of Iran’s population of 80mn subscribe to the app.

The central bank chief went on to add that the government had now moved to entirely remove the US dollar from international transactions and replace it with euros in trade.

That political statement by Iran’s top banker was echoed by Iran’s top general and Minister of Defence of the Armed Forces Amir Hatami. He remarked that the US Treasury Department “has employed 500

The new government rules state that a maximum $1,000 can only be sold to travellers and students. The buyer must present a valid visa in their Iranian passport and the ticket for their outbound journey to receive the cash. Dual citizen Iranians and those with a valid green card for the US or residency elsewhere are not eligible for the new rate.

Other rules include a ban on the possession outside a bank account of more than $10,000. The CBI has also stated that anyone who holds more

“The new government rules state that a maximum $1,000 can only be sold to travellers and students” people only for disrupting the Iranian economy … to stand against Iran’s progress,” Tasnim News Agency reported.

Traders left without a rulebook Despite the government’s intervention to unify the official and unofficial exchange rates at the eleventh hour, most traders across the country trying to come to terms with the first day of the

Ferdowsi street in Tehran, which is famous for money exchange. Victor Jiang / Shutterstock.com

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new currency regime had not received any details from the CBI on how to comply with the new regulation, further complicating matters, according to Press TV.

dollars than this maximum must within a month either sell the money at the official rate or invest it in a US-denominated bank account in Iran.

Buying and selling the dollar at higher prices than the official rate is now classed at the same level as smuggling contraband and anyone suspected of such transactions can be arrested and made subject to legal action.

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Actions by Montenegro's opposition Democratic Front, including protests that turned violent in October 2015 (pictured) have not helped the party to make headway with voters.

BALKAN BLOG:

Divided, weak and doomed to fail

Denitsa Koseva in Sofia

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lmost 30 years after the fall of Communism and despite their ambitions of Euro-Atlantic integration, many Southeast European countries have failed to establish political pluralism and are dominated by single parties and their leaders. This is mostly because of the tools successfully employed by the ruling parties, but the opposition has to bear its share of the responsibility as the numerous small parties seem incapable of setting aside their personal ambitions and working together to beat the status quo.

Djukanovic. “The opposition is divided between those who are still angry about the Nato bombings of 1999 and are proRussian, and parties which oppose Djukanovic but not the West,” Michael Taylor senior analyst for Eastern Europe at Oxford Analytica, tells bne IntelliNews.

Montenegro is the most acute example of a hopeless opposition as politics in the tiny country have been dominated by one man, the veteran politician Milo Djukanovic, and his ruling Democratic Party of Socialists (DPS) for nearly 30 years.

Boutique formations In many cases newcomers on Southeast Europe’s political stage seem opportunistic and not driven by any particular ideology or beliefs. There are some exceptions with good potential, but even they can hardly beat the status quo due to lack of infrastructure and influence.

There is little doubt that Djukanovic will win the upcoming election, putting him back in the presidency for the second time on top of his four terms as prime minister, even though for the first time in Montenegro’s history of independence almost all the opposition parties have decided to back a single candidate, Mladen Bojanic.

However, this move came too late as opposition parties fought for their own interests for most of the past year, and do not seem united by anything other than the hope of finally ousting

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Djukanovic, on the other hand, is the West’s man. Since the beginning of his political career he has made Montenegro’s Euro-Atlantic integration his top political priority.

“[Big] parties have built the support infrastructure. They have offices across the country, which a lot of the new movements don’t have, they tend to be just based in the capital or larger cities … They have the potential, but they don’t necessarily have the support infrastructure,” Cvete Koneska of Control Risks tells bne IntelliNews.

In Bulgaria, for example, former justice minister Hristo Ivanov

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set up the Yes Bulgaria party prior to the March 2017 general election, claiming that it can fight corruption and break the status quo. The party easily grabbed the support of younger people who protested in Sofia in the summer and autumn of 2013, angered by the parliament’s decision to appoint controversial businessman Delyan Peevski as head of the state security agency. However, this was not enough for the new party to secure seats in the parliament, and it is now trying to unite several small opposition parties, hoping to gather more voters.

for the European Development of Bulgaria (Gerb) which is currently in power, the Bulgarian Socialist Party and the Movement for Rights and Freedoms (DPS) – have all been accepted as part of the status quo by both voters and political analysts. Attempts by new, fresh faces like those behind Yes Bulgaria to break the establishment seem doomed to fail as they come up against the powerful ruling elite.

“On one hand, new formations with such claims [to beat the

Yes Bulgaria is typical of new opposition parties in the region, which are located in big cities and are betting on ideas that cannot beat the populistic appeals of the much stronger and more experienced ruling parties.

“Pro-reform, anti-corruption parties are strong in the capital but not in the countryside”

“Pro-reform, anti-corruption parties are strong in the capital but not in the countryside, where parties can establish a clientpatron relationship with voters. In Bulgaria, the pro-reform vote is small, as the fate of the Reformist Bloc (a disparate alliance of several parties) shows,” Taylor says.

Koneska agrees and says that the “social media give the impression that the new parties have a stable network, but in practice their reach is very superficial compared to the more complex apparatus the more established parties have – with local branches, with local media, with the administration, with businesses and so on, which makes them much more permanent and more difficult to dislodge”.

Feeding the status quo Ruling parties are also very successful in presenting themselves as the least worst alternative and, as Petar Cholakov, chief assistant at the Social Control, Deviation and Conflicts department at the Sofia-based Institute for the Study of Societies and Knowledge, says, “The apathy of voters feeds the status quo.”

Most Southeast European parties in power use tactics summed up in Florian Bieber’s “Ten rules by a 21st-century Machiavelli for the Balkan Prince”. Tactics outlined by Bieber, professor of Southeast European Studies and director of the Centre for Southeast European Studies at the University of Graz, include controlling elections before election day, controlling

“Montenegro is the most acute example of a hopeless opposition”

status quo] appear. On the other hand, the party system’s crisis, the lack of success of the current players to mobilise a significant part of the voters shows that there is a potential for new political forces … to play the role of an alternative,” Cholakov tells bne IntelliNews.

However, he adds that the country could again witness a project arising from “unparalleled, unstoppable by anything political populism”, which would not change the status quo, instead blending with it and serving its needs. “The fate of such projects is to be like fireworks – they shine brightly and effectively on the political sky for a short time and without changing anything,” Cholakov says.

Pressing the wrong buttons Another problem for the newly established opposition in SEE is that most parties are personality-dominated rather than focused on ideas, and they often lose credibility as their leaders seem driven by one main goal – to personally benefit from gaining power. This has been the situation with parties from the Reformist Bloc in Bulgaria to Bosnia’s Social Democrats (SDP).

“The Reformist Bloc was seduced and destroyed by [Bulgaria’s Prime Minister Boyko] Borissov, but with the active participation of its leaders. Some of them directly agreed to get on board – to participate in power, others hesitated and did not take clear, firm positions regarding GERB,” Cholakov says.

In Bosnia & Herzegovina and in Serbia, opposition parties also seem unable to go beyond the personal ambitions of their leaders or press the right buttons for voters.

the majority of the media, talking about the fight against corruption without taking any serious steps, a lack of ideology and unfulfilled promises for change in people’s lives.

Torn by political conflicts, Bosnia has been dominated by ethnic parties after the Social Democrats (SDP) failed to establish themselves as a reliable multiethnic alternative.

Bulgaria differs somewhat from its neighbours in the Western Balkans as it has three main parties dominating the political life. Yet in other ways it is similar: all three parties – Citizens

“In the 2010 elections, the SDP, which was the successor party to the League of Communists in Yugoslavia, was the strongest party, but four years later lost more than 80% of its voters

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thanks to leadership and policies that were perceived as egocentric, corrupt and arrogant, garnering just 6.7% of the vote across [Bosnia],” Taylor says.

In neighbouring Serbia, the opposition Democratic Party (DS) also seems to be insufficiently nationalistic. “Although DS has suffered splits (notably when former President [Boris] Tadic left to form a new party), its main problem is that it is regarded by many Serbs as insufficiently patriotic as regards Kosovo,” Taylor added.

The DS suffered a humiliating defeat in the Belgrade municipal elections in March, failing for the first time in its history to pass the 5% threshold to take seats in the city assembly. Meanwhile, President Aleksandar Vucic’s SNS scored a convincing victory, helped by the fragmented opposition. It was a similar story in the 2017 presidential election when Vucic took an easy first round victoryas the opposition vote was split between a couple of leading candidates.

Street politics Street politics are on the rise in some Balkan countries as opposition parties seek to attract more attention and support, having failed to do so through more orthodox channels.

In the last three years Montenegro has seen not only violent street protests but also a failed coup attempt aimed at assassinating Djukanovic during the October 2016 general election.

“The attempted coup of October 2016 could stem in part from the hopelessness of opposing Djukanovic by constitutional means, as he has been in power since 1991,” Taylor says.

The protests were staged by the main opposition party, the pro-Russian Democratic Front (DF), which is also alleged to have been involved in the thwarted coup attempt. The DF is a coalition of parties that was set up with one main goal: to oust Djukanovic and the DPS from power. It uses aggressive rhetoric and openly opposes the country’s membership in Nato and the EU. It is rumoured that the party is financed by Moscow and Russia has several times attempted to influence the Montenegrin prosecution to stop trials against its leaders.

However, the party has scored a series of own goals. Its opposition to membership in Nato and the EU has pushed voters away, and most of its leaders are now on trial either for their involvement in the coup plot or for the clashes in 2015.

One of them, Milan Knezevic, has already been sentenced to four months in jail for his participation in the clashes.

In Kosovo, the nationalist Vetevendosje party has also taken an aggressive and sometimes violent stance. The party is well known for letting off smoke bombs in the parliament on several occasions as it sought to block a vote on a border demarcation deal with Montenegro.

Vetevendosje opposes any international involvement in Kosovo’s internal affairs, and is demanding that Pristina take

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a more aggressive position in its negotiations with Serbia.

It is also against the privatisation of state-owned companies.

The campaign against the border deal with Montenegro ultimately failed; despite a last ditch smoke bomb attack on March 21, legislation ratifying the deal was passed the same day as MPs returned to the chamber and carried on with the session. Vetevendosje has managed to present itself as a radical alternative to the parties currently in power, unexpectedly taking second place in the 2017 general election. More recently, however, the party has been riven by internal conflict, making its future uncertain.

“Vetevendosje looked to be a possible breakthrough party, but has now split,” Taylor noted.

But it’s not only opposition parties that resort to violence in their desperate quest for power. Last April, supporters of Macedonia’s conservative VMRO-DPMNE party, which had been in office since 2006, stormed the parliament in an attempt to stop the formation of a new government by the rival Social Democratic Union of Macedonia (SDSM). VMRODPMNE narrowly won the December 2016 snap election, but failed to form a government as it was unable to secure the support of ethnic Albanian parties, which eventually backed the SDSM. In the aftermath of the attack, which resulted in injuries to MPs including Macedonia’s now prime minister Zoran Zaev, prosecutors have indicted dozens of people, among them a number of VMRO-DPMNE MPs. Now in opposition, VMRO-DPMNE has sought to obstruct the parliament’s work by staging a lengthy boycott.

The winning formula If an opposition party in SEE wants to break the status quo, it needs to get a charismatic leader with drive and determination, Taylor says. Another thing that could make people vote for a new party, he believes, would be a serious economic downturn leading to popular dissatisfaction with the government economic management, or blatant corruption – revelations of top level corruption in Macedonia contributed to the eventual ousting of VMRO-DPMNE though in other countries opposition parties have been less successful in capitalising on this theme.

According to Koneska, people would vote for a new party for pragmatic reasons. “People vote for pragmatic reasons – for jobs, for contracts, or small subsidies for farmers – the usual things that people need. If someone else comes in government and offers these things, loyalties will shift,” she says.

However, as long as the ruling parties use the tools at their disposal to stay on top as long as possible – including controlling the media, appealing to populist ideas and balancing between EU aspirations and rising or traditionally high nationalistic moods – there is little scope for opposition parties to make headway.

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Whisper it – ‘Erdonomics’ could be driving Turkey to a meltdown

COMMENT:

Will Conroy in Prague

T

urkish President Recep Tayyip Erdogan on April 9 was unmoved in the face of the sliding Turkish lira (TRY), reiterating unorthodox monetary policies that have unnerved many investors and repeating his hard-nosed insistence that interest rates need to be lowered to “save” investors.

Analysts are not ready to call it but there’s a growing apprehension that Erdogan, going hell-for-leather for short-termist growth with an eye on what could be snap parliamentary and presidential elections, could risk tipping Turkey’s economy over the edge.

Moderation is not the name of the day – ask nervous investors who were alarmed by last week’s reports that the last truly market-friendly member of the cabinet, Deputy Prime Minister Mehmet Simsek who leads the economic team, had handed in his resignation – and the president is simply swiping away observers warning that Turkey’s economy is overheating, labelling them

“Erdogan again knocked away the argument that monetary tightening is required to address Turkey’s double digit inflation” envious of his country’s supercharged economic success (the Turkish economy, at 7.4% in 4Q last year and 11.3% in 3Q, is now growing faster than the economies of China and India).

As the TRY registered yet another all-time low against the dollar – one USD was fetching TRY4.0755 in morning trading before trimming its losses to 4.0599 by around 21:30 Istanbul time – and broke the 5.0 threshold against the euro for the first time – touching 5.001 against the single currency – Erdogan again knocked away the argument that monetary tightening is required to address Turkey’s double digit inflation, one of the world’s worst current account deficits and the fast depreciating

Turkish president Recep Tayyip Erdogan has some unorthodox ideas on monetary policy

Turkish currency, down around 7% against the greenback so far this year. What’s more, the populist president’s latest intractable stance on monetary policy amid an overheating economy heightened concern on the markets that the independence of the Turkish central bank has essentially been lost.

“How will there be investments if you do not bring down interest rates? We call this an investment-based incentive system,” a pugnacious Erdogan said in a speech in Ankara, where he unveiled a $34bn investment incentive package to help Turkish companies. “You have to save the investor from high interest rates so that these investments could be made.” he added.

Despite the sheer weight of analytical opinion against him, Erdogan lashed out at those who claim Turkey’s astronomic growth rates are excessive, claiming they speak out of jealousy. Turkish growth was creating more just income distribution and he was hopeful that unemployment would soon drop below 10%. Growth means investment, investment means employment, production, technology, exports and prosperity, ran Erdogan’s argument.

Erdogan wastes no opportunity to urge banks to lend more money to the economy to spur growth and April 9 brought local media reports that cash-hungry lenders were now offering the highest rates on lira deposits since the aftermath of the global financial crisis. They cited Bloomberg HT television data detailing how average interest rates on overal deposits stood at 12.81% at the end of March. Turkey’s high inflation, at around 10.2%, has caused interest rates on loans to rise towards an annual 20%, curbing demand for credit from businesses and consumers.

Past form William Jackson, senior emerging markets economist at Capital Economics, said that “if past form is anything to go by”, the lira would need to drop by another 5% or so, to about TRY4.25 to the dollar, in the next week or two to prompt a significant monetary policy response from the Central Bank of the Republic of Turkey (CBRT). But there are those who wonder if even then it would dare act in the face of ‘Erdonomics’.

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He added: “Of course, demands from the government make it difficult to predict what will happen, but it’s worth noting that the central bank faced similar rhetoric from the authorities prior to the hikes in 2014 and 2017. The big test will come at the next MPC [monetary policy committee] meeting on 25th April. If the lira remains under pressure at that point and central bank doesn’t tighten policy that will reinforce concerns that it is bowing to the government which could cause the downward spiral in the lira to gather pace.”

“This mismanagement of the currency leads to a loss of confidence in the purchasing power of the lira which is hard to cure,” Lutz Roehmeyer, who helps oversee about $14bn at Landesbank Berlin Investment, told Bloomberg on April 9.

“Only massive one-off hikes can heal this situation, which is of course not popular as it slows the economy."

Two camps Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, said in a note that the government’s seeming prioritisation of more stimulus measures over "re-balancing" continued to unnerve investors. He added: “There are two camps in the Erdogan administration: the first in the go for growth camp, around [senior advisor to the president] Yigit Bulut; and then the more orthodox team rolled out to talk to foreign investors… who talk in favour of the need for ‘rebalancing’.

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“At the moment, as per the administration's actions, the former camp seems to be winning – the Erdogan administration seems to be going for growth, at all costs, and without a willingness to hike policy rates, the lira has to take the strain.”

JPMorgan Chase & Co. said in a note that it remained underweight Turkey’s currency and bonds. It pointed to a current-account deficit that it forecasts will expand to 6% of output in 2018 and a deteriorating inflation outlook. The nation needs a “sizable” foreign-exchange adjustment and credible policy response, which may not be “imminent,” the bank said in a note released on April 6.

Turkish bonds fell on the day, pushing the yield on benchmark 10-year notes 8 basis points higher to 13.15%. That is close to the record high recorded last week.

The investment incentives announced by Erdogan will comprise of TRY137.4 bn being awarded to projects by companies including Vestel, Tosyali, Metcap and Sasa, the economy ministry said.

The 23 projects would create 35,000 jobs and contribute $19bn to the current account, it added. The incentive package, according to the president, includes exemptions from customs tariffs and government support for employee insurance premiums.

The lira is the fourth-worst performer so far this year among more than 20 emerging market currencies.

KRUK REPORT:

Nadia Savchenko, Ukraine’s fallen hero Kateryna Kruk in Kyiv

"A

ctus hominis, non dignitas iudicetur.” The acts of man, not dignity, are judged. I still very well remember how my heart was squeezing looking at Nadiya Savchenko in a Russian prison. I remember how proudly we shared Nadiya photos and quotes in court. Today I found and read again the article I wrote about Savchenko's release from the prison and return to Ukraine.

She had been serving as a pilot for the Ukrainian army and was captured by rebels in eastern Ukraine before being sent to Moscow to stand trial on charges of murdering two Russian journalists.

This all was just two years ago but it feels like ages away.

Today Nadiya Savchenko, a Hero of Ukraine, one of the most recognizable icons of recent Ukraine history, was stripped of MP's immunity and arrested. In that two years the one-time symbol of patriotism turned into an organizer of a potential terrorist attack on the state, aiming at destroying the Ukrainian leadership and overthrowing the government.

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Even for those who are following Ukrainian events closely, this sounds absurd and shocking. Definitely, there will be people left radicalized and angry with Savchenko's arrest, but the predominant feeling I see among my friends and social media reactions is: "How did we get here?"

Let's start from the very beginning. On March 8 Ukrainian border guards detained Volodymyr Ruban, a man known for his ties with Viktor Medvedchuk, the eminence grise of the Kuchma-era and a personal friend of Russian president Vladimir Putin. Ruban has also taken part in many prisoner swaps.

However, this time he was detained with the vehicle full of weapons, including mines and mortars. Apparently, the Ukrainian Security Service (SBU) and General Prosecutor’s Office (PGO) have been following him for a long time, suspecting he was planning some terrorist attacks.

Ruban and his allies planned to shell central Kyiv and the government quarter with mortars, as well as homes of the key

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political figures in Ukraine. In the days that followed, the SBU and PGO conducted more than 25 searches in different Ukrainian cities and detained many suspects. However, there was one key suspect that couldn't be detained so easily. It was Nadiya Savchenko, a Hero of Ukraine and a member of the Ukrainian parliament, who has parliamentary immunity from arrest.

tenced in Russia for that. As one MP said, he was ready to vote to strip Savchenko of her parliamentary immunity but after watching the video and listening to the Prosecutor General's report he will be voting for Savchenko's arrest too. That position quite accurately describes what many Ukrainians thought that day.

When Yuri Lutsenko, the Prosecutor General of Ukraine, announced what Savchenko planned to do the deputies of the Verkhovna Rada reacted sarcastically. That shouldn't come as a surprise given how little support Ukrainian security bodies have.

Savchenko's case has several implications: • even further disillusion with heroes/idols/public figures and patriots; • possible small shake for Tymoshenko as she was the one who brought Savchenko to the parliament and made her an MP by giving the first place on the Batkivshchyna (Fatherland) party list. I wouldn't be surprised if at some point Tymoshenko will also be called to testify and the entire case would be used to cast some shadow on the front runner for the 2019 presidential elections; • a little popularity boost for security services and PGO after their recent shameful searches of big Ukrainian companies; and • an ambiguous situation for the supporters of radical actions: clearly, the ideas of a governmental overthrow and coup were discussed on all central media making these radical statements part of the public discourse.

However, the SBU operation itself and decisiveness of the steps to stop perpetrators might scare others off from trying.

Just consider this statement: "Savchenko planned to use a mortar in the Verkhovna Rada, to bring down with a crash a (15 tonnes) chandelier and shoot those who resist." This sounds insane and ridiculous until Savchenko confirmed it.

"Why wouldn't I want that? Everyone in the country thinks the same".

The atmosphere was tense even before Lutsenko presented a 20-min video showing Savchenko in conversation with two officers and confirming she was indeed planning an overthrow of the government. It was an extract from almost 72 hours of evidence collected by Security Service.

In the video Nadiya Savchenko: • discusses plans to overthrow the Ukrainian government and exterminate president Poroshenko, head of the National Council on Security and Defence Oleksandr Tyrchynov, and minister of interior affairs Arsen Avakov; • mentions many times that she stays in close contact with the leader of the breakaway so-called Donetsk People's Republic Alexander Zakharchenko and coordinates with him; • says that Ukrainian political leadership must be exterminated, including attacks on homes to make the rest of the establishment leave the country; and • cooperates with Ruban who tried to illegally bring into Ukraine weapons that are produced in Russia.

Together with a friend of mine, we rent a flat not far from the government quarter; she works in one of the ministries. Today after dinner we were watching the PGO video and discussing what if the attack really happened? Would we have survived?

This is not the most pleasant dinner conversation but it is a sobering reminder of how fragile our peace and stability are.

And how many others would like to see it gone or are ready to assist it?

When given a chance to defend herself in front of the parliament, Savchenko didn't deny what she said in the video, but promised there are others in the parliament who might continue her work, and that Ukrainian authorities, "must bear responsibility for starting the war in this hall four years ago."

Just like this one, many other statements Savchenko made simply sounded delusional. There is a strong feeling that she really believes that she is doing the right thing and has absolutely no understanding of what a coup means in a country already in a state of war. Moreover, she repeated some insane statements that Ukrainian authorities are responsible for the war and it is their fault that people don't want to reunite the divided Ukraine.

It sounds unbelievable from someone who volunteered to fight for the country's territorial integrity and was jailed and sen-

Fallen angel: Nadia Savchenko has gone from hero of Ukraine to coup plotter

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I New Europe in Numbers

BIST-100

Turkey BIST-100 stock market index

bne May 2018

After a skyrocketing 2017 Istanbul stock exchange may be in for a trend reversal The Istanbul stock exchange’s benchmark BIST-100 index has lost as much as 10% since the end of January. The index saw its historically highest level of 121,531.5 during intra-day trading hours of January 29 before gradually descending to a 2018 trough to date of 106.624 during intra-day hours on April 11.

The index lost a chunky 5% from the April 6 closing price of 114,738 to the April 11 closing price of 109,253. Some $20bn was thus erased from the value of Turkey’s equities. The rapid depreciation of the Turkish lira (TRY) amid investor anxiety over economic imbalances, rising geopolitical risks linked to the fraught situation that has developed over conflict-torn Syria and signs that conglomerates are struggling to pay their debts have all weighed on stocks.

y/y change in %

Polish CPI, annual change in %

Polish inflation slowdown confirmed as CPI expands just 1.3% y/y in March Poland's consumer price index grew 1.3% y/y in March, slowing down 0.1pp against the annual growth rate seen in the preceding month, statistics office GUS announced on April 13.

The slowdown in inflation will only entrench the Monetary Policy Council (MPC) in its dovish position. Despite predictions that demand pressures in the economy and rising costs of labour are set to push inflation close to rate setters’ red line of 2.5%, a reverse process is currently underway.

March was the third consecutive month in which inflation slowed down.

Russian inflation inches up to 2.4% in March Consumer prices in Russia rose by 0.3% month-on-month in March 2018, in line with previously observed weekly inflation dynamics and bringing the annual inflation rate to 2.4% versus 2.2% seen in February.

The nadir of the recent post-Soviet low inflation has probably passed.

The Central Bank of Russia (CBR) expects inflation to end this year at around 4% and the small rise in inflation in March was not a surprise.

Index

Watcom Russian shopping index

E-commerce dramatically eats into foot traffic at Moscow’s leading shopping malls E-commerce has dramatically eaten into the foot traffic at Moscow’s leading shopping malls in the first months of this year as Russians increasingly move online to buy everything from sugar to shoes, according to the latest Watcom Shopping Index.

The index showed a jump in foot traffic in the run up to the holiday season in December. The week just before the New Year’s Day holidays had an index score of over 605, which was better than the 2016 result (578.63), but still behind the results of the previous two years (620.25 in 2015 and 629.6 in 2014). However, since then the results for the first 14 weeks of 2018 have been well below all the results for the last four years, dropping to a low of 434 at the end of January, its lowest level since the index was launched.

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Ukraine's democracy score falls in annual Freedom House ranking, illiberalism on the rise in Europe bne IntelliNews Ukraine’s overall democracy score fell for the first time since the EuroMaidan revolution in the annual Freedom House ranking, due to overt attacks on civil society and NGOs by the government and its failure to launch a real anticorruption drive despite western donors' insistence.

Ukraine's overall ranking dropped from 4.1 to 4.64 (7 is lowest). Two subratings dropped in particular: the civil society rating, from 2.50 to 2.75, and media independence from 4.00 to 4.25. Ukraine remains in the Partly Free category.

“With the Russian-led conflict in the east grinding on, Ukraine’s politicians are taking advantage of patriotic sentiment to attack NGOs and journalists, accusing them of undermining the war effort. Attacks on civil society and political opponents have sapped the momentum from the

institutional reform process in Ukraine,” said Nate Schenkkan, project director that produced the “Nations in Transit 2018. Confronting Illiberalism” report.

Ukraine is not alone in backtracking.

The report highlighted the worrying rise of illiberalism across Europe.

Freedom House registered the broadest score declines in the project’s 23year history: 19 of the 29 countries assessed had declines in their overall Democracy Scores and for the second year in a row, there are more Consolidated Authoritarian Regimes than Consolidated Democracies.

Amongst the stand out underperformers was Poland which recorded the largest category declines and the second-largest Democracy Score decline in the history of the report. The government’s takeover of the judicial system, politicization of public media, smear

campaigns against nongovernmental organizations (NGOs), and violations of ordinary parliamentary procedure have resulted in a dramatic decline in the quality of Polish democracy.

Likewise the rise of Hungarian prime minister Viktor Orban has lead to the equally dramatic fall in that country’s democracy ranking: Hungary registered the largest cumulative decline in Nations in Transit history, as its score fell for the 10th consecutive year.

And the EU aspirations of Serbia might be in doubt after its score fell for the fourth year in a row, threatening its status as a “Semi-Consolidated Democracy,” thanks to the consolidation of power under President Aleksandar Vucic.

The bright spots this year were Macedonia, Uzbekistan, and Estonia, which all improved their scores.

Change in democracy score averages by subregion

Source: nationsintransit.org

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