bne IntelliNews September 2018

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US declares economic war on Russia Zarif to Trump: Iran oil ban will fail, “world is sick & tired of US unilateralism” September 2018

Russia’s 1998 crisis redux Hungarian oligarch expands business empire to sportswear manufacturing

Digging into Russian dividends p. 30

CEE boom passes peak p. 38

Romania joins the bad boys of Central Europe p. 44

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bne September 2018

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

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Clare Nuttall (Bucharest) news editor

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Eurasia & Southeastern Europe William Conroy (Bucharest) editor wconroy@intellinews.com Central Asia Kanat Shaku (Almaty) bureau chief kshaku@intellinews.com

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Eastern Europe Sergei Kuznetsov (Kyiv, Minsk) skuznetsov@bne.eu Subscriptions Stephen Vanson +44 753 529 6546 (London) svanson@intellinews.com Advertising Elena Arbuzova (Moscow) business development director (CIS) Design Olga Gusarova (London) art director

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bne Intellinews is published by Emerging Markets Direct OU Print issue:

10 Hungarian oligarch expands business empire to sportswear manufacturing 11 Austria’s Oesterreichische Kontrollbank to facilitate trade with Iran despite US sanctions 13 Russian petrochemical major Sibur reportedly preparing for IPO 14 EU approves plans to privatise Slovenia's largest bank NLB 15 Danske Bank to waive profit from suspicious transactions in Estonia

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22 Russia's Rosneft launches first ever share buyback programme as part of investment makeover 23 Robots to collect debts for Russia's VTB bank 23 PPF completes €2.8bn acquisition of Telenor's business in CEE 24 French car share BlaBlaCar buys Russian rival BeepCar of Mail.ru 25 Russia’s VK announces privacy changes to protect users from arrest 25 German Allgeier to pay over €10mn for 67% of Romanian software producer

COVER FEATURE 16 China refuses US request to stop buying Iranian oil, big blow dealt to sanctions strategy

26 Making Croatia an Adriatic tiger?

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21 Czech CEZ reportedly sues Bulgaria over banned asset sale

17 Asian investors replace western players in Russia's FDI 18 UK with top exposure to Turkish private sector foreign loans 20 Russia and Turkey step up fight against dollar’s dominance in trade

30 Digging into Russian dividends 32 Total returns from dividend yielding stocks out pace the market 34 Secretive Surgutneftegaz is top dividend dog 35 Russian stocks are cheapest in emerging markets

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30 37 How bad has August's EM sell-off been?

55 Seven political parties in the running for parliament seats in Ukraine's 2019 election

CENTRAL EUROPE EURASIA 38 CEE boom passes peak 41 Hungarian opposition blasts government for hefty state funding to BMW 42 LGBT Prague Pride supporters march as parliament debates same-sex marriage laws

SOUTHEAST EUROPE 44 Romania joins the bad boys of Central Europe 48 Violence erupts at mass protest staged by Romanian diaspora in Bucharest 49 Five Slovenian parties nominate ex-comedien Sarec for prime minister 51 Rightwing Macedonian parties to boycott name deal referendum

58 Zarif to Trump: Iran oil ban will fail, “world is sick & tired of US unilateralism” 60 Brutal terrorist attack in Tajikistan savage blow to fledgling tourism industry efforts 61 Europe: Ignore Trump’s call not to do business with Iran 63 Small print shows Caspian Sea summit was not the ‘summit to end all summits’

OPINION 64 Russia’s 1998 crisis redux 67 Erdogan’s embrace of Western Balkans worries EU 68 Turkey's crisis a golden opportunity for the Kremlin

EASTERN EUROPE NEW EUROPE IN NUMBERS 52 US declares economic war on Russia 53 Russian Audit Chamber to get stronger anti-corruption mandate

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71 Investors jittery after Ukraine's hryvnia falls below UAH27 to the dollar

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Politics Eastern Europe Belarusian President Alexander Lukashenko believes that the Russian leadership acts in "a barbaric way" towards Minsk, considering his country to be like "their vassals" amid reports that Moscow intends to limit its credit support and oil subsidies to Belarus.

A mission of Ukraine's main donor, the International Monetary Fund (IMF), will make a working visit to Kyiv from September 6 to September 19 to discuss the country’s crucial but stalled $17.5bn standby package. The rumour is that a deal has already been agreed that will release billions of badly needed dollars.

Russian social media site vKontakte (VK) expanded its privacy functions to give its users more tools to protect them from arrest. The Kremlin has been cracking down on online criticism of the government: of 182 criminal cases launched in 2017 for social network posts, 138 were based on VK posts.

Poland’s current account showed a deficit of just over PLN1bn (€24mn) in June, a changeover from the surplus recorded in the previous month but a major reduction of the deficit in annual terms, the National Bank of Poland (NBP) announced.

Hungarian GDP growth slowed to adjusted 4.4% y/y in the second quarter, according to statistics office KSH. The expansion in the second quarter likely came on the back of strong private demand, recovering investment and activity in the Eurozone, the source of the majority of export demand.

Hungarian industrial output expanded 4.2% y/y in June, the Central Statistics Office (KSH) said. The reading confirms the first estimate of output in the industrial sector, released last week. In working day adjusted terms, production expanded 3.1% y/y. Month to month, output declined seasonally.

Court of Justice (ECJ) ruled on July 25 that Hungary should extradite him to Croatia, where he faces charges of bribing former Croatian Prime Minister Ivo Sanader in 2009 in order to have the oil major gain a controlling stake in the local firm INA.

Eurasia An appeals court in England on August 13 allowed Moldovan businessman, Anatolie Stati, to drop a legal case pursued against Kazakhstan, causing both sides to claim a tactical victory. The action was part of a long running dispute over oil deals.

Azerbaijan’s President Ilham Aliyev has condemned the US sanctions campaign against Iran, saying his country treats the Islamic Republic “like a brother”, the local press reported.

Baku is attempting to boost flows of tourists coming from its neighbour across the Caspian Sea.

Southeast Europe

Central Europe Polish GDP growth pushed to a seasonally adjusted 5% y/y in the second quarter, a flash estimate released by the Central Statistical Office GUS on August 14 showed.

Poland recorded a trade deficit of PLN5.2bn (€1.2bn) in January-June, statistics office GUS reported. The deficit at the end of June is 23.8% wider than at the end of June 2017. Imports growing faster than exports – a sign of growing investment.

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Concerns that more US sanctions aimed at Turkey are on the way after US president Donald Trump tweeted on Ankara’s refusal to release North Carolina evangelical pastor Andrew Brunson.

“Turkey has taken advantage of the United States for many years… We will pay nothing for the release of an innocent man, but we are cutting back on Turkey!”

In the streets the people smashed their iPhones to protest against US bullying.

Turkey may split from Nato as soon as the end of this year, according to a report from New York-based financial firm Academy Securities that polls retired Turkish generals. Government officials have threatened the same after the US slapped more sanctions on Ankara this week.

The Croatian police has requested Interpol to extend a Red Notice for the CEO of oil and gas group MOL, Zsolt Hernadi, after the European

Armenian Prime Minister Nikol Pashinian has vowed to “speed up reform” in the South Caucasus nation, after spending exactly 100 days in office.

Pashinian told his cabinet that "we are entering a new stage and the main meaning of this stage is to speed up the reform".

Armenians were angered after former Armenian president Robert Kocharyan was released from jail on August 13. Kocharyan was remanded in custody on July 27 after being charged with overthrowing the constitutional order in an ongoing probe into the events of March 2008, when security forces violently dispersed antigovernment protesters in Yerevan.

A court of appeal ruled on August 13 that Kocharyan cannot be prosecuted for his role in the violence due to his status as a former president.

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Economics Eastern Europe Russia’s GDP expanded by 1.8% in the second quarter, a bit weaker than analysts were expecting but up from 1.3% in the first quarter and continuing in the right direction, economists said on August 12.

Russia Inc will be in profit this year with a budget surplus of between 1.5%-2% of GDP, Russian First Deputy Prime Minister and Minister of Finance Anton Siluanov said on August 13.

Russia’s industrial production unexpectedly improved in July, rising to 3.9% y/y after taking a hit a month earlier when it fell back to 2.2% in June, Rosstat reports. In particular manufacturing grew 4.6% y/y in July versus a more modest 2.2% y/y the previous month and that added up to a 4.1% y/y gain in 7m18.

Economic sentiment in Ukraine improved in the third quarter of 2018, up to 109.6% compared with 104% and 108.8% respectively in the second and first quarters of this year, the State Statistics Service said on August 15. Three out of the five indicators of business confidence improved.

Ukraine's GDP grew by 3.6% year-onyear in April-June, following a 3.1% y/y growth in January-March, the Ukrstat state statistics service reported making 10 months of continuous growth.

Central Europe Hungary's state debt manager AKK sold a combined HUF61.5bn (€187mn) of bonds at auctions on August 16, HUF6.5bn more than planned but at higher costs as yields moved up from the last auction two weeks ago. Jitters over Turkey's falling currency have weighted on bond prices and local currencies across Central Europe. The forint weakened to 325 versus the euro on this week and bond prices were also on a rollercoaster.

Hungary's biggest lender, OTP, reported an after-tax profit of HUF89.5bn (€277.4mn) in Q2, up 11% y/y as business volume grew and its foreign subsidiaries beat expectations, the bank said. Earnings outperformed the HUF81.3bn estimate by Hungarian analysts. Earnings per share (EPS) came to HUF342 for the period.

on from the 22% y/y growth registered in June.

The Czech koruna has weakened against both dollar and euro on the back of the Turkish crisis fears. On August 16, the koruna dropped by nine halers to 25.81 against euro and by 21 halers to 22.82 against the dollar.

Turkey's unemployment rate edged up from 9.6% in April to 9.7% in May, national statistics institute TUIK announced on August 15. The rate was recorded at 10.8% in January but fell across the following three months. It stood at 10.2% in May 2017.

Turkey’s calendar-adjusted industrial production index gained 3.2% y/y in June, marking the lowest annual growth rate registered since December 2016, according to official statistics. Economists had been expecting a 5% growth.

The Turkish government’s budget surplus grew 22% y/y to TRY1.13bn (€146mn) in July after posting deficit growth of 89% y/y to TRY25.6bn in June. In January-July the budget deficit has expanded by 85% y/y to TRY45bn.

Eurasia Czech banks are experiencing a very successful year driven mostly by households’ demand for mortgages.

In the first half of 2018, banks made a profit of CZK43.30bn (€1.7bn), which was CZK600mn more annually, according to Czech National Bank (CNB) – the second highest in Czech history.

Lithuania’s current account showed a surplus of €86.5mn in June, the Bank of Lithuania reported on August 13. The surplus occurs after a deficit of €85mn was recorded the preceding month. In annual terms, the surplus fell 31.1%.

Southeast Europe Annual home price growth in Turkey edged down from a revised 10.61% in May to 10.12% in June and has been below the CPI inflation rate since last September. Home price growth is at the lowest level recorded since March 2011. Homes sales in Turkey rose by 7% y/y to 123,878 units in July following

Trade is up between Kazakhstan and its partners Russia, Belarus, Kyrgyzstan and Armenia – all members of the Eurasian Economic Union (EEU) – expanding by 6.3% y/y to $8.87bn in January-July according to latest data published by the State Statistics Committee. Exports rose by 11.3% y/y to $2.84mn, while imports increased by 4.1% y/y to $6.03bn.

Kazakh retail sales were up by 5.6% y/y in January-July, reaching KZT4.4tn (€1.07bn), according to the State Statistics Committee. The gain reflects an ongoing household consumption recovery driven by refreshed economic growth, which stood at 4% in 2017, up from the 1% recorded in 2016.

Kazakh GDP grew 4% y/y in JanuaryJuly of this year, the official website of the Prime Minister of Kazakhstan stated on August 14.

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Business Eastern Europe With the bulk of the harvest in, Ukraine is on course to collect the same 60mn tonnes of grain that it brought in last year. The harvest of grain in Ukraine in 2017 was 61.3mn tonnes.

Russian oil producers have already returned oil production to record levels this year and will boost crude production next year thanks to the launch of several greenfield projects, OPEC said. Russian oil production has increased recently to a record 11.2mn barrels a day. OPEC expects that average oil production in Russia will be 11.15mn barrels per day in 2018 and 11.17mn barrels daily in 2019.

Russian metal giant Norilsk Nickel reported strong 1H18 financial results on the back of booming commodity prices, the company said on August 13. The top line grew 37% y/y to $5.8bn on the back of higher metals prices, increased production volumes of copper and PGM sales.

RusAgro reports a 8% fall in revenues but a 50% jump in EBITDA for 2018 on falling costs. Russian agricultural powerhouse RusAgro reported 2Q18 IFRS results that showed EBITDA margins rose across all divisions, with the overall figure at 23.1%, compared with 14.3% a year ago, as EBITDA reached RUB4.1bn, up 50% y/y.

This came despite an 8% y/y decrease in consolidated revenues to RUB17.5bn.

Central Europe Polish demand for mortgage loans grew 20% y/y in July, the Credit

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Information Bureau (BIK) reported. The growth comes 2.8pp above the annual expansion rate recorded in June. The healthy interest in mortgages is underpinned by the strong Polish economy and tightening labour market, which is driving up wages.

The output of Hungary's construction sector jumped 28.2% y/y in June, rising at the fastest rate since January, driven by an upswing in EU-funded infrastructure developments, data released by the Central Statistics Office (KSH) on August 10 show.

Dutch insurance company Aegon will sell its assets in Czechia and Slovakia to Dutch group NN, the company said.

The value of the transaction is estimated to be €155mn (CZK4bn). The deal shouldn’t have any impact on the customers, Aegon said.

Czech company Motorpal developing injectors, injection pumps, nozzles and similar products clinched a deal with Indian company Ashok Leyland producing lorries and busses worth CZK1bn (€39mn), the company said. The contract is a long-term supply agreement and the Czech firm plans to hire around 100 new people.

Major Czech steelworks ArcelorMittal Ostrava (AMO) increased its net profit in 2017 by CZK1.8bn (€70mn) year-on-year to CZK3.2bn, the company said – a 146% increase y/y. The main growth driver was from selling off stakes in subsidiary companies like ArcelorMittal Tubular Products Ostrava and parent companies like ArcelorMittal Tubular Products Karvina.

Southeast Europe Sberbank’s CFO reassured investors on August 13 that “work on closing [the disposal] deal [for Turkey’s Denizbank] is going according to plan”, and the price remains within the previously announced range. The current

economic turmoil in Turkey has raised concerns over the sale of Denizbank to Emirates NBD in a deal due to be closed in the second half of 2018.

Rompetrol Rafinare, the refinery controlled by KazMunayGas (KMG) in Romania, boosted its operations and the total throughput for Petromidia refinery was up 27.44% y/y to 3.08mn tonnes. The refining capacity utilization was 98.45%, 28.05% greater compared to the same period last year.

UK-based Vast Resources, an AIMlisted mining company announced on August 15 that it has acquired an indirect 29.41% interest in the Blueberry Project in Romania, which owns the highly prospective polymetallic deposits, located in the Golden Quadrilateral in the western part of the country.

Eurasia Kazakhstan’s oil output grew by 6.1% y/y to 59.1mn tonnes in the first seven months of 2018, according to the State Statistics Committee. The increase was mostly driven by an ongoing acceleration in the output of the giant Kashagan field, which boosted its output 77.1% to 6.2mn tonnes in the first half of the year.

One of the largest independent oil traders, Vitol, is hoping to gain access to exports of petrochemicals and light oil from Kazakhstan as the country's output of these products is set to rise thanks to the completion of modernisation works at its three refineries, trading sources told on Reuters on August 15.

The number of Kazakh property deals grew by 3.6% m/m to 22,980 in July, according to the statistical office. In the January-July period, property deals jumped by 8.2% y/y to 142,084, due to Kazakh GDP growth of 4% in 2017, improving significantly from the 1% growth seen in 2016.

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Finance Eastern Europe The Ukrainian banking sector made a net profit of UAH8.3bn ($305mn) in January-June, according to the NBU’s August banking sector review. The banking sector reported a moderate loss of UAH400mn in April-June due to the raising of additional provisioning by one large bank in April-June.

Privately owned Russian oil major Surgutneftegaz remains investment banks' top pick as they expect it to pay out a massive 19% dividend yield this season. The company has benefited from a reduction in costs due to the ruble’s devaluation and high average oil prices.

Mortgages are booming in Russia with the volumes of credits issued expanding by 60% y/y, according to the website Dom.rf. Russia is on course to issue 1.5mn mortgage loans worth more than RUB3 trillion rubles this year or 1.5 times higher than in 2017.

Once Russia’s largest insurer, Rosgosstrakh has been losing money hand over fist as it tries to get out of the obligatory insuring business. Now it has cut premiums and returned to profit: In the first half of the year, Rosgosstrakh earned RUB2.4bn for the first time in three years.

Russia’s state-owned de facto development bank Vnesheconombank (VEB) says it will close its Ukrainian subsidiary as Russian banks continue to withdraw from their neighbouring market.

Ukraine’s Finance Ministry raised the equivalent of UAH2.4bn ($87mn) at its weekly auction held on August 14, which is worst than the previous week, when it raised the equivalent of UAH12.6bn ($246.4mn, €69mn and UAH3.8bn) at two auctions. However, demand for locally issued dollar bonds is now falling.

Leading Russian mobile phone company Megafon has obtained a threeyear RUB21bn loan from Alfa-Bank to buy out its own shares and take the company private again, the company said in a statement on August 15.

T-bills and two-year T-bonds in two auctions, the central bank said. Albania has sold around ALL223.5bn in T-bills and T-bonds so far in 2018. It raised ALL328bn in government securities in 2017.

Eurasia Kazakhstan’s national currency hit KZT363.97 against the dollar on August 14 – falling to a new 30-month low. The all-time weakest tenge to the dollar rate of KZT382 occurred in early 2016.

Southeast Europe Hungary's state debt manager AKK sold a combined HUF61.5bn (€187mn) of bonds at auctions on August 16, HUF6.5bn more than planned but at higher costs as yields moved up from the last auction two weeks ago. Jitters over Turkey's falling currency have weighted on bond prices and local currencies across Central Europe. The forint weakened to 325 versus the euro on Wednesday but pared losses as the lira bounced back.

Bond prices were also on a rollercoaster this week.

Kosovo sold its entire issue of €20mn in one-year T-bills in an auction on August 14, the central bank announced on August 16. This was the fourth oneyear T-bills auction held this year. Kosovo plans to raise a total of €105mn in the third quarter of 2018.

Macedonia sold out MKD25bn (€406.5mn) of 28-day central bank (CB) bills on August 15, the National Bank of the Republic of Macedonia (NBRM) announced. The bank uses CB bills to manage liquidity in the banking system. At the same time the central bank cut the key rate, which is also the rate of the CB bills, from 3% to 2.75%.

Albania plans to raise a combined ALL12.7bn (€101mn) in one-year

The Asian Development Bank (ADB) plans to provide over $300mn to Tajikistan in the 2019-2021 period, its vice-president Wencai Zhang said on August 13. To date, ADB has approved over $1.6bn in concessionary loans, grants, and technical assistance for Tajikistan since the country joined the ADB in 1998.

State-run Uzbekinvest’s insurance premiums tripled in annual terms to UZS112bn (€12.5mn) in the first half of 2018, the local press reported. Uzbekistan's insurance sector has likely been stimulated by ongoing reforms introduced by Uzbek President Shavkat Mirziyoyev. Total payments by Uzbekinvest were made to the tune of UZS11.5bn, up by 32% from the previous year.

Armenia intends to issue bonds that will tap its vast diaspora, estimated at 7-10mn people worldwide. The diaspora far outnumbers the impoverished post-Soviet nation’s population of 2.9mn and the government hopes to issue a strategy by the end of this year.

TBC Bank Group PLC’s subsidiary JSC TBC Bank has signed a $50mn loan agreement with the China Development Bank (CDB), the Georgian banking group announced on August 13. The deal is the first signed between the two banks, and the largest facility CDB has ever provided to any Georgian entity.

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Viktor Orban's friend supplies shirts for his home team, Felcsut.

Hungarian oligarch expands business empire to sportswear manufacturing bne IntelliNews

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portswear manufacturer Magyar Sportmarka, majority owned by Hungarian billionaire Lorinc Meszaros, a close friend of Prime Minister Viktor Orban, has signed contracts with three division one football teams and a dozen smaller clubs to supply clothing and accessories, Hungarian media reported on July 23.

Magyar Sportmarka wants to turn 2Rule into an innovative, world-class national sports brand, capitalising on the work of Hungarian professionals and businesses, said CEO Agnes Kovari, who owns 30% of the shares. Talentis Group, a holding company of Meszaros, holds the other 70%.

The brand name 2Rule refers to Turul, the Hungarian mythological bird of prey, a national symbol.

Meszaros, who is commonly referred to as Orban’s proxy, became Hungary’s second-richest man after OTP chief Sandor Csanyi with an estimated wealth of HUF280bn (€858mn), making him a billionaire in dollar terms. Unlike Csanyi, Meszaros rose to Hungary’s business elite thanks to his friendship with Orban and through state contracts.

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His business empire includes companies across all sectors, ranging from tourism to banking, industry, agriculture, retail, media, energy and the sportswear manufacturing

“The 2Rule brand got off to a shaky start as all the first division clubs wearing their shirts were defeated in the first matches of the season” business. As a former mayor of the small village of Felcsut, Meszaros is also the founder and president of the football academy set up by Orban.

Magyar Sportmarka has contracts with four local garment makers and is working on setting up its own workshop, Kovari said, but she gave inaccurate information on its suppliers and their location. According to media reports, one company has

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already cancelled a contract with Magyar Sportmarka, which raises questions about the viability of the company’s plans.

At present, 20-30% of the materials used are locally made, but that ratio is expected to double within two years, and the goal is to reach 90% in three years, the CEO added.

Keeping production in Hungary may not be the most costefficient way of operation, industry sources say. Local garment producers outsource much of their work abroad. Among neighbouring countries, Ukraine is the obvious choice, but it is still much cheaper to have goods produced in China or Vietnam than in Hungary, due to labour costs.

It is unusual for sports clubs to switch suppliers in such a hasty manner, pointed out some analysts, who suspect that the deals struck by Magyar Sportmarka and the clubs were not solely inspired by business considerations but were rather based on political motivations.

There is no logic in replacing the products of a well-known international company with decades of research and experience with that of an unknown small company, with no track record, one Hungarian sports economist wrote on social media. In his view, the emergence of 2Rule is just another example of the corruption engulfing Hungarian football, ruled by political aspirations. ​​ Taxpayers pay for Orban's passion Orban is an avid football fan and has built a stadium next to his house in Felcsut, his home village, and has begun a largescale stadium construction programme. Over the past eight years, the government has spent hundreds of billions of forint on upgrading or building new stadiums, even in small towns with only a second or third division team.

Companies & Markets I 11 In 2011, parliament approved legislation to allow companies to sponsor sports clubs directly through tax deductions, commonly known as the TAO-scheme.

In the past eight years, the budget’s shortfall from the TAOscheme reached HUF500bn. Not surprisingly, the football

“Orban is an avid football fan and built a stadium next to his house” academy operating in Felcsut has been a major beneficiary of the programme, receiving tens of billions of forints of corporate money.

Despite the flashy stadiums popping up in small towns, and the generous state subsidies, football fans do not have much to celebrate as Hungary is placed 51st on the FIFA rankings and its top clubs rarely go through the second or third rounds in international championships.

The maker of the 2Rule brand has received some marketing support from state news television, which broadcast the company's press briefing live when the products were showcased last week, a rather unusual gesture in favour of a privately run business. State television may have breached ethical and legal rules, experts say.

Despite all the publicity, the 2Rule brand got off to a shaky start as all the first division clubs wearing their shirts were defeated in the first matches of the season.

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ustria’s Oesterreichische Kontrollbank (OeKB) is prepared to defy US sanctions and facilitate trade between Austrian companies and Iranian counterparts, the chairman of the Vienna Chamber of Economics has said according to a July 25 press release put out by the vice president of the Iranian Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA).

The move would fly in the face of US sanctions due to take effect

in August as part of the Trump administration’s plan to put Iran in an economic stranglehold to force concessions on its role in the Middle East. But as a relatively small market player that offers credit facilities to small and medium sized enterprises, OeKB may not be substantially exposed to the American financial system or market and thus might not suffer sanctions.

ICCIMA vice president Pedram Soltani is touring the European Union, following up on opportunities for Iran to escape the US

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economic assault that may have been partly opened up by the recent visits paid to Austria and Switzerland by Iranian President Hassan Rouhani and Iranian Foreign Minister Mohammad Javad Zarif. Rouhani and Zarif were given firm commitments by the EU that it would endeavour to find ways to help Iran’s economy survive the heavy sanctions. At the start of July, Austria assumed the revolving six-month presidency of the EU and the OeKB announcement might have been prepared as a first step forward by the bloc in creating feasible financing arrangements between Iran and Europe that are shielded from US punitive action.

Founded in 1946, OeKB acts as Austria’s export credit insurance agency. The funds for export financing are raised from its own bonds.

"The capacity for trade between Iran and Austria is very high, and so far we have probably only used 10 or 20% of it," Soltani said.

“We know that the current difficulties are short term and will be resolved within six months, one year, two years, or by the end of the [Rouhani presidency]. We need to develop strategies for realising trade talks between the two countries," he added.

Soltani said: "Some European banks, especially small banks that have less financial dealings with the United States, are waiting for the European Union's decision to resume the provision of services to Iranian banks, with the necessary support from the Union."

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Chairman of the Vienna Chamber of Economics Walter Ruck was quoted in the press release as saying: "Following negotiations with the Austrian bank, they announced that they were willing to ensure the settlement of 80% of the volume of trade between Iran and Austria.”

He added that another 20% would be guaranteed through an Austrian finance company. “Austrian banks have already had doubts about their relationship with Iran because of the sanctions, but now they are willing to re-establish the connection," Ruck said.

The European Union agreed to add Iran to the list of countries that its lending arm, the Luxembourg-based European Investment Bank (EIB), is permitted to do business with – but the development bank’s president, Werner Hoyer, responded that its global operations would be put at risk if it were to invest in the Islamic Republic.

Hoyer was quite entitled to take that line – the EU executive has made it clear that the addition of Iran to the list, to take effect from August, in no way forces the EIB to begin lending – but it added to the scepticism in Iran as to whether the major European powers are going to deliver enough viable economic measures to maintain the multilateral nuclear accord as a pact worth staying in for Tehran, following the unilateral withdrawal from the agreement by the US in May. After its introduction in January 2016, the nuclear deal saw the removal of crippling santions levied against Iran in return for Tehran abiding by measures designed to bar any path it might possibly take to the development of a nuclear bomb.

Iranian officials have been frequent visitors to Vienna in recent years. The nuclear deal was signed there in late 2015. Here, then Austrian Foreign Minister (now Chancellor) Sebastian Kurz is seen meeting Iranian Foreign Minister Mohammad Javad Zarif in October 2014.

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Companies & Markets I 13

Russian petrochemical major Sibur reportedly preparing for IPO Vadim Dumesh in Paris

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ajor Russian petrochemical holding Sibur plans to hold an IPO to raise $2bn-3bn based on a valuation of $20bn-$26bn, Reuters said on July 25 citing unnamed financial market sources.

A possible IPO could be a big test of the resistance of Russia's largest names to the mounting sanction pressure. Despite having sanctioned shareholders, Sibur placed a $500mn sixyear Eurobond yielding 4.125% in September 2017, with the book for the bonds oversubscribed more than threefold.

Russia's largest petrochemical holding is controlled by Kremlin insiders Leonid Mikhelson (48.5%), Gennady Timchenko (17%), and Kirill Shamalov (3.9%). Shamalov is an ex-son-in-law of Russia's President Vladimir Putin, he and Timchenko are included in the US SDN-List.

The company could reportedly offer existing Sibur shares in Moscow and London by the end of the year. JP Morgan and Gazprombank are the organisers, but the IPO is likely to attract other runners due to the ambitious amount of the deal.

Sibur is a major international player and participates in state-led business negotiations. It is one of Russia’s most profitable large companies with earnings before interest, tax, depreciation and amortisation of $2.8bn in 2017 on

“Russia's largest petrochemical holding is controlled by Kremlin insiders” an Ebitda margin of 35%, according to the Financial Times.

The company operates 26 facilities across Russia and employs around 28,000 people.

In 2017 it started exporting liquefied petroleum gas supplies to China, in addition to existing rubber joint ventures with China Petroleum & Chemical Corp (Sinopec). Sinopec and Silk Road Fund bought 10% each in the Russian company.

Saudi Arabian Oil Co (Saudi Aramco) is reportedly also in

talks with Sibur eyeing a joint venture that would produce synthetic rubber in the Gulf kingdom.

The name of the company surfaced in the infamous 2017 Paradise Papers investigation, in connection with the shipping company Navigator that operated a lucrative partnership with Sibur.

“Shamalov increased his holding in Sibur in 2014 by borrowing $1.3bn from the state-controlled bank Gazprombank” The Guardian claimed a link between Navigator and US Secretary of Commerce Wilbur Ross. The involvement of Ross in the shipping venture dates back to 2011, when Ross’s investment firm, WL Ross, began buying into Navigator with an investment that gave him two seats on the company’s board.

Separately Shamalov was promoted to be a Vice President of Sibur in 2012 and he was awarded a stake in the company at the same time.

Transporting liquefied gas from Sibur, Navigator went public in New York, with Ross more than doubling his money and reportedly boasting his investment was "a home run" before stepping down from Navigator's board in 2014.

While there is a link between Navigator and Sibur, the former only accounts for about 0.7% of Sibur’s overall logistical costs according to company sources and is one of over 2000 similar contracts that the management have as part of its daily operations. The contact between the owners of Sibur and Navigator were minimal if there were any at all.

Shamalov increased his holding in Sibur in 2014 by borrowing $1.3bn from the state-controlled bank Gazprombank, where his brother Yury Shamalov is deputy chairman. He bought the stake in Sibur from US-sanctioned stoligarch Gennady Timchenko, another close associate of Vladimir Putin.

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EU approves plans to privatise Slovenia's largest bank NLB bne IntelliNews

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he European Commission (EC) has approved Slovenia’s commitment to sell a first tranche of at least 50% plus one share in its largest lender, state-owned Nova Ljubljanska Banka (NLB), by the end of 2018, the EC announced on August 10.

Slovenia’s outgoing government had postponed the sale of NLB, aiming to preserve support prior to the June 3 parliamentary elections, even though the country had committed to sell 75% of the bank by 2017 in a restructuring plan that served as a basis for the EC’s approval of state aid to the bank in the 2013 bailout of the sector.

Despite this commitment, the government scrapped a planned IPO in June 2016 due to a dispute over the pricing of the

“The government scrapped a planned IPO in June 2016 due to a dispute over the pricing” offer and an ongoing lawsuit over Yugoslav-era deposits in Croatia. The same cabinet, by that time already outgoing, submitted a new proposal to the EC for the modification of its commitments with respect to NLB on July 15.

Even though the EC has now approved this package, it is still uncertain whether the next Slovenian government will be able to carry it out.

Political newcomer Marjan Sarec is on the verge of forming a new government at the head of a coalition of five small parties, three of which were in the previous government. However, as a minority government every decision will need the support of the radical left party Levica, which decided to support the government but not to participate in it. Levica loudly opposes the privatisation of NLB.

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This could have negative consequences for Slovenia.

“If Slovenia does not respect the deadlines foreseen, a divestiture trustee will be appointed to take over the sales process. This commitment is important, as the Commission in the January 2018 decision already suggested that a fully empowered divestiture trustee could further improve NLB's viability,” the EC warned on August 10.

Under the new agreement, Slovenia’s key existing commitments are prolonged. An important commitment in this regard is the return on equity commitment, which ensures that NLB can only grant new loans if the bank receives a minimum return on equity on those loans, the EC stressed.

This will help ensure the long term profitability of the bank and limit undue distortions of competition.

NLB will also not re-enter the businesses it sold as part of the restructuring plan (such as the leasing business) and will strictly comply with an acquisition ban, the EC added.

According to the EC, Slovenia's aid for the bank remains compatible with EU state aid rules on the basis of the new commitment package submitted by the Slovenian authorities on July 13.

The package includes strict deadlines to complete the sale of 75% minus one share of NLB. A first significant sale tranche of at least 50% plus one share will be sold by the end of 2018 and the Slovenian government will reduce its stake in NLB to 25% plus one share by the end of 2019.

“Finally, the new commitment package also includes additional compensatory measures, which will improve the viability of NLB and help to avoid undue distortions of competition in the Slovenian banking market NLB will close additional bank branches in its home market and – unless a full sale is completed by the end of 2018 – also sell its stake in its insurance subsidiary NLB Vita. In order to further remove any viability doubts, NLB will also issue a so-called "Tier 2 bond" (subordinated debt),” the EC said.

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The Commission's investigation concluded that the new package is sufficient to allay concerns concerning the long-term viability of NLB and distortions of competition to the Slovenian banking

“The Slovenian government will reduce its stake in NLB to 25% plus one share by the end of 2019” market. On this basis, the Commission has approved Slovenia's new commitment package for NLB under EU state aid rules.

Slovenia first notified amended commitments to the EU in December 2017. After questions were raised by Brussels as to whether the amended commitments were equivalent to the original ones, Slovenia submitted another amended

Companies & Markets I 15 commitment package, with an ambitious schedule to sell NLB, in July.

NLB is the largest banking group in Slovenia. It has received three state recapitalisations, one of €250mn in March 2011, one of €383mn in July 2012 and in December 2013 a third recapitalisation of €155.8mn together with a transfer of impaired assets to a state-owned bad bank with an implied aid element of €130mn.

In December 2013, the Commission approved the €2.32bn in state aid from these three recapitalisations – equivalent to 20% of the bank's risk weighted assets as of December 2012 – under EU state aid rules, on the basis of the bank's restructuring plan and associated commitments. As a crucial part of this restructuring plan, Slovenia committed to sell 75%-1 share of NLB by end 2017, but this was later postponed after the IPO flopped last year.

Danske Bank to waive profit from suspicious transactions in Estonia bne IntelliNews

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anske Bank will forego profits it had made via “suspicious transactions” in its Estonian branch which are now subject to an investigation for possible money laundering, the bank said on July 18.

Some of the questionable money flows were linked to a corruption scheme exposed by murdered Russian lawyer Sergei Magnitsky, who worked for Hermitage Capital Management fund, according to fund manager Bill Browder, Bloomberg reported.

As much as €7.1bn may have been laundered via Danske bank’s Estonian operations, Danish and international media reported earlier this month. The alleged money laundering is the focus of probes by financial regulatory authorities in Denmark and Estonia, as well as an internal investigation.

Magnitsky died in custody in 2009, while Browder, who was forced to leave Russia, has been leading a campaign to expose the Kremlin for its human rights abuses.

“The bank should not benefit financially from suspicious transactions that have taken place in the non-resident portfolio in its Estonian branch,” Danske Bank said in a statement.

“Consequently, the bank intends to make the gross income from such transactions available to the benefit of society, for instance through supporting efforts to combat financial crime,” it added.

Danske Bank said it was unclear how much income was derived from the transactions in question. The total gross income from the Estonian non-resident portfolio in 2007-2015 was DKK 1.5bn (€200mn), the lender estimates.

The Danish newspaper Berlingske and UK media made the first allegations about money laundering at the bank’s Estonian branch in late February.

The possible large scale of money laundering at Danske Bank broadens the scope of interest in unmonitored money flows from Russia and other countries of the former Soviet Union – such as Moldova or Azerbaijan, as is reportedly the case of the Danske Bank laundromat – into the European Union via the Baltic states.

Latvia, in particular, has developed a reputation of being a safe haven for illegal money because of its boutique banks industry that specialised in non-resident deposits. The country’s third-largest lender ABLV folded earlier this year following allegations of the US government that it was a major money launderer and facilitator of transactions linked to North Korea.

The money laundering scandals in Eurozone members Estonia and Latvia are also an embarrassment for the European Central Bank, which is coming under fire for overlooking problems in the Baltic states. The ECB says it does not have adequate control powers and has called upon member states to better cooperate on tracking down suspicious transactions.

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China refuses US request to stop buying Iranian oil, big blow dealt to sanctions strategy bne IntelliNews

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S plans to strangle Iran’s economy with sanctions took a big blow on August 3 when the biggest buyer of Iranian oil, China, reportedly declined a request from Washington envoys to stop importing Iranian crude.

China is the world’s bigger buyer of Iranian oil. Two officials familiar with the negotiations over the shipments were cited

by Bloomberg. Beijing, has, however reportedly agreed to not ramp up imports of Iranian oil – though the US might also soon find China refusing to buy any American oil if the growing trade battle between the US and China is not quelled.

US envoys are touring the world trying to secure agreements from as many markets as possible not to import Iranian oil.

Sales of oil are indispensable to the health of the Iranian economy. Secondary sanctions aimed by the US at those who continue to buy crude from Iran are due to kick in on November 4. Prior to that a first phase of sanctions aimed at areas including Iran’s banks – the Iranian government will be banned from purchasing US banknotes – will go into effect following a White House announcement made on August 6.

The second biggest buyer of Iranian oil is India. In late June, New Delhi received a visit from US Ambassador to the United Nations Nikki Haley. She told India’s Prime Minister Narendra Modi that Washington would back his country’s plan to develop the Iranian sea port of Chabahar to open up a trade route to Afghanistan that avoids its arch-rival Pakistan. The move would be a concession in return for India agreeing to cooperate with US sanctions aimed at Iran and the oil boycott.

According to shipping data reported by Bloomberg on August 4, China bought 35% of Iran’s oil exports last month.

China and India import around 700,000 and 550,000 b/d of Iranian oil, respectively. Iran exports more than 2mn b/d.

“Pivotal” Iran’s foreign minister Mohammad Javad Zarif said on August 2 that China was “pivotal” to salvaging the Iran nuclear deal,

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Chinese foreign minister Wang Yi said the nuclear deal must be safeguarded "to maintain the authority of the United Nations, the effectiveness of multilateral deals and the credibility of the international rules".

which the US unilaterally pulled out of in early May. The accord removed crippling sanctions levied against Tehran but US President Donald Trump decided to walk out of the deal and instead wage a new campaign of sanctions designed to force Iran to make concessions on its role in the Middle East.

The EU, Russia and India are also committed to keeping the nuclear deal intact.

“The role of China in the implementation of JCPOA, in achieving JCPOA, and now in sustaining JCPOA, will be pivotal,” Zarif said, referring to the technical name for the nuclear deal, the Joint Comprehensive Plan of Action.` After meeting Zarif, Chinese Foreign Minister Wang Yi said that Beijing viewed the multilateral pact as a way to secure stability in the Middle East, UPI reported.

"China always holds the view that JCPOA is a multilateral deal which is verified and approved by the United Nations Security Council and accords the common interests of all parties and the international community, which must be respected and safeguarded so as to maintain the authority of the United Nations, the effectiveness of multilateral deals and the credibility of the international rules," he was quoted by China’s official Xinhua News Agency as saying.

Iran has warned that if the US pushes ahead with its efforts to embargo Iranian oil exports it may block the Strait of Hormuz waterway in the Gulf, thus possibly preventing almost all energy exports from the Middle East from reaching world markets.

On August 3, US officials said that Iran had started naval exercises in the Gulf, with more than 100 ships deployed.

“We are monitoring it closely, and will continue to work with our partners to ensure freedom of navigation and free flow of commerce in international waterways,” said US Navy Captain Bill Urban, the chief spokesman at Central Command, which oversees US forces in the Middle East.

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Asian investors replace western players in Russia's FDI Ben Aris in Berlin

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number of investments from western countries in Russia are on hold, but the situation is more than made up for by new investors from Asia. Foreign investors put up capital for 238 projects in 2017 – a record number for Russia, according to an annual survey by EY. Asian countries showed strong interest in the Russian economy: China last year became the leading foreign investor into Russia for the first time, with Japan and South Korea also among Russia’s top 10 investors.

However, in monetary terms the growth of FDI was a lot more modest. According to central bank data, FDI in the second quarter (excluding banks) was just $1.7bn, down from $12.6bn over the same period of 2017. The latest figures

“China last year became the leading foreign investor into Russia for the first time” suggest the moderate recovery in FDI following the 2014-16 recession may be going into reverse. Recent figures have in any case been flattered by Rosneft’s share sale to Glencore and the Qatar Investment Authority.

Manufacturing was the sector boasting the largest number of FDI projects, says EY. By excluding portfolio investments and M&A, EY claims that its survey reflects real investments in manufacturing and services by foreign companies across Europe.

The regions are becoming increasingly attractive to investors, led by rising FDI flows channelled into Tatarstan, Bashkortostan, Primorsky Krai, Lipetsk and Belgorod oblasts.

Of the total 238 FDI projects, this represents 16% growth in the number of projects y/y, a striking improvement compared with only 2% growth in 2016, according to EY’s latest European Attractiveness Survey – Russia.

As in 2016, foreign investors focused on the construction of new manufacturing facilities in Russia (202 projects), rather than business expansion (36 projects).

Alexander Ivlev, EY country managing partner for Russia, com-

mented: "The manufacturing industry once again proved to be the most attractive industry for FDI in the Russian economy, gaining 127 new projects, or 18 more than the year before.

Last year, the number of projects in the power industry grew by more than 50%, from 15 in 2016 to 26 in 2017. The number of projects in the finance and business services sector more than doubled, from four to 10 in 2017. The transport and communications sector remained almost the same with 31 projects in 2017. Agriculture slowed somewhat with 38 projects in 2017 against 41 projects in 2016."

The unquestionable leader among FDI into manufacturing industries was pharmaceuticals with 35 projects. The machinery and equipment sector was number two with 21 projects.

In addition, foreign investors heavily invested in the chemical and plastic products sector (19 projects). Mineral reserves and metals saw positive growth in 2017 with the number of projects having increased by four and three, respectively. The digital technologies sector grew to seven projects against only one in 2016. However, the electrical equipment sector halved compared to 2016 with just seven FDI projects.

"Last year saw a remarkable trend – strengthening interest of Asian countries in the Russian economy and their growing presence, which more than doubled in 2017 – from just 30 projects in 2016 to 76 last year. China took the lead for the first time, boosting the number of its FDI projects by more than three and a half times, from nine in 2016 to 32 in 2017. This is the largest number of projects financed by Chinese investors since the launch of the survey,” Ivlev said.

South Korea, with 12 projects, became one of Russia’s top 10 investors in 2017. Its top 10 placing was the first achieved since

“The unquestionable leader among FDI into manufacturing industries was pharmaceuticals” the launch of the survey. The South Koreans were behind just two projects in 2016. Japanese investors kept up with a rising trend, financing 17 projects last year versus 12 in 2016.

While Asian investors are on the move, western investors were in retreat in Russia in 2017. Germany, which had ranked first by the number of new projects in 2015 and 2016, lost the lead,

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funding only 28 projects last year versus 43 in 2016. France followed suit, reducing the number of its new projects from 20 to 11 over last year.

On the other hand, Italy increased the number of FDI projects in 2017, with 17 new projects in Russia, on par with the Japanese. Switzerland also boosted its presence in Russia by investing in 11 projects last year compared with seven in 2016.

The UK also increased the number of its projects, but from a very low base. It put up capital in eight projects in 2017 versus two in 2016, thus becoming one of the 10 largest investors in Russia. Finland ranked tenth among Russia’s top investors, with seven projects in both 2016 and 2017, according to EY. After record growth in 2016, US investment activity in Russia slowed, reducing the number of projects by half, from 38 to 19.

Yet, the US ranked third among the 10 largest FDI providers for Russia.

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"Based on the 2017 results, many Russian regions demonstrated positive growth. In Tatarstan, the number of FDI projects doubled from seven to 14, of, which three are financed by US investors.

China and Turkey invested in two projects each,” Ivlev said.

Primorsky Krai in Russia’s Far East also showed significant growth, with the number of new projects increasing in 2017 from seven to 12. Interest predominantly came from Asian investors, with three projects financed by investors from mainland China, while Japanese, South Korean and Hong Kong companies invested in two projects each, and businesses from India and Cambodia invested in one project each."

With nine FDI projects, Lipetsk Oblast made it into the top 10 regions in 2017 (from only two projects in 2016). All of the projects were financed by European investors except two projects supported by US companies.

Moscow and Moscow Oblast remained the most attractive to investors in 2017, with 54 projects (2016: 49). In 2017 a significant number of those projects (10) comprised investments in the pharmaceuticals industry. The leader in investing in the Moscow region was Germany (10 projects) followed by China (six projects). US and Swiss companies invested in four projects each.

Several Russian regions raised FDI for five projects each: Bashkortostan, Belgorod, Vladimir, Novosibirsk and Ulyanovsk oblasts, and Stavropol Krai. Bashkortostan was the only region in Russia, which attracted investors from Vietnam. Two projects in the food sector were financed by Vietnamese companies. Three out of five projects in Belgorod were launched by German investors. In 2016 only two projects were underway in Belgorod and none in Bashkortostan.

St. Petersburg and Leningrad Oblast were placed at number two with 17 FDI projects vs. 15 projects in 2016. Of those, Finnish investors financed three projects. German, Israeli and US companies supported two projects each.

The situation was the reverse in Kaluga Oblast, which is home to a highly successful auto-cluster and was number two in 2016. In 2017 the number of FDI projects declined from 15 to seven, with the investors being only from Europe.

UK with top exposure to Turkish private sector foreign loans Akin Nazli in Belgrade

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urkey’s private sector long-term foreign loans contracted by 2% q/q to stand at $222bn as of end-June, the central bank said on August 15.

European countries have a combined $111bn exposure to Turkish private companies’ outstanding long-term foreign credits – the most of any group. They were led by the UK with $30bn and second-placed Germany with $22bn.

Turkey, enduring a torrid currency crisis, was at the beginning of this week described by many analysts as being days away from entering a debt and liquidity crisis, but a recovery in the value of the Turkish lira (TRY) is under way, thus leading some observers to revise their predictions.

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The fresh statistics listed the US as having the third largest exposure to the outstanding long-term loans, at $20bn. It was followed by the Netherlands with $14bn and Bahrain with $11bn (full table published on IntelliNews Pro).

Data from the central bank also showed that the private sector's short-term loans volume rose by 1% q/q to $19bn as of end-June, including $13bn worth of loans received

by Turkish lenders.

Of lenders, the European Bank of Reconstruction and Development (EBRD) had the largest share, at $10bn. Next were the European Investment Bank with $5bn, the World Bank Group’s International Finance Corporation with $3bn,

The International Finance Corporation has the largest exposure when it comes to the Turkish private sector’s outstanding short-term loans, at $372mn.

“European countries have a combined $111bn exposure to Turkish private companies’ outstanding long-term foreign credits” the International Bank of Reconstruction and Development with $2bn, the Islamic Development Bank with $397mn and the Council of Europe Development Bank with $290mn.

The data also showed Turkish banks’ outstanding long-term loans declined by 2% q/q to $94bn at end-Q2, with $31bn of that made up of bonds.

Non-financial private companies’ total outstanding loans edged down 1% y/y to $111bn at end-June, including $91bn worth of bank loans, $12bn worth of loans from parent companies or affiliates, $442mn in trade credits and $8bn in bonds.

Private creditors provided $154bn of the total of $222bn of outstanding loan stock, while $91bn came from non-resident commercial banks and $31bn was sourced from foreign branches or affiliates of local banks.

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The UK also topped the list of countries with the highest exposure to the Turkish private sector’s short-term loans, at $3.99bn. It was followed by the Netherlands with $3.27bn.

European countries’ total exposure to the short-term loans stood at $15.5bn as of the end of June.

On a remaining maturity basis for the next one-year period, the Turkish private sector has to repay a total of $69.6bn for its loan debts, including $5.5bn in August and $6.89bn in September. The highest amounts to be paid are $8.92bn in October and $7.84bn in May 2019.

By the end of 2018, the Turkish private sector’s scheduled total loan debt repayments amount to $32.3bn.

“The UK also topped the list of countries with the highest exposure to the Turkish private sector’s shortterm loans” Private sector long-term foreign debt moved up 9% y/y to stand at $222bn as of end-2017 from $202bn at end-2016, while the short-term debt rose by 28% y/y to $18bn as of end-2017 from $14bn a year previously.

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

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

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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

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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

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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

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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Russia and Turkey step up fight against dollar’s dominance in trade Ben Aris in Berlin

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ussia’s diamond monopolist Alrosa has started selling its diamonds to foreign customers, settling the deals in rubles, not dollars. The move, reported by Reuters on August 15, is the latest development in Russia’s long-term campaign to end the dollar’s world dominance as the settlement currency for international trade – a goal shared with Russia’s friends China, Turkey and Iran.

Moscow’s fight against the dollar was this week boosted in Ankara where – during a visit from Russian Foreign Minister Sergei Lavrov amid a financial crisis that Turkey claims is the result of an “economic war” being waged by the US and other foreign powers – Turkish Finance and Treasury Minister Berat Albayrak promised measures to reduce companies’ forex risk and said that the dollar, now being deployed as a “political punishment tool”, had lost trustworthiness.

Diamond deals are usually transacted in dollars, but with tensions between Moscow and Washington again on the rise, Russia is moving towards an attempt at abandoning the universal greenback as the currency of international trade.

Russia has already made an attempt at selling crude oil in rubles, using the St Petersburg commodity exchange, but the idea has not caught on with international customers. However, the Kremlin is hoping to have more luck with the smaller and more specialised international diamond trade. In June, Alrosa sold more than 10.8ct of diamonds at an auction in Hong Kong for rubles, BCS Global Markets reported.

The payment went through a branch of Russian state bank VTB in Shanghai. In addition, a long-term buyer of Alrosa diamonds from India paid for a scheduled supply in rubles. “This purely technical and experimental operation should not materially affect the company’s bottom line,” BCS GM said in a note.

Even if the volumes and market are limited, Russia is unlikely give up on the idea of scrapping the dollar in trade as the clash with Washington has increased the urgency of loosening the US hold on international commerce for the Kremlin.

T-bonds dumped In a precursor to the move away from dollars, the Central Bank of Russia (CBR) dumped a large part of its US Treasury bill holdings in July, briefly causing the price of US bonds to rise

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as Russia took itself out of the top 30 largest holders of US sovereign debt almost overnight. Russia has already dumped the bulk of its US treasury bill holdings in its FX/gold reserves to $14.9bn in May 2018, down from $48.7bn in April, and $96bn in March, Reuters reported citing US Treasury data on July 18.

Russian foreign minister Sergei Lavrov said on August 15 that “the dollar’s days as a global trade currency are numbered”.

He was speaking at a news conference with his Turkish counterpart.

Turkey, echoing Lavrov’s comments, has agreed with Russia to settle bilateral trade with their national currencies and eschew the dollar. Turkey this week also sold off most of its US T-bills and so like Russia took itself out of the top 30 biggest holders of US debt. Despite being a Nato member, Ankara, like Moscow,

“Russia has already made an attempt at selling crude oil in rubles” has been hit by US sanctions. The sanctions were imposed in the row over Turkey’s detention and prosecution of US pastor Andrew Brunson on espionage and terrorism charges. When Donald Trump last week also doubled tariffs on Turkish steel and aluminium exports, the suspicion was that that was also a response to the Brunson case and perhaps also to Turkey’s refusal to fall in line with US sanctions on neighbour Iran.

The row between Turkey and the US deteriorated as Albayrak made fiery comments including “they’ll lose their arm in an attempt at cutting off our beard”.

Turkey and Iran working on it Turkey and Iran are already working on settling import and export flows in their respective national currencies rather than the dollar – in fact Iran is now banned from acquiring US banknotes under reimposed American sanctions and some of its lawmakers are pushing for all trade with Turkey, Russia, Iran, India and other markets to be shifted as quickly as possible to non-dollar transactions – and China is on board with the idea of settling trade in national currencies. In 2008, none of the

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$56.8bn Sino-Russian bilateral trade was settled in local currencies, but last year about a quarter of the $84bn in trade was.

China, locked in a trade war with Washington, has not sold US T-bill holdings, but as the largest holder of US debt, with $1.18 trillion of US bonds, getting out of the bonds would be very

Companies & Markets I 21 challenging. If Beijing started selling aggressively the price of the bonds would collapse, destroying much of the value of China’s sovereign reserves. Collapsing the US bond market would also lead to a full-blown diplomatic crisis that could easily spin out of control. If China becomes minded to exit the US bond market, it will do so slowly and over a long period.

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Czech CEZ reportedly sues Bulgaria over banned asset sale Denitsa Koseva in Sofia

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zech energy company CEZ has filed an administrative claim against the Bulgarian competition watchdog, CPC, over a ban on selling its assets in Bulgaria to the local firm Inercom Group, Investor.bg reported on August 7.

In July, the CPC ruled that the highly controversial deal cannot be completed as Inercom would gain excessive power on the photovoltaic electricity market. At the time, local analysts suggested that the decision of the antitrust body had no serious grounds, and aimed to put an end to the major political dispute around the sale of CEZ's assets to an unknown company furthermore controlled by owners related to the minister of energy.

According to CEZ, the decision by the CPC is "inadequate" and CEZ has decided to challenge it. At the end of July, Inercom also appealed to the Supreme Administrative Court (SAC) over the decision.

When CEZ announced in February that it had selected the family-owned Inercom as the buyer of its Bulgarian assets, serious concerns arose about its ability to fund and run the assets. Adding to the controversy, Inercom was also found to be owned by a close friend of Bulgaria's energy minister.

The deal became a major political scandal and has further destabilised the already unstable ruling coalition. All the main political parties are using it as a tool to gain popularity and reduce support for Boyko Borissov’s third government.

Borissov himself is trying to calm down the situation and show

that the government can and will control the situation and would not allow the sale to harm the interests of consumers.

Meanwhile, days after CPC announced its decision not to allow the deal, Bulgarian media reported that CEZ could resume negotiations with India Power Corporation – the next in line after Inercom according to the outcome of the auction for the assets’ sale. CEZ had shortlisted five companies in the sale procedure for its assets in Bulgaria.

The Indian company is part of Kanoria Foundation Trust, which unifies the businesses of the Kanoria family. Unlike Inercom it is a large concern; its value is estimated at $10bn.

“The decision by the CPC is "inadequate" and CEZ has decided to challenge it” India Power produces wind, solar and thermal energy, and also deals with electricity distribution.

In Bulgaria, CEZ operates an electricity distribution business with 2mn customers, a retail electricity supplier, and a wholesale trader. The Varna coal-fired power plant also owned by the firm has an installed capacity of 1,265 MW. In addition, it owns two renewable plants.

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Russia's Rosneft launches first ever share buyback programme as part of investment makeover bne IntelliNews

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ussia's largest oil company, state-controlled Rosneft has launched the company’s first ever share buyback programme worth $2bn that will last until December 2020 acquiring a maximum of 340mn or 3.2% of company's share capital and a third of the freefloat, the company announced on August 6.

Rosneft pitched the buyback to investors in May, along with a pledge to cut its record-high debt burden in an effort to improve its valuation as compared to global peers. In the first quarter the company already delivered on the promise and started deleveraging.

It is not yet clear whether Rosneft would cancel the bought shares and the bank, which will manage the buyback, has not yet been chosen yet. Nevertheless, the market met the buyback news positively as of August 6 with Rosneft's shares gaining 2.7% in Moscow on the opening of the market.

At the same time the shrinking freefloat of Rosneft could limit the number and quality of Rosneft's investors, analysts surveyed by Vedomosti daily warn, estimating that postbuyback the freefloat will amount to 7.5-7.8%.

In May Rosneft planned to finance the buyback through "organic free cash flow and sales of non-core assets", with the free cash flow [FCF] and cash accounts estimated

by Vedomosti at about $9.7bn.

www.bne.eu

Previously the head of state-controlled oil major and influential Kremlin insider Igor Sechin argued that the fair value of Russia's largest crude producer Rosneft is about half of what it should be thanks to sanctions on Russia.

As a world leader in terms of reserves and one of the leaders in terms of costs, Rosneft should be valued closer to or $130bn, Sechin argued in January when Rosneft's capitalisation stood at $65.8bn, since then declining further to $55bn.

The investment case of private Lukoil oil major has previously been compared to Rosneft. The company's capitalisation caught up with that of state behemoth, closing the valuation

“Rosneft pitched the buyback to investors in May, along with a pledge to cut its record-high debt burden in an effort to improve its valuation” gap although it extracts less than half of the oil and gas Kremlin-controlled Rosneft does. This year Lukoil also announced a $3bn buyback and a separate buyback for treasury shares.

bne September July 2018 2018

Companies & Markets I 23

bne:FinTech

Robots to collect debts for Russia's VTB bank IntelliNews Pro

R

ussia's second-largest bank, VTB Bank, will start using robots to collect overdue debt, according to the deputy head of VTB Anatoly Pechatnikov as cited

by Vedomosti daily on July 31.

VTB has currently announced a number of digitally-driven initiatives, including a possible alliance with Chinese AliBaba group, trying to catch up with market leader Sberbank that adopted an ambitious digital strategy and keeps a stable rollout of high-tech and AI products and services.

Pechatnikov argued that tests of the automated debt collection at early stages of overdue loans have showed better

performance and lower costs than that of human collectors, while not being susceptible to stress and emotional wreckage of the job. "[The robot] is programmed for simple dialogues warning the client of the overdue [loan] and getting a pledge to get a payment instalment," he explained.

Previously the head of VTB Andrei Kostin pledged to open a first teller-less branch of the bank in Moscow. Sberbank already used robot assistants in some of the branches of the capital, and uses the AI voice assistance service in the corporate clients' call centre.

bne:Tech

PPF completes €2.8bn acquisition of Telenor's business in CEE IntelliNews Pro

C

zech investment group PPF Group has completed the acquisition of Telenor's subsidiaries in Bulgaria, Hungary, Montenegro and Serbia in a deal worth €2.8bn.

The deal was announced in March by Telenor. The company has some 10mn customers in the four markets – 3.4mn in Bulgaria, 3.3mn in Serbia and Montenegro, and 3.1mn in Hungary, but has lost around 1mn subscribers in the last three years. The divestment of the telecom assets fits with Telenor’s fundraising and cost-cutting strategy as the company is planning to refocus

the business and pursue its digital transformation strategy.

"Following regulatory approvals the transaction has today been completed," Telenor said in a statement on July 31.

A day earlier, the European Commission gave a green light to the sale.

Telenor entered the Bulgarian market in 2013, acquiring mobile operator Globul and retailer Germanos Bulgaria from

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24

I Companies & Markets

Greece's OTE for €717mn, later merging the two companies. In the first nine months of 2017, Telenor Bulgaria's Ebitda edged down 0.2% y/y to €99mn. On the Bulgarian market, Telenor competes with Mtel - the local unit of Telekom Austria, and Bulgarian telecommunications group BTC, which operates under the brand Vivacom.

Telenor entered the Serbian market in 2006, acquiring a 70% stake in Mobi63 for €1bn. Subsequently, the Norwegian company also acquired the remaining 30% stake. Its wireless unit competes with Telekom Srbija's mobile arm, MTS, and VIP Mobile, a unit of Telekom Austria Group. The company said in 2016 that it planned to invest over €40mn in the development of 4G services for the Serbian market during the year, and could launch 5G services by 2020.

In Montenegro, Telenor has owned the biggest telecommunications company since 2004. It competes with T-Mobile, owned by

bne September 2018

the Hungarian unit of Deutsche Telekom, Magyar Telekom, and with M:tel, which is majority owned by Telekom Srbija.

Hungary's Telenor is the second largest player on the market with a 27.5% market share, far behind market leader Telekom, which has 47.5% of the market. Telenor Hungary's market value could be between HUF235-325bn, according to estimates of Hungarian business portal Portfolio.hu.

Telenor and PPF have agreed on a deferred purchase price, where €400mn of the proceeds will be paid in four instalments over four years. The agreed transaction price corresponds to an enterprise value (EV)/Ebitda multiple of 6.4 based on 2017 Ebitda.

PPF's plans for another media sector deal in Bulgaria were thwarted recently, when the antitrust body banned the sale of Nova Broadcasting Group, which includes Nova TV and is controlled by Swedish Modern Times Group (MTG), to PPF Group.

French car share BlaBlaCar buys Russian rival BeepCar of Mail.ru IntelliNews Pro

F

rench online car pooling service BlaBlaCar will acquire its rival in Russia BeepCar owned by internet services major Mail.ru Group, Kommersant daily reported citing the announcement of the companies. The deal will start a partnership under which BlaBlaCar will be promoted across Mail.ru platforms.

Car pooling is an emerging segment in Russia's rapidly growing digitally-enhanced transportation market. Boosted by the economic crisis, BlaBlaCar wants to modernize travelling in Russia. Mail.ru and taxi-aggregator Vezyot have recently concluded a convertible loan agreement in preparation for a new investment round.

Earlier in 2018 Mail.Ru Group along with the MegaFon mobile major invested in taxi-aggregator CityMobil, with Mail.ru purchasing 26% for $12mn.

Sberbank CIB expects the car-pooling market in Russia to expand by RUB377bn by 2025, as it will compete with traditional public transportation and by RUB474bn by replacing personal transportation. The total car sharing and taxi market in 2017-2025 is seen growing 2.5-fold to RUB1.6 trillion.

www.bne.eu

BlaBlaCar plans to double the activity in Russia after the acquisition of BeepCar, according to the CE of BlaBlaCar Nicholas Brusson. An estimated number of users in Russia for the French company stands at 15mn users out of 65mn globally.

BeepCar had 2mn registered users as of end of 2017 and had over 5mn app downloads on iOs and Android devices.

Yandex also wants to compete in the car pooling market with its pilot Yandex.Poputka app launched in the beginning of 2018 in Krasnoyarsk and Rostov-on-Don, with about 10,000 downloads in Google Play.

The analysts were sceptical of Mail.ru taxi market ambitions given the given the considerable first-mover advantage Yandex whose Yandex.Taxi service closed a mega-deal with Uber in Russia and CIS. Another rival on the market online taxi booking service Gett said in June it raised an extra $80mn for operations in Russia from Access Industries of Leonid Blavatnik, Baring Vostok, MCI, and Volkswagen Group among the investors.

bne September July 2018 2018

Companies & Markets I 25

Russia’s VK announces privacy changes to protect users from arrest bne IntelliNews

R

ussian social media site vKontakte (VK) expanded its privacy functions to give its users more tools to protect them from arrest, the company said on August 13.

The Kremlin has been cracking down on online criticism of the government. Vedomosti reports that of 182 criminal cases launched in 2017 for social network posts, 138 were based on VK posts, with another four people prosecuted for posts on Odnoklassniki and two for posting on Facebook.

The arrests have tarred VK with a reputation for being “too compliant” with the authorities, and is now making it harder for them to see what is posted or who posted it.

VK managing director Andrey Rogozov said the social network had begun implementing new privacy features due to the rise in criminal prosecutions in Russia for reposts and likes. Changes include making photos private by default, allowing only the original poster to see which users had reposted their material, and ultimately leading to the ability for users to make their profile entirely private, BCS Global Markets reports. Rogozov also said that more changes to the social network are in the works.

“Ongoing reports about criminal charges for social network posts are likely to lead to changes in features, user behaviour, and ultimately law enforcement practice but do not represent a fundamental threat to VK's business, we believe,” BCS GM said in a note.

German Allgeier to pay over €10mn for 67% of Romanian software producer IntelliNews Pro

G

erman software producer Allgeier announced that it has reached an agreement to buy 67% in its Romanian peer iQuest Group, for €10mn+.

iQuest is one of the country’s 20 largest software producers with a turnover of over €30mn, a sharp expansion rate and strong profitability.

The acquisition is subject to approval by the competition authorities in Germany and other closing conditions. The purchase agreement is expected to be concluded within the next four to six weeks. Allgeier will then acquire approximately 67% of the shares for a purchase price "in the double-digit million euro range". Cornelius Brody, the founder of iQuest, will retain a 21% stake in the company for the next few years. The operating management holds a total stake of approximately 12% .

Algeier already had a development centre in Romania at Timisoara.

The target company has its headquarters in Germany, but operates software production centres in five Romanian cities:

Cluj, Bucuresti, Sibiu, Brasov and Craiova, where it employs 700 developers. It has development centres in Germany, Poland and Swizerland as well. It operates in Romania through two subsidiaries: iQuest Technologies Cluj-Napoca and iQuest Technologies Brasov. iQuest was set up in 1998 by local investor Brody and it produces tailored software solutions (70% of income) as well as proprietary products (generally for secure payments and meeting rooms).

It reported €32mn revenues in 2017 and expects €38mn revenues this year, Profit announced. The Romanian company posted a 15% Ebitda margin last year. Algeier reported €580mn revenues and €26.5mn Ebitda last year.

“iQuest was set up in 1998 by local investor Brody and it produces tailored software solutions” www.bne.eu

26

I Cover story

INTERVIEW:

MAKING CROATIA AN ADRIATIC TIGER? Andrew MacDowall in Zagreb

www.bne.eu

bne September 2018

Cover Story I 27

bne September 2018

T

he past ten years have been tough for Croatia – six consecutive years of recession in 2009-14, the nearcollapse of its sprawling largest private company and several others coming under serious strain, and five different prime ministers including one ousted by a corruption scandal and several that were simply disappointing. Tens of thousands of Croatians are emigrating every year. There has also been mounting international media criticism of alleged attempts to rehabilitate Croatia’s Second World War past.

But President Kolinda Grabar-Kitarovic hopes that the national football team’s thrilling run to the World Cup final this summer will reinvigorate her country of 4.2m people.

“We need to spur that optimism in other areas,” she told bne IntelliNews in an exclusive interview in the presidential offices in Zagreb. “I’m hoping that this success will provide for similar kinds of results that – for instance – Ireland had when the World Cup in Italy in 1990 gave a boost to the rise of the Celtic tiger.”

She distanced herself from the drumbeat of nationalism and xenophobia elsewhere in Europe, particularly in Central and Eastern Europe (CEE) and the Balkans, and called for a reassertion of “European values”, drawing on the experience of Croatia’s 1991-95 war of independence.

“Croatia is the latest member state of the EU, and one of the countries that best remembers why the European project began to begin with,” said GrabarKitarovic. “We remember the times of war that unfortunately for us were quite recent, we remember the times of division in Europe, of barbed wire. For quite a long time before the migration crisis, I had been warning about the erosion of values, and I had noticed that societies were closing inwards.”

Asked whether these “European values” were the sort of exclusivist “Christian values” espoused by leaders like Viktor Orban, prime minister of neighbouring Hungary, the Croatian president

said that she would not “comment on, interpret what one of my colleagues has said,” but added: “I don’t see a problem in upholding Christian values, because I think they’re in conformity with Muslim, or any other religious values – I’m talking about the mainstream.”

Speaking at a modest circular table in a huge reception room carpeted with plush rugs in the Communist-era Pantovcak complex, she added: “For us the European project is still about values, of course it’s about the common market and economic opportunities, and the four freedoms. But it’s also about human rights, it’s about civil rights, about rights of the individual and about creating the most prosperous and the freest space in the world – that offers all of these opportunities to all people and all countries equally.”

Cheering for Croatia Grabar-Kitarovic’s international profile was raised by her appearances at the World Cup, when she regularly donned the national team’s shirt and where pos-

overall, Croats are satisfied with international reactions to her summer in the spotlight, says Davor Gjenero, a political commentator.

Grabar-Kitarovic is not universally popular in Croatia, however, and critics say that her wholesome international image masks a willingness to cosy up to the far right in Croatia for political reasons. For example, Velimir Bujanec, a talk show host who has been pictured parading Nazi memorabilia, was a VIP guest at her inauguration, while the president has said that controversial far-right singer Thompson – whose appearance at the World Cup celebrations in Zagreb caused controversy – is a favourite of hers.

On the other hand, some conservatives see her as an outsider with few real ties to the Croatian right. Grabar-Kitarovic’s description in February of those protesting against the visit of her Serbian counterpart Aleksandar Vucic as “marginal” caused a stir, given that many were war veterans and war widows.

“Croatia is the latest member state of the EU, and one of the countries that best remembers why the European project began to begin with” sible eschewed VVIP areas and official flights in favour of sitting with fans.

Pictures of her wearing the national strip and surrounded by fellow Croatia fans flying coach on the way to Moscow went viral as a shocking show of humility and simple fun that is so unusual for the leader of a former socialist bloc country.

Her involvement in the World Cup also appears to have buoyed her domestic popularity considerably ahead of presidential elections due by the end of next year, in which she is widely expected to run. Polls give her a popularity rating of 67%, making her by a large margin the country’s most popular politician. While some on the left in Croatia’s polarised political landscape have accused her of behaving improperly and shamelessly using the World Cup for self-promotion,

Those close to the president, however, say that she has a commitment to the country and a desire to change it that is absent in too many Croatian politicians – either ideologues squabbling over history or dull technocrats with little vision.

While Grabar-Kitarovic’s constitutional powers in domestic policy are limited, she is seen as an activist president, and has been critical of the government of Prime Minister Andrej Plenkovic, despite them both hailing from the right-wing Croatian Democratic Union (HDZ).

Tensions between president and government have eased in recent weeks, however, and Grabar-Kitarovic praised the government’s handling of the crisis at Agrokor, the retail and food company

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28

I Cover story

that was put under state-run administration in 2017 after running up debts of HRK58bn ($9.1bn), around three times its current value. She was also upbeat on ongoing tax reforms.

Croatia’s recovery from a prolonged recession has been respectable, if not stellar. Regional bank Addiko

bne September 2018

“[The government is] taking the right path, and what I’d like to see continue is further tax reform aimed at reducing the cost of doing business for employers, and increasing the salaries of employees,” Grabar-Kitarovic said. “But I’d like all of us to be a bit more ambitious in setting goals not just for GDP growth but for overall development in Croatia. I think

“I’d like all of us to be a bit more ambitious in setting goals not just for GDP growth but for overall development in Croatia” forecasts GDP growth of 3.0% in 2018, following two consecutive years of 3.2% growth.

But while the country stands a respectable 51st in the world on the World Bank’s Doing Business rankings, the perception on the ground remains that Croatia has been sluggish in implementing economic reforms. Businesses complain about red tape, high taxes, and a lack of clarity in property rights, among other things.

that we need to be a bit more self-assertive on the European and global stage in terms of promoting investment in Croatia, and promoting Croatia as a leader rather than a follower. And of course coupled with that is continued reform of the state administration and the necessary measures to reduce bureaucracy to the lowest level possible.”

While the president’s influence over such slow-grind reform is largely limited to the bully pulpit, in July she present-

ed a new initiative to tackle emigration.

This includes tax reductions, pro-family measures, and changes to legislation to encourage the integration of immigrants. According to figures used by the president, 80,000 Croats left the country in 2017 alone, and the country could see its population drop by 1.1m by 2051. This is putting further strain on an economy in which the ratio of people in employment to pensioners is already 1:1.

East-west convergence Grabar-Kitarovic has been an advocate of the Three Seas Initiative (TSI), which seeks to strengthen the economies of CEE, particularly through improving interconnectivity in energy and transport. The Croatian president sees the TSI as a means to close the gap between the EU’s east and west, and reinvigorate the European project as a whole.

“The Three Seas Initiative is about convergence; it’s also about connectivity, cohesion, and the competitiveness of our businesses,” she said. “I believe that if we focus on improving lives and erasing the differences across the European continent we will also move a lot closer

Russian President Vladimir Putin, FIFA president Gianni Infantino, French president Emmanuel Macron, Croatia president Kolinda Grabar-Kitarovic in torrential rain.

Alizada Studios / Shutterstock.com

www.bne.eu

bne September 2018

to these common values and upholding them together. The TSI is based on three pillars – building intermodal transport that exists in Western Europe but that we lack. Energy, which is a very important aspect of economic development, political independence, and political stability, and digitalisation.”

Looking east, Grabar-Kitarovic defended her relationship with Russian President Vladimir Putin, which appears to be personally warm, and has included her calling for closer co-operation with Russia. Sberbank is Agrokor’s biggest creditor, leading to concerns over its leverage in the country, and Gazprom has been building its presence as a gas

Cover story

“Being an Atlanticist and maintaining a dialogue with the Russian president is in no way contradictory,” GrabarKitarovic said, asserting that the relationship was based on necessity, and three main areas of co-operation.

Firstly, addressing crises such as Ukraine and Syria, in which Croatia supports Nato and EU policy. Secondly, the regional level, with a need for Russian support in an increasingly fractious Bosnia & Herzegovina, as a guarantor of the Dayton Peace Agreement. And thirdly, specific bilateral issues including the Agrokor crisis.

Turning finally to Croatia’s neighbours in the Western Balkans, Grabar-Kitarov-

“Being an Atlanticist and maintaining a dialogue with the Russian president is in no way contradictory” supplier to Croatia through its partnership with Croatia’s PPD, seen by some as a company with considerable political influence.

ic admitted that EU accession appeared “a distant prospect right now”, and said that she regretted that the European Council had not given the go-ahead to

I 29

starting accession talks with Macedonia and Albania in June. While Croatia has been accused of putting roadblocks on the EU path of Serbia and Bosnia in particular, the president insisted that the country was a staunch supporter of enlargement – and called for a new terminology for the region.

“I prefer to call it the consolidation of Europe, because Europe will not be enlarging, it will be consolidation of the vacuum that we’ve created over a great area to the south and east of Croatia.

I don’t like calling it the Western Balkans – I think it evokes negative feelings, it has become a global trope that signifies dissolution, war, instability.

Who would want the Balkans in their own home? I prefer to call it Southeast Europe, to give it a geographically more neutral dimension, but also a broader dimension, because we’re all responsible for their accession, including Greece and Romania and Bulgaria and Hungary and Italy, to help our neighbouring countries to move forward on the EU path as soon as possible.”

World leaders Arriving at NATO (North Atlantic Treaty Organization) SUMMIT 2018. Gints Ivuskans / Shutterstock.com

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I Special focus

bne September 2018

Digging into Russian dividends Ben Aris in Berlin

T

wenty years ago Russia suffered the most debilitating financial crisis since the collapse of the Soviet Union in 1991. An Asian currency crisis had taken a year to filter around the world and finally infected Russia’s economy after oil prices collapsed to $10 a barrel. The cash-strapped Russian economy quickly collapsed and on August 17, 1998 the ruble lost three quarters of its value in a day, the entire top tier of the banking sector was destroyed and the state defaulted on some $40bn worth of treasury bonds. The economy was left in tatters and the man on the street would have left the country if he could.

That was at the peak of the wild 90s.

Corporate takeovers were contested using guns and “breakfast bombs” (explosives hidden under cars to catch executives on the way to work). And taking control of a company often amounted to little more than crossing

www.bne.eu

a shareholder’s name out of the company share register and writing your own in on top.

Russia has come a long way since then.

The system is far from perfect, but property rights are respected and enforced.

The killing has stopped and the economy

and becoming a minority financial shareholder is a routine strategy.

All this is because Russian businessmen’s attitude to their equity has changed. In the 90s owning equity was simply a way of controlling a company’s cashflow that could be siphoned

“The revolution in corporate governance that was pioneered by oil major Yukos in the early noughties has spread to most of Russia’s leading companies” is stable and growing. More than anything the revolution in corporate governance that was pioneered by oil major Yukos in the early noughties has spread to most of Russia’s leading companies

off using a network of shell companies and the so-called transfer pricing schemes. But since then equity has changed its role and now is increasingly the conduit for paying investors

Special focus I 31

bne September 2018

who have committed to a company. The change in mentality has been bolstered by the government which is increasingly looking to dividend payments as the way to extract cash from its holdings, rather than using taxes. Owners – private and public – want minority shareholders. They want to see the value of their stock increase. And they are willing to share their profits with minorities.

Russia’s 2017 dividend season came to an end in August and the leading companies paid out a record RUB1.69 trillion ($26.7bn) to shareholders, up by 16% year-on-year and a new record.

State-owned enterprises have become increasingly attractive after the Ministry of Finance ordered them to make a 50% payout of profits as dividends last year.

While most of the biggest companies have managed to get themselves exempted, their opposition is crumbling and all of them have increased their dividend payout. Most of the state companies are expected to hit the 50% target sometime in the next year.

And owners have been steadily increasing the amount they pay out. This season the average dividend yield was 38% of net profit as compared to 31% for 2016, according to Russia’s home-grown rating agency the Analytic Credit Rating Agency (ACRA).

Dividend expectations for most liquid Russian names Stock

Rec

The outsized return from just picking stocks with good dividends has made these generous companies extra attractive and as a result they have outperformed the overall market, as Moscow Exchange (MOEX) explains with their dividend stock tracker (see related piece) that runs head of the index by about 17%.

12MF DPS, RUB

12MF DY

12MF DY

EVRAZ*

SELL

456

63.9

14.00%

14.00%

Norilsk Nickel

HOLD

10,882

1,500

13.80%

13.80%

Surgutneftegas pref.

HOLD

34.6

4.18

12.10%

12.10%

MMK

HOLD

46.3

5.45

11.80%

11.80%

Severstal

SELL

1,020

118

11.60%

11.60%

ALROSA

HOLD

97.3

10

10.30%

10.30%

LSR Group

BUY

774

78

10.10%

10.10%

NLMK

SELL

162

16.2

10.00%

10.00%

Sberbank pref.

-

182

18

9.90%

9.90%

Enel Russia

-

1.23

0.12

9.80%

9.80%

Tatneft pref.

-

482

46.9

9.70%

9.70%

Globaltrans

BUY

717

68.4

9.50%

9.50%

VEON

-

189

17.5

9.30%

9.30%

RusHydro

-

0.68

0.06

8.80%

8.80%

Federal Grid Co.

-

0.17

0.015

8.80%

8.80%

BUY

175

15.2

8.70%

8.70%

MTS

-

264

22.6

8.60%

8.60%

Rostelecom pref.

-

62

5.2

8.40%

8.40%

Sberbank

-

215

18

8.40%

8.40%

Detsky Mir

BUY

89.8

7.5

8.40%

8.40%

Unipro

-

2.7

0.22

8.20%

8.20%

Moscow Exchange

-

103

8.1

7.90%

7.90%

AFK Sistema

-

9.07

0.7

7.70%

7.70%

Rostelecom

-

70.3

5.2

7.40%

7.40%

VTB

-

0.048

0.0035

7.20%

7.20%

Megafon

-

590

40

6.80%

6.80%

TCS Group

-

1,334

87.1

6.50%

6.50%

Tatneft

HOLD

721

46.9

6.50%

6.50%

Polyus

BUY

4,469

290

6.50%

6.50%

Transneft pref.

SELL

162,600

10,517

6.50%

6.50%

Gazprom

HOLD

144

8.04

5.60%

5.60%

Rosneft

BUY

419

23.4

5.60%

5.60%

Gazprom Neft

BUY

328

18.2

5.50%

5.50%

HOLD

545

30.1

5.50%

5.50%

BUY

4,452

237

5.30%

5.30%

-

6.42

0.31

4.90%

4.90%

Rusagro

BUY

667

31.3

4.70%

4.70%

RusGrids

-

0.77

0.036

4.70%

4.70%

Inter RAO

-

4.14

0.193

4.70%

4.70%

BUY

123

5.61

4.60%

4.60%

-

4,540

190

4.20%

4.20%

PhosAgro

SELL

2,284

92

4.00%

4.00%

X5 Retail Group (DR)

BUY

1,670

64

3.80%

3.80%

Magnit

BUY

4,128

140

3.40%

3.40%

TMK

HOLD

70.4

2.28

3.20%

3.20%

O'Key

BUY

125

3.76

3.00%

3.00%

Surgutneftegas

SELL

29

0.7

2.40%

2.40%

NOVATEK

BUY

924

20.7

2.20%

2.20%

Etalon Group

Polymetal

The average dividend yield is 5.5%, but focusing on the best names investors can earn two or three times more. BCS Global Markets has a dividend stock basket that paid an average dividend yield of 11.8% this season as the cash component of the investment, and oil major Surgutneftegaz is expected to pay a whopping 19% to its shareholders this year.

Price, RUB/s

LUKOIL NCSP

Aeroflot Acron

* Low conviction

Source: Bloomberg, BCS GM

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32

I Special focus

Total returns from dividend yielding stocks out pace the market Russia pays the highest dividends in the world, Moscow Exchange (MOEX) told bne Intellinews in an interview, and Russia’s leading bourse is actively selling its best story to international investors.

Bloomberg estimates the MSCI Russia index yields at 5.5% – nearly twice the MSCI EM benchmark average dividend yield and more than any other emerging market.

“As you can see from the charts, Russia has been a hidden income story from dividend payments,” says Tom O'Brien, head of international sales at MOEX. “If you reinvest the dividends then the real total returns from investing into dividend yielding stocks handsomely outperform the index.”

In order to track this class of share the MOEX calculates four total return indices: two based on the ruble denominated Moscow Interbank Currency Exchange (MICEX) index and two based on its sister index, the dollar denominated Russia Trading System (RTS) index. One version of these pairs tracks the absolute return and second one assumes the investor pays a nominal 15% tax on their dividend payouts.

“Starting from the beginning of 2016, the benefit of the RTS Total Return Index, which includes reinvested dividends, verses the plain vanilla RTS Index has been growing constantly and currently the difference is now over 17% YTD,” says O’Brien.

RTS index vs dividend stocks basket performance

RTS Total Return vs. RTS Index

bne September 2018

That bodes well for the equity market performance in the autumn, argues BCS GM (putting aside the political risks related to US sanctions), as companies are front-loading their cash flows to pump into dividends.

“The market is inexpensive overall (we continue to point at 16% fundamental upside for the RTS index to our year-end target of 1,350). But it also points at strong front-loaded cash flow generation at this stage of the cycle – by metals names in particular, and the steel names foremost,” Vyacheslav Smolyaninov, chief strategist and deputy head of research at BCS GM told bne IntelliNews.

“We count on the ongoing the second quarter earnings season to convince investors that our picks are truly outstanding dividend stories in Russia right now.”

Notably, most of the increases this season came from the oil and gas sector, with biggest names paying RUB700bn for 2017 in dividends, up by 24% y/y.

State-controlled companies increased their dividend payments this season too, with a 19% y/y hike to RUB697bn, or an average of 35% of profit. The federal budget got RUB270bn from the dividends paid by state-controlled companies but hopes to get significantly more next year.

With the market capitalisation dominated by the oil and gas sector it is no surprise that hydrocarbon producers account for 42% of all dividends, followed by metals and mining (27% of the total or RUB455bn), paying out almost their entire free cash flow.

Other sectors paying a lot of dividends include transportation companies (8% of the total or RUB139bn), and telecoms and utilities (7% and 6% of the total, respectively).

And with both the share of profits and the number of companies offering dividends rising each year the prospects for the next dividend season that has just started are even better than the season that just closed.

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MOSCOW

LONDON

CYPRUS

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Secretive Surgutneftegaz is top dividend dog Russia is paying the best dividends in the world, but no one is paying more than the secretive Russian oil major Surgutneftegaz, which expects to hand its shareholders a massive 19% dividend yield this season.

Surgutneftegaz is a strange company and an unlikely candidate for investor’s darling, as it deliberately obstruficate reports and remains so opaque that no one knows for certain who actually owns the company. Investor, turned activist, Bill Browder told bne IntelliNews that he was thrown out of Russia after he showed an investment conference and organogram detailing the 600 shell companies that were used to hold the company’s shares.

More practically investors are also unclear as to what happened to a sizeable number of the company’s treasury shares. But the company is famous for its $40.6bn cash pile and the current market conditions mean it is making money hand over fist, which it is happy to share with shareholders.

With costs denominated in rubles, but earnings in dollars, Russian oil companies are always big winners from devaluations and the ruble is down this year 17% since January, while oil prices have been averaging over $75 per barrel in the last three months.

Surgut is making money from both pumping crude and its cash: the company earns RUB0.80/share in dividends per

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share (DPS) –12% of total DPS or a 2.2% dividend yield – just from interest income earned from its cash pile.

On top of that, because its cash is in dollars, Surgutneftegaz earned yet another RUB2.9/share – 42% of total DPS or a 7.8% dividend yield – from currency gains due to this year’s devaluation of the ruble.

That means Surgutneftegaz will pay a 10% dividend yield earned just from its cash pile – about twice the MSCI Emerging Market average yield – before earnings from pumping a single drop of oil are included in the payout.

“All these factors, if they persist, could well support the company’s financial performance in the second half of the year. We calculate that if the ruble stays at the current level of RUB66.80 by the year end and Urals averages $71/ bbl in 2H18, Surgutneftegas might deliver an 18.6% DY (RUB6.80 DPS) for 2018, the highest among Russian Oil & Gas names,” Sberbank said in a report reiterating the stock as the bank’s top pick in the oil and gas space with a Buy recommendation.

The stock has already performed well recently along with other commodity companies on the back of rising oil and metal prices, gaining 10.3% in dollar terms since the end of June and outperforming the RTS oil and gas index by 18.1%. “But we believe there is some room for upside left,” Sberbank concluded.

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Despite the geopolitical brouhaha investors decided the sell off had been overdone and Russian shares were simply too cheap to ignore leading to a significant rally. Last year was not as good. After a steep sell off in the first quarter the market spent the rest of the year trying to make back the loses from the first three months and ended the year more or less flat.

Russian stocks are cheapest in emerging markets Ben Aris in Berlin

E

quity investors have been leaving emerging markets (EM) in droves in the first quarter as the US Fed tightening cycle pulls them back to the developed world’s bourses and the unstable politics of a looming transAtlantic trade war drives them out of emerging ones. And that outflow got a further impetus in August as Turkey’s currency went into meltdown.

“Investor dislike for EM equities hit a new multi-year low this week,” Vyacheslav Smolyaninov, the chief strategist at BCS Global Markets said in a note. “The sell-off may be overdone, if the world economy emerges from the trade wars unscathed, which is our base case.”

attracted not only football fans in June but fund managers as Russian stocks have become the cheapest amongst the leading emerging markets after the April 6 round of sanctions imposed by the US on a number of Russian businessmen and their companies.

Russia has already benefited from this bottom fishing investment in 2016 when the index returned 52% on the year making it the best performing in the world.

This year is also not going well either. Russia saw net outflows for 15 consecutive weeks as of the start of August, when non-residents sold another $10mn worth of Russian stocks, after selling $110mn the week before, finanz.ru reports.

Funds focusing exclusively on Russia sold $40mn worth of securities in the last week of August and $130mn in the last two, according to BCS GM. Funds invested into vehicles like ETFs, which include Russian stocks in a basket, added $30mn in the same week, but not enough to bring the total inflows into the black.

In total, foreigners sold Russian shares for 15 weeks in a row with the exception of one week at the start of July, according to BCS GM’s Smolyaninov.

Russia’s outflows have been part of a general sell off of EM assets. “As trade tensions mounted over the course of the month, we estimate that emerging markets saw net non-resident portfolio outflows of $8.0bn in June, split about evenly between debt (-$4.2bn) and

RTS vs Brent Oil Price, difference x20 price of oil indicator

EM had their worst week in July since Trump was elected US President when outflows from all EM equity funds reached $5.2bn. Active funds were largely unaffected as the bulk of these outflows ($4.1bn) left ETFs, but that makes Russian equities vulnerable as the lion’s share of portfolio into Russian stocks are now via ETFs. However, the pain of the global EM equity rout has been Russia’s gain. Russia

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equity (-$3.8bn) markets. This June figure caps off the weakest quarter since the end of 2016, with emerging markets facing a variety of headwinds. Most major EM regions were hit with outflows in June: Africa/Middle East (-$4bn); EM Asia (-$2.7bn); and Latin America

energy companies in the MSCI Russia index exceeds 50% and the result of the meeting of OPEC+ on June 22-23, at, which it was decided to increase production by 1mn barrels per day, should drive these stock up further, analysts speculate.

“The funds are flowing out, but many funds were already overweight Russia and are maintaining their bets” (-$2.5),” the Institute of International Finance (IIF) said in a note.

The funds are flowing out, but many funds were already overweight Russia and are maintaining their bets. Although the weight of Russia in the MSCI Emerging Market index is only 3.5%, fund managers have increased the weight of Russian stocks in their portfolios to overweight again. The Lazard Emerging Markets Fund invested almost 10% in Russia, and Templeton Emerging Markets and Fidelity Emerging Markets is overweight with more than 8% of its portfolio in Russian stocks, Vedomosti reports.

The oil and gas sector has been particularly attractive as the average oil prices this year is well over the budget assumption of $40 per barrel and closer to $60 so far this year. The weight of

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Avast to enter London bourse in bid to raise up to $1bn Avast to enter London bourse in bid to raise up to $1bn St Petersburg's start-up scene flourishes on high talent and low costs Romania entrepreneur aims to put home-grown UAV defence technology industry on the map FinTech Russia's mobile major MTS increases stake in Ozon to 16.7%

Avast to enter London bourse in bid to raise up to $1bn Jaroslav Hroch in Prague Avast, 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 Czech-founded company announced on April 12.

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“As trade tensions escalate, fund investors have taken refuge (and sought opportunity) in US assets. These now represent 58% of global fund portfolios – the highest level since 2016, prior to the presidential election,” IIF said in a note.

Stocks under fair oil value The leading RTS was down 10% YTD as of the end of August, but just how much has the market sold off?

As about two thirds of the capitalization of Russia’s stock market is made up of oil and gas names and in the past the mar-

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At the time of writing the RTS was 1,085 and oil prices are averaging $77.1, which means the implied RTS value should be 1,541. Analysts agree that the RTS is probably undervalued: BCS Global Markets has a year end target fro the index of 1,350, but given the higher than expected oil prices so far this year, even that looks conservative – if it weren’t for the politics dogfight between Moscow and Washington.

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Although this relation doesn't work as well as it used to – despite the big outperformance of many of the oil company stocks this year – according to the rule of thumb the RTS is undervalued by over 400 points as of September 1, the biggest gap it has displayed for at least two years.

6

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There is a handy rule of thumb for checking if Russian share prices are over or under valued: the value of the RTS index is simply x20 the cost of a barrel of oil.

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However, equity investors remain unsettled by the raft of political risks Russia is facing as Putin squares off with Trump and more painful sanctions loom.

Many managers are simply looking for a safe haven until the rumble is over.

ket’s performance has been closely tied to the price of oil. However, as politics have come to player a bigger role the relationship between the cost of a barrel of the black stuff and the height of the leading dollar denominated RTS index has broken down. That relation was further weakened by the re-introduction of the so-called budget rule at the start of this year, where all government oil revenues from when oil prices are over $40 are siphoned off into the state’s rainy day fund.

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How bad has August's EM sell-off been?

August has been a crisis month in Emerging markets (as usual), with the collapse of the Turkish lira (TRY) and selloffs in several other markets, including Russia, which has been roiled by the US government threat of new “crushing” sanctions on Russia this autumn. But just how bad has the sell-off been? The consensus is while most markets have been affected there will be no 1997 Asian crisis-style contagion and that many markets should bounce back soon.

Asset prices in Turkey and Argentina have fallen dramatically in recent weeks, while the moves in other countries’ markets look similar to previous EM sell-offs over the past decade, according to Capital Economics. The lira has lost some 40% of its value YTD, the Russian ruble is down by about 7% and the Ukrainian hryvnia is out by about 15%.

Bond markets have also been hit with spreads over US treasuries widening across the board, which spells trouble for Turkey, Russia, Ukraine and Belarus in particular, all of, which plan to raise large amounts of debt in the next 12 months.

But the impact on growth for these markets remains unclear. Clearly economic growth will slow – Russia has just revised its outlook down mildly – but not by large amounts, experts say.

“It’s still very early to gauge whether there has been an economic hit, although our indicators suggest that financial conditions in EMs haven’t tightened to anywhere near the degree to, which they did during the 2013 Taper Tantrum,” William Jackson, the Chief Emerging Markets Economist at Capital Economics said in a note, referring to the US Federal Reserve's decision to gradually reduce the amount of money it was feeding into the economy then.

The taper caused investors to panic, who rapidly withdrew money from the bond markets and drastically increased bond yields.

Capital Economics looked back at the last 11 sell-offs in EM financial markets this decade, caused by currency crisis using a threshold of the JP Morgan EMBI spread over US Treasuries rising by 50bp or more within three weeks to define “crisis.” This captures the major sell-offs triggered by the euro-zone debt crisis in 2011/12, the “Taper Tantrum” in 2013, fears of a China hard landing in 2015, as well as the latest sell-off.

during the ruble crisis of late 2014,” says Jackson, adding that the size of the currency falls are in line with previous crises, the rise in local currency bond yields has been larger, but the widening of spreads to US T bills has been smaller.

“Overall, then, it has been a large sell-off, but perhaps not as dramatic as some headlines have suggested,” Jackson concludes.

Another conclusion is the currencies that have done badly, always do badly in crises and tend to belong to the countries with economic problems like wide current account deficits.

However, apart from Argentina and Turkey, which have been in the front line, the other economies are not showing signs of more than a mild slowdown in growth as a result of the current crisis bout.

One way to assessing the impact on economies is to look at the financial conditions and in most countries the authorites have tightened control similar to their reaction in previous crises in 2014 and 2015, but less than during the taper tantrum in 2013. Moreover, for those countries with sound macro fundamentals, which consequently have not see bond yields spike, these may now benefit from the weakening of their currencies that will lead to a bounce back once the frayed nerves of August calm.

Russian brokers are already reporting that a sell-off in the local treasury bills, the OFZ, has lead to a fall in prices, but the fall in the value of the ruble against the dollar is making these popular bills look very attractive again. Investors are holding off however, until some clarity appears over what the form of the new pending US sanctions will be as the draft law in Congress targets Russia’s sovereign debt.

Change in EM Currencies vs. US Dollar During Sell-offs (%)

“What comes out of this comparison is the sell-offs in Turkey and Argentina this time round have been particularly sharp. The falls in their currencies and rise in their bond yields (both dollar and local currency) have only been matched in scale by the declines in Russian asset prices

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CEE boom passes peak Ben Aris in Berlin

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he boom Central and Eastern Europe (CEE) has been enjoying for the last four years has reached its peak as countries in the region start to run up against their structural limits.

While all the countries are still enjoying robust growth, the rate of expansion is starting to slow and in some cases has begun to fall. The main brake on development is a growing labour shortage in the region, but more insidious is the lack of investment into new technologies and a reengaging of businesses to go up the value added chain that will take longer to make itself felt.

Six economies in Central and Eastern Europe released second quarter GDP data in August and all of them show signs of slowing down: Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. The data showed that regional growth slowed for a third straight quarter, weakening from 4.6% y/y in Q1 to

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4.3% y/y in the second quarter – down from a peak of 5.6% y/y in the third quarter of 2017, reports Capital Economics.

“Detailed breakdowns of the data have yet to be released. But monthly activity data show that weaker growth in Q2 was widespread across sectors. After a sharp rebound in 2017 on the back of a recovery in EU structural fund inflows, growth in construction output slowed markedly in Q2. Meanwhile, continued softness in euro-zone manufacturing weighed on CEE industry. And retail spending weakened a touch – higher oil prices may have tempered consumer demand,” Capital Economics said in a note.

It's been a fun ride as bne IntelliNews pointed out in a cover story “CEE booms” last year but now the countries in the region will return to more modest levels of growth. The Romanian economy already started to slow sharply at the end of last year, while the Czech economy slowed

the most this quarter. Poland put in a small growth, however, economists are warning that the peak has passed and expect all the economies of the region to slow as the rest of the year plays out.

Acute labour shortages that are causing wage inflation and the slow progress manufacturers are making in moving up the value chain is limiting the further growth of countries in the region.

“We think that the gradual slowdown in CEE GDP growth will continue over the course of 2018 and into 2019. Higher inflation and interest rates, as well as less supportive fiscal policy in parts of the region, will probably take the steam out of domestic demand. And weaker demand from the euro-zone and mounting capacity constraints will weigh on net trade. We expect CEE growth to average around 3% in 2019,” said Capital Economics.

GDP growth slowing but still strong The Czech Republic was worst affected

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this quarter. Czechia’s economic growth decelerated to 2.3% year-on-year in the second quarter of 2018 from 4.2% growth in the first quarter as the economy runs up against its structural limits, the Czech Statistics Office (CSU) said on August 14. The main reason is a strong base effect from the previous year, but the slowdown was also due to the depleted capacities of the Czech economy, analysts say. Slovakia’s economy grew 4.1%, compared with 3.6% in the first quarter.

peration to find more labour has opened a bureau to fast-track work permits for Ukrainian jobseekers and bne IntelliNews’s correspondent in Tbilisi reports the capital of Georgia is plastered with posters advertising jobs in Poland.

The labour issue is becoming a major drag on further growth and driving up wages. Six countries in Central and Eastern Europe have acute labour shortages, according to a report of Colliers International. Bulgaria, Romania, Hungary,

“Six economies in Central and Eastern Europe released second quarter GDP data in August and all of the show signs of slowing down” By contrast Hungarian GDP growth unexpectedly quickened to 4.6%, the fastest pace since 2014, driven by agriculture, services and manufacturing. But economic research institute GKI said at the end of July economic growth probably reached the peak in this business cycle of 4.4% in the 4Q17 and 1Q18.

Poland’s economy is the biggest in the region and is also holding up well, but growth is also expected to peter out later this year. GDP growth slipped from 5.2% in the first quarter to 5.1% in the second and is expected to slow further as the year wears on, due to weak investment growth as the construction sector reaches capacity limits, among other problems.

Romania’s economy has already passed its peak. After turning in an astonishing 8.8% growth in the third quarter of 2017, Romania’s state forecasting body the CNP cut its projection for this year’s GDP growth from to 5.5% in July from 6.1% in the previous outlook released in April. Romania’s GDP increased by 4% y/y in the first quarter of the year, the statistics office said earlier in July, confirming an earlier flash estimate, pushed up by private consumption.

Slovakia, the Czech Republic and Poland have very low levels of unemployment, combined with dynamic growth, emigration and the fast development of the service sector. “If the labour force riddle is not solved, then we foresee limitations to GDP growth, perhaps a recession and a likely shadow over private investment in the region in the medium to long run,” the report noted.

Slovakia is now facing its highest job vacancy rates in a decade. Slovakia’s job vacancy rate in the second quarter of the year stood at 2.6%, the highest since 2008. It went up 0.1pp up compared to the previous quarter as well as 0.4pp up against the same quarter of 2017, the

statistical office announced on August 9.

The Polish unemployment rate came in at 5.9% in July, a drop of 1.1pp y/y, the labour ministry said in a preliminary estimate released on August 6. And the July unemployment rate is the lowest since November 1990, shortly before it ballooned to double-digit levels after the implementation of market reforms.

Polish wages grew 7.1% y/y in the second quarter, resulting in an average gross monthly pay packet of PLN4,521.1 (€1,058), according to data released by statistics office GUS on August 9.

Growth in wages continues in Poland, as an effect of the shortage of labour that persists despite companies resorting to employing cheaper labourers from Ukraine on a massive scale.

The labour shortage in CEE has been a boon to Ukraine, which has the lowest wages in Europe – the average wage in Poland is currently four-times more than the official average in Ukraine. Over the last three years there has been an exodus by able bodied Ukrainians looking for work. Some 400,000 Ukrainians have left the country in the last year to find employment in their neighbours and are sending some $10bn of remittances home a year.

The Czech labour market is overheated, which is causing inflationary pressures due to robust wage growth, the central bank board concluded during a June 27 meeting at which it raised the key interest rate by a quarter point to 1%. The Czech

CEE relative rates of GDP growth share of total growth rate in period for selected countries

Labour woes The main problem is everyone now has a job and these workers can’t be made to work more or better. Poland in its des-

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unemployment rate has fallen to 3.1% in July – one of the lowest in the region – and has been contracting every month for the last five months. Analysts expect unemployment to decrease again in the coming months to fall below the 3% mark – less than the structural minimum unemployment associated with a booming economy that enjoys full employment.

This will put further pressure on wage growth, which expanded by 8.6% y/y in 1Q – the fastest rise in the past 10 years.

Romania is facing similar problems.

Romania’s seasonally-adjusted ILO unemployment rate dropped by 0.4pp y/y to 4.5% in June, the INS statistics office reported on July 31. The Romanian unemployment rate has been on a downward trend in recent years helped by the booming economic growth last year. Three quarters of Romanian companies reported this month they were prepared to hike wages by 15% in several key sectors as they struggle to find enough labour.

Demand fading Retail sales are also slowing in the region.

Polish retail sales have started to slow, expanding by 4% y/y in constant prices in April, the statistics office GUS announced on May 23. The reading sees sales drop 4.8pp compared to the pace of annual growth recorded in March, likely owing to buying activity slowing down in April after heightened consumption linked to Easter took place in March. The ban on Sunday retailing also played a role, as last month only one Sunday was open for retail.

Czech retail sales disappointed in June, falling from record highs a month earlier, the government statistics agency reported on August 6. Seasonally adjust-

ed sales stagnated month-on-month in June due to rising inflation, hot weather, increasing prices of housing and fewer working days. “Slower growth can be also attributed to a weakening taste of consumers to spend money. Consumer confidence has decreased over the last two months in a row after a record-

Bulgaria

Hungary

breaking high in May,” said Raiffeisenbank analyst Jakub Cervenka.

Romania’s retail sales increased by 6.6% y/y in Q2, a marginal improvement from the 6.4% y/y in Q1, but the result was still only half the 13% y/y growth in retail sales seen in the same quarter a year earlier, according to the national statistics office.

Industrial production down Falling demand and labour problems are threatening industrial production growth, which has already started to fade in some countries of the region, but the boom years have created momentum, and individual industries are holding up industrial expansion in several countries in the region for the meantime.

Poland has bucked the trend, delivering a positive surprise in July after posting an unadjusted 6.8% y/y growth in industrial production for June. The headline figure beat consensus, which expected growth to come in at only slightly above the 6% mark. The acceleration of growth in June – after expansion of 5.4% y/y in May – once again owes its cause to calendar effects, but

Czech Rep.

Poland

Romania

Slovakia

%y/y (% q/q) 3Q17

+3.9 (+0.9)

+4.3 (+1.1)

+5.2 (+0.7)

+5.4 (+1.4)

+8.4 (+2.2)

+3.5 (+0.9)

4Q17

+3.5 (+0.7)

+4.9 (+1.3)

+5.5 (+0.8)

+4.4 (+1.0)

+6.6 (+0.3)

+3.6 (+0.9)

1Q18

+3.6 (+0.9)

+4.7 (+1.2)

+4.5 (+0.5)

+5.0 (+1.6)

+4.3 (+0.1)

+3.7 (+1.0)

2Q18

+3.4 (+0.8)

+4.4 (+0.9)

+2.3 (+0.5)

+5.0 (+0.9)

+4.2 (+1.4)

+3.9 (+1.0)

Sources: National Statistics Offices, Capital Economics

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Czech industrial production also posted a 3.4% expansion at constant prices in June, following 1.4% growth in May. The main drivers were the energy and engineering sectors, the CSU said on

“Slovakia is now facing its highest job vacancy rates in a decade”

Central & Eastern Europe GDP (seasonally-adjusted) Rank

also to the unexpectedly good performance in the energy sector, analysts say.

August 6. But some analysts are warning that Czech industrial production growth is capped by insufficient capacity and labour to expand further.

Romania’s industrial production index increased by only 1.2% y/y in May and the average growth rate calculated for the rolling three months eased to 2.1% y/y – the weakest performance since September 2016. Romania’s industry shows signs of fatigue after it expanded by 7.8% y/y in 2017, which was the best performance in the post-crisis decade.

Time to step up the value added ladder A lack of investments in key industries is the limiting factor in most of the economies in the region. A lot of investment has gone into all the countries of the region, but most of it was targeting basic infrastructure that the previous socialist governments failed to build, and then building light manufacturing facilities that provided work for the first post-socialist generation.

Now the game has changed an entirely different wave of investment needs to start to take the economies of the region up to the next step on the value added ladder to build more sophisticated industries and develop new technologies.

In a country like Romania, which is further behind than its Central European peers, the challenge is easier as it still has a lot of growth available in areas like the food processing industry.

At the same time poor structural reforms will limit growth, and here backtracking on liberal reforms in countries like Poland and Hungary will turn into problems in the future.

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Green opposition party LMP said that state support could be more efficiently used if it were granted to Hungarian SMEs, a sector that employs the largest percentage of the workforce. It is crucial for the Hungarian economy to encourage foreign investment in sectors other than car manufacturing, the party added.

GKI also warned about the dangers of the Hungarian economy becoming “one-sided”, depending largely on the vehicle sector.

Hungary's government silent about subsidy to BMW.

Hungarian opposition blasts government for hefty state funding to BMW bne IntelliNews

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pposition parties on August 6 criticised the government for granting German carmaker BMW generous state funding to support its planned new plant in Debrecen instead of backing Hungarian small and medium-sized businesses.

In August BMW announced it will open its first European plant in 20 years, in Debrecen, northeast Hungary, with an investment of €1bn. BMW will be the third German premium carmaker to open a plant in Hungary, following in the footsteps of Audi and Mercedes.

The plant will start production in 2023 with an annual capacity of 150,000 vehicles. With Mercedes' second plant expected to start operating next year, Hungary's annual car production could rise to 800,000 by 2023, which would make the country a significant producer in terms of vehicles per inhabitants.

Last year Audi, Mercedes, Suzuki, and Opel turned out a total of 472,000 cars

or some 2.8% of the 19mn cars manufactured in the EU. The government has been tight-lipped about the exact amount of the state sub-

The presence of large automobile manufacturers is positive, but it can increase the technological or even political risks if Hungary becomes too dependent on them, it added.

Finance Minister Mihaly Varga said earlier that it shows the vulnerability of the economy if the shutdown of a single car factory is immediately reflected in the GDP. Last summer, a shutdown by automakers led to a temporary plunge in Hungary's industrial output.

On a more positive note, the BMW investment is expected to shake up the property market in Debrecen. Local media reported buyers fighting for a home the day the news broke of the investment. Prices in the area have risen in value from HUF400,000 per square metre (sqm) to HUF700,000 sqm.

“The Hungarian state will actually pay for the wages of BMW employees for the first four to five years” sidy to BMW, but economic researcher GKI says that it could be similar to that for an investment by Indian tyre maker Apollo Tires in 2017 when the government approved a HUF30bn (€93.7mn) subsidy for the investment, which created 1,000 new jobs.

A HUF30bn grant at current wage levels means that the Hungarian state will actually pay for the wages of BMW employees for the first four to five years, GKI added.

This is just one example of the positive effects of the investment, analysts said.

Over a three to four year period, home prices in Debrecen could rise by up to 40%, real estate group Otthonterkep said.

Lot prices and those of properties have dynamically increased over the past years in Gyor and Kecskemet where German premium carmakers Audi and Mercedes-Benz operate factories, respectively.

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Prague Pride was has unique significance this year as the government backed a bill to allow same-sex marriages on June 22. The draft is now in the Chamber of Deputies for debate, but its passage into law remains far from certain.

One of the parties supporting the bill – the Pirate Party – took part in the march in an allegorical ship full of party members dancing and waving LGBT flags. “There should be tolerance towards each other. It's why the Pirate Party supports this kind of thing,” a member of the Pirate Party told bne IntelliNews.

Around 40,000 people marched Prague to support LGBT rights on Saturday, August 11.

LGBT Prague Pride supporters march as parliament debates same-sex marriage laws bne IntelliNews

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ens of thousands of dancing people marched through Prague city centre to celebrate the eighth lesbian, gay, bisexual, and transgender (LGBT) Prague Pride festival at the weekend, while the Czech Republic's parliament grapples with the thorny issue of becoming the first postCommunist country to legalise same-sex marriages.

Wenceslas Square is usually dominated by tourists but it was covered with rainbow flags, a symbol of the LGBT movement around the world, from early afternoon on August 11.

People waving the rainbow, Czech and European flags gathered to support LGBT rights and later headed to park across the river. The flamboyant displays

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typical of parades in Berlin were to be seen: men clothed in flashing silver dresses or half-naked were among the crowd, but most of the marchers were young liberal people.

For many, Prague Pride is a way to connect to people, or just be seen. “We want to be seen, we want to see how many people are in our community,” Michal, 19, said.

Organisers estimated that close to 40,000 people showed up on the sunny Saturday. The atmosphere was relaxed, people were enjoying the loud music playing from vehicles, having a beer for a lunch and painting their faces with rainbow flags.

The march was peaceful as no serious incidents occurred, which is unusual in Central and Eastern European (CEE) countries where similar gay parades are frequently targeted by violent counterdemonstrations from the conservative right wing.

The size is also extraordinary as in neighbouring Slovakia around 5,000 took part, in Romania the number was close to 10,000. In Poland with a population almost four times bigger, 45,000 marched in the Warsaw Pride according to organisers.

The Czech Republic is widely seen as the most liberal post-Communist country, but LGBT people are still having a hard time. “I have a lot of difficulties with being different. It can be connected with the fact of having a boyfriend or wearing

“The Czech Republic's parliament grapples with the thorny issue of becoming the first post-Communist country to legalise same-sex marriages”

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something extraordinary,” Jakub Knot, 18, said during Prague Pride.

The question of stepping out during the Prague Pride has, however, transformed into a political process, which could influence the shape of the Czech Republic's development. A cross-party group of 37 lawmakers has called for a definition of marriage as the union of one man and one woman to be enshrined in the constitution.

The main opposition to the same sex marriage bill is coming from the conservative KDU-CSL. “I hold the view that marriage is some kind of basic value, which shouldn’t succumb to volatility,” said the main opponent to the bill, Marek Vyborny (KDU-CSL) in comments cited earlier by Czech online news iDNES.cz People opposing LGBT rights, especially from far-right or very orthodox circles, did show up on August 11, but their number was insignificant – fewer than one hundred.

An Orthodox priest, Libor Hlavy, wearing black and holding a cross above his head, was one of the first to declare his dissatisfaction with Prague Pride. “It is Sodom and Gomorrah,” he said of the LGBT movement. “Why should we pass a law, which is crazy?

In the US, the madmen are ruling.

But in Russia, not for now.”

Dissatisfaction with visibility and supporting same-sex marriage was also voiced by far-right protesters, approximately 40 people, who waited for the march and shouted very offensive slogans.

With nationalism on the rise, Czechia can lead as an example for other CEE countries that liberal laws such as those on same-sex marriage are possible.

“I don’t have the need to call it marriage. I know that marriage for Christians is between man and woman.

For me it’s the rights, not the word,” Knot said.

“The Czech Republic is widely seen as the most liberal post-Communist country” Find more Central Europe content at

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Selected headlines from past month: · Busting Nord Stream 2 myths · Microsoft probed over software sales in Hungary · Hungarian PM’s son-in-law takes huge chunk in BSE-listed company · Private equity deals in CEE hit a record €3.5bn in 2017

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Effigies of PSD leaders dressed in prison stripes appeared at protests in early 2017.

BUCHAREST BLOG:

Romania joins the bad boys of Central Europe Clare Nuttall in Bucharest

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he Romanian government has been acting like an authoritarian bully, thumbing its nose at criticism from the street and Brussels as it pushes ahead with plans to take direct control of the the justice system as well as decapitate the highly respected National Anticorruption Directorate (DNA). A violent crackdown on demonstrators in Bucharest on August 10 has shocked the nation and only served to sully the government’s already poor image as a progressive European democracy.

The initially peaceful protest outside the government building on Victory Square turned violent after riot police repeatedly fired tear gas into the crowd and turned water cannons on the protestors. The crowds had swollen to around 100,000, bolstered by members of the diaspora some of which had flown in from their new homes specifi-

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cally to reinvigorate the flagging protest movement. Romania has become used to protests as the population has become radicalised by the ruling parties' repeated attempts to undermine the country’s inchoate democracy and

a “first step to dictatorship”. Mobile phone footage released in the days after the protest shows unprovoked and brutal attacks on protesters, as well as attacks by suspected provocateurs on the gendarmerie – football thugs brought in

“A violent crackdown on demonstrators in Bucharest on August 10 has shocked the nation” innoculate itself from prosecution for graft, lead by the pioneering anticorruption institution of the DNA. One protester, interviewed by bne IntelliNews’ correspondent at the protest, said the police were “trying to make us terribly mad” with their intense and unprovoked use of tear gas, adding he feared the crackdown at the protest was

to provide a justification for the use of police violence, intended to intimidate the increasingly vocal citizenship that are determined to hold the government to account.

Once eager for Brussels’ approval, as it sought a more central role within the EU, in recent months the government in Bucharest has followed a European-wide

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trend of increasingly authoritarianism that blithely ignores the European values that are part and parcel of EU accession. The government has repeatedly shown that it is prepared to ignore criticism from institutions in Brussels and western governments in pursuit of the interests of the ruling elite.

The Romanian authorities are following the example set by other countries that joined the EU in the first wave of Eastern enlargement in 2004 – specifically Hungary and Poland – that have challenged Brussels’ authority and sought to assert their own national sovereignty. By contrast, the later entrants Romania and Bulgaria seemed, until now, consistently keen to align themselves with the EU and its values.

Now this is changing as Romania, like its northern neighbours, has earned the opprobrium of the EU with its onslaught on the justice system and the undermining of the anti-corruption fight that has been a beacon in the region where all the new EU members are attempting to tackle corruption with mixed results.

The underlying issue is that membership of the EU means adopting its institutions, but unformed institutions are clumsy tools of control and the temptation is to revert to the use of corruption and client-sponsor relations that are simpler to operate and have the advantage of personally enriching their executors in the process. Add to this the clientsponsor system means political power accrues to the individual controlling the system and in the rough and tumble of the post-Socialist world politicians are reluctant to weaken their personal power by strengthening the power of institutions that are in the best interests of society, as they are often engaged in politically existential struggles with other less scrupulous rivals. As a result to a great extent across the entire region corruption is not a problem of the system: it is the system.

The backtracking in Romania started shortly after the Social Democratic Party (PSD) and its junior coalition partner the Alliance of Liberals and Democrats (Alde) were returned to power in the December

2016 general election. The following month, the new government adopted a controversial decree partly decriminalising abuse of office, a charge frequently used by prosecutors against officials who had stolen state resources. Forced to back down and cancel the decree by the biggest mass protests since the fall of communism, the government didn’t give up. Instead it went on to launch repeated effects to chip away at the effectiveness of the judicial system and the DNA over the following 18 months.

By mid-2018, the parliament had approved a series of controversial changes to the criminal procedure code.

In a return to the original course of attack by the government, the planned amendments to the criminal code include a redefinition of abuse of office, which would partly decriminalise the offence. Other changes concern the

Iohannis must comply with a request from the justice minister that he dismiss its iconic head Laura Codruta Kovesi, widely seen as the doyen of the anticorruption efforts in the country.

Unsurprisingly, these efforts have met with criticism from the EU and western governments. The latest annual Cooperation and Verification Mechanism (CVM) report issued on Romania last November warned of challenges to judicial independence and a slowdown in the reform process. Bucharest’s efforts to overhaul criminal legislation later sparked an ad hoc expression of concern from the European Commission in June, which stressed that the “fight against corruption and ensuring an independent, professional judiciary is of paramount importance”. A few days later, 12 of Romania’s international partners, including France, Germany and the US,

“In recent months the government in Bucharest has followed a European-wide trend of increasingly authoritarianism” justice system, and have been criticised for limiting the freedom of expression of magistrates and weakening the role of the Superior Council of Magistracy (SCM), as the guarantor of the judiciary’s independence.

The DNA is the embodiment of the antigraft efforts and represents the transformation of the system to all that the EU means in terms of a functioning liberal democracy based on accountable institutions. As such it has been the target of the revanchist forces that want to keep the old client system, as well as protect their ill-gotten gains, as the changes threaten the liberty of the elite – as several high ranking politicians have found to their cost and are now in jail.

The government’s efforts to discredit and neutralise the DNA, which has spearheaded efforts to bring corrupt top officials and businesspeople to justice, have finally paid off. In July, the Constitutional Court ruled that President

called upon the country to consider the potential negative impact of criminal law amendments.

Another illiberal democracy The attacks on judicial independence in Romania, and the violence at the August 10 protest, have drawn comparisons with the so-called “illiberal democracies” in the Visegrad region. Poland, like Romania, has clashed with Brussels over its judicial overhaul, while the values of the governments in both Budapest and Warsaw are at odds with those of the bloc. The root of these illiberal democracies is the pull and push of where ultimate political power lies: in the hands of politicians or in the institutions they are supposed to manage that are specifically designed to cap personal power and make it accountable.

Where Romania differs from, for example, Poland or Hungary is that the agenda of the government doesn’t appear to be driven by idealism, but by

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the need to protect its politicians from the consequences of their past actions.

motivated by concerns over and above political expediency.

Hungary’s Prime Minister Viktor Orban has repeatedly expounded his concept of illiberal democracy, first outlining the basic ideas at an infamous address in the Romanian town of Baile Tusnad in 2014 where he claimed to be building an "illiberal state". Speaking to ethnic Hungarians in Romania, the PM declared liberal democracy a failure, and held up Russia, China and Turkey as models for Hungary if it wished to stay competitive globally.

Both Russia and China have institutions, as both are simply too large to run on the basis of personal relations with key officials alone. But they are hybrid models where the client-sponsor relations are key and epitomised in Russia’s “vertical power” model. In Turkey’s case the country’s EU ambitions have seen a lot of institution building when the country actually had a chance of joining the EU trade club, but Turkish president Recep Tayyip Erdogan is now working hard to

In Poland, the Law and Justice Party (PiS) that came to power in 2015 has been pursuing a deeply conservative agenda, for example in its attacks on abortion rights, at the same time as eroding freedom of the media and embarking on a much criticised overhaul of the justice system.

Romania’s PSD has also toyed with conservative ideas, for example with plans (later dropped) for a mass rally in support of the “traditional family” and discussions of a referendum against same-sex marriages (not yet scheduled). There popularist ideas are the façade behind which attacks on liberal institutions can be mounted, as they are easy to sell to the population.

However, one of the top grievances of the protesters in Romania is that the changes there – that they fear could

“Across the entire region corruption is not a problem of the system: it is the system” undo the power of these institutions and has already accumulated a lot of power in his own hands following the constitutional changes earlier this year to create an executive presidency.

Four years later, again in a speech to ethnic Hungarians in Baile Tusnad, Orban called for the advent of "Christian democracy”, an ideology he defined as "antiimmigrant" and “anti-multicultural”, standing for the Christian family model.

"There is liberalism in the West, there is no democracy," said Orban, going on to call the European Commission a "symbol of failure."

The ruling Fidesz’ demonisation of immigrants, which was stepped up ahead of the April 2018 election that Orban’s Fidesz won by another supermajority, successfully tapped into the fears of many Hungarian voters, but was

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destroy the fight against corruption and distort the justice system – are so blatantly motivated by self interest – legalising corruption is a very hard sell indeed.

Specifically, they are seen as benefitting one man: Liviu Dragnea, the leader of the ruling PSD and arguably the most powerful man in the country even though he is barred from holding an official position because of his two criminal convictions.

The decree adopted back in January 2017 set the bar for abuse of office being a criminal offence at damages of RON200,000 (€44,500 at the time); the damages in the case where Dragnea had been indicted amounted to RON108,612.

Had the decree stood, the charges against the PSD leader would have been dropped. Instead the politician, who had already been issued a suspended sentence in an earlier case concerning voter

manipulation, went on to stand trial and was given a three year, six month prison sentence – the first time such a senior figure has been convicted.

Similarly, the new changes approved in July stipulate that the offence would be applicable only to public officials whose actions bring benefits to themselves or their close relatives – this would again allow Dragnea to evade justice as the case concerned two county council employees who were working on PSD business, thereby benefitting the party rather than Dragnea himself.

After the events of August 10, even some within the PSD have said the relentless focus on judicial changes and its undermining of the anti-corruption fight have to end. A senior member of the party, former education minister and leader of the PSD’s Bucharest branch, Ecaterina Andronescu, wrote in an open letter quoted by Hotnews.ro that “What is happening now within the PSD and in the country is not all right, it has gone ... too far.” Andronescu went on to ask Dragnea to resign, though it’s unlikely that he will. Other PSD members who have stepped forward to criticise the authoritarian party leader tend to be summarily expelled.

No unanimity The EU didn’t remain silent while Hungary and Poland set about adopting changes that went directly against the core values of the union. At issue is the very foundation of the principles of government on which the EU is built: liberal and accountable institutions that are designed to protect the interest of the population and place checks and balances on those in power. The accession countries signed up to this model of government when they joined in 2004 and rejecting it now is not an option for Brussels.

In December, the European Commission triggered the “nuclear option”, Article 7, against Warsaw, which may lead to it stripping Poland of its voting rights in the EU for undermining the rule of law.

Meanwhile, Hungary has received warnings for its controversial NGO law

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and attacks on civil society. Last month the European Commission launched an infringement procedure against Hungarian legislation dubbed “Stop Soros”.

Hungary will also be referred to the

officials in Brussels try to call either state to account. Budapest has made it clear that it would veto any decisions to penalise Poland by stripping Warsaw of its voting rights, and the Polish govern-

“The DNA is the embodiment of the anti-graft efforts” Court of Justice of the European Union over the country's asylum policies, a European Commission spokesperson said in July.

Despite this, the two countries have continued to defy warnings from Brussels. Warsaw is pushing ahead with its challenges to the rule of law, adopting legislation that will make it easier to stack the Supreme Court with PiS loyalists and remove the court’s president Malgorzata Gersdorf more quickly. The government in Warsaw, like its counterparts in Bucharest, appears to have decided to ride out domestic protests and international criticism rather than engaging or backing down.

Moreover, the Visegrad 4 states have increasingly been acting as a bloc to increase their leverage on issues like migrant quotas, where they have strong differences with the “old” EU members to the west. Poland and Hungary have said they will support each other when

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Even the proposed cuts to cohesion spending for Poland and other CEE countries in the next EU budget, presented as a shift in priorities towards the crisis-hit southern members of the union but perceived as a punishment for the Visegrad 4’s lack of cooperation on refugee quotas, are likely to be softened before the budget is adopted, as this again requires unanimity.

In Romania, international criticism coming on top of the enormous protests managed to act as a check on the government the first time around in

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As a result, the Romanian government – driven by the self-interest of its top politicians rather than illiberal ideology – is taking its place alongside the challengers to the EU’s value system from CEE. And the bigger the cohort of illiberally minded CEE nations within the EU becomes, the more power it has within a union that is still grappling with Brexit and other crises.

With additional reporting by Ben Aris in Berlin.

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This means the PSD most likely is taking the gamble that its tinkering with the judicial system and criminal law won’t alienate its support base to the extent that it loses the next election. And while the international criticism is unwelcome, Brussels has proved itself toothless in similar standoffs with Budapest and Warsaw.

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The PSD and its allies are relatively secure in their majority in both houses of parliament, and may have assumed the protests will have subsided sufficiently not to affect their chances when the next general election comes around in late 2020 or early 2021. Anti-corruption protesters are more or less by definition not going to be PSD voters in the first place.

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spring 2017. But the government pressed on, and eventually fatigue meant that protester numbers fell – even on August 10 they didn’t reach the hundreds of thousands seen in early 2017.

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ment returned the favour after the European Parliament adopted a resolution to trigger Article 7 against Hungary in May after the government approved controversial legislation on asylum seekers and NGOs and the Central European University. Since major decisions like these require unanimity, this means there are no really effective sanctions against infringers.

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The large variety of flags waved in the square, such as those from the US, the UK, Italy and Canada, revealed the diverse range of countries some of the protesters are now living in. Corruption and poor governance are among the reasons why young Romanians have been leaving the country in large numbers.

The protest was intended as a symbolic moment, with Romanians all around the world joining their fellows in the country in expressing their discontent with the way the country is governed.

Violence erupts at mass protest staged

by Romanian diaspora in Bucharest Carmen Simion in Bucharest

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ore than 450 people were injured when violence erupted at a mass antigovernment protest in Bucharest on August 10. Riot police fought back protesters, spraying impressive quantities of tear gas into the crowds and using water cannons to disperse the people gathered outside the government building in Victory Square.

Intended as a symbolic moment, with Romanians all around the world joining their fellows in the country in expressing their discontent with the way the country is governed, the rally will instead be remembered for the violent clashes between protesters and riot police.

Over 100,000 people gathered in Victory Square in Bucharest to protest against corruption in the government, according

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to estimates made by local media.

While this was barely one-tenth of the 1mn aimed for by the organisers, it was the largest protest in Bucharest since February last year, when 300,000

The protesters were mainly unhappy with the controversial justice legislation adopted by the parliament, widely criticised for weakening Romania’s fight against corruption. Since coming to power at the end of 2016, the Social Democratic Party (PSD) led government has been waging a constant war against the National Anticorruption Directorate’s (DNA’s) efforts and seeking to water down anti-corruption legislation.

PSD leader Liviu Dragnea is seen as one of the beneficiaries of the changed legislation, along with other top politicians. Dragnea has received a two-year suspended sentence for voter manipulation and was recently sentenced by a first court to three and a half years in prison for instigation to abuse of power. The efforts by politicians to change the law for their own benefit have appalled many Romanians, sparking a wave of protests that have endured – though in dwindling numbers – since the beginning of 2017.

“It is hard to define what I feel, it’s a mix of frustration and helplessness.

They keep doing what they have to do.

The only reason I still live in Romania is my parents to whom my son is very

“Tear gas was frequently used during the protest and it seemed to be launched randomly into the crowd” people are said to have attended a rally in the capital, along with around the same number in other cities around the country.

The protest was organised on Facebook

by Romanians living abroad, but was joined by many living in the country.

attached. Otherwise, I would have left long ago,” a protester told bne IntelliNews.

Tensions between the protesters and the riot police rose during the day, when the police intervened with tear gas to disperse those trying to break the chain in

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front of the government headquarters.

The crowd threw plastic water bottles and other objects back at them.

Tear gas was frequently used during the protest and it seemed to be launched randomly into the crowd, which was mainly peaceful, asking for the government’s

their tear gas spraying and use of water cannons. Images broadcast by local television channels show peaceful people being hit by riot police.

“They are trying to make us terribly mad by continuously spraying tear gas at us for no reason. We are peaceful, there are

“They are trying to make us terribly mad by continuously spraying tear gas at us for no reason. We are peaceful, there are kids here and they don’t care” resignation and chanting slogans against the ruling Social Democratic Party (PSD) such as “PSD, the red plague” and “F** PSD”. Hit by the irritating smell, the crowds were forced backwards, only to surge forward again moments later after the gas had dissipated.

Symbolic moments such as the illumination of the square with the help of mobile phones were interrupted by the noise made by the gas fired at the crowd.

The crowds responded immediately, chanting “We are not leaving.”

Later in the evening there were more violent scenes. Riot police intensified

kids here and they don’t care. I am afraid this is just a mere step in their drive to defeat those who oppose them, first step to dictatorship,” another protester told bne IntelliNews.

The shocking incidents in Bucharest were condemned by the Romanian president who wrote on Facebook that “violence is not accepted, irrespective of political views.”

“An attempt to defeat the will of the people through a violent reaction of law enforcement is a reprehensible solution,” Iohannis wrote, adding that the interior minister has to urgently give

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an explanation of the way the events were managed.

While Romania has been the scene of continuous anti-governmental protests in the past one and a half years, apart a small violent incident in February last year they were all characterised by a peaceful atmosphere.

The numerous violent incidents between groups of protesters and the riot police raised speculation there were provocateurs among the crowd. Some protesters also accused the riot police of provoking the crowds.

Local television showed a fierce attack against two members of the gendarmerie, who had become separated from their group. The two gendarmes were eventually saved by a group of protesters who made a human shield around them and took them out of the crowd. During the fight, a gun belonging to one of the two was stolen, a spokesman for the gendarmerie said a news conference on August 11.

Representatives of the riot police said that as violent acts intensified, they intervened in force to dissipate some compact violent groups in the crowd.

33 people were taken to police stations and eight criminal cases were opened.

Five Slovenian parties nominate ex-comedien Sarec for prime minister bne IntelliNews

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ive Slovenian parties led by the List of Marjan Sarec (LMS) nominated its founder Marjan Sarec as the next Slovenian prime minister on August 8.

The parliament is due to vote on the nomination on August 17. However, it’s still not clear whether Sarec will be able

to command a majority. The five parties behind him have 43 MPs – three short of the 46 needed in the 90-seat parliament. While he is hoping to form a majority government backed by (but not including) the Slovenian Left (Levica), it is by no means certain that the leftwing party’s MPs will support him.

Sarec, a former journalist and comedian, has been mayor of the small Slovenian town of Kamnik since 2010. The political novice unexpectedly forced incumbent Borut Pahor to a second round in the October 22 presidential elections. He scored a second triumph in the June 3 parliamentary election when his LMS won the second largest

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the option to change the political direction of the country by switching from the LMS to the SDS. Miran Videtic, director at VI-PU, a management consulting company based in Kamnik, the small town where Sarec is mayor, believes this is still possible.

Even though all three claim they don’t want to be in coalition with Jansa, a decision to put their political differences with the SDS aside and opt for a more stable government cannot be ruled out.

Political newcomer Marjan Sarec, who benefitted from a disillusioned Slovenian electorate, edges closer to realising his dream of becoming prime minister.

number of votes, 12.6% of the total.

While this is only half the 25% taken

by Janez Jansa’s Slovenian Democratic Party (SDS), Jansa hasn’t managed to gain the support of enough MPs from outside the SDS to form a government, which gave room for Sarec to pursue his ambition to become prime minister.

Whether he achieves it will depend on Levica, which has seven MPs. The party completed an internal referendum on August 8, but still looks indecisive and reportedly keeps asking for new conditions. One of its MPs, Franc Trcek, has announced on his Facebook page that he will not vote for Sarec’s government.

The other potential obstacle on Sarec’s path toward the PM post is the coalition agreement between the five parties that no one outside has seen. The Slovenian public speculates that even Sarec himself doesn’t know its full contents, since negotiations have been lasting more than two months, during which he has been changing stances constantly.

For example, he initially stated that he would never accept a nomination if he didn’t have the support of at least 46 MPs, but he has been nominated by only 43.

One of the LMS’s partners now appears

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to be wavering. The unclear coalition agreement is understood to have been behind the Party of Alenka Bratusek’s (SAB’s) position that, as reported by local media, it will only decide on being part of Sarec’s minority government after a protocol with Levica is harmonised, the partnership agreement is finalised and ministerial appointments decided.

Without the SAB, Sarec can count only on the support of the parties that ran the previous government – the Social Democrats (SD) led by outgoing Minister of Agriculture Dejan Zidan, outgoing Prime Minister Miro Cerar’s Party of Modern Centre (SMC) and the Democratic Party of Pensioners of Slovenia (DeSUS).

Even though the three parties barely obtained 25% of the votes together, they play a key role as they still have

“As well-experienced politicians, it's up to them now to show their commitment to the state and step up with a sustainable solution. Because, a government of five, eventually four, supported by an additional one, eventually an additional two parties is not a guarantor of stability. They know how serious and tough job leading a government is, and shouldn’t let something like this happen,” Videtic told bne IntelliNews.

He believes that they can restart talks with the conservative New Slovenian (NSi) which could be a bridge with the SDS. “Jansa can nominate another person from his party as PM. This way, Slovenia would have a way more stable government and not a minority one with [only] promised support in parliament,” Videtic added.

Since Sarec’s party still doesn’t have a programme, it is hard to define his political orientation. When it comes to his partners, they are a mix of centrists and leftists. Cerar’s SMC and SAB are both centrist, while SD and DeSUS are on the left.

“The political novice unexpectedly forced incumbent Borut Pahor to a second round in the October 22 presidential elections”

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Rightwing Macedonian parties to boycott name deal referendum bne IntelliNews

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8 Macedonian rightwing political parties and NGOs led by the small pro-Russian United Macedonia party have launched a campaign to boycott the referendum on the name deal with Greece due to be held on September 30.

The referendum is a crucial step in the implementation of the name deal with Greece, which will unblock Macedonia's EU and Nato integration processes. The question that will be posed in the referendum is: Are you for EU and Nato integration by accepting the deal between the Republic of Macedonia and Republic of Greece?

Under the deal Macedonia has agreed to change its name to North Macedonia.

Around 910,000 people, or half of the eligible voters, would need to vote in the referendum to make it successful.

country last month, after Athens accused Russia of trying to foment opposition to the historic name deal with Macedonia.

The Greek authorities claimed the Russian diplomats were encouraging rallies in Greece to oppose the name deal, including offering bribes to opponents of the agreement. Opposition to the deal is fierce on both sides of the Greek-Macedonian border, with many mass protests held in Greek cities against the deal that was signed by the two countries’ prime ministers in June.

Three years ago, Russia was accused by Montenegro’s then prime minister (now president) Milo Djukanovic of backing opposition parties to foment unrest in the country and create an image of instability as it tried to secure an invitation to enter

Social Democrat Prime Minister Zoran Zaev called on the opposition to vote in the referendum with the aim of ensuring turnout reaches the 50% mark needed for the plebiscite to be successful.

Zaev has said repeatedly that he will resign if the majority of population vote against the name deal. However, he also said that the parliament will decide on the name deal if the referendum ends unsuccessfully.

With less than two months to go before the vote, Macedonians are deeply divided on their future. Few like the deal that will involve a change of the country’s name for internal as well as international use, as well as a requirement to start using Greek names for

The coalition behind the campaign called “Macedonia Boycotts” will be led by Janko Bacev, leader of the small United Macedonia party.

“Opposition to the deal is fierce on both sides of the Greek-Macedonian border”

One of the signatories is the distinguished former member of the opposition VMRO-DPMNE party, Filip Petrovski.

Nato. Russians linked to the country’s secret services are among those on trial for an alleged coup attempt the Montenegrin authorities said they foiled ahead of the October 2016 general election. The plotters are believed to have planned to install the pro-Russian Democratic Front party in power and assassinate Djukanovic. However, Montenegro became Nato’s 29th member state in July 27.

In an interview with broadcaster AlsatM, Bacev confirmed that his party is pro-Russian oriented and that Macedonia does not need the EU or Nato, but an alliance with Russia.

Moscow objects Moscow is openly against the accession of more countries from the Western Balkans into Nato, with the country’s foreign ministry claiming July 12 that Macedonia was being "pulled into Nato by force" and that such moves do not strengthen security, but deepen divisions and tensions in Europe.

Two Russian diplomats were expelled from Greece last month, and two other Russian citizens banned from entering the

The least bad option More important than the efforts of the group of smaller rightwing parties to boycott the election is the decision of the Macedonia’s main opposition party VMRO-DPMNE. The party is against the deal and the referendum question, but has not said clearly so far whether it will boycott the referendum. Should VMRODPMNE urge its supporters to join the boycott, there is a strong chance of less than half the electorate turning out to vote.

cities that were once Macedonian, with Greece's second city Thessaloniki, known in Macedonian as Solun, being one example.

Some see accepting the deal as the least bad option, since a yes vote in the referendum will pave the way for Macedonia to finally enter Nato and make progress towards EU accession. They fear a no vote would mean an end to western support that would leave Macedonia vulnerable to Russian influence or to a renewed push for federalisation from the country’s substantial Albanian minority.

On the other hand, many Macedonians are staunchly against the deal, though those against are split over whether to boycott the referendum – which could lead to the result being invalidated if turnout slips below 50% – or turn up and vote no.

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US has declared economic war on Russia says Russian PM Dmitri Medvedev

MOSCOW BLOG:

US declares economic war on Russia Ben Aris in Berlin

“T

he US has declared economic war on Russia,” Russian Prime Minister Dmitry Medvedev said on August 10 in remarks that set the stage for a real military clash between the two countries.

Tensions between Moscow and Washington have been escalating steadily since the start of this decade, but these rising tensions have only become visible in the last seven years. Now they are coming to a head.

The US announced yet another round of sanctions on Russia earlier in the week that explicitly target Russian domestic treasury bills, OFZs. If these sanctions are passed into law then they will be the most significant yet. The new sanctions will really hurt the government’s ability to finance its budget deficit and could seriously impede the economic recovery.

The Ministry of Finance has an ambitious RUB2.5 trillion ($37.4bn) borrow-

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ing programme for next year, and given the tense geopolitics it was intending to raise most of this money on the domestic market. That will be a lot harder if the new sanctions are put in place. By targeting the bonds these sanctions are specifically designed to do real and lasting damage to the Russian economy.

"Western partners argue that the Russians are bad, they carry out the wrong policy, that the government of the

If the sanctions are imposed then growth will slow by between 0.5% and 1.5% and the standard of living will decline further.

Medvedev said the Kremlin would not accept these sanctions without some sort of response, although he gave no specifics as to what that response would be.

Since Russia’s capital market was hooked up to the international financial system by joining Clearstream and Euroclear in 2012 the bond market has flourished.

“The new sanctions will really hurt the government’s ability to finance its budget deficit and could seriously impede the economic recovery” Russian Federation should change its position on a number of issues, but to a large extent this [is a] restriction of our economic power," Medvedev said.

Able to buy Russian domestic bonds from the comfort of their trading desks in London and New York, international investors have piled into the OFZs, hold-

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ing a record 34% at the start of this year.

That has been a boon for the Ministry of Finance, making it easier and cheaper to fund the budget deficit without having to expose itself to international regulators with sovereign Eurobond issues on the international markets.

Each round of sanctions have become progressively tougher as relations between the US and Russia go into a death spiral. The original sanctions imposed in 2014 following Russia’s annexation of the Crimea were little more than a symbolic list that named a few state officials and some generals directly involved in taking over the Crimea, but had little economic consequence. The sanctions regime became more serious a year later when investors were barred from lending to blacklisted Russian companies that included some of the biggest names in the country.

Tensions have continued to rise since the 2016 US presidential elections where Washington accused Moscow of meddling in the vote. Things ratcheted up again with the April 6 round of sanctions that for the first time barred US investors (or investors that operated in the US) from dealing with specific existing bonds or shares. Investors were ordered to dump their stocks and bonds in Rusal and other companies belonging to Kremlin insider Oleg Deripaska, among others, causing chaos on the metals market and significant damage to a number of big western investors that were left holding the now unsellable assets.

These rising tensions have also impacted the bond markets. While OFZs were a la mode last year, investors have been selling out this year. First was the Countering America’s Adversaries Through Sanctions Act (CAATSA) sanctions that threatened to target OFZs but didn’t, that came out in February, followed by the April round. Foreign holding of OFZs fell to 28% in June and was down to 27% in July. After the latest Defending American Security Against Kremlin Aggression Act (DASKAA) bill and Defending Elections from Threats

by Establishing Redlines Act (DETER) sanction proposals introduced in the last two months (neither of which is

Russian Audit Chamber to get stronger anti-corruption mandate Vadim Dumesh in Paris Russia's Audit Chamber, which recently got a new boss, heavyweight policymaker Alexei Kudrin, is demanding a broader mandate to fight corruption, position itself as the know-how centre and the go-to anti-corruption institution, Kudrin said on August 3 as cited by Interfax and Vedomosti daily.

Analysts were disappointed when Kudrin accepted the job as head o of the Audit Chamber, as they were hoping the former finance minister would be given a more obviously powerful role as either special economic advisor to president Vladimir Putin or a deputy prime minister job in the government. However, it appears now that Putin’s plan is to tighten control over the government and use the Audit Chamber as the leading institution to police the spending of a mooted RUB8 trillion of new spending to “transform” the Russian economy.

That means giving the Audit Chamber some real teeth for the first time.

Whatever transpires from the changes the Chamber’s star is clearly rising.

Formerly a posh but inconsequential post for former prime ministers like Sergei Stepashin, who also ran the state auditing body before disappearing into obscurity, the previous head of the institution was Tatyana Golikova, who was nominated for the Deputy PM for social policy in the new government – one of the most important posts that will oversee a large part of the new spending under Putin’s May Decrees spending extravaganza. But it's all a work in progress.

Previous reports claimed that the Audit Chamber will be given carte blanche to inspect regional spending and even to scrutinise the Central Bank of Russia, adding to the speculation that the Kremlin sees the institution becoming a key watchdog under Kudrin, clearing the path for efficient spending of Putin's RUB8 trillion development drive.

Kudrin noted that the Chamber's anti-corruption mandate is almost not codified, while he will seek to legally pin the anti-corruption status to the institution that can mobilise its access to state information and accounting systems.

Curbing corruption is the most important of the four goals Kudrin set for his office, along with tying Russia's strategic development goals to the actual budget, enhancing the methods of budgetary control, and informing the public on realisation of national strategic goals.

More recently Kudrin floated the idea that the Russian government could see a third of state officials and bureaucrats sacked by 2024 thanks to digital technology.

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passed yet) the sell-off is bound to accelerate to the point where the Ministry of Finance’s borrowing plans are already in doubt.

limited the deployment of anti-ballistic missile systems used to defend against nuclear attacks and hence limited an arms race between the adversaries.

At the same time the ruble has already begun to weaken, which will drive up inflation, and so any hope the Central Bank of Russia (CBR) had of making more badly needed interest rate cuts this year to bolster the moderate economic growth are dead.

Russia saw the withdrawal as an attack on its sovereignty and began rearming shortly afterwards. US ABM missiles went live at a base in Romania last year, with another ABM base due to go live in Poland soon.

Getting ready for war So Medvedev’s talk of war is not too far off the mark. While the ultimate goal of war may not be to destroy an economy per se, that is how you win them. The US tipped the balance in WWII as it simply massively out produced Nazi Germany once it had put its economy on a war footing. Likewise, the Soviet Union fell as it couldn't keep up with the west in both military and civil production at the same time. No great power has won a classic war that lasted more than a few months where it had the weaker economy. (Guerrilla wars like the US vs Vietnam and the Turks vs the Arabs are a different matter.)

The prospect of war doesn't worry the US as it believes it can bring unbearable pressure to bear on Russia and keep upping the ante until Moscow caves.

It feels that its sovereignty has been threatened and will not back down.

It has in effect revived the Monroe Doctrine first expounded in 1823 that says it is in the interests of the US to stymie the development of any country in another region which threatens US ability to exert its own interests there.

Certainly that is how the Kremlin sees it.

Medvedev in his speech recalled that sanctions against Russia were introduced, "in the last 100 years" and Russia "existed in conditions of constant sanctions pressure." He said he was sure that this was done in order "to remove Russia from among the powerful competitors on the international field".

The root of the current clash probably started with the US decision to unilaterally withdraw from the ABM treaty (AntiBallistic Missile Treaty) back in 2002. The treaty was signed in 1972 and was one of the pillars of European security, as it

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The US is outraged that Moscow would dare to try and interfere in a US election, but this has also been Putin’s objection to Washington. US advisors played an important role in getting Boris Yeltsin re-elected in 1996, the year that Putin came to Moscow to work for the former president. And Putin believed that the US funded pro-democracy NGOs were actually fifth columns, so he banned them. The US does routinely interfere in elections: the Washington Post reported that the US meddled in over 70 elections over 30 years during the Cold War, but this is the first time another power has attempted to meddle in its own elections.

As both sides see the clash as a question of protecting their sovereignty neither side is likely to back down. As part of the DASKAA sanctions Washington is demanding not only that Russia closes down its chemical weapons facilities but that it agrees in the next 30 days to open them up to international inspection – conditions very similar to those imposed on Iran’s nuclear programme.

It is highly unlikely that the Kremlin will agree to what it clearly thinks is American bullying, although it would perhaps agree to a deal that comes under the auspices of an international body such as the Organisation for the Prohibition of Chemical Weapons.

al system of cooperation. The Kremlin has made it clear that its preferred forum is the UN, where it also has the special privilege of a veto, while at the same time the Trump administration has been actively downgrading what relevance the UN had for Washington with its withdrawal from the UN Human Rights Committee being the most recent example.

All this can do is drive the wedge between Russia and the US deeper. Russia has already turned to China as an ally against US unilateralism and Beijing is as keen as Moscow for a multipolar world for most of the same reasons. Washington should be worried about this budding relationship that now includes joint military exercises – perhaps a signal that if the US were to attack Russia and Beijing was forced to choose sides it would come down on Russia’s side: Washington represents a longterm threat to China’s global interests as it becomes more powerful; Moscow doesn't.

Russia cannot accept US chemical weapons inspectors on its soil as it is question of sovereignty. Russia has been preparing for war since 2012, as bne Intellinews said in the cover story “Rekindling a new Cold War as Russia rearms.”

But Russia doesn't have to win a war with the US. It only has to convince the rest of Europe that it has the capacity to last long enough to wreak damage on the continent. Post-war democratic society will be unwilling to fight, to give up their pleasant prosperity and see their homelands destroyed in a war against Russia that is dictated by a fight started in Washington.

The popular protests in Europe would be so strong they would be likely to bring down any government that attempts to ignore them. In this sense Putin’s investment into the World Cup was a clever

“Russia has already turned to China as an ally against US unilateralism” The difference is that Putin concedes that Russia’s relations with the US will never be as good as he had initially hoped but he is willing to work together with the US if they can set up a multipolar internation-

piece of insurance as it is more difficult to demonise a country if you have recently been there and enjoyed it and its people to the extent that millions of visitors so clearly did enjoy themselves.

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and Svoboda with 4.1% have a chance of clearing the barrier.

Only 2.5% of respondents are ready to vote for the Agrarian Party, and the ratings of other parties are less than 2%.

However, the level of undecidedness is high and even Tymoshenko’s lead is not wide given the deep problems the country faces. Almost one in six respondents said they were undecided.

Batkivshchyna and Poroshenko Bloc have relatively better indicators in all the macro regions of the country, with the exception of the eastern regions, while the Civil Position Party draws most of its support from the western and central regions of Ukraine.

Ukrainian opposition leader Yulia Tymoshenko's Batkivshchyna party is leading parliamentary election polls.

Seven political parties in the running for parliament seats in Ukraine's 2019 election

The Opposition Bloc (the rump of the ousted president Viktor Yanukovych’s Regions party) and For Life have strong positions in southern and eastern regions, while the Radical Party and the Servant of the People Party are more popular in central and southern regions. Samopomich and Svoboda are most popular in western regions.

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even Ukrainian political parties are likely to clear the 5% threshold to win seats in next year’s parliamentary elections, and two of those are in contention to lead the government, according to a poll by the Ratings pollster, released on August 7.

Opposition leader and former prime minister Yulia Tymoshenko’s Batkivshchyna (Fatherland) Party is currently leading the polls. Tymoshenko is also the front-runner in the concurrent presidential election race in 2019.

Batkivshchyna commands the support of 19.5% of respondents who were asked who they would vote for if elections were held this Sunday. In second place is the Opposition Bloc with 11.4%, followed by the Civil Position Party with 11.2%, the Servant of the People Party with 10.5%, and the For Life Party with 7.2%, and the Radical Party with 7%.

The eponymous Poroshenko Bloc Solidarity of President Petro Poroshenko is trailing in seventh place with 6.5%.

The other political parties that have declared for the race would not overcome the 5% threshold to enter parliament, although Samopomich with 4.3%

The willingness to participate in the parliamentary elections is lower than in the presidential elections: 46% of respondents are clearly going to vote, and every fourth person is more likely than not.

“The level of undecidedness is high and even Tymoshenko’s lead is not wide given the deep problems the country faces” Find more Eastern Europe content at

www.bne.eu/eastern-europe

Selected headlines from past month: · Belarus president accuses government officials of "heavy drinking" · Putin plays the good cop and scales back pension reform (for women) · Russia's Yandex to test run driverless cars in Tatarstan · Russian tycoon Abramovich cuts stake in main TV channel, said to sell Chelsea football club

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Zarif (right), seen with his deputy Abbas Araghchi, is proving fast on the draw when it comes to battling Trump on Twitter.

Zarif to Trump: Iran oil ban will fail, “world is sick & tired of US unilateralism” bne IntelliNews

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ocking Donald Trump’s "tantrums and CAPPED TWEETS", Iran’s foreign minister has declared that the US president’s attempt at preventing Iran from exporting crude oil has no chance of succeeding.

In an interview with the Iran newspaper, Mohammad Javad Zarif, said the Trump administration's stated aim of cutting Iranian oil exports to zero with the use of a second wave of sanctions to be brought in on November 4 was "meaningless" and "impossible".

"The countries currently the US is negotiating with have told Washington that they will continue their oil purchases from Iran," he was quoted as

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saying. China, Turkey and EU member states are among nations that have so far made it clear to the US they will continue buying Iranian oil and

policies and activities – tweeted: “The Iran sanctions have officially been cast.

These are the most biting sanctions ever imposed, and in November they ratchet

“As a result of these measures, the US has been isolated” conducting other business with the Islamic Republic.

On August 7, Trump – who is attempting to strangle Iran’s economy with sanctions to the point that Tehran is pressured into talks to reshape what he describes as “malign” Middle East

up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States.

I am asking for WORLD PEACE, nothing less!”

Zarif responded on Twitter by writing: "Tantrums & CAPPED TWEETS won't

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change the fact that the world is sick & tired of US unilateralism."

He added: "Stopping US trade and killing 100K US jobs is fine with us, but the world won't follow impulsive tweeted diktats. Just ask EU, Russia, China & dozens of our other trading partners."

Zarif noted that the big European powers were asking other countries to also continue purchasing Iranian oil. The

compared with April, the last month before Trump announced the US withdrawal from the nuclear deal and the reimposing of heavy sanctions.

Iran’s fleet of very large crude carriers, or VLCCs, and Suezmax tankers – the largest that can fit fully-laden through the Suez Canal – has always played an important role in delivering Iranian crude to customers, but its importance is increasing as insurers and interna-

“There is hesitation among buyers around continuing to purchase Iranian crude” UK, France and Germany are aligned with fellow nuclear deal signatories Russia and China who say there is no need for Trump’s sanctions campaign because the accord that the US president walked out of in early May is working well.

tional shipping companies react to the sanctions snap-back, the news agency reported. In April, vessels belonging to the National Iranian Tanker Co. (NITC) were hauling a little under half of the country’s crude and condensate exports. By last month that share had risen to around two-thirds.

The major EU nations, Zarif added, have also proposed setting up accounts for the Central Bank of Iran in their national banks to help Iran get around US restrictions on its use of US banknotes and financial channels connected to the US financial system. "As a result of these measures, the US has been isolated," Zarif said.

“This clearly shows there is hesitation among buyers around continuing to purchase Iranian crude with the implementation of these sanctions,” Warren Patterson, commodity strategist for ING Bank, was cited as saying, adding that the dip in flows will probably result in tighter supply of oil.

Early impact of sanctions shown by shipping Despite Zarif’s confidence and defiance, ship-tracking data compiled by Bloomberg showed on August 8 that, although it is still nearly three months until the US sanctions targeting Iran’s crude exports snap back into force, they are already having a big impact on the Persian Gulf country’s oil trade, even where neighbour Turkey is concerned.

Under the previous sanctions on Iran that applied before the nuclear deal took effect in January 2016, all crude deliveries from Iran to Turkey were made on ships belonging to NITC. That began to change in mid-2016, after those sanctions were lifted, and from September of that year it became rare to see Iranian-owned tankers passing through the Red Sea and Suez Canal to Turkey.

Iran’s oil outflow has fallen and the country is having to rely more on its own fleet of tankers to carry oil to its customers.

Now that picture is switching back again.

Last month more crude was loaded onto Iranian-owned tankers bound for Turkey than at any time since August 2016, the Bloomberg report said.

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Iran’s exports of crude and condensate – a form of light oil extracted from gas fields – were down by 430,000 barrels a day, or 15%, in July

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people were apparently detained.

The footage, released by the Tajik Service of RFE/RL, did not identify the person who managed to film the attack.

IS extremists issued a video on July 31 showing five men pledging allegiance to the group under the organisation's black flag. They criticised Tajikistan as having "been occupied by infidels".

Tajikistan's picturesque Pamir mountains and high-altitude plateaus cover around one half of the remote country.

Brutal terrorist attack in Tajikistan savage blow to fledgling tourism industry efforts bne IntelliNews

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he claimed Islamic State (IS) terrorist attack in Tajikistan that on July 29 left four foreign cyclists dead is a chilling blow to the remote Central Asian’s nation’s minor tourism industry, which was this year counting on a pick-up in business thanks to a Year of Tourism declared by Tajik officials. It may also have wider ramifications for efforts being made to secure more visitors across the region.

What was first thought to be a “hit-andrun” appears to have been a deliberate and brutal act on a scenic highway that claimed the lives of two Americans on a round-the-world bike trip, a Dutch psychologist and a Swiss man, and left three people injured. Video footage shows the cyclists being ploughed into on a road in the picturesque Pamir Mountains and attacked with knives

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and guns. IS claimed responsibility for the attack on July 30, according to SITE intelligence group.

On July 30, Tajik media reports said that three suspects sought in connection with the deaths in Danghara

The Tajik government rejected the IS claim. It instead blamed followers of the Islamic Renaissance Party of Tajikistan, a political party that previously held government posts but was banned by the authoritarian regime in Central Asia’s poorest nation in 2015. The party has refuted any involvement and analysts see the government accusation as unproven and dubious as things stand.

“Roof of the World” Dubbed the “Roof of the World” by Victorian explorers, the Pamirs are a range of mountains and high-altitude plateaus offering stunning views. The range forms roughly half of modern-day Tajikistan.

Apart from the terrible blow struck to the Tajik year of tourism, the perception of posed danger to westerners and other foreigners has the potential to impact on neighbouring Central Asian countries.

Though Central Asia has not been a hotbed of recruitment for the IS, up to several hundred people from each country in the region have reportedly joined the extremist group in recent years. The main concern for governments has so far been the possibility of IS recruits returning home from the Middle East and

“The main concern for governments has so far been the possibility of IS recruits returning home from the Middle East and bringing trouble with them” district, some 150 kilometres south of the capital Dushanbe, were traced to a nearby village, where two were killed after resisting arrest. Another four

bringing trouble with them. The attack appears to be the first case of authorities’ fears being realised.

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“Silkroad Visas” Among countries in Central Asia trying to build up their tourism revenues is Uzbekistan. It is planning to issue new multi-visas, dubbed “Silkroad Visas”, allowing foreigners to visit both Uzbekistan and neighbouring countries. The project has been jointly developed with Kazakhstan. Tajikistan and neighbouring Kyrgyzstan are expected to be included in the initiative.

As part of its economic diversification efforts, Kazakhstan has devised plans to push up its tourism industry's share in GDP from 1% in 2016 to 8% by 2025. The government also hopes to raise employment in the tourism sector to 660,000 by 2025 up from 390,000 people in 2017.

In February, the Fund for the Reconstruction and Development of Uzbekistan (FRDU) pledged a credit line for $200mn

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to support the “co-financing of investment projects for the construction of hotels and facilities, and adjacent road, engineering and communications infrastructure”.

Some specific plans include the development of a “free tourist zone” in Tashkent Region in Uzbekistan and of the “Altai cluster” in Kazakhstan. Both countries are attempting to attract foreign investments via tourism.

Europe: Ignore Trump’s call not to do business with Iran Will Conroy in Prague

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f any doubt existed as to whether Europe and the US are on a collision course over Donald Trump’s plan to decimate Iran’s economy none existed by the close of August 7.

“Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!” tweeted the US president.

“We are encouraging small and medium enterprises in particular to increase business with and in Iran as part of something [that] for us is a security priority,” countered EU foreign policy chief Federica Mogherini, insisting the member states of the 28-nation European bloc would not let the Iran nuclear deal die.

The showdown between the EU and US has been in store since Trump in early May unilaterally pulled Washington out of the multilateral accord which relieved Tehran of crippling sanctions in return for compliance with measures designed to block its road to the possible development of a nuclear weapon.

Instead of sticking with the nuclear deal, Trump opted for a new campaign of heavy sanctions with the objective of strangling the Iranian economy to the point where Tehran would have no

choice but to renegotiate its role in the conflict-torn Middle East.

On August 6 – again failing to explain what specific threat Shi’ite Muslim Iran poses to world peace as things stand or why it is that he singles out the Iranians for claimed terrorist activities when analysts typically trace the origins of most terrorism perpetrated against the West in recent decades to US ally Saudi Arabia or other Sunni Muslim nations – Trump triggered the first phase of those sanctions.

Trump described the first-phase sanctions – which hit Iran’s access to dollars, gold and precious metals and Iranian industries including carmaking –combined with second-phase sanctions that from November 4 will target Iran’s lifeline crude oil exports, as “the most biting ever imposed”.

As well as Iran, the EU’s big three – the UK, France and Germany – and Russia and China remained signed up to the nuclear deal, saying it works and Tehran remains in full compliance with it.

‘In our and the world’s security interests’ During a trip to Wellington, New Zealand, on August 7, Mogherini told

reporters: “We are doing our best to keep Iran in the deal, to keep Iran benefiting from the economic benefits that the agreement brings to the people of Iran, because we believe this is in the security interests of not only our region but also of the world.

“If there is one piece of international agreements on nuclear non-proliferation that is delivering, it has to be maintained.”

Mogherini said it was crucial that Iran feels economic benefits secured by the nuclear deal. She described the late 2015 agreement struck after painstaking negotiations as a “fundamental aspect of the Iranian right to have an economic advantage in exchange for what they have done so far, which is being compliant with all their nuclear-related commitments”.

The Russian foreign ministry also put out a statement objecting to the US sanctions targeted at Tehran, reading: “We are deeply disappointed by US steps to reimpose its national sanctions against Iran. This is a clear example of Washington violating UN resolution 2231 [on the Iran deal] and international law.” The multi-party nuclear agreement had “shown its effectiveness” and

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The blocking statute seeks to protect EU-based firms in a commercial relationship with Iran against action from Washington.

Mogherini is particularly lobbying SMEs, with few or no links to the US, to do business with Iran to profit as well as to protect the nuclear deal.

the international community must “not allow such significant achievements in multilateral diplomacy to be sacrificed in the name of American aspirations to settle political scores with Iran”, the statement added.

Iran’s semi-official Tasnim news agency quoted Iran’s parliamentary speaker, Ali Larijani, as saying the country could

opportunities offered in developing an economy with 80mn inhabitants.

Many of the big European companies that do have US links – for instance energy major Total, carmakers Peugeot and Renault, oil, gas and petrochemical group OMV and, according to an announcement made on August 7, Daimler – have already announced continuing to do business with Iran is not

“If there is one piece of international agreements on nuclear non-proliferation that is delivering, it has to be maintained” actually benefit from the new sanctions by focusing efforts on an internal renovation of the economy. “By focusing on the domestic economy, reforming its structure and facilitating investment, the enemies cannot talk to Iran like that from now on because Iran’s resilience is increasing and this situation offers a good prospect for the country,” he reportedly said late on August 6.

SMEs urged to explore economy of 80mn The EU appears to be trying to persuade largely small and medium sized enterprises (SMEs) that have no essential links to the US financial system or US markets or assets to stay in Iran, or move into Iran, to profit from vast

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viable under the current circumstances.

But, thanks to a “blocking statute” announced by Brussels, many European companies of a far more modest scale might be able to pour into various opportunities.

Under the statute, European firms have been instructed that they should not comply with demands from the White House for them to drop all business with Iran. Those who nevertheless opt to pull out will need to obtain authorisation from the European Commission.

Without an authorisation, they face the risk of being sued by EU member states.

A mechanism has also been opened to allow EU businesses impacted by the sanctions to sue the US administration in the national courts of member states.

The EU is promising to unveil more measures to help secure continued nuclear deal benefits for Iran over coming months, but the Iranian centrists will need to see results to convince the hardliners that sticking with the accord is the best way forward.

One other move lately announced by the EU is the provision of a financing channel in Austria for trade with Iran, again mostly with SMEs in mind. But the limitations to the bloc’s efforts were last month shown when even its own lending arm, the Luxembourgbased European Investment Bank (EIB), baulked at moves by Brussels to persuade it to do business with Iran, arguing the funding it raises in the US would be under threat.

Iran, meanwhile, is working to protect its oil export markets in advance of the second-phase sanctions due in November. On August 5, the biggest buyer of Iranian oil, China, reportedly declined a request from Washington envoys to stop importing Iranian crude.

“European firms have been instructed that they should not comply with demands from the White House”

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Small print shows Caspian Sea summit was not the ‘summit to end all summits’ Ben Aris in Berlin

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or a moment there some analysts who for more than two decades have followed the neverending negotiations on carving up the Caspian Sea may have wondered if a heavily promoted summit in Kazakhstan’s Aqtau was going to go down as the ‘summit to end all summits’.

Alas, the long-awaited August 12 signing of a convention on the legal status of the body of water leaves a lot to be desired.

As it turns out the leaders of the five states that surround the Caspian Sea – Russia, Kazakhstan, Azerbaijan, Iran and Turkmenistan – have not yet inked a deal that will entirely carve up the oil and gas-rich resources under the seabed.

Despite all the fanfare, it appears that the all-important definitive delineation of the seabed will have to be determined in future negotiations. What was agreed upon is that each country will control 15 nautical miles from its shore for mineral exploration and another 10 nautical miles for fishing. The remaining surface area will be shared jointly among all the littoral countries.

A key issue in the dispute has always been whether the Caspian Sea is actually a lake. If it is accepted as a lake that would mean the borders of all five nations would meet in the middle. If it is decreed to be a sea, there would be some common “international waters” in the middle that all the countries would have to share.

natural resources reside, will be divided among the countries via the concluding of bilateral agreements – so expect more interminable negotiations.

The five leaders who gathered in Aqtau – Azerbaijani President Ilham Aliyev, Iranian President Hassan Rouhani, Kazakh President Nursultan Nazarbajev, Russian President Vladimir Putin and Turkmen President Gurbanguly Berdymukhammedov – signed the Convention on the Legal Status of the Caspian Sea that addresses its division and regulates the issues of military cooperation, and the development of biological resources, the seabed and subsoil.

Putin called the signing of the convention a historic event. But a clue that it may not have been so historic came when Berdymukhammedov concluded his opening remarks by saying another summit should be held in Turkmenistan.

Looking at the failure to resolve the division of the seabed, Izvestiya concluded that it "looks like an informal recognition of the inability of the five Caspian states to agree on the rules of the game concerning oil and gas reserves and transit pipelines".

‘Not a sea or a lake’ In the end, the parties to the convention agreed to fluff the issue of the ‘sea or lake’ dispute and developed a special legal status for the Caspian, defining it neither as a sea nor as a lake.

Other points included in the convention are that the use of the waters will be regularly discussed at the level of deputy foreign ministers, with the first meeting to be held within six months and that Turkmenistan and Azerbaijan will be allowed to build a trans-Caspian gas pipeline to transport hydrocarbons from Central Asia to the European Union.

But experts say the pipeline will be a long time coming as it is not the most economically efficient option for selling Caspian oil.

Under the terms of the deal, the surface will be open for common usage. However, the all important seabed, where the

The convention also formally awards each country the right to lay pipelines and cables in their own Caspian sec-

tor, though environmental approval is required from all five countries for such work. But for any pipeline projects in the Southern Caspian to go ahead, the participating countries will first need to divide the seabed.

The convention also bans the deployment of military bases of third countries in the Caspian Sea at Russia’s insistence. In the next two years, Moscow could significantly increase its naval forces in the Caspian region. They are already the most powerful there, according to reports. All the countries bordering the Caspian Sea have plans to strengthen their navy in the region.

In further remarks on the military side of the agreement, Iranian President Rouhani praised the part of the agreement that excludes any foreign military presence in the Caspian, but in his closing statement mentioned that it should include shipment of foreign militaries' cargo across the Caspian, according to RFE/RL. He did not specify any countries but was almost certainly referring to the agreement the US has to ship cargo from Azerbaijan to Kazakhstan’s Aqtau and Quryq ports.

History under the Persian Empire Iranians are generally quite sensitive about the future of the Caspian Sea – given its history under the Persian Empire and the ceding to Russia 200 years ago of Georgia, Armenia and Azerbaijan under the Treaties of Turkmenchay and Golestan – and following the summit social media channels in Iran were ablaze with speculation that Rouhani had handed over territory deemed Iranian to Turkmenistan and Azerbaijan, while granting Russia rights to use the Caspian Sea as the sole defender of the body of water.

According to Western estimates, there are reserves of 30bn tonnes of oil and 145 trillion cubic meters of gas under the Caspian Sea.

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"Mr Gerashchenko have a heart - give us back our money"

MOSCOW BLOG:

Russia’s 1998 crisis redux

Ben Aris in Berlin

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he enormity of Russia’s financial collapse on August 17, 1998 only really hit home with me the next day. “We are so fucked,” George Kogan, one of Moscow’s most famous and longest serving equity salesman, explained to me standing in the apartment of Simon Dunlop, one of Moscow’s most famous entrepreneurs. “The whole system has just crashed. It will take years for Russia to recover.”

Moscow had been a party town for the two preceding years.

The pain of Prime Minister Yegor Gaidar’s shock therapy was finally beginning to fade. The ruble had been a stable RUB6 to the dollar for nearly a year. Inflation was creeping downwards and was in the teens as were the interest rates on the government’s GKO treasury bills. The expats in Moscow were in a tizzy following a stock market boom, where the RTS had risen from its 1996 inaugural starting point of 100 to over 500 by the end of 1997. Investment bankers were trembling with excitement at the amount of money they were making.

Everyone knew what the market’s closing price was that day and the conversation was all about which sector or “great unpronounceable” listed name would take off next.

On the other side of the fence the traders were coining it in.

Thanks to a ruble exchange trading corridor, the national currency was overpriced, pushed up by oil and gas exports, making the import business a gold mine. “I don't know anyone who is not worth $3mn,” one of these traders told me at a party a few months earlier, sipping a vintage single malt.

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When the crash came the traders were as badly caught out as the equity sales people. The traders had been spending their money as fast as they made it, squandering cash on yacht hires in France or Mercedes sports cars for their mistresses. All their money was tied up in inventory and suddenly they found themselves without cash in a frozen economy. Most survived, but the upshot was that once their businesses were running again a few years later they all made sure to have some cash in reserves and property overseas.

Hard to exaggerate It’s hard to exaggerate the scale and shock of the 1998 crash.

The whole Russian economy fell to pieces at a stroke. It had a profound effect on everyone, especially the people in the ministry of finance and central bank, who have worked hard to make sure it never happens again. The current Central Bank of Russia (CBR) governor Elvira Nabiullina was a ministry of finance official then and was recently called the “most conservative central banker in the world.”

A currency crisis that started in Asia the year before squashed commodity prices and oil fell to $10 a barrel at the start of 1998. Russia’s budget broke even at $14 a barrel in those days (its break-even price in 2008 was $115) and Boris Yeltsin’s government didn't have a lot of cash to start with.

Going into the crisis, the entire state hard currency reserves were a mere $6bn (vs $460bn now) so the collapse of the oil

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prices rapidly caused a meltdown. The newly installed Prime Minister Sergei Kiriyenko tried to stave off the worst but on August 17 he finally pulled the plug.

The ruble rate fell threefold overnight from RUB6 to the dollar to RUB21 by early September. Inflation soared to over 80% and the central bank’s attempt to stabilise the economy using a fixed exchange rate between 1994 and 1998 ended in complete failure.

Picking through the rubble The crisis led to the collapse of the entire top tier of the country's largest private banks. Although most of the depositors of these banks were rescued by the Central Bank, the money was returned so slowly that inflation had eaten up a third to a half of its value. Foreign currency deposits forcibly converted into rubles suffered the same fate. Pensioners’ life savings were wiped out again. I joined a small demonstration outside the central bank building on Naglinya Street in November where pensioners were holding signs addressing the governor: “Mr Gerashchenko, have a heart. Give us back our money.”

Gerashchenko bailed out the biggest banks with an emergency cash injection from the IMF, but that money immediately left Russia for tropical offshore havens and owners let their banks fold. Most banks moved anything of value into “bridge banks” and let their flagship banks go to the wall. Vladimir Potanin’s Uneximbank was one of the six biggest in the country, but after its valuable assets were transferred to Rosbank – at the time the unknown bank with one office on Kutuzovsky prospect – the bank collapsed and Rosbank quickly hoovered up anything of value to become one of Russia’s largest private banks within a few years.

Russia also defaulted on some $40bn of GKOs. The short-term treasury bonds widely held by foreign investors, since replaced by the OFZ, are the government’s work-a-day treasury bill (and they are even more extensively held by foreign investors now). These bills were locked into special “S” accounts that allowed some operations but they could not be turned into cash that could be taken out of Russia. Technically Russia did not default, but delayed all bond repayments for five years. Russia eventually honoured this obligation and when permission was given for the “S” account money to be used for equity investments a few years later it contributed to the boom in Russian equities that started in about 2003. Investors eventually made some good money as a result.

But at the time everyone thought that Russia was screwed.

The IMF immediately predicted hyperinflation and years of Latin American-style stagnation. It was to everyone’s shock that the economy made a spectacular bounce back.

Revival I remember in 1999 reading the doom and gloom reports, but their dark predictions didn't tally with life on the street where

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shops were full and the mood of regular Russians was brightening. I remember wandering around and asking myself: why are there suddenly so many smaller, mid-market restaurants?

When the GDP numbers came out for 2000 showing that the economy had grown by 10%, it took at least six months for everyone to realise that the economy was booming and another two years before that translated into a rush into Russian equities.

Among the few business people to realise what was going on was Russia’s top oligarch Roman Abramovich, who in an inspired deal bought control of the PAZ bus plant in 1999, by simply buying up its shares on the open market – the first significant takeover that was not a private equity deal.

That was a revolutionary change in mindset. The 1990s were marred by the robber/raider mentality of asset acquisition. I recall writing a report for the EIU at the time, advising: “Even a 75%-plus one share will not ensure control of a company if you get the wrong partners.” Uber-oligarch Boris Berezovsky pioneered the idea that there was no need to privatise a state-owned company if you could “privatise the cashflow”,

“The whole system has just crashed.

It will take years for Russia to recover.” which he did to spectacular effect with Aeroflot. Abramovich set in motion an interest in improving corporate governance that led to the spectacular rise of oil major Yukos’ shares.

Owner Mikhail Khodorkovsky was persuaded by investment bankers from Brunswick Warburg that he could make more money from his shares than pumping oil and Yukos’ stock went from 20c in 1999 to over $15 by 2003 at the time of his arrest, making Khodorkovsky the richest man under 40 in the world.

“I am all three generations of the Rockefellers,” he told me in an interview at the time. “The first were robber-barons. The second consolidated the empire. And the third were royalty.”

That same year in what is now seen as a legendary call, Goldman Sachs chief economist and a Russian veteran who was still in his 20s, Al Breach, marked the entire Russian equity market up to Buy – a call that would have made you millions in under three years if you had followed his advice.

That trend has continued to this day as business owners are investing in their stock by paying the highest dividend yields in the world (another trend started by Abramovich who emptied his oil company Sibneft of cash by paying out 100%plus of profits as dividends just before he sold it to Gazprom in 2005). Corporate governance has progressed to the point where today Abramovich’s mere 6% stake in Norilsk Nickel is a major issue in the current boardroom battle amongst

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the shareholders over how generous dividend payments should be.

The rapidly rising price of oil fuelled the subsequent boom, but that took several years to kick in. What caused the 10% growth in 2000 – a record that has yet to be beaten – was the three-quarters devaluation of the ruble and the end of what academics Barry Ickes and Clifford Gaddy dubbed “the virtual economy”.

With costs in rubles but revenues in dollars, the entire oil sector became a massive cash cow overnight that poured more cash into the monetarily desiccated Russian economy. Oil companies invested more into production in 1999 than they had invested in the entire preceding eight years. As if rain had fallen on parched land, the entire economy suddenly burst into bloom.

From crash to cash The crash was a defining moment in Russian history. It caused enormous pain, but it also reset the Russian economy by more fairly valuing the ruble.

In the mid1990s, thanks to the hyperinflation, the banks that made the oligarchs rich were money-making machines: the game was to get hold of some sort of revenue stream like a state-owned enterprise’s payroll. You then converted the rubles to dollars, waiting as long as you could to pay, then converted the dollars back to rubles. The ruble bill didn't change, but in the meantime hyperinflation had reduced the value of the bills in dollar terms by a huge amount. The bank kept the difference as profit. The upshot was no one wanted to pay for anything in cash – hence the virtual economy.

The 1998 devaluation undid this mechanism and cash flooded the economy.

It is easy to lose sight of how hard the 1990s were. Following the fall of the Soviet Union, Russians were plunged into African levels of poverty. The number of people living on $1.90 a day or less – the standard benchmark – soared into the millions, while life savings were inflated away to nothing in a matter of days after inflation spiked to more than 2,000% in the early 90s.

By 1997, the levels of this kind of poverty had begun to fall dramatically and a sense of optimism, or normalcy, was appearing. But following the 1998 crash, “$1.90 poverty” soared again from 1.1mn people in 1997 to 3.4mn in 1999. It took another decade to eradicate the blight of that kind of wretched quality of life to zero (none of the other BRICS have crossed this line yet).

While poverty has been rising again more recently, these days it is measured against a minimum subsistence income poverty line: currently 13.9% of the population are on or under this line – which is on a par with, or significantly better than, what most European countries contend with.

Another marked change was the government’s realisation that it had to raise wages. About half the population are dependent

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on the budget for their wages and about a quarter are directly employed by the state. But with public sector wages lagging the private sector by as much as a factor of 10, this was a recipe for social unrest.

When it came out that Boris Brevnov, a young reformer at the head of the state-owned utilities monopoly United Energy Systems (UES) and a friend of First Deputy Prime Minister Boris Nemtsov, was paid $100,000 a year, such riches caused a scandal. A friend of the twenty-something Financial Times bureau chief Chrystia Freeland, now Canada’s foreign minister, Brevnov was western-educated and one of the team of liberals trying to remake Russia’s economy along market lines (Today no-one bats an eyelid at Rosneft’s Igor Sechin or VTB’s Andrei Kostin, who both receive pay checks north of $30mn a year according to reports, as Russia’s leading statesponsored oligarchs, or “stoligarchs”). So wages began to rise by 10% a year and the government kept that up for a decade to close the gap, fuelling a consumption-driven boom.

At the end of the process, the wage differences between Russia and Western Europe were largely closed on a purchasing power parity (PPP) basis, and increasingly in nominal terms too if grey incomes are included in the equation.

The average monthly salary of employees this July was RUB42,640 ($678), which is 10.7% more than in July last year. In the first half of the year, the average monthly salary increased by 11.1% compared to the same period in 2017. Real wage growth has begun to recover again and was up in July by 8% in annual terms having clawed back most of the losses endured since the 2014 crisis. This enormous and rapid catchup forms the bedrock of Putin’s popularity.

Russia went through a dramatic phase-change in 1998.

The Yeltsin era was marked by chaos and poverty but after 17 years of Putin, Russia is a more or less normal country where the middle classes have the same sort of expectations as their Western European peers. Obviously the process is not over, but the UNDP marked Russia up to “high income” several years ago, putting it in the same category as developed market peers and the country remains the only emerging market from the 90s to have made this transformation.

Despite all of its many problems, Russia is still in business and it is still growing. Those traders from the 90s are mostly respectable businessmen running tea import emporiums or chains of car dealerships today. Kogan is still an equity salesman and Dunlop owns one of Russia’s most successful online music and book sites, worth several tens of millions of dollars. Both the traders and the politicians learnt some hard lessons from the crisis of 20 years ago. The fact that crises have been the norm for most of most people’s careers has made Russian businessmen and bureaucrats battlehardened, as they have grown up learning to expect the unexpected.

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ALACO DISPATCHES:

Erdogan’s embrace of Western Balkans worries EU Yigal Chazan of Alaco Dispatches

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urkish President Recep Tayyip Erdogan’s growing ‘soft-power’ influence in the Western Balkans may be bolstering local economies, yet his illiberal agenda could hold up the region’s already slow path to European integration by discouraging reform and sowing instability.

Over the past decade or so, Ankara has sought to extend its sway over Albania and the ex-Yugoslav republics of Macedonia, Serbia, Kosovo and Bosnia through the promotion of investment and trade, the latter growing from $435mn in 2002 to $3bn in 2016. Erdogan has seemingly taken advantage of the hiatus in the European Union accession process, caused in large part by Brussels’ concerns over lingering regional governance issues and, more recently, its preoccupation with the EU’s debt and migrant crises.

Amid fears that the Western Balkans might be cut adrift and become vulnerable to the influence of Ankara and Moscow – a matter raised explicitly by French President Emmanuel Macron – EU leaders met their counterparts from the region in Sofia in May for the first such meeting in 15 years, promising cooperation on a range of subjects but, significantly, insisting no fast-track membership process was on the table.

Europe’s caution towards the Western Balkans is in marked contrast to Turkey’s ready embrace of the region, whose Muslim populations have a strong affinity with Ankara, stemming mostly from their Ottoman roots. Bosnia has been particularly receptive to Erdogan’s overtures and many local Muslims see him as their protector, an impression he has sought to encourage. Yet, rather ironically, his biggest trading partner in the Western Balkans is Serbia, even though several members of the Belgrade regime in the 90s were convicted of crimes in predominantly-Muslim Kosovo.

Economic links with Serbia – Reuters reports 20 Turkish plants have either opened in the past year or are under construction – seem set to strengthen, with Erdogan apparently keen to deliver Russian gas to the country via the TurkStream pipeline project.

Turkish Presidency Recep Tayyip Erdogan with Serbia's Aleksandar Vucic in Belgrade, October 2017. Serbia is Turkey's biggest trading partner in the Western Balkans.

The ties with Belgrade challenge suggestions that Erdogan’s Balkan shift is part of a neo-Ottoman enterprise aimed at frustrating European integration efforts. While Erdogan is critical of Brussels, Ankara has stressed that it supports the EU accession process. It is a goal that Western Balkan governments are unlikely to abandon anyway, notwithstanding the hurdles and their respective citizens’ increasing disillusionment over the lack of progress.

More to the point, Turkey offers the region no alternative to joining the union, which remains its biggest trading partner.

Rather, the Turkish president’s intention seems to be far more pragmatic and tactical. He is investing in, and trading with, the Western Balkans as he regards it as lying within Ankara’s legitimate sphere of influence – a pledge to invest $3.5bn in a planned highway between Sarajevo and Belgrade being the most notable of recent commitments. And though Erdogan’s portrayal of himself as a defender of Muslims strikes a chord with his Bosnian co-religionists, who unlike the republic’s Serbs and Croats have no neighbouring state to look after their interests, it seems more directed at his supporters in Turkey and the Turkish diaspora. His recent staging of a pre-election rally in Sarajevo, attended by thousands of Turks from Western Europe, attests to that.

Yet the rally, held in Bosnia’s capital because several EU countries have banned similar events, was not universally welcomed by Bosnian Muslims – some worried that it might impair relations with Brussels – and unsettled some representatives of non-Muslim communities. The Bosnian Serb leader, Milorad Dodik, complained that Erdogan was “interfering a lot” in Bosnia’s affairs – ominous words from a politician who has long agitated for a separate Serb statelet.

For many Muslims across the region, a big concern is Erdogan’s attempts to undermine support for his rival Fethullah Gulen, whom he accuses of plotting the 2016 attempt to overthrow him. Last October, Erdogan, on a visit to Novi Pazar, a predominantly Muslim town in the south of Serbia, pledged to “root out” the Gulenist movement from the Balkans, where it has a well-developed network. The

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president’s pursuit of his erstwhile ally’s followers has proved to be a divisive issue in the region.

Ankara has been urging regional governments to shut private schools run by Gulenists and to deport Turks linked with the movement. A political scandal broke out in Kosovo in March when six Turkish nationals allegedly linked to Gulenist schools were arrested and then extradited to Turkey. The incident led to the Kosovar interior minister and secret service chief being sacked

by Prime Minister Ramush Haradinaj who insisted that he had no knowledge of the operation. A month later, a Bosnian court rejected the extradition of an alleged Gulenist activist to Turkey.

The interference has alarmed the EU, which worries about the influence of Erdogan’s policies on the region, in particular over the governments of Serbia and Bosnia whose leaders have at times been zealous in their support for the Turkish president.

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Given Erdogan’s lack of respect for human and civil rights, the concern is that his illiberal agenda could prove to be a source of instability and slow progress on governance reforms, setting back European integration even more.

Erdogan has stressed that he wants to promote stability in the Western Balkans, and given the turmoil on Turkey’s southern flanks he would hardly want otherwise. Yet while his investment and trade are contributing to healthier local economies, his authoritarianism is a risk for the region. He professes to support its EU aspirations, yet his engagement may do just the opposite.

Yigal Chazan is an associate at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.

MOSCOW BLOG:

Turkey's crisis a golden opportunity for the Kremlin Ben Aris in Berlin

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he Turkish meltdown is a golden opportunity for the Kremlin to further its goal of breaking up Nato and loosening the alliance that Washington has been trying to build to contain Russia’s European ambitions.

The Kremlin has long had a very angry bee in its bonnet about Nato’s expansion eastwards. The recent announcement that Macedonia is to join the military bloc caused outrage in Moscow. It was already protesting that promises made to Mikhail Gorbachev by virtually every Western leader at the start of the 90s have been broken. Russian President Vladimir Putin complained loudly about the breached pledges in his now famous 2007 Munich Security Conference speech and recently declassified documents confirm that Gorbachev was indeed given verbal promises, although nothing was put on paper.

Turkey has been a Nato member for six decades and it is a key piece in the West’s security arrangement as a leading foothold in the Middle East. It even hosts part of the US nuclear arsenal.

However, with the EU failure to admit Turkey to its trade club,

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Putin and Erdogan reset bilateral relations after the huge row over Turkey's 2015 shooting down of a Russian fighter. Might they now take that relationship one step further, leading to Turkey exiting Nato?

relations with Western powers have been decaying for years.

Now they are approaching breaking point.

Turkish President Recep Tayyip Erdogan has had his issues with Russia, which imposed painful economic sanctions after Turkey shot down a Russian fighter-bomber over the Syrian-

“The recent announcement that Macedonia is to join the military bloc caused outrage in Moscow” Turkish border in November 2016. But Moscow has been working hard to drive a wedge between the West and Ankara.

US bullying since Donald Trump took office has gone up a notch and the thin-skinned Erdogan has not taken it at all well. In particular, Washington’s refusal to extradite Erdogan’s nemesis and Muslim cleric Fethullah Gulen from his home in Pennsylvania has been a major source of friction. Ankara’s

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aggressive political campaigning among expatriate Turks living in Western Europe, and Germany in particular, has been another source of strife. That and Erdogan’s treatment of basic human rights during the two-year-long state of emergency declared after the July 2016 attempted coup, which he blames on Gulen, led to some sanctions from Berlin and the grinding to a halt of Turkey’s application to join the EU.

Erdogan has hit back at Trump with an opinion piece in the New York Times, in which he wrote: “Before it is too late, Washington must give up the misguided notion that our relationship can be asymmetrical and come to terms with the fact that Turkey has alternatives. Failure to reverse this trend of unilateralism and disrespect will require us to start looking for new friends and allies.”

Differences over Syria and Russian defence deals Turkey’s interests in Syria, meanwhile, are totally misaligned with Washington’s: Ankara has been fighting Kurdish rebels that claim land in the east of the country, but to Turkey’s fury Washington has been backing (and supplying) the same forces as the most effective fighters against Islamic State (IS) terrorists in Syria and Syrian President Bashar al-Assad’s government forces.

The criticism of US “unilateralism” has been getting increasing play recently. Putin has long complained of American unilateralism and the central tenet of his foreign policy is to create a “multilateral” world, with a body like the UN coordinating international affairs – an objective that is shared by Beijing. Last week, the Kremlin openly criticised Washington for declaring “economic war” on Russia with another round of sanctions. Iranian Foreign Minister Mohammad Javad Zarif, meanwhile, lambasted Washington saying its planned ban on buying Iranian oil will fail because the world is “sick and tired of US unilateralism.”

Putin’s offer to supply both advanced Sukhoi fifth-generation fighter planes as well as Russia’s highly advanced S-400 SAM system, and Erdogan’s acceptance of the offer, could be the issue that breaks the camel’s back. There is nothing in Nato rules that preclude a country from buying non-Nato compatible weapons systems, but Washington has been very unhappy with the decision, threatening to cancel a contract to supply Turkey with advanced F-35 fighter jets if the Russian deals go ahead.

Trump upped the ante by slapping a 50% tariff on Turkish steel exports on the same day that the lira went into free fall.

The Turkish economy subsequently tipped over into a fullblown currency collapse that threatens a debt and liquidity crisis, presenting Moscow with a golden opportunity. ”To further reduce imports of steel articles and increase domestic capacity utilisation, I have determined that it is necessary and appropriate to impose a 50% ad valorem tariff on steel articles imported from Turkey, beginning on August 13, 2018,” Trump said in a statement released by the White House on August 10.

Commerce secretary Wilbur Ross confirmed that the US will double the tariff on imports of Turkish steel to 50%, because “the previous level of 25% had not been enough to sufficiently reduce Turkish exports to the US.”

"The countries currently the US is negotiating with have told Washington that they will continue their oil purchases from Iran," Zarif was quoted as saying. China, Turkey and EU member states are among nations that have so far made it clear to the US that they will continue buying Iranian oil and conducting other business with the Islamic Republic.

Echoes of Vilnius 2014 The situation now looks very similar to the run-up to the EU’s Vilnius summit in 2014 where the EU was trying to persuade then Ukrainian president Viktor Yanukovych to sign off on an Association Agreement that would have tied Ukraine into the European trade system and taken it out of Moscow’s orbit.

At the eleventh hour Yanukovych refused, partly because the EU would not drop its insistence that Yanukovych release opposition leader and former prime minister Yulia Tymoshenko from jail and partly because the EU didn't offer any cash up front to close the deal. Instead Yanukovych accepted an offer from Moscow for a $15bn bailout, of which $3bn was paid immediately in the form of eurobonds that are now in dispute.

“Doubling the tariff on imports of steel from Turkey will further reduce these imports that the [commerce] department found threaten to impair national security,” Ross added.

Erdogan’s spokesman, Ibrahim Kalin, drove home the growing danger to Nato with a tweet stating that "the US runs the risk of losing Turkey as a whole. The entire Turkish public is against US policies that disregard Turkey's legitimate security demands. Threats, sanctions and bullying will not work. It will only increase Turkey's resolve.”

Ankara suggests it may pull out of Nato Ankara immediately started making comments that it may pull out of Nato as a result of the US actions and throw its lot in with Moscow, which would be a disaster for the West. There are also rumours coming out of Moscow that the Kremlin is offering a small bailout to Ankara if it agrees to order the bases in Turkey hosting US forces, such as the Incirlik air base, to close: Putin and Erdogan talked by phone on August after the US metal sanctions were announced.

An alliance with Moscow makes a lot of sense for Ankara, especially as Erdogan becomes increasingly authoritarian. After the late June presidential election triumph that saw Erdogan’s power greatly expanded by a newly introduced executive presidency, the prospects for more clashes with Brussels over Turkey’s already poor human rights record only increased. And the US’s increasingly aggressive use of trade as an economic weapon for its own commercial benefit is creating an “axis of the sanctioned” that also includes China and Iran.

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Turkey's Short-term External Debt Stock

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Turkey obliged to repay $179bn in foreign debts within one year as of end-June Turkey’s short-term external debt stock moved down by 2% q/q to $120bn at the end of June, the country's central bank said on August 16.

External debt maturing within one year or less regardless of the original maturity stood at $179.1bn at the end of June, down from $180.6bn at the end of May, it added.

According to the figures, the public sector is on the hook for a total of $32bn in foreign debt, including $28bn owed by public banks, in the coming one year period. The private sector, meanwhile, is obliged to pay $146bn, including $74bn faced by private banks and $65bn by non-financial companies.

Ukraine's GDP Quarterly Growth % y/y

Ukraine economic growth accelerates to 3.6% y/y in April-June Ukraine's GDP grew by 3.6% year-on-year in April-June, following a 3.1% y/y growth in January-March, the Ukrstat state statistics service reported on August 14.

The country's economic growth both in the first and the second quarters of 2018 taking into account the seasonal factor stood at 0.9% y/y.

"The economy of Ukraine has been growing for 10 consecutive quarters," Interfax news agency quoted Ukrstat's statement released the same day. "An increase in commodity exports has become one of the factors of growth. In the first half of the year, this indicator grew by 12.7% y/y."

Slovenia records its highest job vacancy rate since 2008 Slovenia’s job vacancy rate in the second quarter of the year stood at 2.6%, the highest since 2008. It went up 0.1pp up compared to the previous quarter as well as 0.4pp up against the same quarter of 2017, the statistical office announced on August 9.

Labour markets across the CEE region are seeing a fall in unemplyment and companies are increasingly struggling to fill vacancies, as their economies grow.

Slovenia recorded the lowest job vacancy rate (0.6%) in the second half of 2009.

Russia Stock Market Index (eop)

Foreign investors selling Russian stocks for 15 weeks straight A lacklustre economic performance and fears of new sanctions have led investors to sell Russian stocks for 15 weeks in a row. In the week ending August 1 non-residents sold another $10mn worth of Russian stocks, after selling $110mn the week before, finanz.ru reports.

Funds focusing exclusively on Russia sold $40mn worth of securities in the last week of August and $130mn in the last two, according to a review published by BCS Global Markets.

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Funds invested into vehicles like ETFs, which include Russian stocks in a basket, added $30mn in the same week, but not enough to bring the total inflows into the black.

New Europe in Numbers

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Investors jittery after Ukraine's hryvnia falls below UAH27 to the dollar Investors and bond traders were jittery after the first week of August when the hryvnia fell below the psychologically important UAH27 to the dollar mark.

With international currency reserves now at the minimum "safe" level and almost $1bn of coupon payments to make in the autumn, the government is going to struggle to meet its commitments. If the state has to dip into its reserves again the hryvnia's value could start to slide against the dollar in the coming months say analysts.

Analysts say the slip in the currency was part of the natural devaluation that happens in the autumn when tax bills come due, but the seasonal trend started early this year.

The fall was also linked to a moderate fall in the country’s gross international reserves (GIR) to $17.748bn, close to the three months import cover economists believe is needed to ensure the stability of the national currency.

Ukraine’s gross international reserves slid 1.3% m/m, or $230mn, to $17.7bn in July, the National Bank of Ukraine (NBU) reported on August 7. The losses were due to foreign currency-denominated debt repayments that exceeded receipts from a local Eurobond placement and net currency purchases

by the central bank. As of August 1, Ukraine’s gross international reserves covered 3.0 months of imports.

“Ukraine’s gross reserves have now declined to the minimum accepted “safe level” of three months of imports.

With foreign currency supply on the foreign currency exchange dwindling in the last two months, the NBU has lost the ability to replenish reserves through currency purchases. At the same time, demand for local Eurobonds has declined in recent weeks,” Evgeniya Akhtyrko of Concorde Capital said in a note.

“We are likely to see further losses in gross international reserves in August due to relatively high payments on foreign debt. In particular, this includes an IMF repayment of about $600mn, as well as repaying and servicing local Eurobonds worth $384mn. We expect the government will make an effort to raise more foreign currency with the sale of local Eurobonds this month.

However, this alone won't compensate the debt repayments,” Akhtyrko added.

“With its worsening ability to raise foreign currency, we expect Ukraine’s gross reserves will fall around $400mn during August to well below the “safe level” of three months of imports. This

Ukraine FX Currency (units per EUR, USD average in period)

will trigger a downward spiral, as the continuously declining reserves will harm Ukraine's prospect on the global debt markets. The main factor that can stop this spiral is an IMF loan tranche, which is critical for bringing Ukraine's gross reserves back above the "safe level" and restoring foreign borrowing,” Akhtyrko concluded.

On a 12 month basis Ukraine’s current account deficit amounted to $2.8bn, up from $2.4bn last year. Ukraine’s current account was reported in deficit of $125mn in June. This was a reversal from the $23mn surplus posted a year ago.

“In line with the previous month, the growing trade deficit was the main culprit behind the worsening current account performance. At the same time, the trade deficit slightly improved compared to numbers reported a month ago,” Ukrsibbank said in a note.

“While external trade continues to worsen, resilient export prices will help to offset (albeit partly) negative impact coming from accelerated consumer imports and higher energy prices. The risks to FX rate stability are increasing and we expect another round of renewed pressure on UAH, retaining our end-year USDUAH forecast to 29.50,” the bank added.

More worryingly, the central bank’s treasury account — the account it uses to make day to day payments — fell close to zero this week: Ukraine is facing the sovereign equivalent of a cash flow crisis.

“We expect hryvnia devaluation to lose steam in the nearest future, provided the withdrawal from the market large amounts of banking liquidity via accelerated selling of the FX currency on the market in the form of NBU interventions,” Ukrsibbank said in a note.

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