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Inside this issue: Going with the grain in Ukraine Austrian banks' slower waltz Istanbul's financial centre dreams Jailed in Georgia May 2011 www.businessneweurope.eu

THE PENSIONS TIME BOMB

Special Report: Mining in Kazakhstan


bne May 2011 Editor-in-chief: Ben Aris (Moscow) editor@businessneweurope.eu

Contents

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CENTRAL EUROPE

Managing editor: Nicholas Watson (Prague) +42 0731582719 watson@businessneweurope.eu Eastern European editor:  Tim Gosling (Moscow) +7 9031927966 gosling@businessneweurope.eu Eastern Europe: Graham Stack (Kyiv) stack@businessneweurope.eu

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Central Europe: Robert Smyth (Budapest) +36 19995200 rsmyth_hu@yahoo.com Jan Cienski (Warsaw) +48 604994850 jancienski@ft.pl Mike Collier (Riga) +37 129473192 balticfeatures@yahoo.co.uk Matthew Day (Warsaw) +48 607291187 mattday@businessneweurope.eu Tom Nicholson (Bratislava) +42 1907732736 tom.nicholson@sme.sk Kester Eddy (Budapest) +36 308665550 kester.eddy@gmail.com Steven Roman (Tallinn) +372 56665911 steven@online.ee Southeast Europe: Justin Vela (Istanbul) +90 5393614470 justinvela@bne.eu David O'Byrne (Istanbul) +90 5359210950 davidob@ttnet.net.tr Bernard Kennedy (Ankara) +90 535 7485120 bkennedy@superonline.com Ian Bancroft (Belgrade) ian.bancroft@transconflict.com Bogdan Preda (Bucharest) +40 722580137 bpreda@gmail.com Nadia Damon (Sofia) +359 885 849884 nadiadamon@gmail.com Andrew MacDowall (Sofia) andrew.macdowall@googlemail.com Eurasia: Bureau Chief: Clare Nuttall (Almaty) +7 7073011495 nuttall@businessneweurope.eu Molly Corso (Tbilisi) molly_corso@yahoo.com Oliver Belfitt-Nash (Ulaanbaatar) +97688113149 oliver@businessneweurope.eu International: Derek Brower (London) derekbrower@gmail.com

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I3

26

Austrian banks' slower waltz

28

Crisis? What crisis?

30

Meet Estonia's next PM

31

KNABbed in Latvia

32

Small beer

33

Poland becomes supermarket of Emerging Europe

34

Private equity firm Riverside increasingly looks to CEE

36

Slovak banks rebound

COVER STORY 6

The Insiders

8

Pension time bomb

11

Nuclear fallout in Emerging Europe

SOUTHEAST EUROPE

Perspective

38

Istanbul's financial centre dreams

EASTERN EUROPE

40

A compromise in Kosovo

16

Going with the grain in Ukraine

41

The talented Mr Plahotniuc

44 18

Foreign investors run fingers through Ukraine's black earth

Romania's engines starting, but still choking

45

Sloveneyards

15

20

Emerging Trouble Funds

21

Bank on IPOs

22

Belarus makes half-hearted step in right direction

24

For Islamic finance, Tatarstan to be Russia's test case

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bne May 2011

Contents

Feeling at home in Central and Eastern Europe starts right here.

EURASIA 47

Jailed in Georgia

48

Kazakhstan to beef up exports

49

A foregone conclusion

50

Mongolia's next step – fame to fortune

56

SPECIAL FOCUS

62

The people's placements

A capital situation in Emerging Europe

63

Gold standards

64

Corporate Statement: NCA: building trust in quality and safety in Kazakhstan

66

Uranium undeterred

68

CLASSIFIED

70

UPCOMING EVENTS

SPECIAL REPORT

52

15 million customers have selected us as their bank of choice. Raiffeisen Bank International represents more than 20 years of experience in Central and Eastern Europe, covering 17 markets in the region with subsidiary banks, leasing companies and other financial service providers. International companies, local businesses of all sizes and private individuals rely on our network of around 3,000 branches. Over 100 international banking awards validate the group‘s service quality. www.rbinternational.com

Corporate Statement: PASHA – the bank of choice for Azerbaijan business

57

Mining a rich seam

59

Rare earths

60

ArcelorMittal's safety investment paying off

I5


6

I The Insiders

bne May 2011

The youthful face of Russia's liberal reforms

best, but the Kremlin is also looking at partnerships, joint ventures, projects that can be implemented jointly with investors. "But we are still at the beginning of the process," Dvorkovich admits, in one of his trademark no-nonsense, straight-to-the point statements.

Ben Aris in Moscow Arkady Dvorkovich

T

he office of Arkady Dvorkovich in the presidential administration's headquarters in Staraya Ploshad (once home to Stalin's personal apparat) has many of the trappings of old school Soviet power. The room is large, but slightly shabby. There is the de rigueur bank of cheap white plastic phones with no dials or keys that connect directly to other VIP offices. Then there is a T-shaped desk, where subordinates sit when talking to their boss, and the overstuffed sofa. Although this office has none of the gold or walnut wood that you'd find in the office of his boss, Russian President Dmitry Medvedev, Dvorkovich is no chinovnik, or Soviet paper pusher; as one of the faces of Russia's liberal reform programme and special economic advisor to the president, he's in a position to make a difference. I first met Dvorkovich in about 2000 when he was a freshfaced assistant to the then minister of economic development and trade, German Gref, who had just launched a plan to revamp the Russian economy. Dvorkovich studied at the highly respected Stockholm Institute of Transition Economics and "gets" the free market, and we spent an hour talking about a rule that dictates the length of the electric cord on fridges and the difficulty of getting rid of these stupid Russian regulations. Today, Dvorkovich has risen to become one of the most powerful liberal reformers of the new generation who are entering public service. Business Week named him one of 50 potential future world leaders in 2003. Gref quickly promoted him to deputy minister, then Medvedev made him special economic advisor in 2008. Dvorkovich has become the voice of reason that whispers in Medvedev's ear. Patchy investment success As the presidential elections loom, Medvedev has become increasingly outspoken, saying at the end of March that Russia's investment climate is "very bad." Investment is recovering from the crisis, albeit slowly: Rosstat estimates that Russia attracted $13.8bn of foreign direct investment (FDI) in 2010, down from $15.9bn in 2009 and well off the $80bn in 2008,

bne May 2011

a record year. However, while the overall volume of FDI has fallen, the size of deals is going up, with a string of large and strategically important investment commitments arriving in the first months of this year, led by the car sector. "We hope to attract new investment to Russia and this is not just car assembling. Not sure that this can be achieved just by raising tariffs, it is about increasing the quality of the investment climate," says Dvorkovich. The state has stipulated that carmakers that can't increase their production to more than 300,000 units a year will have to pay higher import tariffs from 2020 and a similar scheme is now being mooted for the pharmaceutical sector. "However, the situation with pharmaceuticals is a bit different. There is a high domestic demand in particular from the state; it is a different landscape and we can attract investment by the size of the market. If there is some degree of certainty [in the growth of demand], then the international companies will place production here without the need to raise tariffs," says Dvorkovich in his soft and slightly clipped English. The makeover of the car industry has been a huge success, as the state's investment policy that offered tax breaks and guarantees has managed to attract most of the world's leading producers, most of whom agreed in February to double or treble their output over the next nine years. The Ministry of Industry and Trade, which has taken point for the reform, claims Russia is ready to compete on the global car market, but Dvorkovich is typically more restrained. "We are not quite ready to compete head to head with international car producers, but the [World Trade Organization] includes a seven-year transition period and that is enough to increase competitiveness substantially. We need good strategic investors," says Dvorkovich, who is regularly rolled out to speak to foreign investors at conferences. Medvedev's main investment thrust has focused on winning more FDI, but Dvorkovich says the Kremlin is hoping to boost investment of all forms; investment by strategic investors is

Privatisation is key The state's effort to improve the investment climate is going frustratingly slowly – if it's moving at all. Dvorkovich blames most of the problems on the state's pervasive presence in almost all branches of the economy and says that everything – bar a few strategic companies – should be sold off as soon as possible. "We have already agreed to sell the state-owned stakes, but it is a question of timing. However, it is clear that eventually we don't need state participation in most sectors," says Dvorkovich. Amongst the special cases, he names the state's rail monopoly, the federal power grid company, the state-owned oil pipeline network and the gas giant Gazprom. Everything else – including Russia's second largest bank VTB Group – will eventually be put on the block. But there's the rub – privatisation, along with much of the rest of the reform process, is going slowly despite the government's efforts to pick up the pace. "The president has already ordered an increase in the pace [of privatisation]," says Dvorkovich. "Just this week, the National Banking Council board agreed to sell a 7.58% of Sberbank over the next three years and we are preparing this now, waiting for the best time. It will happen in 2011 or 2012, depending on market conditions – but the decision has already been made. It is a done deal." Despite Sberbank's dominance of the deposits business, Dvorkovich says that the Kremlin has no objection to taking state ownership below 51%. But he says that would take time, because the Duma would need to change the law to allow the sale of more shares, "and Sberbank also has to get the agreement of its existing minority shareholders." Corruption is a symptom, not the disease Most of the criticism of Russia centres on the high level of corruption, but Dvorkovich suggests that this is putting the cart before the horse, and that corruption is symptomatic of the high level of state ownership, hence the privatisation programme is also one of the more effective means to reducing corruption. Medvedev upped the ante with a speech in Magnitogorsk on March 31 with a rant against state-owned enterprises and the ills of government officials sitting on company boards, a speech delivered with Dvorkovich at his side. "Russian officials such as deputy prime ministers and ministers will be withdrawn from the boards of directors of state-owned and statecontrolled companies," Medvedev said as part of the effort to improve the efficiency of these companies.

Given these government corporate postings are a major source of cash for bureaucrats, there is likely to be a lot of resistance to the initiative, but it also shows the president's administration is attempting to strike at the right places. "[Corruption] is a systemic issue, as this is not just a bunch of criminals, but exists at all levels and comes back to the state's involvement in the economy," says Dvorkovich. "If we can reduce this, then the potential for corruption will also fall. Corruption is connected to the preferential treatment state-owned companies receive." So the problems Russia's faces are pretty clear – and so are the solutions. But this doesn't explain why the reform process is going so slowly. In an editorial at the end of March, Swedish analyst Anders Aslund compared Russia to Estonia, pointing out that the small Baltic republic has almost completed its reforms and is reaping the benefits; the implication was that Russia doesn't want to make reforms, because too many officials are making too much money. Dvorkovich gives a more considered explanation. First, he says that the system is too big and the number of reformers too small, so the Kremlin can only tackle a few issues at a time. "We have made progress in cutting red tape and there are less licenses than before, but there is not enough focus," says Dvorkovich. "This is such a big system that if people know there is a political focus on an issue, they follow up on it; but if not, then they go back to doing the same things they did before the reform." But the bigger problem is that the sheer size of the country means that the Federal government is actually relatively powerless to force reform on the regions without the regions' willing participation in the process. "There are some regions that are already very active and have been very successful – Kaluga [home to one of Russia's main car production clusters] and [the autonomous region of] Tatarstan are both good examples of active and progressive regions," says Dvorkovich. "A huge responsibility rests on the governors and mayors of regions. We need to introduce best practices across Russia, but we can't impose this top down. We could do more to make this work, but we are not like [the small progressive former Soviet republics of] Georgia or Estonia – both those countries are smaller than one of Russia's regions."

"If people know there is a political focus on an issue, they follow up on it; but if not, then they go back to doing the same things they did before the reform"


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I Cover story

PENSION TIME BOMB Ben Aris in Moscow

bne May 2011

F

or most of the last 20 years, Russia has grown under its own steam. The 1990s were wild, but things slowly got better despite, rather than because of, government. Life was hard, but the standard of living has risen relentlessly, largely thanks to the flood of petrodollars. But things will start to get worse from hereon in if nothing is done about the country's pension system – and nothing is being done about at it at the moment. The lack of pension reform has become a ticking time bomb.

could reverse again soon because while some Russians are confident enough in their future to want children, simply too few people were born in the 1990s to supply enough babies to keep the population level stable. "Although the birth rate has been recovering during the past decade, the size of age groups born during the 1990s was extremely small. These people are starting to reach reproductive age, which means that keeping up the birth rate will be very difficult," says Danske Bank.

Russia isn't unique in facing a looming pension crisis. Average life expectancy is increasing by about two years every decade, according to British scientists, and in places like the US the cost of looking after the old is increasing faster than the revenue that flows in from the various pension schemes. But the combination of the post-war baby boom and the impact of the collapse of the Soviet Union on Russia's demographics has made the situation especially bad.

Under pressure Russia's pension system is already running at a loss and recent rises in pension payments have only made the problem worse. But pensions are still too low and will probably have to rise more. Currently, the average pension is barely enough to cover the essentials of life – accommodation, heating and food. Despite a 30%

Birth pains The latest census shows that Russia's population is clearly shrinking, although more slowly than expected. At the beginning of 2011, the population was 142.9m, 50,000 less than a year before. However, the fall in the size of the population has slowed considerably. Russia's population peaked in 1991 at 148.689m, but was losing 750,000 to 800,000 people per year from the mid1990s to the mid-2000s, so a fall of only 50,000 last year could be regarded as considerable progress. In a widely cited report, the UN warned in 2005 that Russia's population could fall by a third to 116,097m by 2050 if current trends didn't improve. However, it seems that this scenario is now unlikely. "The Russian demographic profile is closer to Japan's than most of the other emerging markets' – old and getting older – because the baby-boom generation born after World War II is retiring in 2011-2020," says Viktor Nossek, vice president for research at Renaissance Asset Managers. The birth rate has recovered a bit since the summer of 2009, but this trend

Cover Story I 9

bne May 2011

"At the end of the day, the grey matter" hike at the start of this year, Russian pensions are still modest. The average monthly pension at the end of 2010 was just RUB7,600, or about €190. Pensioners bne has talked to say there is nothing left over for anything else. Almost all of Russia's pensioners depend on their children to top up their income; pensioners without children are simply surviving. At the same time, the number of workers available to support pensioners is falling. According to Rosstat, the working age population will decline from 87.5m in 2010 to 76.5m in 2030, implying a labour force contraction of 300,000-400,000 per year. That means the pensioner/labour force ratio will steadily increase from 0.35 to 0.50 through 2011-2030. On the other side of the coin, life expectancy is improving significantly from the lows of 58.7 years for men and 71.9 years for women seen a decade ago. Today, Russian men live another four years after retirement, while women live for another 20 years.

Different strokes in Central Europe

Jan Cienski and Nicholas Watson The Czech Republic and Poland may have both taken a big step forward in reforming their pension systems in the first week of April, but the two countries are moving in very different directions. The Polish, like Hungary, are focused on dismantling the private pillars of their pension systems, while the Czechs are taking the opposite tack. On April 7, the Polish government's bruising battle over reforming the pension system came to a close as President Bronislaw Komorowski signed into law legislation that largely undoes pension reforms undertaken a decade ago. The law enacted by parliament would cut the money flowing to private pension schemes from 7.3% of a workers salary to 2.3%, with the remainder going into the public pension system to pay for the cost of providing for current pensioners. The change would reduce the budget deficit by 0.8 percentage points this year and by 1.7 percentage points in 2012 – making it easier for the government to meet its promise of reducing the deficit from 7.9% of GDP last year to 3.0% of GDP by 2012. Jacek Rostowski, the finance minister, was horrified by a pension system that was largely funded by debt. Essentially, the government would borrow to pay workers' contributions to the private pension system, and the investment funds running those schemes would then take more than twothirds of the money pouring into the system and buy government bonds – a transaction that Rostowski called a "cancer" on public finances. Hungary has taken an even more radical approach, all but gutting its reformed pension system and returning to the pay-as-you-go scheme favoured by most Western European countries. Hungarians are being essentially blackmailed by the government into shifting their assets from the mandatory private pension system, into which they pay 8% of their salary, to the state pension fund, or lose most of their pension. On April 6, the Czech cabinet approved the outline of its planned pension reform as a first step before drafting concrete legislation. The Czech government's basic idea is to introduce higher taxes and private savings to try to balance the pension system, which showed a CZK29bn ($1.18bn ) deficit in 2010, which was about 0.8% of GDP. The main plank of the reform is to offer people the option to allocate some of the money they currently have to pay into the pay-as-you-go pension system into private pension funds instead. The plan offers people the option to divert 3 percentage points of their current pension contributions (which now total 28% of the gross wage) towards the private part, on the condition that they contribute an additional 2% in excess of their current contribution, taking the overall contribution to 30% from 28%.


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I Cover story

It's a "push-me, pull-you" alignment of problems. Together, these two factors will send the pensionable population soaring from 30m in 2010 to 40m by 2030. Unless the retirement age is raised, spending on pensions will expand by one-third in real terms over 2011-2030, according to Renaissance Asset Managers. The resources available to the government are still far too low. The total assets in the state-run pension system are of the order of 3% of GDP, compared with 65% in Chile and close to 100% in more developed countries. Likewise, the Russian government is spending only 6% of GDP on pensions compared with at least 10% in the developed world, which means the state pension fund never has enough money to cover the outgoings. Transfers from the federal budget cover the shortfall. Funding pensions already accounts for a third of the current budget deficit and the gap between income and outgoings is expected to increase rapidly from here. Deputy Prime Minister and Finance Minister Alexei Kudrin let the cat out of the bag in a speech last summer when he said the state would probably have to hike the retirement age. This caused a storm of protest and the government has

bne May 2011

and presidential elections in March next year, no-one even wants to mention the word "pensions" let alone start work on a plan. Russia has already made one stab at reforming the system, but immediately fluffed it. The first round of reform was launched in 2002 when the Kremlin introduced a system based on the Chilean model. At the end of 2003, some 55 special asset management funds were registered that can invest part of workers social taxes and 40m Russians received a "happiness letter" informing them of exactly how much money the state pension fund has put aside for their retirement. But the entire effort ended in fiasco. Few Russians understood the letter and fund managers say that the whole process was hijacked by big financial groups and regional governments. "Pension reform has got off to a disastrous start. There was a respectable blueprint that would have qualified funds with track records and transparent structures, but it was changed at the last minute," says Elizabeth Hebert, CEO of Pallada Asset Management, one of the 55 special funds. "We ended up with 55 management companies, most of them unknown, that have no requirement to disclose their owners. Three-quarters of these compa-

"Almost all of Russia's pensioners depend on their children to top up their income; pensioners without children are simply surviving" spent the past year denying there are such plans. But it will almost certainly be forced to do it. Currently, Russia's retirement ages of 60 for men and 55 for women are among the lowest in the world. The finance ministry is considering a gradual increase in the retirement age, to 62.5 for men (in 2015-2020) and to 60 for women (in 2015-2025), in order to cut future pension expenses. Fluffed reforms With Duma elections set for December

nies are owned by groups and invested into their related companies." Real funds like Pallada began to tour large companies to explain to workers the benefits of putting the "investable" part of their state payments into a private fund. What these managers found was typically the shop floor foreman had been offered a bounty – typically $1 per worker – for every employee that signed his private pension contribution away to one of the big groups.

Needless to say, most workers simply didn't bother and by not acting all their pension contributions remain with the state pension fund. Nearly 10 years on from the reform, Russia has a total of $38bn of pension assets under management, or just 3% of GDP, which is the level Chile got to in the second year of its reform. Benefits of a working pension system The need to reform pensions goes way beyond a country's ability to pay its pensioners a decent income or even its effect on the financial markets. Creating institutional investors, such as pension funds, unleashes a whole new type of capital on the market with the long-term perspective that emerging markets so desperately need. It is a game changer and will benefit everyone, not just the OAPs. "A well-functioning, fullyfunded pension system can transform an economy and is among the most important reforms a government can undertake," says Plamen Monovski, CIO of Renaissance Asset Managers. "Successful reform will mobilise domestic capital, diversify credit sources, encourage long-term investment and result in accelerated growth." Russia remains badly underinvested with about €1,000 per capita of foreign direct invetsment in 2008 compared with the €4,000-€8,000 that most of the Central European states have attracted. However, there is enough money on deposit in Russia's banks to finance all of the state's mooted RUB1 trillion infrastructure programme. The trouble is that this money is hard to get at for anyone but the biggest companies. Leaving domestic capital idle is costing Russia about 1.5% a year in lost growth, according to Renaissance Asset Managers. That feeds through into lower productivity. Institutional investors tend to invest into long-term projects that boost productivity, but a survey by consultant McKinsey & Co. found Russia's workers are a third as productive as the average American. More specifically, pension funds will unlock access to credits for small and medium-sized enterprises that are in turn

bne May 2011

a major driver of productivity, diversification and innovation, as well as a significant employer. For instance, pension funds in the UK and the Netherlands allocate up to 10% of their funds to venture capital and private equity investments. And as pension funds look for returns measured in decades, not quarters, they add stability to stock markets. Russia is one of the richest countries in the world, but its stock market is a slave to the commodity cycle – either it is

Cover story

amongst the best performing markets or the worst, depending on what happens to oil and metal prices. Without many institutional investors in Russian stocks, most playing the market are speculators with a short-term horizon. Pension funds and insurance companies account for over 70% of the tradable shares on the London and New York bourses, more than three times as much as on the Moscow exchanges. Moreover, the lack of institutional

I 11

investors makes a mockery of the state's plan to turn Moscow into an international financial centre. There is little point debating the details of the insider trading law or the new Central Depository when a giant chunk of investment is missing from Russia's capital market. "Pension reforms are an opportunity profit for society, as any reform to pensions will do more than make life better for pensioners, it will make life better for everyone in Russia. At the end of the day, the grey matter," says Monovski.

Nuclear fallout in Emerging Europe Nicholas Watson, David O'Byrne and Ben Aris

P

erhaps the starkest sign of how Emerging Europe's response to the nuclear disaster in Japan will be markedly different to that of Western Europe is that even though Latvian President Valdis Zatlers witnessed firsthand the horrors of Chernobyl

while a young Red Army medic, he still insists his Baltic nation will press ahead with its nuclear plans. "It will take some time, but people will trust nuclear power again," Zatlers told reporters while on a visit to the US in April.

Contrast this with German Chancellor Angela Merkel, who was forced into an embarrassing about-face as the full scale of the problems at the Fukushima Daiichi power plant became apparent, reversing a plan she had forced through six months earlier to delay the closure


12

I Cover story

of nuclear power plants to 2036 by ordering that all 17 reactors should close within a little over a decade. "We all want to get out of nuclear power as soon as possible," said a chastened Merkel. Most of Western Europe's leaders find themselves in a similar position,

bne May 2011

has been a tortuous affair, even by the nuclear industry's standards. The latest move in this saga was the Bulgarian government's hiring of the UK bank HSBC in mid-April to advise it on the feasibility of the project. Although HSBC will reportedly receive €2m in consultancy fees and an additional 0.95% on any external funding raised

"The Romanian government's indecision means that the project is blocked and construction of the reactors postponed" and regardless of the final outcome at the Fukushima plant – on April 12, Japanese authorities raised the severity rating of the nuclear crisis at the Fukushima plant to the highest level, on a par with the 1986 Chernobyl disaster – analysts like those at Frost & Sullivan say the future of nuclear in much of Western Europe "is once again in significant doubt." Not so in the former Soviet Union and Eastern Bloc. While new stringent safety features and design will probably speed up the decommissioning of existing older plants and kill the less-economically viable projects on the drawing board, those that are being built for more strategic reasons will still go ahead – albeit perhaps with some delays. Nuclear family Take the Czech Republic, for example. The giant state utility CEZ is currently in the process of tendering for two new reactors at its nuclear power plant of Temelin. CEZ is supposed to pick the winner of the tender in 2013 – out of Areva, Westinghouse, and a RussianCzech consortium of Atomstroyexport, Gidropress and Skoda – in order for the project to be completed in 2025. However, that date is itself five years later than first planned and few analysts expect the tender to be competed before 2016, if at all. Then there's Bulgaria, whose attempt to build a second nuclear plant at Belene

for the project, raising concerns about the bank's vested interest in concluding it's a goer, it's hard to see how the bank can economically justify the plant's construction. Razvan Grecu of Candole Partners cites a report by the Institute for Market Economics (IME), one of the oldest and most reputable think-tanks in Bulgaria, which shows that the plant will be profitable only if it sells electricity at €0.140-0.147 per kilowatt hour (kWh), because the total price of the plant will not be €6.3bn, as suggested by Rosatom, Russia's state nuclear holding whose subsidiary Atomstroyexport has been chosen to build the plant, but €11bn when insurance and infrastructure are added. The report also refutes the conventional wisdom that electricity demand will grow, predicting that demand will be flat over the years despite GDP growth, because the energy intensity of the economy will improve. Demand from abroad will also decline, IME says, because Serbia will start minimising imports after 2015 and Romania is expected to continue with the expansion at its Cernavoda plant. However, that Romanian plant is also now in doubt because of government incompetence and the global economic crisis. The €4bn project was initially planned to be financed mainly by foreign players, but driven by economic nationalism, the government finally decided in 2008 to keep a majority stake (51%)

in the newly created special purposed vehicle, EnergoNuclear, while the remaining 49% would be divided among Enel, CEZ, GDF Suez, RWE, Iberdrola and ArcelorMittal. However, the crisis made this financial scheme unsustainable and the delay and confusion has now forced first CEZ, then GDF Suez and Iberdrola and RWE to withdraw from the project. In March, the economy ministry drafted a decision to reduce its shares in the project to 40% and call for a feasibility study to be completed by 2013. But "the government's indecision means that the project is blocked and construction of the reactors postponed. It is unlikely that the stalemate will be resolved any time soon," reckons Grecu of Candole Partners.

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Cover story

I 13

NUCLEAR POWER PLANTS IN OPERATION IN EUROPE

SWEDEN 10

NETHERLANDS 1

FINLAND 4

RUSSIA 32 thereof 5 in Asia

BELGIUM 7

UK 19 GERMANY 17

So much for the waverers; others, though, insist they are pressing ahead with their nuclear plans.

UKRAINE 15 FRANCE 58

Bearing up Chief amongst those is, of course, Russia, which has a huge nuclear industry and is set to be one of the principal beneficiaries of the region's nuclear renaissance.

ROMANIA 2

SPAIN 8 CZECH REPUBLIC 6

Russia is among Europe's most reliant on nuclear power. Nuclear energy already accounts for 16% of the country's produced power, and Russia is planning to double its nuclear capacity over the next 20 years. Outside of the country, Russia's nuclear industry is in the process of building five nuclear power units and another 10 or so such projects are close to getting off the drawing board. Rosatom has a total portfolio of 30 orders for constructing reactors in different countries. According to a source close to the Russian Energy Ministry, the ministry doesn't foresee much impact from Japan on the implementation of those export projects scheduled through 2030. Public opinion in Western Europe remains wary of Russian-made nuclear power stations following the Chernobyl meltdown, but Russia abandoned the Soviet-era RMBK class of reactors following that disaster and claims that the next generation of nuclear power

BULGARIA 2

SWITZERLAND 5

SLOVENIA 1

SLOVAK REPUBLIC 4

HUNGARY 4

plants are safer than ever. "We now have a whole arsenal of progressive technological means to ensure the stable and accident-free operation of nuclear power plants," Russian Prime Minister Vladimir Putin said in the middle of March. Russia has the youngest fleet of nuclear reactors in the world – they have an average age of 19 years, compared with 26 years in Western Europe and 30 years in the US, reports Bloomberg. The Fukushima reactor is 38 years old, making it one of the oldest reactors in the world that's still in operation. "Until now, countries in emerging markets were well out in front of the nuclear industry revival, accounting for a

disproportionate share of the expected growth in nuclear energy use. Out of the 62 reactors currently under construction, 48 – or 77% of the total – are being built in China, Russia, India and South Korea," says Sergei Bubnov, who heads Renaissance Asset Managers' utilities fund. One of the Russian overseas projects is Turkey, which says it remains steadfastly committed to its nuclear programme. Speaking to bne recently, Turkish Energy Minister Taner Yildiz confirmed that with power demand growing at between 8-9% a year, his government sees no alternative to developing nucle-

"We all want to get out of nuclear power as soon as possible"


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ar power in Turkey and its plans for having three operational nuclear power plants by 2023 remain unchanged. "As with every country, we have to ensure security of supply, and we have decided as a government that this is the best solution," he says.

NUCLEAR POWER PLANTS IN EUROPE IN OPERATION AND UNDER CONSTRUCTION, AS OF JANUARY

According to the energy policy of the Justice and Development Party (AKP) government of which Yildiz is a prominent member, Turkey's reliance on imported natural gas, which already generates more than half of the country's electricity, represents a serious threat to the country's energy security. They have a point. Three times in the past five years Turkey has suffered gas shortages after Iran, with which Turkey has a contract supplying up to 10bn cubic metres a year (cm/y), cut supplies without warning, with similar shortages experienced twice in the past 12 years due to spats between Russia and Ukraine, through which Turkey receives around half of the 30bn cm/y of Russian gas it has contracts to import. But critics of Turkey's nuclear programme point out that as current plans for a Russian built 4.8-gigawatt nuclear plant at Akkuyu on the country's east Mediterranean coast involve Russia supplying the uranium fuel, together with the gas imports, it would leave the country dependent on Russia for the primary fuel for half the country's power generation.

Country

In operation

Perspective I 15

bne May 2011

The GEM consensus Under construction

number

net capacity, MWe

number

net capacity, MWe

Belgium

7

5,926

-

-

Bulgaria

2

1,906

2

1,906

Czech Republic

6

3,678

-

-

Finland

4

2,716

1

1,600

France

58

63,130

1

1,600

Germany

17

20,490

-

-

Hungary

4

1,889

-

-

Netherlands

1

487

-

-

Romania

2

1,300

-

-

Russia

32

22,693

11

9,153

Slovakia Republic

4

1,792

2

782

Slovenia

1

666

-

-

Spain

8

7,516

-

-

Sweden

10

9,303

-

-

Switzerland

5

3,238

-

-

Ukraine

15

13,107

2

1,900

United Kingdom

19

10,137

-

-

Total

195

169,971

19

16,941

bne

Emerging Europe may have broken away from Russia's orbit since the end of communism. But continuing with its nuclear plans could drive it back into the old colonial power's embrace.

"As with every country, Turkey has to ensure security of supply, and we have decided nuclear is the best solution"

A

t the end of March, Russian President Dmitry Medvedev laid out what is one of the clearest expositions of the Global Emerging Markets (GEM) consensus that is challenging – and could even one day replace – the old world order of the Washington consensus. The GEM economies have been growing strongly for about a decade, but this transformation is becoming more political as the leaders switch from fighting economic bush fires to building for the long term. The 2008 crisis has brought into question the validity of the world's dominant liberal economic ideology, dubbed the Washington consensus, which now looks fatally flawed and led directly to the recent meltdown. However, no one on either side of the jump has rejected capitalism, nor have they reached for the palliative of protectionism. Indeed, they've stuck to Nobel Laureate Paul Krugman's "Economist's Creed": "I understand the principles of comparative advantage and I believe in free trade." If there has been any monkey business going on, then it is with China, and more recently the US, in the largely successful attempts to manipulate their own currencies. What is being debated is what form of capitalism works best. In the West, this boils down to a debate over what is the best size of government – big or small – and is epitomised by the charge of "socialism" that the US' Republicans are trying to tag the Democrats with. But the whole programme of the Washington consensus, favoured by the International Monetary Fund, is being questioned. Big emerging markets have never been comfortable with the attempt to foist the West's agenda of liberalising trade and linking it with the Wilsonian agenda of self-determination. But while the GEM countries were poor or in crisis or both, they had to shut up or the IMF would not put up. Now the GEMs are richer - and the West poorer - these countries are much freer to completely ignore these values and a new ideology has been emerging over the last two years. At the same time, the West has been left in an ideological and moral vacuum. As Plamen Monovski, CIO at Renaissance Asset Managers, wryly put it in a recent note titled "Sherpas and Kindergartens": "Since the crisis struck, quite the opposite is true. The considered discussions have turned into open conflicts, covered with a patina of civility, as diametrically opposed interests collide. Watching this circus, the world sud-

denly feels distinctly directionless. There is no G20, G8, G7 or G2 (US-China). These are the times of G0." Looking after the young One of the most radical departures from the Washington consensus is a rejection of the de rigueur separation of commerce and state. Vladimir Putin could have boshed the oligarchs when he took over as Russia's president in 2000; instead, he chose to co-opt them. Russia's tycoons go for one-on-one meetings with the PM to get their investment plans approved. China has the same model: many firms are nominally private, but none will act without coordination with the government, which retains a de facto veto over any plan. More generally, Monovski describes the GEM consensus as relying, "on protection of nascent industries, greater state spending on infrastructure, emphasis on social issues as a countercyclical force, producing resources and relentless industrialisation at the expense of services... This model emphasises the value of domestic savings and derides the foreign capital fetish." There is no mention here of civil society, "freedom" or voter's rights - all core western values as summed up in John F Kennedy's classic speech during the Cuban missile crisis: "Our goal is not victory of might, but the vindication of right - not peace at the expense of freedom, but both peace and freedom, here in this hemisphere and, we hope, around the world." Neither Russia nor China would ever presume to comment on the state of "freedom around the world." China follows Deng Xiaoping's principle of tao guang yang hui ("hide brightness, nourish obscurity"), while Russia's core concept in foreign policy is the promotion of a "multi-polar" world. The absence of liberal political values in the GEM consensus makes the emerging markets more introspective: both China and Russia don't like outside interference and play relatively subdued roles in international affairs. Russia strongly objected to the bombing of Libya (although it didn't thwart it), because it argues the bombing violates the principle of self-determination. The upshot is that liberal politics has been separated out and what's left is the state's obligation to care for and support society. This emphasis – an attempt to de-politicise the relationship between the state and its people – is clearly manifest in both China's and Russia's policies.


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round off the absurd episode, Prisyazhnyuk now claims he had no problems with the article, which is still online, and Bonner has now triumphantly been reinstated as editor. Hush-hush agreement The secrecy and contortions over who owns Hlib Investbud are all reminiscent of official behaviour in 2010 regarding

Eastern Europe

which Hlib Investbud is merging to become its trading wing, Lavrinchuk said he would need to raise "several billion dollars" in investments and credit over the next two to three years. When the reorganisation is completed, the new national champion aims to become Ukraine’s largest vertically-integrated agriculture holding, according to Lavrinchuk, with a planned land bank of 1m

"The strange situation with Hlib Investbud might very well all be the result of a confidentiality agreement with the Russian side"

Going with the grain in Ukraine Graham Stack in Kyiv

O

ne of the best kept secrets in Ukrainian politics are the names of the private shareholders of Ukraine's newly-formed state grain trader, Hlib Investbud. The cat is now out of the bag, as recent comments by the country's agriculture minister imply that Russian interests are involved.

and then even declared that those private interests held a majority stake. At the same time, both Prime Minister Mykola Azarov and Agriculture Minister Mykola Prisyazhnyuk said that they simply did not know who the private interests were; Azarov even claimed he had never even heard of the company.

Hlib Investbud, only created in August 2010, has been the object of howls of protests at home and abroad since it took the lion's share of grain quotas in government tenders in late 2010 and early 2011, sidelining global companies such as Cargill and Bunge, and in doing so acquired grain export quota rights potentially worth billions of dollars.

The absurdity reached a new peak on April 15 when, in an interview with local English-language paper Kyiv Post, Prisyazhnyuk in one breath said he did not know who the private owners of the company were, in the next said "of course" he knew, and then seemed to confirm "press reports" that among the private owners is Russian state-owned bank VTB (known to many Russian speakers by its old name of Vneshtorgbank). But this only further muddled the waters: Ukrainian journalists had in fact previously convincingly traced the

The company aroused even more controversy when Ukrainian officials admitted that unidentified private interests participated in the company,

company's shareholders not to VTB, but to another Russian state-owned bank with a similar name and initials called Vnesheconombank (VEB), as well as to companies possibly linked to Ukrainian officials. Not content with that, Prisyazhnyuk later apparently demanded that the newspaper's owners pull the interview, under threat of closure of the newspaper, according to owner Mohammad Zahoor. Zahoor ordered the article removed, but the editor, Brian Bonner, on point of principle refused to bend to the owner's wishes. Zahoor then sacked Bonner, which led to the journalists at the paper going on strike. The owners claimed in a statement that Bonner’s firing was not due to the publication of the interview with the agriculture minister, but due to differences of opinion – as if there were a difference. To

an alleged $2bn credit to Ukraine from Russia's VTB. Officials in 2010 hemmed and hawed for weeks over the origins of $2bn on the central bank's books – alternatively denying, confirming, and refusing to confirm or deny the existence of such a loan. Later it transpired that Ukraine had signed a confidentiality agreement with the Russian bank, preventing officials from disclosing the deal. "The strange situation with Hlib Investbud might very well all be the result of a confidentiality agreement with the Russian side," reckons Mariya Kolesnik of the Ukrainian agriculture consultancy AAA Consulting. In comments to bne, Hlib Investbud CEO Robert Brovdi characteristically refused to comment on ownership of the company, beyond saying that Ukrainian laws require it to have at least 51% private ownership to avoid having to hold obligatory procurement tenders. But he confirmed that some of Hlib Investbud's new financial clout came from loans from international financial institutions. According to Brovdi, the company needs considerable financial resources to fund its ambitious forwardpurchase programme for grain producers, which is intended to help Ukrainian farmers expand the area under cultivation and intensify production. In an April 19 interview given by Oleksandr Lavrinchuk, head of Ukraine's State Food and Grain Corporation, with

hectares and extensive processing and port facilities. With a Russian presence behind the new grain market player accused of monopolising the market, and draft laws moving rapidly through the Ukrainian parliament which would, if passed, largely restrict grain export rights to state-controlled companies or direct producers of grain and exclude foreign traders, the question is how these plans tie in with broader Kremlin plans to create a grain cartel, or a "grain Opec", uniting Russia, Ukraine and Kazakhstan. Food cartel On a visit to China, Ukrainian Prime Minister Mykola Azarov was quoted as saying that talks were underway with Russia, Kazakhstan and Ukraine on cre-

I 17

Kazakhstan has a state-dominated grain export sector, and Russia also has state grain export structures. But Ukraine has its hands largely tied due to membership in the World Trade Organisation and ongoing talks on a free trade zone with the EU. "Russian involvement in Hlib Investbud could pave the way for a sort of 'grain Opec' by the backdoor for Ukraine, if the company was to really develop into the dominating force on Ukraine's grain market," says Kolesnik. Other analysts remain sceptical about the "grain Opec" idea. "Azarov is playing the Russian card as a bargaining chip both in talks with the Chinese on an investment agreement, and also for the talks between Ukraine and the EU on a free trade zone," believes Alex Lissitsa, president of the Ukraine Agribusiness Club. "The general impression is that there is no unified state policy on agriculture at the moment. Different officials are saying completely different things, depending on whether [European Commission President José Manuel] Barroso or [Russian Prime Minister Vladimir] Putin is visiting." The strategy seems to be working. According to Western diplomatic sources, Ukraine's overtures towards joining the Russian-Belarus-Kazakhstan Customs Union prompted European embassies to ask national governments to go easy on Ukraine in the free trade talks. At a time of spiralling food prices causing unrest and instability across the

"Azarov is playing the Russian card as a bargaining chip in talks with the Chinese on an investment agreement, and with the EU on a free trade zone" ating a grain pool. The three countries together account for 30% of the world's grain export market, and some form of export coordination has long been mooted.

world, the idea of a Russian-inspired "grain Opec" to the east is concentrating EU minds wonderfully.


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that it's "basically not too difficult" for an Asian company to come to Ukraine, buy a Ukrainian agribusiness and then export the produce home. Raiffeisen Investment also told media in February that a number of acquisitions by Asian and Middle Eastern buyers are pending in Ukraine's agricultural sector, naming China for one. However, Ukrainians are well used to a lot of hot air being talked about their black earth, and some suggest it may not be so straightforward, pointing to a 2009 gas-for-food deal with Libya that came to nothing. "The question of Chinese investor interest can be compared to that announcement two years ago that Libya would farm 100,000 hectares," concludes Nikolai Vernitsky, director of Proagro Consulting. "Does today Libya farm in Ukraine? No."

Foreign investors run fingers through Ukraine's black earth Graham Stack in Kyiv

C

hinese and other eastern investors are looking to buy agricultural land and agribusiness across the globe, and Ukraine is increasingly on their radar. But given the restrictions on land ownership in Ukraine, how do you value a company with practically no assets? Sergei Nalivka of AAA Consulting, a Ukrainian agriculture consultancy, told bne that his firm is advising several Chinese investors that are interested in buying into Ukraine's agriculture sector. And they are not alone. A source, asking for anonymity, has confirmed to bne

reports that Hassad Food, a $1bn unit of Qatar's sovereign wealth fund, is in negotiations about making agriculture

Foreign investors face significant obstacles to digging into Ukrainian soil. Legal issues preventing the purchase of agricultural land are a big barrier, whilst local players are ready to pounce on anything of value that actually does come onto the market. Moratorium In the course of privatisation in the 1990s, land held by Soviet collective farms was handed to their workers. But almost immediately a moratorium was imposed on any further sale of that land, due to populist fears the rural population could be dispossessed by unscrupulous investors. The result is a stalemate. Agribusiness can lease land plot by plot from villag-

"Ukrainian agro companies are extremely attractive as takeover targets to other Ukrainian companies"

acquisitions in Ukraine. The source said that talks were in progress with several Asian investors from the east, saying

ers or middlemen, with leases mostly for five to 15 years. This is an administrative nightmare, and business inves-

bne May 2011

tors have no incentive to invest long term, nor can they provide collateral to raise capital. The villagers, 70% of whom are pensioners and many without heirs, are also disadvantaged, since they cannot cash out of their land. This looks likely to change. On February 25, President Viktor Yanukovich told lawmakers during a speech to parliament that Ukraine needs a "fully fledged" market for farmland to boost the agricultural industry's efficiency and so would allow farmland sales next year for the first time to stimulate investment. In addition, Ukraine's government owns around 5m ha of land scattered over the

Eastern Europe

whose grain company Ukrlandfarming recently swallowed two other market players – Rise and Dakor – allowing it to build its bank of leased land to a total of 400,000 ha, the largest in Ukraine. Given their local knowledge, the "agrogarchs" are likely to have first dibs when it comes to M&A opportunities. "The situation is developing now that any Ukrainian agro companies are extremely attractive [as takeover targets] to other Ukrainian companies," says Vernitsky. However, Konstantin Golovinsky, vice president of Renaissance Capital Ukraine and Eastern Europe, points out that because of the lack of land ownership in Ukraine, it's extremely difficult

"Chinese investors are looking to enter into partnerships with top Ukrainian businessmen close to the ruling Party of Regions"

whole country and could privatise this, because the moratorium does not apply to land still in state ownership, only to its resale. Legal changes would still be required to allow foreign entities to buy the land, though. According to AAA Consulting's Nalivka, the Chinese investors are looking to enter into partnerships with top Ukrainian businessmen close to the ruling Party of Regions. There are other drawbacks in buying farm businesses in Ukraine. The poor enforcement of property rights in Ukraine is an issue faced by investors across sectors; AIM-listed Landkom was hit by a double whammy of back-tax claims and land raiders in 2009. Lifting the moratorium on the sale of land looks likely to raise further issues. As it becomes clear that investors will soon be able to buy Ukraine's fertile land, the country's powerful oligarchs are circling. Three of the eight Ukrainians on the latest Forbes billionaires list are agrogarchs, among them Oleh Bakhmatyuk,

to fix a price on Ukrainian agriculture companies, because they don't actually own anything except their equipment. For all the signs of a developing SinoUkraine agricultural partnership, it has bizarrely started with Chinese food exports to Ukraine. Following last summer's drought, there is a shortage in Ukraine of the staple buckwheat used to make the national porridge, kasha. For all the hopes of becoming China's breadbasket, the immediate reality is that Ukraine is now waiting on a 20,000-tonne buckwheat shipment from Dalian.

I 19

Guarded in Russia One of the big battlegrounds in the Cold War was education, which means that Russia is still home to some of the best scientists in the world. However, over the last two decades, the boffins have been largely unable to turn their ideas into products because of the lack of capital. As Russia's economy develops, that's changing, and this process can be seen at the Smart Systems Show in Moscow, which showcases the top tier of Russian robotics. This year's event showcased products ranging from entertaining dance bots to automated massage systems, according to tecca. Given Russia's long history of military and intelligence prowess, among the most eye-catching products was a fourwheeled guard bot, which its creators claim can replace up to three human security officers. SPS Service says its mini tank-like machine, called the Tral Patrol 3, is the next big thing in surveillance. Once a digital map of the territory is uploaded, a team of the mechanical watchdogs form a security web, reporting anything they see back to a central command hub. The bots can spot an intruder at a range of up to 320 feet, and are capable of working a full 12-hour shift before needing to be recharged.


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Since the start of this year, Russia is the best performing Bric market, up by 15% over the first three months. The leading RTS Index passed the psychologically important 2000 mark in March as the valuation of Russian stocks overtook their pre-crisis highs for the first time in two years, and the RTS is expected to pass its all-time high of 2487.92 later this year.

Emerging Trouble Funds Ben Aris in Moscow

M

ainstream investors have woken up to the power of emerging markets and have turned to exchange-traded funds, or ETFs, as their vehicle of hoice. However, longer-term investors warn these funds are effectively "hot money" and say that ETFs could carry the seeds of the next crisis in emerging markets. Russia's stock market is one of those star performers this year, but as the economy is increasingly dependent on oil, analysts worry that the increased importance of ETFs means any correction could be sudden and sharp. The appeal of ETFs is that unlike a mutual fund, these funds are traded on an exchange, meaning investors can get in and out of a fund instantly. But like a mutual fund, the underlying fund is based on a basket of stocks that give the diversity that is the cornerstone of any long-term investment into a risky asset class. They also have low costs and a beneficial tax status. "In many ways, the parallel development of ETFs and the investment case for emerging

markets has been a happy coincidence," says Chris Weafer, head of strategy at Uralsib in Moscow. "ETFs have enjoyed a huge wave of interest from investors wanting to tap into high-growth markets, as they can offer broad exposure or drill down into specific areas." Who would have thought that emerging markets would be beneficiaries of the flight-to-safety trade? But that's what has happened over the last two years as the economies of developed markets find themselves in a deep debt hole. Emerging market investments

Russia is now attracting considerable overseas cash and the fund tracker EPFR says that new money-flows into Russia-focused funds in the last week of March amounted to $486m, up from $139m the week before and the 15th straight week of inflows. By the end of March, assets under management in Russian-dedicated funds hit a new all-time high, breaching the $20bn mark, according to Uralsib, half of which is now in ETFs. "ETF investors continue to increase exposure to Russia. Notably almost all inflows into Russia funds came from country ETFs, which is a continuation of the trend of large inflows into country ETFs, which began late last year," says Weafer. However, thanks to the stock-like nature of ETFs, fund managers say they add to the volatility by acting like "hot money" – highly speculative investments looking for short-term gains. The point was brought home in the middle of March when all the emerging stock markets suddenly sold off after developed markets started to show signs of revival. "The Russian market is currently standing apart from this trend. As a difficult emerging market, Russia received a disproportionately low share of the portfolio investment

"ETF inflows to Russia reflect that Russia is now being increasingly cited among mainstream investors as a market with good prospects" have done very well over the last two years and Russia's market was one of the best performing, up about 150% in 2009 and 22% in 2010.

that fled the West following the credit crunch. Having absorbed much less western hot money, Russia has been less susceptible to the profit-taking and the more general sentiment shift away from

bne May 2011

emerging markets and back towards the developed world," says Liam Halligan, chief economist of Prosperity Capital Management, a dedicated Russia fund. Russia goes mainstream The silver lining in the rise of ETFs is that as a mainstream investment vehicle, the word "Russia" has entered the lexicon of the financial advisors who sell funds to the small investor and the more conservative institutional investors. "ETF inflows [to Russia] reflect the fact that Russia is now being increasingly cited among mainstream professional investors as a market with good prospects during 2011 and beyond – not least due to the continuation of low earnings multiples despite recent share price growth," says Halligan. It's an education process that will ultimately benefit everyone, but in the meantime investors are expecting a choppy ride as worries over what will happen to the oil price dog fund managers. If the ETF investors take fright at falling oil prices, their collective exit could cause a sharp correction in Russian share prices. "These fund flows are very sensitive to oil and other commodity price trends. That sustains a positive backdrop for Russia and Brazil for now, but increases the risk of greater market volatility when commodity prices stabilize or fall," says Weafer. In a worrying sign, Market Vectors' Russia ETF, the biggest US-listed ETF for the country, sharply increased its short selling of Russian funds at the end of February, according to Bloomberg. Short sellers sell borrowed shares, hoping to buy them later at a lower price and return them to the lender. Other investors point to the still cheap valuations as a more positive sign: Russian stock valuations on a price/ earnings base are the lowest among 21 major emerging markets, according to Bloomberg. "Russia is in pretty good shape at the moment," says Julian Mayo, a London-based money manager who helps oversee about $3.5bn invested in developing markets at Charlemagne Capital. "I think it will continue to outperform."

Eastern Europe

Bank on IPOs

bne After a weak start to the year, Russia’s pipeline of IPOs is filling up fast as portfolio investment floods into the country. In the middle of April, Nomos Bank broke new ground by pulling off the first ever IPO of a privately owned Russian commercial bank. Russia’s fifth largest bank, Nomos floated 20% of its shares near the top of the $32-37 price range at $35 per share (or $17.50 per GDR) to raise $718m – more than the $640m it was hoping to collect from investors. The money will be used to recapitalise the bank, as it was low on funds after it took over Khanty-Mansiysk Bank (KhMB) in December, the biggest bank in the rich Siberian region. While analysts say Nomos is extremely profitable – its return on equity was 20% and margins a fat 5% in 2010 – the bank’s capital adequacy ratio (the cash it keeps on hand to pay out on deposits) fell close to the legal minimum. The IPO is good news on several fronts. The first is that it happened at all. Five Russian companies tried to sell shares in February, but the owners overreached themselves on pricing and only a secondary share offering from state-owned banking giant VTB Bank and a small $16m IPO in Frankfurt by pizza chain Papa John’s got out of the gate. Second, Nomos fleshes out the choices on offer to investors in one of Russia’s most attractive sectors. Currently, there are two banking mega-chips, Sberbank and VTB Bank, and the two micro-stocks of Bank Vozrozhdenie and Bank St Petersburg (neither of which formally IPO’d). The latter two have a free float of about $300m each and combined daily turnover of about $100m. The problem is that given most international equity traders start with bets on the order of $10m, only 10 people can buy these banks each day; with a free float of at least 22-25%, Nomos fits neatly into the middle between its listed peers. “Lots of investors are looking at Nomos simply because it is in the right place at the right time – not because it is a strong story in its own right,” says David Nangle, head of research at Renaissance Capital. “Adding Nomos creates a mid-cap banking stock with decent liquidity and plugs a hole in many dedicated Russian investors' portfolios. However, maybe the most significant aspect of the float was the pricing. Although the stock was priced near the top of the price range, that range was low. Pre-crisis, most of Russia’s IPOs have been priced for very fast growth – in other words they were expensive and almost all of them have since underperformed the index (with a few notable exceptions). “The lesson from badly performing IPOs is that the price is not right. However, like any other stock, it is caveat emptor and investors should do their homework,” says Alexander Krapivko, head of equity trading at Renaissance. After a record $54bn of listings up to the third quarter of 2008, the last two years have seen only 22 IPOs that raised a total of $12bn. But Nomos could mark the start of a recovery and dozens of Russian companies have announced plans to list over the next two years.

I 21


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around the official exchange rate in which the currency can trade on the interbank market from 2% to 10%. In essence, given the huge downside pressure on the currency, this was an 8% devaluation. Then on April 19, the central bank took a further step towards full-scale devaluation when it said it would allow the currency to float on the interbank market. However, just three days later, it was forced into a u-turn as the ruble immediately tanked to 5,000 per dollar in trading. One trader told Reuters that the central bank "strongly" recommending banks work within the 4,500-4,600 per dollar corridor meant interbank forex trading simply ground to a halt.

Belarus makes half-hearted step in right direction Tim Gosling in Moscow

B

elarusians queued for hours at foreign currency exchanges at the end of March to change their rubles into dollars as rumours swept the city that the government was fast running out of cash and would have to devalue the currency. The rumours proved correct. As bne warned as long ago as September 2009, the state's support of the economy wasn't sustainable. The hefty state support for the economy during the global economic crisis coupled with a deteriorating balance of payments situation after Russia hiked the gas price, meant the small republic burned fast through its hard currency reserves. The economy has been amongst the fastest growing in the Commonwealth of Independent States, but only because the state was ploughing so much money into the largely state-owned companies.

The crisis came to head on March 29 when the central bank was forced to

The moves by the government were attempts to deal with the rapid decrease in forex liquidity whilst hoping to borrow its way out of trouble, but Minsk's borrowing options are narrowing. It is being isolated by the West due to the vicious crackdown on protesters after the flawed re-election of President Alexander Lukashenko in December, whilst on March 29 Moody's Investors Service joined Standard & Poor's in downgrading the country's foreign and local currency bond ratings; the country is now rated 'B2' by Moody's and 'B' by S&P. "Current levels of official foreign exchange reserves of approximately $1.3bn fall short of Moody's estimate of

"A 10% devaluation is hardly a way out, given that inflation in Belarus exceeded 10% in 2010" devalue or risk running out of hard currency reserves. The devaluation was a step in the right direction, but analysts say the government hasn't gone far enough and effectively just kicked the can down the road for a bit. The devaluation that wasn't After resisting calls for a devaluation, the National Bank of the Republic of Belarus (NBRB) finally gave in, announcing it had widened the band

a 2011 external financing requirement of between $8bn and $10bn," the rating agency said in a statement. Meanwhile, Russia has responded to requests for up to $3bn in loans with a demand for economic reforms, which is delaying the process. The response from analysts was mixed. On the one hand, the move was welcomed as a step in the right direc-

bne May 2011

tion after the authorities spent most of March erratically trying to regulate the forex liquidity problems away. "The move to devalue, in effect, the ruble will be seen as a positive sign in the short term, as it will help to ease pressure on forex reserves," says Timothy Ash of Royal Bank of Scotland, the hope being that the weaker currency would dampen import growth in order to contain the current account deficit. At the same time, adds Ash, it could also be taken as a step towards securing that bailout from Moscow. However, analysts were also disappointed with the limited scope of the widening. Alexander Kudrin at Troika Dialog argues that a "10% devaluation is hardly a way out, given that inflation in Belarus exceeded 10% in 2010 - 30% would be better." However, even that wouldn't bring the ruble into line with the 'calculated' exchange rate, defined

Eastern Europe

as the ratio of money supply to gross international reserves, which is closer to 50% below the official rate, but "it could solve the balance of payments problem." At the same time, analysts fret that the move will practically close down forex operations of all colours for the meantime. With the establishment of multiple exchange rates, the retail cash market, practically stalled already, will go into a deep freeze as banks have no incentive to sell their precious forex for less rubles than they can get on the interbank market. Looking ahead After resisting calls to increase the flexibility of the ruble, the latest aboutface in Minsk suggests that Moscow's echo of the IMF call for deep economic reforms has convinced the Belarusian authorities they have little choice but to

I 23

adapt their approach in the short term if they are to secure a bailout. However, a commitment to make the reforms needed to avoid further crises down the road looks doubtful. "A 10% devaluation on its own is not really a game changer, as the sheer size of the current account deficit implies a fundamental and structural lack of competitiveness of the economy," Ash points out. As Moody's notes, its downgrade is partly based upon worries that the country will struggle to carry out the deep-seated structural reform needed to "smoothly transition from [the] current external debt funded growth model to one that relies on productivity and competitiveness improvements for output growth."


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Countries ranging from France and the UK, Thailand to Brazil are all exploring how to use Islamic financial investment to draw Gulf petrodollars into their economies. The Islamic finance industry has boomed in recent years, growing at a rate of over 14% per annum from around $150bn since the 1990s to a total of $14.1 trillion in 2009, according to Jamelah Jamaluddin, CEO of Kuwait Finance House in Malaysia. The growth is to "serve over a billion people who have previously been underserviced," by the financial industry, she notes. Russia is well placed in many ways to attract Islamic investment, say experts. "We strongly believe it is just a matter of time for Russia to catch up with the global market for Islamic finance," says Zaid Maleh, director of Investment Banking for Middle East and Africa at VTB Capital, the investment business of Russia's VTB Group. Russia is rich in themes that are sharia compliant such as infrastructure and agriculture, Maleh notes, adding that there is an estimated $800bn pool of Islamic cash waiting to be tapped according to estimates from Bloomberg and Moody's Investors Service.

For Islamic finance, Tatarstan to be Russia's test case Rachel Morarjee in Moscow

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fficials meeting in the shadow of the snowy towers of Kazan's 16th century white Kremlin are in an unlikely site for hatching groundbreaking financial plans. But Kazan in Russia's Tatarstan region aims to be the

first place in Russia to launch an Islamic bond, with a planned $100m-200m sukuk issue planned for July this year that will be a test case for the appetite for Islamic financial products in Russia.

Linar Yakupov, chairman of the committee for small and medium-sized business in Tatarstan, says the region is trying to diversify its economy away from its traditional reliance on natural resources and attract more foreign investment. "Islamic finance is one of the alternatives to natural resources. It's an extra option for us because we have a big Muslim population," he adds. But a Muslim population is not the only prerequisite for countries aiming to launch Islamic financial products to attract petrodollars from the Gulf States. Challenges Tatastan's bond issue, which was earlier slated to be issued in March, was delayed by the legal and financial complexities of launching an Islamic financial product in Russia, highlighting the hurdles that will have to be vaulted for a local Islamic finance industry to take off.

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The biggest challenge for Russia is to educate customers about shariah law, says Mohammad Farrukh Raza, managing director of UK-based Islamic Finance Advisory and Assurance Service (IFAAS).

Soviet rule. "Human capital remains a great challenge for the industry, because there are not enough scholars to understand every part of the sharia law," says Maleh from VTB Capital.

Under Islamic law, banks are not allowed to charge interest, so bonds must pay investors using profit-sharing payments similar to dividends or use leasing transactions with purchase options, and must also be seen to fund

Since there are four different schools of sharia law, Russian bond issuers will have to think about which interpretation of the law to use to underpin their bond structure. "In the Russian case, you want to find an equilibrium. You don't want Russia to be limited to a narrow band of investors, but to appeal to investors in the Middle East where the most money is, but who are more conservative," says Maleh.

"You don't want Russia to be limited to a narrow band of investors, but to appeal to investors in the Middle East where the most money is" investments with a social good beyond pure unfettered return. Investment in gambling, arms trading and alcohol are all banned under sharia. "If the lender wants to take part in the profit, he must also bear some of the risk. If there is no risk, then the lender is simply getting interest and runs contrary to sharia," says Abas Bin Abd Jalil of AmanahRaya Capital Group in Malaysia, which is a trustee of $30bn of assets and manages more than $2.2bn of private and listed entities."There are 10m-20m muslims in Russia and there is an opportunity to tap cross-border trade with Middle Eastern trade - state and federal Russian governments should start thinking about it." However, the language barrier in Russia is a formidable hurdle for the industry's development because Russia has a shortage of scholars who are conversant in sharia law and well versed in structured financial products like sukuk bonds. Other countries, such as France, have also faced this problem, but in Russia it is particularly severe in the aftermath of

Tax structures have proved an obstacle for Islamic finance in other jurisdictions such as France because if sukuk bonds are taxed in the same way as corporate profits, they cannot compete with traditional bonds for investors. Adalet Dzabiev, general director of Moscow-based Al Shams Capital Group sounds a further cautionary note for Russia: corruption. "Russian corruption inhibits investment. There is little trust in Russian courts. Whether an investment is Islamic or not, there is little protection of the right of ownership under Russian law or confidence it the Russian courts," he says. Tatarstan's bond issue this summer will prove a litmus test for Islamic finance, and show whether Russian banks can tap investors in the Gulf with innovative new products, or whether the cultural hurdles will be too great.

"Tatarstan's bond issue this summer will prove a litmus test for Islamic finance"

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Moreover, banks are also making what Butler describes as "incremental changes in behaviour" that will have a profound impact on how the region recovers. Deepening deposits Firstly, because of the continuing worries over access to wholesale funding, banks are concentrating on building up strong deposit bases in each of their markets, a challenge particularly for Raiffeisen and Bank Austria. "The focus on funding is going to stay," says Kristian Kuendig, director of the Financial Institutions Group at Fitch Ratings. "They will have to focus on maintaining and improving a good retail deposit franchise." Secondly, at least this year, banks will focus on corporates, because business confidence is recovering much faster than consumer confidence, pulled by the roaring German economy. "Corporates will be much more active than retail in the next 12 months," reckons Gianni Franco Papa, the new head of UniCredit's CEE division.

Austrian banks' slower waltz

This is a challenge particularly for Erste, which is much stronger in retail banking, but it too is successfully using its wide branch network, together with its international centres of expertise, to win corporate business.

Rob Anderson in Vienna

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ustrian banks have a spring in their step once again, but this time around they are watching carefully for potholes on the road ahead. Written off during the global financial crisis because of their massive exposure to the apparently stricken economies of Central and Eastern Europe, Bank Austria (part of Italy's UniCredit Group), Erste Group and Raiffeisen Bank International are increasing lending in the region again and eyeing potential acquisitions. Raiffeisen even felt confident enough in April to propose a five-fold increase in its dividend, stunning analysts. Net interest income and fees and commissions are growing healthily again, but the big boost to profits has come from falling provisioning for bad loans,

down 47% at Raiffeisen in 2010 from the previous year. The big three never slipped into a full-year loss during the crisis and they are now confident that the worst is over. Even though non-performing loans at Raiffeisen remain high at 9% of total loans and they are not expected to peak until the second half

Neither the crisis in the Eurozone periphery, nor the fiscal squeeze being imposed across CEE, nor the threat of interest rate hikes to contain rising inflation are currently seen as likely to switch the motor off again. Nevertheless, no-one is predicting a return to the glory days of rocketing loan growth and

"Corporates will be much more active than retail in the next 12 months" of the year, the bank believes that the return of growth in the region should more than cover this and allow it to write back provisioning. "The dynamo is working again," says Patrick Butler, head of investment banking at Raiffeisen.

soft lending conditions. Banks expect steady lending growth – Erste says in the mid-single digits this year – and promise to be much more cautious on loan/value percentages and lending in foreign currencies.

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Banks are also seeking other kinds of work from corporates as a condition for granting loans, in part because tighter regulation will restrict the amount that banks will be able to lend (compared to their equity) in the future. Butler points to services such as corporate advisory, mergers and acquisitions (M&A), private placements, and hedging. "In the past this was a bit of an adjunct, now it is central," he says. Franz Hochstrasser, deputy chief executive of Erste Bank, highlights the booming corporate bond market in CEE as a new banking battleground. "We have to establish new sources of finance for our clients," he says. "[Corporates] don't want to depend on just one source of funding – they learnt their lesson." Thirdly, banks are bringing their networks under greater central control

than before, partly to seek synergies on both the cost and revenue side, partly to take more account of the heightened differences in country risk, and partly to prevent a recurrence of some of the mistakes by the individual banks that were revealed during the crisis. This will be particularly interesting to watch at Raiffeisen, which has a wide network of small banks and has always had a more devolved structure of decision-making. Black sheep of the family Each of the banks still has its black sheep. For Raiffeisen, the problem countries are Hungary (partly because of the banking levy) and especially Ukraine; for Bank Austria, Ukraine again and Kazakhstan (where it made a further €199m writedown last month); for Erste, which operates in less volatile countries, it is Hungary again and particularly Romania. None of the banks talk about exiting any of these operations, but it's clear that they will be much more discriminating in the future about which country to put capital into and which segment in which country, rather than just trying to grow overall market share as they did in the past. "The assessment is in what segment we want to be strong," says Papa of Unicredit, which plans to open 300 new retail branches in Romania. Rather than exiting, the big three are looking for cheap acquisitions as stricken banks from the Eurozone's periphery retreat from Emerging Europe and walk-

ing wounded such as KBC of Belgium and Volksbanken of Austria pull in their horns. "Multiples have come down very considerably," says Butler. Last September, a Raiffeisen banking report predicted that 2011 "might be a year of increased M&A interest." In February, Raiffeisen itself agreed to buy 70% of Poland's Polbank from Eurobank EFG of Greece for €490m, a modest price multiple of 1.7x book value. Putting Polbank's retail network together with Raiffeisen's existing corporate banking business will create Poland's sixth largest bank by assets. Raiffeisen hasn't ruled out further acquisitions, but any significant ones would almost certainly necessitate a capital increase, given the bank's wish to strengthen its core capital to meet new international rules and repay (like Erste) the Austrian government's injected equity by 2013. Erste is also looking at Poland – where there is speculation that Portugal's Bank Millenium might want to exit – hinting recently that it might be prepared to go against its longstanding practice and buy a small bank. Bank Austria, which has the strongest capital base, remains outwardly the most cautious. "Today there is nothing on the table," says Papa. "The plan we put forward is for sustainable organic growth."

"Bank valuations have come down very considerably"


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parties that they are firmly determined to continue on the basis of the threeparty coalition and that they know well that each of them must back off a little," Klaus told reporters. For the outsider, the whole affair with all its allegations, counter-allegations, intrigue and skulduggery is confusing, but analysts say the root of the problem is that the gravy train on which so many of the Czech Republic's politicians and businessmen have been happily riding for so long is slowly being derailed, and this is leading to an internecine fight within the ODS party which, like the vortex created by a toilet being flushed, has been sucking down anything that's stuck to the side of the bowl.

VISEGRAD:

Crisis? What crisis?

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here's an excruciating You Tube video that's gone viral showing Czech President Vaclav Klaus surreptitiously putting a ceremonial pen in his pocket while his Chilean counterpart, seated next to him, is talking. What makes it so funny, says Erik Best, a particularly spiky commentator on Czech affairs, is that, "it shows a man with everything, pilfering something that he doesn't need, and that is his for the taking anyway. It's sad when duplicity, whether in politics or business, is the default option." What is less amusing, though, is that treachery and deceit are indeed the default option in today's Czech politics, as evidenced by the past few weeks of political shenanigans that have involved secret recordings of ministers, allegations of a putsch by a coalition party, whispers of homosexual affairs, ministerial resignations and, of course, charges of bribery. Events came to a head on April 14 when the pen-pilfering president hastily

convened a meeting of coalition party leaders, saying that a secret recording of a former coalition parliamentary deputy accusing the senior coalition party, the Civic Democrats (ODS), of a government putsch was the "last straw." The outcome of that meeting was a pledge by the three parties in the coalition, the ODS, Top09 and Public Affairs (VV), to maintain the alliance, but that further talks would be needed to iron out difficulties. A cabinet reshuffle is

A monument to inefficiency Few doubt that the Czech Republic is becoming more corrupt. The antigraft NGO Transparency International (TI) puts the Czech Republic at 53rd place out of 178 in its 2010 Corruption Perceptions Index, 12 places down from its ranking in the 2007 survey. In the European sub-ranking, the Czechs are at a miserable 24th place out of 30. Even the former prime minister Mirek Topolanek spoke in 2010 about the need to bring the 15-20% "commissions" down to the old level of 5-7%. However, one prominent property developer in Prague told bne last year that it's not necessarily that the bribes are getting bigger, but that the number of people needing to be paid off is getting larger. The worsening situation has prompted some foreign investors to speak out; the

"The internecine fight within the ODS party has, like the vortex created by a toilet being flushed, been sucking down anything that's stuck to the side of the bowl" certain, perhaps followed by a parliamentary confidence vote. "I was assured by all three chairmen of the coalition

head of the American Chamber of Commerce, Weston Stacey, said in an interview with the newspaper Lidovy noviny

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published April 11 that foreign investors are being scared away from the Czech Republic due to its corrupt image and political instability. "During the crisis, the flow of investment almost halted and now it is being discouraged by the unstable political situation and corruption," Stacey told the paper. "Every investor who wants to do business in the Czech Republic first of all asks if corruption is as bad as it is said to be." Two days later it emerged that ENIC Group, a British investment which controls the English Premier League club Tottenham Hotspur Football Club, has decided to pursue an outstanding CZK110m (€4.5m) claim against the top-flight Czech side SK Slavia that it bought back in 1997, even though it might push that club into relegation. ENIC director Matthew Collecott told Czech Position that there's no question of ENIC deferring its debt settlement demand, given the fact that the group maintains it was ousted from the board and ownership of the club through an alleged scam by the current administrators and owners. The board of Slavia did not return calls to bne. This same week it also emerged that the Czech Ministry of Defence, a notorious nest of corruption over the years, ended up ordering 112 Iveco armoured vehicles at a cost of over CZK4bn when the Czech Army had requested just 19 vehicles for use in Afghanistan.

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power in order to perpetuate the environment that allows corrupt practices to flourish and while they may have been stymied for now, it won't be long before another attempt is made. Mr not-too shabby In May 2010, the Czech public, dispirited by the global economic crisis, finally tired of the established parties and voted in significant numbers for two new parties, Top09 and VV, giving them 43 and 24 seats respectively. Together with ODS' 51 seats, the new three-party coalition commanded a decent majority of 118 seats in the 200-seat parliament, giving hope it would be able to push through the kind of bold reforms that the country has lacked since the 1990s. In keeping with the new climate of openness and honesty, the prime ministerial post was given to Petr Necas, a

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arrived at the startling conclusion that 1 kilometre of normal Czech motorway costs around CZK500m (€20.6m) to build, whereas 1 km of German or British motorway costs almost half that at CZK280m. Necas has also been successful so far in delaying a long-mooted €4bn-plus tender for a nationwide environmental clean-up, which critics argue will be one of the biggest frauds perpetuated on a Czech populace that has suffered a long line of them. Inevitably, though, when people find their "payments" are drying up, they fight back. And so began an engineered crisis that sought to back Necas into a corner and destabilise the coalition. Transport Minister Vit Barta, an unattractive politician he set up has been linked to several scandals in the past, found himself being accused of making payments to members

"Every investor who wants to do business in the Czech Republic first of all asks if corruption is as bad as it is said to be"

used Skoda-driving, highly-principled politician, whose appointment as head of the ODS was taken as a sign the party at large wanted to purge its ranks of the most corrupt elements.

The constant drip-drip and occasional splash of corruption is having a corrosive effect on Czech democracy. A poll taken even before the recent brouhaha found that some 86% of the public show some degree of scepticism about their leaders’ motives for seeking public office, with the most popular reason for someone becoming involved in politics reckoned to be to increase personal wealth or power.

And indeed, there were tiny, but tangible, signs that things might be improving. Just recently, on April 13, the government announced the Czech Republic would not be able to draw money from the EU's Environment Operation Programme due to the suspected corruption at the State Environmental Fund (SFZP) that forced Pavel Drobil to resign as environment minister in December.

So will the coalition be able to draw a line under the recent problems and start restoring trust in the political system? Not likely, say analysts, not least because the recent "crisis" was engineered by the "Prague" faction of the ODS for the precise reason of regaining

Then the office of Necas posted on its website a report by the global infrastructure player Mott MacDonald detailing the failings of the Czech Republic's construction industry and its regulatory oversight. Mott MacDonald is famous for a report a few years ago that

of his own VV party. Necas, egged on by the "Prague ODS" wing of the party, called for Barta and two other VV ministers to be fired, only for Klaus to demur, other coalition members to start demanding the resignations of each other – and chaos ensued. Barta has since resigned, though Necas hasn't been dislodged. And while Necas' two archrivals, former PM Topolanek and Finance Minister Miroslav Kalousek of TOP09, have been protesting (perhaps a little too much) that there's been no plot against him, the PM's position remains precarious and few believe he can last the full term of office that ends in 2014. A new PM more amenable to maintaining the track that the gravy train runs on is expected. To uncover who is behind any plot, it's usually a simple case of following the money. Or in the Czech Republic's case, follow the pen.


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that should not be underestimated when most Estonians view the political classes as a self-perpetuating elite. With his thin frame, square glasses and windcheater, he looks more like a junior maths teacher than an ambitious politician, which helps contrast SDE's avowed concern for ordinary folk with the ruling coalition's technocratic tendencies. "They [the government] just put the macroeconomic indicators before the ordinary individual or the family. They are happy as long as the macroeconomic indicators are doing well, which we think is just part of the picture and not quite enough," Mikser says.

Meet Estonia's next PM Mike Collier in Tallinn

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ne has a reputation for putting its money where its mouth is, so how about this for a bold bet: the day after Estonians voted in Andrus Ansip for another term as prime minister on March 6, bne met with the candidate who finished fourth – and believes he will be the next man into the job in 2015. On the face of it, the wager looks like a long shot. Sven Mikser's Social Democratic party (SDE) won just 19 of a total 101 seats in the Estonian parliament, behind Ansip's Reform part on 33, the opposition Centre party on 26 and Reform's coalition partner IRL on 23. Thus SDE is the smallest party with representation in the Riigikogu. But to students of form, Mikser lacks many of the handicaps of his rivals and SDE gained more seats (nine) than any other party. "The minimum plan was to get one mandate from each district for the first time, which we managed to do. The more ambitious plan was to beat the best-ever result from the 1999 elections when we got 17 seats," Mikser tells bne. "We ran a very well-coordinated

campaign. We managed to get the whole party working in unison with a very clear message: to bring children and families with children out of poverty. All these difficult decisions which the government has made to come out

As he admits, SDE's proposals mean spending more money, not just reallocating existing resources. But the second reason for SDE's growing appeal is perhaps the one Ansip should be more worried about. Nordic nanny state In his election night victory speech, PM Ansip went out of his way to talk about "the Nordic country of Estonia." But if Estonia really is as Nordic as he thinks, then Estonians will at some point demand the Nordic social model (high tax/high spend) rather than the government's neoliberal approach of flat taxes and minimal state support.

"Much of our competitiveness has been the result of rather cheap labour"

of the recession have put the biggest burden on the weakest in society. That needs to be reversed." At just 37 years old, Mikser has youth in his favour, making even Ansip (57) seem like a bit of an old nag let alone the Centre party's Edgar Savisaar (61), who looks just about ready for the knacker's yard. Just as importantly, Mikser seems like a genuine and modest man – a fact

"The government is very much in favour of a business-friendly tax environment and business-friendly economic policies," says Mikser. "I think it's a bit of a simplistic view, because much of our competitiveness has been the result of rather cheap labour. We cannot actually expect to improve the competitiveness of our economy by making this competitive edge permanent. Instead of trying to make labour even cheaper by reducing certain taxes, we need to make the qualitative leap and improve the value added.

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Mikser explains that this can only be done by targeting education – and not just higher education – but also vocational and lower levels of education. "Concentrating on reducing overall taxation is not the solution," he says."

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KNABbed in Latvia

As further proof of his "Nordic” credentials, Mikser was even drafted in by the Social Democrats in neigbouring Finland on April 11 to give an upbeat speech as part of their own election campaign.

Mike Collier in Riga

And with the other opposition party, the Centre Party, likely to undergo years of internal strife as modernisers attempt to wrest it away from Savisaar's grasp, the field is open for the Social Democrats to overtake them as the most active and organised critics of government policy. "What has been called the consolidation of the political landscape – the fact we have four parties in parliament instead of six – means that the opposition has a very important role," says Mikser.

KNAB has existed in a state of perpetual turmoil for the last four years. It has indirectly led to the demise of one government (Aigars Kalvitis resigned as prime minister in 2007 after failing to oust then-KNAB chief Aleksejs Loskutovs) and the future direction of KNAB looks increasingly likely to determine the fate of the current government of Valdis Dombrovskis.

"I'm pretty concerned about the future of the Centre party, because on one hand their support declined quite badly outside Tallinn and Ida-Virumaa [areas with strong Russian minorities]. On the other hand, Edgar Savisaar personally got a very strong mandate which will make it difficult to make significant changes at the top of the party leadership. They will have to concentrate on their internal affairs, which will make us the strongest voice for the national interest as an opposition party in parliament, even though they have more seats."

Accused by some of being a placeman to protect the interests of some of the country's oligarchs, Moscow-educated Vilnitis attempted to overhaul KNAB's command structure, prompting his two immediate deputies, Juta Strike and Alvis Vilks, to go public last year with their opposition to the plan, which they said seemed designed to make law enforcement less, rather than more, effective. Strike and Vilks were not alone: more than 70 KNAB employees signed a letter to PM Dombrovskis denouncing the plan. "All changes always meet resistance and it will always be this way," Vilnitis tells bne. "People who are not ready to accept changes, do not try to understand these changes and often express dissatisfaction without real arguments."

Face of the future According to Mihkel Solvak, a political scientist at the Universit of Tartu, Mikser is a man to watch. "In the pre-election debates he proved himself worthy of leading the party. He's articulate and a good debater. He's young and educated so he seems a credible alternative. Also, SDE managed to pick up a lot of support from the parties that didn't make it into parliament, particularly the People's Union. They had former People's Union candidates running as their candidates and they managed to bring the votes with them."

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The heads of some law enforcement and intelligence agencies like to keep a low profile, but that's not an option in Latvia where the bosses of the Corruption Prevention and Combating Bureau (appropriately acronymed as KNAB) have always made more headlines than arrests.

A list of recent events within the organisation makes it seem more like the Keystone Kops than the Untouchables. Loskutovs was eventually sacked by parliamentary vote in 2008 after it emerged that a pair of KNAB agents had been pocketing thousands of dollars seized during raids (unbeknownst to him). His replacement, Normunds Vilnitis, was a controversial choice who has only become more controversial with time.

KNAB's internal battle has rumbled on, with Strike and Vilks facing repeated disciplinary action, while pressure mounts for Vilnitis' dismissal. TV viewers have even been treated to the sight of Vilnitis facing Strike and Vilks on live TV debates, which usually see him come off second best against their clean-cut Mulder and Scully image. In recent weeks, another KNAB officer, Juris Jurass, alleged in front of TV cameras that Vilnitis asked him to illegally wire-tap several politicians – an allegation Vilnitis says has "no grounds." Despite the distractions, KNAB has actually been making progress on some important cases. The highest-profile arrest of recent months came in June when Strike led a raid on the offices of the national power utility, Latvenergo. Former chairman Karlis Mikelsons and other top executives now face charges of abusing their positions. Another big-ticket arrest was that of Vlademir Vaskevics, a high-ranking finance ministry official and former senior tax official, who is living proof that not all accountants lead boring lives, having in the past been involved in incidents involving car bombs and alleged gangland hits.


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It was instructive to watch on election night when Mikser dropped by to congratulate Ansip on his victory. Reform's post-poll party was taking place on the top floor of the Swissotel skyscraper, an expensive and glitzy expression of the party's corporate-friendly culture. In

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contrast, SDE chose the modest, bohemian and independently-run Wabadus Cafe (worth a visit next time you're in Tallinn). Noticing Mikser's arrival, Ansip seemed flustered and a little offhand, keeping

him waiting and forcing an unconvincing smile only when he realised the TV cameras were live. One might almost say he was a bit rude. Or maybe he was having a Shakespearean vision that on the night of his own coronation, he was already looking at his successor.

the country, reported a 13% increase in sales in 2010. Only in little Slovakia have small breweries had little success, with only four independents left after takeovers and and crushing competition from the neighbouring Czech Republic.

Matthew Day in Warsaw

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After years of living in the shadow of the powerful and suffocating presence of the multinational brewing corporations, the independent beer producers are today producing more and selling more. In Poland, figures from the Association of Regional Breweries, an umbrella group for independent producers, for 2010 put year-on-year growth between 5-10% even as the overall beer market dropped by around 0.5% last year. Marek Jakubiak, owner of two independent breweries, says he saw sales climb in 2010 by 30% from the year before, and that this year they should exceed that figure. By contrast, information

The growing popularity of independent beers has also resulted in supermarkets allocating them more shelf space in beer sections once dominated by the multinational-owned brands. This has provided small brewers with a vital and burgeoning source of sales, and Olkowski reports that supermarkets now "call everyday" to ask about new beers. In the Czech Republic, still the heartland of European beer drinking, small producers offering upmarket products have also benefited from growing incomes, but at the same time profited from a shift in consumer demand. "People are travelling abroad and when they come back they demand different things, and this is changing tastes," says Jan Vesely, executive director of the Czech Beer and

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Malt Association. "In the Czech Republic, pubs, which represent about 50% of all beer sales, used to be tied to one brewery, but now people want more beers, more choice. There is a shift underway and this is providing opportunities for independent breweries as they can get their beers into the pubs." Vesely also highlights another flourishing sector that's tapping into the growing demand for not-run-of-the-mill beer. "The restaurant breweries, which produce beer to be consumed on site, are growing like hell," he says. "In 1990, there was one, now there are over 100." Back in Poland, it's a similar story, with more people eager to drink a unique beer, happy in the knowledge it hasn't

Reasons to be cheerful "I'm happy and confident about the future," says Andrzej Olkowski, chairman of the Association of Polish Regional Brewers, who a few years ago feared the worst for Poland's independent breweries, left economically shabby and vulnerable by years of neglect under communism.

Small beer miles in the world of Central Europe's brewing giants are few and far between at the moment as the sector contends with falling sales, but while the big boys weep into their beer, the small and regional breweries are grinning.

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from market research company Polish Market Review put sales for the SABMiller-owned Kompania Piwowarska, Poland's biggest beer producer, down by 3% in 2010. Across the border in the Czech Republic, the big multinationals felt most of the pain, according to the Czech

One reason for the small breweries now having an edge over the big ones in Poland is the growing wealth of the Polish consumer. More money in their pocket allows them to fork out €0.50-1 more for a beer from an independent brewery rather than plump for the mass-produced product, and also makes them more particular about what they drink. "The growing incomes of Poles mean we can spend more on luxury, and a good beer

"The growing incomes of Poles mean we can spend more on luxury, and a good beer from a small brewery is more expensive"

Beer and Malt Association, of a 7.9% year-on-year reduction in the beer market, while the smaller producers either weathered the storm or managed to exploit it. K Brewery, for example, which owns six mid-size breweries in

from a small brewery is more expensive," says Olkowski. "Poles have also become more knowledgable about beer. It's taken time, but people are now more interested in what they eat and drink, and want good, chemical free, products."

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travelled far. An original number of three restaurant-breweries, or microbreweries as they are also called, in 1990 has grown to 20, and a further 10 are slated to open this year. Andrzej Galasiewicz, owner of Minibrowary.pl, which operates a chain of micro-breweries across the country, believes that in 20 years there should be at least 200. All this has helped vanquish forever, it appears, the worry that indigenous producers in Central Europe with their traditions would be wiped out by insatiable multinational brewers. "There were fears that the big international entities would come here, harvest the market and kill what's left. But they can't kill tradition and the beer market reflects this," says Vesely.

came to do sightseeing, but together they spent €3.5bn. Ukrainians lead the list of average daily expenditures of foreign tourists in 2010, spending €166 daily. Belarussians were second with €139, Russians were third with €73 and Germans came in fourth with €66. So what are all these people doing and spending their money on?

Poland becomes supermarket of Emerging Europe Bogdan Turek in Warsaw

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oland is carving out a niche as the supermarket of Europe, offering lower prices for quality goods than in Western Europe as well as top-quality medical services such as cosmetic and dental surgery that are attracting an increasing number of foreign visitors.

According to the Polish Institute of Tourism, 58m foreigners came to Poland in 2010, a 9% increase over 2009, and a further 6% is predicted to arrive in 2011. The highest number came from Russia, followed by visitors from Germany, England, Ukraine and Belarus. Out of the total, only 12.4m

Teeth, face, body One clue can be seen in the supermarkets in the port of Szczecin on the Baltic coast, which are chiefly crowded with Germans, as are the smaller cities along the western Polish border. Germans, Ukrainians, Czechs and Italians also frequent the shopping centers of Katowice, in the southwestern part of the country. "They come because products of highquality brands, such as Versace, are sold at some 30% less than in their countries," explains Krzysztof Lopacinski, deputy CEO of the Institute of Tourism. Guidebooks in Italy, Germany and even Israel encourage their readers to go to Poland for cheaper shopping for goods as well as services. Medical tourism grew by 15% in 2010 over the previous year, and more than 300,000 visitors got dental implants or


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decided to improve their looks with the help of cosmetic surgeons. As many as 300,000 underwent heart, alimentary tract or orthopedic treatments in the spas. Out of the total, 260,000 were Italians. Kamala Kasprzak, an official of the Klodzko group of spas in southwestern Poland, says that Israelis especially have taken

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chin lift, so I researched on the internet and came up with the names of three cosmetic surgeons in Warsaw who were highly recommended," she says. "The third candidate, Dr Artur Broma, turned out to be perfect – he offers a less-invasive procedure that produces no swelling or scars. The operation was painless and lasted 45 minutes, and I left the clinic after a couple hours.

"They come because products of high-quality brands, such as Versace, are sold at some 30% less than in their countries" a liking to Polish spas. "In this area, the number grew by 100% against 2009," she says, without giving a total amount.

Several of my friends have commented that I look younger – but they don't know why."

The cost of cosmetic surgery is about 30-40% lower than in Scandinavian countries or the UK. The low prices, combined with a level of quality equal to that in Western clinics, attracted 63-year-old Ann Olsen from the US. "I wasn't prepared to pay US prices for a

In a telephone interview, Dr Broma says his foreign patients, which account for about 30% of his practice, chiefly come from England and Germany, and occasionally from Ukraine and Belarus. "It is not the price, but the quality of the surgery that attracts them," he says. "They

Private equity firm Riverside increasingly looks to CEE

FUNDS:

find me on my website or [elsewhere on] the internet." Most visitors coming for medical services are extremely well-informed about their options, and some can quote prices of dental services in various Polish cities. "Warsaw dentists are the most expensive," says Karol Dwernicki from Lvov. "They wanted me to pay PLN38,000 [€9,500] for implants in my lower denture. I travelled to Jelenia Gora (western Poland) and paid PLN16,000." The prospects this year for all types of tourism are promising, reckons the Institute of Tourism's Lopacinski,. "The Polish presidency of the EU [which starts on July 1] will undoubtedly make Poland more popular and the number of tourists is expected to grow by 6%." Poland has earmarked €30m for promotion of the country, the highest amount ever, and Adam Giersz, minister of sport and tourism, launched a promotional campaign for Poland on March 17 at the International Tourism Fair in Berlin under the slogan, "Move your imagination."

and an uptake in deal flow, we'll hopefully be closing two deals this year in the region," Balazs Tahy, vice president, tells bne. "Our vision is to acquire small leaders, make them bigger, better and make a profitable exit. Companies we'd consider investing in need to have a well-defined niche and a leading market position." Riverside focuses on acquiring growing enterprises valued at up to €200m. "We are not a turnaround or restructuring firm," adds Tahy.

Rob Smyth in Budapest

C

entral Europe is currently a focus for the global private equity firm The Riverside Company as the region's entrepreneurs consider how to either move their companies on to the next level or to retire with no natural heir in sight.

With its €420m Riverside Europe Fund IV, the mid-cap private equity firm expects to make two acquisitions in the region in 2011, to add to the two made earlier from its €320m Riverside Europe Fund III, and the nine investments from earlier funds. "We see good opportunities

Tahy wouldn't disclose which sectors or countries these deals are likely to occur in. However, he says the private health sector is particularly attractive in Poland and Romania, though adds that in the former private equity is competing with a powerful stock exchange as a source of capital, while Romania is struggling with its economy, which has reduced deal flow.

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The global economic crisis, which had a particularly harsh impact on CEE, has served to bring very high valuations on companies down to more reasonable levels. However, it also led to owners holding on to their companies rather than selling at those cheaper levels, which had the effect of slowing the deal flow. Now a general economic recovery is underway and so many entrepreneurs are looking for capital to expand their businesses to take advantage of the improved conditions. "Many companies are limited by management, who are afraid of venturing out and don't have sufficient experience of foreign markets in moving their companies forward," says Tahy. While it is good that some companies want to grow beyond what are often

Central Europe

Fund IV, and was its 11th acquisition of 2010 and 234th overall. It was also its very first investment in Turkey. "The Turkish pet food market is relatively young, but growing at an exciting pace," says Adam Pietruszkiewicz, Riverside principal, adding that his firm plans to reinforce Tropikal's market leadership position and expand its product offering and further brand development in the years ahead. The founders of Tropikal are continuing as minority investors, while the CEO and other top management have remained with Tropikal. In December, Riverside exited Computer Press, a Czech book and magazine publisher that it invested in from its Riverside Europe Fund II, after five years. Its other exited Czech investments are: Carborundum Electicrite, an

"Everyone is out to get global dominance, but we have to be realistic" limited local markets, Tahy also urges caution in jumping too far, too fast. "Everyone is out to get global dominance, but we have to be realistic. We are set up to help companies expand their current economic footprint, the question is whether a company is ready for that leap," he says. Looking for the exit Riverside's strategy is to grow the firms it invests in through organic growth and bolt-on acquisitions. He also mentions that Riverside is looking to take on wellestablished businesses built by some of the region's entrepreneurs. "CEE has a very strong entrepreneurial segment, some of these people have built up companies from scratch and are looking to exit and retire, and don't have a natural successor to hand the business over to." For Riverside, CEE also includes Turkey, where last year it invested in Istanbulbased Tropikal, which it describes as the leading distributor of international pet care brands, and the first domestic pet food producer in Turkey. This marked the company's first investment in the region from its €420m Riverside Europe

abrasive products manufacturer; SpofaDental, a dental products manufacturer; and Primalex, a paint manufacturer. In Poland, Riverside has held and exited four other investments: KFM, a manufacturer of thermostats and gauges, which it held for just a year; Megachemie, a manufacturer of construction materials and chemicals, Mifam; a manufacturer of disposable needles; and Zetkama, a producer of industrial

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valves, fittings and iron castings. The latter was exited after eight years. While the owners may be prepared to sell on, it's the people in the company that Riverside is buying into every bit as much as the product, emphasizes Ferenc Vidovszky, senior partner and head of Riverside's Budapest office, which coordinates regional investments. "We like to work with strong management teams and help the companies realize new opportunities," he says. Riverside began its activities in CEE in 1988 when founder Bela Szigethy, himself an American of Hungarian descent, contacted his cousin Vidovszky. Riverside's sole active investment in Hungary – Diatron Group, which develops, manufactures and markets compact hematology analyzers for the human medical and veterinary markets – acquired Metrolab of Argentina in 2008, has a presence in Vienna and sells its products in 60 countries. Riverside made its majority investment in Diatron in December 2005 from its Riverside Europe Fund III. With the same fund, Riverside also became majority owner of MK Chimney Systems in Poland. Riverside typically invests 10-15% of the equity of one fund into a single company and looks to generate a rate of return of around 20%. It has generated an internal rate of return for investors of over 50% from its 50 exits. Riverside takes a majority stake and usually holds firms for five to seven years, but its previous investment in Hungary spanned nine years.

"Many companies are limited by management, who are afraid of venturing out and don't have sufficient experience of foreign markets"


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is making it easier for smaller institutions to drive up deposit rates. In Slovakia, the largest banks are Slovenska Sporitelna (of Erste), VUB (of Italy's Intesa Sanpaolo) and Tatra (of Austria's Raiffeisen Bank International), as well as mid-sized banks such as CSOB, owned by Belgium's KBC Group, and UniCredit, owned by the Italian group of the same name, and a host of small and aggressive banks. "Banks are able to overpay the market," says Sikela of the deposit competition. "This is completely unfair – we will definitely not compete on the same level." Return to profit Despite Sikela's complaints and worries on the part of rating agencies, the Slovak banking system seems to be returning to rude health after the crisis.

Slovak banks rebound Jan Cienski in Warsaw

S

lovakia's banks are recovering strongly from the economic crisis – so strongly in fact that there are worries the banks are taking undue risks as they scramble to attract deposits and lend out money in an economy still shaken by the steep downturn of 2009. Mortgage lending rates are seeing an improvement, but thanks to a 15% drop in real estate prices from the pre-crisis peak, many borrowers are wary about getting into debt or are waiting for prices to fall further before taking the plunge. That has banks responding with practices like lending 100% of a property's value – something that was rarely done in 2009. "We are not happy that some of our competitors seem to have forgotten that there was a crisis and have returned to irresponsible practices," says Jozef Sikela, CEO of Slovenska Sporitelna, Slovakia's largest bank and a unit of Austria's Erste Bank. He says his bank won't lend more than 90% of a property's value.

The rating agencies are also worried. "Banks have loosened their mortgage criteria, with some returning to precrisis origination practices," warns Moody's Investors Service. "A large proportion of high-[loan/value] mortgages is one of our concerns for the Slovakia banking market, especially as house prices are still under pressure." There is also fierce competition among the smaller banks in Slovakia to raise

In 2009, when Slovakia's economy contracted by 4.7%, the banking sector's net profit of €279m was down 48% from the previous year. One reason was lower foreign exchange income because of Slovakia's adoption of the euro at the beginning of the year. "The euro did represent a big loss for us, but we made it up in other areas," says Sikela. In addition, there was a steep drop-off in business activity due to banks imposing much tighter credit conditions for both mortgage and consumer loans. As a result, the annual rise in retail lending dropped from 30% before the crisis to 10% by the end of 2009, while overall lending increased by only 1%.

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Central Europe

sector has become part of Germany's supply chain. Despite the one poor year, Slovak banks were well capitalised and didn't need help from the central bank. Furthermore, going into the crisis Slovak banks had been much more conservative than many banks in Western Europe, which had sought to pump up profits by investing in exotic financial instruments. Because of joining the euro, Slovak banks were also immune from the foreign-currency lending that has been a source of pain for Polish and especially Hungarian banks. "In general, banks are only interested in the domestic retail and corporate segment," says Jozef Makuch, governor of the National Bank of Slovakia. "As retail loans and loans granted to the corporate sector are still quite profitable, banks haven't been forced to seek more risky investments… As a result of the conservative

balance sheet structure, Slovak banks were not hit by the first wave of the crisis. The impact was visible only in the second stage of the crisis, when the domestic economy dropped as a consequence of decreased foreign demand." That conservatism shows up in the banking system's numbers – Slovakia

says that Slovakia's rebound seems to be more pronounced than that being experienced by other Emerging Europe economies. The big risk factor is Germany. If its unexpectedly strong economic expansion and furious export growth slows, then Slovak factories supplying parts

"Banks are able to overpay the market. This is completely unfair – we will definitely not compete on the same level" has a loan/deposit ratio of 81% and a Tier 1 capital ratio of 12.5%. As Slovakia recovers, retail lending is increasing the fastest, with corporate lending trailing behind. Makuch

The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS.

But last year, Slovak banks saw their profit more than double to €514bn as they absorbed the profit hit from being

and components to Germany will see their sales fall. That could potentially cause problems for companies and any resulting increase in unemployment could impact consumer and mortgage lending.

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What you need to know

"We are not happy that some of our competitors seem to have forgotten that there was a crisis and have returned to irresponsible practices" funds, setting off a deposit war. The €100,000 deposit guarantees brought in during the early days of the crisis to stabilise the European banking system

in the Eurozone, while the Slovak economy rebounded in large part because of Germany's unexpectedly strong export boom. Much of Slovakia's industrial

I 37

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Istanbul's financial centre dreams Justin Vela in Istanbul

A

new financial district is planned for Atasehir, a booming municipality on the Anatolian side of Istanbul, as part of a goal by the government to turn the city into a new global financial centre similar to New York or Shanghai. Domestic politics and practicalities threaten to intrude, however. The $1bn development in Atasehir, which is expected to serve 20,000 people, will include 1,500 residential units, parks, a five-star hotel, and offices and conference facilities. Planned wind turbine technology and rainwater collection sites will make Atasehir one of the largest green developments in Turkey. Numerous banks have bought land and are preparing to move their headquarters there, hoping to benefit from the

new financial district through an effect known as clustering. "If you have all the big banks in one area, you will have all the professional services. Despite technology, somehow people still like to be located together," says Mark Yeandle of British consulting firm Z/Yen, which produces a survey of global financial centres every six months. Turkey's Banking Regulation and Supervision Agency, Capital Markets Board, and the Turkish Banks Association are also expected to move to Atasehir, along with the Istanbul Stock Exchange. The Islamist-rooted ruling Justice and Development Party (AKP) has even introduced a motion in parliament to amend a law stipulating the central bank be headquartered in Ankara, paving the way for its move to Istanbul.

Plans for the new financial district date back to 2006. The global economic crisis intervened, but with the economy now booming, the AKP is seeking ways to expand Turkey's importance as an economic powerhouse, claiming it will be among the top-10 economies in the world by 2023. Istanbul's growth appears unstoppable, driven by a rapidly growing, young population and directed by the Housing Development Administration (TOKI), which is directly connected to the prime minister's office. "In the last seven years, TOKI began building 483,287 dwelling units, 350,000 were completed, and the prime minister ordered TOKI to construct 500,000 more dwelling units by 2023, the 100th anniversary of the establishment of the Turkish Republic,"

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says Tahire Erman, a professor of urban development and political science at Ankara’s Bilkent University.

tion and power over Ankara, which is the capital of the secular Turkish Republic," argues Bilkent University's Erman.

Many are enthusiastic about the plans for Istanbul, yet some urban development experts such as Erman say the new financial district will overburden Istanbul. "It is already overgrown, and there are already many problems in the provision of infrastructure and municipal services to the city," she says.

The Turkish daily Milliyet reported in November 2010 that draft legislation currently in parliament has the central bank moving within two years. However, Turkish opposition leader Kemal Kilicdaroglu of the People's Republican Party tells bne that this is unlikely, with the proposal moving slowly through parliament and modern technology making such a move unnecessary anyway. "There is no logic to the move," says Kilicdaroglu.

There is certainly still much work to be done. Z/Yen's latest survey of global financial ranks Istanbul at just 71 out of 75 global financial centres. Yeandle explains the city is currently a "local diversified" financial centre, or one that serves nearby countries such as those in the Balkans, Middle East and Central Asia, as supposed to a truly global centre such as London or New York. "The infrastructure is not bad; access to the international market is not too bad; the availability of people – all those factors are good," he says. "[But] Istanbul needs to improve its business environment, the ease of doing business, and operational risk and corruption perception." Talk of Istanbul elevating its status as a global financial centre and other sublime goals usually linked to the country's heady GDP growth also mask a fragile economic situation. The AKP might have won plaudits for the eight years of relative political stability and economic growth it has brought to Turkey, yet observers aren't convinced that enough has been done to counter the country's traditional boom-and-bust cycles. "Turkey's position as Emerging Europe's star performer is looking increasingly precarious," warns Neil Shearing of Capital Economics. Empire dreams Stoking a growing polarisation in the country, the AKP's opponents are trying to undermine the idea of moving the central bank from Ankara with conspiratorial criticisms, such as alleging it would allow government supporters to be appointed to key financial positions. "In ideological terms, the AKP wants Istanbul, which was the capital of the Ottoman Empire, to increase its domina-

Unfortunately, logic, some would argue, is hardly equal to ideology for a government that is increasingly being accused of silencing critical voices and attacking press freedom. While still the market favourite, the AKP is dismaying some supporters with its increasingly autocratic signals, especially considering the party's intention to rewrite the constitution following the June 12 parliamentary elections that it's set to win by a wide margin. Turkey returning to its Ottoman-era prominence, when Istanbul was a critical international hub, is a top priority for the AKP. Yet no-one misses the absolutism of the Sultanate.

"In ideological terms, the AKP wants Istanbul, which was the capital of the Ottoman Empire, to increase its domination and power over Ankara, which is the capital of the secular Turkish Republic"


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that culminated in a phone call on the morning of March 6 to Atifete Jahjaga, the 35-year-old deputy head of Kosovo's police force, who was startled to hear US ambassador Christopher Dell asking if she would take the job. She agreed, and was duly named the official consensus candidate in a press conference later in the day along with an agreement for parliamentary elections and a direct presidential election next year. "At a time when Kosovo's institutions have been damaged and many question whether Kosovo is capable providing justice for its people, I believe Atifete Jahjaga will be an important symbol of the country's commitment to justice," said Dell. "Her presidency will mark the beginning of a new and constructive chapter in this country's history."

A compromise in Kosovo

www.president-ksgov.net

Phil Cain in Graz, Austria

T

he maturity of Kosovo's political system was put to the test in March when the appointment of a controversial construction tycoon as president was ruled unconstitutional, leaving the government scrambling to find a way to avoid fresh elections. A US-mediated deal managed to resolve Kosovo's first institutional crisis since declaring independence, but the case did little to convince people that this new country is anything but a very fragile work-in-progress. Kosovo's Constitutional Court said on March 28 that the election of Behgjet Pacolli as president was illegitimate, because there was no candidate standing against him and fewer than twothirds of the 120 MPs took part in the session that attempted to vote him into office.

Seven of the nine constitutional court judges approved the decision to invalidate Pacolli's appointment. Those presiding included three foreigners, two representatives of Kosovo's ethnic minorities, and two members appointed

Attending Jahjaga's unveiling, presided over by Dell, were: Prime Minister Hashim Thaci; Pacolli, leader of the government coalition member, the New Kosovo Alliance, and the previous candidate for president; and Isa Mustafa, leader of the opposition Democratic League (LDK). With these backers, her election by parliament was a shoo-in. Busted flush The agreement to install Jahjaga secured the immediate survival of PM Thaci's government, which looked close to collapse after failing to deliver on its promise to make Pacolli president. Thaci promised him the job in February in a bid to conclude coalition negotiations that had rumbled on since snap elections in December, but he was always

"Jahjaga's presidency will mark the beginning of a new and constructive chapter in this country's history" by the ruling majority and two by the opposition. The Portuguese and US judges voted in favour of a fresh election, but their colleagues were unconvinced. Cue frantic talks among Kosovo politicians and the international community

a controversial choice. Rumoured to be the world's richest Albanian, Pacolli is the president and chief executive of the Mabetex Group, a Swiss-based construction company that landed a series of lucrative contracts with Russia's administration under Boris Yeltsin in the

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the Constitutional Court said he could not serve as head of state and head of a party. In November, he lost the party leadership to Isa Mustafa.

Gjakova in western Kosovo and is married to a dentist, with whom she has no children, enough to raise eyebrows in socially-conservative Kosovo.

Despite the compromise to install Jahjaga, local commentators say the whole affair signals the beginning of the end for Thaci, whose reputation is irrevocably damaged by being unable to resolve the crisis without outside help. Thaci had already lost ground in December's election, tainted by vote-rigging requiring re-runs in several areas.

And what of the new president? Jahjaga is a little-known figure in Kosovo, though a favourite for photo calls with visiting US politicians, being pictured shaking hands with George W Bush and Hillary Clinton. Having studied law, she won rapid promotion on joining the Kosovo police in 2000, receiving training at the FBI Academy and Bramshill in the UK, rising to be second in charge in 2009.

Around 14% of Kosovo's police officers are women, compared to 22% in the UK and 24% in Germany. In politics, the situation is better on paper, with women making up around 30% of MPs, although few wield significant power. "There is always a solution for a problem," Jahjaga said in last year's police magazine interview. "Sometimes you just have to try harder."

Thaci's troubles started even before the election, which was triggered by the dissolution of the "grand coalition" between his Democrats and the LDK. The LDK's Fatmir Sejdiu stepped down as president in late September because

Having women in the police has changed its image from being a "strong hand" and has "brought policing closer to the people," Jahjaga told a women's police magazine last year. She comes from a Muslim family in the town of

The most important factor in her rise to the presidency, however, was not effort to achieve it, but being a respected, politically-neutral figure in a country where there are few to be found.

1990s. These business links to Russia, staunchly supportive of Serbia's opposition to Kosovo's independence, are the source of implacable dislike and distrust among some fellow countrymen.

The talented Mr Plahotniuc Graham Stack in Kyiv

M

oldova's governing coalition, the Alliance for European Integration, may be receiving plaudits from European politicians over its EU accession plans, but at home it's having to deal with a problem common to many poor states in this part of the world, namely the presence in government of controversial businessmenturned-politicians. The controversy centres on Vladimir Plahotniuc, Moldova's richest man and now first deputy speaker of parliament. Plahotniuc, with a fortune estimated at $1.7bn (according to Ukrainian paper Delo), was for a long time a name without a face. The businessman accumulated his wealth behind the scenes during Communist Vladimir Voronin's presidency in 2001-2008, apparently by means of energy trading, control of

petrol retailer Moldpetrom, real estate operations and banking, with ties to Voronin and Voronin's son Oleg believed crucial to his success. But while at the time public attention focused on Oleg Voronin, insiders pointed to Plahotniuc as the real mover. They have since been proved right. When Voronin reached the end of his second term as president in 2009, Plahotniuc seems to have switched allegiance to Voronin's anticipated successor Marin Lupu, a popular politician from the reformist wing of the Communist Party of Moldova. But Voronin unexpectedly passed over Lupu when deciding whom he would support as successor. When parliamentary elections in April 2009 resulted in a hung parliament, Lupu split from the Communists to head the Democratic Party, a hitherto mori-

bund part of the opposition camp, thus becoming kingmaker for the opposition. Plahotniuc followed him, becoming the Democratic Party's main sponsor. Then in 2010, the man whose name had only been a rumour became almost overnight a public figure, helped by the fact that he also controls the country's largest TV channel, Prime. When fresh elections were finally called for November 2010, Plahotniuc popped up at number-two spot on the Democratic Party's electoral list only weeks before polling day. This time round, with Lupu again playing a kingmaker role in the post-election horse-trading, Lupu became speaker of parliament and acting president - and Plahotniuc first deputy speaker of parliament, marking a meteoric entry into politics. And just as importantly, Plahotniuc's baby, the Democratic Party, is in charge of the economic bloc in the government, with its man Valeriu Lazar as deputy prime minister and economy minister. Lazar's remit includes stateowned companies, and the thorny questions of raising their tariffs that are kept low as indirect social subsi-


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dies, as well as of their privatisation, as demanded by Moldova's international lenders. You don't have to be a conspiracy theorist to see that having the country's richest man, with a shadowy background, in a position to directly influence privatisation of the family silver is not likely to inspire public confidence, even if the strongest calls for privatisation are coming from the International Monetary Fund (IMF). "It raises questions about where politics stop and business starts. There are fears expressed in the media that Mr Plahotniuc could manage any privatisation for his own benefit," says Alex Oprunenco, political expert at think-tank Expert Grup. Oprunenco points out that the intermingling of politics and business is not limited to Plahotniuc - Prime Minister Vlad Filat is also often named as one of the country's richest men.

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sector wages have been frozen. Moreover, the post-election political climate remains highly charged, with the Democratic Party the focus of flak from the now oppositional Communists, as well as a silent rival to Prime Minister Filat's Liberal Democratic party. "The struggle over Moldtelecom could unplug the whole coalition," says Oprunenco. Prime Minister Filat immediately distanced himself from the tariff hike, saying he saw in it the "the influence of certain business circles," a clear reference to Plahotniuc, and Economy Minister Lazar started to backtrack, saying while the decision might be justified, the timing was not. The new tariffs were due to apply from March 1, but Moldova's anti-monopoly agency suspended the decision in February. But hardly had the government backed down on this issue, than it found itself

Calling up trouble Public suspicion of Plahotniuc's influence on state companies seemed confirmed in January when state-owned Moldtelecom, Moldova's fixed-line telecommunications operator, announced a sharp rise of domestic tariffs – by two or three times according to price category. Moldtelecom, still under Voronin-era management, is a profitable company that pays large sums into the budget, while at the same time domestic tariffs are held low as a subsidy to the rural population and pensioners. Moldtelecom's management justified the tariff hike as a reasonable step towards the abolition of cross-subsidisation. The company makes its money from international calls, thanks to the huge number of Moldovans living and working abroad, and has traditionally kept these high to subsidise the low domestic rates. At the same time as raising domestic prices, it cut the international rates, a move it called "rebalancing." Moldovans are sceptical. The population is currently reeling under the double-whammy of soaring food prices and hiked energy prices due to IMF demands, at the same time that public

"You don't have to be a conspiracy theorist to believe having the country's richest man in a position to influence privatisation of the family silver won't inspire public confidence"

wrestling with another Moldtelecom scandal, this time more directly Plahotniuc-related. It transpired on February 24 that over the course of the previous two weeks, Moldtelecom, together with 13 other large companies – including the Moldovan postal service, Chisinau airport and the health and education ministries – had transferred bank accounts hitherto held with the state-owned savings bank Banca de Economii, to the private Victoria bank, the country's largest private bank, which Plahotniuc ran until entering parliament in November. The details of this sudden migration of bank accounts are still unclear. Plahotniuc disputes the claim, saying that Victoria Bank has had some Moldtelecom accounts since 2007; Plahotniuc's office wouldn't comment to bne. Other companies have said that Victoria bank simply offers better conditions. Expresident Voronin is using the story to accuse the government of destabilising both Banca de Economii and Moldtelecom in the run-up to privatising them to insider interests. ie. Plahotniuc. "The problem is that with Plahotniuc there in the Democratic Party, people are prepared to believe the worst, and his presence there makes opposition claims about wrongdoing more credible," says Cornel Ciurea of think-tank VIITORUL. "But it does all look very strange." What's in a name At the same time as the battles over Moldtelecom, Plahotniuc has had his own personal scandal to deal with. In January, investigative journalists discovered that Plahotniuc – who like many Moldovan politicians, including Filat, also has Romanian citizenship – had recently changed his name in Romania from Plahotniuc to Ulinici. Thus he had effectively acquired a second legal identity in Moldova's neighbour, and used it to register real estate there. Plahotniuc claims the name change was intended to help his son who is studying in Romania and who, Plahotniuc claims, faces discrimination over his Slavic surname. The excuse predictably convinced no-one, but instead left Moldovans wondering quite literally: Who is Mr Plahotniuc?

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No one is talking about us anymore. I paid a visit at a car show two days ago and got invited to have dinner with another 50 guests, starting with Mr Peugeot, Mr Porsche, Mr Cartier and many other such brands, and I was told, 'Look what a silent country you've got, there's no more talk about it,'" Tiriac related. Where did all the money go? In the past two years, Romania has lost €13bn from its nominal GDP and more than 11,000 companies, mostly local ones, with a total turnover exceeding €11bn, have become insolvent, according to a statistics put together by business daily Ziarul Financiar.

Romania's engines starting, but still choking BLACK SEA BLOG:

Bogdan Preda in Bucharest

Y

es, it's true, there is indeed serious talk that Romania could see some real economic growth resuming even as soon as the first quarter and by as much as 1.5% for the entire year. At least this is what the government and the International Monetary Fund (IMF) are betting on.

much length to go so that when Europe will somehow pull together, emerging countries especially like us shall get a bigger piece of cheese to eat than the others," was the way that Ion Tiriac, one of Romania's richest businessmen, described the country's situation in a ProTV programme on March 5.

Still, investment connoisseurs are holding off putting down any money yet. Regardless of whether official statistics indicate sometime in the first half of May that growth has returned after more than two years of contraction, 2011 is still being seen as a transition year that will only lay the ground for 2012.

What Tiriac, formerly the coach of German tennis star Boris Becker, meant was that there is still a lot of room for growth in Romania. He believes that 2011 will be similar to 2010 and that

Whether that ground in 2012 will be smoother or rougher than expected depends on another factor: Romania will hold legislative elections in 2012, and politicians will be fighting to secure another four years during which they can enrich themselves and will do so by breaking promises of economic austerity that have thus far restored some financial discipline and narrowed deficits under IMF and EU pressure. So that could again bring about recession. "The only good news is that we've got so

Tiriac, one of Romania's most respected business people, went on to criticise the government for failing to do enough to encourage investments in the EU country by improving infrastructure, while wasting huge amounts of money. "Tell me please, where did about half of the GDP revenue or about €500bn for the past 20 years go? This money should show something. Where's this money, for I don't know where it is?" Tiriac asked, arguing that he should have the right to know what the money his companies pay as taxes is being used for.

However, such growth cannot and will not be robust if Romania doesn't also turn to production and healthy investments instead of building its economy on growing consumption, as it has done in recent years. "We became amorphous.

Southeast Europe

€37bn in 2010, when it was forced to ask the IMF and World Bank to rescue its badly managed policies with a new austerity-backed lending programme totalling €20bn. Since July, the government has taken measures that have mainly hurt the general population rather than improving its policies or money management. It has increased the VAT tax from 19% to 24%, among the highest rates in Europe, while slashing a quarter of the salaries of its 1.4m government employees, cut state pensions by 15% and also partially or entirely slashed other forms of social aid, including child-care allowances. Additional actions included starting to tax interest rates on almost any kind of bank deposits from zero to 16%, tax foreign-exchange operations, additional house ownership and much more. New deal Such measures narrowed the budget deficit and brought back some hope for growth. What the government failed to do though was implement a sound national investment and EU-funding absorption plan that would restore its credibility and bring back foreign

investors. Many such investors are still staying away from Romania for reasons starting with corruption and red tape, and ending with a business environment that is less predictable than in neighbouring Bulgaria, for example. Annual foreign direct investments in Romania decreased to less than €3bn in 2010 from about €4.5bn in 2008. Still, the IMF's executive board on March 25 approved a new 24-month precautionary stand-by loan to Romania totalling another €3.5bn, which the government said it doesn't plan to draw on. That remains to be seen, as is also the case with the additional precautionary support of €1.4bn from the EU, plus €400m from the World Bank. The IMF said that, "the fiscal and structural measures already implemented are yielding results. The economy has stabilized and growth is resuming." Yet all of this money that Romania has borrowed, and may still need to borrow, will eventually have to be paid back over the coming years, while billions of euros that come for free from the EU are still not being drawn due to a lack of project implementation policies.

About 20 years ago, when it broke with communism and the euro didn't yet exist, Romania had an economy worth about $40bn a year. In 2008, when the global financial crisis reached the country, its economy had grown to about $200bn. Despite such growth and the many billions of euros the country

"We became amorphous. No one is talking about Romania anymore" Romania could start pulling out of the crisis only in 2012.

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could have received as non-reimbursable funds in the past four years since it joined the EU, Romania's infrastructure remains very poor, and its health and education systems are creaking. And as if it weren't enough, Romania's public debt increased from the equivalent of about €5bn in 1998 to almost

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Romania drew on less than a third of the nearly €9bn available from the EU for the 2007-2010 post-accession period, simply because it didn't have the right programmes in place to implement the absorption of such funds, whose disbursement is strictly monitored to prevent funnelling of cuts to third parties. Ironically, the fields in which Romania drew the smallest amount of money from the EU are those in most need of investment: infrastructure and transport with just 2.3% of total available funds absorbed, and public administration with just 7.8%. "We haven't used anything of this money to start the car," Tiriac noted. According to Tiriac, the real sign of economic recovery in Romania will be when banks resume more serious lending in terms of volumes, meaning that borrowers' trust in bank loans shall also be restored. "Banks have a lot of money now, even in Romania there is money in the banks, but they're so prudent or even hyper-prudent because they don't exactly know where, how, what and to whom they should give money," Tiriac said.

Kester Eddy in Ljubljana

B

Sloveneyards

ojan Kobal bangs the table in his enthusiasm when talking about 2003, when he took over as chief winemaker at the Ptujski Cellar, northeast Slovenia. Dating back to 1239, it lays claim to being the country's oldest winery; but eight years ago, standards were no better than in the Yugoslav era. "The farmers were used to bringing all sorts of grapes to the winery, whatever the vine plant growth. They had 3 [kilograms] and 5 kg [of grapes] per vine, and sometimes 20% botrytis [fungus] on there. From that you cannot make [high-quality] wine," he says. Finding the Ptuj cellar largely awash with plonk fit for only the domestic


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market, Kobal and his small management team met the farmers and spelled out the choice: cut back the yields and produce better grapes, or sooner rather than later, join the dole queue. "We put [different] wines on the table, and said, 'Okay, this is wine [made from grapes] with 1% botrytis, this is with 5%. This wine is made from grapes with [a yield

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national attention, and markets, since Slovenia's independence 20 years ago. The popularity of London's Slovenian wines press and trade tasting, which takes place in early April, is an indication of the increasing interest in the Alpine country's viniculture – and in the rising self-confidence of the vintners

"Cut back the yields and produce better grapes, or sooner rather than later, join the dole queue" of] 1.5 kg per vine, this is 5 kg per vine. Taste them. How long do you think you'll be able to work with grapes that make this kind of [low-quality] wine?',” he recalls. Kobal then set about overseeing production from some 60 different grape growers across an area of 450 hectares, stretching from the Croatian border south of the river Drava to hills well north of Ptuj, cajoling, pleading and occasionally threatening them to raise standards. The winery, he insisted, would accept only first-class grapes with a maximum of 1% botrytis. "More than that, and they were second class, worth only half the price," he says. Eight years on – aided by a hefty €2m investment into new cellar equipment (paid for by the owner, Perutnina Ptuj, the local poultry producer) – Kobal has achieved little short of a revolution. The Ptuj Cellar, now under the brand name Pullus, boasts scores of medals from competitions at home and abroad, and produces some 2m bottles of quality wine, of which close to 10% is exported. After a tasting in New York in March, John Foy, a US wine consultant, wrote on NJ.com: "If you're looking for a novel wine experience that will impress your been-there-drank-that friends, pour a glass of Ptujska Klet Pullus Welschriesling 2009." One bottle in a crate Pullus is only one of a growing band of Slovene wineries that has gained inter-

themselves. Launched only last year, when it attracted 26 producers, this year's event attracted 32, Tina Coady of the organisers Hunt & Coady tells bne – though she cautions that in terms of the UK market, awareness of Slovene wines is still very limited. The charge for high-quality and innovative wines was arguably led by wine makers from the Primorje region, south-west Slovenia, beginning in the mid-1990s. In particular, winemakers from the Goriska Brda sub-region (abutting the Italian Friuli border, near Nova Gorica) such as Marjan Simcic, Edi Simcic and Ales Kristancic have all won critical acclaim internationally – and sell a high proportion of their produce in Western Europe, the US

port of Koper, has worked his own revolution on the local refosco grape, which until recently was little known outside the region. "Mr Glavina is one of few Slovene winemakers who dared to use a foreign consultant. With this help, he has changed the way we look at the refosco grape, making it age-worthy and drinkable at last," says Robert Gorjak, a Ljubljana-based wine specialist. The hard work has paid off – Santomas exports about 60% of its production of 80,000 plus bottles, chiefly to the US, Poland, Denmark and the UK. But the Primorje region benefits directly from Slovenia's strong domestic and international tourism sector, and many wines from the smaller, niche wine makers have become quite pricey. Starting later, and in the less-fashionable – and less-visited – north-east, Bojan Kobal faces a tougher task, forcing him to employ a strict pricing policy in order to ensure Pullus wines carve out a stable and reliable market for his much larger vineyard production. As a result, Pullus' mainstream quality wines are priced to reach the domestic supermarket shelves at around the €5-6 per bottle, despite the high costs of working the steep slopes south of the Drava, which rule out the use of machinery in the vineyards. He admits the tight pricing causes grumbles from the grape growers, but

"Mr Glavina is one of few Slovene winemakers who dared to use a foreign consultant"

and Japan. "I particularly like Marjan Simcic, a brilliant winemaker who pioneered lengthy maceration techniques [which allows the grape skins to soak in the pressed grape juice] for whites, making them capable of keeping several years," says Angela Muir, a UK wine consultant. Further to the south, Ludvik Glavina of the Santomas Winery, near the Adriatic

urges patience. "There are 22,000 winemakers in Slovenia – it's a very crowded market. I'm certain our Sauvignon Blanc can be compared to any [on the international market], but nobody built a regional name in two to three years. If you build a name for your region, then you can slowly raise your prices. And that is our plan," he says.


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bne May 2011

Jailed in Georgia Molly Corso in Tbilisi

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n April 1, two Israeli businessmen were found guilty of attempted bribery in Tbilisi – a case that threatens to undermine Georgia's image as a country primed for investment by raising concerns over its commitment toward business when its own interests are at stake. Ron Fuchs and his associate Ze'ev Frenkiel were found guilty of attempting to bribe Deputy Finance Minister Avtandil Kharaidze – a widely anticipated verdict after months of hearings and high-level political statements against the two men. Fuchs received a seven-year sentence; Frenkiel received six months less. The sentences are slightly lower than the eight-year maximum allowed by law. The two men were arrested in October as part of an organised police operation – seven months after Fuchs and his Greek partner won an arbitration settlement against the Georgian government in the International Centre for Settlement of Investment Disputes (ICSID). Fuchs, an oil and gas trader, and his partner Ioannis Kardassopoulos, won

the award – worth over $100m – after a 14-year dispute with the Georgian government over rights to the country's strategic oil and gas pipelines. According to the prosecution, Fuchs and Frenkiel attempted to bribe Kharaidze in an attempt to stop the government from plans to appeal the award. Both have denied the charges and plan to appeal the Tbilisi City Court verdict in May. While the bribery case in Tbilisi does not have a direct impact on the arbitration award – currently under review

deals to illegally secure the pipeline rights. The arbitration case is currently under review and a decision on Georgia's appeal for annulment of the award is anticipated later this year. Backlash Gigi Tsereteli, a member of the ruling party and a deputy parliament speaker, tells bne that the case has "corrupt roots" that "cannot be accepted as legal." But observers warn the potential fallout from the bribery case – and the government's handling of the Israelis' arrest – could cost the country a lot more than the roughly $100m settlement.

"The fallout from the bribery case could cost the country a lot more than the roughly $100m settlement" by ICSID – the verdict dovetails with the ruling party's position that Fuchs resorted to bribery and underhand

Backlash against the arrests and the criminal sting operation started in October, right after the men were arrested,


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when Israeli government officials disputed the charges. Rumours that bilateral relations were tense increased after Parliament Speaker Davit Bakradze delayed a trip to Israeli in March. While the Georgian Ministry of Economic Development and Sustainability and the National Investment Agency assert Israeli investment interest in Georgia remains high, the perception that Georgia has sacrificed potential investment to settle a score persists. This verdict, according to Archil Kbilashvili, the lawyer who defended Fuchs and Frenkiel, will have a "chilling" effect on business. "If this could happen to Fuchs, it could happen to anyone," he tells bne after the verdict was announced. Lincoln Mitchell, an associate at Columbia University's Harriman Institute, says, however, that the trial will not "single-handedly" damage Georgia's

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international reputation, though admits it has the potential to detract investors from Georgia's pro-business message. Georgia is trying to build on successes, like its rank on the World Bank's "Doing Business" survey and the planned Trump brand resort in Batumi, to aggressively market the country to potential investors. Foreign direct investment, the lifeblood of the Georgian economy, was down to $533m, just 16% of 2009 inflows. Incidents like the Fuchs trial could undermine efforts to increase investment by distracting potential businesses, Mitchell says. Currently, investors hear two conflicting messages about Georgia: the government's pro-business, reform winning policy and the Fuchs trial. "There are a lot of appealing reasons to invest in Georgia – and a lot of reasons not to invest," he says, noting market size and location.

Tsereteli, however, insists that Georgia is still open for business. "I don't think it will have a serious effect on bilateral or business investments in Georgia, because everybody who wants to understand what happened can also see all the facts of why it happened," he says, underscoring that the government will be "as helpful as they can be" for companies staring a "legal business."

sent elsewhere in the union, justifying the 3.5m heads of cattle in the country. But since then, the number of cattle has fallen to under 2m and herds of other animals dwindled as well. The 16m-strong population was catered for, but there was little incentive to produce more due to the restrictions on meat and dairy product transport between Kazakhstan and Russia.

But Mitchell noted the juxtaposition of the Israeli arrests against Georgia's drive for more investment creates a more "complicated" image for potential investors to digest. Instead of driving home its moral high ground in the region – ally to the US, supporter of the Nato mission to Afghanistan – the trial raises questions about Georgia's orientation. "One of the appeals to investment in Georgia was that it is the [morally] right thing to do. In many ways, that is still true... but the Fuchs case... creates a more complicated picture," Mitchell says.

That has all changed with the launch last year of the Customs Union between Russia, Kazakhstan and Belarus. "Thanks to the Customs Union, we have not only a single customs area, but a single veterinary space. It has opened a market of 170m people," says Mamytbekov.

Mamytbekov likens Kazakh meat to a flavoursome wild apple, rather than one ripened in an orchard. "The product is organic, there are no growth hormones, unlike in many meat-exporting countries. We have not produced genetically modified plants for cattle fodder, our animals graze where they choose on the steppe," he says.

Kazakhstan to beef up exports Clare Nuttall in Astana

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azakhstan wants to take advantage of its proximity to the world's largest beef importers. The country's abundance of pastureland and history of nomadic herding is a good start, but investment in modern

technologies and good breeding stock are going to be equally important. Speaking to bne shortly before his promotion from chairman of KazAgro to minister of agriculture, Asylzhan

bne May 2011

In 21st century Kazakhstan, few people still take their animals to the high summer pastures, living in yurts while they fatten their herds. But meat is still at the heart of Kazakh cuisine and culture. At banquets and family gatherings, the centrepiece is the huge platter with meat piled high on a bed of noodles. Beshbarmak – the national dish – is usually made with mutton or horsemeat, but can be beef, camel or even fish in the areas near the Caspian Sea. It is washed down with fermented mare's or camel's milk. "Kazakhs are the second-highest consumers of meat in the world," they like to tell foreigners. "The first are wolves!" Herd mentality In the Soviet times, Kazakh meat was

In March, Kazakh First Deputy Prime Minister Umirzak Shukeyev announced plans for a massive increase in beef exports – to 60,000 tonnes a year by 2015. KazAgro, which has the dual role of ensuring domestic food security and increasing exports, will be the main player supporting with the project from the government side. Part of the rationale for the attempt to boost beef production is that Kazakhstan is surrounded by some of the world's largest beef importers. According to Mamytbekov, Russia imports 1m tonnes of beef a year, China 200,000 tonnes and South Korea around 300,000 tonnes. "Being near to these countries and with favourable conditions to increase production, it would be a sin not to take advantage of the situation," Mamytbekov tells bne. However, sufficient grazing space won't be enough. Local cattle don't meet international standards for genetic quality and internationally popular breeds of cattle such as Hereford, Angus and Charolais haven't been bred in the country. "We need to improve the gene pool of cattle," says Mamytbekov. As such, Kazakhstan kicked off an import programme in October by flying in some 2,040 Angus and Hereford cattle from North Dakota. This was part of a $50m deal between North Dakota's Global Beef Consultants and the Kazakh

Eurasia

A foregone conclusion

Clare Nuttall in Astana Kazakhstan's April 3 presidential poll returned President Nursultan Nazarbayev to office with an inconceivable 95% of the vote on a 90% turnout, but the election was marred by widespread allegations of ballot box stuffing and heavy pressure on state employees to turn out and vote for the president. There was never any doubt that the early presidential elections – brought forward from December 2012 – would result in another victory for Nazarbayev, who has ruled the country since independence 20 years ago. The latest election raised the president's share of the vote from an already high 91.2% in 2005 to 95.5%. The official turnout figure of 89.9% was also startlingly high, especially given low-key campaigns and the lack of any serious challenger. None of Nazarbayev's three rivals took more than 2% of the vote. The closest runner-up was Gani Kazymov, leader of the Patriots Party, with just 1.9%. The other two candidates, Zhambyl Akhmetbekov of the Communist People's Party of Kazakhstan, and Mels Yeleusizov of the environmental movement Tabagat, took 1.4% and 1.2% of the vote respectively. Two Organisation for Security and Cooperation in Europe (OSCE) institutions – the Office for Democratic Institutions and Human Rights (ODHIR) and the OSCE Parliamentary Assembly – issued a highly critical report on the conduct of the elections on April 4, highlighting ballot box stuffing, repeat voting and a high degree of pressure on the electorate to vote. Ambassador Daan Everts, head of the OSCE/ODIHR long-term election observation mission, said many shortcomings seen in earlier elections in Kazakhstan were still present. "On election day, there were reports from all over the country of undue pressure on people to vote. This would explain the spectacularly high turnout," Everts said. In particular, there was "rather strong" pressure from state institutions such as universities, hospitals and military establishments. "For example, supervisors at one institution told their subordinates that if turnout was not 100%, there would be severe penalties," Everts said. "Urging people to vote is not wrong, but this came very close to forcing people to vote, which is against the law." Serene At his victory rally in Astana, Nazarbayev seemed untroubled by criticism of the election process as he prepared for his fourth term as president. "More than 90% for a candidate. Why, this is a sensation for Western countries," he said to supporters. "If polls usually divide a nation into various party blocs, we have united. While the word sees bloodshed and ethnic conflict, we - all the ethnic groups and religions of Kazakhstan are one."

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government, which will also includes building breeding facilities and a feedlot. Over the next five years, Kazakhstan will import nearly 70,000 head of cattle, mainly from the US, Canada, Australia, and north European countries including the UK, Ireland and Scandinavia. But while the North Dakotan cattle are already accustomed to harsh winters and severe wind chill like that on Kazakhstan's northern steppes, extra investment will be needed for animals imported from more temperate climates. Building special barns for some cattle will add further to the costs of the project. Beef buzzword KazAgro is also looking into more effective refrigeration for its meat products.

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According to Mamytbekov, locally manufactured refrigerators keep products fresh for just three days; introduction of newer technologies will increase this to two to three weeks. This, combined with completion of the Western ChinaWestern Europe highway, will make it possible to increase exports to Europe in refrigerated lorries. This is a common theme across Kazakhstan's infrastructure for products from grain to wool - a need for investment into modern farming techniques, storage facilities and transportation infrastructure. Beef is the current buzzword in government agricultural circles, but demand for lamb and mutton is also high, and in the foothills of the mountain ranges of south and east Kazakhstan there

are good conditions for production of fine wool. Kazakhstan also has its own particular delicacies. While the opportunities for exporting camel steaks or fermented mare's milk may be low, Mamytbekov considers there are good prospects for exporting horsemeat, especially to Europe. "France imports more than 40,000 tonnes of horsemeat a year and Italy also imports a lot. They are very interested," says Mamytbekov. "Investment is needed to make sure our meat will comply with the standards of the importing countries, and this will require some effort. However, horsemeat is on the menus of France and Italy, and globally consumption is growing. The demand is there, and in principle, we can satisfy it."

over the past couple of months – "Coal Mongolia" gathered private and state representatives to discuss the country's rich source of coking and thermal coal for China, while the "Mongolian Economic Forum" opened up government house to discuss the state's decisions and future role in Mongolia's development.

Mongolia's next step – fame to fortune Oliver Belfitt-Nash in Ulaanbaatar

A

s the world waits to hear in May which firms have won the rights to develop Tavan Tolgoi, one of the world's biggest untapped coal deposits, Mongolia's citizens and international investors are pressuring the government

to change its outdated legislation and prepare the country for the boom ahead. The high level of interest in Mongolia's coal reserves and the country as a whole was exemplified by two conferences

Introducing the latter, Prime Minister Sukhbaataryn Batbold outlined the year ahead. "Mongolia's GDP per capita is $630, under the average of developing countries. We have high goals in front of us. Our focus must be on governance, and government regulations need to be clear," he said. "Our strategies cannot be based on a wish list but on research, and the development must be sustainable and direct to the people. We will eradicate corruption and clearly define the boundaries between state and private sectors. Last year, these issues were like a half-killed snake." Last year's political mantra was "improving the business environment" and gathering interest for international investors to financially support the coming resource boom. As we head into 2011, however, it is becoming evident that the interest is already there. Mongolia has quickly become a hot spot for those investors looking for high returns in emerging markets.

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On April 13, Erdenepurev Amarkhuu, director-general of fuel policy at the Ministry of Mineral Resources and Energy, told reporters in Beijing that Mongolia will probably choose in May more than one of the six groups shortlisted for the Tavan Tolgoi project. The shortlist includes Peabody, a Shenhua Group-Mitsui joint venture, Vale, a

"Good governance is just a catchphrase in Mongolia"

Russia-Japan-South Korea group, ArcelorMittal, and Xstrata. "Definitely not one," Amarkhuu said. "It'll be a combination of the companies." The giant Tavan Tolgoi coal deposit contains an estimated over 6.4bn tonnes of coal, 25% of which is coking coal used for steel production. With China only 240 kilometres away and desperate for more coking coal, Tavan Tolgoi is the name on every Mongolian's lips. The current tender is for the central and western part of the site, while the eastern half will be 51% kept by the Mongolian government, 10% given as shares to citizens, and 10% sold to domestic companies. The remaining 30% of this half will be sold on international exchanges, and the underwriters' shortlist includes BNP Paribas, Macquarie, Goldman Sachs and Deutche Bank. Dutch Disease Despite the bold plans, there are still some major concerns in Mongolia. With such a young judicial system and hazy implementation methods, citizens and investors are calling for the government to deliver on reforms so that this investment boom won’t end up wrecking the economy. "Good governance is just a catchphrase in Mongolia," complained Sambuu Demberel, CEO of the Mongolian National Chamber of Commerce and Industry, at the "Mongolian Economic Forum". "There is a need for speed. We

Eurasia

have become too comfortable with the revenues from mining and are caught in this 'mining mania'. We must go deeper into the economic issues." Over the three days of panels and Q&A sessions, the problems that Mongolia faces in this next step became evident. The Mongolian Stock Exchange (MSE) is inefficient, infrastructure is dire, corporate governance is under par and political attitudes are outdated. Threats of "Dutch Disease" and high inflation are on the horizon. Last year, the ruling party promised over $1,000 cash to each citizen, widely condemned as a vote "bribe". This year, Mongolian President Tsakhiagiin Elbegdorj stood at the podium to apologise: "We know now that promising cash is the wrong mechanism. We will never ever promise cash again." A serious quantifiable error in many concerns was the timing of the government's proposed plans. The recently passed "Concession Law" listed over 120 public-private partnerships (PPP) to begin the huge infrastructure development needed to support the mining boom. "This is not a working document, but a political remark," says Phillip ter Woort, head of the Mongolian office for the European Bank for Reconstruction and Development (EBRD). "PPPs are not easy instruments. People think it's to transfer burden, but it's not a free ride. It takes 18-24 months to finalise just one." None of the proposed PPPs yet have sponsors, and the infrastructure issue is fast becoming a serious bottleneck. The government promises that Tavan Tolgoi's extraction will begin this year, but with no rail line to ship the loads, people are beginning to wonder: are these promises, along with the 10% stock "gift", another of the state's dodgy pledges? There was open and blunt criticism from audience members who expected more from their government, and they received direct replies assuring them that Mongolia was on the right track. "The private sector wants to show how well it can work without corruption. We have an open, democratic system and that's why it will work," the president said.

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CORPORATE STATEMENT:

PASHA – the bank of choice for Azerbaijan business PASHA Bank is a young bank in a young country. Since its launch in late 2007, PASHA Bank has rapidly grown into one of Azerbaijan’s largest banks with a strong focus on the corporate sector.

P

ASHA Bank is one of the leading banks in the fast growing Azerbaijani market, working with most of the large corporations and servicing private accounts, but the bank also pays special attention to small and mediumsized enterprises (SMEs) that are the backbone of the local economy. PASHA Bank received its banking license in November 2007, but unusually for Azerbaijan is a specialist bank in a sector dominated by universal banks. It is a strategy that has paid dividends: PASHA Bank is the second largest bank by assets and remains highly profitable. “PASHA Bank has grown steadily through several difficult years,” says Farid Akhundov, chairman of the board of PASHA Bank. “The global financial crisis was felt in Azerbaijan, but we managed to be one of the most profitable banks in the market.” The 2008 crisis was a wake-up call for the Azeri banking sector, underscoring the need for reforms and strong risk management. PASHA Bank was already a market leader in term of ethical business practices and already holds twice-yearly audits by an international audit company, which will be soon increased to quarterly audits. PASHA Bank invested further in corporate governance by becoming one of the first banks to set up a compliance department equipped with the first compliance officer in the country to be accredited by the internationally recognised ALCO (Association Luxembourgeoise des Compliance Officers du Secteur Financier). “We are transparent about our ownership, our management structure, and we want to be open and ethical in dealing with our clients and employees,” says Akhundov. “Our reputation is all we have. We are very careful with our reputation, and will not compromise it just for the sake of getting additional money or clients.” Funding is currently sufficient for the bank’s growth plans, but from next year PASHA Bank will start considering obtaining

Farid Akhundov Chairman of the Executive Board

an international bond issue and Akhundov says PASHA Bank will be ready to tap the global debt markets. “2011 is the last year of our current three-year strategy. We already have a very clear management structure, relevant infrastructure, all business processes in place,” he says. “Our next strategy, among other goals, envisages obtaining a rating, and looking for a benchmark rate. We hope Azerbaijan as a sovereign and the major state-owned companies will soon enter international capital markets, opening the road for the private sector to do the same. Then we can look at our own needs.” In the foreseeable future, PASHA Bank plans to expand abroad – both into neighbouring countries and further afield – as well as ambitious plans for the bank’s capital markets division. The domestic capital market is young, but PASHA Bank is working closely with the Azerbaijan securities committee and stock exchange to developing the domestic securities market. The bank plans to be a pioneer in developing the fixed-income business to become a leading underwriter and market-marker in the domestic bond market. “We have already acted as market-maker on several local bond issues, and we want to position ourselves as the leading bank in securities trading and capital market transactions,” says Akhundov. In recent years, oil-rich Azerbaijan has been one of the world’s fastest growing economies, but there is still everything to do in developing the bank sector, which has assets of a mere $14bn – a very low level for an economy the size of Azerbaijan’s. The youth of the market leaves banks like PASHA Bank with plenty of growing room. “We have high hopes for 2011,” says Akhundov. “There are a lot of opportunities to expand financial services coverage within the country, and to encourage companies to use banks rather than cash. There is high potential for us to increase the number of clients and client turnover.” Akhundov forecasts consolidation among Azerbaijan’s 46 banks, and expects the market to become more competitive. “Increasing our competitiveness is a priority for us,” he says. “We want to be an able competitor, both against local banks and the foreign banks we expect to enter the market.”

Confession note #01: Our corporate sailing team finished last at the Summer Sailing Competition with almost a day gap from the other teams.

Confession note #02: PASHA Bank is the largest commercial bank in Azerbaijan by total equity reaching USD 171 mln, with net profit of USD 17 mln in 2010.

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Unfortunately, notes Erste Group, this was a short-term fix and was provided without strict conditions, meaning the imbalances of these Eurozone countries were able to persist or even grow in 2010. Meanwhile CEE countries – some of whom had stringent conditions attached to their bailouts from the International Monetary Fund (IMF) – narrowed their current account deficits substantially during that time. According to Erste, 2010 finally brought a reversal in those capital flows – portfolio capital as well as foreign direct investment (FDI) – in CEE. The bank calculates that

However, Kotian adds that he expects the rating agencies to wait until next year to see the extent of the softening in the coalition government's fiscal consolidation efforts. The three-party coalition took office last year with, for once, a decent majority in the lower house, but has since been plagued by a series of scandals that has

Ukraine

Turkey

Romania

Ba1 Ba2 Ba3 B1 B2 B3 Caa1

Hungary

BB+ BB BBB+ B BCCC+

Slovakia's ratings all have a stable outlook. Michal Musak of Slovenska Sporitelna says further improvement hinges on the success of the government's fiscal consolidation efforts. The authorities aim to cut the fiscal deficit from an estimated 7.8% of GDP in 2010 to 4.9% of GDP this year, and ultimately below 3.0% by 2013. If the government manages to get the deficit close to the 2011 target and further consolidation measures for 2012 are approved, "this could prompt rating agencies to revise Slovakia's ratings upwards," says Musak.

Croatia

BB+ BB BBB+ B BCCC+

blue/white/red = stable/positive/ negative outlook change between Jun 2008 and Dec 2009 the rating as of mid 2008 change since Jan 2010

Special focus

Slovakia was a magnet for FDI in the years leading up to the crisis (much of it going into the auto industry), but this slowed sharply in 2009. Even so, the country managed to get through the crisis without experiencing any severe strain on its external financing, or having to resort to a bailout from the international community, and now FDI levels are picking up again, with notable investments in the past 12 months coming from Volkswagen, KIA and Samsung. Though Ivan Miklos, Slovakia's deputy prime minister and minister of finance, told bne in February that he doesn't expect FDI to reach the dizzy heights seen before the crisis again, he nevertheless expects it to be sufficient to keep a lid on the current account deficit, which is expected to widen in 2011 to around ¤2.3bn, representing 2.9% of GDP, from an estimated ¤1.8bn, or 2.5% of GDP, in 2010.

Poland

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3

"However, if the elections pass smoothly, and if we see fiscal and monetary policy tightened afterwards, plus some evidence of a slowdown in domestic demand, I think they will move by year-end, with Fitch going first," he adds. Ozlem Derici of Erste Securities Istanbul has similar expectations: "We expect Turkey to be rewarded with a onenotch upgrade from Moody's and/or S&P after the general elections, most likely in the last quarter of the year."

Czech Rep.

AAA AA+ AA AAA+ A ABBB+ BBB BBB-

Greece

AAA AA+ AA AAA+ A ABBB+ BBB BBB-

Ireland

Rate of change Looking at the best candidates for an upgrade by the end of this year or early next, the Czech Republic, whose 'A1/ A+/A' ratings are on a positive outlook, stands out. FDI inflows to that country more than doubled in 2010, making them the highest in the region, almost 4% of GDP. "In nominal terms, they were even higher than those in 2008," says Kotian.

Portugal

Wasted opportunity In the first quarter of 2009, Central and Eastern Europe suffered huge capital outflows. This caused the prices of those countries' credit default swaps (CDS) – contracts bought to insure against the default or restructuring of debt – to peak above those for Ireland, Italy, Greece, Portugal and Spain (PIIGs), who as members of the euro were not at risk of a currency devaluation. In addition, their financial sectors had access to the European Central Bank's refinancing facility, which eased the pressure on the financing of current accounts.

The markets are already pricing in some changes. Erste notes that Slovakia (rated 'A1/A+/A+') pays a lower risk premium than the better-rated Spain and Italy. Croatia ('Baa3/BBB-/BBB-') and Hungary ('Baa3/BBB-/BBB-') – which are both at the low end of investment grade – and Romania ('Ba1/BB+/BB+') – which was downgraded to junk category during the crisis – can now borrow more cheaply than Portugal ('Baa3/BBB-/BBB-'), which is still rated higher than Romania and at the same level as Croatia and Hungary.

Still, analysts suspect that parliamentary elections in June will prevent any action coming from the rating agencies sooner. "I doubt we will see action before the elections now. The ratings agencies know it should be investment grade already and that they are behind the curve, but they often need a strong reason to move. I think that reason was to be the fiscal rule, but that got pulled, and now with the widening current account deficit they will be reluctant to move

Italy

The question then arises, how long before the rating agencies – much maligned since they were found to be asleep at the wheel (yet again) when a financial crisis broke – move to align ratings to fundamentals?

Spain

However, it's not just Bulgaria that enjoys low debt levels and low current account and budget deficits, this situation is repeated across emerging Europe – and stands in stark contrast to the situation on the periphery of the Eurozone, from where Portugal became the third member to go cap in hand to the EU for a bailout on April 7.

However, Turkey's growth has come at a cost: namely a credit boom, lots of hot money flowing into the country and a ballooning current account deficit. But Moody's was happy in April to see the central bank dramatically raise banks' reserve ratios to deflate the credit boom and curb the amount of speculative money pouring into the economy. "The Central Bank of Turkey's action is credit positive for Turkey's banking system. It will cultivate more sustainable credit growth at appropriately risk-adjusted returns and lengthen the banks' deposit maturity profile," the agency said.

Austria

This is backed up by the International Monetary Fund (IMF), which in an April report said that, capital flows to emerging market economies staged a strong comeback from mid-2009, although the rebound was more extraordinary in terms of its pace rather than the level that net flows reached. "That is true, the overall private capital flows are lower than before the crisis, but given narrower current account imbalances, the region is in less need for external financing through debt," says Juraj Kotian, Erste's co-head of CEE macro/fixed income research.

Moody's

The main triggers for the review, Moody's said, are the Bulgarian government's strong balance sheet and ongoing fiscal caution. "The key here is that Bulgaria has a public sector debt/GDP ratio of only around 15%, while it still has a fiscal reserve of around €3bn, ie. around 10% of GDP," notes Tim Ash, head of emerging market research at Royal Bank of Scotland. "The budget deficit is modest, at only around 2-3% of GDP, while the current account deficit, which had been around 20% of GDP, has collapsed to close to balance."

Turkey has been growing at a blistering pace, registering GDP growth of 8.9% last year, one of the fastest growth rates in the world, leading to calls from many, such as Turkish Finance Minister Mehmet Simsek, for the country's rating to be lifted to investment grade. Moody's last action on Turkey was in January, when the rating agency upgraded it from 'Ba3' to 'Ba2', two notches below investment grade. In March, the agency raised its outlook on that rating from stable to positive.

Fitch

after a deep slump of about 45% in 2009, FDI has picked up and was around 9% higher in 2010 in the countries it covers in the region (Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, Turkey and Ukraine). Erste also reports that since the fourth quarter of 2009, the region has experienced a rebound of portfolio investments, particularly into the Czech Republic and Poland.

S&P

n April 5, Moody's Investors Service put Bulgaria's 'Baa3' rating on review for a possible upgrade, citing its healthy finances. Other emerging European countries are also in much better shape than certain Eurozone members as capital flows back into the region, prompting the question of how long it will be before the rating agencies take more action.

Other good candidates for an upgrade, say analysts, are Turkey, Slovakia and Romania.

Rating by

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Investment grade

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quickly," says RBS' Ash, referring to proposed legislation that would've set fiscal targets for public debt and the budget deficit, but which was ultimately shelved in 2010.

threatened to break it up. That has also seen it water down reforms that would put the state finances on a sustainable path. "By the end of the year, beginning of next, the ratings agencies will have more information on the Czech's fiscal position," says Juraj.

Speculative grade

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MINING A RICH SEAM Clare Nuttall in Almaty

Special Report: Mining in Kazakhstan

photo: www.enrc.com


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T

he rally in global commodity prices that started in late 2009 and persisted throughout last year has put Kazakhstan's mining sector back on track after some severe setbacks during the international economic crisis. Now the mining sector's two giants, Eurasian Natural Resources Company (ENRC) and Kazakhmys, are reviving their investment plans, as are many smaller players. Kazakhstan's mining sector contracted by around 12% in 2009 after a decade of sterling growth. This trend was reversed the following year as prices for some of the country's main exports including oil and copper revived. Modest growth of around 7% is forecast for this year. To take advantage of the improving climate, Kazakhmys said it plans to spend $6bn over the next three to four years to develop new deposits, modernise and expand its existing metals business, and launch new energy projects. ENRC has $7bn of investment plans, and the country's largest steel producer ArcelorMittal Temirtau is partway through a $1.2bn programme to modernise its plants and improve its safety record.

Best China China remains the largest consumer of Kazakhstan's metals and minerals. Oil and oil products comprised 56% of Kazakhstan’s exports to China in the first 10 months of 2010, making it one of the top-10 oil exporters to China. Mining products – ore, slag and ash – accounted for 14.0%; copper and brassware for 13.7%; chemicals and isotopes for 7.3%; iron and steel for 5.8%; and zinc and aluminium for 1.5% each. "Almost all Kazakhstan's exports to China are raw materials, and China

Kazakhmys is developing two major copper deposits, one only 225 kilometres from the Chinese border. Kazakhmys announced in April 2010 that it was setting up a joint venture with China's Jinchuan Group to develop the Aktogay project in east Kazakhstan. Kazakhmys agreed to sell a 49% stake in the project to Jinchuan for $120m, and the two companies will also share the costs of developing the deposit, which are estimated at $1.5bn-2bn. According to Kazakhmys, Aktogay is one of the largest undeveloped copper deposits in the

"Almost all Kazakhstan's exports to China are raw materials" overtook Italy as the country's leading export partner in late 2010, accounting for 17.6% of all Kazakh exports," according to a recent report from Renaissance Capital. Unsurprisingly, China is also behind some of the largest investments being made in the sector.

world, and the company's output will increase by around a third once it comes online. In 2009, Kazakhmys obtained a $2.7bn loan from the Chinese Development Bank to finance its Bozshakol and Bozymchak projects. Bozshakol is due to start production by end-2015. In February, the Chinese Development Bank announced it has also extended a

Kazakhstan’s major mineral resources (1,000 metric tons)

Reserves

Quantity

World ranking

Chromite

350,000

1

Copper

40,000

4

Manganese

600,000

3

Gold

2

9

Iron ore

17,000,000

7

Lead

4,800

1

Uranium

900

2

Zinc

34,000

1

Source: USGS 2006

photo: www.enrc.com

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$2bn loan to ENRC on the same terms as that given to Kazakhmys in 2009. Of this total, $1.6bn is expected to be used by the iron ore division and $400m for the ferroalloys division. Like Kazakhmys, ENRC has ambitious expansion plans, and at the beginning of this year the company's then CEO Felix Vulis announced the company expects to invest up to $7bn to develop its assets within Kazakhstan. Key projects at home are the construction of a ferroalloy plant in the Aktobe region and the expansion of the SokolovskoSarbaiskoye Mining Association. ENRC may also invest up to $2bn in the Zhairem polymetallic project. While firmly rooted in Kazakhstan, ENRC is also expanding overseas. It has made several investments in Africa and South America. Another company well positioned to take advantage of Chinese demand is Kazzinc, most of whose operations are in the north-eastern corner of the country. The company is active in mining zinc and lead, and in metallurgy. Kazakhstan's largest steel producer, ArcelorMittal Temirtau announced at the end of 2009 that it was resuming all of its investment projects in Kazakhstan that had been mothballed due to the crisis. The company is spending on new steel production facilities and mines, as well as on improving its safety record (see related story). Kazakhstan's steel production was up 4.1% year on year in 2010, to 4.3m tonnes, according to the World Steel Association. Consumption within the country was also up to around 3m tonnes as new pipeline and construction projects – many of them government funded – pushed up demand. Kazakhstan also exports steel, with its main markets being China, Russia, Iran and the EU. There are also numerous smaller companies in various branches of the mining industry. Kazakhstan prides itself in holding all of the minerals in the periodic table, and investors are looking beyond copper and iron to the less known but valuable metals such as rare earths, which are increasingly in demand since China decided to slash its exports (see box).

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Rare earths

bne Kazatomprom, the state-owned nuclear holding company, said in April that it plans to invest about $800m with Russian and Japanese partners to mine rare-earth metals as supplies from China shrink. China is the world's dominant producer of rare earths, accounting for 97% of production in 2009, so its move in the second half of 2010 to reduce export quotas by more than 70% to conserve reserves sent shockwaves through industries, such as makers of cars and electronics, that depend on Chinese supplies. This is happening at the same time as demand for rare earths – a group of 17 chemically similar metals – is increasing rapidly. According to a report from Eurasia Capital, global demand for rare earths currently runs at about 134,000 tonnes per annum, which is expected to rise to 180,000 tonnes by 2012 and could exceed 200,000 tonnes by 2014. "Total world… demand is expected to exceed global production by 2014 and processing existing aboveground inventories, as is currently done to meet production shortfalls, will not be enough," the report says. This has inevitably set off a race to tie up supplies from other countries that possess large deposits of rare earths in concentrated and economically exploitable forms, such as Mongolia and Russia, as well as Central Asian countries such as Kazakhstan, Uzbekistan and Tajikistan. Kazatomprom CEO Vladimir Shkolnik said in an interview with Bloomberg published on April 4 that it and its Russian counterpart Rosatom could invest as much as $500m to mine rare earths in Russia and Kazakhstan, though he didn't give a timeframe. In Japan, Kazatomprom has teamed up with Toshiba and Sumitomo in ventures that could cost a total $300m, he said. Kazatomprom last year set up a venture with Tokyo-based Sumitomo to extract rare earths including molybdenum and rhenium from uranium ore that may need about $200m in investment, Shkolnik said, while a $100m tie-up with Toshiba is looking to produce niobium, rhenium, wolfram, tantalum and beryllium.

"Unsurprisingly, China is also behind some of the largest investments being made in the sector"


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license to operate if it did not improve safety. At the time, President Nursultan Nazarbayev, who began his career at the age of 20 at the steel plant when it was inaugurated in 1960 and worked there for several years, was deeply upset, according to a source who quoted his confidants.

ArcelorMittal's safety investment paying off Christopher Pala in Washington

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ver $340m and three years into its programme to cut coal-mining fatalities to zero in five years, ArcelorMittal Kazakhstan is finding that the accidents which had turned the steelmaker into a magnet for controversy have fallen significantly. The number of accidents in 2010 fell to 64, compared with 81 in 2009 and 179 in 2008; fatalities dropped from 42 to 7 in the same period. About 11,000 of the company's 40,000 employees work underground in mines made dangerous by methane deposits. "This shows we're taking the right measures," says Frank Pannier, CEO of the Kazakhstani unit of the world's largest steelmaker. That's certainly a sign things are moving in the right direction and will be a

relief to a company that was forced into action after an explosion at the Lenina mine, which is southeast of the capital Astana, killed 41 people in September

A sorry history Pannier says 2,548 people have died in accidents, mostly as a result of methane explosions, from the time the complex was built south of Astana in 1945, an average of 50 a year. Since ArcelorMittal bought the complex of eight coalmines and two mills in 1996, a total of 217 coalminers have died, which is still an average of 14 a year. The high casualty rate is largely due to the fact that ArcelorMittal's coal runs mostly at depths between 2,600 feet and 3,200 feet. That's very deep in comparison to other coalmining conditions worldwide. The coal seams are also some of the gassiest in the world, containing pockets of methane under pressure that are difficult to detect, says methane expert Clark Talkington. In contrast, for the rest of the Kazakhstani coal industry, which provides 80% of the country's energy, open-air strip-mining is the norm. In July 2008, the company embarked on a plan to eliminate methane explosions that combined staff training and the importation of state-of-the-art gas detection, ventilation equipment and world-class degassing techniques. The investment to improve safety at coalmines is undertaken in addition to a $1bn

"Many studies have shown that not all risks can be eliminated, but we can apply practices which mitigate this risk"

2006, which brought the staff out on strike. After another explosion at its Abaiskaya mine killed 30 workers in 2008, Kazakhstan's government publicly threatened the company with pulling its

programme to raise its output of steel from 4m to 6m tonnes by 2015. The European Bank for Reconstruction and Development granted a $100m loan for the safety programme.

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The programme for degassing is all about removing as much methane as possible out of the mine before production begins and removing the rest during the mining process, Pannier explains. Degassing holes of varying diameters are drilled across the production unit in the coal seam and through the roof of the extracted area to capture the methane, which is brought up by suction pumps on the surface. "What we're doing is doubling the number of ventilation wells," says Pannier. "We also are installing more effective ventilation and degassing equipment and more sophisticated equipment to detect gases."

in the world. "Management is clearly committed to improving safety, and I think they should be able to achieve that by bringing in the latest degassing technology developed in Australia and the United States and adapting it to the local conditions," he says.

A native of Dessau in Germany who has worked at steel and mining companies in Germany, Ukraine and Kazakhstan, Pannier descreibes eliminating mortality from Temirtau's eight mines as "one of the most challenging" jobs of his career. "Many studies have shown that not all risks can be eliminated, but we can apply practices which mitigate this risk," he says.

This year, steel output will be increased by 17% to 3.9m tonnes as demand bounces back, he said.

Talkington, a methane expert who is a senior vice president at Sindicatum Carbon Americas, agrees that ArcelorMittal's mines are among the most difficult

Though the worldwide recession has cut into the profits of the world's largest steelmaker, the Temirtau operation, luckily, "is very cost-effective," says Pannier. "We're working at full capacity, we have captive iron, coal and energy and we even managed to turn a profit in 2009," he says.

There's also hope of actually extracting a profit from the methane as well: in two of the mines, it's captured and used for heating, and an experimental 2-megawatt (MW) power station is being tested. If the technology proves successful, the company could use the methane to power a 50-MW plant to replace that amount of power the company now purchases from the grid, Pannier says.

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"The high casualty rate is largely due to ArcelorMittal's coal running mostly at depths between 2,600 and 3,200 feet"


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deputy chairman. Former chairman Kairat Kelimbetov was moved to the Ministry of Industry and Trade. He had some weeks before he made the statement – unpopular in Astana – that the IPOs were unlikely to happen before the end of the year.

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Gold standards Christopher Pala in Washington

The people's placements

Samruk-Kazyna was created in the depths of the global economic crisis through the merger of two existing organisations – holding company Samruk and investment company Kazyna – in October 2008. It quickly put to work billions of dollars to support the economy during the crisis. With Kazakhstan now growing strongly, the fund's role has evolved; it is responsible for creating new industries and increasing efficiency in the economy's most important companies.

Clare Nuttall in Almaty

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ith Kazakhstan's presidential elections out of the way, the focus in Astana is on the "People's IPOs". Plans to sell minority stakes in various state-owned enterprises – which include Kazakhstan's top mining and oil and gas companies – are a little behind schedule, but due to take place by the end of the year. The companies to be floated are those owned or partly owned by state holding company Samruk-Kazyna, which manages assets worth more than $70bn, accounting for around 40% of the economic activity in the country. Samruk-Kazyna has a total of 404 subsidiaries and affiliated companies, and shares in many of these companies will be offered at a discount to retail investors and pension funds. In addition to raising funds for expansion, this is also intended to stimulate the domestic capital market. At least some of the IPOs are due to take place by the end of this year, and an announcement about the first companies to IPO is expected in the near future. Companies currently expected to be part of the first wave of IPOs include power generation company Samruk-Energo, grid operator Kegoc and postal service Kazpost. In the following two years, IPOs of other companies including National Company KazMunaiGas (KMG), railway

operator Kazakhstan Temir Zholy and uranium miner Kazatomprom are planned. However, it's not yet clear exactly which companies will be floated in the first wave of IPOs, because government officials and Samruk-Kazyna are understood to have backtracked from some of their original choices when it became apparent how much work would be needed to prepare them for the stock market. Now there is greater enthusiasm for "People's IPOs" of companies that are already listed. Selling

Within Samruk-Kazyna, two holding companies, created in late 2008, are responsible for the chemicals and metals sectors respectively. The United Chemicals Company was set up to develop a national chemicals industry and reduce Kazakhstan's dependence on imports of products such as fertilizers. Tau Ken Samruk is the holding company for the Kazakh government's stakes in metals and mining companies. While oil and gas still accounts for the lion's share of Kazakhstan's exports, metals and mining have been growing in importance in recent years. Soaring metals prices and the steady growth in

"Samruk-Kazyna has a total of 404 subsidiaries and affiliated companies" off some more of the government's holding in companies such as the Londonlisted KMG subsidiary KazMunaiGas EP or mining giants such as Kazakhmys or Eurasian Natural Resources Corporation (ENRC) would be an easier task than taking a new company to the market. Reshuffle 2011 has already seen significant changes for Samruk-Kazyna. On April 12, Timur Kulibayev was promoted to chairman of Samruk-Kazyna as part of the post-election reshuffle. Kulibayev, the son-in-law of Kazakh President Nursultan Nazarbayev, was previously the company's

demand from neighbouring China in particular, were an impetus for Kazakhstan to increase its output. The government stakes in the two major London-listed mining companies, ENRC and Kazakhmys, are held within Tau Ken Samruk. Both companies have an immense presence on the Kazakhstan mining sector and internationally as well. Kazakhmys is the largest copper producer in Kazakhstan and one of the top-10 producers worldwide. ENRC, a diversified natural resources group, has a presence in China, Russia, Brazil and Africa, as well as Kazakhstan.

M

ost of the minerals in the periodic table are to be found in Kazakhstan, with plenty left in the ground for entrepreneurial smaller mining companies such as Frontier Mining and phosphates miner Sunkar Resources, as well as big players like Glencore International and Ivanhoe Mines.

the country. It is operated by Altynalmas Gold, in which Vancouver-based Ivanhoe recently raised its interest from 49% to a majority 50%. Ivanhoe is controlled by billionaire Robert Friedland. The rest of the stake is owned by a group of investors headed by Goga Ashkenazi, the London-based, Kazakh-born socialite and businesswoman.

Mining gold is a particular area of growth for Kazakhstan. President Nursultan Nazarbayev has set a goal of more than tripling gold production to 70 tonnes a year by 2015. There are technical challenges, however: most of the Kazakhstani gold is in poly-metallic ore that requires complex processes, mostly refractory, to isolate. But gold, which since 2000 has quintupled in price to $1,400 per ounce, is in tantalizingly abundant supply: the US geological survey estimates there are 1,900 tonnes of gold in the country. This makes it the world's ninth country in terms of reserves, yet in production terms its 20 tonnes a year (t/y) puts it down at number 20. Of those reserves, about a third are held by two companies.

In addition to Bakyrchik, the Kyzyl Gold Project contains the Bolshevik gold deposits and several satellite deposits.

Big and small Some 360 tonnes are believed to be in the Vassilkovskoye deposit located in northern Kazakhstan. This deposit is owned by Kazzinc, in which Glencore announced on April 15 it will increase its ownership to 93.0% from 50.7% by paying up to $3.2bn, consisting of $2.2bn in cash and $1bn in new shares from an ongoing IPO. The company plans to float a stake of up to 20% in London and Hong Kong, which analysts say could raise around $6.8bn-8.8bn in new capital and up to $2.2bn in existing shares. Glencore is planning on doubling the Vassilkovskoye deposit's output to 15 t/y. Another 277 tonnes of gold reserves are in the Kyzyl Gold Project's Bakyrchik mine, located in the industrial centre of

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Kamenogorsk. It currently produces 0.85 t/y, but the company expects this to reach 2.8 t/y by 2013 when the company plans to process ore from underground, which has a grade that is around three times higher. "We have capacity to process up to 1m t/y of ore depending on its hardness," Hambledon Director Nick Bridgen told the Journal of Engineering and Mining. Since this is more than its mines can produce, Hambledon plans to process other companies' ore at plants at Sekisovskoye and possibly at another plant called Ognevka. In addition, Bridgen said the company is looking to buy other deposits. In March, the company announced its intention to raise £8.52m net of expenses through a new share offering.

"Kazakhstan is the world's ninth country in terms of gold reserves, yet in production terms it's down at number 20" After a pre-feasibility study gave the green light, a definitive feasibility study on the Bakyrchik Deposit began in September and is expected to be completed by this summer. Requests for tenders have been circulated for the fabrication of long-lead items, including an oxygen plant and dry-grinding mill. Altynalmas expects to begin construction of a 1.5m t/y fluidized-bed roasting plant to process the project's refractory ores in 2011. Targets are 12.5 tonnes for 2014, the first year of full production, 15 tonnes by 2015 and, after developing a second mining front, 20 t/y. The company is investigating financing options that include an IPO, strategic investors, project financing or continued financing from existing shareholders. UK-based Hambledon Mining, the dean of the junior internationals, has been operating in Kazakhstan since 1998. Its main focus is the Sekisovskoye gold deposit, an open-pit mine and underground development with a multi-functional processing plant located near Ursk

London-registered phosphate producer Sunkar, located near Aktobe in Western Kazakhstan, near the Russian border, was born out of the takeover of Temir Services in 2006. The 836-square-kilometer Chilisai phosphate deposit is one of the largest in the former Soviet Union, with a resource of some 800m tonnes of ore. It extracted 1m tonnes last year. It was developed during the Soviet era and it closed for several years when demand for fertilizers collapsed in the early 1990s. In March, Sunkar reached agreement with Gazprom's Meleuzovskiye Mineralniye Udobreniya to supply 5,000 tonnes of phosphoric concentrate. Frontier Mining, incorporated in the Cayman Islands, mines gold and copper deposits and is expected to produce 3,000 tonnes of copper from the Benkala mine by the end of 2011. Frontier owns half of Benkala and is in the process of acquiring the other half from Coville Intercorp, a private Kazakhstani mining group. Frontier also has one producing gold mine, Koskuduk.


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CORPORATE STATEMENT:

NCA: building trust in quality and safety in Kazakhstan The history of the NCA begins in 1991 and today it's the only state body tasked with the accreditation of conformity assessment bodies and laboratories operating in the country to ensure they meet the highest international standards.

T

he history of Kazakhstan's National Center of Accreditation began in 1991 shortly after independence and today it's the only body that tests and regulates laboratories operating in the country to ensure they meet the highest international standards. Kazakhstan has been a pioneer in regulating its scientific sector and was the first country in the Commonwealth of Independent States to reform its technical and accreditation system, embodied in the NCA, which operates under the auspices of the Republic’s Ministry of Industry and New Technologies. Over the following two decades, the NCA has expanded its international partners network, first becoming an associate member of the International Laboratory Accreditation Cooperation (ILAC) in 2000, before being made a full member last year. At the same time, the NCA signed off on the Cooperation Agreement with the European Organisation for Accreditation (EA) in 2009. As part of this process of joining the global community, Kazakhstan has also won international recognition by the International Bureau of Weights and Measures (BIPM). The final step in the integration into the global system of accreditation will be when the NCA becomes a fully fledged member of the International Accreditation Forum (IAF) of Certification Bodies and work is ongoing with the Pacific Accreditation Cooperation body to achieve this goal. The NCA’s main function is to regulate the testing and calibration of  laboratories and conformity assessment bodies that

ensure goods, services and personnel conform to the Republic’s high technical standards. It is an important job that is the foundation on which all commerce is built; no business can be transacted without a universally agreed system of standards and quality checks. At the same time, accreditation ensures the quality and safety of all goods both produced in and imported into the Republic. Today in the republic there operates around 1,000 public and private laboratories and conformity assessment bodies that are accredited by the NCA. After an initial flurry of activity in the 1990s, the number of laboratories operating in Kazakhstan has stabilised, as most of the Republic's needs for testing facilities have been met. However, there have been changes that are indicative of the development of the Kazakh economy. In recent years, the number of laboratories involved with the construction and petrochemical sectors has risen, as well as that dealing with water and soil issues as the importance of preserving environment becomes an increasingly important issue, as enshrined in the government’s environmental code.

"No business can be transacted without a universally agreed system of standards and quality checks"

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Testing is mandatory for strategically important products such as food, medicine, veterinary medicine, pharmaceuticals, construction, rail, telecommunications, chemicals, and petroleum, among others. However, increasingly Kazakh companies are opting to obtain volitional certificates of quality. Management system certificates are the fastest growing type, as Kazakh companies strive to improve their competitiveness.

"The NCA will host an international conference on accreditation in Astana on September 16"

The NCA has been tasked with bringing the standards of labs in the Republic up to the international ISO 15189 standard and develop the regulatory authorities in accordance with ISO IEC 17020. Kazakh labs are for the most part now well equipped with competent staff. More work for the NCA was generated by the formation of the Customs Union between Kazakhstan, Russia and Belarus last year that has opened up the borders to a number of new products that require certification. The state’s FIIR programme (Forced Industrial-Innovative Development), an industrial development programme that runs until 2014, will also increase the demand for the NCA’s services. As part of Kazakhstan’s modernisation process and the development of the certification processes in the Republic, the NCA will host an international conference on accreditation in Astana on September 16 where the issues and problems of accreditation will be discussed to the mutual benefit of all investors and consumers of laboratory services.

International Conference on Accreditation Astana 16 Sept 2011 CONFERENCE OBJECTIVES • NCA experience in the transition to internationally recognized accreditation system • Analysis of problems & solutions • Prospects for the development of accreditation system in Kazakhstan & Customs Union • Mutual acceptance of test results & certificates AMONG INVITED • John Gilmour – international expert, co-founder of ILAC & Ex-CEO of NATA • Peter Unger – President of ILAC • Randy Daugherty – President of IAF • Shinichi Iguchi – Chair of PAC • Alan Johnston – President of OILM

ilac

international Laboratory Acreditation Cooperation

AS WELL AS • Leaders of international organizations • National accreditation bodies from Germany, Slovakia, Turkey, Czech Republic, South Korea etc. • Representatives of Laboratories and Conformity assessment bodies • Government officials of the Republic of Kazakhstan

11 Orynbor Street, Astana city, 010000, Kazakhstan T. + 7 7172 79 33 97 F. + 7 7172 24 08 29 E. info@nca.kz E. nca_kz@mail.ru www.nca.kz

ilac international Laboratory Acreditation Cooperation

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has said they will revoke their contracts with us," Shkolnik told delegates. "The banks are somewhat less keen to invest into developing new uranium deposits than before, because they have lowered their demand and price expectations. However, that is not relevant to Kazakhstan. When banks become less willing to invest into new projects, this will push the uranium price up, so don't worry about our country."

Uranium undeterred Clare Nuttall in Astana

K

azatomprom and its international partners are pressing on with plans to boost uranium production despite the disaster at Japan's Fukushima nuclear power plant. Speaking at the Minex conference in Astana on April 5-7, Kazatomprom's president, Vladimir Shkolnik, said the crisis at the Fukushima plant, which was severely damaged by the magnitude-9 earthquake and subsequent tsunami that hit Japan on March 11, would not greatly influence the Kazakh state atomic company's plans. Kazakhstan has benefited from the global nuclear renaissance in recent years. High oil prices and fears about the future availability of fossil fuels have encouraged a growing number of countries to turn back to nuclear energy. Kazakhstan shot ahead of both Australia and Canada to become the world's largest producer of uranium in 2009 – a year ahead of schedule – and

raised production further to 17,803 tonnes in 2010. A further hike in output to 19,600 tonnes is planned for 2011. The situation at Fukushima is still critical. On April 12, the Japanese government raised the situation to the maxi-

A report from VTB Capital points out that Kazatomprom's direct exposure to Japan is less than 8% tonnage-wise, and the company has no direct contracts with Tepco, the operator of the Fukushima plant, or any other Japanese utility – all its contracts are with uranium trader Itochu. In addition, even the loss of all six reactors at Fukushima would reduce Japan's nuclear capacity by just 10%, and global demand by under 1.5%. "We do not think Kazatomprom is going to be hurt by the tragic events in Japan, the uncertainty on the uranium spot market that has ensued or the potentially weaker outlook for global industry volumes going forward," says the VTB report "Kazatomprom: Any Impact from Uranium Market Jitters?"

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ing the company to remain profitable even during 2002 to 2005, when prices were particularly depressed. Still building Meanwhile, the Kazakh government has also confirmed that it has no intention of dropping its plans to build the country's first nuclear power station. The plant will be constructed in the western Mangystau region, more than 1,000 kilometres from the area of high seismic risk in south-east Kazakhstan. However, speaking after the full scale of the Fukushima disaster emerged, Kazakh Deputy Industry and New Technologies Minister Duisenbai Turganov said that construction plans for the plant may be revised to put a greater emphasis on safety. Other companies in Kazakhstan's uranium sector agree there is no case for abandoning their plans. Uranium One, an international mining company that has several joint ventures with Kazatomprom, forecasts that global demand for uranium will reach 300m pounds (around 115,000 metric tonnes) by 2020. "62 nuclear reactors

are under construction around the world – eight in Russia, seven in Korea, but only one in Japan. The real growth in nuclear power will come from Asia, with China, Russia and perhaps South Korea to account for most of the demand," said the company's executive vice president for strategic affairs Fletcher Newton.

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"The Kazakh government has confirmed it has no intention of dropping its plans to build the country's first nuclear power station."

Jacques Peythieu, vice president of strategy and development at Areva Mining Business Group, which is also active in Kazakhstan, also said his firm doesn't expect a big change in the uranium market after Fukushima. Even so, Peythieu acknowledged that some countries may be more reluctant to invest in nuclear power after the disaster – there is a chance countries such as Germany, Switzerland and Sweden could abandon their investment plans. "However, the consequences in terms of demand are unclear, and I think that globally we have reason to be optimistic," Peythieu said. "For sure, the world will need electricity. We may see the market developing more slowly than expected, but numerous new projects will be needed."

The uranium spot price plummeted from over $70 per pound to just $49 per pound immediately after the Fukushima disaster. However, the market has shown a rapid recovery, rebounding to over $60 by the end of March. Even at the low of $49 per pound, prices

"When banks become less willing to invest into new projects, this will push the uranium price up, so don't worry about our country"

mum severity level on the International Nuclear and Radiological Event Scale, putting it on a par with the 1986 Chernobyl disaster. Even so, Kazatomprom's Shkolnik appeared confident that uranium demand would remain strong. "All our contracts, including long-term contracts, are still operational – no one

were well above the average price during 2009. VTB forecasts that uranium prices will remain well above long-term historic averages. While Kazatomprom is highly secretive about its production costs, they are understood to be relatively low, allowphotos: www.kazatomprom.kz


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Upcoming events 2011

The Second European-Ukrainian Energy Day 31 May-1 June Conference House +38 044 5411838 Intercontinental Hotel Kyiv http://energyday.com.ua/

Emerging Market Investments Summit 8-10 June Marcus Evans Majestic Barriere, Cannes, France enquiry@astanainvest.com www.emisummit.com

Russian Real Estate Summit 31 May-2 June Adam Smith Conferences +44 20 7017 7444 Marriott Grand Hotel, Moscow, Russia events@adamsmithconferences.com www.adamsmithconferences.com/src9bnebne

JetFin AGRO 2011 9 June JetFin +41 22 839 8080 Hotel Dolder Grand, Zurich, Switzerland sophie.lavaud@jetfin.com www.jetfin.com/agro2011-zurich/program_en.php

CIS Sustainable Energy Forum 1-2 June Adam Smith Conferences +44 20 7017 7444 Marriott Grand Hotel, Moscow, Russia events@adamsmithconferences.com

Sovereign Wealth Focus 14 June Forrest Research University of Edinburgh Business School www.sovereignwealthfocus.com/

JetFin AGRO 2011 7 June JetFin +41 22 839 8080 Grand Hotel Kempinski, Geneva, Switzerland sophie.lavaud@jetfin.com www.jetfin.com/agro2011-geneva/program_en.php

BACEE Annual General Meeting 2011 and Banking Forum 15-16 June BACEE, Istanbul www.bacee.hu/eventstocome.aspx

THE WORLD FORUM for Foreign Direct Investment 7 - 9 June RedHot Locations, London, UK JayneGorman@redhotlocations.com www.redhotlocations.com/world-forum-for-direct-investment.cfm 7th World Islamic Economic Forum (WIEF) 7-9 June World Islamic Economic Forum (WIEF) Foundation +603 2145 5500 Astana, Kazakhstan info@wief.org www.7wief.org/ CASPIAN OIL & GAS 2011 7-10 June ITECA www.caspianoilgas.az/2011/?l=en CASPIAN POWER 2011 7-10 June ITECA www.caspianpower.az/2011/?l=en The 2nd Annual World Islamic Banking Conference: Asia Summit (WIBC Asia 2011) 8-9 June Middle East Global Advisors Singapore www.megaevents.net/islamic_banking/asia/

17th International Energy and Environment Fair and Conference 15 - 17 June TG Expo, Istanbul www.icci.com.tr/icci/english/ III International Islamic Business and Finance Summit 20 - 21 June IBFD Foundation Kazan, Russia http://kazansummit.com/ Money Transfers Moscow 21 June International Association of the Money Transfer Networks Ritz Carlton Hotel, Moscow, Russia http://iamtn.org/conference-calendar Treasury and Risk Management in Russia 21-22 June EuroFinance Moscow, Russia www.eurofinance.com SEE Energy Finance Forum 2011 27-28 June EastEuro Link, Istanbul, Turkey www.easteurolink.co.uk SuperReturn Emerging Markets 2011 27-30 June ICBI +44 (0) 20 7017 7200 InterContinental Hotel, Geneva info@icbi.co.uk www.informaglobalevents.com/FKR3A49BNEWB


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