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Inside this issue: Distressed maybe, but no tears Russia and Poland trade more than insults Sun rises on Turkey's Mittelstand April 2011

Mixed messages from Tashkent Special Report: Belarus post-election


bne April 2011 Editor-in-chief: Ben Aris (Moscow)


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A populist govt in Hungary faces making unpopular cuts


Miklos leads Slovakia into Eurozone's awkward squad


Russia and Poland trade more than insults


A Czech'ered solution to the pension problem


Austrians show eastern Europeans how to save it


Baltic bank for sale, one careful owner


Czechs have the energy for another scandal

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The Insiders


Russia gets competitive




Distressed maybe, but no tears



Foreign investment in Russian car market moves up a gear


Sun rises on Turkey's Mittelstand


Russian in and now rushing out


No easy business for Turks in Kazakhstan


Ukrnafta – a new start or false dawn?


Turkey's renewable energy sector gets second wind


A future Ukrainian oil champion made in Belgium


Romania on a wing and a prayer


Real estate logjam to drag on retailer growth plans


Balkans in the balance

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bne April 2011



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


Croatia accession cup either half full or half empty


Central Asia struggles to profit from high cotton prices


Sluggish in Slovenia


Kyrgyzstan a model of transparency


A curious sale of electricity assets in Turkey


Spreading the message about Islamic finance in the CIS


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.

Mixed messages from Tashkent


Tbilisi plays the Trump card


Not-so risky business in Georgia


Belarus teeters as economy worsens


The angry silence in Belarus


Minsk on my mind


Foreign investors acquire a taste for Belarus beer


Fishy goings-on in Belarus





PASHA – the bank of choice for Azeri business


I The Insiders

bne April 2011

From Soviet republics to Eurozone members

Agata Urbanska of ING Commercial Banking Agata Urbanska


here are two competing images that come to mind when thinking about the Baltics. The first one is that of "European tigers" – a phrase coined to reflect the fast pace of structural reforms in the 1990s and the high pace of GDP growth throughout most of the 2000s. The second, less favourable one is that of "boarding the Titanic" as they forge ahead with adopting the euro, unfazed by the Eurozone's troubles. The average annual growth rate in the 2000-07 period reached over 8% in the Baltics, following over 5% growth in 1996-99. That compares with 4% and 3% average growth for the CE3 (the Czech Republic, Poland, Hungary) in the same periods. Baltic outperformance has been accompanied by booming investments (including foreign investment) and sharply rising credit. GDP per capita has surged. As a percentage of the EU15 average, GDP per capita advanced to 36% in 2008 from a mere 9% in 1995. Estonia has had the best track record – GDP per capita quadrupled in 1995-2008 to 44% of the EU15 average, recording the fastest pace of real convergence among any of the new EU member states. The 2009-10 period saw a sharp GDP contraction and real de-convergence, but that was nowhere close to cancelling out previous gains. The outlook for 2011 is much brighter with growth rates having returned to positive territory from mid-2010. The boom and bust of the last decade has, however, revealed the unsustainability of the growth model that the Baltics pursued. We expect that having fully recovered by 2012-13, growth rates will be in a 4-5% range rather than the pre-crisis 8%-plus. The bad, the good and the better The Baltics' main point of vulnerability was the high indebtedness of the private sector and misperception of high potential growth. The seemingly tight fiscal policies turned out to be too loose. Credit extension, especially to households, in the pre-crisis period was increasingly based on unrealistic wage rise expectations. Annual wage growth peaked at some 20%

nominal rate in 2007 in Lithuania and Estonia and over 30% in Latvia, topping out the trend that started around mid-2004 from just less than 10% year-on-year nominal wage growth previously. Credit growth had been the strongest in Estonia, with growth accelerating from 20% on year in 2000 to 60% in 2006 in real terms. This saw a shocking rise in the stock of private credit to 94% of GDP in 2008 from just 24% in 2000. Latvia and Lithuania have seen a similar pace of credit expansion, though the stock of credit in Lithuania reached only 60% of GDP by 2008. Cracks had already started appearing in this dynamic in early 2007, but the 2008 global financial crisis demolished it. The key to maintaining the prevailing fixed exchange-rate regimes (introduced in the mid-1990s) was the fact that majority of the external debt was owed to Scandinavian banks who invested in the region on the basis of a strong long-term commitment. Given this background, the Baltics at least did not suffer huge capital outflows once the crisis hit. However, the aftermath of the credit bust was the bursting of the real estate bubble. The collapse of export markets on the back of the global financial crisis additionally contributed to the sharp economic contraction in 2009. The good side of the story next to the limited capital outflows was the flexibility of the Baltic economies, which allowed them to adjust successfully. Real estate prices halved in 200809; unemployment rates quadrupled and wages dropped on average 10% in 2009. The crisis saw the biggest domestic bank nationalised in Latvia, which also had to turn to the International Monetary Fund and EU for financial support. But these negative trends stopped and reversed in 2010. In early 2011, we are now looking at declining unemployment, while industrial production and exports are experiencing doubledigit growth and wages growth is turning positive, though the deleveraging continues.

bne April 2011

harsh fiscal cuts since March 2009. Lithuanian Premier Andrius Kubilius' governing party fared much better than expected in municipal elections in February, coming second behind the main opposition party. And Estonian Prime Minister Andrus Ansip widened his government coalition's majority in elections held in March. This consistency in the Baltics in terms of their commitment to the prevailing exchange rate regimes, Eurozone membership targets and general public acceptance of harsh fiscal measures has in particular surprised markets and impressed politicians in other EU countries. Some speculate it is driven by an "easy come, easy go" attitude that cannot work, for example, in Greece, where people are used to lax policy. The other key point for the Baltics is their commitment to the euro/EU against a history of Russian dominance. In contrast, numerous, and on occasion violent, public protests against fiscal tightening have rolled through the peripheral Eurozone countries. Greek police reported a total of 496 protests and marches last year as the government passed tax increases and budget cuts to meet the terms of its EU loan. Ireland's austerity programme, bank bailout and international loan led to an election win for the opposition in February, the biggest political shift in the country's history. On the mend All three Baltic countries beat expectations for growth in the fourth quarter of 2010. But they are facing a change to their growth model that will result in lower GDP growth rates than in the 2000-07 boom. However, these should be sustainable, thus a shift away from the boom-and-bust growth pattern. The general direction is for a smaller contribution from consumption growth, less credit growth and more exports. Indeed, net exports contributed positively to GDP growth in 2010 on strong exports rather than weak imports as was the case in 2008-09 and against the 2001-07 years of strong domestic demand growth and a negative contribution to growth from net exports. In 2010, exports to GDP, a measure of the openness of economies, have jumped higher some 15 percentage

The surge of current account imbalances in 2007 has put the fixed exchange rate regimes in the Baltics in the spotlight. There were a number of voices arguing for devaluation as growth collapsed in 2009. All the Baltics were consistent in sticking to their pegs versus the euro, a policy that has been proven as correct. Wage adjustments and the recovery of external demand were sufficient to deliver exports growth. The huge current account deficits at 15-22% of GDP in 2007 turned into surpluses in 2010. The absence of devaluation has preserved debt sustainability. External debt in the three countries varies from 90% to 160% of GDP. The ratio jumped from 120% to 160% in Latvia between 2008-09 as GDP shrank by 20% in nominal terms, but devaluation would have risked an even sharper deterioration with no guarantee of a boost to growth through exports. The high external debt ratios are one of the main arguments for euro adoption, a plan that a number of other EU members in Central Europe have seemingly suspended for now. Estonia adopted the euro in 2011, unfazed by the unfolding euro crisis, and Latvia and Lithuania are credibly targeting 2014 for euro adoption. The main challenges on the way are the Maastricht criteria on the general budget balance and inflation. The latter in particular is the main risk for a delay.

Agata Urbanska is Senior Economist at Emerging Europe ING Commercial Banking.

Progress of real convergence: GDP per capita (% of EU15 average) Slovenia Czech Rep Hungary Slovakia Poland Estonia Latvia Lithuania Romania Bulgaria

What caught international attention was the re-election in October of the government that was responsible for a series of

points to close to 60% in Estonia and Lithuania and by 10 points to 36% in Latvia. We assume these changes will largely be sustained in the future. Still the key challenge for authorities in the Baltic region is to sustain cost competitiveness, but equally also develop other avenues of outperformance, targeting high-value added industry and supporting investments (including foreign) with a good business environment, limited red-tape, etc.

-20 Source: Eurostat, ING


20 1995


40 2005

60 2008



"All three Baltic countries are facing a change to their growth model that will result in lower GDP growth rates than in the 2000-07 boom"


I Cover story

bne April 2011


Russia Gets Competitive Ben Aris in Moscow

Cover Story I 9

bne April 2011

he only business in Russia is politics." Jailed oil magnate Mikhail Khodorkovsky made this famous remark in the 1990s and it used to be true. Things didn't work out so well for Khodorkovsky, nor his company Yukos, as mixing politics with business is dangerous. But that didn't stop most of Russia's richest men from making fortunes by finagling the state out of its more precious assets. Russia's "economy" was pretty basic back then and had more to do with trading on the price distortions left over from the Soviet era than producing anything. As a result, the Kremlin had a hard time defending itself against the US administration, which refused to grant Russia "market economy" status, the lack of which comes with punitive trade tariffs. A decade later and everything has changed. Ten years of 6%-plus economic growth and no one denies Russia has a market any more. Proper homegrown businesses have appeared in nearly every sector; strategic investors are buying out leading Russian companies in multi-billion-dollar deals. The state has successfully re-engineered a few sectors so that competition, not state orders, drives them forward. And companies are going head-to-head in the marketplace to win over customers. The ukaz (decree) has given way to the reklama (advert) as the weapon of choice in Russian business. Real competition has finally arrived. "Russia's economy has entered a golden phase where strategic investors have arrived and are willing to pay top dollar to break into the most attractive markets," says Roland Nash, CIO of Verno Capital. "This was all those entrepreneurs were dreaming about when they set up their companies in the 1990s." Banking on Russia The change is particularly noticeable in the banking sector, which was one of the first to be reformed. The financial crisis has catalysed the change and the gold rush that began in 2004 with GE Capital's purchase of Russian mortgage specialist Delta Bank has

reversed as the global banks that had rushed into Russia to grab a piece of the fast growing retail part of the business have found the competition too fierce post-crisis and are now leaving. "Between 2005 and 2007, lots of foreign banks entered Russia, but despite the competition the sector was still growing very fast, so there was plenty to go round," says Svetlana Kovalskaya, bank analyst with Renaissance Capital. "But after the crisis that growth slowed and competition – especially from the state-owned banks – is more serious. Both Sberbank and VTB have become a

really viable any more; we do it more as a support for our corporate banking business." And competition will only get tougher as the long-awaited consolidation in the sector gets underway: the number of institutions in Russia fell to 952 as of March 1, down from well over 2,500 in the 1990s. In one of the biggest acquisitions so far, Sberbank purchased leading investment bank Troika Dialog in the middle of March, and Moody's Investors Service says more deals are in the works. "The conditions are in

"Russia's economy has entered a golden phase where strategic investors have arrived and are willing to pay top dollar to break into well-established markets" lot more aggressive, particularly in the small and medium-sized enterprise and retail banking sectors." State-owned retail behemoth Sberbank used to be an ultra-conservative lender requiring guarantees and a ream of documents before it would loan money to a person. More recently, it has moved over to a score-based system for approving credits. And VTB went from a standing start in 2004 when it had no retail business at all to become the second biggest retail bank in Russia today. The result is that the foreign banks which didn't have a well thought-out strategy have bailed. The latest example was the UK's Barclays Bank, which announced in February it is looking for a buyer for its retail operations (see related story in Eastern Europe section). More subtly, the margin squeeze has also affected established banks. Ed Kaufman, CEO of Alfa Bank, tells bne: "In recent years, margins have been continually squeezed in our investment bank business; where we used to make several percent spreads on deals, now we count them in basis points. A standalone investment bank business is not

place for [banking] M&A activity to gain momentum in Russia," Eugene Tarzimanov, a senior bank analyst at Moody's, writes in the report. "Banks have the means to finance deals, evidenced by a high share of liquid assets and increased access to debt financing. Many banks also have excess capital, which they are looking to utilise. Lower M&A valuations following the crisis, combined with accelerating credit growth also stimulate M&A demand." Customer is king Big deals aren't limited to the banking sector: since the start of the year, there have been several mega-deals in the food/beverage and retail sectors too. Indeed, the volume of M&A deals in Russia soared last year. A recent survey by CMS, a law firm in Moscow, says the total volume was up to $56bn in 2010 against a mere $18bn worth of deals in 2009 – and that was just the deals that were publicly declared. "The top-10 list shows that the bulk of deals were Russian-Russian, which means that foreigners are partly missing out on the M&A party," says Liam Halligan, chief economist with Prosperity Capital Man-


I Cover story

agement. "The conclusion is that those foreigners who have done strategic investments have generally found it not so difficult to invest in Russia and they have very few regrets." PepsiCo made headlines in January by paying $3.8bn to buy leading dairy producer Wimm-Bill-Dann – and this was on top of the $3bn the US company has already invested in its own Russian operations. PepsiCo is now the biggest food producer in Russia. This deal followed on from Russian supermarket powerhouse X5's deal to buy smaller rival Kopeika in December

bne April 2011

it pulled the plug. "With Kopeika gone, there are no serious acquisition targets available," says Dr Daniel Thorniley, president of the consultancy DT-Global Business Consulting in a survey of fast moving consumer good companies in February, who advised Wal-Mart. "It has become too expensive to launch a new operation from scratch, so Wal-Mart left for China and India where the market is still wide open." Thorniley says that all the companies in retail, not just grocery stores, have been forced to reassess their strategies. The crisis depressed margins and sales volumes, so now managers are concen-

"Most executives agree and accept that the boom, glory days of easy money have probably gone forever" for $1.65bn as the supermarket business starts to consolidate. Supermarkets have become big business. Market leader Magnit, a Russian regional supermarket chain, turned in yet more record sales in February: revenues were up a whopping 54% year on year to $827m, supported by the company's relentless expansion. Magnit opened 51 new stores in February alone. Russia's formal retail market has become extremely attractive; it had turnover of over $45bn in just the January-February period, of which the leading supermarkets still only account for 15% of the total. But these players are already so big it's becoming increasingly difficult for new players to enter the market and those without a significant presence to gain a foothold. The competition is so tough that the world's biggest chain, Wal-Mart, announced it was finally giving up on an attempt to break into the Russian market and closed its Moscow office in January. Wal-Mart has been floating around the edge of the Russian market for almost a decade, but a week after the X5-Kopeika deal

trating on increasing revenues rather than just pushing the most profitable products; prices are set to come down across the board as competition for the shoppers' ruble increases. Driving competition Perhaps the most remarkable change has been the Kremlin's success in remaking the country's automotive sector. With control of a massive $500bn cash pile, it is pretty easy for the state to make the banking sector profitable while it tinkers with the laws to make the sector more efficient (a work in progress). And reforming the retail sector is apolitical – all you need to do is free up prices and ensure there is access to capital for the sector to grow. But getting industrial sectors like cars off the ground is not easy at all, as industrial policy makes a big difference to the health of the sector. Over the last decade, the Kremlin has signed a series of investment deals that grandfathered in tax breaks and duty discounts, which has brought in nearly all of the world's big carmakers to Rus-

sia. Several automotive clusters have sprung up – the biggest in St Petersburg and Kaluga – to the point where the country's roads are getting clogged with traffic; the Lada is becoming an increasingly rare sight on Moscow's thoroughfares. In February, the Kremlin moved the game forward by signing a second round of investment deals with six of these producers. More tax breaks were on offer for any company willing to increase production to 300,000 units by 2020 as the Kremlin races to make the sector more able to compete head-to-head with imports before it joins the World Trade Organisation (WTO), which will force Russia to lower import duties. The signing of the deals in February (which will be finalised in June) means Russia will almost certainly become the biggest car market in Europe by 2015, if not before (see related story in Eastern Europe section). "We didn't expect such a strong response from the producers, so now we are sure that Russia will be the number one car producer in Europe in the next years," Alexander Rakhmanov, director of the automotive and agricultural machinery department at Russia's Ministry of Industry and Trade, tells bne. The Kremlin's effort to promote investment in the car sector has been an unqualified success and transformed the sector out of all recognition (to the chagrin of anyone who actually has to drive in Moscow). One of the side effects has been that the shares of the listed car companies have soared. The crisis, of course, hit Europe's car market hard and sales collapsed in Russia as they did elsewhere. However, it has also been one of the first sectors to recover. State support for the car sector – the so-called "cash for clunkers" scheme – is due to end on April 1, but competition is already hotting up. Several leading makers have already announced plans to launch new models this spring. Daimler hopes to begin production of its hugely successful Sprinter van and Hyundai is about to launch the Solaris saloon to widespread enthusiasm

bne April 2011

amongst Russian dealers. The market would have grown on its own, but the imminent WTO accession is a goad that has focused everyone on the need to pick up the pace. The automotive sector is emerging as a node for driving Russia's modernisation and diversification – the central themes of Dmitry Medvedev's presidency. The new heightened production levels means the sector will reach critical mass – experts put the magic number at a total production of 4m units a year against the 1.2m cars made in 2010 – that will pull in other business and services to serve the needs of the car-clusters. "For every one job that we create in the automotive industry, we create another 16 jobs in ancillary sectors," says Rakhmanov. "And the Russian market is still far from reaching saturation, but the market is already a developed one with some features of an emerging market." It may look a little like the Kremlin held a gun to carmakers' heads and forced them to raise production, but it didn't really have a choice. Domestic car production has to be ready to meet the competition that WTO membership will bring, but Rakhmanov says with passenger cars, Russia is already there. "With cars we are ready to compete and WTO access will not have a big impact," says Rakhmanov. "There is a sevenyear transition period and that is more than enough time to finish the ongoing reforms. In buses and trucks the situation is different, but we are looking at various measures to prepare those sectors for accession." And the rest The success of the car sector has provided a blueprint for how other sectors will be reformed. That is the point of all the national champions the Kremlin has created in planes, rail, shipping, metals and so on – the hope is to get all these sectors to critical mass so the "multiplier effect" starts working (one job in cars makes 16 jobs in ancillary sectors). The aviation sector was remade several years ago and reorganised into the United Aviation Corporation (UAC),

Cover story

which will supply the first batch of commercial SuperJet planes this April. A very similar investment programme to the car plan was launched for pharmaceuticals in December, which will force international producers to increase their Russian production, as bne reported in February. At the same time, there'll be heavy spending on infrastructure to support these businesses. The state has been spending in the order of $35bn a year on restructuring the railway network and heavy investment in the roads started this year. Indeed, much of infrastructure spending has been framed by Russia's hosting of the 2018 World Cup – Prime Minister Vladimir Putin promised to spend $10bn on facilities, but if you add in all the airports, hotels, roads, power stations and high-speed rail links also planned, then the spending is closer to $60bn. All these deals will also result in closer cooperation between Russian and international companies, which bring the crucial know-how and management skills. One of the features of the new investment agreements is that many of the international companies have been driven into joint ventures or alliances with Russia producers. France's Renault has teamed up with Avtovaz; Germany's Daimler is in partnership with Russian truck maker Kamaz; and Fiat joined forces with Russian saloonmaker Solliers. These partnerships will help the sector adopt modern "just-in-

I 11

time" delivery and efficient production, ending the Soviet-era "next month if you're lucky" supply system that still dominates much of today's industrial production. In a different version of the same thing, the Kremlin has changed its mind about excluding foreigners from so-called "strategic sectors." The share swap between UK oil company BP and stateowned Rosneft in January created a joint venture to develop deposits in the Arctic in a win-win deal: Rosneft has the oil and BP has the know-how to get at it. In these sectors, the plan seems to be to give multinationals a minority stake in the major Russian companies as well as give up some access to Russia's treasures in exchange for the know-how this cooperation brings. All these changes come not a moment to soon. Several government officials interviewed by bne in recent months have said that reforms must be made now or Russia will lose its competitive edge as wages rise, driven up by oil prices. The booklet "Attaining the Future: Strategy 2012" published by the Institute of Contemporary Development on policy for the next decade sums up the thinking: modernisation is the only way forward, otherwise Russia will face slow decline. "The catastrophe may not hit for some time, but we have reached the time when a decision must be made and are approaching the point of no return."

"For every one job that we create in the automotive industry, we create another 16 jobs in ancillary sectors"


I Perspective

bne April 2011

Curing Eurozonitis bne


arch's round of EU summits was supposed to bring a measure of calm back to the Eurozone, but with Portugal on the brink of joining Ireland and Greece in the bailout club, EU countries are clearly still in fire fighting mode. Strange, then, that so many are managing to look optimistically beyond the immediate crisis for the euro. The leaders of the 27-nation EU gathered in Brussels for two days of talks on March 24, during which they put the finishing touches to a package of measures designed to shore up the single currency, following more than a year of instability since the Greek debt crisis exploded onto our TV screens in 2010. Then on the eve of the summit, Portuguese Prime Minister Jose Socrates resigned after the parliament rejected his minority government's latest austerity plan. Socrates was hoping to avoid having to apply for a similar multi-billioneuro bailout to those given to Greece and Ireland last year. The euro's recent advance against the dollar was halted in its tracks and the fear of "contagion" reared its ugly head again as Moody's Investors Service cut the ratings on 30 smaller Spanish banks. In the words of Yannos Papantoniou, a former Greek finance minister, the meeting needed to come up with a cure for "Eurozonitis" before it spreads and becomes chronic. And in the early hours of March 25, EU leaders managed to thrash out a deal that crucially included a permanent bailout package to replace the temporary one that's expected to deliver about €80bn to Portugal in the near future. This new European Stabilisation Mechanism (ESM), which will enter force in mid-2013, will be increased to €80bn in cash, with another €620bn in "committed callable capital." A decision to raise the lending capacity of the temporary European Financial Stability Facility (EFSF), currently in place, from €250bn to €440bn has been put off until June. The summit also agreed a "Pact for the Euro" – which was finally dubbed the "Euro Plus Pact" because it managed to gain six extra adherents like Poland, Lithuania, Latvia and Romania who are not also members of the Eurozone. Though watered down since it was first developed on the sly by Germany and France in February, this pact was the price demanded by Berlin to increase the bailout fund as it tries to instil some Teutonic rigour into the free-spending Mediterranean economies. The pact includes a set of non-binding targets for harmonising policy in a range of areas, from labour markets and retirement ages to debt and corporate taxes, though the latter has been bitterly opposed by smaller euro countries like Ireland and Slovakia that use lower rates to attract investment. (One anonymous Polish diplomat dismissed the pact to Reuters as "worth nothing.")

Rearing PIIGS Will all this be enough? Unfortunately, at several junctures throughout this euro crisis the EU has acted, only to find its action brought only temporary relief. Many believe this time won't be any different. The real danger, then, is the crisis spreads across the Iberian peninsula into Spain and then on to Italy, the remaining two PIIGS; as one anonymous European official told The Economist last year: "The EU can't afford Spain." However, it may not come to this. In the run-up to the EU summit, Spanish markets were showing some signs of decoupling from Portugal's crisis. If a line can be drawn under Portugal, then some argue the crisis could be considered, on the whole, to have actually been a good thing, since it touched countries that were small enough to be dealt with, and hasn't come further down the line to engulf the Eurozone's major economies. A problem nipped in the bud; "the perfect laboratory," one EU official told bne. Certainly, it can't be disputed that the famously profligate countries on the EU's periphery are undertaking reforms that two years ago would've been unthinkable. In fact, it is because of the euro that they are restructuring their economies in exactly the way that the UK, for example, has been banging on about for years for them to do. While certain sections of the UK press that are notoriously hostile to the euro (if not particularly well informed) continue to gloat over the euro's troubles, they fail to see that what they have always argued for is now actually happening. These euro-critics like Peter Oborne of The Telegraph believe the only alternative is having individual currencies, the devaluation of which is a magic wand to regain competitiveness. However, they either wilfully ignore (or are ignorant of) the basic economic reality that any devaluation would inevitably be followed by higher wage growth and inflation, with no sustained improvement in competitiveness. Greece's recent economic problems are indeed a loss of competitiveness since it joined the euro in 2001, but that's down to the structural weaknesses, including fiscal profligacy and a rigid labour market, that wouldn't be solved by devaluing the drachma. Ultimately, say EU officials and economists that bne has spoken to, the crisis in the euro could finally get many of the Eurozone countries to accept what they signed up for when they adopted the euro in the first place: very liberal economic policies. And if that fundamental change happens in the PIIGS, then the euro will have achieved what decades of preaching and carping has failed to do.

Eastern Europe I 13

bne April 2011

Distressed maybe, but no tears Ben Aris in Moscow


The 2008 global economic crisis was a boon for companies like Exotix, a fast growing brokerage that is targeting frontier markets and deals in, amongst other things, distressed debt.

Different strokes Kazakhstan's banking sector was probably hardest hit of all the countries in the region and came close to destruction, only being saved from total meltdown by a $4bn bailout from the state. Exotix was heavily involved with some of the most dramatic stories and a big investor into the restructuring of BTA Bank and Alliance Bank, previously two of the country's four biggest bank, both of which were eventually nationalised.

Operating in markets around the world, the company has been very active in the former Soviet bloc over the last two years and found the ground very uneven: all the countries in the region were hurt, but their ability to bounce back varied enormously.

The assets of Kazakh banks had been growing by over 200% a year for several years and most borrowed heavily on the international debt markets. Despite the problems, there were always hedge funds willing to buy these banks' debt – if the price was right – even as the

he beauty of the free-market system is that if it collapses, then there's usually a of lot of money to be made from the ensuing mess. And making lots of money is the fastest way to fuel a recovery.

sector began to stabilize. "Post the restructuring of the Kazakh banks, some original holders are still looking to exit and we are a big player in trading Kazakh banks' bonds that came out of the restructuring," says Andre Andrijanovs, corporate strategist at Exotix. Ukraine also took a drubbing in the crisis, creating lots of opportunities for outfits like Exotix, although the story there was as much about corporates as banks. For example, the Industrial Union of Donbas (IUD) is a big steel producer, but the company had borrowed to the hilt to fund its expansion and got caught with its trousers down when the financial tsunami hit. "Ukraine’s econ-


I Eastern Europe

bne April 2011

omy is highly dependent on commodities, especially steel. IUD borrowed heavily at the peak of steel prices and had huge debts when the cycle turned," says Andrijanovs.

janovs says that Russian banks were very opportunistic and brought a lot of money into the country during the worst of the crisis, buying up problem debts.

"Most of the Ukrainian corporates and banks were forced to restructure their

Still, now the crisis is passing and with commodity prices recovering on the

"Currently, there are not a lot of distressed opportunities in Russia" debt in 2009 and 2010, as they could not refinance," explains Andrijanovs. "While Ukraine's access to the debt capital market improved in the second half of 2010 as both sovereign and several tier-one corporates were able to place Eurobonds, access for second-tier corporate or companies without credit history in the international market continue to have difficulties placing debt at lower rates." In fact, the whole Ukraine story was a lot more dramatic than it had appeared during the depths of the crisis, as the former prime minister Yulia Tymoshenko, who lost the presidential election to President Viktor Yanukovych in 2010, had all but bankrupted the country during her campaign: she began 2008 promising the IMF a zero budget deficit, but ended the year as the crisis hit with a deficit in double digits, according to some reports. Yanukovych's deal with the International Monetary Fund (IMF) for a new $15bn standby loan was key to stabilising public finances. "People underestimate how insolvent the Ukrainian government was in 2008. It was on the brink and would have fallen if it had not been for the IMF money and the use of carbon credits [from several countries] to pay pensions," says Andrijanovs. Ukraine's government was (and still is) unable to bail out its leading banks or companies in the way that the Kremlin has helped its own, but they've had a lot of help from Russian investors. Andri-

back of strong growth in Asia, Ukraine's economy is in much better shape. Ukraine's economic growth started to accelerate in January, pushing the current account into surplus in the first quarter, according to Valeriy Lytvytsky, head of the group of advisors to the governor of the National Bank of Ukraine (NBU). "The data on the balance of payments exceeded all expectations. The net inflow on the current account is $282m," he told InterfaxUkraine on February 25. "The current account is seeing a surplus thanks to the acceleration of the pace of economic growth... The start [of this year] is very good, but we shouldn't relax." Less than zero Russia was maybe the most surprising market. The headlines told a story of an economy in freefall and a 14-percentage-point about face in GDP growth in the space of a few months. The stock market lost three-quarters of its value

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as investors were forced to sell shares to meet margin calls. Ideal conditions for distressed debt specialists – right?

has seen the global brands teaming up with domestic producers to boost production.

Not in reality. "Currently, there are not a lot of distressed opportunities in Russia," says Andrijanovs. "It was different, as there was extensive restructuring and no pressure [on the debt issuer] to sell. Local banks and investors have plenty of liquidity and have been able to refinance local corporates."

Experts say that the new rules will give the Russian car industry a big fillip, boosting the technological know-how of Russian partners in the ventures. Production should be 60% localised within six years as auto-part makers also set up shop in Russia to supply the car factories. "International car makers are pretty excited, because they forecast significant growth in car sales in the next decade. We expect that car sales will recover to pre-crisis levels by 2013," says Mikhail Ganelin, transport analyst at Troika Dialog.

That's not to say Russian banks didn't struggle, as most of them were following a "delay-and-pretend" policy of simply extending the terms of bad loans and preventing them from being classified as "bad debt." In the spring of 2009, bne met with S&P banking analyst Ekaterina Novikova, who argued that if you included "troubled debt" (the restructured debt not technically counted as bad debt), the Russian bank sector's non-performing loans were closer to 40% of total loans, not the circa 6% the central bank was reporting. Despite the state support, Russian banks are not entirely out of the woods. Sergei Nazarov, manager of Renaissance Asset Managers' financial institutions fund, says that banks are still carrying problem debts on their books, although this is nowhere near the levels of two years ago. "The banks still have non-performing loans that are not reported as such and they are still trying to restructure them. This means trying to convert the collateral into cash. They won't take these debts on as bad loans until they have exhausted all the alternatives and that could take another two years," says Nazarov.

Foreign investment in Russian car market moves up a gear Rachel Morarjee in Moscow


lobal carmakers spent February speeding into Russia, as investors from Asia, Europe and the US raced to beat tightened limits on imports. The deal looks mutually beneficial: Russia gets the international expertise and technology to help drive its modernisation; the automakers get easier access to a market forecast to become Europe’s biggest in the next four years. The Russian consumer should also benefit. "Russia is a very big market and that is why foreign companies are flocking in. More competition will mean lower prices for consumers," and thus more sales, says Alexander Kazbegi, transport analyst at Renaissance Capital.

"Most of the Ukrainian corporates and banks were forced to restructure their debt in 2009 and 2010, as they could not refinance"

As the March deadline approached, the US' Ford and General Motors, Germany's Volkswagen and Japan's Toyota announced investments of over $1bn to boost local production and stake a claim to markets ranging from St Petersburg

to the Pacific Rim port of Vladivostock. Alexey Rakhmanov of the Ministry of Industry and Trade said in late February that more applications from foreign manufacturers were expected. The race was started by changes to the tax code that came into effect on March 1. Under the new rules, carmakers may import components with 0-3% duty

Local partners Russian carmaker Sollers and Ford pledged on February 18 to invest $1.4bn in a new assembly and distribution partnership by 2020. The investors hope to see Ford's market share double within five years. The deal halted Sollers’ negotiations with Italy's Fiat, although the Italian automaker has reiterated it intends to hit the magic number of 300,000 locally produced cars, and is now mulling whether to go it alone or to launch a joint venture with another company. Sollers has its fingers in other pies. Toyota will become the first Japanese company to build cars in Russia's Far East after unveiling plans for a JV with Japanese trading house Mitsui and Sollers to begin production in 2012. Toyota will supply the car parts and Sollers the manufacturing facilities

"Russia is a very big market and that is why foreign companies are flocking in" in return for investment agreements to build at least 300,000 cars locally per year. Previously, auto companies could avoid punitive tax rates on parts by producing 25,000 cars in country, so some had moved to build assembly lines in Russia, but made little further commitment. The latest batch of deals

to build over 300,000 Toyota-brand vehicles annually, while Mitsui will use the Trans-Siberian railway to transport the cars for sale across Russia. France's car maker Renault may also build a plant in Khabarovsk, according to the regional government's website.


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Meanwhile, General Motors has announced it will dramatically expand production in Russia to at least 350,000 vehicles a year, having signed deals for Gaz to build Chevrolets in Nizhniy Novgorod and with Avtovor to expand production in Kaliningrad, in addition to operating its own plant in St Petersburg. Also in bed with Gaz is Volkswagen, which has teamed up with the Russian company to make 300,000 VW and Skoda cars annually. The companies are hammering out the final details of the deal, say reports. The reason the government’s push has proved so successful is that Russia's car market is the fastest growing in Europe.

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In 2008, it briefly pulled level with that of Germany's – the continent’s biggest – as it sold 2.9m cars, before retreating as the crisis battered the economy. As the

"Russia is a platform for capturing the CIS and parts of the Eastern European market" recovery continues, observers predict it will overtake Germany's before 2015. Russian Industry and Trade Ministry officials are forecasting double-digit growth for new passenger car and light commercial vehicle sales in Russia this year, with sales of 2.19m cars predicted – a rise of 14.8% on 2010.

Russian in and now rushing out Ben Aris in Moscow


he gold rush into Russia's retail banking market has come to an end after Barclays Bank announced it plans to sell its high street bank, while reports say that HSBC is also looking to exit the country. HSBC and Barclays Bank would be just two of the most high profile foreign banks that have given up on Russia. With a population of more than 142m people, but a very low banking penetra-

And there’s an added potential bonus. Russia is not only a huge market itself, but can be used by foreign carmakers as a launch pad for sales over a wider

tion – only one in four Russians have any sort of bank account at all, according to some surveys – the retail banking business was doubling in size every two years prior to the global economic crisis, leading to a stampede by international banks into the market from about 2004, which sent prices for banking acquisitions through the roof. Barclays paid top dollar for Expobank, based in Russia's Far East, in March

region. "It's a platform for capturing the Commonwealth of Independent States and parts of the Eastern European market," says Troika's Ganelin.

2008 for $745m (€531m) at the very top of the banking boom, valuing the bank at a whopping 3x book value. Over the next few years, Barclays rapidly rolled out a retail offering across the country. But in the middle of February, the bank announced it was seeking a buyer for its retail business and would focus solely on investment banking. "The people in London realize that they paid stupid money for these banks. There was a rush into Eastern Europe, but now they are willing to write off a big loss. It seems to me to be a very emotional decision," says Sergei Nazarov, head of Renaissance Asset Managers financial institutions fund. A week later, HSBC was also reportedly pulling the plug on its retail operations just two years after announcing ambitious growth plans, although the bank is insisting it "remains committed" to its business in Russia. "No decision has been made to exit one of our businesses in Russia," the bank said in an e-mailed statement to Bloomberg on February 21. HSBC doubled its Russian unit's capitalization in the midst of the crisis and former CEO Stuart Lawson said the bank was, "targeting high net worth individuals as the cornerstone of its growth strategy." The bank launched what it called a "world-class retail offering" in June 2009, opening four branches in Moscow

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and one in St Petersburg as the starting point in an ambitious $200m expansion plan. However, a year later, Lawson left the company in what one banking source at HSBC described as an "acrimonious disagreement over strategy." The possible exit of the two British banks comes after a string of smaller banks have given up on the Russian market. Holland's Rabobank surrendered its Russian retail license last year. Spain's Santander sold its Russian business to local player Orient Express in December. And both Belgium's KBC Group and Swedbank, the biggest Baltic lender, have also cut back their Russian operations in the last year, citing stiff competition as the cause. Too big to beat The reasons for the whittling down of the number of foreign players are multiple. The crisis has obviously depressed earnings and saw the number of non-performing loans soar. At the same time, almost all of Russia's banks slashed interest rates as the crisis reced-

Eastern Europe

ed in an effort to rebuild their deposit bases, reducing the profit margins for everyone in the sector. Finally, the relentless expansion of the two stateowned giants of the sector – Sberbank and VTB Bank – means competition has become increasingly tough. Founded in the Soviet era, Sberbank is a monster with about 20,000 branches nationwide and accounts for 27% of Russian banking assets and 26% of banking capital. VTB's retail business, VTB-24, has more than 530 offices. Most of the bigger private retail banks have at best a few hundred branches, mostly concentrated in Russia's biggest cities. "Shrinking margins and growing competition means the days of easy money are over," says Roland Nash, chief investment officer of Verno Capital. "Those banks that have not built up sufficient bulk in

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the last few years are going to be pushed out of the Russian market or bought up by the stronger players." However, a few foreign banks have succeed in gaining a toehold in Russia; foreign banks cumulatively account for just over a quarter of the sector's total assets as of January this year. France's Societe Generale has probably been the most successful after it bought a string of banks as well as launching a greenfield retail operation of its own over the last decade. The bank has almost 3m clients and its consumer unit posted a €13m profit in the fourth quarter of 2010, following a loss of €58m a year earlier, according to the bank's website. The bank predicts Russia will be the biggest contributor to it international retail earnings by 2015.

"Shrinking margins and growing competition means the days of easy money are over"


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of Ukrnafta's oil at auction. Previously, Ukrnafta regularly sold oil at prices well below the market price, and sometimes even significantly below production costs, to structures that analysts and media claim are linked to Privat group. Neither Kolomoisky nor Bogolyubov could be reached for comment on this piece.

Ukrnafta – a new start or false dawn?

Until October, Privat group had owned around 42% of Ukrnafta stock, with the state-owned energy company Naftogaz Ukrainy holding 50% plus one share, with the rest free float. Because Ukraine's laws require a 60% quorum for any annual general meeting (AGM), Privat group has historically been able to control Ukrnafta through the company's management, while blocking any attempt to change the management by failing to show up at shareholder meetings and preventing the quorum from being met. But with Ukraine's new government enjoying a large majority in parliament, it could now plausibly change the law and reduce quorums to 50% and so Privat group has been forced into a rethink, say sources. An unusually PR-savvy choice of poaching Vanhecke from investment bank Renaissance Capital Ukraine to serve as CEO seemed to personify a new start.

Graham Stack in Kyiv


he appointment of a Belgian investment banker as the new head of Ukraine's largest oil and gas producer Ukrnafta has been billed as a breakthrough in terms of bringing management into line with ownership, modernising the company and moving it towards an international IPO. But suspicions remain that it will be a false dawn. The appointment on February 25 of Peter Vanhecke as CEO raised hopes that the notoriously murky company would enjoy a period of greater value creation and transparency. Despite the state owning 50% plus one share in the company, Ukrnafta has for years been effectively controlled by the shareholders of the country's largest lender PrivatBank, oligarchs Gennady Bogolyubov and Ihor Kolomoisky, whose mutually interlinked financial-industri-

al interests are commonly referred to as the "Privat group." Now the company is the first state company in the former Soviet Union to get a western CEO. An apparent sign of how much hope was being put in the new order was a nearly 220% rise in the share price from October 24, when

Not everyone is convinced. Dissecting the results of the AGM, some analysts conclude that the soaring share price was not the result of new investor interest in the stock, but of Privat group structures buying up the free float: the AGM recorded its highest ever quorum of 95.2%, up from 92% at the last AGM. In the apparent absence of any new investors, analysts conclude that Privat

"Why should Ukrnafta merge with a company that made $150m losses in 2010?" buying seems to have started, through February 25, the date of the recent shareholders' meeting when Vanhecke was appointed. In addition, analysts point to a switch to market-priced sale

group had bought out around 3% of the free float, boosting their stake in the company to above 45%. New Ukrnafta CEO Peter Vanhecke, however, disputes this was the case: the total volume of

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trading in the stock in the run-up to the AGM significantly exceeded the free float, he points out to bne in an exclusive interview, indicating the stock was indeed being traded up by investors. Vertically challenged A 25% share issue is now on the agenda for an EGM set for March 22 and could net the company up to $1.3bn. Vanhecke is adamant that the first priority for spending any new cash is investing in hydrocarbon production, which was down 11.7% in January-February compared with the same period last year. But he acknowledges that another crucial issue for the company is "fixing the business model." This refers to the fact that Ukrnafta is the country's largest oil and gas producer and owns one of the largest chains of petrol stations, but there is no refining capacity in between. The companies Vanhecke is seeking to emulate at Ukrnafta – national champions such as Austria's OMV, Hungary's Mol and Poland's PKN Orlen – are all vertically integrated including refining capacity. "Fixing the business model", however, could be more controversial than it sounds, and potentially casts a shadow over the much-hailed fresh start. The reason is that Ukrnafta shareholders – the state and Privat group – also co-own the country's largest refinery at Kremenchug, with the state holding 43% and Privat group 19%. A merger between the two companies has been a hot topic for years. It is widely held by analysts and the local media that the Kremenchug refinery has been a beneficiary of transfer pricing at Ukrnafta in the past. This did not stop it making over $150m losses in 2010, working at only 30% of its capacity. Now Ukrnafta's critics fear that instead of cash coming in after the new Ukrnafta share issue and being invested in production, the shareholders will instead offer their assets in the Kremenchug refinery and its petrol station chain, and finally merge the two companies. This sheds new light on the share price surge, say critics. If the merger went ahead, the boosted Ukrnafta market

Eastern Europe

capitalisation combined with the bigger Privat group stake in Ukrnafta would allow Privat group to retain its over 40% stake in the merged company. At the same time, the government's 50% stake would be diluted below a controlling stake. The Privat group would thus be strengthened in the company vis-à-vis the state, retaining its ability to prevent a quorum for shareholder meetings when desired. At the same time, the merged company would lose the pricing transparency only recently regained at Ukrnafta. The merger might thus see the loss-making refinery fully loaded with oil, but at the cost of the cash needed to stem the production decline, according to oil market analyst Serhiy Kuyun. Vanhecke acknowledges that part of this story is for the shareholders to decide and outside his remit as CEO. But Vanhecke says he will evaluate any proposed merger only according to shareholder value, and acknowledges that the Kremenchug refinery is financially in a bad situation. He also hints at one other key factor in the equation – whether Ukrnafta’s controlling shareholder, the state, will introduce import duties on oil products to support Ukraine’s loss-making refineries, which would make any merger more attractive. Currently, with zero duty paid, motor fuel imports hold 40-50% of the market, and many refineries are facing closure. The government has indicated it wants more protectionism, but is currently terrified of arousing the massed ire of Ukraine's car drivers, already reeling from surging petrol pump prices due to higher oil prices. Ukraine's energy ministry even announced an "informal" price cap on March 14. So with no import duties making an opaque refinery merger less likely at Ukrnafta, Vanhecke's plans to kick-start production at his new company might still get the honeymoon start they need.

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A future Ukrainian oil champion made in Belgium

"Why limit ourselves to Ukraine? If you look at other regional peers, you see that typically, when faced with a situation when domestic assets were reaching their limits, they started looking further afield. But you need to do this in a very clever way."


At home, Vanhecke says that as the national producer Ukrnafta "should be all over" the Black Sea shelf where oil companies of the littoral countries and international oil companies are investing heavily, although he acknowledges the company lacks offshore drilling experience.

Graham Stack in Kyiv


n a move unique to the former Soviet Union, Ukraine's government has appointed a Westerner to run the ailing national oil and gas producer Ukrnafta with a brief to reverse the decline in production and transform the company into a national champion. Belgian investment banker and ex-head of Renaissance Capital Ukraine, Peter Vanhecke, was a surprise choice to head Ukrnafta – a company debilitated in recent years by a shareholder struggle between the state with 50% plus one share and minority shareholders linked to the owners of PrivatBank, the country's largest lender, holding upwards of 42%. In fact, he was doubly a surprise, as not only is he not a Ukrainian national, but he's also an investment banker new to the oil and gas industry. Only four days into the job and Vanhecke was already talking to journalists, even though he still has no PA. His Ukrainian predecessor was invisible to the press. Ukrnafta's headquarters also lacks a reception, and the $5bn marketcap, 29,000-employee strong company doesn't have an English-language website either. It's a job many would have balked at, but Vanhecke regards it as a challenge. "I didn't take the job for the company that Ukrnafta is, but the company it could be," he says. Vanhecke says he was initially surprised when contacted mid-January on whether he would throw his hat into the ring for the position, and it was only at the annual general meeting (AGM)

on March 25 that voted him in that he knew he had the job. In itself, the selection process was a minor revolution for Ukraine, where insiders usually rule the roost. "There was an objective search to find a CEO," he tells bne in an exclusive interview. "People find that hard to believe, but it was done, and along two routes – one to find an industry expert, and the other to find to find someone with management skills and also financial savvy. I was interviewed separately by the two main shareholder groups to see whether they had my support. It was open and transparent. In both cases, they wanted to understand the strategy and logic of what I wanted to do." "If you analyse this as a business, there are clearly strategic challenges, but do they require oil and gas experts? They probably require strategic and financial knowledge more. My skill set is oriented towards transforming this business. The shareholders share the same vision going forward – this is a business that needs capital investment, and needs it rapidly, needs harmony between shareholders and needs a level of efficiency that is not in the business right now. If they didn't want change, they would not have appointed me." "I am here with a mandate, I am not here to be a patsy for anyone. The shareholders said: 'get to know the company, formulate a strategy and implement it'. They have given me very high, broad and specific goals to achieve: to make this a viable long-term company that is funded sufficiently to

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achieve this… That gives me a level of freedom to do what I can." National champ Vanhecke's aim is to turn the company into a national champion equivalent to regional peers like Austria's OMV, Hungary's Mol and Poland's PKN Orlen. A tall order, but not the first for Vanhecke. "I compare it to what I did in the Russian vodka sector, 2004-05. At the time, there were 400 distilleries, and everyone said" 'you're nuts, don't spend time on this, it's dodgy, you can never do a deal, no foreigners will go there'. Three years later, we did all these deals and consolidated the sector." During his time in Russia working for investment bank Renaissance Capital, which he then headed in Ukraine, Vanhecke also witnessed how oil companies abandoned Soviet ways and introduced modern western technologies to work depleted fields and squeeze more oil out of them. For a company like Ukrnafta faced with falling extraction levels – the figure for January-February was 7.5% down on the previous year – reversing this decline is an overriding task. "There are no 20 options left for this company," he says. "If you look at the production levels, it's not like they have the freedom left to wait another five years." The question is: how to stop the rot? This is where Vanhecke, only days into the job, is looking for answers. Besides introducing new technologies to squeeze more out of existing assets, he says foreign operations are possible.

Improving production, says Vanhecke, will require massive capital investment and thus fund raising. But how much exactly is very difficult to predict. Ukraine has a low-key history in terms of capital market transactions both on the debt side and on the equity side, and a lot will depend on market appetite. Vanhecke says he is still in the process of analysing how big the company's capital needs are, and developing an optimal capital structure. Crucial is for the company to be able to absorb the capital it raises. "The worst thing is for the company to get in a big amount of money, without having an immediate focus for its use. Raising money for the sake of raising money, and pumping it into old technology that is proved to be not optimal, is wrong," says Vanhecke. An upcoming March 22 extraordinary general meeting is set to vote on an up to 25% share issue that could bring in as much as $1.3bn. If the share issue goes ahead, Vanhecke sees the key spending priority as fixing the production side of the business. "An oil and gas company's life blood is production," he says. Fixing the model Vanhecke identifies as a second priority "fixing the business model." Ukrnafta is the largest oil and gas producer in Ukraine with one of the biggest retail networks, but has nothing in between, ie. no refining capacity. Ukraine's largest refinery by installed capacity, the Kremenchug refinery, belongs to Ukrtatnafta, a company that

Eastern Europe

has the same main shareholders as Ukrnafta – the state with 43% and Privat group with 19%. Privat group controls a couple of other smaller refineries in West Ukraine, Drogobych and Nadvirna, in which the state also holds a blocking stake. Discussion of a merger between Ukrnafta and Ukrtatnafta in particular has been a hot topic for years now. "This question has an economic component and a shareholder component, and it is not for the CEO to figure how the latter component might work. My task regarding any acquisition is to safeguard shareholder value, so anything we do has to fit into an economic and value logic," says Vanhecke. "Does anybody actually know the financials of this business Ukrtatanafta? If the occasion comes, let's just work through the financials and see what that means. But if you look at the business models that should be our peers – Mol, Orlen, OMV – these are business models that are fully or partly integrated." Vanhecke notes, however, that the legislative framework in the EU is different from that in Ukraine. One noticeable difference currently in the focus of public debate is that Ukraine imports motor fuel with zero duties, and the share of imported gasoline on the market, according to recent statements by Prime Minister Mykola Azarov, has reached 60%, making domestic refineries loss-making and possibly facing closure. But introducing import duty at a time of sharply rising gasoline prices would be politically difficult. "The cur-

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duced gas. One of the previous bones of contention between Privat group and the state has been the state's requirement for the company to sell its gas to households and utilities at regulated prices several times less than the prices charged to industrial companies for imported Russian gas. "This is a topic for the government," says Vanhecke. "We will, of course, comply with existing legislation. On the other hand, the best way to serve the population is to make this a company which is as highly capitalised as possible. What is good for all shareholders is by definition good for the Ukrainian state." Vanhecke also dismisses the criticism that the company is a book with seven seals, pointing out it's audited by Ernst & Young according to International Financial Reporting Standards. "It's a complex business of course, but I've seen businesses in this part of the world where the only thing you can get are some management accounts on a spreadsheet." Vanhecke compares running the company to running marathons. Topics like unconventional gas and offshore drilling are like "thinking about how tired you might be at kilometre 30. You need to finish kilometre 1 and 2 first." Vanhecke's first kilometre at Ukrnafta will be building a management team. He admits to being pleasantly surprised with the talent pool internally, but that

"I didn't take the job for the company that Ukrnafta is, but the company it could be" rent legislation needs to make it such that something is economically viable," says Vanhecke. "Just to add something to the business that is loss-making, is not necessarily the right decision… Ukrtatnafta will need to present an economic logic in order to be considered." Another legislative issue is the price paid for Ukraine's domestically pro-

fresh blood with an international mindset will also be necessary. Moreover, he intends to upgrade management's English qualifications for better international communication, while working on his own local language skills. "But should Peter be learning Ukrainian, or should it not really be Ukrnafta learning English?" he asks.


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Bric billionaires

Tim Gosling in Moscow


o sector of the Russian economy suffered as much as real estate during the global economic crisis, with construction of new projects virtually coming to a halt. Now with the economy recovering, those stalled building sites are dragging on retailers’ expansion plans. And it's only going to get worse. Retailers are once more greedily eyeing the rising levels of personal income and consumer loans in Russia, with many announcing aggressive expansion plans for 2011 and beyond in a bid to grab a larger slice of a fragmented retail market, in which less than half of the country's yearly retail turnover (around $550bn in 2010) goes through modern chains. The overleveraged real estate sector hit a brick wall when lending dried up in 2008, with 65% of retail projects failing to deliver that year, and is still struggling to get going again. A trickle of stalled malls and hypermarkets are due through 2011, but the two-year hiatus on new projects signals very few deliveries in 2012-13. Cushman & Wakefield already sees vacancy in top Moscow malls below 1% (across Europe, around 5% is considered the optimum for a market at the top of its game) and rental prices heading back towards pre-crisis highs of over $2,500 per square metre (sqm) a year. "The opportune moment for retailers to expand has now passed," says Charles Slater, head of retail at Cushman & Wakefield.


Real estate logjam to drag on retailer growth plans

Reflecting that, Ivan Nikolaev of investment bank Aton suggests that the expansion plans of retailers are likely to slow down over the next couple of years, "with the development of new retail space set to slow to 300,000 sqm this year, and by another 50% in 2012." At the same time, international retailers who have been scouting for space in top-class malls over the last 12 months or so in order to enter Russia

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Russian stocks may be more lowly valued than their Bric peers, but Russia accounts for 15 of the world's 100 richest people, which is more than Brazil, India and China combined.

"The overleveraged real estate sector hit a brick wall when lending dried up in 2008"

According to Forbes magazine's annual rich list published in March, almost all of Russia's billionaires are involved to some extent in the metals and mining or energy sectors, which have benefited from the surge in demand as the global economy recovers. Vladimir Lisin, chairman and majority shareholder of Novolipetsk Steel, moved up 18 places this year to 14th place ($24bn) on the rich list, the beneficiary of soaring steel prices driven largely by Chinese demand. Another steel magnate, Alexei Mordashov, who controls Russia's biggest steelmaker Severstal, is Russia's second richest man, at 29th place with an $18.5bn fortune.

are already struggling. "The lack of space has held back their entry," Slater asserts, "maybe only 30-40% have managed it so far."

stores by the end of 2012 at risk, but for now the company is leveraging its name to take space away from competitors, Zagvozdina says.

Pushing out the competition However, with the Russian grocery market forecast to become the world's fourth biggest with turnover in excess of $400bn per year by 2015, the major hypermarket players such as X5 (which plans to open 500 discounters, 15 hypermarkets and 20 supermarkets in 2011, according to Alexandra Melnikova of Alfa Bank) should push through to hit growth targets by out-muscling smaller competitors on the cost of leases, or by building their own stores. "Everybody below the top six will struggle," reckons Nikolaev. "Access to the capital markets to finance their own development programmes will be key."

That's also a leading edge in Svaznoi's strategy to open 750 new outlets by 2013, according to CFO Michael Tuch, although the mobile phone retailer's readiness to take "alternative" frontage in residential buildings and kiosks is also important. "Fights over space have intensified since the start of the year," he says, "It's certainly much harder to get into top malls, with leasing prices rising as retailers look to outbid one another."

None of this, needless to say, reflects well on the Kremlin's push to diversify the economy away from natural resources, nor convince foreign investors that Russia's economy is any less dependent on them.

Zagvozdina says that according to anecdotal evidence, the shortage faced by retailers that need space in shopping malls will force them to alter their expansion plans for 2012. Tuch agrees, noting that the volume of modern retail space per 1,000 people (approximately 270 sqm, according to Jones Lang LaSalle) is still well below European averages.

Incidentally, a major bit of DST's value derives from a $200m stake in Facebook, the US social networking site, which is also responsible for no less that six billionaires on Forbes' list this year.

As will the real estate strategy and format of retailers, says Natasha Zagvozdina of Renaissance Capital. "Magnit doesn't care, as it builds its own stores generally – if there is to be a winner in the next two or three years, it will be them," she predicts. "X5 can expand its footprint through its discounter stores, which don't need special space. However, O'key only operates hypermarkets, and tends to lease – so the risk to their expansion targets is much greater." A lack of experience in building its own stores could also put electronics chain M.Video's plan to open up to 70 new

Nikolaev expects leasing prices to rise by as much as 15% in 2011, and that acceleration is only likely to increase as the real estate logjam solidifies through 2013. That of course is not going unnoticed in the real estate sector, which may even provoke a reversal two years or so down the line. As Slater notes, "we're already seeing a big acceleration in development this year."

Yuri Milner, founder of Digital Sky Technologies, is a lone member of the Russian billionaire list who's involved in something as modern as the telecommunications, media and technology sector. But he ranks in 1,140 place on the list with a personal wealth of just $1bn.


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Szell Kalman Dubbed the "Szell Kalman" plan after a successful 19th century finance minister, the proposals were intended to reassure investors that Hungary will avoid excessive state spending once the bank tax and other "temporary" crisis measures imposed last year have been withdrawn – originally expected in 2012. (On March 7, the Economy Ministry published the plan in English on the government's website.) The focal point of the plan, to reduce the budget deficit to 1.9% of GDP by 2014 while cutting state debt to 66% of GDP, was welcomed, but the plan met with lukewarm applause, the forint losing 1% in the wake of the announcement on March 1.

A populist govt in Hungary faces making unpopular cuts Kester Eddy in Budapest


t 1:00 pm sharp, the neatly attired lady station master at Mor waves her green disc, and the single-unit railbus hums louder, accelerating its seven passengers and two crew towards Szekesfehervar, 29 kilometres, six rather lonely stops and 35 minutes distant. Mor, a small town 70 km south-west of Budapest, is one of the principal stations on the Szekesfehervar to Komarom line, an 82-km route through sparsely populated rural Hungary. It is lucky to have a passenger service; two years ago, the Socialist government, in an attempt to curb the huge losses of state railway company Mav, withdrew trains on this and a score of other lightly-used lines across the country. Although the authorities substituted buses for the trains, the then Fidesz opposition denounced the closures and, once in power, quickly set about reinstating the withdrawn rail services. "It was

a mistake to close this line; we have real traffic demand here," says the conductor-guard, showing his carefully collated lists that reveal 15 passengers in total have boarded so far. "Sometimes I've had

were women of pensionable age, who travel free: only your correspondent bought a ticket. Indeed, the list of those eligible for discounted or free tickets in Hungary is so all-encompassing that

"Any reforms will require the political stomach to persevere in the face of expected public opposition" 80 on a train when a special event is on," he says, before admitting that at times he's run empty all the way. While the conductor-guard's dedicated enthusiasm is laudable, his economic judgement is, at best, highly dubious; the single fare between Mor and Szeksfehervar, at €2, can barely cover running costs, even in theory. In practice, the story is far worse; of the six remaining passengers to alight at the final destination, three were railwaymen and two

only one in eight of Mav passengers pays the full fare. Little wonder, then, that the state railway lost an estimated HUF43bn (€156m) last year – and that is still after receiving huge state support for passenger operations. It is not surprising that reducing budget support for Mav (and public transport in general) features in the long-awaited government fiscal restructuring proposals, finally released at the beginning of March.

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Analysts praised the fact that it concentrated on expenditures rather than revenues, and targeted HUF900bn in savings and additional revenues by 2013 – higher than had been expected. But – as so often with economic policy under the Fidesz regime – they bemoaned the lack of detail. Nigel Rendell, emerging market strategist with RBC Capital Markets, said that while the principal areas of adjustment, such as health care, pensions, public transport and drug subsidies, offer considerable scope for savings, any reforms will need to overcome "extremely deeprooted problems that will require the political stomach to persevere in the face of [expected] public opposition." And while the Fidesz government still enjoys widespread public support, that may be put to the test sooner rather than later if the plan is fully implemented, says Laszlo Akar, vice president of GKI Research, a Budapest-based economic think-tank. He points to the challenge to cut drug subsidies – an issue made all the more thorny by Prime Minister Viktor Orban's insistence that his government has avoided "austerity" measures. "The plan targets a reduction in pharmaceutical subsidies by one-third [by HUF120bn (€440m) in 2013-14], but who is going to pay the difference, the population or

the producers? There is no indication of how this can be worked out," he says. Akar, who was former state secretary in the finance ministry under the Socialistled government in 1994-98, is also sceptical about the government's ability to cut social transfers such as disability pensions, with stricter checks on medical examinations and the creation of work places suitable for the genuinely disabled. "It's a nice idea to create jobs for these people, but the majority of these people are over 50; are they suitable to work in the construction industry? I think many of these targets are over ambitious and have not been worked through professionally," he says. Others, such as Zoltan Torok, head of research at Raiffeisen Bank in Hungary, are more sanguine, though still cautious. "While in our view the reform package is fairly comprehensive, with a decent structure (in terms of expenditure cut versus revenue items), its communication has been relatively poor," he says. Already the government is facing criticism from many workers who have discovered, to their cost, that the muchvaunted 16% flat tax actually translates into a 20.5% levy on their headline income, and leaves many earning below the HUF300,000 (€1,100) a month threshold with less in their pocket than in 2010. The new programme envisages raising the retirement age to 65, which will hit police and firefighters, who have until now enjoyed the luxury of taking full pension after just 20 years service – a most sensitive group of workers to alienate, particularly given the prime minister's high profile drive to increase the number of police. And the package also targets savings of HUF60bn in public transport in 2013-14. Given the number of social groupings that the government could alienate with these cuts, the Fidesz politicians with a genuine understanding of the economics of everyday business may be rueing that decision to restore services on little-used branch lines like Komarom to Szekesfehervar.

"I think many of these targets are over ambitious and have not been worked through professionally"


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and Estonia, of calculating guarantees within the ESM would be fairer and more beneficial to the Eurozone's poorest members.


Miklos leads Slovakia into Eurozone's awkward squad Nicholas Watson in Bratislava


lovakia has only been a member of the euro for just over a year, but it has already kicked up a fuss about contributing to the bailout fund for other Eurozone members and is also part of a grouping that has probably managed to kill a Franco-German proposal to harmonise corporate tax rates across the bloc. Ahead of a couple of EU summits in March that will do much to define how the Eurozone fares this year and further into the future, Slovakia joined other smaller member states in fighting a key part of a draft plan – originally dubbed a "pact for competitiveness" and renamed a "pact for the euro" – that is designed to impose more fiscal discipline on the 17 countries in the Eurozone.

The proposals comprise limits on debt levels written into national laws, higher retirement ages based on demographics, the abolition of index-linked wage increases, unified bank crisis-resolution mechanisms, measures to boost workforce mobility and, most controversially, a common corporate tax base. At the March 11 summit, European leaders agreed on a programme of long-term economic overhauls to the 17-member Eurozone, and authorized a beefing-up of the bloc's bailout fund for troubled countries. However, Ireland, backed by other smaller nations such as Slovakia, Cyprus, the Netherlands and Malta, refused to budge on raising its corporate tax rate, leading to President Nicolas

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Slovakia's membership of the Eurozone's "awkward squad" is, ironically, in direct contrast to how its citizens generally feel about the single currency since it was adopted in 2009.

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At the end of February, the latest Eurobarometer survey found a high level of trust among Slovak citizens in the EU and its institutions, like the European Central Bank. As many as 71% of Slovak citizens said that they trust the EU, which is 28 percentage points above the EU average. Slovaks place the most trust in the European Parliament (76%), the ECB (68%), the EU Council (67%) and the European

A common corporate tax base is a no-no for low taxation countries like Slovakia and Ireland. "In general, we agree with the competitive pact as it was announced. There were six priorities and we have only partial reservations about one, which was the corporate tax harmonisation – on all others, we agree," Ivan Miklos, Slovakia's deputy prime minister and minister of finance, tells bne. "I accept the rationale behind this proposal, but the final result will actually be the worsening of the competitiveness of the whole of Europe, not only the new countries with low tax rates." Miklos – a polished, sharply dressed, fluent English-speaking economist, steeped in the libertarian principles of the Austrian school of economics – says the main problem with trying to harmonise direct taxes such as corporate tax rates is that places like Slovakia have managed to cut corporate taxes to 19% and below by broadening the base through the closing of loopholes and ending exemptions. Germany, on the other hand, has a much narrower tax base because of the tax code's many exemptions, special rates and other deductions. If the EU decides to go down the path of having a common tax base, then it is unlikely to choose the Slovakian model, since broadening the tax base is, by its very nature, very politically unpopular. "So if we have a

narrower base than today, we will have to impose these exceptions and increase tax rates, because the more narrow the tax base, you need higher rates to gain the same revenues, so this will worsen our competitiveness." Slovakia and its allies look as though they might've won the argument. At the March 11 summit, EU sources told Irish broadcaster RTE that German Chancellor Angela Merkel isn't "quite so hung up" on the corporate tax rate as France and there are apparently very few people in Brussels who feel it's a runner, regarding it as simply too sensitive politically. Fighting on several fronts On another front, Slovakia is trying to force through a new way of calculating the credit guarantees that Eurozone members will contribute to the next bailout fund, the European Stabilisation Mechanism (ESM), that will replace the current fund in 2013. Slovakia wants the way that each country's contribution to the ESM is calculated to account for the strength of the economy – including GDP level, public debt and the development degree of the financial sector. For the current European Financial Stability Fund, the contributions correspond to the amount of reserves particular countries have in the European Central Bank, which in turn are partly dependent on the population of particular countries. According to Slovakia, the new way, backed by Slovenia

Commission (66%), while their own national institutions such as the Slovak parliament, government and courts do not enjoy such high approval ratings. "Despite the problems faced by the eurozone in 2010, it's gratifying to say that Slovaks have kept faith in the euro," Andrea ElschekováMatisová, head of the European Commission Representative Office in Slovakia, told the TASR newswire.

the way for a more effective dialogue with Moscow, on top of boosting the flow of Russian capital into the nation's economy.

Ivan Miklos

Sarkozy to make a head-on demand that Ireland raise its corporate tax rate in return for concessions on the terms of its bailout.

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Russia and Poland trade more than insults Jaroslaw Adamowski in Warsaw


mitry Medvedev's ice-breaking visit to Warsaw in December, the first official visit of a Russian president to Poland since 2002, was expected to open a new chapter in the often-troubled relations between the two neighbours. And indeed, within months of Medvedev's visit, a deal that could be the first in a series of new Russian ventures in Poland was sealed, while Polish investors are lining up to set up production facilities in at least 10 regions of Russia. Since it joined the EU in 2004, Poland has weighed heavily on Russia's relations with the bloc, often slamming the

Kremlin for human rights abuses and its hawkish foreign policy in what it calls its "near abroad". However, after last year's election of Bronislaw Komorowski as Poland's president, replacing the nationalistic late president Lech Kaczynski, hopes were high in Warsaw that the change at the helm would pave

Then on February 7, Russian-British car maker Intrall Rus signed a letter of intent with the Polish Information and Foreign Investment Agency (PAIiIZ) and regional authorities to set up a car plant and a research and development centre in Szczecin, in the country's north-western region of Zachodniopomorskie. Construction of the plant is expected to commence in late 2011, while the first vehicles should come off the production lines by 2014, company officials said. The factory will make a range of commercial vehicles, vans and pick-up trucks for both domestic and foreign markets. Intrall intends to create up to 600 new jobs in Szczecin. The latest venture by Intrall, valued at about €270m, represents the biggest Russian investment in Poland in years, despite Russia being ranked as its sixth largest export market and the second largest importer from Poland, according to data from the Polish Ministry of Foreign Affairs. The Polish government is reportedly likely to provide a grant to support the investment, which is Intrall's second

"Poland's latest car plant was set up back in 2000; since then, all major manufacturers have invested in neighbouring countries"


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attempt at establishing itself in the local market. In 2003, the company acquired the troubled Daewoo Motor Poland car factory in Lublin, but it was forced to halt production four years later. But the investment flow is not just one way. On March 10, Andrzej Zygmunt, first secretary of the Polish Embassy in Russia, was reported by RIA Novosti as saying during a meeting with Smolensk First Deputy Mayor Sergei Maslakov that Polish investors are interested in setting up production facilities in at least 10 regions of Russia, because it's more profitable to manufacture goods for the Russian market on Russian territory than import them from Poland. Though the level of accumulated Polish investments in Russia is rather low at present, a mere $600m, Zygmunt said Polish business activity in Russia is growing every year, with the embassy receiving 3,000 applications from Polish businessmen wishing to set up operations in different parts of Russia. He said Moscow and the region surrounding it account for about 50% of Polish imports, with the rest going to the regions of Smolensk, Kemerovo, Chelyabinsk and Sverdlovsk and others.

"Last year, the Polish Embassy received 3,000 applications from Polish businessmen wishing to set up operations in different parts of Russia"

Automotive hub According to Anatoly Leyrikh, chief executive of Intrall Rus, the carmaker has been long planning to invest in Poland, and was particularly interested in launching its latest venture in the Zachodniopomorskie region. The convenient locale of the region, which lies at the crossroads of transport routes connecting Western and Eastern Europe, and its positive investment climate have played a decisive role in sealing the deal, he said. These factors, as well as the presence of highly-qualified engineers, "create proper conditions for establishing a research and development centre where we will design the majority of our new cars," Leyrich said at the signing ceremony on February 7. Hopefully, the latest project by Intrall could lure other automotive investments to Poland, also from across the eastern border, industry analysts say. They also point out that there is a

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potentially strong demand for cheaper, locally-built commercial vehicles in Poland, and Intrall's cars would likely fit into this niche. Poland is home to 16 out of a total of 41 vehicle and engine plants located in the EU's emerging European member states. However, one major preoccupation of Poles is the growing competition the country's automotive industry faces from other automotive hubs in the region, such as the Czech Republic, Slovakia and Hungary. "Poland's latest car plant was set up back in 2000. Since then, all major manufacturers have chosen to invest in neighbouring countries," says Wojciech Drzewiecki, head of Samar, an automotive market research firm based in Warsaw. "If Poland wants to foster new automotive investments, the government should focus on encouraging investments by leading manufacturers... but also on strengthening the domestic market. Domestic sales account for less than 3% of Poland's car output, which is far below the level expected by potential investors." Recent data from Samar confirms that Poland's automotive industry is chiefly export-oriented. In 2010, a total of 799,255 passenger vehicles rolled off the local assembly lines, down 4.1% from the year earlier, including some 533,455 units which left the production lines at the country's largest production facility, the Fiat Auto Poland plant in Tychy. Of these, 97.4% were exported, Samar says. In Poland's light commercial vehicle (LCV) segment, the disproportion is just as apparent. Last year, some 87,986 LCVs were made at Volkswagen's factory in Poznan and Fiat's plant in Tychy. According to Samar, nearly 96.7% of the aggregate output by the two OEMs (Original Equipment Manufacturers) was intended for export. "With such high dependency from foreign markets, it will probably be long before Poland's automotive market reaches stability," says Drzewiecki, adding that this weakness is echoed in the way the country's car sales often fluctuate wildly from month to month.

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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%.

A Czechered solution to the pension problem Nicholas Watson in Prague


he Czech government said February 22 it expects its pension reforms, which include a tax hike and new private savings pillar, to be approved by parliament in the autumn of this year, ready for launch in 2013. But experts say the changes are unlikely to make it through in their present form and, some argue, would do little to address the main problems with the current system in any case. On February 17, the centre-right ruling coalition presented the first draft of its planned pension reform, which is part of a regional trend of Central Europe and Eastern European governments attempting to rejig their pension systems to plug growing holes in their budget deficits, exacerbated by the global economic crisis, caused in part by the expensive and increasingly unaffordable pay-as-you-go systems currently in place. Short of the "African model" where families comprise a large number of children who will care for their parents in old age, governments are finding there is no ideal fix to these problems

with their pension systems and should probably involve at least one of the following unpopular changes, which makes the problem so knotty for governments to deal with: to lower pension

At the same time, the current pension fund providers would be transformed and licensed afresh, while new ones would be allowed to enter the market. There would be a strict separation between the assets of the fund and those of the clients. And funds would be required to offer several investment profiles for clients to choose from, with one "safe option" offering investments restricted to Czech government bonds. Jan Mladek, an economic adviser for several administrations of the current opposition Czech Social Democratic Party (CSSD), which has heavily fought the proposals, says that thanks to a strong media campaign, at least the reform won’t involve the compulsory savings pillar first promoted by the main party of the governing coalition, the Civic Democrats (ODS). That kind of reform

"The government's proposal will be a voluntary trap – you can walk into it of your own accord, but you won’t be able to voluntarily walk back out" benefits; to increase the retirement age; to increase pension payments. Tax and save 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

has been given a bad name in the region by the Hungarian government's effective re-nationalisation of $14bn in private pension assets, which caused consternation from just about every quarter, from the EU down to many of its own citizens. "[The Czech government's proposal] will be a voluntary trap – you can walk into it of your own accord, but you won’t be able to voluntarily walk back out," says Mladek. The switch from a pay-as-you-go system into a (fully or partially) funded system


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Austrians show eastern Europeans how to save it bne With saving for old age a hot topic right now as Central and Eastern European governments struggle to put their pension systems in order, several surveys suggest the region's citizens aren't saving enough and could take a leaf out of the Austrians' book. First off there was bne's own survey in February of 20-plus year olds in Poland, Russia and Turkey, which found that virtually none of the Poles and Russians surveyed were putting money aside. This contrasted with the Turks, half of whom said they were saving. Then at the end of February a survey carried out by GfK Polonia commissioned by the Polish daily Rzeczpospolita found that in 2010 a majority 66% of Poles did not put as much as one zloty aside for a rainy day. Just as in 2009, the survey said every 20th Pole saved between PLN5,000 (¤1,262) and PLN10,000. Every 100th person put aside PLN10,000-20,000, while just 1% of Poles saved over PLN20,000. More men than women made savings last year. According to Professor Andrzej Rychard, chairman of the Centre for Social Studies, these figures are understandable, given the growing consumerism in Polish society. Saving is more popular in developed economies and Poland still needs over 10 years to join the group of such states, he notes. Austrian economics The Austrians are streets ahead of their European cousins to the east. According to a recent survey conducted for Erste Bank by the market research company Integral, Austrians plan to set aside on average approximately ¤5,460 in 2011. Some 62% plan to invest their money in savings passbooks and slightly less intend to open building society savings accounts (58%). About 40% plan to invest in life insurance this year and 34% in retirement provisions. Encouragingly for the fund industry, 17% said they might consider investment funds appealing, while 11% plan to buy real estate and 8% will invest in gold on their custody accounts. "Putting money aside, in whatever form, has traditionally been very important for Austrians," explains Peter Bosek, member of the management board at Erste Bank. In 2010, deposits by private households – after some ups and downs – stabilised at around ¤207bn, with Erste Bank holding almost ¤40bn of that total. Having said that, Austrians are not averse to splashing out: according to the study, a third of Austrians are planning major purchases such as cars, apartments or new furniture. The majority will pay for these purchases out of their own savings (85%), but 15% will need loans from banks, with the average amount around ¤70,200. The credit volumes are clearly moving upwards, says Erste, though it must be noted that Austrian households by and large remain relatively debt free compared with their western European counterparts. The total private debt of households was equal to 54% of GDP in 2009 (up from 42% of GDP in 1995) – in Germany this figure was 64% and in the US 99%.

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always entails additional costs, as the diversion of part of the 28% social tax into private savings funds will create a wider gap; Finance Minister Miroslav Kalousek told Reuters that the opt-out reform would cost the state CZK20bn a year once the reform is in place by 2013. So to make the changes neutral for the budget, the government is unifying the VAT rates to a single rate of 20% (currently, the Czech Republic has two rates, 10% and 20%), to start as early as next year, which would bring in CZK58bn in revenue per year. Drawbacks and clawbacks The main criticism of the Czech proposals, even amongst those who say they are a step in the right direction, is that they leave too many questions unanswered. "The release of the government draft appears to be more of a trigger for discussion than a fully articulated and carefully crafted plan," says Petr Bittner, a macroeconomic analyst at Ceska Sporitelna, a division of Erste Group. "This is evident not only in the haphazard fashion in which the plan is being communicated to the public, but also in the fact that quite a few questions, some of them very important, remain unanswered." Chief amongst them, he lists, is the question of what a person who opts to put money into the private savings pillar will get from the state-guaranteed part of his or her pension, in comparison with that of a person who chooses to remain in the current system? Also, would there be maximum limits to the fees charged by funds? How would the investment profile of the fund be regulated? (Bittner notes over-regulation can be as detrimental to the returns as under-regulation.) The main criticism, though, centres on the all-too-probable risk that only a small part of the population will opt in, which would mean at the time of retirement too many of the population won't have been saving and now find the state-guaranteed pension too low to live on. This could then lead to the part of the population that saved privately finding its savings confiscated as the overwhelming majority clamours to get its hands on other people's private money

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(see Hungary now). "The government needs to force or cajole – by at the very least saying outright how much the government pension will be and how much funds can add – a sufficient number of people to opt in. This way, they’ll have their own money at stake in the future and won’t be as easily tempted back into the state fold," says Erste's Bittner. Then there's the problem that all these private pension pillars share, whether compulsory or voluntary, that whereas pay-as-you-go systems are mainly subject to demographic changes, private saving systems are mostly affected by developments on the financial markets, which, as recent evidence shows, are

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increasingly prone to increasingly large shocks. While a person saving on a individual basis can always cash out of their investments, those invested in the second pillar are not given the opportunity to get out – not even if already retired. Thus, people are forced to run high risks and generate low yields, while many of them would run less of a risk and achieve higher returns if allowed to save on an individual basis, argues Marketa Sichtarova, chief economist at the financial advisory Next Finance. Few, if any, doubt the current system needs reforming; government studies have shown it will eventually generate deficits growing to around 4% of GDP

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every year without any change. But critics like Mladek say the coalition's answer would preserve the current disadvantages and add others to them. "This includes an unnecessary increase in state indebtedness while the entire system generates pointless losses," says Mladek. Even so, the coalition's proposal has at least one thing going for it that few would argue against: it has ignited a debate about pensions, raising the hope that people will be more interested in how their pensions will look and what options they have to do something about it – even if it is just having more kids.

Baltic bank for sale, one careful owner INTERVIEW:

Mike Collier in Riga


hile the financial crisis has seen some familiar names from the banking world carted off in coffins, there have been fewer examples of the pitter-patter of tiny feet as new banks are born to take their place. Latvia provides an exception in the form of Citadele, a bouncing baby bank conceived during a one-night stand between Parex Banka and the Latvian state. Citadele was formed in August 2010 by means of splitting the notorious Parex, which had to be nationalised by the Latvian state in 2008, into a "bad" resolution bank and "good" Citadele. Juris Jakobsons is the "good" bank's chairman, charged with nursing the nine-month-old through its formative

Juris Jakobsons

years and getting it ready for a comingof-age party when an investor acquires it. "The bank spent close to two years under the heaviest liquidity squeeze and was forced to pay a very high price for deposits," Jakobsons tells bne in Citadele's Riga riverside head office. "The lion's share of a bank's income is usually net interest income, but in our case this was negative when we started. Now, finally we have reached positive territory and this is extremely pleasant. For us, this is the breaking point – we have finally surfaced." Presently, Citadele has assets worth LVL1.4bn (€2bn). Three-quarters of its shares are owned by the state via the national privatisation agency, with the remainder held by the European Bank

for Reconstruction and Development (EBRD). However, a group of minority investors in Parex (including investment groups East Capital and Firebird Management) are challenging the legality of the Parex split, even though the strategy was approved by the European Commission. As the day-to-day manager of Citadele, Jakobsons insists that neither legal wrangles nor public pressure to find a buyer are distracting him from his job. "We are not getting interest directly – we redirect those requests to the privatisation agency and their consultants, Nomura International. The management of the bank is not selling the bank. We have our strategies and our targets and visions. We want to be the most valuable


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Going Dutch in Prague Prague is reportedly getting its very own "Amsterdam shop" that sells legal synthetic drugs courtesy of a Polish company, which has already also established two such shops selling in the Moravian towns of Ostrava and Olomouc. The Polish operator running the retail chain of shops circumvents the law by selling drugs, such as synthetic forms of marijuana and pills containing a substance with similar effects as the pervitine (methamphetamine) hard drug, as "collectors' items" and not for consumption. Both Czech and Polish legislation allows for this. In the shop, customers receive a card with the information that the goods are just for collectors' purposes and if they consume them accidentally, they must seek medical aid. "These are collector's items that are not fit for direct human consumption," Amsterdam shop operator Przemyslaw Wieromiejczyk explains on the shops' website, CTK reported. Czech drug enforcement officials say the designer drugs, which come in brightly coloured wrappers and are marketed as "souvenirs" under names such as "Good Shit" and "Monkees Go Bananas", originate in China and then find their way to the Czech Republic via Polish drug dealers. "It's mad," Michal Hammer, spokesman for the National Drug Squad (NPC), told The Prague Post. "The principle is simple: they're creating new substances, which are more or less a molecule away from an illegal substance, and it becomes a different substance that is completely legal." The law may be catching up, though. On March 15, the Czech lower house of parliament unanimously passed an amendment extending the list of addictive substances to include 33 new ones. The draft amendment will now go to the Senate.

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bank in the Baltics in coming years and we are working hard on that. Valuable for future investors, valuable for our employees, valuable for our clients. This is not simply value in monetary terms, but in a broader sense." Jakobson's efforts have been helped by the somewhat surprising acceptance of the new Citadele brand. "Parex casts a long shadow, whereas Citadele seems like something new and positive," Jakobsons says. "We feel there are many clients we can approach now who previously refused flat to talk to Parex." "Though many people working in the bank were here when it was Parex, the management has changed, and with that the business culture and the approach to problems and service issues. I have worked in the Latvian banking sector since 1994 with Scandinavian banks and UniCredit. I can say that the culture and processes with which we are working have become much closer to this Western European style than they were before." Final furlong On the prospects for a sale, Jakobsons insists that spinning off assets such as the well-regarded asset management arm or Swiss subsidiary AP Anlage & Privatbank ahead of a sale of the core business would make little sense. "These foreign assets which we are holding have positive yields, so why should we scrap something giving positive returns? If one day the new investor thinks, 'Why do I need a Swiss bank?' he can sell it and get a decent return. I can imagine some investor groups would be interested in holding this asset. We are working as a banking group, so when the investor comes along and asks what we are

doing, we have a clear answer and the investor can consider how much he is prepared to pay." The ultimate deadline for a sale, set by the European Commission, is the end of 2014. According to Nomura, it typically takes eight or nine months to complete a sale process, so potential buyers still have a couple of years to monitor the bank's progress, though until a sale is completed, Citadele is forbidden from exceeding certain performance limits to prevent it distorting the market using state money. The interesting thing will be whether potential buyers are existing players in the Baltic banking sector looking to increase their market share or new entrants, maybe even from the east. "If the buyer is someone who already has a strong brand, then probably the brand will change. It happened with Unibanka, now SEB," says Jakobsons. "But there is also the possibility that a banking group not present here at the moment comes in and if they feel the brand is strong, they'd might as well keep it. So for example there is still Yapi [Kredi Bank] in Turkey even though half of it belongs to UniCredit. Strong brands are not scrapped." "If you're buying a new car, you don't take it straight back to the shop and repaint it immediately," Jakobson smiles. "You choose the car you like, you drive it for a while and then you change the colour if all of a sudden you decide to do so."

Ian Hague, co-founder of Firebird Management, is an investor in bne.

"These foreign assets we are holding have positive yields, so why should we scrap something giving positive returns?"

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As if that weren't bad enough, reports say foreign investors in the solar business are planning to file a joint legal complaint against the Czech Republic over the retroactive tax. Given such a sorry history, one might've expected the fragile coalition government to steer clear of any more controversial green energy schemes, but in fact it seems intent on now pushing waste biomass, which will see wood chips converted into energy.

Czechs have the energy for another scandal Jiri Kominek in Prague


series of corruption scandals has seriously dented the Czech Republic's reputation as a place to do business in the EU, and now the country's political and financial elite appear bent on plunging the country into yet another dubious energy misadventure.

was the third fastest in Europe – much of the damage has already been done; the Czech countryside is littered with solar panels located on prime agricultural land, which instead of being used to grow crops, is being used to produce electricity, which in turn is driving up food prices again.

First, there was the biofuel debacle of the mid-2000s, in which farmers, lured by hefty government subsidies, began producing rapeseed (a key ingredient in biodiesel) instead of growing crops for food production, resulting in big price rises at the supermarkets.

Worse, some energy experts predict that as the sun roasts the northern

This was then followed by the solar energy scandal over the past two years, where again politically connected businessmen pushed through legislation via their political allies that resulted in hefty state subsidies and generous fixedpurchase prices for the green electricity produced. Although the new government late last year imposed a 26% tax on solar farms built in 2009 and 2010 to limit the amount of cash flowing out of the budget to pay for those subsidies – Czech solar output growth in 2010

Branching out In December, it was revealed that LST Trhanov, a forestry company linked to infamous Czech arms dealer Richard Hava, had won an exclusive contract from the Ministry of Agriculture without any tender to produce biomass from wood cutting waste sourced from forests run by state-owned forestry company Lesy CR. Energy experts say that apart from LST Trhanov, only the state utility CEZ, Prague power distributor Pražská energetika, as well as the city's mass transit authority will benefit from plans underway to use this biomass to fuel the "Electromobility" campaign currently underway, which will see the Czech capital saturated with re-charging terminals for electric cars. "Apart from enriching a select few, the project will result in a dramatic rise in the price of wood used in the construction, pulp and paper, furniture and other industries, since the commodity will suddenly become artifi-

"Apart from enriching a select few, the project will result in a dramatic rise in the price of wood used in the construction, pulp and paper, furniture and other industries"

hemisphere this summer, there is a severe risk of power blackouts caused by the national power grid being overloaded by the influx of solar-generated megawatts.

cially scarce," one energy sector source tells bne on condition of anonymity. One company that probably won't benefit, according to local magazine

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Ekonom, will be the heating company Plzenska teplarenska, which in 2010 installed the largest biomass boiler in the Czech Republic with a view to getting the contract for supplies of wood chips with Lesy CR that ended up going to LST Trhanov. LST Trhanov was also the beneficiary of another decision by the Ministry of Agriculture when in November, instead of allowing fair competition amongst smaller local logging firms and lumber mills, Agriculture Minister Ivan Fuksa issued what he described as "complex concessions," in effect blank cheques, to the company, as well as other large players including LESS Holding and Wotan Invest, who now have rights to log, measure, appraise, purchase (if they like), transport, sort, and finally sell the lumber from Lesy CR. Critics argue the state budget will be cheated through lost revenues as well as

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having to foot the bill for reforestation, which currently calls for planting a greater number of deciduous (leafy) trees that require a longer growing period rather than the up-to-now harmful, yet more lucrative, practice of planting coniferous (pine) trees, which grow quicker and can be harvested more frequently. "The lucrative contracts [to harvest wood] will by far surpass the [planned nationwide €6bn] tender to sanitise ecologically damaged lands [contaminated by industry]," wrote independent forestry and environment expert Katerina Brezova in her blog published by leading online Czech daily Furthermore, she argues that Fuksa's policy of favouring the big players will drive local and regional lumber mills out of business. Brezova is not alone in her criticism. In its 2009 annual report, the Czech BIS security service warned that the size,

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financial value of potential harvesting rights and non-transparent organisational structure of Lesy CR was a magnet for special interest groups, corruption and cronyism. Fuksa recently responded to criticism by promising to transform Lesy CR into a joint stock company and conduct an IPO. "I intend to ensure the transparency of state forests by placing the company on the stock exchange," Fuksa told Czech national radio. Experts from the Czech government's national economic advisory board (NERV) say, however, that the state should retain a majority interest in Lesy CR due to its long-term revenue potential. "Only 20-30% of Lesy should be sold on the stock exchange due to the future revenue-generating interests at stake for the state budget. The only risk, however, is that only the few and powerful will benefit [from these revenues]," NERV member Jan Prochazka tells bne.


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for banks following Turkey's 2000-01 domestic financial crisis. Before that, due to high inflation and a difficult macroeconomic situation in Turkey, banks largely opted to grant loans to big commercial and corporate companies rather than SMEs. "They were not trying to grant loans to SMEs because they were getting a lot from treasury bills," says Aydin.

No easy business for Turks in Kazakhstan

Justin Vela in Istanbul Following the crisis, the government instituted deep reforms of the banking system and banks began looking for new opportunities. "Banks changed their focus to SMEs because there is a huge cake over there. It is much faster and easier than doing corporate and commercial banking. It is also less risky because you are spreading your risk all over the country to hundreds of thousands of customers," says Aydin.

The sun rises on Turkey's Mittelstand Justin Vela in Istanbul


he city of Istanbul, with its skyscrapers, minarets, and expansive bridges, signifies the achievements of the "new Turkey," yet it’s the rapid development of next-door region Anatolia, Asia's westernmost terrain which comprises the majority of Turkey's landmass, that signifies the potential. In a recent report, the Turkish Enterprise and Business Confederation (Turkonfed) reported that Istanbul is still Turkey's richest province, with an added value of TRY12,902 per person (€5,813). On the other hand, almost all Anatolia's provinces had added values per person of less than half that. Kayseri had an added value of TRY5,827 per person. The poorest province, Van, far to the east along the border with Iran and Armenia, reported only TRY3,159 per person. The

report put the country's average added value per person at TRY8,336, or €3,721. The levels of development remain uneven, but in the past two decades Anatolia (the name derives from the

famously embodied by the so-called "Anatolian Tigers," cities that grew impressively as a new breed of businessmen, often religiously conservative and running small and medium-sized enterprises (SMEs), rose in prominence in the

"Banks changed their focus to SMEs because there is a huge cake over there" Greek word anatoli, or sunrise) has changed from a backwater that inhabitants fled in search of new lives in western cities to a place of increasing industrialisation and opportunity on an international scale. This change is most

1990s. The Turkish version of Germany's vaunted Mittelstand was born. According to Erkin Aydin, coordinator for retail banking marketing at Turkey's Finansbank, SMEs really became a focus

Today, there are an estimated 2m SMEs active in Turkey. While the global economic crisis two years ago caused banks to reduce loans to SMEs, the Turkish government is now actively promoting their growth and last year the number of loans to SME's increased 50.1% from the year before to nearly $80bn. Rising tide The Independent Industrialists and Businessmen's Association (Musiad), a trade organization of about 5,000 members, materialises the rise of Turkey's SMEs, both in terms of fuelling growth in Anatolia and influencing Turkey's increasingly diverse foreign policy. "About one-third of our members are in Istanbul. The rest are in Anatolia, all the rest of Turkey, you can say," says E. Tarik Argit, Musiad's vice-secretary general. Musiad was founded in 1990 by a small group of Turkish businessmen. Today, Musiad companies, nearly all SMEs, contribute about 15% to Turkey's GDP and approximately $17bn to Turkey's export revenue, with 47 offices around the country and 91 contact points abroad. In the lobby of Musiad's Istanbul headquarters, dozens of awards sit on shelves that ascend to the ceiling on one side of the room. The Jeddah Chamber of Commerce & Industry. The

Despite a high level of interest, Turks aren't finding it easy to do business in Kazakhstan. No one wants to stop trying, but Kazakhstan's customs and banking systems are keeping the hungry Turks wary of doing business on the steppe. According to Mahmut Yuksel Sune, a member of the foreign relations commission of Turkey's Independent Industrialists and Businessmen's Association (Musiad), Kazakhstan still has much to do in creating a good business environment. While Musiad member companies want to grow exports to Kazakhstan, a country that imports nearly all its products, two out of three requirements for doing business aren't there. "We have three conditions to go to a country," Sune says. "We must be able to go very easily by plane. Customs must be functioning and in good condition. Banking must be conducted in a good, easy way. Kazakhstan only meets one of these conditions – there is a direct flight. " "When you are there, you cannot do your money transfer," says Sune. "You cannot feel yourself in [good] condition with the documents. How can you easily invest there?" The Turks might be complaining, but things are definitely improving. Kazakhstan rose from 74th to 59th out of 183 economies in the World Bank's "Doing Business" survey for 2011. Turkey itself was ranked 65th, a fall from 60th. Dr Kobil Ruziev of Aberystwyth University says there was no problem getting money in and out of Kazakhstan. "I cannot see why the banks would be a problem. There may be isolated incidents, not anything systematic, you can be sure of that." However, compared to the highly transparent and restructured Turkish banking system, Kazakhstan has a lot to improve, Ruziev admits. On the customs side, it takes an average of 67 days to import goods and an average cost of $3,055. In the OECD area, the average is 11.4 days and $1,106. While there is some work to do, the rewards could be great. Turkish contractors have completed an estimated $13bn worth of projects in Kazakhstan. In Istanbul in January, Kazakh Prime Minister Karim Qajymqanuly Massimov called Turkey a country with great production potential, according to local dailies. "With its noteworthy economic growth, Turkey is a country of interest for all," said Massimov. Through Kazakhstan, Turkey can gain access to the customs union with Russia and Belarus, and increase its trade with China. Kazakhstan itself is a market of nearly 16m people.


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Palestinian furniture delegation. The Pakistan business forum. The National Chamber of Commerce & Industry Malaysia. Musiad does much business with Western countries, but there appears to be a clear focus on other Muslim nations, proving the strength of the cultural affiliations that Turkey offers. "There are good export markets [in the Muslim world]," says Adem Donmez, Musiad's coordinator of sector councils. "Not better than Europe, but more suitable. We see the buying power of these countries going up."

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Anatolian power-house According to Argit, Musaid and the everincreasing number of SMEs popping up across Anatolia feed innovation in all sectors of Turkey, especially in manufacturing and construction. They are also feeding the economy and the country's reputation, as the Turkish government takes Musiad, and representatives from other trade organizations, around the world on frequent trips abroad. "About the government, we are getting the same facilities that have been given to others," says Argit. "The government now is trying

to increase the trade volume by 2023 to $500bn, so we are together, you can say." While some warn that Turkish banks are lending too much to SMEs, non-performing loans (NPLs) have actually fallen in Turkey, according to Finansbank's Aydin. "All the banks are sending the data of the companies to the credit bureau. If the owner has bad credit history, no-one can grant a loan to that customer. The system is getting better and better every day," he says.

for 18 access slots for 12 regional substations with a total capacity of 686 MW. Despite warnings the competitive process risked pushing up bids so high that wind power developers wouldn't get commercial credit to build their projects, the results were largely encouraging, with 17 wind farms totalling 636 MW awarded access to 11 substations.

Turkey's renewable energy sector gets second wind

With the basic feed-in tariff – a payment the state guarantees to pay for all the green electricity produced – set by Turkey's renewable energy law, which was passed in December, fixed at $0.073 per kilowatt hour (kWh), far lower than European norms of €0.080.09/kWh, many had feared that obliging developers to pay for grid access as well would render many projects unviable, even with the chance of extra tariff increments of up to $0.037/kWh depending on the use of locally manufactured components, such as turbines.

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Big players Also encouraged by the results is Erol Demirer, owner of Turkey's biggest wind plant operator Demirer Holding, who while pointing out that the feasibility of any project ultimately depends on the average wind speeds at each plant site, developers bidding 0.5 kuru/kWh should have viable projects, with those who bid up to 1 kuru/kWh also standing a good chance of having viable projects. However, Demirer is still critical of the tender process, pointing to the result of the bids for one substation where one of two bidders opted to submit no bid, with the second bidding unnecessarily high at 1.79 kurus/kWh. "Essentially, all it does is take money away from the wind developers that they earn from the guaranteed feed-in tariff, and risks making some projects unfeasible," he explains. Also critical is Christian Johannes of Ankara-based wind power consultancy Re-Consult, who points out that the three-year delay after the November 2007 tender meant that Turkey now has no way of meeting its planned target of 10,000 MW of wind power capacity by 2020. "Even if the rest of the grid access tenders go according to plan, there just isn't the available capacity to manufacture sufficient turbines to meet demand," he says. That situation may change if international turbine manufacturers opt to begin production in Turkey – the aim

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behind the part of Turkey's renewable energy law that offers extra tariff increments for wind power producers using local machinery and parts. However, despite speculation of impending investment from several big name manufacturers including GE, as yet none have announced any firm plans to invest. Tenderly That may change, however, if grid operator TEIAS can continue to successfully complete its grid access tenders. While Turkey may only currently have 1,400 MW of operating wind plant, another 2,000 MW had been licensed before the 636 MW of new plant that will be licensed after the February tender. Two more tenders slated for the end of March will offer a further 785 MW, with one tender slated for March 29 inviting developers of 11 planned wind plants to bid for five access slots totalling 281 MW and one for March 30 seeing 26 developers competing for eight slots totalling 504 MW – for which bidders include Spain's Iberdrola and major Turkish players Turcas and Zorlu Enerji. And with around another 7,000 MW of grid access still to be offered and developers looking for locally made turbines to allow them access to increased feed in tariffs, turbine manufacturers may yet find the Turkish market too lucrative to avoid.


The economic crisis has hurt all the economies of the world, but now governments across the Central and Eastern European region are planning to spend trillions of dollars on infrastructure investment as the most effective form of economic stimulus to put their economies back on a sustainable growth path. This investment was badly needed even before the crisis hit 18 months ago. Decades of work lie ahead, which presents a unique opportunity for investors of all kinds. Every two weeks, bne will publish an online a round-up of the main investment projects, analysis, commentary, regulatory changes, investment plans, and funding news in bne:infrastructure.


David O'Byrne in Istanbul


ears that the development of new wind power projects in Turkey would grind to a halt due to the low guaranteed tariffs stipulated in Turkey's new renewable energy law appear to be overblown. Turkey's first tender for electricity grid access for new wind plants was completed in late February, with professionals from across the Turkish wind sector declaring the results a success. The tender for grid access was necessary because of the huge number of

applications for licenses to build new wind plants received in 2007 – over 780 applications to build a total of around 78,000 megawatts (MW) of new capacity. Many of these were competing for the same sites, and so for the same limited access slots to Turkey's underdeveloped national grid. In order to decide which plants could be built, Turkey's grid operator TEIAS was obliged to hold competitive tenders for developers to bid on what fee they would pay to get their electricity onto the grid. The first tender announced in January invited 27 developers to bid

The results, though, were encouraging, with bids for 13 of the 17 winning projects coming in below 0.5 kuru/kWh (there are 100 kurus in TRY1) – a level that is equal to 0.31 euro cent and one that financiers at Turkish banks have confirmed to bne is low enough to ensure the companies would still be able raise capital to fund their projects. However, some speculate that many of the developers whose projects are feasible will opt to sell the licensed projects to bigger developers rather than develop the projects themselves – a perennial problem in the sector.

"Even if the rest of the grid access tenders go according to plan, there isn't the available capacity to manufacture sufficient turbines to meet demand"

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Perfidious disease At the top of patient's chart is inflation – a "perfidious disease," acknowledges Isarescu, and one which the Romanian economy has contracted a nasty dose of. Year on year it rose to 7.6% in February, up from 7.0% the month before, on the back of rising food and oil prices. The price of potatoes went up 45% after a poor domestic harvest.

investors’ confidence in the determination of the government to bring the budget deficit under control. He reckons the budget deficit could decline to around 3% of GDP in 2012-13. "With a current account deficit at around 5% of GDP and the fiscal consolidation process well on track, there are high chances for Romania to experience a sustainable economic growth in the future."

Romania on a wing and a prayer

Given February's inflation figure, Dutch bank ING in mid-March increased its inflation forecast for the full year from 5.0% to 5.7%. Local bank BCR acknowledges the inflation risk posed by rising prices of food and oil, but is less worried, expecting inflation to tail off to 4.3% by December. "A slight appreciation of the leu and continued weak domestic demand will support the disinflation process," reckons Florin Eugen Sinca, a BCR analyst.

Others aren't so sure. The Group of Applied Economics' Voinea argues that the austerity package has done more harm than good, worsening the immediate economic woes, while shying away from the reforms needed to improve the country's economic prospects over the longer term. "It would have been possible to get out of recession sooner in the absence of these measures," she says.

Phil Cain in Graz, Austria

There is also concern about the longterm effects of the "austerity package" introduced in July last year by the government. The main pillars of the package were a 25% cut in public sector wages, a 15% cut in state benefits and pensions, and an increase in VAT.


omania is widely thought to have emerged from its first recorded recession – one of the longest and deepest among EU states – but some doubt its inflation-riddled economy can sustain growth much beyond next year's general elections. There certainly has been some more welcome news on the economic front. Greece and Romania were the only EU member states to have seen a yearon-year decline in GDP in the fourth quarter, but Romania's GDP is reckoned to have grown marginally in the first quarter of 2011 and the Romanian National Bank forecasts GDP growth of 1.5% this year and over 4.0% in 2012. "The economy has probably touched base," says Liviu Voinea, head of the Group of Applied Economics, a Bucharest think-tank. The central bank's optimism is buoyed by the prospect of improved trade figures. "Faster growth in exports than

imports will be proof that this country is restructuring its economy and that growth will be sustainable, not just a

Some like Daniel Daianu, a former finance minister, argue the government's unpalatable emergency

"What we ended up with was recession plus inflation" flash in the pan," the bank's governor, Mugar Isarescu, was quoted as saying in the Ziarul Financiar newspaper in March. The International Monetary Fund (IMF), EU and World Bank would like to believe him, having provided a €20bn emergency loan facility in May of 2009. "Romania is a patient that has undergone a successful operation, but his condition is still critical," according to Jeffrey Franks, head of the IMF mission to Romania.

medicine was brutal, but unavoidable. "There was no way to avoid painful correction measures," says Daianu, who reckons more of the same needs to be administered. "Increasing VAT hasn't helped keep inflation down, but it was the only alternative available. Whether you can reduce VAT now is debatable because Romania still has to work on reducing its structural budget deficit." Sinca of BCR also says the austerity measures produced quick positive effects on the state budget and reinforced foreign

What was missing from the package was a concern for the bigger picture. "Increasing VAT is a desperate measure to increase government revenues in the short term, but it also produces inflation," she says. And no Romanian politician hoping for re-election can afford to hold down public sector wages for long. "You need to give them back or someone else will give them back after the next elections." Indeed, the government has already promised a 15% rise in public sector wages this year and Voinea thinks they are likely be restored to 2010 levels ahead of the general elections next year. Holistic approach The 70% appreciation of the leu since 2005 is also not the success some might suggest either, according to Voinea. The rationale for bolstering the leu was to ease the burden of repaying debt denominated in foreign currencies, while pinning down inflation and creating the overall impression of economic stability. But it has also made an export-driven recovery less likely. "With the exchange rate having appreciated, I don't see room for a recovery based on exports," says Voinea. A more "holistic view" was needed, Voinea argues. "Do you want economic

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growth but with some inflation or inflationary growth? Or do you want a recession with hard reforms and deflation? What we ended up with was recession plus inflation." Voinea argues that measures should have been taken to stimulate domestic demand rather than slash it. "The results of the 2010 package, in terms of inflation, were the same, while the economy shrank rather than grew. With wages lower than last year and inflation higher and private credit yet to be restored, I do not see the drivers of a recovery based on domestic consumption." The government should have concentrated its efforts on collecting existing taxes better, rather than hiking sales tax, Voinea says. Romania has the lowest level of government revenue as a percentage of GDP in the EU, around 32% compared with the EU average of just over 44%. "Tax evasion is huge," says Voinea, estimating the losses to the public purse to be around 10% of GDP. By comparison, the government's clampdown on public sector wages hoped to claw back savings of 2% of GDP over five years. Another missed opportunity was to find savings in the public sector elsewhere than in wages. "There is a very large share of GDP spent on public acquisitions – not investments, but the acquisitions of goods and services. It amounts to around 6% of GDP and did not decrease during the crisis." Public investments, amounting to around 7% of GDP, were also a viable target for a more far-sighted austerity programme, lacking "any kind of prioritisation" based on return on investment. Very few of the 40,000 public investments underway at any one time are ever completed. Daianu agrees that a more results-driven public sector would be a great help. And two other steps would also help: "Romania has to absorb EU funds much more and much more productively, and the banking sector has to rethink its lending priorities and lend more to production."

"It would have been possible to get out of recession sooner in the absence of these measures"

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Though Doris Pack, a German Member of the European Parliament, recently called on young people to take to the streets, the sheer complexity of Bosnia's institutional arrangements – combined with the fact that elections were only recently and divisively fought – deprives potential protesters of a much-needed focal point for their dissent, no matter how considerable and well-grounded it may be. Politicians of all stripes can take comfort from the fact that any protests will probably be as non-cohesive as the very state itself. Blue in Belgrade Elsewhere, both Serbia and Kosovo have noticeable concerns of their own as the first direct negotiations between the two foes since Pristina declared independence in 2008 kicked off in March.

Balkans in the balance Alex Young in Belgrade


ith protests in North Africa and the Middle East showing few signs of abating, concern is growing about the Western Balkans' own particular vulnerabilities. Amid rising prices, stubborn unemployment and sluggish economic growth, people have become increasingly impatient with the empty promises and pervasive corruption that have come to define politics in the region. Whilst seemingly secure for the time being, governments across the region will nonetheless need to be far more attentive to the factors that are causing the growing dissent. With their options increasingly constrained by an environment demanding greater austerity and less audacity, many politicians have begun nervously affirming it's the ballot box, not cries of protest, that's the sole arbiter of democratic opinion. Five months on from its general elections, Bosnia-Herzegovina still hasn't

got a government and faces the prospect of further political fragmentation that will impede much-needed reforms

With roughly one-third of the population believed to support early elections, the Serbian Progressive Party (SNS), formed last year following a split within the Serbian Radical Party (SRS), mobilized some 55,000 peaceful anti-government protesters in earlyFebruary, demonstrating their popularity amongst Serbia's disenchanted electorate. Whilst the Serbian government's recent restructuring – including a reduction in the number of ministries,

"People have become increasingly impatient with the empty promises and pervasive corruption that have come to define politics in the region" and the adoption of budgets for 2011. Whilst the newly-formed government in the Serb half of the country (Republika Srpska) sets to work, the financiallycrippled Federation of Bosnia-Herzegovina remains hamstrung by political disputes, motivated in part by fears of the two main Croat parties – the HDZ BiH and HDZ BiH 1990 (the Croatian Democratic Union Bosnia-Herzegovina) – that they will be excluded from the government by a Socialist Democratic Party (SDP)-led bloc.

with Prime Minister Mirko Cvetkovic simultaneously fulfilling the role of finance minister – is likely to stem calls for a snap poll, the government will do well to see out the remainder of the year unscathed. Kosovo's new government, meanwhile, was confirmed by parliament towards the end of February, with Hashim Thaci as prime minister and Behgjet Pacolli as president, following an agreement between the latter's Alliance for a

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New Kosovo (AKR) and the former's Democratic party of Kosovo (PDK). As Kosovo's richest citizen, Pacolli's appointment (after an initial boycott by opposition parties) has sparked considerable controversy, particularly because of concerns about how his construction conglomerate, Mabetex, secured lucrative contracts in Russia in the late-1990s and its alleged ties to the Gaddafi regime in Libya.

the deaths of four protesters on January 21 after clashes with police. Calls for an independent investigation into the deaths have so far been rejected. Amid allegations of fraud and vote-rigging during the 2009 general election, the opposition Socialist Party continues to insist that PM Sali Berisha has to call early elections. With their demands falling on deaf ears, new waves of protests are planned.

The coalition itself, which holds only a slim parliamentary majority, faces a number of important questions about its own long-term sustainability. With an estimated 30,000 young people entering an already saturated labour market every year, combined with continued tensions over the issue of its status, Kosovo faces the sort of social dynamic that could spark future protests targeting not only domestic politicians, but also the international community itself.

Though the closest of the all the Western Balkan countries to the ultimate goal of EU membership, Croatia isn't proving immune to the turbulence. Zagreb has witnessed relatively smallscale but persistent protests against the current government, fueled in part by the revelations which swept the country following the arrest of ex-prime minister Ivo Sanader on suspicion of corruption and abuse of power. Having made insufficient progress in reforming its judiciary and fighting corruption and organized crime, Croatia's dream of joining the EU looks no closer to reality, while the population is becoming more euro-sceptic by the day as

Neighbouring Albania, meanwhile, has witnessed the most violent demonstrations in the region to date, following

Croatia accession cup is either half full or half empty Nicholas Watson in Bratislava


epending on whom you speak to, the latest interim report on Croatia's bid to join the EU that was approved by the European Commission on March 2 either showed the Balkan country the route needed to follow to wrap up the negotiations by the target date of the end of June, or was so critical that it effectively ended any remaining hopes it could meet that date.

For its part, the Croatian government was putting an optimistic spin on the report, which criticises it for not meeting all of the 10 benchmarks required in reforming its judiciary and in fighting corruption and organised crime, meaning that this "Chapter 23" of the accession process won't, as had been hoped, be closed. Croatia has closed 28 out of 35 chapters in its accession negotiations with the EU.

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unemployment and a weak economic recovery take their toll. Though the transition to democracy – albeit still imperfect – that the Balkans has witnessed over the past 20 years has created alternative outlets to express dissent and forums to resolve disputes, the potential for pockets of unrest to erupt remains ripe. Whilst these may not be enough to unseat governments, they will continue to unnerve foreign diplomats, observers and investors alike. Progress will almost certainly remain blocked in contentious areas such as the Serbia-Kosovo negotiations and constitutional reform in Bosnia-Herzegovina. And in these areas lie the seeds of more damaging mobilisations of discontent that could have implications far beyond the borders in which they ultimately surface. Used to handling crisis and adept at improvisation, however, the region's politicians could be better placed than their counterparts elsewhere to ride out any storm.

"Croatia is making considerable progress and also very important this is a shopping list of what we need to do and I am sure that we won't just double, but triple our efforts," Davor Bozinovic, the Croatian defence minister, told bne on the sidelines of the Globesec 2011 forum in Bratislava. "Our final goal is to wrap up negotiations in June." Janos Martonyi, minister of foreign affairs for Hungary, which currently holds the rotating EU presidency and, for the historical prestige, would love to be in charge when another country joins the EU family, said that despite all the "difficulties and challenges," his government is still determined to conclude the negotiations by the June deadline, which would see Croatia join from 2013. Taking one for the team One familiar refrain trotted out by candidate countries and their support-


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ers is that the accession of a country to the EU is not just about that one country, but is also about giving hope to the others waiting further down the line and convince them that it's in their interests to continue down the reform path. "What matters here is the political message not only for Croatia but other countries – that despite all the enlargement fatigue and reservations over this process, don’t give up," Martonyi said. "That will give a message that the EU is working, that it is not a fortress. We don’t want to isolate ourselves." The European Commission certainly understands that, yet since allowing in Bulgaria and Romania in 2007, both of which upon joining immediately started backsliding in their efforts to tackle corruption, it is being unapologetically stricter in forcing the candidate countries to fully meet the conditions of accession. "I think it would be unfair to say that the rules of the game have changed, but the way we work with the candidate country, yes we have, we did change. We are more demanding in trying to see the country indeed fulfills everything. What really matters is not ticking the boxes, but showing a track record," Stefan Fule, European Commissioner for enlargement and neighbourhood policy, told bne. "But this should not be a surprise to anyone. We all know this since 2006 and the previous enlargement." For Fule and others, it is only by ensuring that at the end of this process there will be a candidate country fully prepared to assume the responsibilities stemming from membership, the Commission can make the process of enlargement a credible one and one the existing member states will continue to agree to support.

"What really matters is not ticking the boxes, but showing a track record"

And if that risks infuriating citizens of the candidate countries, then so be it. The Croatian capital Zagreb was rocked by violent anti-government protests on February 26 as a wide range of interest groups took to the streets to voice their disenchantment with an administration increasingly seen as being out of touch with public opinion. In the protesters' minds at least, the country's political

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elite is tainted by a toxic admixture of corruption, economic illiteracy and toadyism towards the EU, which is being regarded with increasing hostility by Croatians fed up with the long drawn-out accession process. Several thousand anti-government protestors, mostly young people, marched through the Croatian capital again on March 2 calling on conservative Prime Minister Jadranka Kosor to step down.

profile, the Zone in many respects is a mirror of the Slovene economy, which, after more than a decade of consistent growth, contracted by a massive 8.1% in 2009, one of the hardest hit of all the countries in the CEE region. As in the Zone, the broader economy has experienced only a limited recovery. "Growth was below [the EU] average in 2010, as GDP expanded by only 0.8%. This year it should pick up to somewhere around 2%, but this is a result of our exports being tied to Western Europe, particularly Germany," says Saso Stanovnik, head of research at Alta Invest, a Ljubljana-based investment house.

In the long run, Fule stresses that what the Commission is doing will be for the benefit of the Croatian people. "This will be of benefit to the citizens of the enlargement country because what the whole of Chapter 23 is about is that you have this prosecutorial council, you have legislation but does it work? Will it stand the test of independence? This is not just important for bureaucrats in Brussels, but also important for the citizens of Croatia." With Croatia regarded by many as a hotbed of corruption – the previous PM, Ivo Sanader, who did much to get Croatia as far as it is in the EU accession process, is now in custody in Austria on suspicion of money laundering and embezzlement of millions of euros – that's probably true. But such arguments will probably do little to cool tempers when, as many predict, Croatia will have to abandon its self-imposed deadline of the end of June and move it back to the end of the year at least. In the longer term, Fule's comments to bne also suggest that this crucial Chapter 23, which covers judiciary and fundamental rights, will be moved up in the accession process of candidate countries to nearer the beginning rather than near the end, as it currently is. This is a reflection not only of the EU's growing preoccupation with the spiralling corruption in the newer member states – the single worst performing indicator across the set of countries over the past decade – but also in the difficulty that countries have in putting in place the institutions and laws needed to root it out.

I 45

Yet data released on March 16 revealed unemployment nationwide at 12.3% in January, with 115,000 out of work – 5,000 more than in December and the worst jobs figure for a decade.

Sluggish in Slovenia Kester Eddy in Ljubljana


t the entrance of Tezno Zone industrial park, two Germanregistered artic lorries, snorting power, heave their loads towards the nearby motorway and their ultimate destination, a car plant in the German state of Baden Wurttemberg. An everyday sight, perhaps, but one that Gorazd Bende, director of the Zone, in Maribor, Slovenia’s second city, never takes for granted. "When the economic crisis hit in 2008, orders for auto components in particular collapsed overnight. It hit many manufacturers here, and around the country, very hard," he says. As a result, the park, which had hosted almost 3,700 jobs that summer, rapidly shed 400 work places, and many that remained were reduced to temporary status. Since the nadir of 2009, job numbers have inched up to around 3,450, and

a dozen new companies established – although the majority are small or micro operations. Redundancies, however, are far from over; the construction sector in particular is still in turmoil – according to the EU statistical office Eurostat, output in January was down

Given that the economy expanded by more than 4.0% annually for 10 years prior to the crisis, providing Slovenes with the most affluent lifestyles of any in the former Socialist bloc, why is the recovery – now under the control of a left-leaning coalition led by Prime Minister Borut Pahor – so sluggish? State interference In many ways, the global crisis only hastened what would have been an inevitable correction in what was an unsustainable economic model, most

"We know that companies with FDI generally perform better, but Slovenians do not really like foreign investors" 17% year on year – and the recovery remains patchy and fragile, Bende cautions. In particular, many companies are facing liquidity problems due to debt queuing, he says. The majority of Tezno Zone tenant companies are in engineering and manufacturing – and mostly private to boot. Despite this rather restricted

particularly in the form of state ownership of large parts of the economy. "Slovenia is a case study of [the downside] of government involvement in big companies, with too many managers appointed because of political ties," says Stanovnik. "This clearly shows up in bad corporate governance, avoidance of cost rationalisation and cost


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bne April 2011

management, strategies that never get carried through, and too many business decisions [for political reasons] that are not economically justified." Slovenia also suffers from what he terms a "relatively bad entrepreneurial culture," in which new businesses, eager for growth, struggle with gener-

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Southeast Europe

been an effective shareholder. These features have inhibited productivity growth and foreign investment in the sectors the state most heavily influences," the survey notes.

is an especially good candidate for a sale. "Sakarya EDAS was privatised at around $75 per kilowatt hour (kWh) of power distributed, but the last distribution companies to be sold went for between $130-$200 per kWh," says Selim Kunter, energy analyst at Istanbul brokerage Ekspres Invest, explaining that he expects CEZ and Akkok to offer the distributor for sale first. "Interest will be very high, as it is the only distribution company currently on the market."

Meanwhile, in 2009 the stock of foreign direct investment (FDI) stood at only 20% of GDP, compared with around

"Slovenia is a case study of the downside of government involvement in big companies, with too many managers appointed because of political ties" ous labour laws while supporting a large, expensive public sector. Meanwhile, smaller growth companies are largely ignored by the banks, which focus primarily on big corporations, while government is all too often preoccupied with distressed companies and industries. "So while economic downturns logically mean the end of some companies, new companies are only slowly being created. Any solution needs reforms and, even more, changes in peoples’ mentality," he says. Stanovnik is far from alone in harbouring such criticisms. In its economic survey of Slovenia, published in February, the Organisation for Economic Co-operation and Development (OECD) voiced much the same concerns and more, urging, amongst other things, the government to quickly address growing macro imbalances, reform of the education system and trim further what it sees as a far-too-generous pension system, even if proposed reforms are implemented. In addition, the survey stressed the need to improve economic competitiveness, primarily by making transparent, if not privatising, the state interests in the banking and commercial sectors, and more actively encouraging foreign investment. "The state's ownership share is one of the highest in the OECD and it indirectly controls many of the country's largest listed companies. Moreover, the state also has not always

55% of GDP in Hungary and the Czech Republic. And though Slovenia is open to foreign investment in theory, in practice numerous factors discourage inward flows – which is reflected in less-than-ideal productivity rates in many sectors – the survey notes. Whether the OECD recommendations will have any impact is an open question.

A curious sale of electricity assets in Turkey David O'Byrne in Istanbul

Tezno Zone’s Bende, while personally keen on foreign investment, says most Slovenians are not enthusiastic. "We know that companies with FDI generally perform better, but Slovenians do not really like foreign investors. While I know there are good examples, such as Renault [the French auto maker], there have been some controversial cases, such as Lafarge [the French cement maker], and the public remember these," he says. Alta's Stanovik is similarly sceptical, noting that the current effort by Pivovarna Lasko, the Slovenian brewery and food group, to sell a stake in Mercator, Slovenia's largest retailer, has attracted some classical old-style thinking. "It seems politicians against [genuine privatisation] are back. They went even so far to suggest a state fund should bid for this stake, thereby increasing the state's interest in yet another blue chip – directly contradicting the OECD recommendations."

I 47


urkey's biggest conglomerates look set for a bidding war after Turkey's Akkok Group and its Czech partner CEZ confirmed to bne that they intend to sell off jointly-held energy assets in Turkey – though they won't yet say which ones. The confirmation by Akkok and CEZ follows months of speculation in the Turkish and Czech media that the state-owned Czech company plans to pull out of Turkey just two years after it completed the purchase of a 37.4% stake in Turkish power company Akenerji for $302.6m. Akkok also holds 37.4%, with the remaining stake traded on the Istanbul Stock Exchange. Akenerji in turn owns a portfolio of operational power plant and new power plant projects under development, as well as Sakarya EDAS, one of Turkey's 21 regional electricity distribution companies that was bought in 2009 for $600m.

Speaking to bne, a spokesman for Akenerji confirmed that the company's owners had agreed on an asset sale and are currently finalizing details with consultants. "Once details have been confirmed, Akenerji will open a data room

With around 1.35m customers, Sakarya EDAS is not one of the country's biggest distributors, but it does offer a useful captive market for companies building a portfolio of power plants and who want captive markets to sell the power they produce, rather than sell into Turkey's nascent open power market or sign longer-term sales agreements with distributors, both at the expense of margins. One such company is Turkey's Enerjisa, co-owned by Turkey's Sabanci Holding and Austria's Verbund, which currently operates a portfolio of 1,415 megawatts (MW) of electricity capacity. Although Enerjisa already owns Baskent EDAS, which distributes power in the Turkish capital Ankara, its consumption won't be sufficient to take all of the power produced by the 5,000 MW of power plant that Enerjisa plans to have in operation by 2015. Speaking to bne recently, Sabanci Group CEO Zafer

"Many speculate that the motivation behind the sale is the failure of the two partners to work together effectively" for bidders to consult and will invite bids," the spokesman said, explaining that only after bids have been received will Akkok and CEZ decide exactly which assets they plan to sell.

Kurtul confirmed Enerjisa's interest in any assets that Akkok and CEZ might be interested in selling – both the Sakarya EDAS distribution company and Akenerji's generating portfolio in general.

With the privatisation of Turkey's 21 state-owned regional power distribution companies effectively complete, analysts concur that Sakarya EDAS

Another company interested in Akenerji's generating portfolio is Turkish steel to logistics group Borusan. Despite having formed its own energy subsid-


I Southeast Europe

iary, Borusan Enerji in partnership with EnBW Energie Baden – Württemberg (EnBW), Borusan has been slow to develop its planned generating portfolio and to date has only one operational plant – a 60-MW wind plant, with a 50-MW hydroelectric plant slated to come online later this year. Speaking

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buying outright or running them in partnership," said Ugur, confirming that Borusan and EnBW were already working on a strategy. Ak attack As one of Turkey's first private power generation companies operating for

"Akenerji has an attractive portfolio"

to bne earlier in March, Borusan CEO Agah Ugur confirmed Borusan's interest. "Akenerji has an attractive portfolio and we would be interested in either

nearly two decades, CEZ and Akkok's Akenerji has built up what analysts describe as a nicely diversified portfolio, including three gas-fired plants

totalling 358 MW, five small hydro plants totalling 88 MW and a 20-MW wind farm. In addition, the company has four more small hydro plants, a wind plant and a 900-MW gas plant already licensed and under development. Not an earth-shattering portfolio by any means, but enough to be of interest to latecomers like Borusan or other power companies looking to augment their own generating portfolios. However, analysts agree that the timing of the Akenerji sale is not the most propitious, coming as it does just as Turkey is about to start the process of privatising 22 of its main state-owned power plants totalling 16,000 MW. With the state portfolio consisting of plants burning locally produced lignite and hard coal and gas, and a large number of fair-sized hydro plants, most of which offer significant potential for improved efficiency, interest from Turkey's main industrial groups is expected to be intense, with many boasting of having prepared "war chests" that they may prefer not to use up buying the Akenerji assets. In the event this may not be an issue, at least not until it becomes clear exactly what assets are being sold. According to analysts the peculiar nature of the sale – inviting bids before deciding which assets are for sale – hints both at the reasons behind the sale and what the likely outcome will be. Many speculate that the motivation behind the sale is the failure of the two partners to work together effectively, and that while CEZ is looking for a way out of the partnership and generate the highest return on their investment, Akkok wants to hold onto as much of Akenerji as they can afford to buy back from their erstwhile partner. "In my opinion they will look to sell Sakarya EDAS first, then Akkok could use their share of the profits to buy back some of the generating assets," says Selim Kunter, adding that if that's the case, then the expected high interest in Sakarya EDAS and the upcoming state power plant sale could work in Akkok's favour.

Eurasia I 49

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Mixed messages from Tashkent Clare Nuttall in Almaty


t looked like a tentative move towards greater openness when legislation giving more powers to the Uzbek parliament was passed in March. Yet Tashkent has recently crushed those hopes by throwing out an international NGO, forcing several international investors to shut down and denouncing western rock as "devil music." Changes to the constitution approved by the lower house of parliament, the Oliy Majlis, on March 4 will give greater powers to the parliament, including the right to select and dismiss the prime minister.

While not widely publicised, the amendments also clarify what will happen if the president is unable to carry out his duties – the head of the upper house of parliament will become acting head of state, Reuters reported. The constitution

President Islam Karimov was suddenly incapacitated. A statement from parliament describes the new legislation – initially proposed by Karimov in his address to parliament

"Beware of the satanic effects of this evil music" had previously been vague on this point, raising concerns over how the country would be governed if 73-year-old

in November – as "the start of a new stage of democratic development of the country and development of civil


I Eurasia

"We aren't going to be silenced by this, we are as committed as ever to report on abuses in Uzbekistan"

bne April 2011

society… and expands the powers of the Oliy Majlis in the system of state authority." In that November address to parliament, Karimov had also talked extensively about the need to improve the business climate in the country, proposing changes that include new laws on protection of private property and privatisation, and obtaining a sovereign credit rating for Uzbekistan. It seemed that with the global economic crisis coming to an end, Tashkent was looking to revive its stalled privatisation process, which was to a great extend aimed at attracting strategic investors to modernise major state-owned companies. This was a welcome surprise in a year that saw the arrest of several prominent bankers and the mysterious closure of Uzbekistan's largest conglomerate Zeromax. Despite Uzbekistan's undoubted attractions – significant oil and mineral wealth, and Central Asia's largest population – one investor described the business climate in early 2010 as the worst it had ever been. However, 2011 looks to be no more of an improvement than 2010. Business as usual London-listed Oxus Gold, which had agreed to sell its 50% holding in the Amantaytau Goldfields joint venture to the Uzbek shareholders in the JV, announced on March 3 that it's having to resort to international arbitration. Oxus said in a statement that the commission appointed by the Uzbek Ministry of Finance to audit Amantaytau Goldfields employed practices that, "have led the directors to conclude that there is no evaluation of the assets taking place in good faith and there is a risk of the audit committee using the process to find reasons to justify putting [Amantaytau Goldfields] into liquidation." The company's stock plummeted 35.8% on the announcement. A Tashkent court has also frozen all the assets and bank accounts of Swedish cosmetics company Oriflame in the country. Oriflame's offices in Tashkent have been closed and its managers

bne April 2011


ordered not to leave the country while an audit of its business is carried out, reported. According to local press reports, several other businesses are also being forced out of business; they include beauty products vendor ParfuMed, furniture retailer KomfortElit and Turkish shopping centre Turkuaz. Documentaries shown on state television have accused several Turkish businesses of links to the banned Islamic group Nurcus, claiming they have been disseminating Nurcu literature and establishing prayer rooms. The "development of civil society" talked about in the new legislation also looks little more than rhetoric. Just 11 days after the March parliament vote, Human Rights Watch (HRW) announced that it had been forced to close its Tashkent office after operating in the country for 16 years. The NGO's office registration was cancelled after several months during which HRW says the government obstructed its work by denying visas and work accreditation for its staff. "With the expulsion of Human Rights Watch, the Uzbek government sends a clear message that it isn't willing to tolerate critical scrutiny of its human rights record," says HRW's executive director, Kenneth Roth. "But let me be clear, too: we aren't going to be silenced by this, we are as committed as ever to report on abuses in Uzbekistan." HRW says the human rights crisis in Uzbekistan is deepening, citing the high number of independent journalists and human rights and political activists currently in prison. "Torture and illtreatment in the criminal justice system are systematic, and serious violations go unpunished," the organisation says in a statement. At the same time, the government launched a bizarre crackdown on popular culture. Another documentary aired in late February warned Uzbeks to "beware of the satanic effects of this evil music… [which] was created by evil forces to bring youth in western countries to total moral degradation," said the narrator of "Melody and Calamity".

I 51

unresolved conflicts. "Foreign businesses will remain cautious of investing in Georgia owing to the risk of tensions between the breakaway provinces of South Ossetia and Abkhazia and Georgia," she says.

Tbilisi plays the Trump card Molly Corso in Tbilisi


onald Trump is coming to Georgia – and officials hope his $250m real estate deal will attract foreign investment to the tiny Caucasus country. But some analysts warn it will take more than Trump's legendary Midas touch to reassure investors. Trump, the US real estate king, TV personality and possible 2012 presidential candidate, signed his first real estate deal in the former Soviet Union on March 10 during a lavish ceremony at Trump Tower in New York. On hand to celebrate the deal was Georgian President Mikheil Saakashvili. The 43-year-old president was instrumental in orchestrating the deal between Trump and Silk Road Group, the development group that will build the two luxury skyscrapers, and met with the real estate mogul in New York on three separate occasions. Michael Cohen, an executive vice president at The Trump Organization and a special council for Trump, tells bne that construction of the first tower will start in Batumi after Donald Trump

Jr travels to Georgia later this year. A second tower is planned for Tbilisi, the Georgian capital. The government has been eager to present the deal as a watershed moment for Georgia's struggling effort to reignite foreign direct investment (FDI) following the disastrous 2008 war with Russia and the global economic crisis. Alice Mummery, an economic analyst for the region at the Economist Intelligence Unit in London, says the

FDI is imperative for Georgia, which is battling a growing trade deficit, high unemployment and a shrinking amount of foreign aid dollars. Foreign investment reached a high of $2.7bn in 2007 before falling precipitously. While officials predicted close to $1bn in 2010, the country attracted just a fraction of that – $553m, down 16% from 2009. Real estate was particularly hard hit last year: construction turnover was GEL1.48bn (€630 m), down nearly 15% from the previous year, according to preliminary government statistics. Kote Gabrichidze, a real estate analyst for Tbilisi's Institute of Polling and Marketing, notes that the Trump deal is an important "indicator" for future investors, but won't be enough to return confidence to the industry. "It is a very good step, very good news for everybody, but maybe the fact that tomorrow we will have worse inflation, which is announced on TV every day, is even 100 times [more important]," he says. "Maybe 10 or 20 Trumps have to come to make up for that." Branded a success There has also been widespread speculation that the deal is little more than the latest Trump branding scheme. Faced with bankruptcies and financial hiccups over the past several years, Trump has increasingly lent his name

"It's a fact that Trump attracts investment wherever he goes" investment will "undoubtedly" remind businesses about Georgia's potential. She warned, however, that Trump alone won't be enough to neutralise the country's long-standing risks: the threat of political instability and its

and marketing finesse – not financial power – to projects. Today, the Trump brand expansion includes products ranging from gourmet teas and ties to steaks and vodka – even a real estate project in India.


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Not-so risky business in Georgia

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bne April 2011


"Maybe 10 or 20 Trumps have to come to make up for all the bad news on the economy"

Cotton from Tajikistan was also included on the US Labor Department's July 2010 list of commodities produced using indentured or child labour. Among the other Central Asian countries, Turkmenistan is expected to produce 1.5m bales, up from 1.25m last year, says the USDA, while production in Tajikistan is expected to fall from 0.48m in 2010 to 0.38 in 2011. Meanwhile, Kazakhstan is managing to increase the area devoted to cotton culture slightly, after its cotton harvest fell 11% in 2010. The head of the Kazakhstan Cotton Association, Sain Rysbayev, said that rising cotton prices had prevented further shrinkage of the area devoted to cotton culture, Interfax reported.

Molly Corso in Tbilisi Eager to banish the memory of armed, masked police officers storming company offices during tax disputes, the Georgian government is trying to win back the trust and confidence of the business community. But rebuilding trust won't be easy. In addition to tweaking the tax code so businesses won't be penalized for making honest mistakes, a newly created "business ombudsman" – tasked with tackling tax issues and soothing business concerns – has topped the government's latest efforts to reach out to CEOs and entrepreneurs. Other measures include a new business council chaired by Parliament Speaker Davit Bakradze and plans for a new tax review council. Prime Minister Nika Gilauri appointed one of his advisors, Giorgi Pertaia, to the ombudsman position in January after consultations with the business community. Pertaia, who is still lodged in the prime minister's office pending the assignment of new office space, tells bne that the government is now more ready to listen to business. "This is actually the sign that the government really wants to solve the problems of business," he says. "[The government] understands very well that the main generator of the economy is business – there is no disagreement that business is very important for Georgia." Relations between businesses and President Mikheil Saakashvili's ostensibly pro-business government cooled in 2009 when the Ministry of Finance decided to restore powers to the Financial Police. Created after the "Rose Revolution" in 2003 to curb Georgia's mammoth black market and culture of tax evasion – as well as to fill the country's empty coffers – the Financial Police became synonymous with the black-clothed, gun-toting officers that closed companies for weeks and arrested executives in front of television cameras. The force was "decriminalised" by Saakashvili in 2006 and folded into the newly created Revenue Service, which included the tax and customs bodies as well. But the Ministry of Finance decoupled the Financial Police from the Revenue Services in 2009 again to make both agencies more efficient and separate administrative duties from policing. Once again an independent agency, the Financial Police was rechristened the Investigation Service, but old fears remain. A change to the tax code that made it easier for the government to freeze assets and bank accounts during tax disputes, introduced around the same time as the new Investigation Service came into being, did nothing to allay these concerns.

According to a press release circulated by Silk Road Group on March 16, fundraising efforts will be "coordinated" with The Trump Organization. Financing is expected from banks, financial institutions and private investors from the US and "other international investors." The Trump team will invest "a considerable amount of their resources" to the project, Giorgi Ramishvili, the founder of Silk Road Group, was quoted as saying in the press release. Cohen wouldn't comment on the financial details of the deal, although he confirmed that it is a licensing agreement. A Georgian subsidiary of the Silk Road Group now owns exclusive rights to the Trump brand in Georgia, according to the development company. Yet Cohen insists it's a "fact" that Trump attracts investment wherever he goes. "Take any project, take Scotland [golf courses in Aberdeen]," he says. "Businesses are already following him there." That is the reputation Tbilisi is betting on. During the signing ceremony in New York, Saakashvili praised Trump for recognising the country's potential – even joking that the possible 2012 US presidential candidate "might win" if he ran for office in Georgia. Stephanie Komsa, an investment analyst based in Tbilisi, says the Trump deal sends a powerful "message" to businesses considering the region – regardless of whether or not he is actually investing millions in the project. "Georgia has been aiming to create itself as a regional hub, a business and tourism destination and I think Trump's decision underlines that someone from the business sector believes it is possible," she said. "Not only that Trump believes it, but Silk Road Group does too."

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Central Asia struggles to profit from high cotton prices Clare Nuttall in Almaty


ecord prices should be good news for Central Asia's cotton producers, especially Uzbekistan, but raising production in response to high demand is proving difficult.

Tashkent complains that use of the Amu-Darya and Syr-Darya rivers for hydropower generation in upstream countries is reducing the water available for irrigation.

In fact, after an increase in production in 2010, Uzbekistan, while still one of the world's largest exporters, is set to produce less than originally forecast this year, according to the US Department of Agriculture. The USDA's February 9 report on world cotton production lowered Uzbekistan's 2011 export forecast by 250,000 bales to 3.5m.

Uzbek cotton is also being boycotted by several international clothing manufacturers and retailers, including Gap,

The country is expected to produce 4.65m bales of cotton this year, considerably higher than the 3.9m produced in 2010, but below the USDA's January estimate of 4.8m. Uzbekistan has been working to increase yield on its cotton fields, but there are limits on how much production can grow. The land has been cultivated intensively for decades, with heavy use of pesticides and fertilisers.

Priced to go The efforts to increase production in Central Asia follow a year in which cotton prices soared to levels not seen since the American Civil War (1861–1865). Prices for May 2011 delivery cotton on the ICE Futures US exchange reached a record $2.197 per pound on March 7. There were poor harvest in two top producers, China and Pakistan, in 2010. Despite a bumper harvests in India, the world's second-largest cotton producer, Delhi capped exports to protect the domestic textiles industry. Demand from other major exporters such as the US, Uzbekistan and Australia grew strongly in 2010. Since then, floods have damaged large swathes of Australia's cotton plantings. The news that Central Asia's cotton harvest would be

"Many schools are closed down as children, some as young as 10, are sent to the fields to pick cotton by hand for up to three months" Walmart and Levi Strauss, due to the continued use of child labour during the harvest. "Many schools are closed down as children, some as young as 10, are sent to the fields to pick cotton by hand for up to three months," says a report from the Environmental Justice Foundation.

less than previously estimated has also affected futures. Ryland Maltsbarger, senior economist with IHS Global Insight's agriculture service, says the high prices are partly due to the low harvest, but supply is not


I Eurasia

Kyrgyzstan a model of transparency

Clare Nuttall in Almaty Kyrgyzstan has managed to achieve compliance with the Extractive Industries Transparency Initiative (EITI) ahead of its more famous energy and mining neighbour Kazakhstan. And the Kyrgyz president has already signed a decree extending the initiative to include the energy sector as well as mining. The EITI was launched in 2002 by former British prime minister Tony Blair, and is intended to encourage companies to publish what they pay and for governments to disclose what they receive. So far just 11 countries comply with the initiative, which sets standards for transparency and accountability in the extractive industries. Kyrgyzstan's compliance was announced on March 2. For Kyrgyzstan, the endorsement by the international body was an important step in helping the country to demonstrate internationally that it is still an investor-friendly place despite the damage done to its reputation by the two recent revolutions, and subsequent expropriations of private assets. "Many investors are interested in the issue of country risk – they want to see companies operating a stable relationship with government and local communities," Sam Bartlett, regional director for Central Asia and the Caucasus at the EITI Secretariat, tells bne. "The EITI helps to build trust, so investors can be confident they will be able to focus on their business rather than thinking about compliance scandals and conflicts." Revolving door Under its first president Askar Akayev, Kyrgyzstan was one of the first countries to aim for EITI compliance. However, progress stalled after Akayev was deposed in 2005. "Kyrgyzstan had always provided very good government data, but the government stopped providing reports in 2007 or 2008. However, things started to change just before the April 2010 revolution," Bartlett says. Since then, Kyrgyzstan's new government has pushed towards compliance. Current president, Roza Otunbayeva, has already signed a decree extending the initiative to the energy sector in addition to mining. This will have implications for both energy pricing and water resource management in the hydropower sector. "Hydropower projects have caused a lot of conflict in the community, so this will increase public confidence in government management of the sector," says Bartlett. "There are some technical challenges ahead, but there is a lot of political will to extend this initiative to other parts of the economy." Meanwhile, Kazakhstan is still trying to get EITI accreditation. According to Bartlett, Kazakhstan has a very strong reporting process and is close to compliance, but there are some technical issues to clarify. In the Eurasia region, Azerbaijan and Mongolia are also among the countries to have achieved EITI compliant status.

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the whole story. "The turnaround in demand has been greater than expected in most places, due to strong demand from Asia. After two years of low prices, production was low, and supply did not have time to respond to the rebound in demand. Prices will not come down until new supply from Australia and Brazil starts to come onto the market in June," he says. Such was the concern over obtaining enough of the raw material to keep mills and garment factories running that importers have been trying to strike individual deals with producing countries to ensure continuing supply. In November, the commerce minister of Bangladesh, Faruk Khan, visited Tashkent and secured an agreement that Uzbekistan would export 250,000 tonnes of cotton directly, bypassing international traders. Maltsbarger points out that Australia has already doubled the area under cotton, while Brazil has increased the area sowed by 26%. "We expect Pakistan and the US to sow more this year, and India may also expand production after the previous record set last year," he tells bne. "However, as oil and food prices are also high, China – one of the largest producers – is likely to find it difficult to expand cotton production because there is more emphasis on grain and oilseed due to concerns about food security." The USDA's global cotton output forecast is currently 115.25m bales, down from the 115.46m forecast in January, while demand is estimated at 116.55m. Reportedly stocks are very low in many countries so continuing price pressure. This is likely to be felt in places from the workshops of south east Asia to the high streets of Europe, where in recent years there has been a boom in low cost clothing. "Despite Asian expansion and the bounce back after the downturn, I expect demand to moderate in 2011," says Maltsbarger. "Prices are three times as high as they were a few years ago, so price is a major deterrent. Growth in the EU and other OECD countries that are textile importers is still slow."

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I 55

Spreading the message about Islamic finance in the CIS INTERVIEW:

Justin Vela in Istanbul


he Islamic Corporation for the Development of the Private Sector (ICD), a branch of the Islamic Development Bank, is working to push Islamic finance in the countries of the Commonwealth of Independent States (CIS). But because of lingering effects from the global economic crisis and a lack of existing institutions, it admits there's still a lot of work to do. Jeddah-based ICD was established in 1999 with the mandate to grow the private sectors of the IDB's 56 member states. Previously, CIS countries were relatively unknown to Arab investors, so ICD has been working to change that, following the proverbial "build it and they will come" credo. "[Arab investors] didn't know much about the countries. Probably to a certain extent Kazakhstan was the only country they knew, because Kazakhstan was opened up in some regions. The other countries were too closed," Khaled Al Aboodi, CEO and general manager of ICD, tells bne in an interview. ICD began its regional work in Azerbaijan. Because it was difficult at first to convince investors to put their money into the country, ICD decided to first establish companies there, working in conjunction with the Azeri government. "We actually do more financing than investment. But we are doing investment in the [CIS] region because we want to encourage investors in other member countries to come and invest," Al Aboodi says. "In the beginning it

Khaled Al Aboodi

was difficult, but now we more or less understand the mentality and the way they do business." In other CIS countries, ICD is focused on smaller projects and building infrastructure, as there are not yet many projects that meet the institution's requirements for financing in terms of size and level of private ownership. For example, ICD won't finance any company that is more than 49% owned by a

provided $2m in financing to Uzbek Leasing International for small and medium-sized enterprises (SMEs). In Tajikistan and Kyrgyzstan, ICD is also providing financing to SMEs worth about $2m. Though the legislative process can be tedious, Al Aboodi says CIS governments are generally supportive of the ICD's work. "There is a different level of willingness to open up. We just started

"Probably to a certain extent Kazakhstan was the only country they knew"

government. Another issue ICD has had to deal with is the perception that since ICD is part of an Islamic bank, its work would be free. It quickly had to educate businesspeople that, just like any other bank, there would be a cost for the financing. Among its projects in CIS countries, in the Russian state of Tatarstan, ICD is managing the Tatarstan International Investment Company, the first Islamic investment company in Russia and a joint venture between the Tatarstan government and the Islamic Development Bank. ICD is also creating investment companies in Turkmenistan and Uzbekistan. In the latter it has also

in the region and we started to see that many projects are growing to be eligible [for financing]." Even so, after spending substantial time travelling in the region, Al Aboodi says borders are too frequently closed due to regional unrest, hampering stability and investment. In order to increase stability, he urges more intra-regional trading. "If I am doing business in Uzbekistan, why cannot other Central Asian states be a market? The problem is the relationships between them, there is a lot to be desired there." Demystifying Islamic finance Al Aboodi acknowledges that, cur-


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rently, the demand for Islamic finance in the CIS isn't significant. He puts this down to wariness, partly because Islamic financial methods aren't well understood, and partly because there were some investments in sukuk, Islamic bonds, related to real estate in Dubai that were badly hit during the crisis, though he has stressed in the past that Islamic financial instruments were affected far less than conventional financing tools. At the same time, there is a rising level of interest due to the examples set by countries such as Malaysia, where Islamic finance has been very successful. This has encouraged ICD to organize "study and familiarization tours" of markets such as Malaysia, where officials can learn more about

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Islamic finance and decide how best to utilize it. However, according to the English daily Arab News, the consensus reached at the inaugural roundtable on "Islamic Finance in Russia and the CIS: Market and Regulation" – held in February in Istanbul and sponsored by the ICD was that Islamic finance in the region is at best a work in progress and the task ahead remains huge, not least because of the authorities in the region.

In an article on the roundtable, Arab News reports that: "The intellectual argument for and the demystification of Islamic finance has gained much ground in Russia and the CIS countries over the last two years, but the political decision makers and bureaucracy, especially the banking regulatory authorities, still need to be convinced about the role an alternative Islamic system of financial management can play, especially in the aftermath of the global financial crisis."

"If I am doing business in Uzbekistan, why cannot other Central Asian states be a market?

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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.


ASHA Bank works with both large corporate and small and medium-sized enterprises (SMEs), as well as providing private banking services. Its specialisation is unusual in Azerbaijan, where most banks are universal banks. PASHA Bank, which received its banking licence in November 2007, is now the second largest bank in Azerbaijan in terms of paid-in capital, and occupies fifth place both in terms of profitability and volume of assets. In 2010, PASHA Bank increased its treasury and trade financing businesses. Its securities investment portfolio grew by 86% in 2010, to AZN156.4m. Relations with international financial institutions were also extended during the year, and it grew its trade financing portfolio by 32%. “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.” PASHA, which received its banking licence in November 2007, is now the second largest bank in Azerbaijan by assets. “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 global economic crisis highlighted the need for Azeri banks to carry out reforms in areas such as risk management. On January 1, 2011, PASHA Bank became one of the first Azeri banks to set up a compliance department with a Luxembourg-certified compliance officer, as part of its efforts to ensure a high level of transparency. The bank already holds twice-yearly audits by an international audit company, and soon plans to increase these to quarterly audits. “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.”

Farid Akhundov Chairman of the Executive Board

There is no immediate need to raise funds to finance its growth plans, but from next year PASHA Bank will start considering an international bond issue. Akhundov says that when the time comes to look to international markets, PASHA Bank will be ready. “We already have a very clear management structures, and have all business processes in place,” he says. “The next steps are to obtain a rating, and to look for a benchmark rate. We hope Azerbaijan will soon get a sovereign rating. Then we can look at our own needs.” PASHA Bank is considering setting up operations abroad, and is looking both at neighbouring countries and further afield. There are also ambitious plans for the bank’s capital markets division. PASHA Bank is working with the Azerbaijan securities committee and stock exchange with the aim of developing the domestic securities 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. Room to grow Oil-rich Azerbaijan has been one of the world’s fastest growing economies for several years, although the financial services sector is still at an early stage of development. The total assets of the banking sector amount to just $14bn, a very low level for an economy the size of Azerbaijan’s. As a result, there is a lot of scope for PASHA Bank and others to grow. “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.”


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Belarus teeters as economy worsens Tim Gosling in Moscow

Special Report: Belarus post-election


ecember's rigged presidential election in Belarus briefly brought protesters onto the streets, only for the authorities to quickly crush dissent. In the following weeks, protests over economic hardships and corruption spread across North Africa and the Middle East, which has served only to increase concern in Minsk over the poor state of the economy. The problems with the already dire economy have mounted since the start of 2011. On March 15, Standard & Poor's downgraded Belarus' sovereign debt a notch to 'B', whilst rumours of a one-off devaluation for the Belarusian ruble saw the population swarming the banks to swap their local cash for hard currency. Both events have their roots in a chronic trade deficit, which is draining Belarus' foreign currency reserves at a rate of half a billion dollars or so a month. In January, the country's forex assets sank to their lowest level since the depths of the global economic crisis, and analysts say Minsk is facing some tough choices if it's to avoid its finances sinking further into the mire. The National Bank of the Republic of Belarus announced in mid-February

that the country's foreign reserve assets shrank by $700m in January to total $4.3bn, their lowest level since October 2009. The government moved swiftly to insist that the drop was the result of "seasonal factors" – namely a sharp increase in demand amongst the population for hard currency. However, analysts argue that the cause is structural, and to be found in the steadily deteriorating trade deficit. "The main reason for the drop in reserves is the country's steadily intensifying nega-

via a Eurobond issue and what it terms "tricks", ie. forex lending by local corporate banks to the central bank. Put simply, Belarus is buying too much abroad and selling too little – with government policy that forces economic growth via lending and wage rises simply putting more money in the hands of companies and people to buy more expensive imported goods. The removal of subsidies on Russian energy supplies hasn't helped the trade deficit either, with the value of the country’s

"The huge current account deficit is clearly not sustainable and has to be tackled by the authorities" tive trade balance, which according to official data in 2010 amounted to over $9bn, a record in the history of independent Belarus," notes Kamil Klysinski of the Centre for Eastern Studies. Erste Bank points out that until now, the pressure on the state's piggy bank has been obscured by the $800m raised

energy imports ballooning, whilst also limiting the export of refined oil products to the EU. Underlying it all, however, is an economy populated by inefficient state-run companies turning out low-quality, heavily subsidized goods – in short, a typical picture of the early stages of transition to


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a market economy. Of course, the crisis has done much to expose these woes, and whilst the country has a relatively healthy low ratio of debt at 50% of GDP, it's due to pay down more than $12.5bn to creditors in the next 12 months. Proper fix The most obvious longer-term solution for Belarus is to carry out more privatisation and attract more foreign direct investment, which would not only bring in extra government revenue and reduce the current account deficit, but also start addressing those structural issues. However, for various reasons, a significant acceleration of such investment flows is some way off, so Minsk needs to urgently tap short-term strategies to give itself wriggle room. As Erste analysts warn: "The huge current account deficit is clearly not sustainable and has to be tackled by the authorities, if they do not want to simply run out of reserves." However, Minsk's bloody-mindedness has hardly let up since Alexander Lukashenko was re-elected president in December. Quite aside from the extra dose of siege mentality created by international condemnation of the crackdown on protesters after the vote, the government continues to sound like a Soviet propaganda film when it comes to economics. Take a speech from Prime Minister Mikhail Myasnikovich to MPs in late February. He brushed off sceptics as he announced that the government aims to achieve a trade surplus by 2015, but stopped short of suggesting any specific measures to achieve it, other than raising exports and limiting imports. Analysts suggest that allowing a drop in the value of the ruble, reining in wage and budgetary spending growth, and tightening monetary policy would help stifle the growth in imports. However, it would be more in their style for the authorities to simply clamp down on the forex market by applying capital controls and foreign currency rationing. In the face of Minsk’s refusal to slowly devalue the currency, alarm was already spreading on the streets by mid-March as rumours of a forthcoming one-off

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devaluation sent people racing to convert the rubles in their bank accounts.

through, it would seriously damage the country's ability to raise debt.

Piotr Prokopovich, chairman of the central bank, promptly shoved his head in the sand, blaming the media for spreading what he termed "unfounded" rumours. "I suppose, after a couple of days the people will calm down and the 'raids' on currency exchange offices will stop," he told the Belta news agency, whilst suggesting there is no plan to make the currency more flexible. At the same time, he didn't categorically rule out a one-off devaluation – which Alexei Moiseev of VTB Capital suggests would offer no more than "a short-lived positive effect."

The report appears to have sent Minsk to the Anti-Crisis Fund of the Eurasian Economic Community – set up by several of the Commonwealth of Independent States (CIS) in 2009 - for a $1.7bn loan, its full quota. Not a problem, says Alexander Kudrin of Troika Dialog, except that that would leave Belarus "without this source of financing as an option in the future."

Another short-term option that the government appears to prefer is one employed to good use in 2010 – continue borrowing. Again, however, this is little more than robbing Peter to pay Paul. As Klysinski points out, the steady drop in reserves over the last few months is despite the issue of $800m in Eurobonds, meaning new credit is being used solely to roll over outstanding debt. At the same time, if economic indicators continue to deteriorate, borrowing will become more expensive, and any shocks on the international debt markets could make life very difficult. The downgrade by S&P in March – reflecting "the country's heightened vulnerability to negative external financing trends because of the deterioration in usable reserves" – is a warning sign this strategy may be untenable going forwards. Still, Minsk says it's considering another $200m Eurobond this year, as well as bonds denominated in Russian rubles worth RUB8bn. Renaissance Capital analysts said in January they're bullish on Belarus debt, not least because the 2011 budget plans for no more than $1bn of external public debt to be raised. However, that limit on borrowing may need to be revised, with politics likely to stir the hornet's nest. EU Observer reported in January that the EU is considering pressing the International Monetary Fund (IMF) and other institutions to withdraw support. If that went

State sell-offs Meanwhile, the former governor of the central bank, Stanislav Bogdankevich, told Prime Tass in January that although Belarus could make do without loans from international institutions for 12-18 months, that would depend on undertaking "large-scale privatisation attracting about $5bn-10bn." That's an ambitious target: the state's privatisation strategy is still bogged down in confusion, and Lukashenko has a habit of reacting with erratic and furious edicts when offers come in below his expectations. The events since the December elections have only served to heighten concerns among western investors. However, investment could come from elsewhere. Chinese money has started to flow to Minsk, just as it has across emerging markets, whilst Bogdankevich suggests the country "may make up its mind to sell the family jewels to Russian oligarchs – the refineries, automobile plants, farm machine producers and Belaruskali." Truck producer Maz has already backed away from a proposed privatisation, and is in talks over a merger with Russian peer Kamaz. Even if Lukashenko were to take such advice, how quickly the government could restructure its inefficient companies and push through any privatisation deals remains questionable. And as revolution spreads out of North Africa and possibly into the authoritarian regimes in the CIS, it's a valid question how much more economic hardship Lukashenko can risk foisting on the people whom he's already had to brutally repress.

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According to the National Statistical Committee, 23.2% of Belarus' population are pensioners, and more than half of the working-age population are employed at government-owned enterprises and organisations. The only possible justification for Lukashenko's economic and political model (and it's a valid one for many) is that by perpetuating most of the old system, Belarus managed to avoid the economic collapse and chaos that followed the demise of the Soviet Union. The lot of pensioners in Belarus really is a lot better than elsewhere in the Commonwealth of Independent States as workers still enjoy the cradle-to-grave care that the Soviet system offered.

The angry silence in Belarus Vic Vapennik in Minsk


ince the violence and repression that followed the rigged December 19 elections, the Belarusian people have adopted a number of strategies to cope with the new, fearful climate. The most popular is silent protest; people simply won't talk about politics at the moment. Silence comes naturally to a people living in a country where the memory of the Soviet system is still fresh in the mind. But whereas "silence was prudent" in the old days, currently it has become a force of passive protest. Ales Pushkin, an artist known for his political performances, was arrested on false charges shortly before the elections – pre-emptive arrests were a distinguishing feature of these elections – and spent 13 days protesting against his unjust incarceration with a hunger strike and a vow of silence. After the elections, he developed the idea into "the action of silence". Of 30 protesters who stood in silence in the centre of Minsk, five were arrested after only 15 minutes, while the police dispersed the others. When they do speak, most

people express resentment. At a shoe repair kiosk in Minsk, the customers were chatting untill one of them says something about "decency." It provoked a passionate outburst from another: "And does [President Alexander]

Still, even amongst Lukashenko's hardcore support, dissent is growing. One pensioner, Valantsina, tells bne that attitudes amongst her friends are changing. When nobody in her native town agreed to accompany her on a trip to Minsk for election day, she stood by the highway alone with a sign that simply said "Ploshcha" ("The Square") and soon got a lift. She marched in the rally and witnessed the indiscriminate and brutal police crackdown on the protesters. "Now there isn't much of a split in the society," she claims. "Today, the Lukashenko supporters are very few and they

"Any change for the better involves changing the president – and everybody here knows it now" Lukashenko have any decency? Just tell me: is he a decent man?"

keep very quiet. Compared with the past, it's a completely different situation."

Well-known Belarusian psychologist Volha Andrejeva says that while some still don't care what happened, for many others the situation has moved them off the fence. "They have abandoned the position of indifference, they can no longer remain indifferent," says Andrejeva.

Valantsina was shocked by the official reports of the fighting in Minsk that blamed the violence on the up to 30,000 people who took to the streets to protest peacefully, rather than the dozen masked men – agent provocateurs, accuse many – who started breaking windows in the main government building. But the bulk of the country has few alternatives to state-controlled media. This time, though, the state's effort to cover up the riots completely

Dwindling support Even so, a large chunk of the population are still grateful to Lukashenko – or at least remain dependent on him.


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foiled by the army of bloggers (many of whom live abroad) being read by an increasing number of citizens with access to the internet. According to

14 that police arrested hundreds of people and administrative courts have sentenced at least 725 people to between 10 and 15 days "administra-

"Today, the Lukashenko supporters are very few and they keep very quiet" Gemius Audience research, the number of internet users in Belarus at the end of 2010 was slightly more than 3.4m, or about one-third of the population. Go west! Perhaps the most dramatic form of protest has been to simply leave the country. In the increasingly repressive atmosphere since the elections, Human Rights Watch said in a report on March

tive detention" for participating in an unsanctioned gathering. The authorities are also investigating more than 46 individuals on riot charges, including seven presidential candidates, political opposition leaders, activists and campaign workers; four have been convicted and sentenced to up to four years' imprisonment, two were fined. At least 30 people – including two former presidential candidates – were still in detention at the end of February.

The upshot is there has been a major wave of emigration. Opposition activists fleeing to Poland have been joined by hundreds of students expelled from universities who see no prospects for themselves at home. On March 14, Ales Mikhalevic, a prominent presidential candidate who testified publicly that he was tortured in KGB custody, said he had joined many others by fleeing the country, safe "out of reach of the KGB." The Belarusians have lost their patience with the president. Mikhail, an engineer at a plant producing TV sets, speaks for most when he says: "Any change for the better involves changing the president. With Lukashenko as president, there can hardly be any change and everybody here knows it now."

world could, and should, do to help bring about change in this remaining authoritarian corner of Europe. While the ministers of the so-called Visegrad 4 countries were having what they called an open and frank exchange with Belarus Deputy Foreign Minister Valery Voronetsky over the clearly fraudulent presidential elections on December 19 and the subsequent crackdown on the opposition, alas the same couldn't exactly be said for next door.


Minsk on my mind

Nicholas Watson in Bratislava


he problem of what to do about Belarus was exercising the minds of the great and the good at the Globesec 2011 conference in Bratislava on March 3. While state officials from the Czech Republic, Hungary, Slovakia

and Poland were delivering a "tough message" to the Belarusian deputy foreign minister in a closed-door session, in the nearby auditorium the country's beleaguered opposition and its supporters were discussing what the outside

When one conference attendee had the temerity to question how the Belarusian opposition was getting its money to travel around the world pleading its case, visiting conferences such as this one, the moderator of the panel discussion, Roland Freudenstien, deputy director and head of research at the Centre for European Studies, jumped off the podium, grabbed the microphone from the startled man, and told him such questions weren't appropriate. Such tactics do little to enhance the debate, especially when the Belarusian opposition have such a compelling story to tell.

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Last man standing Aliaksandr Milinkievich, an opposition leader and chairman of the Movement for Freedom, is one of the few still available to appear at these kinds of events. Virtually all the presidential candidates who stood against Alexander Lukashenko, the Belarus president whom western journalists seem contractually obliged to describe as having ruled with "an iron fist" since the former Soviet republic became independent in 1994, are now either in jail or under house arrest. Milinkievich says that the EU and the West must use the classic carrot-andstick approach to get these political prisoners freed as a very first step. "The assessment of the situation should be firm and coherent. First, all the political prisoners must be freed and the instrument is that the regime cannot solve many of its economic problems without the help of the western countries," Milinkievich tells bne on the sidelines of the conference. The situation over the political prisoners is becoming critical. The state has started putting opposition figures and protesters on trial, with some facing up to 15 years in jail for allegedly organising a mass riot after the results of the election were announced. The opposition claims that the protest was largely peaceful, with just a small number of activists – some allege they were agent provocateurs – blamed for attacking a government building on Minsk's Independence Square. On March 7, Europe's main security and human rights body, the Organization for Security and Cooperation in Europe (OSCE), said it had reached a deal with the Belarusian authorities to send observers to monitor the trials. "A first group of four observers is expected to arrive on Wednesday [March 9] to monitor the trials of Dzmitry Miadzvedz, as well as Russian citizens Ivan Gaponov and Artyom Breus," the OSCE's democracy and rights arm, the ODIHR, said in a statement. "The observers will assess the trials for their consistency with national law and fair trial standards as specified in OSCE

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documents and legally binding international covenants." In the longer run, few doubt that the Lukashenko regime's days are numbered, though with revolutions sweeping across North Africa and into the Middle East, people like Milinkievich caution that the same is unlikely to happen in Belarus. "Many people don't want revolution like in North Africa, but want changes for the better in Belarus," he says. "We would like the change to happen as quickly as possible, but it is not possible to have a sudden break and things change overnight." There are fundamental differences between the situation in the autocratic regimes in North Africa and Belarus. "In Libya they did not have any opposition, any free media, or to any great extent civil society. The protest was mostly of economical and social origin. In Belarus, we have a value-based protest. The people who went onto the streets to protest were mostly educated, proEuropean people." To this end, Milinkievich even holds out the possibility of the current regime being a "temporary partner" during the transition, but that the West's strategic partner should always be the democratic part of the political system in Belarus – an implicit criticism that he feels the pendulum swung too far toward the regime when the EU restarted to engage with it two years ago. Even so, with problems in the Belarusian economy mounting and the EU imposing sanctions, no-one can discount entirely the regime collapsing unexpectedly. "One cannot exclude that Lukashenko's policies will lead the country into a deep economic crisis," says Milinkievich. "It is very important that under such a crisis, the mass protest leads to democracy, not to another autocrat or populist. This can only happen if there are more democrats in society – the Europeanization of Belarus, I call it."

"In Belarus, we have a value-based protest – the people who went onto the streets to protest were mostly educated, pro-European people"


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Foreign investors acquire a taste for Belarus beer Graham Stack in Kyiv


n Eastern Europe, the beer industry was amongst the first sectors to attract major foreign direct investment. Beer consumption, as a halfway house between refreshment drink and real alcohol, soared as retail and gastronomy expanded, and Soviet breweries lagged behind imports in terms of quality. Scottish & Newcastle's early 1990s investment in St Petersburg's Baltika brewery converted a generation of Russians to the virtues of the global economy. The experience was repeated across Russia and then Ukraine. Now it's Belarus' turn. In Belarus, beer is a cabinet-level matter, with the country's biggest brewery, Krinitsa in Minsk, and the smaller Brest brewery both owned by the state foodindustry corporation, Belgospischeprom. But as a sign that Belarus is now serious about attracting investment, Renaissance Capital's Belarus subsidiary was awarded a three-fold investment mandate in October – as government partner, privatisation adviser to the State Property Fund and as investment agent for Belgospischeprom. Renaissance's Belarus manager, Sergei Levin, is the former CEO of the Syabar brewery – a project launched in 2003 by the Russian-American investors Detroit Investment, former owners of Russian success story Ivan Taranov. The new production facilities were built on the site of a bankrupt and idle brewery in Bobruisk, and the project also involved the private sector wing of the World Bank, the International Finance Corporation. Detroit Investment exited the project in 2007, selling it to Heineken, and Syabar is now Belarus's third-largest brewery. Thus it was no surprise when in December Belgospischeprom signed a deal with Detroit Investments to introduce a new production line at the Krinitsa brewery in Minsk. Detroit Investments

and Krinitsa will now produce beer at the plant under the licence of Germany's largest beer sellers, Oettingen. At the launch, Detroit Investments manager, Andrei Kuryochkin, called the new investment "only the first stage in our partnership with Krinitsa." According to insiders, sensitive negotiations are currently ongoing between Belgospischeprom and further potential international investors, with the world's second-largest brewer by volume SABMiller mentioned as one. In early 2009, talks were held between SABMiller and the Belarus government over a deal for the company to produce its brands at Krinitsa and Brest, though the economic crisis put any agreement on hold. SABMiller declined to comment on whether the company is currently in negotiations with Belarus, though analysts note that SABMiller's main competitors, Carlsberg and Heineken, are both present in Belarus already and its Polish subsidiary Kompania Piwowarska has 45% of the Polish market, so expanding into Belarus would make strategic sense. However, while Belarus' economy might've stabilized somewhat since the global economic crisis hit, the rigged presidential election in December and subsequent repression would make any international company think twice before striking any deal with President Alexander Lukashenko's regime. Since February, the EU has frozen the assets of top Belarus officials, and a new packet of sanctions is on the table for April, making major western foreign direct investment in Belarus difficult on both sides of the fence. Import substitution Apart from M&A interest around Krinitsa and Brest, in January Carlsberg, through Baltic Beverage Holdings, upped its stake

in the successful Olivaria brewery from 47% to a controlling stake of 67.7%, with the European Bank of Reconstruction and Development holding a 21% stake in the company. Finnish beer company Olvi Group already in late 2009 increased its stake in its Lidskoe Pivo brewery, acquired in 2008, from 51% to 87%. According to the head of Belgospischeprom, Ivan Danchenko, thanks to both state and foreign companies, the last five years have seen a total of $198m invested in the country's beer sector. Danchenko also says he is expecting the Belarusians to drink a good deal more beer in coming years; annual per-capita consumption in Belarus is still at only 49 litres compared with 150-160 litres in EU countries such as Germany and the Czech Republic. While Danchenko welcomes the foreign investment in the beer sector, he's a lot less accommodating towards foreign beer imports. Imported beer has made steep inroads into the domestic market, now accounting for 29-30% of beer consumption. Danchenko wants that figure brought down to 5%. This is bad news, especially for Ukrainian producers such as Obolon and Sun InBev Ukraine. With the cost of beer production in Ukraine substantially cheaper than in Belarus, imports of Ukrainian beer to Belarus have soared 500% since 2005, accelerating in particular since the 2008-2009 Ukrainian devaluation. This prompted Belarus to launch an anti-dumping action against Ukrainian beer producers in early 2010, and then halt imports altogether. Only in February did the two sides reach a settlement, with Obolon agreeing to raise prices. According to Obolon vice president Viktoria Alimovaya, "the agreement with the Belarusian side was a forced measure. We had to do everything possible in order not to lose the market completely, which is why we are raising prices for our Belarus partners." Obolon has also agreed to set up licensed production of its beer at Brest brewery. However, Obolon stresses there is no move toward acquiring the company.

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According to Nedbailov, two-thirds of the entire company's output is exported to Russia - in the first half of 2010, fishermen harvested 1.798bn tonnes of fish. Santa Bremor products are now represented in all regions of the Russian Federation, including the most developed Central Federal Region, North West and South, Urals, Siberia and Far East. The company's products are also exported to the US, Canada, Israel, Armenia, Cyprus and Lebanon, while since 2008 it has been fully certified to supply foodstuffs to the EU, and exports to Germany, Lithuania, Estonia, Latvia, the Czech Republic and Bulgaria.

Fishy goings-on in Belarus Vuktar Stsiapanau in Minsk


il may be the most high-profile trade between Minsk and Moscow, though for one Belarusbased company there is no better business than selling salted herring to Russia, where it is known as one of the most popular foods to go with one of the most popular drinks. But as Sergey Nedbailov, manager of Santa Bremor, explains, it takes millions of dollars worth of state-of-the-art fish processing equipment from the leading producers in the Netherlands, Iceland and Germany, all the sophistication of the modern know-how, and subtle knowledge of Russian tastes to master this task. Santa Bremor is a subsidiary of Santa Impex Brest, a Belarusian-German joint venture, which has been operating since the spring of 1993. The major activities of Santa Impex Brest include retail and wholesale trade in fish and fish products, as well as their transpor-

tation. Strange as it may seem, this sea fish processing business is situated in landlocked Belarus. It has been operating in the free economic zone of Brest since 1998. Some $126m has been

The area where Santa gets its raw materials stretches from the Far East to Norway, while the main herring and salmon supplying partner countries are Iceland and Norway. The company buys fish directly from producers and this in combination with the advantages of operating in an economic zone (including the exemption from duties on imported equipment and tax incentives for the purchase of raw materials) allows it to keep prices competitive. Santa Bremor's location in Brest near the Belarusian-Polish border is another of the company's greatest advantages. "Brest is situated close to European suppliers, while it is only 350 kilometres to Minsk, 600 km to Kiev, and 1,000 km to Moscow. It appears that the three cities through which we carry out all

"In northern Europe, herring is traditionally marinated with a bright taste of vinegar; in the CIS they like herring light salted and spiced"

invested into the enterprise, which involves more than 3,700 workers at the company's seven plants pickling, smoking and packing herring fillets into plastic moulds. Delicate "Matias" herring fillets and "Ikra No.1" branded capelin caviar have made the company renowned and commercially successful.

our logistics are not too far from us," says Santa Impex Brest CEO Alexander Moshenskiy. First among equals People in the food industry are fully aware that tastes differ, but the founders of Santa Bremor didn't realize these

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differences could extend to the herring preservation method and that the dividing line coincided so exactly with the border of the late Soviet Union. "From the very start, we considered differences in tastes at home and at the European market, and tried to find the most optimal flavour combinations. It refers to products of herring fillets in the first place. In northern Europe, herring is traditionally marinated with a bright taste of vinegar; in the [Commonwealth of Independent States] they like herring light salted and spiced," says Sergey Nedbailov. According to the Russian Federal Statistics Service, per-capita consumption

The recovery of the Russian market holds new opportunities for Santa Bremor and gives rise to new expansion efforts. The construction of a large logistic centre has been completed in Kyiv and another one started in Moscow. Both are financed from equity funds and partly from bank loans. A fourth plant for fish-processing with a total area of 24,000 square metres is already close to completion in the territory of Brest free economic zone. Sergey Nedbailov believes that "a company that doesn't develop, modify and adapt to market conditions sooner or later ceases to be a leader." In line with this thinking, the company is now

"Strange as it may seem, this sea fish processing business is situated in landlocked Belarus" of fishery products in Russia in 2008 was 19.7 kilograms. The growth trend was interrupted by the global economic crisis, which caused Russian consumers to buy cheaper, domestically produced foodstuffs since the devaluation of the ruble had put most imported products out of reach of the average Russian. A year and a half later, the Russians are spending more on fish again. In January-April 2010, the total imports of fish and seafood increased by 37.2% in value and 9.0% in volume compared with the same period of 2009. Trade sources estimate that consumption of fish and seafood has increased by 30%. The increase is attributed to stabilizing incomes of the middle class, greater choices for staple fish species and improved distribution channels. The outlook for 2011 suggests higher demand for fish and increasing per-capita consumption not only in lower-priced segments such as herring, hake and perch, but also in more expensive fish and processed products, including fillet and chilled fish. Experts believe that the higher imports and increased consumer demand signal a strengthening national currency and economic recovery.

giving more attention to the European market and is planning to expand its presence in the West. Sales volumes are small for the moment, but look likely to increase in the longer run.

I 67

I Classified

bne April 2011

bne April 2011


visit our website:

visit our website:



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ie ty






4th Annual Middle East

Risk Management Forum 2011

Middle East & North Africa Insurance Summit ‘Strategic Discussion Seminar about the Further Progress of MENA Insurance Market’



ting A zerba

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The European Azerbaijan Society


Azerbaijan – The Leading Economy in the Caucasus and its Investment Potential 12–13 May 2011, IET London, 2, Savoy Place, London, WC2R 0BL The European Azerbaijan Society, as part of its mission to serve as a networking and knowledge-sharing platform, is launching an annual flagship Business Forum, to be held in the heart of London. This essential two-day event will focus on creating new networks, promote investment generation and facilitate strategic commercial decisions and agreements. Its main objectives are to: • outline the recent and potential trends and opportunities within the Azerbaijani economy • provide the latest and projected data on Azerbaijan’s investment climate • showcase the policies being adopted to ensure a stable climate for inward investment • demonstrate those elements that make Azerbaijan most appealing to investors, when compared to other ountries in the region • help identify the growth sectors in the country.

9th & 10th May 2011 Doha, Qatar

23rd - 24th May 2011, Dubai

Contact: sakib bazaz Mobile: +91 9902774751 email: visit:

Contact: sakib bazaz Mobile: +91 9902774751 email: visit:

So – don’t delay. This is your chance to find out how you can harness the might of the vibrant Azerbaijani economy. What’s more, there is an earlybird discounted fee of £150 (normally £200), if you register before 1 April. To find out more, please contact Vanessa Raine on +44 (0)207 104 2225; e-mail:;


. Ltd nts Eve


5th annual

CEE Structured Products 2nd Annual

Frameworks for future growth

16 May 2011 InterContinental, Warsaw Join up to 100 leading experts in a dynamic networking and idea sharing environment to learn about the future of structured products in CEE

17 - 19 May 2011, Royal Garden Hotel, London, UK

Exploration, investment and development for miners, financiers and investors Key speakers include: • Partha Bhattacharyya, Chairman and Managing Director, Coal India • Mark Smith, CEO, Molycorp • Li Jinming, Chairman, GuangDong Rising Asset Management

Speakers Include:

Bronze Sponsor

Associate Sponsor

Exhibition Sponsor

Raiffeisen Centrobank AG Eperon Asset Management Ltd., UniCredit HSBC PKO BP Intesa SanPaolo Alfa-Bank S&P Indices CitiGroup Commerzbank Credit Agricole Open Finance French Asset Management Association

• Godfrey Gomwe, Executive Director, South Africa, Anglo American • Oleg Mukhamedshin, Head of Capital Markets, UC Rusal • Chris Rynning, Chief Executive Officer, Origo Partners plc •

Frank Holmes, CEO, US Global Investors

Steven Fox, Founder and CEO, Veracity Worldwide

Sponsored by:

Organised by:

Contact Taylor Jenkinson Tel: +44 (0)20 7092 1246 Email: Web: Booking code: BNE

WMIC Europe 2011 AD 85-116-BNE.indd 1

1/13/11 1:27 PM


I Events

bne April 2011

Upcoming events 2011

Astana Economic Forum (3 - 4 May) "Eurasian Economic Club of Scientists" Association Astana

The Second European-Ukrainian Energy Day (31 May - 1 June) Conference House Intercontinental Hotel Kyiv

World Mining Investment Congress 2011 (17 - 19 May) Terrapinn +44 (0) 20 7092 1174 Royal Garden Hotel, London, UK

2nd Annual Russia - Capital Raising and Investment Summit (June) FinanceAsia Hong Kong

2011 EBRD Annual Meeting and Business Forum (20 - 21 May) EBRD Astana, Kazakhstan

2nd Middle East & North Africa Insuance Summit 2011 (23 - 24 May) Fleming Gulf Dubai

Cash, Treasury and Risk Management for Companies in Spain (24 May) EuroFinance +44(0)20 7576 8555 Madrid, Spain


The Sixth Annual EuropaProperty SEE Real Estate Awards Forum & Gala for 2010 (26 May) EuropaProperty SAS Radisson Hotel, Bucharest, Romania

JetFin AGRO 2011 (7 June) Jetfin Events +41 22 839 8080 Grand Hotel Kempinski, Geneva

Astana Invest 2011 (8 June) Caspian Business Events Astana, Republic of Kazakhstan

THE WORLD FORUM for Foreign Direct Investment (7 - 9 June) RedHot Locations London, UK

CASPIAN OIL & GAS 2011 (7 - 10 June) ITECA


I Eurasia

bne April 2010


The International Bank of Azerbaijan is a universal bank and fullservice financial services company. IBA is a National Development Bank, contributing significantly to the strength, stability and transparency of Azerbaijan's banking system. This status ensures shareholders' and people's trust in the Bank both domestically and globally, and assists in the country's socio-economic development.

awards 2009

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