bne:Magazine - May 2014 by Ben Aris

Inside this issue: Chaos deepens in Ukraine Prague's nuclear Hunger Wall Slovak corruption goes round and around

May 2014 www.bne.eu

Macedoniaâ&#x20AC;&#x2122;s ruling party wins big India flounders in Central Asia

GREAT GAME II A hot peace rather than new Cold War looms

bne May 2014

Contents

Editor-in-chief: Ben Aris (Moscow)

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Managing editor: Nicholas Watson (Prague)

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Eastern Europe: Graham Stack (Kyiv) Anna Kravchenko (Moscow) Central Europe: Jan Cienski (Warsaw) Mike Collier (Riga) Tom Nicholson (Bratislava) Kester Eddy (Budapest) Southeast Europe: David O'Byrne (Istanbul) Ian Bancroft (Belgrade) Bogdan Preda (Bucharest) Guy Norton (Zagreb) Andrew MacDowall (Belgrade) Eurasia: Bureau Chief: Clare Nuttall (Almaty) Molly Corso (Tbilisi)

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COVER STORY 6 The Insiders

CENTRAL EUROPE 24 Prague's nuclear Hunger Wall

8 Great Game II +7 7073011495

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12 Perspective 13 Chart of the month

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EASTERN EUROPE

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27 Rookie stuns veteran in Slovakia 30 Non-consensual politics in Hungary

14 Chaos deepens in Ukraine

32 Hearing the Baltic voice

15 Ukraine's poorer half

34 The truth on trial in Latvia

17 Nato and Russia's war of words

36 Poland shakes off slump

19 Naftogaz corruption funnelled via western banks Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu

26 Slovak corruption goes round and around

37 Total joins Polish shale gas exodus

21 Ukraine's usual suspects 23 Russia's EU envoy causes indigestion

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bne May 2014

Contents

SOUTHEAST EUROPE 38

Turkey's football e-ticket system scores own goal

Macedoniaâ&#x20AC;&#x2122;s ruling party wins big

Bulgaria's new man in town

Seeing red over green light for golf in Croatia

Discount retailers discover Romania

Transnistria appeals again to join Russia

Black clouds, silver linings on ZSE

Pessimists rule in Croatia

EURASIA 50

Power to Georgia's people

India flounders in Central Asia

Unaccustomed to the Customs Union

Kazakhstan's big selloff

Made in Mongolia

Mongolia railroaded

PASHA looks to lead in Azerbaijan's economic diversification

SPECIAL FOCUS 62

The EU's neighbourhood problem

UPCOMING EVENTS

I The Insiders

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Putin, Ukraine and asymmetric politics

Mark Galeotti of New York University

uccessful guerrillas master the art of asymmetric warfare, making sure that the other side has to play the game by their rules and doesn’t get the opportunity to take advantage of its probable superiority in raw firepower. Appreciating the massive military, political and economic preponderance of the West, Russian President Vladimir Putin is demonstrating that he is a master of asymmetric politics. The seizure of the Crimea was in many ways a textbook example. The deployment of elite Russian forces – the “little green men” or “polite people,” depending on whom you ask – without insignia to take key political and communications centres and lock Ukrainian forces inside their barracks. The deception may have been pretty transparent, as they all wore the latest Russian kit and drove military vehicles with official licence plates, but the ruse gave them the crucial hours they needed for their mission, especially as alongside them were genuine volunteers and paramilitaries. Were they mercenaries? Local activists? Acting without orders? Unsure what was happening, reluctant to appear the aggressor, Kiev was paralyzed for long enough that it didn’t matter what it decided, the Russians were in charge. Meanwhile, the political dimension: pliable local elites clamoring for Moscow’s “protection,” popular marches in support of the move, a hurried referendum in favor of annexation. Before the West and Kyiv alike really knew what was happening, Crimea’s incorporation into the Russian Federation was a done deal. To be sure, international recognition is a long way away, but Moscow has always been more interested in de facto than de jure. Finlandization The detail of what is happening in eastern Ukraine is different, but then again so too is the likely aim. While the idea of gathering these predominantly Russian lands back into the patrimony may appeal to Putin emotionally, it is unlikely to be his preferred outcome. After all, unlike Crimea, they also have sizeable ethnic Ukrainian populations, and while they may be prosperous by Ukrainian standards, they

would represent a serious drain on an overstretched federal budget. Besides which, the art of asymmetric politics is typically not to aim for an ambitious and obvious target. Seizing eastern Ukraine would force the West into action; I’d expect to see Nato forces deployed into the country to prevent any further Russian move, as well as massive economic and military assistance. It would also bog Moscow down not just into a long-term integration programme, but also the risk of Ukrainian insurgency (remember all those tempting oil and, especially, gas pipelines). Instead, Putin’s ideal outcome is probably a weak and federalized Ukraine that accepts its position as part of

"Are there Russian soldiers and agents among them? I have no idea, but I would expect so" Russia’s sphere of influence. No closer ties with the EU or Nato, membership of the Russia-led Eurasian Customs Union, and enough autonomy for the eastern provinces that its elites can continue to be Moscow’s agents within the system (and protect themselves from corruption investigations and lustration committees). Just as his threat to eastern Ukraine has meant that the West has pretty much written off Crimea, so too by massing forces on the border and encouraging local paramilitaries, Putin can make the “Finlandization” of Ukraine look like the least worst option. A crucial aspect of this campaign is precisely to inject as much uncertainty and deniability as possible into the process, and to move either with sudden and irresistible decision – as in Crimea – or else in small, seemingly meaningless steps. The aim is to try and make any potential countermove look like overkill. Kyiv could, for example,

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potentially deploy regular army units made up of volunteers to shell the government and police stations taken by local irregulars and Berkut and police volunteers. However, that would appear to be a dramatic escalation and conceivably the excuse Moscow would need to send forces into Ukraine. After all, if Kyiv (or its supporters) seem to be acting as if what was happening was civil war rather than local incidents of lawlessness, then it plays directly to Moscow’s narrative of a failed state sliding into anarchy – such that it has a moral duty to secure its borders and protect its compatriots. Are there Russian soldiers and agents among them, coordinating and instigating the attacks as both Kyiv and US Secretary of State John Kerry assert? I have no idea, but I would expect so. While I have carefully looked at all the photos of alleged Russians in the recent disturbances, none clearly appeared Russian the way the “little green men” clearly did, and the professionalism demonstrated by the paramilitaries was generally limited, at best. Nor are the weapons brandished or uniforms worn ones that could not be found in Ukraine, especially given the mass defections of police and the arsenals at their disposal. There are almost certainly are some Russians there – Kyiv claims to have captured at least one – but, like any good guerrillas, they are hiding amidst the population. Guerrilla geopolitics So this is Putin’s guerrilla geopolitics, and so far he’s winning. After all, today’s global conflicts are not fought between rival blocs of broadly comparable strength, who therefore agree an unspoken set of rules between them. This is not a new Cold War, with all the ideological division and stability that entails. If anything, this is closer to the freewheeling days of the 19th century, and especially the Great Game of imperial rivalry in Central Asia. These conflicts will be won by whoever is able to force their enemies to play to their rules, and by whoever best understands that military force is often the least important kind of power. Like the Great Game, the struggles will be fought using deniable covert actions, political misdirection, economic leverage, propaganda, espionage, hackers, mercenary agents and useful dupes. In the 19th century, wily tribal warlords would sell their services to the highest bidder; today, it is the political elites of Donetsk and Kharkiv. Being able to leak an embarrassing phone conversation at just the right moment (just ask Victoria Nuland) or to have the means to incite local paramilitaries will be more effective than a whole aircraft carrier’s fighter wing. In this new Great Game, spies and political operators will be every bit as crucial as tanks and helicopters. More to the point, it demands flexibility, ruthlessness and clarity of aim. This is, let’s be honest, the ideal kind of contest for Vladimir Putin and his Russia. Mark Galeotti is Professor of Global Affairs at the SCPS Center for Global Affairs, New York University

"International recognition is a long way away, but Moscow has always been more interested in de facto than de jure"

I Cover story

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GREAT GAME II A hot peace rather than new Cold War looms Ben Aris in Moscow

Cover Story I 9

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he April 17 deal that brought Ukraine back from the brink of war may be coming apart at the seams, though its true significance is that it was agreed at all. Rather than an end in itself, the deal is a harbinger of how events will play out in the region for the foreseeable future. The Geneva meeting brought together US Secretary of State John Kerry, Russian Foreign Minister Sergei Lavrov, his Ukrainian counterpart Andrii Deshchytsia, and the EU foreign policy chief Catherine Ashton. The deal agreed after seven hours of tense negotiations calls for the disarming of illegal groups in Ukraine, such as the pro-Russia militia that has taken over police stations and other buildings by force in eastern Ukraine. All the state property captured by the various "separatist" groups is supposed to be returned to the state – though as of the end of April it still had not been – and a general amnesty was offered to all but those involved in a capital crime, in an effort to restore peace and reduce tensions. In political terms, the interim Ukrainian government agreed to start consultations about devolving more constitutional powers to the regions – a key Russian demand, which hopes to keep Ukraine out of Europe's orbit by building closer ties with the Russophile east of the country. The Organization for Security and Co-operation in Europe (OSCE) will be given the job not only of making sure the agreement will be put into practice, but also of helping to implement it. Inevitably, the showdown in Ukraine this year has started talk of a new Cold War in Europe. But the real danger of a limited Russian military invasion makes this new period a lot hotter than the relatively stable standoff that preceded 1991. Mark Galeotti, professor of Global Affairs at the SCPS Center for Global Affairs at New York University, says what has been going on in Europe for the last six months is more like a "hot peace", and better described as a new version of the 19th century Great Game than a new Cold War.

Subjugation by economics Rudyard Kipling made the Great Game famous with his novel "Kim", which is set against the backdrop of the struggle between Imperial Russia and Great Britain at the end of the 19th century for control of Central Asia and a route the Russian army could take to attack British India from the north.

sides have agreed to disagree.

A similar fight today has broken out between the EU and US on one side and Russia on the other, except this time the threat is not of military invasion but subjugation by economics – trade deals that will exclude one side and sew up the new markets for the benefit of whoever comes out on top.

Today, there is little stability and new, powerful geopolitical forces are in play. In 1990, the world was roughly divided into 3bn capitalists and 3bn socialists. But following the fall of the Berlin Wall in 1989, the poorer socialists have joined the capitalists in a truly global economy. It was a tectonic shift of unprecedented proportions. After two decades of reform and recovery, all the newly minted capitalist countries of the east are finally finding their feet. The showdown between Russia and the EU in Ukraine is only the most obvious manifestation of this change.

The Cold War legacy is still relevant. Russian President Vladimir Putin complained in his speech of March 18 that the West is still following a policy of containment for Russia. But the big change is that the Cold War was also an existential struggle between ideologies – each side saw the other’s ideology as antithetical. Ironically, the closeness of "war" is what kept the peace: Mutually Assured Destruction (MAD) meant that neither side could actually attack the other. However, in today's "Hot Peace" all the countries involved have the same basic ideology. The fall of the Soviet Union saw the death of the Communist

The Cold War standoff was actually a pretty stable system, as an equilibrium between east and west was quickly reached. It was rules-based and channels for communication were set up to police the system so neither side could win a lasting advantage.

Chinese whispers It is not just Russia that is starting to flex its muscles. China too is rising and has been throwing its weight about in Southeast and Central Asia. US Defence Secretary Chuck Hagel was in Beijing in April to complain about China's attempt to take over disputed islands in the East and South China Seas. He

"Great Game II is one in which open state actions, deniable missions by state agents and the activities of mercenary agents blend much more seamlessly" experiment and all sides have accepted democracy and the free market as the basis of their systems – albeit with some pretty wide variations.

was met by "frank" comments from the vice chairman of the Chinese Military Commission, Fan Changlong, who was "dissatisfied" with Hagel's criticism.

The US condemns Russia's hybrid oligarch-statist version of capitalism, but is not intent on trying to change it. Likewise, Putin has no interest in exporting Russia's model and imposing it on any other country. The salient characteristic of this dispute is the two

"The message to Hagel was intended to reflect China's confidence in its abilities and to reiterate that the relative balance of military power in the region is changing," US think-tank Stratfor said. "In other words, the United States should stop trying to prevent China's

I Cover story

emergence as a regional power and adjust its posture and policies to the changing reality of the region. There is indeed a change underway in the relative balance of power in East Asia." The dispute between China, japan and others over who owns the islands is similar to Russia's claims on Ukraine, except the US has significant economic exposure to China and so has been a lot more muted in its criticism of the

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by former Ukrainian president Viktor Yanukovych (the failure of which to do ultimately led to his ouster) signalled the end of diplomatic options to Russia, so Putin turned to the only other alternative left to him – the military one. The US has done the same in the many wars it has fought over the last 20 years. But the Kremlin's goal is not to invade Ukraine and rebuild the Soviet Union, but to force the other side to

"What has been going on in Europe for the last six months is more like a 'hot peace'" Middle Kingdom's aggression. At the end of Hagel's visit, the two sides agreed that the way to deal with these disputes was through "more cooperation and engagement" – the opposite of the US approach to Russia, where the de facto policy appears to be direct confrontation. China has also clashed with Russia in Central Asia, the home of the original Great Game. Despite outwardly friendly relations, Beijing is in competition with Moscow for influence amongst the 'Stans – except instead of using British schoolboys pretending to be Indians and red-bearded horse traders from Lahore, the currency of today's Great Game is investment deals, long-term credits and energy pipelines. Russia has accepted an increased presence of China in the region, partly because it receives tentimes more Chinese largesse than any of the Central Asian republics and it needs China more than ever as an alternative market to Europe. Multipolar The upshot is this new Great Game will be messy. And the April agreement struck in Geneva to lower the tensions in Ukraine is typical of the way it will be played. Putin has made it clear that "taking" Ukraine away from Russia by striking exclusive trade deals with the EU was a step too far. The planned signing of the EU Association Agreement in November

the negotiating table and extract a compromise that is acceptable. More generally, the fight over Ukraine is crucial for Putin, who has made the establishment of a new multipolar world to replace the unipolar world dominated by the US his key foreign policy aim. Putin is enough of a pragmatist to realize that Russia has forever lost its status as the "other superpower", but nevertheless he wants to build up enough clout so it can, with the world's other major powers (China chief amongst them), force Washington to tempter its actions on the global stage. The new Great Game will be a process of probing enemy defences, politics, insurrection, corruption and liberally investing money in regions to bring them under your sway. These periods are inherently dangerous, as Germany found to its cost at the end of 19th century when it was the rising power in Europe following the unification of all the tiny principalities that created the modern German state. In this new Great Game, the use of military force against the hegemony of the US remains absurd, says Galleotti. Neither China nor Russia could or would confront US military might directly. However, they are both making full use of the palette of alternative tools – military, political, economic, covert action, hard and soft power

– to pursue what they see as in their national interest. "One of the particular characteristics of the original Great Game was that there was little real distinction between the instruments of conventional conflict and competition such as wars, diplomatic missions and treaties and those of the informal realm, from subsidized bandit chieftains to third-party intelligence freelancers," Galleotti says. "Great Game II is one in which open state actions, deniable missions by state agents and the activities of mercenary agents (from computer hackers to local warlords) blend much more seamlessly." The "little green men" – military personnel in unmarked uniforms who there is growing evidence to suggest are in fact Russian special forces – in eastern Ukraine to the Cossack voluntary militia that patrolled the Sochi Olympics (and beat up the punk rock group Pussy Riot when they tried to perform a protest song) are going to become more commonplace. The “patriotic hackers” encouraged to bombard Estonian servers in 2007 were some of the first instances of this, as is the recent appointment of Dmitry Kiselev to run the revamped state-owned press agency RIA Novosti, who told his surviving staff in March: "Objectivity is dead." And as with any good game, you need two people to play. Kerry's comment, "You just don't in the 21st century behave in 19th century fashion by invading another country on completely trumped up pre-text," was met with scorn even by the western press corps. To the Kremlin this message must have translated into: "We can do what we like, but you must do what we say." The mistake Washington has made – or better, the point Putin was trying to make with the annexation of Crimea – was Russia is no longer going to take these kind of orders lying down. "The West is equally guilty of playing the same game. Backing Libyan rebels against Gadhafi and then backing a range of rebel movements in Syria against Assad," says Galleotti. It was the same Great Game thinking

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that led the Kremlin to effectively close down all the foreign-funded NGOs last year and force them to rebrand themselves as "foreign agents" (the double meaning is the same in Russian as English). Obviously, most of these NGOs are legitimate, but some were not. That is not to say they were simply covers for spies, but some were openly promoting US-style democracy, which is (righty or wrongly) different to the Kremlin's conception of it and in that sense the NGOs were another play in the game. However, allowing the game to continue will have the pernicious effect of making the Kremlin more paranoid. Just like NGOs, everything and anything can potentially become an agent of conflict, any organization with foreign funding could be considered subversive; journalists, scholars, businessmen and tourists will all come under more scrutiny. Big military To be a member of a great power – and only great powers can play the Great Game – you need a big military. Like the Cold War, the threat of violence lies behind the machinations and without the threat of military action a player is not a credible force. Russia learned this lesson the hard way during the Cuban Missile Crisis when it realised its navy was no match for that of the US and backed down. Afterwards Nikita Khrushchev invested heavily in the Soviet Navy, sparking a submarine arms race that is still visible today in the port in Crimea – one of the reasons Russia remains so touchy about losing Ukraine. A clash with the West has been on the cards for a while now. bne wrote a cover story in April 2013 on a new brewing Cold War, pointing out Russia was ramping up its military spending to such a degree that the widely respected finance minister of the time, Alexei Kudrin, quit in protest. Russia is now spending more than the US on its military as a proportion of its GDP (although this is still a fraction

Cover story

of US spending in absolute terms). At the same time Europe looks relatively weak, as almost none of the Nato members are meeting their treaty obligations to spend at least 2% of GDP on defence. Another consequence of this Hot Peace is that it is breathing new life into Nato, which was set up to defend the West against a Soviet Union that no longer exists. Over the first decade of the 1990s, the organisation was slowly atrophying through the lack of use and budget cuts. But Russia's first hostile troop movement in over 20 years when it took over Crimea has suddenly made the organisation look relevant again. The downside of an expanded and real role for Nato will be to lock in the mentality of opposition and reinforce

I 11

all the countries that have joined the EU since 2003, but what is missing from the chart is a measure of the hundreds of billions of dollars the EU has invested in each of these countries. Poland alone has received $150bn in aid: Ukraine is being offered $10bn a year for two years, all of the austerity of a new International Monetary Fund deal, but none of the structural funds granted to EU member states. "Poland is doing well because it has been subsidised by the EU," argues Mark Adomanis, a contributor to Forbes magazine. And Ukraine needs massive investment and reform. It is one of only two (along with Kyrgyzstan) countries in the region that has yet to surpass its Soviet-era GDP levels. In the last decade there are been next to no structural reforms at all; both the "Orange" and

"Objectivity is dead"

the Cold War perception of Russia as "the enemy" again. Both sides will slip easily back into their traditional roles of "Uncle Sam vs Red Ivan." Tug of war Nothing highlights the parameters of the new Great Game more than the Ukrainian fracas. Europe has little economic interest in the country and the US has none. Russia has huge economic and strategic interests in the country. Ukraine's importance to the West, as Central Asia's importance to Russia last time round, is its location, at a nexus between two great powers. And this political role is also clear in the terms of the deal that Kyiv is being offered. The Association Agreement precludes it from joining Russia's Customs Union, but full EU membership (and even Nato membership) is not on the table. Nor is there much in the way of EU funds. The Economist ran a chart in April showing how EU membership had transformed the standard of living for

"Blue" governments have failed to get to grips with any of the country's myriad problems. Berlin-based corruption watchdog Transparency International called it "the most corrupt country in eastern Europe" in its last ranking. And yet despite having all the problems that Russia suffers from with knobs on, Ukraine has been deemed suitable for "partnership" with the EU. The truth is that Ukraine is important to the EU in the same way that Afghanistan was important to the British Empire 100 years ago – because of where it is situated and nothing else. Without Ukraine, Russia's aspiration to set up a rival trade bloc – the Eurasian Economic Union that is due to come into being next year out of the current Customs Union of Russia, Belarus and Kazakhstan – will be thwarted. The Kremlin's dream of creating a trading empire to rival the EU would be reduced to one bad-tempered natural resources producer surrounded by a necklace of poor bit players on the world stage.

I Perspective

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Turkey attempts to secure Russian energy Stratfor

he threat of a Russian natural gas cut-off to Ukraine has lit a fire under Turkey, one of Moscow's biggest energy clients. Roughly 60% of Turkey's natural gas supply comes from Russia through two primary routes, and 12.5% of that supply could be at risk if Russia punishes Ukraine and its downstream customers. Rather than pushing Turkey into a desperate and urgent search for alternatives to Russian energy, the events in Ukraine are forcing Turkey to consider ways to solidify its energy relationship with Russia. Turkey was among the 18 countries that Russian President Vladimir Putin addressed April 10 in a now infamous letter to Europe. In that correspondence, Putin laid out a lengthy and sober explanation of the $2.2bn in debt Ukraine owes Russia and highlighted the main consequence of Ukraine's refusal to pay Russia for its natural gas supply: Russian state firm Gazprom would have to resort to the "extreme measure" of reducing natural gas flows to Ukraine. As Putin explained, such a move would then raise the risk that Ukraine would siphon off the natural gas for itself and thus deprive customers further downstream, including Turkey. Turkey's core economic hub in the Marmara region receives roughly 12.5% of its natural gas from a pipeline that runs from Russia through Ukraine and the Balkans to reach Turkey. The rest of Russia's natural gas supply to Turkey travels through the Blue Stream pipeline, which runs under the Black Sea. Turkey has long been uncomfortable with having to depend so heavily on Russia for its energy supply in such a volatile region. Turkey remembers well the energy disruptions that resulted from Russia's invasion of Georgia in 2008, when Azerbaijan lost its transit route through the Caucasus to reach Turkey. Turkey was also affected by Russia's natural gas cut-offs to Ukraine in 2006 and 2009. With Turkey now facing yet another potential energy disruption over a conflict between Russia and its neighbours, one might assume that energy-hungry Turkey would start pursuing alternative energy options to secure its energy supply. But for now, Turkey seems to have come to terms with the enormous challenges attached to its diversification options. Rather than identify Russia as the problem, Ankara is depicting the Europeans as the big thorn in its energy security plans while taking the opportunity to cosy up to Russia. Turkey has thus come out with two proposals, both of which

entail avoiding the Europeans and dealing with Russia directly. Two streams The first proposal is for Russia to increase energy shipments through the Blue Stream gas pipeline, which runs directly to Turkey. Russia could increase shipments from 13.6bn cubic metres (cm) to the pipeline's maximum capacity of 16bn cm. In addition, Russia and Turkey could choose to dust off plans to build a line paralleling Blue Stream. The second Turkish proposal is for Russia to re-route the 2,400-kilometre South Stream pipeline so that it makes landfall on Turkish soil in the Thrace region instead of on Bulgarian soil. South Stream would allow Russia to transport up to 63bn cm of gas to Europe without having to traverse Ukraine. The planned route would start in Russia (where construction has already begun), run through Turkish waters in the Black Sea, make a land connection in Bulgaria and then split northward to supply Central Europe and southward toward the Mediterranean through Greece and Italy. This is first and foremost a Russian-European pipeline designed to circumvent Ukraine. This is not a pipeline designed to feed Turkey. From Russia's perspective, Turkey's energy needs can be taken care of through Blue Stream and any subsequent expansions to that line. But Turkey is now trying to alter the logic of South Steam altogether, first by attempting to convince Russia that the Europeans are only going to create problems over South Stream with the Ukraine conflict in play. Instead of facing more delays from EU bureaucrats on this project, Turkey is proposing that Russia direct ample amounts of gas to Turkey, which will gladly consume it while Russia and the Europeans hash out their differences. Once the European-Russian conflict blows over, interconnectors from Turkey could then be built to extend into Europe. That way, the Turkish logic goes, Turkey secures more Russian gas without having to worry about European disputes while positioning itself as a powerful transit state. Such a proposal would not sit well with the Europeans waiting to receive this gas. The South Stream consortium has already said it would not tolerate higher costs and further delays entailed in a re-routing. Bulgaria has already begun creating legal loopholes to try to bypass potential interference from Brussels and ensure that the project continues as planned.

Perspective I 13

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Russia will also likely prioritize keeping the current route through Bulgaria to maintain its leverage with Europe and isolate Ukraine's dependence on Moscow. At the same time, Russia will be very interested in securing more market share for its energy in Turkey through an expansion of Blue Stream. Turkey's non-Russian energy options will meanwhile remain weighed down by a number of political, logistical and financial challenges. So far, Ankara seems unwilling to incur the costs of unilaterally importing a few hundred thousand barrels per day of Kurdish oil from Iraq against the wishes of Baghdad, Tehran and Washington. Israel's attempts to link Turkey into its eastern Mediterranean energy network still depend on Turkey and Cyprus reaching a peace deal. An increase in Iranian energy flows through Turkey is still years out as Tehran tries to rehabilitate itself. Azerbaijan already is planning for 6bn cm of gas from its

CHART:

Shah Deniz II offshore fields to reach Turkey within the next three to four years (and has 10bn cm contracted for Europe). But any significant increase in energy flows through the Caucasus route would depend largely on Azerbaijan being able to unlock the politically and technically contentious Trans-Caspian route to channel supplies from Turkmenistan, Uzbekistan, Kazakhstan and potentially Iran against Russia's will. Other domestic considerations, such as attracting investment to boost coal production and build more expensive liquefied natural gas import terminals and re-gasification facilities, will also come into play. But they depend on investors being comfortable enough with Turkey's political mood swings to put money into large projects with long payback periods. Russia remains Turkey's primary energy patron. And it appears for now that both Ankara and Moscow will work to keep that relationship intact.

Who's zooming who?

he Economist ran a piece on March 20 under the title "Hammer and scythe", which was a series of maps showing the Soviet Union's post-World War II expansion eastward. The maps ended with one from today showing Crimea as part of Russia. "On March 18th Russia annexed Crimea, marking the first time the country expanded its borders since the cold war. Yet it has form," the magazine warned readers ominously. "A quarter-century after the fall of the Berlin Wall, the hungry Russian bear is back."

Nato 1991

Russia 1991

Nato post-1991

Russia 2014

Sources: The Economist/RT

However, this only tells half the story. Another map from RT (nee Russia Today, the Kremlin-owned TV station) shows Nato's expansion that began after the end of both the World War II and the Cold War. Overlaying the various maps as we have below shows how much Nato has expanded in relation to how much the Russian Federation has since the end of the Cold War.

I Eastern Europe

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Chaos deepens in Ukraine Harriet Salem in Sloviansk

he Geneva accord signed by Russia, Ukraine, the US and the EU on April 17 was supposed to calm tensions in eastern Ukraine, but within two weeks the agreement had crumbled to dust. The US and Europe have imposed a fresh round of sanctions that target Russian President Vladimir Putin "inner circle" and their companies, while a further descent into chaos came April 28 as the pro-Ukrainian mayor of the eastern town of Kharkiv was shot in the back.

US President Barack Obama accused Russia of “destabilising actions” in east Ukraine, whilst Russian Foreign Minister Sergey Lavrov struck back by accusing the US of irresponsibility over the government it helped bring to power in Kyiv. The US has done “nothing do address the underlying causes of the problem,” claimed Lavrov.

Despite a multilateral commitment to deescalate the tensions that have shaken east Ukraine since the new pro-EU administration took power in Kyiv in February, violence in the region has increased dramatically in the last weeks of April, with a series of building seizures, shootouts and hostage snatches. Commentators worry Ukraine is sliding towards an open military confrontation.

On April 28, the US announced a new wave of sanctions targeting high-profile individuals, the biggest beast being Igor Sechin, the so-called "scariest man in Russia" who is currently head of state oil company Rosneft, as well as some murky companies and banks linked to Putin's inner circle. These include a range of Stroygazmontazh group entities, a company owned by Putin's judo buddy that supplies Gazprom with pipes, and lenders Sobinbank and Investcapitalbank.

Diplomatic barbs have flown backwards and forwards and are becoming increasingly acerbic. In the most serious superpower standoff since the Cold War,

The Kremlin has further raised the stakes by announcing that it is conducting military exercises over the border from Ukraine's eastern region, at the same

time as ramping up its aggressive rhetoric about intervening to protect “Russians” in Ukraine. Timothy Snyder, professor of history at Yale University, asks who these Russians are? "There are speakers of Russian in Ukraine, but they are not Russian citizens any more than I, a speaker of English, am a British subject. There are people who identify as Russian – about a seventh of the population – but they are no more Russian citizens than Quebecois are citizens of France. Dual citizenship in Ukraine is not permitted." With more than 40,000 Russian troops massed on Ukraine’s border for the past six weeks, US Secretary of State John Kerry has called Moscow’s military moves “provocative”. But perhaps more worrying is the increasing chaos and lawlessness on the ground. Shot in the back On the morning of April 28, the mayor of the eastern Ukrainian city of Kharkiv, Hennadiy Kernes, was shot and critically wounded by unknown gunmen while out jogging. His condition was described

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Ukraine's poorer half

bne With fears growing of Russia annexing eastern parts of Ukraine, attention is now turning to what the economy of this country would look like were those regions to split. The answer: not good.

including that of Russia. Russia's per-capita income is on the order of $17,000 and even Belarus' stands at $16,000, according to the CIA fact book. Ukraine is the only country in CEE that has yet to regain the level of income it had in 1991.

There's no doubt that on an emotional level Russian President Vladimir Putin would like to see these predominantly Russian-speaking eastern regions of Ukraine become part of the Russian Federation. And there are sound economic reasons for Russia wanting this too.

The uneven distribution of wealth in the country is storing up problems. While it is the nationalist west that wants to rush into Europe's arms, this means doing a deal with the International Monetary Fund (IMF), which will come with strings attached and austerity in the offing. Ukraine is about to massively increase its debt levels and will have to raise taxes too to pay for that debt. But it will be the people in the east that will pick up most of the tab, which is further dividing the two halves of the country.

An article in US magazine The American Interest examines the country’s economic geography and highlights "how hard it’s going to be for the West to make Ukraine work", given that with the exception of Kyiv, the richest (or the least poor) regions of Ukraine are all in the industrialised east. "Economically speaking western Ukraine is more like the Appalachia of Ukraine than its Silicon Valley," the article wryly notes. With a per-capita income of $4,335, Kyiv is not even the richest region in Ukraine. It comes in fourth place after Dnepropetrovsk with $5,298, Donetsk with $4,500 and Poltava with $4,439. The east is home to Ukraine's oil and gas reserves as well as most of its heavy industry; the western half has a few nice towns and mountains. Even these income levels in the east of the country are way below most of the rest of Central and Eastern Europe,

The American Interest notes the wealth-producing eastern regions are closely tied into the Russian economy with deep interconnections that stretch back to Soviet and even Czarist times. "If we add to these factors the entrenched criminality of the Ukrainian governing class, the close linkages between ill-gotten economic wealth and shortsighted political power that have persistently characterized the country since independence from the Soviet Union, and a polarized polity riven with ethnic, linguistic, economic and cultural divides, we do not see a promising field for western action," the magazine notes. "There are reasons why… the European Union hasn’t moved with greater alacrity to bring Ukraine into its orbit and why the prospect of EU membership for Ukraine has always looked distant."

Ukraine's Gross Regional Product Per Capita in 2011

Source: Ukrainian National Statistics Bureau

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by doctors as "serious". Kernes used to be a supporter of the ousted pro-Moscow president Viktor Yanukovych, but had since switched his support in favour of a united Ukraine. Pro-Russian separatists have also begun kidnapping people to use as "bargaining chips." Separatists in Sloviansk, the heartland of the proRussian rebels’ support, on April 25

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terrorism will only strain relations further and made the imposition of stringent sanctions more likely. “We will be looking to designate people who are in his inner circle, who have a significant impact on the Russian economy,” US Deputy National Security Adviser Tony Blinken said on CBS’ “Face the Nation” programme ahead of the new sanctions being announced. “We’ll be looking to designate companies that they and

“We will be looking to designate people who are in Putin's inner circle, who have a significant impact on the Russian economy” snatched seven European military officers, five members of the Ukrainian armed forces and a civilian. The mission was working under of the auspices of the Organization for Security and Co-operation in Europe (OSCE) in the eastern region of Donetsk, currently the epicentre of the country’s protracted crisis, when they were taken. In another disturbing turn of events on April 25, the rebels invited Russian media to a basement building in Sloviansk where they showed four badly beaten and blindfolded men stripped of their trousers. According to the separatists the men are Ukrainian secret service officials. The snatch of OSCE observers – four German citizens, a Pole, a Dane, a Czech and a Swede – incensed European politicians. On April 28, the captives, under obvious psychological duress, were paraded in front of the media at a press conference. The mission’s commander, Axel Schneider, denied the separatists’ accusation that the group were spies. The rebels’ local leader, self-styled gold-toothed Vyacheslav Ponomarev, said the diplomats are “hostages of circumstance” in a “situation of war”. The German foreign minister responded to the brazen display of impunity as, “repulsive and blatantly violating the dignity of those affected”. These random acts of low-level

other inner-circle people control. We’ll be looking at taking steps as well with regard to high-technology exports to their defence industry. All of this together is going to have an impact”. The new sanctions represent a ratcheting up of tensions, but European leaders are still trying to avoid using the more ballistic options on the table. German Chancellor Angela Merkel said on April 25 that any extra European measures would likely fall within the scope of “second stage” sanctions, which will target specific Russian banks/ corporates close to the government, rather than the “third stage” sanctions that would target key sectors and companies and do real economic damage to Russia. "The third stage [sanctions] will be the nuclear option, with significant risk of 'back-draft' or retaliation from Russia on the West – a ‘lose-lose’ for both sides," says Tim Ash, chief strategist at Standard Bank. "The US and West is still reluctant to go down the sectorial (akin to Iran-style sanctions) route. The trigger for this would be a clear cut Russian invasion of Ukraine – tanks/APC’s on the ground, rather than the mere appearance of little “green men” which seems to be the current 'battle order' for Moscow." Foreign and portfolio investors have until remained relatively sanguine about the crisis. While little new portfolio investment is flowing into

Russia after the initial selloff following the annexation of Crimea, most of the long-term investors in Russia are still there, fund managers tell bne. However, that could change if a major bank (and banks are thought to be in the front line now) is hit with damaging sanctions. "The market is not prepared for significant Russian institutions being sanctioned," says Standard Bank's Ash. "It would force selling of debt/equity in these institutions held by many foreign institutional investors." Still, most analysts do not expect any overt military action because that would clearly trigger a "sanctions war" that would hurt Russia badly. It would also undermine any remaining support Russia has in western Europe; several countries, including Greece, Spain, Italy and the Netherlands, have all been reticent about imposing a new round of serious sanctions, as they all have major investments in Russia. The base-case assumption is that stage one and two sanctions will be deepened, even if Russia does not move to a formal invasion, but continues with its disruptive approach towards Ukraine. The outlook for a quick and orderly resolution to the clash is looking increasingly bleak. "I think a really important point to make now is that all sides in this conflict appear entrenched, with no easy solutions, given that the positions of the various sides are diametrically opposed – the administration in Kyiv wants European orientation, which Russia is determined to stop, Moscow wants a Federalist solution in Ukraine, which the bulk of the Ukrainian population appears to oppose, while they also oppose any solution involving the break-up of Ukraine, and further bits joining Russia. Where is the room for compromise?" asks Ash. Indeed, with Victory Day that celebrates the end of World War II looming, it means tensions will probably rise further. And Russia will play on nationalistic sentiments in Ukraine, as it has done at home in the last year, to keep the situation unstable in the run-up to the May 25 presidential elections there.

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explicitly on April 6 after a meeting with the alliance's top brass: "Nato membership for Ukraine is not on the cards." And even Ukrainians of all stripes have traditionally not seemed that keen about membership; according to Gallup, as recently as last summer more Ukrainians considered Nato a threat (29%) to their country than as protection (17%), while even more Ukrainians were likely to view it as neither (44%).

Nato and Russia's war of words Ben Aris in Moscow

entral to Russia's resentment about Nato's march eastwards has been the alleged broken promise by the western military alliance that following the collapse of the Soviet Union it wouldn't move up to Russia's borders. But in a statement released on April 14 Nato stated no promise was ever made to that effect.

Nato's line on expansion is reasonable: the alliance will let in anyone that wants to join and for obvious reasons a lot of the small states that were part of the Soviet bloc signed up. However, the alliance was (and is) specifically created to counter Russia's military might, so from Moscow any expansion looks threatening.

Russian President Vladimir Putin specifically highlighted Nato's expansion as Russia's biggest beef with the West in his historic speech on March 18, when he announced the annexation of Crimea. The Kremlin has also been unsettled by the security clauses in the EU's Association Agreement with Ukraine that look like starting the process of making Ukraine's military compatible with Nato's. “The political provisions of the association deal pave the way for further entrenchment of Ukraine into the foreign policy and military orbit of the EU and the West in general,” accused a Russian foreign ministry official.

Nato has done nothing to allay those fears. Several European leaders,

However, the supreme commander of Nato in Europe, US Air Force General Philip Breedlove, adopted a different tack. Breedlove said in April that Nato troops, including those from the US, could be deployed to Eastern Europe in an effort to, "shore up defences in allied countries that share a border with Russia" – although he avoided naming Ukraine specifically. Other countries that border Russia to the east include Belarus, Latvia and Estonia, of which the latter two are also Nato members. From the Russian perspective, Breedlove's comments make Nato look like it is a tool of US foreign policy, rather than an alliance with Europe. Show us the proof In this context, Nato on April 14 released a statement entitled, "Russia's accusations – setting the record straight," which contradicts Russia's narrative on the whole vexed issue of Nato expansion. "Russian officials claim that US and German officials promised in 1990 that Nato would not expand into Eastern and Central Europe, build military infrastructure

"No such pledge was made, and no evidence to back up Russia’s claims has ever been produced" realising how touchy Moscow would be to more talk of expansion, have tried to play down any suggestion that Nato would take in Ukraine. German Foreign Minister Frank-Walter Steinmeier said

near Russia’s borders or permanently deploy troops there. No such pledge was made, and no evidence to back up Russia’s claims has ever been produced," the statement said.

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RTS' 1000 is the new 500 Russia's stock market is down by almost 18% since the start of the year as the crisis in Ukraine has developed, hitting a low of 1098.55 on March 21 following the referendum in Crimea that opted for annexation by Russia. The stock market plunge is reminiscent of the last huge selloff in 2008 following the collapse of Lehman Brothers in the US. That saw the RTS fall from its all-time high of 2,487 set on May 18, 2008 to a low of 492 on January 23, 2010. That selloff was driven as much by fear as anything fundamentally wrong with Russia's companies. And Sberbank's chief strategist, Kingsmill Bond, argues the same thing is happening today. "1,000 is the new 500," Bond said in a note in the middle of April. "Thanks to five years of decent return on equity and a higher oil price, the book value of the market has nearly doubled since 2008. This implies that, at this oil price, we are close to the valuation trough reached in 2009." Everyone that follows Russian equities agrees that its stock market is ridiculously cheap, even by Russia's traditionally low standards. However, with Russian troops on manoeuvres on Ukraine's border, the fear factor is back. In 2009 the fear was of an imminent global economic collapse (averted by the liberal use of quantitative easing); this time around it is fear of war (that hopefully will be averted by the Geneva accord signed April 17).

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Putin first raised the issue of what Russia was promised during his speech at the Munich Security Conference in 2007, where he explicitly stated that Nato had promised not to expand to Russia's borders. The key meeting at this time was the negotiations between then Soviet premier Mikhail Gorbachev and German chancellor Helmut Kohl in 1989 that enabled the reunification of Germany. However, the content of what was said at that meeting has never been released. Putin seems to be saying that Kohl made Gorbachev a verbal promise not to expand, though nothing was put down on paper. Or perhaps Putin is just lying.

not ignored Russia’s concerns [to the shield]. On the contrary, the Alliance has consistently sought cooperation with Russia on missile defence. At the Lisbon Summit of 2010, Nato Heads of State and Government, 'decided to develop a missile defence capability to protect all Nato European populations, territory and forces, and invited Russia to cooperate with us'."

The mere title of the Nato statement highlights the hardening of the alliance's stance over Russia's military operations on the Ukrainian border, though it will be taken by the Kremlin as yet more evidence of Nato's aggression and arrogance. Putin complained in his March 18 speech that Russia was continuously presented with a fait accompli by the West and told, "This does not concern you," when it complained.

The increasingly tough talk bodes ill for a diplomatic solution to the current standoff between Russia and the US (and to a lesser extent a reluctant, but unsettled, Europe) over Ukraine. Brandishing military power will not intimidate the Kremlin, but unfortunately the war of words will make the lingering Cold War fears of renewed Russian aggression in Europe a self-fulfilling prophesy. It will also justify the continued existence of Nato, instead of a new European Security Agreement that the Russians have called for – something that might have helped prevent the current tense standoff.

Nato's statement drove that point home when explaining why Russia had no right to object to Nato's proposed missile defence shield in Europe: "Nato has

To Moscow, this statement will be taken as more evidence of the West's fait accompli policy towards Russia; "cooperate" doesn’t seem to give Moscow the option to "object" to the shield, as it most vehemently does.

Russia-based analysts believe the market is oversold again. In 2010 as fears of the global meltdown receded, the RTS recovered to 1,500, marking Russia yet again one of the world's best performing markets. If war is avoided and a political compromise between primarily the US and Russia is secured, then the market could again rebound in a similar way.

"Cooperate' doesn’t seem to give Moscow the option to 'object"

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account at the Latvian branch of North European bank Nordea. The shipyard at the time disclosed an "agency and freightage" agreement with Northsale for implementing the rig deal. Northsale enjoyed small company status in the UK, exempting it from independent audit.

Naftogaz corruption funnelled via western banks Graham Stack in Istanbul

talian banking giant UniCredit ignored money-laundering allegations to deal in funds connected to a controversial $400m deal between Ukraine's corrupt state energy company Naftogaz and Latvia's Riga Shipyards, according to documents obtained by bne. As bne has previously reported, the Norwegian financial company Ferncliff revealed that its subsidiary Standard Drilling directly sold an offshore drilling platform to Ukraine's national gas company Naftogaz in 2011 for $220m, contradicting claims by the Ukrainian state-owned oil and gas company that it acquired the rig for $400m from Latvia's Riga Shipyard via an open tender. This wasn't the first time that Naftogaz was involved in a deal involving such a huge discrepancy in the price it paid and the price quoted by the makers of the drilling platform. A previous, nearly identical acquisition of a similar drilling platform by Naftogaz in 2011 had raised widespread accusations of corruption and sparked investigations in Ukraine. But whereas the first deal

in early 2011 involved shell companies and a controversial Latvian-owned bank Trasta Komercbanka, the second looked superficially cleaner: using an intermediary supplier of the drilling platform that was a bone fide shipbuilder, Riga Shipyard, albeit one with no connection to drilling rigs; and instead of using the Latvian-owned

According to sources close to Riga Shipyard, these parallel bank accounts at UniCredit Latvia obscured the details of the deal and made proper oversight by the independent board members more difficult. Naftogaz paid the total contract value of $400m to Riga Shipyard's main bank account at Nordea Bank. The funds were then transferred to the shipyard's new account at UniCredit Latvia, and moved from there to the Northsale account, also at UniCredit Latvia. Northsale then made payments for the rig acquisition and to other suppliers. For instance, accounts seen by bne dating October 2012-March 2013 show around $50m in payments made to the Northsale UniCredit accounts from Riga Shipyard's UniCredit account. Riga Shipyard disputes any wrongdoing and says that details of the deal including payments are confidential. In a statement issued March 25, the Latvian company complained of a media campaign organised against it by Latvian creditors trying to have the company declared bankrupt. "Unfair information

"In the Baltics we had only a tiny presence and decided to gradually downsize and close activities" bank, bne can reveal the second deal was executed via the Latvian subsidiary of CEE banking giant UniCredit.

and statements are being distributed in the community, which fundamentally slur Riga Shipyard," reads the statement.

To complete the deal, bne has obtained documents that show Riga Shipyard used a newly registered UK subsidiary Northsale Logistics Ltd with an account at UniCredit Latvia, and set up another account for itself also at UniCredit Latvia â&#x20AC;&#x201C; parallel to the shipyard's main

Istanbul connection Between October 2012 and March 2013, Northsale transferred a total of $46.5m from its UniCredit Latvia account to the Turkish account of the tiny Istanbul ship repair company Emarine, operated by a Turkish citizen called Murat Bayrak.

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The money was ostensibly transferred for work performed on the B319 rig. But there are good reasons to doubt this because enquiries revealed that Emarine and Bayrak performed no significant work connected to the rig. "Emarine was not part of the B319 project," Salih Fidan, B319 installation site manager in Turkey, bne tells . In an interview, Bayrak declined to say what his role in the operation had been, citing confidentiality clauses in the contract. Emarine has share capital of only around €3,000, a glaring mismatch between the size of the funds transferred and the size of the company. Moreover, sources in the industry estimate the total cost of the work performed – reassembly of the rig legs – at not more than $5m. Riga Shipyard sold Northsale in the last days of 2012, which the shipyard claimed absolved it from consolidating the subsidiary on its accounts for 2012. Most of the payments to Northsale that were wired on to Emarine took place in 2013 after the sale of the subsidiary. Between January 2013 and February 2013, Riga Shipyard transferred $39.5m in multiple instalments to Northsale, which forwarded the same amount to Emarine.

Latvian police in late 2012 announced a money-laundering investigation into the UK shell company Highway Investment Processing, which was involved in Naftogaz's equally controversial rig acquisition in early 2011. Highway Investment Processing had implemented the deal via a bank account at a controversial local Latvian-Ukrainian bank called Trasta Komercbanka. Trasta Komercbanka has denied any wrongdoing. In May 2013, UniCredit declared it was pulling out of Latvia and winding up its bank there. As late as January 2013, the bank had said it planned to centralise its Baltic operations in Latvia. "In the Baltics we had only a tiny presence and decided to gradually downsize and close activities," UniCredit in Vienna tells bne. The decision concerning the Baltics was taken in 2013 and had “nothing at all” to with money-laundering concerns regarding the Riga Shipyard or any other transactions, the bank explains. The new administration in Ukraine has moved quickly to probe the corrupt dealings during the four years of ousted president Viktor Yanukovych. Naftogaz, long a nest of murky deals, has been at the centre of the investigations, with

B319 funds transferred to Unicredit Latvia account of UK company Northsale Logistics, according to agency agreement

Unknown beneficiaries?

There was surprise at the hitherto respected Timonkhin's choice of new employer, who on March 20 was placed on Ukraine's wanted list by the Prosecutor General on charges of embezzlement of around $120m of Naftogaz funds, offences described in detail in media since 2012. Timonkhin joined the supervisory board of Kurchenko's newly acquired Brokbiznesbank and in this capacity, as bne has reported, he apparently signed off on an over $70m loan to a sham firm linked to Kurchenko, which had also received millions of dollars in procurement orders from Naftogaz.

Bank Latvia

$46.5m paid to obscure Istanbul firm Emarine for work performed on B319 rig

Rum company Another angle to UniCredit's involvement with the controversial Naftogaz deal relates to UniCredit's former long-serving head of Ukraine operations, Boris Timonkhin. Timonkhin in July 2013 unexpectedly quit UniCredit's Ukrainian unit Ukrsotsbank, to head banking operations for controversial 28-year-old Ukrainian businessman Serhiy Kurchenko.

Kurchenko has since fled Ukraine. Ukraine's security service SBU detained Brokbiznesbank supervisory board chairman, Denis Bugai, on March 21 on $400m transferred by Naftogaz charges of fraud and forming a criminal subsidiary Chornomornaftogaz organisation. Interior Minister Avakov as payment for B319 rig, to Riga has accused Kurchenko and his gang of Shipyard's account at Nordea defrauding Naftogaz of around $200m.

B319 funds moved from Riga Shipyard's Nordea account to its Unicredit Latvia account

Payment to genuine suppliers in Singapore, Turkey, etc.

Ukrainian police arresting the former head Evhen Bakulin on March 21. Acting Interior Minister Arsen Avakov alleged that losses to the company under Bakulin's watch “on just three counts” exceed $4bn.

$220m paid to Standard Drilling for B319 rig

Timonkhin himself is currently in France, but denies he is on the run. In an interview published in Ukrainskaya Pravda on March 24, the former UniCredit banker denied belonging to what the SBU calls "Serhiy Kurchenko's criminal group." Timonkhin also criticised the arrest of Bugai, the Brokbiznesbank chairman, saying that Bugai was "clean." UniCredit declined to comment on whether Timonkhin had influenced UniCredit's decision to take on the Naftogaz-Riga Shipyard business. Timonkhin could not be reached for comment by bne.

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due to the undervaluation of the state company's equity contribution – licences and infrastructure – by as much as tenfold, and the private partners' sole responsibility for accounts. But attempts in 2009 to end the agreements were thrown out in the courts.

Ukraine's usual suspects Graham Stack in Kyiv

he March arrests of the Ukrainian oligarch and gas trader Dmitry Firtash and top managers in the shadowy empire of another Ukrainian gas trader, Serhiy Kurchenko, were unrelated. But the careers of both men were intimately entwined with Ukraine's state energy company Naftogaz, the scale of the corruption at which is only now emerging.

director of his holding company Ostchem Holdings Limited and of British Virgin Islands-based holding company Group DF. Since Firtash had been one of Yanukovych's main sponsors, it is unsurprising that once Yanukovych won the presidency he would bring Ukrgazvydobuvannia – producing 75% of Ukraine's domestic gas – under Firtash's influence.

On March 27, Ukraine's Prosecutor General, Oleh Makhnitsky, announced that he had placed Kurchenko and other suspects on the international wanted list in connection with embezzlement at Ukrgazvydobuvannia, a major subsidiary of Naftogaz. Kurchenko has been accused of fraud in acquiring propane produced by the company at subsidised prices and selling it on at market prices between 2010 and 2013, among other criminal schemes.

It's become increasingly clear this was the case, raising questions about the relationship between Firtash, who is awaiting possible extradition to the US, and Kurchenko, who is on the run.

Missing from the Prosecutor General's sweep of Kurchenko's gang was any mention of the former management at Ukrgazvydobuvannia such as CEO Yury Borisov, who was appointed to the post immediately following the election victory of former president Viktor Yanukovych in February 2010 and remained in the job until mid-2013. Borisov had been one of Firtash's top managers, having previously been

Joint activities An indicator of Firtash's influence at Ukrgazvydobuvannia since 2010 is apparent control over a swathe of joint activity agreements (JAA) between the state-owned company and private sector players. Firtash-linked structures in partnership with top Naftogaz managers took stakes in a number of them, which also had connections to Kurchenko. Joint activity agreements are joint ventures but without formation of a legal entity, and operated by the private sector partner. State auditors in 2009 had lambasted these agreements for allowing the private partners to take Ukrgazvydobuvannia to the cleaners,

The largest of such JAAs is between Ukrgazvydobuvannia and Karpatygaz, with 360m cubic metres of production reported in 2012. Karpatygaz is owned by the Swedish-listed Misen Energy, following a reverse takeover of the Swedish company in 2011. Ukrgazvydobuvannia at the time gushed about the new "foreign investors" bringing advanced technologies and investment to expand production threefold, and even sponsored accommodation for the Swedish football team during the Euro 2012 football championships that Ukraine co-hosted with Poland, as a gesture of goodwill towards the investors. But an examination of the Cyprus company register reveals a very different picture of Misen Energy's shareholders: 29.6% of Misen Energy is owned by Cyprus company Norchamo Limited, which in turn is owned by Heico Ventures and Suzel Enterprises. Heico Ventures was co-owner of a Firtash holding company, the Cypriot company Ostchem in 2010-2011. Both Cypriot companies feature on an internal map of the Firtash holding that was leaked to media in 2010. Firtash's holding Group DF historically denies any connection to any of the shareholders in Misen Energy, and the group's press service told bne that all its companies are listed on the official website, where there is no mention of either Misen or Norchamo. Just under 20% of Misen Energy is held by another Cyprus firm, Blankbank Investment, which is owned by Zoulian Limited and Zoulian Management Limited. In 2011 a Cyprus company with the same shareholders bought Russian chemicals plant Minudobreniya on behalf of Russian oligarch Arkady Rotenberg, a close associate of Russian President Vladimir Putin. Media reports at the time suggested Firtash

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was Rotenberg's co-investor in the acquisition. In 2010, Firtash-linked Norchamo took a 40% stake in another company that has a JAA with Ukrgazvydobuvannia, TOV Tekhprojekt. The Tekhprojekt investment links Firtash to the powerful Katsuba family of top Naftogaz managers: Volodymr Katsuba ran Tekhproject in 2001-2006, and elder son Serhiy was deputy CEO in 2000-2005, according to their official biographies. Before 2010, Tekhprojekt was owned by Cypriot company Navartis Limited, sole owner of which was younger son Oleksandr Katsuba, according to Cyprus company records, and they may have retained an ownership stake via a number of Belize and BVI shareholder firms. At the end of 2012, the Norchamo stake fell to under 25%. In 2010, along with Yury Borisov's appointment as head of Ukrgazvydobuvannia, Serhiy Katsuba was named deputy chairman of Naftogaz with oversight of procurement, and his younger brother Oleksandr also took a top procurement job at Naftogaz. In 2012 Volodymyr and Serhiy Katsuba entered parliament. The Katsubas were contacted via their parliamentary offices for comment on their connections to Firtash and Tekhprojekt, but failed to respond. Tekhprojekt also has links to Kurchenko. In June 2013, an unidentified minority shareholder sued Tekhprojekt for reducing profits and effectively siphoning off money by allegedly placing spurious orders with sham firms. "In the plaintiff's opinion, the defendants did not demonstrate the justification for such work, the price significantly exceeds the market average, and there is no evidence of the work being actually performed by the counterparty, TOV Business Consult," read the complaint, which the court ultimately threw out. The supplier in question, TOV Business Consult, is one of around 50 sham companies that journalistic investigations have identified as

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operated by Kurchenko. Business Consult is registered at the same address as Gaz Ukraina 2020, one of the group's flagship firms. Gaz Ukraina 2020 manager Arkady Kashkin was arrested on March 21 by Ukraine's security service SBU as part of Kurchenko's alleged "criminal gang that embezzled budget funds." Business Consult also features as recipient of bribes paid to tax police in Chernigov, in a separate criminal case. Already in 2008-2009, state auditors had accused Tekhprojekt and a linked company, Lekstar Service, of siphoning tens of millions of dollars from Naftogaz by overcharging for supplies – thus minimising the profits from the JAA to be shared with Naftogaz. This may have been standard practice across JAAs – and Kurchenko's network, with its ties to Ukrgazvydobuvannia, may have become the main channel for this post-2010. Revealing connections Besides Tekhprojekt, a number of other firms with Naftogaz JAAs are registered in the small Kharkiv region town of Dergachi, the stronghold of the Katsuba family, where father Volodymyr headed the state district administration in 2007-2012. At least one of these also has traces of Firtash ownership: TOV Tsefei is 50% owned by a Firtash-linked company, Ural Consulting Corporation, via a Ukrainian firm. Ural Consulting Corporation, registered in the BVI, is in turn owned by Nevis company Annex Holding, which was a holding company at the centre of Firtash's whorl of holdings, according to a leaked excerpt from the BVI company database. 50% of Tsefei is owned by a Belize firm that could not be traced. According to documents filed in the US under the Foreign Agents Act, in 2005 Ural Consulting funded a visit to the US by Firtash associate Yury Boiko, in his then capacity of head of the Republic Party of Ukraine, with meetings planned with then vice president Dick Cheney, among others. Informally, Boiko is believed to have lobbied on behalf of Firtash's controversial gas trading outfit

EuralTransGas, which US authorities suspected of links to organised crime. Boiko was energy minister in 2010-2012 with oversight of Naftogaz, and deputy prime minister with oversight of energy until March 2014. At the end of 2012, Firtash's partners Yury Boiko and Serhiy Katsuba left the energy ministry and Naftogaz respectively, while Yury Borisov left as head of head of Ukrgazvydobuvannia in 2013 – all of them replaced by confidantes of younger son of exiled president Viktor Yanukovych, Oleksandr. Kurchenko reportedly went on to work primarily for the Yanukovych "family before the president, family and assorted cronies fled in February after his regime collapsed. The full extent of fraud at Naftogaz over the last four years is only just starting to come to light, with many further revelations expected – including regarding Firtash and Kurchenko's dealings with the company. On March 21, heavily armed police arrested the head of Naftogaz since 2010, Evhen Bakulin. After an allnight session of the government on March 25-26, his successor was announced, Andriy Kobelev, a former PriceWaterhouse Coopers management consultant, and regarded as a bright, new broom. "It is hard to believe, but they have actually appointed a decent person to manage this black hole," says Sevgil Musaeva, the Forbes Ukraine journalist who first shed light on Serhiy Kurchenko and his Naftogaz connection. Firtash, meanwhile, is out on what is believed to be the world’s largest bail, €125m, pending extradition to the US on charges of overseeing the payment of bribes to Indian officials to secure mining licences for his Group DF empire in the province of Andhra Pradesh. Kurchenko's whereabouts are still unknown, but he has been placed on the international wanted list. Whatever ties these two Ukrainian oligarchs might have enjoyed previously have now been cut.

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Russia's EU envoy causes indigestion

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replied Chizhov. "They were the Crimea self-defence organisation that spontaneously sprang into action." Nobody questioned the reply. The source said: "It would have been rude, but people agreed afterwards that it was not a very good lie."

Fiona O'Cleirigh of Exaro

he Russian ambassador to the EU's blunt comments to a private lunch in Brussels about "protecting" ethnic Russians abroad in places like Estonia and Latvia, left the western diplomats attending stunned and raised fears about further armed intervention in Europe, the London-based investigative website Exaro can reveal. In comments made to a lunch club held at the Russian embassy in the Belgian capital a fortnight ago and leaked to Exaro, Vladimir Chizhov, permanent representative of Russia to the EU, described Russia as "the most dispersed nation on earth," and said that its president, Vladimir Putin, was very conscious of this. "President Putin wants to protect them," he said. The ambassador referred to a report that he said was produced by Javier Solana during his term as the EU's high representative for foreign and security policy. This, Chizhov claimed, said that if the minority population from one nation made up at least 20% of a country's population, then they should have equal rights with everybody else. One source who attended the lunch told Exaro that the Russians were preparing an excuse for intervention further afield than Crimea. "It sounded as if the foreign office in Moscow had been researching busily through obscure documents," the source said. Russia has justified its annexation in March of Crimea, the Black Sea peninsula that previously was part of Ukraine, on the grounds that it was protecting ethnic Russians in the region, who make up a majority of the population. The region was previously part of Russia. Chizhov told the lunch club in Brussels that Russians made up 38% of the

population in Estonia, and 28% in Latvia, but had been declared "non-citizens" by the two governments. Official figures show in Latvia that 27% of the population is ethnic Russian against 25% in Estonia and 6% in Lithuania. The "non-citizen" label is because these Soviet-era migrants who stayed on in the Baltic states after the restoration of independence in 1991 have never bothered to take the simple naturalisation tests required to gain citizenship. Chizhov said that Russia remains concerned about the actions of the governments of Estonia and Latvia towards ethnic Russians in the two countries. His comments come amid growing tension in eastern Ukraine. Clashes between ethnic Russian protestors demanding greater autonomy (or

A guest from Greece light-heartedly pointed out that Crimea used to be part of Alexander the Great's empire. Perhaps, Crimea should be handed back to Greece, he suggested. The source said: "We all laughed a lot, and even the ambassador laughed. But I do not think that is going to happen." Chatham House Rule The informal group, mainly Brusselsbased diplomats and Belgian businessmen, meets once or twice a month at different locations in Brussels. It hears talks from special guests under the so-called "Chatham House Rule", meaning that attendees are asked not to attribute comments to the speaker. Chizhov was scheduled as a speaker several months ago, before tension between Russia and Ukraine reached crisis point over Crimea. A former deputy foreign minister, Chizhov was

"President Putin wants to protect them" outright independence via referenda) and Ukrainian security forces are growing, with the Russian Foreign Ministry warning on April 9 that a crackdown by the authorities could lead to civil war. "We are calling for the immediate cessation of any military preparations, which could lead to civil war," the ministry was reported by CNN as saying in a statement on its website. During a question-and-answer session at the lunch, one guest asked the ambassador who the mysterious masked figures were that had appeared in Crimea prior to the takover. The well-armed, professional military men had no identifying markings on their uniforms. "They were not Russians,"

Russia's special representative for the Balkans between 2000 and 2002. He speaks English, Greek and French. The source told Exaro: "Having attended many previous lunches, he offered many weeks previously to host a lunch himself, and to give a talk. His subject was not specified at the time. Events happened, and the occasion turned out to be perfect for discussing the hot subject of the day â&#x20AC;&#x201C; Crimea." Kirill Ivanov, press attache at Russia's permanent mission to the EU, declined to comment on Chizhov's comments. Ivanov said that the meeting was "closed", under the Chatham House Rule, "and this is why any comments on that are impossible."

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Prague's nuclear Hunger Wall Nicholas Watson in Prague

ccording to myth, the purpose of Prague's Hunger Wall built in the 14th century was not strategic but to employ and thus feed the poor. On April 10, its modern-day equivalent, the â&#x201A;Ź8bn-10bn expansion of the Temelin nuclear power plant, was finally demolished when the state utility CEZ announced the tender had been cancelled. In the five years since CEZ announced what it claimed would be the Czech Republic's "most transparent" tender ever, the process had degenerated into such a fiasco that its cancellation was the worst-kept secret in Prague for over a year and appeared to have been only kept going in order to provide work for various officials and consultants. "CEZ should have made the decision to cancel the project a long time ago â&#x20AC;&#x201C; it

would have saved tens of millions of euros of shareholders' money, as well as time and energy the bidders had to put in," says Jan Ondrich of Candole Partners, a Prague-based advisory firm that has been a long, trenchant critic of the project. In its April 10 statement explaining the decision to cancel the tender, CEZ blamed the "turbulent" evolvement of

factors, today all investments into power plants, which revenues depend on sales of electricity in the free market, are threatened," it explained in tortured English. However, the project's legions of critics have argued that it never made much sense, even before the incompetent politicians and officials managed to hole it completely.

"CEZ should have made the decision to cancel the project a long time ago"

the electricity sector in Europe since 2009. "While originally the project was fully economically feasible given the market price of electricity and other

Lack of support A report dating from as long ago as the beginning of 2012 by Candole Partners (which counts amongst its clients

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power plants," Sobotka told reporters. "Moreover, the development of energy markets is unpredictable to a maximum extent, and the government can hardly pledge to guarantee electricity prices." Indeed, wholesale power prices in next-door Germany have plunged 34% since 2010 from over-capacity and falling fuel costs. On March 25, data compiled by Bloomberg showed Czech power for 2015 had dropped to its lowest level since the contract’s start in June 2012. And analysts say there is little prospect of prices rising soon given the huge expansion of wind and

Areva was furious and set about contesting the decision through the courts, which had the effect of stalling the tender and making any decision to choose a winner nigh-on impossible. On April 17, Areva announced it was suspending its legal action in light of the tender being cancelled. With Russia's subsequent annexation of the Ukrainian peninsula of Crimea and its continued backing of militant groups in eastern Ukraine, the decision to eject Areva also meant that Westinghouse by default became the only possible winner of the tender.

"A country that uses military aggression in foreign policy is a security risk for the Czech Republic" solar in Germany, as well as low hard coal and carbon prices, which make coal a more attractive fuel for power generators.

competitors of CEZ), estimated that the CZK200bn project to build two new reactors at the Temelin nuclear power plant had only a 46% chance of breaking even over its 40-year lifetime. "If we were potential investors in the project, we would probably decline. Investors typically want a 95% ratio to be sure that they won't lose money," Candole's Ondrich said at the time. "This is like taking €8bn and betting on the flip of a coin whether it's heads or tails." Clearly investors agreed because CEZ fruitlessly cast about for state support for years, before all hope was lost when the recently formed coalition of Prime Minister Bohuslav Sobotka sternly ruled it out on April 9. "We have clearly declared that we currently refuse any type of state guarantee. Nobody should be surprised at this considering the experience we have had with support to renewable sources, above all to solar

Given the deteriorating economics of the project, its supporters began to lean on arguments about energy security, but these too were undermined by murky decisions taken by officials in government and management. Ejected The worst was the shocking move by CEZ in 2012 to eject France's Areva from the tender, which left only the US-based Westinghouse Electric and a consortium led by Russian state nuclear holding Rosatom in the race. CEZ airily said Areva had "failed to meet statutory requirements" and "not fulfilled some other crucial criteria defined in the tender", though subsequent leaks of documents called this into question. According to bne sources, the decision to eject Areva was on the instructions of the office of the previous president Vaclav Klaus, a notorious interferer with a penchant for taking high-handed decisions, even in cases where he had no right to do so.

"Personally, I cannot imagine that Russians will continue to take part in the tender to expand Temelin because a country that uses military aggression in foreign policy is a security risk for the Czech Republic as well," Jiri Dienstbier, minister for human rights, said on March 3 – a view shared by several of his colleagues. Temelin redux Westinghouse and Rosatom expressed dismay at the tender's cancellation, though it was widely greeted with relief by investors in CEZ. But for the nuclear industry and the myriad other parties – both official and unofficial – that benefit financially from such projects, CEZ's chief executive Daniel Benes offered a sliver of hope that they would not go hungry for long. "It does not mean that we have stopped nuclear power plant construction in the Czech Republic," he said in a statement. "[The] risk that within 20 years we will not be able to cover [electricity] consumption of our country is still acute."

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Slovak corruption goes round and around Tom Nicholson in Bratislava

key Slovak witness in a multimillion-euro international VAT fraud case has told police that top members of the Slovak ruling Smer party, the Tax Office, police and the secret service knew of the scandal and profited from it financially, bne can reveal. The revelation is sure to cause further consternation in the EU, which in its latest Anti-Corruption Report released in February found Slovakia to be generally perceived as the most corrupt country in the EU. According to sworn testimony that remains part of a confidential police investigation but obtained by bne, Milan Chovanec, 36, a lawyer from the eastern Slovakia city of Presov, has implicated MP Stanislav Kubanek, Deputy Interior Minister Jozef Bucek and the former head of the elite antiorganized crime unit, Michal Kopcik, in a cross-border fraud spanning five years from 2006 to 2011. The officials have denied his claims. Chovanec made the allegations over the course of dozens of police interviews in January and February 2014, transcripts of which have been seen by bne. Police regard the Presov lawyer as one of the main architects of the fraud, and took him into pre-trial custody in November 2011. To date, 45 people have been charged in the case with tax and racketeering offences, with another

40 regarded as suspects. Damages are pegged at €20m, but according to unofficial estimates could exceed €50m. Carousels According to the police indictment in the case, filed in 2012, the tax fraud revolved around the Slovak company Tatra Trade Corporation (TTC) and involved over 100 Slovak, Czech, Polish, Latvian, Hungarian, US and Irish companies. These companies, investigators claim, dealt in gold bars, bricks, oak flooring, platinum, oil and other goods in a classic "carousel" scheme. Such VAT scams typically involve the re-export of goods across international borders. As the goods cross each frontier, the exporter can demand

Since coming to power in 2012, the Smer party-led government of Prime Minister Robert Fico has targeted VAT crime for special police attention, claiming that widespread fraud is costing austerity-straitened state coffers hundreds of millions of euros annually. A new electronic VAT audit system, introduced earlier this year, revealed the size of the problem: of over 14m VAT transactions reported in January, 1.7m were identified as “risky” by the Tax Office. Officials identified 108 previously unknown “carousel” schemes involving over 800 companies. “For the first time, we have an accurate picture of VAT anomalies and of networks where the entire VAT sum disappears,” said Tax Office head Frantisek Imrecze April 15. “Our response to this information will be swift.” However, senior police and prosecution sources tell bne that aggressive investigations, like that of Chovanec’s TTC, could unearth more embarrassing links between suspected VAT scammers and highly-placed Fico administration officials in the months to come. Police protection According to information from sources connected to the TTC investigation, Chovanec decided to talk after two years in custody in the hope of being released to provide financially for his young child and common-law wife, Katerina Simcikova of Prague, who has also been charged in the case. According

"These companies, investigators claim, dealt in gold bars, bricks, oak flooring, platinum, oil and other goods in a classic carousel scheme" the return of VAT paid. In fraudulent "carousel" transactions, either no goods are actually shipped, or the consignments are traded among shell companies until they wind up back with the original exporter, completing their "carousel ride".

to transcripts of Chovanec’s testimony, he told police that he hoped that if his evidence proves authentic, he will receive a reduced sentence. He remains behind bars. bne attempted to contact Simcikova, but her number has been disconnected.

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In his testimony, Chovanec alleges that his TTC company came early to the attention of the police, but that far from prosecuting him and his associates, Michal Kopcik as head of the UBOK elite racketeering unit during the first Fico government of 2006-2010 agreed to protect the gang in exchange for a share of the proceeds. "In return for providing me with 'police supervision', he [Kopcik] received quarterly payments of at least â&#x201A;Ź10,000 each," Chovanec told police. "Our cooperation began in 2007, mainly with regard to TTC's dealings in gold bars. Kopcik helped to thwart the work of the police anti-fraud unit." Kopcik rejected Chovanec's claims. "These accusations are pure lies. I intend to file a libel complaint," he said in a statement when approached for comment by bne. Chovanec told police in jailhouse interviews that his activities also attracted the attention of ostensible "fixers", such as a man he described to police as "Miroslav", and who promised to help him have accomplices selected as heads of local tax offices to facilitate further tax crimes. "Miroslav had contacts to people who worked in Banska Bystrica (the seat of the national Tax Office) and who comprised a group of top Tax Office bureaucrats, police and secret service officers, people who could influence decisions taken by these institutions," Chovanec claimed in his testimony. "The Banska Bystrica group had detailed information on TTC and its business activities and partners, meaning that at any point they could have launched Tax Office audits and police arrests against me and my business partners. They also had detailed information about my personal life and the lives of my associates." Chovanec claims to have paid hundreds of thousands of euros in bribes and extortion money to Miroslav and his group. Smer MP denies taking payments But the gravest implications arising from Chovanec's testimony concern the

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Rookie stuns veteran in Slovakia

Tom Nicholson in Bratislava For a political greenhorn, president-elect Andrej Kiska looked remarkably composed after stunning leftist veteran Robert Fico to take Slovakia's highest office March 29. Kiska, 51, an entrepreneur-turned-philanthropist, won almost 60% support compared with 40% for Fico, the Slovak prime minister. Despite the margin of victory, the Slovak electorate remains deeply divided between rural voters who favour authoritarian populists like Fico, and urbanites who prefer western-style liberals like Kiska. Voters are also clearly disgusted with mainstream politics following an eviscerating scandal from 2012 known as "Gorilla", in which secret service files implicated the main right-wing parties in systemic corruption stretching back years. In Slovakia's parliamentary system, the presidency is a largely decorative function, albeit one with politically useful powers such as appointing judges and issuing amnesties. The significance of Kiska's achievement thus may lie more in what it says about the mood of the electorate ahead of parliamentary elections in 2016. "Kiska's margin of victory is not just a loss for Fico and his (social democratic) Smer party," says political scientist Jan Baranek. "It's a sign that something is changing in our society. As if people were rejecting standard, party-based politics in favour of something off the radar." Kiska, whose consumer-credit business earned him millions in the 1990s, went on to found the Good Angel charity, which supports the families of terminally ill children. He is not the first non-politician to win high office in Slovakia recently: last year, Roma-baiting extremist Marian Kotleba was elected regional governor in Central Slovakia ahead of a Smer party incumbent. "I think this new predilection for 'apolitical politicians' is a risky development, but that's how the voters decided," says Baranek. Fico's political opponents hailed the landslide loss as a damaging blow to the prime minister, who has not lost a national election since 2002. "This was an important referendum on Fico, his government and his methods, and voters sent him a clear message," said Daniel Lipsic, a former Christian Democrat who has broken away to form a new party, Nova. Rado Prochazka, a constitutional law expert and MP who also ran for the presidency, says that now the presidency has been lost, Smer politicians might have less incentive to govern responsibly. "I fear it's going to be open season on corruption," he explains. But the defeat, while embarrassing, hardly weakens Fico or his party, which continues to hold a comfortable majority in parliament and voter support of around 40%. Cabinet minister Marek Madjaric, who ran Fico's campaign, said the election results showed that Slovaks were happy with Fico as PM and did not want to see his power diluted through a sideways promotion to the presidency. "If there is any question of someone taking a political fall for this result, it should be addressed to me as campaign chief, not to the prime minister," he said.

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alleged knowledge and participation in the fraud of two Smer party officials who remain in top posts today. The name that comes up most often in Chovanec's extensive testimony – over 50 times – is that of Stanislav Kubanek, who serves as deputy chairman of the Smer party caucus in parliament and as the party's regional boss in Presov. When contacted by bne, Kubanek denied any knowledge of the scam or of the individuals involved. "I don't know who these people are, and I have no knowledge of the matters you refer to," he said April 1. According to Chovanec, Kubanek allegedly facilitated cooperation between the VAT gang and the head of the local tax office in Presov. From 2007 to 2009, this office allegedly returned about €3.5m in fraudulent VAT rebates to the Renoir company of Presov,

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Palonder, 61, admitted during an interview with bne that he knows the Chovanec brothers, but said he had not taken part in any tax fraud. "They kept asking me to contact people who could influence tax office decisions, but I never did," he claimed on April 3. Palonder said the Chovanec brothers had paid him €830 a month – a handsome salary in Slovakia's impoverished east – and had given him an SUV to use. He claimed his duties were limited to picking up the Renoir company's mail and driving Chovanec family members around Presov. "The money was like a life-line to me," he said. "I enjoyed having a lot of free time, and everyone envied me for being so rich with a big car." Palonder failed to explain, however, how he had managed to hoodwink his employers – the organizers of a

"I enjoyed having a lot of free time, and everyone envied me for being so rich with a big car" owned by Chovanec's brother Ivan. "This cooperation [between Renoir and the local tax office] was overseen by the Smer party boss in Presov Stanislav Kubanek, who took a cut of 8% in cash of all VAT returned to Renoir," Milan Chovanec claimed. bne attempted on several occasions to contact Ivan Chovanec, but without success. Milan Chovanec alleged to police that the pay-offs and all communication with Kubanek were arranged through Vladimir Palonder of Presov. Although Chovanec was not present at any meetings or transactions with the Smer official, "I was present during telephone conversations between Kubanek and Palonder… I had no need to independently verify Palonder's claims to have reached a deal with Kubanek, because we regularly received proof from all sides that it was so."

sophisticated criminal conspiracy – for over a year into believing he was arranging crucial political and police protection, when in fact he was doing nothing of the kind. "I just wanted to keep them happy, that's the kind of guy I am," he told bne. "I told them it was all arranged, and they never pressured me." Interior Ministry: Payback for police successes Deputy Interior Minister Bucek, according to Chovanec, helped to take police heat off the main company involved in the fraud, Milan Chovanec's TTC. "Bucek and Kubanek communicated with senior Tax Office officials... in order to have them drop their investigations of TTC during this period, especially regarding our trades in precious metals," Chovanec claimed. Bucek denied the allegations to bne. "I have never met the individual in question [Chovanec], and I have no idea who he is. I will be filing a

criminal complaint for libel and false accusation," Bucek said. Bucek, according to Chovanec, also allegedly helped to have an accomplice appointed as head of the border police on the frontier between Slovakia and Ukraine in order to facilitate the gang's cross-border smuggling operation. "Following the appointment of this individual, Kubanek, Bucek and Kopcik received €100,000 a month," Chovanec testified to police in jailhouse interviews earlier this year. Arms trader Ladislav Pipta, a co-accused in the VAT fraud and a name police have associated with organized crime since the 1990s, allegedly promised in return to provide police with the names of rival cross-border smugglers, "thereby helping the police to improve their record of solving cases and at the same time giving himself a monopoly over the black-market trade with Ukraine," Chovanec testified. The Slovak Interior Ministry also issued a statement to bne rejecting Chovanec's testimony. "The Slovak police have been investigating this criminal organization, which claimed fraudulent VAT rebates, since 2008. Milan Chovanec is regarded as the main organizer of this group. Everyone has the right to protect himself as he sees fit, but we regard his testimony as a complete invention and falsehood. It is clearly motivated by the success of the police over the last two years in investigating VAT fraud, which has saved the state budget tens of millions of euros." The whiff of official corruption ties in with perceptions in the EU of how this member state, which was one of the first ex-communist countries to join the bloc in 2004, has singularly failed to get to grips with burgeoning corruption. In its latest "EU Anti-Corruption Report", Brussels found that corruption in a broader sense is perceived as most widespread in Slovakia. "Corruption in a broader sense is perceived as widespread in these countries (82% in Poland, 89% in Hungary and 90% in Slovakia)," the report said.

Central Europe I 29 The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS

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bne’s veteran team of journalists have more than 100 years of collective experience of reporting on this dynamically growing region and can explain the “why” of “what” is going on. Eastern Europe Russia Belarus Ukraine Central Europe Estonia Latvia Lithuania Poland Czech Slovakia Hungary Southeast Europe Slovenia Croatia Serbia Romania Bulgaria Turkey Moldova Albania Bosnia Croatia Macedonia Montenegro Kosovo Eurasia Kazakhstan Georgia Uzbekistan Kyrgyzstan Turkmenistan Tajikistan Azerbaijan Armenia Mongolia

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Antagonistic moves True, even before the election, and with the opinion polls showing strong support for the Fidesz government, Orban had promised little else but “we will continue”. Nonetheless, the unilateral decision to resume construction of the memorial to the occupation of Hungary by Nazi Germany in March 1944 – this after an earlier promise by the prime minister to discuss the issue with Hungarian Jewish leaders “after Easter” – seems particularly antagonistic. Hungarian Jews and many liberals have denounced the memorial as an attempt to exonerate Hungary's role in the Holocaust, in which up to 600,000 Jews and Roma were murdered.

Non-consensual politics in Hungary Kester Eddy in Budapest

n line with the first results after the general election on April 6, Fidesz, the ruling party in Hungary for the past four years under Prime Minister Viktor Orban, has retained its two-thirds “super-majority” in parliament, winning 133 seats in the new 199-seat assembly, the National Election Office confirmed on Sunday, April 13. The result leaves the left-wing alliance with 38 seats; Jobbik, the radical right party, with 23; and the green LMP with 5. But in the first week after the vote, when it was clear that Fidesz was on the threshold of maintaining its grip on power – the super-majority allows it to change the constitution and subsequently any law if it has this level of backing – any hopes that Orban's second consecutive term might be more consensual than his first were dented by a series of controversial moves

seemingly designed to show off his power. “If you look at the first and second day [after the elections], what did you see? Fidesz [arranging a foreign ministry] visit to North Korea, the [Nazi occuptaion] memorial on Szabadsag ter [Liberty Square], an attack on the

But what of business and the economy? To a large extent, the financial markets welcomed the Fidesz win, according to Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy. “The market reaction to Mr Orban's resounding victory is telling. Just like Mr Erdogan's big win in Turkey's local elections earlier, investors prize stability and the status quo above all else,” he says, noting that immediately after the election, the forint remained below the “psychologically important” level of 310 to the euro, “while the yield on Hungarian 10-year local bonds was just some 20 basis points above its record low of 5.4% [reached] just before the Fed let the tapering genie out of the bottle last May.” However, while Spiro attributes the “muted market reaction” to Orban's election triumph in part to the improvement in Hungary's underlying

"Fidesz is going to try to continue its confrontational policy"

Norwegian embassy for supporting civil organisations in Hungary. I think it's clear, Fidesz is going to try to continue its confrontational policy,” argues Csaba Toth, director of the Republikon Institute, a liberal political think-tank, based in Budapest.

fundamentals – most notably the controlled budget deficits – it also says “far more about the recent improvement in sentiment towards emerging markets than it does about confidence in the Orban government's economic policies,” he says.

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"It's clear that the anti-Orban vote was split between the left alliance and Jobbik"

Indeed, there is a “conspicuous disconnect” between the election result and “the persistent unease in the business community about the policy regime in Hungary,” Spiro argues. Others agree. While a constitutional majority guarantees political stability, “Hungary's relations with foreign investors will remain mixed,” reckons Blanka Kolenikova, senior analyst with the London-based consultancy IHS. In particular, companies in the energy and financial sectors “are bracing for another term of unpredictable policies,” she says, given Orban's declared intention of bringing at least 50% of the banking sector into Hungarian ownership, along with creating a not-for-profit utilities sector. Further, the government's pledge to reduce the current 16% income tax to a "single-digit" level, and reduce employees' contributions to pensions and healthcare, while simultaneously trying to maintain the fiscal deficit below 3% of GDP, “raises the risk of further short-term, emergency and unsustainable measures,” Kolenikova argues. Even if Fidesz turns to a more “investment-friendly trajectory,” any changes “will take a long time to take effect and improve investors' confidence,” she adds. Nasty Party Then there are fears over the rise of Jobbik, the far-right party, which

increased its share from 17% to 21% of the total vote. While this could encourage Fidesz to adopt more nationalistic policies to "defuse" power on the far right, most analysts say Jobbik has benefited from a “protest” vote. “It's clear that the anti-Orban vote was split between the left alliance and Jobbik. These [new votes] are not necessarily from people resonating with Jobbik messages,” says Csaba Toth. It's a thesis bne can confirm, albeit from anecdotal evidence. Quizzed in an upmarket Budapest shopping mall just prior to the election, Peter Cseh, 45, would appear to represent exactly this trend. Asked to comment on the Hungarian economic environment, he replied: “Business-wise, I do not feel any change. There is very little cash [around], every company is limiting its spending... I started business in 2008, two years before the [last] change of government, and in those two years I felt companies were more forwardlooking and optimistic than now.” Cseh, who rents broadcasting equipment to TV stations in both the US and Hungary, did not write off the Fidesz government – its policies “may pay off in the future,” he said – but like others approached, he expressed dissatisfaction, if not despair, with the established political elite. “I'm gonna vote Jobbik, not because I like them too much, but most people feel the two main parties are the same… it's like a big show… Mine is a protest vote,” he said.

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Lembergs lets it rip While a great deal of speculation has been taking place among policy wonks about whether Vladimir Putin will try to re-occupy the Baltic states given his successful incursion into Ukraine, according to one prominent local politician the Russian army is already 10 years too late. What Aivars Lembergs, the diminutive mayor of Latvia's port city of Ventspils, lacks in stature he makes up for in public profile, somehow managing to combine the sartorial style and court cases of Silvio Berlusconi with the did-he-really-saythat quotability of Russian nationalist Vladimir Zhirinovsky. The pint-sized kingmaker, who bankrolls the ZZS political party (part of the current governing coalition), has run Ventspils as his personal fiefdom for more than 20 years, as well as acting as chairman of the Ventspils Free Port, the Latvian Transit Association, the Neatkariga newspaper and being ZZS' regular candidate for prime minister. He's also one of the richest men in the country. Ventspils caused jaws to drop on April 8 when, in a lengthy interview with the Diena newspaper, he lambasted Nato – of which the Baltic states have all been members since 2004 – saying: “When Nato troops are here, it is essentially a foreign occupation, the same as in 1940,” adding for good measure that the likes of US President Barack Obama and German Chancellor Angela Merkel are mere puppets in the hands of a “world financial oligarchy” that really controls things. On April 22, the US announced it would send about 600 soldiers to Poland and the three Baltic states for infantry exercises. To top it off, he appeared on the major Russian channel 1TV on April 16, declaring: “Europe's biggest threat comes from Nato member states, not other countries,” citing the example of the UK “occupying” Gibraltar – notwithstanding the fact that it took place in 1713.

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developments in the Baltic countries," Ivars Belte, head of the Latvian state broadcaster LTV tells bne. "Lithuania and Estonia's media leaders have shown great interest and negotiations are ongoing," Belte adds.

Hearing the Baltic voice Mike Collier in Riga

or all its well-documented faults â&#x20AC;&#x201C; political bias, historical inaccuracy and over-reliance on shows featuring canine crime fighters â&#x20AC;&#x201C; one thing you can't accuse Russian TV of is being cheap. From the CNNlookalike worldwide studios of Russia Today to the throbbing eurobeat of the New Wave music festival and countless variety show extravaganzas in between, Russian broadcasters have the desire and resources to spend big on production values. Not so the Baltic states, where the TV schedules are often padded out by repeats of ten-year-old local country & western festivals and a relentless advertising campaign for Dormeo mattresses. As a result it's hardly surprising that many Estonians, Latvians and Lithuanians (population figures show in Latvia that 27% of the population is ethnic Russian, 25% in Estonia and 6% in Lithuania) choose to watch Russian TV channels. There are lots of them, they are free to watch and they are blessedly free of men with mullets singing Boxcar Willie songs in a Schlager style. But the Ukraine crisis and the breathtaking mobilisation of Russian media as an integral part of Russia's offensive has worried Baltic politicians already fearful of the Kremlin's belief it can intervene to

protect "compatriots" in other countries. Their response: to plan the creation of their own joint Russian-language media to counter the message from Moscow. Getting the message out According to bne sources, discussion about the project is still at an early stage but is realistic. While no details have yet been made public regarding budgets and timeframes, the most obvious course of action considering all three countries currently operate state-financed Russian-language radio stations to cater

Ironically, the lion's share of content on the new channel would come from Russia and Ukraine. "We plan that the schedules would be filled with quality Ukrainian and Russian films and TV series content interspersed with regional 'windows' in which each country would have news and information programmes," explains Belte. It certainly hasn't taken long for the idea to rise right to the top of the political agenda. On April 3, Latvian Foreign Minister Edgars Rinkevics said a joint channel would be "an effective tool to counter Russian official propaganda", and just five days later Prime Minster Laimdota Straujuma told bne the matter had just been discussed by her cabinet. "We talked about the idea of a joint Baltic states TV channel in Russian, though the initiative is at a very early, theoretical stage," Straujuma said. But the other side of the Baltic strategy to reclaim the airwaves is an increasing use of broadcast bans on Russian channels â&#x20AC;&#x201C; ironic given the Kremlin's own penchant

"The Russian-speaking audience needs a channel in a language it understands and which objectively reflects the developments in the Baltic countries" to their Russian-speaking minorities would be to pool budgets, share content and try to make a little go a long way. "The Russian-Ukrainian conflict has led to a situation where waiting any longer [to do this] is unacceptable given the number of Russian channels being retransmitted in the Baltic states. The Russian-speaking audience needs a channel in a language it understands and which objectively reflects the

for pressuring and shutting down uncooperative media outlets. The Riga-based and privately owned First Baltic Channel (FBC) is already the favourite choice of Baltic Russians, but has come under fire for its proMoscow content and was hit with a three-month broadcast ban by Lithuania in October 2013 after broadcasting a biased documentary about the country's struggle to regain independence. Vilnius

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has in recent weeks slapped bans on two other Russian channels. Worried that it might face a similar ban in Latvia (where a three-month ban on Russian channel RTR came into force on April 8), FBC released a survey of 1,000 people carried out in mid-March by the independent SKDS pollster revealing that 70% of Latvians opposed shutting it down with 14% in favour and 16% undecided. Antons Blinovs, CEO of the Baltic Media Alliance company that owns First Baltic Channel, tells bne that banning channels stifled diversity of opinion and he had requested the Organization for Security and Co-operation in Europe (OSCE) to monitor the situation. "Media monitoring bodies should be aware that this could create a threat to public stability and democracy," Blinovs says. And there's still a long way to go before the first shows hit the screen. The list of joint Baltic projects that are great in theory but quickly dissolve into bickering

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is long: the Visaginas nuclear plant, the Rail Baltica rail link, a joint liquefied natural gas (LNG) terminal and more. Too little, too late There's also the feeling that whatever the merits of creating a joint Baltic

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Ultimately, entertainment is what it boils down to, says MP Ainars Latkovskis of the Unity party, which leads Latvia's governing coalition. A definite hawk when it comes to Russia, even he is dubious about the proposed channel's chances of success. "It's a

"It's a nice idea, but after a hard day in the Riga shipyards, a Russian worker wants to come home and watch something entertaining" Russian channel are, they come around 20 years too late. With the Baltic states regaining their independence in the early 1990s, there was a chance to create a "Baltic Russian" identity as an alternative to the Russian who "belongs" to Moscow. The opportunity was lost and as a result it was perhaps not surprising that Baltic Russians have looked to the old country for ideas and entertainment.

nice idea, but after a hard day in the Riga shipyards, a Russian worker wants to come home and watch something entertaining. Russian shows have huge budgets that even a joint Baltic channel could not compete with. The amount of money that would be available wouldn't even buy a tank let alone an entertaining show," Latkovskis tells bne.

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of evidence on April 14, most of which consisted of wheeling in one geekylooking witness after another. On a doomed mission to track down a cup of coffee – that day the courthouse cafeteria was also operating a lockeddoor policy – Poikans retained his good humour even if behind his smile was a faint trace of concern. Given that he could face a potential two years in jail if found guilty, that's hardly surprising.

The truth on trial in Latvia Mike Collier in Riga

n April 14 the controversial trial began in Latvia of Ilmars Poikans, who made international headlines under the pseudonym of "Neo" in 2009 when he leaked embarassing tax records of the Baltic country's elite. Just when the EU is accusing Russia of launching a bellicose propaganda war over Ukraine, such conduct closer to home is an unwelcome reminder of how low parts of the EU can still sink in guarding freedom of expression and the press. Controversially, Judge Una Melameda confirmed that Poikans' defence on charges of obtaining and publishing private data would be heard in closed court with no members of the press allowed in to the hearing, citing commercial confidentiality issues. However in making the announcement she surprised the few journalists in attendance by naming the "financial institution" behind the case as ABLV bank, revealing the identity of what had previously been referred to only as "Bank X" but which the investigative

journalism outfit Re:Baltica had already outed in the pages of bne as far back as last November. Re:Baltica also noted the unusual way ABLV suddenly appeared as the plaintiff after several banks were apparently approached by police and invited to participate. The precise nature of ABLV's commercial secret remains a mystery

Facts of the case In 2010 a whistleblower known only as "Neo" – a pseudonym taken from the Matrix series of movies - obtained 7.5m classified files from Latvia's tax authority, the State Revenue Service (SRS) after discovering a simple flaw in its electronic security system. He released selected data into the public domain via investigative journalist Ilze Nagla to show that senior state employees were continuing to pocket large wages and bonuses even as hundreds of lower-paid workers were losing their jobs and having wages slashed by a third as part of an austerity drive following the 2008 crisis. His disclosures included senior staff at bailed-out Parex Bank, the financial regulator (FKTK), the Latvian central bank and state-owned power utility Latvenergo. Months later, Neo's identity was revealed to be Poikans, who worked as a researcher and computing expert

"I'm surprised anyone could look at the lists I released and see commercial secrets in them" – and thanks to Judge Melameda it is likely to remain so. "I'm disappointed the court is closed. I'm surprised anyone could look at the lists I released and see commercial secrets in them," Poikans told bne during a break in proceedings at the Riga Central District Court after the first four hours

at the University of Latvia. He was subsequently named Latvia's "European of the Year" in an online public vote. But in 2010 police raided the home of Nagla, the journalist who had been helping Poikans get his revelations to the public while protecting his identity. Nagla complained to the Riga Central

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District Court but had her case rejected, forcing her to take it to the European Court of Human Rights (ECHR), which ruled the Latvian state had violated the European Human Rights Convention with regard to freedom of expression and ordered that she be paid compensation of €20,000. Nagla was among the few non-geeky witnesses on April 14 in court and told bne she was surprised Poikans was

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parliamentary committees. In future we may see some changes, and this case might help with that." The bank Founded in 1993 when it was known as Aizkraukles Bank, ABLV Bank is currently the largest privately-owned bank in Latvia with offices in many countries of the Commonwealth of Independent States (CIS), including Russia, Ukraine, Kazakhstan, Belarus,

"I think they knew about the security hole and they were trying to hide it" being held responsible for the leak rather than the tax authorities. "I think they knew about the security hole and they were trying to hide it," Nagla said. "As far as I know, all that happened in terms of consequences was that a couple of people in the IT department of the tax authority had their wages decreased for a couple of months. But they are the ones who are funded by the taxpayer and are entrusted with public information." Nagla added that while her own case was concerned with rights rather than directly with whistleblowing, "The European Court of Human Rights admitted the information we released was of public importance so I hope that will help with this case." Lawyer Martins Mits, a human rights expert who is not directly involved in the case, said it was "not particularly unusual" for a case supposedly involving sensitive business secrets to be heard in closed court, though it would place extra importance on the ultimate judgment being fully explained. "From the human rights perspective, it's important the public has full information. In principle the judgment should be made public, however there is also quite strong protection of private data in Latvia, though I understand discussions about where the balance should lie have already started in

Tajikistan, Uzbekistan and Azerbaijan, as well as an office in Cyprus and a subsidiary in Luxembourg. In 2013 it made a profit of €43m and boasted assets worth €3.32bn. ABLV was named by lawyers representing the accountant Sergei Magnitsky, who was investigating a massive Russian VAT fraud but was himself arrested and died in Russian police custody, as one of the banks through which the money was illegally channelled, though the lender denies the claim. In a 2012 report, Global Witness claimed ABLV handled a $30m payment from Kyrgyzstan, which was suspected to be part of a moneylaundering scheme. ABLV denies that allegation too. ABLV is also one of only three Latvian banks classed as of systemic importance and therefore subject to direct oversight from the European Central Bank. Coincidentally, bne understands that the other two banks subject to such oversight – Swedish owned Swedbank and SEB – are also the other two banks prosecutors tried unsuccessfully to enrol in the case against Poikans. Its general business ethos is clear on its homepage where it somewhat eugenically declares: "In business, like in sports, only the weak may be happy with mere participation."

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Solid foundations The recovery now appears broad enough to be sustainable over the longer term, says William Jackson, emerging markets economist with Capital Economics. In a new analysis, he finds that Poland's growth has solid foundations.

Poland shakes off slump Jan Cienski in Warsaw

n what is becoming something of a pattern in recent years, Poland is again set to post some of the EU's fastest economic growth rates this year and next – a sign that central Europe's largest country has shaken off last year's slump. In its latest economic forecast, the European Commission estimates that Poland will see GDP growth of 2.9% in 2014 and 3.1% in 2015 – that makes it the best performer among the EU's larger countries. “I think we can be optimistic,” says Marek Belka, the governor of the National Bank of Poland. “Poland does not really suffer from any economic imbalances. We don't need any sort of a dramatic budgetary tightening. We don't have a problem with an excessive current account deficit. Debt, both public and private, is moderate.” Poland most recently showed its unexpected economic resilience in 2009, the year when it was the EU's only economy not to fall into a recession. After that, as the Eurozone struggled to stave off a collapse and other emerging European economies were hammered by falling exports and budgetary problems, Poland's resilient consumers and strong export sector kept the economy purring. The wheels almost came off last year,

when the economy posted a lacklustre expansion of only 1.6%, as consumers stopped shopping in order to rebuild their tattered savings accounts. What little growth there was came mainly from net exports. But by the end of last year growth was again accelerating after coming in below 1% in the first half of the year as domestic demand and investments both returned to life. As growth has returned, inflation is still very low – only an annual 0.7%, far below the 1.5% marking the bottom bound of the central bank's inflation threshold. Inflation is only expected to hit the bank's preferred rate of 2.5%

The first is that the bulk of Poland's trade is with Germany, where Polish factories have become an indispensable part of the German supply chain. With Germany’s economy now expected to grow 1.8% this year and 2.0% in 2015, Poland's is being pulled along in its wake. Investment is also recovering, as banks are becoming more willing to lend and the next EU budget again opens a spigot of structural funds flooding into Poland. Those factors, together with rebuilt household savings, which will allow consumers to start spending again, coupled with low inflation and falling unemployment, have Mr Jackson predicting a robust recovery. “All of these reasons suggest that the recovery in the Polish economy over the next few years could be stronger than most seem to expect,” he writes. “Of course, the economy remains vulnerable to a fresh relapse in growth in the eurozone, and in Germany in particular. But assuming this is avoided, we think Polish GDP could grow by 3.5% this year and next. These forecasts are above the consensus and would make Poland the

"Poland's main focus should be on making its labour market much more effective" next year. That means rate hikes from today’s record low 2.5% benchmark rate are unlikely this year. “I see this year as a year of stabilisation,” says Belka. With growth rebounding, unemployment is finally beginning to drift lower, hitting 13.9 per cent in February, down from 14 per cent a month earlier.

fastest growing economy in Emerging Europe.” That does not mean that there is nothing for the government to do. Poland is still in the European Commission's excessive deficit procedure with the 2013 deficit at about 4.4% of GDP, far above the

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Commission's maximum of 3%. But with the finance ministry pencilling in a conservative estimate of only 2.5% growth in its budget calculations for 2014, Mateusz Szczurek, the finance minister, expects the country to have little trouble hitting deficit targets of 3.3% in 2014 and 2.9% in 2015. Reforms needed The short- and medium-term outlook looks optimistic, but problems loom over the longer term. Szczurek notes that Poland's poor demographics, with high migration, an ageing population and very low birth rate, will cause huge challenges. “I think that over the next years demography will start to work against us,” he says. That is spurring calls for greater enthusiasm for often politically difficult economic reforms. Poland's governments in the early 1990s set the groundwork for the successful transition from communism to a market economy, and a fresh burst of reforms at the turn of the century are responsible for strong performance in recent years. However, the centrist government of Prime Minister Donald Tusk has been more preoccupied with saving the country from the global economic crisis than with further deep reforms. That will have to change if Poland is to continue catching up to west European living standards, says the OECD, the club of rich countries, in its latest report on the state of the Polish economy. Poland's main focus should be on making its labour market much more effective, said Angel Gurria, the OECD's secretary general, in March. “Poland has made considerable progress in transforming the structure of its economy, making it more competitive and bringing about convergence in living standards with other European countries,” he told reporters. “Despite this success, unemployment is still far too high, and restrictive product market regulations continue to hinder economic activity. Reforms are needed for Poland to build on its strong track record and launch itself as an innovation–based economy.”

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Total joins Polish shale gas exodus

Tim Gosling in Prague Total said in April it would join the exodus of companies that are leaving Poland's hunt for shale gas, dealing another blow to Warsaw's dream of becoming self-sufficient in gas. A Total spokesman said the French company did not renew in April its only shale gas exploration licence in Poland. Despite the presence of gas, Total concluded the area it was exploring, in eastern Poland near Chelm, is not economically viable. "Poland remains a promising country for shale gas, but the exploration process is in its infancy and the industry needs more data and time to understand the geology of Polish sedimentary basins," the spokesman said. The exit of yet another big oil and gas player is hugely disappointing for the Polish government, which has spent 2014 trying to resurrect interest in its nascent shale gas industry. On the back of estimates of massive deposits of unconventional gas, Poland originally hoped to emulate the US in becoming a major gas producer and no longer have to rely on Russia for most of its gas. From 2010 foreign investors snapped up licences to explore for shale gas, but the enthusiasm soon waned as reserve estimates were slashed and test drilling results disappointed. Several, including Exxon Mobil, Marathon Oil and Talisman Energy, have since quit. Poland this year launched a new charm offensive to persuade those foreign investors still on the ground to stay and raise their efforts, and others to take another look. Recently appointed Environment Minister Maciej Grabowski was drafted in to spearhead the renewed push for foreign experience with drilling for shale gas and cash. "This year, I think at least 30 wells for shale gas will be made," Grabowski said in February. "To date there were 55. This year will be a turning point for shale gas". On March 11, the government announced it approved draft legislation on a regulatory framework and tax regime designed to boost investor interest. Previous drafts had been slammed by investors, while the government's failure to finalise the legislation had left huge uncertainty for companies who were being urged to spend big on expensive exploration efforts. However, as Tamas Pletser of Erste Bank has pointed out, Warsaw can offer whatever regulatory and tax temptations it likes, but it can't overcome the fact that test drilling indicates many Polish shale gas deposits are not commercially viable. "The new law was missing for a long time, but what we really miss is the good results of the fracturing," he said. There has been some good news this year, as London-listed San Leon said in late January that it's close to producing "the first commercial shale gas flows in Europe". But much more will be needed to halt more from leaving.

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Turkey's football e-ticket system scores own goal David O'Byrne in Istanbul

urkish football is no stranger to empty stadia, with the football authorities regularly ordering matches to be played behind closed doors as punishment for the misbehaviour of fans and players alike. But the April 20 derby match between fierce Istanbul rivals Fenerbahce and Besiktas was different. With Fenerbahce needing only two points to clinch the Turkish super league, Istanbul's 80,000-seat Olympic stadium should have been crammed. Instead, a row over the introduction of a new compulsory e-ticketing system saw most fans boycott the game in protest, with only 8,178 shelling out for the new cards and joining 10,812 existing season ticket holders.

At issue is the newly introduced Passolig card, which as of April 14 became the sole means by which members of the public can attend football matches in Turkey's top two leagues. Fans are obliged to pay for a pre-paid card, debit card or credit card from Turkey's Aktif Bank, onto which they can "upload" tickets. For this service the bank charges a fee. Fans can also use the card for other banking activities, as well as use it as a photo ID that's now necessary to enter any football stadium. Criticism Critics have condemned the new system on numerous grounds. They argue that fans are being charged a fee for buying

tickets through a bank whose owners have close ties to the government and to which they have to supply all their personal data. This is a move, they argue, that has sinister overtones given the recent passing of a law criminalising the shouting of political slogans in sports stadia in the wake of ongoing antigovernment protests in which football fans have been noticeably prominent. "There is no gain for either the supporters or the clubs," argues Bagis Erten, a football columnist on Turkish daily Radikal, suggesting that criticism from the clubs â&#x20AC;&#x201C; several of which are quoted on the Istanbul BIST stock exchange â&#x20AC;&#x201C; has been muted because

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of fears of souring relations with the government. According to Kemal Hacioglu of the Turkish Football Federation, the new card is meant simply to combat hooliganism – admittedly a perennial problem in Turkish football – and stems from a law passed in 2011 obliging

in credit cards, so it's difficult to see how this fits with their business model," says an Istanbul banking analyst who asked not to be named. Opposition politicians have gone further, alleging that Calik has been "gifted" a monopoly on ticket sales – a potentially useful source of revenue for

"When you see that Fenerbahce and Galatasaray average crowds of more than 30,000 a game, 70,000 applications is pathetic" the Federation to introduce an e-ticket system. "Obviously it will take time to be accepted for next season, [but] we don't expect any problems either in uptake or implementation," he says, reporting that 40,000 cards have already been sold and another 70,000 applications are being processed. But Erten believes the uptake will be slower than predicted and that fan groups might challenge the new system in the courts. "When you see that Fenerbahce and Galatasaray average crowds of more than 30,000 a game, 70,000 applications is pathetic." Erten also asks the very pertinent question: "How can you have a system like this operated by a single bank?" Banking Controversy Indeed, it is the role of Aktif bank, a small investment bank with only eight branches, that is the centre of the controversy. As a subsidiary of Turkey's Calik Holding, whose CEO was until December the son-in-law of Turkish Prime Minister Tayyip Erdogan, Aktif gained sole rights for the new system when another Calik company won the tender held by the Turkish Football Federation for the development of an e-ticketing system. "Aktif is a corporate investment bank, not a retail bank, and has no experience

a group with a large short-term debt portfolio and which failed to conclude a $300m bond offering in late 2012. Hacioglu of the Turkish Football Federation points out that the contract was awarded following an open tender in which Calik's consortium gave the best bid. "The main banks didn't enter the tender, they told us they didn't see it as being sufficiently profitable," he says."We awarded the contract to the company offering the best sponsorship package –

could we have done otherwise?" Hacioglu points out that having already paid $50m for the card infrastructure, Aktif's outlay will total around $200m over the next decade. Hacioglu also defends the fact that Aktif will collect comprehensive personal data on all cardholders including their ID card number, name, address, phone number and photograph, pointing out that it is a normal requirement for any card issuer and also a requirement of the law to combat hooliganism. Whether that will be sufficient to stamp out the violence that is all too often associated with Turkish football though is moot. Sadly, the Besiktas vs Fenerbahce derby game proved to be controversial for more than one reason, with Besiktas midfielder Gokhan Tore one of five people injured after a shooting incident in an Istanbul nightclub following the game. Proof, if any were needed, that violence and lawlessness in Turkey is far from restricted to football stadia.

"How can you have a system like this operated by a single bank?"

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"abusing the entire state system", and called for a technocratic government to be put in place to re-run the polls. This is highly unlikely to happen.

Macedonia’s ruling party wins big Andrew MacDowall in Belgrade

acedonia’s conservative ruling party has won a double election victory, giving it a mandate to continue its economically liberal policies that have given the country arguably the strongest business climate in Southeast Europe. But the VMRO-DPMNE of Prime Minister Nikola Gruevski will almost certainly need to seek a coalition partner to form a parliamentary majority, which would entail hard choices between unpalatable options. And the opposition has rejected the result, while a fourth consecutive term for Gruevski will intensify concerns in some quarters about the “Putinisation” of Macedonia. Initial results from the April 27 snap general election, with 80% of the ballot papers counted, showed the VMRODPMNE on 43.3%, followed by the main opposition Social Democrats on 23.2%. Two ethnic Albanian parties, the DUI and DPA, were on 15.5% and 6.8%, respectively. In a concurrent second-round presidential election, incumbent Gjorge

Ivanov of the VMRO-DPMNE – a close ally of Gruevski’s – led with 57% of the votes, while Stevo Pendarovksi of the opposition Social Democrats (SDSM) took 40%. Ivanov had already taken over 50% in the first round, but

Only game in town A stronger showing by the SDSM and Pendarovski, a widely-respected and pragmatic former foreign policy advisor to two Macedonian presidents, might have indicated that the opposition was shaking off years of torpor and could mount a serious challenge to Gruevski. But the results show that the VMRO-DPMNE remains by a large margin the most powerful force in Macedonian politics, and the still-youthful Gruevski its foremost figure. A hoped-for surge of support for Pendarovski from the Albanian community in the second round (after many boycotted the first) did not materialise. VMRO-DPMNE will take 61 seats in the 123-seat parliament, just shy of an absolute majority, projections published by Deutsche Presse-Agentur suggested. SDSM would take just over half this, 34 seats, with the DUI, which has long been a coalition partner of the VMRO-DPMNE, on 19. The more hardline Albanian-nationalist DPA

"Nikola Gruevski remains prime minister and I can also say that Gjorge Ivanov remains president" a second round was constitutionally necessary due to a turnout of less than 50%. "I can say that our fatherland is in safe hands. Nikola Gruevski remains prime minister and I can also say...that Gjorge Ivanov remains president," senior VMRO-DPMNE official Vlatko Gjorcev said. But SDSM leader Zoran Zaev accused the VMRO-DPMNE of buying votes and

would take seven seats, while GROM, a centrist outfit headed by a former SDSM mayor, and another Albanian party would get one each. The SDSM, which has been accused of running a negative campaign, lost ground from the last election that was in 2011. The result is an endorsement of Gruevski and his policies, which combine an emphasis on economic growth and investment with a dash of nationalist conservatism. It is also yet

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another setback for the SDSM, which looks directionless, and the rest of the opposition. “Nikola Gruevski has won continually since 2006 because he has identified his electorate, targeted it consistently, and developed a specific, issues-based political platform for the VMRO-DPMNE,” Chris Deliso, a Skopjebased director of Balkanalysis.com, tells bne. “In short, voters know what they're getting with the party, whereas no one quite knows what the opposition stands for; in the recent campaign, a decision was made to emphasize Mr Gruevski's alleged failings, rather than to elucidate a specific and positive contrary agenda.” However, Gruevski will still need a coalition partner. The most likely candidate is the DUI, but this would take some swallowing of pride and compromise on both sides. The Albanian party triggered the early election by withdrawing from the ruling coalition over the nomination of Ivanov as presidential candidate on the grounds that he is not “consensual”, and more broadly on the issue of the system of electing the president. The DUI argues that the current direct election guarantees an ethnicMacedonian head of state, effectively shutting Albanians out of the role (given the current heavily ethnicallydefined party politics of Macedonia, it is not incorrect). However, bne understands that the DUI’s bid to find a compromise candidate for the election descended into high farce, boxing it into a corner and leaving a boycott the only option A source close to the DUI leadership told bne that the split with VMRODPMNE was possibly a pre-electoral gambit designed to generate more votes for both parties. If so, this strategy appears to have paid off. Indeed, the incumbents benefited considerably more than the opposition from the snap poll. Given the past working relationship, the DUI may be the least-worst option, particularly as the DPA’s Albanian nationalism is even more at odds with VMRO-DPMNE’s stance. How much

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compromise there will be, and on which issues, remains to be seen. Economic successes Thus the way is clear for at least four more years of Gruevski, who can justly point to a number of achievements. “VMRO-DPMNE's campaign once again highlighted economic development and the need to attract foreign investors, so regardless of coalition partner the government's economy-first focus will continue,” says Deliso. The economy grew by 3.1% last year, and will accelerate to 3.2% in 2014 and 3.5% in 2015, according to the IMF. While this is admittedly from a low base

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Nato membership. However, both have been repeatedly blocked by Greece, which objects to Macedonia’s name on the grounds that it implies a territorial claim on its own region of Macedonia. As in the past, the issue is likely to hinge on whether the international community can force Greece into backing down, or come up with some other compromise. More concerning for many observers is the sense of centralisation of power in Gruevski’s hands, which has even been compared to “Putinisation” – a charge also levelled at Hungary’s Victor Orban and Romania’s Victor Ponta. While this may be far-fetched, there are serious

"Voters know what they're getting with the governing party, whereas no one quite knows what the opposition stands for" – this being one of Europe’s poorest countries – perhaps the most singular achievement of recent governments has been the improvement in the investment environment. The World Bank’s Doing Business 2014 report ranks ex-Communist Macedonia as 25th in the world, up from 36th in 2013. It comes seventh for the ease of starting a business, and third for access to credit. Corporate and personal taxes are a flat 10%, and a raft of incentives are available for investors, as prominent advertisements kept reminding the international business community in the years before the crisis. For a landlocked country with few natural resources, but a strategic position at the heart of the Balkans, such things matter. Macedonia has become a base for automotive component manufacturers in particular. In foreign policy, Gruevski is likely to keep lobbying for the start of formal EU accession talks, having been an official candidate for nine years, as well as

concerns about media freedom, due to factors including the state’s advertising power, political links of major media owners, the closure of independent newspapers, and an expansion of government control over broadcasting. Freedom House ranks Macedonia as only “partly free”, and last year said that the country had “suffered a significant deterioration since 2006” on the organisation’s “democracy score”. Index on Censorship refers to Macedonia as “the only country in south-east Europe with imprisoned journalists”. In this context, the opposition’s failure to gain traction takes on a somewhat more sinister hue. It is worth noting that low turnouts indicate that enthusiasm for Gruevski and his government is far from universal. Nonetheless, he seems set to remain the only game in town for some years to come.

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has been a favourite target. In March, Barekov published a list of 12 questions to Borisov: combining dramatic declamation with figures, these inquired about, inter alia: the alleged murky dealings of Borisov’s banker ex-girlfriend Tsvetelina Borislavova, the property interests of henchman and former interior minister Tsvetan Tsvetanov, and the financing of Borisov’s second home in the Sofia suburb of Boyana (which Barekov delicately called the “Boyana Brothel”).

Bulgaria's new man in town Rob Whitford in Sofia

ur party will have about 30,000-40,000 members by the time of the European elections,” Nikolay Barekov tells bne. “For the time being, we have about 20,000 members.” The party is Bulgaria Without Censorship (BWC), and 20,000 isn’t bad going for one officially only founded in late January. At present BWC and its relatively young (41) leader Barekov are certainly conspicuous movers on Bulgaria’s political scene. Whether they also prove to be shakers remains to be seen. Obviously there’s a prehistory. A successful TV presenter and chat show host, Barekov was head of the TV7 channel in February last year when its coverage of popular demonstrations against high electricity bills and the centre-right government of Boiko Borisov turned suddenly in favour of the demonstrators. That had the conspiracy theorists purring, since TV7 is judged part of the media empire of Irena Krasteva, widely presumed to be an ally of top Bulgarian banker Tsvetan Vassilev, boss of the Corporate Commercial Bank (KTB in Bulgarian).

With the government toppled, Barekov was also whistle-blower at alleged fraudulent overprinting of ballot papers by Borisov’s party GERB in last May’s parliamentary elections (though the allegations have since been dismissed by Bulgaria’s judiciary). And he went into pre-politics thereafter, with BWC established later in the year as a “civic association”, and Barekov himself developing an impressive line in shouty

Rosen Plevneliev, businessmanturned-minister-turned-president, is another bugbear. Barekov has talked of impeachment and, in February, demanded parliamentary inquiries into both Plevneliev’s GERB-backed election in 2011 – massively fraudulent, he alleged – and his business affairs. And Barekov detects an oligarchic bogeyman behind the president, namely the “Capital circle” of Ivo Prokopiev, who owns the newspapers read by what Brits would call the “chattering classes”– Capital and Dnevnik. Fair enough, perhaps, since Barekov is regularly accused of “oligarchic connections” of his own. There’s not only the Krasteva-Vassilev connection – though it’s worth noting Vassilev denies KTB finances Krasteva’s media. There’s also Krasteva’s son Delyan Peevski, quite a bogeyman in his own right. An MP for the mainly ethnic Turkish Movement for Rights and

"Barekov has developing an impressive line in shouty rhetoric about whatever bothers the demonstrators: poverty, monopolies and elite corruption" rhetoric about, well, pretty much whatever had bothered the February demonstrators: poverty, monopolies and elite corruption. Name-calling The former prime minister Borisov

Freedoms (MRF) – junior partner to the now-ruling Bulgarian Socialist Party (BSP) – it was Peevski whose attempted installation last June as chief of the State Agency for National Security precipitated months of mass anti-government demonstrations.

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At end-February, protest leaders submitted allegations of all manner of naughtiness on the part of this group to prosecutors, including some involving BWC finances. Barekov has his own answers. His connections with the Krasteva media group are “greatly exaggerated”, he tells bne, and he’s been financing BWC himself, to the tune of around €250,000 – all from legally attested incomes, he insists. And once formally registered as a party by end-March, BWC will rely on donations not exceeding €500 per person (and membership fees of €1/ month). Making moves Controversy hasn’t obviously damaged Barekov yet. With European Parliament (EP) elections due May 25, and opinion polls usually showing even the leading forces – GERB and BSP – below 20%, newcomer BWC has been showing in

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especially agriculture,” and demandboosting pension hikes of 20% a year. Other social measures include a free tablet computer for each student up to the 12th grade to promote techsavviness, while state support for the second child will rise from an “insulting” BGN35 a month to BGN350. The state also needs to act as “an investor in the revival of leading segments of our industry, especially agricultural processing and buying, and energy generation.” In energy, BWC “strongly supports” the scheme for a 7th block with US Westinghouse technology at Bulgaria’s sole nuke, at Kozloduy (no mention either way of the Russian-backed Belene NPP scheme, though he cautions generally against sole dependence on Russia in energy projects). Further, he says BWC “will fight to break up monopolies that exploit ordinary Bulgarians by charging exorbitant prices for

“We will fight to break up monopolies that exploit ordinary Bulgarians by charging exorbitant prices for electricity and water" the 5-7% range recently. Alfa Research – one of Bulgaria’s least distrusted pollsters– showed BWC at just 2.6% in January, but 5.5% in a poll published at end-February. With BWC so far in a four-way electoral pact, alliances are helping, especially one with the Internal Macedonian Revolutionary Organisation (VMRO), a venerably historic and pretty non-toxic Bulgarian nationalist party. And the message? Well, an angry insistence that Bulgaria needs jobcreation not divisive politics, experts not “criminals and politicians”. As to specifics, for instance, Barekov tells bne that small businesses “find it difficult to compete with large international conglomerates,” so need to be helped by cutting red tape, creating industrial parks to “stimulate key sectors where Bulgaria has a competitive edge,

electricity and water,” though he doesn’t specify in detail what “breaking up monopolies” meant in the utility sphere, nor by what margin prices are “exorbitant”. Governmental ideas, these, rather than specific to an EP campaign. And indeed it’s government that Barekov says he’s aiming for. Defining BWC as a “proEuropean centrist formation” with a “patriotic trend” and “centre-right chances”, he told bne that: “We want to be the leading political force and build a serious and stable coalition for the next government of the state, based on Centrism.”

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effectively encouraged corruption and was environmentally damaging. The environmental campaigners enjoyed widespread public support, with opinion polls showing that more than two-thirds of the population was opposed to widespread gold development.

Seeing red over green light for golf in Croatia Guy Norton in Zagreb

f there's one subject guaranteed to provoke impassioned debate in Croatia, it's golf. Yes, that's right, golf. While for millions of people around the world the game of golf is considered to be Scotland's greatest gift to humanity after single-malt whisky and deep-fried Mars bars, in Croatia it's more often than not seen as one of the greatest ills of global capitalism.

investment and a welcome addition to the limited menu of Croatian tourism, which currently is largely restricted to so-called "sea and sun" holidays in the high season months of July and August. Given the sharply divided opinions about the merits/demerits of the sport in Croatia, it's no surprise that golf has become the subject of such fevered discussions.

According to former New York Times correspondent James Barrett Reston, golf is a "plague invented by the Calvinistic Scots as a punishment for man's sins". In fiercely Catholic Croatia the game is often viewed in much the same light, with opponents of the 90 or so proposed golf course developments in the country keen to characterise golf as the sport of choice for global property speculators willing to wreak long-term environmental damage on Croatia in pursuit of shortterm profit.

Fore! In October 2011, after a three-year campaign, environmental groups led

Supporters of the game, however, see it as a potential source of billions of euros of much-needed foreign direct

But less than three years later and the latest round in the battle over golf is again in full swing, with environmentalists and politicians debating the pros and cons of a new forestry law, which if it receives parliamentary approval later this year, will contain provisions that will facilitate the development of golf courses on land previously protected from any form of non-forestry activity. According to Jagoda Munic, head of nature protection at Zelena Akcija in Zagreb, the draft forestry law is an ill-disguised rehash of the Golf Course Law. "It represents an attempt to push the provisions of the unconstitutional and repealed Golf Course Law through the back door," she says. "Zelena Akcija believes [the proposed legislation] is extremely detrimental to the preservation of forests, but also for the rule of law as we are again dealing with unconstitutional provisions." In March, Zelena Akcija held a demonstration outside the Sabor, the Croatian parliament, complete with banners proclaiming "Sume nisu golf igralista!" (Forests are not golf courses!) Meanwhile, inside the Sabor Agriculture Minister Tihomir Jakovina,

"This is not at all a golf project, they are trying to push a real estate development" by Friends of the Earth Croatia and Zelena Akcija (Green Action) emerged victorious in their fight for the abolition of legislation, popularly dubbed the Golf Course Law, which they successfully argued was unconstitutional,

whose department oversees the nation's state-owned forests, told lawmakers that the proposed law is "primarily intended to accelerate administrative procedures to dispose of land owned by Croatia to attract new

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investors with high-quality investment projects, which would imply increased economic activity and new jobs." There were plenty of dissenting voices to that opinion, with Josip Boric, a member of the leading opposition party, the HDZ, claiming: "It is amazing that the strategic interest of Croatia lies in building golf courses, not creating jobs. The adoption of such laws is the worst form of corruption because it represents legalized robbery." Meanwhile, Mirela Holy, a former environment minister, who recently established Orah, a green issuesoriented party, said that proposed legislation was ill conceived and would inevitably be subject to legal challenges. "If this law is passed, I'm sure that it will be submitted for a review of its constitutionality, as was the case with the Golf Course Law," says Holy. "This proposal is a dangerous risk - it's not in the public interest and I appeal to the government to withdraw it from parliamentary procedure, so as not to shoot itself in the foot." In the face of the fierce opposition both inside and outside parliament, Jakovina agreed that rather than forcing through the proposed legislation on an expedited basis, the government would hold a further parliamentary debate later this year to enable the opposition to table amendments to the law. Norman conquest Among the most controversial of the proposed golf course developments in Croatia is Golf Park Dubrovnik. The €1bn-plus project, which is Croatia's largest greenfield investment to date, was first unveiled back in 2006 but has since been delayed by legal wrangling. Alongside a golf course and golf academy designed by the famous Australian golfer Greg Norman, the project will include a giant complex of 400 apartments, 240 villas and two five-star hotels on the Srdj plateau overlooking the famous walled port city of Dubrovnik, a Unesco World Heritage site since 1979 and the leading tourist destination in Croatia.

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Last April, protesters against the development, gathered under the campaign group, "Srdj je nas!" (Srdj is Ours!), failed in their attempt to derail the development when not enough of Dubrovnik's 40,000 inhabitants turned out in a local referendum on the project. While roughly 80% of those who actually voted were against Golf Park Dubrovnik, total participation was just 31.3% of eligible voters – less than the 50% participation rate required for any decision made in local

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Another supporter is Nikola Dobroslavic, prefect of DunrovnikNeretva county, who believes it will help to extend the city's tourist season beyond the peak season of July and August. "The project will help Dubrovnik tourism, especially in the winter months." Maja Frenkel, a former deputy economy minister in Croatia and wife of Israeli businessman Aaron Frenkel who is bankrolling the Golf Park Dubdrovnik

"The project will help Dubrovnik tourism, especially in the winter months" referenda to be legally binding. Srdj is Ours leader Djuro Capor has vowed to continue to mount legal challenges against the development, which he claims would be both environmentally destructive and imperil Dubrovnik's Unesco World Heritage site status, as well as rob the city's citizens of access to the Srdj plateau. The site of the proposed golf course has a particular resonance for Croatia, as it was the scene of fierce fighting in 1991 against a combined Serbian-Montenegrin force during Croatia's 1991-1995 war of independence from Yugoslavia. As Enes Cerimagic, legal adviser to Zelena Akcija, told TV broadcaster Euronews, the Golf Park Dubrovnik project will see an area comprising of one-third of Dubrovnik's public landholdings turned into a private sector resort that will have little financial benefit for Dubrovnikans. "This is not at all a golf project as it is referred to... [The promoters] are trying to push a real estate development." The project has its local supporters. Dubrovnik's mayor Andro Vlahusic is firmly in favour of Golf Park Dubrovnik, claiming the project will create muchneeded new jobs for the city's citizens. "This project will mean new employees, around 500 permanent and 500 seasonal."

project, claims the proposed development will help Dubrovnik to achieve its full tourism potential, telling Euronews: "Today Dubrovnik has an [annual] income from tourism of around €300m, Florence has €4bn, so the potential [for Dubrovnik] is obvious." Barring any last-minute legal challenges preliminary construction work is scheduled to begin later this year. So while unemployed building workers will clearly look on the Israeli-led project as an opportunity, opponents will no doubt continue to curse Scottish Calvinists for their endorsement of golf.

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REWE, which operates both Penny and the Billa chains, sees Romania as one of the main focuses for its investments, alongside Bulgaria and Italy. Alain Caparros, management board member responsible for international business, said in a statement that the company would “focus on expansion in Eastern Europe in particular, also in Russia”, with the aim of taking a place “at least among the top three relevant competitors in each country”. A REWE spokesperson tells bne the company plans to open 10 new stores in Romania this year.

Discount retailers discover Romania Clare Nuttall in Bucharest

omanian supermarket chains have been outlining ambitious expansion plans as the country’s GDP growth accelerates. With incomes still relatively low, there is intense competition among discount retailers, which is set to increase with the expected entry of Carrefour’s Supeco to the market. Carrefour, which has 166 stores in Romania including 25 hypermarkets, is planning to launch Supeco – a new brand positioned midway between a discount retailer and a cash & carry. It is based on a hybrid model pioneered in Latin America, and later rolled out in other developing economies. However, this is a new phenomenon in Europe, where the recent crisis has suddenly skewed the market in favour of low cost outlets. Carrefour started piloting the Supeco format in Spain, one of the countries worst hit by the crisis, last year, and has yet to launch in any other country. Romania, while now growing relatively strongly, has the second-lowest income per capita in the EU region and cost is an important factor in household purchasing decisions. In 2013, the

country’s GDP per capita in purchasing power standards was just 50% of the EU average, according to Eurostat. While the French retail giant has not yet made an official announcement, and did not respond to a request from bne for confirmation, according to the Romanian press it is already recruiting

Romania’s grocery retailers largely managed to avoid the pain Europe's crisis inflicted on the retail sector as a whole. As consumer confidence slumped and credit dried up, before rebounding in 2012, supermarkets and grocers continued to thrive, according to a Euromonitor report. Vendors of economy products did especially well, as they “benefited from rising demand for low-priced goods”. The same period also saw continuing consolidation as major international chains strengthened their hold on the market. According to Euromonitor, grocery retail chains have been outperforming their independent rivals, and in the last few years chains active in

"There is intense competition among discount retailers in Romania, which is set to increase with the expected entry of Carrefour’s Supeco" for its first three stores in the towns of Giurgiu, Ramnicu Valcea and Targoviste. Discount days The first discount retailers entered the Romanian market over a decade ago, and chains such as Lidl, Profi and REWE’s Penny are already well established within the country. They are also looking at expansion; Profi, for example, opened three new stores in Deva, Borsa and Constanta on April 10, bringing network of stores to 217.

Romania have continued to expand into small and medium-sized cities and rural areas. While small independent grocers, specialist shops and outdoor markets have remained the preferred channel for products such as dairy products and fresh fruit and vegetables, chains such as Carrefour and Mega Image have tapped into this preference by launching smaller outlets in Bucharest and other cities.

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Mega Image, which is owned by Belgian retail giant Delhaize, currently has the strongest presence in Bucharest, operating a total of 168 Mega Image stores and 127 Shop & Go stores in the country. While Delhaize has exited several countries in the Southeast European region as it concentrates on its core markets, the company has so far held on to its Romanian operations. Delhaize has already sold off supermarkets in Albania, Bulgaria, Montenegro, and most recently announced the sale of its 39 supermarkets in Bosnia-Herzegovina to local investor Tropic Group BV. Delhaize CEO Frans Muller has indicated that the company may keep its operations in Romania, noting in a January 2014 statement that in the face of a challenging economy in Southeast Europe, "our businesses in Greece and Romania posted good sales growth.” Expansion With 2012 marking a turning point for the Romanian economy, both grocery and non-grocery retailers are expected to embark upon a period of accelerated growth. A study by Romanian daily Ziariul Financiar forecasts the number of modern stores will double within the next five to seven years. While the Central and Eastern Europe region as a whole achieved a remarkable rebound in the final quarter of 2014, Romania was well ahead of the rest of the region. According to estimates released by Eurostat in February, Romania’s GDP growth reached 5.2%, putting it well ahead of other frontrunners such as the Baltic states. In this respect, Romania is in direct contrast to other markets in the region such as Croatia or Slovenia; both considered to have medium-term potential, but unlike Romania currently suffering from minimal GDP growth. Meanwhile, other markets within the Southeast European region currently have lower purchasing power, although they show potential for growth. Serbia in particular is expected to get a considerable boost when it eventually joins the EU.

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Transnistria appeals again to join Russia

Clare Nuttall in Bucharest The parliament in Moldova’s breakaway region of Transnistria (the selfstyled republic of Transdniestria) voted on April 16 to appeal to Moscow for official recognition, followed by entry to the Russian Federation. The move sparked an angry response from the Moldovan government, which fears pressure from Russia as it prepares to finalise its EU Association Agreement in June. Transnistrian MPs unanimously adopted an appeal to Russian President Vladimir Putin, the Russian State Duma and Federation Council for recognition of the tiny republic as a sovereign state. The document also asks for recognition from the UN. “According to the universally recognized norms of international law, the right of people to self-determination should be the basis of political decisions, each state is obliged to respect that right,” reads a statement issued by the press service of Transnistria's Supreme Soviet. The statement refers to a 2006 referendum within Transnistria, a slither sitting between the eastern bank of the Dniestr river and the internationallyrecognised Moldovan border with Ukraine, which has been called a smuggling operation with some land attached. An overwhelming majority, 97%, voted at the time in favour of independence and subsequent entry to the Russian Federation. "As western democracy teaches us, the referendum is the basis for fundamental decisions that affect the fate of nations," reads a statement by chairman of the Supreme Council, Mikhail Burla. The Moldovan government reacted angrily to the statement from the Transnistrian capital Tiraspol. Chisinau described the appeal as “nothing but a direct defiance of the Transnistrian conflict settlement process [and] Moldova’s territorial integrity.” Tiraspol's request to Moscow is the latest of several, and the second since the crisis in Ukraine blew up. "From a legal point of view, Transnistria doesn’t differ from Crimea in any way," Transnistrian MP Vyacheslav Tobukh told Russian news wire ITAR-TASS. "The process of its reunification with Russia should follow the Crimean scenario." Separatist movements across the region have been emboldened by the Crimean secession. The situation in the Caucasus in particular is being closely watched for any signs that the region’s frozen conflicts could suddenly ignite. “Russia promoting internationally the right of selfdetermination is a cause for celebration for all the breakaway republics,” writes Lilit Gevorgyan, analyst at IHS Global Insight. However, Gevorgyan points out that the rapid annexation of Crimea, which has long been claimed by Russia, is a special case. Incorporating separatist republics such as Transnistria would “be serious red lines that if Russia ever crosses, it could seriously challenge the current nation–state system that [it] is so much in favour of and has benefited [from] immensely… When it comes to other territorial conflicts, Russia is interested in conflict management, and not resolution, as these conflicts remain as leverages on involved parties.”

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Black clouds, silver linings on ZSE

Guy Norton in Zagreb

he inhabitants of Zagreb are currently enjoying the balmy weather conditions in the Croatian capital and have been packing out the terraces of the city‘s myriad cafes and bars to celebrate the onset of spring. But for followers of the Croatian equities scene the prognosis remains distinctly chilly and cloudy. As of April 16, the Crobex official share index of the Zagreb Stock Exchange (ZSE) was languishing at an 18-month low of 1,740 points, down around 3% in the year to date. It’s all in stark contrast to the heady days of 20062007, when share offerings from the likes of oil and gas firm INA Group and Hrvatski Telekom were front page news, attracting the eager participation of hundred of thousands of Croatian citizens. At one point the newfound enthusiasm of Croatian equity investors helped to propel the Crobex index to a record high of 5,400 in October 2007. But with the onset of the credit crunch and associated global economic slowdown in 2008-2009, confidence in the Croatian economy and the financial fortunes of its corporates collapsed. As a result, the budding equity investment culture in Croatia withered on the vine, with droves of retail investors dumping their stocks, causing the Crobex index to plunge to 1,300 by March 2009. Although at one point it staged a recovery to 2,200 in June 2011, the fact that Croatia’s GDP has shrunk by 12% since 2009 has further dampened investor sentiment, with the result that in the last couple of years the Crobex has been stuck in a trading range of 1,700-1,800.

What’s more, trading volumes on the bourse have shrunk in line with the Crobex index. In the first quarter of this year, average daily turnover was just HRK17.7m. Although that’s a welcome 40% or so up on the HRK12.5m figure for the first quarter of 2013, it’s a tiny fraction of the HRK270m average daily turnover recorded in the heady days of 2007. That dramatic shrinkage in trading activity has proved to be a death knell for a number of local brokers that have already gone to the wall, while staffing levels at those that have survived the downturn have been slashed. And it’s not just investors that have lost interest in the ZSE – a large number of companies have delisted from the bourse

market favourites as well, including the country’s leading retailer Konzum and Croatia’s biggest pharmaceutical firm Pliva. In a rare reversal of that unfavourable trend food company Franck recently revoked its decision to delist from the ZSE. But for the moment at least, there’s little or no prospect of any new issue activity – there have been no IPOs of any note on the ZSE since 2007 – although drug producer JGL, which has doubled its financial turnover in the last five years to become the country’s second largest pharmaceutical firm, has mooted the possibility that it might list on the ZSE in 2015, favourable market conditions permitting. Fortune favours the brave Although the recent performance of the Croatian stock market leaves much to be desired, a recent report by InterCapital, the leading independent brokerage house in Croatia, has offered some much-needed light relief to the doom and gloom that has gripped the country’s equity scene in the last few years. The report shows that fortune has generally favoured the brave when it came to investing in Croatian equities at the height of the global economic crisis. According to research by InterCapital analysts, investors will have reaped

“We still have some decent companies here in Croatia” since the introduction of a new capital markets law in 2009, which removed the requirement that all major companies be listed on the exchange. In the last five years over 120 companies have exited the ZSE, with more delistings in the pipeline. Although many of the companies that have exited the equities stage in Croatia were relative minor players whose shares were rarely traded, the ZSE has lost some notable stock

handsome rewards if they decided to take the plunge and plough their hardearned into stocks in March 2009, when concerns about the health of the global economy were at their height. For example, shares in tourist company Valamar Adria Holding have returned a striking 671% in the last five years, while engineering firm Koncar (+262%), oil and gas outfit Ina (+240%), and auto components supplier AD Plastik (+234%) have

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also performed impressively. Investors have also seen solid returns on shares from food companies Atlantic Grupa (+128%) and Podravka (+48%), electronics firm Ericsson Nikola Tesla (+80%) and tobacco-tourism conglomerate Adris (+87%). Ironically, one-time stock market darling Hrvatski Telekom has massively underperformed since 2009, with the company’s shares down 20% over the last five years. In terms of overall market performance, Croatia has also registered a positive outcome since March 2009, with the Crobex-10 index of leading shares on the ZSE, up 37% over a fiveyear period. In terms of regional comparisons, the Zagreb bourse easily outperformed its counterpart in nextdoor Slovenia, where the SBI Top-8 index of Slovenian shares has fallen by 14%, but was slightly outperformed by Belgrade where the Belex-15 index of Serbian blue-chip equities has increased by 48% over the last five years. In global emerging market terms, however, Croatian shares have underperformed their peer group equivalents, with the MSCI Frontier Markets Index up 69% and the MSCI Emerging Markets Index up 95% since March 2009. Emerging market equities in general have proved to be comparative laggards when it comes to developed market stocks, with the S&P 500 index of leading shares in the US, up 174% since March 2009. According to InterCapital’s head of research, Tomislav Bajic, the overall findings of the firm’s research report shows that even in tough times “we still have some decent companies here in Croatia”. But he cautions that it will require real improvements on the macroeconomic front in Croatia for there to be a significant recovery in stock market sentiment and performance in the coming years. So whether Croatian equities can play catch-up with those in the US remains open to question, but as the InterCapital report illustrates every cloud can have a silver lining.

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Pessimists rule in Croatia

Guy Norton in Zagreb In recent years the International Monetary Fund's economic predictions for Croatia have generally proved to be far more optimistic – and ultimately far less accurate – than many of the local economic analysts, whose relative pessimism has proved to be much closer to the mark. So the latest blow to the government's immediate economic hopes came April when the IMF slashed its growth forecast for Croatia. In its spring economic outlook report, the IMF predicted that Croatia will this year remain mired in what it has termed “an unusually drawn out recession”, with GDP set to shrink by 0.6%. That’s in stark contrast to the IMF’s autumn 2013 economic outlook report, when it forecast that the country might indeed register positive GDP growth of 1.5%, thus ending a six-year long period of economic contraction. The IMF’s sharp downward revision of its growth forecast for the Balkan state further undermines the credibility of the current centre-left coalition government’s own prediction that foresees GDP expanding by 0.2% this year, after contracting by a cumulative total of 12% since 2009. The consensus among Croatian economists has long been that this year there will be no meaningful improvement on 2013, when output shrunk by 1%. The potential light at the end of the tunnel lies in the fact that the IMF still believes the country could actually exit from recession in 2015 and post positive economic growth of 0.4%. Overall, the IMF’s generally gloomy prognosis for the Croatian economy will pile further pressure on Croatia’s finance minister, Slavko Linic, who is currently compiling a revised budget for this year that it is hoped will receive the seal of approval from EU mandarins in Brussels at the end of April. Earlier this year Croatia entered the Excessive Deficit Procedure (EDP), under which the country must curb its burgeoning budget deficit and public debt levels. Last year, Croatia’s fiscal gap has been estimated at over 6% of GDP, more than double the EU’s desired maximum level of 3%, which the country must achieve by 2016. Meanwhile, government indebtedness reached 66.8% of GDP in 2013 – up an alarming 11 percentage points on the previous year – taking it well past the 60% level demanded by the EU. Olli Rehn, the EU’s finance commissioner, is looking for Croatia to cut its budget deficit by 2.3 percentage points this year, but the authorities in Zagreb are reported to be looking at a more modest reduction, based on worries that cuts in public spending will further depress economic output and consumer demand in Croatia – and snuff out any light at the end of the country’s recessionary tunnel.

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Power to Georgia's people Monica Ellena in Tbilisi

he 2,000 or so inhabitants of Khaishi, high up in Georgia's montainous Svaneti, pride themselves on having never been conquered. Even during Soviet times, the Svans managed to preserve their customs, traditions and land holdings. But that could end if the long-planned Khudoni hydroelectric power plant (HPP) is built, which will flood the area where they live, meaning they must be resettled. Trans Electrica, an Indian company registered in the Virgin Islands, signed an agreement with the Georgian government in 2011 to implement Khudoni, a large HPP with a price tag of $1.2bn. The scale of the project is huge: a 200-metre high dam will be built about 34 kilometres upstream from Enguri, which is Georgia's largest HPP. The affected area will cover 1,538 hectares, with a flooded reservoir area of 528 hectares. The capacity of the plant will be 702 megawatts (MW), with annual power generation reaching 1.5bn kilowatts per hour (kWh). In the government's view, Khudoni will revolutionise the country's power supply.

But this potential boon for the Georgian economy has turned into a battle. Opposition to the dam is fierce. In a sign that they mean business, irate Svan residents have sworn on a sacred icon to stop the construction. A coalition of NGOs is also calling for a halt to the project, citing geological risks, socio-economic uncertainty and a lack of transparency in the project. Old problems anew The controversy is not new: the Soviet government started a similar project in the late 1980s, but environmental concerns led to mass protests by the then-independence movement and construction was halted in 1989. Abandoned, half-built cofferdams, abutments and buildings stand testimony to what might have been. The project was revived in 2005 by the former Georgian president Mikheil Saakashvili, whose government focused on hydropower in an effort to stop electricity shortages and make Georgia a net energy exporter to the region.

The new government is also adamant it must go ahead. "Khudoni is a very important project and it will be implemented one way or another," insists Deputy Energy Minister Ilia Eloshvili. "The question is whether the government should participate and how, without violating both the investors' and local population's rights. People will be certainly treated according to the highest international standards, as set by the World Bank." But the residents' fate is not the only issue at stake. "Khudoni is planned in a seismic area," stresses Manana Kochladze, chairman of Green Alternative, one of Khudoni's leading critics. "We haven't seen any full geological study, or any detailed environmental socio-economic assessment, and there is no clear plan of how Khudoni will benefit the community." According to Kochladze, the flooded area will directly affect 184 households, over 700 people. But an assessment conducted by the World Bank in 2008 put at 2,000 the number of residents

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that will have to be resettled due to the loss of social infrastructure like schools and health care. As such, NGOs are advocating for small HPPs for both environmental and social reasons. Joachim Gauber, a renewable energy expert who has been advising companies and governments for over 25 years, agrees on the value of small installations. "If properly designed, small-scale hydropower plants are the better option, not least because the value chain remains mainly in the region," he says. Water, water everywhere Georgia's electricity sector has come a long way from the constant blackouts and cold winters that were a feature of life a decade ago. Today, Georgia has an electricity surplus, mainly thanks to its primary natural resource: water. The country's resources – rivers, lakes, water reservoirs, ice, underground water, bogs – rank high among the world's hydropower resources per capita. Georgia has long tried to exploit this potential. Ever since opening its first hydropower plant in 1898, Georgia has built and operated over 50 plants, including the 272-metre tall Enguri dam, which is the world's second tallest concrete arch dam and started operating in 1978. There are currently 27 small HPPs in operation, with a total capacity of 900 MW. Currently, hydropower meets 75% of Georgia's power needs, which increased from 8.6bn kWh in 2007 to 10bn kWh in 2012, growing at an average of 3-4% per year. "Most of our hydropower comes from run-of-rivers and snow melts," explains Deputy Energy Minister Eloshvili. "For nine months of the year, we are selfsufficient, and in summer the production is so high that we can export power. The problem is winter, when the water flow is so low that we have to import." In 2012, Georgia imported 615m kWh of electricity. Most of it came from Russia, but Georgia also imported from Turkey and Azerbaijan. The same year, Georgia sold 528m kWh to Russia, Turkey, Armenia and Azerbaijan. But in 2010, thanks to the heavy rains Georgia was able to export 1.5bn kWh. The

export potential is clear, should Georgia be able to stabilize its year-round production. "That can only be achieved by a reservoir," explains Norberto Pignatti, professor of energy markets at the Tiblisi-based International School of Economics (ISET). "The issue is not really big versus small; it is reservoir versus run-of-rivers. The latter don't make a difference as far as the winter gap is concerned: one year with low rain and your potential is over. The reservoir is more flexible and it allows you to balance the electricity supply even in years with low rain." Eloshvili has no doubt that small HPPs cannot solve Georgia's challenges. "We need big plants with dams. We can't store electricity, but we can store water, and storing water will ensure the energy independence Georgia needs." Long-term opportunity According to official statistics, Georgia currently realizes only 25% of its total hydropower generation potential, which leaves plenty of room for growth and opportunities for investors. Even so, caution is warranted. "Investors face two major challenges in Georgia: a small market and low prices," explains

can absorb Georgia's extra electricity production, especially in the summer. Due to high demand for air conditioning, Turkey's electricity consumption peaks in summer. That is when Georgia's hydroelectric generation reaches its high point, even as Georgian consumption falls. "We have a long-term plan for infrastructure development. We know exactly which lines we have to build internally and externally every year, to Russia, Turkey, Armenia, in order not only to attract but also to motivate investors to build the HPP," states Eloshvili. Even so, the government's policy, the so-called BOO – which means that companies build, own and operate HPPs themselves – is controversial. "That policy means that investors pocket all the profits, with no benefit to Georgia," complains Kochladze. Analysts have proposed a shift in policy to balance foreign investment and country benefits. "Some governments introduce a transfer in state ownership after X number of years," explains Pignatti. "It doesn't necessarily have to be for free, parties can agree on financial compensation." He also maintains that there must be clarity in the company's status and

"Irate Svan residents have sworn on a sacred icon to stop the construction" Giorgi Chikovani, deputy chief of party for the USAID-funded Hydropower and Energy Planning Project, which advises potential investors about the sector's opportunities and procedures. "Since investors need to have a clear cash flow forecast, export is essential to make the investment viable." Eloshvili maintains that the internal market will improve. "Prices will increase, of course we understand that, but we are trying to keep them low for the next two to three years before the economic situation will improve," he says. Analysts consider that the Turkish market

registration. "A BOO agreement with a company registered abroad does not bring much financial benefit to the government." Whether the Khaishi protestors will be able to win the day against the Khudoni HPP remains unclear. Both government and experts agree that controversy is a normal part of big infrastructure projects. "The debate around Khudoni is certainly heated. But energy investors are used to resistance to large-scale projects, in energy as well as roads. What they want to see are clear rules and procedures being followed and implemented," Chikovani says.

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land connectivity, which hampers both trade and access to energy resources," says Neelam Deo, director of the think-tank Gateway House. "India has banked too much on historical linkages and needs to be much more proactive in responding to outreach from these governments and in coming up with its own projects and plans." To create an alternative to air transport, India is developing the Chabahar port in Iran, which would open up a landand-sea route to Afghanistan then on to Central Asia.

India flounders in Central Asia Clare Nuttall in Bucharest

ndia's friendly diplomatic relations with Central Asia have not paid off in practical terms, with trade and investment still at low levels. Now that China and other rivals are firmly entrenched in the region, it may be too late for New Delhi to recover lost ground. India's lack of clout in the resource-rich region was starkly illustrated in 2013, when the Kazakh government blocked an attempt by OVL, the overseas arm of Indian state oil company ONGC, to buy into the Kashagan oilfield. Instead, the 8.4% stake in the giant offshore field that used to belong to ConocoPhillips was sold to China's CNPC. Given its growing need for energy, India has not given up on the region. India is expected to become "increasingly import-dependent", according to the BP Energy Outlook 2030, published in 2013. Along with China and the Middle East, India is expected to account for nearly all of the global increase in oil demand in the next two and half decades. However, India has so far failed to

make much headway in accessing oil and other raw materials from Central Asia. The primary reason is geopolitical. Less than 500 kilometres separate the Indian sector of Kashmir in the far north of the country from south Tajikistan, but the direct land route is blocked by two of the world's most volatile and unstable territories. Establishing a direct land connection would hinge on peace taking hold in both Afghanistan and Kashmir, an unlikely event anytime soon. The future of Afghanistan following the withdrawal of international troops in 2014 is unclear, with the governments in both India and the Central Asian republics fearing a return to violence and instability. Meanwhile, India's traditional route to Central Asia via Kashmir and Tibet has been blocked for more than half a century. Despite the signing of a ceasefire agreement in 2003, Kashmir is divided by the Line of Contact between Indian and Pakistani forces, with the northern part of the territory under Pakistani control. "The main obstacle to developing relations with the region is the lack of

China, on the other hand, borders three of the Central Asian republics, and Beijing has taken full advantage of its geographic proximity, supporting the entry of CNPC and other major companies to Central Asian markets, issuing soft loans to Central Asian governments and flooding the market with its manufactured goods. Most importantly, Beijing has rapidly invested tens of billions of dollars into pipeline infrastructure to carry Central Asian oil and gas to China; an expanded Central Asia-China gas pipeline network spanning all five of the Central Asian republics is due to be completed within a few years. Silk ties India, like China, has built upon its historic connection with the region dating back to before the Silk Road era. However, this has not been accompanied by any great headway economically. Indian investment into Central Asia has been modest, although there have been a smattering of deals including in the oil and gas sector: OVL acquired a 25% stake in Kazakhstan's Satpaev field in 2011, and struck a $1bn agreement to buy into Azerbaijan's Azeri-ChiragGuneishi oilfields and the Baku-TbilisiCeyhan pipeline the following year. The Indian company has also agreed to work with Uzbekistan's Uzbekneftegaz on upstream projects. As India seeks to develop its nuclear power sector, India's Nuclear Power Corporation has secured access to uranium from both Kazakhstan and Uzbekistan. A handful of deals have

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been signed in other sectors such as Punjab National Bank's acquisition of Kazakhstan's Dana Bank and the reconstruction of Tajikistan's Varzob hydropower plant by India's BHEL. India is also pushing for the construction of the TurkmenistanAfghanistan-Pakistan-India (TAPI) gas pipeline, which would allow both India and Pakistan to import gas from Turkmenistan. Agreements on pricing have already been signed and

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had woken from its sleep, others were already there," he says. Growing awareness of the importance of Central Asia to India is reflected in the adoption of the new Connect Central Asia strategy, intended to boost cooperation in both the economic and the security spheres, in 2012. Deo argues the Indian government still needs to rethink its strategy towards the region. "India cannot compete

"By the time India had woken from its sleep, others were already there" Turkmenistan is pushing for a 2015 start date, though with the project hinging on a stable Afghanistan it is still not clear when â&#x20AC;&#x201C; or if â&#x20AC;&#x201C; construction of the 1,680km pipeline will begin. Despite these projects, overall the level of trade is "abysmal" given the friendly relations between India and the Central Asian governments, which have not translated into "pragmatic and practical progress", Professor Mushtaq Kaw, of the Centre of Central Asian Studies at Kashmir Univeristy, tells bne. Missed opportunities While the lack of a land connection is the primary factor, New Delhi has also been less active than its competitors in the region especially during the years immediately after the breakup of the Soviet Union. India was in a relatively strong position at this time, thanks to the strong strategic partnership between India and the Soviet Union since the 1950s, and was quick to recognise the newly independent states. However, in the new "Great Game" that followed independence of these various states, other players such as China, Turkey and the US gained ground. Kaw points out that as a relative latecomer to the region, India allowed major companies, especially those from China, to reach out first. "By the time India

with Russia and China because it has no land connectivity. However, India can add substance to the existing relationship by building on the cultural links and the goodwill it enjoys in the Central Asian republics. The nature of this relationship has to be different from what China enjoys due to geographical proximity and Russia has due to political linkages," Deo tells bne. "India's prospects in the region could be considerably improved if it worked together with Russia, which is not a competitor for access to energy resources in the region." India and Russia already plan to set up a free trade agreement between India and the Customs Union of Russia, Belarus and Kazakhstan. Ironically, Central Asia and India may gravitate closer together at least diplomatically, as they face the common threat of a potential increase in regional instability after 2014. Countries to the north and south of Afghanistan fear a rise in militancy and a possible return of the Taliban after the withdrawal of international forces this year. India has already indicated closer security links with Central Asia, including through growing interest in entry to the Shanghai Cooperation Organisation which currently comprises Russia, China and the Central Asian republics.

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to be formed in 2015 by members of the Customs Union, which should also by then include Armenia and Krygyzstan, will not prevent Astana from developing relations with other countries. "It is important to stress that according to the treaty nothing bans us from concluding treaties with third countries and international organisations," Sagintayev told a news conference. "This is our principle of multi-vector foreign policy."

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ow ironic if Russia's efforts to prevent Ukraine joining the EU end up undermining its own dream of a Eurasian Economic Union. In Kazakhstan, the country's membership of the Russia-led Customs Union continues to cause controversy. The bone of contention has so far been the damage the membership is inflicting on Kazakhstan's economic interests, but Russia's behaviour towards Ukraine is also raising worries amongst Kazakh officialdom. On April 8, Kazakh First Deputy Prime Minister Bakytzhan Sagintayev weighed into the simmering debate over claims that Kazakhstan's food security is suffering due to its membership in the free trade area that also includes Belarus. Addressing a press conference, the official insisted Kazakhstan would have levers available to protect it from any danger of domination by Russia once the project widens into the so-called Eurasian Economic Union. As the second largest of the former Soviet economies, Ukraine's participation in Russia's pet project to form a Eurasian version of the EU is seen as crucial. Moscow's pressure on Kyiv is widely understood to be part of

a effort to force it to abandon plans to sign up to a political and trade pact with Brussels. The Russian annexation of Crimea in March has prompted concern in Kazakhstan over ceding sovereignty to the Eurasian Economic Union, a structure which will be dominated by Russia. Resurrection Addressing these concerns, Sagintayev said Astana would be able to defend its interests using two supranational bodies â&#x20AC;&#x201C; the Eurasian Economic Commission and Eurasian Court â&#x20AC;&#x201C; in

However, sensitivity to speculation that the plans are little more than a "resurrection of the Soviet Union" remains. Russian First Deputy Prime Minister Igor Shuvalov floated an idea in March that a Eurasian Central Bank could be set up by 2025. That revived speculation seen in recent years that Kazakhstan could at some point lose its national currency to adopt either the Russian ruble or another pan-Eurasian currency. Sagintayev, however, dismissed such talk out of hand, and insisted Kazakhstan would not give up the tenge. "I don't know where rumours about a single national currency of the Eurasian Economic Union come from, but we've never discussed these issues. Kazakhstan has had, and will have, the tenge," he said. Forbes Kazakhstan has also reported that a single financial regulator for

"The Kazakh government is to criminalize 'separatist activities'"

which, he claims, the equality of parties will be ensured. "There will be equality in the court as each party [member state] delegates two judges," Sagintayev said, adding that the alliance is not political but economic. The official also insisted that membership in the Eurasian Economic Union, which is expected

the Eurasian Economic Union will be established in the Kazakh financial capital Almaty. Nervously watching Ukraine Despite the authorities' insistence that Kazakhstan is a full and equal partner in the project, there are signs that Astana is nervous as it watches events in Ukraine unfold.

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Nato intelligence says around 40,000 Russian forces have amassed on the border with eastern Ukraine, and Moscow insists it reserves the right to move in to protect ethnic Russians from what it claims are fascist forces in Kyiv. Ukraine, meanwhile, blames Russian provocation for the ongoing protests and occupation of government buildings in cities in the east of the country. Kazakhstan also has a large Russian minority, mainly in the north of the country, and is clearly wary of any similar action against its sovereignty. On April 8, local media reported that the government is to criminalize "separatist activities" and raise tough new penalties, in a new draft of the criminal code. â&#x20AC;&#x153;The draft criminal code will have a new article that criminalizes separatist activities. Calls for illegitimate, unconstitutional changes to the territorial integrity of Kazakhstan or disintegration will be considered a criminal offence," Arman Ayaganova of the Prosecutor General's Office, announced, according to Tengrinews. Under the new legislation, calls for the illegitimate violation of Kazakhstan's territorial integrity will be punishable by up to 10 years in prison. Analysts say the move bars the way towards federalization and creation of national autonomies, but warn that due to vague language the law could also be used against any protest â&#x20AC;&#x201C; noting the recent rise in complaints over the economy since the devaluation of the tenge in February. Russia insists that federalization is the only route out of the standoff in Ukraine. Kyiv rejects the call, saying such decentralization would set the scene for further secessions of regions.

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Kazakhstan's big selloff

bne The Kazakh government is planning to launch a massive privatisation programme in the summer, officials have announced. Stressing the hope that privatisation would boost efficiency at state-owned enterprises and competitiveness in the local market, Astana is set to try again to offload state-owned assets. Many will be non-core assets currently held by the country's state-owned giants. "After the adoption of the necessary legislation, the process of preparing and transferring organisations of the quasi-state sectors to the competitive environment will start in May-June," Economy and Budget Planning Minister Yerbolat Dosayev told a news conference in Astana on April 14. He also said a single type of business entity will be developed for all companies and organisations that remain in state ownership. The government has drafted a list of 32 entities owned by the central government, 586 facilities owned by local governments and 191 operations run by the Samruk-Kazyna sovereign wealth fund through its subsidiaries, he added. The chairman of the board at Samruk Kazyna, Umirzak Shukeyev, said that under the fund's restructuring programme it would get rid of 209 companies out of the 599 it currently manages overall. "This is not a final list but in numerical terms we are going to privatise or restructure 30% of our company. I am not talking about their value but number," he said. By the end of 2016, the fund plans to privatise 103 subsidiaries of national companies. Those contributing assets include rail operator Kazakhstan Temir Zholy, oil and gas giant KazMunaiGas, nuclear holding Kazatromprom, utility Samruk-Energo, grid operator KEGOC and others. While privatising these non-core assets, the government says it will resurrect plans to float stakes in the parent companies. The "People's IPO" programme, designed to help revive the Kazakh Stock Exchange and encourage the population to invest in stocks, has struggled to gain traction in recent years. Shukeyev says that up to 10% in KEGOC, Kazatomprom, Samruk-Energo and Kazakhstan Temir Zholy will be launched on the market in 2015 and 2016. The government also hopes to float 49% in KazMunaiGas units KazTransGas Aimak and KazTransGas-Almaty, he added. However, perhaps with the previous difficulties in mind, he cautioned that not all is set in stone. "We will put all efforts in implementing this programme within the deadlines set, but there may be delays conditioned by a number of factors: for example, companies' IPOs will depend on market conditions, while the sale of assets on the private sector's readiness to buy these assets," Shukeyev explained.

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Made in Mongolia Terrence Edwards in Ulaanbaatar

rior to the fall of the Soviet Union, Mongolia served as a satellite state that produced shoes and clothing as well as food staples. After 25 years of capitalism, the factories and equipment that produced many of these items have fallen into disrepair. But a downturn in mining is pushing Mongolia's government towards encouraging the return of such industries. Mongolia ended up falling 4.4 percentage points short of the International Monetary Fund's economic growth forecast for 2013 of 15.7%. Delays to the expansion of Mongolia's $6.5bn Oyu Tolgoi copper mine because of a disagreement over a $4.2bn financing package played a large role in the shortfall, as did a decline in coal prices and slowing growth in China, where over 90% of Mongolia's minerals are sent. Standoffs between the Mongolian government and mining companies over various projects have caused foreign direct investment to fall. The outflow of foreign investment pushed the currency down 26% against the US dollar at the start of April compared with the year before. The depreciation has exacerbated inflation, recorded at 12.4% nationwide in March, because the country is so dependent on imported goods. Still, there are few who sympathize with the mining industry's current problems. Despite the fact that mining is the largest contributor to the economy, at 20% last year, Mongolians are not always thrilled at being best known for the wealth under their feet – principally coal, copper as well as some gold and iron ore. “It interferes with the nomadic lifestyle,” says Surenjav Odbayar, a mining analyst for local brokerage National Securities. “The

water resources are not so huge either, and they take away from the drinking resources from the herders.” At the extreme end, a backlash against mining has resulted in the rise of hardline nationalist and environmental groups, which some accuse of establishing racketeering rings that extort miners for cash. The country's most celebrated environmentalist, the 2007 Goldman Environmental Prize winner Tsetsegee Munkhbayar, has since been sentenced to seven years in prison for leading an environmental protest group that sometimes resorted violence. A rifle was fired in front of the country's parliament house and police said they

The prime minister and other officials argued that Mongolia needs to open up new industries to ease the country's dependence on mining and prevent the kind of currency swings seen in the past year. There is also the danger of existing domestic industry being further hit by the so-called Dutch Disease, whereby non-resource industries are hurt by the increase in wealth generated by the resource-based industries. “Today, the nation is rarely manufacturing final products, importing 88% of commodities, and mostly exporting raw materials, in turn. This wrong direction of traffic must be fixed so as to avoid an economic deadlock,” said Prime Minister Norov Altankhuyag in his opening remarks at the forum. Odbayar says Mongolia in March announced it was spending MNT270bn (€110m) to finance light industry start-ups and to expand areas such as small manufacturing and textiles, as well as MNT22bn into construction. By comparison, mining investment from

"The winter itself is a marketing advantage for Mongolia" found bombs planted in a government building by Munkhbayar's group. Let's Create in Mongolia! The latest prescription by the government to cure Mongolia's socioeconomic ills is the establishment of domestic production to replace the huge amount of imports and create a more diverse portfolio of exports. “Let's Create in Mongolia” was the slogan for this year's Mongolian Economic Forum held on March 4 – an event largely inspired by the forum held in Davos each year. For the second year in a row, the chief focus was on the need to encourage the growth of domestic industry in a nation known more for its nomadic herders and vast mineral wealth than for luxury clothing brands or tech start-ups.

the government received MNT18.3bn. “It says a lot about the government's thinking,” Odbayar remarks on the size of investments made by government. But what, if anything, can Mongolia bring to the table that can generate the kind of income that the country's mines do? Stephen Kreppel, director of the Mongolian National Marketing Coordination Office, says that labour costs and operational expenses are already too high to compete with countries such as Malaysia for manufacturing, so it will need to find products that consumers will buy based on their merits rather than price. As such, Kreppel argues high-end products derived from the country's cultural roots, such as organic meats and luxury cashmere clothing, would be ideal. “The

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winter itself is a marketing advantage for Mongolia,” he says of a place where temperatures reach minus 30°Celsius and beyond. “And when it's coupled with 100% organic, 100% faulty free, 100% natural, and scientifically warranted, you've got a world beater.” Herding in investors In charge of attracting investment into Mongolian industry is Demberel Irmuun, director of the division for promotion and consultancy services at the newly formed Invest Mongolia Agency. Irmuun says he has about six meetings a day with potential investors, such as an Italian group that recently visited that was interested in exploring options for the production of textiles in Mongolia. The agency models itself after groups such as InvestHK, to facilitate the establishment of overseas companies in Mongolia. To encourage the development of various sectors of the economy, one strategy is to publish a series of investment guidebooks to

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instruct investors on where to invest and with what offices they must register. Although still in the early stages, Irmuun said one forthcoming book would cover Mongolia's budding green energy industry. Last year Mongolia commissioned the 52-megawatt Salkhit wind park, which today provides Mongolia with 5% of its power. That was Mongolia's first wind park, but already the country has two more wind farm projects under development by Turkey's Aydiner Global and German firm Ferrostaal Industrial Projects. In 2012, Japan's SB Energy formed a joint venture with Mongolia's Newcom Group for Clean Energy Asia, which plans to be a regional player for the transmission of renewable energy. That fits in with one of three scenarios for Mongolia developed by the World Economic Forum earlier this year in Davos, which envisages the country carving out a role for itself in China's move toward developing a greener

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economy. "A revolution in environmental attitudes sees China lead the way in the 'circular economy' and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into green products and services," the WEF said. However, given that the other two scenarios presented focus squarely on mining and commodities, it shows how far the country needs to travel in what the WEF terms "charting a course for the country from mineral wealth to long-term sustainable and diversified growth." “When the politicians go abroad, they say mining is still a major component of the economy, but when they're campaigning to the voters they talk all about diversifying the economy,” says Odbayar. “This kind of behaviour leads one to the conclusion that Mongolia is still not giving up on the mining sector."

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Although the ownership structure of the Gashuun Sukhait Railway joint venture is not yet finalized, the Chinese-owned energy company Shenhua Group is expected to own 49%. State-owned miner Erdenes Tavan Tolgoi, local miner Tavan Tolgoi and Mongolian Mining's unit at Ukhaa Khudag, Energy Resources, would each own 17%.

Mongolia railroaded Terrence Edwards in Ulaanbaatar

lack of planning has meant the softening global coal market has put Mongolia through the wringer. Mongolia's policymakers failed to get to grips with developing the country's rail network while the economy was booming. Now the economy is slowing and coal prices are falling, the government is finding it can't make up the difference by boosting export volume because of bottlenecks in the transportation network. Mongolia in April continued construction of its railway network as it attempts to boost exports of minerals, such as coal from its enormous Tavan Tolgoi coal mine, which is currently serviced by truck. The nation sandwiched between Russia and China plans to quadruple the size of its railway network to a total of 5,600 kilometres, starting with 265km from Hong Kong-listed Mongolian Mining Corporation's Ukhaa Khudag mine in the Gobi Desert to the Chinese border, says Yondon Manlaibayar, director general of the department of railway and maritime transportation at Mongolia's Ministry of Roads and Transportation.

Mongolia's cabinet in March approved the state-owned Erdenes Tavan Tolgoi's participation in a consortium of miners operating in the Tavan Tolgoi coalfields. Called Gashuun Sukhait Railway, the joint venture plans to launch construction of 13km of rail from the Gants Mod border port, said Manlaibayar, to where a temporary

The gauge debate The miners at the Tavan Tolgoi coal deposit have long argued for a direct rail line to China. After years of waiting, Hong Kong-listed Mongolian Mining in June 2012 signed a concession agreement with the government and even held a ground-breaking ceremony a few days later. But that plan was rejected in May the following year. Instead, the government contracted Korea's Samsung C&T to do the job. The 217km of railway will be installed as soon as the embankment is finished, which is expected to happen by July, says Manlaibayar. One reason the government has dragged its feet is the issue over what standard of gauge to use. China's railways utilize what is considered to be the international standard. However, Mongolian rail policy, implemented in 2010, requires Russia's wider gauge.

"We want to increase the capacity of our transit lines â&#x20AC;&#x201C; transit is a profitable thing"

offloading port will be built for trucks to unload their coal hauls. "They don't want to wait for us to complete the whole line," says Manlaibayar. "They want to start loading from here immediately, this year."

Some have fretted about the added costs of having to move tonnes of coal from one carriage to the next for the gauge transfer as well as the environmental toll from all the dust kicked up from moving such large cargoes of coal.

The reason is it makes good economic sense to do so, he says. Currently, only a limited pool of truck drivers has permission to travel to the border zone to unload coal exports onto a railway line in China. That gives the handful of drivers allowed to make the pick-up and delivery enough leverage to demand big salaries.

Although China is the destination for nearly all of Mongolia's mineral exports, it is in no rush to roll out a direct line to the country. Mongolia has long worried about China exerting political and economic control over the country. For some, direct access into the country by China is a security threat.

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Many, however, are losing patience. "Currently the Mongolian coal industry is on the brink of survival essentially, with huge structural and competitive issuesâ&#x20AC;Ś It can hardly afford this gauge debate," says Dale Choi, head of Independent Mongolian Metals & Mining Research. The rail line that Shenhua has promised to help build will use the Chinese gauge, while the Samsung C&T line will use the Russian gauge. A railway station for gauge transfer will be built 40km north of the Chinese border as well as 27km of additional rail heading south to join the Samsung and Shenhua rail lines, explains Manlaibayar. He said the current projected cost of having to change gauges would be an added $3 to every tonne of coal. Transit is profitable Now that developing the railways is gaining some traction, land-locked Mongolia also has plans to build a more comprehensive railway network to the east and west of the country. It plans to expand its rail freight capacity by 60% to 33m tonnes a year by 2015, with an eventual target capacity of

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100m tonnes. "The rail was built in the 1950s â&#x20AC;&#x201C; it needs a major upgrade," says Manlaibayar. Last year, Mongolia saw the transit of 2.2m tonnes compared with 15m tonnes from neighbouring Kazakhstan. Manlaibayar reckons that transit of 10m tonnes would be worth over $200m a year. Japan's Nippon Koei has 86% completed the design of an eastbound rail line that could link to rail lines able to reach ports in China's Bohai region. That would gain Mongolia better access to seaports in China for deliveries of its coal products to markets such as South Korea and Japan. The existing line heading south towards Beijing, says Manlaibayar, was not optimal because of the heavy congestion created by China's own domestic cargo transit. Profiting from the growing trade within the region is a long-term strategy. One area that the country can look to exploit is the growing volumes of cargo travelling between Russia and China. Russia plans to increase the value of its trade with China by 150% from last year

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to $200bn by 2020, Manlaibayar says. "Obviously, a major part of that will be oil and gas, which won't be transported by rail, but there will be a need to transport these huge amounts of cargo," he says. "That's why we want to increase the capacity of our transit lines. Transit is a profitable thing. Mongolia could facilitate that trade with its planned route in the east as an alternative to the already congested train lines from China's Manzhouli line to Russia, says Manlaibayar. Mongolia has plans outside of its two giant neighbours, too. Earlier this year, Mongolia launched a trial run for the transport of goods from Jinzhou in China to Frankfurt in Germany, via Mongolia. He says the trial took 15 days to reach the destination and 14 days to return. "We shipped computer part products and because the product is so expensive itself, a small difference in transportation costs doesn't bother them," says Manlaibayar. "Time is more important," he adds - a lesson that Mongolia's policymakers would do well to learn.

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CORPORATE STATEMENT:

PASHA looks to lead in Azerbaijan's economic diversification Farid Akhundov, Chief Executive Officer

hopes to eventually raise $150m with a Eurobond before 2017.

Rising consumer borrowing that is growing in leaps and bounds has supported the banking sector. A middle class is emerging, but the fast pace of lending, combined with the inevitable turmoil that followed Russia's annexation of Crimea, has put some pressure on the bank sector. However, the conservatively run Central Bank acted rapidly to slow lending and ensure stability. "For example, car loans are now no longer Lombard loans, which has slowed down growth in these credits," says PASHA Bank's CEO, Farid Akhundov. "The volumes were anyway small, but now they are prohibitively expensive."

For most of the last decade the government has made the bulk of investment, but now it wants to pass the baton to the private sector. "The Central Bank has been working to encourage banks to be more involved in the real sector and with SMEs and micro-finance organizations – to get more involved in business in general," says Akhundov.

t has been growth as usual for Azerbaijan's leading commercial bank PASHA Bank in the first quarter of 2014, despite the economic and political uncertainties that have swept through the region. And this year promises to be an exciting one as private enterprise assumes the mantle from the state in driving the investments that will propel the country's economic development.

Foreign borrowing is being encouraged again to support the growing needs of small and medium-sized enterprises (SME) by the Central Bank. "There were never any restrictions on foreign borrowing, it was more than about the regional banks' ability to tap into international markets," says Akhundov. In March the government sold the first ever sovereign Eurobond in a heavily oversubscribed issue, raising $1.25bn at a yield of 5% to be repaid over ten years. The oil-rich republic doesn’t need the money; the bond was more of a benchmarking exercise to pave the way for an increase in commercial borrowing. The State Oil Company of the Azerbaijan Republic (SOCAR) has already successfully placed two Eurobond issues, raising $500m in 2012 and $1bn in 2013, but PASHA Bank intends to be in the vanguard of the purely commercial issues. "We are in the process of formulating our new strategy for 2015-2017 and part of this will be to continue to deepen our ties with the international financial markets," says Akhundov, "and we are hoping to issue our first Eurobond during the new strategic period." PASHA Bank already has one international syndication under its belt, and will close the second later this year for $80m. It

The government's change in attitude to international borrowing is a result of the ongoing diversification of the economy. Oil and gas still account for the lion's share of GDP, but while economic growth was 6% last year, the energy sector grew at a slower 1.5% while the non-oil sector expanded by 10%.

PASHA Bank has been ahead of the curve on this score, having targeted SMEs in its strategic period for 2012-2014. Since the start of the period, the bank has raised SME lending quite reasonably. The business clients are parsed into three categories – corporate, commercial and business – to better meet the needs of big, medium and small business clients. "The portfolio has been growing steadily. We have an ambitious target to increase our SME loans portfolio to $100m by the end of strategic period. We have targeted the real sector of the economy from day one of the current strategic period and enjoyed high growth rates for three years by now; 2013 was a very good year in that respect and we expect similar growth in 2014," says Akhundov. The big change this year is the government's intention to transfer less oil revenue to the budget. The general consensus is that private investment should overtake state-led investment projects in the years to come. "Tax, administration, customs and economic policy in general are all moving in the right direction. Infrastructure development was led by the government, but now, when the basics are in place, the government will slow down the pace of large-scale projects," says Akhundov. "Private enterprise will take over the lead and the government’s reduction in transfers to the budget from the state oil fund is a reflection of this process. The banking sector is going to be a major beneficiary of these changes."

Special focus

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The EU's neighbourhood problem International Foundation for Better Governance The Eastern Partnership (EaP) initiative was established in 2009 and directed at six countries of Eastern Europe and the South Caucasus: Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. It was designed to help these fledgling independent states that emerged from the wreckage of the old Soviet bloc to foster “a more ambitious partnership” and a “deeper bilateral engagement” with the EU. Russia and the five states of Central Asia were excluded. The partnership, the EU stated in the founding document, would “maintain and bolster the course towards reforms, [serving a]… shared commitment to stability, security and prosperity of the European Union, the partner countries and indeed the entire European continent." The EU adopted "Action Plans" for each Eastern Partnership country (except Belarus) within the framework of the European Neighbourhood Policy. These Action Plans set out an agenda of political and economic reforms with short- and medium-term priorities of three to five years, including those related to border management, migration, police reform, lawenforcement cooperation, and effective prevention and

fight against organised crime and corruption. Five years later, it is clear that the EaP has largely failed to achieve its goals. Little progress The EaP 2013 assessment report found that little progress, if any, was made by most of the six countries other than Georgia, which had already committed itself to a reform programme without Europe's prompting. Under former president Mikheil Saakashvili, Georgia was named by the World Bank in 2006 and 2008 as the top reformer in its annual "Doing Business" survey. It remains at 8th place the highest ranked of any country in the former Soviet Bloc to do business – better, in fact, than all the EU members. Kakha Bendukidze, an ethnic Georgian who made his money in Russia, was brought into government to slash red tape and Saakashvili famously sacked the entire traffic police force to end street-level official corruption.

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“Moldova suffers from endemic corruption and a lack of respect for property rights. There are divided views on the future course of the country’s development, and we face the prospect of parliamentary elections in the autumn. For this reason there is a need to debate together the different options facing the country," says James Wilson, director of the International Foundation for Better Governance. The poorest country in Europe, Moldova has been wracked by a string of scandals that have undermined the public's trust in the state. The former first speaker of the Moldovan parliament and one of the country's richest men, Vladimir Plahotniuc, is wanted by Interpol on a number of charges including smuggling, racketeering and murder, yet the state has done nothing to prosecute him. Azerbaijan and Belarus have largely ignored the goals set by the previous EaP report. In particular, both have come in for heavy criticism for their lack of democratic processes, curbs on freedom of speech and repression of the political opposition. Perhaps the most troubled of all the six countries in the EaP is Ukraine. Over the last decade there has been little in the way structural reforms undertaken by any government – either orange or blue. Together with Kyrgyzstan, Ukraine is one of only two countries in the former Soviet Union where the economy is still smaller than it was in 1991. Moreover, corruption is rampant in Ukraine. Of the ¤2.8bn invested by the EU into the EaP programme, the lion's share has gone to Ukraine. Yet the country has little to show for this investment and is today teetering in the brink of economic collapse. The Berlin-based Transparency International dubbed Ukraine "the most corrupt country in Eastern Europe" in its last ranking. Ukraine is also deemed a "repressive" regime by the Heritage Foundation and ranked at #112 in the "Doing Business" survey. Pacts The failure of the EaP to inspire was thrown into stark relief by the EU summit in the Lithuanian capital of Vilnius in November. Only two of the six EaP countries – Moldova and Georgia – agreed the EU Association Agreements, including the Deep and Comprehensive Free Trade Areas, which the EU said it will expedite

the signing to "no later than June 2014". Azerbaijan, Armenia, Belarus and Ukraine all failed to finalise their Association Agreements, although the new pro-EU government in Kyiv has since signed off on the political part of the deal. Forced to choose between Russia and the EU, Minsk didn’t take much persuading to throw in its lot with Moscow, long its best friend and main trading partner. Likewise, there was never any doubt about which way the reform-minded Georgia would go, especially after it fought a short war with Russia in 2008. It threw itself into Europe's arms at the first opportunity. Armenia was more interested in the EaP, but with its economy in slow-motion collapse, Armenian President Serzh Sargsyan made a pragmatic choice based on what was in the country's immediate economic interest. The cash and cheap gas deal offered by Moscow outweighed the long-term and more intangible benefits of a European deal, so Armenia has chosen to join the Customs Union, which includes Russia, Kazakhstan and Belarus. Oil-rich Azerbaijan has been prospering in the last few years and doesn’t feel it needs mentors, so it has abstained from joining either trade club, preferring to deepen ties with its neighbours Georgia and Turkey instead. Moldova shrugged off Russia's overt threats of cutting off its gas and closing its borders to Moldovan agricultural products to carry through on its decision to go with Europe and sign the Association Agreement. But Ukraine highlights the Hobson's choice each of the six countries faces. Of all the countries in the region,

"Five years later, it is clear that the EaP has largely failed to achieve its goals" none has deeper economic, historic and cultural ties with Russia. The two economies are more integrated than any other paring in the former Soviet Union, and the birthplace of the Slavic nation is also home to two of Russia's most important strategic assets: its major gas export pipeline network to Europe and the home of the Russian Black Sea fleet. Yet these ties were entirely ignored by the EaP process. Perhaps more damaging was the EaP's failure to acknowledge the diversity of views amongst the local

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Moldova is in a more difficult position than Georgia. Also not blessed with mineral wealth, it has been weighed down by economic chaos and endemic corruption – a problem that afflicts all the countries of the region. Still, it scores #78 on the World Bank's "Doing Business" ranking, well ahead of all the BRIC countries.

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population that is a function of this long-twinned history. By selling the programme to successive Ukrainian governments, the EU assumed a national unity, ignoring the deep divisions over European aspirations.

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These divisions came to the fore after the Vilnius EU summit in November, when former president Viktor Yanukovych's failure to sign the long-negotiated Association Agreement set off the protests in Kyiv that led to his ousting in February. This has in turn led to counter protests in the Russophone east of the country, with the ethnic Russian population there dissatisfied with the new pro-EU interim administration in Kyiv.

Ukraine is not the only country divided on ethnic lines that colour European aspirations (see infographic map). The EaP has failed to address these internal divisions or explain the benefits of the programme to several populations. A poll conducted in Moldova earlier this year found 71% of the respondents said they felt there was a need for more detailed information on the pros and cons of joining the EU; another poll held in Ukraine in February found that while just over half of the respondents said they wanted to join Europe, another 42% said they would prefer to join the Russian-led Customs Union, with 7% undecided. The lack of visible progress has led European parliamentarians to become increasingly sceptical of the EaP project. On April 23, Czech Foreign Minister Lubomir Zaoralek called for the EaP to be transformed, arguing the EU should approach these countries more individually. And last year a leading Polish MEP and

former vice president of the parliament, Jacek focus Saryusz-Wolski, complained the EU has little to show for the EaP and warned that the EU was in danger of "losing its eastern neighbours.â&#x20AC;? With these kinds of internal divisions in the populations in question, regional development should not be an either/or option, but done in partnership. Several mistakes have been made in setting up the EaP, but the greatest obstacle is that it was set in direct competition with Russia. Russia has deep economic, cultural and historical ties with all the aspirant countries and, moreover, is an economic and investment node for the region, according to the European Bank for Reconstruction and Development (EBRD). After four years of failure, it is time for Brussels to admit the lack of progress in the EaP and reach out to Moscow to form a partnership that will be more mutually beneficial to all the countries and their peoples. The International Foundation for better governance has been registered under Belgian law as a not for profit organisation association dedicated to promote, protect and defend Fundamental rights of Citizens, Human Rights, Democracy and the Rule of Law. To this end the Foundation will undertake activities to improve mutual understanding, the exchange of information, cooperation with organisations that protect human rights, democracy and the rule of law in the Member States of the European Union , as well as other international and national institutions and organisations and companies active in this sphere. www.better-governance.org

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Q&A with Philip Woolas

Philip Woolas, who as the former UK Minister of State for Borders and Immigration in the Home Office in 2008-2010 was intimately involved with the European Neighbourhood Policy and the associated Eastern Partnership initiative, explains why the policies have failed to achieve their goals and how they need to be reformed. bne: The Eastern Partnership initiative has had mixed success – two countries embraced it, the other four have either rejected or ignored it. Why is that and what could have been done differently to ensure a better outcome? Woolas: The big picture is I think that the European Union's attitude to the Eastern Partnership and those six countries was to approach them with a strategy that had worked with the accession states earlier and made the assumption you could adopt the same strategy for these six former Soviet republics. Underpinning that is a false assumption which has had terrifying consequences: that the power of Russia had disappeared when the Soviet Union collapsed, when in fact the power of the Soviet Union was in large part due to Russia and the power that it has economically, militarily, hard and soft diplomatically, hasn't gone way just because the Soviet Union has. I think compounding that mistake was the option given to these six countries: either you are with Russia or you are with the European Union. That is not the choice. For these countries it should be, why can't we work with both. We are democratic capitalist countries, we have economic interests to the east and the west, never mind the ethnic ties that the world is waking up to. So by presenting it as a stark choice, particularly in the run-up to the Vilnius summit [in November 2013], the EU provoked the Russian leadership in a way it didn't need to. bne: So was it perhaps naivety on the EU's part to approach it this way?

Philip Woolas

Woolas: I think it's a combination of naivety, arrogance and looking backwards. It's naïve because it assumes the European Union model is what all the countries in the region want. That is not the case. If you look at Moldova, yes it wants to join the European Union, but it also wants stronger links with Romania, it has its own ethnic enclaves of Transnistria and Gagauzia. I think it's arrogant because it assumes Russia wouldn't look after its own interests, perceived and real. And I think it's looking backwards because it's basically saying the European Union's growth from the Treaty of Rome to the latest situation with 28 member states can be replicated to the east. It can't, it doesn’t work like that. For Britain that likes to straddle the Atlantic and the European continent, it should know that one size doesn’t fit all. bne: Working as you have done and continue to do so around Europe, what is your impression of how the Ukraine crisis is being viewed elsewhere on the continent. Woolas: I was in Poland recently, in Silesia, which is a part of Europe that has been at one time Polish, German, Soviet, and they are scared. One of the parties, attempting to lighten the mood said the history of that part of the world has been that the Russians invade one country first and then Poland. And everybody on the Polish side of the table said, 'please, don't please joke about that.' Now I'm not suggesting the Russians are about to invade Poland, but what I am saying is that the uncertainty, fear, economic instability and other unintended consequences of what's going on is not just felt in Ukraine, but are also felt in Poland, Romania, Bulgaria, Slovakia and I imagine in parts of Germany too. It's very serious.

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I Events

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Upcoming events 2014

Bellwether Europe 2014 (15 May) The Economist London, United Kingdom www.economistinsights.com

IV International Economic Summit of Russia and OIC Countries (5 - 6 June) KazanSummit Organizing Committee Kazan, Russia

12th Annual Adam Smith Conferences Russian Retail Banking Forum (27 - 29 May) Adam Smith Conference +44 20 7017 7444 Moscow, Russia events@adamsmithconferences.com www.adamsmithconferences.com

Catalyst Cap Intro: Emerging Markets Alternative Investing (23 June) +1 212 966 2993 New York City, USA cap-intro@catalystforum.com http://catalystforum.com/node/263

European Bonds & Loans Forum (5 - 6 June) Global Leading Conferences Vienna, Austria http://globalleadingconferences.com

6th annual Private Equity Emerging Markets (24 - 27 June) ICBI Amsterdam, Netherlands

Changing Economies Changing Lives EBRD Annual Meeting & Business Forum Warsaw, Poland 14â&#x20AC;&#x201C;15 May 2014

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