Inside this issue: Kruk fears "frozen conflict" in Ukraine MH17 as metaphor for Russia Donald Tusk's Mickey Mouse opposition August 2014 www.bne.eu
Trouble on the Belgrade waterfront Rogun dosh remains a problem
Postcards from the edge Frontier markets make a comeback
bne August 2014
Contents
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COVER STORY 6 The Insiders
CENTRAL EUROPE 22 Slovakia's precarious balancing act
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25 A power grab by Babis 11 Chart of the month 27 Poland's pension problems to hit WSE EASTERN EUROPE
28 Donald Tusk's Mickey Mouse opposition
12 Kruk fears "frozen conflict" in Ukraine
29 Killing the Klub in Hungary
15 MH17 as metaphor for Russia
31 Hungary's banks face huge bill
17 Battle of the gas giants
33 Latvia blitzes Estonia's WiFi credentials
19 Sweden freezes shares of shadowy Ukraine gas producer Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu
21 Loan Maidan
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Contents
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SOUTHEAST EUROPE 44
EURASIA
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Belarus looks to “New Silk Road”
Rogun dosh remains a problem
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Georgia's market of 900m
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Trouble on the waterfront
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An executive presidency beckons for Turkey
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Central bank's Kelimbetov fighting fires in Kazakhstan
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Georgia's banking sector makes steady progress
Western Balkans look to leave past behind
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Kazakhstan names most corrupt public agencies
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Azerbaijan keeps its options open
Food for thought in the Balkans
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Georgia defence minister says Nato to acknowledge progress
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Mongolia's economic hangover
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Kyrgyzstanis to find benefits of EEU membership elusive
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Uzbek currency turns 20 amid thriving black market
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OPINION
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Romania makes uneven progress against corruption
SPECIAL REPORT – FRONTIER MARKETS
Transnistria's travails
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Albania faces long, hard road to EU
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Moldova struggles to restore banking transparency
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Follow us on twitter.com/bizneweurope
Russia hugs Belarus in evertightening embrace
Turkey's challenges
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UPCOMING EVENTS
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I The Insiders
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Ukraine is not yet dead – but the outlook is pretty grim Even before the annexation of Crimea and outbreak of fighting in Donetsk renewed doubts about its viability, Ukraine was on a harrowing trajectory of decline and decay Mark Adomanis in Washington
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hat sort of future awaits Ukraine? Given the horrific violence in Lugansk and Donetsk, violence that has already consumed hundreds of innocent lives and that will likely consume many more, there has been an understandable increase in pessimism. It’s really hard to hold out much hope for the country’s future when houses are being blown apart by artillery fire, former neighbours are shooting at each other with automatic weapons, and now passenger jets are being blown out of the sky.
population actually grew throughout the late 1990s and early 2000s, the Ukrainian workforce has already started to shrink. The number of economically active Ukrainians has declined by roughly a million people over the past 14 years, and the country’s general demographic trajectory means that, unless there is a dramatic and unprecedented increase in immigration, this decline will continue indefinitely. It might sound a bit overdrawn, but Ukraine’s economy will have to rely on an ever-shrinking number of workers forever.
However, even before Yanukovych’s messy overthrow Ukraine was on a long-term path to ruin, a path that would be difficult to change even under the most favorable circumstances. Why? What are Ukraine’s problems? While there are many areas of concern, I would say that the most pressing concerns fall into three main categories: demography, geography and politics.
Ukraine’s demographics aren’t just among the worst in the Europe, they’re arguably the worst of any country on earth. Regardless of which course Ukraine chooses, whether it
Demography Russia has attracted a lot of negative attention for its low birthrates and high death rates. It’s been called a “dying bear,” a “dying nation,” and “imploding,” among other things. Western experts express broad agreement that its demographic trends will cause serious (and perhaps irreparable) damage to its economy and military. There is also general agreement that the authorities have done little or nothing to address the problem. However, although you will often hear Russia described as the world’s “most swiftly depopulating country” or read articles stating that it is “suffering from the world’s worst population crisis,” those dubious honours actually go to Ukraine. Since its independence from the Soviet Union, Ukraine has suffered the world’s largest absolute population decline, a cumulative loss of almost 7m people. Unlike in Russia, where the economically active part of the
"It’s hard to see how Ukraine could make a 'European choice' even in the most favourable of circumstances" integrated with Europe or the Russian-led Eurasian Union, its demographic trends will exert a strongly negative influence on its economy. Geography It’s not a coincidence that the most economically successful of the “new” EU entrants, the Czech Republic, Slovakia and Poland, are all located close to Europe’s largest economy. Proximity to Germany and its enormous domestic market gave these countries a realistic opportunity for export-led growth (in many cases led by German firms looking for lowcost manufacturing). The transport challenges associated with pursuing this growth model were real, post-communist
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It is conceivable that, in the very long term, Ukraine’s regional divisions will become less significant. But at the
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The IRI’s figures showed similarly vast differences between the two regions. 64% of west Ukrainians expressed support for the idea of joining Nato, while in the east the figure was a mere 14%. Similar gaps were encountered when Ukrainians were asked about joining the EU (90% support in the west, 20% in the east) and on the willingness to suffer temporary economic pain in exchange for long-term benefits (66% support in the west, 17% in the east). There wasn’t a single significant issue on which polling showed the two regions in agreement.
Ukraine and Russia Relative Population Change 1992-2015 (1992=100)
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The BBG found, for example, that more than 35% of eastern Ukrainians agreed that Russia had played a "mostly positive" role in the crisis in Ukraine. The comparable figure for western Ukraine? 1%. An almost equally significant gap emerged when Ukrainians were asked about the US. A substantial 58.8% of western Ukrainians though that the United States has played a "mostly positive" role over the past few months, while in the east the figure was only 17.1%. The single largest gap, however, concerned Crimea. A plurality of eastern Ukrainians (45.8%) thought that the referendum reflected the genuine wishes of Crimeans. A mere 16.8% of western Ukrainians agreed. In other words, Eastern Ukrainians have made peace with the departure of Crimea while western Ukrainians haven’t.
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Politics While many analysts now declare that, thanks to Russian intervention in Crimea, Ukraine’s political divisions are a thing of the past, independent polling conducted on behalf of US organizations like the Broadcasting Board of Governors (BBG) and the International Republican Institute (IRI) continues to show vast differences in outlook between the country’s western and eastern halves.
Mark Adomanis is an MA/MBA candidate at the Lauder Institute at the University of Pennsylvania. He regularly contributes Russia-related writings to a range of outlets such as True/Slant, Salon, Forbes and The National Interest.
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Ukraine’s geographic position doesn’t make integration with Europe impossible, but, unlike the most successful postCommunist countries, it doesn’t have any lucrative export markets on its doorstep. Developing Ukrainian exports to Europe will be a much more difficult, expensive and timeconsuming process.
Conclusion Compared to the post-Communist countries that have had the greatest success in integration with the EU, Ukraine is in much worse demographic, geographic and political situations. The country’s population is in uninterrupted freefall, it is far away from Europe’s economic center of gravity, and its politics continue to be riven with huge regional differences. Given these factors, it’s hard to see how the country could make a “European choice” even in the most favourable of circumstances.
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Ukraine is in an entirely different situation. A large percentage of its population and almost all of its heavy industrial base is in the Eastern part of the country. Dnepropetrovsk, Kharkiv, Donetsk, and Lugansk are all several hundred miles away from places like Bratislava and Warsaw, much less major cities in Western Europe. Even if Ukraine’s infrastructure were up to par (and it’s not, its roadways are widely recognized as some of the worst in the world), the sheer distances involved severely complicate any attempt to pursue an export-led growth model.
present time they show no sign of diminishing in significance. In the past intense east-west differences, and the political deadlock they inevitably create, have made Ukraine virtually ungovernable, and this will continue to be the case for the foreseeable future.
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countries generally inherited underdeveloped and poorlymaintained infrastructure, but the distances involved were small enough that they could be overcome.
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commonly used index, MSCI Frontier Markets, rose 26% in 2013, while the MSCI Emerging Markets Index actually fell 2%. In the first half of this year, the MSCI Frontier Markets index was up another 20.5%; the MSCI Emerging Markets Index was up 6.3%.
Postcards from the edge
Frontier markets make a comeback
Tim Umberger, senior adviser at East Capital, told the fund management firm's investment summit meeting, which was held in Romania, Serbia and Montenegro this year, that it is an “exciting time” for frontier markets in Southeast Europe. “Things started to move more in the last two years. We have been saying for a long time that the fundamentals of this region look good, and markets are still down compared to their peak, so there is a way to go," he said. While the pace of growth differs between countries in the region, given this strong convergence story, long-term growth is expected to be well above the EU average, East Capital believes. This is expected in Serbia, with a new government in place and firmly on the road towards EU entry. Serbian GDP per capita is well below that in Croatia and Slovenia, highlighting the potential for convergence. Meanwhile, production costs are considerably lower than in either Western Europe or EU member states in the CEE region, encouraging companies such as Fiat to set up production in the country. Unscathed All this has attracted lots of new money to frontier market funds, so much so that many fund managers believe frontier markets are now an asset class in their own right.
Nicholas Watson in Prague
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ne of life's investment flights of fantasy involves picking up The Economist, flipping to the "Markets" section at the back, and cursing your lack of foresight for not having put $50,000 in, say, the Pakistan stock market, which is up over 25% so far this year. Investing in places like Pakistan, so-called frontier markets that are
even riskier than emerging markets, is certainly not for the faint-hearted. But over the past two years it has become a lot more rewarding as money begins to pour back into these markets. According to Renaissance Capital in an April report, frontier markets were a more profitable place to invest in 2013 than emerging markets – a trend which has continued this year. The most
Charles Robertson of Renaissance Capital estimates that there is about $22bn invested in frontier market funds, which is still tiny compared with the some $800bn invested in emerging markets, though up "dramatically" from the $9.5bn at the end of 2012. Based on data from fund EPFR, frontier funds have seen inflows of $4.4bn (or 33% of assets under management) from the beginning of 2013 to April 2014, while over the same period EM equity funds saw net outflows of 5%.
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At first glance that may seem odd. After all, the US Federal Reserve's decision to start "tapering" its bond-buying programme, which from 2008 saw a lot of the $4 trillion of “funny money” poured into emerging markets, caused an immediate flight to quality. This took its toll especially on vulnerable economies like those of the so-called "Fragile Five" – Turkey, Brazil, India, Indonesia and South Africa. However, analysts say the frontier markets have remained largely untouched by all this, mainly because the story there is more about local consumption growth, infrastructure spending and reforms, such as the broadening and deepening of the financial services sectors. Added to this, say Renaissance, are the big-picture long-term themes of good demographics and improving education. So basically, as the growing populations in places like Nigeria or Pakistan become more middle class, they will consume more and spending on infrastructure will rise. As The Economist notes:" the so-called BBC stocks (banks, brewers and cement companies) are one way to play these investment themes." In bne's region, it is the predominantly Muslim countries of Central Asia and Azerbaijan where this demographic driver exists, rather than Central and Eastern Europe. "Curiously, frontier-and-beyond markets, as well as [emerging markets], also dominate the rankings among those countries where the working age population will shrink the most, from Ukraine (-7%) to Lebanon (-3%)," Renaissance explains. "Nearly all are in Emerging Europe, where the economic collapse of the early 1990s had two consequences: many young people left their home country, and those that stayed either delayed having, or did not have, children." Ukraine is the starkest example of this, and is explored in more detail in "The Insiders" column by Mark Adomanis. Still, demographics don’t hold all the answers for investors. Education, reforms, global energy prices and local
credit growth play significant roles in driving growth and asset prices, and here the picture for CEE/CIS frontier markets is much better. For example, Tajikistan and Uzbekistan are set to hugely expand their oil and gas industries, while Georgia is one of the great reformers in the world. Where the frontier starts What is a frontier market? It's hard to say where an emerging market ends and a frontier one begins. Indeed, the star performer in frontier markets since the beginning of 2013 has been the United Arab Emirates (UAE), which (together with Qatar) benefited from MSCI’s announcement that it would transition the countries from its frontier index to the emerging market one in May. For bne's purposes, we narrow the focus more than, say, the MSCI Frontier Markets Index, which includes EU countres like Romania and Estonia, as well as the most developed market outside Russia in the CIS, Kazakhstan.
• • • • • •
Moldova Mongolia Tajikistan Turkmenistan Uzbekistan Ukraine
The problem with investing in these markets is finding suitable ways to invest, while also dealing with the illiquid nature of investments when things inevitably go awry, which they tend to do more often in frontier markets than in their emerging counterparts. Renaissance notes that frontier markets’ equity issuance has collapsed by over 80% from the 2008 peak and has yet to rebound meaningfully. However, it expects the strong market performance recently together with the re-rating seen in several frontier markets, "for privatisations and stake sales to gradually pick up." It is hoped, for example, that the Mongolian Stock Exchange, under
"Over the past two years investing in frontier markets has become a lot more rewarding" MSCI also stipulates that there must be a stock market of a certian liquidity – something that is lacking in some of bne's frontier markets. Within the CEE/CIS region, bne would class the following countries as frontier markets – none of them EU members or candidate countries (except Albania, which was just granted the privilege in June), all very hard to invest in and illiquid, and all very risky: • • • • • • • •
Belarus Albania Armenia Azerbaijan Bosnia-Herzegovina Georgia Kyrgyzstan Kosovo
a new CEO appointed in June, will manage to reverse the struggle it has had attracting investment even after a three-year, $14m restructuring carried out by the London Stock Exchange. Once one of the region's standout performers, the benchmark MSE Top 20 Index has slid 38% since it signed that agreement with the LSE in April 2011. Andy Brown, a London-based emergingmarkets money manager at Aberdeen Asset Management, told Bloomberg that from a liquidity perspective, investors need to adopt a long-term approach because it costs a lot to trade. “The markets are relatively thin. You don’t really want to be trading in and out on a regular basis. It can certainly be a bumpy ride,” he said.
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Many upper-middle-income countries may not converge to average OECD GDP per capita by 2050
Source: Authors’ calculations based on World Bank (2013), World Development Indicators (database) http://data.worldbank.org/data-catalog/world-development-indicators.
Finally, there are some concerns that the "convergence effect", the vital driver for investing in frontier markets, may not happen in quite the straightforward way that many have been predicting and have cited as the best reason for investing in such frontier markets. The Organisation for Economic Co-operation and Development (OECD), in a report published in July, accepts that developing economies will continue to grow faster than more
advanced countries and their share in world GDP will continue to grow (the share of non-OECD countries – in Purchasing Power Parity terms – surpassed that of OECD countries in 2010, according to the new PPP series released in May). However, the OECD notes, "the differential rate of economic growth between OECD and non-OECD countries has narrowed recently and there has been a significant slowdown in the rate of growth of emerging countries. It is not clear what the future trend will be."
"The markets are still down compared to their peak, so there is a way to go"
What this means, as the chart shows, is that middle-income countries have not been growing fast enough to catch up with the OECD average by 2050, which was the base-case scenario assumed by many economists. And it's unlikely they will be able to do so in the future, the OECD argues, for three main reasons: the slowdown in emerging economies is likely to persist for some time as the Fed's "funny money" dries up; the slowdown in China will impact on natural resource producers like Mongolia; and many big emerging markets have not done enough to improve their productivity over the past decade or more. Thus for investors looking at frontier markets, picking and choosing the correct ones will be crucial, for which a look at the back of The Economist might well help.
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Russia sanctions split the globe
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ivisions within the West over imposing sanctions on Russia were highlighted again in July. While Washington targeted Russian banks and oil companies on July 16, Europe appeared unwilling to follow suit – until the Malaysian airliner MH17 was shot down, almost certainly by the Moscow-backed rebels.
At the same time Russia's role as a major energy supplier plays a crucial role: countries along the route of the new mooted South Stream gas pipeline are especially keen to keep relations with Moscow on an even keel, as they want access to cheap gas and transit fees that the pipeline would bring.
As bne went to press, the EU was in the process of expanding its list of Russian officials, businessmen and entities under asset freezes and travel bans. The new list of targets, to be released by the end of July, will be those considered "materially or financially supporting actions undermining or threatening Ukraine's sovereignty, territorial integrity and independence."
Finally, the silence from the rest of the emerging world has been noticeable. China, Russia's new best friend, has publicly criticized the sanctions. In the middle of July, before the downing of MH17, far from looking isolated Russian President Vladimir Putin was surrounded by friends at the annual BRICS summit, held in Brazil. The assembled leaders of the fastest growing economies in the world posed for group pictures and signed off on billions of dollars worth of contracts, including the establishment of a new BRICS development bank to rival the International Monetary Fund (IMF) and World Bank.
The US is happy to cut into the business of some of Russia's most important companies, as it has little exposure to the Russian economy. However, the rest of the world has been notably more reluctant. Europe is torn over what to do thanks to its heavy investment into the increasingly lucrative market: Russia is already the second biggest consumer market in Europe on most counts, and is soon to be number one at a time when the rest of Europe's economies are visibly slowing.
Our map this month shows the state of relations between Russia and the world. Only four nations (US, Canada, Australia, Japan) plus the EU have imposed sanctions on Russia. The rest of the world is either neutral or in business with Russia.
Russia's international isolation? Russia's relations with the other countries of the world.
Source: bne
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INTERVIEW:
Kruk fears "frozen conflict" in Ukraine Liam Halligan in London
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ateryna Kruk was born in Rivne, Western Ukraine in 1991. After studying for a Master’s Degree in Poland, she returned to Kyiv last autumn as the Euromaidan protests began. Determined to shift Ukraine towards Western Europe, Kruk became heavily involved in the protest movement. Tweeting extensively in English, she emerged as the “unofficial voice” of Euromaidan, providing a running commentary both on the protesters’ strategic positioning and dramatic events on the streets, as she tells Liam Halligan. Liam Halligan: Is Ukraine part of Europe? Kateryna Kruk: Ukraine isn’t only part of Europe but is also its eastern border. This border isn’t really defined in geographical or physical terms. Cultural differences define the true border of Europe. As such, this border is rather wide and vague, but obviously lies somewhere in Eastern Ukraine. Being part of Europe, belonging to it, is also a process. By observing cultural changes in Ukraine, you can see how the country is becoming more and more European.
LH: Was it right to violently oust former president Yanukovych before his term was due to end in 2015? Unpopular in both West and East Ukraine, he would surely have lost the election anyway. KK: Yes, he would definitely have lost. But once people were shot on the Maidan (on February 20), that was way too much for many Ukrainians to stand, even those who were previously indifferent. Ukraine hasn’t experienced war or military conflict for some time. Protesters getting shot in central Kyiv was more than many of us could accept or understand. Remember, also, that it was Yanukovych’s decision to leave Ukraine. No one physically forced him to go. Euromaidan didn’t have that ability, whatever the threats made by Praviy Sektor. A deal was negotiated the day after the Maidan shootings, signed by Yanukovych and the opposition leaders, under which Yanukovych would remain president, but the elections would be held several months earlier than previously planned. Then, just a few hours later, Yanukovych left the
country. Euromaidan only found out about that the day after he was gone. LH: The protests began last November but, in January and February, escalated into serious violence. How did that make you feel? KK: To be honest, I became terribly confused. I’d joined the revolution and observed Euromaidan from day one. I saw its huge potential as a peaceful, progressive movement and was actually very upset when the violence began. At the beginning, the main goal of Euromaidan was to break corruption in our country. I very much wanted us to win and Ukraine to change. Yet we had no real leader, nor a clear vision of our next steps. All we had were opposition politicians who wanted the power that Euromaidan was helping them to gain. The three opposition party leaders supposedly running Euromaidan weren’t saying the same things. So protesters felt lost, that there was no other way but violence. One could feel, in early January, that nothing was changing and something had to
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happen. People became impatient and some inside Euromaidan pushed opposition leaders to be more assertive with Yanukovych. The aggression was partly aimed at Yanukovych, but at opposition leaders too. You can’t do good using ugly measures, but there we were on the Maidan, leaderless and surrounded by riot police. The authorities were getting ever more aggressive, introducing laws used under dictatorship. We reached the point where either we won, and Yanukovych and his people resigned, or we lost. Sooner or later, it had to happen. The violence was also driven by fear. Protesters knew they would anyway be punished, go to jail and be beaten, so had nothing to lose. Escalation was inevitable. I felt it, predicted it, saw it start and knew I could do nothing to stop it. It was horrible. But I still knew in my heart I was on the right side and fighting for something important – and that feeling gave me power. LH: There is speculation opposition leaders instigated the sniper shootings, firing on their own protesters to generate outrage to oust Yanukovych. Could this be true? Even Estonian Foreign Minister Urmas Paet has suggested it might be. KK: Considering the brutality and violence Yanukovych directed at Euromaidan, I’m certain he was responsible for these murderous actions. I think these shootings were organized with the help of Russian Special Forces. Yanukovych and his men made Ukraine a paradise for corruption. They are used to killing their own citizens. Yanukovych is quite capable of arranging the shooting of people protesting for freedom and democracy. I heard the rumour the killing was done by the opposition. I’ve thought about this theory, of course. But it’s clear one of the snipers was firing from the office of the Deputy Prime Minister, which strongly suggests the operation
was connected to the Yanukovych government. It was simply too brutal to be done only as a provocation, in my view. Knowing for sure won’t bring the people who died back to life. We’ll know in the end, though. You can’t hide this kind of information forever.
Ukrainians agree with her regarding the future direction of our country. Perhaps she got a little bit emotional and carried away on that phone call. Ukraine is a sovereign nation and it’s up to us – the Ukrainian people – to decide who is in government.
LH: To what extent has Euromaidan been assisted by foreign governments? How did you feel to hear secret recordings of Assistant US Secretary of State Victoria Nuland saying who should and shouldn’t be in the Ukrainian government?
LH: Some people have expressed alarm that members of Svoboda and Praviy Sektor were heavily represented in the interim Ukrainian government and remain in office now. Are you alarmed?
KK: I think we’ve received help from abroad – yes. First and foremost, the protest movement has benefited from the political legitimization that comes from the support of western countries. We’ve also been backed by people overseas who recognise our fight for freedom and willingness to become a real European state. There may also
There’s a lot of Russian propaganda about the role of Praviy Sektor and Svoboda. Praviy Sektor isn’t a parliamentary party, so can’t take part in the creation of any coalition. Svoboda, meanwhile, has only two members in government. We have nationalistic parties and organizations in Ukraine. That’s not a secret or something unique. But their influence
"It may be that an 'Eastern Partnership' is the closest we get as, I accept, there are different points of view inside the EU" have been financial aid. I know for sure we’ve received much more help from ordinary citizens and NGOs than governments. What foreign government help there has been, will probably have been felt much more at the level of politicians and opposition parties. As an ordinary protester, I know Euromaidan has received warm clothes and medicines for our hospitals. We’ve had food and technical assistance from overseas. Hospitals in the Baltic states, Poland and the Czech Republic have invited injured activists to be treated there for free. I’ve felt a lot more support from the civic sector than from any government. And I’m certain no other state has influenced or orchestrated the direction of Euromaidan. As for Victoria Nuland, I’d say most
is much exaggerated. In previous presidential elections [Dmytro] Yarosh and [Oleh] Tyahnybok, who represent these nationalistic parties, gained less than 3% support. Compare this to the results of recent European Parliamentary elections and then let’s have a conversation about who has a problem with nationalism. Svoboda now has two ministers, but I doubt the party will cross the threshold to gain entry to the Rada in the next parliamentary elections, currently scheduled for 2017. These elections will probably be earlier, as indicated by [President Petro] Poroshenko. That will help us get rid of the remaining allies of Yanukovych in the Communists and the Party of the Regions. LH: Many claim that the fire at the Odessa trade union headquarters
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in May, in which 41 ethnic Russians died, was a massacre. What do you think? KK: The investigations show a clash between separatists and pro-Ukrainian protesters. When I saw the news footage, I had a sense of déjà vu, as I saw something similar in Kyiv in February. I think pro-Ukrainian protesters were trying to help people get out of the building. I’m not saying the Ukrainian government are all saints, but I’ll never accept this fire was a deliberate act by pro-Ukrainian supporters. It’s hard for me to talk about Odessa, as I wasn’t in Odessa. But I was in Kyiv during the Euromaidan disturbances, so I do know what happened there. LH: Should Ukraine join Nato? Is there a new Cold War? KK: Nato is a political-military alliance. It’s a huge challenge for the Ukrainian public even to discuss such matters. I personally think Ukraine should be in Nato. But I don’t think that will ever happen, given how Nato is perceived in the Kremlin.
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I don’t think Putin wants Eastern Ukraine to be part of Russia. He’s simply using the region to destabilize Ukraine as a whole. This conflict is also a wonderful opportunity to divide Europe, which is exactly what Putin wants. Europe needs to take a strong, unanimous position. The more Europe’s weak points are revealed, the more they will be used by Putin. This violence in East Ukraine is organized and financed by Russia. To stop it, the West should introduce further sanctions and have a clear position on the international isolation of Russia. There are lots of economic issues involved, of course, not least energy supplies. But there has to be clarity from the West – either help, or don’t interfere at all. If the Eastern border was closed, and controlled by the Ukrainian army, we can solve violence in the East – but only if Russia stops supporting terrorists. That’s something the West can make Russia do. LH: What is your vision for UkraineRussia relations?
Russia has an aggressive style of diplomacy and politics. The reaction to such a bold move as Ukraine joining Nato would either be very restrained or rather aggressive, as Moscow would feel the enemy was right at its border. Knowing Russia, that second scenario is more likely.
KK: Whether I want it or not, Ukraine and Russia remain close. But Russia wants to make this relationship as hard as possible. Over the next few years we face frozen conflict, with Russia using Ukraine to pursue a bigger goal of spreading disorder across the European Union.
We don’t have a new Cold War yet, but I think Russia wants one. Life is easier in a bipolar world. The concept of “the enemy beyond” means you can act as a saviour. In today’s global order, it’s harder for Russia to find its place and continue playing a significant role. The country’s social and economic problems mean it can’t be a global superpower. But it can create a situation where everyone has to consult Moscow and consider its actions if Russia is perceived as a dangerous and unpredictable partner.
Although older Ukrainians have been raised to think Ukraine and Russia are close, my generation doesn’t feel any special relationship. We want to be good neighbours but not brothers. The idea that Ukrainians, Russians and Georgians are all the same family is a Soviet myth.
LH: Will Russia invade East Ukraine? What should the West now do to help de-escalate unrest in your country?
LH: When will the EU agree to full Ukrainian membership? KK: Ukraine has proved it shares European values, its spirit of freedom and democracy. That’s far more important than the level of GDP. I believe it is Ukraine’s destiny to join the EU, but we’re quite aware there are
serious problems we have to deal with first: fighting corruption, nepotism and restoring the rule of law. This is a long path and could take 10 or 15 years. But the most important step has already happened. Ukraine will never again be a Soviet-style country. We are and will remain a European nation. And we will join the EU. This is something me and other Maidan people will take care of. We owe it to those who fought and died for our European future. LH: What are your plans now, Kateryna? And do you truly believe the EU will let Ukraine join? You’re a major threat, for instance, to Europe’s formidable farming lobby. I was recently offered a job in the new Ukrainian government as a press secretary, and I took it. Kyiv is an expensive city and I have to live. Later this year, I’m going back to university in Poland. Culturally and on the level of values, Ukraine deserves to be an EU member. But it may be that an “Eastern Partnership” is the closest we get as, I accept, there are different points of view inside the EU. Above all, Ukraine deserves a clear answer on EU membership and we haven’t had that. We’ve already moved a long way and there’s no going back. Yet there has been no clear answer from the EU – and so we feel lost. We have a new president who has stated our clear aim to join to EU – and yet, from the other side, there is silence. That is part of the explanation for the behaviour of Euromaidan. We’ve had very misleading signals from the EU. But we’re building a European Ukraine anyway and we’re going to keep doing that. Even if we can’t ever join the EU, that won’t kill our dream of making Ukraine a better country.
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execution of his policies, both at home and abroad. Sometimes, this is deliberate. In the case of eastern Ukraine, Russia’s campaign to stir up chaos in order to put pressure on Kyiv was precisely intended as war on the quiet and on the cheap. Not anticipating that it would last as long as it has, and in the process acquire its own momentum, Moscow opted simply to arm, protect and encourage local and imported proxies.
MH17 as metaphor for Russia
STOLYPIN:
Mark Galeotti of New York University
T
here is still much that is unclear about the tragic shooting down of Malaysian Airlines Flight MH17, and much that will probably never be known. Nonetheless, it does seem most probable it was shot down by a surfaceto-air missile operated by insurgents that was either provided by Russia or else stolen from Ukrainian army stocks and maintained and prepared for action with Russian expertise. Understandably, anger at Moscow is mounting, even though there is no evidence that the rebels either realized they were shooting down a civilian airliner or were acting under the direct orders of the Kremlin. Of course, on one level that is irrelevant. Moscow has engineered a state of civil war in eastern Ukraine and provided undisciplined and often thuggish rebels with advanced weaponry; it can hardly fail to be regarded as having blood on its hands. Nonetheless, there is a poignant irony
to the fact that having got away with many acts clearly dictated by Moscow, from assassinations abroad to annexing Crimea, the Russian government faces its toughest foreign policy challenge
What seemed a cynically efficient strategy has proven to be problematic. Unable or unwilling to compromise in the early weeks and months, Kyiv has regained its nerve and purpose and mustered its security forces. Slavyansk has fallen and, without more extensive (and more obvious) Russian support, then Kyiv is probably able to crush the insurgency militarily, albeit not without serious loss of life on every side. Take me to your leader Meanwhile, who is in charge of the insurgency? The “defense minister” of the self-proclaimed Donetsk People’s Republic (DPR), Igor Girkin – who goes by the nom de guerre Strelkov – was a Russian intelligence officer and likely still is, but he also appears at least to a degree to have gone native and has openly criticized Moscow for not supporting the rebellion more. Even
"One must question just how much real control Putin has over the execution of his policies, both at home and abroad"
yet from something for which it only created the conditions. This highlights another irony of Vladimir Putin’s Russia. For all his unquestioned mastery of the Kremlin, his “tsar redux” personal style of leadership, and his commitment to the “power vertical,” one must question just how much real control he has over the
if Strelkov and the rest of the DPR leadership were brought to heel though, it is not at all clear how much real power they have over the various field commanders. According to intercepted telephone conversations released by the Ukrainian Security Service – unconfirmed but highly plausible – the decision to
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"The eastern Ukrainian insurgency holds up – in its own bloody and toxic way – a mirror to wider processes within Russia itself"
shoot down MH17 was taken by the commander of a Cossack unit on his own authority. This was reported to the DPR command after the fact.
In short, the eastern Ukrainian insurgency holds up – in its own bloody and toxic way – a mirror to wider processes within Russia itself.
Not only do units and commanders in the rebellion have considerable military autonomy, they (ab)use their positions – their firepower and the capacity to kill, beat and threaten with impunity – for personal or political gain. Cases of institutionalized looting (unlike the individual cases which have been punished with draconian ferocity), shakedowns at checkpoints and the settling of old scores are numerous.
Turning a blind eye No one within the elite is challenging Putin, and when he wants he is able to sweep away anyone he pleases. But he also depends on that elite and working with them often means turning a blind eye to inefficiencies and corruption simply to maintain that working relationship. There is, in effect, an unspoken etiquette, a sense of the acceptable levels of nepotism, sloth and graft.
Meanwhile, commanders and interests are at odds. The feud between Strelkov and Alexander Khodakovsky, commander of the Vostok Battalion, has become public knowledge. Meanwhile there are suggestions that the powerful oligarch Rinat Akhmetov has made deals with field commanders to keep his business interests safe. There are also divisions between those eager to see a “Novorossiya” joining the Russian Federation, and those instead simply looking for what they consider a more equitable status within Ukraine. No one within the insurgency is challenging the DPR leadership. But they need to work with the field commanders and often simply don’t fully know exactly what is going on, on the ground – as with MH17. Furthermore, with little real central control and no evidence that Moscow can call the shots, how can a meaningful peace be reached, even if Kyiv is minded to talk terms? The only way it could be done is if the DPR leadership – and/or Moscow –can either broker a consensus or else in effect fight a civil war within a civil war and force a deal on the field commanders.
From time to time, an especially egregious violator of these norms will be chosen as an example. One such was the Dagestani power-broker,
That often involves keeping their deals secret (there is a reason why the Kremlin is so keen on extending its financial monitoring structures), moving assets out of Russia and thus the government’s reach (ditto), and even manipulating the central leadership to their own ends. When the security agencies fight over turf, budgets and precedence, for example, they tend to do so by presenting themselves to the Kremlin as the most loyal and the most useful, all in the name of institutional gain. Putin has shown an awareness of the debilitating impact of endemic corruption, factionalism and inefficiency. However, he has also built a system of power that depends on keeping the elites happy and supportive by granting them limited but extensive license to embezzle. Just as the hands-off approach in Ukraine seemed tremendously successful until it suddenly didn’t, so too the social contract at home. With capital flight increasing, the budget under severe pressure and the first hints of quiet discontent within the elite, Putin may well find himself wanting to turn the
"There is an unspoken etiquette, a sense of the acceptable levels of nepotism, sloth and graft"
Makhachkala mayor Said Amirov – known as “Said the Deathless” for surviving perhaps 15 assassination attempts – who was convicted in July for orchestrating the murder of a rival. However, it speaks volumes that to arrest Amirov the Kremlin had to send in special forces from Moscow, unwilling to rely on the local police, and spirit him away to Moscow’s Lefortovo prison. More often, though, the clans, factions and opportunists of the elite are doing their best to enrich and advance themselves by any means available, short of arousing the Kremlin’s ire.
rhetoric of the disciplined, centralized power vertical into a reality. But can he do so without fighting a (political) war with his own elite? Mark Galeotti is Professor of Global Affairs at the SCPS Center for Global Affairs, New York University, who writes the blog In Moscow’s Shadows.
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deal signed by Moscow and Beijing in May. This planned 4,000-kilometre Power of Siberia pipeline will link Gazprom's gasfields in eastern Siberia with the Russian Pacific and the Chinese border. The $55bn pipeline is a crucial plank in Gazprom's strategy to link these new gasfields it has spent billions on developing with the vast, newly opened-up Chinese market. However, reports say Rosneft has been lobbying behind the scenes to gain access for its gas on the Power of Siberia pipeline ever since the China deal was signed in May – something that became public on July 1 in a statement.
Battle of the gas giants Ben Aris in Moscow
R
osneft has stepped up its attacks on Gazprom's monopoly over natural gas exports by pipeline, part of a chipping away of the power of the Russian state gas firm while at the same time a reflection of the rise of Rosneft chief Igor Sechin. An internet site that tracks Russian legal proceedings on July 7 showed Rosneft had registered a complaint in a local arbitration court against Sakhalin Energy, half-owned by Gazprom with the rest held by Shell and two Japanese companies, Mitsui and Mitsubishi. Ria Novosti quoted a source as saying Rosneft is seeking access to a gas pipeline network owned by the Gazprom-led consortium developing the Sakhalin-2 oil and gas project, which feeds the consortium's liquefied natural gas (LNG) plant in Prigorodnoye in Aniva Bay. Rosneft is looking to build its own LNG terminal on Russia's Sakhalin island in partnership with Exxon Mobil to take advantage of the 2013 move by the Kremlin to partially end Gazprom's monopoly over the gas sector by
allowing competitors to start exporting LNG abroad. But Rosneft's LNG project needs access to the Sakhalin-2 pipeline network to make it viable. "Rosneft was declined access to the Sakhalin-2 project pipeline. Currently, the company is working with the authorities and Gazprom to develop a solution acceptable for all parties involved. Rosneft has also filed a motion with the Federal Antimonopoly
"The head of Gazprom Alexey Miller has announced that Power of Siberia pipeline and export supplies to China were planned only for Gazprom resource base. This position is completely different from the target of developing Siberia and Far East regions and openly contradicts the current legal system," the Rosneft statement reads. "Gazprom, being an infrastructure monopoly, is obliged to guarantee independent producers access to the transport system." Darth Sechin The attack on Gazprom indicates the rising power of both Rosneft and its CEO Igor Sechin, the de facto head of
"The showdown is part of a creeping 'de-Gazpromisation' underway in Russia's energy sector" Service to recognize Sakhalin Energy Investment Company Ltd. as a subject of natural monopoly," a Rosneft representative told RIA Novosti.
the so-called hard line statist Siloviki faction in the Kremlin and a close personal friend of Russian President Vladimir Putin.
The lawsuit follows a challenge by Rosneft over Gazprom's monopoly on a planned pipeline to supply Russian gas to China, part of a $400bn gas export
Sechin's power has been growing at an alarming rate in the last few years as Rosneft has grown into the world's biggest listed oil company. In a sign
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of the changing times, in June Sechin publicly defied a new transparency law introduced by Putin demanding all the heads of state-owned companies declare their income. Sechin is widely believed to be the best paid boss in Russia and was forced to declare he spent $25m on buying Rosneft's shares earlier this year, which the company said came from his "bonus." However, Rosneft found a legal loophole to justify not releasing the size of Sechin's pay packet to the public as required by the new law. More generally, the showdown is part of a creeping "de-Gazpromisation" underway in Russia's energy sector. As Russia's economy stagnates, the Kremlin is becoming ever more focused on boosting productivity. Gazprom's wantoness and endemic corruption is public knowledge, but the Kremlin has been reluctant to rope the behemoth in. However, in recent years it has allowed not only Rosneft to get into the gas business, but has also encouraged
independent gas producers like Novatek. As well as losing its monopoly over LNG exports, Gazprom has also seen its share of the partially liberalised domestic market eaten up by
acknowledges the need for competition to promote efficiency, but rather than open a sector up, it sets two large stateowned companies in direct competition with each other. This hybrid system will produce real competition and the progress that implies, but leaves
"Rosneft has been lobbying behind the scenes to gain access for its gas on the Power of Siberia pipeline" independents, which have raised their share of the Russian gas market to over 25%. Gazprom's domestic gas sales fell again in 2013 to 243bn cm, down 8.3% from the previous year. The plan with Rosneft is a copy of the strategy used by the Kremlin in the banking sector: the Kremlin
The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS.
the Kremlin in ultimate charge of a strategically important sector. It has worked to an extent with the banks, where Sberbank has been set in competition with VTB (and its retail subsidiary VTB 24). Sberbank has been transformed from a lumbering Soviet-era dinosaur into the darling of portfolio investors in just a few years.
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bne August 2014
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privatisation of the strategically crucial state company.
Sweden freezes shares of shadowy Ukraine gas producer Misen Energy
As bne reported in April, a number of Firtash-linked structures in 2010-2011 took stakes not just in Karpatygaz, but in a whole cluster of companies that held JAAs for gas extraction with Naftogaz. Apparently, judging by the Swedish documents, Firtash then transferred these agreements to the Karpatygaz JAA, while using his influence in the state company Naftogaz to further expand the gasfields governed by the agreements. As a result, according to the February 2011 agreement now revealed in Sweden media, Misen Energy's operations in fact extend to cover over 50% of Ukraine's total gas reserves, and 70% of total state-owned reserves, totalling 574bn cubic metres (cm), giving valuations of the Swedish company that far exceed its current value.
Graham Stack in Berlin
S
weden has frozen trading of one of Ukraine's leading gas producers, Misen Energy, following bne's exposure of Misen's secret links to the Ukrainian oligarch Dmitro Firtash, who was arrested in Vienna on organised crime charges in March. Documents obtained by Swedish media indicate that Misen Energy may have gained control of as much as half of Ukraine's gas reserves through secret deals with state energy company Naftogaz – and that the Naftogaz official negotiating the deal was a business partner of Firtash. Sweden's First North stock exchange froze trading in Misen Energy on June 25, following Swedish media reports on Firtash's links to listed energy company Misen Energy. bne revealed these links in April, following Firtash's arrest in Vienna on bribery and organised crime charges: the Cyprus firm Norchamo Ltd, holder of a 30% stake in Misen Energy, is owned by two further Cyprus firms, Heico and Suzel, listed as part of Firtash's Group DF conglomerate in internal documents leaked to media in 2008. Swedish regulatory authorities are currently investigating. In comments in April, Misen Energy representatives denied any links to
Firtash. “Misen and Karpatygaz have no connection to Firtash,” Boris Sinyuk, CEO of Karpatygaz, Misen Energy's 100% owned Ukraine subsidiary, said. According to Sinyuk, “Misen Energy AB is a public company, shareholders of which are more than 3,000 individuals and legal entities, including conservative Scandinavian pension funds and western investment banks.” But in fact, according to the company's own disclosure, 99% of the company is owned by five companies, one of them being Norchamo, and all of which appear to have Ukrainian links. Misen/Karpatygaz demanded a retraction from bne of the article under threat of legal action, which bne rejected. Licence to print money Now Swedish media have got hold of the story – and published documents sourced locally showing how Misen Energy has effectively taken over half of Ukraine's gas reserves, around 70% of the state-owned reserves, under the terms of a Joint Activity Agreement (JAA) with the Naftogaz subsidiary, Ukrgazvydobuvannya – a deal that was renewed in February 2011. This JAA thus comes close to a 1990s-style backdoor
There are two great advantages to such JAAs as exist between Misen Energy/ Karpatygaz and Ukrgazvydobuvannya: firstly, gas extracted under the agreements can be sold at market prices – which have soared as Russia has ratcheted up pressure on Ukraine over gas supplies during the crisis. The law otherwise requires gas extracted directly by Ukrgazvydobuvannya and other state-owned companies to be sold to the population and to utilities at heavily subsidised prices, several times less than the market price. Secondly, the JAAs are extremely opaque, requiring no formation of a new legal entity, with the private partner operating the gas drilling and responsible for all paperwork. In 2009, Ukraine's state audit committee blasted such agreements for taking Naftogaz to the cleaners, but attempts to revoke them were thrown out by Ukraine's notoriously corrupted courts. Typically, according to the audit committee, Naftogaz contributes almost all the real assets to such JAAs, but receives depleted revenues well below the 50% it should get: the private operators can cook the books, siphoning off funds through inflated supply contracts, while selling gas to related-party traders below market prices. This all makes JAAs potentially a licence to print money.
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Convergent interests It is no secret that Yury Borisov, head of Ukrgazvydobuvannya in 20102014, had previously been CEO of Firtash's holding companies Ostchem and Group DF, as bne reported in April, indicating the extent of Firtash's influence. According to bne enquiries, the Ukrgazvydobuvannya official who actually negotiated the 2011 deal with Misen Energy, is himself connected to Firtash's Norchamo Ltd. Oleksiy Tamrazov, first deputy head of Ukrgazvydobuvannya until March this year, is named in the Misen Energy contract as representing Ukrgazvydobuvannya, and he acknowledges himself that he was the architect of the deal. In 2011 – the same year as the deal was signed – Norchamo founded a Ukrainian company, NK Magistral, registered in Kyiv at Turgenev street 15, office 52. According to court documents, this is the exact same address as the postal address of a gas trading company co-founded by Tamrazov, Zakhidna Naftogazovaya Kompaniya (ZNGK). Tamrazov held top management posts at ZNGK, including CEO, prior to his job at Ukrgazvydobuvannya. He is not on paper as an owner at ZNGK, but makes no secret that he is a partner in the business together with the formal owner Serhiy Chornyi. Tamrazov denied to bne any connection to Norchamo or Firtash. “ZNGK is connected only to me and to my partner, and has no connection to Firtash,” he said. “And Firtash is not the beneficiary of Norchamo, I know who the real beneficiary is." “NK Magistral is on the floor below ZNGK and I have never seen any Firtash people there,” he added. Tamrazov acknowledges that ZNGK collaborates in gas trading with a number of Firtash-linked companies, including Group DF's chemical giants. According to Tamrazov's personal website, ZNGK company's turnover in 2013 totalled around $0.5bn, and is one of the top-10 importers of motor fuel and diesel in Ukraine.
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Clan wars For all Firtash's clout in Ukraine, Misen Energy/Karpatygaz did not enjoy plain sailing after signing the 2011 deal. In December 2012, Eduard Stavitsky, a friend of the family of exiled president Viktor Yanukovych, replaced Firtashlinked Yury Boiko as energy minister. The move caused a fissure between the Yanukovych family and Firtash that gradually destabilised the regime throughout 2013, until the now legendary protests kicked off on Kyiv's Maidan at the end of November 2013. Almost immediately the cosy Misen Energy relationship with Naftogaz also hit the rocks – with the energy ministry refusing to book its gas starting January 2014, preventing it from being sold on the domestic market and effectively cutting off Misen Energy's revenues. The company is now using the episode to dissociate itself from the disgraced Yanukovych family – and from Firtash. “In the summer of 2013, Misen Energy faced problems which would have been unlikely to emerge if the Company had indeed had connection with the aforementioned individuals,” Sinyuk told bne.
Thus the departure of Yanukoyvch was not a mortal blow to Misen Energy and the JAA in Ukraine, despite Firtash's inconveniencing in Vienna. “At this stage, the situation with the energy ministry is virtually resolved,” Sinyuk told bne in April. Tamrazov has also been fighting a rearguard action against new competitors in the Naftogaz trough: he has been writing as an investigative journalist for respected outlet The Insider, exposing what he alleges is new corruption at Ukrgazvydobuvannya involving fuel trader and politician Ihor Eremeev. Back in Sweden, investigative journalists and regulators are now taking a close look at whether Misen Energy – created in 2011 as the result of a reverse acquisition of an existing Swedish-listed company by the Karpatygaz shareholders – is compliant with Swedish corporate law. And in a different direction, they are scouring the paperwork for traces of Firtash's alleged erstwhile mentor – mobster Serhiy Mogilevich, wanted by the FBI in connection with fraud at a Canadianlisted company in the 1990s.
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Eastern Europe
Loan Maidan
opinion is important due to the existence of a bailout programme for Ukraine,” she says.
Sergei Kuznetsov in Kyiv
U
krainians who took out mortgages in foreign currencies have been badly hit by the devaluation of the country’s currency, the hryvnia. Many of them are struggling to repay their debts, and have appealed to the government to lessen the financial burden. But it looks like the Ukrainian authorities are not listening.
Avramenko says that these borrowers believe that “financial risks” should be shared between the government, banks and borrowers. “We are proposing to convert mortgage loans to hryvnia from foreign currency under the exchange rate that existed at the moment a loan was obtained. The interest rate should be kept at the current level,” she explains.
Following this year’s political, economic and military crisis in Ukraine, the hryvnia slid to about 11.7 per dollar, having stood at 8.0 per dollar at the beginning of 2014. This is a painful blow for borrowers who receive their salary in hryvnia but must convert part of it into foreign currency in order to service their mortgages.
“This corresponds to a model of social justice between the government and its citizens. The Ukrainian central bank said in 2007-2008 that the hryvnia will remain one of the most stable European currencies. People were taking such statements into account when they borrowed,” Avramenko adds.
In the course of the last two months, hundreds of borrowers have protested outside government buildings in the centre of Kyiv, demanding help. “They are not refusing to pay. These people just want to say that, due to objective reasons, they can’t pay as much as is being required of them,” Yaroslava Avramenko, a leader of the borrowers’ movement, tells bne.
Forex borrowers are appealing to the Ukrainian parliament to adopt a bill that takes into account their demands. But the parliament has supported a different version of the bill, one that's been proposed by the government.
The movement is called the “Loan Maidan” – an echo of the Euromaidan protests on Kyiv's Independence Square (known as the Maidan) that formed the heart of the recent rebellion against the rule of the now-ousted president Viktor Yanukovych. Going bad According to an outlook by Moody's Investors Service, published in May, the amount of loans going bad and a corresponding rise in Ukrainian banks' non-performing loan (NPL) ratios is expected. “The rating agency anticipates that given the magnitude of the recent currency depreciation and the unhedged position of many borrowers in foreign currencies, formation of new problem loans will accelerate and NPLs will double to close to 30% of gross loans.”
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Ukraine agreed a $17bn two-year support package with the IMF in April. The funding should help the country overcome the current crisis and build the foundations for a recovery. However, Ukrainian officials have already said that the aid package alone is not sufficient. "The IMF package has helped the recovery, but today this is not enough, in that we are experiencing unprecedented aggression from the Russian Federation," Volodymyr Groysman, Ukraine’s deputy prime minister, told international donors at a meeting in Brussels in July. Oleksandr Turchynov, the head of Ukraine’s parliament, said in July that support of the government-backed bill is crucial for continued cooperation with international donors. “If the parliament adopted an unbalanced bill, the international organisations would cease cooperation with Ukraine, and Ukraine will face a default,” he warned. Tuyukova admits that the governmentsupported bill could aggravate the situation regarding banks' levels of bad
“This version of the bill suits every institution except the borrowers” According to this version, home loans should be converted under the exchange rate at the date of possible conversion, which of course is after the value of the hryvnia has plummeted. “This version of the bill suits every institution except the borrowers,” Avramenko says bitterly. This is a view shared by analysts. "Indeed, this bill is more favourable for the banks, but it is not favourable for borrowers,” Anastasia Tuyukova, senior analyst at Kyiv-based Dragon Capital, tells bne. Tuyukova points out that the main advantage of the government's bill is that it is supported by the International Monetary Fund (IMF). “The fund’s
loans. However, the banks are prepared to discuss with borrowers softening the lending terms on an case-by-case basis, to avoid such developments, Tuyukova believes. On the other hand, an increase in the banks' NPL ratios should not represent too strong a blow to the banking system. “Since the crisis of 2008, mortgage lending in Ukraine has not been developing. Today, mortgage loans make up just 5% of the banking system’s loan portfolio. One third of them are already NPLs. If even one third more of loans were to be added, it still would not be a problem for the whole system,” Tuyukova says.
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Slovakia's precarious balancing act Tim Gosling in Prague
M
any EU states have baulked at antagonizing Russia by backing sanctions over its role in the Ukrainian crisis, but Slovakia is alone in actually blocking the West's efforts to offer direct support to Kyiv. Questions are now being asked in Washington about where Bratislava's loyalties really lie, especially given the series of deals between Slovakia and Russia that are currently on the table. With Russia using its exports of natural gas as a tangible means to pressure cash-strapped Ukraine, the EU has been pushing to supply Kyiv with cheaper supplies – albeit the gas is still actually bought from Moscow. The likes of Poland and Hungary are sending small volumes by reversing pipeline flows, but Slovakia, which sits on the main line that carries Russian gas through Ukraine to Europe, is key.
The situation moved up a gear in June, when Moscow cut gas supplies to Ukraine over its unpaid bills. That leaves the EU exposed, with Ukrainian pipes carrying around 40% of Russian gas headed for the bloc, and Kyiv likely to be tempted to siphon off some gas should it still be cut off come the winter.
cm/y, according to estimates. That would all but cut the threat of another winter spent shivering for the states at the eastern end of the EU, as happened during the Russian-Ukrainian "gas wars" in 2006 and 2009. The bigger point is that it would severely dent Moscow's leverage over Kyiv as it looks
"Energy is the top priority for Bratislava – there are deep connections with Russia across the sector" While Poland and Hungary – which began reversed supplies in 2012 – are sending around 6bn cubic metres a year (cm/y) combined to Ukraine, Slovakia could potentially boost that to 36bn
to move closer to the EU and out of Russia's orbit. However, despite years of negotiation, Bratislava refuses to play ball. It claims
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that reversing one of the four pipelines on the main line would be at odds with its contract with Russia's statecontrolled gas exporter Gazprom. It has also slammed Ukraine for its conduct in the "gas wars," when it diverted flows headed west for its own use. Priorities That stance is not so surprising given Ukraine's track record over the gas trade, suggests Sharon Fisher from IHS. "Slovak policymakers are not happy with Ukraine since 2009, and they remain sceptical about the interim government," she says. Weeks of talks over reversing the pipeline early in the year produced little more than bickering and vitriol. Then, on April 9, US Vice President Joe Biden rang Slovak Prime Minister Robert Fico. Slovakia agreed on April 22 to open a disused pipeline. However, that offers a capacity of just 10bn cm/y. Moscow was quick to give its blessing to the limited route. Lukewarm responses out of the US and EU were just as instructive. Bratislava has been open throughout that its own gas supply – of which over 80% comes from Russia – takes priority. Slovakia's role as a transit state for around $20bn worth of Russian gas flows to Europe is a major earner for the budget, but it faces rising threats to that business due to the crisis in Ukraine. "Energy is the top priority for Bratislava," says Otilia Dhand at Teneo Intelligence. "There are deep connections with Russia across the sector." Bratislava received its reward in April, when Gazprom handed it a discount on gas imports. The reported price cut of 10% leaves the country paying around $340 per 1,000 cm, according to estimates, at the lower end of the scale among European states. Gambling More immediately, keeping in with Moscow is vital right now as Fico faces rising political pressure at home. The PM was stunned in May when he lost the presidential election to political rookie Andrej Kiska. The years of tough economic conditions and an
authoritarian bent on the part of some bigwigs in Fico's Smer party cut into his support. The price cut for gas imports hands the government a potential route to stem the losses. A double-digit drop in gas prices for households in 2015-16 was announced at Smer's congress on June 28, as part of an "anti-austerity" package worth a reported ¤250m. Surprising many, the left-wing Smer has pressed hard to keep Slovakia's precarious fiscal situation on track since coming to power four years ago. Any space to loosen the belt has been hard earned. "Fico is only interested in keeping gas prices low," suggests Fisher. "With [national gas utility and importer] SPP back in state hands
remainder – announced it had selected VTB Bank to run a ¤500m bond issue. However, it was an agreement a week earlier by another Russian state-owned banking giant, Sberbank, to lend dominant power producer Slovenske Elektrarne (SE) ¤870m that put the cat amongst the pigeons. Analysts note that such a size of loan is unusual for a Slovak company without syndication. On top of that, it's around the volume of investment needed for Slovakia to finish the long-delayed expansion of the Mochovce nuclear power plant. The deal has sparked much speculation in the Slovak press that the loan points the way to a potential Russian buyout of the 66% stake in SE held by Italy's
"There's a long-standing fear of Slovakia going back to the Meciar era" [since June], it will be a challenge to lower gas prices for a budget already under huge strain." The move appears a gamble on Slovaks being more worried about their wallets than about the Russians. "Slovaks are generally pro-western and worried about Russia and Ukraine," suggests Fisher. Dhand points to a recent survey in which 83% of respondents expressed their disagreement with Russian policy in Ukraine. Cat amongst the pigeons The stakes could yet rise, however. Reports of deals between Russian banks and the Slovak energy sector, even as the US and EU consider further sanctions against Russia, are prompting speculation that deeper cooperation could be on the cards. On June 15, even as Russian banks struggled to secure any kind of deal in the US and EU, SPP-Distribucia – 51% owned by Bratislava with Czechbased energy group EPH holding the
Enel. Fico has been highly critical of Enel for helping to raise the cost of living since it bought into SE in 2006 for ¤840m, while the Mochovce project is seriously behind schedule and over budget. Enel said on July 10 that it will look to sell a portfolio of overseas assets, including SE. Writing in Slovak daily SME on June 12, Economy Minister Tomas Malatinsky, who has since lost his job in a cabinet reshuffle, said the Russian state nuclear agency Rosatom is a potential buyer. Any sale would require Bratislava's approval, and several other suitors are understood to be keen, not least Czech utility CEZ. Rosatom has been sniffing around Slovak nuclear assets for some time, but handing Russia ownership of an EU nuclear facility may be a step too far even for the strong pro-Russian contingent in Bratislava. Old school ties At the same time, both Dhand and
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Seagal on tricky ground Voicing support for Russia and its president, Vladimir Putin, can come at a cost, as US actor Steven Seagal found out recently. When Seagal's eponymous blues band was unveiled as the headline act for Augustibluus, a blues festival held at the beginning of August in the western Estonian town of Haapsalu, there was a huge outcry from Estonians, who objected to Seagal's support for Russia's annexation of Ukraine's Crimean peninsula earlier this year. Estonia has a tortured history with Russia, gaining independence from the Soviet Union only in 1991. Since then, there have been numerous spats with its giant neighbour, ranging from trade wars to nasty disputes over Soviet memorials in the country. Estonian singer Tonis Magi called for a boycott of the festival if The Steven Seagal Blues Band appeared, leading to the festival organisers' decision to cancel the invitation on July 22, citing Seagal's "negative associations." Estonia's foreign minister, Urmas Paet, told the Tallinn daily Delfi: "Steven Seagal has become active in politics in the last few months in a manner not befitting a world which honours states based on the rule of law."
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Fisher say they wouldn't be surprised to see Slovakia strike more deals in the energy sector with Russia, given the strong Russian ties of senior officials in the government. "Slovakia's alignment with Russia predates its stance in the Ukraine crisis," says Dhand. "The ruling circles include people who traditionally have good relations with Russia, are former Communist Party members or studied in Moscow. That includes Fico." Another prominent official with strong connections in Moscow is Foreign Minister Miroslav Lajcak. His trip to Moscow on May 18-19, which saw him meet with individual officials included on the lists of western sanctions, raised eyebrows. "Lajcak's visit made everyone sit up and take notice," notes Dhand. Washington, in particular, is casting an increasingly wary eye over Bratislava, confirms Fisher, who is based in the US capital. Although she says that US officials have come round to understand Slovakia's caution over Kyiv's track record on paying its gas bills, other issues have clouded the picture. "For Washington, the most damaging thing was Fico's comments on Nato troops," says Fisher, referring to the rejection by the PM on June 4 of US President Barack Obama's proposal to boost the US military presence in Central and Eastern Europe, and compared the idea – which has been heavily backed by Poland and the Baltic states – to the Warsaw Pact invasion of what was then Czechoslovakia in 1968. Opposition parties have accused the PM of "acting like a Russian agent." While Czech officials had made similar comments the previous month, Prague is seen differently in the US, Fisher says, even if that's not entirely fair, or a view shared in Brussels. "There's a long-standing fear of Slovakia going back to the Meciar era," she says referring to the anti-market authoritarian PM that governed Slovakia for most of the 1990s. While Brussels is fairly unperturbed – indeed Slovakia was amongst the
first in "new Europe" to adopt the euro while euro-scepticism stalks the Czech Republic – Fisher adds that "Washington has always viewed the Czechs as more reliable." Balancing act The suspicions over Slovakia's loyalties also appear a little unfair given the stance of many other European states. While the likes of France and Germany have strongly criticized Moscow's role in Ukraine, they have spoken out against sanctions in the interests of maintaining economic ties. Hungary, Austria and Bulgaria are also fighting against Brussels' efforts to halt the construction of the massive Russianled South Stream gas pipeline, which would bypass Ukraine to deliver Russian gas to a hub in Austria. All three states would host the South Stream pipeline on their territory, providing access to gas as well as transit fees. However, the South Stream issue only illustrates the fine line that Slovakia appears to be trying to tread between east and west. Indeed, it's a similar balancing act to that which Ukraine practiced over the past 20 years. On the one hand Slovakia appears to be deepening its dependence on Russia when it comes to energy and the economy. "Slovakia has not been moving quickly enough to diversify," agrees Fisher, "and is potentially digging itself into a hole." At the same time, analysts and officials worry the economy is over-reliant on the Eurozone for exports. On the other, the country risks losing huge revenues should South Stream go ahead, as Russian gas flows that bypass Ukraine will also bypass Slovakia. "It's somewhat surprising the Slovaks didn't manage to get on the South Stream route somehow," says Fisher. "Everyone else in the neighbourhood is grabbing a slice."
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his five representatives on the CEZ supervisory board Babis has gained an unexpectedly strong position – he's de facto gained control over this institution... This has shaken the coalition," says Zuzana Kubatova, an investigative journalist who has covered CEZ for many years. The changes at CEZ, as well as that of supervisory board members at state oil firm Mero and state oil products pipeline firm Cepro on the same day, are in line with Babis' policy for the government to become more active in the running of state companies and overseeing their strategic direction.
A power grab by Babis David Binar and Nicholas Watson in Prague
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Babis has earmarked CEZ, almost 70% owned by the state, as a major source of cash to pay for the new government's spending plans. In March, he suggested CEZ pay out its whole net profit from 2013 in dividends to shareholders; the power giant normally distributes around 50-60% of its group net profit. In the end, the board opted to pay out 61% of last year’s profit, which means some CZK15bn (¤546m) will pour into budgetary coffers. Babis already appears to be throwing his weight around, indicating on July 7 that the ¤8bn-10bn expansion of the Temelin nuclear power plant, which was abandoned in April after the whole process had degenerated into a legal and economic fiasco, will be revived. Two new reactors "certainly need to be built," he insisted.
he effective takeover of the Czech utility CEZ by Finance Minister Andrej Babis signifies the major shift in power since the billionaire arrived on the political scene, as well as dissatisfaction with the way the state energy giant has been run for the past decade.
2013. Only two new members of the supervisory board are deemed close to the Social Democrats (CSSD), the leading party in the coalition. CSSD now control three members of the supervisory board, with their candidate Vaclav Paces being approved as chairman.
At CEZ's AGM on June 27, the Ministry of Finance, which manages the state's shareholdings, effectively took control of the supervisory board, which supervises the management of this crucial state company, whose power is illustrated by the country's nickname of "CEZko" – a corruption of the word "Cesko", the colloquial name for the country.
Analysts say Babis' effective takeover of the supervisory board is surprising, because it ignored an unwritten rule that all parties
"Babis has de facto gained control over this institution... This has shaken the coalition"
Seven members of CEZ's 12-person supervisory board were changed, with five new members being affiliated to Babis' ANO party, which was only formed in 2011 and came second in the parliamentary elections in October
from the ruling coalition must be represented; the smallest coalition party, the Christian Democrats, are left without a representative. "Through
Supporting the suspicion that a decision over a new Temelin tender has already been taken, officials in South
Korea were quoted on July 8 by local press as saying the Seoul government has decided that state-run KEPCO will be a bidder in the new tender.
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"Benes is in the firing line over his decision to award a ¤60m contract to build a nuclear fuel dump at Temelin to a shell company registered in Lichtenstein"
Transparency The worrying fall in CEZ's profitability is behind another key change pushed through at the AGM. According to new rules, every member of the supervisory board has the right to access any document related to CEZ activities without needing the approval of the wider board. This is regarded as a key move to greater transparency at a company whose inner workings have long been the subject of controversy. Vlastimil Jirik, a numbers man who was a member of supervisory board until 2010 when he resigned, is known to have briefed Babis over the past few months about several transactions, including the acquisition of the German coal miner Mibrag, that were trumpeted by CEZ management as big successes, but whose own investigations have found to be hugely value destroying. "In terms of transparency this move is quite promising," says James de Candole of the advisory firm Candole Partners, which is a trenchant critic of the company. The AGM also confirmed in his post the current CEO Daniel Benes, though his standing with Babis remains very low, being considered primarily responsible together with former CEO Martin Roman for the ruinous expansion policies that have seen CEZ's net profits fall 32% since the record high of CZK51.9bn in 2009, and its share price drop by 44% over the past three years. CEZ has attributed the profit declines to "a major drop of the wholesale prices of electricity due to massive subsidies going into renewable energy sources, combined with a stagnating European economy and ongoing uncertainty
concerning the regulatory environment in the energy sector." On June 24, CEZ finally extricated itself from the disastrous 2009 acquisition of the major power distributor in Albania for ¤102m, which since then had become embroiled in a big battle with the government there that culminated in Tirana stripping CEZ Shperndarje of its licence and putting it under administration. Benes is also in the firing line over his decision to award a ¤60m contract to build a nuclear fuel dump at the Temelin nuclear power plant to a shell
company registered in Liechtenstein – a decision the Czech antitrust authority on June 11 fined CEZ over, arguing the company in question, CEEI, was not qualified to enter the tender because it had no idea how to build such a structure, and should therefore have been disqualified at the outset. On June 30, it emerged the Prague high state attorney Lenka Bradacova, an anti-corruption crusader, has reopened an investigation into the deal, which looked suspiciously high given that the cost of an equivalent dump in neighbouring Bavaria, Germany and completed only a year earlier was around just ¤30m. A CEZ spokesperson has defended to bne the use of a company whose ownership remains unknown on the grounds that to find out would contravene EU laws over procurement. Legal experts say this a fallacious argument, as EU laws stipulate only that a public company cannot discriminate against a tendering company over its ownership.
"Babis' policy is to become more active in the running of state companies and overseeing their strategic direction"
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government's viewpoint, is that a smaller OFE system will help Poland's fiscal situation. Accounting rules treat obligatory social security deductions flowing into the ZUS system differently than those diverted to the OFE system – a matter of treating the ZUS money as a contingent liability instead of an outright liability. By cancelling the bonds held by the OFE system, Poland reduced its government debt by 8 percentage points of GDP. The ZUS system will also absorb a growing portion of the funds held in a worker's OFE account a decade before retirement, eventually taking on the full obligation to pay out a pension.
Poland's pension problems to hit WSE Jan Cienski in Warsaw
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he Polish government's budget saving plan to seize most of the assets in privately run pension funds and shift them to the state-run retirement system is leaving the rump of the privately run system gasping for cash – something that is also likely to have negative consequences for the Warsaw Stock Exchange. Last year the government shifted 51% of the assets held by the funds – about PLN146bn (¤35bn) – largely in government bonds, to the state-run system. The government argued that the funds, formed in 1999 as part of a wide-reaching reform of the pension system, had been badly thought out and so were too costly. In addition to grabbing more than half of their assets, the government also forced the 14m Poles with accounts in the private system to make a choice about whether to stay there or to transfer all of their retirement savings to the state ZUS system. The initial response was very tepid, and there had
been fears that only about 300,000 people would remain in the privately run OFE system when the deadline expires at the end of July. However, there has been an uptick of interest in recent days, and assumptions
On the negative side, the 16 privately managed funds are going to have to consolidate as they will manage a much smaller pool of money after July. As well, the WSE will see significantly less new money flowing in than before the government's changes. In 2011, under pressure from the first wave of the economic crisis, the government slashed obligatory transfers to the OFE system from 7.3% of a worker's salary to only 2.3% – dropping monthly inflows into the WSE from PLN1.7bn to only PLN700m, according to an analysis by Open Finance, a a financial adviser. That also marked a
“The remaining people in OFE are more than previously estimated, but it will still not be enough and will affect the WSE” are now that about 1m people will stick with OFE. That means the government is unlikely to completely eliminate the OFE system, as had been done with a similar retirement programme in Hungary. Even so, the emaciation of the OFE system will still have some serious side effects. Taking stock On the positive side, from the
peak in the WSE's valuation. Until then shares traded in Warsaw had benefited from an OFE bonus, thanks to rules making it almost impossible for the funds to invest in shares not traded in Poland. Now, the smaller size of the funds plus the new system of gradually shifting the pensions of older workers to the ZUS system means that the WSE will
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Donald Tusk's Mickey Mouse opposition
Jan Cienski in Warsaw Polish Prime Minister Donald Tusk has had a terrible few weeks since the transcripts of several controversial conversations featuring senior ministers were splashed across the national press in June, but he's very lucky to have such inept opponents. The opposition Law and Justice party tried and failed resoundingly to oust the government on July 11, losing the vote by 236 to 155 in the 430-member legislature. Later in the day, the opposition also failed to unseat Justice Minister Bartlomiej Sienkiewicz, whose security apparatus should have been able to prevent eavesdropping on his obscenity-laced chat with the head of the central bank. To add insult to injury, a new opinion poll by CBOS issued the same day suggested Tusk's Civic Platform has been only marginally weakened by the weeks of scandal, falling just 3 percentage points to 29% support compared with June. Law and Justice, by contrast, did not budge, with the support of 24% of the electorate. Wojciech Szacki, writing for Polityka Insight, an analysis firm, claims it's apparent that Law and Justice has hit a "glass ceiling" in terms of support. "Even at a moment of crisis for Civic Platform, Law and Justice would have no chance of winning a majority in parliament," he suggests. Law and Justice leader Jaroslaw Kaczynski is hoping to capitalise on Tusk's problems to finally break through to a wider group of supporters. However, his party's brief term in office from 2005-2007 still sends shudders through many centrist Poles, who were put off by its right-wing nationalism and hunt for often imagined criminal conspiracies that ended up bending or breaking laws. That has made it difficult for him to move beyond his core electorate, concentrated in the rural east of the country. The party's absorption of two smaller coalition partners also lingers in the memories of other political parties, which are loath to cooperate too closely with Kaczynski. That reluctance was seen again in July, when the Law and Justice leader's attempts to unite small right-wing splinter parties into a single anti-Tusk bloc collapsed. All of which is good news for Tusk, as he leads his party into local elections later this year, and presidential and parliamentary elections in 2015. Voters may not be overly thrilled with his team as it comes towards the end of Poland's first consecutive term in office of any government since the fall of communism, but they seem to be even less taken with the opposition. "Poles have their electoral preferences and even several weeks of scandal with recordings of senior [Civic Platform] politicians has not caused a sharp fall in support for that party," writes Szacki.
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see an annual net outflow of about PLN4bn, predicts Ryszard Petru, head of the Association of Polish Economists. That means the days of the OFE bonus are gone. “The remaining people in OFE are more than previously estimated, but it will still not be enough and will affect the WSE,” says Petru. As the lacklustre response from current OFE holders has filtered in, the WSE has responded. The exchange's broad WIG index has been flat for the last six months and had fallen by 2.6% over the month to mid-July. The government's original hope had been for many people to abandon the OFE system, which was why people had to actively intervene to keep their privately managed accounts – otherwise they would be folded into the ZUS system. But counting on Polish lethargy was so successful that it looked as though almost no one would stick with the OFE system, which could be unexpectedly detrimental to the WSE. As a sop, fund managers were allowed to directly contact their account holders and even to send along stamped envelopes, making the renewal process slightly less onerous – one of the reasons for the increase in people staying with their OFE accounts. The Polish reforms were part of a broader trend that saw countries transforming their pay-as-you-go pension schemes, in which today's workers finance the pensions of today's retirees, into a system where a portion of workers' deductions go to pay for their own future pensions. While the reformed system has long-term benefits, especially in countries like Poland with a shrinking population, the up-front costs, as governments have to borrow to finance existing pensions while shifting some savings for future use, are difficult for governments to stomach.
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INTERVIEW:
Killing the Klub in Hungary
Kester Eddy in Budapest
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irk Gerkens, chief executive of RTL Klub, Hungary's most popular commercial television station, has hit back at government accusations of tax evasion, denying any accounting wrongdoing and accusing the authorities of “further harassment” against RTL “for being a free media.” “We didn't do any kind of tax cheating. We have carried forward losses in our books, which are audited every year by PwC [the international corporate services firm],” Gerkens told bne in an interview. Gerkens was responding to comments by Mihaly Varga, Hungary's economy minister, who told a press conference on June 25 that he had ordered NAV, the tax authority, to audit RTL on suspicions that it had booked “fictitious transactions” in order to avoid paying corporate tax last year. According to Index.hu, a leading Hungarian website, Varga said: “there is one media player that wants to wriggle out of carrying the just and mutual public burden” – a reference to Magyar RTL, the local owner of RTL Klub. Varga later told the state news agency MTI that he was referring to transactions that had reduced RTL's tax base by HUF23bn (¤75m) in 2013, but that if all was in order, the company could “sit calmly and await the audit.”
New law The dispute is the latest incident in the increasingly bitter row between the government and RTL Klub sparked by the new advertising tax legislation, passed by the Hungarian parliament earlier this month and signed into law by Janos Ader, the Hungarian president, on June 17.
“around HUF4bn” last year, although most of this originated from the group's cable operations rather than its flagship channel, RTL Klub. But the move to call for a tax audit is purely to cover up what Gerkens claims is a botched job by ministry officials in the legislative process. “They did this last minute tax exemption
"When you look at how the tax is designed, it's clearly meant to hurt us the most" The new law is widely seen to be aimed at Magyar RTL, the Hungarian subsidiary of Luxembourg-based RTL Group, as it is the only media company which has advertising revenues above HUF20bn (¤66m), the threshold level which attracts the maximum tax rate of 40%. It's a point not lost on Gerkens. “When you look at how the tax is designed, it's clearly meant to hurt us the most, because it will tax our turnover - not profit – at 40%. This is unseen in the world,” he declared. Under the previous tax regime, RTL's Hungarian operations had been a money-spinner, netting profits of
[amendment] which allowed a company to reduce the tax base by 50% of the previous year's losses. This was intended to help TV2 [our principle competitor], but what they didn't know was that I also have carry-forward losses,” he says. As a result, Magyar RTL will see its 2014 half-year tax payment reduced from an estimated HUF2.25bn (¤7.4m) to around HUF600m (¤2m). While that's good news in theory for RTL, Derkens told bne he had expected a negative reaction. “It [the tax audit] is a clear step of further harassment against RTL for being a free media. It's obvious,” he said, noting that the latest
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threat comes after Janos Lazar, minister for the Prime Minister's Office had labelled the company “corrupt”, while on June 23 Napi Gazdasag, a business daily with close ties to the government, had headlined a story alleging RTL Klub directors had received massive end-of-year bonuses totalling HUF1.6bn (¤5.3m). The paper later admitted it had
its managers like this, that's a question for shareholders. But it was HUF1.6m [around just ¤375 per person]. That's not a story, but they wanted to see a big number,” he said. Despite the alleged harassment, Gerkens, who has been with RTL Klub for its entire 17 years in Hungary, said
"The tax audit is a clear step of further harassment against RTL for being a free media" over-valued the payments by a factor of 1,000 due to a printing mistake. “Even if it was HUF1.6bn for 14 people, it's none of their business, because if a private company wants to remunerate
the owners were “not in the mood” to leave the country, although an additional full-year tax burden of some HUF4.5bn to be paid in 2015 would mean losses and an “obvious restructuring” of business operations.
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One option would be to raise advertising rates, which at peak times are 33-50% lower than those in neighbouring Poland and the Czech Republic, so the market “can obviously take” an increase, Gerkens argued, although no business decision has been taken on the issue. He insists that RTL has not only kept strictly to the law, but that it is a “massive” tax payer, contributing almost HUF9bn (¤29.5m) in total contributions to state coffers last year. Asked if the broadcaster was considering taking the tax dispute to court, Gerkens replied: “Sure, in Hungary and abroad, but I don't want to disclose the legal strategy.” Does this mean possible legal action at the EU level? “In the EU and outside the EU,” he said.
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upon a ruling from the Supreme Court in early June that said the banks' practice of using a spread in forex rates – ie. lending at one rate and basing repayment on another – was unfair. The justice ministry bill says lenders must reimburse to borrowers any gains made through the practice. It also stops the use of spreads in future, as well as banning unilateral interest and fee rises in loan contracts. That applies to both forint-denominated and forex loans, unless banks challenge the legislation by September. The government has said it plans a second bill when parliament reconvenes which is likely to act upon pledges from senior officials to wipe out the use of all forex loans by Christmas.
Hungary's banks face huge bill Tim Gosling in Prague
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ungary's banks are braced for a big hit after lawmakers approved a bill on July 4 that will force lenders to compensate borrowers of foreign currency loans for "unfair" charging over recent years. The central bank has warned the banks could have to pay compensation worth about ¤3bn to affected clients. The legislation, which needs to be signed into law by the president, is a rapid response to recent legal rulings, and is but the first step of a populist package that the ruling Fidesz party has been threatening for around a year. A three-month programme in late 2011 allowing loans to be paid off early at below-market exchange rates reportedly cost the banks over ¤1bn. Meanwhile, over the past 12 months, the levels of non-performing loans (NPL) have mounted, as borrowers hold off paying debt while they await the relief scheme. The government has been pushing over
the last year for a legal green light to implement a wider scheme to force banks to offer relief to those who took out foreign currency loans, mostly in Swiss francs, in the boom years before the crisis hit in 2008. These borrowers have suffered from the fall of the forint since. However, Hungary's
That represents the biggest threat hanging over the banks. The fear is that the government will force them to convert outstanding loans at unfavourable rates, and at a rapid pace. Like the first stage legislation, it is the subject of much debate between the government and the Hungarian Banking Association. The lobby group last week assured the government it will comply with the new legislation, but insisted at the same time policymakers should work out a fair burden-sharing programme, and take into account the sector's "loadbearing capacity". However, Budapest appears ready to play hardball. Economy Minister Mihaly Varga warned in June that the
"The package under formation could be significantly higher than the 'final repayment' package was in 2011-12" top courts have consistently failed to offer a clear framework, which means the thousands of individual cases are becoming tied up in the legal system. Prime Minister Viktor Orban and his administration now appear to have run out of patience, and have seized
government is ready to face any legal challenge from the banks. Meanwhile, although analysts have generally agreed the first phase legislation is likely to hit the banks for HUF400600bn, the Fidesz-associated National Bank of Hungary (NBH) looked to raise the bar on June 28.
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Rent-a-drink The Latvian tax authorities in July turned the tap off an attempt by a company to circumvent the country's licensing laws by "hiring" out alcoholic drinks to customers On July 24, Latvia's State Revenue Service (VID) announced that Seavita was having its drinks license removed and its accounts investigated over a lack of cooperation in a probe into its novel business model of "loaning" out liquor to its customers. Seavita had attracted widespread attention when posters appeared on billboards in the southern town of Bauska promoting its “Alco Club,” in which members could hire rather than buy drinks. “VID informs that property that cannot be used for purposes other than consumption cannot be loaned,” the tax agency said, adding that the means by which drinkers were supposed to "return" the booze they had imbibed was never made clear by Seavita's terms and conditions. “Civil Law point 2152 states that after the expiry of the lease or rental, the tenant must return the leased or rented item with all its accessories, in as good a condition as possible. It should be noted that as alcohol can only be consumed, restitution of it after the termination of the lease lease is not possible,” VID said.
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NBH Deputy Governor Adam Balog told local media that the bill could come in as high as HUF900bn (¤2.9bn), according to Reuters. He added however that none of the country's banks will need to increase capital significantly. Analysts at Erste put the figure at HUF500bn-600bn, and suggest "overall, according to the present information, the package under formation could be significantly higher than the 'final repayment' package was in 2011-12." Local produce In the background, the government is pushing for a greater share of locallyowned banks. With the forex loans schemes coming on top of high sectoral taxes and tough regulatory action, the majority of the banks – the major ones, apart from Hungarian OTP, owned by
unit. However, it received just one – a ¤1 bid from the tiny Szechenyi Kereskedelmi Bank, which is majority owned by the CEO of the Government Debt Management Agency with the state holding the remaining 49%. RBI recapitalised the subsidiary at the end of 2013. Yet the NBH remains keen to predict an exodus of foreign banks, and Balog didn't pass up the opportunity on June 28. He insisted the measures in the submitted bill will help banks get rid of toxic assets without hurting the stability of the sector, but may make some foreign bank owners rethink if they want to stay in Hungary. "This situation will keep the markets on edge for some time," admit analysts at Commerzbank. "Concern
"Prime Minister Viktor Orban appears to have run out of patience"
Eurozone groups – have seen heavy losses since Orban came to office in 2010. That appears to be part of the plan, intended to persuade foreign owners to quit the country and lower valuations. Similar pressure has been seen in the energy sector, in which MVM - anointed "state-champion" by Orban - is busy buying out foreign investors. However, Budapest is unable to leverage legislation on "strategic" companies to force the banks to sell as it has done with the utilities. While some foreign banks looked ready to call it quits in late 2013, reports suggested local suitors essentially wanted them to walk away emptyhanded despite holding huge loan portfolios and other assets reported to total around ¤10bn. In November, Raiffeisen Bank International (RBI) admitted it was studying offers for its Hungarian
surrounding the fairness of upcoming legislation has escalated since PM Orban recently reiterated that the government … plans to drive the sector towards less than 50% foreignownership." Yet, since the turn of the year, the banks have again lined up to reiterate their commitment to the market. Without realistic acquisition offers they have little choice. While Budapest may want to turn the screw, it must tread a little warily. The heavy pressure on the banks has seen them pull their heads in, and the central bank's "funding for Growth" schme is the only realistic source of credit for many. While Hungary has seen healthy recovery in the first half of 2014, the expectation is that it will struggle to keep up the pace mid-term, as credit remains tight and investors continue to baulk at government policymaking.
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matching and in some cases surpassing its neighbour (though not in the fields of online voting or digitalisation of medical records).
Latvia blitzes Estonia's WiFi credentials Mike Collier in Riga
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allinn is well known as the location of Nato's elite cyberdefence centre, the place Skype was born and as a city whose inhabitants seem to be in a permanent state of internet connectivity, but the Estonian capital found itself under cyber-assault from an unlikely quarter recently when the Latvian capital Riga cheekily and unilaterally named itself "European Capital of WiFi". In a dawn operation performed with ruthless efficiency, on July 3 the Riga municipal authorities and national telecommunications company Lattelecom (51% owned by the state and 49% by Sweden's TeliaSonera) erected signs at all five major roads into Riga informing visitors of the self-awarded honour and shattering the existing entente by which everyone assumed E-stonia was the leader in all things online. The Latvians then set about rubbing the Estonians' noses in it by pointing out that Riga has three free WiFi points per square kilometre and one free WiFi point per 750 inhabitants, compared with Tallinn's two free WiFi points per square km and one free WiFi point per 1263 inhabitants.
Riga also scoffed at a variety of other pretenders to the crown including Vienna, Stockholm, Helsinki and Paris, whose free WiFi capabilities pale in comparison with the mighty Latvian WiFi war machine. “Riga has moved ahead of other European cities for free WiFi coverage," Riga Mayor Nils Usakovs gloated at the unveiling of the signs. Full of martial pride, Lattelecom chairman Juris Gulbis said Latvia was “on the road to becoming a WiFi suerpower” with the sixth-fastest internet in the world and more than 4,000 free WiFi points across the whole country “with new free WiFi points being added every day.” Fierce rivalry The cheeky fait accompli by Riga is just the latest in a growing series of rivalries between the Baltic neighbours whose relatively small sizes make them a useful testing ground for IT technology, ideal for rolling out hi-tech networks with a density that would be prohibitively expensive in larger countries. While Estonia was long held to be an internet pioneer not just in the region but worldwide, Latvia has been gaining ground rapidly in recent years,
And in some respects, the Riga WiFi capital claim is actually justified. Foreign journalists love to ooze admiration for the fact that Tallinn has signs all over the place directing you towards internet access points (“In Estonia, a broadband Internet connection is available everywhere,” Deutsche Welle recently gushed with more enthusiasm than accuracy), but anyone who has actually spent time in the two capitals will find it hard to deny that it is easier to get online for free in Riga than in Tallinn. Where Estonia has the Mektory startup incubator, Latvia has TechHub Riga. While Estonian companies have a knack for mobile apps, Latvia has become a big player, via Lattelecom, in data hosting at high-security data centres that have found a lucrative client base particularly among Russian companies keen to keep their servers and computing capability off Russian soil. In its quarterly report titled 'The State Of The Internet' and based on first quarter of 2014 data, internet security company Akamai handed Latvia a PR coup by saying it had the sixth-fastest average internet connection speed in the world (12mbps, behind South Korea, Japan, Hong Kong, Switerland and the Netherlands), having increased the figure by 15% on quarter and 26% on year. Estonia didn't even make the top ten, with the Czech Republic the only other Central and Eastern European country in the mix in 8th place (11.2mbps). Latvia also made the global top ten for average peak connection speeds (8th place) and High Broadband connectivity (6th place) with Estonia again nowhere to be seen. bne approached various Estonian IT sources for comment and a robust rebuttal but sadly they all seemed to be on holiday – and presumably out of WiFi range...
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Trouble on the waterfront Andrew MacDowall in Belgrade
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vernight, billboards appeared all over Belgrade depicting a gleaming cityscape, a computergenerated artist's impression that looks part boxy 1990s British urban redevelopment, part Gulf desert fantasy. “Slavimo Beograd!” says the slogan – “We Celebrate Belgrade!” This is Belgrade Waterfront (BW), a $3bn megaproject plan for the redevelopment of the Serbian capital, unveiled with much fanfare by Serbian Prime Minister Aleksandar Vucic on June 27. And it is indeed to be developed by a Gulf partner, the somewhat mysterious Eagle Hills, which is headed by Mohamed Alabbar, chairman of major Dubai-based real estate firm Emaar Properties. But despite the fanfare from the government and developer, the project has received a sceptical response from many in Belgrade, including architects
and civil society organisations, who question the BW's conception, a lack of consultation and a master plan out of context with the city’s history, needs and topography. Kula Belgrade The development will have a site area of 1m square metres and a total construction area of 1.8m sqm on a swathe of land on the right bank of the River Sava in central Belgrade, including the Savamala district that in the past has been a Roma ghetto and then a grand early 20th century merchant’s district. Savamala now ranges from glitzy restaurants through alternative artsy bars and crumbling but beautiful institutional buildings blacked by the exhaust fumes of passing lorries, to boarded-up tenements and Belgrade’s bus and train stations. The centrepiece of Belgrade Waterfront will be an “iconic” 200-metre tower
called Kula Belgrade, “serving as the beacon of the entire master-planned community,” according to an Eagle Hills press release. The development, if it goes ahead, will also – inevitably – incorporate the Belgrade Mall, with 140,000 sqm of gross construction area, which claims to be the largest mall in the Balkans. The completed Belgrade Waterfront’s land use mix will include 60% residential, 17% commercial and 15% “retail, cultural and entertainment zone”; 6000 residential units; 24 commercial office “clusters”; and eight hotels. It will be home to 14,000 people with a further 12,000 working in the area’s offices. Landscaping will include a 1.8-kilometre promenade along the Sava – currently lined with the rusting hulks of abandoned ships and squalid semi-derelict light-industrial units – and a 37.6 hectare Central Park, presumably
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preferable to the muddy patch currently standing between the bus station and the grand but dusty old Hotel Bristol. There will also be a performing arts centre, and a “BW Gallery” located in the 1905 Belgrade Cooperative Building, considered by some (including your correspondent) Belgrade’s loveliest structure. Serbian contractors are to be lined up for the development, and
been planned in a “hermetic procedure” without consultation with the public or professionals. “This project that has been forced upon us has very little to do with Belgrade or local spirit of any city. This project is a general space that could be anywhere; it is, more precisely, a non-place,” he explains. “Belgrade really needs to develop this part of the city, which has, on one
“We don't know anything about the company which appears to have been established especially for this project” 20,000 jobs created during construction and a similar number after the development phase. But others use less flattering language. Milan Djuric, technical director of the Association of Belgrade Architects and speaking on behalf of its board, tells bne that while the area is certainly in need of redevelopment, the Waterfront project is fundamentally flawed. He says it is apparently designed for a seaside city (like most Gulf cities) rather than Belgrade, which stands at the confluence of the Sava and Danube, where the Balkan hills meet the flat Central European Plain. Developing “Belgrade on the Water” has been on the agenda for decades, but the Waterfront project’s design has come as something of a surprise to professionals. “The presented project is completely out of context [with the] city’s history, needs and topography,” says Djuric. “It cannot be regarded as a contextualised solution. In the end it seems that the effort has been made to adjust current conditions in the city to the future project, and not vice versa.” Indeed, the artist-impression plans of the development seem to depict central Belgrade as rather flatter than it is, and it is hard to spot historic buildings incorporated into them. Duric says that the development has
hand, due to historical circumstances become a kind of relic in the city, and on the other hand awoken the imagination and appetite of Belgraders with its potential for development. The intention of developing it is important, but the choice of the method is what disturbs the public, and especially the professional public in Belgrade.” Lack of consultation Ko Gradi Grad, a “collective” that seeks to increase citizens' participation in urban planning, tells bne that the agreement had been made between public officials and foreign investors “without any transparent public accountability, and all the public is presented with is a model of
integrate the heritage elements within the location, as much as possible.” But she did not reply to a question about how many of Savamala’s densely-packed old buildings would need to be pulled down to accommodate the Eagle Hills vision. In response to a question about Eagle Hills’ experience of developments in millennia-old European cities, the spokesperson told bne that the “company and its team has a vast experience is undertaking similar large-scale projects in Malaysia, UAE [United Arab Emirates], Morocco, Jordan and Nigeria, among others.” Yet some have questioned the background of Eagle Hills, which has a minimal online presence – one civil society source told bne that he thought it was connected to the Dubai-based developer Emaar, and indeed bne emails to generic BW and Eagle Hills addresses received an out of office response from Mathilde Montel, an Emaar press person. But the Eagle Hills spokesperson denied the link. Trevor McFarlane, chief executive of Dubai-based Emerging Markets Intelligence & Research, says that while scepticism in Belgrade was understandable, the company reflected Gulf business practices, and the investment could be a boon for Serbia.
"This project is a general space that could be anywhere; it is, more precisely, a non-place” the project and a nationwide campaign celebrating it.” Intrigued, bne went to an Eagle Hills spokesperson for more details. She said that “Belgrade Waterfront is not a radical departure from the historical architecture of Belgrade… In fact, the project’s design draws architectural inspiration from the city. One of the focal points of the master plan is to
“We don't know anything about the company which appears to have been established especially for this project,” McFarlane tells bne. “This leads me to think that high-profile backers are involved, but they'd prefer to keep a low profile." "What's interesting is that it is headed up by the well-respected Mohammed Alabbar, whose involvement should
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put sceptics at ease because of his experience in delivering enormous projects. In reality this deepening of ties between cash-rich UAE and indebted Serbia could serve the SEE [Southeast European] country well,” he says. The Belgrade Waterfront development is the latest stage in the deepening of ties between Serbia and the UAE, which already includes arms development, soft
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indistinguishably intertwined with the state, and the business culture is such that government related investors are not accustomed to disclosing investment details,” he says. “Cash-strapped countries in the SEE region wanting to enter the EU, such as the Serbia, are seen by cash-rich Gulf governments and thus some companies as an early route into the European Union.”
"The vast majority of real estate professionals are supportive of the Waterfront project, though there are critics" loans from the Emirates to Belgrade, the widely-praised deal that saw Etihad take a 49% stake in and management control of Air Serbia, and talk of further arms and agricultural supply deals. McFarlane says that private money is now following the government’s, as is common in the Gulf; this may be another reason for secrecy. “It is worth remembering that business in the Gulf is often
But Djuric, Ko Gradi Grad and others remain deeply sceptical, both about the way the door has been opened for Eagle Hills and the long-term viability of the project. They say that the deregulation of urban planning regulations to accommodate the project is unprecedented and reflects a desire to attract investors at any cost, though Djuric says that this is understandable
perhaps given Serbia’s difficult economic situation. Despite sluggish growth – indeed, Serbia may sink back into recession again this year – and some of Europe’s lowest incomes, Eagle Hills remains bullish about the country’s prospects. But it adds that the project will be rolled out incrementally, depending on its success. Tellingly, the only set timeframe thus far is for the completion of Kula Belgrade by the end of 2016. Srdjan Vujicic, director of real estate operations at Coreside, a local associate of global property company Savills, tells bne that the “vast majority of real estate professionals are supportive” of the Waterfront project, “although there are some critics.” “We believe that developing in phases is a must and probably the project will not be completed in full quantity, but since we have lack of commercial, residential and retail space on market and fact that investors will reach for international buyers, we don’t see a viability problem,” he argues.
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English-language daily Hurriyet Daily News.
Turkey eyes up the neighbours David O'Byrne in Istanbul
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he ongoing ISIS insurgency in Iraq and the occupation of the oil-rich Kirkuk region by Kurdish Peshmergas has presented Turkey with a serious dilemma. On the one hand there is the potential for more oil and gas; on the other an independent Kurdistan and what that means for its own restive Kurdish population.
and the KRG, followed in December by the commencement of exports of crude from the region via Kirkuk-Ceyhan – albeit opposed by Baghdad, which has threatened legal action. For Turkey, faced with an increasingly antagonistic government in Baghdad, the potential of oil and gas flows from
Chief among these is the ongoing ISIS insurgency in northwest Iraq, which has allowed Peshmerga forces of the KRG to occupy Iraq's oil-rich Kirkuk region and ISIS to cut the Kirkuk-Ceyhan oil export pipeline, which carries Kirkuk crude to Turkey. With ISIS appearing to have no game plan beyond occupation and destruction, restoring the flow of oil appears to depend entirely on their removal. But this eventuality is unlikely in the short term, given that three months on from general elections Iraqi Shiite leader Nouri al-Maliki is refusing to allow the formation of a government without him as prime minister and opposition parties have refused to support a formal declaration of a state of emergency. Little incentive to return Similarly, the KRG's occupation of Kirkuk has an appearance of permanency. Having been part of the original Kurdistan region until the1960s and with Kurds still believed to be the largest ethnic group, Kirkuk has been long claimed by the KRG as part of its territory. And with the region believed to hold between 5bn-6bn barrels of crude, the incentive to return the region to Baghdad's central control is minimal. "Kirkuk can easily produce 350,000 barrels a day, which means if they can sell the oil, the KRG could be exporting up to 500,000 b/d by the end of the
The increasing strength and influence of the Kurdistan Regional Government (KRG) offers the promise of increased flows of oil through Turkey and the future prospect of Turkey being able to purchase gas from the region at a substantial discount to market prices.
"Turkey has put its chips in with the Kurds and in the short term it may work, but there are many uncertainties and risks"
With the Iraqi central government in Baghdad unable to deliver on promises of gas supplies or increased crude exports through Turkey via the KirkukCeyhan pipeline, the past five years has seen Ankara grow increasingly close to the KRG administration in Erbil. Last year saw the announcement of two major gas deals between Turkish entities
Erbil has been impossible to turn down. "They [Ankara] have put their chips in with the Kurds and in the short term it may work, but there are many uncertainties and risks," says Emre Deliveli, economic columnist on the
year," says Schwann Zulal, CEO of Carducci Consulting, which has offices in London and Erbil. Zulal explains that the KRG is close to completing a 40km section of pipeline
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that will allow crude from Kirkuk's Khurmala fields to flow through its own pipeline network, bypassing the ISIS-controlled region, and then via the Turkish section of Kirkuk-Ceyhan to Turkey's Mediterranean export hub at Ceyhan. Such a hike in exports would provide a boost for Turkey, which has long complained at the loss of transit revenue due to the low flow through the 1.6m b/d capacity Kirkuk-Ceyhan line.
infrastructure investment to allow exports to start.
Zulal explains that everything depends on whether the KRG can get the go-ahead to export the oil. However, currently such a move is opposed by both Baghdad and the US, which has been lobbying for a new Iraqi government to be formed without al-Maliki.
Early July saw a Kurdish deputy in the Turkish parliament submit a bill calling for local authorities in Turkey's mainly Kurdish oil-producing regions to receive 50% of production revenues. The motion has no hope of being passed, but has been widely understood as a signal of more to come.
Unable to sell most of the crude it has already exported through Turkey and with Baghdad politically deadlocked, for the time being the KRG appears unwilling to risk further trouble. However, this could change if the KRG pushes ahead with plans for a
Independent thinking The question remains, though, whether cheap gas will be sufficient incentive for Turkey to accept an independent Kurdistan on its borders, which could in turn act as incentive for Turkey's own fractious Kurds to push for greater autonomy.
For the time being, Turkey's governing Justice and Development Party (AKP) has been sending mixed signals, stopping short of outright condemnation of an independent Kurdistan. With presidential elections
"The question remains whether cheap gas will be sufficient incentive for Turkey to accept an independent Kurdistan on its borders"
referendum on full independence, and claims full rights to export its oil reserves and the region's estimated 6 trillion cubic metres (cm) of gas reserves. That would be good news for Turkey, which has long been looking for cheap gas supplies to meet growing demand and pressure existing suppliers Russia and Iran for more competitive prices. "They have a plan to send 6bn cm/y of gas to Turkey by 2016, but 2017-18 would be more realistic," says Zulal, pointing to the need for considerable
set for August and general elections next year, the AKP government has been occupied with a Kurdish reform package, aimed at both improving the rights of the country's estimated 14m-25m ethnic Kurds, and securing their support at the ballot box. The question is whether Turkey's Kurds, long ignored by Ankara, will be content to accept overdue concessions, or whether they will be more impressed by the newfound oil wealth and independence of their southern neighbours.
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one’s interpretation. Various bigwigs attended a concert of the Vienna Philharmonic in the refurbished city hall, a garish pseudo-Moorish structure ruined by Serb shelling during the 1992-1995 Bosnian War. But in a sign of how petty and tetchy relations between the various actors in the region can still be, the events were boycotted by the president and prime minister of Serbia over the wording of a plaque commemorating the shelling of the building. Though they probably would have avoided the ceremonies anyway, the reason given for the boycott is a sign of how difficult relations between countries in the region can be.
Western Balkans look to leave past behind Andrew MacDowall in Sarajevo and Belgrade
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ournalists and curious tourists descended on the Bosnian capital of Sarajevo the weekend of June 28-29 for the centenary of the assassination of Archduke Franz Ferdinand, with many a report mentioning the Balkans are still divided by ethnic politics and the consequences of conflict, a century after a shot fired by a nationalist sparked World War I. The region certainly has real problems with unresolved territorial disputes and legal cases over the legacy of war; sometimes these impact economics as well. But generally, the Yugosphere is coming closer together economically as businesspeople ignore the political rifts. “Despite persistent glitches and occasional implicit disagreements in political relations among neighbours from the former Yugoslav republics, both political and economic relations continue to improve steadily,” Luka Oreskovic, principal at Eastbridge Strategies, a CEE-focused strategic consultancy, tells bne. “Yet while
it continues to be difficult to institutionalise political ties, economic ties continue to exponentially grow with each year.” The anniversary of the assassination was marked in Sarajevo by events emphasising reconciliation and peace after a century of war. Conferences and exhibitions discussed the legacy of war and how to heal the wounds of conflict. A somewhat eccentric play by Bosnian director Haris Pasovic was performed on the Latin Bridge, beside which
Together, apart Bosnia-Herzegovina itself is divided into two ethnically-defined entities, the largely Croat and Muslim Bosnian Federation, and the Bosnian Serb Republic (RS), which regularly agitates for independence and blocks any attempts to unify the state. Investors complain that the multiple layers of government make decision-making slow, though the RS has a more centralised system than the Federation. International bodies including the International Monetary Fund (IMF), which has helped support the beleaguered economy with loans, have to shuttle between Sarajevo and Banja Luka, the capital of the RS. To the south, Kosovo’s independence is not recognised by the UN or Serbia, which sees the country as a breakaway province, and Serbs in the north also reject Kosovan sovereignty. While
"While it continues to be difficult to institutionalise political ties, economic ties continue to exponentially grow with each year" Franz Ferdinand and his pregnant wife Sophie were shot by Gavrilo Princip, a radical who desired either freedom for the Southern Slavs from Austrian rule or a Greater Serbia, depending on
generally investors feel that corruption and low administrative capacity are more of a problem than Kosovo’s disputed status, both Belgrade and Pristina have claims on the large Trepca
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mines in the north of the country, and the legal limbo has held back investment.
bne, citing the example of the Serbian “Chipsy” brand of crisps popular in Kosovo.
Even where territory is not officially disputed, divisions still exist. In Macedonia, clashes between ethnic
CEFTA has become a significant enough factor for Croatia’s exit after it joined the EU in July 2013 to have a noticeable
"Even in their deeply-divided country, Bosnians will tell you money has no ethnicity"
Slavs and Albanians occasionally lead to violence and even deaths. Serbia and Croatia are pursuing mutual cases of genocide against one another at the International Court of Justice. But regional trade ties are growing nonetheless. One of the catalysts for trade development is the Central European Free Trade Agreement (CEFTA), which encompasses all the former Yugoslav states not in the EU plus Albania and Moldova. Since the agreement came into force in 2007, intra-regional trade has risen. Members’ exports to other member states rose from 15% of total exports to 20.5% in 2012, peaking at 25% in 2008, just before the economic crisis hit demand for imported goods in the region, according to William Bartlett, senior research fellow in the political economy of South East Europe at the London School of Economics. However, there is still some way to go: regional trade is dominated by commodities and trade between companies in different sectors remains low. Economic ties are admittedly strongest between countries and regions with ethnic ties – for example Albania and Kosovo, Serbia and the RS, and Croatia and the Croat-dominated areas of western Bosnia. But this is partly a matter of geography. “There is little prospect of increase in economic ties between Serbia and Kosovo, although these do exist, for example Serbian processed agricultural goods are exported to Kosovo,” Bartlett tells
impact on the region’s economies. “It was definitely visible in Croatia's economic output that it left CEFTA, as the economy experienced difficulties last year, despite the EU accession,” Zoltan Arokszallasi, a senior analyst at Erste Bank, says. “The positive impact of EU accession to Croatia can, however, eventually be perceivable on growth numbers too. After Croatia left CEFTA, Serbia naturally has a more dominant position in the Agreement. Serbia was, however, already running a surplus with other CEFTA countries earlier. The exit of Croatia changes the relative position of several industries in both countries.” Improving standards In Sarajevo, assassination anniversary aside, one of the most common talking points among diplomats, think-tankers and businesspeople is the country’s failure to bring its agricultural regulation up to EU standards – thus
Beyond CEFTA, the EU accession process should help support regional trade by lowering barriers and improving regulation, as well as providing funds for infrastructure and agriculture development. Bartlett also sees promise in the ambitious SEE 2020 Strategy launched by the Regional Cooperation Council, a grouping of the region’s governments, which foresees boosting intra-regional trade from €94bn to €210bn. But non-EU members in the region are at least half a decade from EU membership, and in many cases considerably more. And implementing lofty goals on the ground, even with legislation in place, has repeatedly proved problematic in SEE. Of course, regional economic ties are about more than just goods crossing borders – investment and the expansion of regional companies are also factors. Oreskovic cites the example of Croatian food and retail company Agrokor’s acquisition of Slovenian retailer Mercator, a €1.3bn deal confirmed on June 26. The combined company will be a true regional giant, with revenue of around €7bn a year. Agrokor hopes to follow the acquisition with an initial public offering in London, followed by a move to expand in countries outside the region, possibly the large and highly-competitive Russian and Turkish markets. “Last week's closing of the acquisition is the best example of how a now Croatian-Slovenian retail chain will
"Economic ties are admittedly strongest between countries and regions with ethnic ties"
cutting its farmers off from the Croatian market. One diplomatic source told bne that the main reason is the fact that there is no state-level agriculture ministry due to the RS’ instance that agriculture is an entity-level issue.
consolidate and come to dominate the retail market across former Yugoslav republics by joining forces across state lines,” says Oreskovic. “Such consolidation plays will likely continue in other sectors as well as businesses
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look to grow, opting to acquire new assets in markets they know well which are their neighbouring countries of former Yugoslavia. Although political barriers to such expansion exist, the combination of political inconsistency and private sector's unwavering efforts to expand will result in more interconnected markets and businesses in former Yugoslavia with every year that passes.” Economic clouds More than politics, the biggest risk to greater regional trade and investment, and the expansion of companies across the Western Balkans, is the patchy economic outlook. Arokszallasi expects Serbia to slip back into recession this year after devastating flooding in May, and Croatia’s economy will probably also shrink. The smaller economies will do better. Montenegro and Albania will rack up more respectable rates of 2.9% and 2.1%, respectively, according to the IMF, while Macedonia, which according to the World Bank has the region’s best business climate, will reach 3.2%, rising to 3.4%. Kosovo is the leader, with a forecast of 3.9% – the IMF being more conservative than some who predict a 5% GDP expansion. But this is from a low base. The logic of trading with nearby countries with long historical and often linguistic ties is strong, as is the establishment of regional firms in competitive markets increasingly penetrated by foreign companies. The further thawing of diplomatic relations evident from Serbia’s 2013 agreement with Kosovo and reciprocal visits of heads of government and state should ease some of the political challenges to closer regional economic cooperation. As many Bosnians will tell you, even in their deeply-divided country, “money has no ethnicity”.
Southeast Europe
Food for thought in the Balkans
Guy Norton in Zagreb Cool-headed business logic finally triumphed over hot-blooded political passion when Croatian conglomerate Agrokor at the end of June finally sealed its long-sought acquisition of Slovenia’s leading supermarket chain Mercator. Agrokor's deal to purchase an initial 53% stake in Mercator comes as a huge relief to Agrokor’s owner Ivica Todoric, whose near decade-long pursuit of the prized Slovenian retailing asset has consistently been frustrated by parochial political concerns. Under the final terms of deal, which was provisionally agreed upon a year ago but has since been heavily revised, Agrokor is set to pay a total consideration of around ¤550m to take full control of Mercator, Slovenia’s largest corporate and a major player on the country’s economic stage, employing over 10,000 workers Agrokor, Croatia’s leading privately owned firm, will pay Mercator’s vendors ¤86 per share or the equivalent of ¤172m for a 53% stake in the grocer. That’s much lower than the ¤120 per share valuation initially agreed upon in June 2013 and a fraction of the ¤210 per share price tag that Agrokor was willing to pay in 2011, when its advances were rejected by the Slovenian authorities in Ljubljana on competition grounds. Meanwhile, under the provisions of Slovenian takeover law, Agrokor will also have to publish a public tender for the remaining shares at the same price or better, which values the whole of Mercator at ¤325m. To compensate for the lower-than-initially agreed share price, Agrokor has agreed to sweeten the transaction by providing Mercator with ¤225m in funding, with ¤200m to be used to pay down debt and ¤25m for working capital purposes. As is so often the case in the former Yugoslavia, local political concerns inevitably conspired to overshadow the landmark deal; the campaign for Slovenia's July 13 parliamentary elections saw a rising tide of opposition to the transaction, based on fears that Agrokor’s acquisition of Mercator would lead to the loss of jobs and revenue for both Mercator’s employees and its suppliers in Slovenia. The eventual winner of those elections, the Party of Miro Cerar, moved quickly to reiterate its opposition to major privatisations. Dejan Zidan, leader of the Social Democrats, argued that Agrokor’s takeover of Mercator could jeopardise the financial fortunes of the country’s farming industry, citing concerns that Agrokor as a major food producer in its own right, will replace home-grown Slovenian products on Mercator's shelves with merchandise produced in Croatia, Serbia and Bosnia-Herzegovina.
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Romania makes uneven progress against corruption Clare Nuttall in Bucharest
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ecent high-profile arrests and a sharp increase in indictments for corruption-related crimes have illustrated the increased determination by the authorities to combat corruption in Romania. But these efforts are being held back by MPs and high-ranking officials.
Nastase, who was first convicted in 2012 of siphoning off $2m in state funds to finance his election campaign. The following year he was returned to jail for accepting bribes. In July 2013, Transport Minister Relu Fenechiu became the first serving minister to be sentenced for corruption.
The Romanian president’s brother, Mircea Basescu, was indicted on July 14 on charges of taking a ¤250,000 bribe to help reduce the jail sentence of crime boss Sandu Anghel, who is serving eight years and nine months for attempted murder. When his brother was detained by police in June, President Traian Basescu, who was elected in 2004 on an anti-corruption platform, denied any involvement in the scandal, and says his brother should face trial. “I can assure you that between the need to strengthen the judiciary and the natural urge to defend my brother, I will always choose the former,” Basescu said in a June 19 statement published on the presidential website.
Stubborn problem Despite the increasingly active DNA and judiciary, the level of corruption in Romania remains high by European standards. A European Commission study published in February found that corruption costs European countries
Basescu’s political opponents naturally seized on the arrest to bolster their own positions. Prime Minister Victor Ponta, who is tipped to become Romania’s next president after Bacescu stands down at the end of his second term in November, called on the president to quit immediately. However, Basescu’s brother is just one of a growing number of highranking officials to be targeted by prosecutors recently. Romania’s National Anticorruption Directorate (DNA) reported in February that during 2013, more than 1,000 defendants had been indicted, one-third higher than in 2012. The headcount included six ministers and MPs, 34 mayors and deputy mayors, 25 magistrates and 10 managers of national companies. Among these are former PM Adrian
MPs were either on trial for corruption or had already been convicted. The parliament has also repeatedly intervened in individual cases. In March, MPs voted against lifting parliamentary immunity for former finance minister Daniel Chitoiu, blocking an investigation by state prosecutors. These moves have dismayed NGOs working to reduce official corruption. In a joint letter on June 7, five NGOs and think-tanks appealed to the parliament to obstructing the judicial process. “The Romanian Parliament constantly denies the requests by the DNA for the pre-trial detention of the investigated politicians on corruption charges or the start of their criminal investigations... This attitude undermines the rule of law and it is placing us outside of the Western civilization,” the letter said. “We want the government and parliament to stay out of this game and
“I don’t feel that we are sending a signal to society that corruption is not a choice in life” a total of around ¤120bn a year, with the highest levels of bribery found in Bulgaria, Greece and Romania. “In Romania, both petty and political corruption remains a significant problem,” says the report. “Although some positive results have been observed when it comes to prosecution of high level corruption cases, political will to address corruption and promote high standards of integrity has been inconsistent.” Nowhere has this been more apparent than in Romania's parliament on December 10, 2013 – dubbed “Black Tuesday” – when MPs voted to give top politicians including the president and MPs, as well as lawyers, immunity from prosecution in corruption cases. The support from parties across the political spectrum most likely demonstrated MPs’ fear of becoming the subject of future investigations; at the time of the vote, 28
allow the judiciary to do what it needs to do,” Laura Stefan, anti-corruption expert at Bucharest-based think-tank Expert Forum, tells bne. “Black Tuesday and the emergency ordinances issued by the government are an attempt to undermine the legal and institutional framework. These requests for immunity send out a very bad signal to society.” Tougher sentences In the last decade, Romania has seen a steady increase in the number of convictions for corruption-related crimes and the severity of jail sentences. However, observers argue that even tougher penalties are needed to create an effective deterrent. “I don’t feel that we are sending a signal to society that corruption is not a choice in life,” says Adrian Moraru, deputy director of Romanian NGO Institute for Public Policy (IPP).
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Southeast Europe
Transnistria's travails Clare Nuttall in Tiraspol
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n a sunny afternoon in June, Tiraspol, the capital of Moldova’s breakaway Transnistria republic, doesn’t look like a hotspot in the new cold war between east and west. Groups of youths stroll through the city centre in swimming trunks and flip flops, with bottles of beer dangling from their fingers, heading for the Dniester river, where many of the town’s 144,000 population are swimming or sunbathing. But businesses are struggling as the closure of the Ukrainian border has coincided with Moldova’s move towards the EU, which threatens to cut off existing export markets. Transnistria’s president, Yevgeny Shevchuk, has complained of the dual pressures being put on the Transnistrian economy. "Politicallymotivated decisions are still affecting Transnistria and having negative implications for its economy,” Shevchuk said June 10, Interfax reported. Other officials have previously claimed that Transnistria (also known as Transdniestria) is the victim of a
Transnistrian exports may be completely closed off from the European, Moldovan and Ukrainian [markets]," it added, referring to the fact that Ukraine too signed a similar EU deal on June 27. This could potentially destabilize the region further, where Russia has been using its position as Transnistria’s patron to put pressure on Chisinau. Since the early 1990s, when Tiraspol declared its independence from the newly created Moldovan state, the sliver of land between the Dniester and the Ukrainian border has been de-facto independent, its stagnating and corrupt economy shored up by handouts from Moscow. The authorities stepped up their efforts to achieve sovereign recognition in April after Russia annexed Crimea, when the Transnistrian parliament voted to appeal to Moscow for official recognition, followed by entry to the Russian Federation. Food for thought However, while the authorities are looking to the Soviet past – the republic’s
"Until recently, living standards in Transnistria were seen as higher than in Moldova proper thanks to support from Russia" “blockade”, and that it risks a slump of up to 65% in exports after Moldova signed its EU free trade and association pact on June 27. “Since the Association Agreement ignores the interests of Transnistria, experts predict a significant deterioration in the economic situation in Transnistria after its signing,” said an April date statement from the Ministry of Foreign Affairs. “In particular…
flag bears a hammer and sickle – private businesses have increasingly been looking westwards to Europe. European markets now absorb more than half Transnistria’s exports, which are mostly food and agricultural products, textiles and cement. Perhaps surprisingly, Chisinau has maintained a relatively relaxed policy towards Transistrian businesses – many of which have registered in Moldova
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in order to gain access to European markets on the same terms as their Moldovan counterparts. Anatolie Triteace, president of MMD Group, which started out as a meat importer and recently moved into processed fruit and vegetable production, says that while the company’s main operations are in Transnistria, it exports the bulk of its production to European countries such as Bulgaria, Greece and Turkey. The company has not so far encountered obstacles to exporting its products to Europe. “We operate in Transnistria, but I think that Transnistria is also Moldova,” he tells bne. However, for MMD and other businesses, the situation could change now that Moldova has signed its EU deal. While the Deep and Comprehensive Free Trade Area (DCFTA) – the main pillar in the Association Agreement – will open up European markets to Moldovan exporters, the flipside is that Moldovan producers will have to raise standards and submit to more rigorous quality and safety inspections. Since Tiraspol does not recognise Chisinau’s authority, it will be impossible to carry out similar checks on Transnistrian-based producers, potentially blocking them from EU markets. Further adding to the breakaway republic’s troubles, its eastern border has been virtually closed since the start of the conflict within Ukraine, since Kyiv’s new government considers the Moscowbacked enclave to be unfriendly. This has cut off access to both the Ukrainian market and the crucial Ukrainian port of Odessa on the Black Sea. It is not yet clear what impact this double blow will have on Transnistria’s economy. Until recently, living standards in Transnistria were seen as higher than in Moldova proper thanks to support from Russia. In particular, Transnistrian companies and consumers receive Russian natural gas at highly subsidised prices, while Tiraspol has refused for several years to pay for the gas it imports at all, claiming the bill is Chisinau’s responsibility.
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Rogun dosh remains a problem Naubet Bisenov in Almaty
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ajikistan is the poorest of the former Soviet states – a situation the autocratic government of President Emomali Rakhmon hopes to remedy by building the world's tallest dam. A World Bank draft report on the Rogun dam gives the Tajik government grounds for optimism, but another report raises more cause for concern.
installed capacities for each height (starting from 2,000 MW for the smallest dam to a maximum of 3,600 MW for the tallest). The analysis also takes into account various variables such as demand for electricity, fuel costs, total investment costs and the capacity of power interconnectors with neighbouring countries.
Ahead of the World Bank's July 14-18 consultations over the dam, the Washington-based lender published drafts of feasibility studies on the construction of Rogun. To the delight of President Rakhmon, the bank's assessment appears to favour the largest version of the dam being built, which would stand at 335 metres tall with an installed capacity of 3,600 megawatts (MW).
The analysis results show that all the Rogun design options would have
The bank's economic analysis considers nine possible Rogun design options, comprising three different dam heights (335, 300 and 265 metres), with three
2013 and calculations are based on the 2013 US dollar rate). "The highest dam option generally shows the greatest benefit across all sensitivities, except in the Low Demand growth case when the lower need for capacity makes the smaller dam options more appropriate," the World Bank says. This is music to the ears of the selfimportant president, who wants Rogun to be the tallest and have the largest
"The highest dam option generally shows the greatest benefit across all sensitivities" an overall beneficial impact on the Tajik electricity system: $69m for the smallest Rogun option to over $2.5bn for the highest in a period until 2050 (the study assumes the dam is built in
capacity. However, the investment cost of building the dam would be huge relative to the size of the economy, "on the order of 50% of 2013 GDP", and "would present macroeconomic
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challenges even if it is part of the leastcost solution to meeting Tajik energy demand", the analysis warns. According to the World Bank, Tajikistan's GDP totalled $8.5bn last year. Money problems The analysis also discusses financing options for the dam, though here there is less good news for the Tajik government. Almost all of the funding options are regarded as impossible due to Tajikistan's inability to fund it on its own, or because of problems with attracting outside funding in the current atmosphere of hostility to the project from downstream countries, especially Uzbekistan. For the project to be sustainable from a macroeconomic point of view with entirely foreign-funded public sector borrowing on commercial terms, it should be financed at an interest rate of less than 10%. "This scenario remains hypothetical since the availability of such large commercial financing is unlikely irrespective of the interest rate," the analysis says. If the government wants to fund the project through public sector domestic financing, it would need to spend an additional 5% of GDP annually on the project for a decade. This might be possible, but would imply a large reduction in disposable income for an already poor population; 36% of Tajiks lived below the poverty line in 2012. And even if the money could be raised from domestic sources – in 2010 the government tried to raise $800m by forcing public-sector workers to buy shares in the project; less than $200m was raised – converting it to foreign currency would cause a large depreciation in the national currency, the World Bank warns. As a result, the combined reduction in income and currency depreciation would reduce private consumption and private investment, forcing a reduction in social spending for several years and increasing poverty further. The bank suggests that such a large project should involve equity participation by other players, including downstream countries and commercial
partners, as broad international support would help improve financing terms. "This would reduce investment, operational, and fiscal risks and strengthen macroeconomic stability," the bank says. A combination of Tajik government selffinancing, foreign equity participation, preferential and multilateral loans, and commercial or export agency loans could generate the most favourable
developing nations. Human Rights Watch voices concern in a report about the process that will resettle 42,000 people in the 170-squarekilometre flood zone and villages near the construction site. Already the government has moved about 1,500 families who, the watchdog alleges, have been denied what was promised them. "Loss of land for farming and raising livestock, lack of employment, and poor access to essential services in
“People who had previously relied on their lands to provide food reported that, after resettlement, they had to purchase most or all of their food at markets” terms and avoid foreign control of the asset, while at the same time providing broad international involvement and reassuring neighbouring countries of compliance with agreed arrangements, the analysis concludes. And it’s the concerns of Tajikistan's neighbours and other international bodies that could ultimately doom the project, or at least delay it for years. Confrontation Uzbekistan vehemently opposes damming cross-border rivers because, it fears, this will deprive its cotton fields of water and threaten millions living downstream should an earthquake destroy such dams. During a visit to downstream neighbour Kazakhstan in 2012, Uzbek President Islam Karimov urged the upstream nations of Tajikistan and Kyrgyzstan to take into account international public opinion in planning dams, otherwise it could "lead not only to confrontation but also to war". To hamper the construction of Rogun, Tashkent has already imposed an effective transport blockade on Tajikistan, preventing the transit of construction materials for the dam. Another report in June raised depressingly familiar concerns regarding the building of dams in
resettled communities have combined to create significant hardship for resettled families,” the report says. “People who had previously relied on their lands to provide food reported that, after resettlement, they had to purchase most or all of their food at markets, leaving less money for other household needs.” Economics and opposition are certainly problems for the Rogun dam, but they are probably surmountable. Perhaps the greatest threat to the project, though, is the discovery of huge oil and gas resources in Tajikistan. Oil and gas Uzbekistan's frequent suspension of gas supplies to Tajikistan and Kyrgyzstan, especially during winter, might have forced those two countries to turn to hydropower as an alternative source of energy, but has also raised efforts to look for their own sources of oil and gas. Cash-strapped Tajikistan is looking at a China-led Turkmenistan-UzbekistanTajikistan-Kyrgyzstan-China gas pipeline, known as Line D, as a handy source of funds for the Rogun project. The pipe is expected to pump 25bn cm/y of Turkmen gas to China. Kyrgyz authorities believe that the pipeline would raise about $1bn in transit fees
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and taxes annually; Tajikistan's revenue should match that. But analysts say the gas pipeline is also encouraging oil and gas companies to explore Tajikistan's own promising oil and gas fields. There are two oil and gas basins in Tajikistan, according to Tethys Petroleum, which is exploring for hydrocarbons there: in the the Fergana basin in the north of the country, while in the south lies the Tajik-Afghan basin, an extension of the prolific Amu Darya basin. "Tajikistan is part of the same geological basin which Turkmenistan and Uzbekistan share, but it hadn't been developed in Soviet times," Tethys Petroleum's executive chairman, David Robson, tells bne in an interview. "Tajikistan, from the geological perspective, is a country where there is a lot of potential for oil and gas." Robson explains that the Sovietera discoveries in Central Asia were mainly in shallow layers; the Soviets didn't need to look into deeper layers in Tajikistan because they could easily pump oil and gas from fields in Uzbekistan and Turkmenistan. Tethys, which arrived in Tajikistan in 2007, made the first oil discovery since the country gained independence in 1991 near the Afghan border. "Then, of course, we were heavily involved in bringing partners Total and CNPC [China National Petroleum Corporation], but that prospect just wasn't big enough to excite them," Robson says of his attempts to draw the attention of big players to Tajikistan. "What excites them and us is what's going on in deeper horizons, which have never been drilled in Tajikistan. No well has ever been drilled through the layer of salt which keeps the big fields in Turkmenistan." Robson says Tethys has acquired seismic data that indicate "enormous" reserves of hydrocarbons in Tajikistan – over 3 trillion cm of recoverable gas and around 8bn barrels of oil and gas condensate. "I know Total and CNPC share similar optimism now," he says. "Three of us – Tethys, Total and CNPC – all share a lot of confidence that there is certainly something there which could
be enormous in size." Robson points out that CNPC's intent to build a pipeline from Turkmenistan to China via Tajikistan is a good sign for oil and gas exploration in the country. "If things work there – and there are still a lot of ifs – there is sufficient gas there in Tajikistan to fuel the current Chinese gas demand for 22 years just on its own," he says, though adds it's risky because reservoirs are at a depth of 7km and under high pressure with gas containing hydrogen sulphide. In June 2013, Tethys announced the completion of a farm-out agreement with Total and CNPC, with each acquiring a one-third interest in the Bokhtar production sharing agreement in southern Tajikistan. They also set up a consortium, the Bokhtar Operating Company, which they jointly own and manage. Data from the Bokhtar block compares favourably to that from Turkmenistan's supergiant Galkynysh gasfield, as "they look exactly the same," Robson tells bne. "We are confident we will find something, but it's gonna be a deep, expensive process." Total and CNPC are "carrying" Tethys' costs of drilling the first well to the tune of $80m, but since the company's contract area is "massive" – some 36,000 square km – the parties are now working on obtaining more seismic data to identify the sweet spot for drilling the first well next year. Robson estimates the first well will cost $60m to drill, although Gazprom has spent $120m to drill a well to that depth. Overall investment will run into "several hundred millions" over the next three years, of which a third will have to be covered by Tethys itself. The discovery of "supergiant" reserves of gas at Bokhtar would not only solve Tajikistan's economic and energy woes, but might also turn the country into a big player on the regional gas market to rival Turkmenistan and Uzbekistan. If so, it may also persuade President Rakhmon to abandon the Rogun project.
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Central bank's Kelimbetov fighting fires in Kazakhstan INTERVIEW:
Nick Kochan in Almaty
A
s the head of the National Bank of Kazakhstan, Kairat Kelimbetov is the leading spokesman and policymaker for economic policy in Kazakhstan. He is also a close confidant of President Nursultan Nazarbayev. So when he says his country is "very scared of radical sanctions" being imposed on Russia, it is clear that events in Ukraine are sending shockwaves through Central Asia. In an interview with bne, Kelimbetov said Kazakh officials are currently trying to estimate the consequences of the sanctions regime imposed on Russia by the US, EU and other nations. "The Russian economy will be impacted by sanctions and with negative growth. There will be an indirect influence on the Kazakhstan economy," he says. Furthermore, he says Kazakhstan is "very scared of radical sanctions" that might follow if the crisis in Ukraine deepens. "Russia is our biggest trade partner and we are in a Customs Union with them," he says. "Definitely this is not the situation that we like. This is only a concern at the moment, but we realise that this [could] very soon become a reality. Everything will depend on how the US and the EU develop the situation. It depends on the situation in Ukraine, but this is a lose-lose situation. It is beyond our control, as it is politically driven, not economic," he says. The impact of the sanctions has already been felt in the degree of uncertainty that it has created over policymaking. For example, the government of Kazakhstan is known to be preparing
a sovereign Eurobond issue. But the timing of this issue has been thrown into disarray by the regional uncertainty. This in turn is impacting other Kazakh corporates who are looking to issue bonds. The uncertainty has also forced the government into some unplanned actions, notably the 19% devaluation of the tenge, sprung on the population in February as a response to the fall in the Russian ruble. "In February, we realised that we were in a very uncompetitive situation for the economy," Kelimbetov says. "Reserves had decreased over 2013, from $28bn to $24bn. In the first two months of 2014, we continued to lose reserves. The National Bank was facing speculative attacks on the
tenge versus the ruble, I would say yes. We now have room for some reserves. The economy has responded in a proper way to the changes. The reserves of the National Bank have returned to $28bn. The joint reserves of the government and the National Bank now exceed $100bn, which is where they were before the crisis," he says. Bad loans Kelimbetov has redoubled efforts in the wake of the Ukrainian crisis to deal with one of the spectres hanging over the local banking system , namely their level of non-performing loans (NPL). These are a legacy of rampant, unsustainable property lending before the global financial meltdown in 2007-2008, but the country has failed to provide the institutional
"If you ask me if I am now comfortable with the situation of the tenge versus the ruble, I would say yes" currency. We saw the line of people who wanted to exchange the tenge for the dollar growing and we decided we couldn’t artificially support this level of the currency. We would get out of the market. Then we started to support the tenge at the level of 185 tenge to the dollar, a weakening of 19%."
tools to allow banks to work them down to a safer level – something Kelimbetov believes would put the banks on a surer footing. "There was a very tolerant policy towards NPLs [under previous governor Grigori Marchenko]. When I arrived, everyone understood that we couldn’t continue this policy," he notes.
"If you asked me if I am now comfortable with the situation of the
Kelimbetov, who was appointed in October 2013, says the previous system
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of banks provisioning against NPLs had allowed banks to misrepresent to the regulator that everything was normal "when it was far from that," adding that this had led to led to "zombie behaviour" by the banks.
bne Kazakhstan, which like most post-Soviet states suffers from high levels of corruption, has named its most corrupt government agencies. Tax, customs, land affairs and public procurement are the most corrupt spheres in the country, according to a body designated to fight corruption. Kazakhstan has adopted the best measures to change legislation to bring it in line with international standards to reduce corruption, Andrey Lukin, deputy chairman of the Agency for Fighting Economic Crime and Corruption, told a conference in Almaty on June 26. However, "a lot of work has yet to be done," he said. The corruption tsar admitted that "isolated" cases of corruption existed in "all spheres," according to the state-run Kazinform news agency. "I can point to a number of spheres that are most corrupt - this is corruption in the tax, customs, land affairs and state procurement spheres," he said. According to Transparency International's "Corruption Perceptions Index" in 2013, Kazakhstan occupied 140th place out of 177 countries, below Russia and Pakistan which are tied in 127th place and only four notches above Nigeria (at 144). Cumbersome regulations, red tape and inefficiency at government agencies leave a lot of room for corruption in Kazakhstan. At the Korgos customs post on the Kazakh-Chinese border in 2011, the then acting head, Temirkhan Yerumbayev, admitted corruption was rife at his post, but shifted responsibility onto entrepreneurs who "encourage" corruption. "It's still in the heads of our citizens that it's easier to give a certain amount of money [as a bribe] to have all documents filed for them to cross the border than do it officially by themselves," he said in 2011. "People believe they are being extorted for a bribe" even though the delay is for technical reasons, he explained. The customs post was hit by a scandal in 2011 when about 50 customs officials and officers were arrested on suspicion of involvement in a smuggling ring. Korgas is one of Kazakhstan's (and the Customs Union's) main gateways for imports from China. In a separate development, during a parliamentary debate on legislation governing the postal service, Senator Svetlana Dzhalmagambetova complained about malpractices at Kazakhstan's national postal operator Kazpost. Dzhalmagambetova claimed that postmen in rural areas just outside the capital, Astana, were employed as part-timers for as little as less than $50 a month, while Kazpost managers received monthly salaries worth "KZT1m-1.5m [up to $8,100] and bonuses." The senator echoed President Nazarbayev's complaints in 2006 that the heads of Kazakh state companies and development institutions received hundreds of thousand dollars a month in salaries and millions of dollars in bonuses. They also had "telephone calls, lunches and laundry services" paid for by their companies, Nazarbayev said.
Today, banks are being encouraged to get rid of bad property assets by putting up equity, which they place with the National Bank as collateral. The scheme is backed by $1bn of government funds. Management of the non-performing assets stays with banks, Kelimbetov explains. "We don’t have the expertise to manage it. We will say [to banks], let’s complete the construction of a house and let’s sell it. You will pay us back the funds realised and that will clear the obligation. If you cannot fulfil the construction and the business still doesn’t work, then we will take some of the equity as collateral," he says, adding that the National Bank will provide money for five or ten years. NPLs should be reduced to 15% of total loans by the end of 2014 and to 10% by January 2016, under a deal between the National Bank and Kazakhstan’s top-10 banks. Banks that fail to meet the deadline will be penalised for breaking prudential norms. Kelimbetov hopes the scheme will turn the tide on NPLs. "Banks are always trying to not do anything. They have used the NPL argument to limit the credit they provide to the real sector. This is not acceptable to the National Bank. We want to fix it, we want to clean up the balance sheet of the banks, we want to check the capitalisation of the banks," he says. The NPL problem explains the collapse in the credit ratings of the bank from just below the Kazakhstan sovereign rating of 'BBB+' to below investment grade over the last decade. "I am happy with the sovereign rating of 'BBB+', but we are not happy with the ratings of the banks," says Kelimbetov. "In 2004, the banks were in good shape. At that time, the banks were one or two notches below the sovereign. Now they are seven or eight notches below the sovereign because of the high level of NPLs. We want to convince banks to fix this situation and bring their ratings closer to the sovereign."
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Privatisation and consolidation Kelimbetov is currently overseeing the privatisation of two Kazakh lenders, Alliance Bank and Temirbank. These were on the verge of collapse and defaulted on their payments to foreign creditors in 2008 and 2009 as a result of the real estate bubble bursting, and had to be taken over by the sovereign wealth fund Samruk-Kazyna (of which Kelimbetov is a former chief). But in 2013, President Nazarbayev instructed Samruk-Kazyna to sell its shares in Alliance and Temirbank. "[Samruk-Kazyna] has a bureaucratic type of management and no one from the bureaucracy wants to take on responsibility for the writing off and the asset-recovery process," says Kelimbetov. "The whole idea was to get Samruk-Kazyna out of the process and to provide opportunities to the private sector." After failing to secure foreign partners from the US, Europe, Russia and China
for the two banks, it was decided to look closer to home. And on May 20, Samruk-Kazyna announced it had finalized the sale of stakes in the two banks to Verny Capital, the investment vehicle of mineral resources oligarch Bulat Utemuratov, a local businessman. Verny Capital acquired 80% of Temirbank’s common stock for $196m and 16% of Alliance Bank’s common and preferred stock for
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see more consolidation of the country's banks. Kazakh banks currently need just $50m of core capital, but Kelimbetov describes this as an insufficient amount. "We would like to increase it in five years 10-times, to $500m (KZT100bn)," he says. "We now have a total of 38 banks, but half of this list will not make it in the new conditions. Those that cannot provide this capital will have their licence
"I am happy with the sovereign rating of 'BBB+', but we are not happy with the ratings of the banks" $8.2m. This leaves Samruk-Kazyna with a controlling 51% stake in Alliance Bank, while Verny Capital becomes the controlling shareholder of Temirbank. The privatisation process is another step in Kelimbetov's strategic goal to
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revoked and that will prevent them from collecting deposits from the public. They can convert themselves into an investment bank, but not have the benefit of [holding] the money of the people of Kazakhstan."
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INTERVIEW:
Georgia defence minister says Nato to acknowledge progress at summit Monica Ellena in Tbilisi
I
rakli Alasania does not like war. Like most Georgians of his generation, the energetic 40-yearold defence minister has lived through enough of it. But he knows that Georgia's strategic position, at the crossroads between east and west, means that the country needs to be prepared, skilled and equipped to defend itself if necessary. As Nato gears up for its next summit in the UK in early September, Georgia has shifted its focus from the improbable goal of securing a Membership Action Plan (MAP) – the last step before full membership – to what the Wales summit will bring to Tbilisi. In late June, Nato foreign ministers decided to offer Georgia, as Nato Secretary General Anders Fogh Rasmussen put it, a "substantive package" to help the country "come closer" to Nato. In early July, Nato's special representative for the Caucasus and Central Asia, James Appathurai, held talks with the Georgian leadership to define what that means. "This summit will not talk about enlargement, but clearly will talk about the open door policy," Alasania tells bne in an interview in his office in downtown Tbilisi. "What I expect is the validation of Georgia's achievements. Georgia is becoming a role model to follow in the region. We are the country that reforms, that matures its political system, and that contributes to EuroAtlantic security."
Alasania aims to increase the interoperability of Georgia's military with Nato and to beef up the country's self-defence capabilities, such as airdefence and anti-tank capabilities. "Georgia is today a credible partner," he insists. "So I expect two baskets [from the summit]: a political declaration clearly identifying Georgia's progress and stating the next stage for the
membership became the foreign policy pillar of the western-oriented leadership that came to power in 2003 following the Rose Revolution. Despite making rapid progress on several fronts, Georgia missed out on a MAP at the Bucharest summit in April 2008. The subsequent war with Russia over one of Georgia's breakaway
"On a military level, we are already a Nato member" integration into the alliance, and a concrete package increasing Nato's imprint and presence on Georgian soil." Opportunities, past and future Georgia's long quest for Nato membership started with the collapse of the Soviet Union. The 1990s opened a window of opportunity for Tbilisi to reach out to the world beyond the Iron Curtain. But Georgia failed to take it. "Instead of consolidating ourselves, like the Baltic states, we started shooting each other," Alasania recalls. "It was a great mistake. Back then we showed Georgia's immaturity to handle the state and state relations." As a result, Georgia endured civil wars, the loss of 20% of its territory and a quarter of a million internally displaced persons. Nevertheless, full EU and Nato
regions, South Ossetia, in August 2008 took Nato membership off the table. But the idea was revived a couple of years later at the summit in Lisbon. "Historic opportunities are opening up for Georgia again. That's why we are acting like Nato country members: to prepare ourselves for this window of opportunity. When it is going to be open, we'll be ready." Reform, train, equip Since his appointment in 2012, Alasania has implemented deep, structural reforms at the Ministry of Defence that are focused on transparency, accountability and training. He raised soldiers and officials' salaries, conditions and benefits, abolished mandatory conscription, and increased civilian oversight and control, both at the parliamentary and NGO level.
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"I personally have to report every purchase above GEL2m (€415,000) and explain where this money goes. The procurement system is totally transparent with electronic tenders, so that everyone can see what we are buying, unless it is very secretive, and even then the purchase is scrutinized by a parliamentary special committee," Alasania explains. "The defence ministry was the most secretive institution in Georgia, now it is one of the most transparent." The process hasn't gone unnoticed in Brussels, as Nato has since advised the Georgian MoD to put together a team looking at institution building to share its experience with other countries. "We are now exporting our reforms," he adds. Georgian troops have also built up their combat experience. In 1999, Georgia joined the Nato-led peacekeeping mission in Kosovo. Later, it sent troops to Iraq and Afghanistan, where, by May 2013, Georgia had 1,560 troops – the largest per-capita troop contributor and largest non-Nato force in the country. It has also suffered a high number of casualties – 29 soldiers – as its troops are deployed in unstable Helmand province. "It is a huge number for a small nation," admits the minister. "We think people understand that's the price to keep Georgia's independence, there is high support for the army. It is the most trusted state institution in the country after the church." Moreover, Georgian troops are currently deployed in the EU-led mission with French command in the Central African Republic. As a result, Georgia today boasts some 12,000 soldiers whom Alasania claims have been trained to the highest Nato and US standards. "This exposure fundamentally changed the perception and thinking of the Georgian military. The officers that went through Afghanistan, Iraq and Kosovo know exactly how to conduct modern combat operations. Plus, 90% of my top military leadership has gone through US, France and Germany's army colleges, so they know how to plan modern warfare. So this is transformational."
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Georgia is also looking forward to turn its training facilities into Nato ones. In fact, Georgia's forces have so impressed western officials that its troops have been certified to join the Nato response force – the alliance's 25,000-strong rapid reaction unit – in 2015 through
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full membership, and it has turned Georgia's deepening relationship with the West into a battle of wills. But the Georgian leadership shows no signs of backing down. On June 27, Georgia, together with Moldova
"The defence ministry was the most secretive institution in Georgia, now it is one of the most transparent" to 2017. "On a military level, we are already a Nato member," Alasania adds. But there is still a lot to do. Developing strong capabilities in terms of command and control, intelligence, surveillance and reconnaissance, and logistics takes time, practice and a good deal of money. Michael Cecire, associate scholar at the Foreign Policy Research Institute, highlights that, "conscription won't be phased out for another few years, the reserves system is still in the earlier stages of being reformed, and increased civilian control is a reality but barely institutionalized." It is a long-term process, Alasania acknowledges. "Many things have to be strengthened, mainly logistical chains, which is one of the priorities alongside infrastructure and military education." The Bear factor The biggest unknown is Russia. Moscow strongly opposes closer ties between Tbilisi and Nato, let alone
and Ukraine, signed EU free trade and association pacts that will bring them closer to the bloc. And Alasania says the path towards full integration with Nato is irreversible, as it's "the choice of the Georgian people." "But we are defusing tension with Russia: our foreign policy is to normalize, eventually, relations with the Russian Federation. We know though it will not be possible until Russia starts to fulfil the six-point agreement signed after the 2008 war. For now, we opened up channels of negotiations with trade and culture, so we are not giving them any pretext, at all, to destabilize the country," he says. If the 2008 war was not enough, the annexation of Crimea and the violence in Eastern Ukraine are dire reminders of the potential threat that Russia still poses for Georgia. "Georgia's connection with the Nato defence system is hence very relevant," Alasania concludes.
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Special Report: Frontier Markets
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Albania faces long, hard road to EU membership Ben Aris in Tirana
T
he Blloku (the Block) epitomizes everything good about Albania's break with its dictatorial past and the journey it has just begun towards full membership of the EU. But recent events there show how far it still has to go. During the Marxist-Leninist dictatorship of Enver Hoxha the Blloku was literally walled off from the poorest people in Europe – a Forbidden City full of impossible-to-find goods and eateries for the elite. Today, it is full of regular people sipping rich Turkish coffee in the many cafes, drinking Turkish beer in bars, browsing in the western-branded shops and even eating at an outlet of "Albanian Fried Chicken" that looks suspiciously like its US near-namesake. In June, one street was even closed
to traffic and filled with beer-covered tables for a small crowd to watch the World Cup on giant TV screens. Albania has come a long way since Hoxha was deposed in 1989. But not far enough. On the morning of June 26 the tranquil atmosphere of the Blloku was rent by machine gun fire. A motorcycle carrying two men riddled Artan Santo, founder and CEO of Credins Bank, Albania's biggest private bank, with bullets in a professional mafia-style execution, before racing off and disappearing into the rundown city. The men had followed the banker from his home and the whole incident was caught on CCTV, but police were powerless and have failed to identify the culprits.
The shooting was a stark reminder of just how much work Albania has to do before it can join the EU – the process which began when it was granted cherished "candidate status" at the end of June. High on the list of things to do for the government set by the EU is deal with corruption and organized crime, which are bad even by Emerging European standards. Try, try, try, try again Albania cleared the first hurdle on what will be a long road to EU membership on June 24 after the EU unexpectedly granted it "candidate status". It was the small Balkan country's fourth attempt since 2009 to get on the ladder to join Europe's trade club; the last rejection was in December 2013.
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The decision was uncertain up until the last minute, but after the government agreed to settle a $100m dispute with Czech utility CEZ the day before and burned fields full of marijuana around the lawless village of Lazarat a week earlier, the 28-nation bloc's foreign
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(and unwilling) to do much about the problem. But faced with the prospect of being rebuffed by the EU yet again, Rama grasped the nettle only days before the EU ministers were due to meet
"Corruption and organized crime are bad even by Emerging European standards"
ministers gave Albania the thumbs-up at a meeting in Luxembourg. EU Enlargement Commissioner Stefan Fule said on Twitter the decision represented an "acknowledgement of reform efforts" by Albania. The push to join the EU has been led by the former artist and now prime minister, Edi Rama, who came to power in June 2013 and pledged to push for EU membership. After speaking by phone with Fule, Rama also took to Twitter to say he was "proud that we all together did it. Thanks and gratitude to all of you." Albania is now the sixth accession candidate alongside Turkey, Montenegro, Serbia, Macedonia and Iceland. However, none will have any chance of joining the EU in the next five years; on July 15, new EU chief JeanClaude Juncker declared a five year moratorium on new members. Drugs and power The depth of the corruption problem and the government's commitment to making a change came together in the remote village of Lazarat in Albania's southern mountains near the Greek border. For years, the village has produced with impunity tonnes of marijuana for export to Western Europe. According to European Drug Enforcement Agency estimates, the illicit crop accounts for up to a third of Albania's GDP and the government has been unable
and make their decision on Albania's application. After a four-day gun battle with locals, police finally captured the town in what was more of a military operation than a drug bust – Lazarat's residents apparently returned fire with anti-tank missiles and heavy calibre machine guns – to burn the fields and destroy the stockpiles ready for shipment. Rama also cleared away another hurdle by settling a long-running battle with CEZ. The Czech utility bought a 76% stake in Albania’s sole electricity distributor in 2009, partly on the strength of promises made by the World Bank that it would intervene if things turned sour. And they did. In 2012 the local subsidiary CEZ Shperndarje clashed with the country’s main stateowned electricity producer KESH over tariff hikes it imposed on customers.
had invested in subsequent years. Again, just in time before the meeting of EU ministers, the Albanian government struck a deal with CEZ to repay its original investment in instalments through to 2018, while CEZ agreed to stop the arbitration process in return. "According to the agreement CEZ, after fulfilment of conditions precedent, will get in annual installments €100m in total, ie. the amount similar to initial investment into purchase of Albanian distribution company," the group said in a press release posted on its website. "Conditions for ending of arbitrage are part of the agreement." Gaining candidate status is only the very start of the process: the right to hand in an application with no guarantee that it will ever be granted membership. The next step is to start the tough negotiations needed to agree on exactly what else the country has to do to be eligible, the so-called chapters. PM Rama said the membership negotiations will be "more intensive, the road is more difficult and the challenge becomes bigger… We are convinced that we shall do it despite the conditionalities set on us because those we have set on ourselves are much tougher." And Albania will also face some resistance from the expansion-weary EU members. The UK, Germany and France were reportedly reluctant to
"Albania will face resistance from the expansionweary EU members" The dispute came to a head in 2013 when the regulator simply pulled CEZ Shperndarje's distribution licence, in effect nationalising the company. The Czech government was not happy and threatened to block Albania's EU bid, while starting international arbitration proceedings to get back its initial €102m investment, plus what it
grant the small Balkan state candidate status. The British government has already vowed to veto Albania joining the EU unless strict limits are imposed on the free movement of workers, but by that time the UK may have already given up its own seat at the EU table.
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Moldova struggles to restore banking transparency Clare Nuttall in Chisinau
M
oldova’s parliament is considering draft legislation aimed at increasing transparency in the banking sector and preventing hostile takeovers by secretive entities. But with several of the country’s largest banks already controlled by murky offshore owners, it could be too little, too late. The draft law on financial institutions was drawn up after dramatic changes in the ownership structure of the banking sector in recent years. This culminated in 2013 with the takeovers of both Banca de Economii Moldova and the country's largest bank, Moldovan Agroindbank. Former shareholders in the two banks, as well as those in Victoriabank, claim they were the victim of "raider attacks", or illegal expropriation, with the new owners rumoured to be linked to oligarch Vlad Plahotniuc and his group, bne reported in September 2013. Today, around 72% of Moldova’s banking sector by assets is estimated to be
foreign-owned. However, with just four international banks present in the country, the majority of this total is offshoreregistered outfits with untransparent ownership. Backed by international financial institutions active in Moldova, the National Bank of Moldova (NBM) –
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share transactions in Moldovan banks where offshore-registered companies have purchased blocks of shares that fall just below the current 5% threshold for NBM approval. Other clauses in the draft law will control how banking shares can be used, forbidding owners to pledge shares in banks or put them into the capital of other companies. If adopted in its current form, it will also introduce criminal responsibility for shareholders and banking administrators for breaches of the law. “In terms of supervision and transparency of ownership, there are three major challenges,” the NBM’s first deputy governor, Marin Molosag, tells bne. “First, improving legislation on transparency of share ownership; second, increasing the power of the national bank to take actions; and thirdly the reform of the judicial system.” The European Bank for Reconstruction and Development (EBRD) has repeatedly raised concerns over the banking system with the Moldovan government. “We believe that the regulation needs to be strengthened, and the national bank needs to be given more power so that it is able to independently exercise judgement on these issues,” EBRD vice president Andras Simor told bne on the sidelines of an investment conference in Chisinau in June. Unfortunately, the draft legislation is making slow progress through the
"International banks are profiting as people escape from non-transparent banks to the real standard banks” which regulates the banking sector but has seen its powers eroded – is pushing for new legislation to increase transparency. A key clause in the draft law on financial institutions will require all sales of stakes of 1% or more in Moldovan banks to be approved first by the central bank. This follows numerous
parliament, with little likelihood of adoption before the November parliamentary elections. Several sources close to the process tell bne that powerful forces appear to be lobbying to delay its adoption. Fears of instability While Moldova’s banking sector remains in generally good health – most banks
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are well capitalised, liquid and profitable – the takeovers have had negative consequences, in particular that banks are channeling money towards companies connected to their new owners, rais-
Within Moldova’s small business community, would-be borrowers have become wary of the banks that have been subject to hostile takeovers. Ridha Tekaia, president of Mobiasbanca,
“The shareholder structure of some banks is just not transparent and that precludes us from working with them" ing concerns about their future financial stability. “The recent change of shareholders in some banks creates not only additional financial risks, but resulted in new obstacles to implementing the mandate of the banks, namely the intermediation of financial flows and redirection of passive money (deposits) to active money (loans). This is another reason why we are paying attention to this issue,” Molosag tells bne.
which is owned by France’s Groupe Société Générale, reports movement in business from the affected banks towards those whose ownership structure is transparent. “Consumers have started to be scared and have changed their banking relationships to where they feel more comfortable. International banks are profiting as people escape from non-transparent banks to the real standard banks,” Tekaia says.
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International financial institutions active in Moldova such as the European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC) are also piling on the pressure, by working only with the country's transparent banks. The EBRD’s Simor says that access to finance is “clearly a bottleneck” in Moldova, and that the bank is “very keen” to do more in the country but is now limited in the banks it can work with. “Recently with all the changes in shareholdings, where it is not clear who owns some of the banks, unfortunately we had to cut down on our business and we are only dealing with very few banks now,” Simor says. “The shareholder structure of some banks is just not transparent and that precludes us from working with them... Until changes do take place, unfortunately we are limited in what we can do.”
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"It's like riding a bicycle: in order to stay competitive, you have to pedal all the time and move without stopping,” Myasnikovich said at the same ceremony. “Investments in new technologies, equipment and factories represent the essence of our economic policy.” Dire finances Flowery speeches aside, the government has its work cut out. The economy grew by just 1% in the first four months of this year, a mild devaluation is on the cards in the second half of this year and the country is subsisting on handouts for the time being.
Russia hugs Belarus in ever-tightening embrace Ben Aris in Moscow
"T
he ancient Romans used to say that a citizen is someone who pays taxes, who supports the state, who voluntarily gives up part of their labour for the common good," Belarusian President Alexander Lukashenko said during a speech to mark the 70th anniversary of Belarus' liberation from Nazi occupation and the country's Independence Day on July 1. "But taxes are not only an economic category, but also a political and moral one… The desire to evade taxes is moral treason." The president was in fine form and he forecast that Belarus would record the highest GDP on record in 2014, earning a total of $72bn, which is $150bn in purchasing power parity terms. Lukashenko then went on to equate diligence with patriotism in the sort of soaring rhetoric seldom heard since the demise of the Soviet Union. "Many take pleasure in condemning all things Belarusian. They claim that everything is bad in Belarus, that Belarusian goods are worse than anyone else's, they don't want anything Belarus-made but they
want imports only. But let me ask it another way: who makes Belarusian products? Germans? Chinese? Americans? Maybe Russians? No! You and I, Belarusians, make Belarus-made products. When we evaluate Belarusian goods, we look into the mirror. It is us
"The economy has struggled to achieve sustainable growth following a balance of payments crisis in 2010-11, which was triggered by a temporary cessation of Russian assistance," Moody's Investors Service said in a credit report on the country in June. "GDP growth over 2012 and 2013 averaged 1.3%, which is much lower than the 7% average GDP growth of the prior decade." The country's finances are in bad shape. The government was running a $7.3bn current account deficit last year, equivalent to 10.2% of GDP. On top of that, it has some $4bn of hard currency debt repayments to make this year (of which $2.4bn is to external creditors).
"If a Belarusian product is bad, we are the ones to blame" who have made Belarusian goods. If a Belarusian product is bad, we are the ones to blame." He then exhorted the people in the crowd to take pride in their work. "Diligent work is a moral obligation. It is what daily patriotism is all about." Prime Minister Mikhail Myasnikovich then picked up the baton and described how the government would throw itself into "vigorous modernization and innovation-driven development".
Bankers estimate the total currency call on the country will come to $10.7bn this year, but as of May the country had barely $2.6bn of foreign reserves left. The Russians have taken most of the pressure off Lukashenko. On July 9, Belarus said it received a $450m loan from Russia under a deal the two governments signed on January 31. At the end of June, Russia's VTB Bank extended a $2bn short-term loan, which shored up Belarus' wobbly currency and gave the government some wiggle
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room when it comes to making policy. This followed on from a $1bn bridge loan the Russian bank extended in May. Belarus has also been receiving instalments from a $3bn bailout loan
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Russian President Vladimir Putin tries to shore up support for his Eurasian Economic Union project – an extension of the current Customs Union between Russia, Belarus and Kazakhstan that is
"Belarus’ dependence on Russia is such that the economy is unable to withstand disruptions in Russian assistance" agreed with the Eurasian Development Bank's EurAsEC Anticrisis Fund in 2011. "Our estimates suggest that Belarus has already solved its external refinancing issues… [T]ogether with the [recently] agreed transfer of only 50% of [oil] export duties to Russia’s budget in 2015, the external position has visibly improved and a mild Belarusian ruble devaluation is our base-case scenario," VTB said in a note. Moscow's aid to Belarus comes as
supposed to come into being this coming January. "Russia and Belarus will continue their economic cooperation," Putin said in Minsk where he had come to celebrate Belarus' independence day with its president. Ukraine, Moldova and Azerbaijan may be reluctant to join Putin's trade bloc, but Belarus has already been a big winner from its membership of the Customs Union. Its volume of trade with Russia has increased by a third from $27.9bn in 2010 when the
Customs Union was set up, to reach $43.8bn in 2012, although last year the figure fell back to $39.7bn due to Russia's economic slowdown. In truth, Lukashenko now has little choice but to throw in his lot with Russia. Belarus’ relatively high GDP growth and rising per-capita incomes (now $16,000 against Russia's $18,000, according to the IMF, and well ahead of its other peers in the region) were achieved through persistently loose monetary and quasi-fiscal policies, according to Moody's. "It’s a growth strategy which relies on increasing credit growth to drive investment higher and increasing wages to drive consumption higher," concludes Moody's. "Current policies are unlikely to change as long as they can be financed by external economic assistance from Russia. This assistance, in the form of energy subsidies and external credit, has increased Belarus’ dependence on Russia such that the economy is unable to withstand disruptions in Russian assistance."
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Belarus looks to “New Silk Road” Sergei Kuznetsov in Minsk
F
our years after the idea of a China-Belarus industrial park was first raised by the Belarusian authorities, construction is underway and the park’s first resident, the Chinese telecommunications group Huawei, has signed up. However, there are a lot of challenges left to surmount, including rivalry from similar projects in Russia and Belarus' unfavourable reputation. In late June, the park was named Great Stone by a special decree signed by the Belarusian president, Alexander Lukashenko. According to government officials, this ambitious $5bn project should attract more than 200 hi-tech companies and employ over 120,000 people. “However, it’s hard to predict how these plans will [pan out]. The first stage of the park will show how much interest there is in the project,” Kirill Koroteev, the China-Belarus industrial park’s deputy director general, tells bne. The first stage of the park covers over 850 hectares. This space will be used, according to the marketing info, for “industrial, logistics and public facility purposes.” A 350-hectare strip bordering on Minsk’s international airport has been allocated as the starting zone for high-priority construction. “Currently, we are trying to raise funding for the starting zone,” Koroteev says, adding that the park is negotiating long-term loans with Export-Import Bank of China and China Development Bank. Loans of about $200m are being sought for the starting zone, while the entire first stage requires $500m-600m. Some 60% of the park is controlled by two Chinese corporations – China CAMC Engineering and Harbin Investment Group. Koroteev believes that this fact, in addition to good political relations between the two governments, should
allow the project to secure funding on favourable terms. The territory of the China-Belarus industrial park is located 25 kilometres away from Minsk, near the M1 international highway that connects Russia, Belarus, Poland and Germany. “Most of the facilities are in the design stage… However, recently we began construction of the first premises in the starting zone. Transport links to the boundaries of the park are also being laid out,” Koroteev says. “The China-Belarus industrial park will become one of the vital hubs on the New Silk Road Economic Belt,” the park’s marketing bumf reads. This statement is a reference to the new concept announced by Chinese President Xi Jinping during his visit to Central Asia last year. The president ambitiously proposed to strengthen relations between China, Central Asia and Europe, with an emphasis on economic ties. Rivalry with Russia As well as Huawei, Koroteev also reveals that another major Chinese telecom company, ZTE, could become a resident. “ZTE is defining its budget, and
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committing to the project. The park faces other big challenges. “There is very strong competition from Russia, which has a serious state programme for the development of industrial parks,” Koroteev says. The Belarusian authorities have repeatedly stated that one of the advantages of the industrial park is free access to the markets of Belarus, Russia and Kazakhstan through the Customs Union. However, Oleg Andreyev, managing director of investment banking at Minsk-based EnterInvest, tells bne that 145m of the total 170m population of the Customs Union lives in Russia, and “there is no significant reason to open operations in Belarus or Kazakhstan.” Moreover, there is always a risk that relations between members of the Customs Union will deteriorate. “And if something goes wrong in our relationship tomorrow, imports [to Russia] from Belarus could be restricted or quotas imposed,” Andreyev says. The industrial park is open to companies from any country, not only from China and Belarus. However, it will be a tall order attracting western investors, due to EU and US sanctions imposed against Belarus’ government and companies in response to human rights violations and breaches of democratic standards during previous elections. “It’s not an easy task for us to fight for investors, also because of the specific relationship between Belarus and the EU. Many businesses will look at this point [and be deterred],” Koroteev admits.
"The first stage of the park will show how much interest there is in the project" determining the line of products that they can produce at the park,” he says. But Koroteev believes that other companies will wait until active construction of the facilities and infrastructure has begun before
And then there are the issues of the inability of Belarusian banks to provide “adequate financing” for companies looking to set up in the park, as well as a possible deficit of skilled labour to employ there. “Belarus already suffers from such a deficit,” Andreyev says.
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The problem with countries is that you can't move them or change their neighbours, but Pertaia points to Cyprus and Israel as examples that have done well economically despite intractable "frozen conflicts." Investment returns Georgia's small size has been a blessing in disguise, as it has largely avoided being pulled down by the economic pall hanging over the globe.
Georgia's market of 900m Ben Aris in Tbilisi
"I
nvest in Georgia, a market with access to over 900m people." That's one of the straplines for the state investment agency of the small Caucasus republic. It's an enormous number, and it includes not only the rest of the Caucasus, but also all of Western Europe, some of the Middle East and, most surprisingly of all, Russia. Georgia fought a short, sharp war with Russia in August 2008 and has suffered a trade embargo for much of the intervening years, but the state investment agency still lists Georgia's proximity to its bellicose northern
of investment because if companies go to Russia and invest heavily, they expose themselves to large risks." Damned if you do, damned if you don't, Georgian businesses have re-started exporting to Russia, but almost all are limiting the amount of their exposure by using brokers and not doing the obvious follow-through investments into logistics and marketing inside Russia. The country has used its run-in with Russia to focus on diversifying its export markets and in the intervening years has moved a lot closer to Ukraine, Azerbaijan
"We are on the verge of signing up a global top three private equity fund" neighbour as one of its main selling points. Russia is simply too large, too rich and too close to ignore. "The trouble with Russia is it is an important market, but it is not a free market – rather it is a political market. Companies have to be very careful because political statements can quickly turn into trade bans," says Giorgi Pertaia, director of Invest in Georgia, in an interview with bne. "It limits the amount
and Turkey. The country is hoping to capitalise on its geopolitical position as a nexus between the three worlds and its good trade (if not always political) ties with its surrounding neighbours. In July it signed off on a free trade and association pact with the EU. The country also has free trade agreements with Turkey and the Commonwealth of Independent States (CIS) – hence the enormous number of people it claims for its hinterland.
A textbook example of successful reform – indeed, Kyiv mayor and former world heavyweight boxing champion Vitali Klitschko said in July that he wants to copy Georgia when setting up his administration – the country is ranked at number eight in the most recent World Bank "Doing Business" survey – well ahead of all its Western European peers, except Denmark. GDP growth hit 7.1% in the first quarter of this year, up from 6.0% in the previous quarter. The government forecasts 5% economic growth in 2014. This compares with the 2% growth in 2008 following the conflict with Russia, and the contraction of nearly 5% in 2009. The story with foreign direct investment (FDI) is similar. In the boom years Georgia was attracting $2bn a year in FDI – partly due to a very aggressive privatisation programme. But in 2008 the country was hit by a triple whammy, says Pertaia: the global financial crisis, the war with Russia, and political unrest and riots within the country. "The investment volume suffered significantly at this time, and FDI and the economy both slowed. However, Georgia is resilient compared to other countries in the region and today is growing fast," says Pertaia. "Last year FDI recovered to some $900m. It is less than we wanted but the trend is rising. In just the first quarter of this year we attracted $260m, which is a 14% increase on the same period last year, so things are going in the right direction." A river runs through it The government is promoting four main sectors to spur growth: hydroelectric
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power, tourism, manufacturing and agriculture. Georgia has very few natural resources, unlike many of its energy-rich neighbours, but the one thing it does have in abundance is water and mountains. "Our main export market [for power] is Turkey, where the seasonal demand matches the seasonal supply of Georgian hydropower. The summers in Turkey are hot and dry, and they have a big energy supply deficit, as everybody is using air conditioning and TVs. In Georgia the maximum water flow comes in the spring and the summer, which is when we produce the most electricity," says Pertaia. The government is actively pursuing and promoting investment into hydropower. The state-owned Partnership Fund was set up to "close the equity gap" between startups and money, and has been given control of some of the country's most valuable assets, using their dividend payments to finance the $1.5bn fund. Its biggest investment is the Neskra hydropower plant with a total capacity of 210 megawatts (MW), worth $570m. Construction has already begun and the fund is in talks with Korean company K Water, amongst others, as a potential co-investor. At the same time, the privately owned Georgian Co-investment Fund (GCF) has $6bn under management and is focusing on the same sectors as the state. Former prime minister and billionaire businessman Bidzina Ivanishvili seeded the fund with his own cash – but only owns 15% of the total to ensure it remains apolitical – and this was added to by other investors like the Azerbaijan State Oil fund, the Abu Dhabi sovereign wealth fund, Kazakhstan's KazMunaiGas and other private investors, all of whom are looking to make a return on their capital. GCF has an even larger hydropower project in the works – a 350MW four-stage cascade hydropower plant that will cost $700m to complete. "We are on the verge of signing a deal with global top three private equity funds to co-invest in one of our projects. If the deal goes ahead – and we hope to announce a success soon – it will be one of the biggest investments in Georgia’s
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Georgia's banking sector makes steady progress
Ben Aris in Tbilisi Steady economic growth and low exposure to international markets have left Georgia's banking sector sheltered from the worst of the financial storms that have swept the world in recent years. The banks' biggest problem today is to penetrate more deeply into Georgian society and grow their businesses. Though small, Georgia boasts by far the most sophisticated banking sector in the region. The sector's assets have been rising at a modest pace of 15-17% a year over the last two years. "The economy and the banking sector have performed well in the last couple of years and TBC has put in a string of strong results," says Giorgi Shagidze, chief financial officer of TBC Bank, the largest lender in Georgia by deposits. "The banking sector is beginning to mature, offering more services and products to the companies, but the penetration of banking services in Georgia is still low – about 30-35%." Still, TBC followed its rival Bank of Georgia onto the London Stock Exchange on June 14, listing GDRs in the equivalent of 40% of the bank's stock and raising a bit more than $700m in the process. Between them, TBC and Bank of Georgia hold about 60% of the banking sector's assets. "We listed the bank in order to raise financing for growth, as the bank wanted to leverage strong financial results. There is a positive outlook for the economy and the banking sector penetration in Georgia remains very low, so the growth potential for our bank is very attractive," Shagidze said in an interview with bne in Tbilisi. Consumer lending is growing, but the pace of growth is slow enough that TBC can fund all its lending activities using its own deposits, so the bond market remains small and only a handful of international bonds have been issued by the state or commercial banks. The sedentary pace of lending growth also means Georgia has, so far, avoided creating the kind of consumer bubbles that have afflicted the likes of Russia and Kazakhstan. "Georgia has not been exposed to the hot growth in consumer crediting the other countries have had to deal with. Consumer lending levels remain low even compared to markets like Russia and Turkey," says Shagidze. Every year, the bank works out a strategy with international consultants McKinsey & Company and then tries to implement it. TBC has been rolling out all the classic services and products such as consumer loans, credit cards, car loans, mortgages and the like. Retail banking accounts for 40% of its business and it is now the biggest deposit taker in the country. "The strength of the bank is its brand and the fact that we offer the best customer experience. We have developed mobile, internet banking and we have the best bill payment system in the world, as well as the best customer internet site according to surveys," says Shagidze.
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history," says the GCF's CEO, George Bachiashvili, in an interview with bne. This means several huge new hydropower plants are due to come on line over the next four to five years, after which Georgia should become a net exporter of electricity. Tourism blossoms With tourism things have gone even faster. Tbilisi is an ancient city with more churches per square kilometre of all denominations than any other capital in the world. The woods that run down the city's steep hills to the Mtkvari River cast a dappled light over the small streets where cafes and restaurants nestle under the wooden porches of traditional Georgian architecture. Georgian food is famous throughout the former Soviet Union and the wine plentiful, excellent and cheap. Last year over 5.4m people visited a country with a population of only 4.5m. Five-star hotel rooms are already at a premium and need to be booked six months in advance to be certain of a reservation.
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The Partnership Fund has five hotel projects in the works, of which the Rixos Borjormi Spa Resort, near the source of the mineral water spring of the same name, is the biggest. "This was a famous resort even in Tsarist times, as the Romanovs had one of their holiday houses here. We have invested into renovating the buildings and creating a five-star hotel," says Nino Cholokashvili, senior investment officer of the Partnership Fund. GCF has even bigger, if more controversial, plans. The $500m Panorama Tbilisi project will add several flagship hotels and high-end serviced apartments to the capital. Bachiashvili says that after public meetings to address environmental concerns, the project has been resubmitted to the city authorities and hopes to get approval soon. Food for thought Agriculture is the last of the potentially interesting sectors. Georgia boasts nine different climate zones and in addition to its famous wine is also the world's
Azerbaijan keeps its options open Naubet Bisenov in Almaty
R
ussia, emboldened by its success in attracting some of the former Soviet states into a Eurasian Economic Union (EEU), has been courting Azerbaijan in a bid to bring this oil and gas-rich nation back into its fold. Moscow fears Azerbaijan, which in the past was part of the "Guam group" of Georgia, Ukraine, Azerbaijan and Moldova, will follow the examples of the other members of that group, which in June all signed EU free trade and association pacts. Baku has so far resisted the Kremlin's courtship, openly rejecting Russian
officials' hints that Azerbaijan would eventually join the EEU. In early June, Russian Economic Development Minister Alexei Ulyukayev annoyed Azerbaijani Economy and Industry Minister Shakhin Mustafayev by being first to suggest that Azerbaijan's possible membership of the EEU "remains a subject of discussion." Dismissing such a prospect, Mustafayev said Azerbaijan was not considering membership of any bloc, be it the EU or EEU, because Baku sees no problem in bilateral trade relations and is satisfied with that system. According to Azerbaijan's Statistics Committee, in 2013 the country's trade with the
biggest nut exporter. But privatisation left land ownership mostly in the hands of small farmers, so it has been difficult to consolidate farms to a size that would attract significant investment. The Partnership Fund has a plan to grow blueberries. "The European harvest mostly comes in May and there is another harvest of blueberries in Poland in October. However the Georgian harvest is right in the middle," says Cholokashvili of the Partnership Fund. The GCF also has a few small projects in agriculture on the go. The fund is already building 5ha of greenhouses to grow tomatoes, which will be expanded to 9ha and then eventually 50ha. It is also planning to invest in a dairy farm with a herd of 1,000 cows that will produce 25 tonnes of milk a day, as well as a dairy processing plant that can handle up to 400 tonnes of milk and will collect milk from other farms. "The problem is Georgia currently imports about 80% of its food products. The plan is to replace the imports and start exporting instead," says Bachiashvili.
Customs Union (the precursor to the EEU, comprising Russia, Belarus and Kazakhstan) stood at $3.1bn, compared with $15.3bn for the EU. Two weeks later on June 18, after a meeting with his Azerbaijani counterpart in Baku, Russian Foreign Minister Sergei Lavrov backtracked, by saying that "there was no formal" invitation to Azerbaijan to join the Customs Union or EEU. However, he added: "We've always noted that we will welcome any of our partners who show interest in joining the CU or EEU." Russia's attempt to cajole Azerbaijan into its trade club unleashed a storm of anti-Russian and anti-EEU criticism among the Azerbaijani talking heads and media. "I believe Azerbaijan should refuse" to join the EEU, former adviser to the Azerbaijani president, Vyafa Guluzade, told the Mediafax news agency. "The project under the name of the Eurasian Union, in my opinion,
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aims not at integration between CIS [Commonwealth of Independent States] countries, but at the restoration of a post-Soviet empire in the former Soviet space." Fikret Garbadansky wrote on Minval.az that the Kremlin is trying to compensate for its failure in Ukraine with "victories" elsewhere. "Relative failure in Kyiv outraged Moscow, which will try to compensate with victories in other Guam countries whose potential of resistance is much lower," he said. The leader of the Azerbaijani opposition party Musavat ("Equality"), Isa Qambar, told Mediaforum.az that the EEU didn't have "any prospects from the point of view of politics and economy" and didn't "promise any good" for Azerbaijan. "We believe Azerbaijan should speedily integrate into the Euro-Atlantic space and take specific decisions and serious steps to join the EU and Nato," he said. These comments reflect wider public opinion in Azerbaijan about integration with the EEU: according to the "EDB Integration Barometer 2013" study conducted by the Eurasian Development Bank's Centre for Integration Studies, support for Eurasian integration in Azerbaijan is the lowest among CIS countries at 37%, while opposition is the highest at 53%. Playing one off against the other There are wider, regional concerns about Moscow's cozying up to Baku. In neighbouring Armenia – which fought a nasty, brutish war in the 1990s with Azerbaijan over the Armenian enclave of Nagorno-Karabakh that it still occupies, the media there have raised concerns that Russia, which has tradtionally supported Yerevan in the dispute, could agree to change its stance in return for Baku's consent to join the EEU. Last autumn, Armenia surprisingly decided to join the EEU, even though it had been in deep negotiations with the EU over a free trade and association pact. Moscow's courtship of Baku is also taking place amid a worsening in Azerbaijani relations with the West
over human rights. In April, the Council of Europe commissioner for human rights, Nils Muiznieks, harshly criticised Azerbaijani authorities over the deterioration in human rights and basic freedoms in the country. Azerbaijan’s civil liberties rating declined in 2013 due to blatant property rights violations by the government, in a year in which the state also cracked down on the opposition and civil society in advance of presidential elections, Freedom House says in its "Freedom in World 2014" report. "During the year, the authorities employed excessive force to break up anti-government protests, introduced restrictive laws to limit freedoms of expression and association, and jailed journalists and government
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Institute, doesn't think there is any cooling in relations between Azerbaijan and Nato, and increasingly frequent visits by Russian officials to Azerbaijan won't affect those ties. "Azerbaijan's elite favours integration of our countries into Euro-Atlantic structures, as integration with Nato is a natural and historical process," he told Haqqin.az. The West believes there cannot be stability without democratic development, which is why it prioritises human rights and issues of democracy, he explains. "Baku shouldn't fear this – on the contrary, it should cooperate with the West in this sphere," he says. "All in all, we need this ourselves."
"Azerbaijan is blackmailing the West with rapprochement with Russia" critics," the report says. President Ilham Aliyev won the October 9 election with 84.5% of the vote. According to the deputy chairman of the opposition Azerbaijani Popular Front Party, Fuad Qehremanli, Azerbaijan might be using the possibility of closer cooperation with Moscow as a way to blackmail the West to ignore human rights violations. "By curtseying to Russia, the authorities are avoiding western calls for democracy. At the same time, they hint to the West that if it increases demands for democracy, Azerbaijan may change its foreign policy course," Qehremanli told Mediaforum.az. "This means Azerbaijan is blackmailing the West with [rapprochement with] Russia." The opposition politician believes that Azerbaijan's authorities are "politically and morally" close to Russia, and by getting closer to it they "want to obtain guarantees for their authoritarian regime". "In the current situation it sees a threat in taking steps in the sphere of democratisation," he says. However, Farrukh Mammadov, president of the Azerbaijan-Nato Cooperation
Azerbaijan is a key country for the EU's energy security. It is a big oil and gas producer that is involved in building the EU's so-called "Southern Corridor," which will ship Caspian gas to Europe via Turkey, without crossing Russian soil. President of the European Commission Jose Manuel Barroso paid a visit to Azerbaijan in June and signed an agreement to expand cooperation between Baku and Brussels. Malena Mard, head of the EU mission in Baku, said Barroso’s visit to Baku was aimed at addressing the possibility of Azerbaijan signing an association agreement with the EU, according to RFE/RL. By playing the West off against Russia, Azerbaijan seems to be keeping its options open and pursuing its own interests: by being pragmatic, Baku may eventually achieve its ultimate goal of solving the territorial dispute with its arch-enemy Armenia while regaining Nagorno-Karabakh and other lost territories.
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economic forecasts are not released publicly).
Mongolia's economic hangover Jacopo Dettoni in Ulaanbaatar
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fter experiencing the buzz of double-digit growth rates and lavish interest from international investors, Mongolia's economic miracle has turned a bit sour. Economic growth has slowed and investors are more cautious, which has caused foreign investment to dry up.
Caught between a weak commodity cycle and flagging investor sentiment, the government decided to breathe new life into the economic boom through generous fiscal and easy monetary policies. As a result, the fiscal deficit ballooned and remained over 10% of GDP in 2012 and 2013; the World Bank forecasts more of the same in 2014.
“Three years of growth-oriented economic policies have led to large economic imbalances” With no agreement in sight between the government and the global miner Rio Tinto over the multi-billiondollar expansion of the giant Oyu Tolgoi copper and gold mine, largely considered a barometer of Mongolia's economy, the authorities in Ulaanbaatar are left to deal with the challenges inherited from years of unprecedented growth. “Three years of growth-oriented economic policies have led to large economic imbalances,” the World Bank warned in its latest country report published in June.
In the meantime, the central bank injected fresh liquidity into the system equivalent to 20% of GDP, creating a credit boom. As a result, the economy is still barrelling along, with GDP growing at 11.7% in 2013 and 12.4% in 2012, following the stunning 17.5% rate achieved in 2011, when Mongolia hit the headlines as the hottest frontier market out there. “Today, the central bank is managing economic growth forecasts in the order of 8% to 9% for 2014,” a central bank source told bne, preferring to remain anonymous (Mongolbank's
Flip side of growth If the gambit is paying off in terms of economic growth, increasing imbalances represent the flip side. The credit boom achieved through central banksponsored programmes like the 8% mortgage rate has boosted imports in a time when exports, mostly raw minerals, were falling because of China's economic slowdown. That, combined with falling foreign investment due to the government's legal capriciousness, have led to trade imbalances that ended up eroding foreign currency reserves. Mongolbank's foreign reserves fell to $1.6bn in May, down from over $4bn at the beginning of 2013, according to official figures. Without taking into account existing currency swap agreements with other central banks, net reserves could be as low as $540mn, credit rating agency Fitch Ratings has estimated. Plummeting foreign reserves hit the local currency, the tugrik, hard, which has lost 10% against the US dollar so far this year, following a 17.6% decline in 2013. In a country with little domestic production and a heavily reliance on imports, a weakening currency immediately translates into inflation, with prices currently growing at an annual 14.6% clip, according to June figures from Mongolbank. “Monetary policy needs to be tightened, since – as in other countries – excessive credit growth has contributed to strong imports,” the International Monetary Fund's (IMF) deputy managing director, Naoyuki Shinohara, said in a June statement. Besides, “the consolidated deficit should be brought down steadily toward the target laid out in the Fiscal Stability Law [2% of GDP],” Shinohara added. Silver bullet Authorities in Ulaanbaatar often treat the giant Oyu Tolgoi mining project as a silver bullet able to cure any imbalance and lure back investors. With $4bn on the line, representing one-third of the country's annual GDP, they could have a point. Yet the negotiations over the
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project's expansion are not moving forward as expected and the road ahead appears bumpier than ever, with the Mongolian side showing growing signs of irritation with Rio Tinto. In the latest in a long series of sudden about-turns, the local tax authority has filed claims for unpaid taxes, penalties and disallowed entitlements associated with the initial development of the Oyu Tolgoi mine, which could be worth as much as $130m. Rio Tinto-controlled Turquoise Hill Resources, which owns 66% of the mine – the remainder being owned by the government
itself – refutes the claims and has opened an official dispute with the government. The whole issue risks further delaying an agreement over the mine's underground expansion. The company was supposed to complete an updated feasibility study and send it to parliament for final approval in a matter of weeks. However, “distribution of the underground feasibility study will be delayed” as “outstanding shareholder issues, including tax claims, must be resolved before further investment in the underground can proceed,” Turquoise
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Hill said in a statement in July. That will likely put off any final agreement to 2015 as the earliest. Given the project's magnitude, things for the Mongolian economy may indeed turn on a dime whenever an agreement is struck. Until then, the government is left alone to fight a double battle: keep the economy on track and keep the current imbalances in check. Prime Minister Norovyn Altankhuyag unveiled a 100-day economic stimulus plan back in back in April – he will probably need more than that to succeed on both those fronts.
Belarus and Kazakhstan, and will be transformed into the EEU next year – will lead to the development of new industries in Kyrgyzstan, while barrierfree trade means duty-free imports of petroleum products, gas, chemicals, timber and metals.
Kyrgyzstanis to find benefits of EEU membership elusive Naubet Bisenov in Almaty
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yrgyzstan enjoys one of the lowest rates of customs duties on imports due to its membership of the World Trade Organization. This has spurred development of light industries and boosted trade, turning Kyrgyzstan into a regional hub that serves customers from faraway places like western Kazakhstan and Russia by
re-exporting cheap Chinese products. However, this situation is set to change when Kyrgyzstan joins the Russia-led Eurasian Economic Union (EEU) next year. The Kyrgyz government reckons the enlarged market of the current Customs Union – which comprises Russia,
The government also tells a sceptical public that the country needs to join the EEU in order to improve the working conditions of hundreds of thousands of Kyrgyz migrant workers in Russia and Kazakhstan, where, the government believes, they will be able to compete for jobs on an equal footing with Russian and Kazakh citizens and enjoy social security perks available to locals. According to the Russian Federal Migration Service, around 526,000 Kyrgyz citizens were officially registered in Russia as of March. Kyrgyz migrant workers sent $2.1bn in remittances from Russia alone in 2013, which accounted for nearly 30% of annual GDP. The government also cites the possibility of supplies of cheap energy as a benefit of EEU membership. In April, Kyrgyzstan sold its gas distribution networks to Russia's Gazprom for a token $1, but this has so far had an adverse effect on gas supply in the country's south because Uzbekistan has cut off gas exports, absolving itself from previous obligations following the Gazprom takeover.
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At the same time, in order to ease Kyrgyzstan's integration into the EEU, the Customs Union members have offered some sweeteners. On May 29, Kyrgyz President Almazbek Atambayev agreed a final road map at a Customs Union summit in the Kazak capital of Astana, which includes a grant of $377m to help Kyrgyzstan implement the necessary changes in legislation to comply with Customs Union regulations, harmonise rules on the movement of goods and vehicles, train customs officers and strengthen border controls. Russia has agreed to contribute $200m of this, and Kazakstan will cover the rest. Russia and Kyrgyzstan also signed an agreement to set up a Development Fund worth $1bn, which will be managed jointly and will work to ease Customs Union integration. Stitched up While the benefits have yet to materialise, ordinary Kyrgyz citizens face the prospect of losing the advantages they enjoy at the moment outside the Customs Union. This is something some are clearly aware of; on May 20, police in Bishkek detained at least seven activists protesting the country's plans to join the bloc. Since joining the WTO in 1998, Kyrgyzstan has developed vibrant textile and garment industries thanks
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markets are estimated to employ about 10% of Kyrgyzstan's workforce between them. However, since the establishment of the Customs Union in 2010, Kazakhstan has tightened controls on the border with nonmember states and customs duties have gone up significantly. "Kazakhstan has toughened requirements and has fenced off the border with barbed wire. There is no trade. This is another reason that we should join the Customs Union," Economy Minister Temir Sariyev said in May.
those in Customs Union member states. Bishkek imposes duties on imported cars at $0.3 to $1.95 per cc of engine, depending on the age of the car and size of the engine (cars aged over 12 years are levied a customs duty at $1.5 and $2.25, depending on the engine size). Duties on imported cars in the Customs Union range from €1.2 to €5.8 per cc of engine. Should Kyrgyzstan bring the rate of duties on cars to Customs Union levels, the price of imported cars will at least double in Kyrgyzstan.
Taking advantage of low customs duties, Kyrgyz traders have also learnt to import cheap Chinese goods to re-export them as Kyrgyz products, using simplified customs regulations adopted within the Commonwealth of Independent States (CIS). According to the Kyrgyz Statistics Agency, the country's imports from China totalled $1.2bn in 2013, while China's National Bureau of Statistics puts the figure at $5.1bn. In addition to poor customs administration, experts attribute the discrepancy to Kyrgyz re-exports to CIS countries. In view of this, Russia has said it will spend $55m of the $200m grant it is allocating to Bishkek on building and re-equipping border checkpoints. This will eventually hurt Kyrgyz businesses involved in re-exporting goods, leaving thousands jobless. The average rate of Kyrgyz
Currently, Kyrgyz importers pay about $750 in customs duties for a 2,500 cc Toyota Camry, produced in 2003, while Kazakhs pay $14,207 in customs duties for the same car – on top of the cost of the car. The same car produced in 2014 will have $3,250 added to the price of the car in customs duties in Kyrgyzstan and $7,636 in Kazakhstan. The asking price for a 2003 Toyota Camry starts at $12,500 on the kolesa.kz online car market, while the same car is listed for as little as $5,000 on the kolesa.kg website. This situation has led to many Kazakhs buying cars in Kyrgyzstan, but driving them in Kazakhstan using a document proving that they have the right to drive it, to avoid paying prohibitive duties in Kazakhstan. However, the Kazakh Customs Code bans Kazakh citizens from driving foreign-registered cars without paying the customs duties. As a result, the traffic police target cars with Kyrgyz number plates in Kazakhstan, setting Kazakh motorists against the Customs Union.
"Kazakhstan has toughened requirements and has fenced off the border with barbed wire – there is no trade" to low customs duties and cheap labour: Kyrgyz garment producers import textile materials from China and produce clothing tailored to former Soviet consumers' tastes.
customs duties is around 5% at the moment. This is expected to grow to about 8% after the country joins the bloc. As a result, the Kyrgyz garment industry may become less competitive.
This, in turn, has helped the Dordoy market in the capital and the Kara-Suu market on the border with Uzbekistan to thrive, attracting traders from neighbouring countries. The two
One of the spheres where ordinary Kyrgyz citizens stand to lose greatly from EEU membership is car sales. Kyrgyzstan now has duties on imported cars that are several times lower than
Like the authorities in Kazakhstan, Kyrgyz officials have tried hard to sell the EEU as a purely economic, not political, bloc. Yet if Kyrgyzstan's membership proves detrimental to the interests of citizens, joining the Russian-led bloc could prove a dangerous game in a country that has overthrown two presidents in popular revolutions in the past decade.
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entities must obtain permission from the central bank to access forex, but bureaucracy, corruption and limited forex reserves mean not all applicants are granted such permission. Shermamat Abdullazade, a former finance ministry official who is now living in exile in the US, told the fergananews.com website in an interview in late May that Uzbekistan doesn't have enough reserves to issue such permission to all applicants. He explains that enterprises that are protected from on high have easy access to forex, but authorities cut exchange quotas for other enterprises with foreign involvement in order to "extort cash from them."
Uzbek currency turns 20 amid thriving black market Olim Abdullayev in Tashkent
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t Tashkent's landmark Chorsu market, black market currency dealers greet shoppers with stacks of Uzbekistani som packed in plastic bags. "We buy dollars, euros, Russia[n rubles] and gold," they shout at passers-by indiscriminately – right under the noses of police officers loitering nearby, who pretend not to notice the illegal activity. This is a scene in the Uzbek capital almost 18 months after authorities adopted measures in a bid to smash the black foreign exchange market in the country, which has thrived ever since the national currency, the som, was adopted exactly two decades ago in July. At its adoption, the national currency changed hands at UZS6 to the dollar, but double-digit inflation has taken its toll: the value of the som against the dollar has fallen by more
than 500 times on the black market over the past 20 years. Since its adoption the som has never been a fully convertible currency, as the government has imposed restrictive control on access to foreign currency. Foreign firms say currency convertibility is one of the greatest obstacles to proper investment operations in Uzbekistan. In 2003, Tashkent signed up to Article VIII of the International Monetary Fund’s Article of Agreement, which bans "restrictions on the making of payments and transfers for current international transactions." Despite committing itself to currency convertibility for current account transactions, the Uzbek government maintains informal restrictions on the forex market and the repatriation of foreign companies' profits. All legal
Even when joint ventures access forex, the country doesn't have a legal private market for investors to transfer their funds and private money transfer systems offer services only to individuals with strict limits on forex transactions. "The goal of the government's tight fiscal and monetary policies is to minimise capital outflow, regulate imports, stimulate local manufacturing and reduce the country's dependency on external factors," the US State Department said in its 2013 Investment Climate Statement on Uzbekistan. "The [Uzbek government] believes that this course minimises Uzbekistan’s exposure to risk stemming from global financial woes, but in practice, deters potential foreign investments." Four rates for forex Tight government controls over forex have created a situation where there are now four different exchange rates in the country: two of them – the official rate set by the central bank and the exchange booth rate – are legal exchange rates; the third rate – the Uzbekistan Commodity Exchange rate for import operations – is semi-official; while the fourth rate – the black market rate – is unofficial and technically illegal. Black-market currency dealers sell dollars at a rate of UZS3,100 to the dollar, while commercial banks are supposed to sell them to the population for about UZS2,362. The official
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exchange rate set by the central bank (without any liability to sell dollars) was UZS2,320.16 on July 8. The fourth rate is around UZS3,700 at which importers buy dollars on the commodity exchange to pay for their imports, according to the uzmetronom.com website, believed to be linked to the Uzbek security services. Uzbekistan has imposed further restrictions on access to forex by individuals. Regulations adopted by the Central Bank of the Republic
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restricted in purchasing cash dollars from the population. Yes, we have no dollars The new regulations didn't result in Uzbek citizens being able to access forex more freely despite the burdensome procedures. According to central bank regulations, every Uzbek passport holder is entitled to purchase $2,000 a quarter, but commercial banks cite various reasons or create additional obstacles to discourage citizens
"The state is the mafia in Uzbekistan" of Uzbekistan banned commercial banks from selling cash dollars to the population from February 2013. Instead, authorised banks were ordered to sell non-cash dollars into potential buyers' international payment cards such as Visa or MasterCard. Eligible Uzbek citizens could then use the funds while they were abroad, with restrictions placed on how much they could withdraw each day (usually no more than $100). The central bank sold the new scheme as "more perfect" and "widespread international practice." It also claimed that holders of international cards could use them for online payments, but Visa or MasterCard issued by Uzbek banks do not have CVV numbers. At the same time, commercial banks are not
from pursuing their entitlements. For example, they tell clients that they have reached their limits to sell foreign currency, or say that because of many applications to buy foreign currency they can sell only part of the entitlement, forcing people to come back several times until they exhaust their limits or patience. In response to inquiries about the purchase of dollars in early July, one branch of Kapital Bank in Tashkent said that it hadn't sold dollars to individuals since December 2013 because "we don't have dollars." From time to time, law-enforcement agencies carry out raids against blackmarket currency dealers, which stops the trade for a few days. The latest such
raid was organised in Tashkent on June 26. This is done to give the appearance of a fight against black marketeers and usually targets either ordinary citizens or those at the lowest layer of the currency trade hierarchy, locals believe. After such raids, the exchange rate usually fluctuates, providing people involved in the activity with additional profits. Uzbekistan sends millions of migrant workers to foreign countries every year, mostly Russia and Kazakhstan, who send home cash worth billions of dollars. According to the Central Bank of Russia, in 2013 remittances from Russia alone totalled $6.63bn, which accounted for nearly 12% of Uzbekistan's GDP in 2013 (denominated in dollars at the official exchange rate). Due to the over 30% difference in the official and black market rates, almost all cash dollars end up on the black market and circulate outside the banking system in Uzbekistan. Despite the fact that selling dollars to the population at the deliberately low rate damages state interests, few in Uzbekistan believe the authorities are serious about destroying the black market in forex. Moreover, locals believe that the tentacles of the "mafia," which controls the black market and makes enormous profits, lead directly to people high up in the government. "The state is the mafia in Uzbekistan," sighs one resident of Tashkent.
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INVISIBLE HAND:
Turkey needs to get its groove back Liam Halligan in London
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urkey’s economic potential is obvious. Sitting at the crossroads of Europe and Asia, this secular, predominantly Muslim democracy could hardly be more strategically located. With its blend of western and eastern cultures and fast-growing 74m-strong population, many of them young and well-educated, Turkey should be among the world’s most attractive emerging markets.
way of containing social unrest. Having expanded by 9% a year during the post-Lehman bounce-back, Turkish GDP grew by just 2.2% in 2012 and 4.3% the year after. The International Monetary Fund estimates a 2.3% rise in 2014, followed by 3.1% next year. Buoyant by western standards, such numbers don’t pass muster in an increasingly populous emerging market at a time of barely-contained political violence.
And so it has seemed. The Turkish economy has tripled in size since the early 2000s, riding an almighty wave of consumption and construction. Foreign direct investment has poured in. This ancient country, with its ubiquitous monuments and minarets, now has a multitude of skyscrapers, shopping malls and infrastructure mega-projects. These include the $11bn Istanbul-Izmir motorway, a high-speed Ankara-Istanbul raillink and a plausible bid to build the world’s largest airport, handling 150m passengers a year.
Low growth is being compounded by stubbornly high inflation – 7.4% in 2013 and an estimated 8% this year. Turkey meanwhile ran a current account deficit equal to no less than 7.9% of GDP in 2013. While expected to narrow slightly this year, this current account deficit from the large and ongoing excess of imports over exports piles downward pressure on the currency, stoking inflation even more.
More recently, though, economic storm clouds have gathered. Turkey’s audacity and ambition have begun to look like hubris. Debt levels are soaring and the Turkish lira looks precarious. Trade remains heavily dependent on a still sluggish Eurozone. Unrest in Syria and Iraq, just across the southern border, has also discouraged investment. Long-held suspicions that the Turkish economy is a bubble have lately come to the fore.
Turkey’s GDP per head is $11,000, just behind Poland and about the same as Argentina and Brazil. The country boasts an array of modern firms producing goods and services for a growing middle class – at the heart of the investment case. The domestic pharmaceutical market, for instance, has grown from $3bn to $13bn during the decade to 2012. That’s led to a wave of sticky investment from leading global pharmaceutical companies from Switzerland, Germany, Japan and the US. Befitting its location, Turkey also attracts considerable investment from Russia and the Gulf.
Political risk also looms large. In May 2013, demonstrations against the closure of central Istanbul’s iconic Gezi Park provoked a notoriously heavy-handed police crackdown. That unleashed a slew of public unrest, as millions of protesters across the country expressed outrage about civil rights, inequality and corruption. Gezi Park and its aftermath convulsed Turkey, further polarizing society. And earlier this summer, as demonstrators marked the one-year anniversary of the initial protests, tens of thousands of police were scrambled and tear gas once again deployed in downtown Istanbul. Growth as social balm Against this background, economic growth is important not just in terms of national prosperity but as the best
What really overshadows the Turkish economy at the moment, though, is what overshadows the prospects of many other middle-income countries – the next move of the large western central banks, particularly the US Federal Reserve. A torrent of “hot money” has poured into emerging markets in recent years, caused by ultra-low western interest rates and “quantitative easing” (QE). This has generated dangerous credit bubbles in high-yielding destinations like Turkey. When American QE began in November 2008, it was billed as a $600bn programme. Since then, the Fed’s virtual printing presses have generated almost $4,000bn of “funny money,” quadrupling the US central bank’s balance sheet. The Bank of England has similarly increased its balance sheet four-fold. The Bank of Japan is catching up fast, as is the European
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Central Bank, despite keeping Euro-QE covert, burying expansionary monetary operations under a mound of technicalities to placate the German public. Over the last five years, much of this cheap money from the West has found its way into emerging markets such as Turkey, as institutional investors there, stymied by paltry returns on domestic bonds, have conducted a desperate “search for yield.” This investment influx has pumped up asset prices in “alternative” investment destinations while pressing-down on local borrowing costs, sparking a credit explosion. While many emerging markets have gorged themselves, Turkey has indulged more than most. In the spring of 2013, global markets took serious umbrage at the Fed’s initial attempts to slow down QE. Several emerging markets – particularly those with large trade deficits, high inflation, slowing growth and dependence on foreign inflows – were vulnerable, their equity and bond markets tumbling. A handful were singled-out by western analysts for their combination of weakness and relatively large size, pointing to possible systemic importance. Those “fragile five” were India, Indonesia, Brazil, South Africa and Turkey. The emerging markets bond bubble was expressed in Turkey first and foremost in a corporate borrowing spree. Loans to Turkey’s private sector have more than quadrupled since QE began, with corporates owing some $41bn in short-term debt and $157bn in long-term debt by March 2014. As much as 90% of these liabilities – amounting to 22% of GDP – are denominated in foreign currency, according to Moody’s Investors Service, leaving debtors at the mercy of the Turkish currency market. Add in government debts held overseas and foreign-denominated liabilities total an eye-watering 45% of national income. Defying the laws of economics After the “taper tantrum,” the lira suffered badly. It fell 25% against the dollar between the spring of 2013 and January 2014 and 27% against the euro – a plunge arrested only by a sharp interest rate hike. Since then, the currency has partially recovered, but remains down 18% and 19% against the dollar and euro respectively. Turkey’s central bank – notionally independent since 2001 – has come under enormous pressure to return interest rates to their pre-January levels. Extremely vocal in his criticism, Prime Minister Recep Erdogan has insisted on rate cuts despite high inflation, alarming global investors. After a decade in power, the authoritarian Erdogan is popular with some voters but highly divisive. Despite heavy criticism at home and abroad, Erdogan's ruling Justice and Development Party (AKP) comfortably won local elections at the end of March – in part due to a weak and divided opposition. No one was surprised when, in early July,
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Erdogan declared himself a candidate in Turkey’s first direct presidential election, to be held in August. While Erdogan is credited with overseeing a transformation of the Turkish economy, many financial analysts worry aloud that the PM, by pressuring the central bank to slash rates amid obvious inflationary dangers, is attempting to defy the laws of economics. In mid-July, the central bank lowered its one-week repo rate half a percentage point to 8.25%. While this is the third consecutive reduction since May, the rate remains well above its 4.5% pre-January level. Erdogan looks likely to win on August 10, with the AKP prevailing in the 2015 general election. As such, much will depend on the composition of government. Many international investors hope for the continued influence of Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek, who have defended the central bank and reassured financial markets the government will pursue stable policies. Their presence in the next cabinet will be seen as a guarantor of what remains of the credibility of Turkey’s monetary policy. I suspect that Erdogan will ultimately keep Babacan and Simsek in government. To ditch them, or watch them walk
"Many worry the PM, by pressuring the central bank to slash rates amid obvious inflationary dangers, is attempting to defy the laws of economics" away, would undermine his goal of Turkey becoming one of the world's top ten economies by 2023, with GDP of $2,000bn, up from $820bn now. This is a laudable aim and, no doubt, there is scope for substantial investment gains for those willing to stay the course. The total capitalization of the Turkish stock market is less than 50% of GDP, and with a much smaller free-float, compared with 100% or more in most developed countries. The potential upside is huge. Yet Turkey faces considerable financial volatility as the Fed withdraws more QE over the coming months, not least as some 70% of Turkish equities are held by foreign investors. Many of them, when the going gets tough, will be quick to head for the exit, whatever the long-term investment case. Liam Halligan is Editor-at-Large of bne. Follow on Twitter @liamhalligan
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Events
Upcoming events 2014 8th Annual Conference Invest Mongolia (2 – 3 September) Ulaanbaatar www.frontier-conference.com
TURKMENTEL-2014 8th Turkmenistan International Telecommunications & Information Technologies Conference (17-18 September) Ashgabat www.turkmenistantelecoms.com
Catalyst Cap Intro: L/S Equity – Event Driven Investing (22 September) New York City Catalyst Financial Partners +1 212 966 2993 cap-intro@catalystforum.com http://catalystforum.com/node/300
Tajikistan Business & Investment Summit 2014 (24 - 25 September) Euroconvention Global Dushanbe, Tajikistan www.conventionventures.com
6th Turkmenistan Investment Forum (1-2 October) Avase www.turkmenistaninvest.com
10th Annual Mining and Exploration Forum (7 - 9 October) MINEX FORUM Moscow, Russia www.minexforum.com
Catalyst Cap Intro: Credit – Fixed Income Alternative Investing (27 October) New York City Catalyst Financial Partners +1 212 966 2993 cap-intro@catalystforum.com http://catalystforum.com/node/301
Catalyst Cap Intro: Emerging Markets – Macro Alternative Investing (8 December) New York City Catalyst Financial Partners +1 212 966 2993 cap-intro@catalystforum.com http://catalystforum.com/node/302
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