bne IntelliNews Magazine - December 2015 by Ben Aris

Inside this issue: Poland’s train monopoly PKP takes a new track Twilight of Ukraine’s oligarchs

December 2015

Turkish opposition leaders need to shape up or ship out

www.bne.eu

GBP 4.50/USD 6.75/EUR 5.90

Ben Aris looks at retail in Russia and the region, and interviews Dixy chief Ilya Yakubson

SHOPPING IN THE TIME OF

Special Report: Capital Markets Survey 2015 p. 26

Babis tells Ben Cunningham he’s keeping faith with Czech coalition – for now p. 38

Mark Galeotti asks: will 2016 see the three Russias diverging? p. 60

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Contents

bne December 2015 Senior editorial board +7 9162903400 Ben Aris (Moscow) editor-in-chief baris@bne.eu

James R Hammond (Boston) +1 6178525441 publisher jhammond@bne.eu Nicholas Watson (Prague) managing editor

+42 0731582719 nwatson@bne.eu

Robert Anderson (Prague) news editor

+42 0603517867 randerson@bne.eu

Liam Halligan (London) +44 7801799279 editor-at-large LHalligan@newsparta.net Central Asia Naubet Bisenov (Almaty) bureau chief Eastern Europe Nicholas Allen (Berlin) bureau chief

+49 15730395872 nallen@bne.eu

6 THE MONTH THAT WAS

COMPANIES & MARKETS

Central Europe Tim Gosling (Prague) bureau chief

+42 0720180811 tgosling@bne.eu

Southeast Europe Clare Nuttall (Bucharest) bureau chief

+7 7073011495 cnuttall@bne.eu

Advertising & subscription +7 9160015510 Elena Arbuzova (Moscow) business development earbuzova@bne.eu Michael Dragoyevich (London) +44 7715412938 commercial director mdragoyevich@bne.eu Design Olga Gusarova (London) art director

+7 7015933810 nbisenov@bne.eu

+44 7738783240 ogusarova@bne.eu

Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu All rights reserved. No part of this publication may be reproduced, stored in or introduced to any retrival system, or transmitted, in any form, or by any means electronic, mechanical, photocopying, recording or other means of transmission, without express written permission of the publisher. The opinions or recommendations are not necessarily those of the publisher or contributing authors, including the submissions to bne by third parties. No liability can be attached to the publisher for these comments, nor for inaccuracies, errors or omissions. Investment decisions or related actions taken on the basis of views or opinions that appear herein are the responsibility of the reader and the publisher, contributors and related parties cannot be held liable for these actions.

10 White & Case – the US law firm embedded with the Kremlin 12 Poland’s train monopoly PKP takes a new track 15 Otis Russia lifts UTC’s business to new heights 16 An unwelcome investor jets into Latvia

Print issue: €499 / year.

38 Babis keeps faith with coalition – for now 39 Bank deleveraging in most of CEE over 40 How Belarus keeps Lithuania onside

SOUTHEAST EUROPE 42 Latvia’s international man of mystery 45 Calling Serbia and beyond

18 Romania’s Dacia changes gear EASTERN EUROPE 20 Romania’s Fortech prepares for next growth stage 22 Ukraine sees EU free trade deal from 2016 though hurdles remain 24 Crowdfunding real estate investment in Russia

48 Twilight of Ukraine’s oligarchs 50 Ukraine’s 7 boyars 52 Ukraine needs a ‘Plan B’

EURASIA 54 Uzbek cars lose their shine

26 SPECIAL REPORT – Capital Markets Survey 2015

COVER FEATURE

bne IntelliNews is the property of New Sparta Media. New Sparta Media | 27a Floral Street, 3rd Floor, London, WC2E 9EZ, UK

CENTRAL EUROPE

32 Shopping in the time of crisis 34 Retail in the region 36 Dixy miffed, not crushed by sanctions

55 Saw bolıñız, Kelimbetov! 56 Georgia’s lari faces tough coming of age

I Contents

bne December 2015

67 ARTS, CULTURE & PEOPLE

Macroeconomic indicators

Sweden’s dark secret exposed in book on TeliaSonera

Financial indicators

UPCOMING EVENTS

Uralsib’s eccentric owner faces day of reckoning

OPINION 58

Will 2016 see the three Russias diverging?

Turkish opposition leaders need to shape up or ship out

Belief creates its own truth

Russia not quite so bad

Europe stands defiant but damaged

NEW EUROPE IN NUMBERS 70

Charts of the month

Follow us on twitter.com/bizneweurope COMPANIES MENTIONED Yukos (Page 7, 10, 11, 37, 50) Orient Express (7) Home Credit (7) VTB 24 (7) airBaltic (8, 16) Estonian Air (8, 17) Ceske Drahy (8) Skoda Transportation (8) Telekom Srbija (8, 45, 46, 47) Telekom Slovenije (8, 45, 46, 47) Mobile TeleSystems (8, 45) China Telecom (8, 45) Advent International (8, 46) Mid Europa Partners (8, 46) Novator Partners (8, 46) Apollo Global Management (8, 46) Bulgaria Telecommunication Company (8, 47) VTB Capital (8, 26) Gazprom (8, 29, 31) KazMunaiGas (8) KazMunaiGas Exploration Production (8) CEE Stock Exchange Group (9) Oesterreichische Kontrollbank (9) Raiffeisen Bank International (9) Ventspils Nafta (9) Vitol Group (9) Corporate Commercial Bank (9) Fondul Proprietatea (9) Franklin Templeton Investments (9) Hidroelectrica (9) ContourGlobal (9) Uralsib (9, 67) Promstroibank (9) Neftegasindustria (9) Vnesheconombank (9) White & Case (10, 11)

Shearman & Sterling (10) GML Ltd (10) Cleary Gottlieb Steen & Hamilton (10) Baker Botts (10) Hanotiau & van den Berg (10) De Gaulle Fleurance et Associés (10) AK BARS (11) Vnesheconombank (11) PKP Grupa (12, 13, 14) PKP Intercity (12, 13, 14) PKP Energetyka (13) PKP Intercity (14) AWT (14) HZ Cargo (14) Xcity Investment (14) CVC Capital Partners (14) Otis Russia (15, 16) UTC Building & Industrial Systems (15) United Technologies Corp (15) Inkombank (17) Antonov (17) Bombardier (17) Let (17) British Aerospace (17) Dacia (18, 19) Renault (18, 20) Volkswagen (18) Skoda (18) Samsung (18) Nissan (18) Ford Craiova (19) Fortech (20, 21) Art Net (20) Pfizer (20) Symantec (20) Swisscom (20) KupiVip.ru (25)

Car-Price.ru (25) ZaOdno.ru (25) Fastlane Ventures (25) Aktivo.ru (25) Citigroup (27, 28, 29) VTB Capital (27) Wizz Air (28) Barclays Bank (28, 29) JP Morgan Securities (28, 29) Nomura International (28) Erste Group (28, 29) Wood & Co (28) Deutsche Telekom (28) Slovak Telekom (28) VRN Sarl (28) Novatek (28) Naspers (28) KEKh eKommert (28) UniCredit Group (28, 29) BNP Paribas (29) Deutsche Bank (29) HSBC (29) ING Group (29) Societe Generale (29) Halkbank (29) Akbank (29) Finansbank (29) Garanti Bank (29) İş Bank (29) Vakıfbank (29) Yapı Kredi (29) Ziraat Bank (29) Gazprom (29, 31) Banca IMI (29) Astaldi (29) Nurol (29) Makyol (29) Özaltın (29) Göçay (29) PKO BP (30)

Credit Suisse (30) Morgan Stanley (30) Sberbank CIB (30, 31) Bank of America Merrill Lynch (30) Lazard (30) BTG Pactual (30) SG Corporate & Investment Banking (30, 31) Gazprombank (31) Commerzbank Group (31) Standard Chartered Bank (31) Otoyol Yatirim ve isletme AS (31) Pola Investment Ltd (31) Koc Financial Services Inc (31) VakifBank (31) PPF Group NV (31) Turkiye Garanti Bankasi AS (31) Export Credit Bank of Turkey (31) Magnit (32, 33, 35) Dixy Group (32, 33, 35, 36, 37) X5 Retail Group (33, 35, 69) O’Key (33, 35) Lenta (33, 35) Eurocash (34) Emperia (34) Jeronimo Martins (34) Sberbank (35) Mercury Group (36) CEZ (40) Banca de Economii (42, 43) Banca Sociala (42, 43) Unibank (42) Victoria Bank (43) Meinl Bank (43, 44) Hrvatski Telekom (45) Deutsche Telekom (45) Telekom Austria (45) Telenor (45) KBC Banka (45) Cinven (46)

Debitel (46) BH Telecom (46) Post and Telecommunications of Kosovo (46) ACP Axos Capital (46) Magyar Telekom (46) Makedonski Telekom (46) Crnogorski Telekom (46) HT Mostar (47) Montenegro Telekom (47) Arsenal (47) Ferrexpo. (48) Finances and Credit (48) Nadra Bank (48) PrivatBank (49) Natftogaz (49) Ostchem (49) System Capital Management (49) Dniproenergo (50) Unexim (50) Alfa Group (50) NTV (50) Inkombank (50) SBS Agro bank (50) Sibneft (50) Ukraina Media Group (50) 1+1 Media Group (50) Interpipe (51) Inter Media Group (51) EuralTransGas (51) RosUkrEnergo (51) Roshen (51) Ukraine Agro holding (51) Avangardco (51) GM Uzbekistan (54, 55) General Motors (54) Halyk Finance (55) Renaissance Capital (57) TBC Bank (57)

Check out the new intellinews.com ⋅ Free to access ⋅ Optimised for mobile, tablet ⋅ More photos, podcasts ⋅ Expert coverage of business and politics in Eastern Europe and Eurasia ⋅ Plus premium newswire and data services See what bne IntelliNews has to offer at intellinews.com

I The Month That Was

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Politics Central Europe Poland’s Law and Justice party, which won an outright majority in the parliamentary elections on October 25, announced a hardline cabinet line-up, belying hopes it would strike a more conciliatory stance than in its last term in office. Perhaps the most divisive figure is Antoni Macierewicz, who has been chosen to be the new defence minister. Another divisive name in the government is Zbigniew Ziobro, who will head the justice ministry. The European Commission has launched an infringement procedure against Hungary's deal with Russia on the expansion of the Paks nuclear plant. Budapest breached EU procurement rules in awarding the contract on the €12.5bn project to Moscow without a tender, the EU executive said. Poland and Slovakia leapt to use the horror in Paris to justify their stance on migrants. With hundreds killed or wounded in the French capital, both were quick to link terrorism to the EU's quota scheme to redistribute refugees across the bloc, saying they will not take part. Hungary also said it plans to join Slovakia in suing Brussels over the scheme.

Croatia’s conservative opposition eked out a narrow victory in parliamentary elections on November 8, but tricky coalition negotiations lie ahead. With 99% of the vote counted, the opposition conservative Croatian Democratic Union (HDZ) won 59 seats in the 151-seat parliament, with the ruling Social Democrats (SDP), just behind at 56. A new right-leaning grouping of independents, the Bridge of Independent Lists (Most), has 19 seats, potentially giving it a kingmaker’s role. The new Romanian government of Prime Minister Dacian Ciolos was sworn in following an overwhelming vote of confidence in parliament on November 17, when it received 389 votes for to 115 against (with two abstaining). The new technocratic cabinet was brought in after the resignation of former PM Victor Ponta, who stepped down following mass protests after a tragic nightclub fire on October 30 in Bucharest left at least 60 dead. The Slovenian army started preparations to build a fence at the Croatian border early on November 11 in order to control the influx of migrants. The move came just one day after Slovenian Prime Minister Miro Cerar announced the country would start erecting “temporary physical barriers” at the border. Slovenia has been on the frontline of the migrant surge into Europe after Hungary closed its borders.

Eastern Europe

Southeast Europe President Recep Tayyip Erdogan now has no real challenger after his Justice and Development Party (AKP) made a stunning comeback in the Turkish general elections on November 1, increasing its share of the vote by nine points to 49.5% and regaining its parliamentary majority.

Russia will impose a food embargo on Ukraine following Kyiv's decision to join international sanctions against Russia, which is scheduled to come into effect on January 1, 2016. Ukraine estimates potential losses at $600mn in 2016. Ukraine is also preparing to implement its free trade deal with the EU in January, regardless of how Russia might react. The World Anti-Doping Agency has recommended Russia be barred from international sporting com-

petitions, including events in the 2016 Olympics in Brazil, following allegations of widespread doping.

Eurasia President Ilham Aliyev's ruling New Azerbaijan Party (YAP) won 70 seats in the November 1 election. The result represents a landslide victory for YAP, which has not lost a presidential or parliamentary election since 1993. The election was boycotted by the main opposition parties, such as Musavat, the Popular Front and the National Council of Democratic Forces, because of government interference in the registration of their candidates. The saga of the sacking of former security minister Eldar Mahmudov, whom Azerbaijani President Ilham Aliyev removed without explanation on October 17, has continued with the arrests of 15 high-ranking security officials in the last month. The ensuing investigation has taken down officials from other ministries as well, namely former communications minister Ali Abbasov, and at least nine employees of the communications ministry and public telecom companies. Uzbek authorities released political activist Murod Jurayev, who has been in jail for 21 years and is considered one of the world's longest-serving political prisoners, on November 12. Jurayev was originally imprisoned for 12 years in 1994 on charges of attempting to overthrow the government. However, the sentence was extended at least on four occasions because of violations he allegedly committed in prison.

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Economics Central Europe Fitch affirmed Hungary's junk status on November 20, dashing hopes in Budapest that the country could return to investment grade this year. Fitch affirmed Hungary's long-term foreign Issuer Default Rating (IDR) at ‘BB+’ (one notch below investment grade), saying the rating reflects the country's strong economic outlook and significant current account surplus, which has contributed to a noticeable reduction in external debt. The outlook remains the same. The country lost its investment grade at the three major credit rating agencies in 2011 and 2012, as long drawn-out talks with the IMF on a bailout broke down. Central Europe's factories are following an uncertain trajectory, PMI readings for October showed. While the stuttering Eurozone recovery – antagonised by global issues – held Czech and Hungarian readings back, analysts see stabilisation in German industry behind a bounce back in Poland.

Southeast Europe Deleveraging by foreign banks active in CEE finally came to an end in the second quarter, if Russia and Turkey are excluded, according to a report by the committee of the Vienna Initiative of Western banks. The external positions of banks towards the region, excluding Russia and Turkey, rose by 0.1% of regional GDP in the April-June period, marking the first increase since the first quarter of 2011, the report said. Macedonia's central bank cut its economic growth outlook, citing "worsened external environment, especially more unfavourable for the metal export sector and higher uncertainty in the domestic economy". The bank projects GDP growth of 3.2% in 2015 and 3.5% in 2016, down from 4.1% and 4.5% respectively, which it had predicted in April, before the deepening of the politi-

cal crisis in the country. Growth is set to strengthen to 4% in 2017.

economy grew 0.7% on quarter in the July-September period. The government is assuming an 11-12% y/y decline in 2015, and 1-2% growth in 2016.

Eastern Europe After months of insisting that Ukraine must redeem its Eurobond held by Russia in full when it falls due in December, President Vladimir Putin said Russia could restructure Kyiv's $3bn debt. Under the proposed terms, Kyiv would repay $1bn per year for the next three years until 2018, if the US, EU or IMF guaranteed the debts. Currently the IMF does not lend to countries that are in arrears on debt payments to other states, meaning that, if the bond is recognised as official debt, Ukraine's threat to default on the Russian-held Eurobond in December could block a four-year $17.5bn extended funding facility provided to Ukraine by the IMF. Russia's GDP in the third quarter declined by 4.1% y/y, according to preliminary flash estimates. GDP decline moderated from the 4.6% y/y seen in the second quarter. Self-exiled liberal Russian economist Sergey Guriev has been appointed as chief economist at the European Bank for Reconstruction and Development (EBRD) and is due to start work in one year's time in autumn 2016. Guriev, a fierce critic of the Kremlin, left the country for Paris last year after he was caught up in an investigation into wrongdoing connected to the state’s persecution of the Yukos oil company.

There was more evidence of Ukraine’s recession bottoming out as the

Russian retail banks have fired over 25,000 employees since the beginning of 2015, according to statements by 14 banks with a more than 40% share of loans to individuals in their portfolios. Orient Express bank let go more than 4,000 employees since January, reducing its staff by almost half. Another Russian market leader in consumer lending, Home Credit, also cut its staff by almost half. VTB 24 has laid off 2,600 employees since January.

Eurasia The Kazakh central bank has re-adopted a free-floating exchange regime under the new governor, Daniyar Akishev, who has allowed the tenge to devalue by 7% since he replaced Kairat Kelimbetov on November 2. The move marks a departure from the in-effect managed exchange rate policy adopted by Kelimbetov less than a month after he announced the abolition of the trading corridor for the tenge’s exchange rate on August 20, allowing the national currency to float freely. That announcement had resulted in a nearly 30% slump in the value of the tenge against the dollar. The bank then burnt over $5bn on propping up the tenge. S&P lowered Mongolia’s long-term sovereign credit rating to 'B' from 'B+' on weakening fiscal and external performance with a stable outlook, the ratings agency said in its latest report. “The stable outlook balances the country's low-income resource-driven economy, weak policy environment and fiscal performance, high external risk, and limited monetary flexibility with the prospect that large mining projects could quickly reverse Mongolia's sovereign credit profile during the next 12 months,” the report said.

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Business Central Europe

Southeast Europe

The Latvian government finally approved the controversial investment plan for flag carrier airBaltic. The cabinet reportedly amended the deal to insure itself against any fallout, with the plan – which would bring a German investor with strong Russian links into the airline – having already led to the dismissal of the transport minister. Parliament will now be asked to vote on the deal. airBaltic is now the one surviving national airline in the Baltics after Estonian Air was shot down by an EU ruling on state aid. The flag carrier gave up the ghost the day after Brussels ordered it to pay back €85mn of state support from recent years.

Six bidders are competing for Telekom Srbija, which will be the second telecom incumbent from the Western Balkans to go on the block this year after a failed attempt to sell Telekom Slovenije in August. Russian mobile operator Mobile TeleSystems (MTS) is believed to be among the bidders, state-owned China Telecom may also have bid, and several private equity firms including Advent International, Mid Europa Partners and Novator Partners are also reported to be interested in Telekom Srbija. Telekom Slovenije is reportedly bidding for its Serbian peer alongside US private equity firm Apollo Global Management.

Czech state-owned railway operator Ceske Drahy plans to file a lawsuit against train maker Skoda Transportation after it lost an arbitration procedure over the delayed delivery of locomotives. Ceske Drahy was seeking compensation of over CZK900mn for the delayed supply of the locomotives. The railway operator placed a CZK2.5bn (€92mn) order at Skoda Transportation for the supply of 20 locomotives, which were due to be delivered in 2009. They did not arrive until 2013. Skoda Transportation blamed the delay on 2008 changes in the technical norms, which meant it had to modify the locomotives. The Arbitration Court of the Economic and Agrarian Chambers decided against Ceske Drahy’s compensation claim and ruled that the railway operator must pay Skoda Transportation CZK1.2bn, which is the remaining sum under the purchase contract.

Bulgarian businessman Spas Roussev is likely to assume full control of Bulgarian Telecommunications Company (BTC), the country’s largest telecom operator by revenue, after winning a controversial tender held by creditor VTB Capital for its ultimate owner, Luxembourg-registered InterV, with a €330mn bid. The completion of the deal is still uncertain as InterV shares have been frozen by a court injunction requested by the Bulgarian authorities, while an obscure Russian investor, who claims to own a majority stake in InterV, vowed to fight for his “stolen” equity stake by all possible legal means.

agencies to justify purchases of foreign software from January 1, 2016.

Eurasia A judge at Tbilisi City Court has overturned his previous ruling and reinstated the management of Georgian television station Rustavi 2 TV. Since August, Rustavi 2 TV has been embroiled in an ownership battle, which began when former owner Kibar Khalvashi filed a complaint with the Tbilisi City Court that he had been forced to sell his shares in the broadcaster at a below market price by the previous administration of former president Mikheil Saakashvili. The ownership battle has since turned into a proxy war for the current ruling Georgian Dream-led coalition and the opposition United National Movement (UNM), which Saakashvili founded. The case has sparked criticism from international observers over media freedom and the independence of the judiciary in Georgia.

Eastern Europe Gazprom CEO Alexei Miller knocked VTB CEO Andrei Kostin off the top slot in this year’s Forbes ranking of Russia’s best-paid executive. They earned $27mn and $21mn a year respectively. Major foreign IT companies may freeze investments in Russia or pull out entirely because of "unclear rules of the game", according to a letter from the Association of European Businesses (AEB) to the Russian government. The AEB said it had asked the cabinet to postpone for at least six months the implementation of a law requiring state

The board of directors of Kazakstan's state oil and gas company KazMunaiGas (KMG) has proposed a revision to its relationship agreement with production company KazMunaiGas Exploration Production (KMG EP), whose GDRs are traded on the LSE, which would lead to KMG “restoring appropriate control” over KMG EP. If KMG EP’s board agrees, then minority shareholders will get to vote on the proposal at a 26 January 2016 extraordinary general meeting. All shareholders would be entitled to sell their shares at “an agreed premium” to the average share price over the last 30 days.

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Finance Central Europe Hungary’s central bank has bought a majority stake in the Budapest Stock Exchange (BSE) in a HUF13.2bn (€42.5mn) deal. The Magyar Nemzeti Bank (MNB) paid HUF3,550 per share, raising its stake to 75% from the 6.9% it held previously. Up until now Austria's CEE Stock Exchange Group controlled a 50.5% stake in BSE and Oesterreichische Kontrollbank held 18.35%. Raiffeisen Bank International (RBI), the struggling Austrian lender, reported better-than-expected thirdquarter results and forecast an overall profit for the full year, though much of the improvement came from the delay in implementing restructuring targets until next year. RBI, the second biggest nonRussian bank by assets in CEE, reported net profit of €90mn in the third quarter and €378mn for the first three quarters. It revised its guidance for the full year to a small consolidated profit, having previously warned it might be lossmaking. Latvian regulators have turned to the police in their Ventspils Nafta insidertrading probe. Financial watchdog FKTK has asked the police to investigate possible market manipulation connected to Vitol Group's September acquisition of the oil terminal operator. VN's share price rose 70% in the days just ahead of the deal; it managed just 3.48% the day of the official announcement.

Shareholders in Romania’s Fondul Proprietatea voted overwhelmingly to renew Franklin Templeton Investments’ mandate to manage the fund, despite a worse-than-usual performance in the last 12 months. The fund also said it would prefer to sell its €491mn stake in Romania’s Hidroelectrica after the latter’s shares are listed, but would consider an offer received beforehand. US-based ContourGlobal has been given preferred bidder status for the construction of the 500MW Kosova e Re coal-fired power plant. Construction of the €1bn plant is expected to start in late 2016 or early 2017. The project will be the largest investment in Kosovo to date, and is expected to solve problems caused by its outdated energy infrastructure. ContourGlobal and the World Bank have reached an agreement for financing the plant.

Eastern Europe Philanthropist George Soros, one of Ukraine's strongest international backers, has put some of his money where his pro-Ukraine mouth is to invest in a dedicated Ukraine investment fund in cooperation with a local brokerage. The fund's first investment is to acquire a stake in a leading local IT firm.

will remain a minority shareholder. The Russian central bank has approved the plan to salvage and restructure the bank, under which the Deposit Insurance Agency (DIA) will grant a RUB14bn sixyear loan and a RUB67bn 10-year facility (total of $1.3bn) to Uralsib, marking one the biggest bailouts since 2009. Russia’s central bank and the economic wing of the Kremlin are not prepared to provide state development lender Vnesheconombank (VEB) with another monster bailout. The government has refused to backstop VEB with a recapitalisation worth RUB1.5tn ($23bn) to plug a black hole in its books. Instead, the government is considering removing problem assets from VEB's balance sheets, including a number of loans made to companies involved in building facilities for the Winter Olympics held last year in Sochi. VEB already received a package worth RUB330bn earlier this year to help it to continue provide financing to the real economy.

Eurasia Turkmenistan is set to start building a gas pipeline to India. President Gurbanguly Berdymuhamedov ordered the construction of a 1,735km Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline to export 33bn cubic metres of natural gas per year from the giant Galkynysh field, one of the world's largest fields with estimated reserves of 13,100bn cm of gas.

Southeast Europe Bulgaria's central bank on November 5 rejected the conclusions of a report by the country's National Audit Office (NAO) that it failed to adequately supervise the banking system and ignored warnings about the health of Corporate Commercial Bank. Corpbank collapsed in June 2014, costing the Bulgarian taxpayer over €2bn and plunging the country into political and economic crisis.

One of Russia's largest private banks, Uralsib, will have an 82% stake acquired by businessman Vladimir Kogan, the former owner of Promstroibank and largest shareholder of the Neftegasindustria holding, the bank said. The previous owner of Russia's 26th largest lender, Nikolai Tsvetkov,

Turkmenistan has completed the construction of an 88km-long railway line to Afghanistan. The new line is part of a Turkmenistan-Afghanistan-Tajikistan route, which aims to break the transport blockade of Tajikistan imposed by Uzbekistan. Turkmenistan also intends to build a 38km section of the line in northern Afghanistan. Tajikistan is drafting a feasibility study for its section of the railway for $9mn, allotted by the ADB. The work should be completed during this year.

I Companies & Markets

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Photo © Ks2008q | Dreamstime.com

White & Case – the US law firm embedded with the Kremlin Jason Corcoran in Moscow

mbedded inside a “command centre” in Moscow, US law firm White & Case is leading the Kremlin’s legal fight to fend off claims by former Yukos shareholders on several foreign fronts, while also advising Russian state companies on how to navigate the sanctions minefield, bne IntelliNews can reveal. The Kremlin set up the command centre within its newlyconstituted International Centre for Legal Protection after the Permanent Court Arbitration in The Hague awarded Yukos shareholders compensation worth $50bn in July 2014. The government’s refusal to pay compensation for the 2006 break-up of the Russian oil company formerly owned by Mikhail Khodorkovsky triggered a full-scale hunt for overseas sovereign assets to enforce The Hague decision. Russia’s stake in broadcaster Euronews was frozen on October 29 following seizures of Russian property in France and Germany. President Vladimir Putin’s spokesman Dmitry Peksov vowed that legal efforts to protect “the legitimate interests of Russia and its property” will be taken – a task the Kremlin has decided to undertake with the help of White & Case’s expertise. The Yukos case has proved to be a goldmine for a number of US law firms representing both sides over the past decade.

Shearman & Sterling ended up billing about $77mn in fees for representing GML Ltd, the vehicle through which Khodorkovsky and his former Yukos colleagues held their controlling stake in Russia's once-largest oil producer. The Russian state, which was ordered to pay GML’s legal fees as part of the settlement, forked out $31.5mn to Cleary Gottlieb Steen & Hamilton and Baker Botts for their representation. And now White & Case, which was retained in the summer, is getting its share. “The firm doesn’t have to hold their nose too much to do this work,” a senior Moscow lawyer at a rival firm tells bne IntelliNews. “This is a prestigious mandate being retained by a sovereign and they will be thrilled to do it because the budgets are very high and it impresses corporate clients.” One-stop shop The legal command centre, which is fronted by Andrey Kondalkov, a former director of economic cooperation from the Ministry of Foreign Affairs Department, draws on the best arbitration lawyers in the business from White & Case, Hanotiau & van den Berg in Belgium and Holland, and De Gaulle Fleurance et Associés in France. It deals with all claims against Russia instead of “having to go from one ministry to another ministry,” explains David Goldberg, a partner at White & Case.

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“We have a mandate to deal with the Yukos proceedings in the US, the UK and Germany, and we are cooperating with the other firms in the other jurisdictions,” Goldberg tells bne Intellinews in an interview. “The most important set is in Holland. If the award is set aside, there will be nothing to enforce in most jurisdictions, although there are some countries that may look into enforcement of an award set aside at the place of arbitration.” Russia’s argument is that the UK and US courts don’t have jurisdiction because the Kremlin never signed any arbitration agreements. “Even if awards were legal, no way someone

“The firm doesn’t have to hold their nose too much to do this work” should be responsible for debts of another person,” Goldberg said. “So far this story has been one-sided because the Russian government was silent, while the other side seems to have spent millions on PR in the US and UK.” White & Case’s office in Moscow is located at the Romanov Dvor business centre, which is about a five-minute walk to Red Square. Goldberg, an Oxford-educated Russian who works on the Yukos case, was once described by clients in the Legal 500 directory as “a highly trained ruthless assassin”. Goldberg, who divides his time between London and Moscow, doesn’t shirk from the description. “As a litigator and an arbitration practitioner, winning cases is important to me,” he says.

Companies & Markets I 11 financial institution has managed to access the international markets following the imposition of sanctions in 2014. AK BARS, based in Kazan, is partly controlled by the government of the Republic of Tatarstan. “Our long history and experience advising financial institutions in Russia allows us to successfully bring important transactions like this to market,” London-based partner Stuart Matty said in a statement at the time. Working for the Russian state has not prevented the law firm from building ties with Ukraine, which has fraught relations with its neighbour since Russia’s annexation of Crimea and the war with the pro-Russian separatists in the east. White & Case represented the Ukrainian government in its recent restructuring of $17bn of debt, of which $3bn belongs to Russia. White & Case is also embroiled in a Russian spy case in New York. Scott Hershman, one of its lawyers, is representing Evgeny Buryakov, who was charged earlier this year with posing as a banker in New York while secretly spying for Moscow. Buryakov is accused along with two other Russians of committing economic espionage on behalf of Russia. He denies the charges. Buryakov’s legal tab is being picked up by Russian state development lender Vnesheconombank, or VEB, as it’s also known. VEB also avails itself of the firm’s Moscow-based partners, Natalia Nikitina and Thomas McDonald, for transactional work for the bank.

The firm, however, declined to discuss its work on sanctions on behalf of any state companies. “White & Case helps a wide variety of clients, both Russian and foreign, respond to a broad range of questions about the EU and US sanctions on Russia, but that as a matter of principle we do not disclose their identities,” Andrew Newsham, a London-based spokesman wrote in an emailed statement to bne IntelliNews. “We are not able to comment beyond this.”

“White & Case helps a wide variety of clients respond to a broad range of questions about the EU and US sanctions on Russia”

White & Case’s website reveals the law firm ran seminars this year in Frankfurt, Germany, on how badly sanctions have affected German businesses in Russia. And a joint seminar last year in London with PwC discussed the effect of sanctions on financial institutions.

Ketchum, the US PR firm employed by the Kremlin in the West, ended its nine-year relationship work with the Russian government in March after earning as much as $23mn in fees. Ketchum was continuously lambasted in the Western media for its efforts to improve Russia’s image, especially after it became so tarnished following the annexation of Crimea 18 months ago.

Good for business White & Case’s work for the Russian state is also paying dividends in the private sector. The firm was number one legal advisor in Russia by deal value and volume last year and in 2013, according to data provided by Mergermarket. It advised the Russian lender AK BARS Bank on a $350mn Eurobond in August, which was the first time a Russian

However, there is little sign White & Case is under any public pressure to quit working for Kremlin Inc.” They [the Russian government] went for the best in international arbitration, and we are the best according to leading legal directories including Chambers and Legal 500,” Goldberg says.

I Companies & Markets

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Poland’s train monopoly PKP takes a new track Tim Gosling in Sopot and Andrew MacDowall in Warsaw

hen is a train company not a train company? Answer: When its main ambition is to quit running locomotives to become a property tycoon.

State-owned PKP Grupa, comprising holding company PKP S.A. and several operating units, confirmed in early October that it plans to sell a majority stake in PKP Intercity – the country’s main passenger carrier – via an IPO in 2018. Should it get the deal away, the former rail monopolist will have ceded ownership control of all of Poland’s trains and rails over the last few years. “It’s a strange company,” remarks Artur Galbarczyk at Fitch Ratings. “Its main remit is to dismantle itself to leave it managing a property portfolio.” The strategy to privatise the rail industry is somewhat of an anomaly in Poland, which retains control of numerous giants in banking, energy and other sectors. The country has been criticized for having one of the highest rates of state control in the economy in Central and Eastern Europe – outstripping even Russia. Seven of Poland’s 10 biggest companies are state controlled, according to Henryka Bochinarz, who heads the employers lobby group Lewiatan. “20% of GDP is statecontrolled,” she says with incredulity. However, taking advantage of EU rules on rail liberalisation, Warsaw introduced legislation in 2000 dictating that the state railway monolith should be split into separate operating companies, which would then be sold off. It was no liberal whim, but driven by stark economic reality: creaking infrastructure caused slow speeds and tragic accidents on the Polish railways throughout the 1990s, and losses mounted at PKP, which resulted in a huge build-up of debt. At the same time, the railways lost out heavily in terms of investment to roads. Others view the restructuring more ideologically. “It was a once-in-a-lifetime opportunity to bring down the last bastion of communism,” proclaims Piotr Cizkowicz, a board member at PKP Grupa. Breaking up is hard to do Little changed over the following decade or so until the plan received a shove in 2012 with the appointment of Jakub

Karnowski as chief executive and a bevy of other financial, rather than railway, managers. “My job is to restructure the company and to spend EU funds,” Karnowski tells bne IntelliNews of his mission to break apart the former monopolist – though he may not get the chance to finish the job if the new government, as has been reported, forces him out. The bulk of that funding from Brussels will go towards improving Poland’s infrastructure. “Before our mission started, the railway system in Poland was highly underdeveloped and underinvested,” Cizkowicz tells bne IntelliNews.

“It’s a strange company – its main remit is to dismantle itself to leave it managing a property portfolio” Poland has since been feverishly pouring cash into its railways, and in September approved a plan to spend PLN67bn (€15.8bn) by 2023. Karnowski says €10.5bn will be spent overall during the EU’s 2014-2020 funding window, with Brussels picking up 80% of the tab. The largest recipient in the bloc, Poland has been allocated around €67bn in cohesion policy funding for 2007-2013 and €77.6bn for 2014-2020. “We used the opportunity given by the EU funds to make a real change,” Cizkowski explains. “When the new board started its mission, the use of EU funds was at a very unsatisfactory level. Now we are successfully utilising around 95% of the subsidies.” At the same time, although the plan forms the bedrock for the value of PKP Grupa’s train operator assets, control of the process is far from obvious, says Karnowski. “It’s not clear who is really running Polish rail infrastructure investment,” the CEO laughs. “That’s a good question.” Poland is one of the few EU states to have unbundled its rail industry, the CEO claims. Infrastructure sits in the hands of

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Companies & Markets I 13

PKP PLK, in which the treasury ministry holds a 62% stake. “PLK will not be privatized,” Karnowski stresses. That leaves the implementation of the massive spending programme looking a bit ad hoc. “I can’t have management control of PLK, but need to be close to the process of course,” Karnowski continues. “Our business depends crucially on this issue. I talk regularly with the CEO of PLK.” Pendolino effect At least Karnowski and his team now appear firmly in control of PKP Grupa’s previously parlous financial state. Management’s restructuring steps have turbocharged the selloff of assets in recent years, despite the uncertainty stalking global markets. The company’s debt burden has tumbled from PLN4.1bn (€973mn) in 2012 after a series of divestments. Poland’s fifthbiggest power generator, PKP Energetyka, was offloaded this year, while other non-core businesses, including telecom and cable car operators, have also been shed. Karnowski and his team now have a couple of years to bash the passenger unit PKP Intercity into shape before the IPO. “All proceeds from the privatisations have been going to pay down the debt,” notes Galbarczyk. “PKP is scheduled to finish that process by 2018.” “We have no debt following the sale of PKP Energetyka,” insists Karnowski. “Net debt is positive, and that issue is fully finalised.” However, with the pressure having eased, so has the urgency to plough every single zloty into squeezing down the debt. Fitch affirmed PKP at ‘BBB’ on November 5, citing “significant deleveraging” since 2012 and state guarantees for remaining debt. “It has sufficient liquidity for debt repayments in 2016 when €180mn in Eurobonds are due,” Fitch said. However, it also noted that while PKP is in a position to fully pay down its debt, it has instead decided to steer PLN1bn into an increase of share capital at PKP Intercity. Privatisation revenue in 2016-17 is estimated at PLN1bn, all of which will be needed to repay debt due without debt refinancing. PKP will also need to get up to speed as a property wheeler and dealer quickly. “We expect PKP to reach a net cash position in 2017,” the rating agency said. The company also needs to funnel a lot more cash into the loss-making PKP Intercity to prepare it for the IPO in two years’ time. Karnowski estimates investment demands at the passenger rail unit at PLN5bn, again with the majority to come from EU funds. “But we can also now take on new debt if necessary,” he suggests. Much has been made of the effort to transform Poland’s sluggish and grotty trains. Executives claim the “Pendolino effect” has brought customers flooding back to the railways. The introduction of the high-speed locomotives in late 2014 is a game-changer, says Cizkowicz, “a symbol of the changes introduced over the last three years”.

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I Companies & Markets

Karnowski explains that while Intercity might be unprofitable right now, the problems are not deep-seated. “We can definitely combat that and have positive net income by 2017. We’re not looking for a strategic investor – the process will mimic that of PKP Cargo,” he says, referring to the successful IPO of Europe’s second-largest freight carrier in 2013, which raised €1.4bn. PKP Grupa sold a further stake last year to leave it holding a minority 33%, though it maintains operational control. PKP Cargo's share price is around 7% down on the PLN68 listing price, which compares the 16% drop seen in the Warsaw Stock Exchange's main WIG30 index over the same period. PKP Grupa is looking to build the cargo division into an international player. PKP Cargo bought Czech peer AWT for over €100mn earlier this year, and is looking to extend its reach across CEE via a cooperation agreement with Croatia’s HZ Cargo. That sets up a potential north-south link through the region; the EU-driven Baltic-Adriatic rail freight corridor was inaugurated on November 12. The company also hopes to build on an agreement to run regular trains connecting Poland with Chinese trade hubs. That grand ambition suggests PKP plans to keep some skin in the rail game. It does not intend to sell any of its 33% stake in PKP Cargo or give up operational control of the company “for the moment”, Karnowski says. On the right track? Even so, PKP Grupa sees its future mostly in property. The company owns “around 2,300 railway stations, of which just 600 are currently operational”, Cizkowicz notes. “We also inherited more than 22,000 apartments and more than 100,000 parcels of real estate, of which about 10,000 have commercial potential.” A real estate fund – Xcity Investment – will sell some plots and develop others, taking on partners on a case-by-case basis. “PKP S.A. will become a real property company,” insists Karnowski. “We can work with private investors, and therefore make no demands on the taxpayer to create value around the assets.” Xcity should become “one of the biggest real estate funds in Poland”, reckons Cizkowicz, with central stations in cities across Poland offering the potential to create trophy projects. Karnowski says there are already PLN20bn in deals in the pipeline. However, a huge unknown lurks in the background. Karnowski’s remit to dismantle the state rail monolith was handed down by the market-friendly Civic Platform (PO) government that was unseated in October. The incoming Law & Justice (PiS) administration has a statist economic policy, and the leaders of many state-controlled giants are on tenterhooks over their personal survival, let alone the strategies for their companies. In fact, in mid-November Polish media quoted sources "close" to PiS as saying that Karnowski is now “certain to leave his

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post”. He is reportedly to be replaced either by former PKP Intercity CEO Czeslaw Warsewicz, or Andrzej Wach, who was appointed to head PKP Grupa by the left-wing SLD government in 2004 and retained by the last PiS government that governed in 2005-07. PKP PKL and PKP intericty are also expected to see leadership changes, according to the reports. Members of PiS have also already threatened to overturn the sale of PKP Energetyka should it take power. They claim the buyer Luxembourg-based CVC Capital Partners could easily sell the company on to Vladimir Putin’s Russia – a bugbear of the populist party and Poles in general. “There’s no chance [PiS could block it] – the deal is finalised,” retorts Karnowski. But other sources at PKP say it’s not so clear what PiS might think of the wider mission to take the state almost completely off the rails, by reducing ownership to a minority in all companies save the rail infrastructure. Any attempt to halt the process would likely find favour with the unions, who have fought privatisation all the way. “When it comes to the unions, it’s a real struggle every day, but we manage to find a solution,” says Cizkowicz. “[They] strong-arm us through their contacts with politicians.” However, the effort to beat Poland’s railways into shape relies on the huge waves of cash flowing from Brussels. The IPO of Intercity is planned not only to match PKP’s debt schedule, but is also based on EU legislation calling for passenger rail markets to be fully opened up by 2019. At the same time, with so many assets now shed, PKP Grupa is unlikely to top the list for PiS as it surveys Poland’s statecontrolled giants. The banks will likely come first, followed by energy. “The extent to which PKP is strategic for the state has diminished dramatically,” Galbarczyk points out. Karnowski, meanwhile, is certain that he and his team are on the right track. “The privatisation of the businesses planned is absolutely the best way forwards,” he insists.

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Otis Russia lifts UTC’s business to new heights Ben Aris in Moscow

ost people in Moscow live in an apartment block. As by far the biggest city in Europe, there is little space for suburban housing – not that you’d want a garden anyway thanks to the long cold winters. So the Soviets built huge apartment blocks – often by slotting together pre-cast concrete panels – and everyone who wanted got a dacha outside the city limits where they could grow potatoes and enjoy the long summer holidays. This cultural quirk means Russia is a paradise for Otis, the world’s largest manufacturer and maintainer of elevators, escalators and moving walkways. “Otis has operated in Russia for more than 120 years, when the company put the first elevator into the Winter Palace in St Petersburg for Tsar Alexander III,” says Giorgio Elia, Eastern Europe vice president and general manager of UTC Building & Industrial Systems, of which Otis is a part. “Elevators have changed a lot since then, but one thing that has not changed is our commitment to the country, by providing safe, innovative and energy-efficient products, sourcing materials for local manufacturing and by employing and investing in local employees.” Today, the company supplies and services the immediately recognisable spring-loaded floor style elevators that are ubiquitous in Russian apartment blocks from one of its three Russian factories. A small percentage of the parts are imported, mainly the electronics for the elevator’s ‘brains’. “Russians, like many people around the world, have always needed reliable elevators,” says Elia, who arrived in Moscow only three months ago to lead Otis Russia. “The Otis name is so widely known that many people here think we are a Russian company. With three factories in Russia, more than 3,600 Russian employees and many satisfied Russian customers, we sometimes forget ourselves that the business was founded in the US more than 160 years ago. We’re proud of our global reach, as Otis equipment carries the equivalent of the world’s population every four days.” United Technologies Corp, the parent company of UTC Building & Industrial Systems, has been doing very well in recent years, with sales for the entire group growing steadily from $52.3bn in 2010 to top $65.1bn at the end of last year, according to the company’s latest annual report. Organic sales growth at Otis, the company said, was primarily a result of higher new equipment sales in China, the US and Russia.

UTC’s sales to customers in Russia in 2014 were approximately $500mn and its net asset exposure in Russia as of December 31, 2014 was approximately $125mn. While Russia is a key supplier of certain commodities and parts, the company said it has taken steps to minimise the potential for disruption to its business. “To date, we have not seen any significant signs of disruption, although we continue to closely monitor developments in the region,” UTC said. Alongside the growth in its business, UTC’s earnings per share have also risen by about a third over the 2010-2014 period to $6.82 per share. And the company has generously returned an even higher proportion of that money to shareholders with dividends nearly doubling over the same period to $2.36. Energy conscious Elevators have been evolving fast over the last few years. The rooftop winch room is a thing of the past as a system of counterweights and high-tech motors means the equipment to pull the car up and down fits on the side. The walls have gone

“The Otis name is so widely known that many people here think we are a Russian company” too, replaced by glass – like something out of Willy Wonka’s factory. But there are no ‘Vermicious Knids’ here; only a hightech system that uses the weight of passengers to generate power on the downward journey, reducing the building’s energy bill by up to a quarter, explains Elia, who is as ebullient as you would expect an Italian national to be. As an example of evolving technology, the Otis Gen2 elevator system features a compact gearless machine, requiring minimal machine room space, allowing for rapid installation. The innovative ReGen regenerative drive captures energy created by the elevator, feeding the energy back into a building’s electrical grid. This makes the Gen2 up to 75% more energy efficient than conventional systems with nonregenerative drives, Elia boasts.

I Companies & Markets

Otis Russia is also transforming itself, keeping pace with the segment. Because of the sheer size of Russia’s residential, office and commercial real estate projects, the budgets are commensurately large, which means there is money for stateof-the-art equipment in these projects. Often building from scratch, Russian developers are looking for smart solutions in their best buildings, which are the ones that get put up first.

“To date, we have not seen any significant signs of disruption, although we continue to closely monitor developments in the region” Otis Russia has responded by developing integrated elevator systems that are energy efficient and work with other building systems to improve the passenger experience. Architects love the new elevators, which are easier to place in a building thanks to their lower weight and machine room-less design. “The Russian segment is very interesting and we have an office in every region of the country to manage our growing business. We are also expanding our distribution network

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to enhance our customer service throughout the country. Business may be bit slower this year, but we in Otis are well-equipped to weather more or less favourable economic conditions,” says Elia. “Building is going on but the priorities have changed. Now everyone is a lot more interested in energy efficiency, for example,” he says. Like the copy machine business, the service contracts that come after the elevators are installed are an important part of the business. “We see a number of growth opportunities,” says Elia. “We are expanding in certain segments in Russia and also in Kazakhstan, Armenia, Georgia, Turkey and Tajikistan, amongst other countries.” “Otis Russia has a long-term strategic view in line with its history and legacy of innovation. It is a benchmark company. The original company was founded in 1853 and it remains a leader in safety, reliability and quality products globally. Innovation is key to our future, as we work constantly to improve the safety of existing products and to develop safer technologies for new products. Russia is important to us and we remain committed to growing in Russia,” he says.

INTERVIEW:

An unwelcome investor jets into Latvia Mike Collier in Riga

did consider walking in there and saying: 'look, my hands are not dripping with blood. I do not eat babies',” says Ralf-Dieter Montag-Girmes.

The many barreled-named German investor has just emerged relatively unscathed from an extraordinary 90-minute grilling at Riga International Airport by the Latvian press – an attempt to explain who he is, where he's from and, most importantly, why he wants to invest €52mn in airBaltic, Latvia's troubled state-owned national airline. In fairness, Montag-Girmes does not seem the baby-eating type. Sporting a crisp and sober suit, a tasteful black Junkers

Ralf-Dieter Montag-Girmes

watch, and the barest hint of a German accent in the slightly aristocratic English that could be a legacy of his time at Oxford, he seems unruffled by his ordeal. His placidity is in contrast to his compatriot Martin Gauss, the airBaltic chief executive, who let his frustration bubble over in the press conference over questions of government leaks and media conspiracies, as well as perhaps lingering fear that MontagGirmes might back out of a deal that airBaltic badly needs in order to modernise its fleet. “It's very sad what is happening around the most positive decision in the last four years in Latvia. It's very sad how it happened, because what we achieved last week was a

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positive decision from the Latvian government to approve an investor and secure the long-term future of this airline. The result after six days is a complete political mess which has nothing to do with this successful airline,” Gauss tells bne IntelliNews through gritted teeth. The furore surrounding Montag-Girmes' investment – which he insists comes entirely from his own personal fortune – has already claimed one victim in the form of transport minister Anrijs Matiss, who was sacked by Prime Minister Laimdota Straujuma on November 5. Far from calming the media feeding frenzy, it poured blood into the water and the smart money says Straujuma herself will be heading for the departure gates as soon as next year's budget is passed at the end of November. Reasons to be suspicious The reasons for all the controversy are myriad, but most concern whether Montag-Girmes is the right man with the right cash. He has longstanding business links with Russia in both the financial and aviation sectors, having brokered deals to sell Russian jets to Cuba, Venezuela, Zimbabwe and Iran – countries with a less-than-Nordic reputation for business ethics and transparency. He also acted as a consultant in efforts to uncover the fraudulent collapse of Russia's Inkombank, a circumstance that has erroneously been reported as him having something to do with the collapse itself. And questions have been raised over why his businesses are all based in Cyprus, having relocated from Panama. Perhaps there's also some understandable reticence on the part of the Latvians to do business with another mysterious German tycoon following airBaltic's stewardship under former CEO and chairman Bertolt Flick – a man who mixed politics, off-shoring and generally sharp practice with disastrous consequences that necessitated a government bailout of the airline in 2011. “It doesn't happen very often that you come into a country, you want to make an investment, you look at it very hard and then you get challenged for it rather than thanked for it. I would certainly describe that as an interesting experience,” he says with bone-dry irony. “Clearly the airline is very important to Latvian economy. I understand that and I also understand certain concerns the country has with its geopolitical position, but still I was surprised. We probably underestimated that.” Reports that his investment comes with a major string attached – that airBaltic will have to buy Russian Sukhoi planes in addition to the Bombardier CS300s it will be the first airline in the world to operate – are simply untrue, Montag-Girmes maintains. “If you run an aircraft leasing company, you have connections to a lot of manufacturers, as I do to Antonov in Ukraine, to Bombardier in Canada, to Let in the Czech Republic... in some respects I even do to British

Companies & Markets I 17 Aerospace… That's part of my business, but I am not linked to any particular manufacturer.” One of the other things that raised eyebrows in the press conference was Montag-Girmes assertion that he first got interested in airBaltic in June this year when he happened to see Gauss giving a presentation in Paris. The fact that he had set up a trio of aircraft leasing holding companies in Latvia back in December 2014 is a “pure coincidence” he maintains. “We were very close to coming to an agreement with a European customer in summer last year. We started looking around at what would be a convenient jurisdiction for aircraft leasing and for that particular case we had identified Latvia, which in fairness has done a lot to modernise its legislation to attract exactly that sort of business... Unfortunately, that deal fell through.” Good timing The money he is prepared to put up is the largest single transaction of his 30-year business career, and doesn't come without risk, he acknowledges: “When you buy a pack of cigarettes, it says you can lose your health and you can lose your money. Here we have done a very thorough analysis of what is the risk/reward ratio and I would not have made such a decision if I did not like that ratio. I am not an addicted investor and I do not have a hobby of collecting airlines, particularly if they have a risk of going bankrupt.” It seems remarkable that bankruptcy is a danger, but it is – especially if the deal does not go ahead and the Latvian government suddenly finds its airline short of €52mn. That could lead to a situation in which it would be forced to lease out the CS300s it has on order as soon as they are delivered, and would force a complete rewriting of the business plan, an exasperated Gauss told the press. Yet with the collapse of Estonian Air on November 8 and the memory still fresh of two Lithuanian airlines failing within the last ten years, the market would appear ripe for exploitation by airBaltic. Bookings from Tallinn have tripled and the disappearance of a direct competitor will likely accelerate profitability. According to Montag-Girmes, the prospects for the airline are good and he flatly denies there is any time limit on his investment. “Sometimes fate helps a good company along and this is particularly the case at the moment with the additional traffic airBaltic is picking up from the re-routing of traffic from Moscow to Kyiv via Riga,” he says. “This is clearly beneficial for the company and sad as it may be for Estonians, [the disappearance of] Estonian Air is clearly also good news for the company, as are low fuel prices.” “So the immediate outlook for the company, especially after it has been recapitalised, is very positive and I'm glad to be a party to that. I think there are some improvements in financial engineering and some aspects of ways in which the company is run that we can also bring,” he adds.

I Companies & Markets

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Romania’s Dacia changes gear

Clare Nuttall in Bucharest

Nicolas Maure, CEO Dacia Renault Romania

utomaker Dacia has been highly successful in exporting to markets across Europe and the Mediterranean area since its takeover by Renault in 1999, but the small domestic market and rising labour costs is forcing the company to reconsider its strategy in Romania.

high-tech production in Romania. At present, its car assembly plant and mechanical and chassis plant at Mioveni are “not highly automated”, according to Maure, but this is about to change. “We want to introduce leading-edge technologies in both product and process,” he told the conference.

Construction of the Dacia factory at Mioveni near the industrial town of Pitesti, 120km from Bucharest, started in 1966, and its first model, the Dacia 1100, rolled off the assembly line two years later. Named after the ancient territory of Dacia, which covered much of present-day Romania, the brand is an iconic one within the country, and Dacia accounts for the lion’s share of domestic production.

Back in 2006, the company made a significant investment in its engineering centre in Bucharest. This was followed four years later by an advanced testing facility, which is the largest Renault testing facility outside of France. The facility has stateof-the-art engine stimulation test benches working not only for Dacia, but for Renault, Samsung and Nissan, following the 1999 strategic agreement between Renault and the Japanese carmaker, Maure said in an interview with bne IntelliNews on the sidelines of the conference. Meanwhile, the company’s stamping dye plant works in line with Nissan processes, at the same level those in Japan today.

France’s Renault acquired a 51% stake in the company when it was privatised in July 1999, five years after losing out to Volkswagen in the race to acquire fellow east European carmaker Skoda of the Czech Republic. Renault has since raised its stake to hold 99.43% of Dacia's equity, while investing over €2.2bn. Today, it is Romania’s largest company by turnover, and produced its five millionth car in May 2014. Through its acquisition of Dacia, Renault gained a base in Southeast Europe, and access to a workforce that is cheaper than in either Western Europe or other Emerging European countries such as Poland and Slovakia, even after Romania’s entry to the EU. Labour costs are, however, steadily creeping up towards the EU average, forcing Dacia’s management to look at ways to ensure the company remains competitive.

“This is a major change in the processes we have. We will continue to develop our engineering activities under Renault in Romania, as well as to move into new high-tech domains,”

“It is a very great weakness in Romania not to have a domestic market for new vehicles”

“Labour and other costs are increasing, which means we have to look for higher value-added activities whether it’s in manufacturing, engineering or the offshore activities we have for Samsung and Nissan,” Dacia Renault Romania’s director general, Nicolas Maure, told the Foreign Investors Summit in Bucharest on October 27. “The only way to compensate for this is to invest into added value and keep flexibility.”

Maure explained. This will entail other changes such as recruiting more engineers and other highly qualified staff. “We will not increase production capacity for the foreseeable future, but we will continue to invest in the line-up, adding more automation to maintain the competitiveness of our plants,” he told bne IntelliNews.

Hi-tech response Dacia’s response to rising labour costs has been to invest in

The vehicle plant, which has a capacity of 350,000 vehicles a year, is mainly export oriented; 93% of its output was sent

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abroad in 2013. The most popular model is the Duster, which currently accounts for over 50% of total daily output. Mark Fulthorpe, director of automotive at IHS Global Insight, describes Dacia as the standout success in Southeast Europe, helped by its focus on exports of low-cost models. Within the region, “in terms of vehicle manufacturing, the big story is Romania”, Fulthorpe said in an interview with bne IntelliNews earlier this year. The Dacia plant “stands apart from others in the region and clearly has the broadest strategic implications.” Data from the Romanian Automotive Manufacturers and Importers Association (APIA) shows vehicle production was up 18.4% year-on-year (y/y) in September. In the first nine months of the year, Romanian automakers produced just under 300,000 vehicles (up 3.8% y/y), of which almost 260,000 were produced by Dacia. This follows a hike in Dacia’s sales in 2014 to reach a total of 511,465 units, up 19% y/y. Just under 30,000 of these were sold within Romania, the company said. At the same time, APIA reported an increasing trend in car imports, of which the majority were used cars. The rise in production at Dacia was mainly driven by external demand. September data from the European Automobile Manufacturers’ Association (ACEA) shows that demand for new passenger cars increased for the 25th consecutive month, which ACEA said was driven by ongoing scrappage schemes and by the economic recovery in Southern Europe. All Europe’s ‘big five’ markets saw a strong increase in registrations during September, with a 22.5% y/y increase reported in Spain. Overall, new car registrations in the EU passed the 10mn mark in the first nine months of 2015. Closer to home However, the extremely small local market is seen as a missed opportunity for Dacia and Romania’s other major automaker, Ford Craiova. Total EU registrations in January-September included 56,839 new cars registered in Romania. This is equivalent to just one new car per 378 people, compared with a new car bought by approximately one in 34 people in Germany or one in 149 in Poland. Most of Romania’s fleet is old, and the majority of purchases are of old cars, with imports of used cars outweighing purchases of new cars by around three to one. “It is a very great weakness in Romania not to have a domestic market for new vehicles,” Maure said. “The market for new vehicles dropped from 350,000 new cars in 2008 to a bit less than 100,000 last year. It is not a very robust situation when we have two big plants working 90% for export, so it is crucial that we find ways to restart the domestic market for vehicles.” A government effort to stimulate the market, the First Car programme, was less successful than hoped for. “Unfortunately the programme was modified quite a lot and is not effective today. We must discuss with the government ways to stimulate the credit side,” said Maure.

Companies & Markets I 19 Constantin Stroe, president of ACAROM, the Association of Automotive Manufacturers of Romania, described the programme as “stillborn”, adding that: “It is totally absurd that two high-end brands sell only 6% of their production in Romania.” Maure believes that doubling the size of the domestic market by 2020 is a “minimum objective”, but this will depend on several factors including continued economic growth, tighter controls – both fiscal and in terms of technical inspections – over used car imports, and a revival in crediting for car purchases. “We need to find ways to encourage fleet customers and especially individuals to start taking credits to buy cars again,” said Maure. “Since the 2008 crisis, the vast majority of potential buyers of vehicles in this country have been very reluctant to take out a new loan on top of their existing debts. Interest rates are low, but people do not go to the banks any more.”

“We want to introduce leading-edge technologies in both product and process” He noted that with Romania’s GDP growing at 3.5% to 4.0% a year, well above the EU average, this should encourage new purchases by both fleet and private customers. APIA figures already show an upturn in vehicle purchases by companies in September. However, credit growth has stalled since the crisis despite the faster economic growth, and as a result many people are still buying cheaper used cars, to which there is no immediate change in sight. The situation elsewhere in Southeast Europe is even less promising, since virtually all sales are of used cars, meaning that Dacia will have to continue looking to Western European and Mediterranean buyers until the Romanian market makes a full recovery.

I Companies & Markets

bne December 2015

Romania’s Fortech prepares for next growth stage Clare Nuttall in Bucharest

n the last 12 years, Fortech has grown into one of Romania’s largest IT outsourcing companies – a homegrown contender in a market increasingly populated by multinationals. Location and labour have been key to its success, though like many such local companies that are expanding in the region and even abroad, it is struggling to find qualified engineers. Today, Fortech employs 550 people in Cluj, central Transilvania, and is a four-time entry on the Deloitte Technology Fast 50 Central Europe survey, which ranks the fastest-growing technology companies across the region. In 1998, the company’s co-founder and CEO, Calin Vaduva, was working in Greece and facing the same dilemma as many other young, talented Romanians – whether to continue his career abroad or return to his home country. He chose the latter, joining software company Art Net as CTO. Fortech was launched on December 1, 2003, with a team of five people, several of them Vaduva’s former colleagues from Art Net.

The early years were “painful”, according to Vaduva. “We had a team, ideas and potential to develop, but we had no customers and not a lot of money,” Vaduva says in a telephone interview with bne IntelliNews. Using his existing contacts and networking ferociously, he managed to win the firm’s first clients. The Romanian government’s efforts to promote local companies at international trade fairs also helped. During the initial building period, “wherever there was a fair, I was there,” he says.

The boom years After a shaky start, Fortech boomed. 2005 to 2008 were good years for many companies in the region, but the business continued its rapid expansion even through the global economic crisis, growing steadily year after year. Fortech is one of the largest of the Romanian companies to have taken advantage of the country’s location and its workforce; a combination of technology and language skills have established it as a “nearshore” centre serving Western Europe as well as farther-flung locations. Compared to global offshoring locations such as China and India, Romania has the advantages of being culturally similar to Western Europe as well as geographically closer. Its clients now include Pfizer, Renault, Symantec and Swisscom.

“We had a team, ideas and potential to develop, but we had no customers and not a lot of money” Vaduva’s primary concern is attracting and keeping good people. Competition for employees is strong – both from multinationals active in Romania and from other homegrown firms. It is becoming increasingly difficult to find good people as demand for skilled employees soars. Cluj, a university town, was one of the early centres for the IT industry outside Bucharest, and competition is intense. “There are many people here and availability is low. We are expanding to other geographies, so that when we get new customers

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we have the option to scale up,” says Vaduva, adding that Fortech plans to open offices in first Iasi, another university town in eastern Romania, then Arad, and is also considering expansion abroad. Vaduva has put a lot of effort into making his employees feel happy and comfortable, in addition to investing in training for new skills and technologies. “Feedback has shown that the largest part of job satisfaction depends on how people feel with their colleagues. We want to create an environment that is professional but also where people come with pleasure to work,” Vaduva tells bne IntelliNews.

Companies & Markets I 21

The data you need is just a few clicks away

Part of this is learned from the experience of companies in other countries. “IT is a living industry – in Romania we see what’s happening in the US and Germany, and we adapt,” he says. His strategy changed as Fortech grew from a tiny organisation where everybody knew everybody else into a company employing several hundred people. “Now we have a new challenge – how to prepare for the next jump to 1,000 or 2,000 people.” Fortunately, Vaduva believes the technology sector is an attractive career choice for young Romanians, meaning there has been an increasing number choosing to study IT or related subjects at university. “Studying technology is becoming more and more appealing because the sector is much more attractive than all other sectors. It is the only area in Romania where we do not see any unemployment – every graduate can get a wellpaid job. It is also easy to advance your career in this area.” With a view to the longer term, Fortech has reached out to high school students, targeting three schools in Cluj through its hiSchool Training programme, which gives pupils the chance to take part in real life IT projects. Fortech is planning to spend a total of €20,000 on the project, which Vaduva says has been “very successful” and there are plans to include other companies in the future. Despite the ongoing uncertainty in global financial markets, Vaduva forecasts strong long-term prospects for Fortech and the Romanian outsourcing sector at large. Even if there is a recession in 2016, he says “going on the long-term trend, we plan to grow our company in Romania and possibly abroad.”

Economists and analysts use the Emerging Markets Direct e-store to get regularly updated data and forecast reports covering over 72 countries and 400 sectors, classified at the US NAICS 6 level of detail. Visit j.mp/emdstore

I Companies & Markets

bne December 2015

Trade

Ukraine sees EU free trade deal from 2016 though hurdles remain Iana Dreyer in Brussels

kraine is preparing to implement its free trade deal with the EU in January 2016, regardless of how Russia might react. The move would end a saga of complex negotiations and multiple delays, though there is still some uncertainty over the final fate of the deal that triggered the Ukrainian crisis, and Russia has already reacted negatively. European Commissioner for Trade Cecilia Malmström was in Kyiv on November 13 to discuss with the Ukrainian government the concrete steps required before the introduction of the Deep and Comprehensive Free Trade Area (DCFTA) – the main pillar of the Association Agreement Ukraine signed with the EU in 2014. The implementation of the deal – bitterly opposed by Russia, which persuaded previous Ukrainian president Viktor Yanukovych to refuse to sign it, leading to his ouster – has been deferred so as to leave room for negotiations with Russia. But the talks have not yielded results, while the war in the east against Russianbacked rebels continues to this day, despite a shaky ceasefire. “We have to be ready for the economic consequences, as Russia resorts not only to the occupation of sovereign and independent Ukraine, but also to the trade war against us,” warned Ukrainian President Petro Poroshenko. Indeed, Russia has already responded, calling Ukraine's EU association pact terms absolutely unacceptable on November 17. “Very strident comments here from [Russian Economy Minister Alexei Ulyukayev],” says Tim Ash of Nomura International. “Moscow likely will press for a further deferment in the start of the DCFTA beyond the already delayed date of January 1, 2016.” The EU trade agreement foresees the elimination of import duties. There are reduced tariff rates and longer phase-in periods or bigger quotas for sensitive products – agricultural products and metals on the EU side; the car sector on the

Ukrainian side. In a move to support Ukraine’s failing economy, the EU is already unilaterally applying the reduced tariffs and import quotas agreed to in the DCFTA. The bulk of the agreements’ benefits is expected from Ukraine’s adoption of many trade and economic rules included in the 2,000-page text, covering areas like intellectual property, competition policy, public tendering

“We have to be ready for the economic consequences, as Russia resorts not only to occupation, but also to trade war against us” procedures and more open services markets – notably energy. The agreement also requires Ukraine to apply EU technical and sanitary standards, and to adopt some of Europe’s social and environmental norms. Ukraine is not expected to adopt all the laws as of January next year, so implementation will be gradual. Over time, large parts of the Ukraine economy could become part of the EU’s single market if the reforms are properly implemented. During her stay in Kyiv, Malmström discussed the state of play in preparations for the deal. “The DCFTA is an important tool. Ukraine should take full advantage of the deal,” she said. However she cautioned that “the DCFTA is not a magic wand”, saying it all depended on whether Ukraine can improve its investment climate to attract business. Ukraine’s major challenge is to ensure its agricultural and food-processing sectors manage to comply with the EU’s costly sanitary and phytosanitary rules. The EU has

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Companies & Markets I 23

promised to offer technical and financial assistance to do so. The European Bank for Reconstruction and Development (EBRD) has stepped up its presence in Ukraine as part of a general Western effort to support the country. The EBRD has allocated €100mn in 2016 to help Ukrainian companies trade internationally.

The government says it is trying to reduce the number of import and export licences for a variety of goods, but the teams working on this are quite small, Zholud explains. “Even in the same ministries, while we have new leaders, the majority of the ministry is the same. And quite often they are not willing to change.”

Ukraine has adopted laws that prepare it to be compliant with the DCFTA. For instance, its April 2015 law on the gas market makes it formally compliant with EU energy market rules. Ukraine has also put its legislation on public procurement in line with the World Trade Organization’s Government Procurement Agreement, which it will join end-2015.

It is precisely on such licensing matters that the EU has stumbled this year. This spring Ukraine introduced a ten-year moratorium – signed into law by President Poroshenko – on exports on raw wood, which has hurt Romanian, Slovak,

Modernising trade policy The current government in Kyiv has been keen on helping business diversify and is modernising its trade diplomacy. Nataliya Mykolska, a former corporate lawyer and Germantrained expert in international trade law, was appointed as trade envoy for Ukraine in the spring of 2015. Mykolska has reached out to a variety of countries to help increase Ukrainian exports. Her ministry has convinced the US to increase unilateral trade preferences for Ukrainian exports and called for a free trade agreement with Canada – a key Ukrainian political and economic partner. Mykolska has also been reaching out to Kazakhstan, which is not applying the trade restrictions and food embargo that Russia imposed on Ukraine in response to Western sanctions last year, even though it is a member of the Russian-led Eurasian Economic Union. At home, Mykolska is encouraging a more modern policy formulation, encouraging companies to come up with sectorwide proposals and demands instead of company-specific lobbying. She is communicating on the need for domestic reforms and a better business climate. Internationally, she is positioning Ukraine as a country that is open for business. Whether the current economics team of the Ukrainian government will leave a lasting imprint on the way the state carries out trade policy – and how thoroughly it will implement the DCFTA – remains to be seen. Oleksandr Zholud, senior analyst at the Kyiv-based International Centre for Policy Studies, tells bne IntelliNews that recent changes to the tax code mean the Ukrainian government could face reduced tax revenues, potentially creating problems with the International Monetary Fund, which is administering the government’s bailout programme. “To some extent, Ukraine may try to get some additional revenue from [customs] tariffs,” Zholud explains. A 5% across-the-board import duty surcharge introduced in February 2015 in response to the country’s balance of payments problems reflects just that kind of attitude. Kyiv has promised to get rid of the measure in December.

“While we have new leaders, the majority of the ministry is the same, and often they are not willing to change” Polish and Austrian industries. A similar measure was introduced in July on scrap metal. These moves violate the spirit of the WTO and the text of the DCFTA. In the end, the EU too must signal a lasting commitment to the deal. The agreement is almost completely ratified, but the process is complex, requiring approval of the member states, the European Parliament and 28 national parliaments. Greece and Cyprus have not yet ratified the deal, while the Netherlands has postponed the final ratification of the deal after a petition run by a populist platform succeeded in having a legally non-binding – but politically charged – referendum on Ukraine’s Association Agreement organised next spring. It appears the saga of the EU Association Agreement with Ukraine, talks over which began in 2008, is not over yet.

I Companies & Markets

bne December 2015

Funds

Crowdfunding real estate investment in Russia Ben Aris in Moscow

ussia’s real estate sector is on its back, but internet entrepreneur Oskar Hartmann believes that means there are bargains to be had. Following Europe’s lead, the founder of Russia's leading online fashion discount store has launched the country's first crowdfunded real estate investment scheme – and already he’s raised over $14mn in a month to buy the first property. Hartmann is best known for setting up fashion discounter KupiVip.ru about eight years ago. Since then, he has launched a string of other sites focusing on e-commerce, including CarPrice.ru to sell cars and ZaOdno.ru, a discount online store for household staples, as well as founding the internet investment fund Fastlane Ventures over five years ago. But his latest venture Aktivo.ru breaks new ground by moving into finance. The idea is simple: real estate has always been seen as a longterm secure investment, but ordinary people usually cannot afford to make more than one investment – buying the apartment they live in. What Aktivo.ru does is togather hundreds or thousands of people to gether who all buy a small share in a building and then collect a share of the rent each month. “I am doing an investment at the moment on Aktivo.ru and would like to invite you to co-invest with me. I built Aktivo. ru as a commercial property crowdfunding platform, which allows successful people to buy shares in large commercial property to build a passive monthly income and achieve financial freedom,” Hartmann writes in a recent marketing email blast to solicit investment. Although at first sight this looks like some sort of “phishing” scam, the fund is a PIF (mutual fund) regulated by the Central Bank of Russia (CBR), and the investment is secured by real property rights over the buildings. The risk the investor takes on is more or less the same as any investor in real estate takes on the development of the market. “This is like a normal PIF,” explains Ekaterina Nikolaeva, managing director of Aktivo.ru. “We have set up a management company that has a license from the CBR that guarantees the safety of the investment.”

Time to buy Moscow’s real estate sector is in a bad way at the moment. Demand for residential housing is expected to fall by 30-40% in 2015, according to VTB Capital, with discounts on the prices on the secondary housing market currently at record highs. Meanwhile, vacancy rates on retail space have been creeping up from 7.5% at the end of last quarter, while rents have plunged. And vacancy for office space is also at an alltime high: there are one and half times more empty offices in Moscow at the moment than in the depths of the 2008 crash. The bet for any potential investor into Moscow property is that the market has hit bottom and it will be uphill from here. For those willing to take a punt, Aktivo has some quality properties to invest into. The company is currently in the process of raising money for Tverskaya 9, a residential and retail asset. If the golden rule of real estate deals is “location, location, location”, then it doesn’t come much better than this. The building is at the bottom of Moscow’s main thoroughfare and a stone’s throw from Red Square. The property costs $18.8mn and fundraising began at the end of October. The reaction was positive: Aktivo has already 3,000

“We have set up a management company that has a license from the CBR that guarantees the safety of the investment” registered clients and had collected 70% of the money by November 6, or $14.1mn. “We hope to close the fund raising by the end November and then close the deal in December. The first rental payments will be made in January,” says Nikolaeva. The property is supposed to yield 11-16% per year with full payback on the initial investment in seven years, according to

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Aktivo’s prospectus, and there is a long-term lease agreement in place until 2022 fixed in US dollars – crucial in these times of exchange rate volatility. The price of the space is $8,730 per square metre, less than half the historic highs that property commanded in the boom years. “We will buy the retail part of the building – the first four floors – and have a lease contract for seven years with the current tenant denominated in US dollars,” says Nikolaeva. “The price of the property is cheap. Three years ago the cost of a square metre was as high as $28,000 per square metre on Tverskaya, so if the value of the space recovers, then the rental value will rise too.” Although the crowdfunding is about to close, investors can get into and out of the deal at any time: Aktivo.ru plans to set up a secondary market for shares in the scheme, which investors can buy and sell at any time, says Nikolaeva.

Companies & Markets I 25 Of course, a crowdfunding online investment is easy to do. A punter just has to go to the website, register and choose an amount to commit, starting with a minimum of $5,000. “Filling in a form will take couple of minutes, you will need only the basic passport information, tax number, bank

“Filling in a form will take couple of minutes” account details and a copy of your passport (the first page and page with registration),” the website explains. “The set of documents will be generated automatically then a personal manager will contact you to agree on a convenient time and place to sign the contract.”

I Special report

Special Report: Capital Markets Survey 2015

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Special report I 27

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A tough year but some hopeful signs Nicholas Watson in Prague

014 was a testing year for issuers, lead managers and investors in the Central and Eastern Europe/Commonwealth of Independent States (CEE/ CIS) region, and 2015 proved to be little better, though there were the odd encouraging signs. For the top underwriters in the region, debt, equity and syndicated loan issuance was all down from 2014, as was M&A. For the equity capital markets (ECM), bankers report that apart from Warsaw, IPO activity across the region was pretty thin this year. PwC data shows there were 24 IPOs on the Warsaw Stock Exchange (WSE) in the first nine months of 2015, which was up from the 21 in the year-earlier period. Zagreb (2) and Bucharest (4) also enjoyed a better nine months, though elsewhere – Istanbul, Prague, Vienna – IPOs were either lower in number or non-existent.

“Equity deals in the region have suffered as a result of the capital outflows from emerging markets in general in 2015,” says Peter Szopo of Erste Asset Management. Global investors are estimated to have sold $40bn worth of emerging market assets in the third quarter, evenly divided between equities ($19bn) and debt ($21bn), which the Institute of International Finance says would make it the worst quarter since the crisis-hit fourth quarter of 2008. For the year, IIF expects foreign investor flows to emerging markets to fall to just $548bn this year, lower than levels recorded in 2008 and 2009 at the height of the global financial crisis, and suffer a net outflow of capital this year for the first time since the 1980s. For the banks, this means less ECM business in general. According to Dealogic, in the January-October period

there were 52 equity deals in the CEE/ CIS region worth a total of $4.8bn, which compares with 73 deals worth $7.8bn in the year-earlier period. The winner of the “bne IntelliNews ECM Bookrunner Award for 2015” goes to Citigroup Global Markets, which worked on five deals worth a total $1.4bn in the January-October period, followed by Russia’s VTB Capital with five deals worth $565mn. “Citi continued to dominate issuance in the CEEMEA region over the last 12 months, having executed more equity transactions than any other bank despite EM volatility,” the US bank said. Citi was involved in the marquee IPO of 2015, as well as the ‘one that got away’. Citi was joint global coordinator and bookrunner for the London IPO for

I Special report

Wizz Air (together with Barclays Bank, JP Morgan Securities and Nomura International) in February. This second attempt to float Wizz Air (the first was pulled in June 2014 due to volatility in airline stocks) was successful in raising £275mn in a deal that was six-times oversubscribed, valuing the Hungarian budget airline at £1.5bn. The shares have since risen to trade at around £17 from the issue price of £11.50. Citi and JP Morgan were also the joint global coordinators and bookrunners for the IPO of the Slovak state’s 49% stake in Slovak Telekom (Erste Group and Wood & Co joint lead managers), which promised to be “the deal of the year in the CEE region”, according to Erste’s

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Indeed, with global M&A activity on track to reach record high levels this year, the M&A market in CEE in the first ten months for the top 10 advisors, while lower in the numbers of deals (1,871 vs 3,438 a year earlier), had broadly similar value ($72.9bn vs $88.3bn), according to Dealogic. The winner of the “bne IntelliNews M&A Advisor Award for 2015” was VTB Capital, advising on 12 deals worth $11.2bn. In second place was JP Morgan advising on seven deals worth $10.9bn. It’s no surprise that VTB Capital should top the table: Russia is seeing a surge in M&A and other corporate deals brought

“At the moment there is certainly a preference for debt financing in the region” head of ECM Günther Artner, until it was substituted at the last minute in May for a strategic sale of the stake to 51% owner Deutsche Telekom. The IPO offer would have raised about €750mn, at the lower end of an IPO range valuing the company at €1.5bn-2bn, while Deutsche Telekom offered €900mn for the stake. This speaks to a wider problem in the region’s ECM this year, in that the M&A market is providing tough competition. “Companies have lots of cash and they are looking for acquisition opportunities, while the stock market environment is positive but valuations are not such that you can get a higher valuation in the stock market than in an M&A deal – usually this is not the case,” says Artner.

about by a combination of Western sanctions, the recession and state legislation. VTB Capital boasted to Bloomberg in October that it has earned at least half of the domestic investment banking fees for M&A this year, as Russian companies retreat from overseas exchanges – a step being encouraged by the Kremlin. However, it admitted the pie has got a lot smaller; investment-banking fees have shrunk to $130mn this year from a record $1.3bn in 2007. Russia saw some of the most noteworthy monthly deals: in October VRN Sarl injected €2.1bn into Russian gas producer Novatek in exchange for a 9% stake, to take its total holding to 23%; and Naspers acquired a 51% interest

in KEKh eKommerts, which operates Russia’s largest classified site Avito, for €1.08bn to take its share of the business to 68%, while simultaneously selling stakes in two internet companies in the Czech Republic for $201mn. Other countries like Hungary, Poland, Czech Republic and Romania also reported increases in M&A activity. IPOs have also been hurt by the relative attractiveness of issuing debt or loans, given the record low interest rates and the fact companies in the region are in good shape with strong balance sheets. “At the moment there is certainly a preference for debt financing in the region,” says Erste’s Artner. Even so, the debt capital markets (DCM) in CEE have not enjoyed the best of years by any stretch, with the financial sanctions against Russia the main culprit. As an illustration, VTB Capital in the first ten months of 2013 was bookrunner for 121 deals worth $17.7bn; this year, that had fallen to 42 deals worth $3.9bn. The total for the top 10 bookrunners in the first ten months of this year was 186 deals worth $56.2bn, compared with 246 deals worth $101.2bn in the yearearlier period. The winner of the “bne IntelliNews DCM Bookrunner Award for 2015” was JP Morgan, which was bookrunner for 12 deals worth $5.0bn. In second place was Citi with 15 deals worth $4.9bn and UniCredit Group with 15 deals worth $4.4bn. After a decent start to the year and the summer lull, there was a notable pickup in activity in the autumn as sovereign issuers looked to tap the market ahead

And the winners are…

bne IntelliNews ECM Bookrunner Award for 2015

bne IntelliNews DCM Bookrunner Award for 2015

bne IntelliNews M&A Advisor Award for 2015

Citigroup Global Markets

JP Morgan

VTB Capital

Special report

bne December 2015

of a potential rate hike from the US Federal Reserve. In September, Republic of Poland sold €1bn in 10-year eurodenominated bonds, with bookrunners BNP Paribas, Deutsche Bank, HSBC and JP Morgan. The bonds, which will mature in September 2025, achieved a yield of 1.592%, with demand at €1.3bn, mostly from institutional investors from Europe, especially Germany, the ministry said. With the price originally guided at low 50s over mid-swaps, Poland was able to tighten that to 48 basis points (bp). The issue came on the back of Poland's growing reputation as one of Europe’s top-performing economies, which made it the winner of the “bne IntelliNews DCM Issuer Award for 2015” with four deals worth $4.7bn. “All our foreign debt issues this year were fully in line with expectations. But we must remember that the issuance process is quite fast nowadays and given that we do not fix any issuance parameters well in advance, our expectations regarding particular issues were rooted in the current market situation, so they were ambitious but reasonable,” Bogdan Klimaszewski, deputy director of the Public Debt Department at the Ministry of Finance said. “I have to point out again that like in previous years, timing of our actions was crucial for the success of every transaction.” Kazakhstan was in second place in the issuer rankings, with one giant deal worth almost €4bn in July. It sold 10-year bonds at 285bp over US Treasuries, and 30-year bonds at 335bp over Treasuries. “The bid book was for nearly $10bn,” Finance Minister Bakhyt Sultanov told journalists. Citi and JP Morgan were joint bookrunners, with

Kazkommerts Securities and Halyk Finance acting as co-lead managers. Slovenia also re-tapped their 30-year tenor in September to the tune of €275mn, even though the country had reached 100% of its issuance plan for this year a long time ago and is heavily into the financing of next year’s redemptions, as shown by the high level of cash reserves after four deals in 2015 worth $3.35bn. That proved a feature of the market this year as countries pre-financed at low rates. Macedonia on November 24 issued €270mn of five-year Eurobonds (bookrunners Citi, Deutsche Bank and Erste), while Hungary re-tapped its three-year benchmark 2.50% 2018 bond for HUF20bln, five-year benchmark 3.50% 2020 bond for HUF15bln and 10-year benchmark 5.50% 2025 bond for HUF12bln. There is an expectation that Romania will also appear in the market before the year is out, given it is behind the curve in issuance this year (only one issue worth $2.25bn). In terms of corporate debt, the CEE region remains one of “untapped potential”, according to Maria Arakelyan of Deutsche Bank, despite the decade to 2013 seeing CEE/CIS companies increasingly raising funds on domestic and international bond markets. Russian corporate issuers dominate CEE bond markets in dollar terms – of the $437bn in corporate bonds outstanding as of April over 60% were from Russian entities – and despite the sanctions have continued to tap the markets toward the end in 2015. Russian Railways was 2015’s biggest corporate borrower with nine deals worth $1.9bn. Other notable Russian

I 29

issuers included Norilsk Nickel, which in October placed $1bn in seven-year bonds to a demand of $4bn at 6.625% (bookrunners Barclays, Citi, ING Group, Societe Generale and UniCredit), followed a few days later by Gazprom placing three-year Eurobonds worth €1bn (bookrunners Banca IMI, JPMorgan, and UniCredit). The issue enjoyed double the proposed supply, enabling a cut in the final placement yield to 4.625%. “The Euro-deal for Gazprom was very successful and very timely. It underlined the strong international appetite for Russian risk and was a very effective transaction reopening the market,” says one London-based banker involved in the deal. In syndicated loans, Turkey figured heavily in a segment where ING won the “bne IntelliNews Syndicated Loans Lead Arranger Award for 2015”. ING had the mandate to arrange 22 syndicated loan deals worth a total of $1.75bn in the first nine months of 2015. The winner of the “bne IntelliNews Syndicated Loans Borrower Parent Award for 2015” was Otoyol Yatırım and İşletme AŞ, a joint venture featuring Italian construction giant Astaldi along with Turkish construction firms Nurol, Makyol, Özaltın and Göçay. This massive $5bn deal – arranged by Akbank, Deutsche Bank AG, Finansbank, Garanti Bank, Halkbank, İş Bank, Vakıfbank, Yapı Kredi and Ziraat Bank – completes the financing for the 421 km Gebze-Orhangazi-İzmir highway in Turkey, which includes the world’s fourth longest suspension bridge over the İzmit Bay.

bne IntelliNews Syndicated Loans Lead Arranger Award for 2015

bne IntelliNews DCM Issuer Award for 2015

bne IntelliNews Syndicated Loans Borrower Parent Award for 2015

ING Group

Republic of Poland

Otoyol Yatırım ve İşletme AŞ

I Special report

bne December 2015

CEE ECM Bookrunner Ranking (Jan - Oct 2015) Pos.

Rank

Deal Value ($m)

No.

%share

Bookrunner Citi

1,441

30.0

VTB Capital

565

11.8

JPMorgan

491

10.2

PKO BP

270

5.6

Credit Suisse

237

4.9

Wood & Co

184

3.8

Barclays

159

3.3

Morgan Stanley

144

3.0

UniCredit

117

2.4

Sberbank CIB

114

2.4

Bank of America Merrill Lynch

114

2.4

4,807

100.0

Total

CEE M&A Advisor Ranking (Jan - Oct 2015) Pos.

All Advisor Parent

Rank

Deal Value $ at Announcement (m)

No.

%share

VTB Capital

11,210

15.4

JPMorgan

10,913

15.0

Barclays

8,100

11.1

Lazard

6,434

8.8

Credit Suisse

6,123

8.4

Citi

5,250

7.2

Bank of America Merrill Lynch

4,785

6.6

BTG Pactual

4,000

5.5

SG Corporate & Investment Banking

2,566

3.5

Morgan Stanley

2,360

3.2

72,901

1871

100.0

Total

CEE DCM Issuer Parent Ranking (Jan - Oct 2015) Pos.

Issuer Parent

Rank

Deal Value $ (Proceeds) (m)

No.

%share

Republic of Poland

4,748

8.5

Republic of Kazakhstan

3,960

7.1

Republic of Slovenia

3,351

6.0

Republic of Bulgaria

3,237

5.8

Republic of Turkey

2,963

5.3

Romania

2,251

4.0

Russian Railways OAO

1,860

3.3

Slovak Republic

1,763

3.1

Republic of Lithuania

1,692

3.0

Republic of Croatia

1,642

2.9

56,199

186

100.0

Total Source: Dealogic

Special report

bne December 2015

CEE DCM Bookrunner Ranking (Jan - Oct 2015) Pos.

Rank

Deal Value $ (Proceeds) (m)

No.

%share

Bookrunner JPMorgan

5,035

9.0

Citi

4,943

8.8

UniCredit

4,449

7.9

VTB Capital

3,922

7.0

SG Corporate & Investment Banking

3,810

6.8

HSBC

3,641

6.5

Sberbank CIB

3,489

6.2

Barclays

3,240

5.8

Gazprombank

2,904

5.2

Deutsche Bank

2,458

4.4

56,199

186

100.0

Total

CEE Syndicated Loans Mandate Lead Arranger Ranking (Jan - Oct 2015) Pos.

All Advisor Parent

Rank

Deal Value $ at Announcement (m)

No.

%share

ING

1,750

8.7

SG Corporate & Investment Banking

1,142

5.7

BNP Paribas

1,056

5.2

Commerzbank Group

854

4.2

UniCredit

831

4.1

Bank of America Merrill Lynch

787

3.9

HSBC

759

3.8

Standard Chartered Bank

743

3.7

Deutsche Bank

738

3.7

Citi

719

3.6

58,219

141

100.0

Total

CEE Syndicated Loans Borrower Parent Ranking (Jan - Oct 2015) Pos.

Borrower Parent

Rank

Deal Value $ (m)

No.

%share

Otoyol Yatirim ve isletme AS

4,956

8.5

Pola Investment Ltd

3,619

6.2

Koc Financial Services Inc

2,849

4.9

Akbank

2,827

4.9

Isbank

2,548

4.4

Turkiye Vakiflar Bankasi TAO - VakifBank

1,960

3.4

PPF Group NV

1,772

3.0

Turkiye Garanti Bankasi AS

1,522

2.6

Export Credit Bank of Turkey - Turk Eximbank

1,505

2.6

Gazprom

1,500

2.6

58,219

141

100.0

Total

I 31

I Cover story

bne December 2015

Ben Aris in Moscow

hoppers in Russia have taken a real battering over the last couple of years. Consumers are reeling from the triple whammy of soaring inflation, falling real incomes and Russia’s infectious devaluation. But counter-intuitively, at the microeconomic level large supermarket chains are flourishing. Almost any company selling domestically produced goods to locals is booming, as one of the results of the slowdown has been to catalyse consolidation of the retail sector.

Today’s headlines are grim, but this company level expansion has already shown up in the stock market: while the Russian stock indices are back at 2005 levels, international portfolio investors are currently overweight Russia. The bulk of recent investment is piling up in a single stock: Magnit, Russia’s biggest and fastest growing supermarket. The president of Dixy Group told bne IntelliNews that the crisis is little more than a “nuisance” (see related story) and the

retailer has opened more stores in the first nine months of this year than during all of 2014. The Soviet-era open air markets and produkti corner stores are bearing the brunt of falling incomes and tanking retail turnover numbers, but that is also driving more customers through the doors of the large chains that have the financial wherewithal to not only stand the pain, but capitalise on the opportunity. Falling incomes Russia has suffered from a full-scale crisis

Cover Story I 33

bne December 2015

following the devaluation of the ruble by half in December 2014 and the population is suffering. bne IntelliNews’ Despair Index suggests the current crisis is even more painful than that of 2008: Russia’s Despair Index has worsened over the last two years, rising to 36.9 points (inflation 15.6% + unemployment 5.2% + poverty 16.1%), which is higher than the 34.0 reading hit in 2008. After a decade of strong growth, Russia’s economy contracted by 4.1% year-on-year (y/y) in the third quarter and is expected to put in at best meagre growth of 0.7% in 2016, according to the government’s official estimates. Most international financial institutions (IFI) predict another recession next year. Pre-crisis, salaries were rising by some 10% a year, well ahead of inflation, and the wages of state employees were rising even faster. Yet nominal wages were up by just 4.5% y/y in September, well behind the annualised rate of inflation of 15.7%, resulting in a fall in real incomes by over 9% over the first nine months of this year. With less money in their pockets, Russian consumers are not buying. In October, several of Russia’s key macroeconomic indicators had turned positive, so leading economists began to speculate that Russia had turned the corner – but not retail. The fall in retail turnover continued to accelerate in September, falling by 10.4% month-on-month (m/m), which is being driven by the high inflation: half of the average income is believed to be spent on food, up from 40% last year and an all-time low of 25% in 2007, but still way down on the three-quarters that Russians spent on feeding themselves in the early 1990s. That high share of spending puts Russia on a par with Kenya, Pakistan and Nigeria. Part of the reason why retail is struggling is that not only has the share of food doubled since the boom years, but the cost of that food has exploded, partly driven by the Kremlin’s self-imposed ban on European food imports. Headline inflation seems to be slowing as the year draws to a close, but the cost

of food remains sky high. The price of fruit and vegetables was up by 27.9% y/y in October, while Russian favourites like cucumbers and tomatoes saw their prices increase by an extraordinary 40% and 60% respectively in the same month. As winter closes in – Moscow is already decked in the first snow of winter – the cost of food should only rise further. The devaluation of the ruble hasn’t helped, as the icy Russia still imports almost all its fresh produce. Good news for supermarkets This is all bad news for the Russian consumer, but oddly has been good news for the leading retailers. Russia’s macroeconomic problems have been a boon for the top supermarket chains, all of which are still expanding headlong. “The challenges of a more fragile consumer backdrop and need for further price investments are to be offset by tailwinds from high food inflation and further consolidation opportunities. We see food retail turnover growing 12% year-on-year in 2015 and non-food categories to stay flat,” VTB said in a

The second benefit has been an enmasse trading down from expensive imports to cheaper made-in-Russia products. Magnit has been the biggest winner here, as it was already targeting the discount end of consumers by offering cheaper goods. Finally, there has been a rapid consolidation of the sector. The falling sales have hit small cornerprodukti stores the hardest, while the big chains have the financial wherewithal to withstand the storm and gain even more market share as a result. Even the high interest rates and paucity of corporate lending has not affected retailers much, as food shopping is a cash-rich business and the leading chains have ploughed every penny they make back into expanding their networks. All the leading chains reported strong growth in sales in the third quarter of this year. Magnit saw its net sales rise by 21.7% y/y to RUB235bn ($3.6bn) in the period, and is still the biggest chain

“Foreign competitors in retail have been swept away by the sanctions and devaluation, so that Russian producers are stepping into their shoes” recent report, predicting that Russia’s largest retailers, including Magnit, Dixy and X5 Retail Group, would be big winners from the changing consumer environment. The most obvious benefit is that foreign competitors in retail have been swept from the market by Western sanctions and devaluation effects, so that Russian producers are rapidly stepping into their shoes. The most famous example has been the disappearance of French Camembert cheese. However, as cheese is a simple food-processing business, it has taken only a few months for Russian producers to set up shop and store shelves are filling again, albeit with a lower quality version of the well-known names.

in terms of revenue and the number of stores, which also increased to a total of 10,728 by the start of October. Russia’s number-two supermarket chain X5, which operates several brands including its flagship Perekrestok chain, is starting to catch up with the market leader, earning RUB195bn in the third quarter, which was a 28.3% gain y/y. But even the smaller rivals are doing well: O’Key sales were at RUB39.5bn, an 8% y/y gain; Lenta at RUB62.7bn, a 29.3% gain; and Dixy at RUB65.7bn, a 13% gain. Stock wunderkind Portfolio investors love this retail story and have been flocking to invest.

I Cover story

bne December 2015

Retail in the region

bne IntelliNews The Russian recession and spillover effects from the Ukraine crisis have been bad news for economies around Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS). Like it or not (and most countries don’t), Russia remains an “investment node” for the region, as a former chief economist at the European Bank for Reconstruction and Development once pointed out. The country is so large that if Russia’s economy gets the sniffles, the rest of the region gets a cold. Kazakhstan, like Russia, is highly exposed to the falling oil price and found itself having to free up the tenge as the devaluation of the Russian ruble took its toll. The tenge’s value against the dollar consequently slumped by 63% so far this year, to KZT308.4 by mid-November. The devaluation of the tenge has taken its toll on retail sales. The retail sector in Kazakhstan boomed over the past 15 years on the back of the oil-based economy. Sales increased by 1,000% to KZT6.3tn in 2014, reaching per-capita sales of KZT363,000 (€1,640) against just KZT38,000 (€280) in 2000. But as the oil price dropped and the economy slowed, retail is suffering. Retail trade contracted by 4.1% in September from the month before and 0.7% on year. Kazakh shoppers seem to have adopted a wait-and-see attitude, cutting down on unessential spending and switching back to corner shops and informal markets that were popular during the crisishit 1990s, from modern shopping malls and supermarket chains. The bottom line is the markets have taken back the lead from the supermarkets as the most popular shopping venue as a result of the crisis, increasing their share of total retail trade to 50.1% in September from 48.9% in August. However, the country’s retail woes have had little impact on investors, as Kazakhstan doesn’t have any listed retail companies. Polish consumers appear in fine fettle, as low inflation and a tightening labour market have put the consumer in the driving seat of the economy, which posted 3.4% annual growth in the third quarter. “Data suggest that strong retail spending has been the main prop,” says William Jackson at Capital Economics. “Consumers have been supported by lower oil prices, which has boosted real incomes, as well as more supportive monetary and fiscal policy.”

Retail sales in Poland averaged an annual 7.4% from 2001 until 2015, according to Trading Economics, though that has obviously slowed this year, with sales increasing by 0.80% y/y in October, following 0.1% growth in the previous month. The rise in consumption and retail sales has boosted Polish retail stocks through the year, with supermarket chains particularly benefiting. Since the start of the year, the biggest Polish food retailer Eurocash saw its share price rocket just under 47% by mid-November. Emperia failed to keep pace, but still posted a gain of around 39%, while Biedronka's Portuguese parent Jeronimo Martins was up over 60% on its home stock market. Yet there are clouds on the horizon. Polish shopkeepers face uncertainty from the deflating zloty, while large retailers are also eyeing warily the incoming Law and Justice (PiS) government, which promised during its recent election campaign to levy a charge of up to 2% of turnover on large shopping chains. While more products may be flying off the shelves, large retailers are seeing profits drop as aggressive competition takes hold. “We have observed a strong deflationary trend in the Polish FMCG distribution market that has put pressure on all major market players’ results,” note analysts at Erste Group. While Turkey is not particularly connected to Russia and is an energy importer rather than exporter, the economy has been battered by the twin general elections this year and the rising political instability. Like other countries in CEE/CIS, Turkey has benefited over the past decade from rising consumerism from an emerging middle class. According to Trading Economics, Turkish retail sales growth averaged an annual 6.6% from 2006 until 2015, reaching an all-time high of 24.7% in December of 2010. Yet consumer confidence and seasonally adjusted retail sales have been falling fast since the summer, with retail turnover falling by 0.2% y/y in September. More Turks shopping in the formal sector at large chains have meant shares of its leading supermarkets have benefited. The big winner this year was top supermarket chain Tesco Kipa that saw its stock rise 74% so far this year by mid-November.

bne December 2015

When the Soviet Union collapsed in 1991 almost all shopping for staples was done in open-air markets, which can still be found at the centre of every city, including Moscow and St Petersburg. The most visible sign of the advent of capitalism was the springing up of supermarkets from the mid1990s. Today, supermarkets account for a bit less than three-quarters of all food sales, the president of Dixy, Ilya Yakubson, told bne IntelliNews in an exclusive interview, and there is a mad rush to capture this unclaimed market share. It will take another two years or more, believes Yakubson, and in the meantime the leading supermarket chains can look forward to outsized growth and returns. Russia’s stock market is not doing so badly this year – by November 17, the dollar-denominated RTS Index had risen 13% so far this year. But the supermarket shares were mixed. Magnit has turned into the “tourist stock” – a proxy for the whole market in the way that in their day oil major Yukos, gas monopolist Gazprom, and banking giant Sberbank once all played the same role. Magnit’s shares were down 1% as of November 17, but Sberbank CIB analysts have the stock marked down as a ‘Buy’ with a 27% upside. The company’s lacklustre share performance this year is probably a function of the fact that anyone with an appetite for Russian shares already holds Magnit (the London-listed GDRs are up at around $46 compared with the 2008 listing price of $8.50). Foreign portfolio investors in global emerging markets (GEM) are currently moderately overweight in Russia, which makes up 4.5% of GEM funds’ assets under management even though its MSCI Emerging Markets Index weight is just 3.8% – most of this difference can be attributed to Magnit’s shares. “One might say that GEM funds are overweight on Magnit, not Russia,” says Sberbank CIB’s chief strategist, Andrei Kuznetsov. “MSCI benchmarked investors in Russia have 20% of their portfolios in Magnit, and are more than 10% overweight in

Cover story

the stock,” Kuznetsov explains. “This is the largest the overweight has ever been, and it has been increasing in spite of Russia’s weak domestic growth environment. Magnit is the second-largest overweight in the MSCI EM Index.” That might already be changing, as the biggest winner amongst the supermarket stocks this year was X5, which is up 68% so far this year. The company has a new store format that analysts like, and it continues to invest and grow at a breakneck speed. Sberbank CIB also has

I 35

this stock down as a ‘Buy’, but with a more modest 15% upside. The smaller companies seem to have less appeal. Lenta’s stock was up 11% year to date, but Dixy is down 26% and O’Key is down 50%, despite all five supermarket chains showing broadly similar growth rates. But if Russia’s economy really does turn the corner and starts growing again, returning investors will clearly follow down the path beaten smooth by Magnit and these stocks will be the ones to watch.

Share of food in Russian household spending Percentage 50

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source:Rosstat, Rosstat,VTB VTBCapital Capital Source:

Russia retail turnover, 2015 Month-on-month percentage change -3.6

-4.0 -6.0

-7.0

-8.0

-9.2

-8.5 -10.0

Feb

Mar

Apr

-10.4

-9.4

-9.6 Jan

-9.1

-9.2

May

Jun

Jul

Aug

Sep

Source: IntelliNews, Source:bne bne, Rosstat Rosstat

Annual Russia retail turnover, 2006-2016F Year-on-year percentage change 15.0 10.0

14.1

16.1

13.7

6.5

7.1

6.3 2.5

5.0

0.5

3.9

0.0

-8.5

-5.0

-5.1

-10.0

2006

2007

2008 2009

Source:bne bne, Rosstat Rosstat Source: IntelliNews,

2010

2011 2012

2013 2014 2015

2016

I Cover story

bne December 2015

wholesale distributor concentrating on the twin giant cities of Moscow and St Petersburg. In those days, the most money was to be made from simply importing foreign goods to stock bare Russian shelves. “It was an easy business. You could have a dirty store with no lights and poor quality space, and still have people queuing up to buy things,” says Yakubson. “That has changed now, as the customer has become more sophisticated and demands better quality service and goods.”

Russian supermarket chain Dixy miffed, not crushed by sanctions

INTERVIEW:

Ben Aris in Moscow

f course, the sanctions are bad for business and we have been affected, but they have been no more than a nuisance,” Ilya Yakubson, president of Dixy Group, one of Russia’s leading supermarket chains, tells bne IntelliNews in an exclusive interview. Russia’s supermarket chains were peeved when the Kremlin decided to ban the import of many European agricultural goods last summer – but not, it seems, much more than that. The Russian sanctions were a tit-for-tat response to restrictions imposed by the EU and US following Russia’s annexation of the Crimea in March 2014 and its backing of pro-Russian rebels fighting in the east of Ukraine. According to Russian officials, while the Russian ban on European agricultural products is costing Europe an estimated $100bn a year, Western sanctions are costing Russia only about $30bn. Other studies put the

cost to Russia equally as high, but clearly for both sides the amounts run to tens of billions of euros. Nevertheless, while the sanctions might have crimped growth at Russia’s food retailers, they have not really hurt them. After a few months of trying to replace the ubiquitous Polish apples and other EU perishables, most food retailers found new sources of fresh produce in places like Turkey, Egypt, Brazil and Israel. “It was annoying, as in one month we had to completely remake a distribution system that we had built up over the last 15 years,” says Yakubson. “I know it has become a bit of a cliché, but [European] cheese was probably one of the hardest things to replace. But now most Dutch and Italian cheeses are being made in Russia.” Crisis veteran Dixy is no stranger to crises; a veteran of half a dozen, Yakubson has taken this one in his stride. The company’s roots go back to 1992 when it was founded as a

However, like most traders Dixy was hit hard by the 1998 financial crisis that saw the ruble cut to a quarter of its value against the dollar overnight. “Wholesalers were in an impossible position: they had to pay dollars for their goods, but revenues were in rubles. By the end of the 90s, most of the wholesalers had gone into retail as the only way to make a profit.” In 2007, Mercury Group bought out founder Oleg Leonov and then listed the company on the domestic RTS and MICEX stock exchanges to raise funds to accelerate the expansion of the retail chain. However, the share price performance has been lacklustre, with the stock trading in a band between RUB300 and RUB500 for most of the last five years. The share price has fallen markedly this year from a peak of RUB495 on March 20 to close to the bottom of its range now, trading at RUB331 as of October 29. For most of the last decade and a half the game in retail has been very simple: grow as fast as you possibly can to grab as much market share as you possibly can. “At the end of the 90s, the leading retailers were not in competition with each other but with the open-air markets,” says Yakubson. Russians have traditionally shopped in the bazaars – huge open-air markets that can still be found at the heart of almost any district in any city. But the share of organised retail (modern retail formats like store chains, supermarkets and hypermarkets) have been rapidly eating into the bazaars’ share of the shopping basket: Yakubson estimates that modern formats now account for 70% of food

bne December 2015

shopping expenditure, with open-air markets taking the remaining 30%. A decade ago those numbers were the other way round. Fresh produce, fresh crisis At the end of 2008, retailing went through the whole boom-bust thing again. Arguably, that crisis was worse than any of the previous ones – and Yakubson reels off a list of them, big and small: 1993, 1998, 2004, 2008 and the current downturn that started in 2014. But like ancient Rome, irrespective of how bad things get, the population will always demand “bread and circuses” – the share of income spent on food fell from three-quarters to a low of about 25% in 2007, but it is expected to increase to over 50% this year. While Russians have cut back on bigticket items, like new cars or foreign holidays, they are still buying food – even if they have traded down to cheaper Russian-made goods. Indeed, even that is not clear, as a recent study found that the share of imported goods (that haven’t been banned by the Kremlin) has remained the same – just people are buying less of them. The operating environment for retailers has got tougher. Rosstat reported that retail turnover fell by an unexpectedly hard 10.4% on year in September and real incomes are also down by 3.3% over the first nine months of this year. But, oddly, that hasn’t affected Dixy’s business much, because the last things Russians will cut spending on are tea, sugar, pasta and bread. “We are on course to open a record number of stores this year: we have already opened 400 more stores in the first nine months of this year, which is more than we opened in all of 2014,” says Yakubson. Overall the company’s financial results have remained impressive. Revenues in 2014 came in at RUB229bn ($5.7bn at 2014 average exchange rates), up from RUB180bn in 2013 and RUB147bn in 2012, according to the company. And net profit grew 45% in 2014 to RUB4.5bn from RUB3.1bn the previous year. The sharp devaluation of the ruble since December 2014 will reduce the dollar

Cover story

I 37

rowing were lower, but we still use some bank loans,” says Yakubson. “We are still in a race [with the other stores] to capture as much market share as we can. We are reinvesting every penny we make.”

value of revenues this year, but this will be more or less offset by the continuing rise in sales. On October 14, the company announced that total revenues in September were up 17% on year to RUB21.6bn (€314mn), while nine-month sales were up 19.8% at RUB197.4bn.

At the same time, the cost of setting up new stores has gone up. When Dixy opened its first store in 1999, the fit-out cost was about $50,000, but that has risen to $400,000 per store in the interceding years.

Indeed, Yakubson claims that the devaluation of the ruble has been a lot more damaging than the ban on European agricultural imports; despite all the progress, Russia still imports some 40% of its processed foods (and most of its fresh produce), which has to be paid for in hard currency. “Some 50-70% of fruit and veg is imported to Russia, and as the cost has gone up consumption has gone down,” says Yakubson.

It will take many more years until the consolidation of retail is complete and Russia finally abandons its bazaars for modern shops. Currently, Dixy concentrates on its traditional markets of Moscow, Moscow region, St Petersburg, the Leningrad region and Yekaterinburg where it was established, but the company is entering a new region every year, says Yakubson. The company has launched stores in Tyumen, Orel and Kaliningrad, to mention some of the recent additions, but the pace of regional growth is limited by the need to build an entire distribution system to service those stores, which is a capital-intensive and time-consuming process.

However, retailers like Dixy have turned to its neighbours in the Commonwealth of Independent States (CIS) such as Moldova and Azerbaijan, as well as fellow BRIC countries to fill the gap. “Of course this has added to the costs. In past crises you could pass the inflation on to the consumers, but not this time round.” Rosstat reports that the inflation of food costs was up 20% this year, well ahead of the average 11% inflation rates and that is hitting the consumer in the pocket.

Despite all the pesky problems Yakubson has to deal with, he is confident in the future of his company. “This crisis is a great opportunity,” says Yakubson, echoing a sentiment that bne IntelliNews has heard repeated by many of Russia’s top company executives recently. “The lower we go, the stronger the rebound will be. The autumn of 2008 was awful, but after that our business started to grow like crazy. The sanctions will be dropped eventually and the same thing will happen.”

All the leading retailers are reporting the same thing. Sales have been dented by the economic slowdown, but all the main chains, Dixy included, are still reporting growth. That means they have a steady flow of cash and the bulk of their investments continue to be made out of retained earnings. “No one really has problems with financing investment. Retail is one of few industries in Russia that is still growing. It would be nice if the cost of borDixy Dixy group group sales sales dynamics dynamics in in 2014 2014

Sales Sales dynamics dynamics byby division division in in 2014 2014

Like-for-like, Like-for-like, y/yy/y %%

15.015.0

13.5% 13.5%

11.4% 11.4% 9.5% 9.5%

10.010.0

5.9% 5.9% 5.0 5.0

5.0 5.0

2.7% 2.7%

1.7% 1.7% 0.0 0.0

0.0 0.0

LFLLFL sales sales

Source: Dixy

Avg. Avg. ticket ticket No.No. of tickets of tickets

Dixy Dixy

Victoria Victoria

Megamart Megamart

I Central Europe

bne December 2015

Photo: yakub88

INTERVIEW:

Babis keeps faith with coalition – for now Benjamin Cunningham In Prague

ven as the Czech governing coalition remains in place and broadly popular, tensions between Prime Minister Bohuslav Sobotka and Finance Minister Andrej Babis remain at a slow boil. In an interview with bne IntelliNews, Babis labels the government inefficient and highlights persistent internal political rivalries – but he also shows little sign of plans to bring it down anytime soon.

unlikely one, but has proven surprisingly stable in a country that saw four prime ministers in the previous four years.

Babis is the country’s second richest man and his newly formed ANO party finished a strong second in the October 2013 election. The resulting coalition saw Sobotka’s winning Social Democrats (CSSD) and the socially conservative Christian Democrats (KDU-CSL) join with ANO in a coalition. The combination of two establishment parties with a personality-driven party espousing anti-politics seemed an

In keeping with the apolitical branding, Babis insists that today's professional

To hear Babis speak, though, the arrangement is an utter disaster. “I am working more than before, but the performance is 50 times less,” Babis says. “I can’t manage my own time. I am sitting in parliament listening to the stupidities of corrupt people.”

politicians are unfit for governing, and disparages Sobotka as having “never been in the real world”. Babis also shows particular contempt for Interior Minister Milan Chovanec (CSSD), whom he accuses of using the Ministry of Interior’s control of state businesses to reward his party allies. Babis produced minutes – conveniently waiting just steps away on a table – from a May supervisory board meeting for Ceska Posta, the state postal service, in which members voted to keep future decision-making about contracts secret.

"I can’t manage my own time. I am sitting in parliament listening to the stupidities of corrupt people"

Central Europe I 39

bne December 2015

“The minister of finance cannot get any information about tenders within Ceska Posta,” Babis complains. After spending several minutes condemning turf battles, the giveand-take of coalition politics, and his governing partners, Babis nonetheless balks at the idea of bringing the government down. “The only value is that I meet normal people and they encourage me to continue,” he says. Much of the Czech political establishment remains alarmed by Babis. His personal wealth, ownership of key media like the daily newspapers Lidove Noviny and Mlada Fronta Dnes, and extensive business holdings in the agricultural and chemical sectors saw Sobotka, among others, note that Babis’ power in the Czech Republic is “unprecedented since 1989” and that it represents “a permanent risk of a conflict of interest”. For his part, Babis insists that the country needs a new kind of politics, one stocked with professional managerial types that make decisions based on rational calculation. In his mind, political convictions are a fiction that waste time. The upshot of this thinking is that his coalition partners have sought to portray the finance minister as anti-democratic. Pavel Belobradek, the KDU-CSL head, said on a television talk show in October when confronted with comments by Babis that, “Democracy hinders [the pace of work], but it is essential that democracy in its entirety be defended.” Equal opportunity graft Still, Babis’ insistence that government should be run like a business, along with frequent condemnations of decades of corrupt post-communist politics, resonates with many people. Graft remains both a real and perceived problem; a recent poll by the CVVM agency found that 20% of Czechs consider bribes a common practice for easing interaction with a state institution. At the same time, Babis’ own party has not been scandal-free in recent weeks. Radmila Kleslova, chairwoman of ANO’s Prague branch and deputy chief of the party at large, recently resigned in the

Bank deleveraging in most of CEE over

bne Intellinews Deleveraging by foreign banks active in Central and Eastern Europe finally came to an end in the second quarter – if Russia and Turkey are excluded – according to a new report by the committee of the Vienna Initiative of Western banks, which is based on banking statistics released by the Bank for International Settlements (BIS). The new figures could indicate banks are poised to become a motor of economic growth once again, in a region that has had a patchy recovery since the global financial crisis. The external positions of banks towards the region, excluding Russia and Turkey, rose by 0.1% of regional GDP in the April-June period, marking the first increase since the first quarter of 2011, the report published on November 18 said. Including Russia and Turkey, banks still took money equivalent to 0.3% of GDP out of the region, compared with an outflow of 0.5% in the first quarter. Since the third quarter of 2008, when the crisis struck, banks have taken the equivalent of 8.3% of GDP out of the region. The rise in the second quarter reflected a significant increase of banks’ external positions in the booming Czech Republic and Poland (over 1% of GDP for each country). Apart from those two, most countries in the region continued to experience reductions in foreign bank funding, except for Bosnia & Herzegovina, Estonia, Macedonia and Moldova. The most dramatic outflows – exceeding 1% of GDP – were in Bulgaria, Croatia, Montenegro, Slovakia and Slovenia. The BIS data mostly match balance of payments figures, which show that the region as a whole received positive bank inflows in the second quarter, compared with outflows in the first. The inflows turned positive for the Czech Republic, the Slovakia and Poland in the second quarter. A few Southeast European countries (Albania, Bosnia & Herzegovina and Croatia) and most of the Baltic countries (Estonia and Latvia) also had positive flows. In contrast, countries of the former Soviet Union continued to experience outflows, which moderated noticeably in Russia, but resumed in Ukraine following inflows from official creditors in the previous quarter. In terms of overall domestic credit across the region, again excluding Russia and Turkey, there was stronger growth, helped by credit to non-financial corporations turning positive in July-August. There was robust growth in the Czech Republic, Estonia, Macedonia, Poland and Turkey, but weak growth in Serbia and contraction in other countries (Hungary, Slovenia, Russia, and Belarus), often linked to a backlog of non-performing loans. Domestic deposits continued to expand at a steady pace in most countries in the April-June period, except in Ukraine and Moldova. The increase in deposits continued to more than offset the decline in foreign bank funding for many countries (except for Ukraine, Moldova, Bulgaria, Hungary, and Russia).

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wake of controversy surrounding her continued ties to national power company CEZ. A long-time lobbyist and a former member of the communist-era secret police, the StB, Kleslova remains the mayor of Prague’s 10th district. (In fact, Babis has a penchant for surrounding himself with former police and spooks,as bne IntelliNews has previously reported.) Kleslova had long been perceived as a sort of éminence grise of Prague City Hall, where ANO’s Adriana Krnacova sits as mayor. While Babis admits that Kleslova “made a mistake”, he goes on to note that “she resigned” and argues that once wrongdoing became apparent, his

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party dealt with the issue quickly. He contrasts that with how Sobotka’s CSSD has handled still burgeoning scandals in regional metropoles like Ostrava and Olomouc. “[Sobotka] needs the support of these regional organisations to be the chief of the party,” Babis says. “Me, I don’t care.” On substantive domestic policy issues, Babis is largely noncommittal. Though earlier critical of the Czech National Bank’s weak crown policy – which has seen the central bank intervene to keep the currency pegged at roughly CZK27 to the euro – Babis now seems unwilling to criticise the bank directly. “There is

less pressure on efficiency of companies, but for the people it is negative,” he says. “It has had a good impact on the economic performance of the Czech Republic.” Much like the weak crown policy, the government looks set to stay in place into 2016. But as the country’s most popular politician, Babis holds most of the cards on determining for how long. ANO holds about an 8-point advantage over the CSSD in recent opinion polls, but with just 28% of the total, a similar coalition would likely emerge from an early election held today. When that changes, so might the government.

sian expat community is all anti-regime. In Vilnius, 490 out of the 653 (75%) Belarusian voters allowed to vote did so for incumbent President Alexander Lukashenko, who has been in power for 20 years now. This was not much more than the suspiciously high 83% that Lukashenko won in Belarus itself. Arvydas Anusauskas, a Conservative MP in the Lithuanian parliament, says this is telling and alarming. “All those resources that we have invested in the Belarusian opposition and dissemination of European values through the European Humanities University seems not to have returned any dividends,” Anusauskas tells bne IntelliNews.

How Belarus keeps Lithuania onside Linas Jegelevicius in Vilnius

ithuania never misses an opportunity to slam Russia, but very rarely – if ever – does it scold the authoritarian Belarus over the border. Moreover, after Belarus released six political prisoners ahead of the presidential election in October, Lithuania was quick to exhort the rest of the EU to lift the bloc’s sanctions on

Belarus, which it did on October 29. Why? Trade and a misplaced idea that carrot with no stick will be enough to spur change, say critics. Lithunia’s stance is all the more surprising given that Vilnius plays host to key segments of the hounded Belarusian opposition. Not that Lithuania’s Belaru-

The primary mission of the European Humanities University (EHU), which once operated in Minsk but moved to Vilnius after the Belarusian authorities clamped down on the European spirit of the studies, is “to contribute to Belarus and its integration into the European and global community”. The ‘university in exile’ intends to return to Belarus when it is convinced that academic freedom and its independence can be assured, its website states. But many local politicians and analysts point out that the stance of Lithuania’s political elite, which has traditionally done little to nudge Belarus towards making any political reforms, make

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that more likely to be later rather than sooner. “Unlike with Russia, Lithuania has always tried to have exceptionally good relations with Belarus,” Kestutis Girnius, a US-born analyst, tells bne IntelliNews. “Although some Lithuanian politicians

in Belarus, even in the eyes of the EU’,” says Vytautas Bruveris, a political analyst. “In short, we’ve bolstered the regime with this decision.” Trading places Lying at the heart of Lithuania’s stance is, of course, money. Trade between the

"We cannot expect Lukashenko to turn into a Western-style politician all of a sudden"

and political analysts call for a tougher stance, the Lithuanian establishment – from the first president, Algirdas Brazauskas, to the incumbent president, Dalia Grybauskaite – emphasises the importance of the practicality of the relations.” Vytautas Landsbergis, patriarch of Lithuanian Conservatives, remarks insightfully on the EU’s recent suspension of sanctions: “Both the EU and Vilnius wanted nothing from the Minsk authorities and were not demanding anything from it. They gave Minsk a candy and now we are all watching it sucking it. I don’t understand why Lithuania has not raised the issue of a nuclear power plant being built in Astrav”, which is located just 20 kilometres from the Lithuanian border. MP Anusauskas agrees. “The lifting of sanctions is a two-way street, but Belarus has not committed to anything and the favourable decision was handed to them on a plate. Since it was a oneway thing, no changes will follow in Belarus.” Most analysts agree that by suspending sanctions, both Brussels and Lithuania have sent a message of acceptance of the Belarusian regime, and by extension of the president. “Lukashenko’s opponents, who until now expected that the EU would keep pressing the authoritarian ruler, must be very disappointed, as now Lukashenko can proudly tell them: ‘Hey you, stop nagging. All is okay with democracy

two neighbours has risen three and a half times over the last ten years with Lithuanian exports soaring four times and Belarusian imports three times. The two countries’ trade volume reached an impressive €1.3bn last year. “Lithuania obediently accepted the EU motion because of economics. As its closest neighbour, Belarus is a very important trade partner,” points out Bruveris. Naglis Puteikis, another Lithuanian MP, reveals the clout that Belarus has on policymakers’ decisions. “As a native of the seaport city of Klaipeda, where Belarusian cargo prevails and where Belarus has a big stake in several sea-

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an incentive for Lukashenko not to fully link Belarus’ fate with Russia, but give it a chance to retain its ties with the West, or even expand them. The decision on its own already helps Lukashenko to resist Russia’s traction. Imagine if the European Union turned its back on Belarus; then Belarus would certainly be drifting towards Russia, which we do not want here.” Indeed, as much as Lukashenko sometimes seems to be a close ally of Vladimir Putin, he has distanced himself from the Russian president on several critical issues, like the annexation of Crimea and the war in Ukraine, he notes. “Such a stance must vex Putin a lot… We cannot expect [Lukashenko] to turn into a Western-style politician all of a sudden,” Girnius says. And ironically, the nastier and more malign Putin becomes, the brighter Lukashenko shines in comparison. “The more Putin is violent, the better it is for Lukashenko, who can burnish his image effectively doing nothing – just occasionally frowning at one or other of Putin’s actions,” the MP Anusauskas says. Girnius believes that the next litmus paper for Lukashenko will be Belarus’

"Lifting of sanctions is a two-way street, but Belarus has not committed to anything" port-based marine companies, I would not perhaps dare even to scold Belarus publicly,” Puteikis tells bne IntelliNews. “As a politician, though, I feel we have to do a whole lot more to resist the regime. Now it’s all about the economics, not politics.”

decision on whether to allow Russia to build a military base in Belarus. “Even if he gives in to Putin on this issue, it doesn’t mean that Belarus will be again shifting toward Russia. Lukashenko is a good player and he always thinks what is best for him first of all,” Girnius says.

Some also argue that the suspension of EU sanctions against Belarus could serve the cause of democracy and keep Belarus from turning away from Europe and toward Russia. “I think we can interpret [the sanctions suspension] another way,” says Girnius. “I’d see it as

However, Bruveris warns that lifting the sanctions on Belarus is doing Russia a favour. “Russia will try to use Belarus, its century-long ally, as a mediator in its relations with the West and for the ultimate goal of getting the EU sanctions [on Russia] lifted,” Bruveris says.

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Latvia’s international man of mystery Graham Stack In Berlin

Latvian financier linked to the mass production of Scottish shell companies has denied to bne IntelliNews any involvement in the $1bn Moldovan bank fraud that has caused a major scandal in Europe and brought down the government there. In November 2014, Moldova’s banking system was subject to fraud on a massive scale as around $1bn in funds were funnelled out of the tiny, poor country’s savings bank and two smaller banks – Banca de Economii, Banca Sociala and Unibank – via a group of UK shell companies that banked with Latvian lenders. One year on and the fallout from the scandal is still being felt: on October 29, Moldova’s pro-EU government collapsed following the arrest earlier in the month of Vlad Filat, an ex-prime minister, who

is accused of accepting bribes worth $260mn to facilitate the fraud. He denies the accusations. The indignity for a country once hyped as the poster boy for the EU’s Eastern Partnership has also started a conversation in Europe about Latvia’s offshore banks, which happily processed the $1bn stolen from Moldova, and probably sped the money on its way to Alpine or Anglo-Saxon bank accounts. It has also sparked an awareness in Scotland of the snowballing abuse of the liberal incorporation climate to set up limited partnership (LP) shell companies for Eastern European money launderers. Understanding about the fraud has been advanced by the leaking of the first instalment of a probe by corporate investigators Kroll to the press. But the

Kroll report left many questions unanswered, not least who in the EU facilitated the fraud – organising the routes by which the funds left Moldova and were cleared into the global financial system, and linking Moldova with Latvian banks and Scottish shell companies. Savoir faire At least one man ticks these boxes, but denies vehemently he had anything to do with the Moldovan fraud: 37-yearold Latvian Vitalijs Savlovs runs the Scotland-based ‘Arran’ group of business introducers for Latvian banks and other international banks – business introducers being outfits that set up corporate vehicles for clients while opening bank accounts for the new firms. The Arran companies appear to be named after the Scotland’s picturesque West Coast holiday island.

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The Arran company service providers in the UK share addresses, and have provided nominee directors, to a number of firms with links to Moldova’s financial sector, including some firms used in the fraud. At the same time, the Arran group advertise in Russian-speaking countries as providers of offshore and shell companies together with bank accounts, acting as business introducers for Latvian and other offshore banks. According to researcher Richard Smith, who specialises in the analysis of the UK company database, around 2,200 firms and LPs linked to the Arran companies north and south of the border have been established over the last decade. Overall, since 2008 nearly 16,000 Scottish LPs have been registered, whereas before that date only a few hundred were incorporated per year. Savlovs-directed business incorporation firms Arran Business Services, and the linked Arran Secretaries, were first registered in 2008 at Edinburgh’s 16/5 Pilton Rise (a sketchy part of town), and have been registered at a number of different Scottish addresses – all of which feature as addresses of mass registration of shell companies, usually with accounts at Latvian banks in the few cases where details are available. Over 300 firms have been registered at the 16/5 West Pilton Rise address since 2008, according to Smith. As early as 2009, a company registered at the 16/5 Pilton Rise featured in a controversial episode: Performance Global Limited, with a Latvian bank account, was linked to a breach of UN arms sanctions imposed on Cote d’Ivoire by Eastern Europeans, according to a 2012 UN Security Council Report. This in no way implies Savlovs’ personal connection to the affair. In 2011, a disputed share packet in Moldova’s second largest bank, Victoria Bank was acquired by Maxpower Invest, which is also currently registered at the 16/5 Pilton Rise address. Arran Business Services was then registered consecutively at Glasgow’s 48 Carnarvon Drive and Aberdeen’s 9 Clash-

mach Drive. Lectom Limited, a firm that as of 2011 held a disputed share packet in Moldova’s Banca de Economii – one of the Moldovan banks involved in the massive $1bn scam – was registered at these addresses consecutively, at the same time as Arran Business Services. Savlovs also set up ArranConsult Ltd at an address in the English city of Bristol, where Lerson Ltd was registered. Lerson held a 4.95% stake in Moldova’s Banca Sociala, another bank implicated in the Moldovan fraud, according to the Kroll report. In April 2014, Arran Business Services in Scotland then moved its official address to 18/2 Royston Mains Street in Edinburgh, an address close by the 16/5 Pilton Rise address. 18/2 Royston Mains St is the address of another company that acquired 4.95% in Banca Sociala, Novland Ltd. It is also the address of Fortuna Ltd, the firm that ended up holding the around $1bn in funds owed to Banca Sociala and Banca de Economii. 18/2 Royston Mains St is also the home address of a Lithuanian professional nominee director Viktoria Zirnelyte, partnered with a co-national nominee director, Remigijus Mikalauskas. Zirnelyte in turn is a former employee of Marios Papantoniou, according to Scotland’s Sunday Herald. Papantoniou is a longstanding company service provider in Edinburgh under the brand

Zirnelyte sometimes lists the Duke Street and Brunswick Street addresses as her home address, while Axiano Business LP and Axiano Trading LP are registered at Zirneleyte’s and Arran Business Services’ Royston Main St address. Closing the circle, Asten Technologies Ltd, the oldest firm to feature one of the Arran group among its nominee directors, since 2008 was incorporated by Axiano’s predecessor firm. This all suggests an interlinked cluster of company providers. But none of this means that these company service providers knew that the firms incorporated or served in as nominees were being used in the fraud that Kroll investigators allege took place – and the Kroll allegations themselves have not yet been proved in a court of law. Riga redux In an interview with the BBC, Zirnleyte said that the firms she incorporated were processed by “[a]nother company, intermediary” in Latvia who are “more close with their clients”. Are Savlovs’ Arran companies the Latvian intermediary company that Zirnleyte was referring to? A bne IntelliNews reporter visited Savlovs’ well-concealed offices in Riga. From the outside, nothing would indicate any sort of business being conducted at Exporta Iela 3, on the edge of Riga’s beautiful old town,

"At least one man ticks these boxes, but Latvian Vitalijs Savlovs denies vehemently he had anything to do with the Moldovan fraud" ‘Axiano’. Axiano’s offices in Edinburgh’s Duke Street, and addresses linked in the Scottish Property Register to Papantoniou’s in-laws, the Turnbull family, in Edinburgh’s Brunswick and Buchanan streets, feature as addresses of hundreds of further firms, including firms listed in the Kroll Report as involved in the Moldovan fraud.

which is also the seat of the country’s offshore banking sector. But the door of a ground floor flat in a residential housing block opens to reveal a Tardislike apartment containing what appears to be an outpost of Austria’s Meinl Bank: a large office with a number of computer terminals, over the door to which hangs a neon ‘Meinl Bank’ sign.

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Meinl Bank is a private bank that specialises in servicing Eastern European clients. Arran Consult’s website says the company is a registered agent for Meinl Bank. “Mr Shavlov [sic] does not have the function of a Meinl Bank representative,” a Meinl Bank spokesman tells bne

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Savlovs vigorously denies having any connection to the firms used in the Moldovan fraud. He also denies some details contained in public documents – that an Arran Consult employee established Lerson Ltd, according to the Kroll report; that according to a London High

"What happened in Moldova is the banks’ fault"

IntelliNews, spelling Savlovs name the Russian way and adding that Meinl does not comment on its business partners and clients. Only one employee is present on a weekday afternoon – together with the director and owner Vitalijs Savlovs, whose name is emblazoned in Russian on his office door. The name of the office WiFi network, TaxDNet, seems to refer to website taxduty.net, set up in 2005-2006, which references Arran Consult. The website offers Russian-speaking clients offshore firms and bank accounts, and appears linked to Baltikums Trust Management, according to webpage headers and content. Baltikums Trust Management is a former affiliate of Riga private bank Baltikums Bank, owned by brothers Alekandr and Sergei Peskovs, Latvia’s second richest family, according to journalists Lato Lapsa and Kristine Jancevska. Baltikums Bank was not one of the Latvian banks to which funds were in the Moldovan fraud. Baltikums has no connection to Savlovs, the Arran firms or Taxduty, the bank tells bne IntelliNews. Cover-up Savlovs is a suave, well-groomed 30s-something, but he is clearly angry at a previous article referring to him in bne IntelliNews, and often interrupts questions with his own harangues. His excitement may have worsened his English; some of what he said during the interview remains elusive, even on repeat hearing.

Court decision of February 2014 he ‘introduced’ offshore vehicles to culprits in Russia’s $183mn Otkrytie warrant fraud; or that he was a board member of another affiliate of Baltikums Bank, BB Trust Consultancy, according to Latvia’s company register, which suggests he is well connected in Latvia’s murky offshore banking world. Savlovs sees the blame attributed to Eastern European involvement in the Moldovan $1bn fraud as part of an EU conspiracy to cover up the final destination of the money. “Why has no one been able to find this money yet?” he asks rhetorically, suggesting that

should be asking questions of other people.” Calming down, Savlovs acknowledges acting as business introducer for foreigners to Latvian offshore banks, but denies he moved to Scotland to launch a conveyor belt of shell companies for Latvian bank clients. He also claims there is not much to his business; he earns a tiny fee per company and incorporates just over 100 firms per year for clients. As he points out, it takes only 15 minutes to incorporate a UK company online. “But many business people in post-Soviet countries don’t know English, and we help them,” he says. “Apart from this, we don’t do anything.” Savlovs also says that he sees all his clients face-to-face, travelling to their home counties to do so. He checks their identification, and says the customer ID is checked again by the banks. “If a passport turns out later to have been forged, this is a job for the police, not for me,” he says. According to Savlovs, he has received no police requests to check his customer files. “I don’t know why banks use [business introducers],” he tells bne IntelliNews.

“Many business people in post-Soviet countries don’t know English, and we help them”

the EU is in on the fraud, and blaming Eastern Europeans is part of the coverup. “Because nobody in the EU wants to find this money. Moldova is a big hole for Europe to clean money, that’s my opinion.” According to Savlovs, such a scheme is also at work in Latvia. “Huge money flows from EU to Latvia in subsidies, but if you take a car and drive, where do you see the fields [being worked] and the factories? They pay subsidies to close factories in Latvia, they don’t do this in UK, France or Germany, where production costs more money, so you

“I think it is a cheap way for them to expand their network… Introducers just set up companies and check ID – they are not responsible for what happens with the company afterwards. What happened in Moldova is the banks’ fault,” he emphasises. Savlovs’ patience with the bne IntelliNews reporter finally runs out when his photo is taken, at which he covers his face with his hands, demands the photo be deleted, and calls the police to complain. “I am fed up with talking now,” he says, escorting the reporter to the door.

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degree of balance between valuation and the country risk” that the bidders feel. “In the absence of the valuation report by the current privatisation adviser, current sentiment indicates that the equity valuation is lower in comparison to the previous tender,” Dodig tells bne IntelliNews. “Also, the latest unions’ protest against the sale of the company doesn’t make the whole process easier.” Members of the two unions representing Telekom Srbija workers staged a protest against the privatisation on November 11 with around 2,300 people taking part. Many Serbian citizens have also spoken out against the planned sale, as has the independent Anti-Corruption Council.

Calling Serbia and beyond Clare Nuttall in Bucharest

ix bidders are competing for Telekom Srbija, which will be the second telecommunications incumbent from the Western Balkans to go on the block this year after a failed attempt to sell Telekom Slovenije in August. That has been the pattern for attempts by governments across the former Yugoslavia to privatise their incumbent telecom operators. With the exception of the 1999 sale of Croatia’s Hrvatski Telekom to Deutsche Telekom, auctions have typically failed to attract bidders, been cancelled, or – where transactions have actually gone ahead – later been investigated for corruption and a lack of transparency. This dismal record is despite the fact that in general telecom companies are considered attractive targets for privatisation by both strategic buyers and private equity firms, as shown by the earlier wave of investment into telecom firms across Emerging Europe. However, investors are not yet ready to hang up the phone on potential telecom deals in Southeast Europe. Serbia’s minis-

ter of trade, tourism and telecoms, Rasim Ljajic, told a talkshow on RTV Vojvodina on November 16 that six bidders are still in the running for the government’s 58.11% stake in Telekom Srbija after one interested party dropped out. Ljajic declined to disclose the names of the bidders, but said that privatisation adviser Lazard Freres would analyse the bids over the coming fortnight and rank them, with price being the primary consideration, though also taking into account the bidders’ proposed social and economic programmes for the company. Both Ljajic and Prime Minister Aleksandar Vucic say they will not go ahead with the sale unless an adequate price is offered. That is reminscent of the previous attempt to sell Telekom Srbija, which fell through in 2011 when the sole bidder Telekom Austria offered just €1.1bn, well below the €1.4bn sought by the government. Erste senior equity analyst Mladen Dodig points out that Serbia’s ministries of finance and economy still have to decide on the exact model for the privatisation, which “allows the government a certain

Ljajic admitted on November 16 that layoffs are expected. Telekom Srbija employs around 9,000 people in Serbia and a further 4,000 in Bosnia & Herzegovina and Montenegro. Overstaffing is common in Serbian companies slated for privatisation, and is a particular problem at Telekom Srbija. Belgrade is hoping that the buyer will invest into raising Telekom Srbija’s competitiveness. Its mobile division, mts, holds a 44% market share in Serbia, but has been losing ground to Telenor, the local arm of the Norwegian incumbent. Telenor has gained market share by pioneering mobile banking services on the Serbian market following its acquisition of KBC Banka in 2013. Under these circumstances, Dodig forecasts that, “future capital expenditures and the social programme for workers (especially redundant ones) would have significant weights when the government starts to evaluate binding bids.” Russian mobile operator Mobile TeleSystems (MTS) is believed to be among the bidders after its CEO Andrei Dubovskov confirmed its interest in Telekom Srbija to Russian news agency Tass in June. A meeting has also taken place between Serbian government officials and representatives of stateowned China Telecom, Tatjana Matic,

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state secretary at the trade, tourism and telecommunications ministry, told local media on November 4.

environment and strong public opposition to the sale, according to an August 4 statement from SSH.

Several private equity firms including Advent International, Mid Europa Partners and Novator Partners – all of which have invested in CEE telecom deals – are also reported to be interested in Telekom Srbija.

Similar factors are present in the Serbian market, where Erste’s Dodig says that “the failure of the Telekom Slovenije tender just might set the tone for the bidders for its Serbian peer,” though he adds that “every privatisation has its own specific details.”

Finally, Telekom Slovenije is reportedly bidding for its Serbian peer alongside US private equity firm Apollo Global Management. On November 12, Slovenian news agency STA quoted a well-placed

A third Balkan operator could be up for sale soon, as the privatisation of Bosnia’s BH Telecom was included in the country’s Reform Agenda for 2015-

"The failure of the Telekom Slovenije tender just might set the tone for the bidders for its Serbian peer" source as saying that Apollo was submitting a bid with the Slovenian telecom operator as its partner. This follows a solo bid from Telekom Slovenije in the first round of the auction process. Combining the two former incumbents would create the largest telecom operator in the region, overcoming one of the main deterrents to investors, namely the small market size. Serbia is the most populous of the former Yugoslavian republics with a population of 7.1mn, while the smallest Montenegro has just over 600,000 inhabitants.

2018 – a wide-reaching reform package intended to support Bosnia’s progress towards EU accession.

Setting the tone Telekom Slovenije is regrouping after Ljubljana’s failed attempt to sell it to UK private equity firm Cinven earlier this year. In addition to the bid for Telekom Srbija, the Slovenian company also completed its acquisition of domestic mobile operator Debitel in October.

Even where governments have managed to find buyers for state telecom companies, in most cases these deals have later turned sour.

However, a letter sent by Cinven to Slovenia Sovereign Holding (SSH), which is managing the country’s privatisation process, highlighted the other challenges for telecom investors in the region. Cinven cited the “highly uncertain business environment” in which Telekom Slovenije operates, in particular the “complex” political

This would be the second attempt at a sale of 90% state-owned BH Telecom after the first was scrapped in 2009. Previously, Bosnian politicians had been reluctant to proceed with privatisation, but like Telekom Srbija, BH Telecom’s financial performance has declined recently and the company announced a 9.9% fall in net profits in the first half of this year.

Interference on the line Pristina is embroiled in an international legal dispute over the failed privatisation of Post and Telecommunications of Kosovo (PTK). ACP Axos Capital won the tender to acquire a 75% stake in PTK in April 2013, but the parliament voted against the deal. In June, Axos filed for arbitration at the International Centre for Settlement of Investment Disputes (ICSID). If the court finds in favour of the German investor, Kosovo could have to pay up to €500mn in damages.

Back in 2011, the US Securities and Exchange Commission charged Hungary’s Magyar Telekom with bribing government and political party officials in both Macedonia and Montenegro in order to win business and shut out competitors. Magyar Telekom's parent company Deutsche Telekom was charged with breaching the Foreign Corrupt Practices Act. Makedonski Telekom has been part of Deutsche Telekom Group via Magyar Telekom since 2001, while Magyar Telekom bought 76.53% of Montenegro’s Crnogorski Telekom four years later. “Magyar Telekom's senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business,” said Kara Novaco Brockmeyer, chief of the SEC enforcement division's FCPA unit in a December 2011 statement. The Makedonski Telekom case erupted again in Macedonia in September when testimony given by the country’s former deputy secretary for state security, Slobodan Bogoevski, was revealed in court transcripts published by Macedonian news portal MKD.Bogoevski accused former prime minister Vlado Buckovski and leaders of the junior ruling Democratic Union for Integration (DUI) party of taking bribes from the company. Both Buckovski and DUI leaders have denied the accusations. Bogoevski’s testimony helped revive the case in the US, and Metodi Zajkov, secretary general of Transparency International Macedonia told bne IntelliNews that there are ongoing discussions in Skopje about possibly opening a domestic inquiry. This chequered history does not bode well for future sales of telecom companies from the former Yugoslavia. Pick a number Corruption remains a serious problem in several countries, with most scoring well below CEE countries on Transparency International’s annual Corruption Perceptions Index. Populations in Serbia and

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other countries are declining, and Southeast Europe as a whole lags behind CEE in economic development. A September World Bank report found that the convergence rate of GDP per capita between Southeast Europe and the EU has “stagnated” recently after progress between 2000 and 2007.

privatizing these assets. However, as Holzner points out, privatisation is already a contentious issue in countries across the region. Even in long-time EU member state Slovenia thousands demonstrated earlier this year against the planned Telekom Slovenije privatisation.

However, this does not explain why both Romania and Albania managed to sell majority stakes in their telecom incumbents, while countries in the former Yugoslavia have failed – although the post-privatisation history of Bulgaria Telecommunication Company (BTC) has also been mired in controversy.

This was also illustrated in the MuslimCroat Bosnian Federation where a dispute over the management of HT Mostar and other state-controlled companies split prime minister Fadil Novalic's coalition government in June. The decision by the junior ruling Social Democratic Party of Montenegro (SDP) to back the probe into the sale of Montenegro Telekom contributed to the current rift within the ruling coalition in Podgorica, where the Democratic Party of Socialists and SDP are only hanging together in the hope of securing an invitation to join Nato.

Mario Holzner, deputy director and research economist at the Vienna Institute for International Economic Studies (wiiw), suggests that the difficulty in completing privatisations in the former Yugoslavia, and the high level of popular opposition, are linked to the unique economic structure. “Serbia was a latecomer to the privatisation issue and, as in other countries in the former Yugoslavia, had a history of worker self-management. Unlike with the central planning approach of most countries in the region, managers had a lot to say in how their companies were run and in

In Serbia, Aleksandar Vucic’s government received a boost when better-than-expected macroeconomic data for 2015 led to the International Monetary Fund (IMF) giving the go-ahead for a modest increase in public sector wages and pensions, partially reversing the 10% cut made a year ago. As Erste’s Dodig points out, Vucic is not under pressure to

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Guns, lots of guns in the Balkans The problem of rampant gun smuggling in Southeast Europe was once again in the spotlight following the Paris terrorist attacks, as it emerged a Montenegrin was arrested with a cache of weapons in his car on his way to France and Kalashnikovs used in the attacks were reportedly made in Bulgaria. Police in Germany confirmed the arrest of a 51-year-old Montenegrin national on November 5 during a routine check on the motorway between Munich and Salzburg. The police found “many machine guns, revolvers and explosives” in the vehicle of the suspect, a spokesman said. He was reportedly on his way to Paris, which saw 130 people killed in a series of coordinated terrorist attacks on November 13. Then Bulgarian National Television reported on November 18 a “reliable insider” from the country’s secret services as saying that some Kalashnikov machine guns used in the terror attacks in Paris were manufactured in Bulgaria in the 1980s under the country’s communist regime.

"The latest unions’ protest against the sale of the company doesn’t make the whole process easier"

According to the Organized Crime and Corruption Reporting Project, during communism the Bulgarian Kalashnikov was manufactured in what was then called the Friedrich Engels factory (now run by a private company named Arsenal) in the town of Kazanlak. There were even limited editions made with the original signature of General Mikhail Kalashnikov.

sell off Telekom Srbija, as the pay rise will make the Serbian public more sympathetic to his government’s linked fiscal austerity and privatisation programmes aimed at getting the economy onto a stable growth path.

Vast arms factories proliferated behind the Iron Curtain during the Cold War, whose products spilled all over the Balkans during the civil wars in the 1990s. Police say these weapons are readily for sale in black markets across CEE, where many countries still struggle to cope with the gangstermilitias that sprung up in the 1990s.

many cases the firms were owned by the managers,” says Holzner. “Another important factor was the wars in the 1990s, as a result of which few foreign investors were interested in taking over existing structures,” he adds. Overcoming these issues and convincing international investors of the attractiveness of their telecom operators will be critical if governments in the former Yugoslavia are to succeed in

However, a successful sale of Telekom Srbija for a good price – on the heels of the public sector pay raise – would substantially raise the credibility of the process and could encourage future sales of telecom incumbents elsewhere in the region.

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Twilight of Ukraine’s oligarchs Graham Stack in Kyiv

kraine’s once-mighty oligarchs look to be entering their twilight years. Ukraine’s authorities have cut off captive banks and brought criminal charges against egregious abuses, while the double whammy of Ukraine’s war-torn economy and a global collapse in commodity prices is bringing the once-mighty tycoons to their knees financially. “I always laugh when reading the ratings of our richest businessmen, because I know what these fortunes were really made of, and that the so-called oligarchy is just an enormous bubble,” scoffed the chief of the National Bank of Ukraine, Valeriya Gontareva, in an October interview, explaining how easy it has been to cut Ukraine’s once-feared oligarchs down to size. As an example, Gontareva offered up Konstanin Zhevago, owner of one of the world’s largest iron ore deposits, whose company is traded on London’s stock

market as Ferrexpo. Gontareva closed Zhevago’s bank Finances and Credit, Ukraine’s seventh largest by assets, on September 17. “If you have built you business on UAH16bn retail deposits, UAH6bn NBU refinancing loans and only UAH3bn corporate deposits, sooner or later you will have to pay back the money,” Gontareva said she told the surprised long-serving member of parliament, demanding that he sell off parts of his industrial empire to recapitalise the bank. According to Gontareva, 76% of lending at Finance and Credit was related-party lending that had gone to Zhevago’s sprawling business empire. When Zhevago failed to recapitalise the bank, the NBU pulled the plug before he could remove a $174mn Ferrexpo deposit. Zhevago is just one of Ukraine’s oligarchs now cut off from the captive banks that had fuelled their business expansion. Agriculture baron Oleh

Bakhmatyuk, Ukraine’s largest landowner, saw both his banks closed down by a resolute central bank, backed by the International Monetary Fund (IMF). “Of Bakhmatyuk’s two banks, one lent 64% of its credit portfolio to his business, another 96%,” Gontareva lamented in the interview. Bakhmatyuk has disputed these figures. A former chief of a top-five Ukrainian bank says such oligarch banks are nicknamed ‘vacuum cleaners’, because they hoover up the populations’ savings, but lend only to their owners and their cronies. “In fact, lending to the proprietary business is just a route to move the funds offshore,” he tells bne IntelliNews. Gontareva had previously closed down the bank of perhaps the country’s most controversial oligarch, Dmitry Firtash, in early 2015. “The first person I met when I took the helm at the NBU [in June 2014] was Nadra Bank’s [chairman] Dmitro Zinkov. At

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that time they had received UAH12bn in refinancing, and stress tests show a balance book hole remaining of UAH12bn. And it was immediately obvious that the bank was not capable of independent life,” Gontareva said in the interview. But the greatest move may be yet come. In October, the NBU forced PrivatBank to disclose that its insider lending stood

government backing is closing down the ‘vacuum cleaner’ banks fuelling oligarch operations, law enforcement is lining up criminal charges and ratcheting up the rhetoric against the oligarchs, deterring any counter-strike. In August, PrivatBank said that it was cooperating with a criminal investigation into allegations that around $1bn in refinancing loans made

"I always laugh when reading the ratings of our richest businessmen, because I know what these fortunes were really made of" at a level of 44.2% of its share equity, compared with only 3.9% declared in 2014. The figure rocked the market and immediately put the future of the bank into question, since oligarch owners Ihor Kolomoisky and Hennady Boholyubov displayed reluctance to recapitalise the bank accordingly.

to the bank in 2014 by the NBU – which in turn came out of IMF funds – had been illegally moved abroad. The arrest of Kolomoisky ally Gennady Korban, head of the Ukrop opposition political party, on October 31 appears to be another shot across the bows for Kolomoisky and Boholyubov.

But with PrivatBank effectively being the country’s national savings bank, there is no question of liquidation, since it would be impossible for the government to pay out the 34% of the nation’s retail deposits that are held at the bank. But nationalisation of the bank is under consideration, top officials have said openly. “PrivatBank has to be preserved as a bank,” head of the presidential administration Borys Lozhkin said in an interview on November 14. “There can be no talk of liquidation – PrivatBank is too big to fail, we have to deal with it very carefully and cautiously.”

Kolomoisky has himself been practically declared ‘Public Enemy No. 1’ by none other than former Georgian president Mikheil Saakashvili, now governor of the Odesa region. Saakashvili is one of the strongest pro-reform voices in Ukraine and backed to the hilt by the US embassy. “These people [Kolomoisky and Korban and other oligarchs] have been robbing Ukraine – where else do they have their money from?” Saakashvili told TV

“If the shareholders stick to this plan [drawn up by the NBU for extensive recapitalisation], the bank can remain private,” Lozhkin added. PrivatBank spokesman Oleh Serga responded to the government talk of nationalisation by writing bitterly on Facebook: “The current authorities resemble a quite competent and cohesive team of marauders.” Criminal charges At the same time as the NBU with

is still an appeal pending, meaning Firtash still cannot leave Austria to attend to his ailing business empire in Ukraine, which is entangled in numerous corruption investigations. Centre to Firtash’s energy empire was the notoriously corrupt state energy company Natftogaz, where a resolute new management broom is busy eliminating schemes that opponents say helped the oligarch to his fabled riches. Firtash’s business allies, Serhiy and Aleksandr Katsuba, former top managers at Naftogaz, were forced to flee Ukraine in September due to criminal investigations over their time at the company. At the same time, police have launched criminal investigations into Firtash’s business interests in Ukraine over UAH5.7bn in debt owed by chemicals plants to Naftogaz. “We have reached an out-ofcourt settlement between Naftogaz and [Firtash-owned chemicals conglomerate] Ostchem that they will pay the entire sum, UAH3bn by winter,” Interior Minister Arsen Avakov said in an interview on November 12. “They are paying regularly, we hold their gas [in storage] and much of their plant as security.” Ostchem has accused the government of targeting it for political reasons. Even more serious charges of financing terrorism are being lined up against the business of Ukraine’s richest man, Rinat Akhmetov, owner of the giant System Capital Management mining, metals

"The current authorities resemble a quite competent and cohesive team of marauders" journalists on October 26 in response to Korban’s arrest. “All such thieves should go to prison.” Kolomoisky’s great rival in the energy sector, Dmitry Firtash, is hamstrung by bribery charges that were brought by the US, which resulted in his arrest in Vienna in March 2014. An Austrian court has since decided against the US extradition request, but there

and power concern – one of the pillars of support for ousted former president Viktor Yanukovych. Akhmetov’s power generators under his DTEK group of companies buy coal from territories controlled by Russia-backed insurgents in East Ukraine. Ukraine “should provide for transparency in coal purchases in the anti-terrorist zone [rebel-held territories in East Ukraine],” said US Ambassador to

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Kyiv Geoffrey Pyatt at a conference on September 22. On October 13, a regional court then granted a petition by Ukraine’s security service SBU to allow a financial review of coal purchases made by Akhmetovowned power generator Dniproenergo, claiming that Akhmetov’s coal purchases from rebel-held areas funded “terrorist activity”. DTEK issued a statement on November 4 saying the court’s finding of its involvement in financing terrorism is baseless. “DTEK conducted and

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conducts activity exclusively within Ukraine’s legal sphere,” the statement said. “The company doesn’t have agreements with enterprises registered on territory not controlled by the Ukrainian government.” Russia-China double whammy Perhaps the mortal blow against oligarchic power in Ukraine has been struck not by the national authorities, say analysts, but by a double whammy from Russia and China. The Kremlin-backed insurgency in East Ukraine caused Ukraine’s crucial

oligarch-owned export industries to collapse as plants were mothballed and transport infrastructure destroyed. The collapse in exports triggered a collapse in the value of the hryvnia currency, with knock-on effects for the finances of oligarch business, some of which have huge foreign-exchange debts. In parallel, a slowdown in Chinese economic growth and dollar strengthening has seen world commodity prices plummet by over half since early 2014, with the price of iron ore, crucial to the export operations of Akhmetov and Zhevago, down by nearly two-thirds.

Ukraine’s 7 boyars In the years following the collapse of the Soviet Union, a small group of ruthless businessmen in Russia seized the opportunity created by the destruction of the old system to become fabulously wealthy. With hundreds of millions of dollars in hard currency at their disposal in an otherwise impoverished and corrupt country, these oligarchs rapidly consolidated their control over anything that was valuable, culminating in the notorious loans-for-shares deal in 1995-96. “We control half the economy,” boasted Boris Berezovsky, speaking of the seven men who held sway during the Yeltsin era.

And they amassed political power too: when Yeltsin became too sick to function, Berezovsky’s protégée Roman Abramovich was effectively running the country together with Yeltsin’s daughter Tatyana Yumasheva. It was they who recommended that Vladimir Putin take over when Yeltsin decided to retire in 1999. Of the seven – Mikhail Khodorkovsky (Yukos), Mikhail Fridman (Alfa Group), Vladimir Potanin (Unexim), Vladimir Gusinsky (NTV), Vladimir Vinogradov (Inkombank), Alexander Smolensky (SBS Agro bank) and Berezovsky (Sibneft) – only Potanin and Fridman are still in business in Russia.

Rinat Akhmetov

Ihor Kolomoisky

Victor Pinchuk

Wealth: $4.5bn Businesses: System Capital Management – includes metallurgy, energy (DTEK) Media assets: Ukraina Media Group

Wealth: $1.9bn Businesses: Banking (PrivatBank), metallurgy and oil enterprises Media assets: 1+1 Media Group

Wealth: $1.5bn Businesses: Media, metallurgy (Interpipe) Media assets: Novyy Kanal, STB, ICTV, M1, M2, Q-TV

Long the richest man in the country he has not had a good war, as many of his best assets are stranded in the conflict zone in the east. His wealth has been at least halved since the conflict began, down from a peak of $18.6bn.

Kolomoisky is the second richest man in Ukraine and the most politically active. Together with his partner Gennadiy Bogolyubov, they own Ukraine’s biggest lender PrivatBank, as well as metallurgy, oil enterprises and leading TV stations. PrivatBank is so big it has effectively become the nation’s savings bank, holding the largest share of the population’s money.

Married to former president Leonid Kuchma’s daughter Olenia, Pinchuk is the blue blood of the Ukrainian elite. Another metallurgy tycoon, his Interpipe conglomerate has fallen on hard times and his fortune reduced, but he is still ranked as the fifth richest man in the country. His Yalta European Strategy (YES) foundation attempts to promote liberal values, though he largely stays out of politics these days.

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Other oligarchs such as Viktor Pinchuk’s once-mighty steel pipes and railway wheels producer Interpipe, have been devastated by the loss of the Russian market that once accounted for 40% of its sales. “Until the plunging [Russian] oil market, and demand for steel pipes along with it, find firm ground, there will be no certainty on when the company can return to servicing its debt,” says Concorde Capital analyst Roman Topolyuk. As a result, almost all oligarchs are now tied down in humiliating and protracted debt restructuring talks with international creditors – success or failure of

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which will determine whether they can hold on to their business empires. “Oligarchs are weaker and poorer,” says Sergei Fursa, analyst at Dragon Capi-

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party sponsorship, but Fursa detects the first signs of crumbling power in a different arena: on the soccer pitch. “Soccer teams used to be oligarchs’

"These people have been robbing Ukraine – where else do they have their money from?" tal. “The end [to oligarch power] is not close, but this is the trend today.” Oligarchs may be still fighting their corner thanks to their TV networks and

The first thing Putin did on assuming power in 2000 was throw Gusinsky and later Khodorkovsky into jail, and drove others into exile. Helped by a recovery in oil prices, a new generation of rich Russians appeared who made their fortunes from normal businesses – supermarkets, mobile phones – in the boom that followed. Ukraine is facing the same set of problems today. About half a dozen oligarchs control a huge share of GDP and have wormed their way deep into the political system. President Petro Poroshenko’s archenemy Ihor Kolomoisky was behind two political parties that ran in the recent regional elections, which together won just over 20% of the vote, about 1% more than the eponymous party of Poroshenko.

favourite toys, but today they have no money. The quality of Ukrainian football has thus dropped, and this is very significant,” says Fursa.

Unlike Russia, where up to a third of deputies to the upper house of parliament were on an oligarch’s pay roll according to a study in the late 1990s, in Ukraine many of the oligarchs exercise explicit political power as serving members of Ukraine’s parliament. President Poroshenko was the only one of the top oligarchs to see his wealth increase in the last year, according to the most recent ranking of Ukraine’s rich by Novoye Vremya. The collapse of Ukraine’s economy has reduced these men’s fortunes by up to three-quarters in some cases, yet they remain fabulously wealthy and deeply entrenched in their home regions as the biggest employers, controlling banks, TV stations, newspapers etc. For Ukraine to flourish the oligarchs need to be defenestrated – but how do you do that when the man at the top is one of them?

Dmitry Firtash

Petro Poroshenko

Konstantin Zhevago

Oleg Bakhmatyuk

Wealth: $1bn Businesses: Media, Chemical (Ostchem), Gas trading Media assets: Inter Media Group

Wealth: $979mn Businesses: Media, chocolate (Roshen), shipbuilding Media assets: TV5

Wealth: $735mn Businesses: Metals and mining (Ferrexpo), finance

Wealth: $597mn Businesses: Banking (VAB) and agriculture (Ukraine Agro holding, Avangardco)

Dmitry Firtash, who claims on his website he “is not a member of any political party or movement”, has been at the centre of the politically charged and murky gas trading world – EuralTransGas and RosUkrEnergo – and is believed to have siphoned off hundreds of millions of dollars from the Russian gas import business. He has been in exile in Vienna since early 2015, where he was detained by the request of FBI, though an Austrian court later refused his extradition to the US. In Ukraine the state is suing Firtash’s chemical holding Ostchem for UAH5.7bn.

President Poroshenko is an oligarch who made his money from the Roshen chocolate plant among other investments. He has always been active in politics, serving in both the liberal Viktor Yushchenko and corrupt Viktor Yanukovych administrations. Despite repeated promises since becoming president and controlling the largest political party, he has not sold either his chocolate factory or his TV5 TV station.

The youngest billionaire in Europe (35 years old), Zhevago made his money from the London-listed Ferrexpo metal pellet producer. He is also openly political and has been a Rada deputy since 1998.

Ukraine’s egg king, he has set up a state-of-the-art agricultural holding that is amongst the biggest producers of chicken eggs and grain in Europe. But his bank was wiped out by the crisis.

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COMMENT:

Ukraine needs a ‘Plan B’

Kateryna Kruk in Kyiv Activist, journalist and co-founder of Global Ukrainians, an international network of Ukrainians worldwide, Kruk was awarded the Atlantic Council Freedom Award for her work communicating the Euromaidan revolution to the world via Twitter. She predicted a frozen conflict in July 2014, which has largely come to pass, and now assesses the progress of crucial reforms in Ukraine.

ast year, Ukrainians were way too preoccupied with the conflict in eastern Ukraine, which was soon followed by a Russian invasion, to be able to concentrate on other aspects of the functioning of the Ukrainian state. War indeed changes everything. It is the most horrible thing that can happen to a state, to a nation, to a human being. Unfortunately, Ukraine found itself in a situation where both fronts – the eastern front and the so-called reform front – required equal attention and devotion. And if in eastern Ukraine we were able to hold our positions, when it comes to evaluation of the progress with reforms, the situation seems to be much worse. Often the ability to diagnose a problem, and being sincere about its nature, is the most important part of the treatment. Right now Ukraine is going through a painful process of realising that in many aspects we have wasted chances

created by Euromaidan and must try to understand how should we act now. On the level of political decisionmaking, Euromaidan created an opportunity for quick regime change. It is clear now: regime change didn't happen. If I would be writing this piece a few months ago, I would definitely be more positive in my comments. But the last few months revealed to us the real face of authorities, which can be described rather simply: currently the ruling elites can be referred to as postMaidan only when we talk about when chronologically they entered office, not when we talk about their nature. Obviously, we shouldn't forget about the positive changes that have taken place. Undoubtedly, one of the most important

Real progress has also been made by the team at the Ministry of Economy. The main focus of their efforts was deregulation, creation of a transparent system of state purchases, and launching the privatisation of state-owned enterprises. Even though most of these initiatives, except for the state procurement system, are still in the development phase, the ministry is trying to be open and transparent in its work. The new Ukrainian police force is probably the most visible and bestknown reform that Ukraine has made so far. Creation of an entirely new service instead of the highly unpopular and untrusted militsia was needed, both in terms of the success of the reform, as well as showing to the public that changes really are taking place. Yet more

"We have wasted chances created by Euromaidan" developments was the restructuring of Ukrainian debt. Ukrainian Finance Minister Natalie Jaresko and her team have done a fantastic job to start negotiations, find a common position acceptable for Ukraine and its international debt holders, and to finalise a decision. True, Ukraine still has problems with bonds owned by Russia, but it is purely because of the Russian position towards Ukraine, not a result of mistakes from the Ukrainian side.

legislative work is needed to make the new police force a working structure with real power, not just a nice PR move. It is also impossible not to mention the breakthrough decision to proceed with the decentralisation of Ukraine. Even though it was strongly overshadowed by unclear provisions for East Ukraine regarding the status of the region, which were presented to the Ukrainian parliament in one package with the

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decentralisation reform, the fact that this very necessary reform was brought to the constitutional level is a huge step forward. Even though now it is almost impossible to predict whether it will be passed by the parliament or not, decentralisation alone could be one of the biggest steps we have made so far to distance Ukraine from the Soviet-style centralised-state model. Hard graft Nevertheless, all those positive developments seem incredibly small and insufficient compared to the continuing problem of corruption in Ukraine. Economic hardship can be partly explained by the lack of stability caused by war, but lack of progress in the fight with corruption can only be explained by a lack of political will. And that is why it is so dangerous. Sadly, General Prosecutor Viktor Shokin and Ukrainian President Petro Poroshenko have chosen to create the illusion of a fight against corruption. There has been no investigation into [former president Viktor] Yanukovych and his allies. No evidence has been sent to European courts that would make it possible to prolong personal sanctions against Yanukovych. The creation of an anti-corruption prosecutor's office has been sabotaged, which endangered the whole process of lifting the visa-regime between the EU and Ukraine. There has also been pressure put on prosecutors who had started investigating their corrupt colleagues this summer. And there has been no investigation into the bloody shootings on Maidan in February 2014, which resulted in the deaths of more than 50 people. Undoubtedly, both Ukrainians and our foreign partners might be wondering why this is happening. Bringing in new people and creating new structures could galvanise the process, but authorities have decided to rely on the "good old boys" of the Prosecutor General's office. This is one of the facts that prove the president is not serious about fighting corruption, because the young generation of Ukrainians would never be as corrupt as the one that survived the collapse of the Soviet Union.

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The people who are currently running Ukraine were all born, raised and spent most of their adult life in the state that seemed to them to be the strongest in the world. And suddenly they see this state collapsing: something that seemed to be eternal and unbreakable

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a high price; this time it should work." The last two years showed us it is not enough just to pay a price; you must cherish what you got for that price. Now we know it was naive of us to expect that people with old-styled thinking would transform Ukraine into

"The young generation of Ukrainians will never be as corrupt as the one that survived the collapse of the Soviet Union" appeared to be fragile and weak. The chaos of the 90s as well as the collapse of the Soviet Union taught people that they can only rely on themselves, not on a state. That is one of the reasons why corruption in Ukraine reached such an unprecedented level: because of the feeling that you have to take care of yourself first and foremost. The latest developments in the Ukrainian revolution and the conflict with Russian don't encourage those who were already questioning the durability of the existence of the Ukrainian state. That might be one of the reasons explaining why corruption is still flourishing and its influence on the state might be more devastating than ever. My generation, the generation of people born and raised in a free and independent Ukraine, know no alternative. That is why we feel responsible for what is going on in the country now and how our actions influence it. The struggle with corruption and the explanation for it continue in the differences seen in our society, allowing you to understand the challenges that face Ukraine on the meta-level. After Euromaidan, Ukraine made a few really big steps forward, but now it seems like it has stopped. Because of that, many have started questioning the importance of Euromaidan and whether anything has really changed in Ukraine. The price you pay Ukrainians often repeat: "We paid

a country based on new rules. Ukraine has lost its chance to make quick changes that would allow the country to move further foward. Now only two possible paths remain: a coup d'etat or a slow and timeconsuming evolutional change of generations. Ukrainian society is right now torn between these two options and I so much hope it will be wise enough to choose the second! If it is, both we Ukrainians and our foreign partners should be prepared for a long process of gradual transformation of society by educating it according to Western norms and values. Why do I mention education (and by it I don't only mean schools or universities, but all kinds of traineeships and informational campaigns)? Ukrainians want to change, but sometimes they simply don't know how to. The Soviet model is unacceptable, yet not so many know the Western model well enough. So now Ukraine is in a situation of trying to find a balance between its own expectations and reality. 'Plan A', quick and decisive changes in the country after the Euromaidan revolution, didn't work. But that doesn't mean Ukraine has failed and has no chance to improve. That only means we must think of a 'Plan B'. That is not easy, but the very fact that we are trying hard to make it work means that despite all failures and losses, we haven't given up on trying to make our country a better place.

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Uzbek cars lose their shine Olim Abdullayev in Tashkent

ollapsing car sales in major export markets have, to the delight of many Uzbeks, meant a flood of cars unsold abroad coming on to the local market. To prop up car prices, which are also being hit by falling remittances from Uzbek migrant workers abroad, and keep the domestic automotive industry alive, a crucial sector for the country’s stressed economy, the Uzbek authorities are cutting car production. But to many this is merely a short-term fix.

and long waiting times for car deliveries after making down-payments have allowed GM Uzbekistan, which mostly exports Nexia and Matiz cars under the Daewoo brand, to fund the production of the cars with the buyers' money. But the new situation seen since the summer has broken this pattern, so the car producer now has to find new schemes to fund production. The solution it seems to have come up with is to cut production to artificially boost demand.

“The time of Uzbek cars has passed, as they cannot stay popular with Russian drivers permanently because they have become conceptually obsolete and there are many different cars on sale in Russia,” a Tashkent-based analyst, who requested anonymity, tells bne IntelliNews.

Road to recession Sales of vehicles produced by GM Uzbekistan in the Russian market plunged by 49% year on year (y/y) to 17,119 units in January-October, figures from Russia’s Association of European

The recent flood of cars unsold abroad entering the Uzbek market has briefly changed the paradoxical situation in the country where locally-produced cars made by GM Uzbekistan, the monopoly car maker that is a joint venture in which General Motors holds a 25% stake and the Uzbek state the rest, traditionally were sold at higher prices than abroad, and used cars cost more than new cars. Local observers believe that the discrepancy in new and old car prices

making them less competitive. Exports of Uzbek-made cars to Russia have also been hurt by the overall 33% drop in demand for cars in Russia due to the recession there caused by the fall in the oil price and the Western sanctions. Sales of Uzbek cars in the country’s second largest export market of Kazakhstan have also dropped, by 66% to 2,059 in January-August, according to the Association of Kazakh Auto Businesses. The fall in the Kazakh market is explained by a flood of cheap imports from Russia caused by the weakness of the Russian ruble against the Kazakh tenge. To stem the flood, on August 20 the Kazakh government abolished the national currency’s trading corridor to allow it to

"The time of Uzbek cars has passed" Businesses (AEB) released on November 11 showed. This is drastically down from the peak of 92,778 units hit in 2011. The decline is partly attributed to Russia's introduction of a recycling duty on imported cars following its accession to the World Trade Organization (WTO) in 2012; this levy drove up the price of Uzbek cars on the Russian market,

float freely, which caused the value of the tenge to slump by nearly 30%. The falling exports to Russia and Kazakhstan have flooded Uzbekistan’s domestic market with cars, making it easier for long-suffering local motorists to get hold of new cars. In the past, as bne IntelliNews has written, the Uzbek authorities released a limited number of cars onto

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the domestic market in order to maintain high prices for locally manufactured cars. They have also adopted high import duties and levies that make car imports prohibitively expensive. As a result, the price of a locally produced car in Uzbekistan used to be higher than the same car in foreign markets, and the price of a used car was higher than that of a new car (by law, motorists are allowed to sell new cars only after a year from the date of purchase). On top of this, buyers had to wait for up to a year after paying for most of the car to get delivery. This is true for the best-selling and most sought-after Nexia and Matiz cars, which are at the lower price range of GM Uzbekistan’s product line. There tend to be less problems with getting hold of the higher-end cars and SUVs, which consume far more fuel than cheaper cars. “There is no demand for those expensive cars, because they consume a lot of fuel and many motorists don’t like paying a lot for fuel, given we have fuel shortages regularly every two or three months,” the Tashkent-based analyst tells bne IntelliNews. Bargain buys The lack of demand for Uzbek cars in the export markets, combined with falling remittances and a weaker national currency, the Uzbek sum, briefly eased the situation with purchases of new cars in dealerships and pushed the prices of used cars down in Uzbekistan. “Prices are falling and cars are much cheaper now and they are no longer more expensive at the market than in a dealership,” a buyer in Tashkent’s Sergeli car market told bne IntelliNews during the summer. “Dealerships sell cars for sums, while cars are sold for dollars in markets. Because of the higher exchange rate, cars are cheaper in dollar terms in the market.” The slump in car prices reached about 40% this summer, the car buyer noted. There are three reasons for the situation briefly seen in summer, the analyst explains. “One reason is that the plant is churning out cars like before, but there are no export markets to sell them, so the domestic market is getting saturated,” he says. “Another reason is the dollar’s exchange rate has gone up,

Saw bolıñız, Kelimbetov!

Naubet Bisenov in Almaty Kazakhstan's Senate on November 2 approved the appointment of a new central bank chief after the previous incumbent, Kairat Kelimbetov, was sacked by President Nursultan Nazarbayev over a loss of trust in the bank and national currency after two devaluations in the space of two years. However, observers warn the personnel change won’t solve the problems with the country’s monetary policy in particular, and the economy in general, as these are “institutional”. Explaining the appointment of Daniyar Akishev as governor of the National Bank of Kazakhstan (NBK), Nazarbayev said: “Trust in the bank and the national currency, the tenge, is falling now and this should be prevented. The country is experience shortages of tenge liquidity and credit to the economy is falling. These are bad indicators and we should work on correcting them. I am confident that Akishev’s education and experience will help him solve this task.” Kelimbetov was appointed governor of the central bank in 2013, and oversaw two devaluations of the national currency – the first in February 2014 and the second in August 2014, when the tenge was allowed to float freely. As governor, Kelimbetov took much for the blame for the devaluations, which were a response to the deteriorating economic conditions due to poor government policies and low commodity prices. However, Sabit Khakimzhanov, head of research at the Almaty-based investment bank Halyk Finance, doesn’t believe the problems can be solved by replacing the man at the top of the NBK. “The main problem is that the National Bank as an institution is not sufficiently independent – its decisions heavily depend on the government,” Khakimzhanov tells bne IntelliNews. The analyst says the inability of the central bank to independently run its business and resources prevents it from attracting sufficient numbers of well-qualified specialists. This influences the quality of decisions it takes and its ability to conduct correct monetary policy. “We pay a lot of attention to top management, whereas the most important issues are the institution itself – decision-making mechanisms, mechanisms of fulfilling decisions, mechanisms isolating this institution from outside factors, for example the government’s influence, coordination of fiscal policy, general understanding of problems by the government and lack of the government’s understanding of the policy carried out by the National Bank,” he says. Analysts believe a major reason behind Kelimbetov's sacking was that he lost a fight within elite circles after the bank resumed interventions in the foreign exchange market in September to stop “speculative operations”, and had started publishing information naming and shaming certain commercial banks. “Members of the elite must have considered such a step as hostile, as he pointed fingers at owners of commercial banks who tried to move the exchange rate of the tenge,” Maksim Kaznacheyev, a political analyst, told the Kapital business broadsheet.

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so people do not have money or do not want to pay a higher price in sum terms for a car. And the third reason is our labour migrants are sending less money from Russia, so the purchasing power of some population groups is falling.”

up prices, in March the Uzbek government adopted a programme to “ensure structural reforms, modernisation and diversification of production” in 2015-2019, under which GM Uzbekistan would see its output cut in 2015 and over the next two years.

The exchange rate of the sum has fallen by nearly quarter in value against the dollar on the black market from UZS4,300 in the summer to UZS5,400 at the moment. The official exchange rate, set by the Central Bank of Uzbekistan, is a wildly implausible UZS2,663 against the dollar.

Under the programme, the production of cars will fall to 219,000 units in 2015 against 245,700 in 2014, but slightly increase to 228,600 in 2016 and to 247,500, a level comparable to 2014. The output should increase further to 268,000 in 2018 and 280,600 in 2019, according to government plans.

The Russian economic difficulties also mean that there are limited employment opportunities for millions of Uzbek migrant workers in Russia. This has led to a fall in remittances that Uzbek labour migrants send through transfer systems such as Western Union by nearly 16% on year to $5.6bn in 2014 and by 55% on year to $1.15bn in the first half of 2015, according to the Central Bank of Russia. This is bad news for an industry, consisting of about 200 companies, which directly employs more than 25,000 people and is a major component of the country's GDP. The government says the economy is growing by 8%, but analysts believe that behind the scenes the Uzbek economy, like its peers in the region, is struggling in the face of falling commodity prices. So with the aim of maintaining demand for locally manufactured cars and propping

In addition to cutting the overall output, GM Uzbekistan has been cutting the production of Nexia and Matiz cars, thus artificially creating demand for more expensive cars. Tashkent has long been abuzz with rumours that the Uzbek carmaker will scrap the production of cheaper, more economical models like Nexia, Matiz and Spark altogether. bne IntelliNews' recent visits to the Sergeli car market showed that the situation observed in summer had started reversing by autumn, with one-year-old, wellmaintained Matiz and Nexia cars costing $500-1,000 more than new cars in dealership. “One has to wait for the deliveries of Nexias in dealerships for much longer than they do for other newer models,” a car seller explained to bne IntelliNews. “Another reason is that fewer Nexias are produced now than in the past.”

Dealerships in Tashkent say that they will deliver cheaper cars within “days and weeks”, not months like in the past if they have Nexia and Matiz cars in stock. But they say they don’t know when exactly these cars will be supplied to them. By contrast, the more expensive Malibu, Captiva or Orlando cars fill the showrooms and can be got hold of almost immediately. When there was high demand and long waits for Uzbek-manufactured cars, GM Uzbekistan and local commercial banks entered agreements to sell new cars on loans, a manager at a Kapital Bank branch in Tashkent told bne IntelliNews. “However, it has now stopped providing cars for loans unilaterally without giving any reason,” the manager complained. However, people on the ground expect the sales of cars on loans to resume again “soon”. The cuts in production could be a response to falling exports, or a solution to the producer’s problems with funding the production, local observers suggest. “The situation when used cars started costing more than new cars may be repeating again because we already had a precedent,” the Tashkent-based analyst says. “It might be just the production of popular cars was cut significantly and is going to be scrapped altogether in order to open up the market for more expensive cars. Or it could be GM Uzbekistan just resorting to old funding schemes,” he concludes.

Georgia’s lari faces tough coming of age Monica Ellena in Tbilisi

amar the Great looks stern on the 50 Georgian lari banknote. And the first woman to rule Georgia in the country’s golden age in the XII century has reason to worry: in the past 12 months, the value of GEL50 has dropped from $30 to little more than $20. But as the Georgian

currency celebrates a bittersweet 20th anniversary with a colourful makeover, economists maintain the devaluation was necessary and effective, and that a stabilising economic environment could make for a brighter 2016. It’s been a difficult year for the

Georgian economy as lower oil prices and Russia’s recession slashed the country's main sources of income. Remittances, over half of which come from Russia, have been one casualty. In the first nine months of 2015, they amounted to $802mn, down 26.7% year on year (y/y), confirming the downward

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trend of 2014 when private money transfers accounted for 8.7% of GDP. Foreign trade has been another victim as the economies of most of Georgia’s trading partners, namely Russia and others in the Commonwealth of Independent States (CIS), nosedived. Through September, foreign trade totalled $7.3bn, marking a 13% drop y/y, as demand for Georgian goods dropped, in particular exports to CIS countries, by 44% y/y. Higher inflation risks and currency pressures have led the National Bank of Georgia (NBG) to tightenmonetary policy. However, next year regional economies should adjust to the weaker oil price and Georgia could become “healthier” with a stabilising currency and gradually declining inflation and interest rates, maintains Oleg Kouzim, an economist with Renaissance Capital. “We see it roughly flat next year, but the lari could be taken stronger or weaker by the Russian ruble and the Turkish lira,” Kouzim tells bne IntelliNews. “The big adjustment of the lari this year was mainly triggered by the ruble and the Azerbaijani manat.” Azerbaijan is Georgia’s main trading partner. Georgia has consistently run current account deficits over the last decade – not unusual for a country at Georgia’s stage of economic development. Ricardo Giucci and Stephan von CramonTaubadel, economists at the German consultancy Berlin Economics, recently argued in a paper that, “to ensure that the current account deficit does not grow beyond sustainable levels and facing [the] threat of a major loss in international competitiveness, the depreciation of the lari was a necessary response”. An analysis conducted by the two economists showed that the devaluation led to a drop in the country’s trade deficit in April-August compared with the same period in 2014 by about $500mn. Let it float The introduction of the lari, or hoard in Georgian, on September 25, 1995 was regarded as a new beginning after the initial, ill-fated attempt to replace the

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Soviet-ear currency with the kouponi (aka ‘coupon’). This was introduced in April 1993 at par with the ruble, but the rate held for just a couple of weeks, before Georgia entered a spiral of hyperinflation that in a few months peaked at 15,607%. By September 1994, $1 was worth about 5mn kouponi.

Economists on the other hand were not so shocked, arguing that the local currency was in fact overvalued and has since adjusted to a value that better reflects the country's economic fundamentals. “The lari move was in fact needed to remain in line with the main [trading] partners,” explains Kouzim.

“People would go out with suitcases to buy the few grocery items available,” recalls Badri Japaridze, co-founder and deputy chairman of Georgia’s largest retail bank TBC Bank. “At one stage you needed tens of thousands of coupons to purchase matches.”

Hands off Since the currency started falling, the NBG has intervened a handful of times, but only marginally to prevent major fluctuations, in general opting to safeguard reserves. The central bank governor, Giorgi Kadagidze, uses other countries’ experiences to justify this stance, telling bne IntelliNews in the spring that going against market fundamentals never ends well.

The central bank decided to peg the lari to the US dollar in a bid to boost the new currency’s credibility and use. The

"People would go out with suitcases to buy the few grocery items available" peg proved unsustainable: by the end of 1998, the pressure on the lari had forced the NBG to significantly deplete its reserves in trying to prop it up. Allowing the currency to float freely from December 7, 1998 triggered an immediate devaluation by 20% against the greenback and a spike in inflation. Despite the inauspicious start, the lari has proved more resilient over the last decade, fluctuating around GEL1.65 to the dollar. That has not necessarily been a good thing. Yaroslava Babych, assistant professor of economics at the International School of Economics at Tbilisi State University, arguesthat its “stability may have affected the market’s expectations about the value of the lari, causing households and businesses to ignore the currency risks when deciding in which currency to borrow in”. As a result, Georgians confidently borrowed in dollars, pushing the dollarisation of the economy to dangerous levels. When the lari began dropping sharply in November 2014, Georgians were caught by surprise.

“Spending reserves to cover up the fundamental shortages will not help at all – it would only postpone the problem,” he said. Both national and international financial institutions are on the same page. “It is crucially important that we keep a free floating currency to maintain our competitiveness and that foreign reserves are not burned to keep the lari’s rate artificially [high],” Japaridze contends. Not everyone agrees. Some politicians of the ruling Georgian Dream coalition accuse Kadagidze, the last high-ranking official left from the previous administration led by former President Mikhail Saakashvili, of failing to protect the lari. But for people like Japaridze, it is time to go beyond the headlines. “The media failed to explain properly the devaluation – the drop had a strong psychological impact, it will take people some time to regain trust in the lari.” And that is probably more than any makeover in the currency’s design can achieve.

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STOLYPIN:

Will 2016 see the three Russias diverging? Mark Galeotti of New York University

here have been many attempts to understand Russia by subdividing it. Is it a feudal Russia of rulers and ruled, or the ‘four Russias’ posited by scholar Natalya Zubarevich, divided geographically and socio-economically? My own sense is that alongside such formulations, we also need to see the country and society divided into three, and the competition between them – one as much philosophical as practical – is likely to become all the sharper in 2016, defining Russia’s future trajectory, and the eventual post-Putin order. The three However little attention it may get in foreign coverage, Russia has a working, rational state. This is not some neo-fascist imperialism, nor an out-of-control kleptocracy where everything is plundered and funnelled into foreign bank accounts. There are inefficiencies, there is petty corruption – apparently on the rise again as a result of officials’ shrinking real incomes – but in the main, the country works. Roads are paved, refuse is collected, teachers teach and police officers police. Most people essentially want to do their jobs, live – that perennial Russian dream and mantra – a “normal” life. However, above ‘Real Russia’ squats the smaller, but vastly richer ‘Kleptocratic Russia’. This ugly parasite is much of the time happy to let its host do its thing, but has ultimate authority over the structures of state, routines of life and workings of justice, when it chooses to exert it. This is the realm of the embezzling senior officials, the pampered sons and daughters of the mighty, the businesspeople who depend as much on sweetheart deals and covert cartels as any real acumen. Yet this country cannot simply be dismissed as a kleptocracy, because at the very top of the stepped ziggurat of national power lies the smallest and, perhaps, most dangerous and pernicious incarnation: ‘Ideological Russia’. It is hard to doubt that, whatever his motivations during his earlier presidencies, Vladimir Putin is driven now not by personal economic interest but an ideological programme – a vision of a nation restored to its due place in history and the world (and, by extension, a vision of his appropriate legacy). He has surrounded himself with a small coterie of like-minded cohorts –

or at least figures willing and able to play that role – and they are ultimately in charge. The Kleptocrats get to reach in to Real Russia when they choose, to divert a procurement contract here, dictate a court decision there, but the Ideologists in turn have the final say. Ever since Crimea, the primary thrust of national policy has been towards confrontational geopolitics, which have hit at the heart of the kleptocrats’ interests, grinding an already-suffering economy downwards and limiting their scope to move themselves and their assets at will. Beyond that, whereas in the past these two blocs collaborated smoothly, there are now indications that the Ideologues see some of the Kleptocrats and their parasitic habits as a growing problem in an age when dwindling resources need to be focused more directly

"The Kleptocrats get to reach in to Real Russia when they choose, but the Ideologists in turn have the final say" on the ideological project. Witness, presumably, Russian Railways chief Vladimir Yakunin’s dismissal and the increasing evidence of a not-as-bogus-as-usual anti-corruption campaign on the way. Of course, no such simple pattern can be exact and accurate. There are individuals high up in the system, from cabinet ministers to central bank chief Elvira Nabiullina, whose technocratic instincts seem closest to those of Real Russia. Likewise, even Ideologists still seem happy to help their children find comfortable and highly lucrative positions, from whence to steal with savage abandon. However, as a broad model for trying to understand the disparate and often contradictory forces working to shape Russia’s future, this seems to have some value.

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Widening gaps in 2016 Although it is probably wishful thinking to expect dramatic and positive outcomes over the course of the coming year, for a variety of reasons 2016 is likely to see the relationships between the three Russias become increasingly tense, laying the groundwork for change to come. On September 18 next year, elections will be held for the Duma, the lower house, which will in many ways also be a referendum on the regime. There is no question of United Russia (and its affiliated pseudo-parties) losing their control over the chamber, both because of the propaganda campaign likely to precede the vote and also, where necessary, judicial rigging of the process and the count. We can, for example, expect to see the more vocal and effective Kremlin critics systematically excluded, vilified and pressurised. How the vote will count, though, is that it forces the state to mobilise the masses – and the extent to which it has to struggle to produce the results decreed by the Kremlin will provide insiders with an index of true popular discontent.

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disenfranchised? There seems little prospect of their rising against the regime, literally or metaphorically (rising, after all, for what?). Instead, theirs are the weapons of the weak: refusing to conform, turning to the underground economy, passively resisting to behave as their masters want. This does not go unnoticed, and will be visible – at least to those who see the real, uncooked books – in indices from labour unrest and productivity to suicide rates and support for local civic initiatives.

"Whenever Putin is replaced or succeeded, it will not be with another Ideologist, but with a Kleptocrat"

After all, Putin’s sky-high personal ratings tell us little about the public mood. Arguably, the growing rash of local labour and social protests, from truckers blocking roads to demonstrations against rising utilities prices, are a better measure, as inflation, wage pressures and the effects of social spending cuts all come to bite.

In itself, this will not force change on the elite. However, it may scare the Kleptocrats and technocrats. If the economy worsens, if the elections prove tougher to massage, and if the Kremlin looks increasingly willing to sacrifice their interests in the name of an ideological project, at some point they will begin to look for ways to protect them.

The Ideologists may be tempted to crank up their propaganda about a Russia isolated and embattled, but there is a real risk of ‘fantasy fatigue’ if this is just a matter of intemperate words and invented threats. On the other hand, manufacturing or introducing Russia into crises abroad to give substance to the hype, from a renewed Ukraine campaign to picking fights over the Arctic sea-lanes, would not only deplete dwindling resources, but likely only deepen its economic and diplomatic isolation.

And here’s the inevitable prediction buried in all these “year ahead” articles. It may well not come in 2016, but whenever Putin is replaced or succeeded, it will not be with another Ideologist, but with a Kleptocrat. The interests of the elite will take precedence over the masses, but also over Russian geopolitical grandeur, and this new regime will eagerly seek to mend bridges with the West.

This is unlikely to please the Kleptocrats, squeezed between economic stagnation, popular dissatisfaction and Kremlin adventurism. However, at present political power trumps all in Russia: the rich are not so much wealthy in their own right so much as the temporary stewards of those assets until the day comes when the Kremlin seeks to reassign them. To this end, they have a perverse incentive to want to see genuine rule of law and secure property rights come to Russia, and an end to its geopolitical struggle with the West. An archetypal bank-robber wants the police force to be inefficient and corrupt – until he is rich enough to own banks, at which point he wants the state to protect his ill-gotten gains. So, too, a kleptocratic generation of Russian oligarchs, minigarchs and boyar-bureaucrats who have done well thanks to Putin may well come to feel that their interests have come to diverge from his. And what about the poor Russian people, the perennially

As a generation of ruthless exploiters gives way to their more pampered and less sharp-toothed children, the pressure to create reliable protections for property rights (however that property may have been acquired in the first place) will only grow. Meanwhile, ordinary Russians and their technocrat fellowtravellers in the elite will be looking for change, and thus the possibility – no more – is that a Kleptocratic presidency may in turn give way, some day, sometime, to a generation finally eager to make real the promises of 1991 – of building genuine, working political and economic democracy. Perhaps.

Mark Galeotti is Professor of Global Affairs at the SPS Center for Global Affairs, New York University and Director of its Initiative for the Study of Emerging Threats. He writes the blog In Moscow’s Shadows (http://inmoscowsshadows.wordpress.com/) and tweets as @MarkGaleotti.

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Turkish opposition leaders need to shape up or ship out BEYOND THE BOSPHORUS:

Suna Erdem In London

ore than a week after a trashing in Turkey’s general election, what’s a Turkish opposition leader to do? He sits tight, of course.

Kemal Kilicdaroglu, leader of the Republican People’s Party (CHP), has been on the wrong side of multiple polls – including three general elections – since 2010. Despite being the main opposition to an increasingly polarising ruling party, mired in corruption charges and accused of anti-democratic paranoia, the CHP has rarely broken 25% of the vote. The party founded by Turkey’s deified Mustafa Kemal Ataturk is a damp squib. Yet Kilicdaroglu is still in place, criticising rogue MPs calling for his head. Devlet Bahceli has been in charge of Turkey’s nationalists since 1997. Apart from three and a half years in coalition at the turn of the century, his Nationalist Action Party (MHP) has seen no action. It has lost a total of 14 general and local elections. In the latest, the MHP lost votes to become the fourth party in parliament, humiliatingly falling behind newcomers and ideological enemies, the Kurdish People’s Democracy Party (HDP). Yet Bahceli brushes aside calls for resignation. The HDP leader, Selahattin Demirtas, is new and maybe should be given the benefit of the doubt, but having ridden a wave to gain an astonishing 13% of the vote in June’s elections, losing more than 2 points of that in just five months is hardly an achievement. The behaviour of Turkey’s opposition amply demonstrates that Turkey has got the government it deserves – or, to rephrase, the government its politicians and commentators deserve. Snatching defeat from jaws of victory The opposition had a chance after June’s hung parliament, but, in the public’s opinion, failed to take it. No doubt President Recep Tayyip Erdogan enabled the failure of coalition talks led by his Justice and Development Party (AK) over the summer. But this doesn’t eradicate the feeling that the opposition parties didn’t try hard enough, laying down red

Photo: Orlok

lines, pronouncing against working with AK, yet completely refusing to contemplate the alternative – working together to keep AK out of power. The Turkish people have chosen its imperfect ruling party once again, in the midst of civil strife and economic uncertainty, because they don’t feel attracted enough by any of the other parties. It’s a simple enough conclusion and should lead to resignations, followed by a search for new direction. But nowhere is there a feeling of accountability, of mea culpa, of self-awareness or soul searching in an opposition leadership clearly more content enjoying the benefits and status of politics than working hard at persuading the public. For years, opposition figures – and I also include the media – have attacked Erdogan and AK indiscriminately, with no apparent interest in being competent or just. Many criticisms of late have been justified, but they weren’t at the start.

"The behaviour of Turkey’s opposition amply demonstrates that Turkey has got the government it deserves"

Ertugrul Ozkok, the influential former editor of Turkey’s leading newspaper Hurriyet, which has often been critical of AK and its leadership, wrote a telling editorial soon after the polls, saying that he would from now on praise the government when it was due and criticize when warranted. Instead of what, exactly? What he is describing is surely what any journalist should be doing, all the time. Unfortunately, this has always been something of a rarity in the deeply flawed and partisan Turkish media – both before and after the government’s anti-democratic crackdown on the press.

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As someone who has watched AK’s rise and fall, I often wonder what would have happened if the party’s efforts to join the EU and improve the economy hadn’t been overshadowed so often by largely spurious worries of Islamism, stoked by the opposition and the media. This might not have set Erdogan on the warpath against everyone from the military and judiciary to the self-styled secularist liberals he had want to impress. More recently, if the Kurdish separatists had really wanted peace, they could have kept their unilateral ceasefire in place. They also played into Erdogan’s hands – he won much support from people worried about renewed violence. Well, you might say, what do you expect of guerrillas? Fine, but in that case, the HDP, which avowedly wants peace, could have called unequivocally for the rebels to stop and impressed a nation scarred by decades of violence. Demirtas, who wants to be taken seriously as a national politician, could have held off blaming the government for suicide bombings against Kurds and leftists in Ankara, whatever his private views. This had the role of diminishing the ridiculousness of subsequent claims by AK that the bombs were the result of collaboration by Islamic State, the rebel PKK and foreign powers.

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It is just as well for the Kurds that the militaristic MHP is not now sharing power with AK. But had I been an MHP voter, I would be upset that Bahceli’s intransigence lost the party a chance to govern. And they are – even friendly MPs from Bahceli’s own constituency are saying it’s time he was replaced by a more modern, conciliatory figure. Over at CHP, too, at least three candidates have emerged to vie for Kilicdaroglu’s role, which should give rise to hope. But past calls have not brought regime change. Even if there is, how likely is the party to implement the radical change it so badly needs? CHP supporters complain that right-wing Turks will never support a social democratic party. It’s true that Turks are centre-right, but why don’t they woo the centre? The left-wing has in the past garnered 40% of the votes, so it is possible. Why don’t they attract the liberals disillusioned by AK? And why do they have no appeal to the Kurds – aren’t social democrats supposed to help oppressed minorities? As things stand, AK are a shoo-in for the next general election in 2019. And, in the absence of anybody else, the wily and – for a devout figure – strangely amoral Erdogan is on the way to being an all-powerful president on Turkey’s centenary in 2023. It’s time for the opposition to wake up.

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UPSIDE DOWN WORLD:

Belief creates its own truth Dr Jerome Booth of New Sparta

itizens of the developed world believe their countries are economically strong and resilient. Yes, there may be problems and political crises, but whoever is elected most of life goes on just the same. Voting, under such circumstances, can become merely a lifestyle choice. Developed societies have strong institutions and long histories of stability and good governance. Trust is a large part of the social contract. Voters can trust legislators not to steal egregiously from them, or otherwise grossly misuse public funds. They can also trust the bulk of their fellow electors to make sensible choices – more or less. Scandals uncover misdemeanours from time to time, incentivizing those with questionable ethics to tow the line, and reassure the voter that accountability of elected officials is a reality. They can relax. They do not have to worry constantly, even if some do choose to do so, about whether their country is being mismanaged. They don’t have to pay too much attention to detail, safe in the knowledge that others do. They also don’t necessarily have to work as hard as the poor or those living in countries without a social safety net. They can object more to change and the negative aspects affecting them that come with globalisation. They can afford to ignore evidence, even science, that is inconsistent with their beliefs and prejudices, and believe what they want to believe about a number of politically charged issues. They are content. In developing countries, by contrast, perceptions and reality are different. Political scandals can be more consequential, and economic problems are often more immediate and damaging. Being rich brings the ability to withstand economic storms; the poor are more exposed. The history of bad economics and bad politics is closer – and, for some, still a living reality. Institutions evolve, though, and are malleable. Institutions have been developing particularly fast in the last 25 years since the end of the Cold War, though they still have further to go. The unleashing of markets and consumer choice has

meant that relative prices can profoundly mould institutional development. The best governance practices can be copied. The British historian Niall Ferguson in his Ted Talk argues that six ‘killer apps’ made the West great and they can all be applied in emerging markets. They are competition, the scientific revolution, property rights, modern medicine, the consumer society and the work ethic. All of these are now realities in various parts of the developing world… and, in the developed world, some of them are looking tired. The result is that the West’s great historical economic advantage over the developing world is being eroded. Bad attitude Attitudes are slower to follow however. Just as politics trumps economics in policymaking, so beliefs trump reality in perceptions of risk – though not forever. Belief that developed countries are risk-free leads to lower asset price volatility, so creating the impression of low risk. Sovereign risks in developed countries are belittled or ignored. Meanwhile, in order not to challenge our precious prejudices or upset our Core/Periphery Disease, we need to argue for the permanent distinctiveness between core and periphery, between developed and emerging. We do this in a number of ways. First we identify certain risks as characteristic only to emerging markets, when in fact such risks are everywhere. These include political risk and corruption, as well as policies specifically designed to rob savers – including default, devaluation and inflation. We also erroneously characterize emerging markets all as commodity producers, and assume their ability to withstand any sort of shock is much worse than in the developed world. Some of us, in addition, have a subconscious tendency to deny progress. Our concept of time developed in Europe from a cyclical one in the Middle Ages, with a cosmos of the perfect harmony of celestial spheres – see C.S. Lewis’s wonderful description “The Discarded Image”. We moved from the cyclical to the modern idea of linear time and progress as scientific discoveries multiplied and urbanisation freed the peasantry from the seasonal cycle of an agrarian existence.

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Yet is this privilege of progress exclusive, not applicable to the rural poor of the developing world? As rural Indians or Africans emerge from “the darkness” of rural poverty, their personal concept of time may yet evolve from one of cycle to trend, but for developing nations as a whole growing at 5-7% a year, medieval non-linear concepts of time are grossly inappropriate. Emerging nations have long stressed the motif of progress – it’s even written on the Brazilian flag. Development economics, the ideal of economic progress in developing countries, is decades old. Yet some contemporary observers still manage to separate the politics from the economics,

“The West’s great historical economic advantage over the developing world is being eroded” ascribing cyclicality as dominant over trends in politics even if the strong trend of economic progress cannot be denied. Before the Cold War ended there was perhaps a case for that in a broad set of countries, but no longer. The spread of political as well as economic freedom is real. Take that example of Brazil. On the surface the country has gone backwards politically and economically over the last few years. Fiscal management has been lamentable and the president faces possible impeachment for corruption. Look a little further back, though, and one can see a very progressive trend, not just in the economics – sovereign default risk in Brazil is insignificant today – but in the politics. Brazil is a vast federal country. The first time Lula stood for

COMMENT:

the presidency was the first time there had been a truly national candidate. Before that, politicians had regional power bases. Lula started mentioning the poor every other sentence and appealed to a much broader audience than previous, more elitist politicians. Electorates learn, but only by making mistakes it would seem. So it has been with the newly politically active broad electorate in Brazil. Whereas before Lula one could argue that economic management was technically more competent than now, the voice of most of the population was unheard. What we now see is the education of that broader electorate, not a cyclical reversion to type. We can perhaps draw two conclusions insofar as belief creates its own truth. Firstly, in the developed world contentment has bred complacency. Secondly, in the developing world, despite the rhetoric of progress and national pride, lack of confidence has held countries back. Belief in one’s domestic institutions has lagged reality. Lack of belief has created its own truth. The meme that is Core/Periphery Disease is dominant in developing not just developed countries. Collective inferiority complexes are evident when emerging market central banks invest national savings excessively in US and European sovereign bonds rather than emerging market sovereign bonds. And the condition comes with dangerous cognitive dissonance as well. The same reserve managers who invest national savings in low yielding over-priced developed world bonds would not think of putting their own personal savings in the same instruments. So Core/Periphery Disease does have cracks in it. Let’s see if the inclusion of the renminbi in the SDR can make those cracks a little larger. New Sparta is the private office of Dr Jerome Booth – economist, entrepreneur, investor, commentator and leading expert on emerging markets. New Sparta is majority owner of bne IntelliNews. Follow him on @Jerome_Booth

Russia not quite so bad

Marcus Svedberg of East Capital

t is Turkey that is in the limelight this month following the decisive outcome of the parliamentary election – and we agree this will be positive for the markets in the short term – but we are also turning more positive on Russia. As a matter of fact, the market has already started to rebound – and it has little to do with oil. The situation in Russia is very different from Turkey though, and there is less of a distinct trigger, but rather several factors that we believe will support the market over the coming months.

Reasons to be cheerful The first, and perhaps most important, is that inflation is expected to half from the current 15% by the middle of next year and, according to some economists, reach 4% by the end of it. The drop might seem dramatic, but two-thirds of the current inflation is a translation effect stemming from the ruble losing half of its value during last winter, suggesting that underlying inflation adjusted for this is around 5%. This price drop will be accompanied by a series of interest rate cuts of several hundred basis points. This, in turn, will lead to a

Opinion

rebound in consumption, bank lending and most likely also inflows into the bond market. The second point is that we believe there is a possibility that European sanctions will be lifted in January 2016, at least partially. Technically, the sanctions expire at the end of that month, and the EU would need to find consensus to renew them. The situation in East Ukraine has stabilized and it seems like all parties are moving towards implementation of the Minsk II agreement, which is a pre-requisite for the

“Though we would like to see more growth and efficiency-enhancing structural reforms, there have been at least three major improvements lately” lifting of the sanctions. Our understanding is that Germany is keen to see sanctions lifted and that is normally an important signal of where Europe is heading. Some of the financial sector sanctions are likely to be removed first, which would enable the large Russian state-owned banks to re-enter the Eurobond market, decreasing hard currency borrowing costs significantly. The third point refers to macro in general and the ruble in particular. The currency movement over the past 1.5 years – a result of oil prices, sanctions and macro in that order – has been extraordinary and is the main reason the equity market underperformed and financial stability was maintained. We believe the ruble may appreciate slightly due to an expected modest rebound in oil prices, a partial removal of sanctions and a slight macro improvement. The economy is in recession and will continue to operate much below potential, but we believe growth bottomed out in the second quarter. The direction has changed and the risks may therefore be on the upside, especially as expectations are so low. The point is that when the downside risks are deemed smaller than the upside, investors and companies may start investing again. The fourth point is about companies. We have repeatedly argued that there is a big discrepancy between macro headlines and realities on the ground. A combination of important substitution and relative strength has supported a number of domestic oriented companies in Russia while many of the exporters were “protected” by the weaker ruble. We have seen how market leaders like Magnit, Aeroflot and M Video have grown their Ebitda by 30-60% in the first half of this year even as the economy was contracting by almost 5%. And retailers like Lenta and Detsky Mir grew their sales by 30-40% in the second quarter when the economy was

bne December 2015

bottoming. There are obviously companies that struggle, but the above examples are not only anecdotal, corporate profits have overall been very strong this year. Finally, Russia is reforming and this realisation should help the market and the economy in the longer term. Even though we would like to see more growth and efficiency-enhancing structural reforms, there have been at least three major improvements lately. Better days First, Russia has amended its pension system and the government now supports the resumption of contribution into private pension funds. Goldman Sachs estimates that pension investments into Russian equities will increase by $60bn, or 55% of the current free float, by 2020. Second, Russia continues to improve its business climate and just moved up another three notches in the World Bank’s “Doing Business” survey. Russia retains its position as the bestranked BRIC economy at 51st place after being 123rd five years ago. Third, the anti-corruption drive seems to have been restarted. This is a more intangible process, yet graft is not only getting exposed but also taken to court. The governor of Komi was recently arrested and accused of fraud and criminal conspiracy. Earlier this year, the governor of the Sakhalin region was arrested for bribery. Pursuing highlevel cases as a deterrent is the classical modus operandi

"The Russian financial markets tend to perform when sentiment is shifting from bad to not quite so bad" of Russian anti-corruption work, but there is also a lot of activity with regards to petty corruption. The number of people facing corruption charges has increased by more than five times over the past two years and more than 4,000 officials are under investigation. The two most important factors for the market are probably the likely partial lifting of sanctions after January 2016, and the expected rapid decline of inflation and interest rates in the next 12 months. The economic and political situation will not look particularly great at the beginning of 2016, but it will look decidedly better than it did a year ago and that is what financial markets tend to trade on. To put it differently, the Russian financial markets tend to perform when sentiment is shifting from bad to not quite so bad. Marcus Svedberg is Chief Economist of East Capital

Opinion

bne December 2015

INVISIBLE HAND:

Europe stands defiant but damaged Liam Halligan in London

he Paris attacks, which struck during the evening of Friday November 13, murdered 129 people and wounded over 300. When stock markets opened the following Monday, France's CAC-40 closed a mere 0.1% down, while Germany’s DAX index actually rose. This was widely reported – and not just on the business pages. Numerous post-Paris commentaries also recalled that within days of London’s tragic 2005 suicide bombings, which killed 56 and injured 700, the FTSE-100 had fully recovered. We were reminded, too, that just a couple of weeks after 9/11, in which nearly 3,000 perished, American shares were back to their pre-attack high. Western share indices, after the initial shock of a jihadist whack, often rally in part as an act of defiance. Equity investors generally view the financial implications of terrorist atrocities as short-lived, unlike the human suffering. While that’s true, I don’t subscribe to the fashionable view that the Paris attacks will have little economic impact and recently heightened geopolitical risk will dissipate. And my scepticism has been compounded, I’m afraid, by Turkey’s quite astonishing decision to shoot down a Russian Su-24 bomber on the Syrian border. Different this time Terrorism has sharply increased of late – in Europe, the US, Africa and the Middle East. It killed over 32,600 people last year according to the Global Terrorism Index, a staggering 80% up on 2013. While many argue the economic impact of such atrocities is transitory, Paris could well be different. These attacks struck at the heart of the EU, at a time when the trading bloc was, anyway, in an existential crisis. And while Western central banks have steadied jittery markets in recent years, shooting them full of liquidity, the efficacy of such “quantitative easing” is increasingly in doubt. Eurozone GDP grew just 0.3% between July and September, down from a mediocre 0.4% expansion the quarter before. This was despite the European Central Bank’s €85bn-a-month QE programme, initiated in March – and subsequent hints this massive monetary stimulus could be cranked up even more. The French economy is clearly already suffering as terrorist fears discourage shoppers from frequenting retail parks at the busiest time of the year. The now proven ability of Islamic

State to strike within West European capitals could impact retail sales in other large EU economies too – with shoppers spooked by a surfeit of armed security guards in malls. Then there’s the hit to French tourism – which accounts for 7% of GDP – and the broader travel industry. The recent string of terrorist incidents in Tunisia and Egypt, and Paris itself, has brought “unprecedented levels of disruption” to the sector, according to Peter Fankhauser, CEO of Thomas Cook. Even if these effects fade, a more lasting impact could come from tighter European borders. The Schengen zone, allowing passport-free travel among 26 EU countries, is now in serious jeopardy. Several nations had erected temporary border controls prior to Paris, given the unprecedented wave of migrants fleeing Africa and the Middle East – not least Syria. Renewed fears of terrorism could now prompt member states to impose stringent intra-EU security checks, on people and goods. Once in place, such safeguards are tough to remove – despite the negative impact on cross-border supply lines and commerce. Central and Eastern Europe, in particular, has much to lose from any formalization of this Schengen breakdown. We’ve already seen a sharp response to the migrant crisis from the Visegrad states. Konrad Szymanski, Europe minister for Poland’s recently-elected Law and Justice party, declared in early November that there is “no political possibility” his country will take part in the EU’s migrant redistribution programme. “Poland must retain full control of its borders, asylum and immigration policy,” he said. Yet eastern EU members now view with alarm reports that five EU states – Germany, Austria, Belgium, the Netherlands and Luxembourg – are considering a “mini-Schengen” between themselves in response to post-Paris security fears. The Paris attacks have put an already risk-prone Europe on a knife-edge. And that’s before you consider the impact of Greece and/or the UK leaving the EU, which opinion polls suggest is now a real possibility – and particularly since Paris. So, no – I don’t want the terrorists to “win”. But no one should deny that the danger to Europe’s economy has just sharply increased. Liam Halligan is Editor-at-Large of bne IntelliNews. Follow him on @liamhalligan

ARTS CULTURE & PEOPLE

bne December 2015

BOOK REVIEW:

Sweden’s dark secret exposed in book on TeliaSonera Nick Kochan in London

he Swedish government turned a blind eye to endemic corruption at the heart of the country’s premier telecommunications company, allowing its management to engage in flagrant corruption in Central Asia. That is the core claim of “Telia: Alliansregeringen och korruptionen” (Telia: The government and corruption), a book on the recent history of TeliaSonera, whose bribes to Gulnara Karimova, daughter of Uzbekistan’s authoritarian president, have become the subject of lurid headlines and numerous investigations, including those in Sweden, the US and Switzerland. Knowledge of the corrupt practices at the heart of management was widespread, but such was the government’s conviction the company would only break into the market if it played by local rules, that the facts were suppressed. It is also no accident that TeliaSonera is 37% government owned, and a stalwart of the Swedish commercial-political establishment. Despite a number of press exposes of a $300mn bribe paid to Takilant, a company fronting for Gulnara’s own business, Sweden’s politicians and law enforcement agencies remained silent and did nothing. Sweden’s attitude to corruption in its midst, in this sense, was little different to that in Uzbekistan, where Gulnara lived the high life on the proceeds of bribes reputedly totalling as much as $1bn, paid by international telecom companies including Russia’s VimpelCom and TeliaSonera. VimpelCom is also being pursued by international law enforcement agencies and recently set aside $900mn against a settlement with the US Department of Justice. TeliaSonera has yet to come clean on its financial obligations to the authorities. See no evil... The expose of the corrupt Swedish management culture as well as of Uzbekistan’s compromised ruling class has been conducted by Patricia Hedelius, a Swedish financial journalist. She has interviewed some 50 managers of the company and Swedish politicians, as well as bankers and consultants from

Uzbekistan, Belarus and Kazakhstan. She concludes that, “The Swedish government was willing and able to close their eyes to what they knew was corrupt business.” The book concludes that it took widespread international pressure from the US to push the Swedish authorities into taking action against the company. This coincided with a deepening flow of information from Uzbekistan as the relationship between Gulnara and her father, Islam Karimov, soured. Her rampant excesses, not only in terms of the size of bribes but also in terms of a decadent lifestyle – she was a pop star, fashion model, socialite with a dubious and increasingly salacious private life – prompted the president’s wife to persuade her husband to break off relations with the errant daughter. Gulnara was put under house arrest (where still languishes to this day), stripped of much of her wealth and humiliated. Banks handling her money further turned the

“The Swedish government was willing and able to close their eyes to what they knew was corrupt business” screws on Karimova, so when a friend sought to retrieve some of her money from a Swiss private bank they were turned away. The authorities had apparently instructed the bank to freeze her assets. Longer-term efforts to recoup her wealth will require international co-operation. A powerful television documentary piled the pressure on Sweden’s government to act on the corruption at the heart of TeliaSonera, when it reported what had been widely known among the Swedish establishment for a long time.

bne December 2015

TeliaSonera’s failure to do the most basic due diligence on its business partners, namely the owners of Takilant, was highlighted. Had this been done, they would have found the dark forces of Uzbek corruption pulling the strings. Once the heat under the management became too uncomfortable to bear, the government removed the CEO at the time, and is belatedly investigating his claims that he knew nothing about his company’s shameful lapses in a particularly profitable region. TeliaSonera has also since announced it is selling its interests in Central Asia, no doubt in the hope of drawing a line under the episode. Hedelius sees a new sense of ethical responsibility in its current management, and is prepared to allow that the culture pertaining in 2005, when the company pushed into Central Asia, was very different to today’s.

ARTS CULTURE & PEOPLE

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official position for business purposes. Such an outmoded law is likely to protect many who should now be facing prosecution. The law in Sweden has since of course been brought up to date with modern standards of governance, which demonstrates the sea change in attitude and practice toward corruption that has occurred over the last decade. What is clear about this hard-hitting book, which has yet to be translated from Swedish, is that it has hit some of the right targets. Hedelius knows this because TeliaSonera has withdrawn its advertising from Svenska Dagbladet, the newspaper where she works. “TeliaSonera stopped marketing through my paper. If I was an Uzbek journalist, I would have expected that. But I work in Sweden and this is a partly stateowned Swedish company. It is outrageous. Transparency should be really important for our democracy and for a stateowned company,” Hedelius says.

Looking away Almost as shameful as the government’s tardiness in acting against corruption in its midst is the lack of action by its law enforcement in tackling the case. This has greatly exercised US authorities, who have threatened to start their own criminal investigation if Sweden continues to drag its feet.

The paper has said it is standing by her, and indeed is serialising the book as an important commentary on Swedish corporate culture. Stieg Larsson’s fictional character of Mikael Blomkvist, the investigative journalist and publisher of Millennium magazine, would be proud.

One possible hindrance is the inadequate anti-corruption law in force in 2005, when the dubious activity began. Hedelius explains that Swedish companies were not prohibited from making such payments to private individuals who held no

“Telia: Alliansregeringen och korruptionen” (Telia: The government and corruption), Patricia Hedelius, published by Massolit Förlag (2015).

PROFILE:

Uralsib’s eccentric owner faces day of reckoning Jason Corcoran in Moscow

evelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his Russian bank. Tsvetkov surrendered control of Uralsib, Russia’s 26th largest, on November 4 as part of a bailout after a year of it being on the precipice of bankruptcy and under threat of having its license revoked. Deals to offload the lender to Moscow Credit Bank, Alfa Bank and SMP Bank foundered as the loss-making institution's financial health deteriorated

amid the country’s deepening recession, sanctions and a worsening loan book. As part of the rescue, or “sanitation” as it’s known in Russian, the state will extend an RUB81bn ($1.3bn) lifeline to Uralsib and allow entrepreneur Vladimir Kogan, a close ally of President Vladimir Putin, to take a 82% stake. Tsvetkov will be left with a minority holding. The bailout is the biggest using Central Bank of Russia funds since the controversial takeover of Bank of Moscow by VTB in 2011.

ARTS CULTURE & PEOPLE

“The writing was on the wall for Uralsib for quite some time,” one former senior employee tells bne IntelliNews. “Even Tsvetkov’s guru, known for his dubious visions and premonitions, would have seen this one coming.” Tsvetkov is a follower of the self-help guru Sergei Neopoletansky, one of the founders of the doctrine of Sun Light. Neopoletansky, which is believed to be an alias, says he is a disciple of the Indian Hindu guru Sathya Sai Baba. Some

“Even Tsvetkov’s guru, known for his dubious visions and premonitions, would have seen this one coming”

bne December 2015

biggest shareholder, while Alekperov was listed as a major shareholder in Nikoil. A fitness fanatic who served in the Soviet air force, Tsvetkov commanded that elevators at the bank’s Moscow headquarters be blocked from stopping on floors 1-4 on the way down to encourage exercise. He obsessed about diets and encouraged vegetarianism, fasting and starvation. Another hobby of his was numerology. In 2007, Tsvetkov was assessing two candidates as a replacement for chairman of the bank. The two contenders were Andrei Donsky and Vladimir Ryskin, and Tsvetkov eventually opted for Donsky because his tenure at the bank was numerologically compatible with his, according to one insider at the bank.

of Neopoletansky's adherents believe he is the embodiment of the deity, while other UralSib employees claim he is a charlatan and a crook. Tomes by Neopoletansky called “The Alchemy of Abundance” and “The Matrix of Happiness” became required reading for senior bank personnel who were tested on its contents.

A devotee of feng shui, a Chinese system of keeping things in harmony, Tsvetkov paid an extortionate rent for the bank’s London office in Tower 44 because “the building looks like a rocket ship to the stars”, according to a former staffer. The office, which takes up the south-facing side on the 33rd floor, was decorated with space motifs and has an amazing view of the Thames from Tower Bridge to the Big Ben. “It is the ideal feng shui location,” says the former exec.

Tsvetkov, a dabbler in ontology, yoga and feng shui, obliged managers to attend seminars at the Ritz Carlton where they were required to talk to trees and pretend to be different animals by growling, grunting and howling on tables. One executive said he was almost fired for declining to attend, while another senior analyst got into strife for dismissing the sessions as “Scientology”.

Honest Nik To his credit, former staffers say Tsvetkov refused to deal with state companies or energy companies because he thought “dirty money” would contaminate the group and his wellbeing. Hence, the bank's balance sheet remained small and it became overly exposed to the risky real estate and constructions sectors.

Former employees at Uralsib tell bne IntelliNews that Neopoletansky was paid “several million dollars” from company coffers for his seminars. Olga Gorshkova, a bank spokeswoman, declined to comment by e-mail. “His birthdays were legendary,” recalls another former executive. “All senior managers had to line up and each one make equally outrageous comparisons between him [Tsvetkov] and Peter the Great or other heroes of Russian history. It was just like North Korea and nobody dared not do it or they would be out or demoted.” Oily beginnings In 1993, Tsvetkov set up a brokerage called Nikoil, which became Lukoil’s main agent in the notorious voucher auctions. Tsvetkov and his wife Galina pledged their small house in the Russian countryside to set up the firm, according to Thane Gustafon’s book “Wheel of Fortune”. By the early 2000s, Tsvetkov and Vagit Alekperov, founder of Lukoil, had contributed substantially to one another’s fortunes. Nikoil, which would become Uralsib, organized Lukoil’s privatisation and served as its investment bank, managing relationships with potential foreign lenders and investors. By 2002, Tsvetkov was listed as Lukoil’s second-

“It was just like North Korea and nobody dared not do it or they would be out or demoted” Tsvetkov used to circulate company presentations with new age-inspired titles like “The Corporation as an Organism” with pictures of zodiac signs, according to a former Uralsib trader. “However, if you leafed through these presentations, sometimes they also had real information in them like financial performance figures for different departments of the bank. These couldn’t be located then in the actual IFRS filings,” says the former trader. Tsvetkov has been very involved in charity and Forbes reported he spent as much as $300mn of company funds on the restoration of churches, the construction of houses for families with adopted children and other projects. By 2006, Uralsib was the fifth biggest lender in the country by assets and among the bracket of the five most profitable. But the bank never really recovered from the 2008 financial crisis,

ARTS CULTURE & PEOPLE

bne December 2015

and Tsvetkov was forced to sell off his supermarket chain Kopeika in 2010 to help plug a financial hole and keep Uralsib solvent. Tsvetkov had been desperate to sell the supermarket business to the US giant Walmart, but was frustrated when the Kremlin intervened and told him to sell it to X5, the retail chain of Mikhail Fridman’s Alfa Group. “He nearly had a meltdown because he

"The bank never really recovered from the 2008 financial crisis" had to accept Alfa’s oil money rather than the Walmart deal,” says one executive from that time. “He disappeared to the retreat in New Mexico for 10 days to get his head around it.”

Forbes estimates the capitalization of the bank tumbled from a peak of $7.9bn in 2007 to a paltry $170mn today. And in midOctober, Fitch Ratings lowered Uralsib's long-term foreigncurrency issuer default rating to 'B-' because of the weakening of the bank's capitalisation, asset quality and profitability. Problem loans surged to 15% of the loan book and the bank faced the risk of breaching the 6% Tier 1 capital ratio, according to Fitch. Mikhail Sukhov, deputy governor of the central bank, claimed the real value of Uralsib’s assets were overstated by “tens of billions of rubles”. The regulator didn’t find any evidence of outright fraud, but said the lender’s business was unprofitable due to high internal costs. Forbes estimates that Tsvetkov’s own wealth has shrunk to just $350mn from $5.2bn in 2006. Tsvetkov, who hasn’t talked to the media in years, is apparently unfussed by the decline in his fortunes and is happy to focus on his spirituality and research activities.

At the same time, former executives claim Tsvetkov knew many of the bank’s managers were “diverting profitable trade” to other lenders for kickbacks and did nothing about it.

Emerging Markets Direct – your data source for the developing world Croatia Country Report – October 2015 j.mp/croatia-oct

Romania Country Report – October 2015 j.mp/romania-oct

The European Commission raised its 2015 growth forecast for Croatia’s economy to 1.1% from 0.3% projected in May. The growth should be supported by increasing external demand and a halt in the domestic demand contraction. The 2016 outlook was also revised up to 1.4% from 1.2% projected in the spring forecast.

Romania’s GDP will accelerate to 3.9% y/y in 2016, from 3.4% y/y in 2015, according to the International Monetary Fund’s latest World Economic Outlook report, issued on October 6. The country’s economic advance would thus be the highest among European economies in 2016, after being significantly above the average (1.9%) this year. But the IMF also warned on fiscal slippage risks.

• Croatia's consumer prices fell 0.8% y/y in September, after dropping 0.6% the previous month and annual growth of the first nine months of the year reached 2.3% y/y; • The unemployment increased to 16.2% in September from 15.9% in the previous two months, while the average net monthly wage rose 4.2% in August, slowing from a 3.8% hike in July; • January-August trade gap widened 0.5% y/y as exports rose at a faster pace than imports.

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• Romania’s industrial output 6% up y/y in August; • Construction work in Romania up 10.8% y/y in August; • Romania’s retail sales up 9.6% y/y in August on VAT rate cut for food.

j.mp/emdstore

I New Europe in Numbers

bne December 2015

Azerbaijan’s foreign exchange reserves have fallen to their lowest level since March 2013, reported as $6.8bn at the end of October by Azerbaijan’s central bank.

Azerbaijan continues to burn through forex forex reserves Azerbaijan continues to burn through reserves Forex reserves, millions of US dollars Forex reserves, millions of US dollars Manat devaluation

$15,193

14,000 $14,219 12,000 10,000

Reserves have fallen by over 50% since the beginning of the year as the central bank struggled to maintain the manat’s pegged rate of AZN1.05 to the dollar.

8,000

Oct 15

Jul 15

Apr 15

Jan 15

Oct 14

Jul 14

Jan 14

Apr 14

$6,835

Majority of Russians fear Islamic State attack

Percentage of respondents expecting attack in next 12 months in... Probably

Probably not

Definitely not

The poll was conducted over three days beginning on November 13, with most of the respondents contacted before the IS attacks in Paris took place that evening.

Sources: Central Bank of the Republic of Azerbaijan

A poll by Russia’s Levada-Center has shown that 65% of Russians expect Islamic State (IS) to carry out a terrorist attack on Russian soil in the next 12 months. 62% believe that the US will suffer an attack at the hands of IS in the next year, and a massive 77% believe an IS attack will occur in the EU in the same period.

Majority of Russians fear Islamic State attack Percentage of respondents expecting attack in next 12 months in... Definitely

Falling oil prices have hammered the currency since last year, with energy making up 95% of the country’s exports and 75% of government revenues.

European Union

Russia

The poll also showed that 50% of Russians support the country’s current military involvement in Syria, while an equal proportion would be in favour of providing direct military assistance to the ruling regime.

USA

Source: Levada-Center Turkey filed more requests to censor tweets than any other country in the first half of 2015, according to figures released by social media website Twitter.

Top of Twitter censorship requests Top10 10destinations destinations of Twitter censorship requests Number requests, first first half halfof of2015 2015 Number of of requests, 800

718

At 718 attempts to censor, this is the third six-month period in a row that Turkey has come of top of the list – this time filing over 10-times more requests than second-placed Russia.

600

S. Korea

India

France

USA

Brazil

Japan

Germany

200

Russia

400

Turkey

Source: Twitter

Turkey’s Information Technologies and Communications Authority (BTK) went as far as meeting with Twitter VP Colin Cromwell, in Ankara to request that the process of censoring accounts is made easier. Source: Twitter Turkey’s GDP stands to grow by a fifth if women were as represented in the workforce as men are.

Turkish women could boost country's GDP by 20% Turkish women could boost country's GDP by 20% 20

70 Female labour participation (RHS)

Potential GDP boost, %

60 50

5 Turkey Turkmenistan Uzbekistan Macedonia Kyrgyzstan Bos. & Herz. Albania Georgia Armenia Tajikistan Slovakia Czech Rep. Serbia Romania Poland Hungary Ukraine Russia Montenegro Croatia Belarus Mongolia Estonia Latvia Lithuania Bulgaria Slovenia Kazakhstan Azerbaijan Moldova

Assuming equal hours worked and productivity between men and women, an equal-sized male and female workforce would have a profound impact on the wealth of many Central and Eastern European and Commonwealth of Independent States (CEE/CIS) nations. At only 29%, Turkey’s women are the most underrepresented in CEE/CIS. Kazakhstan, Azerbaijan and Tajikistan’s women are the best represented, at 68%, 63% and 59%, respectively. Source: World Bank; bne IntelliNews research

New Europe in Numbers

bne December 2015

With Turkey election won, real work is only just beginning for AKP Ozgur Altug, Chief Economist at BGC Partners, interviewed by Henry Kirby

After defying the polls by 7 percentage points and cruising to a parliamentary majority in the November 1 general election, Turkish President Recep Tayyip Erdogan’s Justice and Development Party (AKP) must now make good on their populist pledges if their newfound support is to continue, says Ozgur Altug, chief economist at BGC Partners in Istanbul. “Turkish companies and the economy have suffered a lot over the last five months and that’s one of the reasons the AKP managed to increase its popular support from around 41% to roughly 50%,” Altug explains. “We had the terrorist threat from the Kurdistan Workers' Party, Islamic State attacking Turkey and, on top of that, deteriorating consumer confidence causing economic activity to slow down significantly.” Promises of populist measures such as a 30% hike to the minimum wage, higher police salaries and pension payments, and cheap student loans were enough for the AKP to win back a sizeable share of the popular vote they had lost in June’s indecisive general election, which produced a hung parliament. But that brings its own dangers. “Erdogan promised an improved economy. Now he must deliver it, or people will take their votes elsewhere,” Altug says. “And he needs a reliable economic team to make this happen.” According to Altug, the first post-election test was to see who was appointed to the economic team. “We had some reliable names already like the deputy prime minister, Ali Babacan, and the finance minister, Mehmet Simsek,” he says. It was subsequently announced on November 24 that Babacan had been left out of the new cabinet. However, Simsek was promoted to deputy prime minister and will assume Ba-

bacan’s role of coordinating economic policy. “We think that financial markets will give the benefit of doubt to the new government with Simsek being on board, but overall the cabinet looks like to be dominated by the president. But again, Mr Simsek is an experienced name from the markets’ perspective, which would like to see action now and central bank (CBRT) independence. “But if the markets see government spending… aggressively or jeopardising the CBRT’s independence, the perception of this single-party government will be hurt massively in an environment where Turkey is dealing with serious problems in the region. Now the Russian airplane incident has complicated things further.” One of the most necessary yet toughest challenges for the AKP’s economic team will be the implementing of muchneeded reforms. “They have a very good roadmap and have identified 25 headline areas for structural reform,” Altug says. These reforms include key areas for improvement, such as labour productivity, a reduction of import dependency, formalising the unregistered economy and increasing the savings rate. Reforms to tackle import dependency are vital for Turkey, which has regis-

tered a sizeable current account deficit – although shrinking – over the last few years. As a net importer with few natural resources whose manufacturing sector is the single biggest contributing sector to GDP, Turkey is highly affected by commodity prices and, while it is reaping the benefits of the commodity price collapse, the opposite of this could easily be the case were prices to swing upwards in future. Turkey still has a large current account deficit, at 5.7% of GDP in 2014, but it’s on an improving trend, Altug says. “At the end of 2011 it was 9.7% and over the last three years it’s been reduced drastically. By the end of the year it will nearer to 4% – it’s improving very quickly.” Speaking about a possible referendum over rewriting the Turkish constitution to create an executive presidency, Altug says there are more pressing issues the government will have to address before constitutional reform finds it way onto the agenda, such as passing next year’s budget, which was delayed by parliament being dissolved in the run-up to November’s election. Altug believes passing a 2016 budget will likely take until March. While discussions have indeed started on the constitutional change, the government must first “prepare the new constitution, add a presidential system into it, convince other parties to approve it, undergo the commission process, and only then put it to referendum,” Altug says. We’re talking about at least another 12 months. I’d expect it to take place in March or April 2017 - if it happens,” he says.

Turkey's current account deficit narrows Percentage of GDP 0.0

-2.3

-5.0

-5.7

-6.0

-6.6

-4.0

-7.9

-9.7

-10.0 2008 2009 2010 Source: Central Bank of the Republic of Turkey

I 71

2012

2013

2014

2015F

I New Europe in Numbers

bne December 2015

MACROECONOMIC INDICATORS

Budget Current deficit account

Inflation (CPI)

GDP, $mn

GDP growth, local currency

Country

2014 total

Annual

Quarter, latest

Forecast, 2015

GDP per capita ($)

Agri.

Indus.

Serv.

% GDP

Latest, YoY

YoY

Albania

13,370

2.1

+2.5

+3.4

4,549

-5.1

-12.1

+2.1 Oct

17.3 2Q15

+16.8 2Q15

Armenia

9,529

5.9

+5.1

+3.3

3,551

-1.8

-7.9

+1.9 Oct

18.2 2Q15

+3.0 Oct

+3.4

8,060

-0.5

16.0

+3.7 Sep

5.0 2013

-0.7 2014

GDP composition (%)

Unemployment Ind. prod.

Azerbaijan

75,188

1.4

+3.7 (YTD)

Belarus

75,925

4.1

+4.4

+3.4

7,685

1.0

-6.7

+11.5 Oct

0.5 2014

-7.1 Oct

Bosnia & Herz.

19,191

1.1

+4.4

+3.4

4,735

8.1

26.4

65.5

-2.1

-7.7

-1.5 Oct

43.0 Sep

+2.8 Sep

Bulgaria

55,733

2.3

+2.2

+0.8

7,418

6.7

30.3

-3.7

0.0

-0.6 Oct

9.5 Oct

+0.6 Sep

Croatia

57,639

-0.4

+1.2

+0.5

13,415

-5.7

0.7

-0.9 Oct

17.2 Oct

+5.4 Sep

Czech Republic

186,877

4.4

+4.6

+2.5

19,295

-2.0

0.6

+0.2 Oct

5.9 Oct

+0.6 Sep

Estonia

25,916

4.1

+2.0

+2.3

18,988

0.6

-0.1

-0.6 Oct

5.2 3Q15

+4.1 Sep

Georgia

16,898

4.7

+2.5

+3.2

3,785

-3.2

-9.7

+5.8 Oct

12.4 2014

+9.2 2Q15

Hungary

137,104

2.8

+2.7

+2.4

13,182

68.7

-2.6

4.1

+0.1 Oct

6.7 3Q15

+7.8 Sep

Kazakhstan

234,065

4.3

+1.7

+5.0

13,438

-1.2

2.2

+9.4 Oct

4.9 Aug

-3.9 Oct

Kosovo

7,308

+0.2

+3.8

4,022

12.9

22.6

64.5

-3.5

-6.8

-0.8 Oct

35.3 2014

-11.3 2Q15

Kyrgyzstan

7,515

+7.3

+4.5

1,279

20.8

34.4

44.8

-0.5

-24.7

+4.9 Oct

2.2 Aug

-8.4 Sep

Latvia

31,920

3.6

+2.7

+2.9

15,973

4.9

25.7

69.4

-1.4

-3.1

-0.2 Oct

9.7 3Q15

+2.0 Sep

Lithuania

43,911

3.8

+1.4

+3.0

16,206

3.7

28.3

-0.7

0.1

-0.7 Oct

9.5 Sep

+5.1 Oct

Macedonia, FYR

11,327

5.2

+2.6

+3.4

5,066

-4.2

-1.4

-0.5 Oct

26.9 2Q15

+8.6 Sep

Moldova

8,337

4.6

+0.7

+3.4

2,284

-1.8

-8.0

+13.2 Oct

4.1 2Q15

-3.3 Sep

12,419

7.8

+3.0 (1H15)

+7.5

4,069

-2.0

-25.4

+3.4 Oct

7.8 2Q15

+16.1 2014

Mongolia Montenegro

4,547

2.7

+3.4

+3.0

7,334

-3.9

-14.6

+1.5 Oct

15.7 Oct

+12.4 Oct

Poland

543,255

3.3

+3.3

+3.2

13,888

33.3

62.7

-3.2

-1.4

-0.7 Oct

9.6 Oct

+2.4 Oct

Romania

199,903

4.3

+3.4

+2.7

9,794

-2.0

-0.5

-1.6 Oct

6.8 Sep

+3.4 Sep

Russia

1,261,604

0.6

-4.3

-3.8

6,843

-0.5

3.1

+15.6 Oct

5.5 Oct

-3.6 Oct

Serbia

43,866

-3.6

+1.0

0.0

5,890

7.9

31.8

60.3

-4.6

-6.0

+1.4 Oct

17.9 2Q15

+13.8 Sep

Slovak Republic

99,795

2.2

+3.2

+2.5

18,090

3.1

30.8

-2.9

0.1

-0.6 Oct

11.0 Oct

+7.2 Sep

Slovenia

48,051

2.6

+2.6

+1.8

23,262

2.8

28.9

68.3

-4.9

5.8

-0.8 Oct

11.5 Sep

+6.2 Sep

Tajikistan

9,019

6.7

+6.4

+5.8

1,105

0.3

-7.9

+5.3 Sep

2.5 Aug

+12.3 Sep

Turkey

843,173

2.8

+3.8

+3.3

10,852

-1.3

-5.7

+7.58 Oct

10.1 Aug

+2.8 Sep

Turkmenistan

46,371

10.8

n/a

+11.5

7,875

7.2

24.4

68.4

0.8

-4.4

+4.4 2014

10.6 2013

n/a

Ukraine

162,881

-8.2

-14.6

-2.3

3,792

-4.6

-3.5

+46.4 Oct

9.6 2Q15

-5.0 Oct

7.6

+8.0 (YTD)

+7.1

1,995

19.1

32.2

48.7

0.2

1.2

+2.6 1Q14

10.7 2013

+8.1 1H15

Uzbekistan

60,828

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Development Bank; National Statistical Committee of the Republic of Belarus; Haver Analytics

*All data are latest available official figures or independent estimates

SPACE FOR AD/HOUSE AD SHOWING OTHE..

I 73

New Europe in Numbers

bne December 2015

FINANCIAL INDICATORS

SOCIAL Total market cap., all publicly traded equities

Stock market

Literacy

Tertiary edu.

Month

12-month

Ytd

52-wk low

52-wk high

P/E

Latest $mn

YoY %$

YoY % local curr.

% adults

% pop.

Albania (-)

96.8

58.5

Armenia (-)

99.6

46.1

Azerbaijan (-)

99.8

20.4

Belarus (-)

99.6

66.4

Bos/Herzegovina (SASE)

+4.3

+2.0

-0.3

663.0

731.8

98.2

23.2

Bulgaria (SOFIX)

-2.7

-16.4

-16.3

434.5

547.0

13.4

3,745.0

-34.6

-24.4

98.4

92.8

Croatia (CROBEX)

-1.9

-6.6

-2.7

1,672.3

1,817.7

12.2

19,245.0

-8.0

+5.5

99.1

63.0

Czech Republic (PX)

-0.1

-1.4

+2.0

933.3

1,058.4

14.2

25,177.7

-23.5

-14.1

78.0

Estonia (OMXT)

+3.3

+15.8

+17.3

749.2

914.2

10.2

1,995.0

-6.6

+7.1

99.9

33.0

99.7

61.6

Hungary (BUX)

+7.8

+35.8

+45.2

15,686.7

23,826.7

12.3

16,146.5

+2.2

+18.0

99.4

56.6

Kazakhstan (KASE)

+0.9

-9.6

-4.6

761.0

1,030.3

41,319.2

+70.9

+163.2

99.7

55.2

Kosovo (-)

91.9

47.6

Kyrgyzstan (-)

99.2

Latvia (OMXR)

+2.9

+42.1

+46.8

405.8

607.1

7.7

1,388.0

+25.0

+43.3

99.9

69.9

Lithuania (OMXV)

+0.2

+4.8

+6.6

450.9

505.7

8.5

3,823.0

-14.8

-6.0

99.8

66.3

Macedonia, FYR (MBI10)

+4.7

-4.3

-4.5

1,616.8

1,874.4

238.0

-15.1

-1.0

97.5

41.2

99.1

38.4

-3.3

-14.3

-13.9

12,477.3

15,862.4

98.3

55.5

98.4

62.2

-5.5

-9.1

-5.8

47,908.2

57,379.5

14.9

143,436.0

-23.6

-10.7

99.7

71.5

Stock market index

Georgia (-)

Moldova (-) Mongolia (MSETOP) Montenegro (MONEX20) Poland (WIG) Romania (BET)

+0.3

+2.7

+2.6

6,503.1

7,638.9

14.9

19,653.0

-19.4

-6.6

98.6

51.5

Russia (MICEX / RTS)

+6.8 / +1.9

+18.9 / -14.9

+27.4 / +14.9

1,396.6 / 629.2

1,868.07 / 1,082.2

14.4

450,033.3

-18.7

+21.4

99.7

76.1

Serbia (BELEXLINE)

-0.6

-11.7

-7.5

600.1

746.6

10.5

2,921.0

-23.3

-10.4

98.2

56.3

Slovak Republic (SAX)

+6.5

+37.8

+36.3

216.3

307.6

50,322.0

-2.8

+10.4

99.6

53.6

Slovenia (SBITOP)

+1.3

-13.5

-9.5

646.7

836.3

11.1

5,970.0

-24.1

-13.2

99.7

84.4

99.7

24.4

-5.4

-11.0

-12.2

71,299.4

91,412.9

12.3

197,657.5

-8.1

+21.2

94.9

7.98

99.6

79.3

Ukraine (PFTS)

-7.3

-34.3

-35.3

239.2

488.2

4.1

5,865.0

-75.2

-70.5

99.7

78.9

Uzbekistan (-)

99.5

8.87

Tajikistan (-) Turkey (XU100) Turkmenistan (-)

Sources: Bloomberg; Capital IQ; InFinancials

*Official figure or independent estimate

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