bne:Magazine - October 2014 by Ben Aris

Inside this issue: Hail to the new Moscow taxis Slovak corporate shark joins media feeding frenzy Swiss squeeze in Poland

October 2014 www.bne.eu

Trying to make sense of censorship in Turkey

Gas panic again!

bne October 2014 Senior editorial board Ben Aris (Moscow) editor-in-chief editor@bne.eu Jame R Hammond (Boston) publisher hammond@bne.eu

Contents

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Robert Anderson (Prague) news editor anderson@bne.eu

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Liam Halligan (London) editor-at-large LHalligan@newsparta.net

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Eastern Europe Graham Stack (Kyiv/Berlin) bureau chief stack@bne.eu Central Europe Tim Gosling (Prague) bureau chief gosling@bne.eu Southeast Europe Clare Nuttall (Bucharest) bureau chief nuttall@bne.eu

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32 COVER STORY 6 The Insiders

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CENTRAL EUROPE 26 EU commissioners get their just desserts

8 Gas panic again! 12 Perspective 13 Chart of the month

27 Slovak corporate shark joins media feeding frenzy 29 Fishing for business in the Czech Republic 30 A PIR disaster

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Advertising & subscription Elena Arbuzova (Moscow) +7 9160015510 business development director (CIS) arbuzova@bne.eu Design Olga Gusarova (London) art director o.gusarova@bne.eu

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Nicholas Watson (Prague) managing editor watson@bne.eu

Central Asia Naubet Bisenov (Almaty) bureau chief bisenov@bne.eu

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EASTERN EUROPE 32 Swiss squeeze 14 Splits emerge over president's plan

34 OECD membership - grab it while you can

16 Valdai Club – searching for a middle path industry ravaged by war 17 Bashed over Bashneft 19 Hail to the new Moscow taxis

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. bne is the property of bne Media Ltd · Reg number: HE 185230 · Michalakopoulou 12, 4th floor, Suite 401, P.C 1075, Nicosia, Cyprus · Postal address: Schluterstrasse 19, Berlin 10625, Germany

21 "Oil x20" rule lures investors back to Russia 23 French Kiss leaves a sweet taste

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bne October 2014

Contents

SOUTHEAST EUROPE

EURASIA

OPINION

Trying to make sense of censorship in Turkey

War of words erupts over EEU

Military aid to Ukraine won’t solve anything

Turkey faces winter gas shortage

Customs Union boosts Kazakh e-commerce

STOLYPIN: The risks in a galvanized Nato

Property blues in the Balkans

A kiss too far in Kazakhstan

51 42

EBRD still sees grounds for optimism

Kazakhstan tries to dispel devaluation fears

Crimeans happier to be part of Russia than Russians themselves

65 53

Mongolia: the must-see destination no one is visiting

INVISIBLE HAND: A lasting ceasefire, temporary sanctions

Oh my Googoosha!

Russia gradually greening with smart technology and cooperation

UPCOMING EVENTS

Romania seeks greater role as power exporter

Reprieve for Romanian “cave cheese”

I The Insiders

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THE INSIDERS:

Russia has eager new oil and gas customers in Asia Chris Weafer of Macro-Advisory

he main focus of Western sanctions against Russia has been to cause disruption to the banking and oil sectors. The former has directly squeezed the availability of liquidity on the domestic interbank market and raised the cost of capital for both consumers and business. That is a major contributory factor to the slowdown in the Russian economy since May. The sanctions against the oil sector are aimed at disrupting investment into new oil projects, which, if they remain in place for long enough, might result in a slowdown in the country’s oil output in a few years rather than more immediately. For the US that move makes some sense, as its fast growth in oil and gas production means it may be a major exporter of hydrocarbons by the end of this decade and force Russian product out of some markets, which would open up sales opportunities.

Sense of urgency The Ukraine-Russia crisis, and the sanctions fallout, has already changed the way gas producers, in particular, and customers are planning their respective futures. It is not that the crisis has thrown up any new issues or risks; most of the topics now grabbing energy market headlines have been known or subject to negotiation for years. But the events of the last few months do at least seem to have injected a greater sense of urgency to “get on with it”. Previously Europe was not that bothered that 30% of its gas came from Russia and Moscow voiced no concern than 80% of its gas export revenues came from European customers. Now both are very focused on the concentration of risk and diversification has become the mantra across the energy world.

For the EU, which is, and will remain, very dependent on imported energy, the attempt to disrupt future oil flows from Russia makes no sense. Neither does Brussels’ effort to block the construction of the South Stream gas pipeline, which has a flow capacity of 60bn cubic metres (cm) and would allow Russian gas to be delivered to customers in the Balkans and Central Europe without having to transit the troublesome Ukraine transit pipeline system.

The European wish list is for more LNG loading facilities, more pipelines from anywhere other than Russia and a big move into shale gas production, albeit the latter looks unrealistic given the greater environmental sensitivities. The Russian wish list is to build more pipes to Asian customers and to eventually take a bigger share of the global LNG market by building more processing plants, and commissioning more LNG tankers and ice-breakers to take the gas across the Arctic route. Several of these projects have already been approved since the start of the Ukraine dispute. The Asian buyers, especially the Chinese, are happy to build pipelines – so long as they are exclusive to them – and LNG terminals because that will give them a more secure supply mix and a favourable position when it comes to price. The Caspian countries, including Iran, think they are also finally in a very favourable position as a source of new gas to Europe, although it is clear that the available supply from the Caspian is relatively modest while China has most of the Central Asian gas deposits already under contract. Iranian gas – sufficient volumes of which for export will still be a very long time in coming – may also go the same way or to its energy hungry neighbour to the south, India.

One of the basic tenets of economics is that the greater the supply relative to demand, the greater the likelihood of a lower price and the smaller the risk of shortages. The Chinese understand this and are rushing as fast as possible to build new oil and gas import pipelines, from Central Asia and Russia, in addition to the liquefied natural gas (LNG) loading facilities and investment into shale gas projects. Other Asian energy dependent countries, such as Japan and South Korea, are planning similar moves. The reasons for Brussels' opposition to South Stream and support for oil sector sanctions are very well understood; they stem from political emotionalism rather than economic pragmatism. But by early next decade the major Asian energy importers will have multiple supply options and, very likely, be in a strong position to get competitive prices. Europe, if it continues to block major new supply routes and actively tries to damage future energy supply from Russia, may find itself in the opposite position.

The oil industry is rather more straightforward, even if forecasting supply shocks and the oil price is still guesswork most of the time. But taking actions, in the form of sanctions to block future new sources of oil, is a price-raising rather than a price-reducing strategy. The nuclear industry is likely

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to remain under pressure and while Japanese reactors are expected to restart after safety modifications, the industry will almost certainly lose global market share as opposition grows in Europe. Amongst the renewable energy sources, solar is by far the most promising and, with the expected advances in technology, should become a more commercially viable and reliable part of the energy mix coming into the next decade. Still, the demand for gas is expected to grow steadily as both overall energy demand rises and usage of coal, timber and other pollutants is reduced. Build it and they will come South Stream will eventually get built despite objections from Brussels. That is because it represents supply security for those countries connected to it. They have all learned the lesson from Germany that the energy risk is not from Russia but the transit route across Ukraine. Completing the exclusive Nord Stream link from Russia into Germany made South Stream inevitable. South Stream countries also understand economic reality and prefer that strategy to short-term political point scoring. The existing trans-Ukraine pipe will remain in place and available, if not for additional Russian gas, then new supply from Caspian sources and Iran via Azerbaijan and the Black Sea. Meantime, the Trans Adriatic Pipeline (TAP) and Turkey's TANAP pipelines are under construction and will deliver about 15bn cm of Azerbaijani gas to Europe in 2018 under phase 1. Where Phase 2 gas is to come from is yet to be determined. China and India are trying to tie up gas from the eastern side of the Caspian. China recently signed a deal with Turkmenistan to more than double its current 25bn cm import deal by 2020 and India is pushing the TAPI pipe to bring gas across Afghanistan and Pakistan. China currently only imports

50bn cm of gas annually so the expanded pipe will cover all of that while the recently signed deal to import almost 40bn cm of gas from Russia, in phase 1, should cover a lot of increased demand growth. Japan has talked for years about a direct gas link to Sakhalin and, despite a delay because of sanctions sensitivities, this is expected to become a live issue in 2015. Russia’s recent decision to cancel $10bn of North Korean debt was, reportedly, on the condition that Pyongyang removes any objection to the building of a gas pipe to the South. What all this means is that projections of rising demand for LNG from these three big consumers may not be as large as previously expected and, unless regional demand for gas surges way beyond current projections, the customers will certainly be the ones dictating the price and the choice of import route. That’s why it doesn’t make sense for the European Commission to try and block the South Stream pipeline nor to try to disrupt future oil flows. Russia has options for new gas and oil exports to eager customers in Asia. Despite the hype of Caspian and, eventually, Iranian gas, these cannot substitute for the capacity of South Stream if that project were to be blocked. In that event, Europe would very likely be looking enviably at the cheap energy in Asia next decade much as it has been looking at how cheap energy has powered the revival in the US economy in recent years.

Chris Weafer is Senior Partner at Macro-Advisory, which offers bespoke Russia-CIS consulting. From October, Chris will contribute a monthly column to bne; you can read it at www.bne.eu.

EU imports of gas (1) and crude oil (2), by country of origin - 2009 Other 9% Egypt 2% Nigeria 2% Libya 3%

Russian Federation 34%

Other 8% Azerbaijan 4% OPEC 35% Kazakhstan 5%

Quatar 5% Norway 15% Algeria 14%

Norway 31%

Russian Federation 33%

"The reasons for Brussels opposition to South Stream stem from political emotionalism rather than economic pragmatism"

I Cover story

Gas panic again! War over Russian gas exports to Europe has already begun

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Cover Story I 9

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Ben Aris in Moscow

ven if a lasting ceasefire in eastern Ukraine can be secured, the cessation of military hostilities will only mark the beginning of a new fight: the battle between Russia and Ukraine over gas supplies has already begun and will probably come to a head in January when Kyiv could run out of gas. On September 11, Russia's Gazprom began tightening the screws on its European customers. Poland's statecontrolled PGNiG reported that flows of Russian gas through three of Gazprom's pipelines were down by 45% compared with what it had requested during the previous 24-hour period. Slovakia, which has angered Moscow by reversing the flow of one pipeline to supply Ukraine with gas, also noted a shortfall of gas of about 10%. Romania and Austria also reported slight falls in shipments from Russia. In a comment to the Polish press, Gazprom spokesman Sergei Kupranov said that the company was delivering 23m cubic metres of gas a day (cm/d) to Poland, adding that Gazprom is not fulfilling orders for additional gas because Russia is restocking its gas reservoirs before the start of winter. Energy Minister Alexander Novak denied to the Austrian newspaper Die Presse on September 18 that Russia was "playing games" with gas exports and "ruled out" curbing gas exports this winter to Europe. Many in Europe scoff at this, convinced that Gazprom is sending a warning about supporting Ukraine and is using gas as the medium to deliver that message. Russia, they argue, is clearly gearing up for a repeat of the gas wars that left Europe freezing in 2006, 2008 and 2009. Unpaid bills Gazprom already cut Ukraine’s supply in June over the unpaid gas bills of just over $5bn. So far, Ukraine’s domestic production and its imports from Poland and Hungary have been enough to

cover demand in the summer, when Ukraine consumes less than 80m cm/d. But this rises to more than 210m cm/d in winter, according to a recent EU study. It will probably have to buy another 5bn-10bn cubic metres of gas this winter if it consumes as much as it did last year. Ukraine is home to most of the former Soviet Union’s gas storage facilities and has put enough aside to cover demand for the first half the winter. The worry is what happens after that, especially if

consumption by a fifth this winter (and Ukraine is the most inefficient user of gas in Europe) and gets some gas from its new friends in the EU, it could muddle through the winter without buying Russian gas, according to two recent studies. "Based on a scenario analysis we find that Ukraine can only get over the winter without Russian gas when demand is reduced by at least 20% and reverse flows from Slovakia are inaugurated. If one of these two conditions is not met, then storages would run below critical levels in early

"Ukraine plans to cut consumption this year to 45bn-46bn cm" February turns out especially cold. Gazprom said this year it would cut gas transit to Europe through Ukraine to 46.3bn cm in January–August from 54.4bn cm a year earlier. Its total supplies to Europe will fall to 107bn cm, with Ukraine’s share falling from over half to 43% of the gas pumped.

2015. The only way to avoid a shortfall of gas in this case would involve resuming imports from Russia several weeks before the storage runs empty," says a report produced by the German Advisory Group and the Institute for Economic Research and Policy Consulting.

Ukraine has just under 16bn cm of gas in storage, down from an average of 18bn-20bn cm at this time of year. The country produces about 22bn cm of its own gas, but that still leaves a shortfall of some 16bn cm if consumption is the same as in 2013.

The Institute drew up six scenarios (see table), four of which result in Ukraine running out of gas between November and January if it fails to both cut gas consumption and get more gas from the EU.

To close the gap, Ukraine plans to cut consumption this year to 45bn-46bn cm while trying to get gas from EU countries by reversing the flow in some of its pipelines. Slovakia's decision to reverse flow through one pipeline, which so angered Moscow, could supply up to 10bn cm. After that, Kyiv has little choice but to turn to Russia for the remaining 6bn cm (actually more like 10bn cm, as 5bn-6bn cm of “technical gas” cannot be removed from the pipeline), at a cost of around $2bn depending on the price agreed. Still, the gap is small enough that as long as Ukraine can reduce

The common factor in the two scenarios under which Ukraine survives the winter is that it succeeds in cutting consumption by a fifth. After that, the amount of gas it gets from the EU will make life progressively easier as deliveries rise. Ukraine’s problem is also Europe’s. Some 40% of imports from Russia might not be delivered to the EU. What happens then? Europe is in a similar position to Ukraine: nearly all countries have used the summer to fill their gas storage facilities and many are over 90% full. Europe (including Ukraine) has a total of 88bn cm of gas in storage.

I Cover story

bne October 2014

"Gazprom is sending a warning about supporting Ukraine and is using gas as the medium to deliver that message"

Another study for the Institute of Energy Economics at the University of Cologne found that if Ukraine runs out of gas, the rest of Europe would run out too: "Russian gas exports are crucial for European supply. In 2013, Russia exported more than 160bcm of natural gas to Europe (including Turkey, excluding Belarus and Ukraine), thereby supplying more than 30% of European annual gas demand." If supply were to be cut off for three months, the IEE reckons, all of Europe

would be able to get through the winter except for Poland, Turkey and Finland. However if there were a six-month suspension, shortfalls would occur in Germany and many other countries in Emerging Europe, while only France and Italy would be able to cope (80% of power in France comes from nuclear). A nine-month suspension would severely disrupt supplies in every country including Italy and France,

leaving a 46bn cm hole in gas demand, according to the IEE. Germany is by far the largest customer for Russian gas in Western Europe. Its significant storage facilities (equal to 25% of its annual demand) mean it could last up to five months without more gas from Russia, says the IEE. "Europe has to import at least an additional 45bcm of [liquid natural gas] compared to 2013, which implies soaring gas prices since LNG has to be attracted from Asia. German storage will only be refilled to a maximum of 85% after the embargo is over, which implies lower security of gas supply in the following winter of 2015â&#x20AC;&#x201C;2016," the IEE report says. If supplies were cut for six months, it would cause a deficit in Germany of

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3bn cm; after nine months the deficit would rise to 12bn cm. Turkey receives 14bn cm/y of Russian gas through Turkey’s western gas supply line via Ukraine. Already the Ukraine crisis has briefly affected gas supplies to Turkey, and with Turkish demand soaring at the same time as little investment going in to new supply routes, the country is facing the prospect of gas shortages for the next four winters at least. Liquid gold Commentators have raised the possibility of supplying Europe with liquefied natural gas (LNG) from the US and elsewhere. Europe has some 20 ports able to accept LNG deliveries. But the US does not yet have the facilities to export LNG and won’t have before 2015.

Cover story

There has been little discussion of the price shock involved in ramping up LNG supplies to Europe. An additional 45bn cm of LNG would be needed to stabilise supplies in Europe during a five-month cut in supply. In a sevenmonth cut, 65bn cm would be needed. But even this level of imports wouldn’t spare Poland or Turkey from shortages because of their limited infrastructure, argues the IEE. All this assumes the coming winter will be a normal one. The IEE goes on to speculate on what would happen if there were a cold snap in February and concludes that it would cause shortages in almost all of Europe: "Since gas infrastructure (LNG imports, storages and pipelines) is already in an extreme situation, it could not compensate for increased

I 11

gas demand, caused by a cold February." Is Russia prepared to escalate the fight to the point where it cuts off supplies to Europe? The cost of cutting off gas to Europe is also a huge cost to the Russian state. Although Gazprom sells more gas at home and in other Commonwealth of Independent States than it exports to what it calls "Far Abroad" countries (in 2013, 288bn cm vs 174bn), the key EU states are responsible for about twothirds of revenues, since it is sold there mostly at market prices. However, the events of recent months have shown that when push comes to shove, if Putin is forced to choose between Russia’s national interest and Gazprom’s bottom line, he clearly will side with the former.

I Perspective

PERSPECTIVE:

Sanctions beef up Russia's BRICS ties Graham Stack in Berlin

estern-Russian mutual sanctions prompted by the Ukraine crisis have strengthened Moscow's partnerships with individual members of the BRICS group of emerging markets, and are adding to the BRICS political cohesion globally. Russia has a unique role among BRICS – an acronym for the group of major emerging markets comprising Brazil, Russia, India, China and South Africa that has also become a formal political group with annual summits: Russia does not just share market characteristics with other BRICS nations, but has developed close strategic partnerships with other members, particularly India and China, say experts. Now, as a side effect of mutual sanctions between Russia and the West, another strategic partnership with a third member of the BRICS, Brazil, is taking off: Brazil is fast becoming Russia's strategic ally in food security as a result of a Russian ban on imports of Western agricultural produce. Russia seems to have planned its sanctions on EU and US food imports well in advance of their announcement on August 6. Since 2011, Russian regulators have had restrictions on Brazilian meat exports to Russia due to disputed production methods, but lifted these restrictions in early May, rapidly certifying scores of Brazilian producers for export to Russia, according to Brazilian media. These moves caused overall Brazilian exports to Russia to surge from $200m-280m per month in January through May, to $430m in June, increasing to $500m in July, according to trade statistics, as Russia apparently stocked up in advance of sanctions. Alone, beef purchases by Russia more than doubled in July on year from $85m in 2013 to $181m in July, and stayed high at $147.2m in August. This has made Russia the world's largest consumer of Brazilian beef and pork, at the same time confirming Brazil's status at the top of the world rankings of exporters. “Thanks to this, Brazil has consolidated its position as the leading provider of beef to the world,” says Antonio Jorge Camardelli, president of ABIEC, Brazil's association of beef exporters. The EU apparently did not welcome this development. "We will be talking to the countries that would be potentially replacing our exports to indicate that we would expect them not to profit unfairly from the current situation," a senior EU official told the Financial Times on August 12. But Brazil's ambassador to Russia, Antonio Guerreiro, on August 21 denied any approach had been made. “Even if such attempt is

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made, the result will be nil. The Brazilian government never meddles with the operations of our businessmen," he said. Cementing the BRICS According to Brazilian BRICS expert at the University of Birmingham, Marco Vieira, Russia's enhanced Brazil partnership as a result of sanctions adds to what he calls “Russia's particular position within the BRICS”: it's the only BRICS member that has a strong bilateral relationship with each of its fellow BRICS, except South Africa. Russia's fledgling partnership with Brazil follows strategic partnerships forged with China in energy, and India in defence and nuclear power – both of which have also been strengthened by Russia's falling out with the West over its aggression in Ukraine. Russia's strategic energy partnership with China was launched in February 2009 with a $25bn deal to build pipelines and supply oil from Siberia to China. The partnership was taken to a new level in May, at the height of tension with the West over Russia's annexation of Crimea two months earlier: Russia and China signed history's largest ever gas deal on May 20 after years of negotiations, envisaging massive gas pipelines to bring Siberian gas to the energy-hungry Chinese market, with the deal valued at $400bn. Russia's strategic relationship with India encompasses defence and nuclear power – areas where Russia is a world leader and India has huge demand. “Russia is our leading partner in military-technical cooperation… for instance it is the only country with which India has an inter-governmental commission headed by the defense ministers,” India's ambassador to Russia, P. S. Raghavan, said in an interview on September 4. Ironically, given that analysts regularly call for Russia to be excluded from the BRICS concept due to slowing growth rates, Russia is the driving force behind developing the BRICS from an acronym into an alliance, having pioneered the first summit in Russia's Yekaterinburg in June 2009. The Ukraine crisis, while strengthening Russia's strategic links with Brazil, India and China, has also shown growing loyalty to Russia by the BRICS. “The current anti-Western political agenda of the BRICS has indeed provided the group with a strong identity and raison d'etre beyond its initial artificial definition as a loose group of disparate yet rising economic powers,” says Veira. Russia is also strengthening geopolitical coordination with two of the BRICS, China and India, which together with Russia dominate the Eurasian landmass. Russia already partners China in the security organisation Shanghai Cooperation Organisation (SCO). India only has observer status but is applying for full membership, with strong backing from Russia. Russia's alliance-building efforts will take another step forward in July 2015, when Russia will play host to the first joint summit of the BRICS and SCO in Ufa, the capital of the Russian constituent republic of Bashkiria – where the accession of India and Pakistan to the organisation, will likely be at least accelerated, if not then celebrated.

Chart I 13

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CHART:

Mainly positive CEE/CIS picture emerges in competitiveness study

talled reforms and developmental differences are the biggest obstacles to sustainable global growth, according to the World Economic Forum's (WEF) latest study of the world's most competitive economies, though it was a largely positive picture that emerged form bne's region. The Geneva-based WEF's annual survey is a ranking of the competitiveness of individual countries – the so-called Global Competitiveness Index. The GCI score for a particular country is based on data in 12 categories that together provide a comprehensive picture of competitiveness. These 12 factors include infrastructure, health and education, an efficient labour market, and technological development. The highest ranked country in the 2014-2015 report was Switzerland for the sixth year running, with Estonia

coming out top again in the CEE/CIS region, moving up from 32nd to 29th. Russia improved by three positions since last year to 64th place, with its macroeconomic environment continuing to improve because of low government debt and a government budget that has maintained a surplus. Other strengths, it cites, include its high level of education enrolment, fairly good infrastructure and large domestic market. Turkey was the best performer in Southeast Europe by a margin of almost 20 places, at 45th place on the index – down one place since last year. However, the report notes that Turkey – along with other large emerging market economies such as Brazil, India, Mexico and Nigeria – continued “to face difficulties in improving competitiveness.”

I Eastern Europe

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According to the bill as seen in its entirety by bne, "temporarily, for three years..., a special order of local government is introduced in some districts of Donetsk and Luhansk regions, which include the districts, towns and villages located as of the date of entry into force of this law within the area of the anti-terrorist operation." The components of this special order comprise: a full amnesty for those involved in “the [otherwise unspecified] events that took place in Donetsk and Luhansk region;” freedom to use Russian in public and private life and education; local elections to be held November 9; participation of the thus elected local authorities in appointment of prosecutors and judges; oversight of the elected officials in forming a local “volunteer” police force.

Splits emerge over president's plan for east Ukraine Clare Nuttall in Bucharest

krainian President Petro Poroshenko in September circulated a draft version of a controversial bill seen by bne that gives special status to districts of East Ukraine held by Russian-backed rebels, which some in Ukraine fear could see the region turned into a Transnistria-style frozen conflict. Giving the rebel-held areas of East Ukraine – which include the major cities of Luhansk and Donetsk and have a total population of around 2m – political and economic special status was one of Kyiv's commitments in a peace accord signed in Minsk on September 5 by representatives of Kyiv, Moscow, the OSCE and the rebel structures in Luhansk and Donetsk.

The bill on "temporary order of local selfgovernment in certain districts of Donetsk and Luhansk regions" proposes introducing for a period of three years a "special form of government" in the rebel-held districts,

Controversially, given Ukraine's cashstrapped budget and fears of pending default, the draft bill envisages Kyiv providing direct budget support for the rebel-held districts: "State support lies in introducing a special economic regime of economic and investment activities aimed at the restoration of industrial facilities, transport and social infrastructure, housing, reorientation of industrial potential, the creation of new jobs, and the attraction of investment and loans for the reconstruction and development of facilities located in some areas," reads the draft, as quoted by Interfax. The level of financial support will be fixed in the annual budget at a level that cannot be subsequently reduced.

"The degree of autonomy for the rebel-held regions envisaged by the bill is unclear due to woolly phrasing"

holding early local elections under the new law on November 9, allowing for a local police force and amnestying rebels not accused of serious crimes.

"Ukraine guarantees the definition of such expenditures of the general fund of the state budget with protected expenditures, the volume of which

bne October 2014

cannot be changed during the reduction of the approved budget allocations," reads the provision of the proposed law, as quoted by Interfax. The degree of autonomy for the rebelheld regions envisaged by the bill is unclear due to woolly phrasing. The bill allows for the government and other executive bodies to sign agreements with the “relevant local authorities” regarding the “economic, social and cultural development of the individual regions.” The rebel-held regions are also

Eastern Europe

'terrorist reservation' and Russia, and all of this festival to be paid for out of the Ukrainian state budget.” Poroshenko defended the draft bill in comments to leaders of parliamentary factions and groups September 15, saying that measures in the draft bill are nothing more than "de-facto elements of decentralization” which ensured the “complete and unconditional observance of the state's sovereignty, territorial integrity and independence,” with the “guaranteed maintenance of

"A separate question is whether the law will be acceptable to the rebels themselves or to the Kremlin"

to be free to develop “good neighbourly relations” with Russian regions on the basis of cross-border cooperation. Legions of critics Criticism of the proposed law was not slow in coming, and not just from nationalists but from mainstream pro-EU liberals, one of Poroshenko's core constituencies. Prominent pro-EU Donetsk journalist Serhiy Garmash published on Facebook an appeal to the president from the “Committee of patriotic forces in Donbas." It read: “Poroshenko's law on the 'special status' could be called a “law on capitulation” or “law on assistance from the president of Ukraine to the terrorist organisations of Donetsk People's Republic and Luhansk Peope's Republic." Nashi Groshi, a Soros Foundationbacked project that scrutinises state budget expenditure for signs of corruption, gave the following damning appraisal of the proposed law: “It is being proposed that Ukrainians fund a banquet for the Donbas terrorists from out of the budget for three years. This means the legalisation of armed terrorist groups, surrender of occupied territories under their control, destruction of the border between the

all of the basic attributes, including the foreign, security and legal policy," as quoted by Interfax. Poroshenko also told parliamentarians that the time limit of three years would "suffice to implement deep decentralization which must be put through a process of corresponding constitutional amendments." Prime minister Arseny Yatsenyuk - a political ally of Poroshenko's, but a competitor in upcoming parliamentary elections in October - speaking on television on September 16 sounded lukewarm on the plan, calling it a "bad scenario" instead of a "very bad scenario." Arguing that Russian President Vladimir Putin intended to seize the whole of Ukraine "one way or another," Yatsenyuk asked: "is there any hope that with the help of some or other concessions and the passing of a law the Russian president will refrain from his plans?" According to respected liberal paper Zerkalo Nedeli, quoting a source in the presidential adminstration, populist pro-EU party Batkvyschyna, headed by former prime minister Yulia Tymoshenko, currently the largest single party in parliament, will oppose the law, as will the nationalist party Svoboda.

I 15

According to Zerkalo Nedeli, to get the law passed Poroshenko will have to rely on MPs formerly belonging to the Party of Regions and Communist Party of Ukraine parliamentary groups – ie. the former pro-Russian governing coalition ousted by mass protests in February. Mayor of Kyiv Vitaly Klichko's UDAR party is also likely to support the law, as are independent MPs in Poroshenko's own "orbit." Poroshenko currently does not have his own force in parliament. Together these groups would total 230 votes in parliament, sufficient to see the law passed. The fact that Poroshenko may have to rely on the former pro-Russian parliamentary majority, the bulwark of his ousted predecessor Viktor Yanukovych's power, will only increase the controversy surrounding it. Mustafa Naiem, the journalist who initiated the Euromaidan protests in late November 2013, and who is now running for parliament on the electoral list of Bloc Petro Poroshenko, wrote on Facebook that, "this is a direct path not only to confrontation in parliament, but also to open accusations that Petro Poroshenko is conspiring with the Party of Regions and Communists." A separate question is whether the law will be acceptable to the rebels themselves or to the Kremlin. Rebel representatives have in recent days maintained that no law passed in Kyiv will have any relationship to them, and they seem certain to dislike the failure to recognize overarching Donetsk and Luhansk regional structures above the level of local government, say experts. The time limit of three years for the East Ukrainian autonomy as envisaged in the draft bill also appears at odds with Kremlin demands for permanent special status. "They [the proposals] appear to stop short of the federal solution which Moscow has pushed for and would not give Ukraine's regions a veto power on Ukraine's geopolitical orientation and choices," Standard Bank's Tim Ash writes in a research note. "I doubt hence that they will be... acceptable to Moscow or its rebels in Ukraine.

I Eastern Europe

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data in his arguments – he specialises in demographic issues – and attempting to find a middle ground. The Kremlin wound up Ria Novosti at the start of this year and folded its assets into Russia Today, so Andreev has put together fresh funding from some stateowned and privately owned Russian companies and banks for Valdai. "We set up a foundation together with the Russian Council of Foreign Policy, which has been a supporter of Valdai from the beginning. Also involved is the Russian International Affairs Council, the prestigious MGIMO (State University for International Relations) and the Russian Higher School of Economics, amongst others," says Andreev. INTERVIEW:

Valdai Club – searching for a middle path Ben Aris Moscow

he Valdai Club was set up in 2004 by the now-defunct Russian stateowned media giant Ria Novosti as a forum to swap ideas between the leading international experts on Russia with the best of the domestic academics. Once a year it gathers and meets with Russian President Vladimir Putin to present its ideas and despite being founded by the state, remains one of the few places were there is an honest debate and search for a middle ground between the increasingly hard lines adopted by Russia and the West. bne talked to the Valdai's chairman, Pavel Andreev. According to the Valdai Club's website, its mission is to: "foster a global dialogue about Russia and to provide an independent, unbiased, scholarly analysis of political, economic and social processes in Russia and the world." But that work is becoming harder as positions in Europe's east and west harden, a process that was going on well before the current crisis

in Ukraine, according to Andreev, the young chairman of the Valdai Club. "We try to create a platform for all people to discuss the issues of the day, but we see a polarisation developing between the people inside the country and the West," says Andreev. "More and more

Playing to the gallery Andreev is not entirely happy with the way things are going in Russia, but comes to the problems from a Russian perspective, whereas the international judgement of Russia's policies is largely formed from an international perspective. "Putin is like any other politician who has to play first and foremost to his electorate, and he needs to make sure he maintains their support. The same thing happens in the West, except the tools they have available are more sophisticated," says Andreev. "In the West there is a more institutional political system as opposed to in Russia where there is a more personalised

"Speaking to American and Russian policymakers, I get the feeling they are living in a parallel realities – it's scary" are thinking about a global agenda, not just a Russian agenda." Despite being a state-funded body, the club nevertheless strives to foster an open debate amongst experts. For example, this year bne columnist Mark Adomanis was invited to join the meetPutin session; Adomanis is typical of the Western experts focusing on the

system," says Andreeev. "The [Western] institutions allow for changes in the faces of the organisation even if mistakes have been made. In Russia the problem of making changes in the faces is a lot more difficult, as everything is so personalised. It means that Putin is always held responsible for his actions and his mistakes, and can't hide behind an institution."

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Andreev says that another difference between the Russian and European model of democracy, and even more so of the US, is that in the West there is a well-established mainstream narrative. "Politics in Europe and America are conducted very much within the mainstream ideology of the development of the country. There is a paradigm that defines the mainstream and only mainstream politics are allowed in both America and Europe," says Andreev. "Look at all the left and right parties in France and Germany that are outside the mainstream. It's a real struggle for them to enter into the public debate. They are mainly blanked out by the establishment." In contrast, the Russian political elite doesnâ&#x20AC;&#x2122;t really have a programme of actions, or a narrative they can follow, or a party identity that defines a fundamental stand on policy issues. This is because party politics never had a chance to develop in Russia, as politics since the fall of the Soviet Union has been dominated by two strong presidents since 1991. "[The Russian political elite] is much more reactive to events to what's going on inside the country and outside the country. They are very good tacticians, these tactics don't necessarily lead to you to a common understanding or a final goal. In the US the goal is understood that the US is the world's policeman and that is what the whole political establishment is working for," says Andreev. "There are differences of course between all the parties, but there is a unified view and I don't think we have that in Russia yet." These differences in the nature of the political systems make dialogue between east and west difficult, and have led to misunderstandings, believes Andreev. "Speaking to American and Russian policymakers, I get the feeling that they are living in a parallel realities. It's scary," says Andreev. Grand bargain However, despite the fact that Russian politics is dominated by a single man, there are several views amongst the

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I 17

Bashed over Bashneft bne Into an already fragile environment came the bombshell news on September 16 that Vladimir Yevtushenkov, owner of Russia's largest mobile phone company MTS and the country's 15th richest man, was to be arrested over his holding company's 2009 acquisition of oil company Bashneft. News of Yevtushenkov's arrest devastated markets: his holding company Sistema's market capitalization plummeted by 37% on Moscow's stock exchange, losing $2.8bn, while the market capitalisation of core subsidiaries like MTS and Bashneft fell by 7.3% and 20.5% respectively. Yevtushenkov owns 62% of Sistema and is chairman of the board. The arrest of Yevtushenkov took markets by complete surprise, wiping $2.8bn off Sistema's market cap, despite the conglomerate's majority stake in Bashneft being frozen in July after a criminal case had been opened against the oil company's former owner, Ural Rakhimov, for having alleged stolen it from the state. Investigators opened a criminal case against Yevtushenkov at the end of August, it has now been revealed, bringing charges of larceny and receipt of stolen goods against him when he acquired the Bashneft companies from Ural Rakhimov in 2009. In the event that Yevtushenkov is found guilty â&#x20AC;&#x201C; he denies the charges â&#x20AC;&#x201C; the state would have the right to confiscate Bashneft from Sistema, according to legal experts. Confiscation of assets is directly mandated under the criminal offences on which Yevtushenkov has been charged, with the assets to be transferred to the rightful owner, and where it is not possible to establish who is the rightful owner, then the assets are transferred to the state. Crucially, in the case of shares the rightful owner can also demand compensation for dividends paid out while the shares were held unlawfully: Sistema received around RUB180bn, around $4bn, in dividend payments from Bashneft in 2009-2013, according to business daily Vedomosti. The implications of Yevtushenkov's arrest for Sistema are difficult to calculate: losing Bashneft and simultaneously divulging $4bn in cash might cripple it, forcing Yevtushenkov to seek a buyer for MTS. Then there are the wider implications for Russia, which is already reeling under sanctions imposed by the West for its aggressive behaviour in Ukraine. The state oil company Rosneft is a target of those sanctions, as is Igor Sechin, the company's boss, who is a close ally of Russian President Vladimir Putin. Insiders believe the real goal of the charges against Yevtushenkov might be to force him to sell Bashneft at a price he was not willing to accept. It has worrying echoes of a decade ago, when the owner of the Yukos oil company, Mikhail Khodorkovsky, was arrested in 2003, put on trial and jailed, while his company's assets were divvied up between state companies, with Rosneft a particular beneficiary. "Investors are trying to figure out what this means exactly. Should we take these allegations at face value, is this part of some kind of turf war between Russian business elites, or does this mark a repeat of the Khordokovsky affair, that is, are there political factors at work?" says Tim Ash, head of research at Standard Bank. "The story just reinforces the line that the business environment in Russia is challenging."

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political elite on how the country should be run – and especially on how to deal with the Ukrainian issue. "There are two main views," says Andreev. "One view is of the more radical wing, which believes there needs to be a constant instability maintained in Ukraine – a frozen conflict – before it is turned into some sort of protectorate or the country is dismembered." "The second group – which I think is much more reasonable – is that the pressure in East Ukraine and on the country as a whole needs to be continued until there is some sort of reasonable settlement on the structure and power in the country. The ideal end game for Russia would be to create some sort of federal structure and a reasonable autonomy for the regions in the east," Andreev says. But Andreev argues that the whole conflict could have been avoided if there was some new pan-European security treaty to define the post-Cold War relationships, and this year's Valdai Club annual general meeting will be focused on this question. "[A new panEuropean security deal] would be the ideal situation – some sort of grand bargain. We live in either a world with rules or a world without, and at the moment there are no rules. The new rules, the new grand bargain, of how we going to deal with everything in this world is essential to hedge against the volatility and hot wars," says Andreev. "Is the Kremlin interested in doing that? Absolutely!" Putin has suggested drawing up some sort new European security deal and even sent a detailed draft proposal to Brussels with Prime Minister Dmitry Medvedev on his first foreign trip after he was elected president in 2008. But the proposal came to nothing. A new deal would in theory affect the spectrum of hangups between Russia and Europe. "Look at the visa negotiations with the EU. Look at the economic negotiations on the common economic space. Look at the negotiations on security," lists Andreev. "Time and again we are hitting the wall. We don't receive any feedback. Russian

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offers go in the bin. The feeling in the Kremlin is there has to come a time and the feeling is the time is now. Once everyone smells that war is near – that a war is possible – this is an opportunity to start talks on a security treaty. I don't want to sound pessimistic, but I don't feel the West is prepared to start discussing this sort of partnership." Andreev argues that settling the differences with the West and building a new basis for partnership in Europe remains the Kremlin's preferred option. "The overall majority of [Russia's] political, economic and intellectual elite are Western leaning. They are globally oriented and liberal," says Andreev. But relations between Russia and Europe are probably at an all-time low. Much has been written about Russia's "pivot to the east", but Andreev is

"The majority of Russia's political, economic and intellectual elite are Western leaning – they are globally oriented and liberal" dismissive of this. "I don't think that this pivot towards Asia is a break from the West or the European markets. Absolutely not. The same with the Eurasian Economic Union – it's not trying to re-establish the Soviet Union or autarkic market. It is to leverage Russia's competitive edge in global trade and leveraged production potential, he says. All together these changes and misunderstandings don’t paint a pretty picture. "I'm quite worried about the developments of the past several years. I was more optimistic in mid-1990s than I am now," says Andreev. "I don't think we have strength to make use of the competitive advantage of the country. The Russian economy and Russian society doesn't have the vibrancy and dynamism necessary to build a New World at the moment."

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I 19

affordable. Moscowâ&#x20AC;&#x2122;s yellow taxis have been around since the 1990s, but they used to cost the equivalent of a weekâ&#x20AC;&#x2122;s wages and take several hours to arrive because they needed to be ordered well in advance to battle through the gridlock in the centre of Moscow.

Hail to the new Moscow taxis Ben Aris in Moscow

etting a taxi in Moscow in the 1990s used to be a scary business, at least for the uninitiated. Standing at the side of the road, holding out your hand, palm downwards, it would take less than 30 seconds for a crumbling Lada to screech to a halt beside you. Haggling over the price at the end of the ride, however, could take much longer. But for the initiated, riding in such gypsy taxies was fun once you knew the rules. If you were familiar with the route, it was not necessary to haggle over the price - everybody knows how much it should cost to go from Pushkin Square to 1905 Gorod. The rest of the journey could be passed in pleasant banter about the weather, politics or the respective merits of Russian versus English literature. Riding in gypsy taxis today remains a key Russian social experience, but their market is long past its heyday. Taxi services in Moscow and St Petersburg are rapidly starting to resemble those in the rest of Europe as hundreds of professional yellow cab companies have appeared in the last four years.

Russians do not pick up strangers looking for a ride any more. A few Gypsy cabs survive, but they are mostly driven by immigrants from Tajikistan, Uzbekistan or Azerbaijan, and you can stand on the street for up to 20 minutes until a gypsy cab happens to pass. Instead, it's become far

Secondly, the City of Moscow has been incrementally introducing tougher regulations to discourage gypsy cabs as Mayor Sergei Sobyanin tries to move Moscow slowly towards a taxi system similar to other European capitals. However, he has not banned gypsy cabs - which would be hugely unpopular - because they continue to act as a social support for many Russians and immigrants at the bottom of the income ladder. As such, a licensing system has been introduced for taxis, but it is still not rigorously enforced. To get a licence you need little more than a yellow car and a photo (there is no fee). Nevertheless, the fines for driving without a taxi licence have risen slowly but steadily from a few hundred rubles ($10) to several thousand rubles ($100) recently. The number of registered drivers has climbed steadily from 10,000 in 2011

"Riding in gypsy taxis today remains a key Russian social experience, but their market is long past its heyday" simpler to take out your smartphone and order a cab that will arrive within minutes. Affordable ride Russia has gone through a phase change that has turned taxi driving from a way to make a few extra rubles into a commercially viable business for several reasons. Firstly, with unemployment at historical lows of 5% and incomes that have risen by 10% a year for the last decade, official taxis have become more

to about 55,000 today. Most European cities limit the number of taxi licences in order to ensure that drivers can earn a decent living. The same idea has been floated in Moscow and City Hall suggested that 55,000 registered drivers was a maximum, but so far the local government has yet to formally cap the number of licences issued and continues to hand them out to anyone that asks for one. Thirdly and most importantly, as Muscovites increasingly carry

I Eastern Europe

smartphones, several apps have appeared that allow the punter to order a taxi that will arrive in minutes, not hours. "Until 2010, stopping gypsy cabs in the street was still huge," says Grigoriy Dergachev, head of development for Yandex.Taxi, the leading mobile phone taxi application. "The problem was official taxis could cost up to RUB1000 ($30) and they took at least an hour to arrive. From the north to the south of Moscow is a

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them to pick up customers and fares have fallen as a result. The number of taxis has gone up 10-fold, while the fares have fallen three-fold over the last five years, estimates Dergachev. In reality the fares have fallen far further than this. In the 1990s it still cost the equivalent of $30 for a taxi ride, but as the average monthly income for most of the Yeltsin-era was about $50 this was a small fortune.

"It's become far simpler to take out your smartphone and order a cab that will arrive within minutes" 30-40km drive and you had long traffic jams in between. People in a restaurant or bar in the middle of December didn't want to wait that long so they went and flagged a car down on the street."

Today the minimum fare with Yandex. Taxi for a 10-minute ride is RUB200 ($5), which is pocket change against the $3,000-plus a month average salary in the city.

Yandex.Taxi is one of several applications set up to solve this problem. It has aggregated together more than 200 taxi companies – like Status Taxi, Cabby, Red Taxi, Euvrostandard, SMS Taxi and even Pink Taxi, which caters exclusively to women with exclusively female drivers – gathering together more than 10,000 cars online at any one time.

Creating the business The taxi business is still in a halfway house. Zhora is a Tajik immigrant and recently swapped his Uzbek-built Daewoo sedan for a yellow cab, but he says that he doesn't turn on his Yandex screen much during the day. "I still get enough people waving me down to keep me busy, but the main problem is the traffic jams," says Zhora, who did not want to give his last name.

Clicking open the app and the screen of your phone shows a map of central Moscow covered with little yellow dots, each one a free taxi. The dot closest to Yandex offices where we are holding this interview is literally just round the corner and if Dergachev were to tap his screen, the car would arrive here in a matter of minutes. "Usually a customer doesn't have to wait for more than five to seven minutes for a car to arrive," says Dergachev. "It's a revolution!" The efficiency has also driven down the prices. As the taxi has only to drive a few hundred metres, it is cheaper for

Moscow traffic jams are legendary, but since Mayor Sobyanin introduced expensive paid parking in the centre, which is rigorously policed, the jams have abated somewhat. "Yandex charges RUB25 per minute regardless of whether you are moving or not. So if you are stuck in a jam for 20 minutes, that's RUB500 ($12) and people don't want to pay. They know it is too much," says Zhora. Because of the Soviet honour system, punters in Moscow are acutely aware of how much a ride should cost and the meter mentality has yet to take hold.

Leader of the pack, Yandex.Taxi All the new companies rely heavily on the fact everyone has a phone. For example, SMS taxi attempts to cash in on the Russian obsession for texting. Sim card penetration reached 100% many years ago, but it is only in the last few years that Russians have been trading in their dumb phones for smart ones: smartphone sales have been growing by over 50% a year for the last two years, while sales of traditional phones are growing in the low teens. Yandex.Taxi was fairly late into the market, launching in 2011, but since then the service has been growing exponentially. To begin with it accounted for maybe one extra ride for a driver at the end of the day. But as Yandex is Russia's dominant search engine, accounting for just under two-thirds of all searches on Ru.Net, it has been a simple task to promote the service, which ties in neatly with the company's Yandex.Map, the leading map app in Russia. Today, an increasing number of drivers rely exclusively on Yandex.Taxi to bring them customers. Yandex.Taxi is now the biggest online taxi service in Russia. There is some competition from the Israeli-backed GetTaxi, which in September took in fresh capital from Russia's leading private equity investors Barings Vostok Capital Management. Also Uber, the taxi app that has disturbed the taxi business in Europe, has also just entered Russia in the last month, offering minimum fares of RUB200 – half Yandex's minimum. But Yandex.Taxi will be hard to dislodge from its incumbency. The company is receiving over 630,000 orders per day just in Moscow, and already offers the service in St Petersburg, with plans to launch in the 11 milionki (cities with more than a million residents). Sales are still in the fast growth phase: this summer, when traditionally orders fall off, Yandex.Taxi’s order volume grew by 25% between June and August. And that is before the terrible autumn and winter weather sets in, when taxi orders traditionally skyrocket.

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Eastern Europe

"Oil x20" rule lures investors back to Russia Ben Aris in Moscow

ith peace possible in Ukraine, some portfolio investors have decided that this is the time to get back into the Russian stock market. Inflows rocketed more than four-fold in the week ending September 12, with portfolio investors buying some $200m of Russian shares, according to the fund watcher EPFR. For some the risk-reward balance is tipping towards the reward end of the scale as the potential upside from buying super-cheap Russian stocks outweighs fears of the situation in Ukraine getting any worse. Politics between Russia and the West have never been as fraught as they are today, making pricing Russian stocks extremely difficult. That specific "Russia risk" that has always kept Russia's shares priced at a lower multiple than its emerging market peers is a bigger factor than ever. So are these intrepid investors clever or foolish? An oft-cited rule of thumb that appeared a good guide to the market’s value in the past is "the fair value of the RTS is simply the current price of oil times 20." This rule is far from perfect. In bad times the ratio of oil prices to the RTS index value has fallen into the low teens and in boom times it has climbed as high as 30. But the ratio has been much less volatile than the RTS, which has swung about wildly. At the time of writing, the RTS index stood at 1,192 and while the price of oil has recently dipped to $96 per barrel, this implies a fair value for the index of 1,920. On this basis Russian stocks look very cheap.

Early days: oil x 20 = 5 The oilx20 rule took a little while to establish itself after the market was set up in September 1995. In those days, with trading volumes counted in a few million dollars a day, a single investment could send the index spiking. With the RTS index set at 100 on the first day of trading and oil prices of $17, the index was only five-times the price of oil. However, as the market wound up for its first boom in 1997, the multiple quickly rose to hit a high of 29-times the price of oil (then $19) as the market peaked in October 1997, before the effects of the Asian crisis eventually caused Russia’s first big financial crisis. By September 1998, the multiple had fallen to just three times the price of oil ($12.7) as Russia went into a tailspin.

I 21

Interregnum: oil x 20 = teens After Russian President Vladimir Putin took over as president in 2000, the price of oil began to recover and reached $25 that year, and the oil/RTS ratio remained bound in a range of 6-9. In the first two years of Putin's first term, Russia was reeling from the after effects of the 1998 crisis, but despite the gloom, the Russian economy actually grew by a record 10% in 2000. It was not until 2001 that the beneficial effects of devaluation became obvious. In retrospect the 1998 crisis reset the Russian economy and laid the foundation for a boom that built steadily over the next eight years. Roman Abramovich piqued investors’ interest in the stock market as early as 1999 by taking over the PAZ bus maker by buying up its super cheap shares, and portfolio investors then moved steadily into the market. By January 2002 the oil price was $18.7 but the oil/RTS ratio was up to 15. These were the golden days of liberal reform and by September 2003 the ratio hit 20 for the first time, marking the start of what now are seen as the boom years in Russia.

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Boom years: oil x 20 = 20 Between 2003 and 2008 Russia's economy soared, growing by 6-8% a year. Foreign portfolio investors tumbled into the Russian stock market, the arrest of Yukos owner Mikhail Khodorkovsky and the nationalisation of Yukos not withstanding. The RTS was gaining up to 50% every year and everyone was making money hand over fist. Moscow was a party town.

January 2009. However, interestingly the oil/RTS ratio was a lot more robust, remaining in the low to midteens for all of 2009. By the end of 2009 the RTS had recovered to 1,500, tripling the investment of anyone brave enough to buy in the black days of January, but more importantly by January 2010 the oil/RTS ratio was back at 20, even though oil was now only $77 a barrel, and stayed there until September 2011.

The party was fed by the incessantly rising price of oil during this period that flooded the economy with cash, but despite the growing hubris, the oil/RTS ratio had sunk back to the low-teens for most of 2003-2005, only returning to 20 in September 2005, which probably marks the start of what former former chairman of the US Federal Reserve Alan Greenspan dubbed in the US context "excessive exuberance."

Divergence: oil x 20 = low teens Looking at the chart something strange happened in the autumn of 2011, when the relation between the RTS and oilx20 broke and the two have since been diverging.

Again the chart shows a spike in the ratio to a peak of 35 in January 2007 after which fears over the unfolding subprime mortgage crisis in the US punctured the good mood. The oil/ RTS ratio began to fall well ahead of the stock market and dropped once again to the low-teens well before the collapse of Lehman Brothers set the world on fire in September 2008. During the euphoric period in the middle of the noughties the x20 rule worked very well. Oil prices fuelled enthusiasm as they rose from $100 to almost $150. The link between oil and the RTS remained in the range of x20-x25, although once again, as in 1997, the RTS got ahead of the x20 oil multiple. Bust again: oil x 20 = mid teens The RTS set a new all-time record of 2487.92 on May 19 2008 when oil was $122.8 per barrel and the oil/ RTS ratio almost exactly at 20, but the ratio almost immediately started to fall. After Lehman went bust that September the RTS went into free fall, dropping to a low of 492.59 in

So what is going on? Obviously the "Russian risk" looks more risky than it has ever done since the end of the Soviet Union after Putin sent Russian troops into Ukraine. Likewise, the Russian economy is barely growing as it struggles under the burden of international sanctions and its own failure to reform. However, the oil/RTS ratio is still in the low to mid-teens and this relationship looks fairly robust. It implies that following the 1998 crisis there are a lot more investors that remain committed to Russia and have put a floor on the market. Indeed, if you average the oil/RTS ratio over the last 19 years since the market was founded, then the longterm average for the ratio is actually 15.61, not 20. Given that oil prices had dropped to $96 per barrel in September, this implies a fair value of 1440 for the RTS, which is also the top of the range in which it has been trading for most of the last two years. So with the RTS at the bottom of this range at the time of writing maybe the intrepid investors are not so intrepid after all. If the market sticks to its form of the last two decades, it should rise another 300 points at least as soon as things get a bit calmer.

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I 23

French Kiss leaves a sweet taste Naubet Bisenov in Almaty Russians love chocolate. In Communist times the Soviet state made sure there was a plentiful supply of chocolate and it was one of the few little luxuries widely available. Even today when visiting a friend in Russia it is de rigueur to bring some flowers, a bottle and a box of chocolates. French Kiss is a boutique chain of handmade chocolate stores that was founded in Moscow 10 years ago to sell top-quality fancy chocolates to Russia's emerging middle class. Open the box and you will find an array of sweets with a variety flavours and fillings sculpted into attractive and almost artistic shapes. "Handmade chocolate was a new idea at the time, but the people who tried it always came back," says Huseyin Yamanyilmaz, the founder and owner of French Kiss. "So we have been

Investors bne The new Russian private equity firm VIY Management (VIYM), run by Andrei Yakunin, the son of the chairman of Russian Railways, Vladimir Yakunin, and his partner, Israeli citizen Yayr Ziv, have just bought a blocking stake in French Kiss. The fund recently launched the "Russia and Former Soviet Union Growth Equity Fund" that is targeting small and medium-sized enterprises. It has $120m under management, of which half has already been invested. While the fund doesn't disclose the size of his financial transactions, the typical ticket size is between $5m and $15m, says Dmitry Schuetzle, the managing director of VIYM. French Kiss is a typical investment, says Schuetzle, who is looking for specialised niche players that have successfully found a foothold in the market and need growth capital to scale up. VIYM has also invested in a company that produces rice in southern Russia - including specialist rice grains such as sushi and risotto grains - and a domestic top-end toilet paper producer, amongst other companies.

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Niche strategy

bne Handmade chocolates is typical of the niches that Russian entrepreneurs are starting to fill out. Following the collapse of the Soviet Union, the basics, such as generic chocolate producers, struggled for half a decade to get back on their feet, but as Russia recovers on the back of ever rising incomes, entrepreneurs are now building new businesses and filling out the corners of the market. Getting into the chocolate business in the 1990s was cheap and most of the international players are long since well established in Russia and turning over tens or hundreds of millions of dollars. But there is still plenty of space to grow in the smaller niches. And thanks to the sheer size of the Russian consumer market these remain extremely lucrative for a successful venture.

opening more branches and began to import ingredients from different countries." All the chocolates are made by hand in the store and carefully packaged. The customers are mostly individuals, but companies also order bespoke designs to give as corporate gifts. Rather than reinvent the wheel, French Kiss imports a lot of the raw materials from other countries. Raw chocolate comes from Belgium and cherries and oranges are from Greece. Chocolate and most of the other ingredients are not included in the current EU food ban imposed by the Kremlin in September, but Yamanyilmaz says he is already having problems sourcing pecans and almonds that come from the EU and US. "We chose the brand French Kiss as it was romantic and sexy. There is some commonality between a French Kiss and eating chocolates," says Yamanyilmaz wryly. The turnover of the company has been growing steadily and Yamanyilmaz has continued to open more stories. There are a total of 16 branches now in Moscow and another 18 franchisees in other regions. With the fresh capital the plan is to open at least four more

stores in Moscow and two more in the regions in the short-term. Currently most of the branches are standalone retail outlets but Yamanyilmaz says that part of the expansion is to move into malls and sell more online. The price of a French Kiss box of chocolates is significantly higher than that from the Soviet-era factories, most of which are amongst the few Soviet-

"We chose the brand French Kiss as it was romantic and sexy â&#x20AC;&#x201C; there is some commonality between a French Kiss and eating chocolates" era products that have successfully retooled and trade on their widelyknown brand names. However, compared to a box of hand-made chocolates made in the rest of Europe, French Kiss' products remain relatively cheap: a box of French Kiss chocolates retails from about RUB1100 ($29).

Eastern Europe I 25 The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS

bne October 2014

What you need to know

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

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bne October 2014

EU commissioners get their just desserts Jan Cienski in Warsaw

n life, you often get what's coming to you, is one of the aphorisms that the pricklier countries of Central Europe should probably take to heart when contemplating the varied fortunes of the region's nations when it came to getting plum assignments in the new European Commission. Those countries generally seen as enthusiastic members of the EU club and with a good track record of fiscal discipline did very well.

issue of whether the UK even wants to remain an EU member. Poland's close diplomatic relationship with Germany, helped along by Tusk's ties with chancellor Angela Merkel, also helped. The three Baltic countries also did well. Former Latvian prime minister Valdis Dombrovskis is a Commission vice president, along with Estonia's Andrus Ansip, vice-president for digital single market.

"Polish diplomacy was involved in several games, it was very complicated and precise work"

Elzbieta Bienkowska, Poland's deputy prime minister in charge of a super ministry that combined transport and regional development, took the powerful internal market and services portfolio. That comes after Poland grabbed the EU's top job, with prime minister Donald Tusk becoming the new president of the European Council. Bienkowska pronounced herself thrilled with the job, and there is little reason to doubt her. She said that Poland had been proposed a Commission vice presidency without portfolio, an idea that Warsaw resisted in order to get a job with real teeth. “Polish diplomacy was involved in several games, it was very complicated and precise work,” she said in a radio interview. Poland has emerged as one of the EU's power players. It is the EU's sixth largest economy, and in recent years has been punching above its weight in part because many other large countries have gone missing. Spain is distracted by its ongoing economic mess, Italy's new government is again trying to reform the country, while David Cameron was distracted by the Scottish referendum and by the broader

Dombrovskis will look after the euro and social dialogue. Lithuania's former health minister Vytenis Povilas Andriukaitis is commissioner for health and food safety affairs. The big losers were the Czechs and the Hungarians. Hungary has long been one of the EU's awkward squad, and Prime Minister Viktor Orban's inflammatory pronouncements on the future of the liberal state, his suspicion of sanctions against Russia and his increasingly tarnished democratic credentials have marginalised Hungary. That ended up hurting Foreign Minister Tibor Navracsics, who got one of the lowliest jobs on the commission - education, culture, youth and citizenship. Education is almost exclusively within the purview of national states, giving him little to do.

He had been hoping for a higher profile post in charge of enlargement or neighbourhood and transport policy. Bruxinfo, a Hungarian web site, noted that “the portfolio does not belong to the most heavyweight ones”. One strike against him was that when he was justice minister he had helped draft Hungary's controversial media law that ran into a storm of criticism in Brussels for limiting press freedom. While the Hungarians attempted to put a brave face on their post, there was no disguising the disappointment in Prague. Even the new commissioner Vera Jourova said she was upset she had not been given the regional development portfolio when she was told she would be getting justice, consumer policy and gender equality. Petr Pesek, a columnist with Lidove noviny called the assignment a “cold shower from Brussels” and both the opposition and the president were scathing about the outcome of Czech lobbying in Brussels. While the Czech are not as badly seen as the Hungarians, they are also not seen as EU team players. The Czechs have often allied with the UK in opposing initiatives supported by most other members, their disbursal of EU structural funds has been riddled with corruption (unlike Bienkowska's record in Poland) and they have also opposed tougher sanctions against Russia for its actions in Ukraine. To make matters even more irritating for the Czechs, the Slovaks and Romanians got better portfolios, particularly galling for a country which sees itself as the most advanced in the region.

"To make matters even more irritating for the Czechs, the Slovaks and Romanians got better portfolios"

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towards financial tycoons buying up media. “Journalists often talk as if they come from another planet, as if they are somehow unique, but I see the media market as like any other,” he says. “Why should it be okay on the one hand for Penta to own 25 hospitals, which have an equally important social purpose, and on the other hand not OK for Penta to own media?” Penta and “Gorilla” Founded by a precocious trio of 20-somethings educated at Moscow’s prestigious MGIMO diplomatic academy two decades ago, Penta seized control of Slovakia’s wealthiest “privatisation investment fund”, VUB Kupon, in 1997 along with its blue-chip holdings.

Slovak corporate shark joins Central Europe's media feeding frenzy Tom Nicholson in Bratislava

n a region dominated by financial groups with enormous political clout, Bratislava-based Penta Investments is in a class by itself. No surprise, then, that Penta's media shopping spree targeting half a dozen major Slovak media houses – including the iconic and feisty Sme broadsheet – has open society advocates worried and the Sme newsroom in uproar. Sme's deputy editor Konstantin Cikovsky threw down the gauntlet in a column published on September 21 about Penta's recent media purchases and its attempts to buy more. “Penta’s media acquisitions are not financial investments,” he wrote. “They are a naked attempt to influence Slovak politics.”

But Penta managing partner Jaroslav Hascak tells bne in an exclusive interview that his media acquisitions should not be viewed as anything but sound business strategy in a market where viable assets can now be had for a song.

Later, under the successive governments of Mikulas Dzurinda (1998-2006), Penta became the country’s most powerful private equity investor, winning privatisation deals and successfully lobbying for reforms in the health sector, now one of its core businesses along with real estate and industry. Penta in 2013 made profits of ¤100m on revenues of almost ¤5bn, with interests spanning Central Europe. Until three years ago, Penta’s remarkable run of success was ascribed to audacity, ruthlessness and the undeniable business acumen of Hascak. But over Christmas 2011, a 100-page file was uploaded to the internet purporting to be a transcript of conversations recorded in a Bratislava flat in 2006 by the Slovak secret service, operating with court approval. Penta has repeatedly denied the authenticity of the “Gorilla” file, its secret service code name, and argues

"Penta’s media acquisitions are not financial investments – they are a naked attempt to influence Slovak politics" He admits, however, to irritation that his acquisitions have ruffled feathers, especially given the region-wide trend

that the transcripts were obtained illegally. A high-level police investigation is ongoing.

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The file’s contents – unconfirmed dialogues between Hascak, senior Dzurinda government officials and even current Slovak PM Robert Fico – depicted a hydra of political kickbacks, rigged privatisation sales to European investors, parliamentary vote-buying and years of high-level corruption. Violent street protests followed, and the Dzurinda-led right-wing parties were annihilated in the March 2012 elections, resulting in the first non-coalition government in Slovakia’s independent history led by Robert Fico’s social-democratic Smer party. Imagine then the public consternation at Penta’s plans to acquire at least half a dozen major Slovak media outlets, something that would have been unthinkable at the height of the “Gorilla” demonstrations. The first two deals (for 7 Plus, tabloid publisher of the country’s most-read weekly and second-best selling daily, along with the respected Trend business weekly) caused shockwaves when announced in early September. But Penta’s latest target – the Petit Press holding – is proving an even bitterer pill to swallow. Petit Press publishes almost 30 national and regional Slovak papers with a week ly sold circulation of around 775,000 copies. This includes the daily Sme, which helped topple authoritarian exPM Vladimir Meciar in the 1990s, but paid the price including physical attacks on its journalists, cancellation of its printing contract and confiscation of its owners’ property. For its employees and for open society advocates, Petit Press remains more than just a publisher – a fact underlined in 2012 when a court injunction briefly stopped Petit Press from publishing a book on the Gorilla scandal. That injunction was filed by Penta – the same financial group now offering to bury the hatchet. “The only legal case we currently have with Slovak media is with a business daily over an editorial that we felt crossed the line,” Hascak tells bne. “We are not even asking for any financial damages. Given the fact that at the height of the [Gorilla] scandal Penta had 3,000 mentions a month in the

Slovak press, I believe I have acted with exemplary forbearance.” Oligarchs in media Until Hascak confirmed it to bne, Penta was only rumoured to be going after Petit Press. According to multiple sources close to the transaction, Penta hid its interest behind the privately-owned Slovak newswire SITA, which put its name forward on a bid for a 50% stake in Petit Press from German publishing group Rheinisch-Bergische (RBVG). According to how the deal is allegedly structured, Penta would later quietly buy SITA. The reason for the subterfuge, sources said, was that RBVG had a gentleman’s agreement with the Slovak side not to sell to a financial investor like Penta, dating from 2013. Penta is far from the only financial group to venture into Slovak media. Rival J&T Group has owned the second mostwatched TV station, JOJ, for a decade, while mercurial football sponsor Ivan Kmotrik controls the all-news channel TA3 and dominates the media printing and distribution sectors. Former Communist secret service agent Juraj Siroky (who admitted to his past after his spy file was published) has been associated with the daily Pravda dating back to the 1990s. And perhaps most famous of all, Andrej Babis, Slovakia’s richest man (#731 on Forbes with a net worth of $2.4bn) and now Czech finance minister after founding a new party that came second in the 2013 elections, owns the largest daily Mlada fronta Dnes as part of his MAFRA print media holding in the Czech Republic, which he bought in 2013 – also from Petit Press owner RBVG. Penta vs Fico But like Petit Press, Penta too is different. The other financial groups and postcommunist oligarchs who own Slovak media are on good terms with the Fico government; all certainly have benefited economically from its rule. Penta, on the other hand, has consistently squabbled with Fico over its health insurance holdings, and Smer politicians were presumably not best pleased to hear

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themselves referred to as “a rabble” and “incompetent” in the alleged transcripts of Hascak’s Gorilla diatribes. All of which invites speculation as to whether Penta will use its media for political gain as well. “I am very sceptical about Penta’s aims, because this is a financial group that is all about money with no history on the media market,” says Grigorij Meseznikov, a political scientist with the Institute for Public Affairs think-tank in Bratislava. “Penta will definitely use its media holdings to increase its power, and if Fico gets in their way, I am positive they will use them against him as well.” But in an interview with bne on September 21 in Bratislava, Hascak says that the group’s aims are strictly business, and that Penta is looking to buy more media in the Czech Republic and Poland as well. “All three countries are undergoing a strong process of consolidation in the media sector, and we wanted to take part in it. Print media are in a brutal phase of contraction, with revenues falling 7% to 10% year on year, but we believe this will slow to about 4% in the coming years. There is huge over-capacity on these regional media markets with many titles that no longer have any economic rationale for their existence. We have a lot of synergies, and our plans are long-term,” he says. As for possible newsroom revolts, Hascak says it would be “very unfortunate” if key journalists left Sme, but that he is “prepared to operate it as a start-up from the HR perspective. But I am confident we can avoid that scenario.” At time of reporting, the Slovak owners of Petit Press, Prva Slovenska Investicna Skupina, were still in talks with RBVG about whether they could come up with the money to exercise their prior right of purchase on RBVG shares in their joint company, and thereby thwart Penta’s intentions. “I still believe PSIS will make use of its prior right of purchase on the German stake,” Petit Press CEO Alexej Fulmek told bne on September 22. “Because if Penta buys a stake in Petit Press, it will damage the company.”

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Fishing for business in the Czech Republic Nicholas Watson in Prague Jakub Vagner, the Czech television presenter and extreme angler, is the holder of the world record for catching the heaviest and longest freshwater fish. Now he's trying to reel in an equally big fish – a Czech fishing conglomerate ranging from media to resorts - with the backing of private equity. Vagner has teamed up with Robert Schonfeld's RSBC Group, a Prague-based private equity firm, to set up a holding company called Jakub Vagner Rybarstvi (Fisheries), which will spend up to ¤10m over the next few years to create what they call a "closed circle" of the whole fishing industry: media, game fishing resorts, commercial fishing areas, and branded tackle and equipment outlets. This will be achieved by combining already owned assets (both Vagner and Schonfeld own fishing properties), consolidating existing fishing assets that currently operate in a very fragmented market, and creating new businesses associated with the pursuit. Vagner – a boyish, laid back figure well known to both Czech and international audiences from his shows on National Geographic and Czech Television – will leverage his name to sell the goods and services. Already Jakub Vagner Rybarstvi has one print and online media publication focused on game fishing (and will soon have another), as well as a high-end private fishing reserve 45 minutes from Prague that's stocked with huge fish of over 3 metres and up to 150 kilograms, which will be a pilot project for the future resorts. "We will combine the higher cash flow game fishing with the very conservative, very long-term investment of commercial fishing, to allow our company to have an investment return in some reasonable timeline," says Shonfeld. Landlocked Czech Republic might seem an odd choice to set up such a venture, but in fact the country is home to 1m active anglers, which is about 10% of the population. The popularity of catch-and-release fishing in the country is growing, with new anglers coming from both genders and all walks of like, says Vagner. The trick will be to attract the estimated 220m anglers around the world – 40m in Japan alone – to the freshwater opportunities that the country affords. Vagner's fame outside of the Czech Republic is also likely to grow with a new series he is currently working on called "Fish Legends" for the Discovery Channel, which will target European audiences. One of the main goals will be to establish a collection of resorts over the next five years that cater to all types of anglers. Some will be more family friendly in order to move angling trips away from what has traditionally been a fairly solitary pursuit. "We'll try to create places where you can take your whole family and make fishing possible for everyone, but even if they don't enjoy fishing, then you need to have other activities around it," says Vagner. Then there will be the high-end resorts for busy executives that are well stocked with huge fish including carp, catfish, pike and beluga sturgeon. Finally, there will be resorts for the hardcore anglers who "like to be in the mud, in the rain, staying in tents, but with not so many fish, but beautiful fish - these people want to catch one big fish," says Vagner. "We want to hit everything."

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But the early promise has largely fizzled out, leaving a furious treasury minister, under whose purview the programme exists.

Photo: DanySahneMUC

A PIR disaster Jan Cienski in Warsaw

wo years ago, Donald Tusk was gripped by a bold idea for how to save Poland from an economic slowdown that threatened to derail the country's record two decades of uninterrupted economic growth: set up an investment agency that would funnel cash to crucial infrastructure investments. But now Tusk's brainchild, Polish Investments for Development (PIR), is under mounting criticism. Its banker president, Mariusz Grendowicz, was fired late on September 16, and many are convinced that the agency will soon be folded into a government-owned bank. When Tusk made his announcement, the idea was to create an agency fuelled with more than PLN10bn (¤2.4bn) in government money - which would be leveraged to four times that amount - but run on private sector lines. Registered as an incorporated company, PIR was supposed to get involved in large projects like oil and gas exploration, as well as building roads, ports and pipelines. The idea was for PIR to be a “first in, last out” investor, whose presence would

reassure other investors and entice them to back large projects. “For a responsible government, which wants growth, and to keep people working,

Problem child Grendowicz, an experienced investment banker, took a long time to pull his team together. For many months he was almost alone in PIR's headquarters, located in the Warsaw Stock Exchange building. Decisions have also been taken at a very languid pace. So far the agency has only become involved in one investment. In August it agreed to spend PLN430m (¤102m) as part of a project to finance oil exploration in the Baltic Sea by Grupa Lotos, Poland's second largest refiner. In all, PIR has examined 53 projects and given preliminary acceptance to eight. The treasury ministry says that PLN10bn in new projects should be signed by the end of next year. That pace was evidently not fast enough for the ministry. PIR late on Tuesday issued a terse three-sentence statement saying that Grendowicz was being removed and “thanked” for his role in setting up the agency. A new CEO is being sought.

"The idea was for PIR to be a 'first in, last out' investor" the key is to find ways of financing development and growth,” Tusk said at the time. His hope was for PIR to be up and running and doling out money by the end of 2012 or early 2013, which could have provided crucial support to help steady a slowing economy. It was also a time when structural funds from the EU's 2007-2013 budget were starting to fall off, and the added spending would have allowed infrastructure spending to keep going until the next budget was passed. Crucially for the fiscally pressed government, PIR's spending was not supposed to be counted as government expenditure.

PIR has also been hit with other problems. The agency had been planning to cooperate closely with a company called Hawe, which was supposed to build a fibre-optic network connecting 870,000 households to be in part financed with PLN120m from PIR. However, Hawe's upper management turned out to be composed largely of very well-connected apparatchiks. One of the main shareholders was also Marek Falenta, the man the government accuses of being behind the “Waitergate” scandal in which senior officials were illegally recorded while eating at top Warsaw restaurants. This summer PIR asked Hawe for an explanation, and said that the project's future depended on the answers it got.

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"Keeping PIR in its current form misses the point – the company is expensive and not fully transparent"

Finally, it is not at all clear how Eurostat, the EU's statistical agency, will treat PIR spending. Bloomberg Businessweek reports that Eurostat is taking a close look at PIR and whether its investments should be added to Poland's public debt – essentially destroying the rationale idea of the agency in the first place. The issue is that if PIR gets involved in projects that would not be attractive for a private company, this represents a government subsidy. Even the government seems unhappy with PIR's progress. In one of the record-

Papers also speculated that PIR would be absorbed by the Bank Gospodarstwa Krajowego, a state-owned development bank which also finances projects and whose functions in some ways overlap with PIR.

ed dinner conversations, which were later printed in the Polish press, interior minister Bartlomiej Sienkiewicz called the agency a long string of expletives. While PIR was supposed to provide a boost to the fortunes of Tusk's government, it is instead turning into a political target. Leszek Miller, head of the ex-communist Democratic Left Alliance party, has called on the government watchdog agency to investigate goings on at PIR. “We won't allow this to escape the attention of important state institutions,” he told Polish radio.

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

However, killing off PIR would be an acknowledgement that Tusk's shining idea had tarnished, which would be politically embarrassing. Instead, the treasury ministry put out a statement that PIR's structure may be changed to function more like an investment fund. That would allow it to earn management fees, which would stop it from running at a loss. “Keeping PIR in its current form misses the point,” says Dagmara Leszkowicz with Polityka Insight, an analysis firm. “The company is expensive and not fully transparent.”

What you need to know

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www.bne.eu

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borrowers are underwater – that is they owe more than they borrowed. Halina Kochalska, an analyst with Open Finance, a mortgage broker, calculates that if a borrower had taken a 30-year, PLN300,000 forex mortgage in mid-2008, they would have paid a monthly rate of PLN1,409 compared with PLN2,130 in zlotys – unsurprisingly there weren't many takers for the zloty loan. That was a mistake. Today, the zloty borrower faces a monthly rate of PLN1,420, while the franc borrower has to cough up PLN1,740. Even worse, after six years of payments amounting to PLN123,000, the unfortunate franc borrower actually would have to pay the bank about PLN433,000 to clear the loan – about 50% more than the original mortgage. And the problems don't stop there.

Swiss squeeze Jan Cienski in Warsaw

oland's dalliance with foreign currency mortgages, especially those denominated in Swiss francs, continues to cast a pall over the country's banking system as worries grow about the rising strength of the franc due to rising political turmoil in Europe. As elections loom, irate borrowers of such loans also make a tempting target audience for populist politicians. Forex loans in Swiss francs were enormously popular in Poland before the economic crisis of 2008, with about 80% of all mortgages being denominated in foreign currencies. The reason was that Swiss interest rates were significantly lower than those set by the National Bank of Poland; about 700,000 borrowers succumbed to the temptation. Forex loans now account for 48% of outstanding mortgages.

The risks of that sort of a strategy became apparent after the failure of Lehman Brothers, when the zloty's value against the Swiss franc plummeted. Most borrowers had taken out mort-

Poland's real estate prices fell in 2008, and have not recovered to pre-crisis levels, making it even more difficult to cancel loans. Further, the central bank's rate setting Monetary Policy Council is expected to cut rates from its already record low of 2.5% – making the comparison with zloty borrowers even more unfavourable. The Swiss franc has also started to gain against the zloty in recent weeks, driven in part by rising worry over Russia's actions in Ukraine. Poland, which has a robust trading relationship with Russia,

"Foreign currency loans are like a ticking time bomb" gages when the franc cost about PLN2.4 – the rate briefly shot up to PLN4. Today it's around PLN3.5. The Swiss National Bank helped when it slashed its rates, also helping keep Polish monthly payments low. However, much of the property bought at the original exchange rate is unsellable because

stands to be one of the biggest victims of the sanctions being levied by the EU against Russia. That is starting to rattle the central bank. Voicing concern Until now, forex borrowers have had a good record or repaying their debts. In large part that was because most such

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loans were granted to urban middle- and upper middle-class people, whose jobs and incomes have been largely unaffected by the waves of crisis. Only 3% of all mortgage loans are in arrears, but that is up from 1.5% at the end of 2009. But if the franc breaks through its current levels and soars towards PLN4 or higher, there could be problems. There are also political worries. Poland faces a series of elections over the next year – local elections in November, presidential elections next spring and parliamentary elections later in 2015.

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Marek Belka, the central bank governor, is telling Polish banks to be careful. “Foreign currency loans are like a ticking time bomb,” he told bankers during a banking forum earlier this year. “Let's not fool ourselves that it doesn't make any difference, that people are paying them and that you will somehow deal with financing these loans. We can't simply leave this problem alone for the next 20 years. Sit down among yourselves and suggest some sort of innovative solution. This isn't a problem which we should ignore.”

"Until now, forex borrowers have had a good record or repaying their debts"

Hundreds of thousands of irate forex borrowers could become a very attractive grouping of the electrorate to appease. The right-wing opposition Law and Justice party has already murmured support for borrowers, and the example of what happened in Hungary is unnerving Polish policymakers. There, Prime Minister Viktor Orban helped cement his populist appeal by attacking banks and coming up with schemes to help beleaguered forex borrowers – who were even more numerous than their Polish counterparts. Hungary's banks had to swallow a $1.7bn loss in 2011 when mortgage holders were allowed to repay their loans at favourable rates. Additional schemes to help borrowers working their way through the Hungarian parliament could cost them billions more. There is also a class action lawsuit against Polish banks working its way through the country's courts. The lead case has been filed by Tomasz Sadlik, a professional translator, who says he was misled into taking a Swiss franc loan, which he was unable to repay when the zloty fell.

Belka reiterated that concern in a September interview with Bloomberg. “It’s an attractive theme for politicians of all walks of political life,” he said. “I appealed to the banks to do everything to massage it out and to my knowledge they are open to it, they are doing it.” The solidity of Poland's generally well-regarded banking sector depends on whether banks have, in fact, taken Belka's advice.

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No sex please, we're Polish Poland is a very conservative, Catholic country, but a campaign apparently backed by a petition of 250,000 people that threatens to make teaching sex education in schools punishable by two years in jail has raised eyebrows. Currently there is a draft law under discussion in the Polish parliament that aims to make the "promotion of paedophile behaviour" punishable with two years in prison, according to The Telegraph. No controversy there. But Fundacja Pro, a Polish pro-life organisation that is behind the petition, wants a clause to be added to the legislation that would make “the same penalty apply to anybody who promotes sexual behaviour in minors aged under 15 or facilitates their involvement in such behaviour," arguing that sex education in school can promote sexual behaviour in minors and undermine their morality. That, worry opponents, is so broadly worded that it could make teachers at schools talking about matters such as sexual development and contraception liable for prosecution. They also accuse Fundacja Pro of tricking people into signing the petition by omitting to say the anti-paedophile campaign also targets sex education.

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INTERVIEW:

OECD membership - grab it while you can Mike Collier in Riga

humour too, such as his advice to prospective members of the organization he has headed for eight years: “Don't invade anybody. It's bad practice.”

year... I think we can do all the technicalities by the end of next year and leave the political issues for 2016 where through the year perhaps we can finish the process,” Gurria said. "It's an ambitious but realistic calendar."

alts don't really do physical contact, except perhaps on Midsummer's Eve, which accounts for a mini baby boom every March. So when Angel Gurria, secretary general of the Organisation for Economic Co-operation and Development (OECD), reaches out and grabs the sleeve of the nearest Latvian for emphasis during his lecture at the Stockholm School of Economics in Riga on September 12, it sends a palpable frisson of discomfort through the audience.

"We must be tough with Russia"

Gurria is an engaging speaker, and not just because he might execute a flying tackle at any moment. Where most finance ministers are notable for their stoic reserve, the former keeper of Mexico's purse strings is quite the opposite, prodding and provoking his audience, and not afraid of using plenty of

was his Stockholm School of Economics lecture that was his bravura performance, foreshadowing Latvia and Lithuania likely accession to the OECD. "Estonia has been a member since 2010 and Latvia's accession was launched last

Officially, Gurria was in town to speak at the Riga Conference – a mid-level sort of talking shop that was effectively two days of variations on the theme “We must be tough with Russia,” but it

No problems were foreseen with Lithuania's likely invitation to start its own accession process from next year, he

added. "Latvia is now in the process, Lithuania is going to have a decision taken next May or June which we're sure will be positive... Eventually in 2017-18 we'll have the three Baltics as full members of the OECD."

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The way Latvia has bounced back from an acute economic crisis in 2008-10 could serve as a useful example for other small countries wanting to join the OECD, Gurria told his audience.

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pean Union and the countries themselves, we have another initiative called Eurasian Competitiveness and we have another programme called Caucasus, based on productivity, how to improve

"When to start Russia accession talks? I hope the sooner the better"

However he also said legislation needed to be speedily introduced to improve the way state-owned companies are managed to ensure Latvia did not fall behind schedule. "It is practically without exception that this is one of the issues that is not only analysed but discussed and debated, but it is typically one of the issues that is left to the very end of the case," Gurria said, citing the example of Slovenia where reforms were left "to the last second." "It is a critical issue because there are 94 companies involved... We're not particularly religious about the ownership – what is important is that the companies work without any particular advantages or privileges, that there is a level playing field, that they are open to competition, that they are not monopolies and that they are managed professionally," Gurria said. As if such straight-talking wasn't enough, he proceeded to further flabbergast his hosts by making himself available for informal press questions in an adjoining room – a rare invitation from a visiting VIP that bne was more than happy to accept. “You want to say so many things, the question is how do you do it?” he chuckles by way of intro.

competitiveness and how to become more successful in what you could call a 'cut-throat' world," he says. "Now with everybody coming out of the crisis you lost jobs, you lost exports, you lost market share and everybody is trying to recover that as soon as possible – but everybody is doing the same thing so it's real survival. With Azerbaijan, with Kazakhstan, we are constantly working." A good model would be the experience of Germany and Austria, Gurria suggests, where workers on reduced hours were given extra training to make them “more employable, more portable.” And then there is Russia. Both Latvia and Lithuania have leapfrogged Russia's attempt to join the OECD after its accession hopes were put in limbo by its actions in Ukraine. “The issues surrounding that will be defined by the members, but the situation on the ground is uncertain to say the least," he notes.

Advice for other EU Having touted the OECD's role as almost a consultancy for countries that aren't necessarily members, bne asked if the countries putting together the Russia-led Eurasian Economic Union had tapped the OECD for input.

“The sanctions are what I would call Europe trying to respond to the situation in a way that's acceptable. I'm sure everyone would like to be thinking of something else but we at the OECD will continue the technical [work]," he says. "But discussions about accession and when they are reinstated are really going to be defined politically by our members. Clearly this will require the situation on the ground to improve. When? I hope the sooner the better, not for the sake of accession discussions or the OECD but because this is important for the whole world."

“Yes, we have a programme called Sigma which is supported by the Euro-

To emphasise his point, he grabs another arm.

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give TIB the right to block sites on an application from members of the public for any one of eight reasons defined on the body's website as: 1. Provocation for committing suicide 2. Sexual exploitation of children 3. To ease the use of drugs 4. Supplying drugs which are dangerous for health, 5. Obscenity, 6. Prostitution, 7. To provide place and opportunity for online gambling, 8. Crimes mentioned in the Law on Crimes Against Ataturk numbered 5816. However, the blocking notices don't list the precise reason for a block being imposed. So which of the eight could be the reason for blocking Issuu?

Trying to make sense of censorship in Turkey

"I haven't made a complaint, I'm just trying to find out the reason for the block," I explained.

David O'Byrne in Istanbul

urfing the Internet in Turkey has never been straightforward. The bizarrely vague Article 5651 of the Turkish penal code has over the past decade been used to ban and block thousands of sites for often obscure reasons. Access to YouTube, for example, was blocked no less than nine times between March 2007 and June 2008 on the grounds that it contained videos insulting the founder of the Turkish Republic, Mustafa Kemal Ataturk, and on the more nebulous charge of "insulting Turkishness." Those blocks were only lifted in October 2010, but YouTube was blocked again in March this year along with Twitter following the appearance of recordings of phone conversations allegedly between senior Turkish politicians, including then Prime Minister Tayyip Erdogan their family members and leading business figures allegedly implying widespread corruption at the highest levels of

TIB itself proved to be somewhat unsure. Repeated phones calls with requests for information resulted in my finally being Photo: Dusan Milenkovic passed to a lawyer who informed me that my complaint had been accepted and Issuu.com would be unblocked that same day.

government. Both were unblocked some months later thanks to a constitutional court ruling, despite a threat by Erdogan to "wipe out" Twitter. Not that these bans mean much in practical terms. Tech-savvy Turks have employed tactics ranging from Google DNS settings through to the TOR browser to bypass them. It was then of little surprise and less inconvenience when this writer noticed in early July that Issuu, the online publishing site which carries the online version of bne's flagship monthly magazine, had been blocked on June 9 under law 5651 by order of Turkey's Presidency of Telecommunication and Communication (TIB). Where previously a court order was required to block access to a website, amendements to that Article 5651 which were introduced in February this year

"Ah, I don't know why it was blocked, but it will be unblocked today," he replied. Yet as of Thursday, September 10 Issuu remained blocked, the reason why still shrouded in mystery. One possibility has emerged, though. Turkish English language daily Today's Zaman on September 9 published a news story claiming the block had been implemented because one of the magazines that Issuu publishes, a Swedish Christian magazine by the name of Demokrati, had published a picture on its cover depicting Erdogan aide Yusuf Yerkel kicking a mourner at the funeral in May this year of some of the 301 miners who died in the tragic Soma coal mine fire. Today's Zaman implied that the block had been implemented under new amendments to Turkey's Internet legislation, passed on September 9.

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"The blocking notices don't list the precise reason for a block being imposed"

In fact, as stated above, the Issuu ban was imposed not on September 9 but on June 9, and the picture doesn't come under any of the eight categories under which a ban could be imposed without a court order. And as similar photographs continue to be displayed on both Turkish and international news sites, none of which have been blocked in Turkey, it also doesn't appear to breach parallel legislation which allows for material deemed defamatory, or an "attack on privacy" to be blocked without a court order. Indeed, Today's Zaman too republished the original photo with its story. But then later the same day removed both the photo and the story, presumably having been made aware that the cover of Demokrati could not be the reason for Issuu being blocked. Turkey's internet war While the reason for the block on issuu. com remains obscure, the reason why Today's Zaman should publish a story implying that Turkey was using draconian internet legislation to block access to material embarrassing to the Erdogan administration is easier to fathom. Zaman group is the main media arm of Turkey's "Hizmet Movement", a fiercely insular and somewhat shady religious group which follows US-based rogue Islamist preacher Fetullah Gulen and is reckoned to have over a million "followers" or "Gulenists" in Turkey. Although the group actively supported Erdogan in the early years of his administration, more recently it has been engaged in a veritable war of attrition with the Erdogan administration, much of it played out through the internet. The group was blamed by the Turkish government for the appearance earlier this year of the recordings of telephone conversations between Erdogan and oth-

er senior ministers and business people that resulted in the now lifted blocks on both YouTube and Twitter. Those leaks followed the launching by Turkish police last December of a series of highly publicised corruption probes that forced the removal of four senior government ministers. Both Erdogan and senior ministers were quick to blame both the probes and the leaks on an illegal "parallel state" staffed by Hizmet supporters operating throughout Turkey's already "Byzantine" bureaucracy. The past nine months has seen thousands of alleged Hizmet supporters in the police and judiciary either sacked or moved to new posts, and more than 20 police officers charged with making illegal wiretaps. At the same time, the government has moved to curtail Hizmet's financial

said. "Turkey's demand for Gulen's deportation is legitimate." Whether or not the request will be taken seriously remains to be seen. But if more recent changes to Turkey's internet laws are anything to go by, the government continues to worry about the threat posed by Hizmet and other groups opposed to its increasingly authoritarian rule. A portmanteau law passed on September 9 included clauses giving TIB further powers to block websites and monitor internet usage. In addition to being able to block sites without a court order for content deemed unsuitable, TIB now has the power to block websites temporarily without a court order if they are deemed "a threat to national security", to "prevent a crime being committed" or to "protect public order" - terms vague enough to cover pretty well anything. Yet more draconian still are new regulations that cover internet browsing records. While the February legislation obliged ISPs to hold internet traffic data for all users for two years, the September amendments allow TIB to collect and store this data itself and to share the

"Ah, I don't know why it was blocked, but it will be unblocked today"

empire, passing legislation that will force the closure of its lucrative chain of university cramming schools from September 1, 2015, while allegedly trying to force the takeover of Hizmet's Islamic banking arm, Bank Asya. Turkey has also submitted a request to the US for the extradition of Hizmet leader Fetullah Gulen. These moves were defended in September by Turkey's new prime minister, Ahmet Davutoglu, who repeated allegations that Gulen was the head of an organisation trying to illegally influence the political process in Turkey. "We have the right to ask these steps be taken," he

records with "other authorities" without a court order. These moves have already been denounced by groups such as Reporters Without Borders, Amnesty International and Human Rights Watch, which have also warned about plans announced recently by newly elected Turkish President Erdogan to abolish TIB, and to transfer its activities to Turkey's shadowy national security agency, MIT. This is a move that might make sense in bureaucratic and national security terms, but is unlikely to make the process for finding out why apparently benign internet sites such as issuu.com remain blocked for Turkish internet users.

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Photo: Gazprom.ru

Turkey faces winter gas shortage David O'Byrne in Istanbul

s the crisis in Ukraine rumbles on and another war over Russian gas supplies looms, Turkey is facing the prospect of cold weather causing gas shortages for the next four winters at least. Second-guessing Russian President Vladimir Putin has never been easy. Given the failure of successive ceasefires in Ukraine to halt hostilities and still no sign of an agreement with Ukraine over gas supplies, few would be brave enough to bet against a repeat of spats between Moscow and Kyiv of 2006 and 2009 that closed down the export pipeline through Ukraine causing gas and power cuts all over Central and Eastern Europe. Among those countries affected was Turkey which receives 14bn cubic metres a year (cm/y) of Russian gas through Turkeyâ&#x20AC;&#x2122;s western gas supply line via Ukraine.

In 2006 and 2009, Russia was able to minimize the impact by raising exports using spare capacity through the 16bn cm/y capacity Blue Stream pipeline

That portfolio includes long-term contracts for 14bn cm/y and 16bn cm/y from Russia, as well as 10bn cm/y from Iran, 6.6bn cm/y from Azerbaijan and

"Turkey is on the brink of being undersupplied" across the Black Sea. Today, though, due to the continued expansion of regional gas distribution grids and the continued commissioning of new gas-fired power plants, Turkish gas demand is expected to reach 49bn cm this year - perilously close to the 52bn cm/y maximum of the country's import portfolio - meaning any cut in supply would result in Turkey being unable to meet demand, especially if it occurred during a peak demand cold spell.

liquefied natural gas (LNG) from Algeria (4.4bn cm) and Nigeria (1.2bn cm). Already the Ukraine crisis has briefly affected gas supplies to Turkey. "We just don't know what is going to happen - there was an unexplained pressure drop on the western line last week," says Burak Guler, an Istanbul-based energy policy analyst and the Turkish representative for the European Federation of Energy Traders (EFET),

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pointing out that the peak demand December to February period offers the greatest risk for a shortage. Russian gas aside, Turkey is already facing the problem of losing the 4.4bn cm/y of Algerian LNG, the contract for which times out at the end of this year. An agreement in principle signed last year for up to 6bn cm/y for ten years has yet to be turned into an actual contract with Turkey holding out for a long-term pricing deal and Algeria preferring to sell on the more lucrative spot market. Whether or not the contract will be renewed is unclear. In July, Turkey signed a deal with Qatar for nine cargoes of spot LNG to be delivered over this winter, with Turkish Energy Minister

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the Turkish gas sector. With the last state-funded gas import infrastructure being the Azerbaijan-Turkey gas line completed in 2006, Turkey has turned to the private sector to develop new LNG import terminals and gas storage. And although interested, the private sector has been reluctant to invest due without a clear indication that the gas can be sold at market prices. Since 2009, state gas importer Botas has been selling the gas (currently up to 42bn cm/y) at a loss because the government has sought to hold down both retail gas and power prices during the current election cycle. A new gas market law currently before parliament will, if passed into law, allow for the breakup of Botas into three separate entities dealing with

"Turkey's plans for establishing a liberal energy market are way behind schedule"

Taner Yildiz commenting that this represents around a third of Turkey's spot LNG requirements for the coming winter. Technical limitations The key figures though are not those for annual supply and demand, but those for the daily capacity of Turkey's gas import infrastructure. "Turkey is on the brink of being undersupplied," Matthias Keuchel, the head of gas at Enerjisa, Turkey's second biggest private power generator and a joint venture between Turkey's Sabanci Group and E.ON, told a conference in Istanbul in September. According to Keuchel, the daily sendout capacity of Turkey's four import pipelines, two LNG import terminals, one underground gas storage point and minimal local production totals only 193m cubic metres per day against maximum daily demand that could top 215m cm. The problem, explained Keuchel, stems from the slow pace of reform in

respectively: gas transmission, LNG import and gas storage, and importing and marketing of pipeline gas, with the planned transfer of at least some of Botas' import contracts to the private sector. These changes should also spell an end to the unofficial subsidies, although when that will happen is moot. "In the longer term, this (subsidy) issue will be fixed, but not for four to six years at least," says Burak Guler explaining that Turkey's plans for establishing a liberal energy market are way behind schedule. An energy market operator, EPIAS was slated to be operating a power trading platform by October 2013, but this is not now expected to begin trading until late 2015, with gas trading not anticipated until several years later. According to Keuchel, in addition to passing the planned gas law and liberalising the market, the government urgently needs to introduce incentives

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for private sector companies to fund new gas storage, LNG import terminals and pipelines,and to boost the send-out capacity of Turkey's gas infrastructure. However, such investments take years to plan, finance and develop, and with the only ongoing project - a new gas line slated for completion until 2018 no quick fix is in sight, meaning Turkey is facing the prospect of cold weather causing gas shortages for the next four winters at least. Ironically, with a general election scheduled for June next year, the best scenario the government can hope for should the weather turn cold is that Russia will cut the gas arriving via Ukraine. That at least would serve to disguise the causes of a gas shortage that would almost certainly have happened anyway.

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Property blues in the Balkans Clare Nuttall in Bucharest

outheast Europe’s Black Sea and Adriatic resorts have been among the top destinations for Russian buyers of second homes and investment properties for the last decade, but the worsening of relations between Russia and Europe has cut Russian interest for one-time hotspots such as Bulgaria and Montenegro. While statistics for this year are not yet in, estate agents and property consultants in the two countries report a fall in purchases by Russians, though it is still too early to say how much of an impact this will have on property values, especially since buyers from some Western European countries are filling some of the gaps left in these markets. However, the sheer volume of Russian investment - as of March 2013 an estimated 350,000 Russians owned property in Bulgaria alone - means that some fallout is inevitable. Both Bulgaria and Montenegro have received a dramatic inflow of Russians

- tourists, investors and property buyers - since the mid-2000s. Russian property website Prian reported in December 2013 that Bulgaria has consistently been the most popular country for property

among the first to start snapping up property along the Adriatic coast in Croatia and Montenegro, from the start of the global financial crisis in 2008 west Europeans started to be replaced by Rus-

"Russians eager to sell their properties could create new opportunities for Europeans to purchase high-end real estate at low prices" searches. “Every fifth visitor to our real estate portal was interested in this country. The reasons Russians love it are clear and simple - reasonable prices, warm climate, similar culture. No one can shift the Balkan “star” from its podium,” says a report published on the site. For similar reasons Montenegro is also among the most popular destinations. While British and Irish buyers were

sians. Since then the inflow of Russian buyers to Montenegro’s coastal resorts has been so large, it earned the country the title “Moscow-on-Sea”. Sanction effects But conditions are changing. Both Bulgaria and Montenegro were participants - somewhat reluctantly - in the European sanctions imposed against Russia over the annexation of Crimea. Other factors

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"The reasons Russians love it are clear and simple - reasonable prices, warm climate, similar culture" such as the ruble’s weakening against the euro have made properties in the region less attractive for Russian buyers, raising fears that the current slowing in demand could be just the start of a larger outflow. Milovan Novakovic, general manager of Colliers International in Pogorica, likens Russian buyers to a swarm of bees. “They alight suddenly in huge numbers, but can disappear just as quickly overnight.” In Bulgaria there are already signs of a drop in demand, with some Russians also putting their Bulgarian properties on the market. Bulgarian newspaper Trud and television channel NovaTV each estimate a fall of up to a third in Russian purchases at coastal resorts this year, although there has been less impact on the real estate markets in major cities. Asen Bianov, owner of Varna-based Accent Invest, reports “a major drop in interest and purchases by Russian clients”, which he attributes partly to the fall in the ruble against the euro. “Now Russian buyers can afford less for their money. Furthermore, there are many questions asked by the Russian government when they transfer their money abroad,” he says. Jacqueline Torrance, manager of Appletree Properties, a British estate agency focussed on Bulgaria, describes 2014 as an “unsettled year” for the international property market in Bulgaria, with the drop in Russian interest at least partially offset by an increase in enquiries from Belgium, France, Italy and Scandinavia. In Italy in particular, domestic economic problems coupled with high property prices have encouraged Italians to look to lower cost markets like Bulgaria. However, the worsening of the Ukraine crisis has also made the former eastern bloc look risky to western buyers. “Buyers from the UK and other west-European countries have become very hesi-

tant. Those of us who live in Bulgaria understand that the situation here is very different to that in the Ukraine, but people who live elsewhere in the world do not,” she says. Overall, she says, it is too early to evaluate the damage to Bulgaria’s property market. “Certainly, those agencies that deal entirely with Russian buyers are going to find it more difficult to survive. But the fact that Russians are eager to sell their properties could create new opportunities for Europeans to purchase high-end real estate at low prices.” A fall in Bulgarian property prices could also attract new buyers from the east. Accent’s Bianov notes higher interest from Ukrainian buyers, while in an interview with Bulgarian newspaper Standart News, the head of the Green Life agency reported interest from as far away as Kazakhstan and Mongolia. Montenegro has also had a drop in demand from Russians since 2013, although - as in Bulgaria - the shortfall has been made up by west Europeans, which are now entering the market in larger numbers than at any time since 2008. Andrea Marston, head of marketing at Montenegro Prospects, attributes this to “better economies at home, together with prices that have been relatively static for years, infrastructure improvements, and press coverage of luxury resorts in Montenegro”. While Russians have been the biggest spenders and most high-profile investors in Montenegro, west Europeans have continued quietly buying up more modest properties along the Adriatic. According to Marston, the typical buyer is more likely to be a British or Irish couple looking for a two-bedroom holiday home, rather than a Russian oligarch. A slight fall in Russian purchases could actually be a good thing for the market

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since its image as a “mini Moscow” has put off some buyers, in the same way that the British colonisation of the Costa del Sol deterred other nationalities. Even Montengro’s Prime Minister Milo Djukanovic has attempted to dispel the stereotype. “One of prejudices that’s alive and well is the prejudice... that Montenegro is Moscow on the Sea. That’s not true,” Djukanovic told the Brussels Forum on transatlantic cooperation in March. Marston does, however, point out that “If the number of Russian buyers continues to fall, it will impact the market because I don’t think there will be a big upswing from western Europe.” However, according to Colliers’ Novakovic, the exception is at the high end of the market, which remains as attractive as ever to Russian buyers. Russians still account for the largest share of purchases at the luxury Porto Montenegro development, for example, where some 40-50% of buyers so far are Russian. “Perhaps we just need more good projects to attract the Russians,” he says.

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Photo: Boby Dimitrov

INTERVIEW:

EBRD still sees grounds for optimism in Southeast Europe Andrew MacDowall in Belgrade

outheast Europe (SEE) is only slowly recovering from the 2009 economic crisis and is held back by failure to reinvigorate reform efforts, the European Bank for Reconstruction and Development’s (EBRD) regional economist tells bne as the bank’s growth forecasts were published. But Peter Sanfey also highlighted reasons for optimism in a region which has suffered a more difficult transition from communism than its neighbours to the north. From Croatia’s tourism sector to Bulgaria’s competiveness as a foreign investment destination, there are longterm economic upsides on which SEE countries can capitalise if they tackle structural limitations and fiscal issues. “We have dropped our growth forecast for SEE from 2.2% in May to 1.9%, whereas in Central Europe and the Baltics we raised it from 2.5% to 2.8%,” Sanfey tells bne. “For SEE, we have pencilled in 2.6% growth for 2015.” By some margin the region’s biggest economy, Romania, is also set to be

the best performer – the small states of Macedonia and Kosovo aside. The EBRD was more pessimistic than most when it forecast 2.6% growth for 2014 back in May; following disappointing second-quarter growth figures, the bank’s judgement looks prescient. It has stuck with the figure, which Sanfey concedes is now more optimistic than the average, while projecting 2.8% next year, suggesting that the 5.2% growth racked up in the fourth quarter of 2013 may have been a flash in the pan.

impressively in recent years,” he says. “This is not just about getting some growth back, it's about inflation coming down, fiscal deficit really coming under control, from 9% a few years ago to 3% now. In 2013, Romania exited the EU’s Excessive deficit procedure. It has the advantages of relatively large economy, strategic location, diversification. There has not been so much [foreign direct investment] in recent years, but investors are there and there will be more to come in future.”

"Romania has turned around impressively in recent years"

Nonetheless, Sanfey is upbeat about the country’s prospects and impressed by the country’s tough policy response to a savage recession and near fiscal crisis in 2009. “Romania has turned around

Bulgaria blues To the south, fellow EU member state Bulgaria has endured an unenviable year that saw anti-government protests over ties to oligarchs, the suspension of

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EU funds and ostracism from Brussels over Bulgaria’s persistence with Gazprom’s South Stream gas pipeline in the wake of Russia’s seizure of Crimea and its role in the fighting in East Ukraine. Most recently, a banking crisis has shaken faith in the system, called the national bank into question and once again revealed links between politicians and controversial businessmen. The EBRD has lowered its growth forecast to 1.5% this year, and expects 2.0% in 2015 – sluggish for a relatively poor country that was an investor darling until 2008. “For a country that has GDP per capita still below 50% of the EU average, there should be a lot of catchup potential, but it requires Bulgaria to really seize the opportunity and start reforming again – there’s a big job ahead,” says Sanfey. The unloved and Russophile Socialistled government resigned after just a year in power in July, paving the way to a snap election on October 5, that the nominally rightist, Atlanticst GERB is

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though we understand that the last government but one fell because of energy prices. More generally, there are a lot of petty obstacles to doing business that our clients point to. The government can do a lot more to really tackle those and sell Bulgaria as an investment destination.” On the other side of the Balkan Peninsula is the EU’s newest member state, Croatia. Accession has not provided the hoped-for fillip to Croatia’s economy, which has not registered meaningful growth since 2008, and where the left-leaning government, hobbled by the electoral cycle, seems unwilling or unable to tackle reform. “Year after year the performance has been disappointing,” says Sanfey. “If it’s another year of negative growth, it’ll be the sixth year in a row of downturn – we expect minus 0.5%, and have pencilled in a very modest positive number for next year, 0.5%. We gave Croatia credit as everyone did for joining the EU, but they didn’t address underlying issues.

"The problem with Bulgaria is that there hasn’t been a stable political situation for some time" almost certain to win. “It will be important to have government in place that has a mandate and medium-term perspective, which has been lacking,” says Sanfey. “The problem with Bulgaria is that there hasn’t been a stable political situation for some time and that has held back economic policy making and held back transitions in sectors like energy – and of course there has been the banking crisis." Since before the last government, Bulgaria’s policymaking has been inconsistent, and, as elsewhere in the region, structural reform has stalled. “The energy sector is very important in Bulgaria and is in a mess at the moment,” says Sanfey. “You cannot expect to attract serious investment in the sector if you cut energy prices as Bulgaria has. It’s very short-sighted in our view,

The state is very bloated, and the labour market rather inflexible. Reform efforts have been a bit hesitant and for that reason we don’t see any sign of a major turnaround yet, and indeed next year is an election year.” The EBRD economist tempers his concerns about stalled reform with optimism about Croatia’s potential, pointing out that it is a small economy open to Western Europe, and an economic recovery in the Eurozone would help bring growth into positive territory. There is scope for “quality upgrading” in tourism, which generates more than 10% of GDP – an observation with which many in the Croatian tourism sector would agree as they seek to develop businesses beyond sun, sea and sand – while some tourism businesses are still to be privatised. The EBRD is

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also active in the promising agribusiness sector, where big local companies such as Agrokor have become great success stories. Floods of problems Landlocked Serbia to the east has been hit hard by catastrophic flooding in May, the worst on record. The EBRD expects the economy to shrink by 0.5% this year, recovering to 2.0% in 2015. The Progressive Party of Aleksandar Vucic won an absolute majority two months before, with a mandate for sweeping reform, including privatisation and changes to the labour code, but its appetite for austerity has yet to be proven. “Serbia faces a very difficult situation in the short term, particularly the fiscal situation,” says Sanfey. “The level of the deficit [is worrying] and public debt is now somewhere between 65% and 70% of GDP and still rising, whereas it’s supposed to be capped at 45%. This has been recognised by the government.” Serbia’s last standby agreement with the International Monetary Fund (IMF) was suspended in January 2012 due to its fiscal incontinence. Since then, the prospect of a new deal has been muchdiscussed, with little concrete progress. “Serbia needs to really demonstrate that it’s getting its fiscal situation under control as a matter of priority, and an IMF agreement would help in that regard, so I expect one to be signed. This would give some comfort to investors.” While some in Serbia doubt Vucic’s commitment to reform and liberal democratic values, Sanfey is upbeat about the outlook. “I see Serbia as a country with a lot of potential in the region, they have a government with a strong mandate which cal look forward to being in power for a few years. They have started the EU accession process, negotiations are underway, and they have been very pragmatic on the Kosovo issue [Serbia refuses to recognise the breakaway state but is normalising relations under EU supervision].”

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in January-June 2013. “Cross-border flows registered significant increase of exports to Hungary and Serbia, the main reasons being the reduction of electricity price on Romania’s market and the export operations to the more expensive markets from Hungary and the Balkans. The export to Serbia increased after the floods impacted several generation capacities in this country last May,” Transelectrica’s report said.

Romania seeks greater role as power exporter Clare Nuttall in Bucharest

omania almost doubled electricity exports in the first half of 2014, as Bucharest seeks to take advantage of power deficits elsewhere in Southeast Europe to establish the country as a regional energy hub. However, with other countries looking to boost their own domestic capacity, it could be difficult for Romania to profit from higher production in the longer term. On September 15, Serbian Minister of Energy and Mining Aleksandar Antic announced the country will receive electricity and coal exports from Romania for this winter, should they be needed. Serbia has already had to raise its electricity imports this year, after serious flooding forced the closure of a unit at Kostolac, the country’s second largest power station, as well as several

hydropower plants. In mid-September, parts of Serbia and neighbouring countries were again hit by floods, rais-

More room to export Romania’s electricity surplus is set to increase this year. Production is rising in part due to heavy investment into renewables, thanks to generous subsidies in place until the beginning of this year. Despite a fall in electricity prices, investments into new generation capacity – including building two additional units at the Cernavoda nuclear power plant – are being considered. Changing consumption trends have also freed up more power for export. “Electricity consumption patterns have changed in Romania. Services are now a major contributor to GDP, and their consumption is relatively low compared to the industrial sector,” the EBRD's senior banker for power and energy utilities, Mihnea Craciun, tells bne. Romania is now looking to open up new markets for electricity exports. In April, Romania struck a deal to export ¤1bn worth of electricity – some 2.5 TWh

"Southeast Europe is a region with a historic deficit of power" ing fears of further damage to power generation infrastructure. Romania has stepped in to make up the shortfall; in the first half of 2014, Romanian electricity exports were up by around 85% on year, according to grid operator Transelectrica, with Romanian power exports to Serbia reaching six-times the level recorded

or 5% of total production to Albania. There are also plans to build new connections with Moldova, which currently gets most of its power from the NGRES thermal power plant in the separatist Transnistria region. However, the real prize in the region is Turkey, and Bucharest is pushing for the construction of a sub-sea transmis-

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sion cable under the Black Sea to allow direct exports to the Turkish market. An agreement on electricity interconnections between the two countries, paving the way for the ¤650m cable to be built, was signed in January. A direct link to Turkey would be an important step in Bucharest’s ambitions to become an energy hub for the region – an aim that encompasses oil and gas as well as electricity. However, to achieve this, new infrastructure is needed, and with Turkey now investing into domestic capacity, it is unclear whether support – and more importantly funding – for the project will be forthcoming from the Turkish side. “Southeast Europe is a region with a historic deficit. Before the crisis an increase in consumption was expected, and most countries in the region needed new capacity,” Craciun says. “There are high hopes that Romania could become a regional hub but for this to happen, importing countries would also have to be willing to invest in interconnections. However, it is clear that other countries prefer to increase their own energy security by building capacity at home rather than investing into import infrastructure.” Longer-term strategy Despite these concerns, the Romanian government is currently working on plans for a longer-term energy strategy that is likely to aim for increased exports of electricity, as well as oil and gas. Due to be drafted by October, the strategy will set out policy on a range of issues including electricity production and export, nuclear energy and shale gas. At the same time as boosting electricity exports, Bucharest also wants to develop Black Sea offshore hydrocarbons resources, in a bid to end dependence on Russian gas exports for both Romania and neighbouring Moldova. President Traian Basescu said September 3 that Petrom and ExxonMobil would have to invest between $4bn and $5bn to develop the Domino-1 field, which could give the country energy independence by 2018-19.

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Reprieve for Romanian “cave cheese” Clare Nuttall in Bucharest Forced to shut down amid falling dairy product consumption and stiff competition from other EU countries, one traditional Romanian cheese factory has gained a reprieve. After a year’s suspension, production of Nasal “cave cheese” is due to restart soon, with a local company taking over from the plant’s Dutch owner FrieslandCampina. Ripened in a natural cave in the Transylvanian mountains, the conditions that produce Nasal, a sweet cows' milk cheese with a reddish rind, are unique. Legend has it that in the middle ages peasants took the curd cheese traditionally reserved for Hungarian count Grof Taga and hid it in the cave near the village of Nasal. Returning several weeks later, they discovered that the curd had developed a red rind and a distinctive taste. A village industry grew out of this discovery, and there have been attempts to industrialise production; the Taga factory was built at the entrance to the cave in 1950s. However, the size of the cave limits the amount of cheese that can be matured, and efforts to reproduce the effect of the bacteria elsewhere have failed. Despite these limitations, FrieslandCampina, one of the world’s five largest dairy companies, invested into the Taga factory after taking over its owner Romanian dairy producer Napolact in 2004. However, in 2013 FrieslandCampina announced that it was shutting down the factory, citing a “continuous decrease in sales and therefore production.” This caused an outcry among both the local population – which saw the 12 workers at the small factory laid off – and Romanian gourmets concerned about the loss of a unique local product. Some 14 months later, in August the AgroTransilvania Cluster, founded by the county council in Cluj, Transylvania to support agro-industry in the region, said that the factory would reopen. Production is due to resume within the next few months under the management of Fabrica de Branzeturi Transilvania, which is jointly controlled by the cluster and the Somes-Aries Cooperative. FrieslandCampina Romania’s sales director, Cornel Caramizaru, says that popular pressure had contributed to the decision. “When we announced last year to put Taga under conservation, we received numerous messages of consumers and members of the local communities expressing their regret not to be able anymore to buy Nasal,” Caramizaru tells bne. The news comes as FrieslandCampina reported a fall in dairy product consumption of over 6% per year in the five years to 2014. As a result, all the company’s plants have been operating under capacity. In response to this squeeze, the company announced in May that it would consolidate cheese production at a single Romanian location. Its operations in Carei and Targu Mures are due to be relocated to Baciu by January 2015. The company cited “tough market conditions, particularly the lack of consumer spending,” with its managing director for Romania, Jan Willem Kivits, admitting that “our current production footprint is no longer sustainable.”

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Nazarbayev's warning was slow to reach the Kremlin, as the Russian media only picked up the story after excerpts of the interview were translated into Russian. But then five days later, on August 29, when asked by a student at a youth forum whether Kazakhstan would see a repeat of the "Ukrainian scenario" should it diverge from its current pro-Russian policy, Putin showered Nazarbayev with praise as a "very wise" leader who knew perfectly well that a "vast majority of Kazakh citizens favour the development of relations with Russia.”

War of words erupts over EEU Naubet Bisenov in Almaty

ussian President Vladimir Putin and Kazakh President Nursultan Nazarbayev have long been sparring over the precise significance of membership of the Moscow-led Eurasian Economic Union (EEU), a coded war of words that has become more loaded following Moscow’s incursion into Ukraine. Nazarbayev said on August 24 that Kazakhstan's membership of the EEU, which will be formed from the Customs Union (CU) of Russia, Kazakhstan and Belarus in January 2015, was the "right choice,” but that Astana would use a provision of the EEU treaty to leave the free-trade bloc if it felt it threatened the country's political independence. Speaking in an interview broadcast by the state-run Khabar TV station, Nazarbayev said Kazakh businesses needed markets to sell their products, which is why Kazakhstan should develop closer economic relations with its immediate neighbours. "This is our opportunity and we don't have other choices. Thus forming not a political but economic union is the right choice,"

Nazarbayev said, speaking in Kazakh. "I have arrived at this wholeheartedly based on research and informed decision." However, acknowledging fears that closer integration could eventually lead to political union with Russia, Nazarbayev said all members of the bloc had equal rights and could veto decisions that go against national interests. He said that if the EEU threatened the country's independence, Kazakhstan would leave the organisation. "Some fear that Russia will again invade us. But this is not true," he said. "The treaty has a provision that if we don't accept certain conditions, Kazakhstan reserves the right to leave [the organisation]. I've said this and I will repeat: if independence is threatened, Kazakhstan will never hold membership of such organisations."

However, at the same time, Putin made what appeared to be a veiled threat about the fragility of Kazakh nationhood. "He [Nazarbayev] made a unique thing. He has created a state on a territory where there had never been a state," Putin said. "Kazakhs didn't have statehood." Modern-day Kazakhstan was established as an autonomous republic of the Russian Soviet Federative Socialist Republic in 1920 and was promoted to a Soviet republic in 1936, finally winning independence only on the dissolution of the Soviet Union in 1991. The Kazakhs need the Moscow-led CU and EEU, Putin continued, "because this is beneficial for them to develop the economy and to remain in the space of a great Russian [speaking] world.” Succession fears Putin’s comments highlight the question of Kazakhstan’s future orientation following Nazarbayev's eventual departure. Nazarbayev, who has ruled Kazakhstan since the dying years of the USSR when he was appointed to head the Communist Party there, has not groomed a successor. Kazakhstan watchers see this as a serious threat to the country's stability in case of his sudden death or incapability to hold the office. Nargis Kassenova, director of the Central Asian Studies Centre at Almaty’s KIMEP

"Putin wants to see a secure successor whom he will consider as a reliable continuer of Nazarbayev's policy"

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University, argues that Putin ducked the question about a potential “Ukraine scenario” in Kazakhstan to try to ease tensions between Moscow and Astana. “Putin wanted to calm Kazakhstan down that everything is alright and no Ukrainian scenario has yet been drafted for us," Kassenova tells bne.

rights in southern and eastern Ukraine as a pretext for its annexation of Crimea and continuing meddling in the eastern regions of Donetsk and Luhansk. Since Moscow's annexation of Crimea, Astana has revived a state programme to attract ethnic Kazakhs living abroad

"Nazarbayev made a unique thing – he has created a state on a territory where there had never been a state"

However, she adds that Putin's remarks on Kazakh statehood could be interpreted as a warning to Nazarbayev and his successors not to try to change their pro-Russian policy. "If Kazakhstan after Nazarbayev takes a different path, then the situation and Russia's attitudes can change." Russian political analyst Arkady Dubnov also believes that Putin has signalled to Nazarbayev and the Kazakh elite that the country's security is guaranteed only if Moscow remains Astana's strategic partner. "Putin wants to see a secure successor whom he will consider as a reliable continuer of Nazarbayev's policy," Dubnov told the BBC’s Russian service. In August’s interview, Nazarbayev also warned that Kazakhstan should be careful in promoting the Kazakh language and imposing it on ethnic minorities who still largely rely on Russian in day-to-day business. More than 90% of Kazakhstan's 17.3m citizens are able to speak Russian, but only around two-thirds claim to speak Kazakh. Kazakhstan's constitution designates Kazakh as a state language, while Russian serves as a lingua franca and is allowed in official use. "If we adopt laws to ban all languages but Kazakh, we will turn into a Ukraine," he said in reference to the Ukrainian parliament's revocation of the official status of Russian in eastern and southern regions following the ousting of former president Viktor Yanukovych. Russia has used the protection of Russian-speakers'

back to the country, offering citizenship after a year of residence and a generous package to those settling along the border with Russia. Ethnic Kazakhs do not constitute an absolute majority in northern Kazakhstan, and represent less than 40% of the population in the northern Kostanay and North Kazakhstan Regions. Overall, ethnic Kazakhs account for two-thirds of the population, with ethnic Russians making up slightly more than 21%. The government estimates that around 5m ethnic Kazakhs live abroad, mainly in China, Uzbekistan, Russia, Turkmenistan and Mongolia. Economic repercussions Kazakh authorities are trying hard to persuade the domestic public that the EEU is purely an economic and not a political union. Nazarbayev and members of his government say that the EEU will open up a market of 170m people for Kazakh businesses which, in turn, should boost economic activity. However, Local opposition leaders believe that Kazakhstan has not benefited from deeper integration with Russia since the inception of the CU in 2010, while surrendering decision-making on economic issues to the supranational Eurasian Economic Commission. Moreover, Kazakh exports to Russia increased by only $1bn to $5.8bn between 2010 and 2013, whereas imports from Russia rocketed from $11bn to $17.7bn. Russia’s economic problems, exacerbated by Western sanctions because of the

Ukraine crisis, are now hitting the country’s imports: Kazakh exports to Russia fell by more than 20% to $2.5bn in the first half of 2014. Russia is also the main conduit for Kazakh trade with the West, and a further cooling of economic relations between Russia and the West would damage the Kazakh economy, directly or indirectly, even though Nazarbayev has so far managed to evade Putin's pressure to join his tit-fortat trade wars with the West. When in August Russia banned imports of certain foodstuffs from Europe, North America, Australia and Norway, Astana and Minsk managed to persuade Moscow not to involve them in the trade wars; in return, they promised not to re-export banned goods to Russia. Russia’s problems are also affecting Kazakhstan’s competitiveness. In response to the depreciation of the Russian ruble by about 10% between late October 2013 and early February 2014, Kazakhstan's National Bank devalued the tenge by 19%. Financial experts then said the tenge was devalued with a 10% cushion. Almaty, the country's financial capital, has since been abuzz with rumours about a "second wave" of devaluation. Under the weight of Western sanctions and capital flight, the Russian ruble has fallen by a further 6% since February to touch a low of RUB37.39 to the dollar on September 1. This means the falling value of the ruble is eroding the 10% advantage the February devaluation has given the tenge. With Russia already accounting for a third of Kazakh imports, the National Bank may find it hard to maintain the exchange rate of the tenge if cheap Russian products start flooding the Kazakh market. On August 6, Nazarbayev reshuffled his government in order to "efficiently" adapt to the changing global economic conditions amid the ongoing crisis in Ukraine. National Economy Minister Yerbolat Dossayev then told the president that the government was working on a "separate package of measures" that would be implemented in case the situation in Ukraine worsened and further sanctions were implemented. Dossayev didn't give any details of the plan but said it would be presented in September.

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in the past three years to reach sales of $600m in 2013. "An analysis of online cheques has shown that the sector has grown by 88% this year so far," he says. "Should we exclude online ticket sales of Air Astana, which has a large market share, the market grew by 286%." With sales totalling $80m a year, the national air carrier accounts for 12-15% of the e-commerce market.

Customs Union boosts Kazakh e-commerce Naubet Bisenov in Almaty

azakhstan's oil-based economy has struggled because of stagnation in the sector and falling demand for Kazakh goods in the country's major trade partners, Russia and China. However, there are new sectors of the economy such as e-commerce that have been helped by Kazakhstan's membership of the Customs Union (CU) with Russia and Belarus. Kazakhstan's membership of the CU, which was set up in 2010, has led its trade deficit with Russia and Belarus to increase several fold. But there are a number of areas where Kazakhstan's membership of the free-trade bloc has spurred the development of new sectors. In addition to car-assembly (Kazakhstan is set to assemble up to 50,000 cars this year), one such area is e-commerce. Market players say that the free movement of goods between Russia and Kazakhstan has made it easier to bring goods imported to Russia on to

Kazakhstan without needing to undergo customs clearance at the Kazakh border. Konstantin Gorozhankin, chairman of the Association of E-Business of Kazakhstan, says that e-commerce began to take off after internet

Lots of potential Kazakhstan still has potential for e-commerce to double or triple every year over the next two to three years, after which the market will mature, Gorozhankin predicts. However, e-commerce still only constitutes a tiny share of total trade in goods and services in the country. According to the Kazakh Agency for Communications and Information, this share stood at 2% in 2013, but is expected to increase to 10% by 2020. Gorozhankin believes the Kazakh population and businesses have not yet fully realised the potential of e-commerce. Even a well-established player in this area such as Air Astana sells only 7% of its tickets online compared with Lufthansa's 90%. He explains that the population is not familiar with online purchases and a majority of customers do not trust online trade or simply is not aware of it. "Our people's attitude to shopping is still old fashioned where they have to

"E-commerce grew 80-90% a year on average in the past three years to reach sales of $600m in 2013" penetration exceeded 20% of the population. With 4.7m active internet users, the country passed this threshold in 2010 when the penetration rate reached 27%. Gorozhankin says e-commerce is currently showing one of the highest rates of growth in Kazakhstan: the sector grew 80-90% a year on average

feel and touch a good like at the bazaar before they buy it,â&#x20AC;? he says. Out of $600m in online trade, Kazakh customers spent only 10% on purchases from local online traders, Gorozhankin says, blaming this on a sluggish local market that does not offer a choice of goods at cheap prices compared to welldeveloped foreign traders. US-based

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retailers account for two-thirds of total Kazakh online purchases, the EU and UK for 14%, and Russia for 8%, according to his figures. Local market players complain that purchases from US-based Amazon or China's Alibaba do not make a positive contribution to the Kazakh economy and only support jobs abroad. Kazakh citizens can now import goods from third countries tax free if the value of their orders does not exceed 造1,000 or weigh no more than 31kg per month. Russian companies on the ground Gorozhankin believes that the CU has paved the way for major Russian online retailers to enter the Kazakh market, where they operate as local companies. One such company that seized the opportunity offered by the common market is the Russian Lamoda online fashion retailer, which arrived in Kazakhstan in 2010. The company ran its businesses in a trial mode in 2011 and 2012, and adopted its strategy for the Kazakh market in 2013, says Lamoda.kz's operations director, Dmitry Solomko. "In 2013 we studied the local consumer needs and adapted processes to offer high-quality services with quick deliveries. We realised that the market was ready to use the internet in new ways as a platform to buy our goods," he says. Echoing Gorozhankin regarding Kazakhs' shopping attitudes, Solomko explains that his company started a service in which customers could cancel orders and return goods on the spot after seeing them. He also says different delivery options such as a 24-hour delivery have proven popular with Kazakh online shoppers. This helped the company pass a threshold of 1,000 orders per day at the beginning of 2014, with the average value of an order nearing $100. "The month-onmonth growth was over 12% on average in 2013. It is a few percentage points smaller now but we can still see a good dynamic," Solomko boasts. Lamoda.kz, which sells about 2m items of clothing from 900 mass-

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A kiss too far in Kazakhstan Naubet Bisenov in Almaty A poster for a gay-friendly nightclub in Almaty featuring the great Kazakh composer Kurmangazy and Russian author Pushkin engaged in a kiss has caused outrage in conservative Kazakh society and raised the spectre of Russia-style anti-gay laws being introduced. Intended as an entry for a closed advert competition in neighbouring Kyrgyzstan, the award-winning poster advertises the Studio 69 club located on the junction of Kurmangazy and Pushkin Streets in central Almaty. Hence the choice of the subjects for the poster. In a statement posted on its Facebook page, the poster's designer, advertising agency Havas Worldwide Kazakhstan, apologised for any unintentional offence it might have caused and explained the poster was created for a "small circle of individuals" for the Red Jolbors Fest held in the Kyrgyz capital of Bishkek, where it claimed third place in the Outdoor Advertisement category. Despite the agency's reassurances that the poster would not be published in the paid media, it has circulated widely on social media, causing a storm. The nightclub's director, Maria Belskaya, has said Studio 69 has nothing to do with the poster advertising the club, and the competition's website states the advert was commissioned by the "LGBT community of Kazakhstan". The poster has stoked simmering anti-gay sentiment in Kazakhstan where society largely remains hostile to the lesbian, gay, bisexual, and transgender (LGBT) community, which deliberately keeps a low profile. Outraged public and cultural figures, including a Kurmangazy descendant, have called for legal action against the designers of the poster, while the Kazakh culture minister described the poster as a "crime". There is also the fear that having Russia's most venerated poet depicted in such a way could invite strong reaction from the homophobic authorities in Russia, where Deputy Prime Minister Dmitry Rogozin's nationalist Rodina party has already called for "just punishment" for the poster's designers. The Kazakh authorities have so far resisted calls for the adoption of Russian-style "gay propaganda" legislation that was passed by Duma last year, which bans the "propaganda of non-traditional sexual relations". The Kazakh-language, opposition-leaning Zhas Alash newspaper has blasted the authorities for their inaction over the "insulting of Kurmangazy" and suggested that "pervasive" gay clubs in Almaty enjoy the protection of people high up in the government. Members of the gay community in Almaty have mostly refused to discuss the poster, but some of them say they were also shocked by the brazenness of it.

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market brands, operates from its base in Moscow, with 24-hour delivery services in Kazakhstan's main cities of Almaty and Astana. It now offers direct delivery services in the country's 17 cities and towns and uses the Kazpost national operator to deliver orders in towns and villages where it does not have presence, Solomko explains. The company now employs 200 people in Kazakhstan against 30 in 2012, and opened a collection point in Almaty this year where customers can try their purchases.

"Our people's attitude to shopping is still old fashioned where they have to feel and touch a good like at the bazaar before they buy it"

Citing the inconveniences that orders from Amazon or other foreign websites create for Kazakh shoppers in terms of consumer protection and delivery times, Solomko is upbeat about the development prospects for local e-commerce players

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

in Kazakhstan. "In contrast to foreign websites, we treat our clients as the main source of information on how we should behave on the local market and since the client sets the rules we are ready to adapt to them," he concludes.

What you need to know

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with Russia, the more we will depend on the ruble," Sabit Khakimzhanov, head of research at investment bank Halyk Finance, tells bne in an interview.

Kazakhstan tries to dispel devaluation fears Naubet Bisenov in Almaty

azakhstan's central bank has extended the currency trading corridor to enable the tenge to strengthen up to 8% against the dollar, in a bid to diffuse fears among the populace that the authorities are planning a second devaluation. A wider trading corridor is welcome news for the country's embattled financial sector, which is still recovering from the 2007 housing market crash and 2008 global crisis. On September 10, the governor of the National Bank of Kazakhstan, Kairat Kelimbetov, announced that the regulator had widened the trading corridor against the dollar from KZT185 plus/minus 3 to KZT185 plus 3/minus 15. Earlier, Kelimbetov speculated that the new corridor would allow the currency to appreciate to KZT179-181 to the dollar, saying it might even strengthen to as high as KZT170. The National Bank devalued the tenge by 19% in February after spending billions of dollars trying to keep the exchange rate stable when the currency

of Kazakhstan's major trading partner Russia collapsed. Russia accounts for around a third of Kazakhstan's total imports. Since that February devaluation, rumours have been swirling in the country's financial capital, Almaty, about a "second wave" of devaluation, which the regulator has decided to quell by reassuring about the tenge's strength.

Kazakhstan, along with Russia and Belarus, is a member of the Customs Union, which will be transformed into the Eurasian Economic Union in 2015. He says the arguments offered by Kelimbetov in support of the tenge are of a fundamental nature whereas the devaluation problems of the tenge are not fundamental. "I agree with him that the tenge still has a cushion and it is undervalued against the ruble," he continues, "but our currency faces pressure because there is no certainty about and trust in the tenge and monetary policy since the fixed-rate regime is always more fragile and inflexible." Problems in Kazakh banking system The move by the central bank to extend the currency trading corridor will have knock-on benefits for the country's banks, which are still dealing with last decade's financial crisis. Kazakhstan's banking system is currently facing two major problems â&#x20AC;&#x201C; rising non-performing loans (NPLs) and long-term funding. Kazakh banks suffered badly from the bursting of the property bubble in 2007 because of their dependence on foreign funding, which came to a "sudden stop" as the credit crunch took hold. The banks reacted to this shock by raising interest

"The more we will integrate with Russia, the more we will depend on the ruble"

Local financial analysts share Kelimbetov's optimism over the tenge, but warn against complacency about the behaviour of the Russian currency, which is continuing to fall in value as more sanctions from the West are imposed. "The more we will integrate

rates and shifting the burden onto the clients. "When you shift the risks onto the clients, the quality of assets worsens," Khakimzhanov notes. The already poor quality of commercial banks' loan portfolios worsened further

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as a result of the global crisis and has recovered only very slowly. Even though the government has been preoccupied with the problem of bad loans in the past few years, the share of NPLs stood at 31.6% for the whole of the banking system as at August 1. The government has tried to solve this problem in an administrative manner by establishing schemes to buy NPLs from commercial banks and to encourage them to write them off, but

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to solve the problems in the banking sector. "Unlike the OECD countries, Kazakhstan doesn't apply regulatory impact analysis and lacks specialists and analysts because there is no demand," the analyst complains. Transparency in the financial sector, infrastructure, reporting and corporate governances also remain major issues in the country, where the law prevents banks from holding stakes in nonfinancial organisations privately; as a

"When you shift the risks onto the clients, the quality of assets worsens"

these measures have largely failed. The government has now ordered banks to reduce the share of NPLs in their loan portfolios to 15% by 2015 and 10% by 2016. Annette Ess of Standard & Poor's told a conference in Almaty on September 10 that most of the banks ("about three-quarters" of the country's 38 banks) to which S&P's assigns ratings would fulfil the 15% requirement by the end of 2014 or would be close to it. Ess believes that banks will manage this by writing off debts, increasing the recovery of debts through the sale of security pledged on loans (though this takes time), and setting up special subsidiaries that will continue to deal with bad loans. Khakimzhanov of Halyk Finance explains that banks will funnel bad loans from their balance sheets, but will keep them as part of consolidated balance sheets. He sees the root cause of the problem in the imperfect legislative basis – the company law, the bankruptcy law and civil laws – which creates a "certain barrier" to making the transfer of property rights easier and freer. In his opinion, Kazakhstan needs to change these laws and regulations, and strengthen the role and independence of the judiciary

result, banks can only acquire shares in such entities on the stock exchange. "This means banks cannot control insolvent debtors and cannot appoint an administrator. A threat of this happening usually disciplines debtor companies. In Kazakhstan, banks cannot do anything with insolvent entities," Khakimzhanov tells bne. Without creditors exercising their right to sell assets of debtors who fail to fulfil their obligations, the quality of loan portfolios will continue to be a problem in Kazakhstan, he believes. "This means banks will issue loans only to affiliated entities because there is less risk. Only banks with administrative leverages will develop in this situation because it is impossible to establish control over debtors via courts without the trappings of power," he says. At the moment, Kazakh banks issue loans only on security, usually assets and working capital, Khakimzhanov explains, "otherwise they will not be able to control debtors." Capital requirements In order to strengthen the banking system, the National Bank intends to increase minimum capital requirements from the current

KZT10bn to KZT100bn in 2019. The banks that fail to meet these requirements will have a cap placed on them over the retail deposits they can attract. The regulator explains the measure by the need to "increase the share of loans in GDP, expand the coverage of consumers with financial services, develop new high-tech services, including mobile banking and internet banking services, and to switch to Basel III standards." In a commentary published on August 8, S&P said the new capital requirements would strengthen the banking sector "only if there are simultaneous efforts to improve banking regulation, banks' risks management practices, and corporate governance." S&P believes the measures will force smaller and weaker banks to leave the market or merge with larger institutions, while the weaknesses of the sector – "the lenient banking regulation and supervision, banks' aggressive risk management practices, and sometimes deficient corporate governance procedures" – are likely to persist. It will also discourage foreign investors and niche players from entering the market, the rating agency says. Despite this, it doesn't anticipate the measure will affect Kazakh banks' ratings over the next two years. At the moment, only five banks out of the country's 38 have a market capitalisation of over KZT100bn and six banks have capitalisation of KZT50bn100bn, according to S&P. Khakimzhanov of Halyk Finance is critical of the measure and says that Kazakh banking regulations should be liberalised instead of being tightened. "The regulator is now trying to regulate not what should be regulated, but with its regulation and restrictions it is trying to substitute solutions which can be adopted only for a certain financial institution," he laments. "Banks lack resources because all resources are diverted to deal with unproductive activities such as fulfilling regulatory requirements, for example maintaining capital requirements."

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Mongolia: the must-see tourist destination no one is visiting Terrence Edwards in Ulaanbaatar

nown to many as the land of the Blue Sky and the birthplace of Genghis Khan, Mongolia, the world's least densely populated country, has been named a must-visit location by publications such as The New York Times, The Guardian, and National Geographic. But despite the exotic appeal of the Gobi desert and vast steppe, tourism still remains a blip on Mongolia’s economic charts. By most accounts tourist numbers have fallen so far this year. Government figures show that the number of people entering on tourist visas was 210,587 in the first seven months of 2014, some 8.5% fewer than the same period last year. However, because many people enter the country to look for work or other reasons unrelated to tourism,

that figure alone is unreliable. But financial reports from the publicly traded Genco Tour Bureau show earnings were down 22% for the first half of the year, though that also misses the peak tourist season between June and October. Tsedevdamba Oyungerel, Mongolia's minister of tourism, sport and culture, also believes that tourism is down from past years: “So, according to this year's observation, July was quite a successful month. But only July. June wasn't successful and August was not good either.” The lack of attention tourism receives from the government is unfortunate given that the industry can have such wide economic impact compared with mining – the main driver of

Mongolia's economic growth – which tends to benefit only a small portion of the population. Too much reliance on resources typically results in appreciations of the local currency and deteriorating competitiveness in other sectors – a phenomenon known as “Dutch” disease. Sustainable tourism, on the other hand, provides jobs in local communities and encourages more spending there. It also provides an economic incentive to help preserve cherished vanishing cultures, such as Mongolia's nomadic traditions. Own worst enemy Waning enthusiasm for Mongolia's mine assets has forced lawmakers to look to other industries such as tourism to keep the economy afloat. The change of heart helped Oyungerel snatch the ministry's largest-ever

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budget yet this year. The parliament for 2014 approved a budget of 5bn tugrug ($2.7m) this year, five times greater than the Tourism Ministry had the year before. Unfortunately, Mongolian tourist services leave many travellers frustrated. A lack of roads makes

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Strained relations with the Mongolian government made organising the driving marathon more trouble than it was worth, says event manager Katy Willings, so participants will not even have to drive through Mongolia any more to finish. For the first time since The Adventurist first launched the driving marathon 10 years ago,

"The government is hoping to legalise gambling to create new attractions for tourists" travel laborious and sometimes perilous at night when there is little-to-no visibility. Although the government plans to build paved roads between the capital and every province next year, there still will not always be good routes between provinces. “The quality of roads is really bad – they're bumpy with many potholes. Really, the government should do something about the roads,” says Unbrakh Tsetsenbileg, a sales manager who has also worked as a tour guide at Juulchin World Tours. Oyungerel and Tsetsenbileg both think tourist companies must find ways to boost marketing and promotion. That is why the Tourism Ministry has spent most of this year's budget on its partnership with the ITB Berlin trade show to help build up a network with travel companies around the world. But controversies such as last year's attempt by the Ulaanbaatar Citizens' Council to ban the use of foreign languages on signs outside buildings demonstrate the obstacles facing the tourist industry. Locals felt the signs made their capital look too much like a foreign country. Oyungerel said she took a strong stand that the signs are helpful to foreign guests and eventually prevailed. Most damagingly, domestic criticism of one of the country's largest tourism draws, the Mongol Rally, has led to it being diverted away from Mongolia.

2015's brave motorists setting off from Britain to travel 10,000 miles across Europe and Eurasia will finish at the capital of another Mongol nation, Ulan Ude in Russia's Buryatia Republic. For Mongolia, that means the loss of of tens of thousands of dollars from tourist spending, customs duty, VAT, excise tax and sales tax. In addition, this year will also be the first time cars will be shipped out of Mongolia back to Europe, rather than donated or sold. Proceeds from sales that exceeded The Adventurist's own expenses had previously been donated to charity. “New policy: no car left behind. We're never going to import another car to Mongolia,” says Willings. Local newspapers had decried the Mongol Rally as a public nuisance and an excuse for supercharged young foreign travellers to

and in trouble”, has not abandoned Mongolia completely. It will continue to host the Mongol Derby in Mongolia – a 1,000km horse race that replicates the journey of the postal riders that delivered messages for the 13th century Mongol Empire. Rolling the dice on casinos Minister Oyungerel is now hoping to legalise gambling to create new attractions for tourists. She expects parliament to vote on a law that would allow for a horse-racing track. She is also preparing a second bill that would allow for a casino. “The legalisation of gambling, if done in a responsible way, would be a major positive for Mongolia's economic growth and create an industry that is larger than the current mining based economy,” says Harris Kupperman, chairman of the real estate development company Mongolian Growth Group. “With over one billion potential customers in China alone, the legalisation of gambling would allow Mongolia's tourist sector to mirror Macao's growth over the past decade.” But the real challenge Oyungerel and tour groups will have to face will be improving the industry without wiping away the rugged veneer that makes Mongolia such a special place to visit in the first place. “There is a beauty about that,” says Oyungerel about the challenges of being a tourist in Mongolia. “Those who

"The quality of roads is really bad – they're bumpy with many potholes" leave junked cars in the developing country. To the contrary, Willings says, the cars are all refurbished and had to pass inspection before being sold or donated. Nevertheless The Adventurist, which encourages its clients to get “lost

travel to Mongolia should expect some spontaneity. If they live by a set schedule they should come to Mongolia and leave behind their schedule for some days.”

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associate, is under investigation in Sweden into bribes the Scandinavian telecommunications group TeliaSonera allegedly paid to Avakyan's Gibraltarregistered company in order to enter the Uzbek telecom market. Chief Executive Officer Lars Nyberg of TeliaSonera, which operates under the UCell brand in Uzbekistan, resigned over the allegations in February 2013. Swiss prosecutors are also investigating Avakyan and Karimova for alleged money laundering.

Oh my Googoosha! Naubet Bisenov in Almaty Gulnara Karimova, the once powerful daughter of Uzbekistan's authoritarian President Islam Karimov, is under investigation for allegedly being part of an organised crime ring suspected of defrauding the state of millions of dollars. Uzbek prosecutors' announcement that Karimova is under investigation effectively removes any chance that the so-called "princess of Uzbekistan" will succeed her ageing father, who has ruled the country since the collapse of the Soviet Union, and could mean that she will end up in one of Uzbekistan's notorious prisons. It may also intensify the fierce succession battle within the countryâ&#x20AC;&#x2122;s elite. Uzbekistan's Prosecutor General's Office said in a press release on September 8 that Karimova - a businesswoman, philanthropist, former permanent representative at the UN, jewellery designer and pop diva under the name Googoosha is under investigation for alleged membership of an organised crime ring that had been involved in â&#x20AC;&#x153;systematic" economic crimes through blackmail and extortion and falsifications of

documents in 2011-2013. The ring, Uzbek prosecutors said, fraudulently got hold of state stakes in the Uzbekistan Airways national carrier, the Coca-Cola Ichimligi Uzbekistan joint venture, Fergana oil refiner and other enterprises worth a total of UZS159.5bn ($72m at the official exchange rate). The prosecutors said two other members of the ring, Rustam Madumarov and Gayane Avakyan, were sentenced under Clause 3 of Article 165 of Uzbekistan's Criminal Code for extortion and other crimes

Karimova has not yet been charged, but Uzbek prosecutors said criminal cases against most members of the organised crime ring had now been sent to court, and separate criminal probes had been launched against certain members of the ring, including Karimova, about whom "all the necessary testimonials have not yet been collected". "After the completion of the investigation, rigorous adherence to the principle of inevitability of punishment for each member of the organised crime group will be ensured," prosecutors said in the press release. Robber baronness Last year Karimova - who was named "the single most hated person in the country" and a â&#x20AC;&#x153;robber baron" in a 2005 US diplomatic cable leaked by WikiLeaks - engaged in a Twitter war with her mother Tatyana, younger sister Lola Karimova-Tillyaeva, and Rustam Inoyatov, chief of Uzbekistan's notorious SNB security service. Karimova was also involved in a public spat with First Deputy Prime

"The website claimed the compromising material had so outraged Karimov that he beat up his daughter" on May 24. The extortion charges carry a maximum sentence of 15 years imprisonment. Madumarov, a former pop singer, is said to be Karimova's boyfriend. Avakyan, her business

Minister and Finance Minister Rustam Azimov. Karimova accused her mother and sister of practising sorcery and Inoyatov of attempting to seize power in the country. Azimov, perhaps

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"After the completion of the investigation, rigorous adherence to the principle of inevitability of punishment for each member of the organised crime group will be ensured" Uzbekistan's most favoured official in the West, was accused of possessing billions of dollars and imposing financial restrictions on businesses. Karimova's public clashes with her family and Uzbekistan's most influential figures were seen as a sign of her political ambition to succeed her father. The clashes were sparked

off by the release of an interview with Karimova by the Las Vegas-based celebrity interviewer Peter Allman, recorded in autumn 2012 and released in March 2013. The website of Muhamad Solih, President Karimov's Islamic rival in the 1991 presidential election, claimed that Karimova had fallen out of favour

after Inoyatov showed Karimov a SNB dossier of her "criminal deeds" and her "half-naked photos". The website claimed the compromising material had so outraged Karimov that he beat up his daughter. Following the incident Karimova was stripped of her business and media empire and charity networks. Since February, Karimova and her 16-yearold daughter Iman have been under house arrest in Tashkent, though in August Karimova managed to smuggle out audio recordings to the BBC in which she claimed that she and her daughter were being treated "worse than dogs" and were suffering physical and psychological abuse.

Hit by falling remittances Clare Nuttall in Bucharest The Russian economic slowdown is taking its toll on the former Soviet countries of Central Asia and the Caucasus, which have seen the first drop in remittance flows from Russia since 2009. The European Bank for Reconstruction and Development (EBRD) said in its September report on the region that Uzbekistan and Moldova were the worst affected by the drop in remittances recorded in the first quarter of 2014. Other countries whose economies are highly exposed to Russia’s have also suffered. In Tajikistan, remittances - mainly from Russia - make up 49% of GDP, while they contribute 29% of Kyrgyzstan’s GDP. “Any further dampening of growth in Russia from the introduction of new sanctions would increase the effect on growth in this region,” according to the EBRD. Despite this, GDP growth remained “quite strong” in Central Asia, driven by major extractive industry projects, although the region’s largest economy Kazakhstan had been held back by delays, in particular at the giant Kashagan oilfield.

Overall, the EBRD expects economies in Central Asia to grow by 6% this year (down from an earlier forecast of 6.2%). The Eastern Europe region is expected to contract by 0.5%, but the forecast average is pulled down by Ukraine, while forecasts for the three Caucasian economies, Belarus and Moldova are all in positive figures. Some countries in the region may yet benefit from the sanctions imposed by Russia on Western producers of food and agricultural products. The “impact [of the sanctions] could be offset, particularly in Kazakhstan, by increased exports to Russia,” EBRD analysts say. However, the biggest change within the region is not directly connected to the Russian slowdown. In Mongolia, the EBRD has slashed its 2014 growth forecast from 12.5% in May 2014 to just 5%. This dramatic deceleration is due to lower prices of key export commodities as China's economy slows, delays to the second phase of the Oyu Tolgoi mining project and weaker investment activity, the EBRD says.

Eurasia I 57 The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS

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What you need to know

Opinion

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Military aid to Ukraine won’t solve anything Mark Adomanis in Washington

krainian President Petro Poroshenko openly called for the US to supply Ukraine with arms in an address to Congress on September 18. "Ukraine needs lethal and non-lethal assistance. "We can't win the war with blankets. And we can't keep the peace with blankets," he told a joint session of Congress, in an impassioned and eloquent speech. "Democracies have to stand together – or they will be eliminated one by one." Poroshenko will certainly find a ready audience willing to listen to his pleas for arms. Although the Ukraine conflict is currently at a standstill and a highly imperfect ceasefire appears to generally be holding, the past several weeks have seen ever-louder calls in the US and Europe to provide lethal military assistance to Kyiv. These calls have been especially vocal from the more conservative sides of the political spectrum in the US, where the advisability of military support is considered self-evident. As this column is being written, the Senate Foreign Relations committee is debating legislation written by Robert Menendez and Bob Corker that would substantially escalate US assistance to the Ukrainian military. Among the $350m worth of aid being considered are kit such as counter-artillery radars, surveillance drones and antitank weapons. If enacted, Menendez's bill would be an enormous escalation from the paltry amounts of body armour and MREs that the US has offered so far. And the Senate isn’t alone in its enthusiasm. Just the other day the House of Representatives passed a resolution that, while short on specifics, also mentions the advisability of additional military assistance to Ukraine. While it’s not yet certain, it does appear likely that the US will soon be sending a sizable quantity of military hardware to the threadbare Ukrainian army. The domestic

political pressure to respond to Russia’s actions in Ukraine in a way that is seen as “tough” is overwhelming, and few dare resist for fear of appearing “pro-Putin” or “proRussia.” If Menendez’s bill makes it out of the Senate, for example, there is no way that President Barack Obama, who met Poroshenko in the Oval office on September 18, will veto it. There’s one problem with the growing consensus, however: military assistance to Ukraine won’t solve anything. No defence In comparison to Russia, Ukraine faces a gap in defence capabilities so enormous that it is difficult to exaggerate.

"Military aid will do nothing to resolve the conflict and is very likely to enflame it" According to data from the Stockholm International Peace Research Institute, the best source of data for comparing defence spending, in 2013 Ukraine’s total military budget was a mere 6% of Russia’s ($5.3bn versus $87bn). And that is just the headline spending figures. While Russia’s military industrial complex is obviously not free of corruption, evidence suggests that the levels of graft inside Ukraine’s Yanukovych-era army reached truly pharaonic proportions: billions upon billions of dollars from the (already paltry) defence budget simply vanished into thin air.

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"If Menendez’s bill makes it out of the Senate, there is no way that President Obama will veto it" In the early weeks of the crisis the Ukrainian army was so desperately short of money and fuel that it had to resort to a public fundraising drive. Getting Ukrainian military capabilities to a level at which they would present a reasonable deterrence to Russia would take assistance orders of magnitude larger than anything being proposed by Menendez (or anyone else inside the Beltway). To put it bluntly, in order to be even a rough match for the Russian army, Ukraine would need at least $5bn per year in additional defence spending. The Ukrainian economy can’t come up with that kind of money, and the West isn’t going to either. In the meantime, though, the only thing that military assistance will accomplish is the following: it will make Ukrainian leaders somewhat more willing to risk the renewal of a military conflict that they will not be able to

Opinion

win. Military aid would prolong an already bloody and catastrophic conflict, and risk even further escalation from Russia, which has made it abundantly clear that it will do whatever it takes to prevent a battlefield defeat of the rebels in eastern Ukraine. If the West really wants to help Ukraine, it should provide generous long-term assistance to restructure the economy. For various political reasons this won’t actually happen, but Western economic assistance could accomplish quite a lot of good if done in the right way. Buying the Ukrainians new tanks might feel like it’s very “serious” and “tough,” but it is actually the worst of both worlds: it wastes increasingly scarce Western resources, while simultaneously limiting the crisis to narrow military terms where Russia possesses an unassailable advantage. There are no easy answers in Ukraine, no quick fixes to a situation that has spiralled out of control. One thing is clear, though: military aid will do nothing to resolve the conflict and is very likely to enflame it. Keep that in mind once Menendez’s bill is passed.

Opinion

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The risks in a galvanized Nato

STOLYPIN:

Mark Galeotti of New York University

he recent Nato summit in Wales saw much discussion of the need to prepare to meet the “Russian threat,” of red lines and "little green men," of tough-minded resolve and unshrinking unity. At a time when most of Nato’s agenda is crowded with disasters of its own making – Libya, Afghanistan, Syria, Iraq – it must come as something of a relief to be facing the revival of an old and familiar antagonist. However, while the Ukrainian crisis has breathed new life into the alliance, it has also demonstrated its essential limitations, and the risks of simply exacerbating current tensions with Moscow. Nato is, after all, a military alliance. Despite its often illfated excursions into peacemaking and peacekeeping, in essence it remains a structure developed to deter if possible and resist if necessary a direct military attack. Article 5 of Nato's founding treaty, after all, stipulates that an attack on one member is an attack on all. That was all well and good when the real threat appeared to be Soviet tanks spilling through the Fulda Gap into West Germany, when unity seemed the only defense against a Warsaw Pact that could throw more troops, tanks and aircraft into the field. But the age of such conflicts, at least in Europe, is mercifully over. Now, the challenge is from non-linear warfare, a subtle and deliberately complex blend of political, military and economic means. To the soldiers, the lessons to be learned from Crimea and eastern Ukraine are that force needs to be met with force, promptly and decisively. “Just shoot the first ‘little green man,’” I’ve heard several of them say, “and you deter the rest.” All well and good, and certainly one of the reasons why the Russians were willing and able to take Crimea so quickly and easily was that the Ukrainian military did nothing to resist: Kyiv issued no clear orders and the

commanders on the ground appeared uncertain how to act in the absence of those directives. But the form that the Russian incursion took was, as much as anything else, shaped by the opportunities presented to them. Once it became clear the Ukrainians weren’t about to take up arms and sally from their bases, why not use the Naval Infantry marines and Spetsnaz commandos to take the peninsula? When faced with a less amenable foe, though, the Russians are likely to adopt rather more roundabout tactics that place Nato in a less comfortable position. What, for example, if the first sign of a new Russian adventure is not a camouflaged soldier, even if he has taken off his badges, but a teenage girl waving a placard calling for rights for the Russian minority? Or a Caribbean-based front company trying to buy a strategically-located island, secretly on behalf of a Russian state-affiliated corporation? Or divisive and extremist political groups agitating for a withdrawal from Nato, who seem mysteriously well funded? Or firefighters crossing the border seemingly by accident as they battle a toxic fire when a tanker full of noxious chemicals accidentally drives into a frontier post? The essence of Russia’s new game plan is to prevent making Nato's life easy by presenting a direct and incontrovertible threat. No one is going to shoot a placard-waving teenager, nor a firefighter battling a blaze, and Nato has no power to scrutinize the ultimate beneficiaries of property sales or backers of fringe lobby groups. Cyberattack Nato is unsure of its footing when the threats are more subtle and the responses less clear. Just ask Estonia. In 2007 it was hit by a massive wave of cyberattacks clearly

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encouraged and orchestrated by the Russian state, but largely carried out by so-called “patriotic hackers.” Faced with the difficulties in proving beyond doubt which machines launched the attacks, let alone that the Kremlin was behind it, and unclear how it could react — Nato could hardly launch cruise missiles against computer geeks vandalizing government websites — then the alliance did very little. And now, Estonian security officer Eston Kohver is sitting in a cell in Moscow, having been kidnapped from Estonia in a cross-border raid by Russian commandos. Is this an act of war, a challenge to Article 5? Suffice it to say that Nato tanks are not on the move to get Kohver back. Ultimately, the Kremlin’s new non-linear tactics are an evolution of the time-honored ones of asymmetric war, whereby the weaker side seeks to ensure that it fights in a way and at a time that suits its more powerful enemy least. But they are also intensely opportunistic. Had the new government in Kyiv that replaced Yanukovych been united and determined, had the military chain of the command been trusted and sound, then it is doubtful that Putin would even have tried to seize Crimea, let along stir up trouble in the east.

Opinion

off from the West and its dangerously infectious notions of egalitarianism, transparency and rule of law. This faction is currently in the ascendant, but it need not be so, especially given the evident concerns of many within the Russian business community at the prospect of being locked away from the West. This is the challenge. Nato patently still has a role. But it is far too blunt an instrument to be able to deal with the range of subtle, deniable or downright devious tactics Russia would deploy. Instead, the West will have to develop new, more appropriate defenses — and try to avoid playing into the hands of the ultra-nationalist wing in the Kremlin happy to find excuses to see their country surrounded and beleaguered.

Mark Galeotti is Professor of Global Affairs at the Center for Global Affairs, School of Professional Studies, New York University, who writes the blog In Moscow’s Shadows.

Of course, Nato still has a role, not least to ensure there is no temptation for rather more robust pressure from Moscow on Europe. But to think that it can or even should try to respond to the full range of challenges of the new age of conflict is foolish — and even dangerous. First of all, the task of inoculating bordering states from potential Russian mischief — whether stirring up disgruntled minorities, subtle destabilization or unsubtle economic pressure — is more properly handled by other agencies. National governments, obviously, need to pay more attention to what, in military terms, would be called “target hardening.” Those minorities need to be integrated, due diligence should identify flanking Russian buyouts, political finance regulated. The trouble is that this means not just taking action now that Russia looks problematic, but sustaining it — turning away potential investment, alienating a neighbor and so on — even when things look quieter. Of course, the EU could also play a positive role here, but to date the EU’s capacity to mobilize and maintain this kind of action is also questionable. But the second serious concern is that the more Nato eases itself comfortably back into its role as the defender of the West from the Russian hordes, the more it consolidates the current dangerous and zero-sum confrontation. It also plays to a nationalist, even xenophobic constituency within the Russian elite, especially strongly represented within the security agencies and the Orthodox Church, who actually appreciate any opportunity to cut themselves

"The essence of Russia’s new game plan is to prevent making Nato's life easy by presenting a direct and incontrovertible threat"

Opinion

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Crimeans are happier to be part of Russia than Russians themselves Vera Graziadei in Crimea

t is mid-July and I am on a flight to a place that the UK Foreign and Commonwealth Office advises against with this menacing warning: "If you’re currently visiting or living in Crimea, you should leave now. If you choose to remain, you should keep a low profile, avoid areas of protest or stand-off and stay indoors where possible." Had I not been going to this exotic peninsula on the edge of the Black Sea every year since I was six, I would probably follow this advice. But even at the peak of the Crimean crisis in March, when I was anxiously phoning all my Crimean friends, none of them had encountered any problems, seen any "little green men", been searched, threatened or in any way intimidated. The majority of ordinary citizens were not affected at all, and far from "keeping a low profile," many flocked to the streets to celebrate what most saw as a re-unification with Russia. "I was crying with joy. I've never seen the sea front so full people. Everyone was ecstatic [on Russia's Day, June 12]. The day Crimea joined Russia was the happiest day of my life," Lyubov, 65, an old family friend from Yalta, told me on the phone. All my other friends and acquaintances, young and old, told me they voted for independence from Ukraine and that all their friends and family had done the same. The only person I knew whose experience was different was Jamala, a Crimean-born singer of Qimily Tatar origin, who told me in March: "When my grandpa heard that Russian had occupied Crimea, he barely handled it. He will not be able to endure another war, that's why I'm in hysterics as well.” The Crimean Peninsula is a unique cultural crossroads where east meets west - amongst feather-grassed steppes, forested mountains and a picturesque coastline you can find Greek ruins, Italian fortresses, Scythian burial tumuli, the Palace of the Crimean Khan, Jewish synagogues in caves, former palaces of the Tsar and Russian nobility, as well as many Soviet-era spas. Ethnically 58% of Crimea’s population is Russian, 24% is Ukrainian and 10% are Tatars, along with other minorities, including Belorussians, Volga Tatars, Armenians and Jews. One of the goals of my trip there was to talk to people themselves, to hear their voices unmediated by the press

and to understand what they think and feel about their new political status. New tourists All of these people's welfare mainly depends on tourism, so I am worried that when I arrive to Simferopol airport I will encounter empty lounges. I question the first airport assistant I see about how busy they are. "We used to have 23 flights a day and now we have 80. All from Russia. We are very busy," she replies. Of course, many people used to drive to Crimea via Ukraine and, with the war in the eastern Ukrainian region of Donbass, that option is not available to them anymore. During my July trip I find Crimea quieter than usual, though by August it seems quite busy again. As a regular tourist I do not see any major changes except for Russian flags everywhere, placards advertising Russian political parties and police dressed in a different uniform. Otherwise, Crimea remains just as I love it: culturally and geographically rich, and with always something new to explore. Needless to say I never encountered any major roadblocks, never was stopped, searched or threatened. Crimean beaches are not empty, there is food in the shops and most

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of what I have read about Crimea before I went there was just not true. On both trips I visit Hotel Yalta, a modernist giant that recalls a large ship, where my parents used to take me as a child, and I am pleasantly surprised to find it not much under its usual capacity. Owned by Muscovites for quite a few years, it was only this summer that the owners decided to do numerous renovations, including a new pool, new playground, new restaurants and a Cinema-themed bar that looks as if it could easily belong in the south of France. Many more works are still underway - a sign of the owner's renewed optimism in the future of the business. "Things are going okay this summer, but next year will be better," a young lady at the reception quickly answers me, but she avoids giving me more specific numbers and pretends to be busy with papers. Two receptionists at the Alushta's Sanatorim Druzhba, a Soviet modernist masterpiece resembling a spaceship out of Andrei Tarkovsky's â&#x20AC;&#x153;Solaris,â&#x20AC;? are far more willing to engage in conversation, given that their dilapidated workplace is only a third full. Lyudmila, 43, and Alyona, 48, both of whom voted for re-unification, are now upset that the prices have gone up but their wages remained the same (only now they are paid in rubles). "No one controls prices, so some shops have raised them more than others. It's like a free-for-all," complains Alyona. "It's better in Sevastopol, because they have a good mayor, he actually walks around the city himself, checking prices", adds Lyudmilla. Some of the younger generation are not as optimistic. Crimean-born Liza Kuzub, who's been living in Kyiv since 2012 but has come back home for the summer, shares with me that many of her friends, who are young interpreters and translators like herself, are concerned about their career prospects, as there are no foreign tourists and there are fears that there will not be many in the future if "Crimea will become an anti-globalisation isolated place." As a result, 70% of the young people she knows are planning to move out of Crimea in search of a more promising life. A Maidan activist, she still says that she always loved Russia and Russian people, even though recent events have made her look at everything "in a different light." By contrast, Olga Rogacheva, a 27-year-old translator from Sevastopol, is not planning to move anywhere and dismisses my question about whether Russia forced a referendum upon Crimeans. "All my family and friends in Sevastopol wanted to join Russia for a long time. I even have a video on Youtube, where people gathered at the Popular Assembly on the square and decided to separate from Ukraine. Back then there was not even talk about

Opinion

the Russian army, or seeking Russia's help. It was just the people of Sevastopol deciding themselves that their city should become autonomous, because they didn't want to be with Kyiv anymore." Sevastopol has always been a Russian city with a special status, so it is not surprising that they would be proRussian, but it is not much different for the rest of Crimea. When the Soviet Union collapsed and Ukraine voted to be independent, Crimean support was the lowest of all of the Ukraine (only 54% in favour) on a low turnout (65%). The following year the Crimean parliament voted in favour of a referendum, but it was forcibly suppressed by Kyiv's administration. Crimean-born Igor, a 32-year-old organiser of concerts, who developed patriotic feelings for Ukraine but not to the extent as to "wear Ukrainian embroidered shirts,â&#x20AC;? confidently states that even though in his opinion the referendum was illegal, "because the rules of the referendum were broken and sovereignty of a country was violated," he does not doubt that the majority of Crimeans voted to be with Russia.

Opinion

But he is sceptical about the reasons behind the voting: "Only 20% people are sincere Russian patriots, the rest are just pragmatic people, who see it to be more â&#x20AC;&#x2DC;profitableâ&#x20AC;&#x2122; to be part of a bigger economically, more powerful neighbour." He is convinced that it was Russian media that influenced people's opinions: "I just hope for all the people that voted for Russia, expecting 'golden mountains', that those golden mountains will come to them." Personally he did not vote at all, because he "prefers to be free and he doesn't want his rights to be curtailed in Russia." When I ask him which particular rights he's afraid he might not be able to exercise, he replies "in Russia you can't even re-post [opposition activist Alexei] Navalnyâ&#x20AC;&#x2122;s blog and I prefer to live not such a rich life, but to be free." At the end of the interview, when I ask him whether he is going to move out of Crimea, he admits that even though he has the means to do so, he'll stay as he will be able to "live with it all." Tatar takes To get a minority perspective, I speak to Mustafa Seitumerov, a leader of the Tatars of the Southern Part of Crimea, who confirms that during the time of the referendum some of his people were afraid, because of the history of forced deportations by Stalin. However, the war in Donbass makes them grateful to be living in peace. He also reminded me that they used to be represented by former Ukrainian president Viktor Yanukovych's Party of the Regions, which is now very weak and has no chances of winning in the near future. This means that even if they had remained part of Ukraine, they would have had no hope that their interests would be well represented in the Ukrainian parliament. However, he did express regret that joining Russia happened in such a hurried and forceful way, and said that even though some of his friends instantly hung tricoloured

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flags on their homes, for the majority it will take a longer time to change their hearts. He shared his hopes that Tatar people will not be fooled and that the promises that have been made to them by the new government (for example 20% of the MPs in the Crimean parliament) will be fulfilled. He also denies rumours that the Tatar people are planning an armed uprising against the new government: "Tatars fought for 70 years for their rights and we never took up arms. We want to be working with the new government, we do not want to be pushed away." Already during the short time that Crimea has been under Russia, the Tatar language has been legalised as a state language (which Ukrainians refused to do for years) and one of the main Tatar holidays was made into a national holiday for the whole of Crimea. Finally, I go to Karaites Kenasas in Evpatoriya to find out what Karaites Jews feel about being part of Russia. An answer is provided to me by the building itself - in the central yard there is a marble obelisk to Russian Emperor Alexander I with a Russian golden eagle on the top. Karaites, unlike Tatars, have no history of conflicts with Russia and on the contrary, they have always collaborated with them, have fought on Russia's side during all wars, and many Karaites took high positions of power under Russian rule. Overall, despite a slower touristic season, the majority of Crimeans seem happier to be part of Russia than Russians themselves, even though with any new political change there will always be those who are unsatisfied. The question is whether, despite legitimate questions about how it came about, one respects Crimeans' right to selfdetermination as per the Autonomous Republic of Crimea's constitution, or whether one follows other geopolitical and economic agendas. It is clear that the majority of Western governments and press have chosen the latter.

Opinion

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INVISIBLE HAND:

A lasting ceasefire, temporary sanctions Liam Halligan in London

he partial ceasefire in Donbass and Lugansk has done little to ease the East-West information war and diplomatic argy-bargy relating to Russia and Ukraine. If anything, the rhetorical exchanges have become testier during September, with the EU and US expanding their sanctions programme, even though a ceasefire – patchy, but thankfully still holding – was agreed between Kyiv and rebelfighters in East Ukraine. But sanctions will soon come to an end for several reasons. The new US/EU measures are designed to target top stateowned energy, defence and financial services companies – including Gazprom, Lukoil, Rostec and Sberbank. The list of Russian officials subject to asset freezes and travel bans has also been extended. “Given Russia’s direct military intervention and blatant efforts to destabilize Ukraine, we’ve deepened our sanctions, in concert with our European allies,” said US Treasury Secretary Jacob Lew. Vladimir Putin’s verbal retort was spiky. “Even when the situation is moving towards a peaceful settlement, they take steps aimed at a breakdown of the peace process. Why?” asked the Russian president. At the time of writing, Moscow has yet to respond with counter-measures to this second wave of EU/US sanctions. But the 12-month ban on Western food imports, introduced over the summer, remains in place. Barely affecting US producers, Russia’s carefully targeted agricultural embargo is now causing howls of protest from the EU’s powerful farming lobby.

awareness among Europe’s political classes of this huge eastward trade in perishables, Moscow’s food sanctions mean commercial realities are now hitting home. EU exports to Russia of foodstuffs now banned amounted to ¤5.2bn last year, according to recent calculations by the European Commission. Brussels controls a compensation fund, set up under the Common Agricultural Policy for farmers facing potential ruin, of just ¤420m – miniscule compared even to official estimates of the losses. It’s unclear how much of this emergency fund will be available for compensation related to sanctions. For some European farmers, the Russian market is now vital. Some 75% of EU cabbage exports went to Russia last year, together with 63% of tomatoes, 57% of pears, 54% of peaches and 52% of apples sold abroad. The ban on exports to Russia has caused a mighty food glut in Western Europe, driving some wholesale prices down as much as 80%. The single market, of course, means EU countries reliant on selling to Russia have diverted produce to member states that aren’t, depressing farmers’ prices throughout the 28-country block. Across the EU, fruit is withering on trees and vegetables are rotting in the ground, having become uneconomic to harvest. European farming groups put total sanctions-related losses at well over ¤10bn, far beyond the official numbers.

Food for thought A rapid growth in consumer purchasing power over the last decade means Russia has become a very significant market for EU food producers. A third of the bloc’s fresh fruit and vegetables exports were sold in Russia last year, plus a quarter of exported EU beef. If there was previously little

Even prior to Moscow’s food-export embargo, it was clear EU/US sanctions were seriously impacting Western Europe’s economy. Having grown 0.8% during the first three months of the year, GDP in Germany, which has by far the most business-links with Russia among the large EU members, contracted 0.2% in the second quarter. Italy, also with big trading ties to Russia, has just gone back in recession. There’s a real danger that heightened geopolitical tensions, aggravated by sanctions, could mean the same fate befalls the entire Eurozone.

"The EU can’t and won’t bailout Ukraine"

Inflation across the Eurozone was just 0.3% in August, a fraction of the 2% level targeted by the European Central Bank. Falling food prices are now further stoking deflationary dangers. This fruit and vegetable glut, and related downward pressure on wholesale food prices, could push the Eurozone

Opinion

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into outright deflation as the region struggles to find new markets or consume more of its own food.

Kiev yet to agree on a new price, the spigot was closed in June.

Having shaved interest rates again in early September, ECB supremo Mario Draghi has pledged to start buying assetbacked securities – otherwise known as overt quantitative easing – later this autumn. So, the US Federal Reserve is attempting to wean the US off its monthly dose of QE just as the ECB is about to start mainlining the same drug. An extremely risky process, this monetary switchover is already in danger of seriously unnerving fragile global equity and bond markets. A lurch into headline Eurozone deflation, which Moscow’s food ban could quite easily generate, may result in financial panic.

The International Monetary Fund’s existing $17bn Ukrainian support programme was based on a 5% economic contraction in 2014 and a bounce-back the following year. Under that scenario, Ukraine’s debt/GDP ratio climbs from 40% to 62%, which the IMF has argued is manageable, allowing Ukraine to avoid a painful debt restructuring.

Reasons to be cheerful Invisible Hand has previously argued that Western sanctions on Russia would be short-lived, as Europe wouldn’t be prepared to take the commercial pain – not least because far greater trade exposure to its giant eastern neighbour makes that pain so much greater than that of the US. With the Eurozone on the cusp of recession, that pain threshold is near. German industrialists are quietly angry at the impact of sanctions on their extensive Russian business interests. French farmers, meanwhile, are vocally furious at the impact of Moscow’s food ban. Mobilizing in their usual manner, and incensed by recent prices falls, they’ve already set fire to several regional tax offices in France. There’s another reason East-West sanctions could be dismantled quite quickly – or, at least, not extended further. Ukraine’s economy is a mess, and getting worse. This increasingly indebted country’s upcoming schedule of bond repayments means that if a deeply damaging default is to be avoided, a default that could send shockwaves across an already shaky Eurozone, an enormous additional bailout will be needed. In the US and Europe in particular, there’s barely the money and certainly not the political will to provide the necessary funds to Ukraine. The upcoming rescue package, then, will need both Russian and Chinese money. That’s not going to happen until the West drops its sanctions or gives a very clear and public commitment to drop them, so allowing Moscow to do the same. In June, the European Bank for Reconstruction and Development (EBRD) forecast the Ukrainian economy would contract by 7% this year. That was changed to an even more crushing 9% GDP reduction in September, with the EBRD pointing to “significant downside risks” to that already disastrous outcome if there’s any further fighting in East Ukraine or more damage to trade with Russia. The bank’s economists also warned, ominously, that Ukraine would face “formidable difficulties” if gas supplies from Russia weren’t fully restored before the winter. Gazprom supplies over half of Ukraine’s still heavily-subsidized gas. With Moscow and

These figures date from before the worst of the fighting in East Ukraine. They don’t consider the massive damage done to factories and transport infrastructure in Donetsk and Lugansk, which together account for almost a sixth of Ukraine’s GDP and a quarter of all industrial exports. Even if the ceasefire holds, and peace is quickly restored, the damage to roads, railways, utilities and airports will take years to repair. The IMF has recently revised its numbers and now foresees a 6.5% contraction this year. But there’s still a high chance the existing programme will fall apart, implying a default.

"Russia’s carefully targeted agricultural embargo is now causing howls of protest from the EU’s powerful farming lobby" That would compound Ukraine’s economic turmoil, endanger Eurozone stability and further discredit the IMF. Unrealistic forecasts also unravelled in Greece, resulting in a painful and extremely disruptive ¤200bn debt restructuring, made far worse by earlier IMF delays and denial. The EU can’t and won’t bailout Ukraine; Germany isn’t even prepared to fund other Eurozone members. Congress would pay for President Barack Obama to arm Ukraine against Russia, but the White House has wisely refused, making US lawmakers even less likely to pay for anything else. In particular, Washington hawks would be loath to give serious non-military money to Kyiv given that the cash would go straight to Moscow. Russia, after all, holds several multi-billion dollar Ukrainian bonds upon which payment is soon due. Kyiv will soon need another, much bigger bailout. Europe and the US have neither the money nor stomach to finance that alone. That’s the main reason sanctions will soon come to an end. And that’s before you consider the gas. Liam Halligan is Editor-at-Large of Business New Europe. Follow on Twitter @liamhalligan

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Opinion

Russia gradually greening with smart technology and cooperation Nelly Segisova of Smart City Technologies Group

Sustainable development in Russia has grown increasingly important in recent years as the government seeks to modernise the economy and lessen the country’s reliance on extractive industries. Reforms have been happening through legislation, civil society initiatives and greener business practices, but there is still a long way to go before Russia’s economy becomes truly sustainable. Given Russia has such a wealth of natural resources, the focus on maximising their development is only to be expected. The main challenges are to improve the energy efficiency of resource extraction and of the wider economy. Using technology and expertise to create smart cities is a big part of the solution and a major area of potential international cooperation. There are vast opportunities from modernising energy consumption where efficiency could lead to savings. To push this forward in manufacturing and infrastructure, it is vital to use high-tech and knowledge-intensive solutions. This requires advanced methods of management and strategic thinking. A greener economy in Russia requires a long period of structural and technological transformation – and most importantly the emergence of a "new" responsible citizen. One way to begin this transformation is to look at how best to leverage the advanced smart cities technology available in a manner appropriate to the local context. Smart City Technologies Group is adapting advanced global technology to regional infrastructure projects in Russia. One successful project we’ve seen was in developing a long-term partnership with a company in Yakutia, a rugged and frigid region in northeastern Russia. We provided advice on introducing energy-efficient technologies projects on public buildings, along with legal support and mediation services. As a result, we saw efficiency improve by more than 50% and a much higher-than-expected return on investment. The lending banks were so impressed they were willing to initiate similar projects on a bigger scale with the same set of players. Our partner is now becoming a specialist in modernising public and industrial buildings in the extremely challenging climate of Yakutia, where winter temperatures can fall below -60°Celsius. As a next step, we hope to initiate a project in Yakutia with major elements of

smart city technologies in the region’s water, transport and energy sectors. These are experiences that can help Asian countries with their acute energy needs as their populations and economies grow. The focus should be on providing guidance and resources to help cities draft plans for sustainable development and integration of technologies to make that happen.

"A greener economy in Russia requires a long period of structural and technological transformation" A more balanced share of fossil fuels to clean technologies in the world fuel mix can be expected no sooner than 2050. Before then, we must use the technologies at our disposal and continue to use fossil fuels – but in more effective ways. In many parts of Asia, for example, compressed natural gas (CNG) or liquefied natural gas (LNG) is used for transportation. Similarly in Russia, despite its huge oil reserves, we are starting to see greener CNG- and LNGpowered vehicles. We see a huge opportunity for international cooperation. Russia’s vast size with many different environments makes it a playground for experimentation. Russia's long southern border also allows for effective links with Asia, which in the future will allow for more mutually beneficial interactions. Russia is home to the world’s biggest natural gas reserves and enormous mineral deposits, while Asian countries have the desire and abilities to develop innovative technologies. There is much synergy to be found here to create a cleaner, more efficient future.

Nelly Segisova is head of Smart City Technologies Group and a contributor to the Singapore International Energy Week (SIEW) 2014 website www.siew.sg

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