Business New Europe April 2012 issue by Ben Aris

Inside this issue: Green not always clean in Ukraine Family affairs in CEE Croatia's annus laboriosus Mongolia's problems with growth April 2012 www.businessneweurope.eu

Special Report: Alive & Corrupting

MARCH OF THE OLIGARCHS

How to invest in Eastern Europe and China

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Contents

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Central Europe: Robert Smyth (Budapest) +36 19995200 rsmyth_hu@yahoo.com Jan Cienski (Warsaw) +48 604994850 jancienski@ft.pl Mike Collier (Riga) +37 129473192 editor@balticfeatures.com Matthew Day (Warsaw) +48 607291187 mattday@businessneweurope.eu Tom Nicholson (Bratislava) +42 1907732736 tom.nicholson@sme.sk Kester Eddy (Budapest) +36 308665550 kester.eddy@gmail.com Steven Roman (Tallinn) +372 56665911 steven@online.ee Southeast Europe: Justin Vela (Istanbul) justinvela@bne.eu David O'Byrne (Istanbul) davidob@ttnet.net.tr Bernard Kennedy (Ankara) bkennedy@superonline.com Ian Bancroft (Belgrade) ian.bancroft@transconflict.com Bogdan Preda (Bucharest) bpreda@gmail.com Branimir Kondov (Sofia) br_kondov@yahoo.co.uk Guy Norton (Zagreb) norton@bne.eu

32 COVER STORY 6

The Insiders

Family affairs in CEE

March of the Oligarchs

German firms Czeching out

bne's Billionaires Club

German vim and verve in Slovakia

Perspective 30

Porta's door is open for business

airBaltic unveils five-year plan

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EASTERN EUROPE 14

Ukraine nears danger zone

A shot in the foot

Poland strains against red tape

Russian pigs caught in WTO poke

Hungary's "double speech" strategy

Wermuth launches Tatarstan Cleantech fund

Slovaks veer left after scandals

Green not always clean in Ukraine

NetJets Europe banks to the east

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Eurasia: Bureau Chief: Clare Nuttall (Almaty) +7 7073011495 nuttall@businessneweurope.eu Molly Corso (Tbilisi) molly_corso@yahoo.com Oliver Belfitt-Nash (Ulaanbaatar) +97688113149 oliver@businessneweurope.eu Advertising & subscription: Elena Arbuzova +7 9160015510 Business Development Director arbuzova@businessneweurope.eu Alec Egan +44 2030516548 Business Development Director (International) egan@bne.eu Design: Olga Gusarova-Tchalenko +44 7738783240 o.gusarova@businessneweurope.eu Cover illustration: Illarion Gordon

Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu

CENTRAL EUROPE

Made in Russia's Far East

VTB's private equity push

Anti-demo demonstration

Print issue: ¤68 / year Basic online package: ¤180 p/user, p/year Full subscription package: ¤500 p/user, p/year 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

bne April 2012

Contents

SOUTHEAST EUROPE 37

Croatia's annus laboriosus

Turkey takes foot off the gas

The cracks beneath Istanbul's modern faรงade

41 43

EURASIA

SPECIAL REPORT

Mongolia's problems with growth

Fico vows an end to monkey business in Slovakia

Make or break in Tajikistan

The Czech connection

Banking on Georgia

Hungary's crumbling pillars of society

Albanian ambitions

Uncivil in Georgia 64

A Czech'ered past

From mass market to upmarket

Armenia slowly emerges from shadows

Can Putin deliver lower corruption in Russia?

OPINION

A new phase

Diary of a Russian election observer

Bribed in Bucharest

CLASSIFIED

UPCOMING EVENTS

A Romanian retraction

Made in Europe 55

I The Insiders

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A Russian evolution

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security. Now this has largely been achieved, they're starting to demand more from their leaders â&#x20AC;&#x201C; and from the political class in general. The economy needs to be further liberalised, the state needs to get out of the way of business and, above all, corruption must decline. In recent years, the Russian population has been deeply disinterested in politics, particularly the younger generation who've benefited disproportionately from Russia's economic transformation. In contrast to many other emerging markets, there are effectively no large groups of disenfranchised youths with nothing to lose. Young Russian adults generally have few problems finding relatively well-paid jobs. Many are the business owners and entrepreneurs driving the country's economic progress.

Mattias Westman of Prosperity Capital Management

he Russian presidential election won by Vladimir Putin on March 4 was the fifth one I've observed as an investor in Russia. The first one was more than 15 years ago, in June 1996. We were about to launch our "Russian Prosperity Fund" and were very eager to learn the result. The campaign had been extremely tense and the incumbent Boris Yeltsin had started with an approval rating in low single-digits. The actual election was heavily stage-managed and the outcome had only a passing relationship with the wishes of the Russian population at the time. Yeltsin ended up being re-elected despite suffering a heart attack just a few weeks before polling day. But the compromised result was universally greeted across the Western world as "a great victory for Russian democracy" and a final crushing defeat of worldwide communism. While the latter was probably true (and a reason to celebrate), the former was less true. There have been four more presidential election campaigns since, including Putin's last one. Some have been more exciting than others, but all have been interesting in own their way. This one was no exception. Protest vote The demonstrations and the rise of the "protest movement" raised big questions about how Russia's growing middle classes, primarily those in Moscow, would perceive the election process. In the months before, the main question was whether Putin was going to run again and in the long run I personally think his candidacy was a mistake. Putin had the opportunity to step aside and be seen as the politician who finally stabilised Russia, putting the world's largest country on an even keel and creating a functioning democracy, which could have secured his position in history as Russia's greatest ever leader. Instead, he chose to come back to the Kremlin and now risks "wearing out his welcome" with the Russian population. Still, Putin remains very popular among the Russian popula-

tion in general and his appeal is built on the huge economic progress the country has made since he took power in 1999. Russia's annual GDP has increased from less than $200bn to around $2,000bn. Average monthly wages are almost 15 times higher than 12 years ago and inflation has fallen from 85% in 1999 to around 5% today. On the back of this incredible turnaround, Russia's diplomatic status has also been transformed, from a chaotic laughing-stock of a country at the end of the 1990s to a widely-respected player once more.

"All political power stemmed from the centre and, ultimately, the presidency, creating a 'winner takes all' situation" When Putin first took office in 1999, many Russian people felt deeply humiliated by the collapse of the Soviet Union and the decline of their country "from superpower to basket case." Putin's high personal approval ratings don't carry over to his party. United Russia is seen as a grouping of bureaucrats, local strongmen and corrupt officials. Objectively speaking, such perceptions are at least partly true and part of the emerging middle class are becoming impatient with what they see as the slow speed of Russia's reforms. Another group contain those who appreciate what Putin has done for their country, but would still like to "move on". They want a new generation of leaders and another Putin presidency feels like a step backwards. Just a few years ago, Russia's middle class (or at least the Muscovites) were very preoccupied with achieving material

Those who've benefited less are the older generation, who may have had more difficulty coping with the collapse of the planned economy and adapting to the new "capitalist" Russia. Even this group, though, have generally seen their living standards rise sharply. State pensions and public sector wages have also significantly increased. This older generation is, in fact, the most pro-Putin voting block. Winner takes all The recent protests were triggered by reported instances of voting irregularities during the Duma elections in early December. They also have their roots in the lower rate of growth that Russia has seen since 2008, which in turn was the result of the West's "sub-prime" crisis. Russian people now see that fast economic growth cannot be taken for granted and further reforms will be needed in order to avert the risk of "stagnation". This realisation has shaken parts of the urban middle class and prompted them to demand more from their government, which has been reflected in the protests. Far from being something investors should fear, the recent protests are a profoundly positive development. They in no way represent a "Russian Arab Spring". Those protesting have been doing so not out of desperation, but from a position of economic strength. Their hands hold not Molotov cocktails but top-of-the-range iPhones and cups of over-priced Starbucks coffee.

Over time, these changes will have important consequences. Smaller victories will now be possible, and upon such smaller victories political careers and reputations can be forged. There is now no reason why a charismatic, independent candidate can't get elected as a regional governor and gain executive experience, potentially making him or her a viable candidate for the presidency itself. A liberalisation of the national media has also begun. The three main national terrestrial TV channels have always been pro-government but, since the USSR collapsed, a plethora of independent radio channels and newspapers have sprung up. Around 40% of Russian households have access to broadband internet. The virtual world in Russia, in contrast with some other large emerging markets, has never been limited in any way. For 20 years or more, everyone in Russia who is interested has had access to independent information. What has changed lately is that the national state-controlled news media has also started to report extensively on the protests, while giving ample airtime to opposition presidential candidates. This is a major, welcome change â&#x20AC;&#x201C; and one that will be extremely difficult to reverse. There is currently no real credible opposition party in Russia. This is partly due to the "power vertical" described above and the numbers involved in the current movement remain small â&#x20AC;&#x201C; estimates ranging from 30,000 to 100,000 people. The hope must be that this new reality will attract into politics some of Russia's "best and brightest", so laying the ground for a vibrant democracy. Russia's population is clearly becoming more politically active. Even if this process is one of "evolution rather than revolution", it is highly likely to continue. Mattias Westman is founding partner of Prosperity Capital Management

The political system built-up over the last decade, designed by the Kremlin's eminence gris Vladimir Surkov, included a very strong "political vertical". This meant that almost all political power stemmed from the centre and, ultimately, the presidency, creating a "winner takes all" situation. Such a system made it very difficult for alternative political forces to grow from the ground up. But in the last few months that has begun to change. Surkov has been demoted, direct elections for regional governors have been re-introduced, thresholds for entering parliament have fallen and the numbers of signatures required to register as a candidate have also been lowered.

"Far from being something investors should fear, the recent protests are a profoundly positive development"

I Cover story

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gerous) task, as bne quickly discovered. Most of the investment banks in the region have a pretty good idea of where the money is, but to actually list their biggest clients would put them out of business – or worse. Still, there are several names that pop out even on a cursory examination, and others that are more speculative but can be included with a high degree of confidence.

March of the oligarchs bne

f Forbes magazine is to be believed, 2011 was good year for the world's wealthiest individuals.

In its March edition, Forbes lists the world's billionaires in an exercise the magazine began 25 years ago, when it identified 140 people that were worth a billion dollars or more, mostly Americans. This year's list contained a massive 1,226 billionaires (up from 1,210 in 2010), who had a combined net worth of a record $4.6 trillion. So the crisis doesn't seem to have hurt everyone, then. What continued in this year's list is the growing importance of the emerging markets in the make-up of the world's wealthiest. The BRIC nations are home to a quarter of the names on the 2011 list, up from 10% in 2006. Of the 310 billionaires in Europe – the world's richest region – Russia dominates, being home to 96 billionaires this year, up from 79 in 2010 The increasing number of ultra-high net worth individuals in Russia should come as no surprise; bne reported last year that the chance of becoming a billionaire is the highest in Russia. Between 2004 and 2011, Russia produced one billionaire for every 1.87m people, compared with the US, the next best place to be, where one billionaire was created for every 2.29m. "After all, there certainly weren't any billionaires in Russia in 1991 when the Soviet Union was dissolved, and probably

none until 1994 when the first businessmen began to secure control over privatised property. But since then, Russia has been churning out billionaires by the dozen every year," says Jacob Nell, an analyst with Morgan Stanley in Moscow, who calculated the odds of becoming a billionaire in each market. Shadowlands Despite the glitter of the Forbes list, the US magazine has only scratched the surface of who owns the wealth in emerging markets. bne has found there are dozens of other names that should be on the list – some that are obvious, some that aren't. Clearly, Forbes grossly underestimates the number and wealth of the region's richest. "I could give you at least another 10 names, but I am not sure it is a good idea," says one highprofile banker in Moscow. "Some of the oligarchs don't mind being famous, but there are a lot more that don't want the attention. If I gave you the names, it would be dropping a hot brick in my lap – and in theirs." The bulk of Russia's money – which is home to half of the richest men in Europe – exists in the "shadowlands": this money is not necessarily illegally acquired, but the power of the Russian state and the unpredictability of the business environment means that if you have money and want to keep it, then it is usually advisable to keep your head down.

Just how many billionaires are "really" out there? Quantifying the acknowledged and more public wealth of the world's most successful businessmen and women is a tricky business. In addition to hiding much of their wealth from the powers that be, even the publicly acknowledged rich in the West have complex investments, some of which are public and some of which are not. For example The Economist has attempted to disentangle the empires of both British billionaire Richard Branson (#255 on the list, worth $4.2bn in 2011) and Swedish furniture king Ingvar Kamprad (#377, $3bn) only to conclude that IKEA, "ingeniously exploits the quirks of different jurisdictions to... minimise tax and disclosure." The confusion is highlighted by the newly launched "Bloomberg Billionaires Index" that updates estimates of the world's richest on a daily basis; Bloomberg estimates Kamprad's wealth at $42bn – more than 10 times Forbes' estimate this year. Given this, imagine how much more effective wealth-hiding schemes work in the rough-and-ready jurisdictions of Eastern Europe, which appears to be emerging as a global money-laundering hub. Billionaire city Trying to draw up a definitive list of billionaires in Central and Eastern Europe and the Commonwealth of Independent States is a thankless (and probably dan-

Cover Story I 9

bne April 2012

Probably the most glaring omission from the Forbes list is Russian presidentelect Vladimir Putin, who is worth around $40bn if the local press is to be believed. In 2007, ahead of the previous presidential election, Russian political analyst Stanislav Belkovski caused a minor political storm when he claimed in a newspaper interview in that Putin secretly owned shares in oil company Surgutneftegaz, state-controlled gas giant Gazprom and oil trading company Gunvor. If true (the Kremlin has denied the accusations and no evidence has ever been presented), then Putin would be the fifth richest man on the planet, just behind Bernard Arnault, the owner of luxury good company LVMH, worth $41bn. In fact, the whole of the Russian government is chock full of millionaires (just look at the quality of their suits and the cost of their watches), and probably even a smattering of billionaires. Apart from Putin, the other famous example of wealthy politicians is former telecommunications minister Leonid Reiman, who was accused of being the real owner of Megafon, Russia's third largest mobile phone company. While Reiman has never admitted to the charge, the accusations were partly held up by a Swedish Arbitration court that found him guilty of corruption in 2006. The company was worth at least $16bn at the time of the dispute, according to Deutsche Bank, and is several times that now. In general, the corruption in the Kremlin is legion. Several years ago, the World Bank commissioned a study to see how concentrated wealth was amongst Russian companies and found that 22 of them controlled about 25% of the country's annual GDP. However, according to

bne sources, the researchers also uncovered vast business empires controlled by government officials or their families – a part of the report that was quashed for political reasons. Other senior ministers were found to own shares in many of the state-owned blue chips, according to one banker who worked on the report. More difficult to assess are the prominent oligarchs in difficulty. Exiled businessman Boris Berezovsky was once one of the seven richest men in Russia. Today, Forbes estimates his worth at less than $1bn and the Sunday Times' rich list puts his net worth at about $900m. However, as Berezovsky made heavy use of transfer pricing schemes in his efforts to "privatise the cash flow" of nominally state-owned companies like Aeroflot, who knows how much he really has stashed in offshore havens. Jailed oligarch and former Yukos oil company owner Mikhail Khodorkovsky presents a similar problem. At one time the richest man in the world under the age of 40, no one is sure just how much he and his partners Platon Lebedev (jailed alongside Khodorkovsky) and Leonid Nevzlin (who lives

of the claws of the state and run by former Yukos CFO Bruce Misamore after Khodorkovsky was jailed. And then there are simply the legion of oligarchs that prefer to remain in the shadows. You don't have to look far for evidence of a massive amount of undeclared cash floating about. In a recent interview with bne, the chief financial officer of VTB bank, Herbert Moos, says its newly established private bank already holds a quarter of the group's entire retail deposits, some $10bn of Russian money that has returned from overseas since the crisis started. Likewise, when leading retail lender Rosbank set up a private banking division, the chairman told bne that quickly a third of the bank's entire retail deposit portfolio belonged to a mere 1,000 customers. The money flowing back into Russia is partly a function of increasing fear among some wealthy Central Europeans that their cash isn't as safe as it once was in the traditional offshore havens like Switzerland. By way of illustration, the ongoing corruption scandal in the Czech Republic involving the controversial privatisation

"World Bank researchers uncovered vast business empires controlled by Russian government officials or their families – a part of the report that was quashed for political reasons"

in exile in Israel) are worth today. But like Berezovsky, for years Yukos ran massive transfer-pricing schemes: this correspondent was at a shareholder meeting where the company signed off on a deal to sell oil at $1.25 per barrel to an "independent" trading company at a time when the price of oil was closer to $25. Billions of dollars disappeared into offshore black holes and is probably still hiding there. Moreover, Khodorkovsky set up the personal investment fund GMR in his heyday to invest into anything but oil, which was kept out

of the Czech coal miner Mostecka uhelna spolecnost (MUS) began when the Swiss authorities found CZK12bn (€480m) in local bank accounts that is believed to be linked to six Czechs and one Belgian who are suspected of having siphoned off cash from MUS. Several years ago the Swiss provided the Czech authorities with the information concerning these individuals and invited them to join the case it intended to pursue against them, only for the Czechs to sit on the information and do nothing.

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bne's Billionaires Club

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Name: Akin Ipek Country: Turkey Estimated wealth: $1bn +

Cover story

I 11

Greeting cards are not the most obvious basis for a business empire, but since taking over his family's printing business, Ipek has succeeded in expanding the group's interests to include gold mining, media, tourism and now oil exploration. Having dominated the Turkish greeting card sector and become a major exporter, Ipek's decision to invest the profits in gold mining ahead of the seismic increase in gold prices now appears little short of prophetic. With four

Kulibayev, son-in-law of President Nursultan Nazarbayev, is probably Kazakhstan's most influential business-

operational mines and a fifth under development, the IPO of his Koza-Ipek gold mining subsidiary in 2010 proved to

man. Since the 1990s, he has held several top positions at state oil and gas company KazMunaiGas and other

be one of the biggest of the decade. And having also invested in a daily newspaper and a TV channel, it was little sur-

state energy companies, as well as being chairman of the boards of several of the country's largest state-

prise that the group was being seriously tipped to take over all or part of the media assets of Turkey's troubled Dogan

owned companies including railways operator KazakhstanTemirZholy and atomic energy company Kazatom-

Group. Instead, Ipek has taken his group into tourism and oil exploration. As well as opening one of the country's most

prom. Together with his wife Dinara, he owns a majority stake in Halyk Bank, Kazakhstan's second largest

expensive hotels – which is alcohol free – Ipek has also been building up a portfolio of oil prospects in Turkey's under-

bank by assets. Until December, Kulibayev headed Kazakhstan's $80bn sovereign wealth fund and state hold-

explored southeast. Given the success of his gold prospecting ventures, few would bet against a profitable oil strike.

ing company Samruk-Kazyna, but was sacked after the December 16 violence in the oil town of Zhanaozen. However, he remains the most important figure in Kazakhstan's oil and gas industry, which is the backbone of

Name: Timur Kulibayev Country: Kazakhstan Estimated wealth: $1.3bn

the economy, and has retained his position on the board of directors of Russia's Gazprom. Kulibayev's current

Karkosik has made it into the ranks of Polish billionaires thanks to focusing on the grubby businesses of

position is unclear; he is expected to return to a top position in the government or at one of the state-owned

metals and car parts. While they may lack the glamour of high-tech industries, his determination to create

enterprises, but it is not known when or where. Kulibayev is one of several men believed to be a potential

a global car parts company is paying dividends. Poland's Wprost weekly estimates his fortune at PLN3.6bn

successor to Nazarbayev, but he has kept a low profile personally and rarely speaks in public. He also turned

($1.1bn). His main investment vehicles are Impexmetal, active on the copper, aluminium and zinc markets,

down a suggestion that the Atameken business union which he heads be turned into a political organisation.

and Boryszew, his investment company which is buying up car parts companies. Karkosik, 61, styles himself as a Polish Warren Buffet, an investor who steers clear of expensive advisers and holds companies for the long term, but is always prepared to sell if the price is right. The comparison to Buffet is not completely crazy. Over

Name: Nurzhan Subkhanberdin Country: Kazakhstan Estimated wealth: $1.1bn

Subkhanberdin is the founder and chairman of Kazkommertsbank, Kazakhstan's second largest bank by assets. He also has holdings in companies across the energy, telecoms, transport and media sectors in Kazakhstan through his shareholding in Central Asian Investment Company. Subkhanberdin attended Moscow State University with President Nazarbayev's son-in-law, Timur Kulibayev, and is known to be close to Kazakh-

the last decade, his main investment vehicles – Alchemia, Boryszew, Skotan and Krezus – have each gained

Name: Roman Karkosik Country: Poland Estimated wealth: $1.1bn

stan's first family. Subkhanberdin's relationship with the top echelons of power led to Kazkommertsbank

several thousand percent. He got his start in the late 1970s, first running a bar, then moving into orange juice. In 1989, he began making cables after he found it almost impossible to buy them while building himself a house. By the early 1990s, he was a significant player on the nascent Warsaw Stock Exchange. He is now using some of those gains to add to yet another area of investment – searching for energy in Asia.

being considered the "government's bank". When the financial crisis hit Kazakhstan in 2007, Subkhanberdin's powerful connections helped to ensure the bank's survival despite its over-exposure to the real estate sector.

Name: Alexander Mashkevitch Country: Kazakhstan/Israel Estimated wealth: $3.3bn

Mashkevitch is one of so-called "ENRC trio" together with long-time business associates Patokh Chodiev and

Name: Marek Dospiva Country: Czech Republic Estimated wealth: $1bn +

Dospiva and his two co-founders of Penta Investment, a Czech-Slovak firm started in 1994, saw their business recover well post-crisis; according to the company's website, Penta had revenues in 2010 of ¤2.1bn and assets worth ¤3.4bn. 2011 was in all probability a better year than 2010 and only in March the group was

Alijan Ibragimov. The three men started working together during the perestroika era, and after independence

snapping up a 40% stake in Polish retailer Empik Media & Fashion for PLN410m (¤100m). Despite being

scooped up some of Kazakhstan's largest chromium, alumina and energy assets. These were merged togeth-

embroiled in the huge "Gorilla" corruption scandal in Slovakia, business for Penta appears good.

er to form Eurasian Natural Resources Company, which listed on the London Stock Exchange in December 2007 with a market capitalisation of around £6.8bn - catapulting the Kazakhstan-based company straight into the FTSE 100. Mashkevitch retains his Kazakh citizenship despite also holding an Israeli passport and

Timis, a 49-year-old Romanian citizen, is one of the most controversial Romanian-born billionaires. Now

rarely spends more than a month of each year in Kazakhstan. He is friendly with Kazakh President Nursultan

residing in London, he left Romania for Australia at the age of 16, where he started his own transport com-

Nazarbayev and on occasion has liaised between the Kazakhstani and Israeli governments.

pany, which owned only one truck driven by himself. By 1992, he held investments in the gold mining industry. He went on to set up Regal Petroleum, which owned some oil and gas resources in Romania and Ukraine, and in November 1996 was floated on London's Alternative Investment Market. It became famous after the

The former head of BTA Bank, Ablyazov has been in exile in London since Kazakhstan's largest bank was

September 2003 acquisition of 60% in an oilfield located in Greece, where it later reported it may have found

nationalised in 2009 under controversial circumstances. The Kazakh government and the new management

up to a billion barrels of oil. Such news pushed up Regal's market value to about £500m, prompting institu-

of the bank accuse him of masterminding the embezzlement of around $10bn from BTA before its collapse. BTA is pursuing the lost billions through the courts in the UK and Russia. Ablyazov claims the takeover of the bank was a government ploy to steal his bank, as part of the so-called "Project Superkhan" engineered at the top levels of government. So far, the English high court has been unsympathetic to Ablyazov's defence, and in February sentenced him to two years in prison for contempt of court. Since then, he has been on the run, and

tional investors to buy shares in it. By mid-2005, however, the bubble burst as it became clear that the oilfield

Name: Frank (Vasile) Timis Country: Romania Estimated wealth: $1.2bn-1.3bn

is believed to have fled to France. For the last decade, Ablyazov has had an often turbulent relationship with

Name: Mukhtar Ablyazov the Kazakh government. He served briefly as minister for energy, industry and trade in 1998, but in 2001 coCountry: Kazakhstan founded the opposition Democratic Choice of Kazakhstan movement. The following year, he was sentenced to Estimated wealth: up to $10bn six years in prison for abuse of power during his spell as a minister, but was released after just 10 months on the condition that he stay out of politics.

did not contain the amounts the company had claimed. In a few hours, its stock price fell by more than 60%. In 2009, the company was fined nearly $1m by UK authorities for issuing misleading statements about its oil reserves. More promising has been his investment in diamonds and iron ore in Africa. His African Minerals Limited in 2010 announced an initial mineral resource estimate of over 10bn tonnes of iron ore, which is now recognized as the biggest iron ore find in 20 years and has made Timis over $500m.

Name: Ioan Niculae Country: Romania Estimated wealth: $1bn +

Niculae, 55, has worked in the chemical industry his entire life, first for a state-owned company, later on his own. He is currently a major stakeholder in five of the biggest chemical plants in Romania, but has a diverse portfolio that includes interests in refineries, four-star hotels, consulting firms, restaurants, slaughterhouses, soccer teams and real estate. Niculae has made most of his money in recent years from buying the

Name: Patokh Chodiev Country: Uzbekistan/ Belgium Estimated wealth: $3.3bn

Another of the ENRC trip, Chodiev was born in Uzbekistan, made his fortune as a co-founder of ENRC in

state-owned ailing fertilizer producers and taking advantage of a government-support scheme that allowed

Kazakhstan, but now lives mainly in London under a Belgian passport. A former Japanese language student,

certain industrial companies to use solely domestic natural gas, which is priced at a third of the international

he launched his first business employing the Blind Workers Workshop in Moscow to make plastic bags,

market price. Thus, Niculae managed to make money from selling chemical fertilizers at market prices, while

before joining up with Ibragimovich and Mashkevitch in the metals and mining sector.

benefiting from a government-support scheme. However, his income from fertilizer production in Romania is expected to drop as the government stopped the support scheme under pressure from the EU.

I Cover story

Name: Ivica Todoric Country: Croatia Estimated wealth: $1bn +

bne April 2012

Regarded as the king of the Croatian food industry, Todoric is the founder of Agrokor Group, the largest private company in Croatia. Agrokor is the owner of some of the country's most famous retail brands, including the supermarket chains Konzum, iDEA and KPlus, water and beverages, such as Jamnica, Jana and Juicy, ice cream and frozen foods, and meat production and processing. Todoric also has an ownership stake in mobile

bne April 2012

Perspective I 13

The EU's "mythical approach to reality"

operator, "Tele2".

bne Name: Danko Koncar Country: Croatia Estimated wealth: $1bn +

Dubbed the 'King of Chrome', Koncar's Kermas Group manufactures and distributes ferrochrome and chrome

Name: Philip Zepter Country: Serbia Estimated wealth: $5bn

Zepter, real name Milan Jankovic, has an estimated net worth of $5bn, primarily derived from Zepter Inter-

chemicals in Russia, Germany, and Turkey. Koncar has also been linked to mining interests in South Africa, along with investments in shipyards, real estate and a liquefied natural gas terminal in Croatia.

national, a global conglomerate that producers, sells and distributes exclusive, high-quality consumer goods. Zepter sued the International Crisis Group for defamation following a 2003 report which described him as "an arms dealer, money launderer and crony of brutal Yugoslav president Slobodan Milosevic."

Name: Miroslav Miskovic Country: Serbia Estimated wealth: $1bn +

years, Miskovic established Delta M (a sort of abbreviation of his initials - double M) that prospered in the late 1990s. Today, Miskovic's Delta Holding has an array of business interests in agriculture, retail, distribution, ransom payment - estimated at 7m deutschemarks - secured his release.

Currently residing in Geneva, Karosas owns the SK Impex group in Lithuania. He started in the oil business in 1990 as a mediator between Swiss banks and Russian oil extraction companies. Later he established (and subsequently co-owned) Switzerland-based oil management company Western Petroleum. According to Karosas, annual revenues of Western Petroleum had reached $6bn by the time it was liquidised in 2010, mostly because oil trading moved online. He has since compiled a diverse portfolio of assets, including tanker ships (now sold), charter flight company Aurela (recently sold to Cyprian company Servolian Investments), Medicinos bank, real estate company Turto Garantas, and Sugihara Beauty Therapy And Surgery Clinic. Karosas also owns luxury properties in Switzerland, Spain, Czech Republic, Austria and Lithuania. He has a vast collection of vintage cars, a private jet, and several exclusive wine cellars. He is a rally enthusiast and formerly a successful participant. Karosas graduated as mechanical engineer from Vilnius Construction Engineering Institute.

Name: Dmitrijus Buriakas Country: Lithuania Estimated wealth: $1.2bn

Singer, in an interview with bne , says that the euro embodies the problem of many European institutions, which have come to regard reality as something that can be changed by good intentions alone and at will – basically, the European elites say to themselves: "we want it, we decided this, so this will change reality."

Being the Economist, it inevitably went on to say that while European government actions appear to have averted both a financial collapse and a nasty credit crunch, the continent "remains a long way from recovery." For permanent relief, it argues, the Eurozone "needs to build institutions that allow joint liability for government debts balanced with fiscal discipline."

Then, when reality has that nasty habit of intruding on European fantasies, the initial reaction is one of denial, which is what is currently happening. Allied with this is a good dose of hypocrisy, where European institutions sing the praises of austerity and budget cutting, but wouldn't for a moment think that it should be applied to their own departments. Witness the extraordinary scene in June 2011 of the European Commission laying out glossy brochures about its swanky new €240m home at a meeting of EU leaders to discuss measures to resolve the debt crisis in Greece. This infuriated British Prime Minister David Cameron: "You do wonder whether these institutions actually get what every country, what every member of the public is having to go through as we cut budgets and try to make our finances add up," he was reported as saying.

Miskovic is Serbia's best known businessman. A former deputy prime minister during the Slobodan Milosevic

financial brokerage, real estate and insurance. In April 2001, Miskovic was kidnapped for 18 hours, before a

Name: Saulius Karosas Country: Lithuania Estimated wealth: $1.5bn

hen the legendary bearish Economist wrote on one of its covers in March, "Can it be…the recovery?", it was tempting to feel that the good times are back again. However, it would be foolish to think Europe's sovereign debt crisis has gone away.

The relative calm stems from Greece committing the largest sovereign default in history being greeted by investors with a metaphorical shrug of the shoulders – not the market meltdown that many had predicted. Greece's promise on further reforms released its second international bailout, a payment of €7.5bn. The problem is that few believe the official Brussels' line that Greece is an isolated case, and attention is now focusing on Portugal, which has been employing the same kind of financial jiggery-pokery that Greece used to make its finances look better than they really were. Charlie Fell, a financial market analyst, says the country's reported budget deficit would not have come in almost two percentage points below the desired level, but for a last-minute transfer of banking-sector pension funds to the government social security system. "This transfer accounted for almost 60% of the fiscal adjustment in 2011. Removing this oneoff item implies that the underlying improvement was 1.3% of GDP, way less than the 'fudged' reported number," he says.

Currently living in Nice, Buriakas holds Lithuanian and Russian citizenship. In 1996, he established Vision International People Group, which specialises in health products. Buriakas owns B&S Holding Group, which counts Russian, Austrian, Swiss, Ukrainian, Cyprian and Lithuanian companies under its holdings. Most of his business in Ukraine is under DeVision company, which operates in the construction and real estate sectors. Its current projects include a 19,000-seater sports and entertainment arena, in which the finals of the upcoming European Basketball Championship of 2015 will take place. There have been repeated reports over

The high level of debt (both public and private) and a chronic growth problem won't simply be turned round by a bit of goodwill and a few "magic wand" structural reforms, says economist Edward Hugh, meaning Portugal is headed for a second bailout before September next year, to follow the €78bn one in May 2011.

Buriakas' alleged links with the Russian Federal Security Service (FSB) and the world of organised crime.

Name: Nerijus Numavicius Country: Lithuania Estimated wealth: $1bn +

Numavicius, the youngest Lithuanian billionaire and the only one not living abroad, is the largest shareholder of Vilniaus Prekyba group. Last year, the group was reorganized into four different enterprises: Entaras, NVP Projektai, Patria Holdings and VP Ltd. Meanwhile, the Lithuanian Competition Council allowed Numavicius

Plus ça change, as they say in Paris – and it's this that causes people in the newer part of the EU to shake their heads in dismay, fearing that a lack of fundamental change in attitude amongst the EU elite will destine the bloc to years of stagnation and, perhaps, worse.

to increase his amount of shares in the group from 36.9% to 73%. VP group has the largest retail stores' network in Lithuania, Maxima, and a pharmacies' network, Euroapotheca. Maxima also owns retail networks in Latvia, Estonia and Bulgaria, a construction and decoration retailer Ermitazas, and several real estate enterprises. They are also reported to have recently acquired Polish retail network Aldik Nova. The man himself keeps a low profile. It is known that he gained a BA in Medical sciences from Vilnius University in 2001. He also is chairman of International Business School at Vilnius University and a congress member of the Lithuanian Business Confederation. Ian Bancroft, Ieva Barauskis, Jan Cienski, Mike Collier, Clare Nuttall and Bogdan Preda contributed to this article

Miroslav Singer, head of the Czech National Bank, is that rarest of beasts: he's a jovial central banker. But he saves most of his ire (perhaps indignation is a better word for such an affable man) for a cultural attitude among Europe's elite that created this crisis and then allowed it to perpetuate and deteriorate. He calls it Europe's "mythical approach to reality"; more colloquially, it would be the triumph of hope over experience.

For Singer, the real danger is that this active suppression of accepting things need to change fundamentally is allowed to continue for so long the European dream will be consigned to the dustbin of history, along with the world's other extinct empires. "History has shown us that decaying empires can decay for quite a while in very good style. Venezia was decaying for hundreds of years, but was still a hotspot for rich gentlemen," he says. "Talking to many people in Europe you get the feeling that they still think we are a beacon of civilisation for the rest of the world. Talking with my Asian or Latin American colleagues I can clearly say that we are not a beacon for others. The Byzantine Empire probably thought it was a beacon to follow until its last days. " Singer is quick to stress that the EU doesn't have to meet the same end as the Byzantine Empire. But its leaders need to drop this mythical approach to reality and start facing up to the fundamental changes that are needed to create sustainable growth rather than the lopsided trade growth that the euro generated until the huge imbalances caused the whole edifice to collapse. This will require that these imbalances are mitigated or reversed, and this will create a different pattern of European trade. Most of this adjustment will have to take place in the consumer part of the economy, rather than a huge reindustrialisation of the continent, which won't be pleasant for those forced to bear the brunt of this. "I'm not sure whether Europe is ready to understand this, it seems not to be getting through. But it will sooner or later have to do it," he says. "This is a deep crisis, but we tend to underestimate how the world has to change after this crisis."

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of the Chinese real estate market will impact heavily on the price Ukraine can get for its steel in 2012 and thus the volume that it will produce. "We expect a steel price decline in the next three-five months as construction volumes in China start to decrease," says Erste Bank's Ukraine analyst, Maryan Zablotskyy. "Ukrainian steel mills will find it difficult to fight lower prices." At the same time as revenues from steel exports slump, the price of Russian gas imported by Ukraine spiked by 21% in January to $416 per thousand cubic metres as a result of the oil price surge in 2011 prompted by unrest in the Arab world. Ukraine's gas bill came to $1.1bn in February. In addition, Kyiv has to make $6.0bn in debt repayments in 2012, of which $3.5bn is repayment to the International Monetary Fund (IMF) – the first tranche of which was paid in February.

Ukraine nears danger zone Graham Stack in Moscow

kraine's foreign exchange reserves, essential to supporting the country's fixed exchange rate, have fallen by nearly one-quarter since August, and are now hovering at only a fortnight over the three-month import cover regarded as minimum. With global steel prices on which Ukraine depends continuing to slide and the price of Russian imported gas soaring, it is time for Kyiv to look for external help – but that's easier said than done. Ukraine's central bank, the National Bank of Ukraine (NBU), reported March 6 that its forex reserves had fallen to only $31bn, which it said is sufficient to finance imports of goods and services for only three-and-a-half months. The central banker's rule-ofthumb says that three months import cover is a minimum to support a currency, giving Kyiv a fortnight to put things right.

Ukraine's reserves peaked at $38.2bn in August, but as the Eurozone crisis unfolded it has been downhill all the way. The NBU lost $3.35bn alone in September as the country's balance of

whammy from falling steel prices – making up 40% of export revenues – and a hike in the price of imported Russian gas. Steel prices have dropped globally due to the impact of the Eurozone crisis,

"The IMF's demand to raise the price of gas by 50% is unacceptable – we will not agree and will never agree to this" payments turned negative and reserves thereafter continued to haemorrhage, losing $746m this year so far. The current account is booking a deficit of $1.0bn-1.5bn most months, with a small surplus in January 2012 an exception. The problem is not of Ukraine's own making: the country is facing a double

and for Ukrainian producers prices have fallen by over 20% since September. As a result, steel production fell 7.7% in February on the year, according to Bloomberg. More worrying is that it isn't just the Eurozone crisis that is impacting the steel industry. The increasing slowdown

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While the external blows are not the fault of the government, the slide in reserves has been exacerbated by Ukraine's central bank clinging to a fixed exchange rate, whereas regional peers such as Russia and Turkey have let their currencies weaken. The reason: Ukrainian companies and households are still heavily leveraged in foreign currency as a result of the credit boom in the run-up to 2008. The World Bank said in February that it puts the level of non-performing loans in Ukraine at 40% of total. The government fears that any devaluation would see this figure soar, while scaring the population into withdrawing deposits and converting them into dollars. No exit Ukraine should not be facing any disorderly devaluation let alone default because it has not one, but two exits waiting for it with open arms – albeit each with a steely embrace. One possible exit from its current woes would be a new deal with the IMF – but that would entail another sharp rise in the price of gas supplied to the population and to utilities, which the government is loath to do going into parlia-

A shot in the foot

Ben Seeder in Riga With EU foreign ministers on February 23 deciding to slap full economic sanctions on Belarus, some member states have expressed worries about how this could effect business at home. Relations between the EU and Belarus in recent weeks running up to the decision had gone from bad to worse. At the end of February, the EU's foreign policy chief, Catherine Ashton, announced travel bans and asset freezes against a long list of Belarusians linked to the regime of President Alexander Lukashenko. In response, Minsk withdrew its diplomatic representatives in Brussels. The next day, a meeting of the Member States' Ambassadors answered with the withdrawal of 27 member-state representatives from Minsk. While many EU officials expected such a move by the EU given the worsening human rights situation in the country since the rigged presidential election at the end of 2010, some harbour doubts about the advisability at a time of such economic stress. "Latvia is sceptical about the desirability of introducing economic sanctions… Latvia does not want its economy suffering disproportionately because of the sanctions," Latvian Foreign Ministry spokesman Janis Silis told bne earlier in March. Latvia in particular has a lot to lose from full sanctions on its neighbour. Speaking at a conference in Riga on March 9, Andris Maldups, director of the department of transit policy at Latvia's transport ministry, said the "worst-case scenario" – a full trade embargo against Belarus by EU nations – would be "disastrous" for Latvia and the oil hub at the port of Ventspils. Maldups estimated that under such a scenario, Latvia would lose up to LVL360m ($678m) per year in transit income derived from rail transport fees and pipeline fees for goods shipped from or via Belarus. The country's main oil products pipeline into Ventspils transits through Belarus and over half of the East-West rail transportation capacity of 85m tonnes a year (t/y) goes through Belarus. The share of transit in Latvia's GDP is approximately 13%, while roughly half of the transit comes from or through Belarus. According to the Ministry of Transport, around 22m tonnes of oil products and 20m tonnes of coal transit through Latvian ports each year. Around 70% of the oil products transit through the port of Ventspils. On the sidelines of the business forum, hosted by Citadele Bank in Riga, Latvian businesswoman Dace Zutere said Ventspils would "become a ghost town" if oil transit through Belarus were halted. "The port and oil terminals employ about a third of the population of the town. I don't know how it could survive that," she said.

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mentary elections October 2012. "The IMF's demand to raise the price of gas for households by 50% is unacceptable to us – we will not agree and will never

"Ukraine is begging for a gas price rebate from Russia that would solve the current account deficit problem" agree to this," President Viktor Yanukovych stated categorically on March 6. Yanukovych's Party of Regions is going into crucial parliamentary elections in October with falling ratings, partly it believes due to earlier agreements with the IMF to hike utility prices and the pension age. Moreover, it is widely believed that a good part of subsidised gas provided to the population is in fact diverted to industrial companies linked to government backers, constituting a hidden subsidy to well-connected industrialists. But it is not just the requirement for Ukraine to raise the price of gas that is keeping the IMF away from Ukraine. The US-dominated body is also widening its mandate to cover democracy, and this bodes ill for Ukraine, which the West has criticized for jailing two leading opposition leaders, former prime minister Yulia Tymoshenko and former interior minister Yury Lutsenko. US Assistant Secretary of State Philip Gordon in comments on Ukrainian TV on February 13 indicated that more democracy, ie. releasing Tymoshenko, would be a condition for renewed IMF funding. And Chris Jarvis, head of the IMF mission to Belarus said March 5 that the IMF could not respond to dictatorship Belarus' request for financial support until it was "confident that a new programme would be supported by the IMF’s membership," ie. get the political green light from the West. The IMF then March 6 announced that Jarvis would be the IMF's new man for Ukraine – go figure. With the IMF playing tough, Ukrainian hopes are pinned on Russia's new

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efficient players should retain some of the highest margins on a global scale," reckons Mikhail Krasnoperov, an analyst with Troika Dialog.

president returned, Vladimir Putin. In comments made on the day of his election victory March 4, Putin confirmed that he would make the former Soviet states his foreign policy priority, and as part of the build-up to the elections he had proposed the creation of an EUstyle Eurasian Union. Ukraine would be the lynchpin in such plans, but even the Russia-friendly Yanukovych administration has claimed that its destination is Europe and without Ukraine, any Eurasian Union would be simply Russia and some minnows. Ukraine is begging for a gas price rebate from Russia that would solve the current account deficit problem and conserve reserves, but Gazprom has to date offered only a miserly 10% that it afforded to other European customers – unless Ukraine follows in Belarus' footsteps and gives Gazprom a stake in its transit pipeline system. If so, Ukraine could count on its gas price being halved and generous provision of credits. But this again could prove costly when it comes to parliamentary elections – the gas pipelines are regarded as Ukraine's chief "strategic asset" and a decision to divest control will be regarded as treachery by part of the electorate. Ukraine's best bet now – aside of course from releasing Tymoshenko and Lutsenko – is that the newly-elected Putin, looking to get off to a good start with Ukraine and his foreign policy, might now choose to soften these conditions in return for some woolly commitment by Kyiv to the Eurasian bloc. Putin has said his first foreign visit as president would be to a CIS state and this likely means Ukraine. But Putin's inauguration is scheduled for May, so he won't make it to Kyiv in his new role for another four weeks. And with the pace of events heating up as Greece and Europe wobble, this may even prove too late for Ukraine.

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To counter the competition from European pork exporters, the Russian government has allocated RUB6bn ($200m) of investment to help the domestic pork industry boost production and maintain their market share in 2012. Agriculture Minister Yelena Skrynnik said at the end of January that the state wants to end the import of some 500,000 to 600,000 tones of pork products annually, or about a fifth of the total consumption.

Russian pigs caught in WTO poke

The shortage already sent pork prices up to record levels in 2011 and now the uncertainty over the WTO accession has been resolved, the increasingly attractive market has spurred several big domestic pork producers into launching investment programmes.

Ben Aris in Moscow

low-intensity meat war is cooking between Europe and Russia.

With the world population topping 7bn last year, food is rapidly becoming a strategic product on a par with oil and countries are rushing to shore up their production of this most basic product. Russia could be an agricultural powerhouse, but still imports 40% of its food, according to the Federal State Statistics Service. However, a state-backed investment drive meant it became self-sufficient in chicken meat in 2009 and this year it hopes to do the same with pork. The importance of meat imports was highlighted in the 1990s when a trade spat with the US led to Russia blocking the imports of "Bush's Legs", as frozen American chicken legs were dubbed by stall holders in Russia's open air markets, after the then-president George W Bush. The state has poured money into the sector via loans to farmers from Rosselkhozbank (Russian Agricultural Bank), which is now one of the five biggest lenders in the country. The agricultural sector is growing fast and Russia leapt

up the rankings to become the fourth largest grain exporter in the world in 2008. But meat production has been lagging behind. Chicken production has followed grain as the simplest meat product to develop. Pork is next and beef production will follow as a few statefinanced mega-ranches come online in a few years time. In the meantime, most pork imports have come from Europe and pork became a bone of contention during

More meat on the bone Currently, Russia supports local producers with a system of quotas and high duties on pork imports, but after Russia acceded to the WTO in December the new more open trade regime will make imports by European pork producers even easier. "During the last five years, Russian and foreign investors invested more than $7bn in the Russian pork industry," says Sergei Yushin, the head of the Russian National Meat Association, who warns that more foreign investment is under threat following the start of

"In the last five years, Russian and foreign investors invested more than $7bn in the Russian pork industry" the recent WTO negotiations, which culminated in Russia's accession to the global trade bloc in December. Russia's domestic pork producers will inevitably suffer as trade restrictions on European imports are removed. "[WTO accession] is likely leave the poultry segment unaffected, while profitability will decline in the pork segment, though the most

WTO membership without strong support by the state. Pork imports to Russia could triple under the new trade regime, the National Pig Breeders' Union told Bloomberg in January, to reach 1.8m tonnes in 2020, which should meet almost half of Russia's total demand.

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Wermuth launches Tatarstan Cleantech fund

bne Russia's regions will be the country's engines of growth in the years to come, and hoping to tap into the shifting centre of economic gravity, veteran Russian fund Wermuth Asset Management launched the first ever environmentally focused fund in February, targeting Russia's most investor-friendly region Tatarstan. One of Russia's autonomous regions, Tatarstan is virtually a country within the country, complete with its own president, parliament and sovereign wealth fund (that is fed by the local government's ownership of oil company Tatneft). The local government has seeded the Tatarstan Cleantech Fund with ¤100m, to which Wermuth contributed another ¤10m and committed to raise an additional ¤90m by next summer. The mandate is to invest into anything that will improve Tatarstan's environment – and make a profit of course. "Tatarstan has a very progressive government and is actively working to improve its investment climate through the use of special economic zones and other incentives," says Dieter Wermuth, formerly chief European economist at Mitsubishi UFG in London, who now works with his son Jochen, who founded the eponymous investment firm in 2000. "We have a very broad brief and can invest in companies anywhere doing anything – provided they contribute in some way to Tatarstan's local economy, either by providing products or setting up production in the region. The Tatarstan Cleantech Fund is the first international clean-technology fund with a specific mandate to focus on Russia's needs, and the Republic of Tatarstan in particular. The fund will mature after 10 years, but start to wind down after six, and has a target return on investment of 30% per annum. And it is offering to double the returns for investors that set up production in the region. And there is a lot of do. Russian industry is 11-times more energy intensive than somewhere like Germany, and is one of the biggest producers of greenhouse gases in the world. The new fund also represents a new lease of life for Wermuth, which was badly wounded in the 2008 crisis. At its peak before the crash, Wermuth had some $1bn of assets under management, but a mixture of redemptions and value destruction reduced that to $300m. With 5% leverage from international hedge funds, the fund nearly went bust in the depths of the meltdown when it suddenly needed to find $15m at the start of 2009. "We only survived as our investors recapitalised the fund. If we hadn't received that money, there would have been a fire sale. We were lucky," says Wermuth.

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lutionise the industry. Pioneers look enviously to Holland, world leaders in greenhouse technology. Firtash's project will bring Dutch greenhouse technology to Ukraine, with yields at his state-of-the-art greenhouse complex to exceed those of existing complexes by 30-65%, at commercial farms six-fold and in family plots – the mainstay of Ukraine's vegetable production – by an incredible 18-times, under published plans. According to Firtash, his giant greenhouse complex will be capable of producing around 20% of the country's pepper needs, for example.

Farmers are afraid that the rise of cheap high-quality imports will kill off investment into Russia's pig farms, which tend to be smaller and less efficient than the large-scale factory farms in the West. Domestic production will go into decline from 2014, the Pig Breeders' Union warns. "The industry's investment attractiveness will drop sharply after Russia's accession to the WTO," Nikolai Birulin, the union's chief expert, said at a conference in January organised by the Moscow Institute for Agricultural Market Studies. "Only those farm projects that are being constructed now have a chance to be commissioned." Russia's pig-breeding industry could face losses of at least RUB20bn ($662m) under the terms of the country's WTO membership, he calculated. The government is well aware of the problem, Deputy Agriculture Minister Ilya Shestakov said on the sidelines of the conference and it's planning to support domestic production with administrative measures and credits until the sector can stand on its own trotters in the face of competition from cheaper imports. In the meantime, Russia's leading pork producers are accelerating their investments to grab as much market share as they can before the competition arrives. At the start of February, Russia's leading meat processor, Cherkizovo Group, announced it will increase pork production at its 10 pig farms by 80% over the next two years to 180,000 tonnes a year, CEO Sergei Mikhailov said at 2012 Russia Forum in Moscow. And rival firm Rusagro has also said it will extend is pork plant in the Tambov region by investing an addition RUB3bn in 2012 to bring the plant to an annual capacity of about 100,000 tonnes, according to the company's CEO Maxim Basov. The company has already invested RUB2.5bn last year and extension will be co-financed by the government, Basov said, which has allocated RUB6bn from the budget to develop deep processing of pork in the country.

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Green not always clean in Ukraine Graham Stack in Kyiv

as oligarch Dymtro Firtash's star is rising in Ukraine. Already chairman of Ukraine's main employers' association, Firtash bagged his first state post on February 17 as head of the National Tripartite Social and Economic Council, and is now looking to boost his reputation further in the eyes of the population. The wheeze he's alighted on is to invest $100m in a greenhouse pilot project designed to revolutionise Ukrainian agriculture – and that in the impoverished West Ukrainian village he grew up in. But bne enquiries have raised questions about the nature of the investment and potential use of state subsidies. Firtash's holding company, DF Group, announced February 9 that the businessman will invest a whopping $100m

in a greenhouse complex in his native Sinkov in the Ternopil region of impoverished West Ukraine where he grew up. To get some idea of the size of the investment, experts estimate it matches

Gas to burn For Firtash, the move into greenhouse technologies could be a logical next step after winning back over $3bn worth of natural gas from Ukraine's gas distribution monopoly Naftogaz Ukrainy, which had been confiscated from Firtash's gas trade Rosukrenergo by former premier Yulia Tymoshenko in gas agreements signed with Russia in January 2009. Not only did Firtash win back the gas thanks to a Stockholm arbitration court decision, but Tymoshenko received a sevenyear jail sentence in October for signing the agreements that tried to eliminate Firtash's business. Firtash now has a lot of gas to burn, but with a market glut in Europe, he is now faced with the question of how to make a decent profit on it. One answer has been his acquisition of most of Ukraine's gasguzzling chemical industry. And greenhouses, for which gas comprises around one-third of the running costs, are anoth-

"Firtash might not be risking much with this pioneering investment in greenhouses" the total invested into greenhouse complexes in Ukraine since independence in 1991. With Ukraine's agriculture still on a downwards slope following the not-very heights of the Soviet era, greenhouses are one technology that could revo-

er potential way for Firtash to realise his underground hoard, say experts. But according to bne enquiries, Firtash might not be risking much with this pioneering investment in greenhouses. As of February 2011, Ukraine's cashstrapped government provides a direct

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subsidy for greenhouse construction comprising up to 50% of the cost of the investment. The money paid out under this budget position in 2011 was miserly – around $7.5m. But in the 2012 budget, the greenhouse subsidy programme has been pooled with a number of other similar agriculture support programmes, meaning the available budget resources now total roughly $150m.

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Spot in the sun In a similar vein, Ukraine has established very generous subsidies for solar power, but there are allegations that top government officials are the biggest beneficiaries of the subsidies. Similar to the greenhouse story, Ukraine has one of Europe's most generous subsidies for solar power: Ukraine

"It is probably clear to you which solar power projects this is about, because there aren't that many belonging to Andrei Klyuyev"

Theoretically, Firtash could thus claim a $50m subsidy for his $100m project. Firtash's press service confirmed the sum of investment and parameters, but didn't answer enquiries about the state subsidies.

offers a feed-in tariff at a price of €0.46 ($0.61) per kilowatt-hour for large-scale solar projects, by the far the highest rate in Europe: rates in environmentallyfriendly Germany are €0.05, according to Bloomberg.

Experts and market participants are sceptical at the slated construction cost of $100m for a 10-hectare greenhouse complex in Ukraine. Europe's largest and most technologically advanced greenhouse complex, the UK's Thanet Earth complex, is being built over a number of years at a total cost projected at around $150m – but comprises seven separate greenhouses with 55 hectares under glass, over five-times larger than Firtash's planned complex. The $150m figure for Thanet Earth also includes the cost of acquisition of the site in South England, and the installation of a proprietary heat and power generation plant and an electricity substation.

The generous subsidies certainly are having a spectacular effect: Ukraine is now set to boast Europe's largest solar power complex, the 80-megawatt (MW) Okhotnykovo Solar Park, installed by the Vienna-based company Activ Solar in sun-drenched Crimea. In fact, this is just one of three major projects completed by Activ Solar in 2010-11 that saw Ukraine's installed power capacity from renewable energy sources double in 2011.

As a rule of thumb, Ukrainian experts say the most technologically advanced greenhouse complex costs around $400 per square metre to build, so for 10 hectares total costs should run to a maximum of $40m. This raises obvious questions as to whether the much-hyped Firtash greenhouse gas investment is all that it is made out to be – questions which will become louder once the volume of state subsidies is revealed.

But controversy surrounds who is the real owner of Activ Solar. A number of respected journalist investigations allege that the Vienna-based company is linked to Andrei Klyuyev, until recently Ukraine's first deputy prime minister with a remit for energy. Klyuyev denies this. Investigations by Ukrainian journalists established that Activ Solar CEO Kaveh Ertefai is Klyuyev's son-inlaw, and that the company's business development manager is Klyuyev's son Bogdan, as well as numerous intersections between business structures belonging to Andrei Klyuyev and his brother Sergei, and Activ Solar.

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Klyuyev's alleged involvement with Activ Solar led to a major spat between the EU and Ukraine, and possibly also to his dismissal from his cabinet post in early February. In an interview with the usually dependable Kommersant Ukraine, a source identifiable as the European Commission's envoy to Ukraine, Jose Manuel Teixeira, complained about Ukraine's decision to use €31m of EU money intended for energy conservation to construct a power cable link to the national grid for the solar power projects in Crimea and Odesa. "It is probably clear to you which solar power projects this is about, because there aren't that many belonging to Andrei Klyuyev," the European Commission source told Kommersant Ukraine. An EU Brussels spokesman later said it would ask Kommersant Ukraine to retract the article. Only six days after the article appeared, Klyuyev was removed from his post – to become head of the national security council. But Teixeira was also not forgiven: "The Ukrainian Foreign Ministry is watching with growing amazement the public statements by the EU Ambassador to Ukraine Jose Manuel Pinto Teixeira, which are more and more falling short of a well-established tradition of international relations," Ukraine's foreign ministry spat out later in the month, accusing Teixeira of becoming "Ukrainianized". Activ Solar has installed 90% of Ukraine’s solar capacity to date, according to Bloomberg, thus effectively monopolising the favourable subsidized feed-in rates. The big question is whether the government is ready to open up such generous – and potentially beneficial – subsidies, whether for solar power or greenhouses, to outsiders, or will keep them reserved for the wellconnected. Until now, the latter has been mostly true, and given the parlous state of Ukraine's finances, it's unlikely that much will change.

www.sollers-auto.com

Made in Russia's Far East Artem Zagorodnov in Vladivostok

t the peak of the economic crisis in 2009, Russia's Far Eastern city of Vladivostok erupted in protests after a decision by the Kremlin to raise import duties on cars. Residents took to the streets to defend a major source of revenue for the entire Far East – driving Japanese second-hand autos to the country's more Western territories for resale at a hefty profit. Following the introduction of new tariffs, the number of cars imported annually was expected to plummet from well over 200,000 to around 60,000. As thousands of riot police were flown in from Moscow to restore order, Prime Minister Vladimir Putin pitched a canny solution – assemble the cars in the Far East, thereby making the Japanese and Korean brands domestically manufactured and not subject to the same duties. By the end of the year, the Sollers automobile plant in Vladivostok, which currently manufactures five models of the SsangYong SUV, was launched. "It was a political decision," explains Vasily Avchenko, author and Vladivostok correspondent for daily Novaya Gazeta. "It was part of a broader carrot-and-stick strategy for localising car production in Russia." After two years of work, the project is being hailed as a major success by the management of Sollers, which is

quick to deny any political connection. "Sollers is a private company with an independent board of directors; the government doesn't decide our development strategy," says Sollers' Far East director, Alexander Korneychuk, from his swanky office on the third floor of the factory overlooking Vladivostok's harbour. In March, Sollers Far East – a division of the Sollers Group, formerly known as Severstal-Auto – launched production of its fifth model, the Actyon, which is the first with a non-diesel engine. Production of the Actyon alone is expected to exceed 15,000 units this year, while the total

Location, location, location Sollers built the factory nearly from scratch in record time on the territory of a defunct ship repair station. Its bright orange-and-blue facility stands in stark contrast to the brick detritus and broken windows of neighbouring buildings. When the company moved in, water was available for two hours a day. Some $60m has been spent on infrastructure at the plant so far, with a gas connection still 800 painful metres away. "When we get the gas hooked up later this year, we'll be able to start painting and sweltering the cars here on the spot. We'll have a full-scale vehicle production by 2014," says Korneychuk.

"Despite the depressing view from the window, the location has been ideal for the operation Sollers is running" number of cars produced is expected to hit 35,000 versus 25,000 in 2011. "We were thinking of relocating production of the SsangYong models from our plant in Tatarstan to the sea coast for some time, but we needed a political decision to justify the required infrastructure investments," explains Korneychuk.

Currently, 100% of the components are imported from South Korea. Each model is assembled piece-by-piece until, at the end of one of the two types of assembly lines, a process workers call "the wedding" attaches the frame to the body of the car. The automobiles then undergo safety testing before being

I Eastern Europe shipped by railroad to Western Russia. Currently, under 5% of the autos produced at the Sollers' Vladivostok plant are purchased in the Far East. Exports to neighbouring countries are not being

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done to convince major international partners that it was possible to assemble cars here, and we did that," says Korneychuk, adding that once Japanese cars are assembled here in Vladivostok,

INTERVIEW:

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VTB's private equity push

"Sollers is a private company with an independent board; the government doesn't decide our development strategy" Ben Aris in Moscow considered, as Russia "has the secondfastest growing market of off-road vehicles in the world, after the United States," says Korneychuk. Despite the depressing view from the window, the location has been ideal for the operation Sollers is running. "We take the assembly kits off the docks right here," says Korneychuk, gesturing behind him, "and put them on the railroad over there. Everything is within one kilometre. Our factory has no warehouse because we don't need one. If a shipment is delayed, we are forced to stop production." Moving the assembly line to the Vladivostok facility allowed Sollers to lower the price of the SsangYong models throughout Russia, which currently range in prices in the Far East from between $24,000 and $40,000. Critics point out that the operation has been profitable thanks to federal subsidies that give Sollers a huge discount on shipping the cars by rail across Russia – subsidies that will eventually run out. But Korneychuk has his sights set higher: "Over the last two decades, Japanese cars have developed a certain reputation throughout all of Siberia. People know and like them so much that they don't require any advertising, a huge savings in costs," he explains. Sollers is currently in negotiations with Mazda and Toyota to set up an assembly line for some of their models in Vladivostok (the Toyota Land Cruiser Prado may be launched later this year). "The original phase of this project was

"we're going to make a huge dent in the second-hand car market." The new assembly lines will be launched in neighbouring empty buildings – property disputes notwithstanding. "Those buildings may be abandoned, but they still have an owner," he emphasizes. Local parts Meanwhile, Sollers is under an obligation by the federal government to localise auto parts production with each passing year. By 2015, no fewer than 10% of the components going into the Vladivostokmade cars will have to come from Russian producers. "We've found partners willing to invest in setting up such operations in the region," claims Korneychuk. Yet the author Avchenko is sceptical about a full-scale design and manufacturing automobile hub for export to other countries forming in the Far East anytime soon. "I reckon the politics of some nearby countries may prevent them from opening factories here, while the barriers to doing business would probably offset any savings in labour costs," he argues. For all of the successes of the Sollers Far East plant, it still only assembles foreign-made cars at its facility. Russians frequently lament the absence of a reputable domestic car brand. The time to make one, says Korneychuk, is now. "Russia's got about five years until domestic demand is satiated and the market begins to grow at normal rates. Lexus showed that you can build a reputable global auto brand amid a normal domestic market, but it will be a lot harder than if we do it now."

TB Capital quickly came to dominate the investment banking business in Russia shortly after it was set up in 2009, and now it hopes to do the same in private equity. For most of the last four years, private equity has been little more than a department within VTB Capital, but in 2011 the investment bank set up its first two formal funds – and more are on the way. "What we do now is more of a merchant banking operation," says Tim Demchenko, head of Private Equity and Special Situations at VTB Capital. "Until now, the principal investments have been done under the VTB franchise with the bank's own proprietary capital. But for each dollar we invest, we have tried to raise another $3 to $4 of external capital. So far it has gone pretty much deal to deal." Choosing to ramp up its commitment to private equity looks well timed. Private equity funds invested $4.2bn into Russia in 2011, double the $2.2bn invested in 2010, with the average deal size increasing to $80m against $50m over the same period, according to Ernst & Young. Most of the deals were done in the high-tech or internet sectors, which made up 42% of the total in 2011, with other popular sectors including, consumer (16%), real estate (16%) and the financial sector (9%), the consultant said in a recent report. And now is an ideal time to make private equity investments. "Periods of low growth and sluggish fundraising have historically produced rather strong private

Tim Demchenko, head of Private Equity and Special Situations at VTB Capital

equity vintages – even in comparison to investments in public equity," says Thomas Meyer, an analyst with Deutsche Bank. VTB's private equity business has grown steadily as the Russian economy starts to recover. Last year, one formal fund was capitalised with $500m of VTB money and another $1.5bn from third-party investors, all of which has been invested, much of it in the real estate sector, which has been recovering nicely over the last 12 months. Heading for the exits With only three years of operation under its belt, it is still early days for VTB's private equity business, but it already has had two outstanding exits. And Demchenko says two more exists will be announced over the next six to 12 months. The most talked about was the IPO on the New York Stock Exchange of software developer EPAM Systems in February. "In this market, to list in New

to be a really exceptional story," says Demchenko. On the face of it, EPAM was an impossible sell. Based in Belarus, dubbed the "last dictatorship in Europe" by the former US secretary of state Condoleezza Rice, this is not a familiar market for most American investors. But EPAM's explosive growth and high profitability meant the company sold 6m shares at $12 a pop, returning "well over 40%" for its investors, says Demchenko. The soggy state of the equity markets, still labouring under the threat of the sovereign debt crisis in Western Europe, means IPOs are not high on Demchenko's priority list. The Russian equity market also has a long list of backed-up public offerings. In the meantime, Demchenko has focused on sales to strategic investors, as well as domestic mergers and acquisitions. The fund's other big exit was more typical for Russia at the moment: the sale of the office center Lesnaya Plaza in central Moscow to real estate investor

"For each dollar we invest, we have tried to raise another $3 to $4 of external capital." York being a good company is not good enough. There are billions, if not hundreds of billions, worth of IPOs delayed in the USA, so to offer a company it has

O1Properties for an undisclosed amount. Reports in the local press estimated the transaction value at $220m to $250m. O1Properties is 100% owned by Boris

I Eastern Europe

Anti-demo demonstration

bne They've had little to do over the last 12 years, but suddenly Russia’s best political reporters are exhausted by the endless string of demonstrations. And most of them happen on Saturday, screwing up the weekend with the kids. Fed up with all the extra work covering the protests, Russia's journalists say they are planning an "anti-demo demonstration" to call on the protest movement to stay at home (or at least restrict their activity to the internet). In the middle of March, a group of journalists set up a Facebook group, "Journalists Against Demonstrations", and say they will take to the streets too. “After yet another demonstration we were back at our desks, exhausted. We began to understand how sick and tired we were of all these repetitive protest campaigns; sick and tired of running around in the street till late at night," says Yelizaveta Surnachova, a correspondent for the Slon.ru web portal, reported Ria Novosti. "So as a joke we set up the group; and as a joke, several of our colleagues supported the idea." The group's motto is: “Let Journalists Return to Their Families!” It includes correspondents from such respected news outlets as Vedomosti and Kommersant dailies, Ekho Moskvy radio, and the Polit.ru and Gazeta.ru internet portals, Surnachova said. And the group is considering inviting riot police to their event. “Those guys must be sick and tired of the rallies for fair elections, for Putin or whatever else,” Surnachova added. The "protest against protests" site was a bit of fun, but it also highlights a more serious point. The most recent protest on Novy Arbat in central Moscow on March 11 attracted a mere 20,000 people, small by recent standards and led some to speculate that the protest movement is losing momentum. Even the opposition admits that Putin’s genuine support is probably over 50%. However, there are increasing number of reports of spontaneous flash-mob actions happening around the city, organized by groups like Street Artists, who assembled a group of over 200 people to dance to “Putin on the Ritz” at the end of February. “A few months ago young people didn’t give a damn about politics, but now it has suddenly become cool and things like this are happening every week all over Moscow. It is totally out of control and not even associated with the 'official' opposition,” says Olga Romanova, a journalist with the campaign liberal paper Novaya Gazeta. President-elect Vladimir Putin should be warned: you can fight violence with violence, but the Kremlin is powerless to fight against funny. If this carries on, the opposition will have to trade in their white ribbons for red noses.

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Mints, Otkritie's board chairman, who reportedly plans to IPO the company at the end of this year. Demchenko will only admit to the deal meeting its target of "at least a 30% return," but the fund has not been shy in taking another big punt on the "White Gardens" development on the same street. The biggest real estate development in Russia's history, "White Gardens" has reportedly had $1bn of investment and China's sovereign wealth fund is also a partner in the project (Demchenko wouldn't comment, citing a confidentiality agreement).

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Eastern Europe

expand fast in the regions, then thanks to the VTB network we can help on a variety of topics such as finding real estate and staff, as well as relations with the local government and suppliers or even new business partners. It is about building an eco-system around your partners," says Demchenko.

cess is predicated entirely on its ownership. "It's helpful, but it's not the critical success factor. Sure, we see opportunities thanks to the state connection, but at the end of the day the success of a fund is based on its team and the best deals are always the ones that you originate yourself," he says.

In Russia's rough-and-tumble business environment, having a good krysha, or roof, can help you simply plough through all the red tape in a local administration that you aren't familiar with. But Demchenko dismisses the common criticism that his bank's suc-

Still, Russia's private equity business is still in its infancy and few institutional investors are yet present in Russia. The government has been trying to develop the business, partly by seeding the Russia Direct Investment Fund with $10bn and a similar IFC banking fund with $250m.

Demchenko says the small size of the business is a function of the development of the economy. "We are only two decades into Russia's development as a market economy; it is a question of supply and demand," he says. "There are only a handful of funds that are active in Russia, but then there are not that many attractive private companies either. In the West there are hundreds of funds, but there are thousands of companies, some with a couple of hundred years of history behind them."

Tough market Russia has always been a tough market for private equity. The economy's superstrong growth means owners at the most attractive companies are reluctant to give up equity, while at the same time most companies rely on retained earnings for three-quarters of their investment capital needs; cash rich, there is little incentive to sell a stake to a private equity firm. However, since the 2008 crisis, the environment for private equity in Russia has improved somewhat. Slower growth means valuations are growing more slowly and some good companies

"Sure, we see opportunities thanks to the state connection, but at the end of the day the success of a fund is based on its team"

are looking for finance to acquire their weaker rivals. But the real attraction of partnering with VTB's private equity fund are the additional advantages that tying up with one of the most powerful institutions in the country can bring, says Demchenko. "If a retailer wants to

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

What you need to know

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bne April 2012

ability depends on the leanness of their operations, the cheaper cost of manufacturing products in Emerging Europe has been the main force pulling them towards the region; labour and land, two of their biggest input costs, are much cheaper in the region in comparison with Germany. Like countless other German firms, such a reality spurred Leoni, which makes wires and cables, to make the move eastwards. "We could no longer afford to produce wiring systems for the automotive industry in Western Europe due to competition reasons," says Sven Schmidt, a representative at Leoni. Cheaper labour has also been a particularly strong draw for Germany's numerous medium-sized clothing and apparel firms, like Hammer Fashion and Gerry Weber, which have established factories in countries like Romania, Hungary and Bulgaria.

Family affairs in CEE Sherelle Jacobs in Cologne

ith its proximity to Western Europe, cheap labour and EU accreditations, much of Central and Eastern Europe's (CEE) potential remains largely untapped by Western Europe's small and mediumsized enterprises (SMEs), though the Mittelstand (Germany's legion of SME family firms) are certainly leading the way. But has their daring paid off and what does the future hold? Germany's vaunted Mittelstand are famous for their knack for identifying and exploiting unglamorous but highly lucrative market niches. And their appetite for external expansion is laureate. The attitude of Mittelstand towards the CEE region is no exception. An expanding anthology of pioneering Mittelstand is rolling out operations in the region, from Hako Holdings, which manufactures cleaning machines in Poland, to Sortimo International, which

makes innovative equipment and accessories for vans. The movement of German companies into the region is traceable back to the immediate post-Cold War period; when the Iron Curtain fell, German firms

portion of this activity, with Slovakia a case in point. "We estimate the number of German companies operating in Slovakia at around 450. These companies include both global players such as Volkswagen or Siemens and numerous smaller and medium-sized enterprises,"

"Since Romania became an EU member, much of its legislation has been adapted to European legislation, which is a relief for investors" flocked to their eastern neighbours and established tens of thousands of subsidiaries. Today, Germany is by far the region's largest investor, with total investment reaching â&#x201A;Ź77bn in 2008. German SMEs contribute a healthy pro-

explains Markus Halt, a spokesperson for the German Chamber of Commerce in Slovakia. Land and labour For many Mittelstand, for whom profit-

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That many CEE countries are part of the EU is also seen as a big plus for the naturally cautious Mittelstand, which often do not have large amounts of capital to fall back on if business decisions backfire. Romania, which had a chequered legal reputation before joining the EU, is a good example of a country where EU accession has made a real difference. "Since Romania became an EU member, much of its legislation has been adapted to European legislation, which is a relief for investors," says Carmen Kleininger, a spokesperson for the German Chamber of Commerce in Romania. The fact that the region still has a lot of unharnessed potential and space for niche industries is also a big draw for many SMEs. "The Slovak automotive industry and its supplier branches continue to draw the attention of exportoriented companies in Germany," says Halt of the country's German chamber. "Its potential still is not fully tapped in particular for smaller and medium-sized businesses." Deeper reasons for the attraction of Mittelstand towards the region could lie in fact that the German business culture amongst SMEs is generally more enterprising and outward-looking than

German firms Czeching out

bne For years, the Czech Republic has been the apple of Germany's FDI in Central and Eastern Europe (CEE). But the country is now facing criticism for shortfalls in its business environment and reports of German companies moving their operations out of the country are on the up. This has raised questions about whether the Czech Republic will be Germany's favoured investment destination in the region for much longer. German investment in the Czech Republic is high. According to Deutsche Bundesbank, since 1993 Germany has invested around Â¤22bn in the country. The German Chamber of Commerce estimates that there are around 4,000 German companies operating in the Czech Republic. Germany is also a major provider of jobs in the country, with the top 15 German companies there alone providing 100,000 jobs. German investment in the Czech Republic is heavily concentrated in the automotive industry â&#x20AC;&#x201C; Volkswagen famously has reinvigorated Skoda Auto and Daimler manufactures car parts in the country. But German interest also extends to other areas, such as energy efficiency, the food industry and the medical technology sector. Siemens is one of the biggest players in these alternative areas; over the last year, its portfolio has included research projects with major Czech hospitals, the supply of medical equipment and power plant renovation. Nonetheless, a survey released by the German Chamber of Commerce in the summer of 2011 caused a stir; although it asserted that the Czech Republic remains the most attractive investment destination in CEE, it found that the country ranks bottom in the region for transparency in public procurement, behind Kosovo and Albania. It also reported that the country has one of the worst reputations in the region for corruption. "We ask German investors each year about their satisfaction with the location of the Czech Republic. Most appear to have the same criticisms: no euro, no satisfactory legal certainty, lack of transparency in public procurement," says Bernard Bauer, managing director at the German Chamber of Commerce in the Czech Republic. "There is also the problem of corruption, and the Czech elite is not being reined in in this regard." bne has heard one high-ranking German official call the Czech business environment a "swamp." Perhaps the trend that has caused the most disquiet in Czech quarters is German companies' growing lack of satisfaction with the Czech work force. "Especially in the technical and commercial professions, it is becoming increasingly difficult to find good employees who also have practical experience," explains Bauer. Fears that future graduates will lack the skills that German companies require has caused particular concern; since its accession to the EU, the Czech Republic has been haemorrhaging a worrying proportion of its best skilled graduates.

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German vim and verve in Slovakia

bne Slovakia's recent economic record has impressed and even surprised many foreign investors. Although it tends to be overshadowed by its larger neighbour the Czech Republic, Slovakia's spectacular economic transformation in recent years has not gone unnoticed – experts often compare it to Ireland's metamorphosis in the 1990s – and German companies are by far showing the most vim for investing there. German firms in particular have woken up to Slovakia's winning combination of cheap labour, low taxes and euro membership. Germany is by far the biggest investor in the country, currently accounting for around a quarter of Slovakia's GDP. Investment is rising – in 2010, German investment climbed to ¤4.15bn from the ¤4.0bn the year before, an upward trend largely driven by increased investment from firms that are already active in the country. The reasons for Germany's increasing enthusiasm for investing in the country are varied, but all relate back to the country's rapid development over the last few years. "German investors... are satisfied with employees' willingness to perform and their qualifications. The tax burden is considered rather low. And the favourable geographic position has even animated some larger companies to install trade and service centres for the whole of Central Europe in Slovakia," says Markus Halt, a spokesperson at the German Chamber of Commerce in Slovakia. German firms in the country range from international heavyweights such as Volkswagen and Siemens, to a vibrant range of small and medium-sized enterprises, which in total employ around 86,000 people in the country. German investment is concentrated in the car industry, which has long been a core sector of the country's economy. Schaeffler Group recently announced plans to invest ¤700m in a new car parts plant in Slovakia, and in March Volkswagen announced that it expects to double car production in the country this year, after a 46% rise last year. It also announced it will add a third production shift and create hundreds more jobs in its Slovakia branch. "We plan to invest around ¤1.5bn in Slovakia in the next five years," says Vladimir Machalik, a spokesperson for Volkswagen in Slovakia. Nonetheless, German companies are becoming increasingly active in other sectors. German activity is strong in the transport sector, given the high demand for improvements in roads and railway infrastructure in the country. Another up-and-coming area in which German investment is set to take off is in renewable energy and energy efficiency. Major barriers to doing business nonetheless exist and could jeopardise the future of German investment.

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that in other countries. German SMEs, along with those from China, Bulgaria and Latvia, supply the largest quantities of foreign direct investment in the world within their business classification. German SMES also have higher levels of technical cooperation with foreign enterprises than those of any other country. There are other, often overlooked but revealing, indications of the outward perspectives of German SMEs. For example, 82% of firms have their own website, a tool which effectively operates as a global window into a company's business activities, way above the EU average. Another factor cited is the similarity between CEE business culture and that in Germany. "The cultural relationship (contrary to Asian markets) facilitates quick orientation within the respective market and also cultivates a working relationship based on trust," explains Ute Lochner of Brose, a medium-sized car parts supplying firm with operations in the region. Local challenges Yet operating in CEE is not without its challenges, a fact which the Mittelstand are acutely aware of. Wages, one of the biggest headaches for SMEs, which must compete with larger companies in the final pricing of their products, are proving troublesome for smaller companies. The yearly rise in hourly labour costs in some countries in the region, such as Slovakia, Romania and Poland, was more than double the EU average in the third quarter of 2011.

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Central Europe

that see the economic climate in CEE positively plummeting from 33% in 2008 to 14% in 2011. While that's possibly partly a reflection of the impact of the global downturn on CEE, worryingly the proportion of companies that view their company's progress in CEE as good has also decreased, from a high of 58% in 2007 to 42% in 2011. Such a mediocre outlook has prompted some experts to question whether German SMEs will, in the long term, seek to relocate to emerging markets further afield, such as the BRIC countries. But others point to the savings on transport and other costs that will prompt firms to stay the course. There is both quantitative and anecdotal evidence to suggest the latter

"Today, Germany is by far the region's largest investor, with total investment reaching ¤77bn in 2008"

assertion is likelier: German SMEs across the region are continuing to expand their operations and move into new locations. And anecdotal evidence suggests that German companies are ready to embrace the challenges. The outlook of the company Brose is typical. "International business always brings challenges due to intercultural differences, different laws or different educational standards. Running business in 23 different countries worldwide for

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Reports of the labour force in CEE lacking requisite skills are also increasing. Given the intense, artisan specialism that the Mittelstand are renowned for, this is a serious stumbling block. Some also cite bureaucracy and corruption as prominent problems for firms (see box stories). A study published by the German Chamber of Commerce in the summer of 2011 reveals these quandaries may be taking their toll on investor confidence; it found that German business optimism in the region has declined in recent years, with the proportion of companies

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us means to face these challenges and adapt business accordingly to the different needs of the different countries," says Lochner. There are strong indications that, for now at least, Germany's Mittelstand have sufficient mettle and nerve to commit to the region and reap the long-term benefits. SMEs across Western Europe should take note.

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Porta's door is open for business

hasn't completely atrophied. "There are loads of real estate developers that have gone bust over the last couple of years, but the ones that have been able to survive feel much more bullish about the prospects of the market and feel that this is the time when you can enter the market at the bottom," says Janvars.

INTERVIEW:

Mike Collier in Riga Mikus Janvars

any words have been used to describe the markets in the Baltic states in the last 10 years: "booming" "overheating" and "collapsing" have probably been among the most common. But in all that time, one word has never been heard, which makes Mikus Janvars' use of it seem remarkable: "comfortable." "We feel really comfortable about the future of the market," Janvars tells bne in the breakfast bar of the Hotel Alberts in central Riga for an earlymorning meeting, "There are loads of opportunities." Janvars is one of a handful young Baltic financial brains who have just set up Porta Finance with the aim of securing M&A deals, raising capital and advising on debt restructuring. It is the sort of business that was in cryogenic suspension during the economic crisis with M&A deals dead, capital as rare as a warm day in winter and debt restructuring dominated by banks laying down the law in order to protect their own exposed balance sheets. But according to Janvars that is all changing. "Already at the beginning of 2010, the M&A activity in the Baltics was picking up quite significantly. Then at the end of last year it really seemed to pick up. What's driving it are first of all the macro developments with the Baltics now 'out of the woods'. The fiscal measures and austerity measures that are still on the agendas of most EU countries are already [in the] past in the Baltics."

In Janvars' view, investors are aware of the head start this gives the Baltics moving forward. "The economies have adjusted, the internal devaluation – although extremely painful - has taken place, exporters have regained competitiveness and investors see that. People are starting to like Baltic assets

"Evli didn't feel quite as bullish about the prospects as we did, so we made a decision that in our mutual interest the best way forward would be to part ways and for us to buy out the operations of Evli corporate finance in the Baltics. Evli still has its private banking operations, and it still does corporate finance in Finland,

"There is already a track record of exotic geographies investing in the Baltics" once again. Back in 2009, if you called someone to say 'We have this and that', people were simply not picking up the phone. Now it is completely different – people are actually calling you and saying, 'Remember this and that from two years ago –have there been any developments?'" Opportunity knocks In a way, Porta Finance is itself a product of the same process of waking up after hibernation. In February, Janvars (plus partners Julijus Grigaliunas and Aidas Galubicka) bought out the Baltic corporate finance operations of Evli, the longestablished player in the region for which all three had previously been working. "Everyone who has some sort of ambition wants to work for him- or herself, so if the right opportunity is there, you want to take it. We saw the right opportunity and we took it," he says.

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Sweden and Russia, so they are still in the business but moving more into the asset management field," he says. As to which areas of the Baltic markets are likely to provide the richest pickings, Janvars is realistic. "It is obvious that given the size of the Baltic markets, it's difficult to specialise in one sector. You still have to be general until you establish a very strong track record in certain sectors which you can then leverage. But exporting companies, wood processing and food processing are some of the sectors that have recovered particularly well. We also foresee activity in the energy sector and even a bit of a recovery on the real estate side." This last one may seem surprising given the huge scale of the Baltic property bubble that burst in 2008, but it does makes sense provided your risk appetite

"We've been on a roadshow with [Central and Eastern European-oriented] private equity houses to chat with people about the prospects for the Baltics and the feedback we received was surprisingly positive, even in comparison with other CEE countries which by European standards are very healthy economies." "Of course it's not all bright and white," he cautions. "There are still problems, but overall the macro- and micro-news has been driving interest." Though it's still early days for Porta (the name is a portmanteau word derived from the Latin to suggest a gateway rather than a tribute to the great Argentine fly-half Hugo), the company will ultimately seek to be active beyond its Baltic hinterland. "Initially, we will be focusing on the Baltics, but we are considering some other geographies," says Janvars. "We're taking a look at what's happening in Belarus, we've established contacts in Poland and have certain ideas about Russia, the US and Scandinavia. You can't be local in finance - you have to have people on the ground locally in your core markets, but at the same time you have to have a wide-ranging network across the region because pretty much no deal is local." "We will be looking further afield too, but we need to realise that only the biggest cases in the Baltics would be of interest to people from China, or North America. But there is already a track record of exotic geographies investing in the Baltics," Janvars says, citing the purchase of Lithuanian pharmaceutical company Sanitas by Canada's Valeant for €314m in August 2011 and the US' Thermo Fisher Scientific's acquisition of Lithuanian biotech Fermentas for $260m in May 2010.

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airBaltic unveils five-year plan

Mike Collier in Riga Scheduling is a topic with which all airlines have to contend, but with Latvian flag-carrier airBaltic, it was a case of unforeseen circumstances on March 6 when a press conference planned for March 7 had to be moved forward at short notice to prevent employees hearing about job losses from media instead of their managers. Around 150 of the airline's 1,200 employees will be departing as part of a new business plan that envisages the company saving up to LVL330m (¤473m) over six years. The fleet will be modernised and reduced in size from 34 to 26 planes (Boeing and Airbus are both in advanced stages of wooing on fleet renewal with a decision in favour of one of them by the summer), leasing deals will be renegotiated and the flight network has already been reined in from 70 destinations to 60. The plan is officially known as "airBalticReShape", so it comes as no surprise it is the work of a consultancy, in this case Boston Consulting Group. But even more eye-watering than that trendy title is the scale of the turnaround required for a company that has seen more than its fair share of drama in recent years, following the colourful antics of German former CEO Bertolt Flick to the opaque financial backing of Russian oligarch Vladimir Antonov, currently fighting Lithuanian attempts to extradite him from the UK to face charges relating to the collapse of Snoras bank and its Latvian subsidiary Krajbanka. Another German is in charge at airBaltic now in the form of Martin Gauss, formerly of Hungarian airline Malev which itself spectacularly bit the dust in February. If his predecessor Flick was known for his red hair and fiery temper, Gauss is a calmer character despite the size of the challenge facing him: the company lost a whopping ¤109m in 2011 and expects to leak another ¤54m this year. In 2013 losses will be trimmed to ¤22m before hitting parity in 2014 – if all goes to plan. Speaking to bne after the press conference, Gauss said he hadn't waited long before shaking things up. "There was one issue I immediately changed," he laughs. "We were not allowing passengers to switch on their mobile phones before they had left the aircraft. We now have an announcement which says you can switch on your mobile phone after landing. Passengers appreciated it and that was my first thing." Speculation is always in the air that airBaltic is looking for new financial backers, but Gauss is giving little away about a forthcoming trip to the Gulf States. "I'm going with a government delegation. We'll be telling the airlines what we do to attract potential partnerships. We're open on other discussions but mainly we'll be discussing partnerships with the Middle East carriers as they are serving other destinations we fly to and we would like to connect to these carriers in the Gulf States," Gauss says.

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more than 200 professions, ranging from public notaries to stock brokers, which the government estimates could create from 50,000 to 100,000 new jobs. "Poland has the largest number of privileged groups, the greatest restrictions on Polish economic freedom and entrepreneurship," says Gowin, calling the number of regulated professions Poland's "ranking of shame". The attempts to slash away at the thickets of red tape have already provoked howls of protest. Gowin wants to do away with map memorisation tests for taxi drivers: "In the era of GPS that is absurd," he says, to which taxi drivers have responded with fury, fearing an influx of new entrants who could undercut their wages. Hanna Gronkiewicz-Waltz, Warsaw's mayor and a party colleague of Gowin's is also warning that this may not be a good idea.

Poland strains against red tape

However, premier Donald Tusk is firmly behind Gowin. "The deregulation of regulated professions will begin the process of widening and returning economic freedoms to Poles," Tusk said, calling the system of mandatory training and then exams set by professional associations for jobs like optometrists, lawyers, developers, real estate brokers and masseurs a "sickness" that prevents people from finding work.

Jan Cienski in Warsaw

oland's centre-right government has long talked the talk of slashing red tape and freeing up business, but has been afraid of the political costs of actually walking the walk – until now. In its first four years in office, the government of Prime Minister Donald Tusk shied away from making painful economic reforms that would endanger its quest for a second term in office, but with victory in last year's parliamentary elections under its belt, the government is beginning to move. The lead is being taken by Jaroslaw Gowin, the right-wing justice minister, heretofore known more for his Catholic orthodoxy than for any liberal views on the economy. Gowin recently

announced that he will reduce regulations on 49 different professions, ranging from taxi drivers to sports

"In the era of GPS, map memorisation tests for taxi drivers is absurd"

trainers and real estate managers, part of a wider effort to dramatically reduce Poland's 380 regulated professions, the highest number in the European Union. The eventual goal is to free up

Even the right-wing opposition Law and Justice party is clambering aboard the deregulation bandwagon. Jaroslaw Kaczynski, the party's leader, recently trotted out his own list of 200 professions he wanted to deregulate, boasting that it was "much further reaching" than the government's.

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commission to stage media stunts that made him personally very popular but which did little to free up the economy. Palikot achieved his aim – he is now in parliament at the head of his own eponymous party – but the effort to reduce wasteful regulations made little headway. "I'm doing what he [Palikot] was unable to do," says Gowin. Every year, Lewiatan, the leading lobby group for Polish employers, puts together a list of "Black Barriers" that make life difficult for business, and every year the list gets longer. "Entrepreneurs have not changed their opinion that the labour

"Poland has the largest number of privileged groups, the greatest restrictions on Polish economic freedom and entrepreneurship"

code is over-regulated and that it creates serious barriers to economic activity and makes it difficult to increase employment," the association says. Poland's international rankings reflect this lacklustre record. The World Bank's annual "Doing Business" rankings place Poland in 62nd place, down from 59th

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in 2011, in large measure because of barriers to starting a business and problems with tax regulations. Those hurdles haven't prevented Poland from racking up some of the EU's best growth numbers. The economy grew by 4.3% last year and looks set to hit about 3% this year, one of the highest in the EU. As the Finance Ministry is keen to point out, from 2008-2011, the time of the global economic crisis, the Polish economy grew by 15.7%, while the EU as a whole contracted by 0.5% during that period. However, there are increasing signs that Poland's economic growth will start to slow in 2013, and the government is looking to find ways to defend against a slump and to lower unemployment, currently at 13.5%. Gowin's early targets are relatively uncontroversial – aside from taxi drivers, other professions like security guards, sports instructors and tour guides have little political heft and are unlikely to cause him many problems. The problems will start when he starts to try to tackle wealthier and more powerful jobs like notaries and investment advisors. Poland's Financial Supervision Authority is already making worried noises about reducing requirements for brokers while the insurance industry professes to be worried about falling quality of public services. Tusk seems to be well aware of the risk. "When it comes to deregulating professions everyone is for, but when a concrete proposal arrives, then some become cowards," he said.

Try, try, try again Gowin's programme marks a return to Tusk's verbal commitments to deregulation dating back to his first election victory in 2007, when he was happy to be portrayed as an economic liberal. But an early attempt at reducing red tape failed spectacularly. Tusk chose Janusz Palikot, a successful businessman and MP, to head the effort in parliament, but Palikot, an inveterate self-promoter, used his deregulation

www.premier.gov.pl

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Poland takes a bite out of Apple On March 5, a CNNMoney headline proclaimed that, "At $500bn, Apple is worth more than Poland". Well, no it isn't – but why let the facts get in the way of a good tagline? "Apple's stock market value topped the $500bn mark in early trading Wednesday [February 29], another record high for what was already the world's most valuable company," the media group went on helpfully. "Apple's valuation is now higher than the gross domestic product of Poland, Belgium, Sweden, Saudi Arabia, or Taiwan." In a narrow sense Apple's market value is higher than Poland's annual GDP, but the comparison is meaningless. The problem is that CNN, in its rush to misinform its readers with attention-grabbing headlines, is trying to compare two different things – the market capitalisation is the market value of all of a company's outstanding shares and thus a measure of future profits, while GDP is a measure of the annual value of goods and services that a country produces. Better, Professor Paul De Grauwe of the London School of Economics told the BBC, is to calculate Apple's "added value" (the increase in the value of something that has been worked on, so that it can be sold in a new form) and compare that to Poland's GDP, which is also essentially a measure of a country's added value. "We would take the sales of Apple and subtract everything that is in the iPhone, but that Apple has not produced itself," De Grauwe told the BBC. In this way, Apple's relative value would shrink to put it at the 56th largest economy in the world (according to World Bank 2010 figures), 30 spots below Poland, 11 spots below the Czechs, four spots below Hungary, but three spots above Slovakia.

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and possible legal proceedings at the European Court of Justice. Despite this stern warning, the messages coming from Hungary continue to be mixed. "I see the Orban government following the same strategy as it has applied over the last few weeks – a strategy of 'double speech'," says Andras Biro Nagy, an analyst at Budapest-based think-tank Policy Solutions. What this means is that at home Orban talks like a diehard Eurosceptic, while at the same time his government tells the Commission what it wants to hear.

www.orbanviktor.com

Hungary's "double speech" strategy Phil Cain in Graz, Austria

ungary's government continues its domestic display of Euroscepticism while gradually bending to EU demands. On March 13, the EU ratcheted up the pressure on Hungary when the bloc's finance ministers agreed to suspend EU funds destined for Hungary because of its failure to hit budget targets, though said the funds could be reinstated in June if Brussels determines that the government is working to bring its budget policies in line with EU rules. And the previous week, the European Commission insisted Hungary overhaul constitutional changes it had introduced on January 1 or be denied an International Monetary Fund (IMF) bailout and face legal action. Concern – particularly relating to the independence of the central bank, judiciary and data protection authority – led the EU to suspend EU/IMF bailout talks in December and launch accelerated infringement proceedings on January 17.

That ultimatum from the Commission came in response to a document outlining the actions the rightist Fidesz government of Viktor Orban have taken to allay EU misgivings. Hungary's 100-page response was handed to the

Orban recently told Hungarians the "leadership mentality" of the European Commission was not enough to govern a country village. Yet at the same time, this government has already proposed changing the data protection law to comply with EU demands. "The 'double speech' strategy seems to work back at home," says Nagy. "The erosion of Fidesz support has stopped over the last two months and the far-right Jobbik party is not able to exploit the growing anti-EU sentiment." The line Fidesz is peddling domestically about the ultimatum is that the European Commission accepted 90% of the report and that what remains is merely a matter of tweaking. At the same time, some members of the Orban government, addressing an international audience, have expressed more urgency and flexibility. "The government is aware

"At home Orban talks like a diehard Eurosceptic, while at the same time his government tells the Commission what it wants to hear"

commission on February 17, the last possible day, and Orban had described the document at the time as "convincing". However, the Commission thought otherwise, and Hungary now has a month to be more convincing still or face ongoing exclusion from IMF talks

of the risks and it is seeking an optimal solution and an IMF deal is unarguably part of this," Tamas Fellegi, a minister without portfolio in charge of IMF negotiations, told an investor conference in Budapest. The necessary changes would be made "promptly", he added.

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There is little reason to narrow the gap between domestic fist shaking and international compliance. "There is considerable political gain domestically in emphasising the importance of the Hungarian interest," says Julia Lakatos, head of International Affairs at the Centre for Fair Political Analysis. "Prime Minister Orban will continue to do so, just as Margaret Thatcher or Jacques Chirac were known to go against the European common interest in favour of their national interests." The haven of the Hungarian language makes it easier, say analysts, reducing the chance of messages reaching unintended audiences. At the same time, Orban has no option but to comply with the commission's demands, Lakatos says. It has reached the "post party-politics" phase, she says. "After a great deal of conflict and politically-charged statements from all sides, the negotiations have returned to the routine way of doing EU business. It is not in the interest of the Hungarian government to change from its current cooperative stance." Normalisation of EU-Hungary relations is crucial to regaining market trust no matter where the Hungarian government seeks its finance, she says. The Organisation for Economic Cooperation and Development (OECD), a club for rich countries, is inclined to agree. "Swift action is needed to stabilise the Hungarian economy and put growth on a sound footing for a durable recovery," according to its latest survey published in Budapest on March 13. The IMF deal is an inescapable part of it, it said. The OECD forecasts a budget deficit of 3.4% of GDP in 2012 and 3.3% in 2013, compared with the government's predictions of 2.5% and 2.2% in 2013. On March 12, Moody's Investors Service, a rating agency, said the delay in securing an IMF/EU financing deal was "exerting pressure" on a rating it has already relegated to junk status in November.

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Slovaks veer left after scandals

bne The opposition leader and former prime minister Robert Fico completed a remarkable comeback on March 10 when his leftist party Smer (Direction) won a landslide 44% share of the vote, giving it 83 seats in the 150-member assembly. It is the first time since Slovakia became independent in 1993 that any party has won enough seats to rule without a coalition partner and left it just shy of the three-fifths majority that would have allowed it to unilaterally amend the constitution. President Ivan Gasparovic said at a news conference after the results were in that he would ask Fico's party to form a new government. Fico's previous coalition partner when he was prime minister between 2006 and 2010, the Slovak National Party, did not clear the 5% threshold for representation in parliament this time. Five other parties cleared the 5% threshold – just. Almost tied for second place, on 8.8% and 8.6% respectively, were the Christian Democratic Movement (KDH) and Ordinary People and Independent Personalities, which campaigned on an anti-corruption ticket. Then came Most-Hid on 6.9%, followed by the Slovak Democratic and Christian Union (SDKU) on 6.1% and Freedom and Solidarity (SaS) on 5.9%. Fico said he would strengthen the social safety net for the poor while also pledging to adhere to the EU-mandated deficit target of below 3% of GDP for next year, in part by ending Slovakia's flat income tax and raising rates for high earners and corporations to 22%. The fresh elections were held more than two years early because the previous coalition under the leadership of PM Iveta Radicova fractured in October over legislation to expand a euro bailout fund. After Radicova lost a vote of confidence on the measure, Fico and his party agreed to supply the votes needed to pass it, but only in return for these early elections. But what dominated the campaign – the dirtiest, said many, in the country's young history – was a toxic series of corruption scandals that rocked the coalition. The first salvo in this dirty war was the publication last December of a secret service file, code-named "Gorilla". The 100-page Gorilla document comprised a dozen transcripts of conversations that were allegedly recorded in a bugged residential apartment in Bratislava in 2005 and 2006. In the file, a cabinet minister, a senior government bureaucrat and a shareholder in the shadowy Penta investment group appeared to discuss kickbacks for the sale of state assets, such as electricity and heating plants. The original audio tapes were destroyed in 2008 by the secret service, but the transcripts were described as "authentic" by Justice Minister Daniel Lipsic in February.

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modest operating profit in 2010 and it expects to make another modest operating profit in 2011. "We have growth here in Central and Eastern Europe and the Balkans, but not in Italy, UK or Spain. It's from 2014 we will really start to see some growth," predicts Horiszny.

www.netjetseurope.com

NetJets Europe banks to the east Nicholas Watson in Prague

ith Warren Buffett's annual letter to investors in February highlighting plans to expand the NetJets private jet franchise into China, the European sister company NetJets Europe is also looking to the region's emerging markets like Russia to shore up its business in these difficult times. NetJets is the world's largest provider of business jets, selling part-shares in planes and also renting them on a peruse basis, but inevitably the private jet is one of the first expense items to be junked by individuals and companies looking to cut costs during any economic downturn. The 2008 crash brought the company to the brink of collapse, prompting Buffett's Berkshire Hathaway, which purchased NetJets in 1998, to call it "the major problem" in 2009. But a restructuring that shrank the fleet by 20% over the past four years and a budding economic recovery in the US has resulted in 2011 pre-tax profits hitting $227m after a $711m loss in 2009, and now the firm is looking to launch a Chinese business by the end of this year. "NetJets is proceeding on a plan to enter

China with some first-class partners, a move that will widen our business 'moat'," Buffett wrote in his annual letter. The Chinese partners have not been identified. Turning its attention to still-buoyant emerging markets like China makes sense, say analysts â&#x20AC;&#x201C; and is one that NetJets Europe, a Lisbon-based European sister company that's responsible for 20% of NetJets' revenue, is also following as part of its attempts to revitalise its business. Like the US parent, NetJets Europe has also managed to turn around the business that was hammered by the double whammy of customers cutting back on flying privately, and some of those also needing to sell their shares in the aircraft to raise cash. NetJet Europe guarantees to buy within 90 days clients' part-shares in the aircraft. "In 2009, the number of flights fell 20% versus 2008, which put us at a loss that year," Vadim Horiszny, senior vice-president of NetJets Europe for the CEE region, tells bne. The company has developed a 10-year cost-saving restructuring programme, which helped the company back into a

To and from Russia with love Russia is, unsurprisingly, a priority market for NetJets Europe. Blessed with a growing economy full of dynamic companies that are growing at a decent clip, Russia boasts a wealthy capital city with a lot wealthy people who are suckers for the trappings of wealth, like private jets. NetJets Europe started operating into and out of Russia in 2004 and performs an average of 2,000 flight movements a year. In February, NetJets Europe launched a product specifically designed for the Russian market, which gives customers who purchase 50 or more flight hours a 20% discount on flights over three hours out of Moscow and St Petersburg to all destinations within Europe. "Russia is a very attractive market for NetJets Europe and one where we see real growth potential," said Eric Connor, the new chairman and CEO of NetJets Europe. "We have created a product that is designed to make flying with NetJets Europe more cost efficientâ&#x20AC;Ś Starting from â&#x201A;Ź319,000, we think this new product will be attractive for customers and prospects." Central Europe and the Balkans are also interesting markets for NetJets, since some like Poland and Romania have economies that are expected to grow relatively strongly this year (latest EU forecasts have Poland as the fastest growing economy in 2012). Furthermore, Horiszny points out these markets have a lot of room to grow. "In every major city there are people who fly private, but not as much as in western cities, for example if you compare Stuttgart and Warsaw," he says. NetJets Europe is already seeing this increase in demand, for both private and leisure; in Prague, NetJet Europe's movement in private aircraft increased by 10% in 2010 after a similar increase in 2009. "We are flirting around 1,000 movements," says Horiszny.

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Croatia's annus laboriosus Guy Norton in Zagreb

arring a last-minute hitch â&#x20AC;&#x201C; something that can never be discounted in the Balkans â&#x20AC;&#x201C; Croatia will become the 28th member of the EU on July 1, 2013. On that fateful day, the country will finally achieve its long-cherished dream of joining Europe's elite politico-economic bloc, ushering in an unparalleled era of economic prosperity. That at least is the marketing spin propagated by local politicians who in the two decades since Croatia gained independence from the former Yugoslavia have pursued the goal of EU accession with an almost monomaniacal zeal. The economic reality promises to be somewhat different, warn both domestic and international observers who feel that Croatia is still poorly prepared to meet the challenges of competing in the single European market it will join next year.

While the previous rounds of EU enlargement involving states from Central and Southeast Europe in 2004 and 2007 were conducted in the midst of a global economic boom, Croatia will join the EU in 2013 against a backdrop of global economic slowdown, if not outright recession. As such, the recently installed left-wing coalition government in Croatia has its work cut out if is to resuscitate the country's moribund economy. As Fitch Ratings recently noted: "Croatia's poor growth performance (0.1% average in

the five-years to 2011) weighs on its rating." Nevertheless, Fitch affirmed Croatia's 'BBB-' investment grade rating, with the caveat that it retained its negative outlook. "Despite some positive initial policy steps by the new government, further fiscal consolidation measures and structural reforms will be required to boost economic growth and stabilise the public finances," it said. UK investment bank Barclays Capital too remains sceptical about whether the government has the wherewithal to push through potentially painful social

"What has been done so far is not and will not be enough to stimulate growth and improve the investment and business climate"

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reforms that can improve the country's creditworthiness. In a recent trip report entitled, "A start… but still too little, too slow", it welcomed the fact that the government had promised to cut spending by HRK4bn (€530m) – roughly 1% of GDP – but queried whether its actions went far enough. "While the

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Growth gap There's also widespread doubt about whether the government's GDP forecasts for this year – it is targeting growth of 0.8% of GDP – is even remotely achievable. Most local economists believe that the economy will instead shrink by 0.5-2.0%.

"Nobody except the government is looking at positive GDP growth in 2012"

first nominal expenditure reduction in Croatian history is perceived as an achievement by the authorities, we think the proposed measures are not overly ambitious and represent largely a one-off solution." As such, it went on to warn: "We think the risks of a downgrade to non-investment status over the next months are very real." Critics of the government's economic policies are not only to be found abroad. In a damning indictment of the current state of play in the economy, the Croatian employers' association Hrvatska Udruga Poslodavaca (HUP) in a recent statement complained: "Labour and capital in Croatia are overtaxed, labour legislation is bad and inflexible, the education system is not coordinated with labour market needs, the justice system is slow and ineffective, and the state and local administration is inefficient." The HUP went on to bemoan a lack of real and fundamental reforms that would create conditions for economic recovery and long-term sustainable growth. "What has been done so far is not and will not be enough to stimulate growth and improve the investment and business climate. Quite the contrary, some steps are having a negative effect on the investment climate and economic growth, such as higher taxes that create additional risks and legal insecurity," it said.

Alen Kovac, chief economist at Erste Bank in Zagreb, believes that the government's growth forecasts understate the impact that the recessionary conditions in the Eurozone will have on Croatia this year. "Our baseline scenario of GDP shrinking by 1% this year is based on the slowdown in the Eurozone which will have a negative impact on tourism revenues and investment activity," he says. "Nobody except the government is looking at positive

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Analysts say that the government's ability to push through changes on the labour front will also have an important impact on its efforts to attract much-needed foreign direct investment which has dropped dramatically in recent years. To reverse this decline, the authorities in Zagreb are creating a special agency to promote foreign investment, taking over these functions from local authorities, which are largely blamed for deterring investors by erecting numerous bureaucratic hurdles. "The government is working hard to get foreign investors to look at Croatia again," says Kovac, adding that it is hoping that the prospect of EU accession in July 2013 which will bring in €3.5bn of

GDP growth in 2012 because of the weak external and domestic economic environment."

funds for infrastructure and development projects in the first two years of membership.

He also believes that planned investments in roads, railways and the energy sector that the government hopes will boost growth this year will only have a positive impact in the medium term. "They're a good idea, but they won't really have an economic impact until 2014-15."

This, it is hoped, will prove to be a deal clincher when it comes to the government attracting foreign participation in a slew of public-private partnership projects that it's looking toward in order to make Croatia's EU membership an economic dream rather than a nightmare.

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metres a year (cm/yr), which has just been renewed for one year, after its original 25-year term ended last December.

bargaining agreements, which are seen as key to improving the efficiency and profitability of the country's numerous state-owned enterprises that account for roughly 25% of Croatian GDP. "If there is no agreement on labour market reforms, the government will not meet its fiscal targets for 2012. Changes need to be made this year so as to have a positive impact on Croatia's competitiveness when it joins the EU in 2013."

"Some steps are having a negative effect on the investment climate and economic growth"

Kovac believes that the most pressing challenge facing the government this year is to get agreement with the country's powerful public sector trade unions on changes to collective

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Plans for the contract to be transferred to one or more private sector companies by the end of its 25-year term in December had to be shelved after talks between Gazprom and a number of prospective buyers were not concluded in time. The contract has now been extended until the end of 2012, albeit with no clear indication again if private sector companies will be able to conclude deals in time.

Turkey takes foot off the gas David O'Byrne in Istanbul

ack in the early 1990s it appeared a safe bet. Surrounded by countries with vast gas reserves available at bargain prices, pegged to an oil price then hovering at under $20 a barrel, Turkey opted to meet growing power demand and the need for a cleaner fuel for urban heating with imported gas. But 20 years on, with Turkey experiencing record demand for both gas and power (50% of that generated from gas), the wisdom of that move is being questioned. The coldest winter in 33 years was arguably the worst possible time for gas cuts from two of the country's suppliers – Iran and Azerbaijan – together with an ongoing problem with a third, Russia. While the cut in supply by Azerbaijan was caused by a problem at the well head that was quickly resolved, Iran contrived to cut supplies for two periods of a week in January and February, sparking fears of widespread power cuts, and forcing Turkey to cut its gas transit to Greece. Turkish officials have confirmed to bne that they have no reason to doubt Tehran's explanation that the cuts were caused by successive explosions at compressor stations. However, this in

turn raises doubts over Iran's ability to adequately maintain its own gas-transit system in the wake of international sanctions, which bars western contractors from working on oil and gas installations, as well as the supply of equipment and materials. It also comes at a time when talks between the two countries over the high price of gas that Tehran charges have broken down, prompting Energy and Natural Resources Minister Taner Yildiz to tell the media that Turkey plans to sue Iran in international court to seek a settlement. "The road to arbitration is being paved on March 16, and we will not wait for too long after that to file our complaint," Yildiz was quoted as saying by the daily Zaman. On top of this, Turkey has been facing problems with the oldest of its gas import contracts – with Russia for 6bn cubic

Now with gas demand continuing to grow rapidly on the back of the commissioning of new gas-fired plant, Turkish officials estimate that demand for 2012 will top 48bn cm, perilously close to the 51.2bn cm maximum that Turkey's import contracts allow. Yildiz has announced plans to sign two new gas import contracts this year, but with no major new gas supplies likely to be available for five or six years, the only new gas available in the short term will be liquefied natural gas (LNG) – useful for eking out enough to meet peak demand, but not a long-term supply solution. No surprise then that Yildiz has also announced that Turkey is looking to develop its own domestic resources of energy to meet growing power demand, and reduce dependence on imported gas from 50% of power needs down to 30%. Diversification difficulties That may not be as simple as it sounds. In the decade since the state stopped developing new power plants, private sector developers have shown a marked preference for quick-to-build, cheap-tooperate gas-fired plants. Already around 17 gigawtts (GW) – a third of Turkey's generating capacity – is gas burning, and during the recent cold spell produced over 50% of the power

"Even if we start now, it could take 20 years to reduce the percentage of power generated from gas to 30%"

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The cracks beneath Istanbul's modern facade

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trafficking by banning speed boats, that has transformed the country's image in the last five years," claims Aldo Bumci, the minister for tourism.

the country used. "Even if we start now, it could take 20 years to reduce the percentage of power generated from gas to 30%," reckons Mustafa Karahan, head of Turkey's Electricity Traders' Association (RTD), pointing to the volume of new gas-fired plants under development.

Neighbourhood problems All of which is raising interest from a greater array of investors, pushing the country over the $1bn mark for annual FDI. That's not just good news, but vital given the problems in Greece and Italy. With that pair Albania's largest investment and trade partners by far, Tirana has added incentive to spread its net wider to find FDI.

bne Eleven Turkish workers were killed on March 11 when the tent they where sleeping in at an Istanbul construction site caught fire. The incident raises questions about Istanbul's headlong rush to become one of the world's financial and commercial capitals.

Indeed, with a massive 13.5 GW already approved for construction, gas demand is set to actually rise for some time – even assuming that 64 plant totalling 19.5 GW whose license applications are pending are not approved for construction.

The fire occurred in the Esenyurt district of Istanbul, in a large tent serving as a dormitory for workers at the construction site of a new mall called Marmara Park. The workers were reportedly employed by the Kayi subsidiary of the German ECE Company. Some of the workers reportedly died from smoke inhalation while others were burned to death. The tent adjacent to the one where the workers died also caught fire. Police have detained the construction site supervisor and work safety chief, along with nine others.

And alternatives are thin on the ground. Increasing opposition to hydroelectic power has seen many projects locked in long legal battles, with the negative publicity generated over high-profile projects like the ill-fated Illisu hydro dam causing western developers to steer clear.

Turkey's ruling Justice and Development Party (AKP) aims to re-establish Istanbul, home to approximately 17m people, as a global financial and cultural centre of the same stature that it enjoyed during the Ottoman and Byzantine times. International companies tend to agree with the view that Istanbul is an ideal base to run operations for Turkey, Central Asia, the Middle East and Africa. In the midst of the Eurozone debacle, Turkey looks a good bet to many investors – risky and in need of close monitoring perhaps, but better than so many other countries in the region.

Turkey's abundant wind resources are already under development, with 1.7 GW already generating, but few expect plans to reach 10 GW by 2020 to be realised, pointing to the difficulties selling variable wind power on Turkey's nascent power market, and problems connecting to the country's poorly maintained grid.

Istanbul is one of the most dynamic and fastest-moving cities in the world. It is nearly impossible not be seduced by the pulsing energy that permeates the city and the sight of flashy skyscrapers being built among the minarets along the Bosporus. The AKP is doing all that it can to retain that perspective and portray Istanbul as the ideal hub for business. To foster this image, the city is undergoing a massive amount of construction and development aimed at modernising infrastructure and heightening the city's glamour. New projects are regularly announced, each seemingly more grandiose than the previous one.

Inevitably given the recent hype globally about how shale gas is the answer to many countries' energy security problems, the unconventional gas source has also been mentioned. In March, state energy company TPAO said it has held talks with Exxon Mobil about exploring for shale gas in Turkey. The US Energy Information Administration, Turkey has 15 trillion cubic feet of technically recoverable shale gas.

That sleeping workers died in the midst of all this makes one wonder: how stable are the foundations of this glory? And is the government turning a blind-eye to companies not following regulations as they race to increase the city's prestige?

"Alternatives to gas are thin on the ground"

But for Turkish energy analyst Haluk Direskeneli, the solution lies in Turkey's 12bn tonnes of reserves of low-grade lignite – the world's seventh largest, around 40% of which lies in one massive basin stretching across a third of the country. "Local coal can be produced for as little as $2 per million British thermal units, compared to $4.5 for imported coal and up to $12 for imported gas," he explains, pointing out that the main challenge is to develop local technology that can burn the low grade coal efficiently and cleanly.

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Albanian ambitions Tim Gosling in Tirana

ith just 3m or so people, the Albanian market is simply too small to attract huge amounts of investment. So Albanian officials hope to leverage recent reforms to become the investment base for a micro-region boasting 10m potential consumers. Albania's foreign direct investment (FDI) hit $1bn for the first time in 2010. "Four years ago, the country launched a series of aggressive structural reforms," points out Majlind Lazimi, chief of staff at the economy ministry. "Those have helped us to do very well in global indicators such as the World Bank rankings." Indeed, a raft of reforms in 2007-08 propelled the country from 135th place to 86th in 2009 in the World Bank's "Doing Business" annual survey. And officials boast that alongside geographic and cultural advantages, recent reforms such as slashing income tax to a flat 10% and cutting red tape for starting a business makes Albania one of the most attractive investment destinations

in the region. Business people and foreign officials working in the country agree that significant progress has been made, but stress more needs to be

Lazimi says that interest is growing among investors from other EU markets as well as the US and China. "Albanian business has seen the second crisis coming, and the flexibility of our economy is allowing them to look to new markets for both trade and investment," he says, adding that the country being a developing economy creates opportunities for foreign investors. "Energy is the top priority in Albania's economic policy," Lazimi states frankly, and the power sector is one of the strongest success stories in Albanian FDI since legislation in 2006 created concessions to operate Albania's hydroelectric power plants. The official adds that despite 102 concessions having

"We see no major manufacturing coming, but we are going to go out to start talking to potential investors in that segment"

done. A long-delayed administrative court to help protect investors is a particular concern, for example, and that's reflected in the World Bank ranking, with Albania failing to advance since that last big jump. Albanian officials also point to the country securing visa-free travel with the Schengen zone in 2010. "Alongside joining Nato and clamping down on human

been awarded, only 40-50% of hydroelectric reserves are being utilised. While poor rains in 2011 saw Albania and other countries in the region forced to import electricity at costs far above domestic prices, that only illustrates the opportunities. In 2010, Albania exported €100m worth of electricity from hydropower, Lazimi points out, adding that export lines into neigh-

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At the same time, Albania doesn't want for ambition on a grander stage, and is also looking to leverage its geographic position to join the global geopolitical race to feed the growing appetite for gas in Southern Europe.

ethnic Albanian populations. "The legal basis for accelerated cooperation is there," says Lazimi, "via the latest CEFTA [Central Europe Free Trade Agreement – essentially a Central and Southeast European common market of countries preparing for EU membership] agreements. We're looking for other energy projects to get involved in – coal in Kosovo for example can be complementary to our hydro."

The Trans-Adriatic Pipeline project hopes to carry gas from Azerbaijan's giant Shah Deniz field to Italy. Surveying off the Albanian coast began in February. Lazimi also claims that Qatari

While serving the region with power is a serious ambition in itself, expansion of trade ties and infrastructure should help expand the profile of investors in Albania, according to the plan. As a

bouring countries are being built, and infrastructure and legislation for other renewables such as wind and solar are being preparated.

"Albania now needs the banks to step up – and right now they're not very willing"

investors are interested in plans to build liquefied natural gas (LNG) terminals on the coast, although a concrete project has yet to be started despite plans going back years. Lazimi points out that either of these plans would allow the government to begin gasification of the country should they happen. Regional ambition Closer to home, Albania hopes to use energy as a way into the surrounding region. "We want to develop regional energy projects, and to do that we need a European approach," he says. "That will also offer the advantage of expanding relations in the micro-region – and the ethnic Albanians spread across it can play a part there – and boost trade and investment." That's a reference to Albanian ambitions to increase its chances of attracting larger investors by effectively swelling its domestic market to 10m potential consumers. The ambition involves becoming the investment base to serve the micro-region, which includes Montenegro, Kosovo, and Macedonia – all of which have large

government report admitted in 2010, for instance, "manufacturing accounts for a relatively low share of FDI." Eneida Guria, head of Albania's new foreign investment agency, laments that the trend continues. "We see no major manufacturing coming," she says, "but we are going to go out to start talking to potential investors in that segment." It's clearly a tough sell, however. In Tirana, for instance, recently elected Mayor Lulzim Basha is ready to offer stunning tax breaks to major investors. "For every 50 new employees, we'll waive local taxes for four years," he explains, before announcing proudly that for any investor creating "over 10,000, the city will reimburse their state taxes for five years." The city coffers are likely safe for now, with Basha admitting there is no company in Albania that current employs over 10,000 people. Instead, says Guria, despite high "initial interest" from investors, her agency's two successes in attracting major proj-

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ects since it was established at the start of 2011 are two tourist resorts worth €500m and €1.2bn respectively. "The initial approvals are in and they should hopefully kick off in 2012," she says.

report on the country's participation at the conference, while TUI, Germany's largest tour operator, has reported a 14% increase in pre-bookings to the country. The government has pledged to continue to invest in promotion overseas, including attending other tourism fairs.

Agriculture is another sector with huge potential, and "the sector deserves more attention from investors," she says. The Economy Ministry is setting up development funds to help knock the sector into shape, but Lazimi says the government "now needs the banks to step up – and right now they're not very willing." The elusive EU boost While Guria admits that some of the reforms – especially those that aim to reduce the powers of certain ministries in licensing businesses and other bureaucratic functions – are not progressing quite as swiftly as her political colleagues might suggest, she generally praises the processes and says they have helped make her job easier. One of the biggest boosts, however, would be progress in Albania's route towards EU membership. In late 2011, Brussels declined to offer Albania candidate status for the second year in a row, citing the political deadlock in the country, which has since been partially cleared. Guria says there's no way to quantify how much the stalled process has cost Albania in terms of investment. Clive Rumbold, deputy head of the EU mission in Tirana, stresses that: "FDI follows the perception of future EU membership. It's a guarantee of European standards in issues such as investor protection." At the same time, Tirana's EU ambitions should go some way toward calming fears that all this talk of "leading the micro-region" is just another phrase for creating a "Greater Albania." The recent announcement by Prime Minister Sali Berisha that he will make Albanian citizenship open for all ethnic Albanians, as well as any foreign citizen investing €100,000 in the country, keeps these worries bubbling below the surface.

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From mass market to upmarket Andrew MacDowall in Sofia

arch's ITB Berlin saw the usual flurry of publicity for strange and wonderful destinations. The world's largest tourism fair attracts representatives from almost every country on the planet – 187 this year – many of which barely feature in the glossy brochures of the average travel agent's. Tourism is the world's largest service sector, and few are the nations that don't want a share of the large and growing market. Somewhere between the world's most famous destinations (the likes of Spain) and the more obscure (Chad returned to the ITB for the first time since 1999) is a country in Southeast Europe that, according to official figures, attracts more visitors than India, yet still remains relatively unknown to most of the world's travellers. For decades, Bulgaria has thrived as a sun, sea and sand destination for European package tourists. Other than pleasant sandy beaches, the country's success is almost entirely based on one competitive advantage – low prices. In recent years, Bulgaria has also become known as a ski destination, again capitalising first and foremost on affordability. The World Tourism & Travel Council (WTTC), a global body of industry leaders,

estimates that the "overall impact" of the sector will account for 12.9% of Bulgaria's GDP in 2012. The WTTC's definition is certainly a broad one, but by most estimates tourism contributes between 9% and 14% of Bulgaria's economic output. Some 8.71m foreign visitors came to Bulgaria in 2011, up 4.0% on the previous year, according to official figures. Dependable though a base of several million package tourists each year has been, there is a growing awareness in the industry that it cannot be relied on forever – and that Bulgaria has con-

But to a large extent these developments represent business as usual. Companies outside the massmarket segment complain that too little is being done to diversify into higher-value niches such as cultural, adventure and ecotourism. Bulgaria's range of relatively unspoiled natural landscapes, historic villages and towns, archaeological sites, and remarkably well-preserved traditional culture offer opportunities for tourism development that have thus far been under-exploited. Reports suggest that just over 10% of visitors to Bulgaria make their way to cultural sites at present. Niche tourism may never bring in millions more visitors, but tend to deliver higher margins with less environmental impact – and could also bring economic development to rural regions. Furthermore, Bulgaria may not be able to rely on mass-market tourism forever; there is plenty of competition, and it could intensify. Should Romania finally get its act together and refurbish its coastal resorts, Romanians would have less reason to head south for their summer holidays. Were Greece to leave the euro, currency devaluation could make it an affordable coastal tourism destination once again.

"Bulgaria still can't get rid of its old image of being a cheap summer destination" siderable potential to develop highermargin activities to develop a crucial economic sector. Success in doing so, however, has been limited. The Germans are coming Bulgaria's appearance at the ITB has led to a number of positive-sounding headlines. Eurosport is to air a special

"Bulgaria's main competitors for summer vacations are Turkey, Greece, Spain and Croatia," Tsvetelina Tsankova, managing director of nvision travel, a Sofia-based travel company, tells bne. "Their advantages are good price policy, cheap flights to the destinations, good and constant promotion, relatively better image and better service."

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A Romanian retraction

bne Finance Minister Bogdan Dragoi warned on March 9 that the country risks sliding into recession in the first quarter of 2012, only to be quickly corrected by President Traian Basescu, in what is being viewed as a sign of rising tensions ahead of elections later this year. Blaming the severe cold snap in February that wreaked havoc across Southeast Europe, Dragoi said the economy could shrink in the first quarter of 2012 versus the previous quarter. Following on from a 0.2% contraction in the final three months of 2011, that would see Romania join the likes of Spain, Czech Republic and Italy in technical recession. However, following massive protests against austerity in January, the mood amongst government officials is becoming tense, and suggestions of recession – no matter that he tried to couch them with talk of high bases and bad weather – in Dragoi's first press conference in Bucharest since his appointment, clearly do not follow the party line. President Basescu quickly moved to refute the forecast of recession two days later. Wriggling to avoid discussion of the recent quarter-on-quarter growth rates, he instead concentrated on the improvement recorded on a year-onyear basis, with Romania recovering from a 1.3% contraction in 2010. In the fourth quarter of 2011, the economy posted significant growth compared with the same period in 2010, he said, adding there is no reason for concern about drifting back into recession. Compared with the first quarter of 2011, growth of 1.5-2.0% is expected in the first three months of 2012. For the whole of 2012, the authorities forecast growth of 1.5% to 2.0%, which would allow the government to push populist policies ahead of the autumn elections. This has prompted warnings from analysts. "The main challenge for Romania during the election year," Erste Bank says, "is to stay within the ambitious budget deficit target it has committed to 3% of GDP. Tempers have begun to flare in the run-up to elections and even President Basescu turned to more populist rhetoric asking the ruling coalition to raise public wages by June 1. Our estimate indicates that a 10% increase in the average public wage could generate an additional expense of around 0.3% of GDP. We continue to see a budget deficit of 3.4% of GDP in 2012."

"Bulgaria still can't get rid of its old image of being a cheap summer destination"

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the mid-1990s, which resulted in only 2,200 units being produced.

Tsankova is sceptical about the success of current promotion efforts, and argues that a shift in emphasis is needed to address the lack of diversification. "Bulgaria still can't get rid of its old image of being a cheap summer destination, which hinders the development of cultural tourism," she says. "The promotion done by the ministry abroad is not sufficient. If we compare it to that of Turkey and Greece, we can even say it's almost missing altogether." Much of the existing promotion and development of alternative tourism has been pioneered by the private sector, though the government is working on improving cultural attractions such as archaeological sites and museums. The official InvestBulgaria Agency (IBA) is attempting to direct foreign investment into niches in which it sees particular potential. "Value-added in tourism is not so high at the moment," IBA executive director Borislav Stefanov says. "But we aim to encourage upscale projects. There's quite a lot of potential in cultural tourism, as well as medical and spa tourism." A common concern is that the sector is currently poorly led and coordinated. At government level, it is shoehorned into the unwieldy Ministry of Economy, Energy and Tourism, while private sector lobby groups are fragmented and occasionally operate at cross-purposes. Patchy promotion and lack of infrastructure, as well as Bulgaria's position outside the Schengen visa zone, are also hampering efforts to tap into fast-growing tourism markets in Asia and the Middle East. While Bulgaria is expected to join Europe's visa-free Schengen zone this year, allowing visitors from countries such as China to visit on a single European visa, Bulgaria will have to do much more to attract the attention of emerging-market tour operators. Coordination with counterparts in neighbouring countries to offer regional packages would be a start –Bulgaria is currently so little-known outside Europe that it is not a particularly viable stand-alone destination.

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www.greatwall.bg

Made in Europe Andrew MacDowall in Sofia

he opening of the first Chinese car factory in the EU was a landmark event for both Bulgaria and Chinese automakers. Noteworthy as the opening was, the plant is still small scale and predominantly Bulgarian-financed – not quite the foreign investment coup some would have us believe. But the choice of Bulgaria by Great Wall Motors certainly gives the country a chance to build up its automotive supply chain and develop a much-needed export-oriented industry. It also highlights Bulgaria's competitive advantages as a manufacturing centre. Chinese automakers – and those from other emerging markets – will also be watching with interest to see how Great Wall's pioneering move into the extremely competitive and demanding EU market fares. The first Chinese-badged vehicles to be made in the EU rolled off the production lines at Great Wall Motor's plant, in Bahovitsa, near Lovech in northern Bulgaria, in February. The factory is a joint venture between Great Wall and Litex Motors, a subsidiary of Litex Commerce, a large and influential Bulgarian holding company originally based in Lovech.

Output is expected to reach 4,000 units this year, ramping up to 50,000 when at full capacity – as soon as 2013, with total investment reaching €100m. Models produced will include a city car, an SUV and a pick-up truck, with the portfolio potentially expanding in the future. Initially sales will focus on the Bulgarian market, with exports to other Balkan countries starting towards the end of

Great Wall's decision to locate a factory in Bulgaria is a fillip for the country. Foreign direct investment, previously an important growth driver, has flagged due to the global crisis and Bulgaria's own sluggish economic performance. With the country's leading investment partners labouring under the Eurozone's malaise, Bulgaria has belatedly turned east. "It's very important, as this is the first sizeable manufacturing plant developed in partnership between Bulgarian and Chinese firms," Borislav Stefanov, executive director of the official InvestBulgaria Agency, tells bne. "Until now, there has been very little investment from China, despite it being a big exporter of foreign direct investment globally. Chinese investment rose from €10m in 2010 to €15m last year, but that's still a relatively small amount." Indeed it is – and, for all the fanfare about Chinese interest in Bulgaria, it's notable that the Bahovitsa plant is first and foremost a Litex investment. The Bulgarian company has ponied up 90% of the cash thus far, allowing Great Wall to enter the EU with remarkably little capital risk. More importantly, as the International Monetary Fund highlighted on a number of occasions even before Bulgaria's

"Great Wall is a pioneer and, if successful, others like Chery will want to follow" the year, but Great Wall's company president and chief executive, Feng Ying Wang, has said that her company hopes to expand sales across Europe over three to five years.

service-led boom of the mid-2000s came to an end, the country needs to expand its base of export-oriented industries, both to diversify the economy and to balance its current account.

Great wall of money Great Wall is the first original equipment manufacturer (OEM) – that is, manufacturer of complete vehicles – to establish operations in Bulgaria since an abortive attempt by the UK's Rover in

And Bulgaria does have a number of advantages for manufacturers seeking access to the EU market and beyond: exports to other member states are free of additional taxes and duties, and trade relations with Balkan non-mem-

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bers are also favourable. As Stefanov points out, Bulgaria has lower costs for labour, land and utilities than most EU members, and benefits from macroeconomic and political stability (for example, public debt is less than 20% of GDP). Flat corporate and income taxes of 10% are the lowest in the EU, and Stefanov insists that they are "staying where they are". Finally, there is location. While not as close to the heart of Europe as Slovakia, for example, Bulgaria is within reach of the former Soviet Union countries and the Middle East, to which Stefanov hopes automotive firms based in the country will look for exports over the longer term. "Both companies â&#x20AC;&#x201C; Litex Motors and Great Wall Motors â&#x20AC;&#x201C; desire to deliver quality, affordable, well-equipped and attractively designed vehicles to the European

"Until now, there has been very little investment from China, despite it being a big exporter of foreign direct investment globally" consumers at the best price/product ratio on the market," Kiril Georgiev, advertising and PR manager at Litex Motors, tells bne. "Bulgaria as a country is strategically located for a gradual and long-term entry into European market by Great Wall. Bulgaria also has a high quality workforce and excellent business conditions." Quality issues For the time being, the Great Wall vehicles will largely be assembled from kits manufactured in China, meaning that the value added in Bulgaria will not be as much as it could be. Bulgaria does already have a small but lively automotive components sector, with local and international companies making parts including cables, seats, hinges, upholstery and cylinder heads. These businesses will be hoping that Great Wall and Litex realise their stated aim of increasing the proportion of locally-

sourced components at the Bahovitsa plant. Other suppliers may look to set up in Bulgaria if they see the market growing. "We are looking for national subcontractors for some components," Georgiev says. "We plan to offer them the opportunity to establish production facilities next to our plant and such to establish an industrial area and thus additionally to stimulate the regional and national economy. This process is a long-term one and will take time for implementation in the next few years." The development of a domestic supply chain has been one of the features of Renault's stellar success with its Romanian subsidiary Dacia, which is now one of that country's leading exporters and is supported by a cluster of suppliers around its plant near Pitesti (as well as others elsewhere in the region including Bulgaria). Stefanov also points to the example of Slovakia, which went from having a negligible auto industry in the early 1990s to producing more finished units per head than any other country. "The automotive industry does tend to form clusters quite quickly," he says. "At the moment, most tier-one and tier-two supplies will come from China. Suppliers will be looking to see if volumes increase to provide opportunities for them to come to Bulgaria." David Leggett, managing editor of automotive industry website just-auto. com and an experienced analyst of the sector, strikes a more cautious tone on the development. "Bulgaria is not known as a hotbed of automotive manufacturing," he notes. There are also likely to be questions over the quality of Chinese-built cars assembled in Bulgaria, particularly after well-publicised safety issues with other Chinese manufacturers in Europe in the past. "This is a significant and interesting development, a Chinese manufacturer dipping its toe into Europe," Leggett tells bne. "Great Wall is a pioneer and, if successful, others like Chery will want to follow. But we have yet to see how many units they will sell, and what quality they will be. Let's wait to see how quickly production ramps up."

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Mongolia's problems with growth Oliver Belfitt-Nash in Ulaanbaatar

ith an almost threefold increase in GDP growth last year and inflation now in double digits, Mongolia's economic problems appear to be of the overheating kind, rather than the recessionary sort. The government is now talking about spending curbs, but it still has promises to keep ahead of elections due in June.

could rise further from the 11.1% hit in December.

While GDP growth was officially put at 17.3% for 2011, up from 6.4% in 2010, "some have been counting the trucks leaving the mines and say the real figure may be twice that," says Peter Morrow, an adviser to Khan Bank, the largest commercial bank in Mongolia.

However, people like President Tsakhiagiin Elbegdorj expect little from the government in the way of enlightened policy ahead of this summer's elections. "We hear dangerous promises, but rarely present any solutions," Elbegdorj said in his closing speech to the Mongolian Economic Forum in March, in what was perhaps an early taste of the tone to be expected from the campaigns. "Businesses owned by politicians thrive while the poor stay poor, and this needs to change. Only international bodies bring up corruption, but we Mongolians must deal with this problem. The government is a danger and a risk to the well-being of the Mongolian people."

What's driving that growth are massive production and exports of natural resources. Mongolia's coal exports to China grew 26% in 2011 and the sale price per tonne rose 155% to $106 â&#x20AC;&#x201C; but that's still well under the global price of $219 per tonne, so there's some way yet to grow. While coal has been a driver of growth, the retail sector was the fastest growing part of the economy last year, up 42.5% from 2010. Together with government spending rising 56% in 2011, which is expected by the World Bank to increase another 32% this year, there are growing worries that inflation

During a visit to Japan in mid-March, Prime Minister Sukhbaatar Batbold spoke to the media about the need for "a tight monetary policy" as well as taking "control over the expenditures, especially on the budget side."

Prime Minister Batbold accepts the government has work to do, telling the same Mongolian Economic Forum: "We have economic strategies, but no solid planâ&#x20AC;Ś Market development is not yet in place and we need clear, scientific-based methods for the future." Bottlenecks The up to $3bn IPO of Erdenes Tavan Tolgoi, the state-owned coal company that controls the world's largest deposit of coking coal, is symptomatic of the bottlenecks and government indecision in major projects and reforms. Foreign investors and local voters alike have been waiting for progress on this entity to list in Mongolia, London and Hong Kong, but the deal seems to have hit a speed bump at every stage of the road. Half the deposit was to have been sold to a consortium of China's Shenhua Group, Peabody Energy and a RussianMongolian mining group, but the share split and details of the deal has been a problem from the outset. The popula-

"Businesses owned by politicians thrive while the poor stay poor, and this needs to change"

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tion was promised 10% of the mine last year, but now that figure could increase to 20% as elections approach, and Hong Kong could drop off the listing locations because the company might not meet the requirements. The company says it's still "very keen" to list by June, though many don't expect a deal to happen before the autumn. Part of the hold-up comes from the lack of a legal framework for a listing of that size on the local Mongolian Stock Exchange. A new Securities Law has been in the works for over a year now as the London Stock Exchange (LSE) runs its experienced eye over the document. "The new law will force accountability for companies in line with international standards," says Saruul Ganbaatar, chief strategy officer for the

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MSE. "It will define Depository Receipts for Mongolia." The law is also expected to enforce a 30% free float of any company wanting to remain listed on the MSE, which would drastically increase liquidity and encourage more companies to follow after Tavan Tolgoi. The long-awaited law was due to be considered in the autumn session, but now has been delayed until spring. Tavan Tolgoi aside, the $1.6bn-sized MSE is in need of serious reform if it is to be considered a viable option for raising capital, as most investors stay clear of the outdated and opaque system of today. "The new Millenium IT LSE system will come to Mongolia within a month or so," Tony Weeresinghe, the LSE's global development director, said at the

beginning of March. "We will install the same system that runs in London, so the foundation will be here when the MSE develops further." And the MSE is sure to grow fast if current figures are anything to go by. "Less than 10% of Mongolian companies are listed," says Bold Baatar, chairman of the MSE. "Property is up to $1,500 per square metre downtown and the capital markets must catch up with the growth. Almost all of the MSE's market capitalization is concentrated in the top five companies, and as more like Tavan Tolgoi and Oyu Tolgoi [copper-gold project] come to market, I believe we have a potential for a $45bn exchange."

The deal will be the largest ever signed in Tajikistan’s mining sector, and Dushanbe had hoped to announce a decision to coincide with the country's 20 years of independence celebrations in August. However, the process has been postponed several times. The government is now understood to be addressing several issues, including the tax regime for the developer, which will have to be resolved before the tender can close. Dushanbe is working with the International Finance Corporation (IFC), part of the World Bank group, on the process.

Make or break in Tajikistan Clare Nuttall in Almaty

he date for closing a long-delayed $3bn tender to develop Tajikistan’s Kalon Konimansur silverlead-zinc deposit has been tentatively set for the summer. Advisors suggest the government's ability to push through the deal could prove make or break for Tajikstan's investment case for decades to come.

Two years after the tender was initially announced, the bidders to develop Kalon Konimansur have been whittled down to just two. Australian mining giant BHP Billiton is now left competing with a consortium comprising Switzerland’s Glencore International, two Kazakh companies – Kazzinc and Konimansur – and Tajikistan’s Adrasman ore refinery.

Tajikistan is desperate to increase revenues by exploiting its natural resources. While the country is well endowed with metals and minerals, as yet only a fraction of the potential is being developed. Kalon Konimansur was explored between the 1960s and 1980s while Tajikistan was still part of the Soviet Union, but plans to develop it were abandoned after independence when the new country descended into civil war. Although some Russian companies approached the Tajik government after the war, it was reluctant to sign over the asset unless it was sure it was getting the best possible deal. According to the most recent assessment of the deposit, it contains around 1m tonnes of ore, and estimated silver

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reserves of around 70,000 tonnes, and developing it could transform the entire Tajik economy. Around 10,000 workers would be needed for the construction phase, and a further 2,000 permanent jobs created when the mine starts operating. "This is the first time an open

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of Adrasmon, near Tajikistan’s border with Kyrgyzstan. Since the mine will be open pit, the town's 13,000 people will have to be relocated. That operation will be one of the 10 largest resettlement projects in the world. The IFC says the investor will have to follow its

"This is the first time an open competitive tender has been used for a mine project of this scale and complexity – not just in Tajikistan but in the whole of Central Asia" competitive tender has been used for a mine development project of this scale and complexity – not just in Tajikistan but in the whole of Central Asia," a member of the IFC team advising the government tells bne. "If successful, it will really put Tajikistan on the map for international mining companies, and Tajikistan’s neighbours are watching with great interest." Nosy neighbours The pool of potential bidders to develop the deposit was relatively small, since only a limited number of companies work on silver-lead-zinc deposits of this type. Furthermore, the majority are based in the Americas, and Tajikistan is well outside their usual sphere of interest. Of an initial seven bidders, three failed to qualify and two Chinese bidders – Ziti Mining and Sichuan Group - later withdrew. Investment of around $3bn is likely to be needed to develop the deposit itself, with an addition $500m earmarked for surrounding infrastructure. Around $100m of that will go on securing water supplies, $100m for road and railway rehabilitation, and a further $200m-300m to build electricity generation capacity should the state or a private company be unable to guarantee sufficient supplies. A further complication is that the deposit is situated directly beneath the town

"Equator Principles," which will ensure that the people of Adrasmon are not negatively affected, and will actually be better off than before. Speaking to bne, an IFC official working with the government said the closing of the tender is vital for Tajikistan. The country’s legacy of poverty and civil war has given it a poor reputation amongst those international investors who are aware of it at all. While the government has shown willingness to make reforms, Tajikistan is still well off the investor map, although a handful of companies including Saddleback and several Chinese mining companies are active in the country. "A successful auction would really open Tajikistan up to international investors, as we saw with a similar project we worked on in Mozambique," the official tells bne. "If the tender is awarded to the Kazzinc/ Glencore consortium or BHP Billiton, this will really open Tajikistan to foreign investors, but if the process fails, there will be negative consequences." "Whichever way it goes," he concludes, "there will be important repercussions for Tajikistan."

"Whichever way it goes, there will be important repercussions for Tajikistan"

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debt because of the confidence that the banks were essentially solvent." Deposits have remained high since initially dropping in 2008, and consumer confidence is also strong. A 2010 survey by the Caucasus Research Resource Center found that 49% of the 2,089 people asked either strongly/fully trust the banks. "Generally speaking, what happened after the financial crisis of 2008 and the global meltdown, the general public lost confidence in the banking sector all over the world, especially in the western countries," notes Badri Japaridze, deputy chairman of the supervisory board of TBC Bank. "In Georgia we have a different picture. We have a lot of confidence from the public side, so the banking sector has relatively quickly recovered from negative developments in 2008."

Banking on Georgia

Outside interest The sector's ability to recover so quickly has caught investors' attention, notes Michael Kortenbusch, founder and managing director of Business & Financial Consulting. "The attractiveness of the Georgian banking sector for foreign investors is based on two factors: first, Georgian banks have left the crisis behind in 2010 and shown strong financial results; second, Georgia is interesting to investors in general as a fast and successfully reforming economy."

Molly Corso in Tbilisi

espite the continuing problems in Europe's financial industry, Georgia's banks posted record profits in the past year. And fresh international forays and investment have underlined how the country's small but vibrant banking sector is poised for further growth in 2012. The country's two largest banks, Bank of Georgia and TBC Bank, both reported high growth across the board in 2011: Bank of Georgia's net profit increased 72% from the year before to $81.3m (€61.6m), while TBC Bank earned GEL91.6m (€42.3m), an 85% increase. The solid performance in 2011 is thanks to a broad recovery that helped the banks turn around their business fol-

lowing the disasters of the August 2008 war with Russia, the global financial crisis and a domestic political crisis. The International Monetary Fund (IMF)'s Edward Gardner credits the country's strong regulator – the National Bank Of Georgia – for ensuring that banks had a lot of capital prior to the war and the crisis. "The high level of capital sort of gave them a buffer," he says. "It... gave them the ability to roll over some of the

These reforms led investment firm Sturgeon Capital to buy 20% of Liberty Securities in February. Liberty Securities is owned by Liberty Investments Holding B.V., a Dutch company founded by Dinu Patriciu and Lado Gurgenidze – the owners of Liberty Bank. Clemente Cappello, founder and CEO of Sturgeon Capital, tells bne that the investment fund was attracted to Georgia because of the country's liberalisation and "general attitude" toward investors. "Obvi-

"In Georgia the resources are relatively speaking small, and because of this the Georgians are trying to promote themselves as more open and transparent"

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Uncivil in Georgia

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There has been some progress already. Albeit to a lesser extent than Georgia, Armenia has nonetheless advanced up the World Bank's "Doing Business" ranking, rising six points to 55th place in 2011, the second highest score for any country in the former Soviet Union. However, Armenia also has one of the world's largest shadow economies compared to the size of its GDP â&#x20AC;&#x201C; it is estimated at between 50% and 60% of total GDP. An International Monetary Fund report found that in 2010 taxes amounted to just 16.9% of GDP, giving Armenia the lowest tax collection rate of any former Soviet state except Tajikistan. In the latest "Corruption Perceptions Index", released in December, Armenia was in 129th place, while Georgia was in 64th.

ously, we are quite impressed with the development of liberalisation that has happened over the past several yearsâ&#x20AC;Ś Particularly, we like the business environment and the large reforms undertaken over the past years," he says.

Molly Corso in Tbilisi Allegations of government-condoned violence toward opposition party activists are prompting new concerns about the conduct of the autumn parliamentary elections in Georgia. While the ruling party has denied any wrongdoing, the accusations have already added to the politically charged rhetoric, and threaten to turn the election campaigns into another round of protests and confrontation. Opposition leader Irakli Alasania, a former UN diplomat for Georgia, has accused President Mikheil Saakashvili and his National Movement party of organising "paramilitary" groups in western Georgia. Alasania, an ally of billionaire-turned opposition financier Bidzina Ivanishvili, claims the country's defence minister, Bacho Akhalaia, and his family are creating unofficial armed groups in Samegrelo to control and oppress people who support the opposition. A poor region in western Georgia that borders Abkhazia, the contested territory currently occupied by Russian troops, Samegrelo has been a focus of Saakashvili's large infrastructure projects and tourism development programmes. During a special press briefing on March 20, Alasania cited evidence of the armed groups, even listing names of supposed members and the men who are financing them. The opposition leader, however, declined to provide any proof of his claims, instead stating that he plans to send "this information today to the National Security Council for further evaluation and hopefully for an immediate reaction." The political reaction to Alasania's accusations has been swift, however. Saakashvili called the comments "immoral" and "idiocy", and Defence Minister Akhalaia has referred to Alasania as "delusional." Political opponents have also been slow to take up Alasania's cause. Giorgi Targamadze, leader of the Christian-Democratic Movement, a moderate opposition group largely perceived to side with the government, asked politicians to refrain from using inflammatory language, since "even mentioning 'civil war', because something that politicians start talking about actively, it usually then becomes a reality."

Cappello notes that in other countries in the region, often it is the natural resources that are the key asset that attracts foreign investment. But in Georgia the resources are relatively speaking small, and because of this the Georgians are trying to promote themselves as more open and transparent. "There is not a single aspect â&#x20AC;&#x201C; it is the general attitude," he says. Investor interest in the country should also get a boost by another banking deal completed this year: Bank of Georgia's decision to list on the premium market on the London Stock Exchange in February. The listing should put a spotlight on Georgia's banking success story, notes Giorgi Shengelia, senior associate at BG Capital. "Nearly all the portfolio investors who invest in Georgia know Georgia through Bank of Georgia, as it is the only company from Georgia listed on the international stock exchange," he says. "Because Bank of Georgia is listed on the premium market, a larger pool of investors will have an opportunity to invest in Bank of Georgia and this will help to increase awareness of Georgia. It will be much easier for other companies to attract additional investments, as investors will already be familiar with the country."

Alasania's accusations against the ruling party come just a week after stories of heavy-handed treatment of opposition supporters in western Georgia by the Chamber of Control's State Audit Chamber. The Chamber, empowered to track political campaign finances, has reportedly started its own campaign against Ivanishvili supporters in the western Georgia regions of Guria (where Ivanishvili's brother lives) and Samegrelo. Similar cases were also reported in other regions around the country. Amnesty International issued a statement on March 16 claiming the government-condoned questioning was having a "chilling effect" on opposition activists and risked violating citizens' rights to freedom of expression and association. Questioning was reportedly done in an "aggressive" manner, with a "heavy" police presence.

"We like the business environment"

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Armenia slowly emerges from shadows Clare Nuttall in Yerevan

he Armenian government talks a lot about cleaning up corruption and bringing the country's shadow economy out into the open. But vested interests and a lack of political will at the top mean the steps taken so far have been small and only mildly effective. This is a sharp contrast to Georgia, Armenia's neighbour and its main gateway to the outside world. The paths of the two small post-Soviet nations suddenly diverged after the 2003 "Rose Revolution" in Georgia, when the new president, Mikheil Saakashvili, launched a far-reaching anti-corruption programme, purging the police force, civil service and education system. This yielded dramatic results in just a few years, with Georgia shooting 50 points up Transparency International's "Corruption Perceptions Index". Georgia's experience is starting to have an impact in Armenia, where people are

increasingly aware of how much easier life is across the border and are starting to put pressure on their own government to change. Many Armenians, for example, buy their cars at the Rustavi bazaar near Tbilisi, where they see that they can register a new car in just 15 minutes compared to several hours in Armenia. This, together with the lack of bribe-hungry traffic police, has made Armenians question the system back home. Armenian businesspeople have a similar epiphany when they start investing in Georgia. "When people get home, they complain and start to put pressure on agencies here, which has already had some results," says Konstantin Saroyan, CEO of Yerevan's stock exchange OMX Nasdaq Armenia. "Effecting change in the business environment takes longer, not least because fewer people are involved, but I hope that in time it will go in that direction."

Taxing times Changes made by Serzh Sargysyan's government include reforms to the tax collection agency. Some of the highway and traffic police reforms successfully implemented in Georgia have been cut and pasted in Armenia. As early as 2008, the government launched a lottery using retail till receipts, in a bid to encourage shops to issue receipts and stop retailers from evading tax. But after the initial excitement about the lottery, the novelty has worn off; formal retail outlets still account for only around 12% of retail trade in Armenia, with the rest taking place in open air bazaars, stalls and kiosks. Armenia's first retail chain Star Supermarkets initially struggled because the founders were determined to play by the rules, says the company's CEO Vahan Kerobyan. "Getting the formal sector up to 10-15% is the most difficult stage, because the industry is not fully transparent. We suffered in the beginning, as we are a transparent company that is competing with street vendors who are not transparent at all," Kerobyan tells bne. Armenia is also seeing a growing divide between rich and poor, with the emergence of a middle class at least in Yerevan. "Armenia is seeing a widening of the wealth gap, which is increasing pressure for change," says Richard Giragosian, director of the Regional Studies

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Center in Yerevan. Many people are still migrating abroad for work; according to official statistics; one-third of the population is living in poverty. Reducing inequality and tackling corruption would bring considerable benefits for businesses in Armenia. "Armenia's macroeconomic indicators are strong, but the country would

"We suffered in the beginning, as we are a transparent company that is competing with street vendors who are not transparent at all"

benefit from more reforms like those implemented in Georgia. A lot of words are said, but the government needs to be more aggressive in making changes," says Aram Kayfajyan, director of Yerevan-based investment firm Armenbrok. Saroyan agrees that while many businesses currently prefer to stick to the old ways, in the longer term they will be forced to become more transparent. "The government already has incentives to encourage companies to go public, but some businesses prefer to work as they are, with shadow transactions. We try to explain to companies that for now they can thrive with this policy, but Armenia is steadily reducing the shadow economy," he says. "Companies that understand this evolution today will be better off in the future." Investment blues Cleaning up Armenia's image should help to boost investment. Despite Armenia's 8m strong diaspora, foreign

direct investment has only inched up over the years. In the 1990s, many diaspora investors got burned and abandoned their attempts, while those that have flourished in Armenia tend to be the ones who adapted to local practices. Today, around 70% of the flow of money from the diaspora into Armenia is aid, with much of the rest used for buying real estate. Giragosian points out that the disapora tends to "build churches not factories", and that aid channelled into the country has no conditionality on democracy or greater transparency. "Demands for democracy or economic development, or any criticism of the government are seen as airing dirty laundry in public and giving ammunition to Armenia's enemies," he says. As a result, the pressure for change is coming from within Armenia. The biggest problem for Sargysyan is that while he may be able to fight lower level corruption, some of the most lucrative segments of the economy are still dominated by a handful of oligarchs who control the imports of key commodities, including sugar, gasoline and kerosene. So far, there have been few signs that Sargysyan has the stomach to take on these oligarchs. The government has started to act, but unlike in Georgia it is treading carefully â&#x20AC;&#x201C; not least because 2012 is a parliamentary election year, with the next presidential elections due to follow in February 2013. The continuing high level of poverty in the country means that hitting anyone's livelihood or enforcing higher tax payments is going to be unpopular. But without strong will from the top, the process of reducing Armenia's shadow economy, while inevitable, will be slow and bumpy.

"So far, there have been few signs that Sargysyan has the stomach to take on the oligarchs"

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Opinion

Diary of a Russian election observer bne Until a few months ago, I didn't consider myself to be particularly "political" â&#x20AC;&#x201C; I had a comfortable life and plenty to do looking after three children. But like most of the 28,000 independent election observers that turned out during Russia's presidential election on March 4, I was spurred into action by the popular protests that began in the freezing cold to protest against the blatant vote-rigging during the Duma elections in December. I don't have any particular party affiliation, although I admire Grigory Yavlinsky, the leader of the Yabloko opposition party, who was barred from running for president on a technicality. I simply wanted to see for myself how Russia's elections are run. And if my experience is anything to go by â&#x20AC;&#x201C; pretty chaotically and fundamentally flawed is the answer. It is easy to sign up with one of the many grassroots organisation that train observers and get a mandate from one of the presidential candidates to go through the training. I was actually accredited by Russian oligarch Mikhail Prokhorov's camp and received a checklist of potential violations that range from voting procedure abuses to how the ballots are counted. I did not expect to see any violations â&#x20AC;&#x201C; I thought the whole process would go smoothly. After all, the polling station was only my local library a couple of blocks away.

Early morning. My instruction manual told me to be there by 7:30 am, as voting was due to begin at 8:00 am. Shortly after my arrival, before any members of the election committee had arrived, two men came through the front door carrying three shopping bags from a budget supermarket chain. The bags looked very full. "These must be lunches for the committee members," I thought, only later to discover the bags were stuffed full of the official ballots waiting to be cast. The men dumped the bags on the floor, under the secretary's desk in the middle of the public room that was going to be

used for voting. Later on after voting started, I told the head of the library's voting committee to put the ballots in the safe. "Don't worry," he replied. "There is a policeman to keep an eye on them." Eventually, he compromised and moved the bags of ballots from under the secretary's desk to the floor in the corner of the room behind the secretary's desk. No one bothered to count the ballots after they arrived to check how many votes could be cast at this station.

Voting starts. By the time the doors officially opened at 8:00 am, the first members of the library's electoral committee were drifting in and I was joined by another six observers aged from 19 to 50. Our lists detailed a long list of checks to be carried out before the voting began, but here we ran into our next problem. One item was to see the list of voters to make sure it had no prior signatures or even minor pencil marks except for the signatures of those voters who voted earlier or received permits to vote outside their voting district. We were also supposed to examine voting boxes and smaller boxes for voting outside the premises to make sure that they were empty and they had to be sealed in front of us. The committee also had to announce to us the total number of voters registered at the library. But it seemed that no one on the committee was aware of what the official procedures were. The secretary of the committee, a young woman wearing a mini-skirt, turned up 10 minutes before voting should start. The other observers, all inexperienced first-timers like me,

"It was obvious that all the observers' complaints carried no weight and would not be considered by anybody"

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surrounded her, showing their mandates and demanding the committee run through the pre-voting checks. "Her skirt is too short," complained one of the older observers, prompting the secretary to keep tugging it down, only for it to ride up again. "It's not proper."

birth on the board, and she should be 58 whereas this women is not even in her 40s."

The secretary happily signed our registration papers, but refused to go ahead with the checking procedures in the absence of both the head and the deputy head of the election committee (the latter of whom never actually showed up).

Finally, voting drew to a close and the committee members began checking the number of ballots to see if they tallied with the number they received. But one had gone missing. "Why not just write in the protocol that we are missing a

By 8:00 am most of the committee were there, but the head of the committee was still missing. An argument broke out with the observers angrily insisting the voting couldn't start until the pre-vote checks were completed. The first few voters who arrived grew impatient as the argument became more heated and they eventually left. Finally, 20 minutes after the official start of voting, the chairman showed up smelling faintly of alcohol (probably from the night before), but he turned out to be an amiable enough chap. I filed an official complaint that he was late. He signed my complaint with a smile and later attached it to the final protocol of the elections. It was obvious that all the observers' complaints carried no weight and would not be considered by anybody. And we never did learn how many voters were officially registered, or how many actually voted (although we kept our own count).

Day wears on. Voters came and went throughout the day, but there were several people floating about who were neither part of the committee nor observers. I approached each one of them and asked for their credentials. One man standing in the corner at first said he was a representative from the local municipality, but when I pointed out that this is illegal, he quickly changed his story, claiming he was an observer sent by a municipal candidate in the elections. The chairman said the same man was simply a driver from the municipality. One of the observers had spotted a woman giving out ballots whose details did not match those of the member of the committee posted on the wall. The observer approached the chairman and asked if this was Vera Ivanovna, who was a member of the committee. The chairman looked the observer straight in the eye and said, "Yes." "That's strange," replied the observer, "because I hear everyone calling her Katya". "Oh, you know how some people are," the chairman shot back, "they have one name, but prefer to be called something completely different." "That may be," agreed the observer, "but there is her date of

Without missing a beat, the chairman simply turned to Vera/ Katya and said: "Okay, Katya, please leave the room now."

"The members of the territorial committee tried to kick us out because they did not want any outsiders to witness the count"

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own private fiefdom to which no outsiders should be allowed to enter. And this is exactly how elections in Russia are: they are the internal affair of one group in society who stand in them, organise them and oversee the results. Russian federal law does not clearly forbid that elections can be organised and run by the government or the ruling party, and so they are clearly biased towards an already existing power. So the way the system runs, it ensures that on any level, municipal or presidential, it replenishes itself.

in the interests of the people, but in the interests of their immediate bosses.

Russians are debating whether the recent Duma and presidential elections were fair. My answer is regardless of how many votes were stolen or ballot boxes stuffed, the elections are unfair by definition. They are neither independent nor free, and they are run with numerous procedural, legal and even common sense violations. The observers have no real rights to monitor or interfere in violations, since they have to complain to the very same people who perpetrate these violations. Since elections are run with little or no outside checks and balances, those in charge of the process act not

Despite all my sadness after having seen how so many people are willing to trade their integrity for the interests of their bosses, I feel the future is ours. There is a strong and growing grassroots interest in all levels of elections and how they are run. People want substantial reforms in Russia's legal and judicial systems. People want a moral reform of our society. These people are now active and know their rights. They are now demanding more than the illusion of stability and they won't just disappear.

The gulf in the room between the observers and vote counters was enormous. They can't comprehend the motives of people who are prepared to spend 24 hours watching the voting process, who are not even paid to do it, nor are there to protect anybody's interests except that of society at large. We are totally alien to them.

ballot," I suggested. But in some Soviet-style throw back the chairman was aghast at the suggestion. "No! This line in the protocol always has to be zero," he replied and ordered a search of the library. The missing ballot finally turned up lying on top of the piano in the election room. Later, when we checked on the election website not a single ballot had gone missing from our polling station â&#x20AC;&#x201C; or from a single polling station in the entire district for that matter. By the end of the day, the chairman had become quite chatty and admitted to me that he was not much liked at the territorial committee, which counts the votes for the whole district, because his results usually were one of the lowest in the district. He explained that he had no personal interest in the outcome of the presidential elections and was only there because a friend of his was running in the municipal election.

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Last stop. The last task was to deliver the ballots to the territorial committee and file complaints about any violations we had observed at the polling station. It was 5:00 am the following day and Putin's victory had already been announced, despite the fact our votes were yet to be counted. The members of the territorial committee tried to kick us out because they did not want any outsiders to witness the count. But they finally relented. The atmosphere was extremely hostile, with the observers standing on one side of the room and the territorial committee people huddled together on the other side, openly sniggering or throwing us looks as if we were a group of crazies that had escaped the local psychiatric hospital. They acted as if they believed elections were their

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Special Report: Alive & Corrupting

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Fico vows an end to monkey business in Slovakia Tom Nicholson in Bratislava

t's January 2006, and a prominent Slovak corporate raider is meeting privately with a top state official in Bratislava. The two are discussing upcoming government privatisation sales, which have been rigged in return for millions of euros in kickbacks. The tycoon explains how to fix such tenders: by finding out ahead of time what the competition is offering. The idea, he says, is to inflate the sealed envelopes containing the bids, and insert a micro-camera. "Then you just read the contents, line by line." The risk of discovery is small, he adds, "but if by some chance they find out, the results are fatal." He's talking from experience: such skullduggery was once indeed exposed at the privatisa-

tion agency where the state official works. For three months now, the Slovak public has been treated to such lurid tales of corruption as part of a secret service surveillance file, codenamed "Gorilla" and leaked onto the Internet before Christmas last year. Compiled at the end of the second Mikulas Dzurinda government (2002-2006), "Gorilla" comprises transcripts of a dozen incriminating chats

from a bugged flat in the Slovak capital, where politicians and civil servants met with a local financial heavyweight to wheel and deal. Many of the people named remain fixtures of the Slovak political scene today, just as the cynicism on display echoes a very contemporary disregard for the rules of the game. "The voter is shit," says the tycoon at one point. "The voter knows nothing, he sees only the surface."

"The voter is shit, the voter knows nothing, he sees only the surface"

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Knowledge is power Thanks to "Gorilla", however, the average Slovak voter now has a pretty good idea of what lies beneath the surface. Which raises a vital question: can this knowledge be harnessed to clean up Bratislava politics? "'Gorilla' has been a very empowering experience for Slovaks," says Martin Simecka, a Communist-era dissident and former editor of the leading Slovak broadsheet SME. "For years, people knew politics was corrupt but there was no proof, and they felt frustrated. Now, it's as if they have been able to peer through the keyhole into that Bratislava flat, and to see exactly what goes on. Now it's the politicians who are scared. The shoe is on the other foot." In the uproar that ensued after the "Gorilla" file was published, thousands of people turned out at demonstrations across the country to protest high-level corruption. Despite a deep February chill, the rallies were some of the largest the country has seen since the 1989 revolution. Demonstrators dragged a mock gallows to the Government Office, and pelted parliament with eggs, bananas and paving stones. Several police were injured, and security forces deployed water cannon and tear gas. Public outrage was directed mainly at the centre-right parties of the outgoing Iveta Radicova government, three of which had been in power at the time the transcripts were made. The largest party of the coalition, the SDKU of former PM Mikulas Dzurinda, got only 6% at the polls on March 10 (compared

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with over 15% in 2010), barely enough to qualify for seats in parliament. Dzurinda has since promised to step aside as SDKU's leader. Social democratic leader Robert Fico, meanwhile, swept to power with a parliamentary majority, the first time in Slovakia's modern history that a single party will form a government without a coalition partner. Voters across the political spectrum are now waiting to see how he handles the "Gorilla" investigation. "I have no interest in proceeding against the file or against the team that is investigating it," Fico told bne at a meeting a week before elections. If the PM-elect is as good as his word, the ongoing "Gorilla" investigation could shake the foundations of crony politics in Slovakia. On March 15, police charged former economy minister Pavol Rusko with fraud, stemming from the 2004 sale of the PPC energy firm to Penta, a local capital group that features extensively in the 'Gorilla' file. Damages are estimated at €42m; Rusko has called the case "absurd", while Penta had refuted the "Gorilla" allegations and filed charges. And police are just getting started, according to outgoing Interior Minister Daniel Lipsic. "Rusko was the first to be charged, but he won't be the last," Lipsic says, adding that the "Gorilla" operation had been "legitimate" and justified, and that the file is "authentic". Reading the runes But if history is any guide, Fico may be disinclined to see the investigation through. During his first government,

"Rusko was the first to be charged, but he won't be the last"

from 2006 to 2010, the "Gorilla" surveillance operation was shelved prematurely by Fico's secret service director, Jozef Magala. Under Fico's interior minister, Robert Kalinak, police took a desultory look at the file in 2009, only to bury it in a regional anti-corruption unit's archives the following year. And the General Prosecutor backed by Fico's Smer party, Dobroslav Trnka, steered a renewed police investigation of "Gorilla" off a cliff in April 2011 by ordering a subordinate to "immediately re-evaluate the entire case… not that I'm trying to tell you how to decide, but after studying the file, I am amazed at how the basics of criminal proceedings were ignored." Part of the problem may be that Fico's Smer party is no stranger to "Gorilla"style corruption itself, and that Fico was the only political leader to have allegedly visited the flat to meet the tycoon. According to the file, Fico drank a Coke while discussing domestic politics and Smer's plans for the healthcare sector, where the tycoon had millions of euros invested. Six years later, on election night in March 2012, as a triumphant Fico was being carried on the shoulders of celebrating Smer members, he flashed a grin and a bottle of Coca Cola at the cameras. As if to say: I'm in power now, and you've got nothing on me. "I wasn't trying to make any statement, and it wasn't a show of strength," said the PMelect the following day. "It was just that I needed caffeine, and coffee doesn't agree with my stomach."

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people charged are former directors of the company, together with thirdparties, who are also suspected of being at the same time the owners of Appian. Around €500m in local bank accounts have been frozen in connection with the case, which is suspected of having been syphoned off from MUS.

The Czech connection Graham Stack in Kyiv and Nicholas Watson in Prague

n John le Carré's later novels like "The Night Manager", there's a character who keeps popping up – the financial fixer/lawyer to the international moneyed elite, who sits at the back of the private jet but in front of his wealthy and often shady clients as a buffer. Money flows seamlessly between front companies registered in offshore havens from Cyprus to the Caribbean, all overseen by a ubiquitous company director, who also happens to be this lawyer. Author Chris Morgan Jones based his 2011 debut novel, "An Agent of Deceit", around such a character, whom he describes as an unglamorous middleman who sets up the network of companies and monitors the flow of cash through that network. Ultimately, Morgan Jones tells bne, "the client and middleman become locked in a mutually binding relationship from which neither can escape." One of the more interesting connections thrown up by recent revelations in the Czech Republic concerning the moneylaundering case of coal miner Mostecka uhelna spolecnost (MUS) is the link with Russia, Ukraine and the lawyer Markus Buechel. Buechel, currently Russia's honorary consul to Liechtenstein, seems to have carved out quite a niche for himself in Central and Eastern Europe as

a director of various offshore companies since his brief stint as prime minister of Liechtenstein in the early 1990s. Over the last six months, the Czech daily Mlada fronta Dnes (MfD) has published a series of revelations about the controversial privatisation of the Czech coal miner MUS in 1998, which saw the murky Appian Group, whose true ownership remains

What has particularly shocked the Czech public is that several years ago the Swiss provided the Czech authorities with the evidence and invited them as the injured party to join the criminal proceedings, only for the Czechs to drag their feet over the matter. This has led to much speculation about collusion at the highest levels of government. Czech Justice Minister Jiri Pospisil has filed disciplinary complaints against Prague High State Attorney Vlastimil Rampula and three of Rampula's subordinates over the belated reaction to the Swiss request for joining the case. Rampula, of course, denies any wrongdoing and has even managed to return to his old job after being ousted in October – something that's caused consternation among the Czech public. Belatedly – and many suspect in a cynical piece of political theatre for the press and public – the Czech government has been trying to insinuate itself into the

"The client and middleman become locked in a mutually binding relationship from which neither can escape" elusive, wrestle ownership control of the company from the state. In October, the Swiss authorities announced they had launched criminal proceedings against "seven people suspected of money laundering and economic crime in connection with controlling one of the most important energy companies in the Czech Republic". According to various news outlets that have seen the indictment, the energy company in question is MUS, now known as Czech Coal, and the

Swiss action. But on March 8, the Swiss gave a resounding "no", arguing the Czechs had waited too long and treated the Swiss side disrespectfully (which perhaps goes some way to explaining why so much of the Swiss investigation is now finding itself on the front pages of the Czech press). No trial date has yet been set by the Swiss, though the Czech media is waiting for more juicy revelations when it does. In the meantime, the press is feasting on a related issue to the MUS investigation

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concerning, almost inevitably, the country's largest and all-powerful company, the giant state-controlled utility CEZ. Spent fuel CEZ – and by dint of it being about 70% state owned, the Czech taxpayer – are the proud owners of surely one of the world's most expensive spent fuel facilities at its Temelin nuclear power plant. In 2008, MfD reports that CEZ paid CZK1.5bn (€61m) to a hitherto unknown company registered in Slovakia called CEEI to build the spent fuel facility at Temelin, even though an earlier project prepared by the Czech Nuclear Research Institute, part-owned by CEZ, priced the facility at one-third of CEEI’s bid price, while the cost of an equivalent facility at the Isar nuclear power plant in neighbouring Bavaria completed a year earlier came in at almost half that amount, according to its owner E.ON. CEZ follows the line used in all these depressingly frequent cases in the Czech Republic where a tender has been awarded to companies whose ownership is hidden that it has "no legal basis for the question who is the owner of each participant because it cannot be a criteria" in the bidding process. But it refused to comment further to bne about whether it has a obligation to its shareholders and the government to find out who the owners were given EU law governing sanctions on certain countries, worries over organised crime and terrorism, and that it was going to spend tens of millions of euros to build something as security sensitive as a spent nuclear fuel facility. CEEI's owners today remain hidden behind Cyprus-based nominee shareholders and trustees. Its owner until last year was the Liechtenstein-based company UBIE, which has listed as a director Markus Buechel. Buechel could not be reached for comment, but has reportedly said that even he doesn't know who ultimately owns CEEI. According to MfD, the documents related to the Swiss investigation show a financial link between UBIE and Appian, which snared the Czech coal company MUS in that dodgy privatisation. These documents show that in 2006 and 2007, an Appian subsidiary sent UBIE a total of CZK12m,

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although why remains unclear. In 2003, Appian also transferred CZK150m to a British Virgin Islands-registered company Ashby Commercial, which sent on CZK100m through a series of other shell companies that ended up in a Cypriotregistered company Dillard Enterprises, owned by Liechtenstein-based Financial and Investment Energy Holding (FIEH), whose director is also Markus Buechel.

according to Antonov, and also owned Antonov's various fuel retail companies, consolidated into Galnaftogaz in 2001. According to Antonov in a September 2008 interview in Vlast Deneg, Buechel originally was a co-owner of FIEH, but Buechel's share was diluted with his consent. Whether Buechel was originally fronting for another owner – perhaps from Russia – is an open question.

In addition to Dillard Enterprises, FIEH owns large stakes in Ukrainian companies that form the Universalna Investment Group, which is led by Ukrainian oligarch Vitaliy Antonov.

Despite having the mysterious Liechtenstein company as majority shareholder, Antonov early on realised the benefits of corporate transparency and started working with the European Bank of Reconstruction and Development (EBRD) and the private sector wing of the World Bank, the International Financial Corporation (IFC), as early as 2001. In 2004, Galnaftogaz was named Ukraine's best company for corporate governance; in 2005, the EBRD and IFC together lent the company $50m each.

Social climbing The circumstances of Buechel's acquaintanceship with Ukraine's Antonov could equally well come from a novel. Antonov grew up in the shadow of the Carpathians and was a qualified climbing instructor towards the end of the Soviet Union. He claimed in interviews given in 2008 that he made Buechel's acquaintance in 1994 through a common acquaintance in an alpine sport in Switzerland, after Buechel was forced out as prime minister of Liechtenstein in 1993. But proximity to the Carpathians for Antonov meant not just alpine sports, but cross-border trade: according to a proverb, "all West Ukrainian fortunes were made on the border", and Antonov's home town of Stryi was a transport node up for railway lines through Hungary. According to Antonov, by the mid-1990s he was involved in a transnational barter scheme typical for the times that saw local industrial goods from his home region sent to Russia, and in return Russian oil – mostly from Mikhail Khodorkovsky's ill-fated Yukos – sent to among others Lithuania's Mazeikiu Nafta refinery, and the resulting motor fuel sent by rail to Ukraine to be marketed by Antonov's Galnaftogaz structures. In a 2008 interview in Kontrakty, Antonov says he was only one link in the barter chain, and not the originator. Logically, the link with most clout in the chain would have been the Russian provider of oil for processing – ie. the now-jailed Russian oligarch Khodorkovsky's Yukos. Buechel's FIEH oversaw the business,

In 2007, the ownership of almost 80% of Galnaftogaz shares changed from FIEH to a Cyprus company GNG Retail PLC as part of "our corporate restructuring program", the company tells bne, and the EBRD's Ukraine director replaced Buechel on the board of Galnaftogaz. Antonov said in an interview that as early as 2004 the EBRD had sought to take an equity stake in the company. Was it the share switch from Buechel's mysterious FEIH to the Cyprus company that allowed the deal to finally go ahead? In 2009, following the switch, the EBRD took a 10.26% stake in the Ukrainian company, which it boosted to around 19% in 2011. Likewise, the EBRD took a 23% stake in Antonov's insurance company Universalna after he had installed a Cyprus company as ownership vehicle instead of Buechel's FIEH. EBRD said they could not comment on FIEH, but said that "GNG is one of our best clients in Ukraine in terms of corporate governance and integrity." The same, however, can't be said for Appian or CEEI, whose owners remain hidden by a tangle of offshore companies. Markus Buechel is key to unlocking the true nature of relations between Appian, CEEI and CEZ – but like a good lawyer, he's not talking.

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groups, which are working against the public interest," Alexa said. While declining to specify any names or companies involved in this alleged "pattern of corruption" (saying it was "not the purpose" of the study), Alexa noted that the investigation had highlighted a long list of criticisms and detrimental moves under the Orban regime. "Clean operations are not a given in the Hungarian business sector. Even though simple, unified rules apply for setting up a company, fair operation is not guaranteed, whether it is foreign or domestically owned. A high corruption risk is present in public procurement, bankruptcy, liquidation and permitting procedures," she said.

Hungary's crumbling pillars of society

The legislative environment had become "chaotic and unpredictable" due to the many laws pushed through parliament using private members' bills (which, due to a legal loophole, obviate the need for government to undertake mandatory consultation with affected parties) and the frequent last-minute, substantial amendments applied to bills in parliament.

Kester Eddy in Budapest

n early March, it transpired that a firm owned by a former Hungarian government party MP had been awarded a contract to develop the area in front of Hungary's parliament, including an underground car park – without a public tender. A week earlier at the end of February, news broke that Continental Dohanyipari, a Hungarian-owned tobacco company, had strongly influenced proposed legislation to bring the tobacco and cigarette industry under state control. Foreign investors in the sector – British American Tobacco, Imperial Tobacco and United Leaf Tobacco – were outraged. The three issued a statement insisting that only the DBMSZ, the industry association in Hungary, was authorised to represent the sector's views, and questioned the ethical and legal issues of a private company playing such a privileged role in lawmaking. Such incidents appear to vindicate the damning conclusions of the latest "National Integrity Study", a report by

Transparency International Hungary on the country's institutions and sectors, and their ability to function ethically and for the public good. According to the graft watchdog, since the Fidesz government of Viktor Orban took power almost two years ago, trends in several crucial areas or "pillars" of society – including judicial and legislative procedures, supposedly independent institutions such as the state audit office and media council, and most particularly the influence of private commercial interests and political decision making – have been deteriorating alarmingly. All of which have serious implications for fair competition and the business environment in Hungary, Noemi Alexa, executive director of Transparency International Hungary, said when presenting the study to the press on March 8. "If we add up all the [negative] trends, we can see a new pattern of corruption is emerging. In short, the Hungarian state has become captive to certain business

Such practices, coupled with the weakening of independent institutions meant to act as checks and balances against misuse of state power, "seriously undermine" the transparency of the entire legislative process, Transparency International said. In response, the ministry of public administration and justice said that, "in common with Transparency International, the government sees the fight against corruption as vitally important." The Orban regime, it claimed, had unearthed "numerous cases of largescale corruption" in connection with previous government leaders and, since taking office, had "closed loopholes in a great number of areas and launched an extremely intensive series of measures against corruption." Captured state Gabor Takacs, an analyst at Nezopont, a government-leaning think-tank in Budapest (and represented on the advisory panel of the Transparency International study), also criticised the headline conclusions. "We'd like to note that much of

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"The Institute has repeatedly warned that Hungary has degenerated into an oligarchic, illiberal state" the report's findings were based on data from 2009 and the first half of 2010 that is, before the Fidesz government was formed," he tells bne. However, Lajos Bokros, former Hungarian finance minister and president of the conservative Freedom and Reform Institute, says the conclusions dovetailed with his own. "The Institute has repeatedly warned that Hungary has degenerated into an oligarchic, illiberal state,"

he says, adding that special interests had increased their malign influence in the past decade and "the situation has deteriorated further under the efforts of the present government to… institutionalise authoritarian power." Despite continued news of incoming foreign investor activity – Prime Minister Orban was busy laying foundation stones for a new Knorr-Bremse plant in Kecskemet, a €17m investment

project, in March – the Transparency International report is hardly a vote of confidence in Hungary for any business seeking to set up in the region. "Hungary is under the microscope right now for all the wrong reasons," Nicholas Spiro, managing director of the London-based Spiro Sovereign Strategy, tells bne. "Yet when it comes to matters of graft, most foreign investors tend to see things in relative terms: there have been big improvements in Hungary over the past 20 years and things are much worse further south, not to mention eastwards. However there is no room for complacency and it is incumbent upon Fidesz to root out corruption given its political dominance," he says.

natural resources. The only resource we have is our people and if they are not being educated properly, they are not being properly prepared to survive in the competitive 21st century," she says. The issue is also harming the image of the country as an investment destination, just at a time when the economic crisis is making such capital scarce. "When I'm speaking with a potential investor, it is usually question number one – 'is it [corruption] as bad as I've heard?'" Weston Stacey, head of the American Chamber of Commerce and one of the founding members of Platforma pro transparentni verejne zakazky (Platform for Transparent Public Procurement), told bne last year. Fortunately, 2011 is being increasingly regarded as a watershed in the country's fight to clean up public procurement.

The Czech Republic has now fallen as low as 57th place (out of 182 countries ranked) in Transparency International's 2011 Corruption Perceptions Index (CPI) – the world's most credible measure of domestic, public sector corruption. This means the country is the 21st least corrupt place out of the EU's 27 states. Graft is estimated to cost the Czech economy about CZK100bn (€4bn) each year, with about 90% of that coming from public tenders, so it's clear where the focus needs to be applied.

A Czech'ered past Nicholas Watson in Prague

roups of tourists led by tour guides in orange scarves and hats carrying orange clipboards emblazoned with the English words "Corrupt Tour" have become an increasingly common sight around various parts of the Czech capital since February. Milling around hospitals, tunnel construction sites and swanky villas, these tourists are part of a new itinerary,

hosted by the Corrupt Tour Travel Agency, that ferries people to the centres of some of the Czech Republic's depressingly long list of corruption scandals. Although the tours started by the theatre impresario Petr Sourek are light-hearted in tone, they are an attempt to address a serious issue in the country, which Czech people are daily becoming more aware – and heartily sick – of: corruption.

The amount of savings from rooting out graft could be huge for the hard-pressed Czech taxpayer. The government's economic think-tank, the National Economic Council (NERV), says public contracts worth CZK630bn were drawn up in 2009. This is about 17% of GDP, so if savings of only 2% could be made, the amount would be comparable to the cuts in social expenditures for 2011, Prime Minister Petr Necas has pointed out. Jana Ryslinkova, a former elected member of the Prague City Assembly, who spearheads the campaign to uncover the truth behind the fiasco of the tender for the Opencard system (one of the Corupt Tour's points of interest), says the money lost to corruption could be spent on things like the struggling educational system. "We are a small country with no

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Small steps In April 2011, the British engineering firm Mott MacDonald submitted a report to the NERV in which it detailed the many and varied ways in which contractors bump up the cost of major construction projects. A major conflict of interest surrounds the companies that prepare plans for road construction and repair contracts, as they often also work for the winners of the tenders to build the roads. In practice, this means that the contractors get the nod from the coordinator for changes in the project’s basic specifications, which boosts the final cost and helps them avoid being saddled with cost overruns. Mott MacDonald also highlighted the lack of an independent inspectorate to check on the quality of construction, which has left motorways like the D47 unusable. "The biggest problem was that there was no independent check-up of projects and professionals were pushed out. Some projects were intentionally designed to be more expensive – and we know this was intentional ignorance on the part of the government," says Jiri Petrak, the recently retired managing director of Mott MacDonald's Prague office.

NERV then followed up in June 2011 with the unveiling of its own anti-corruption plan, which identified a series of problems with Czech tenders and 15 measures that should be taken in order to save tens of billion crowns from public budgets. Key amongst its proposals were: to prevent qualification criteria being applied that limit the number of bidders; to lower the cost threshold at which a public tender needs to be held, thereby

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leave their posts almost immediately after the scandals were revealed. Politicians began to realise that it is fatal for the parties to defend the bribers," Tabery says. Tabery and others also point to the fundamental changes in the capital Prague, the nexus of money and power in the country. The current Prague Mayor Bohuslav Svoboda is credited by many with making a good start in cleaning up

"I think a lot of things are changing, especially the social atmosphere has become increasingly critical to corruption" stopping the practice of breaking up tenders into small amounts to avoid scrutiny; to publish tenders on the internet; and to protect corruption whistle-blowers.

the capital's politics and business, and has not resorted to populist promises but prefers to rely on patient compromise to change the way things are done.

This plan has led to the long-overdue public-procurement law, which is currently wending its way through parliament. Amongst other things, it will lower the thresholds for tenders for any procurement deals by central and local government bodies, and require the publication of owners of companies in tenders.

Not a moment too soon. The anti-graft umbrella organisation Naši politici earlier this year released the results of a survey of about 2,000 of Prague's biggest public tenders between 2006 and 2011 that showed an alarming number of connections between winning companies and sitting politicians. Using publicly available material, "we identified dozens of cases where fully or partially owned companies of elected representatives on the statutory organs of the city, or Prague districts, received significant shares of public tenders," Naši politici noted.

Also that summer, the government endorsed the setting up of a new anti-corruption commission, on which will sit a variety of ministers and will be headed by Deputy Prime Minister Karolína Peake. The commission's work will involve scrutinising draft and existing legislation for any loopholes and drawbacks, while also proposing new legislation to fight corruption. Against the backdrop of the deepening crisis in Europe, pundits like Erik Tabery, editor-in-chief of the weekly Respekt, also detected a sea-change in the public's attitude toward corruption in 2011. "I think a lot of things are changing, especially the social atmosphere has become increasingly critical of corruption," he tells bne. One visible sign of this is the changing behaviour of politicians – and not just at election time. "For example, ministers

The appearance of Naši politici itself is a hopeful sign. Funded by the Endowment Fund Against Corruption, George Soros' Open Society Fund (OSF), and Trust For Civil Society in Central and Eastern Europe, it is one of a growing number of non-governmental organisations, or NGOs, that are dedicated to cleaning up corruption in the Czech Republic. This year, the OSF's Prague chapter announced it will donate CZK11.5m toward a new anti-corruption and freedom of information initiative named after Otakar Motejl, a former Czech justice minister who until his death in 2010 was regarded by the Czech public as one of the country's most trusted civil ser-

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vants. The Otakar Motejl Fund will work with other groups to promote honest government. "Now we invite all Czech citizens and businesses to join. It is up to us Czechs in what kind of country we shall live in," the Prague OSF said in a statement, echoing the feelings of many.

we all understand that it's our money and we protest, then we will not solve the problem. It requires that we understand a little more about what is required, get more involved – protesting when it's already a tragedy means it's already too late."

"Corruption will grow unless we are ever vigilant," says Ryslinkova. "Unless

As is the way with these matters, success also brings its own set of problems,

warns Tabery. "Various businessmen and groups are preparing for the next phase of gaining power and money: they're buying media, creating influential organisations and they want to legally get to the money flows," he says. "It will be a much harder period for society because this is not easy to detect."

the reform effort coasts along in neutral as it did from 2003-07. If corruption is reduced, the state and key stakeholders in the economy could make billions.

COMMENT:

Can Putin deliver lower corruption in Russia? Charles Robertson of Renaissance Capital

ladimir Putin, who won his third term as Russian president on March 4, has promised a great deal to many constituencies – from a significant rebuild of Russia's military to muchneeded investment in Russia's previously excellent education infrastructure. For this piece, "we are basically talking about corruption", to quote Putin from his January 20 speech, which correctly identified this as a key issue for investors.

If President Putin, and (presumably) Prime Minister Dmitry Medvedev, can make progress on this front, it would significantly surprise sceptical investors. Many assume that the host of reforms of 2000-02 (private land ownership, flat tax boosting budget revenues, improvements in the ease of doing business) were an unrepeatable aberration. But the lesson of the global financial crisis was that Russia cannot hope to grow at a high 6-7% if

Would a shift towards strong democracy help? Yes, but it is not essential. It is true that countries with the highest democracy ranking from the Polity IV database are also perceived to have the least average corruption, based on Transparency International's Corruption Perceptions Index. Even discounting for per-capita GDP, it is also true that countries that are less corrupt tend to be more democratic, while those with a worse ranking tend to be more autocratic. Yet the strongest correlation seems to be between per-capita GDP in constant 2005 purchasing power parity (PPP) dollars and the corruption perceptions index – as countries get richer, they are seen as suffering less corruption. Corruption in Russia should fall as the middle class grows in size and wealth. Countries that are seen as less corrupt than they should be for their per-capita GDP wealth level include South Africa and Turkey, which are generally liked by equity investors, as well as Poland, Zambia, Ghana, Georgia, Singapore and Rwanda. Low corruption matters to equity investors and arguably allows stocks to trade at higher premiums. Strong democracy is not essential. Both Singapore and Rwanda – autocracies according to Polity IV Project and the Centre for Systemic Peace (Polity IV) – show that strong political leaders can deliver on low corruption. Those countries where corruption perceptions are worse than they should be at a given per-capita wealth level tend to be

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favoured by debt investors, particularly hard-currency debt investors. We assume this is because their legal protection does not depend on local courts. Such countries include Russia, Kazakhstan, Ukraine, Belarus, Argentina, Mexico and Venezuela – amusingly, the US also fits into this group. Greece and Italy are both strong democracies that fare worse than Russia (or the US), compared with their per-capita income levels. The resource curse is obvious. The countries with the worst corruption ratings relative to per capita-income are oil exporters. None of the countries with the very best ratings are oil exporters. As we have noted previously, energy exporters are the most common exception to the rule that all countries democratise when per-capita GDP rises above $6,000 in constant 2005 PPP dollars. No country producing 150,000 barrels a day (b/d) per million of its population has ever become a democracy. Russia's net exports are just 50,000 b/d per million people, so a shift from its current "weak democracy" rating to a "strong democracy" is possible – we put the chances at a high 29% chance a year. Energy exporters with a weak democracy rating that have shifted to strong democracy since 1965 include Malaysia, Mexico, Peru and Russia itself in 2000 (before slipping back in 2007). Russia's Duma is already considering legislation to make it easier for parties and presidential candidates to participate in elections. So either via stronger democracy or via strong political leadership, Russia may succeed in reducing corruption. The key conclusion from this report is that a stronger judiciary and less corruption would re-rate Russian equities higher, and benefit an incoming Russian government hoping to advance privatisation and fund high social spending. If Rosneft traded at a similar price/earnings ratio to Statoil of Norway, its market capitalisation would rise from $80bn to $120bn, and the planned privatisation proceeds from this company alone would be $18bn, instead of $12bn, on our estimates. If a similar situation was seen across the board, the government's ability to fund Putin's spending plans would be greatly enhanced.

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A new phase

bne Russia's anti-corruption drive may not be going very fast, nor is it producing much in the way of results, but the Kremlin's efforts are slowly being institutionalised. Up until now, the campaign (such as it is) has been a series of ad-hoc arrests and investigations into state officials in nearly every branch of government. Generals have been fired, tax inspectors arrested, judges debarred and even senior officials from the Finance Ministry banged up. The strategy seems to have been to fire a series of warning shots to everyone in government that they can no longer steal with impunity. The results have been patchy. Russia moved up slightly on Transparency International's 2011 "Corruption Perceptions Index" to tie for 143rd place out of 182 countries, up from 154th a year earlier. However, Russia remains the world's most corrupt major economy, with a score of 2.4 on a scale from 0 (highly corrupt) to 10 (highly clean) on a par with Uganda and Nigeria. Half of Moscow's residents and nearly 40% of all Russians have been in a situation where they felt a bribe was necessary to solve problems, according to research conducted last year by the Public Opinion Foundation and the Indem Foundation, which studies corruption. Ironically, one effect of the government's drive has been to send the size of some bribes soaring. "The fire inspectors always ask for bribes," a Moscowbased real estate agent tells bne on condition of anonymity, "but since the government reduced the number of inspections [as part of the anti-corruption effort] from once a year to once every five years, all that happened is the fire inspectors now ask for five times as much." Eradicating corruption is going to be a very long and hard fight, but it has been moving into a new phase as President Dmitry Medvedev begins to institutionalise some of his anti-graft measures. In the middle of March, Medvedev ordered the government to prepare a draft bill to control excessive and superfluous expenses of domestic civil servants on personal purchases of real estate, securities and transport vehicles. The law will oblige civil servants to disclose the origin of the money spent on anything they buy if the value of the purchase is more than the combined value of their household income over three years. If the bureaucrats refuse, they could face the sack or have their property confiscated. Likewise, top managers at stateowned banks were ordered to declare their income at the start of this year. Duma deputies and their families are already obliged to disclose their net worth and income; in March, it emerged that the governor of the central Russian Tula region, Vladimir Gruzdev, is the richest deputy with a combined family income of over RUB3.8bn ($130.1m) in 2011. However, as he made most of his money from selling his stake in supermarket chain Seventh Continent in 2010 for an estimated $400m, even Yelena Panfilova, head of Transparency International Russia, says there is no question that his money isn't clean.

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Bribed in Bucharest Bogdan Preda in Bucharest

aluca stuffs two RON10 banknotes (about €4.50) and five identity cards into the pocket of a bodyguard at a local tax office in Bucharest, the Romanian capital. Ten minutes later, the guard walks past the queue of about 70 people with the identity cards and five local tax forms that had been meanwhile printed, stamped and signed by the tax clerk inside. Raluca had made it. In less than 15 minutes, she paid the local taxes for herself, her family members and those of some neighbours for this year and took advantage of a 10% discount for having paid the entire amount before March 31. The last people in the queue will have to wait for at least another two hours before paying theirs. "With a job to be kept, two kids at home and a busy husband, I had no choice but to bribe my way in to pay taxes on land, apartments and cars owned by our family and those of our neighbours," says Raluca, who didn't want to be identified by her family name for obvious reasons. "The system didn't give me an alternative."

prime minister, foreign minister, opposition Social Democratic Party boss and parliamentary speaker, was being told by Supreme Court judges that he will find out on March 30 whether or not he'll have to spend time in prison on bribery and corruption charges. So was his wife, Dana Nastase, and a family friend, who are also part of the same trial. They all claim they're innocent and that the charges against them have been fabricated in order to keep Nastase out of politics for the past three years. Nastase's case is just the most prominent in Romania, where other politicians have been either imprisoned or tried for various wrongdoings, especially over the last five years since the country joined the EU, which still criticises it for not doing enough to put its justice system in order. The problem with Nastase's case is that he's not being tried for some "big corruption case", but over some alleged bribery worth $100,000 that prosecutors said he received during the previous election campaign. Commentators such as Ion Cristoiu blame the authorities for having gone too far with tainting the image of one of Romania's best politicians.

The math is simple, according to Raluca. She paid a RON20 bribe, but saved another RON400 by paying her local taxes before March 31. She's happy to have saved time, the bodyguard is probably happy, as no doubt are the clerks inside – and she's clearly bothered to see the surprise on my face. "It's a fact of life in Romania whether we like it or not," she argues. "On one hand, I feel I'm too old to leave this country, but on the other I have to adapt to this sick system over here, which many of us now perceive as normality."

Meanwhile, authorities say that Mihail Boldea, a lawmaker and former ruling Democratic Party member, who made more than €1m from real estate deals by forging court papers and other legal documents, has fled Romania for an unknown African country via Turkey. Prosecutors, who claimed they couldn't immediately arrest him due to his parliamentary immunity, summoned him for questioning on March 21 even though they knew he left the country on March 17, the daily Gandul reported.

Higher up Elsewhere in Bucharest, at about the same time, Adrian Nastase, a former

Yet this charging of politicians, top government officials and businesspeople in recent years doesn't seem to be solving

the general corruption that the average taxpayer must pay "under the table" for all sorts of services, ranging from ordinary health care for which they already paid taxes, to paying a bribe in scores of other situations of their everyday lives. Such a situation is illustrated in Transparency International's statistics, which in its latest report on corruption in December put Romania among the top three mostcorrupt EU-member states, with only Bulgaria and Greece considered to be more corrupt. "Romanians are disappointed by the authorities' lack of efficiency in protecting them from corruption, either in the form of abuse of public resources, bribery or secret decision-making, but also because of their lack of efficiency in discovering and punishing existing corruption acts,'' Transparency International's Romanian office wrote in the report. The embezzlement of public funds has led to some notorious examples in today's Romania, with the worst linked to public services or utilities. For example, €10bn has been spent over the past five years by the state-owned National Highway and Road Company on just 150 kilometres of completed highway. Then there was the preferential power sales awarded by state-owned Hidroelectrica to certain power trading companies, which resulted in €1.5bn of profits over the last 10 years disappearing. And the state railway company, which has been constantly managed by political appointees, has posted losses totalling €1.3bn over the past four years. One of its former general managers is being tried only now for allegedly for allegedly having diverted €70m from the company in 2002 and 2003. This widespread mentality of making "a buck on the side" at all levels of government structures has dramatically reduced Romania's capacity to absorb EU nonreimbursable funds, which would have gone a long way toward the country's development. Since it's almost impossible to divert EU aid funds into other businesses due to strict monitoring, officials are not attracted by the hard work needed to put together the projects.

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EBRD 2012 Annual Meeting and Business Forum (18 - 19 May) European Bank for Reconstruction and Development (EBRD) EBRD Headquarters, London, UK www.ebrd.com/am

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Russian Pharmaceutical Forum (22 - 24 May) Adam Smith Conferences +44 20 7017 7444 Saint-Petersburg, Russia events@adamsmithconferences.com www.adamsmithconferences.com

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Emerging Market Investments Summit 2012 (June) Marcus Evans +357 22 849380 Fairmont Le Montreux Palace, Montreux, Switzerland summits@marcusevanscy.com www.emisummit.com

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