bne:Newspaper - February 20, 2015

Content: 2 Top Stories 5 The Regions This Week 11 Eastern Europe 14 Eurasia 17 Central Europe 20 Southeast Europe 23 Opinion 25 Lists 24 Lists

bne:Newspaper Follow us on twitter.com/bizneweurope February 20, 2015

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Ukrainian troops withdraw from Debaltseve bne IntelliNews Ukrainian President Petro Poroshenko has announced that Ukrainian forces fighting Russianbacked separatists are pulling out of the East Ukraine town of Debaltseve, which has been under attack from the rebel forces since midJanuary.

will add to pressure on Ukraine's military and political leadership over the conduct of the war.

Kyiv has claimed for weeks that the situation at Debaltseve was under control, even as Ukrainian media reported the opposite.

Speaking at a military airport before flying to East

Apart from the risk of increased Western sanctions against Russia, the fall of Debaltseve

See page 2

Hungary seals gas deal as it calls for Russian rapprochement Kester Eddy in Budapest Russia's isolation from Europe is unreasonable and cannot help bring about peace, while any hope of Europe being competitive without Russian energy is an illusion, said Hungarian prime minister Viktor Orban at a joint press conference with Russian President Vladimir Putin.

During the Russian president's controversial visit to Hungary on February 17, Orban won a

gas deal and in return he backed up his guest on his geopolitical challenges. The Hungarian PM declared the cease-fire agreement in Minsk "a good basis" for further negotiations towards a peaceful settlement in Ukraine, noting that Hungary has "200,000 arguments" for a peaceful solution - a reference to the ethnic Magyar See page 4

Top Stories February 20, 2015

Ukrainian troops withdraw from Debaltseve

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40th battalion saying by phone that his troops were “sitting, watching, waiting for the battalion to be killed", with ammunition and food running out. Relatives of Ukrainian servicemen trapped in Debaltseve blocked an exit road from Kyiv on February 17 in protest at what they said was Kyiv's "abandonment" of its forces.

Ukraine, Poroshenko claimed that the withdrawal had been planned by Kyiv and not forced by the rebels.

Reports spoke of over 50 corpses of Ukrainian soldiers being delivered to the morgue at the nearest government held town, Artemovsk.

"We have stated and proven: Debaltseve was A rebel military spokesman, Eduard Basurin, under our control, and there was no encirclement. said on Russian TV on February 18 that over 300 Our units and forces have left it in a planned and Ukrainian soldiers had surrendered, according to organised manner,” Poroshenko said. “They've left Interfax. Ukrainian soldiers posting on the internet also reported the surrender of some groups of it with their military equipment, with tanks, with armored personnel carriers, with self-propelled government forces. guns, tow tractors, and automobiles," he added as quoted by Interfax Ukraine. TV pictures and The withdrawal of Ukrainian troops may indicate reports showed some columns of Ukrainian a deal was struck between Kyiv and Moscow, say personnel carriers and army trucks carrying analysts, allowing Poroshenko to save face and soldiers out of the town, although it is not clear Putin to avoid a threatened sharpening of Western whether all Ukrainian forces have been evacuated. sanctions against Russia, were the conflict to Poroshenko said that in his airport statement escalate again. that "from 2,000 soldiers, we have 30 who are wounded."

Speaking at a press conference in Budapest, Putin had called on Kyiv to now let Ukrainian forces Poroshenko's words contradicted widespread surrender. "The problem of the encircled units reports that the Ukrainian troops in Debaltseve needs to be put to an end. Our common task were encircled and running out of ammunition is to save human lives ... and not let this bruise and food, including desperate calls from aggravate ties between Kiev and the insurgents," commanders of troops in the town to live he said. Putin said that rebels should give disarmed Ukrainian TV detailing their plight.

Ukrainian troops safe conduct out of the town.

Russian President Vladimir Putin had also previously suggested that Poroshenko was being misled by his army staff on the situation on the ground. On February 17 he called on Ukrainian troops to lay down their arms and for rebels to allow the government forces to leave the town.

On February 17, internet news site LB.ua quoted the deputy commander of Ukraine’s

Putin said the fighting in Debaltseve was "foreseeable skirmishes" and there had been otherwise a "significant reduction of hostilities", following the ceasefire signed on February 11, and entering into force on February 15. Putin called the rebels “miners and tractor drivers", despite numerous reports of Russian servicemen fighting in their ranks, partly confirmed by Western states.

Top Stories February 20, 2015

Hungary seals gas deal as it calls for Russian rapprochement population living in its eastern neighbour.

"We're convinced that the isolation of Russia from Europe is not rational. The security of this region cannot be maintained without Russia ... so we're striving for better cooperation," Orban said.

Putin, however, while expressing support for a negotiated peace, firmly blamed Kiev for the continuing fighting. "The Ukrainian government has, for the third time, decided to resume military conflict," he said. "This will have no end unless the decisions makers in Kiev decide there is no military solution."

The visit by the Russian president, his first to an EU member state since meetings in Austria last summer, has been widely criticised both within Hungary and abroad as giving succour to Russia. It comes as the European Union extended sanctions against Moscow because of its support for separatist militants in Ukraine.

But Orban dismissed any threat to European unity caused by the visit, saying there was "no need to fear". Stressing that "long and successful negotiations" with the Russian leader had "secured gas supplies for Hungary's households and industry", he said the new deal will enable Hungary to escape the "take or pay" clause about which so many Gazprom customers complain.

The pair had reached a "political agreement" on a new contract - Hungary's priority going into the talks - Orban continued. Only "technical details" remained to be solved, he said, adding that this should be achieved by the end of the year, when the current deal ends.

In view of the collapse of the South Stream

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project, Hungary is eager to explore other options to access Russian gas from Turkey, Orban said, saying he has held negotiations with Serbia, Macedonia and Greece on the issue.

"It would be good for Hungary to have the investments to transport Turkish gas through Greece, Macedonia and Serbia. Whether this will come to fruition is a future question but Mr President made me hopeful on this," he said.

Putin, noting that his visit coincided with the 70th anniversary of the liberation of Budapest from Nazi rule at the cost of "more than 200,000 Red Army soldiers", said negotiations were "very constructive and businesslike" and said Russia was ready for more cooperation, including possible further use of gas storage facilities in Hungary.

Regarding the planned extension of Hungary's Paks nuclear plant, Putin said Russian credit, at some 80% of the total cost of ¤12bn, was "very favourable" for Hungary. Russia will also work to assist Mol, the Hungarian energy group, in its energy projects in Siberia, he said.

Five bi-lateral agreements - on regional cooperation in higher education, health care, nuclear energy training and the the opening of a Hungarian consulate in Kazan - were signed at the beginning of the press conference.

In contrast to Orban's upbeat assessment of the visit, commentators and opposition leaders in Hungary were critical of the visit, many saying it only helped Putin to show off at home and sow disunity in Europe.

“It was 40 minutes drag on nothing, it was awful.

We can forget these five agreements, they're not important. You don't need a meeting of this level to sign those. For sure, there are reasons for this visit, but that's not what it's about,” Laszlo Keri, a political scientist, told ATV television.

Gyorgy Drucker, an energy consultant, even played down the value of the supposed gas contract

Top Stories February 20, 2015

agreement. “We already had the option to take over the natural gas until at least 2020, so after all nobody really needs a new agreement urgently,” he told bne IntelliNews.

Edit Inotai, Senior Fellow at CEID, a think tank, was more positive: “The two got along rather well, there was no sign of friction, as with [German chancellor] Merkel in the recent visit.”

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“Typically [or Orban], this was the pragmatic, business-oriented approach, lacking any criticism on Russia's violations on international law,” she told bne IntelliNews, adding: “On the other hand, it will not help improve the Polish-Hungarian relationship - Orban is visiting the new Polish prime minister this week.”

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The Regions This Week February 20, 2015

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Central Europe The CEO of Polish coking coal miner JSW quit on February 16 as part of a bid to end strike action that has hit the company hard. Miners have now returned to work after three weeks of action led major customers to seek alternative supplies.

Slovak politics is braced for shocks from the scandal at the Swiss unit of HSBC. Close to 150 accounts at the bank are now under investigation, with reports suggesting that many may be linked to privatisation in the last decade.

RBI has received more than 20 bids for internet banking unit Zuno which operates in Slovakia and the Czech Republic, it confirmed on February 17.

Compatriot Erste and Slovak financial group Arca Capital are thought to be in the running for the lossmaking start up.

Latvia says it has a potential suitor for E.ON's stake in Latvijas Gaze. Riga pulled out of a deal to buy the stake last year, extending its struggle to wrest its pipelines from Gazprom. Speculation says the potential buyer is Marguerite - an investment fund backed by several European development banks.

Hungary's central bank will double the size of its cheap loans scheme, it announced this week. The Funding for Growth programme will make HUF1tn (¤3.2bn) available to SMEs this year, the MNB said, claiming the move could add 1pp to 2015 growth.

Slovakia joined the jostling to meet Russia's proposed Turk Stream gas route. Slovak TSO Eustream insisted this week that its Eastring project to link to the Balkans is complementary and not competition for Turk Stream. Hungary confirmed this week it wants to lead a project to carry gas from the Turkish border to Central Europe.

Hungary’s central bank may hold reserves in Chinese yuan. Budapest has been chasing Chinese investment and trade, but like others in the region, has struggled to actually see any hard cash. The move also fits Russia and China's push to reduce the global role of the US dollar.

Record harvests will do little to avert deflation across Central Europe. Latvia saw an all time high in 2014, while the Czech Republic produced its third largest haul of grain.

Slovakia will block Greek attempts to ease the terms of its bailout, and is "calm" about a "Grexit" PM Fico told the Financial Times. Previously Fico has attacked EU austerity policies. However, he told the FT: "It would be impossible to explain to the public that ‘poor’ Slovakia . . . should compensate Greece.”

The Regions This Week February 20, 2015

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Southeast Europe Romania’s highest court jailed former minister of sport and youth Monica Iacob Ridzi to five years for misuse of some ¤0.6mn-0.7mn of public funds. A former minister in the cabinet of Emil Boc during 2008-2009, Ridzi was a close friend of President Traian Basescu’s daughter Elena. Ridzi resigned in July 2009 after only seven months of her term amid the corruption scandal.

Serbia’s economy is expected to continue contracting in 2015 with GDP seen dropping by 0.5%, the National Bank of Serbia said in its latest Inflation Report. The bank kept its forecast unchanged from the previous edition of the report released in November. The Serbian economy plunged into recession last year, reversing 2013's 2.6% expansion, mainly as a result of the devastating floods that hit the region in May as well as the government's fiscal austerity measures. The NBS said it estimates GDP shrank by 1.8% in 2014.

parliament on February 19 decided to postpone the debates and the vote on the proposed debt, as lawmakers said they need additional time to examine the plans in detail.

Swiss bank UBS has reached a settlement with Croatia over a lawsuit it filed in a New York federal court last year that charged the country had not repaid a $45mn debt it took over after the breakup of Yugoslavia. The financial terms of the settlement were not disclosed, but the Swiss bank said in a letter it filed with the court that it expects the Adriatic country to approve a final settlement deal and make a payment by February 23.

Croatia received seven bids in a tender for onshore exploration and production of hydrocarbons in the north-eastern part of the country. The economy ministry said did not name the bidders, but said it was happy with the offers.

Last month, Croatia awarded 10 licenses for hydrocarbons E&P in the Adriatic Sea, which are Ten former employees of Albania's central bank part of Croatia’s plan to become an energy hub in have been jailed for between eight and 18 months Southeast Europe. after being found guilty of abuse of office over the theft of ALL713mn (¤5mn) from the bank's Croatia’s anti-graft agency USKOK said a joint reserves. The scandal broke in July 2014 when investigation carried out with representatives from Finland and Austria showed no evidence of Bank of Albania employees were arrested for several thefts of money from the central bank a reasonable suspicion that a Croatian official vault. The longstanding central bank governor asked for and received a bribe from Finnish Ardian Fullani was sacked in 2014 and is currently company Patria related to an armoured vehicle awaiting trial. deal in 2007.

The floods that hit southern Albania in early February have affected the livelihoods of 42,000 people, according to the United Nations mission in Albania. Hundreds of people were forced to abandon their homes amid rising waters caused by heavy rains. Hundreds of police officers, including special forces units and even army helicopters were used in the rescue operations.

Bulgarian PM Boyko Borissov hinted he could resign in the event the parliament does not approve BGN16bn (¤8bn) in new debt. Bulgaria's

Kosovo Serb MPs said they will hold talks with the Serbian government before deciding whether to leave both the Kosovo coalition and the parliament. Serbian MPs in Kosovo began considering quitting the coalition led by Isa Mustafa and their seats in parliament after the PM on February 3 fired the ethnic Serbian Minister for Returns and Communities Aleksandar Jablanovic.

The Regions This Week February 20, 2015

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Eastern Europe Prominent Russian opposition leader Alexei Navalny was jailed for 15 days for breaching demonstration restriction laws. He was also barred him from a planned rally on March 1. He is already serving a 3.5 year suspended sentence for embezzlement, which he claims is politically motivated.

Russia's state-owned gas giant Gazprom announced that it plans to list shares on the Hong Kong stock exchange and become only the second Russian company to be traded there.

The company has already listed it shares on the Singapore stock exchange and was recently given a triple AAA grade by China's rating agency Dagong – the highest possible.

Russian state oil major Rosneft published the income of its top managers, but obscured the pay of its CEO Igor Sechin, who is believed to receive $50m a year paycheck.

A Moscow court awarded Russian conglomerate Sistema $1.1bn in damages for losses related to the seizure of the Bashneft oil company by the state. Sistema paid $2.5bn for control of Bashneft a few years ago in a controversial privatisation.

Ukraine's trade deficit narrowed sharply last year to $468.3mn from $13.5bn in 2013 thanks to a collapse in imports caused by the sharp depreciation of the hryvna. Ukraine's total exports fell 13.5% last year, to $53.9bn, while imports plunged 28.3% to $54.381bn, the state statistics service said.

Russia remained Ukraine’s most important trading partner last year, with bilateral trade volume of $22.4bn, compared with $38.2bn in 2013, the State Statistics Service of Ukraine said.

China and German were in second and third place with $8.1bn and $6.9bn trade volumes in 2014.

German broadcaster ZDF is in trouble for airing footage of Russian tanks it claimed were in

eastern Ukraine, when actually they were on patrol in South Ossetia in 2008. The station made exactly the same mistake as when US senator Jim Inhofe showed the same pictures to the US Senate.

Russia's state-owned Gazprom says it hopes to sign second gas deal with China soon. Last year it signed off on a historic $400bn gas supply contract, although the two sides have yet to agree to build a pipeline connecting them.

Ukraine's government has ordered a 264% increase in domestic gas tariffs as part of the deal with the IMF, which recently offered to increase its bailout programme with an additional $17.5bn loan.

The EU included Russian crooner Iosif Kobzon in its latest blacklist. He has already been barred from entering America due to alleged ties to Russian mafia. The Russian foreign ministry said there would be no tit for tat ban on western artists as "there is no one of his stature in the EU”.

US cable news channel CNN has applied for a broadcast license from Russia's state media watchdog, just one month after leaving the country following the introduction of a restrictive media advertising law. The laws do not affect foreign media outlets and CNN's decision to pull out had more to do with money than problems.

The demand for Russian assets has surged as the price of Brent crude rebounded 32% from a six-year low on January 13, leading Russian equities and the ruble to rally the most in the world this month. Corporate bonds returned 6.2% in the past one month, the best performance among emerging markets except Venezuela.

Sovereign-bond yields have fallen to the lowest level since December 11.

The Regions This Week February 20, 2015

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Eurasia Lukoil and Hyundai Engineering are set to build a gas processing plant in Uzbekistan. The plant will have an annual capacity of 8.1bn cubic metres of gas and will process sour natural gas from the Kandym group of fields in Uzbekistan to produce treated natural gas and stable gas condensate, as well as solid and granulated sulphur.

The World Bank has approved a $195mn loan for a railway link between the Fergana valley in eastern Uzbekistan and Tashkent Region.

The project entails the construction of a 124km railway link between the towns of Angren and Pap, including a 19.2km tunnel under the Kamchik pass. The railway is expected to move 600,000 passengers and 4.6mn tonnes of goods in its first year of operation. Works are slated to wrap up in 2016.

Kyrgyzstan’s mining production fell by 6.8% y/y to KGS90.99bn ($1.49bn) in monetary terms in 2014. Gold production fell by 6.2% y/y to 18.1 tonnes in real terms and by 4% y/y to KGS78.99bn in monetary terms in 2014. Gold production at Kumtor, the country’s largest gold mine, operated

by Canadian firm Centerra Gold, fell by 5.45% y/y to 567,693 ounces in 2014.

Kyrgyzstan’s annual inflation rate reached 11.6% in January, up from 3.6% in January 2013.

Inflation pressures are mounting as the Kyrgyz som keeps losing ground against the dollar in the currency market – the som depreciated by over 20% in 2014, making imports more expensive.

Tajikistan’s exports of cotton, the country’s single largest export voice alongside aluminium, grew by 7% y/y in January. Total cotton shipments amounted to almost 12,000 tonnes in the first month of the year, up from 11,000 tonnes a year earlier. Aluminium exports by Tajik state

aluminium producer Talco fell to 5,900 tonnes in January, from 17,600 tonnes a year earlier.

Mongolia’s annual GDP growth slowed down to 7.8% in real terms in 2014, from 11.6% in 2013.

Nominal GDP grew by 14.3% y/y to MNT21,800bn ($11.16bn) in the year. Mongolia’s annual consumer price inflation (CPI) rate stood at 9.8% in January, down from 12.3% a year earlier. CPI inflation in Ulaanbaatar stood at 9.3%, down from 12.2% in January 2014.

Kazakhstan’s foreign trade surplus increased to $37bn in 2014 against $35.8bn in 2013. The main reason for the widening surplus was shrinking imports, which dropped from $48.8bn to $41.2bn.

Exports also declined but at a slower pace – from $84.7bn to $78.2bn. Kazakhstan’s main export destinations are Italy (20.5% of total), China (12.5%), Netherlands (11.2%), Russia (6.6%) and France (6%). Main suppliers are Russia (33.3%), China (17.9%), Germany (5.6%), the USA (4.8%) and Ukraine (2.9%).

Kazakhstan is to support the car industry amid the deteriorating economic conditions and the weaker Russian ruble. The industry was hit by a 19% devaluation of the tenge in February 2014, with sales of new cars falling by 1.3% to 163,600 cars for the first time since 2009. The weak ruble prompted Kazakhs to buy cars in Russia, with estimates put at 50,000 cars in November and December alone. Industry players estimate a further decline in sales of new cars at around 110,000 in 2015.

Azerbaijan’s crude oil production totalled 3.668mn tonnes in January, down by 0.9% year on year. In 2014 the country produced 42.041mn tonnes of oil, down from the 43.08mn tonnes in 2013.

bne Chart February 20, 2015

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Russia's investment climate plummets A survey into Russia's investment climate by Moscow-based Detail Communications found that investment confidence has halved since the crisis hit. However, a third of respondents – a mix of portfolio managers and analysts from some of the most prominent investment banks, asset management firms and hedge funds – expect the Russian stock market to bounce off the bottom this year and put in double-digit returns.

"Russia is arguably facing its most challenging times in modern history. For the country, 2014 was marked by tensions in Ukraine, sanctions, plummeting oil prices, change in ownership of Crimea, currency devaluation and economic recession. Needless to say, this did not go down well with investors. By the end of the year, the market capitalization of the entire Russian stock market was less than that of one single corporation – Apple," said Timofey Pletz, CEO of Detail.

Even so, Detail found that, "Almost a third of the respondents showed great optimism and expect

to see double-digit growth from the Russian stock market in 2015. That’s despite the fact that none of them forecast economic growth in 2015."

Despite expectations of a big 'dead cat bounce' this year, similar to one that saw a tripling of asset prices in the spring of 2009, investor confidence remains close to historical lows. On a scale of 1 to 10, Russia had an average score of 5.6 for its investment climate before the crisis, which has since more than halved and is now equal to 2.5, the survey found. Around 70% of investors gave Russia two of the lowest possible scores.

Investors are concerned with a smorgasbord of problems, but political risk and geopolitical tension are top of the list. That said, one of the worries that don't appear to faze investors is the fear that Russia will default on its debt: 92% of the investors are either completely not worried or have only slight concerns about Russia defaulting on its debt. "A Russia default is also out of the question, with only 8% [of >

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respondents] saying they are very worried about it," says Pletz.

It’s an issue that bne IntelliNews raised in a recent chart, questioning whether rating agency Standard & Poor's recent decision to downgrade Russia to junk status was justified; a look at the macroeconomic fundamentals raises a big question mark over the decision.

Investors are also pretty pessimistic about the prospects for near-term economic recovery: none of the respondents expects the Russian economy to rebound in 2015. The majority (44%) believe it will happen in 2017. Almost 20% say it will happen only in five years’ time.

As for attractive investment opportunities, oil and gas remains the standout sector of choice for investors. "Despite underlining the concern

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about how dependent Russia remains on oil prices, which plummeted in 2014, almost half of the investors (38%) named the oil and gas sector as the most attractive industry," says Pletz.

These companies are the big winners from devaluation, as their costs are in rubles but most of their revenue is in foreign currency.

Tied in second place are the metals and mining industry, also a big winner from devaluation, along with agriculture.

Interestingly, the survey finds that domestic issues are top of the pile when it comes to making Russia a more attractive investment proposition: almost 50% of investors say reform and diversification of the economy is the top priority to make Russia more attractive to investors. Peace in Ukraine and sanctions being lifted are in third and sixth place, respectively, the survey found.

Eastern Europe February 20, 2015

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First top Yanukovych ally arrested, almost one year after ousting bne IntelliNews Ukraine's prosecutor general has announced the arrest of a leading Ukrainian opposition politician, Oleksanr Efremov, on charges of abuse of office with aggravating circumstances.

“On Saturday February 14 employees of the prosecutor general's office together with officers of the security service of Ukraine (SBU) detained the former head of the parliamentary group of Party of Regions in the Verkhovna Rada, Oleksandr Efremov,” the prosecutor's office said in a press release.

The arrest marks the first arrest of a toplevel official in the administration of ousted president Viktor Yanukovych, almost one year since Yanukovych fled Kyiv on February 22, 2014, after police opened fire on opposition protests, killing over fifty. Many former top officials from Yanukovych's Party of Regions subsequently fled Ukraine for Russia together with Yanukovych, whom Russia has refused to extradite.

Efremov was a dominant political and business figure in East Ukraine's pro-Russian Luhansk region for over a decade, including a spell as governor. Following the ousting of the Party of Regions from power in Kyiv, Luhansk became one of the strongholds of Russia-backed separatists fighting against rule by Kyiv. Efremov publicly supported in parliament some separatist demands, until he lost his seat in parliamentary elections on October 25.

Pro-Ukraine activitists frequently accused Efremov of also secretly backing the separatists financially. A bne investigation in May 2014 confirmed that the self-proclaimed head of the separatist Luhansk People's Republic (LNR), Valery Bolotov, had ties to the local Party of

Regions. Bolotov's only official position prior to heading an anti-Kyiv rebellion in Luhansk in April 2014 was as head of the local association of paratrooper veterans. The paratrooper veterans association was registered at the same address in Luhansk as the local Party of Regions offices, bne established.

Efremov said that his arrest was politically motivated.

"I regard my arrest as political persecution for invented reasons. They know who was really behind the deaths on Maidan, but they can't get hold of them. That is why they are imprisoning anyone they can lay hands on,” Efremov said in a statement placed on the Party of Regions website. Efremov is currently deputy head of the Party of Regions.

Efremov said he lived openly in Kyiv and had cooperated fully with law enforcement inquiries.

“The authorities have put me behind bars because I have a different view of the future of Ukraine,” he added.

The arrest of Efremov follows almost immediately the appointment of the new prosecutor general Viktor Shokin on February 10. Shokhin's appointment came after the resignation of his predecessor Vitaly Yarema after mounting criticism of failure to bring charges against figures from the Yanukovych administration.

“The new Ukrainian Prosecutor General, Viktor Shokin, has a history of treading where other prosecutors fear - or have been bribed - not to tread,” blogged commentator Nikolai Holmov. “Efremov is the sort of head that the new Prosecutor General also is known for hunting. Undoubtedly, more arrests will follow too,” Holmov added.

Eastern Europe February 20, 2015

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Russian funding eases debt pressures on Belarus as geopolitical tensions rise Sergei Kuznetsov in Minsk Belarus' foreign government debt repayments have reached a peak and the government is facing a serious shortage of funding. The country is required to pay $4bn this year, while its foreign currency reserves stood at just $4.7bn as of the beginning of February. The Belarusian authorities are confident that Russia will again provide financial support, but at the same time Minsk appears increasingly worried about a possible threat from Moscow to its sovereignty.

“We do not want to take on more loans… However, if we encounter real trouble, Russia will lend us a shoulder,” Alexander Lukashenko, the president of Belarus, said during a press conference on January 29. Lukashenko added that he “has a solid agreement” on this matter with his Russian counterpart as well as with the Russian prime minister.

instability in Ukraine and its general political isolation from Europe and the US,” Kazakevich tells bne IntelliNews.

He adds that the very structure of the alliance between Belarus and Russia is based on the premise that Russia always acts as a supplier of financial resources and economic benefits for Belarus. In 2014 alone, Russia provided $2bn in government loans to Belarus.

CHANGES ARE GOOD

Lukashenko said his government is still relying on the final tranche of a loan from the bailout fund of the Russia-led Eurasian Economic Community, EurAsEC, which previously rescued Belarus from a balance-of-payment crisis in 2011 by offering a $3bn aid package. According to initial agreements, the final tranche should be worth $440m. However, its fate has been unknown since late 2013.

Andrei Kazakevich, director of the Vilnius-based Institute for Policy Studies Palіtychnaya Sfera (Political Sphere), believes that Russia will be the principle source for maintaining the country’s international reserves, because refusal to do so would inevitably entail in a "reformatting" of the Belarus-Russia relationship. "This would not be very favourable to Russia now, because of the

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Eastern Europe February 20, 2015

Stanislav Bogdankevich, former governor of the National Bank of Belarus, also believes that Russia will continue to provide financial support to Belarus. “To obtain a loan from the International Monetary Fund (IMF), it would be necessary to change the existing economic model, to change course. The latest statements by Lukashenko suggest no willingness to do so. He does not intend to abolish manual economic governance,” Bogdankevich tells bne IntelliNews.

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of the ‘Russian World’. In most of them, Belarus is considered a part of it – because of the domination of the Russian language in Belarus, existing traditional ties [with Russia], and the existence of a Union State [Belarus-Russia bilateral integration formation],” Kazakevich says.

After the eruption of the Ukraine crisis and the active intervention of Moscow in the situation there, including military support for the separatists in the Donbas, Lukashenko’s rhetoric towards Russia Belarus has been trying to negotiate a new support has become tougher. “There are some ‘wiseacres’ programme with the IMF since late 2010, when the who claim that Belarus is, as they say, part of the previous stand-by loan programme for the country ‘Russian World’ and even almost Russia. Forget ended. However, the multinational lender has about it: Belarus is a sovereign and independent repeatedly stated that it wants to see “a credible state,” Lukashenko said on January 29. commitment to a comprehensive package of consistent and strong macroeconomic policies and Kazakevich says that Russia’s approach to the deep frontloaded structural reform” in Belarus.

“Russian World” could indeed be a potential threat to the Belarusian state, because the concept “envisages However, the Belarusian government has not the political and cultural domination of Russia over completely abandoned the idea of cooperating with the region which belongs to the ‘Russian World.’” the global lender. A new visit to Belarus by IMF experts is scheduled for March, and the authorities Minsk has also become increasingly ambivalent about could once again raise the question of possible the Eurasian Economic Union (EEU), a trade bloc funding, despite the low chances of a success. recently created by Russia, Kazakhstan, Belarus and Armenia. During his press conference on January “We continue to work with the IMF. In March a 29, Lukashenko said that Belarus could leave the planned mission of the organisation will work in the EEU if the agreements between its member states country to study our situation. We are not ruling out are violated. “If the agreements we have reached are any possibilities as far as financial cooperation is respected, we will honour everything with regard to concerned. But the consideration of these matters the EEU. If they are not respected, we reserve the will need time, at least several months,” Finance right to withdraw from this union,” Lukashenko said.

Minister Vladimir Amarin said on January 29.

However, Lukashenko later toned down his Despite their confidence in Russia’s largesse, the rhetoric. The president said in an interview with Belarusian authorities appear to have started a Russian TV channel on February 14 that the worrying about the Kremlin’s new aggressive policy trade union is beneficial for Belarus and that the towards post-Soviet states. Moscow considers country “sees prospects in it”. On the other hand, post-Soviet countries that have a significant Lukashenko underlined that “if it is too painful and Russian-speaking population and traditional tight [for Belarus], there is a possibility of leaving economic and interpersonal relations with Russia any agreement, even the [EEU].” to be part of the so-called “Russian World”, and in Ukraine it has shown its readiness to defend its As Bogdankevich predicts, “Lukashenko will influence there, even by military force. maintain the eastern vector [of his foreign policy] alongside moderate liberalisation of his relations “There are several interpretations of the concept with the West.”

Eurasia February 20, 2015

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Kazakhstan redrafts budget as it moves towards early presidential elections Naubet Bisenov in Almaty Kazakhstan's rubber-stamp parliament has asked President Nursultan Nazarbayev to hold an early election to extend his power for another five years before the "global crisis" hurts the country's oilbased economy further, potentially destabilising the situation in the country. The initiative comes in the midst of a massive belt-tightening exercise because of the low price of oil and ongoing geopolitical tensions in the region.

Following a motion by the Kazakh parliament's lower chamber, the Mazhilis, on February 18, the upper chamber, the Senate, asked the president on February 19 to hold an early election. President Nazarbayev should now formally accept the request and call for an election or reject the idea.

The Assembly of Kazakhstan's People, a forum for the country's minorities appointed by the president, floated the idea of staging an early election on February 14, citing economic and foreign policy difficulties faced by the country at the moment.

There is a high likelihood that the president will call the election because such unanimous calls from public organisations, parliament and other bodies are widely believed to have been orchestrated by the president himself.

Nazarbayev seems to fear that the economic difficulties the country is currently facing will affect the socio-economic situation in the run-up to the presidential election in 2016, creating an unfavourable background for his re-election.

As the country's first president Nazarbayev is

exempt from a two-term limit set for presidents.

He was re-elected in 2011 with 95.5% of the vote on a 90% turnout. Kazakhstan has never held elections judged fair and free by the Organisation for Cooperation and Security in Europe.

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businessneweurope I Page 15

shortfalls worth nearly KZT1tn ($5.1bn) if the average price of oil is $50 per barrel in 2015.

to jump from $12,800 in 2015 to $17,600 in 2019, according to Dossayev.

Presenting budgets cuts announced by the president on February 11, National Economy Minister Yerbolat Dossayev told MPs on February 19 that the money had been envisaged in the 2016 central budget.

Industrial output is forecast to contract by 0.3% year on year, while growth in the services sector is expected to slow down to 2.2% in 2015. Exports are estimated to fall by 44.7% to $43.6bn, while imports by 21.8% to $34.7bn in 2015, he noted.

"Issues relating to the election in the current situation are needing [to be solved] and we support [the idea]. There is not much money we could speak about because it is an enormous expenditure," Dossayev explained to MPs. "For 2016 money was envisaged for holding a presidential election and it is slightly over KZT5bn," he said, in remarks carried

by Tengrinews.

Dossayev also said that under orders from the president the government had redrafted the central budget, reducing the forecast average oil price from $80/b to $50/b in 2015-17 and to $60/b in 2018-2019.

"Taking account of a reduction in forecast GDP and imports, at the price of oil at $50/b in 2015, the central budget's revenue (without including transfers [from the National Fund]) is estimated at KZT3,219.9bn [$17.5bn], which is KZT939.6bn [$5.1bn] lower than the earlier approved target," he said. According to law, the government can tap the National Oil Fund, which accumulates revenue from the extractive sector. Transfers from the fund to the central budget will stand at KZT1.7tn ($9.2bn) a year in 2015-17.

Dossayev said GDP growth was now estimated at 1.5% in 2015 (3.3 percentage points lower than the Novemberestimates), 2.2% (3.1 pps lower) in 2016, 3.3% (3.4 pps lower) in 2017, 3.6% (2.2 pps lower) in 2018 and 4.1% (2.4 pps lower) in 2019.

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Eurasia February 20, 2015

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Mystery of Karimov's disappearance enlivens Uzbek presidential election Olim Abdullayev in Tashkent The campaign to elect an Uzbek president on March 29 - or rather re-elect the ageing incumbent Islam Karimov - is in full swing, but state-run television has only just shown Karimov accept his nomination, almost two weeks after the event took place.

On the night of February 18 Uzbek state-run television's flagship Uzbekiston channel showed the February 6 footage of Karimov's acceptance speech at a conference of the Uzbekistan Liberal Democratic Party (UzLiDeP), which formally nominated Karimov, 77, for another term.

That the footage wasn't shown the same day the conference took place on February 6, and that state-run official mouthpieces did not provide excerpts of the speech, had given rise to rumours about the health of Karimov. He was last seen in public on January 27 when he received credentials from the new US ambassador in Tashkent, Pamela Spratlen, in his official residence Oksaroy.

The rumours were also fuelled by the website run by the People's Movement of Uzbekistan, headed by the president's arch-rival Muhammad Salih, who has been living in exile abroad after he lost the country's first ever genuinely contested presidential election to Karimov in December 1991. The website claimed that the president fainted at a dinner on January 28. It claimed that Karimov was "in a coma".

The website gained notoriety in March 2013 when it reported that the president suffered a heart attack after an argument with his eldest daughter Gulnara, who is now believed to be under house arrest for her public spats with the country's influential figures, including her mother Tatyana and sister Lola Karimova-Tillyayeva. A week later Uzbek television showed Karimov, safe and sound,

receiving Kazakh Foreign Minister Yerlan Idrisov to prove that Salih's information was false.

This time, however, the absence of Karimov, who is believed to suffer from cancer, had raised serious questions about his wellbeing.

The semi-official Uzdaily.uz business news website reported on February 6 that Karimov attended the UzLiDeP conference, which endorsed the incumbent's nomination for another five-year term. But, according to the Moscow-based Fergana News website, no other official agencies, including the presidential press service, national television stations and the UzA news agency, mentioned that Karimov attended the conference.

Ordinary people in Uzbekistan, who usually shy away from discussing politics in public with strangers because of their fear of omnipresent National Security Service agents, suspected that Salih might prove right this time. On the ground, many fear that if Karimov leaves office suddenly, this could cause damaging instability. Exposed to a barrage of state propaganda that presents Karimov as the guarantor of "peace and stability", they say they can't see anyone who could take his place.

Karimov's absence has again sparked talk about the question of the eventual presidential succession - which Tashkent had plainly hoped to quell by having him stand in a new election. In the event of his serious illness, a behind-the-scenes succession battle may break out (or may well already be underway).

Ironically, whether Karimov is seriously ill or not, his absence from his own election campaign for yet another presidential term has actually added a little intrigue to an otherwise dull and routine procedure in Uzbekistan.

Central Europe February 20, 2015

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Czech central bank shrugs off president’s comments

Robert Anderson in Prague The Czech Central Bank (CNB) is standing by its policy of keeping the Czech crown weak - despite criticism this week from President Milos Zeman because of the significant risk of deflation.

In a speech at the CFA forecasting dinner in Prague on February 19, Miroslav Singer, central bank governor, said: "We have said we are concerned with the domestic demand at the current juncture. We are still in a highly deflationary environment and it is difficult to disregard such a risk."

The Czech inflation rate is currently 0.1% and has been under the central bank’s 2% target for two years, depressed by the Eurozone’s weakness and the fall in the oil price.

The central bank has been using verbal interventions to prevent the crown strengthening since November 2013 because its key interest rate is already virtually zero (0.05%). On February 5 it said it did not expect to change its policy of keeping the crown weaker than CZK27 to the euro before the middle of 2016. There has even been speculation that it may target a weaker level of the crown.

On February 18 Zeman accused the central bank of using non-standard policy tools and of impeding the country’s hopes of adopting the euro.

“I’ll do everything to ensure that this respectable institution is filled in the future with people who will not do unnecessary experiments with the Czech economy and will support the country’s entry into the Eurozone,” said the president, who

has the sole right to appoint members of the bank board.

Zeman has claimed several times that the CNB’s policy to keep the koruna weak is an intentional move to delay the country’s entry into the single currency.

Zeman, as well as the ruling Social Democrats, support prompt adoption of the euro, while the central bank board – which was appointed by his predecessor, the Eurosceptic Vaclav Klaus – is much more hesitant. Opposition to euro adoption in the country is also high, with around 75% opposed, according to polls.

Zeman, however, will have chosen five of the seven-person board of the bank before the end of his first term in March 2018.

A decision on joining the euro – which the country is obliged to do under the terms of its EU Accession Treaty - will only probably be made by the next government. The governing coalition has decided not seek to adopt the euro during its current term, which lasts until October 2017, and, according to an agreement with the central bank in December, will not set a target date or enter the ERM II this year.

When it does so, the exchange rate should be much stronger than it is currently, Eva Zamrazilova, a former central bank board member, told Czech television on February 19."The crown has room to firm vis-a-vis the euro in the long run and so we should not move quickly

Central Europe February 20, 2015

to join the euro," said Zamrazilova.

Zeman’s comments were criticised by Finance Minister Andrej Babis as an “unacceptable” interference with central bank independence.

Babis’s Ano party is currently leading opinion polls.

The president’s intervention pushed the crown up 1.4% on February 18 to 27.185 per euro - the biggest intraday gain since November 2011 and the strongest level since 2013, according to Bloomberg - but it retreated again on February 19.

businessneweurope I Page 18

In a note on February 19 Societe Generale said it expected the crown to weaken further: “With the looming period of dividend repatriation with the real negative flow, and with lower inflation versus the CNB's expectation, we expect EUR/CZK to rise back toward roughly the upper end of the January's trading band, i.e. we target EUR/CZK 28.00.”

Zeman’s comments are also unlikely to have a long-term effect on the central bank board. “If Zeman had said he liked what we were doing, then we would have been in real trouble,” said a source close to the board.

Slovak politics braced for shocks from Swiss HSBC

Benjamin Cunningham in Bratislava A trove of leaked documents from HSBC's Swiss subsidiary include revelations about 147 accounts with ties to Slovakia. A spike in new accounts as the country went through a privatisation drive in the early 2000s suggests potential political fallout if investigations are able to turn up details.

Some 40 Slovak-linked accounts were created at the unit in 2002, around the time Slovenske Elektrarne (SE) and gas utility Slovensky plynarensky priemysel (SPP) were in the middle of being privatised. This is drawing particular attention, and Slovakia's National Crime Agency (NAKA) says it has requested additional information from law enforcement agencies in Switzerland, the UK and the Czech Republic.

NAKA said on February 11 it will investigate

based on its mandate to prevent money laundering and the financing of terrorism.

HSBC computer analyst Herve Falciani turned over details of an estimated 30,000 accounts holding nearly $120bn in assets to French tax authorities. As the number of Slovak-linked accounts emerged, the Financial Administration said the country's special "Tax Cobra" unit, will investigate, and that Bratislava has requested all relevant documents from Paris. Falciani claims there is more to come.

The case puts Slovak politics on alert. With just a year until the 2016 general election, the revelations have the potential to influence the landscape significantly, says Grigorij Meseznikov, president of the Institute for Public Affairs in

Central Europe February 20, 2015

businessneweurope I Page 19

Bratislava, largely through collateral damage. "Of "Potential rivals can use it as an argument course much will depend on the names on that against these parties, even if it is some older list," he admits. person whose name appears on the list," Meseznikov suggests.

An estimated 60 clients with ties to Slovakia are said to hold $48.7mn in those 147 accounts.

The SDKU is disintegrted, having been gutted Six Slovak passport holders are directly linked just ahead of the 2010 election by the Gorilla to accounts, many of the other accounts are scandal, which also centered on allegations anonymous or affiliated with shell firms. Sme of corrupt privatisation. Previously Slovakia's reports that the largest single account holds largest party on the right, it now polls at around $10.5mn.

2% support, and is unlikely to be a major factor in the upcoming election. KDH however drew A number of the accounts date back to 1998, 10.9% in a Focus agency poll released February when authoritarian prime minister Vladimir 12, good enough to finish third.

Meciar was still in charge. Then a wave of new accounts was created in 2002, during Mikulas The chance that a sudden revelation closer to Dzurinda's second term as prime minister. In election time could influence the outcome has addition to SE and SPP, several regional energy some recalling the Gorilla case, which delivered companies and water utilities were privatised a landslide victory for Fico and Smer just months around the same time. later. The left-leaning party remains frontrunner to lead the next government, polling at 35.5%, but Another spike in new accounts took place in the same Focus poll indicates it would likely need 2005, just ahead of general elections in spring a coalition partner.

2006. That vote saw Dzurinda's centre right SDKU beaten by the current centre-left Prime The leading party on the right, Siet', polls at Minister Robert Fico and his Smer party.

11%, with KDH closely behind. At the same time it would prove difficult to directly implicate The suspicion that the Swiss accounts are many current political actors with wrongdoing connected to the privatisation efforts will not help going back to 2002. Siet', for example, was only those on right as they head to the 2016 vote. In founded in 2014. "It does not seem to me that it 2002, the SDKU governed alongside the Christian would have a similar dynamic" to the Gorilla case Democrats (KDH), the Party of the Hungarian in the 2012 election, Meseznikov sums up.

Community (SMK-MKP) and the largely defunct Alliance of the New Citizens.

Southeast Europe February 20, 2015

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Moldovan minority government wins vote of confidence

Iulian Ernst Moldova’s parliament endorsed PM-designate Igor Gaburici (independent) and his cabinet by a majority of 60 votes out of 101 on February 18, putting an end to the political uncertainty since the parliamentary elections on November 30.

Gaburici represents a pro-EU minority coalition, informally supported by the moderate Communists (PCRM) of Vladimir Voronin. However, the government's ability to pursue radical reforms, particularly judicial reforms that are critical for the country, is debatable given its fragile support in parliament.

Besides the structural reforms that are to be addressed by the newly formed cabinet, it faces major economic and financial problems, most visible in the currency’s depreciation of 25% in the year to date, but also in the alarming situation in the banking sector.

The country’s reintegration - the settlement of the situation in the separatist region Transnistria - is a longer term issue, however equally critical, and here the ambiguous position of Gaburici has created uncertainty. MPs of the Liberal party (PL) have reproached Gaburici's previous statements in favour of federalisation of the country as a solution to Transnistria’s desire for independence.

Gaburici is the second nomination of the minority coalition formed by the Liberal Democrat Party (PDLM) and Democrat Party (PD), which holds 42 seats in parliament, after former and acting

PM Iurie Leanca (PLDM) failed to get lawmakers’ support a week earlier.

Unlike Leanca, Gaburin has won the support of the majority of MPs of the Communist party, judging from the number of votes.

The structure of the government and the ruling strategy were nearly identical with the ones proposed to lawmakers by Leanc, except that the candidate for the ministry of justice, Igor Efrim, was replaced by Vladimir Grosu.

Rumours in the local media, and reiterated by MPs of both opposition parties PL and the radical Communist PSRM in the debates preceding the vote on the government, suggest that the PCRM had agreed long ago with the minority coalition over the nomination of Gaburici. Gaburici’s resignation from telecom company Azercell last December was allegedly prompted by such plans.

While gaining the Communists’ support, the minority ruling coalition lost the support of Leanca – who has hinted that he voted against Gaburin and would consider his further steps in the days to come. The decision to form a minority coalition also appears to be unpopular with the pro-EU voters, who had hoped for a government including the third pro-EU party, the Liberal Party of Mihai Ghimpu, who is seen as a guarantee for reforms and ranks comparatively stronger in the perceived corruption polls, compared to the key leaders of the parties in the minority coalition.

The political turmoil over the past two months and

Southeast Europe February 20, 2015

half has contributed to the plunge in households’ and investors’ confidence, which have aggravated the fundamental economic problems of lower remittances and weaker external demand. The major problems in the banking system surfacing over the past couple of months have also undermined the credibility of the central bank and the local currency.

Moldova’s currency weakened by nearly 10% against both the euro and the dollar in the two trading sessions of February 16 and February 17, under the official exchange rates calculated by the central bank based on interbank deals.

The central bank has hiked the monetary policy interest rate by an unprecedented 5pp to 13.5% in response to the currency’s steep depreciation.

businessneweurope I Page 21

plunge on household's excessive behaviour over the currency. Households’ sales of foreign currency accounts for 78% of companies' foreign currency demand, Dragutanu explained.

To get to the bottom of the banking crisis, Moldova’s central bank said on January 31 that it had selected Kroll Associates to conduct preliminary investigations into the operations of the three banks currently under special administration - Banca Economii (BEM), Banca Sociala and Unibank.

The central bank cited suspect transactions as its grounds for putting the three banks under special administration. Financial statements issued by the banks at the end of November indicate that massive transfers abroad of funds The fundamental causes of the exchange rate originating from the three banks were carried out. re-alignment are foreign trade and remittances, The size of the suspected transfers is estimated according to central bank governor Dorin Dragutanu. at MDL17.8bn (¤937mn) - more than 10% of the The governor also blamed the exchange rate country's GDP.

Failed sale of Zelezara puts at risk Serbia’s IMF loan deal

Gabriela Gandovska in Sofia The Serbian government's sale of Zelezara from Esmark of the US that the plant would not be closed once the raw material currently in stock was Smederevo, the country's only steel mill, has collapsed, putting at risk Serbia’s loan used up. The plant employs some 5,000 people. agreement with the International Monetary Fund.

"It has been a difficult decision for us," Vucic Prime Minister Aleksandar Vucic said on February told a news conference. "We’ve been working for 17 that the government did not receive a guarantee months to save Zelezara."

Southeast Europe February 20, 2015

Vucic said the loss-making steel mill will remain in state hands and the government will look for another partner. The state will reshuffle Zelezara management by end-March, cut costs and aim to increase production to over 1mn tonnes this year from some 340,000 tonnes in 2014.

The government's plan, however, needs backing from the European Commission, as Serbia has committed under its pre-accession agreement with the EU to end financing for the steel sector as of February 1. The failed sale also puts at risk Serbia’s loan agreement with the International Monetary Fund. Belgrade has pledged to cut subsidies to state-owned companies as a condition to receive a three-year, ¤1bn stand-by loan. The IMF will decide on the agreement on February 23.

“Given the fact that unprofitable companies’ restructuring is one of the key fiscal consolidation measures, any delays or halted processes would raise investors’ eyebrows and could pose risks to securing the IMF deal,” Hypo Alpe-AdriaBank said in an e-mailed note to Bloomberg.

“Such scenarios could cause adverse effects and increase fiscal slippage risks.”

businessneweurope I Page 22

The government has pledged previously to stop subsiding the company's operations as of 2015 and included no state aid for it in this year's budget bill. Previously, Zelezara was costing the state budget some $10mn a month.

Zelezara reportedly owes ¤260mn to banks, ¤120mn to suppliers and a further ¤145mn for raw materials. The steel mill is one of the largest of the 500 companies Serbia needs to sell or close to trim its budget gap.

Esmark filed the sole valid bid in the tender to buy 80% of Zelezara in January, saying it plans to invest $400mn in the next five years and to keep all of its workforce. In 2015 alone, it vowed to invest $28mn to restart the second blast furnace that has been idle for some two years.

Despite its financial troubles, Zelezara managed to generate ¤201mn worth of exports last year, emerging as Serbia's fourth biggest exporter in 2014. In early 2012, Serbia bought back Zelezara from its previous owner US Steel for the token price of $1 to prevent its collapse.

Opinion February 20, 2015

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Minsk deal offers Ukraine tough longterm opportunities STOLYPIN:

Mark Galeotti of New York University With the ceasefire brokered in the second Minsk summit seemingly in trouble, the gap between a brittle and temporary ceasefire and a true and lasting peace remains broad and unlikely to be bridged by Minsk-2. Instead, what we are likely witnessing is the transformation of the conflict to a new stage, one dominated by a longer-term struggle over governance as much as warfighting capability. This is a struggle in which Moscow begins stronger, but Kyiv actually has some opportunities to level the field.

The Minsk-2 accords lay out a roadmap for peace which envisages first a withdrawal of heavy weapons from the front line, then local elections in the rebel-held areas and also constitutional changes in Kyiv to decentralize powers to the regions, and then the return of control of the border to the government. This all makes sense in theory, but as many have already noted, there are numerous weak links in this chain of events.

The rebel leaderships, for example, have hardly demonstrated themselves to be self-effacing servants of the democratic principle. They are unlikely to allow a free and fair election campaign in the regions under their guns, let along surrender or share power if others won. These will be at best tainted and at worst wholly fraudulent snap elections, which Kyiv and outside observers will essentially have to accept or watch the whole peace process unravel. Given that Moscow is also relying on the local leaders in this new confederalized Ukrainian state to be its agents and veto, especially in case of renewed moves to align the country more directly with the west, Russia also will need to ensure its allies win.

Furthermore, while Ukrainian President Petro Poroshenko may be willing to commit Kyiv to this constitutional reform, he needs to get it through a fractious and divided Rada. Already nationalists have been making bloodcurdling threats, not least to assassinate any pro-Russian legislators elected from the Donbas region in the east, and they may well spearhead resistance to reforms that appear to reward rebellion. Should the ceasefire fail, then the risk is magnified that the nationalists might be able to surge on the resulting public anger and push for an even more intransigent line.

Without these changes, without accepting deeply questionable local elections in the south-east of Ukraine, and without being able to control its own soldiers, including the notoriously freewilled ultranationalist militia units, then Kyiv will be unable to enjoy the fruits of Minsk-2. Not least among them is regaining control of the border over which currently freely flow Russian troops, volunteers and weapons.

There is thus a depressingly good chance that this ceasefire will not hold, especially not long enough for the full peace process to be carried forward.

Whom does this benefit? Moscow may well be calculating that this is in its advantage. The outcome is likely to be a frozen conflict, the creation of local pseudo-states under its control that are not valuable in themselves – unlike Crimea, the southeastern Ukrainian campaign was never intended as a simple land grab – but as instruments to continue to destabilize and influence Kyiv. With part of its country outside its control, and an economy continuing to be depressed by the war and Russian maneuvers, then regardless of its aspirations,

Opinion February 20, 2015

Ukraine would not be joining Nato or the EU in the foreseeable future.

Meanwhile, the Kremlin is likely calculating that without actual fighting taking place, Western attention will soon waver and redirect. Some new crisis will monopolize public attention, perhaps one in which Moscow’s help might be convenient. Those convenient voices calling for a more placatory policy would be more likely to be heard. Businesses suffering because of sanctions would lobby for a relaxation. At the very least, the pressure to arm and fund Kyiv will diminish.

Of course, an unspoken central assumption of the Kremlin’s is that this is a moment of temporary and unexpected weakness. This is a product of the fall in oil prices, as well as the unusually sustained and vigorous Western outrage at events in Ukraine, stoked by the “bad luck” – as the Kremlin would see it – of the MH17 shootdown. Thus, a delaying action makes tactical sense. If Kyiv cannot be forced to acknowledge Russian hegemony now, freeze the conflict and wait a while for the correlation of forces and circumstances to be more propitious.

However, it could well be that time is not on Russia’s side. Already, the economic crisis is having an impact on the security apparatus. The intelligence and law enforcement agencies are having to absorb cuts of 10% or more in their budgets and some military procurement plans are quietly being put back. Russia’s economic woes are not going to end soon, as so the costs of supporting client states, continued military reform and balancing the guns vs. butter equation – perhaps best regarded as “might abroad vs. popularity at home” – will become all the more onerous.

Ukraine, of course, hardly looks in a good state.

Even with the International Monetary Fund's (IMF) latest $17.5bn loan, it faces lean, hard years. To that can be added the challenges of a still largely unreformed bureaucracy (sad to say, but Ukraine’s is more corrupt and arguably even less efficient than Russia’s), sharp political divisions, and unrealistic public expectations.

businessneweurope I Page 24

However, with a right combination of domestic political will and external financial and technical assistance – and it is hardly a given that either will actually materialize – then it is not impossible that the country will begin to find its feet. In this context, then Kyiv actually can begin slowly to mount a counter-attack on three fronts.

The first is geopolitical. Kyiv has been assiduous in courting the West, but as a victim more than a partner. If the Ukrainians begin seriously to start tackling the fundamental economic, political and administrative challenges they face, while maintaining a strong but dignified stance towards Moscow, they may begin to gain serious credibility in the West. At present, they are, to be honest, viewed with more pity than respect.

The second is governance. Whatever the flaws of the actual vote, it is hard to question that most Crimeans genuinely did want to join Russia. This owes less to historical affinity than to a sense that Kyiv had failed them for more than two decades.

If rump Ukraine can develop as a better-run, transparent, working liberal democracy and market economy, then the people of the southeast may well see their future in the west. Just ask the ethnic Russians of the Baltic states, who may grumble about “prejudice” against them, but have no desire to head to Russia instead.

Finally, Kyiv could use the time to prepare the ground militarily, too. One of many reasons for its lack of success in the war has been that its underfunded and undertrained army was still in many ways a shadow of its Soviet self, geared for a mass war in the west rather than counter-insurgency in the south-east. Over the coming months, even if Kyiv cannot afford to mobilize larger forces, it can at least retrain, reorganize and rearm for this mission.

In short, Minsk-2 is just a lull in the war, not an end.

However, while Moscow clearly feels it is getting the best out of the deal, it does offer Kiev some interesting opportunities. But only if it is serious, daring and determined enough to take them – and the West continues to be willing to help.

Weekly Lists February 20, 2015

bne: Infrastructure Enel suspends plans to sell Romanian assets bne IntelliNews

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Italian energy group Enel has suspended temporarily the sale of its Romanian holdings, Romanian news agency Agerpres said on February 18, quoting the company’s response to its inquiry on this topic.

The sale of Romanian assets was part of a broader plan aimed at generating ¤4bn by the end of 2014, with the aim of reducing group’s consolidated debt, the Italian company explained. Since the target was reached after the sale of other assets, the group will decide on the continuation of assets sale programme as part of a new strategy. More details about this will be made public in March, company’s representatives informed.

Slovakia looks to use sale of Slovak Telekom stake to fund power sector ambitions

Slovakia looks to be solidifying plans to try to sell its minority stake in Slovak Telekom and use the proceeds to take a controlling interest in power producer Slovenske Elektrarne (SE), with the prime minister giving the scheme his backing on February 17.

bne IntellinNews

Suggestions that Bratislava could use the funds from the sale of its 49% stake in the telecommunications company to expand the state's 34% stake in SE had previously been opposed by senior members of the government. However, a spokewoman for Prime Minister Robert Fico suggested that has now changed.

"The government is searching for ways in which, at the expense of an unusable minority share in [Slovak Telekom], the state can extend its influence in other companies, such as Slovenske Elektrarne," Beatrice Szaboova told Hospodarske Noviny.

Weekly Lists February 20, 2015

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure.

For more information, please visit the website at www.bne.eu.

businessneweurope I Page 26

bne:TMT

Russia's leading on-demand music streaming service Zvooq has dropped its paywall in an attempt to drive music piracy out of the market.

Russia’s leading music service Zvooq takes on pirates

The company, founded in 2011, has released free versions of its apps for Android and iOS, allowing users to listen to music from its entire 20 million licensed track catalogue without restriction or the need to pay. The company says it hopes to switch Russians away from pirated music towards licensed content.

bne IntelliNews

Yandex increases profits but warns of slowdown in Q1 bne IntelliNews

Russian search engine Yandex posted an adjusted net profit increase of 13% y/y to RUB4bn ($70.5mn) in Q4/14, with revenues growing by 21% y/y to RUB14.7bn, adjusted EBITDA gaining 18% y/y to RUB6.1bn, and adjusted EBITDA margin of 41%. For 2014 overall adjusted net profit gained 13% y/y to RUB13.8bn, with revenues growing by 29% y/y to RUB50.8bn.

At the same time the company expects sales growth to slow down to 15% in Q1/15Â amid the Russian economy's current broader struggle

Weekly Lists February 20, 2015

bne:Banker Polish watchdog places strict restrictions on RBI over sale of subsidiary bne IntelliNews

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure.

For more information, please visit the website at www.bne.eu.

businessneweurope I Page 27

Poland's banking regulator KNF has issued strict conditions for its approval of Raiffeisen Bank International's (RBI) attempt to sell its local unit. The Austrian bank said earlier this month it will look to sell Polbank as part of a CEE-wide scheme aimed at reducing riskweighted assets.

RBI must fulfill the conditions made to the Polish Financial Supervision Authority, head Andrzej Jakubiak told the Polish Press Agency on February 19. In 2012, when Raiffeisen Bank Polska took over Polbank, KNF demanded the merged bank be floated on the Warsaw Stock Exchange (WSE) by the middle of 2016.

The regulator says it will now insist on the move before approving any exit from the country's eighth-largest lender by the Austrian parent. RBI says it still plans to list in Poland, and may accelerate the offer.

Fitch keeps Russiabased International Investment Bank at 'BBB-'

The International Investment Bank (IIB), the Soviet equivalent of the European Bank for Reconstruction and Development (EBRD), has retained its investment-grade credit rating from Fitch Ratings. After placing the IIB on Rating Watch Evolving (RWE) in mid-January, Fitch on February 18 affirmed the investment grade rating of the bank at 'BBB-', improving its outlook to Stable.

bne IntelliNews Fitch's decision to maintain IIB's 'BBB-' rating chuffed the bank no end, as the decision effectively decouples IIB from the weakening Russian sovereign rating story and is recognition of the improvements the bank has made over the last couple of years.

Weekly Lists February 20, 2015

bne:Credit Hungary at risk of dropping back into EU's excessive deficit procedure bne IntelliNews

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure.

For more information, please visit the website at www.bne.eu.

businessneweurope I Page 28

Hungary failed to make any reduction in its debt in 2014, with the ratio of 77.3% of GDP at the end of last year the same level at which it finished 2013, preliminary data from the central bank showed on February 17. That puts the country at risk of dropping back into the EU's excessive deficit procedure.

In nominal terms, Hungary's debt rose in 2014. Consolidated gross debt stood at HUF24.52tn (¤80bn) at the end of last year, up from HUF23.1tn 12 months previously. On a quarterly basis, however, the debt shrank from HUF25.1bn in Q3, when it accounted for 80.3% of the GDP. The European Commission warned Hungary in December that it risked breaching EU rules as the pace of debt reduction looked to be too slow. Hungary has the highest public debt in Central Europe and the government is seeking to cut it to 75.4% of economic output by end-2015.

Azeri central bank switches manat peg to euro-dollar basket

The Central Bank of Azerbaijan (CBA) has announced that it will drop pegging the manat to the dollar and move to an exchange rate policy of a dual-currency basket with the dollar and the euro, AzerNews reported on February 16.

bne IntelliNews The Azerbaijani manat has been effectively pegged to the dollar at just over AZN0.78 per dollar since mid-2011, and it has managed to strengthen against both the dollar and the euro despite falling oil prices badly affecting the national currencies of regional countries, including Kazakhstan, Georgia and Russia.

A central bank official told Reuters that the new dual-currency basket would probably be split 30% in euros and 70% in dollars, in line with Azerbaijan's exports. The bank will also set a trading corridor so that the bank can intervene to keep the exchange rate within that corridor.