bne:Newspaper - January 9, 2015

Content: 2 Top Stories 5 The Regions This Week 10 Eastern Europe 12 Eurasia 15 Central Europe 18 Southeast Europe 21 Opinion 24 Lists

bne:Newspaper Follow us on twitter.com/bizneweurope January 9, 2015

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Poland bites bullet on mine closures

Wojciech Kosc in Warsaw The Polish government has defied expectations that it would not dare to do anything about the unprofitable coalmining sector a few months before the general elections. The new plan for the sector’s key company is out, but the tough part – getting coal’s powerful unions to agree to it – lies ahead.

On January 7, the government decided that the unprofitable coal giant Kompania Weglowa (KW),

Europe’s largest coal producer, will be liquidated and its healthier assets will be moved to a new company at a cost of PLN 2.3 billion (¤534 million) in 2015 and 2016.

The plan boils down to dividing KW’s assets into three groups.

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Moldova’s central bank places third bank under special administration bne IntelliNews Moldova has put 30% of its banking sector by assets under central bank administration after a series of large transfers between three banks that have left them short of liquidity and could force the country – Europe’s poorest – to pick up a huge bill.

On December 30 the central bank said that it had put in place special administrative procedures,

including external management, at Unibank, the country’s fifth largest bank. On November 29 it took similar measures at Banca de Economii a Moldovei (BEM) and Banca Sociala.

The central bank cited unusually large deals involving Unibank, which has a 9.8% market See page 3

Top Stories January 9, 2015

Poland bites bullet on mine closures The first group will be nine coal mines that the government assessed could still be profitable.

They will be moved to a new special purpose vehicle (SPV), owned by state coal exporting company Weglokoks. This move will, according to the government, create a new strong company able to “compete on the European coal market”.

The second group consists of four coalmines that the government deemed no longer viable. These coalmines will be transferred to another SPV for closure, which has angered coal trade unions.

The third group is non-core assets that will be sold or liquidated.

The four coalmines that will be closed currently employ about 11,000 people. The government proposes that 6,000 of them will get new jobs in the new healthy entity, while the remaining 5,000 could take advantage of various protection programmes, including leaving the job for a oneoff payment equal to up to 24 monthly salaries.

The final step of the plan would be to merge the new entity with the Polish energy sector, although no details were given about the merger.

The decision ends months of speculation about the future of the troubled KW. The government said it had no choice but to liquidate KW or it

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would spiral into “uncontrolled bankruptcy”, even as soon as by the end of January.

Prime Minister Ewa Kopacz told the press that the new entity, to which the viable coal mines will be moved to, will be strong enough to attract investment from the Polish energy sector, which is about 80% reliant on coal for energy generation.

“This process will lead to consolidation of the energy sector with our mining industry,” Kopacz said, as reported by PAP. She did not say, however, which energy companies will invest in the new entity.

According to data presented by the government today, KW has been losing PLN 200 million (¤46 million) a month recently in its operations, representing between PLN 42-66 (¤9-15) per tonne of extracted coal. KW’s loss for the 11 months of 2014 stands at PLN 1.1 billion (¤255 million). The company had debts of PLN 4.2 billion (¤975 million) as at the end of November.

The plan now has to be approved by the parliament, but a much more difficult challenge will be to get the mining unions to agree to it.

Union leaders were quick to make it clear on January 7 that the plan is not what they expected.

“No-one has saved any company by liquidating it,” said Waclaw Czerkawski, deputy head of the Miners Trade Union (ZZG), as quoted by industry website wnp.pl. “This plan will not change the situation one iota because it will meet a firm ‘No’ from unions and miners themselves,” he added.

Top Stories January 9, 2015

Moldova’s central bank places third bank under special administration share by assets, BEM, the country’s third largest bank, and the smaller Banca Sociala, The size of the resources transferred is around MDL17.8bn (¤937mn) - more than 10% of the country's GDP. All three banks are reportedly controlled by Moldovan businessman Ilan Shor, the head of BEM’s managing board, who is linked with Russian banks and investors.

However, their shareholder structures are unclear since ownership disclosure requirements are loose in Moldova for owners that hold stakes of under 5%. Nearly 40% of Unibank is controlled by eight entities registered in Australia, South Africa, UK and Cyprus, each with shares of slightly under 5% - the limit above which shareholders need special endorsement from the monetary authority.

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lack of transparency and shallow supervision.

Legislation restoring the central bank’s powers was recently enacted but enforcement of regulatory requirements remains weak, the International Monetary Fund (IMF) remarked on December 17 at the end of its post-programme monitoring review.

Overall, the banking sector on aggregate is wellcapitalised, liquid, and profitable, the Fund added.

While the system reported aggregated profit in January-November, capital adequacy dropped by 8.2pp to 14.8%, below the 16% statutory level, at the end of November. Some banks also face major liquidity problems, as revealed by the significant emergency loans provided by the central bank and mentioned by the Fund.

Under special administration, the central bank appoints managers and the banks cease taking deposits and extending loans for a period of nine months.

CHANGES ARE GOOD

After the fund transfers, Banca Sociala reported on December 25 that its assets expanded by 3.2 times month-on-month to MDL20.44bn at the end of November, according to the central bank’s monthly reports. The bank, previously Moldova’s fifth largest by assets, claims that it has overtaken Agroindbank to become the country’s largest lender. The rise in Banca Sociala’s assets during November almost equalled Agroindbank’s entire asset base.

It is possible that the unusual rise in assets was the result of complex financial operations involving Banca Sociala, BEM and Unibank, all three of which are controlled to various degrees by Shor.

There is speculation that the final purpose of the operations is the transfer of resources to foreign namely Russian - partners.

Moldova’s troubled banking system is plagued by fraud and money laundering, concealed by the

YOUR BUSINESS PARTNER. www.rbinternational.com

Top Stories January 9, 2015

A broad audit will start within two weeks to uncover the problems in Moldova’s banking system, acting Prime Minister Iurie Leanca has said, according to Unimedia. The audit will be carried out by one of the largest global firms, he added.

In September, BEM was planning to take over Unibank, but the central bank rejected the deal, citing incomplete documentation. The state's stake in BEM was initially diluted to 33.4% in August 2013 and in early 2014, while Russia's VEB Capital consolidated its position to 24.9%. The capital increase was, however, cancelled in court in November 2014 and the state re-gained majority control with 56.13%. However, Shor, who was appointed in spring of 2014 by the Russian investors, remains head of the bank's managing board.

Unofficial sources quoted by News Maker daily estimated at the end of November that the liquidity needs of the three troubled banks amounted to MDL14-15bn, which is some 13% of the country’s

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GDP or half of the government’s annual budget.

According to the IMF, the central bank had already extended emergency loans to BEM and BS equivalent to 3.5% of GDP to help them honour inter-bank liabilities and repay some ¤33,000 per deposit account, well above the ¤316 guaranteed by the existing insurance system. A capital injection on this scale would be needed if the three banks were to be financially restructured, but they could also be closed down or sold, sources said.

Nonetheless, finding a private investor under current circumstances is problematic, while closing down the banks would severely hurt depositors. The deposit insurance system in Moldova is underdeveloped and it could cover only a very small part of households’ savings, within the limit of MDL6,000 (¤316) per deposit.

Less than 10% of households’ deposits were guaranteed by the system at the end of 2013, according to the latest annual report from the country’s deposit guaranteeing body FGDSB.

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The Regions This Week January 9, 2015

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Central Europe Lithuania joined the euro on January 1, completing the entry of Baltic states to the single currency. While the population remains unconvinced, Vilnius pushed the move through, insisting it will help raise investment and drop borrowing costs. It is also keen to plug itself deeper into Europe as tension with Russia continues.

Gergely Gulyas – known as the legislative enforcer for PM Orban – demanded Hungary's laws on public assembly should be changed to limit the length of demonstrations. The official denied that the call is connected to the ongoing series of protests against the government.

The Czech president's chancellor is struggling to explain a cut price property purchase. Vratislav Mynar bought the Prague villa for just CZK5.5mn from a lawyer for political "godfather" Roman Janousek, despite it having been sold fro CZK8mn over a decade ago.

Polish doctors went on strike this week, objecting to new cancer treatment procedures and pay. Around 15% of GP surgeries were shut through the week, although the government announced it had reached a compromise in crisis talks.

Latvia's flagcarrier is the most punctual airline in the world, according to OAG analysts. A full 95% of flights operated by airBaltic – which was the first airline in Europe to introduce an on-time arrival guarantee in early 2009 – arrived on time in 2014, the report says. The Baltic carrier beat Hawaiian Airlines, Austrian Airlines, Iberia and Norwegian Air Shuttle to the title.

Czechs should walk pigs near Mosques, according to a post on Facebook by Senator Tomio Okamura – head of the populist Dawn party.

He also called for a boycott of Muslim owned businesses, saying "every kebab purchased is another step towards burqas". Czechs planned a day of kebab eating for January 9 in response

and Okamura has backpedaled as Dawn party members reacted angrily to the call.

Lithuanians should evacuate or find a weapon and stay inside in the case of war, the defence ministry advises in a new 100-page booklet to be distributed to schools and libraries. The ministry says it has received a huge volume of requests since the conflict in Ukraine began.

Web shops will be banned from deliveries on Sunday in Hungary under the country's new legislation shutting stores on the Sabbath. Large retailers will be forced to close on Sunday's from March.

Speculation that RBI is set to sell its Polish unit persists. Following claims in December that Polbank is up for sale, unnamed sources said this week the Austrian parent could list up to 40% in an IPO as it seeks cash. However, the option of selling to an investor also remains on the table.

Prolonged deflation in the Eurozone and falling oil prices pose risks to the Czech National Bank's inflation target, and are increasing market expectations for policy action to move the koruna to a weaker level.

MOL is in talks with potential buyers for its stake in Croatia's INA, the Hungarian company's group CEO said. The claim raises fears in Brussels and Washington of a potential Russian bid.

France's Societe Generale and local rival Getin are mulling bids for Poland's Alior Bank, unnamed sources claim. Carlo Tassara Group is obliged to sell its 26.2% stake in Poland's 14th largest bank by mid-2016.

Poland is preparing to build a power sector state champion. The treasury minister announced on January 8 that it wants to merge PGE, Tauron, Enea and Energa in a bid to build a company capable of competing on the European stage.

The Regions This Week January 9, 2015

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Southeast Europe Investments in green energy projects amounted to less than ¤1bn in Romania in 2014 versus initial projections of ¤2.7bn, according to energy market regulator ANRE. Romania may miss its target of raising wind power capacity to 4GW by end-2020.

Deputy Prime Minister Ali Babacan said on January 7 that Turkey’s inflation rate may decline below 6% by March-April, if the lira does not depreciate further. Babacan added that the negative affects of currency depreciation and food prices will disappear in 2015.

Croatia’s 2014 budget deficit was lower than expected, according to preliminary figures, the country’s finance minister, Boris Lalovac, said on December 5. The budget gap is expected to have reached HRK12.8bn (¤1.66bn) at the end of 2014, significantly less than the planned HRK15.6bn.

is being developed by local oligarch Tseko Minev.

The agreement, rushed through in August 2014 in the final days of the previous government, would have enabled the ski resort to take over more land within the Pirin National Park.

Employees of Croatian railway infrastructure construction firm Pruzne Gradjevine are preparing to strike over plans for large-scale layoffs. The Union of Croatian Railways claims that employees aged over 50 will be targeted.

Kosovo’s gross external debt rose 6.6% y/y to ¤1.7bn as of end-September 2014, equal to 32.3% of the full-year GDP projection, up from 29.2% of GDP a year earlier. The country's foreign liabilities increased by ¤82mn in the first nine months of the year.

The ongoing cleaning of Romanian banks’ balance sheets appeared to lose momentum The Slovenian arm of Germany's Novem Group in October and November 2014. The stock of has signed a major deal to supply interior parts bad loans dropped by just RON353mn (¤78.7mn) for the new BMW 7-series, which the car giant is compared to a fall of RON6.4bn in Juneexpected to present in September. The head of the September.

Slovenian firm, Matjaz Omladic, sees its revenues jumping by a quarter in the coming year thanks to Serbia’s state-controlled Telekom Srbija has acquired a majority stake in local lender Dunav the BMW contract.

Banka after subscribing close to 70% of its Romania’s central bank has cut the monetary new share issue worth an overall RSD1.55bn policy interest rate by 25bp to 2.5% effective from (¤12.7mn), the bank said. With the acquisition, the January 8, putting pressure on the deposit and loan telecoms company intends to enter the mobile interest rates that have already decreased over the banking sector and catch up with its biggest past couple of years. The move, although broadly competitor, Telenor Serbia, which started offering supported by macroeconomic fundamentals, is mobile banking in September. particularly aimed at encouraging lending.

Turkish Finance Minister Mehmet Simsek said on Bosnia's largest power utility Elektroprivreda January 7 that the Turkish government expects BiH plans to launch the Podvelezje wind farm by a total of TRY1.8bn (¤653mn) additional tax the end of 2016. The ¤71.5mn with farm is being revenues from the recent tax hike on alcohol and partly funded by a loan from German development tobacco products. Ankara expects to collect an bank KfW. additional TRY1.3bn from tobacco products and TRY500mn from alcohol products in taxes.

The Bulgarian government has scrapped an agreement to expand the Bansko ski zone, which

The Regions This Week January 9, 2015

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Eastern Europe German chancellor Angel Merkel repeated that sanctions on Russia will not be lifted until all the conditions of the Minsk summit agreements are implemented – ie until there is a real ceasefire in east Ukraine and Russia withdraws all its fighters and aid there.

best thing he did for the country was hand over control to Putin, according to a VTsIOM poll. 70% of Russians have a negative view of Yeltsin, with only 15% approving of him.

Corruption fighter Aleksey Navalny and his brother Olga were both convicted for Ukraine's economy shrank 7.5% in 2014 in embezzlement in what is widely seen as a "worst year since WWII", according to the central politically-motivated decision. Aleksey was given bank chief. This year economic performance is a suspended sentence, but his brother has been expected to be something similar before returning jailed for three and half years. Navalny removed to growth in 2016. an electronic monitoring tag and broke his house arrest, but the court in Moscow chose to ignore Sharp rises in the domestic price of gas and the the violation. devaluation of the hryvnia currency pushed up inflation in Ukraine to almost 25% last year, its New Russian consumer credit laws came into highest level in 14 years. effect on January 1 that cap the interest rates banks can charge on consumer loans to 30% Russia’s international reserves fell to a five-year on top of the overnight rates. The CBR has low of $388.5bn in the period from December 19 been worried that the fast growth of the highly through December 26, the CBR said, down from profitable consumer lending business was causing a pre-crisis peak of over $600bn. Russia spent a credit bubble. about $80bn on supporting the ruble in 2014.

Putin signed off on a new Military Doctrine that Russia's 2014 oil and gas outputs hit post-Soviet is largely defensive in tone and content, making record highs just as oil Brent crude prices fell little adjustments to the 2010 military doctrine and below $50 for the first time since 2009. Russia retaining most of the same core elements. The produced an average of 10.58mn barrels per day new doctrine notes Russia's strategic interests (bpd), rising by 0.7% helped by small non-state in the Arctic and introduces a reference to nonproducers, Energy Ministry data showed on Friday. nuclear deterrence.

Oil and gas condensate production in December hit 10.67mn bpd, also a record high since the Billionaire philanthropist George Soros called on collapse of the Soviet Union. the EU to pump $50bn into Ukraine and admit that all Europe is "under attack" by Russia. He Russian President Vladimir Putin's rating said Ukraine should be considered as a "defence remains high despite currency crisis. The expenditure" by the EU countries. president's approval dipped in polls slight from 84% at the end of 2014 to 73% in a poll held at the BP continued to deepen its ties with Russian start of January. Rather than undermining Putin's state-owned oil major Rosneft, paying $700popularity, Russians see western sanctions on 800mn for a 20% stake in Rosneft's TaasRussia as an attack on the whole country and have Yuryakh project that will produce about 5.5mn rallied behind Putin. tonnes per year by 2018, or 2.5% of Rosneft's total crude output.

Putin took over from Yeltsin exactly 15 years ago on New Years Eve and 85% of Russian believe the

The Regions This Week January 9, 2015

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Eurasia German Chancellor Angela Merkel said the major powers involved in trying to resolve the conflict in Ukraine are working on setting up a possible meeting in Kazakhstan, but it remains unclear whether it will come together.

2011 was violently suppressed in the western town of Zhanaozen, ending in many fatalities.

Astana Mayor Adilbek Dzhaksybekov has appointed Nurali Aliyev and Yermek Amanshayev as deputy mayors of the capital city. They replaced Aida Balayeva and Kanat Sultanbkeov. The reasons for the reshuffle were not provided. Nural Aliyev is the eldest son of Dariga Nazarbayeva (the president’s eldest daughter) and Rakhat Aliyev, who has been in disgrace for several years.

Armenia officially joined the Eurasian Economic Union (EEU) on January 1, banding together with Russia, Kazakhstan and Belarus in a Moscow-led project meant to counterbalance the EU. As part of a deal signed last October, Armenia will have limited representation in the organization until the end of 2015. Kyrgyzstan is also set to join the trade The National Bank of Kazakhstan (NBK) expects bloc on May 1. inflation to stay in 5-7% corridor in 2016-2018, down from a projected 5-8% in 2015, according to Armenian Armed Forces violated ceasefire with the bank’s medium-term strategic plan. In 2014, Azerbaijan 61 times in various directions of the inflation was expected to have stayed within the frontline throughout the day, said the Azerbaijani corridor of 6-8% after staying at 4.8% in 2013. In Defense Ministry, APA reported. Armenian armed November, CPI inflation was reported at 6.9% in units fired on the positions of Azerbaijani Armed ytd terms and at 7.6% in y/y terms.

Forces in Kemerli village of Gazakh region from the posts in Dovekh village of Noyemberyan The Uzbek Fund for Reconstruction and Development region, positions in Alibeyli village of Tovuz region (UFRD) will allocate $66mn for the construction of from the posts in Aygepar village of Berd region. a $500mn chemical complex for the production of polyvinyl chloride (PVC), caustic soda and methanol An Azerbaijani man who was not identified in in Uzbekistan, according to a presidential decree. media reports immolated himself on January 8 in the Azerbaijan capital of Baku, on a street where The Uzbek central bank reduced the refinancing city authorities are demolishing old buildings rate from January 1 from 10% to 9%, according to to make way for new developments. Residents a statement. The central bank said the decision have been protesting for months, seeking more was made “based on the current and expected compensation for their demolished properties. inflation level, to further promote high rates of The man's motives were not known, and the area economic growth, and increase the investment was cordoned off by police. activity in economy’s real sector.”

Kazakh state-owned oil and gas company KazMunaiGas denied there is a strike by oilmen that has reportedly taken place in the Mangistau region. “There is no strike,” Abzal Nurkasymov, head of media relations of KazMunaiGas, told Trend. “The leadership of the national company KazMunaiGas, jointly with the akimat (mayor’s office) of the Mangistau region, is negotiating with the workers of service companies that serve the oil and gas projects in the region.” An oil workers’ strike in

Tajikistan's armed forces are setting up a new base near the Afghan border in response to the apparent massing of fighters on the Afghan side of the border. The base, to be called "Khomiyon," will be in the Kulyab region. "Tanks, armored vehicles and other weaponry" will be deployed to the base, which ‘units of all security structures of the country will be able to use for conducting maneuvers’," reported RFE/RL, citing a source in Tajikistan's Ministry of Defense.

bne Chart January 9, 2015

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As Central Asian succession risks loom, Kazakhs have more reason to be content As worries grow over the health of ageing leaders in Central Asia and their succession plans, one key factor that may determine how smooth these potentially explosive transitions will be is the level of economic dissatisfaction in Kazakhstan, Tajikistan and Uzbekistan.

As this week’s chart shows, Kazakh President Nursultan Nazabayev appears to have done the most to improve the lot of his fellow citizens since independence from the Soviet Union in 1991. As the economy has flourished on the back of growing oil exports, Kazakhs’ income levels have followed suit. GDP per capita has risen from $1,647 in 1990 to $13,172 in 2013, making it a middle-income country according to World Bank criterion.

Uzbek President Islam Karimov has made much less of the country’s ample natural resources –

Uzbekistan is the world's 17th largest producer of natural gas, ninth largest producer of gold and sixth largest producer of cotton – but the population remains poor. GDP per capita was $651 in 1990 and had only reached $1,878 by 2013.

Tajikistan is not blessed with the same level of natural resources as the other two, but those it does have either haven't been developed properly (hydroelectric power and gas) or have been stolen by elites. The country’s largest export earner, the giant Tajik Aluminium Company, or TALCO, is personally overseen

by President Emomali Rahmon. According to The Economist, "Each year, TALCO produces hundreds of millions of dollars in profits that are routed to a shell company in the British Virgin Islands.” Tajikstan's GDP per capita has risen from $496 in 1990 to $1,037 in 2013.

Eastern Europe January 9, 2015

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EU to provide ¤1.8bn extra funds for foundering Ukraine bne IntelliNews The EU will provide ¤1.8bn in macroeconomic assistance to default-threatened Ukraine, the European Commission announced on February 8. But the move might not be enough to save Ukraine from a sovereign default.

has to be approved unanimously by EU member states, which could slow the process given the current political uncertainty in Greece. The funds are also conditional on the IMF's resumption of its funding for Ukraine, which is in turn conditional on Ukraine adopting stiff reforms, such as eliminating energy subsidies.

The loan comes one day after a call by veteran financier George Soros for the EU to find ¤50bn for Ukraine, and a plea by Ukraine's prime minister, According to SigmaBleyzer, the ongoing Arseny Yatsenyuk, to German TV viewers for funds devaluation pressure on Ukraine's hryvnia has nixed previous attempts to eliminate energy to help "Ukraine defend Europe." subsidies by hiking domestic tariffs on gas The move is the EU's first direct acknowledgement supplied to the population and utilities, since Ukraine pays for its gas imports in hard currency. that Ukraine is facing financial collapse, with the funds intended to help "with the critical challenges The government announced another gas price hike the country is facing, such as a weak balance of payments and fiscal situation," according to a on January 5, but devaluation now means that to fully eliminate energy subsidies, the government statement by the Commission. would have to hike the price paid by households fourfold in 2015. "So far, the government has not "Ukraine is not alone... The European Union has provided unprecedented financial support officially announced such move, which is likely and today's proposal proves that we are ready to be extremely unpopular," says SigmaBleyzer, predicting that around half of Ukrainian households to continue providing that support," European Commission President Jean-Claude Juncker said. would then qualify for financial assistance from the budget to pay utility bills.

But the new funds fall far short not only of The IMF is also likely to demand changes to the ¤50bn demanded by Soros, but even of the ¤15bn extra funding that many believe Ukraine's budget, which was passed at 5:00am on December 29 in an emergency sitting, with Ukraine needs to stave off default. "The country MPs reporting that they had not been provided is estimated to require around $15 billion of additional financial assistance in 2015, on top with a copy of the law. Full details of the law only emerged when it was published in the government of the funds envisaged in the already approved $27 billion financial aid package [from the announcer on December 31. "[G]iven that the International Monetary Fund]," analysts at private budget has significant risks, negotiations may not equity outfit SigmaBleyzer wrote in a report on be easy," says SigmaBleyzer.

December 8. "If this financing is not secured, the But the EU funding decision, in combination with country risks facing a full-scale financial crisis." decisions by international lenders on smaller The decision to provide the extra funds to Ukraine investments in Ukrainian infrastructure in

Eastern Europe January 9, 2015

late December and January, including $0.5bn in loan guarantees provided by Germany on January 8, does at least show the West is still backing Ukraine, providing an important signal to the markets, which rallied on the EU announcement. "With a billion or two from the US, and maybe $6-7bn more from the IMF, the hope is that something close to $10-15bn can be delivered to beef up the existing $17bn IMF program," writes Standard Bank analyst Tim Ash. According to SigmaBleyzer, Ukraine now needs fast disbursal of around $5bn in IMF funding, to provide an airbag in the event of a Russian demand for early repayment of a Ukraine's $3bn

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two-year Eurobond that the Kremlin bought in December 2013. "If these assumptions do not materialize, Ukraine may face a severe financial crisis in 2015," it warns.

Russia has said that it would not demand early repayment of the bond in the likely case that Ukraine's sovereign debt exceeds 60% of GDP, breaching the terms of the loan and possibly triggering a cross-default on other Ukrainian debt. But no one takes the Kremlin at its word after the events of 2014. "Unless Russia can be persuaded to take a back seat over Ukraine, any amount of Western financing will simply not work," Ash concludes gloomily.

Ruble follows oil down, making Russian rating downgrade more likely bne IntelliNews Russia's ruble slid more than 4.5% on January 6 to cut the rating by one step on January 9, when it against the dollar, breaching RUB65 after opening announces the results of its review. at RUB60, before pulling back to RUB63. The ruble also fell against the euro to RUB76.

Analysts believe a cut to junk rating will accelerate capital flight and the ruble's slide. Reflecting the Against the background of thin trading during the deteriorating credit status, five-year credit default holiday season, news that world oil prices had swaps on Russian debt jumped 80 bps to 618 on slumped to their lowest level since the crisis year January 6, according to Bloomberg, the highest of 2009 triggered the drop in the currency of the since the crisis-hit month of March 2009, making world's largest energy exporter. a total 143 bps hike over the past three days.

Current estimates for the Russia economy in The ongoing collapse in the ruble and the price 2015 forsee a sharp recession, but not as yet a of oil are now prompting credit rating agencies to collapse. The consensus forecast is for a 1.8% review Russia's current investment grade rating, contraction in Russian GDP, according to Bloomberg. with a downgrade to junk status widely believed to be inevitable in the near future.

Russia’s currency lost 41% last year, the most in the world after Ukraine’s hryvnia and its worst Standard & Poors, which currently rates Russia annual slide since its 1998 default. The central one rung over junk status, put Russia on negative bank burned through about $90 billion of reserves watch in December, implying that it is likely to trying to defend the currency. Government bonds downgrade Russia to junk on completing a review fell the most in emerging markets in 2014, with in mid-January. Fitch Ratings, which currently the five-year yield climbing 822 basis points to rates Russia at two steps over junk, seems likely 15.44 percent.

Eurasia January 9, 2015

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Russia’s neighbours feel impact of ruble’s fall bne IntelliNews Belarus and Turkmenistan have devalued their currencies in response to the slide in the ruble. Turkmenistan devalued its currency by 19% against the dollar as of January 1, the first depreciation in almost seven years, while the Belarussian Central Bank said on January 5 it was lowering its official rate for the Belarussian ruble versus the dollar by around 7%. The Russian ruble weakened 41% versus the dollar in 2014.

President Aleksandr Lukashenko on December 27 replaced the prime minister, the head of the central bank and other top officials less than a week after the authorities had restricted access to foreign currency.

The depreciation comes as oil slid to the weakest level since May 2009 and natural gas tumbled to a four-month low in Europe, curtailing the earnings prospects for central Asian energy producers.

“The National Bank and the government will in the future continue to take consistent measures to improve macroeconomic balance and strengthen the stability on the country’s financial and currency markets,” the regulator said in the statement. The bank said it will also limit the use of international reserves to support the ruble.

According to BelTA news agency, the steps taken by the government and the central bank are part of a set of measures meant to normalise the situation in Belarus' financial sector. The Russia’s financial crisis, spurred by sanctions over simultaneous reduction of the tax on purchasing the Ukraine conflict and Brent crude’s 48% drop foreign currency via the currency and stock last year, is raising speculation that countries exchange and the reduction of the official including Turkmenistan’s northern neighbor exchange rate of the Belarusian ruble against the Kazakhstan will need to devalue to keep exports dollar are designed to bring the exchange rates competitive. Kazakhstan depreciated its currency in different segments of the national currency by 19% in February, citing the weakening ruble. market closer. The National Bank expects that the move will not result in an increase in the actual The Turkmenistan central bank weakened the manat exchange rate used to sell foreign currency to to 3.5 per dollar as of January 1 from 2.85 previously. individuals and corporations.

In Belarus the central bank said it was reducing the currency's official rate to 12,740 rubles per dollar starting on January 6 from 11,900 rubles on January 5. The bank also announced on January BelTA writes that the situation on the country's 8 that it would increase its key refinancing rate by 5 foreign currency market remains stable. percentage points to 25%, effective on January 9.

Belarusians purchase and sell foreign currency as usual. Most of the currency exchange offices In addition, Belarus is dismantling capital controls less and banks are well-supplied with foreign currency. than a month after their introduction failed to arrest the Besides, foreign currency sales have been ruble’s depreciation. The government has scrapped exceeding foreign currency purchases lately, noted a surcharge on currency purchases by companies, the source. The last few days of 2014 witnessed a and the levy collected from foreign currency massive increase in fixed-term national-currency purchases by individuals has been halved to 10%. deposits of individuals.

Eurasia January 9, 2015

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Meet the EEU family

bne IntelliNews Members: Belarus, Kazakhstan, Russia, Armenia Potential members: Kyrgyzstan (likely), Tajikistan (unlikely) Population: 173mn (Russia, including Crimea, 146mn; Kazakhstan, 17mn; Belarus, 10mn) Total GDP: $2.7tn Share of world gas reserves: 20% Share of world oil reserves: 15%

On January 1, the Eurasian Economic Union Treaty governing what critics have derided as Russian President Vladimir Putin's plan to recreate the Soviet Union came into force as planned. According to the agreement, the Eurasian Economic Commission (EEC) will be the supranational regulatory body of the Customs Union (CU), which came into effect in January 2012, and the Single Economic Space (SES).

The Presidency of the Council rotates every year among the deputy prime ministers of the EEC member states, which as of January 1 comprised Russia, Belarus, Kazakhstan and Armenia.

us to explore the possibility of establishing a common economic space in the Eurasian region, including the focus countries of the Eastern Partnership [an EU policy on closer ties with Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine]."

Already Russia is using the EEU to further its interests globally, calling on the EU on January 2 to launch talks with the EEU despite the Ukraine crisis, and in a sly dig at the US arguing it is a better partner for the EU given conflicting health standards in the US food industry.

The treaty on Armenia’s accession was signed by the three existing members and Armenia on October 10, 2014, and so joined the existing Customs Union members Russia, Kazakhstan and Belarus. Armenia will have limited representation in the economic union until the end of 2015. Three Armenian members will share one vote in the union’s governing body, the Eurasian Economic Commission, TASS news agency reports.

In an interview with EUobserver, Russian Ambassador to the EU Vladimir Chizhov said: “Our idea is to start official contacts between the EU and the EEU as soon as possible. [German] Chancellor Angela Merkel talked about this not long ago. The EU sanctions [on Russia] are not a [hindrance]... I think that common sense advises

"We might think of a free trade zone encompassing all of the interested parties in Eurasia," Chizhov added.

According to the “Eurasian Economic Integration: Facts and Figures,” the EEU Treaty sums up the existing regulatory-legal framework of the CU and SES, consisting of over a hundred international treaties signed between 1995 and 2012. The codification into one treaty is expected to improve applicability of the agreements between the Member States in macroeconomics, finance, trade and investment, transportation and energy, industry and agro-industry, and make them more systematic.

As for Kyrgyzstan, it is currently implementing roadmaps for its accession to the CU and SES that were agreed in May 2014 and October 2014, respectively. Both documents set forth numerous

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terms and conditions calling for legislative and regulatory changes with deadlines ranging from “6 months before accession” to “after accession” or “2014-2020.”

Since in essence the EEU Treaty is a compilation of the relevant provisions of the existing CU and SES laws and regulations, Belarus, Kazakhstan and Russia should not see any overnight changes to their usual business procedures with the launch of the EEU on January 1. The three countries have already launched a unified external tariff and customs code, began unifying their sanitary, phytosanitary, veterinary, and technical regulations, and moved border controls to the external CU border.

For Armenia and, later on, the Kyrgyz Republic it is a different story. Both countries have some import tariffs, including for agricultural goods, that are lower than the unified CU customs tariff, so they will see some phased-in customs tariff increases. For example, the treaty on Armenia’s accession to the EEU foresees the Armenian

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import tariff on some beef, pork and poultry items increase every year starting in 2016 from 10% to 25%, 15% and 50%, respectively, in 2021, with the final transfer to the unified CU tariffs on these items in 2022.

Moreover, as both countries are World Trade Organization members, before any such EEU-related customs tariff changes can take place, both countries will have to re-negotiate them in the framework of the WTO. Similarly, trade with Armenia and Kyrgyzstan will be affected by their transfer to the unified CU sanitary, phytosanitary, veterinary and technical regulation measures, such as the use of the unified CU forms of veterinary certificates to facilitate trade in goods that are under veterinary control.

Finally, the transfer of border controls to what by that time will be the external EEU border will definitely affect Kyrgyzstan. Armenia, having no common borders with any of the other EEU members, should not be affected.

Central Europe January 9, 2015

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Poland to build state electricity champion

bne IntelliNews Poland plans to merge its four biggest power utilities, the treasury minister announced late on January 8. The plan is just the latest to spook minority shareholders in the state-controlled companies.

The ministry has been hinting at the possible consolidation of the sector for over a year, but such an ambitious plan was not expected.

The manager of state-held assets said in an emailed statement that it wants to merge PGE, Tauron, Enea and Energa in a bid to build a state champion capable of competing on the European stage.

Poland is currently "wrapping up" an analysis and will present detailed plans by the end of January, Wlodzimierz Karpinski said, according to PAP. "Today Poland's power firms are small compared to the largest European players. Only strong firms with proper capital and financing means will be able to secure the energy security of our country."

The goal of energy security has long led Warsaw to search for a viable strategy for the state-controlled sector. The government has placed huge demands on the utilities to invest in new coal-fired and nuclear capacity, as well as its drive to develop the country's shale gas deposits.

That effort that now looks to have been largely in vain. However, state gas utility PGNiG, which was leading the shale gas charge, has not been included in the consolidation plan. Karpinski had

said in late 2013 that consolidation was being mulled, but stressed that first, the government needs to update its policy for the sector.

This confused energy strategy has hit investor sentiment. The utilities have also been hit by low power prices across Europe.

Still, Polish power firms are marked down to make investments of PLN100bn (¤23.2bn) over the next five years to build new generation capacity and improve the grid, Karpinski noted. "Consolidation in power is primarily a chance to increase the investment capacity of firms, also in commodities, for building value chain and increasing asset values."

That hints at another controversial plan for the sector. Warsaw unveiled a rescue plan for its struggling coal industry on January 7 that confirms the utilities will be forced to help out. The share prices of the power companies suffered in late 2014 on such fears.

Nuclear delay The government’s plans for the nuclear sector have been another source of uncertainty for investors. Late last year, PGE EJ1, a subsidiary of the government-owned PGE utility, which is responsible for launching the country’s first nuclear power station, cancelled a contract according to which Australia’s WorleyParsons would conduct an environmental survey on the best location for the plant. The utility broke the 311m zlotys (¤74m) contract, saying it was “due to WorleyParsons’ failure to meet contractual

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obligations and a delay in execution of works performed under the contract".

However, the Rzeczpospolita daily reported that the reasons were also linked to the government’s growing concerns about the Australian firm’s ties to the much larger Russian market as well as to a controversial project to build Bulgaria’s Belene nuclear power plant. Worries about the Bulgarian project were the subject of US cables revealed by Wikileaks, where US officials noted the “pernicious corruption” in the Bulgarian power sector and especially the close ties between WorleyParsons and Bogomil Manchev, whose power in the sector was “rumored to be all-encompassing”.

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The first stage of the plant – whose final location has still not been determined – is due to come online at the end of 2024. However, with all the work done by WorleyParsons now in question, the fear is that the environmental assessment will have to be restarted, potentially adding two years to project completion.

Poland has been planning a nuclear power plant since the 1970s, but economic chaos followed by a lack of money and growing environmental worries have left the country as one of the few ex-Soviet bloc countries without such a facility.

“Manchev and [one of his many subsidiaries] Risk have a close working relationship with the Australian-US firm WorleyParsons,” noted Wikileaks.

Bogomil Manchev is a high-profile energy consultant facing fraud and mismanagement charges for the role his Risk Engineering company played in the stalled Belene nuclear power plant project. He has denied wrongdoing.

Rzeczpospolita reports that Polish authorities were warned by Polish intelligence about the risks of going with WorleyParsons, but that those fears were rejected as the company offered the lowest cost bid to complete the work. In a response to the newspaper, the Australian firm called PGE’s management unprofessional.

PGE is now proposing to complete the environmental study on its own, and the two sides are fighting over what happens to the contracted 311m zlotys.

The conflict is likely to further delay the 60bn zloty nuclear project. The nuclear plant would lower Poland’s dependency on energy imports from Russia as well as reducing the country’s reliance on polluting coal – which now accounts for almost 90% of power generation – helping Poland meet its clean air targets.

5 & 6 February 2015 - Tbilisi, Georgia

2nd Annual South Caucasus Infrastructure New Energy Investment Summit

&

UNDER THE AUSPICES OF: of Energy and Natural Resources of Georgia * Ministry of Regional Development and Infrastructure * Ministry of Georgia

www.conventionventures.com

Central Europe January 9, 2015

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Hungary reportedly set to deepen gas ties with Moscow bne IntelliNews Hungary is seeking to more than double the amount of gas Gazprom stores in the country, local media reported on January 7. There are also claims Hungary could sell gas storage and distribution assets to the Russian gas giant, as Budapest appears ready to provoke more fury in Brussels and Washington by strengthening ties with Moscow.

While on a visit to Moscow in December, Hungarian Foreign Minister Peter Szijjarto proposed to more than double storage volumes of Russian gas to 1.5bn cm as of April, Vilaggazdasag claims, citing unnamed sources. Hungary’s facilities can store about 6bn cm of gas.

facilities, but Vilaggazdasag sources could not confirm that. In December, the development ministry denied allegations that Budapest is considering selling some of its storage facilities this year.

These issues might be put up for discussion during a planned visit by Russian President Vladimir Putin’s to Budapest. Local media suggest the controversial meeting is set to take place in March. The head of the Prime Minister’s Press Office confirmed on January 7 that Budapest is discussing a date for a visit by the Russian leader.

That meeting, and potential deals on gas storage and even the acquisition of facilities, will increase international pressure on Prime Minister Viktor Orban. In late 2014 he came under fire from Brussels and Washington over his perceived lean towards Moscow.

Hungary and Gazprom signed an agreement in September allowing the Russian gas giant to store up to 700mn cubic metres (cm) of gas in the Central European country, as well as raising supplies. That came as Poland and Slovakia - the That helped spark ongoing protests in Hungary, others in the region feeding Ukraine with EU gas - and Orban has toed a more concilatory line in reported huge cuts in deliveries from Russia. recent weeks. However, true to form, the PM appears to have decided to plough on with his Days later, Budapest halted supplies to programme.

Ukraine. Last month, Hungary said gas shipments could resume in January, however, In January 2014, Orban surprised observers when there have been no reports that the route has he cancelled an international tender on expanding been reopened yet.

Hungary's sole nuclear power plant Paks. On a visit to Moscow, he agreed a ¤10bn loan from Local media reports have suggested that Gazprom Moscow in return for handing the contract to wants to buy a stake in Hungarian gas storage Russian state nuclear agency Rosatom.

Southeast Europe January 9, 2015

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Turkey's Anadolu buys into country's second biggest supermarket chain David O'Byrne in Istanbul Turkey's Anadolu Endustri Holding, whose owners control Turkey's biggest brewer, Anadolu Efes, has finalised an agreement to buy a 40.25% stake in the country's second biggest supermarket operator, Migros Ticaret, a move which analysts concur has as much to do with Turkey's increasingly stringent restrictions on the sale and marketing of alcoholic drinks as it does with the country's fast growing supermarket sector.

She points to Anadolu Endustri's other business interests and those of the group's owners, the family holding companies of Turkey's Yazici and Ozilhan business dynasties, which between them own 43% of Anadolu Efes - Turkey's biggest brewer, as well as a leading brewer in the CIS region, the fifth biggest in Europe and the tenth biggest globally.

With 19.5% of Migros stock traded on the Istanbul Stock Exchange (BIST), this leaves BC also holding a 40.25% stake through it's affiliate Moonlight Capital, making it equal partners with Anadolu. In a statement the two companies confirmed that they plan to run Migros in partnership.

The past two years seen the introduction of a blanket ban on sponsorship by alcohol producers, with Anadolu Efes forced to change the name of its basketball team - Turkey's most successful from Efes Pilsen to Anadolu Efes, and to abandon its Efes Pilsen music festival after 23 years.

With over 70% of the Turkish beer market, largely through its flagship Efes Pilsen brand, Anadolu Endustri will pay Migros' current majority Anadolu Efes has been particularly vulnerable owners, international private equity group BC to the policies of Turkey's ruling Justice and partners, TL26 per share, a premium of 36% on Development Party which over the past few years the share price on October 2 when talks between has abandoned its previous laissez faire pluralist the two started, valuing the company at around 6.4 policies in favour of its own brand of increasingly billion liras (¤2.3 billion). authoritarian Islamic nationalism.

Given Turkey's fast growing population, retail and in particular food retail has become an increasingly attractive investment. With a total retail area of 1.6 million square meters spread over 1,196 stores in four domestic formats, Migros is Turkey's second largest retail group, responsible for 15.5% of Turkey's food retail sector, while its 890 flagship Migros stores, are the country's largest nondiscount supermarket chain.

At the same time all forms of alcohol advertising have been outlawed, including even the display of alcohol brand names on store fronts, and retail sales of alcohol have been prohibited after 10pm a move which has particularly affected small local stores, with many being forced to close.

Less obvious and less advertised has been the effect on alcohol sales of changes in Turkey's organised retail sector, which is increasingly dominated by conservative family-owned However, buying into the group makes sound companies which disapprove of alcohol on commercial sense for Anadolu Endustri on more than religious grounds. In the past four years two of one level, explains Irem Okutgen, food and beverage the country's biggest supermarket chains which analyst at Istanbul brokerage Garanti Yatirim. stocked alcohol, Sok and Dia, were bought up by

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Turkey's Ulker group, which removed the alcohol from the shelves.

"Most of the big supermarket chains in Turkey are owned by conservative groups and don't sell alcoholic drinks," explains Okutgen, pointing out that Anadolu's interest in Migros stems not only from the need to secure its own retail outlet chain, but also from the wish to prevent the main nondiscount supermarket chain being bought up by a group which would refuse to stock its products.

"If Migros was bought by a group which didn't want the chain to sell alcohol that would been a major blow for Anadolu Efes," says Okutgen, adding that by buying into Migros, Anadolu has in effect secured itself a sales outlet for its brewing affiliate.

All eyes on Tesco With the ownership of Migros now secured, attention has turned to the future of UK retail giant Tesco's lossmaking Turkish subsidiary

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Tesco Kipa. The company was confirmed as being in talks with both BC partners and Anadolu Endustri over a possible sale or a three-way merger of Tesco Kipa early last year, long before the company announced its unprecedented 90% profits slump for the first half of 2014.

Those talks were later abandoned, raising questions as to what Tesco plans to do with its 191-store Turkish chain, other than continue with its existing programme of closing lossmaking stores, and whether other buyers may be looking at the chain.

"We know Tesco has been evaluating merger opportunities, looking to benefit from the knowhow of local partners and possible synergies," says Okutgen. "But they may also be considering exiting the Turkish market completely or delisting from the BIST," she says, pointing out that the company's free float is only 4.5%.

Serbian president says Kosovo recognition must not be precondition for EU entry bne IntelliNews Serbian president Tomislav Nikolic said on December 5 that the European Union must not make Belgrade's recognition of Kosovo a precondition for Serbian accession to the bloc. The Kosovo issue is likely to be the main stumbling block to Serbia’s EU ambitions as the country has made good progress towards accession in other areas, particularly economic reform.

Nikolic said in an interview with Happy TV late on January 5 that while he was keen for Serbia to join the EU, giving up Kosovo must not be made a condition for accession to the bloc.

My position is that giving up on Kosovo-Metohija must not be a condition for joining the Union," Nikolic said. Serbia “cannot [join the EU] without Kosovo-Metohija”, he added.

His statement follows a call in December 2014 for a referendum to be organised to allow the Serbian population to decide how far Belgrade should go to compromise with the EU over Kosovo, a former province of Serbia that has been independent since 2008.

Kosovo broke away from Serbia after a war of independence in 1998-1999, in which more “My position is clear and absolutely unchanged than 10,000 died. The newly formed republic’s we should be in the EU, and join the Union proudly. population is mostly ethnic Albanian, but many

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Serbs consider it to be an integral part of Serbia.

So far, Kosovo has been recognised by 108 countries worldwide. However, Russia, which holds a United Nations veto, has blocked Kosovo's entry to the UN. In 2014, the International Olympic Committee granted full recognition to Kosovo, paving the way for Kosovan athletes to compete in a national team in the Rio 2016 Olympics. The decision drew heavy criticism from the Serbian government.

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Shortly after Johannes Hahn, the European Commissioner for European Neighbourhood Policy and Enlargement Negotiations, made his first official visit to Serbia on November 20, Nikolic told broadcaster RTS that he had been told by Hahn that Serbia would not be welcomed into the EU until it had resolved the Kosovo issue.

Recently there has been somewhat shaky progress towards better relations between Belgrade and both Kosovo and Albania. Vucic and his Albanian counterpart Edi Rama met in Belgrade in Despite the deep divisions over Kosovo’s status, November - the first visit by any Albanian leader to with the two countries aiming for EU membership, the Serbian capital for almost 70 years. there is a strong incentive for both to work towards a peaceful solution. Under a 2013 deal However, the visit first had to be postponed after brokered by the EU, the two countries agreed to a brawl at a football match between the two work towards normalizing relations. Brussels countries in Belgrade sparked a diplomatic row. has made integration with the EU and eventual The two prime ministers also clashed at their joint accession for both Serbia and Kosovo contingent press conference on November 10, when Rama on this process. raised the issue of Kosovo, sparking an angry response from Vucic.

However, there is some ambiguity over whether Brussels is looking to Belgrade to recognise Kosovo’s population of around 2mn includes a Kosovo, or whether a softer option would be 100,000-strong Serb minority, which continues acceptable. to look to Belgrade rather than Pristina for leadership. Despite efforts at normalisation, there Prime Minister Aleksandar Vucic has also are sporadic outbreaks of violence in the ethnically commented on the issue in an interview with divided Kosovska Mitrovica area. Security has Belgrade TV Prva on January 3, saying that been stepped up in Serb areas of Kosovo this "There are countless interpretations of the week as Serbs prepare to celebrate Orthodox Brussels agreement, and difficult talks in difficult Christmas on January 8. conditions are ahead of us.”

Aside from the Kosovo issue, Serbia has made Nikolic claims that the new European Commission steady progress on its path towards EU accession under Jean-Claude Juncker, which took office in in the last year. The accession negotiations 2014, is taking a tougher stance on Kosovo than process was formally launched in January 2014, its predecessor. and Belgrade hopes to open the first chapters of its EU accession talks this year.

"Now they are not saying 'we do not demand that you recognise the independence of KosovoIn an October 2014 report, the European Commission Metohija' - instead, they are saying what the commended Serbia’s progress towards accession, German parliament said two years ago: 'to citing its economic reforms, the adoption of new laws become an EU member, you will have to bring a on labour, privatisation and bankruptcy and progress signed agreement on good-neighbourly relations in the fight against crime and corruption, although with Kosovo that will define all your relations,'" it also called for “new momentum” in the dialogue Nikolic told Happy TV, according to Tanjug. between Belgrade and Pristina.

Opinion January 9, 2015

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2015 will be Russia’s year of ruling dangerously STOLYPIN:

Mark Galeotti of New York University Contrary to some Western hopes and the more feverish rumors within the Moscow intelligentsia, there is no imminent threat to Russian President Vladimir Putin. However, his rule is strong but brittle, and a combination of systemic pressures are eating away at the regime’s social, economic, political and geopolitical reserves. This will leave the Kremlin much less able to weather future shocks and unexpected turnarounds. As a result, 2015 will be dominated both by efforts to protect and restore those reserves and also the uncertain lurch from threat to crisis.

After all, the Kremlin had banked on a re-run of the response to the 2008 incursion into Georgia: a few months of splenetic rhetoric and then a “re-set.”

As it was, 2014 thus saw Russia battered by a perfect storm of macroeconomic, military and political pressures. This is inevitably having an impact on the finances of state and public alike.

Reserves have fallen from $510.5bn at the start of 2014 to $388.5bn by the end, largely because of efforts to sustain the ruble. This is still a respectable stash, but when one considers the It is clear that the Kremlin did not anticipate accounting sleight of hand that means “rainy the implications of its Ukrainian adventures. day” funds are included, then Russia’s external The Crimean land grab was a piece of inspired debt obligations over the next two years alone will opportunism, taking advantage of ideal conditions, consume these reserves. including a distracted and uncertain new government in Kyiv. While the decision was spur The government has introduced a 10% cut across of the moment, the plans had been long drawnmost government departments (although the up. However, the lack of even token resistance military and security agencies have so far been encouraged Putin to go further and intrude protected), which across 2015 will begin to have into so-called “Novorossiya.” This had not been an effect on public services. Even the military, gameplanned militarily or politically, and mired though, is beginning to have to come to terms Russia in a conflict in which defeat is unthinkable, with potential future budget cuts, with longbut victory – without a massive escalation – term projects such as the roll-out of the PAK DA appears unwinnable. strategic bomber already being earmarked for delay.

Crimea was an expensive piece of real estate, not in the capture but in the harmonization to Russian However, the bulk of cuts will be in public services standards. All the costs are magnified by the wider and this will begin to have an impact on life for economic crisis brought about by the slump in oil most Russians over time. Just as the ruble’s prices, and hardly helped by the unexpectedly (for tumble has not led to immediate and dramatic Moscow) deep and enduring Western sanctions. changes in most people’s lives but instead a slow

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constriction as prices rise faster than wages, so too these cuts in state funding will manifest themselves gradually over time.

This strikes at the very heart of Putin’s implicit social contract with the Russian people: political quiescence in return for a steadily improving quality of life. Russians under Putin have lived better than Russians have at any point in their history and it is this, rather than national glory or even his bare-chested mythology, that explains the very real esteem in which he is generally held. However, as that social contract begins to be broken, Russians may begin to express their discontent, at least with the situation, even if not yet with Putin himself.

More serious will be the pressures on the separate bargain struck with the elite: loyalty for the opportunity to live a good life, not least through embezzlement and corruption. Either the Kremlin will have to attempt to force a renegotiation of the “acceptable limits of corruption,” or else it will have to continue to swallow a practice that consumes possibly as much as a quarter of Russia’s GDP. This will sharpen and trigger intra-elite feuds, of the sort that have flared up periodically through Putin’s era, over access and assets. The longrunning scandal over the Interior Ministry’s economic crime division – as the Federal Security Service and Investigations Committee try to take over this lucrative portfolio – and the arrest of Vladimir Yevtushenkov and dismemberment of AFK Sistema are likely signs of things to come.

Meanwhile, Russia’s geopolitical situation is also parlous. However much it may try to present China as an ally, its ruthless negotiations over credits and energy supplies show Beijing is not so much Moscow’s banker as its loanshark. When even Belarus is trying to distance itself – President

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Alexander Lukashenko acidly told newly-appointed Prime Minister Andrey Kabyakau that, “yes, Russia is our brother, our friend. But you see how they behave lately” – then it is time for Russia to acknowledge its dearth of reliable allies.

Finally, even the internal resources of the Russian leadership – imagination, decision, wisdom – appear tapped out. Crimea proved a strategic blunder, “Novorossiya” doubly so. The response to the economic crisis has been hamfisted, incoherent and often ad hoc. The decision to suspend a custodial sentence for opposition darling Alexei Navalny while imprisoning his brother on questionable fraud charges looks like a brutal act of hostage-taking and seems to have angered, not cowed their real target.

It is important to stress that this does not in itself mean some imminent threat to the regime.

Instead, it means that its capacity to weather shocks and challenges becomes increasingly limited. This could be anything: a resurgence and expansion of Navalny’s protest movement, open clashes within the elite, a financial scare, an upsurge in terrorism or even health problems for Putin. The point is that stuff happens. The measure of a government is its capacity to respond to the unexpected, and the intellectual, political and social reserves on which it can draw to do so.

With the Kremlin increasingly lacking in ideas and strategy and its resources running low, 2015 is likely to be a tense, dangerous year for Russia.

Putin must just hope for, well, not too much stuff to happen.

Mark Galeotti is Professor of Global Affairs at the Center for Global Affairs, School of Professional Studies, New York University, who writes the blog In Moscow’s Shadows (http://inmoscowsshadows. wordpress.com/)