Business New Europe April 2013 edition by Ben Aris

Inside this issue: Show trials in Moscow Europe's "constitutional dictatorship" Moldova's misery deepens

April 2013 www.businessneweurope.eu

Anglo American steps into Mongolia Special Report: Azerbaijan

Rekindling the Cold War

How to invest in Eastern Europe and China

Rather than spending our time in an office, we travel around our region, meeting with over 1,200 companies a year. This tells us more about the markets than any index in the world ever could. Read more about our award-winning funds at www.eastcapital.com.

Historic yields are no guarantee for future yields. Fund shares can go up or down in value, and investors may not get back the amount invested. Before investing, please read the prospectus carefully. Full information on East Capital’s investment funds such as the prospectus, simplifi ed prospectus and fi nancial reports can be obtained free of charge from East Capital, from our local representatives and are available on the website. Please also note that the funds, or some of the funds, may not be available for sale in your country.

bne April 2013

Contents

Editor-in-chief: Ben Aris (Moscow)

+7 9162903400

Managing editor: Nicholas Watson (Prague)

+42 0731582719

News editor: Tim Gosling (Prague)

+42 0720180811

Eastern Europe: Graham Stack (Kyiv)

+7 9266052742

Central Europe: Robert Smyth (Budapest) Jan Cienski (Warsaw) Mike Collier (Riga) Matthew Day (Warsaw) Tom Nicholson (Bratislava) Kester Eddy (Budapest) Steven Roman (Tallinn)

+36 19995200 +48 604994850 +37 129473192 +48 607291187 +42 1907732736 +36 308665550 +372 56665911

Southeast Europe: Justin Vela (Istanbul) David O'Byrne (Istanbul) Bernard Kennedy (Ankara) Ian Bancroft (Belgrade) Bogdan Preda (Bucharest) Branimir Kondov (Sofia) Guy Norton (Zagreb)

+90 5393614470 +90 5359210950 +90 535 7485120 +40 722580137 +38 513835929

Eurasia: Bureau Chief: Clare Nuttall (Almaty) +7 7073011495 Molly Corso (Tbilisi) Oliver Belfitt-Nash (Ulaanbaatar) +97688113149 Advertising & subscription: Elena Arbuzova +7 9160015510 Business Development Director Tatiana Alexeeva

+7 9168306850

Alec Egan Business Development Director (International)

+44 2030516548

Design: Olga Gusarova-Tchalenko

36 COVER STORY 6 The Insiders

CENTRAL EUROPE 26 Europe's "constitutional dictatorship"

8 Rekindling the Cold War 27 Flight of the humbled banks 12 Perspective 29 Latvia's absent depositors 13 Chart of the month 30 Latvia formally applies to join the euro EASTERN EUROPE 32 The new man in the castle 14 Where's Russian growth going to come from? 15 Medvedev's $30bn giveaway 18 Macquarie and Renaissance seek out infrastructure deals

+44 7738783240

34 Poland's turn to the left 35 An inconvenient voice from the past 36 Czech coalminer NWR looks west as well as east

20 Show trials in Moscow

Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu All rights reserved. No part of this publication may be reproduced, stored in or introduced to any retrival system, or transmitted, in any form, or by any means electronic, mechanical, photocopying, recording or other means of transmission, without express written permission of the publisher. The opinions or recommendations are not necessarily those of the publisher or contributing authors, including the submissions to bne by third parties. No liability can be attached to the publisher for these comments, nor for inaccuracies, errors or omissions. Investment decisions or related actions taken on the basis of views or opinions that appear herein are the responsibility of the reader and the publisher, contributors and related parties cannot be held liable for these actions. bne is the property of bne Media Ltd · Reg number: HE 185230 · Michalakopoulou 12, 4th floor, Suite 401, P.C 1075, Nicosia, Cyprus · Postal address: Schluterstrasse 19, Berlin 10625, Germany

22 Russian banking enters new phase 24 Ukraine's pugilistic democracy

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

bne April 2013

Many talk about Capital Market Transactions in Central and Eastern Europe.

We do them.

Contents

SOUTHEAST EUROPE

EURASIA

A deal seen near in Serbia-Kosovo talks

Anglo American steps into Mongolia

Not quite Spring in Azerbaijan

New guy

All in a name

Azerbaijan treads a cautious diplomatic path

Moldova's misery deepens

Court ruling dashes hopes of Armenian opposition

Final countdown

Bulgaria's interim solution

Roman ruins

Turkmenistan launches modest privatisation drive

Baku pushes Azerbaijan's high-tech sector

Turkey strives for more investment

Georgians acquire taste for Carrefour

Azerbaijan's ambitions in space

Slovenian politicians skirt around mounting problems

Kazakhstan's taste for French cakes

Promoting Azerbaijan

UPCOMING EVENTS

OPINION 56

Raiffeisen Bank International has relationships in Austria and Central and Eastern Europe second to none. Close relationships, too, with major investors worldwide. Investors value our regional know-how and market access, giving issuers firm placement at the right price. www.rbinternational.com

SPECIAL REPORT

Romanians flooding into UK - myth or reality?

I The Insiders

bne April 2013

Policy challenges for Russia in 2013

or monetary stimuli would boost prices and weaken the balance of payments. Instead, economic policies need to boost productive investment in new capacity; the Russian government needs to focus on the supply side of the economy. The IMF is recommending that Russian policymakers aim for a more ambitious fiscal policy tightening in 2013 than the 0.5% of GDP envisaged in the current budget (measured by the non-oil deficit). Besides containing domestic demand, this approach would help build "fiscal space" to respond to any adverse spillovers from international developments.

Odd Per Brekk, IMF Senior Resident Representative Russia

hat is the outlook for the Russian economy in 2013 and the medium term? The answer rests on two factors: what happens in the rest of the world and how successful the Russian government is in meeting the demand for deep structural reforms. According to the International Monetary Fund's World Economic Outlook (WEO) update published in January, global growth will accelerate slightly, from 3.2% in 2012 to 3.5% in 2013, and further to 4.1% in 2014. Compared with our forecast in last October's WEO, this means broadly unchanged growth for most large economies and regions. The exception is the euro area, where we have lowered the growth forecast for 2013 from plus 0.2% to minus 0.2%, in other words a continued contraction this year, and that will hurt Russia. These are baseline projections and assume continued economic policy progress. Indeed, substantial progress has already been made with the European Stability Mechanism, key elements of a European banking union agreed on and the announcement of the Outright Monetary Transactions by the European Central Bank. The projections also assume that the US will come to grips with the remaining risks associated with the so-called "fiscal cliff" and the federal government debt ceiling. The possible lack of follow-through to deal with any of these problems remains a key risk going forward. The main spillover from international problems for Russia’s economy is the effect they have on oil prices, but so far there has been little impact on our baseline projections for Russia. Oil price expectations were lowered a little in the latest WEO Update, but the current slowdown in Russia is mainly caused by domestic factors. Russia was the G20 country hardest hit by the global crisis, with GDP contracting by almost 8% in 2009. Over the next two years Russia began to recover, driven mainly by private consumption, growing by about 4.5% a year. However, in 2012, the recovery stalled again, falling to about 3.5%. The currently low unemployment and high capacity utilization rates suggest that economic activity is now close to, if

bne April 2013

not above, its potential. We expect growth to remain at a moderate 3.8%. The return of uncertainties for the global economic outlook means more uncertainty for Russia. At the same time, core inflation remains high and is expected to stay above the Central Bank of Russia's (CBR) forward-looking target path, aimed towards 4-5% inflation by end-2014. Against this backdrop, the government has renewed its energies to promote economic growth. It has set an ambitious 5% increase in GDP target as a medium-term target. At the same

"Our research suggests that Russia's 'growth model' of the last decade may have run its course" time, IMF research suggests that Russia’s "growth model" of the last decade – which produced a decent 5.0-5.5% average annual growth – may have run its course. In the past decade most of the growth came from increasing capacity utilization and improvements in the efficiency of existing production capital, rather than investment in new and productive capacity. Rising oil prices fuelled the process. But now we believe economy is pushing up against its capacity constraints. Implications for Russia’s economic policies The need to change model presents both several short- and long-term challenges. The first order on the agenda is to prevent domestic demand from expanding too fast and that way overheat the economy, while at the same time build more flexibility and "fiscal space" to respond to possible external shocks. As there is little unused potential left, growth cannot be increased by simply stimulating domestic demand. Fiscal

Second, Russia needs to keep monetary policy on hold, but with a tightening bias. The CBR is in the midst of switching to an inflation-targeting regime. It is making laudable progress in putting together the underpinnings of this regime, notably a more flexible exchange rate. To build up its credibility as an inflation fighter, meeting the official inflation targets will be especially important in the short term. Looking further down the road, Russia needs investment in new and productive capacity if it is to achieve faster growth, and so needs to become more investment friendly. Here there are three things Russia can do. First is ensuring macroeconomic stability. Here, Russia is doing well and the new "fiscal rule", which bases budgetary spending of oil revenue on long-run oil prices, as well as the inflation-targeting policy is what is needed. These are the "policy anchors" needed for economic stability that Russia has been missing. That said, the fiscal framework could also be further strengthened. While the new fiscal rule will help shield the budget from the volatility of oil prices, it is not enough to deal with the issue of large public sector liabilities over the longer term, especially the state's pension obligations. As for monetary policy, Russia now has a more flexible ruble exchange rate and has scaled-back foreign exchange inter-

ventions, which has freed the CBR to fully focus on inflation. We strongly endorse the CBR's plans to further strengthen monetary policy instruments, money markets, communication and inflation projections, to be ready for the adoption of inflation targeting by the end of next year. Second, Russia needs a more developed and stable financial sector. To bring Russia in line with international standards the CBR needs adequate authority to effectively supervise the bank sector and address the issue of related-party lending. It also needs enough power to act on the basis of its professional judgment when dealing with individual banks. In the short term, the IMF shares the CBR's concern about the rapid growth of unsecured retail credits, and supports the prudential measures the CBR says it will impose to tackle the danger that booming consumer lending can create. Third, Russia needs an improved "investment climate," which will be critical to lifting Russia up to a higher growth trajectory. Russia’s recent move from 118th to 112th place in the World Bank’s "Doing Business" ranking is welcome progress, but the ranking also shows that there is still much to do. Russia's accession to the World Trade Organization is also a net positive that will help improve the investment climate by making the rules clearer and more predictable. The government's renewed focus on privatization is also welcome in this context, and should be supplemented by efforts to strengthen property and minority shareholder rights, scale back unnecessary bureaucratic procedures, address corruption, and generally strengthen the rule of law. Overall, our analysis suggests that if policy is based on these three pillars, the Russian economy could significantly improve on its current performance, growing by as much as 6% annually over the medium term. Which scenario will materialize will depend on the government’s economic policy choices.

A gradual upturn in global growth during 2013 WEO Real GDP Growth Projections (Percent change from a year earlier) World

U.S.

Euro Area

Japan

Brazil

Russia

India

China

2013 (Jan 2013 WEO)

3.5

2.0

-0.2

1.2

3.5

3.7

5.9

8.2

2013 (Oct 2012 WEO)

3.6

2.1

0.2

1.2

4.0

3.8

6.0

8.2

2014 (Jan 2013 WEO)

4.1

3.0

1.0

0.7

4.0

3.8

6.4

8.5

2014 (Oct 2012 WEO)

4.1

2.9

1.2

1.1

4.2

3.9

6.4

8.5

Source: IMF, World Economic Outlook

I Cover story

bne April 2013

the Russian military budget already doubled between 2006 and 2009 from $25bn to $50bn, but under the new plan it will rise further to $128bn a year on average for the next six years, or about 3.2-3.7% of GDP. Although this still lags the US' annual defence budget of $600bn, more than all its Nato allies combined, in absolute terms it will bring Russian spending up to par with the US as a share of GDP – and at a time when some Nato members are slashing their own defence spending to as low as 1% of GDP.

Rekindling the Cold War as Russia rearms Ben Aris in Moscow

ith the full support of a feckless policy elite and an uncritical media establishment, Washington is slipping, if not plunging, into a new Cold War with Moscow." Strong words from Professor Stephen Cohen in a January article published in The Nation, who is a lonely voice in the US academic establishment with an unpopular point of view. He has been warning for several years now that rapidly deteriorating relations between the US and Russia will lead to a new period of sustained political and military tension between the two powers. And with Russia now ratcheting up spending on re-equipping its military to the tune of hundreds of billions of dol-

lars, plus the noticeably chillier tone in the security rhetoric in the last months, it could well be that historians will one day point to the current period as the start of Cold War II – though the proxy wars that characterised the first one are not much in evidence yet. President Vladimir Putin was at a military plane factory in Novosibirsk on March 6, where he said that Russia has a "historic chance" to rearm and he intends to seize it. "We will have no other historic chance to solve these ambitious tasks the country is now facing to ensure its defence capability in due time and with due quality when [the required] funds are available, thank God," Putin said. "Tomorrow we will

have none of these funds, and time will be lost." Putin has clearly made a decision to try to return Russia to its Soviet-era military strength. Increasingly, it also appears that Russia has given up any hope of becoming a cooperative partner with the West. Last year, Putin said that military spending will increase by $770bn between 2014 and 2020 – more than the country intends to spend on modernising its power sector. The sum is so big that the then-finance minister, Alexei Kudrin, who was noted for his fiscal prudence, protested so loudly he ended up losing his job. To put this sum into context:

Cover Story I 9

bne April 2013

Russia needs to determine exactly who its enemies are and develop its Armed Forces accordingly, Deputy Prime Minister Dmitry Rogozin said on March 21. "We really need to understand what our strategic threats are, clearly define who our adversary is, what kind of adversary, and configure our Armed Forces and military-technical systems to counter those threats," said Rogozin, Russia's former envoy to Nato, who now oversees the country's militaryindustrial complex. Nuclear Spending has already been pouring into Russia's nuclear arsenal. US President Barack Obama signed a strategic arms reduction deal with his counterpart Dmitry Medvedev in 2010, but as Medvedev's star waned so did the good relations: Cohen argues in his book, "Soviet Fates and Lost Alternatives: From Stalinism to the New Cold War", that Obama invested too much into Medvedev who was only a stand-in, and not enough into Putin to make the so-called "reset" in Russo-US relations stick. Now relations are decaying rapidly. According to Putin's chief of staff and close confidante Sergei Ivanov, the Kremlin is "no longer interested in reducing its stockpiles" of missiles. "The upgrade of our strategic nuclear forces has already finished in all key areas – from the point of view of development, trials and transfer to the Armed Forces. All modern new-generation nuclear forces have effectively been developed and tested in our country," Ivanov, a former Russian defence minister, said in an

interview with the daily Komsomolskaya Pravda. "When I hear our American partners say: 'Let's reduce something else,' I would like to say to them: 'Excuse me, but what we have is relatively new'." If Ivanov's comments didn't make the Kremlin's new policy clear to Washington, then a massive Russian military

is clearly too ambitious, while the overall threat assessment that underpins it seems ludicrous." How did we get here? Putin was initially welcomed by the Beltway establishment after he took office in 2000, and his first major trip abroad was to meet then president George

"We see Nato is getting closer to Russia and we have to consider this factor in our defence planning"

exercise in February – the biggest since the fall of the Soviet Union – that included moving tactical nuclear missiles around for the first time, should have. Russia's supposed to inform Nato of its exercises but apparently this one caught the alliance by surprise. The exercises followed a recent surge in Russian strategic bomber flights that included a recent circling of the US Pacific island of Guam by two Tu-95 Bear bombers and simulated bombing runs by Tu-95s against Alaska and California in June and July. According to US reports, the Pentagon was alarmed at both the scale of the exercises and the types of weapons being deployed. "Putin and his team seem to truly believe that Russia’s riches make it the envy of the world and that the US wants to appropriate Russian oil and gas so much it is ready to risk war, if Russia is weak enough," argues Pavel Felgenhauer, a Russian journalist and critic of Russia's political and military leadership. "Both Putin and his top general – First Deputy Defense Minister and Chief of the General Staff, Army General Valery Gerasimov – have recently spoken publicly of mounting military threats and enemies surrounding Russia from all sides. Putin’s highly expensive rearmament programme has, therefore, been presented as a desperate attempt to preempt Western-led military aggression. Putin's rearmament program

W. Bush in Croatia in 2001, followed by a G8 summit in Italy. A measure of the changes in priorities can be seen from Medvedev's first trips when he became president in 2008, which were to Kazakhstan and on to China. And Putin started his second term in 2012 with trips to Minsk, followed by France, Germany, Uzbekistan and China. His meeting with Obama in June last year was sixth on the list. From the Russian perspective, the Kremlin has been hugely disappointed with the development of its relations with the West. It feels it has reached out at least twice – after the 9/11 attacks, as another example – but, it believes, has been rebuffed each time. Cohen argues it was the US policy of "triumphalism" under the Clinton administration that is to blame: the US considered it had "won" the Cold War and has been trying ever since to build on its military supremacy, while at the same time ignoring Russia's legitimate strategic interests in its traditional spheres of influence, such as Russia's so-called "near abroad." Things came to a head with Putin's famous 2007 speech in Munich, when he complained about Nato's broken promises not to expand "one inch" and its "provocative" placing of Nato forces on Russia's borders. "I think it is obvious that Nato expansion does not have any relation with the modernisation of the Alliance itself or with ensuring

I Cover story

bne April 2013

security in Europe. On the contrary, it represents a serious provocation that reduces the level of mutual trust. And we have the right to ask: against whom is this expansion intended? And what happened to the assurances our western partners made after the dissolution of the Warsaw Pact? Where are those declarations today? No one even remembers them," Putin said in the speech. But even in Munich Putin said Russia was still willing to become a strategic partner with the West. However, since his keynote speech at the St Petersburg Economic Forum in June 2012, even that talk has stopped. Russia has now drawn a line in the sand; Putin has made it clear that any further expansion of Nato will be extremely dangerous, as the Kremlin

"Russia and the US have actually already fought their first post-Soviet proxy war in Georgia in 2008" will not tolerate more western forces on its borders. And Georgia and Ukraine are next up as possible candidates. The issue of the US proposed missile defence system based in Europe – nominally to protect against "rogue states", but incidentally also effective against Russian strikes – is more of the same. Russia's permanent representative to Nato, Alexander Grushko, said in an unusually candid interview with Voice of Russia at the start of March that the Nato expansion project has exhausted itself. "It doesn't solve any real security problems, it just creates additional dividing lines in Europe, unnecessary tension and generates Cold War approaches not only in states' political behaviour, but in military construction as well," he said. "We see that Nato military infrastructure is getting closer to Russia. And we have to consider this factor in our defence planning," he added ominously.

The military aspects of this new renewed tension are mirrored by the Kremlin's clampdown in the civil arena. A new law on non-governmental organisations (NGOs) was passed at the end of last year that effectively kicked the development agency USAID out of Russia. The commentators focused on its nominal role to develop civil society, but the Kremlin saw USAID (and other similar organisations) as unwelcome interference in domestic politics. The so-called "Magnitsky case" has been even more divisive. The Kremlin was outraged by the US Congress' passage of the "Magnitsky Act" last year – which withholds visas and freezes financial assets of Russian officials thought to have been involved with human rights violations such as the death in custody of the anti-corruption lawyer – and responded with a ban on US citizens adopting Russian orphans. Cohen points out that despite the blatantly partisan nature of the Magnitsky Act, the "democratic" US press universally supported it without question, whereas there was a lively discussion and widespread condemnation in the "authoritarian" Russian press of the adoption law. All these moves (and many others) have only underscored the Kremlin's belief that the US exhibits double standards and is not to be trusted. "Can anyone imagine what the reaction from Freedom House would be if Putin were preparing to crucify someone, or to have decapitation (or any form of capital punishment at all) re-inserted into the Russian legal code?" Mark Adomanis asked in a recent piece in Forbes, following the announcement that this US ally would crucify or behead a group of minors convicted of armed robbery. His point was that there are plenty of other human rights abusers in the world, but only Russia has been singled out for legislative condemnation with the Magnitsky Act. Dangerous games Cohen argues strongly that the US is playing an extremely dangerous game. Opposition commentators like celebrity journalist Masha Gessen have openly called for a colour revolution in Russia

bne April 2013

and an ousting of Putin. But this naïvely assumes any new government would quickly take control, restore order and be better than its predecessor. Cohen's point is that we are talking about one of the most heavily armed countries in the world with a bristling nuclear arsenal and none of these assumptions are guaranteed – or even likely, if events in North Africa are anything to go by. The US policy of "triumphalism" is bound to fail. One of the main reasons the last war was "cold" was due to the respect each side had for mutual destruction, but the new balance of power is predicated on the US assumption of its military superiority as the "only superpower" left. Yet while the US does have the most powerful military in the world, it is not all-conquering as the wars in Iraq and Afghanistan show. And while Russia's military power was severely weakened by the collapse of the Soviet Union, it remains a formidable opponent. The US' intercontinental ballistic missiles (ICBM) outnumber Russia's, but the latter has more shortrange tactical nuclear missiles that threaten Europe (hence the idea of the missile shield). Moreover, Russia still boasts several world-class armaments. Its T90 main battle tank is as good as anything the US has; it is working on a fifth-generation stealth jet fighter, the T-50; and the S-400 anti-missile defence system is the best in the world and soon to be updated with the S-500. On top of the existing material, Russia has also started to work on rectifying its weaknesses: it is testing the Topol-M, the first ICBM to be developed since the fall of the Soviet Union. If a new arms race begins, then the Topol-M will challenge the US Trident missiles, which have not been upgraded in a decade, within the next 10 years. "It is high time to begin tackling the development of an advanced long-distance aviation system because it will take decades to appear. Even five years are not enough for such things," Ivanov said in March. In the meantime, the clash in policies will continue to destabilise global geopolitics. Russia is using its popular (and cheap) weapons as a foreign policy tool

Cover story

to cement relations with countries outside the US sphere of influence, in much the same way that Washington does with allies like Saudi Arabia, Israel, or used to do with ousted Egyptian president Hosni Mubarak. In just the first two months of 2013, Russia sold $2.5bn worth of arms – as much as it sold in all of 2000 when Putin took over from Boris Yeltsin – and has another $49bn worth of orders, said the head of the Federal Service for Military and Technical Cooperation, Alexander Fomin, in March. And this clash is already manifesting itself in increasingly violent ways. Contentiously, Cohen argues that Russia and the US have actually already fought their first post-Soviet proxy war in Georgia in 2008. And the current argument over Russian and western arms deliveries to Syria during the civil war is in the same vein, and only highlights the need to get Russia on board if international stability is to be ensured. Indeed, the nuclear test at the beginning of March by the former Russian client state North Korea and its decision to end the non-aggression pact with South Korea on March 7 is already making the need for this cooperation pressing. The situation in North Korea has provided an opening to improve relations, though. On March 15, the US announced plans to deploy 14 new anti-missile interceptors in Alaska after North Korea threatened a pre-emptive nuclear strike, and forgo development of a new interceptor that would have been deployed in Central Europe. The US' abandonment of a key part of a European missile defense plan that has been bitterly opposed by Russia was initially greeted by the Kremlin coolly, though Deputy Foreign Minister Sergei Ryabkov was more upbeat on March 21. "There is no unequivocal answer yet to the question of what consequences all this can have for our security," Ryabkov told reporters. "The causes for concern have not been removed, but dialogue is needed - it is in our interest and we welcome the fact that the American side also, it appears, wants to continue this dialogue."

I 11

I Perspective

bne April 2013

Cyprus has been the favourite offshore financial haven for Russian business. As of January, €43bn of the €68bn deposited in Cypriot banks was held by domestic residents, according to the central bank. Thus more than €20bn came from the rest of the world, with the bulk of that believed to be from Russia. However, many Russian companies are domiciled in Cyprus and so technically count as domestic, meaning the volume of Russian cash in the banks could well be more than that €20bn.

A fiscal Magnitsky Act bne

he last-minute deal stitched together with the Cyprus government and Europe to save the Cypriot banks from collapse will heavily punish large depositors. As far as the Kremlin is concerned, the raid on the estimated €20bn-30bn of Russian money banked there is the financial equivalent of the US' notorious Magnitsky Act. In order to secure a €10bn bailout from the so-called Troika (the International Monetary Fund, European Central Bank and European Commission), the Cypriot government agreed to restructure Laiki Bank by splitting it into good and bad banks. The bank's good assets will be merged into Bank of Cyprus and toxic assets will be later liquidated. Controversially, especially for Russia, holders of bank deposits of more than €100,000 will have a one-time levy of reportedly 30% imposed on them, while deposits below €100,000 will be secured. In the Russian government's first comments on March 25, hours after the deal was reached in Brussels, Prime Minister Dmitry Medvedev said Moscow intends to study the consequences of the bailout deal before making any move. "We have to figure out what this story turns into in the long run, what the consequences for the international financial and monetary system will be - and thus, for our own interests as well," news agencies quoted Medvedev as saying in Russia's first official response to the rescue. In an allusion to the dodgy nature of a lot of the Russian money in Cyprus, Medvedev was quoted by news agencies as telling a meeting of government officials: "In my view, the stealing of what has already been stolen continues."

The reason for the Troika's demand that Cypriot bank depositors are forced to "bail in" in order for the country to get a bail out is widely regarded as political expediency. With elections approaching, Germany's government does not want to be seen using its taxpayer money – as the bulk of the EU money will come from Germany – to bail out Russian oligarchs and gangsters who are squirreling money abroad. "German politicians seem to have adopted a very moralistic approach to the Cypriot bailout, which may well now reflect 'bailout' fatigue more than anything, plus the close proximity now of Bundestag elections [due in September]," Timothy Ash, head of emerging markets at Standard Bank, wrote in an emailed note.

That is a common tactic in Russia; companies or individuals who have angered the powers-that-be find their assets frozen, their offices raided by the tax authorities and other measures, such as environmental fines, applied to varying degrees. Russia could also make life difficult diplomatically on issues such as Syria and arms control. Nekrassov rejected the idea that Russia could decide to cut off natural gas exports to Europe via Ukraine, which it has done several times in the past to punish Kyiv for not paying its bills. "Gas is no longer a weapon," Nekrassov said. "When Russia did that before, it realised that the foreign energy lobby reacted and efforts to find alternative sources were increased. If Russia kept threatening, it knows that nobody would be buying its gas in 20 years' time."

CHART: The EU has made it clear that it views Cyprus as a special case, and this bail-in won't be repeated elsewhere; to the Kremlin, it looks awfully like another example of selective legislation specifically designed to punish Russia. Last year the US Congress passed the so-called "Magnitsky Act", which imposes travel restrictions and freezes US assets of any state officials involved in human rights violations and corruption. However, its name and motive comes from the death in custody of accountant and auditor Sergei Magnitsky

"In my view, the stealing of what has already been stolen continues" who was working with a large foreign investment fund, and the bill is seen directly targeting Russian officials implicated in his death. Especially galling for the Kremlin, newly appointed Secretary of State John Kerry was in Uzbekistan in March to renew the US' friendship with the Central Asian dictatorship, despite that country's far worse record on human rights. Inevitably, concerns are growing of Russian reprisals against European businesses for the Cyprus bank deposit levy. Alexander Nekrassov, a former Kremlin adviser, was quoted by The Guardian as saying that some Russians will undoubtedly suffer very badly from the levy. "Then, of course, Moscow will be looking for ways to punish the EU. There are a number of large German companies operating in Russia. You could possibly look at freezing assets or taxing assets," he was quoted as saying.

Perspective I 13

bne April 2013

"Moscow will be looking for ways to punish the EU"

BRICs in the global driving seat

im O'Neill, the man who coined the term BRIC, quit as the head of Goldman Sachs Asset management in February, a decade after he came up with the now famous label. How have the four giants that make up the group done in that time? Surprisingly, Russia has put in the greatest growth, with the economy expanding 537%. That just trumps China's 523%, while it's far above Brazil's 337% and India's 299%, according to the chart run in the Wall Street Journal. The result is clearly out of whack with current sentiment, with Russia's relations with the rest of the world at their lowest level for years. Portfolio investors have been returning to emerging markets, but Russia is being ignored. The discount on Russian stocks compared to BRIC peers is at an all time high, despite the fact that the country has the strongest growing economy in Europe.

Brazil 337%

Russia 537%

O'Neill is upbeat on the BRIC's next decade, but admits Russia may lag. "Controversially, I think world gross-domestic product between 2011 and 2020 will be stronger than each of the past three decades because of the BRICs," he tells the WSJ. China creates another Spain every year. In 2011, just one year, the increase of dollar GDP in the four BRIC countries was equivalent to the size of Italy's entire economy. "By 2015, the aggregate GDP for the four BRIC countries will probably be bigger than the US," he adds. "So what's going on in BRIC countries will be increasingly the real driver of global GDP." Russia in particular suffers from its dependency on oil and is likely to put in the slowest growth amongst the four, with an average of 4% a year, as it is also the most developed, the analysts notes, but claims that on its own, such forecasts miss the point. Russia, the supposed "weakest," is probably going to add more to global GDP this decade than the entire Eurozone, he claims.

India 299%

China 523%

I Eastern Europe

bne April 2013

impossible before 2016 at the earliest. The economy ministry's most optimistic forecast is for 5.4% growth from 2016 – and only if the government carries through on all its proposed reforms and creates 25m new high-tech jobs – something no one expects will actually happen. The ministry's more likely "target" scenario is Russia will be putting in a meagre 4.1% of growth by 2016, which is barely above stagnation levels. Currently, the economy ministry's GDP growth forecast is just over 3% for this year and 3-4% for a few years thereafter. Eroding independence An increasingly bitter dispute has broken out that could end with the independence of the Central Bank of Russia (CBR) being eroded, if the Sovietstyle command economy thinking of the statists is allowed to triumph.

Where's Russian growth going to come from?

The main issue being discussed in March was the efficacy of an interest rate cut. The CBR raised overnight rates to 8.25% in a surprise hike in September citing inflation concerns, at a time when the rest of the world has slashed rates to near zero.

Ben Aris in Moscow

Russian companies are up in arms as a result. Oligarch Oleg Deripaska recently described due to the high cost of borrowing, which contributed to the terrible first-quarter of RusAl, Deripaska's aluminium company.

ussia's economy is not just slowing; it is stagnating. In the first few months of this year, GDP growth slowed to a crawl and the Kremlin is starting to panic, setting off a lively public debate over how to kick start growth that so far has brought little consensus. Currently, the argument is over the efficacy of a potential interest rate cut, but even if rates are cut and that does bolster growth, the much deeper and wider questions on how to restructure the Russian economy remain. Like many other countries, Russia saw its GDP growth fall off a cliff at the end of last year. At the start of 2012, the economy was chugging along at a more than respectable 5% growth, but by December that had slumped to just 2.2%. And as we headed into the new year, economists were shocked by it tumbling again to a mere 1.6% growth in January – below even analysts'

pessimistic forecasts of 1.9%. Most people are sticking to their full-year GDP forecast of 3.5% growth for this year, but doubts are already appearing and even if Russia grows this much, it is still well off the 5% that President Vladimir Putin called for at the start of the year. The powers-that-be can be broadly split into three camps. The statists, led by Putin, who want to cut interest rates and so provide some stimulus to the flagging economy. The Ministry of

including the Finance Ministry, want the government to rapidly implement reforms and improve the business climate so the private sector can lift Russia Inc up again. In more general terms, the dispute is over the goal-setters and the bean counters. Putin's popularity (currently at around 65%) is predicated on the economic prosperity that he delivered over the last 13 years – incomes have gone up some 16-fold since 2000 – so

"Russia's central bankers are leeches sucking all the blood from the economy" Economic Development wants to tap more of the $500bn-plus in the central bank reserves and spend Russia's way out of trouble. And the liberals,

an economic slump represents a huge political danger for the erstwhile strong man. On the other hand, the economy ministry says 5%-plus growth is

Eastern Europe I 15

bne April 2013

But the CBR is sticking to its guns. Outgoing governor Sergey Ignatiev – who will be replaced in June by Putin's current economic advisor, Elvira Nabiullina – has rebuffed the growing criticism, arguing that the economy is already running at full potential; a rate hike would produce no extra growth but would stoke already higher-than-desired inflation rates (over 7% in February against the target of 4-5%). This is an argument echoed by the International Monetary Fund. The economy ministry is on the other side of the fence and wants growth increased through state investment in infrastructure, which will be funded by diverting revenues from crude oil and gas production fees and export duties normally destined for off-budget

Medvedev's $30bn giveaway

bne The big dollop of egg on Russian Prime Minister Dmitry Medvedev's face since it emerged a strip of water in the Barents Sea ceded by the thenpresident to Norway contains more than $30bn worth of oil and gas spells trouble for the already weakened premier. Russia and Norway had been negotiating for more than 40 years over just where to draw their maritime border and in 2010 Medvedev finally signed off on the compromise. The deal opened up the possibility to explore the region for oil and gas, which is already home to Russia’s massive Shtokman gasfield. Both countries claimed a 175,000-square-kilometre zone, about half the size of Germany, situated north of Russia's Kola Peninsula and the Norwegian coast in the middle of the icy northern sea. Quite sensibly, the two sides simply agreed to split their differences and draw the line through the middle of their respective preferred lines. The issue had bubbled since Soviet times, when the original row was over fishing rights to this bit of the sea. But the game has changed now that serious undersea oil and gas exploitation in some of the harshest conditions in the world is technically possible. Then on February 27 the Norwegian Petroleum Directorate announced that seismic surveys in waters previously disputed with Russia had found a further 1.9bn barrels of oil equivalent (about 85% of the additional resources could be gas and the rest oil) under the seabed worth an estimated $30bn. The Russian press piled in to make fun of the already weakened prime minister. "Aleksandr II sold Alaska, Dmitry Medvedev gave Norway the part of the Barents Sea with huge reserves of hydrocarbons," read the headline in Ekho Russkogo Severa, a regional news analytic portal based in Arkhangelsk. National newspapers, radio and TV stations all followed up with similar withering headlines including references to Khrushchev's ceding of Crimea to Ukraine. The fiasco has all but destroyed what is left of Medvedev's authority since he stepped aside to let Vladimir Putin run for the presidency all but unopposed in May last year. It has also catalyzed rumours that he is headed for the exit as a useful scapegoat for the rapidly slowing economy. From over 5% growth at the start of 2012, the last growth numbers show Russia’s economy had slowed to 1.4% in February. Economic prosperity is the foundation of Putin’s power – so if it disappears, then he is going to need someone to blame.

I Eastern Europe

reserve funds. The government has already promised to pull an additional RUB100bn ($33bn) from the reserve fund to spend on infrastructure. However, the economy ministry is talking about even more dramatic changes that would require the lifting of the strict "budget rule" just approved by the Duma in December, which ties the government's hands when it comes to spending petrodollars with the surplus automatically paid into the Reserve Fund that saved Russia's economic bacon during the 20082009 meltdown. "This is good news for growth expectations in the short run, but constant changes to the budget framework would damage the predictability of the Russian business environment," argues Natalia Orlova, chief economist with Alfa Bank. The finance ministry has taken the most sensible, but hardest to pull off, stance. It rejects any increases in state spending, stressing instead the implementation of structural reform as well as improvements to Russia's investment climate. The finance ministry says balanced state finances and accompanying stability are the key factors in improving the investment climate. Again the government has already launched 22 "roadmaps" of reform, but at issue is how soon (if ever) these reforms will have an impact. Given the first roadmaps were only launched last year and several – like those for the power sector and customs service – are still being discussed, it seems unlikely they will make a difference for a few years yet. At the same time, the government has clearly launched its first really concerted attack on corruption with new investigations and laws being introduced on an almost weekly basis since November. But the jury is still out on how effective this campaign will be. "Even the inner circle, those by [Putin's] side, there are so many thieves and corrupt officials there," Mikhail Gorbachev told the BBC in an interview in March. "If things don't change, Russia will continue to drift like a piece of ice in the Arctic Ocean."

bne April 2013

What will happen next is anyone's guess. However, Russia-watchers are nervous that the first repercussions will be felt at the CBR, which could lose some of its independence. On March 15, Putin ended mounting speculation by naming the former economy minister Elvira Nabiullina as his candidate to be the new governor of the CBR. Putin’s choice drew mixed reactions. On the one hand Nabiullina is seen as an extremely competent economist and was a successful minister. Moreover, she immediately suggested there will be continuity with the policies of the old team, as she asked Ignatiev to stay on at the CBR as an adviser. But on the down side, she has no banking experience and her public office career has focused entirely on promoting economic growth – not fighting inflation. The upshot is that observers are expecting the CBR’s policy to shift towards a "dovish" double mandate of controlling inflation, but tempered with efforts to accelerate economic growth. In practice, that means she will be quicker to cut interest rates than Ignatiev was, with analysts expecting the easing cycle to start as soon as April and a total of 75 basis points of interest rate cuts to come over the rest of the year. The corollary is that her appointment over the market's preferred choice of the current first deputy chairman of the CBR, Alexei Ulyukayev, does represent a mild erosion of the central bank's independence because she is clearly a Putinite. She comes directly from the presidential apparatus where she has been a presidential adviser for the last four years. Still, when Nabiullina takes over in June, she is unlikely to start a revolution. And given inflation traditionally falls away to next to nothing over the summer, she will have some room for cuts that won't stoke inflation, say economists. "First, the global context favours this step – several emerging market countries are currently cutting interest rates to prevent international capital inflows,”

says Alfa Bank's Orlova. "Second, President Putin's recent decision to limit tariff hikes at 6% year on year should keep cost inflation low, giving the CBR room to cut its policy rates. The president's preference for a lower interest rate seems to be an important factor in his decision on the new CBR chairman." Tail and headwinds In the meantime, Russia is facing a tough time. State spending has always been the first thing that governments reach for when trying to stimulate (in the UK the state now accounts for 50% of GDP, on a par with Russia). However, because of the inflation fears and a nonoil budget deficit of 10.4% of GDP (the deficit if you count out oil revenues), former finance minister Alexei Kudrin says the Russian government's hands are tied: the current budget saw spending increased by a mere 5% over last year, which is the first cut in spending in real terms after more than a decade of 20%-plus year-on-year increases. For the government, money is clearly very tight. "The non-oil deficit… has increased from 1.8% of GDP in 2004 to 13.7% of GDP in 2009 and now stands at 10.4% of GDP," Kudrin wrote in an op-ed in March. "Despite attempts to curb the expansion of government spending in the face of rising oil and gas revenues, the government stepped up spending. By the standards of the developed countries, and even BRIC countries, growing government spending is running at an unprecedented rate: from 2000 to 2012, federal government spending increased 12.5-times in nominal terms and by 3.6-times in real terms." That level of spending has come to an end: even with oil prices well over $100 since the start of this year, the federal budget is barely in the black. Increasing budget spending is not an option. Russia has to turn to its companies if the economy is going to recover quickly. Historically, there have been four important drivers of the Russian economy: extraction, construction, investment and, of course, consumption. However, none of these factors are doing very well.

bne April 2013

Eastern Europe

• Extraction The extraction of oil and many other natural resources is weak thanks to the lack of demand in the rest of the world due to the global slowdown. Russian industrial production suffered its worst contraction in January for since October 2009, down 11.8% on month. Uralsib notes that the main contribution to the weak industrial data was from the extraction sector, which contracted 3.6% on month and 1.2% on year in January, after growth of 2.1% and 0.2% respectively in December. In general, manufacturing is growing strongly, but here too it is starting to max out. "Manufacturing production continues to grow faster than mining and quarrying, but only because mining sector growth is so slow," says Sanna Kurronen, an economist with Danske Bank. "However, the manufacturing production level is also close to its potential and investments are needed to increase the production more rapidly." • Construction Construction is one of the more prospective drivers, as demand for new housing remains unsated. However, here too growth has been slow. Real estate prices have remained stable and construction – particularly in residential – accelerated in 2012, up 2.4% in 2012 form the year before, but this is not enough to drive overall growth and well below the pre-crisis double-digit growth. Indeed, there is a sufficient overhang in things like commercial space from the boom years, although other segments like warehousing are already starting to recover slowly. Still, construction material production slumped in January due to the lack of capital investment and this will be a difficult year for the real estate business.

• Consumption Consumption was the saving grace of the Russian economy in 2012, fuelled by white-hot consumer lending, up just under 40% from the year before – a pace that was maintained in the first few months of this year too. The predictions of 3.5% growth for this year are largely based on a continuation of the growth in consumer demand. But economists had a nasty shock when consumer data disappointed in January. "Retail trade growth decelerated sharply to 3.5% year on year in January after 4.5% year on year in 4Q12. Consumption drivers also weakened; real disposable income growth was up only 0.7% year on year and unemployment jumping to 6.0% from the recently revised year-end figure of 5.1% was a negative surprise. Retail loan growth was 39.6% year on year, close to the 39.4% in 2012," say analysts at Uralsib. What is confusing is that consumer borrowing is still running white-hot, so why is demand falling? Alfa Bank speculated that the reason is consumers have over-borrowed and its economist Orlova came up with the frightening estimate that 80% of new borrowing is being taken out to cover old loans now. Alfa Bank speculates that the high borrowing by consumers is now destructive: Orlova estimates that 80% of the loans taken out since the start of this year were used to pay off old loans. If she's right, then going forward more borrowing will actually destroy demand, not support it. The silver lining in this very dark cloud is the fact that the CBR is well aware of the problem with consumer borrowing

I 17

and has already moved to reduce it by imposing tough Basel III rules on the sector that kick in this June. • Investment The biggest unknown this year is what will happen to investment and, as bne pointed out in its Outlook 2013: Confused Picture For Russia report, the forecast for this year depends heavily on what happens to investment. Investment was above expectations in January, but still far too weak to support growth. The problem is that it is too little and of poor quality. "The fact that investment growth came in higher than expected in January, posting a 1.1% year on year increase, is positive but does not change the overall growth outlook. Investments contribute around 23% of GDP, and this item's growth is quite unstable, being heavily dependent on budget spending," says Orlova. The Russian economy needs investments of 25% to 29% to expand, so everything depends on the government's success in boosting investment through reforms and improving the investment climate. Without this investment, the potential growth rate of the economy will fall to 2.5%-3.0% over the long term say economists. And the need is already pressing. Danske Bank issued a report at the start of this year entitled, Russia: where to find new growth drivers, which was mildly optimistic. However, it concluded: "We continue to expect decent GDP growth from Russia of over 3% year-on-year in 2013-14, as domestic demand keeps up the good performance. However, the long-term potential growth level is edging down, as investments in production capacity and infrastructure are not sufficient."

Industrial Growth Drops to the Lowest Level Since October 2009 15 Industrial output, YoY, % 10 5 0 (5) Source: Rosstat

(10)

Oct 09

Jan 10

Apr 10

Jul 10

Oct 10

Jan 11

Apr 11

Jul 11

Oct 11

Jan 12

Apr 12

Jul 12

Oct 12

Jan 13

I Eastern Europe

bne April 2013

To the government's credit, the plans were not forgotten. Inflation continued to fall to an all-time low of 5.5% in July 2010 and despite a rise again to the current 7.3% on the back of a poor harvest last year, the investment programme was relaunched anyway. The main recipient so far has been the state-owned rail monopoly Russian Railways, which has received an average of $32bn a year since 2008, and the government has managed to pump $100bn a year into the infrastructure sector as a whole over the last four years.

www.brunswickrail.com

Macquarie and Renaissance seek out infrastructure deals

FUNDS:

Ben Aris in Moscow

e invest in infrastructure and industries with a strong alignment to infrastructure, as there is a very strong rising demand for these assets in Russia," says Pavel Nazarov, director of Macquarie Renaissance Infrastructure Fund (MRIF). That huge demand comes from the shoddy state of much of Russia's infrastructure today. Inflation is much in the news at the moment following the proposed appointment of former economy minister Natalia Nabiullina as the new central bank governor and what this means for the fight against it, and it's Russia's two-decade-long bout of high inflation that is main the reason for this situation. In its battle to bring down inflation from an historic peak of 2,333% in December 1992, the Russian state kept tariff increases to the bare minimum, starving everyone from utility companies to

grid operators of investment. Russian infrastructure has rotted in the meantime, and after almost 40 years with no investment it desperately needs to be renovated and replaced. The inflation battle was finally won in the spring of 2008 when the rate

New targets for investment are constantly being introduced. A road fund was set up and went into operation this year and the number of airports in Russia has been cut from 1,000 to 300 through a process of closure and privatisations in the last four years. All this activity is creating opportunities for investors, but private investment into infrastructure is still stepping off square one. Trailblazer Set up in 2008, MRIF is a pioneer in the field. The fund has a total of $670m under management that has been invested exclusively by bodies related to governments: the Eurasian Development Bank; the European Bank for Reconstruction and Development; the World Bank's commercial arm, the International Financial Corporation; the Kazakh sovereign wealth fund, Kazyna Capital Management; and the de facto Russian development bank

"We typically need to do a lot of work to craft well-structured deals that can become stable, long-term investments" fell to single digits for the first time in modern history. Almost immediately, the government drew up a $1-trillion investment programme, but by the autumn of that same year the global economy went into meltdown and all these investment plans were shelved.

Vnesheconombank, which is the largest investor with $200m in the fund. Currently, the fund has four investments: a stake in Brunswick Rail, Russia's leading commercial freight operator; a stake in Russia Towers, the leading

bne April 2013

provider of telecommunications infrastructure to Russia's burgeoning mobile phone providers; and stakes in two utility companies. "We have invested in both projects related to state-backed companies like in the power sector, and into private companies, including Russia Towers and Brunswick Rail," Nazarov tells bne. But Nazarov notes that while there is a strong need for private capital investment in many infrastructure subsectors, few of these areas are actually easy to invest into. "There are not many 'packaged' transactions in the market, and we typically need to do a lot of work with our partners to craft wellstructured deals that can become stable, long-term investments," says Nazarov. The problem is that while companies are becoming increasingly interested in selling off their non-core assets and optimising their balance sheets by concentrating on what they are good at, this doesn't automatically mean there are a lot of deals to do. In Soviet times, companies were built up into complexes: a steel producer could well own the power facilities that it needed to run its plant. "We believe there are opportunities to invest in infrastructure assets currently held on the balance sheets of large companies, but are not core to their business. These investments can be structured in the form of sales of existing assets with the subsequent lease-back arrangements or in the form of commitments to fund future capex against either lease-back or off-take agreements." This makes it difficult for the investment bankers to put together a deal in which they can invest. Nazraov says there are three criteria that define an investable infrastructure deal. 1. The object has to have predictable revenues, such as a take-off agreement, decades-long toll arrangement or longterm leases; 2. There need to be high barriers of entry so that the object enjoys close to monopolistic control over its business;

Eastern Europe

3. A low correlation to economic growth, so the revenues won't tank if economic growth slows mildly. In many ways, Russia Towers is a perfect example of the coming infrastructure projects that MRIF wants to find. As mobile telephony develops in a country, companies invest heavily in building transmission towers and opening up a region to their services as the only provider in the local market. However, after a few years

"We continue to like energy and we are looking at things like ports, airports and toll roads" their competitors arrive and also build towers. At some point, it makes no sense for everyone to build towers in the same place, so rivals agree to share the towers and in doing so cut costs. Eventually, the mobile operators give up on even this and sell their towers to a company like Russia Towers to run, moving the cost of towers from their capital investment column to a much more predictable operating cost. Russia is just reaching this last stage now, and Russia Towers was founded in 2009 to take advantage of this change and is already by far the biggest player in the game. Other sectors like power, bridges, roads and rail need to move to similar models. "We are constantly looking at new sectors," says Nazarov, who adds that the fund has money to make several more investments. "We continue to like energy and we are looking at things like ports, airports and toll roads."

I 19

I Eastern Europe

bne April 2013

Show trials in Moscow bne

he Kremlin is about to shoot itself in the foot again after it announced that it is opening an investigation into Hermitage Capital Management's Bill Browder for illegally trading in locally listed Gazprom shares during the naughties. Browder has gone from being Russia's biggest portfolio investor to spearheading a relentless campaign in exile in London against the Kremlin following the death of his associate, the accountant and auditor Sergei Magnitsky, while in Russian custody in 2009. It is Magnitsky who is the subject of another spiteful and image-tarnishing decision by the Russian elite to posthumously put him on trial for allegedly abusing tax incentives to help Hermitage Capital avoid paying taxes in 2001, the charge over which he was jailed in 2008. It is the first time that Russia has ever tried a dead man, and Amnesty International slammed the decision, calling it indicative of Russia's "worsening human rights record." The latest investigation into Browder, announced by a senior Interior Ministry official on March 5, will centre of accusations that companies belonging to Hermitage violated the so-called ring

fence around Gazprom's locally listed shares that banned foreigners from ownership. "The Interior Ministry's Investigative Department is investigating a criminal case concerning the illegal purchase of Gazprom shares by legal entities that were majority owned by foreign nationals, notably William Brower," said Mikhail Aleksandrov, head of the department's section which investigates organized crime and

accusations seriously, then every foreign investor in Russia should be under arrest." Browder claims that the charges are politically motivated and as a result of his campaign to sully the Kremlin's name and hold high officials to account for Magnitsky's death. The US Congress passed in December a bill called the "Magnitsky Act", which withholds visas and freezes financial assets of Russian officials thought to have been involved with human rights violations, including those that led to Magnitsky's death. "These absurd allegations are clearly motivated by the retaliation to our global campaign for justice for Sergei Magnitsky," Browder said in a statement. "Our campaign angers and scares the Russian officials who want to keep their criminally obtained wealth abroad." Can of worms The ring fence around Gazprom shares was eventually dropped at the start of 2006 and the share price subsequently soared. However, foreigners had long before worked out ways around the ban on owning what was at the time Russia's most attractive stock using a variety of "grey schemes." While foreigners were precluded from directly owning the shares there was nothing to prevent a Russian company buying them that was in turn owned by foreigners. Indeed, Russian investment

bne April 2013

Eastern Europe

The move will only serve to damage Russia's investment image further at a time when the Kremlin has been investing so much time and effort into improving it. But that is typical of the Kremlin. The golden rule of Russia watching is: if the Kremlin is faced with a choice between pursuing its domestic political agenda or preventing damage to its external image, it will always place the domestic goals ahead of its international reputation â&#x20AC;&#x201C; no matter how bad it makes itself look. As the charges mount against Magnitsky and Browder, the tame media has been doing its bit. On March 6, the proKremlin NTV channel â&#x20AC;&#x201C; notorious for a string of sensational exposes of Kremlin critics â&#x20AC;&#x201C; aired a programme devoted to Browder and the Magnitsky case, with a trailer for the programme intoning: "Who benefited from Sergei Magnitsky's death? No one but Browder." Browder now lives in the UK and is unlikely to travel to Moscow to face the charges, so the court says he will be

tried in absentia, following a refusal by the UK authorities to extradite him (or indeed any of the oligarchs on the run that now live in London). Magnitsky's death has become a cause celebre and the centre of worsening relations with the US. Congress late last year introduced sanctions against Russian officials accused of human rights violations with the so-called

Hermitage has denied the allegations. "The ownership of Gazprom shares was completely legal," the company said in a statement. "It was approved by the Russian authorities and the Russian Federal Securities Commission as well as Gazprom itself. If one took these

ban was triggered by the "Magnitsky Act", although this was later denied by other officials, including Prime Minister Dmitry Medvedev. Putin said late last year that the politicization of Magnitsky's death was "not our fault." "Magnitsky was not some human rights activist, he was not fighting for the rights of all," Putin told journalists at a massive news conference on December 20. "He

"Who benefited from Sergei Magnitsky's death? No one but Browder" "Magnitsky Act", partly due to heavy lobbying by Browder and anti-Putin protest movement figures, notably Boris Nemtsov, a former deputy prime minister. Just weeks after the law was enacted, Russia banned US nationals from adopting Russian children. Putin's spokesman, Dmitry Peskov, said the

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

"These absurd allegations are motivated by the retaliation to our global campaign for justice for Magnitsky" corruption cases. Aleksandrov said that Russia lost some RUB3bn ($97m) from 29 transactions with Gazprom shares concluded by Browder's firms.

was a lawyer for Mr Browder, whom our law enforcement agencies suspect of committing economic crimes in Russia." There may be some truth to that. But as Eugene Ivanov writes in Russia Beyond the Headlines, "unfortunately the Magnitsky trial looks more like a desperate attempt at revenge."

What you need to know

banks happily set up these schemes and actively marketed them to foreigners, including leading investment bank Troika Dialog, which has since been merged with state-owned Sberbank. Charging Browder with illegally selling Gazprom shares to foreigners will open a can of worms, as almost every single significant Russian investment bank and international fund investing in Russia would also be open to the same charges.

I 21

www.bne.eu

I Eastern Europe

bne April 2013

rising from 11.2% in 2011 to 14% in 2012. "Our goal is to reach 20% ROE and I am confident we can do it in the next few years," says Volchenko, a petite but ebullient woman who exudes energy and hails from Yekaterinburg, the former home of the Russian mint. The key to the bank's growth has been to outperform its rivals by offering better quality of service, commanding lucrative niches and simply being better than the state banks. At the core of PSB's strategy is its corporate banking.

Russian banking enters new phase Ben Aris in Moscow

hings have changed in Russia's banking sector since the crisis and life has got a lot tougher for the commercial banks. Gone are the heady days where banking capital was growing by 40% a year or more and there was plenty of cash for everyone to expand. Since the 2008 global crisis, the sector's growth has slowed to half that rate (and even slower in Moscow), while the big state-owned banks have got their act together and are now providing stern competition to the smaller commercial banks. But by combining a focus on quality, service and seeking out profitable niches, the best of the commercial banks are recovering fast and are optimistic about the future. However, the emphasis has changed from growth to profits. Promsvyazbank (PSB) has long been a leading commercial bank in Russia, which made money by focusing on Russia's legions of mid-sized companies that are still big by European standards, but not big enough to attract the attention of the state-owned banking

behemoths. PSB was hit hard by the crisis along with everyone else and had to completely rethink its retail strategy, but since last year the bank's return on equity (ROE) has been improving. “Last year was our most successful in the last five years,” says Alexandra

"Corporate banking in Russia has become very, very competitive and so you have to compete on quality of service, not just the margins, which have been shrinking," says Volchenko. "You need to be quick and visible to your customers." The bank's success at identifying some lucrative niches has also helped. The corporate business generates others like trade financing, factoring, payroll, private and retail banking to owners/employees, not to mention the fee-based income from providing corporate services. Although the bank is ranking 8th in the country in terms of assets it is number two in trade finance and factoring, number four in SME lending and number six for retail deposits, making PSB one of the biggest privately owned commercial bank in the country. Corporate business

"Last year's phantom crisis led to a great deal of volatility" Volchenko, first vice-president at PSB. “Our return-on-equity (ROE) was 17-18% pre-crisis, but fell heavily in the worst of the turmoil. But thanks to our new strategy that focuses more on small- and medium-sized businesses, retail banking and corporates, we have recovered and are now growing strongly.” Volchenko says PSB’s 2012 profits were the highest ever at over RUB8bn ($270m) and the ROE has rebounded,

remains vital for the bank accounting or about 80% of the bank’s loan book and 62% of its deposits. Navigating a phantom crisis Last year was a difficult year for everyone, as the recovery from the 2008 meltdown stalled across the entire European continent. There was a "phantom crisis": banks felt the pain as if Western Europe had had another financial collapse, but no collapse actually happened, says Volchenko.

bne April 2013

"In the first half of last year there was a significant improvement, but as time went on the cost of funding was being driven up," says Volchenko. "However, at PSB we made a strategic decision early on to diversify our funding base, so as the cost of market-based money rose we could rotate and make more use of our deposit based funding in the second quarter. We were also able to attract significant inflows of deposits and current accounts in the last four or five months of the year – about RUB50bn – which helped keep our costs down and profitability high." In Russia's banking sector these days big is beautiful. Several international banks like Barclays and HSBC entered the market at the height of the boom years in the middle of last decade, but they didn't have time to build enough business. Following the crisis, the slowdown in asset growth squeezed margins and many of these banks pulled the plug. PSB has been lucky to gather enough momentum to get to a size where it can weather the storms of the last few years. "Importing European models to Russia brings benefits, but at the end of the day the market here is still immature and you have to be alive to the realities of the market," says Volchenko. "This gives Russian banks the edge." To maintain the bank's growth, PSB has also turned to the burgeoning SME sector. The bank was an early member of the European Bank for Reconstruction and Development's highly successful SME loans programme, and today PSB has some 73,000 SME customers of which 11,000 have also taken loans from the bank. "In 2012, this segment was worth approximately RUB1bn. It is a huge potential market, not just for lending, but also for fees and services," says Volchenko. "Russia can't just focus on commodities. The development of entrepreneurialism is key for the development of the country as a whole.” SME development is high on the government's political agenda and PSB is playing its part. In January the bank launched a RUB300m venture capital fund to finance SME start-ups, which

Eastern Europe

will be invested through to 2014. The fund plans to invest into 50-70 small companies in traditional, not hightech, spheres that need expansion capital. The state agency to support SME development, OPORA, is also a participant in the fund. "The fund is not a big one, but it is designed to support our customers and we will expand it if it is successful," says Volchenko. New rules The prospects for this year are a bit better as confidence slowly returns. Corporate lending in particular surprised analysts by accelerating in February: sector-wide corporate lending was up 15% on year. But even

I 23

However, all of Russia's banks will need to boost their capital in the new slower growing Russia. The sector as a whole will need to raise $100bn of fresh capital over the next three years to meet the new stricter capital rules, Alexei Simanovsky, the CBR's first deputy chairman, said in March. The sector's capital increased by 16.6% in 2012 to RUB6.1 trillion ($203bn) including the RUB1 trillion of profit banks earned – a record. "This means banks can cover a considerable part of their requirement for capital with their profits," Simanovsky said. "The funds of domestic and foreign investors can also be used for this purpose. But rapid

"These new rules will affect banks' willingness and ability to lend to consumers" with a recovery, banks are going to see growth at a slower pace going forward after the Central Bank of Russia (CBR) imposes stricter prudential rules on the sector. "Last year's phantom crisis led to a great deal of volatility and to the CBR decision to accelerate the implementation of tougher regulations," says Volchenko. Russia will introduce the so-called Basel III regulations that shift the focus to providing more reserves for when things go wrong. Recommendations to increase risk weightings are effective from the start of this year and will become compulsory from start of next year, which will hit big lenders to consumers especially hard. "These rules will affect banks' willingness and ability to lend to consumers," says Volchenko. "The upshot will be to slow retail lending from the second half of this year. But at PSB we decided to create a cash cushion in the first half of this year." PSB took advantage of rules that allow subordinated debt to be added to the bank's capital, something that will be phased out under the new regime. The bank raised $600m in subordinated debt and another $120m as a perpetual bond in February.

growth in bank lending, especially in the household sector, which grew by just under 50%, continues to put pressure on the sector." Retail lending has slowed a little, but still expanded by just under 40% in February. However, analysts are expecting growth in retail lending to slow to about 25% this year. Volchenko says the game has changed and banks need to get ready for the new reality. In the boom years, returns of 18% to 25% on equity was usual, says Volchenko. But now returns have fallen, owners are more cautious about injecting more capital into their banks. “The return on equity of the bank is more important as shareholders won’t want to invest if the returns are poor and banks won’t attack capital unless they know what to do with it. Our return on equity has shown solid improvement on a very consistent basis this year rising from 5.9% two years ago to 11.2% in 2011 and 14.0% in 2012. We expect continuing improvement this year, especially with the contribution of our retail business and very good performance of our credit process and controls,” says Volchenko.

I Eastern Europe

bne April 2013

Standard Bank, says stripping Vlasenko of his seat would seem at odds with the government's stated intention of pushing ahead with the FTA. "The EU has made it crystal clear in recent weeks and months – including presumably during Yanukovych's visit to Brussels [in March] – that the application of selective justice had to be ended as the price of getting agreement on a FTA by the May deadline set by the EU," says Ash. "At face value the Ukrainian government would seem to be burning its bridges with the EU and the West and undermining its negotiating position with Moscow in the process."

Ukraine's pugilistic democracy Ben Aris in Moscow

fter a four-week hiatus during which Ukraine's feisty opposition blocked the workings of parliament in protest at President Viktor Yanukovych's heavy-handed policymaking, the Rada resumed work in the middle of March – and opened with a full-scale brawl between deputies. The opposition had been blocking parliament's work as part of a demand to introduce personal voting as opposed to the current bloc voting by factions, which would have the effect of increasing the opposition's sway. The blockade had to be broken for one day because if the assembly doesn't meet for 30 days, the president has the option of dissolving it under Ukraine's constitution – and no one wants that at the moment. At the March 5 session, MPs of the opposition factions immediately again tried to block the rostrum, in protest against a government-inspired lawsuit that resulted in Serhiy Vlasenko, a defence lawyer for former prime minister Yulia Tymoshenko, being stripped of his parliamentary powers

on the grounds that he had been doing business while a member of parliament. The move by the government was deeply ironic, as the majority of Ukraine's deputies are businessmen who are specifically there to promote their own interests. Vlasenko's dismissal will have wider consequences too, as it caused a storm of criticism from Europe and adds another new obstacle to Ukraine's attempt to reach a free trade agreement (FTA) with the EU. European Commissioner for Enlargement and European Neighborhood Policy Stefan Fule lambasted the court ruling, saying: "Stripping a parliamentarian of his mandate like in the case of Vlasenko is not the European way. Does this bring Ukraine closer to the EU?" Fule asked rhetorically on Twitter. No it doesn't. The EU has already dug its heels in over Tymoshenko, explicitly linking her release from prison to the trade deal. Kyiv's response has been to start a murder investigation that could see Tymoshenko jailed for life. Tim Ash, head of strategy at

These pugilistic debates in the Rada are reminiscent of Russia's parliament in the 1990s when the ultra-nationalist leader of the Liberal Democratic Party, Vladimir Zhirinovsky, shot to fame after he started punching more liberal female colleagues during policy discussions. But the scene coming out of Kyiv put even Zhirinovsky's antics to shame: the fracas looked more like a clash between rival football fans at a match. These fights have become a regular feature of policy debates in Kyiv. One of the most memorable sessions occurred in April 2010, when deputies arrived in the chamber armed with eggs and flour. Then-parliamentary speaker Volodymyr Lytvyn found himself taking up a defensive position in front of the lectern hiding behind two umbrellas as he was bombarded by the rest of the assembly. To his credit, he resumed his speech without showing any discomfort. Russia's parliamentary clashes are a lot calmer these days. Fisticuffs has given way to more civilised protests, such as the wearing of white ribbons (the insignia of Russia's nascent opposition movement) or holding up placards during debates. Ukraine's Rada is almost evenly divided between the ruling Party of Regions and their redoubtable opponents from the opposition. In Russia, the ruling United Russia has a larger majority, but since the Kremlin started launching corruption investigations into its own loyal deputies the mood has become

bne April 2013

a lot more dour. Moreover, Russia's opposition is rapidly fragmenting and these deputies have spent more time recently fighting each other rather than their enemies in United Russia. Both these parliaments stand in stark contrast to the political millponds in the rest of the former Soviet Union, where the "opposition" are a few token representatives of parties not obviously aligned with the president (but nevertheless mostly loyal to him). In Turkmenistan only one party is allowed, the democratic party of Turkmenistan, which holds all the seats; deputies in Ashgabat have no one to fight even if they wanted to. Take to the streets Work at Ukraine's parliament has been frozen since February as the opposition attempts to turn the screws on Yanukovych, who is rapidly and successfully dismantling the structures that underpin democracy. With tensions rising, the leader of the Batkivschyna faction in parliament, Arseniy Yatsenyuk, called on the population to take to the streets over the next two months in what could possibly turn into an Orange Revolution Mark II (the first Orange Revolution of 2004 overturned a dubious presidential election and propelled Viktor Yushchenko and Tymoshenko into power). However, observers are sceptical that Yatsenyuk has the charisma to pull it off. His choice of "Nobody will ever overcome us. We are strong and we are heading for victory" as a rallying cry for the street action to come is a good example. "Catchy, inspiring, memorable and convincing eh? – Yes, quite – it's awful! Even the slogan isn't convincing as a slogan – despite what it says is probably quite true…. eventually…," Nikolai Holmov, a blogger living in Kyiv, wrote in March. Yatsenyuk's team realized their mistake and quickly changed the slogan to the far more suitable "Arise Ukraine!" But even if the crowds have something catchier to shout, they are unlikely to

Eastern Europe

show up on the day. "[Yatsenyuk] does not... enthuse as a personality. He does not make you want to get out of your chair, clench your fist and punch the air shouting 'Rise Ukraine!' He is more likely to make you want to put the kettle on, make a cup of tea, and discuss with your wife what he said, over a biscuit," says Holmov. The pugilism in the Rada is understandable, as the opposition must be getting frustrated. Despite the blatant grabbing of the country's assets by Yanukovych and his so-called "Family" clan, led by the president's eldest son, the population remains more resigned than angry. A recent poll by the Razumkov Center found that President Yanukovych would win the presidential election slated for 2015, if it were held now: 20.7% of respondents would vote for Yanukovych, 14.4% for UDAR Party leader and boxer Vitali Klitschko, 11.3% for Yatseniuk, 6.6% for the right-wing nationalist Svoboda Party leader Oleh Tiahnybok, and 4.8% for Communist Party leader

"Yatsenyuk does not make you want to get out of your chair, clench your fist and punch the air shouting 'Rise Ukraine!'" Petro Symonenko. Clearly, the citizens of Ukraine have become weary of all the arguing amongst their "representatives", who seem to pay little attention to their problems or needs, distracted by the cut and thrust of politics. An even more telling poll in March found that Ukrainians trust the church and TV more than the country's banks, parties and courts put together. The church enjoys the most trust, having the faith of just under two-thirds of the population, according to the Razumkov Center, followed closely by the media, which has the trust of 61.9% of respondents. The rest come a long way behind with 22.4% for the courts, 20.5% for all political parties, and 17.3% for the commercial banks.

I 25

I Central Europe

bne April 2013

an "irreversible" situation whereby parliament's power to protect the constitution would supersede that of the Constitutional Court, making parliament the supreme sovereign institution. This in effect supports critics of the package, who say it threatens the independence of the judiciary, contravenes the principle of separation of state and church, and ultimately benefits Fidesz via restrictions on political advertising. Along with a narrow definition of heterosexual marriage and family, it also restricts the powers of the constitutional court by annulling any decisions made before the new constitution came into effect in January 2012. "Orban is now building up an autocratic regime on a daily basis, and we are living in an era of constitutional dictatorship where everything depends on the will of just one man – Orban," Attila Mesterhazy, the Socialist leader, told reporters after the vote.

Europe's "constitutional dictatorship" Kester Eddy in Budapest

t lunchtime on Monday, March 11, a (very) thin line of four students sought to block the entrance to the parliament's car park in Budapest: the students – sporting placards declaring "Don't betray Democracy" – held their sit-down protest against the imminent vote on the controversial "fourth amendment" to Hungary's constitution, due that afternoon. But just as security forces soon dispersed the protesters, so too, inside the house, did the ruling FideszChristian Democrat MP caucus dispense with the opposition. Amid a noisy protest, 265 voted in favour, with 11 against and 33 abstentions, of making the 14-page document law, pending its presidential review.

The vote flew in the face of appeals in the previous week by the EU, the US and Council of Europe urging Viktor Orban, the Hungarian prime minister,

the amendment appeared to enshrine in the constitution some laws with which the Commission had expressed concern.

"Orban is now building up an autocratic regime on a daily basis" to delay the parliamentary vote and allow a full impact assessment of the proposed constitutional amendments. On the afternoon of March 8, Jose Manuel Barroso, president of the European Commission, phoned and later wrote to Orban to say he feared

Despite a polite, if short, reply, assuring Barroso of his commitment to "European norms and regulations," the attention appeared to stiffen the prime minister's resolve. Orban told his party on Monday, March 11 that he would not "give way" to international pressure. Approval of the amendment would create

Central Europe I 27

bne April 2013

Socialist MPs hung black flags out of the windows of Parliament "in mourning for Hungarian democracy." Andras Schiffer, leader of the green LMP, said the prime minister worked "continuously" to eliminate the rule of law, while former prime minister Ferenc Gyurcsany cited Orban's declaration in 2007 that, "the rulings of the Constitutional Court are binding on everyone; there are no loopholes, or getting round it, this is an iron law of Hungarian democracy." Taking to the streets The vote sparked demonstrations in front of parliament and in front of the Presidential Palace, where several thousand gathered before a large contingent of anti-terrorist police barred entry. Displaying banners declaring, "The Constitution is not a Game", they urged President Janos Ader – who was absent on an official visit to Germany – not to sign the parliamentary vote into law. Although attended by all age groups and largely peaceful, some clashes with the police were later reported.

Flight of the humbled banks

bne The foreign lenders that dominate Hungary's banking market have been hammered into losses over the past three years from a capricious government and rising bad loans. But while angry and disillusioned, they've all rejected any suggestion that they intend to quit the country - until now. The CEO of Italy's biggest bank, Intesa Sanpaolo, was the first to break ranks on March 12, suggesting the lender could cut its presence in Hungary, which he said had turned into a "nightmare" for the financial services sector. "Hungary as you know used to be very good for financial services – it has now turned into a sort of nightmare," Enrico Cucchiani said on a conference call. "We made a very significant acknowledgment of the situation in the fourth quarter, it continues to be a challenging environment, we have plans in place to restructure operations rather aggressively… and could reduce our presence." Any retrenchment should fit nicely with the wishes of Prime Minister Viktor Orban, who announced the same day that he'd like to see at least 50% of the country's banks back in Hungarian hands. "It's an unhealthy situation that foreigners have such a high degree of ownership in Hungary's banking system," Orban said. "While respecting international treaties and relevant economic norms, we must strive to increase the Hungarian ownership ratio within the Hungarian banking system. The government has a target number – we would like at least 50% of the Hungarian banking system to be in Hungarian hands." Certainly, Hungary's banks are struggling. Intesa's Hungarian unit lost ¤279m in the fourth quarter, mostly due to higher provisions needed to cover losses on loans. And the Hungarian banking sector as a whole fell to its first overall loss in 13 years in 2011 on the back of these rising bad loans, as well as a crisis tax introduced by Orban's government when it came to power in 2010, and a one-off scheme that forced them to shoulder huge losses on foreign currency mortgages. A new financial transaction tax and refusal to drop the crisis tax on the sector has further irked the large Eurozone parent banks that control much of the market, but they have insisted – in public at least – that they are in Hungary to stay. That determination is likely partly driven by the fact they'd struggle to claw back even a small percentage of their investment if they tried to sell their Hungarian assets; it also depends on a longer-term view that the government and its unorthodox policies can't last forever – 2014 to be exact, which is when the next elections are due.

I Central Europe

Derailed In a sign of how fragile this idea of Baltic unity is, the European Commission in March launched an antitrust investigation against the Lithuanian state-owned railway company Lietuvos Gelezinkeliai for removing a rail link between Latvia and Lithuania, a move that it charged hindered competition. Lietuvos Gelezinkeliai dismantled the rail lines connecting Renge station in Latvia to Mazeikiai in Lithuania in 2008, following an order from the Lithuanian government., which claimed that the track is in a bad condition and could cause an accident. It has not reopened the route since. "The removal of this track could have prevented customers from using the services of other rail operators for the transport of freight between Lithuania and Latvia," the Commission said, adding that it will "treat the case as a matter of priority." There is a subplot to this: Mazeikiai is home to ORLEN Lietuva, the only oil refinery in the Baltics and a subsidiary of Poland's PKN Orlen. Following the removal of the rail lines, Orlen has been forced to use another route, which is some 120 km longer. Both Orlen and Latvian state-owned rail company Latvijas Dzelzcels complain that Lithuania's move is aimed at protecting its own transport companies at the expense of their competitors.

bne April 2013

However, the government's communications office defended the amendment, saying parliament had been forced into the move by the Constitutional Court's ruling in December last year that had annulled part of the "Temporary Provisions" to the Fundamental Law (ie. Constitution). The Court had not issued a "substantive criticism" of the Temporary Provisions, but rather objected on formal grounds, the office argued, and hence the amendment was not anti-constitutional. "According to the Constitutional Court, a unified Fundamental Law can mean only one document, thus the National Assembly is obliged to incorporate all constitutional-level provisions in one legislative text." But despite this, and soothing statements by Janos Martonyi, the foreign minister, who told the Financial Times that international concerns were based on "misunderstandings" and – in contrast to his prime minister's statement in parliament – that "the legislature felt the powers and competences of the constitutional court were extended and not reduced," the reverberations from Monday's vote are likely to continue as both international institutions and business assess the impact. The situation is further complicated by the recent appointment of Gyorgy Matolcsy, the mercurial former finance minister, to head the central bank. Matolcsy rattled markets on March 8 by stripping most of the powers from

bne April 2013

Central Europe

the two deputy governors appointed during the time of the previous governor, Andras Simor. The move raised concerns that the bank will lose independence as it moves to support government efforts to boost growth and jobs in the run-up to the next general election, due in the spring of 2014. Opposition to the amendment now centres on hopes that the president will veto the package – a " very unlikely move," according to Szabolcs KerekBarczy, executive director of the Freedom and Reform Institute, a rightleaning Budapest think-tank, who points out that Ader and Orban are old friends from university days. "In that case, Fidesz would nevertheless pass the same amendment very soon. Ader then would have no other choice but to resign. I am sure, though, he will not veto, and even if he did, he wouldn't resign. Thus Orban will drag Hungary into a more full autocracy," Kerek-Barczy says. The political and legal unpredictability in Hungary poses potentially serious problems for business and investment, Nicholas Spiro, managing director of Spiro Sovereign Strategy, a Londonbased risk analysis company, tells bne. "The problem is that Hungary needs foreign investors – both strategic and financial – in order to help the economy grow and to avoid, should market sentiment not remain favourable, being forced into the arms of the International Monetary Fund," he says. Yet "the government is going out of its way to undermine investor confidence further at a critical time for market sentiment."

"The rulings of the Constitutional Court are binding on everyone - there are no loopholes"

I 29

12 months to end-September, NRDs increased by nearly 20%, mainly due to depositors from the Commonwealth of Independent States (CIS), the successor to the Soviet Union, relocating their funds from Cyprus, according to the IMF. At the end of September, about a third of NRDs were from EU countries, 12% from CIS countries and 55% from other non-EU jurisdictions. But with a lot of the EU money coming from Cyprus and a big slice of non-EU money coming from offshores such as the British Virgin Islands and Belize, it is estimated by the IMF that 80-90% of NRDs come from the CIS.

Latvia's absent depositors Mike Collier in Riga

pinion is divided on the Latvian banking sector. According to the country's banks and regulators, it is in rude health with the central bank declaring bluntly that "concerns about the sustainability of the Latvian banking sector have no grounds". The International Monetary Fund (IMF) begs to differ, and has joined a growing list of critics saying so publicly. The cause of their concern is the increasingly high level of non-resident deposits (NRDs) appearing in the Latvian financial sector. On January 28, the IMF, in its own second review following Latvia's completion (and early repayment) of its €7.5bn bailout loan, warned that this rapid rise in NRDs in the banking system is "a potential source of vulnerability, with possible implications for Latvia’s liquidity position and reputation." While attracting foreign money is in many ways desirable, it comes with

numerous risks, particularly when a small, relatively poor state like Latvia finds itself guaranteeing big deposits washing over the border into banks that have big question marks over their transparency and stability. Effectively, there are two sorts of banks operating in Latvia: mainly Nordicowned banks dealing with domestic clients and boutique banks dealing with non-resident clients. NRDs across the Latvian banking system hold about LVL5.5bn (€7.8bn), or 51%, of total deposits. Almost two-thirds of Latvia's 29 banks specialise in NRDs, accounting for 43% of the banking system in terms of assets and 58% in terms of total deposits. NRDs account for more than 70% of deposits for two-thirds of local banks and more than 60% of deposits for all non-Nordic subsidiaries. Not only is the size of Latvia's NRD sector big, it is growing fast. In the

Not that there is anything wrong per se with attracting money from the CIS. If it's clean money, Latvia would be foolish to spurn the eagerness of investors to put their money somewhere they feel is safe, where they can speak Russian and where they have access to sophisticated, well-regulated banking services. With a treaty on avoidance of dual taxation with Russia in place, there are good reasons for Russian investors to consider depositing with Latvian banks. But if it's money from dubious sources finding its way to Latvia because it's unlikely to ever be detected entering the main European banking stream, the ultimate payback for Latvia won't be pleasant. "Given their short maturity and higher volatility, NRDs are particularly prone to sudden reversals," the IMF said in its report. "Given the size of the sector, a sudden reversal of NRD flows, and the potential of contagion to resident deposits, represents a source of vulnerability to international reserves and a significant contingent fiscal liability (via sovereign backing for the deposit insurance system)." And the IMF is far from alone in its criticism. In its own second review of Latvia's post-loan situation released on January 15, the European Commission wrote: "There are risks inherent in a large non-resident banking sector... The Commission invites the authorities to follow closely what kind of financial flows are attracted,

I Central Europe

Latvia formally applies to join the euro

Tim Gosling in Prague Latvia on March 4 launched its formal application to join the Eurozone from January 2014, requesting at the same time that the European Commission and European Central Bank now offer a final assessment of the Baltic country's readiness to adopt the single currency. "This is a day that will enter Latvia's history," Finance Minister Andris Vilks told reporters during a special ceremony when he, Prime Minister Valdis Dombrovskis and central bank chief Ilmars Rimsevics signed the application, which will be considered by Eurozone finance ministers in June or July. Despite opposition from a majority of Latvians, the government has pushed to fulfill the criteria for joining the euro since the 2008 crisis when the economy was near collapse. Harsh austerity measures – heralded by many as an example to be followed – have understandably drained support for the single currency among Latvians, and polls show much of the population worries about the effects of a currency switch on prices and the country's independence. However, the prime minister claims the euro will benefit Latvia in terms of increased investment, lower currency exchange costs and would help many households. As in many Emerging European states, a significant proportion of Latvian mortgages are denominated in euros. Dombrovskis said he expects public opinion to swing behind accession as the entry date gets closer, and he continues to reject any discussion of a referendum. That leaves the decision in Brussels' hands, and will depend on the convergence report, which according to European Commission spokesman Simon O'Connor, should be presented to EU economy and finance ministers this spring. Latvia's macroeconomic indicators - including its budget deficit, state debt and inflation - are in good shape to meet the Maastricht criteria governing euro entry following the austerity and reform efforts over the last few years. In 2008-2010, the country saw the biggest drop in GDP in the EU, with output falling a cumulative 20% as the economy's credit-fuelled surge burst, a property boom imploded, and the (relatively) major bank Parex collapsed. Last year, Riga paid off the International Monetary Fund-led bailout it received during the crisis three years early, and posted the highest economic growth in the EU in 2012 at 5.5%. However, concerns remain over the banking sector, and the growing volume of bank deposits from Russia and other former Soviet states in particular. While those issues are not formally linked to the conditions for entering the currency, such risks are unlikely to go unmentioned behind the scenes, with the Eurozone hardly in need of any more banking problems. If successful, Latvia would join Baltic neighbour Estonia in the currency union, with Lithuania's recently appointed government having pledged to seek entry in 2015.

bne April 2013

where they are invested, what are the activities of non-resident banks in the domestic market, etc. In particular, it must be kept in mind that the business, legal and regulatory environment in CIS countries is often weak and investments/loans in these countries call for caution (checking creditworthiness, enforceability of collateral, etc.). "Also, attention should be paid to the capital hikes where the source of financing may be coming from loans between related entities/persons. The Financial and Capital Market Commission may need to further enhance knowledge of activities of individual non-resident banks and at times be more intrusive... The authorities should devote more financial and human resource capacities and attention to tackling complex economic, financial, money laundering and tax evasion crimes... There is evidence that institutions like the economic and the financial police have inadequate resources to offer attractive remuneration and keep or hire experienced and well qualified staff." But it is what the IMF calls "reputational risk" that is perhaps the biggest danger with Latvia's NRD "success story". Reputations at stake The names of several Latvian NRD banks crop up regularly in connection with major financial scandals: the notorious €400m Ukrainian oil rig case (covered extensively by bne) shows Trasta Komercbanka was used to transfer funds. In July last year, London lawyers representing the anti-corruption lawyer Sergei Magnitsky, who died in Russian custody, and his client Hermitage Capital sent evidence to the Latvian authorities alleging that no fewer than six Baltic banks (Aizkraukles banka, Trasta Komercbanka, Baltic International Bank, Baltic Trust Bank, Paritate Bank, and Rietumu banka) were used to launder around $63m "directly from the Russian Treasury through shell companies to the Latvian banks".

bne April 2013

In November, campaign group Global Witness said it had seen documents from a New York court alleging that Maxim Bakiyev, the son of the former president of Kyrgyzstan, had been using a $45m account at Baltic International Bank for insider trading deals on the stock exchanges of the US, the UK and

Central Europe

example, the number of staff keeping an eye on NRDs has been "adjusted appropriately". In December he told bne that the high level of NRDs was no threat, despite an admission that in contrast to other financial centres such as Switzerland or Luxembourg, "Latvian banks mainly provide financial logistics

"The authorities should devote more financial and human resource capacities to tackling complex economic, financial, money laundering and tax evasion crimes" elsewhere. Bakiyev is also wanted in Kyrgyzstan on charges of looting the state treasury. Baltic International Bank is majority owned by Valeri Belokon, chairman of Blackpool Football Club and a former business partner of Bakiyev's. Following his sacking as Russian defence minister by Vladimir Putin in November in connection with a RUB3bn corruption scandal at Oboronservis – a company owned by the Russian Defence Ministry – Anatoly Serdyukov was spotted in Latvia, according to local and Russian media. While Serdyukov is currently only a witness rather than a defendant, speculation has begun that Latvian banks may be involved in the case. The attitude of the Latvian authorities seems to be that the brakes still work just as well as they always have – as if they have sustained head injuries causing memory loss during the catastrophic crashes of first Parex Bank in 2007 and then Krajbanka in 2011. Briefing journalists on February 5 about the Latvian banking sector's progress in 2012, Kristaps Zakulis, head of Latvia's financial regulator the FKTK, said: "Banks are adequately capitalized and liquidity is high." Zakulis insists that "proper risk management" is in place and that, for

was illegally sent out of the country via offshores last year alone. Ignatiev told the daily Vedomosti that a large proportion of that total was down to "one well organised group". If even a fraction of that money were passing through Latvian banks as part of complex offshoring schemes, it would be a scandal. But if the "well organised group" was using Latvian banks and the country's proven stock of nominee directors via shell companies, it would be sensational. With fear of Russian military power an ever-present emotion in Latvia, it would be ironic if the country's opportunistic banks were actually sucking the lifeblood from the big, scary bear.

services to non-resident customers, ie. they are dealing with short-term incoming cash flows." Nationalist MEP and former finance minister Roberts Zile isn't convinced. Zile played party pooper at a February 22 conference designed to laud Latvia's progress towards the Eurozone by pointing out the risky situation with NRDs. "We have to think why Latvia is so different from other members of the euro area... I think the relevant authorities have to supervise and regulate this market," Zile said, adding that he had heard German politicians expressing serious reservations about the situation.

"We have to think why Latvia is so different from other members of the euro area" "Are they going to pay for these risks?" he asked rhetorically. But perhaps the most explosive revelations are yet to come. On February 20, Russia's central bank governor Sergey Ignatiev sensationally claimed that $50bn of Russian money – equivalent to 2.5% of Russia's GDP –

I 31

I Central Europe

bne April 2013

founder and current Foreign Minister Karel Schwarzenberg in the second round of an election in which the victor cast a fair bit of mud at his rival. Even resisting those calls, the government is very likely to fall at the next election set for 2014. As such, the opposition Social Democrats (CSSD) – which look a shoe-in to form the next government – will be even more nervous. While Zeman led the party as PM between 1998-2002, he fell out with the current leadership several years ago. His rise to president is likely to cause strains within the party, particularly should it come to power.

The new man in the castle

Threats to the corrupt and the press Meanwhile, Zeman's promise to clamp down on corruption will also be tough to take for some. "One of the biggest dangers we are facing are godfatherlike mafias that reside on the body of Czech society," the new president said. "They suck blood out of this body and don't return any added value."

bne

"The best defence against mafia business is full declaration of assets and incomes" he suggested, according to Dow Jones, adding that he will urge both houses of parliament to enact legislation requiring public servants to fully declare the amount and origin of their assets.

he Czech Republic's first ever directly-elected president was sworn in on March 8. In his inaugural speech, President Milos Zeman pledged to unite the country and end its petty ongoing political squabbles, and push to fight corruption. He then threatened the media. Being sworn in at Prague Castle as he takes over from his old adversary (and sometime supporter) Vaclav Klaus, Zeman promised he would be a unifier for the country's politicians, who have a habit of falling out with one another to the point of destabilizing government on a regular basis. The current coalition faced several crises in 2012 that threatened to unseat it, and it struggles on with the barest of majorities. However, Zeman's pledge to be "president of all citizens," and to act as a mediator on the political scene "but in no way a judge because that is not a proper role for the president," is unlikely to quell worries in the parliament's lower house.

While he said that "I offer the presidential office to be a place for dialogue," according to AP, the leaders of all the country's main political parties are more likely to remember his vow during the campaign that he plans to regularly attend cabinet meetings and be involved in the day-to-day governing of the country, despite the presidential role being mostly ceremonial. The ruling Civic Democratic Party (ODS) and Top 09, which have implemented

However, suspicion remains over Zeman's closely-held ties to Russian business interests and campaign funds, while the "opposition agreement" that his minority government operated in the late 1990s when he was PM – essentially

bne April 2013

Central Europe

fight the rise of neo-Nazis, which he lamented can be found "in all the cities and towns" of the Czech Republic.

rival that clearly riles Zeman, who has battled the media throughout his political career.

by the controversial New Year amnesty rolled out by Klaus just ahead of handing over the keys to Prague Castle.

Meanwhile, as far as the gathered politicians were concerned, the most popular part of his speech was when he turned his wrath on the media, promising to target those "that deal with brainwashing, media manipulation, manipulating the public opinion. (Those) whose representatives have little knowledge but a huge selfconfidence. People who write about everything and understand nothing."

The Czech press was quick to protest the new president's bid to bundle them in with mafia and neo-nazis, and the speech is unlikely to help deflate a

Reflecting that, a vote by the senate on March 4 to ask the Constitutional Court to impeach the now ex-president on charges of high treason has provoked

The remark was the first of his inauguration speech to elicit strong applause from the hundreds of lawmakers and public servants present, according to Dow Jones. Schwarzenberg, who enjoyed huge media support during the presidential campaign, was unlikely to be one of those. And it was that strong preference shown by the Czech press for his

"The best defence against mafia business is full declaration of assets and incomes" growing mood of opposition (centred in the larger urban centres) to the older political elite that emerged in the wake of communism. Zeman and Klaus are the twin figureheads of that generation, and the view that the country needs to find new leadership, in particular to deal with persistent corruption amongst political circles, has only been boosted

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

surprisingly little criticism for such a radical move. The widely-held view is that while the move can cause Klaus little direct harm by banning him from office – he has served the maximum two terms allowed – it is intended to finally bring the curtain down on his political sway in the country, which he has openly declared he hopes to retain.

What you need to know "I offer the presidential office to be a place for dialogue" a harsh austerity programme over the past three years or so, will hardly welcome any interference from a leftleaning populist who has called for early elections several times since the vote in January. Zeman eventually beat Top 09

sharing power with Klaus' ODS – encouraged public-sector corruption to flourish, accuse many critics. A more widely believed claim from the left-leaning Zeman was his pledge to

I 33

www.bne.eu

I Central Europe

bne April 2013

Poland's dilapidated power generation infrastructure. The plan is supposed to get started quickly, making its first investments by the second quarter of this year, stepping in as funds from the current 20072013 EU budget wither and before the injection from the next budget starts to flow.

Poland's turn to the left Jan Cienski in Warsaw

he government of Polish Prime Minister Donald Tusk is shifting dramatically away from its free market liberal roots, adopting a hands-on industrial policy thanks to a new investment vehicle fuelled by the proceeds from the sale of state assets. Polskie Inwestycje Rozwojowe (PIR – or Polish Development Investments) was proposed by Tusk last year and is being brought to life by Mikolaj Budzanowski, the treasury minister, and his deputy Pawel Tamborski, an investment banker who switched to government work last year. The investment vehicle is already getting its first cash injections. Earlier this year the Polish government together with Bank Gospodarstwa Krajowego (BGK), a state-owned investment bank, sold about PLN5bn (€1.2bn) in shares of PKO BP, the country's largest and statecontrolled bank. Part of those funds went towards meeting the treasury's goal of earning PLN5bn through the sale of state assets this year – money that goes towards reducing Poland's public debt. However, another portion went to the new investment scheme. The money is supposed to be used the make PIR and BGK "the first or the final"

investors in big infrastructure projects in order to reassure the private sector that the projects have high-level government backing, Tamborski said recently. Budzanowski spelled out his philosophy to the Polish News Agency: "If interesting investment projects appear, then from our side there will certainly be a readiness to continue selling packets of shares from public companies and guaranteeing the capitalization of [BGK]

Partial socialism Poland is not the only country to try and combat a slowing economy by grabbing the economic tiller – France, the original etatist economy, set up a €10bn investment fund in 2009 to boost infrastructure projects. But Poland has until recently been much more of a devotee of free market doctrine than France, the result of its bruising experience with communism and of the success of its economic reforms in the 1990s, which turned it into one of the world's fastest growing economies. When he first won power in 2007, Tusk, at least verbally, stayed fairly true to his liberal and free market origins. But the advent of the economic crisis has made the government sharply change direction. In a recent conversation, Jan Krzystof Bielecki, a former prime minister and now one of Tusk's closest economic

"Public investments are often conducted in a populist way for the simple reason that the final deciders in these matters are politicians" and [PIR] even this year for subsequent sums of billions of zlotys." The idea is to eventually give PIR a PLN10bn war chest, which could be leveraged into a much larger amount to support investments. When he sketched out the plan last year, Tusk said that the money would be used for, among other things, projects like building highways, hunting for shale gas and upgrading

advisors, pointed out that over the last two decades, the private sector had failed to build any truly large multinational businesses. That means that the government, which still owns about PLN100bn in various companies ranging from banking to insurance, energy, refining and copper mining, has to take the lead rather than simply continuing to sell off its shares and using the money to repair public finances.

bne April 2013

The idea dismays more orthodox liberals like Leszek Balcerowicz, the architect of the 1990 economic reforms that transformed Poland into a market economy. He told the Rzeczpospolita newspaper: "There are people who believe in partial socialism – that is called interventionism. I feel that even a small dose of socialism, in other words the politicisation of the economy, does not work… Public investments are often conducted in a populist way for the simple reason that the final deciders in these matters are politicians." Budzanowski's manual approach was shown recently in his decision to push large state-controlled companies into financing the hugely expensive search for shale gas – a project that has caught the eye of the government because it could turn Poland into a gas exporter and ends its current uncomfortable dependence on Russian gas imports. The five companies included obvious ones like PGNiG, the former gas monopoly, as well as three power generators, but also KGHM, a copper miner with no obvious interest or experience in prospecting for gas. The private sector is also dubious of whether the PIR will be able to function like, in Budzanowski's words, a "flywheel" which will stimulate large investments. After meeting with Budzanowski, the Business Centre Club, a business lobby group, said that it was "as a rule opposed to state interventionism and the participation of the state in the economy," but allowed that there might be a role for the investment vehicle at a time of falling investments and a slowing economy, before ending in a caustic statement. "The BCC hopes that the project will not follow the fate of the Reconstruction Finance Corporation created by President Roosevelt during the times of crisis in 1933, which functioned until 1953 bringing marginal benefits to the private sector as it was the object of money grubbing and vote buying by politicians."

Central Europe

I 35

An inconvenient voice from the past

bne Lech Walesa, the Polish icon who led the fight for human rights and freedom during Communism, sparked outrage in March as he waded into the growing storm over gay rights in this staunchly Catholic country to declare that homosexuals should know their place and accept limited democratic participation. His comments have helped stoke a growing fight between Poland's conservatives and liberals over a range of issues. The deeply religious former president has become a controversial figure in his later years, and continued in that role during the March TV interview. Following recent parliamentary votes that saw the government fail to get legislation on civil partnerships past conservatives and a trans-sexual deputy ousted from the race to become deputy speaker, Walesa was asked where homosexuals should sit in the parliamentary chamber. "No minority should climb all over the majority," the former dissident said. "Homosexuals should even sit behind a wall, and not somewhere at the front... They must know they are a minority and adapt themselves to smaller things, and not rise to the greatest heights." Polish liberals shot back. Never one to miss a point of leverage for a bit of self-promotion, Janusz Palikot, leader of the anti-clerical, pro-gay rights Palikot Movement, said: "Lech Walesa up until now was known for tearing down walls, not building them." However, the former president has been an increasing irrelevance for some time; it's the conservatives both outside and inside the government that offer the main challenge. The debate around issues such as sexual minorities and abortion is starting to impact broader policy in Warsaw. Prime Minister Donald Tusk's centreleft government is trying to address issues such as Poland's role in the EU and the timing of joining the euro, but riling conservatives in the coalition over these social issues is limiting his room for manoeuvre. While the main conservative opposition Law and Justice party is a disorganized force, its support would be needed to approve constitutional changes necessary to join the single currency. But it's not just a question of trying to push euro-adoption past the opposition. There is a significant conservative force within Tusk's Civic Forum opposed to both the euro and wider social issues that could threaten the government's survival if provoked. Some 46 Civic Forum MPs voted against their own party's bill on civil partnerships in late January, and Justice Minister Jaroslaw Gowin, who attacked that bill as unconstitutional, is being regarded as a real threat to Tusk from the right of the party. Reports suggests Gowin could take up to 40 deputies with him should his fight with the party leadership flare up.

I Central Europe

bne April 2013

Polish miner Lubelski Wegiel Bogdanka. That first-ever hostile takeover attempt of a Polish company collapsed not only due to a failure to agree over money, but also because it became the subject of vitriolic attacks by the more nationalistic quarters in Poland. Marek Jelinek, NWR's long-serving chief financial officer, says any delay in the regional consolidation is a reflection of today's reality, where deep-level mining operations in Central Europe and associated high capital expenditure compare unfavourably with opportunities in other parts of the world where valuations are very attractive.

Czech coalminer NWR looks west as well as east

The US coal industry, for example, is even more fragmented than in Europe, where the geology of coal deposits has given rise to an industry composed of a large number of tiny players typically producing several hundred thousand tonnes a year. "These players don't have the balance sheets to withstand this type of environment and so are simply shutting down," says Jelinek.

bne April 2013

and Eastern Europe, is what gives NWR confidence about the medium to long term. According to energy consultancy Wood Mackenzie, seaborne coking coal imports to Europe are expected to rise at a compound average growth rate of 4% over the decade to 2021. For this reason, NWR says it is not planning to abandon its largest project, the Debiensko mine in Poland, which is Europe's largest deposit of highquality coking coal at 190m tonnes. NWR slashed planned spending at Debiensko last year to €5m from €50m after discovering large amounts of underground water, which together with comments it was looking for partners in the project prompted speculation that NWR was heading for the exit. "We are not walking away from Debiensko – that's not on the table under any scenario," says Penny, pointing out that the company is currently buying up the land around the mine, a process that should be completed in April.

Nicholas Watson in Prague

he creation of New World Resources by tycoon Zdenek Bakala out of the remnants of the Czech coal industry and its subsequent IPO was aimed at producing a miner capable of consolidating Central Europe's fragmented coal industry. Not for wont of trying, NWR's efforts have so far been in vain, and its new chairman now says the miner intends to spread its net wider, including as far afield as the US. Is this an implicit acknowledgement that its strategy since Bakala's private equity outfit first bought five Czech coalmines in 2004 has failed? Not a bit of it, insists Gareth Penny, who took over as chairman of NWR in October, after spending five years at the helm of diamond miner De Beers. "At the IPO, the Central and Eastern Europe roll-up strategy was something that was strongly put out there… [but] we are not going off-piste, the two are not mutually excusive," Penny says about the possibility of buying mines in the US, which at 29m tonnes a year is the largest

exporter of high-quality coking coal (that used to make steel) to Europe. "Our business is to become the number one miner and marketer of metallurgical coal in Europe: the question becomes how do you deliver on that," says Penny. "And if we do so by growing outside the region, we become

Thus acquiring some of these generally low-cost outfits with non-unionised labour would allow NWR to capture some of the trade in certain coal grades that is already imported from the US, says Bram Buring, an analyst with the Prague-based brokerage Wood & Co, in a note. However, "given that the company is in capital conservation mode and financing for [M&A] is still

Penny says NWR is looking at a number of potential partners on the periphery of the property, as well as perhaps

"We are not walking away from Debiensko – that's not on the table under any scenario" an immensely attractive partner in terms of consolidation in the region, and the chances of doing consolidation are infinitely greater than if we stay like we are now." That may be true, but at the very least it's a pushing back of the regional consolidation strategy, the difficulty of which to pull off was exemplified by the chastening failure in 2010 to acquire

quite expensive, we would not expect any news on this front for the time being," he says. As Penny notes, it is still economic to bring metallurgical coal to Europe, as evidenced by imports of 50m tonnes a year, "it's just it's happening by someone else." And this structural deficit of coking coal, together with the continuing shift of industry to Central

www.newworldresources.eu

Central Europe

bringing in a financial partner or a customer. "We will look at different alternatives to decide on what's most accretive for our shareholders," he says. For Penny, the immediate objective is to stop the rot that has seen NWR's shares fall by over 50% in the past year. On February 21, NWR reported its

I 37

in. We are a price-taker, operating in a global village, and our fortunes are determined by the steel industry, construction industry and the auto industry," says Penny. Global steel production rose just 1.2% in 2012 versus the 6.8% growth seen the previous year, while forecasts for

"It is still economic to bring metallurgical coal to Europe, just it's happening by someone else" worst quarterly loss since going public in 2008, losing €48.6m in the fourth quarter of 2012 compared with an €8.8m profit in the year-earlier period. The reason is simple, a solution less so. Prices of coking coal, the mainstay of NWR's business, have fallen 30%, forcing down revenue from €1.63bn in 2011 to €1.29bn in 2012. The company was left with 1.3m tonnes of coal inventories at the end of 2012. "Since 2012, it's been a challenging position we're in and continue to be

this year are at the pessimistic end of the scale, meaning there's unlikely to be much relief for NWR's long-suffering investors. "The results for the first half of this year are going to be very challenging," warns Penny. Still, NWR believes a floor on prices might have been reached, noting that the price for coking coal has recently risen from €100 per tonne to €103. "It's nowhere near where we'd like to see it, but the trend is in the right direction," says Jelinek.

I Southeast Europe

bne April 2013

government of Boris Tadic couldn't, namely to recognize the authority of Hashim Thaci's government in Pristina over the north of Kosovo, in return for far-reaching autonomy for the Serbs living there. The Kosovan government is resisting this, fearing it would lead to de facto independence of the northern part of the country. Thaci talks, without a hint of irony given he was a secessionist guerrilla fighter, about the "territorial integrity" of Kosovo. Hence the impasse: one side sees control from the other as a danger to its very existence, according to Gerard Gallucci, a retired US diplomat and former UN peacekeeper who served in Kosovo.

A deal seen near in Serbia-Kosovo talks Nicholas Watson in Prague

he latest rounds of EU-mediated talks between Serbia and its erstwhile province Kosovo in March may not have produced any breakthrough, but comments from the government of Serbia and changing attitudes among its citizens suggest a deal to improve relations is near at hand.

the spokesman for the late dictator Slobodan Milosevic when Serbia fought with Nato over Kosovo. But "the Serbian president cannot go to Kosovo, nor the prime minister, nor ministers, nor the police or army. Serbs can only leave Kosovo. That's how much Kosovo is ours and what our constitution and laws mean there."

Writing in in the Serbian weekly NIN on March 7, Serbian Prime Minister Ivica Dacic wrote that Serbs had been lied to that "Kosovo is ours" in the decade since the predominantly ethnic Albanian province was freed from Belgrade's rule with Nato's help and then unilaterally declared independence in 2008.

Dacic's strongly worded remarks followed a poll by B92 TV and the agency Ipsos Strategic Marketing

"For 10 years, Kosovo was taboo. No one could officially tell the truth. Tales were told, lies were told that Kosovo is ours," wrote Dacic, who was once

that the only thing Serbia can now do is to fight to secure the best position for the Serbs still left in Kosovo. That, say analysts, remains the big stumbling block between the two sides, which are due to meet again on March 20: what to do with the enclave of Serbs in northern Kosovo who don't wish to accept central rule from Pristina. Dacic's government – which is led by the Serbian Progressive Party, a

"For 10 years, lies were told that Kosovo is ours" published on March 6 that found 63% of Serbian citizens accept that Kosovo is in practice an independent state and

group of former hardline nationalists – has been able because of its past to offer concessions that the previous

Southeast Europe I 39

bne April 2013

Yet Gallucci sees the promise of a compromise in the "Ahtisaari Plan" – named after the former Finnish president and Nobel Peace Prize laureate Martti Ahtisaari – which recognised that the conflict in Kosovo between Serbs and Albanians could only be peacefully resolved if a way were found to allow the two groups to co-exist in a majority-run polity while they also lived their own lives in their own communities. "The nonAlbanian municipalities would have local competencies, links to the outside and some mechanism for cooperating amongst themselves," Gallucci posits on the TransConflic websitet. "A realistic approach to implementing the Ahtisaari Plan in the north – mostly involving having status neutral internationals taking the place of Pristina in key areas – might work. For example, instead of giving Pristina control of funding from Belgrade to the local Serbs, it could be reported to a responsible international authority and/or go through a bank controlled by neither party." Crossing the Ibar Serbia, according to a February report from the think-tank International Crisis Group, appears to have "crossed a threshold", meaning the two sides are now closer than ever to resolving the dispute over the north of Kosovo. The reasons for that are two-fold and related: Belgrade improving its relations with Pristina is a condition for the EU formally

New guy

bne In March came the breakthrough in a dispute that had threatened to embarrassingly halt Croatia's march into the EU this summer. On March 11, Croatian Prime Minister Zoran Milanovic and his Slovenian counterpart Janez Jansa put pen to paper and signed a memorandum that removes a 20-year-old banking dispute standing in the way of the Slovenian parliament ratifying Croatia's EU accession treaty. Croatia concluded its EU accession talks in 2011, but all 27 EU states need to ratify the treaty that will allow Croatia to become the 28th member on July 1. Twenty-two states completed the process, while Germany, Denmark, Belgium and the Netherlands have started the procedure. The only one not on track to sign the treaty is Slovenia, which was holding back its signature due to this complicated banking dispute dating back to the collapse of Yugoslavia in the early 1990s. Slovenia's Ljubljanska Banka was once a strong brand across Yugoslavia, but as that country unravelled in bloodshed the bank swiftly pulled out of Croatia, giving depositors only a brief window to claim their cash. More than 130,000 Croatians, as well as many Bosnians, saw their savings locked in Slovenia. As a result, many launched legal proceedings against Ljubljanska and its legal successor, Nova Ljubljanska Banka (NLB), today Slovenia's largest bank. Under the latest deal, Zagreb has agreed to halt a ¤270m legal suit seeking reimbursement from Ljubljana that is before its local courts, while further talks between the two on the issue will be held under the auspices of the Swiss-based Bank for International Settlements. In return, Slovenia agreed to get its parliament to sign Croatia's accession treaty. Jansa, who subsequently had to step down as PM as his government collapsed around him following corruption allegations, insisted that the country's political crisis wouldn't derail the signing, as it's in Slovenia's interest to avoid more ructions in the EU at a time when its economy is struggling. Indeed, Alenka Bratusek, who took over as PM at the head of a new centre-left government on March 20, has indicated she will sign the treaty. She doesn't need any additional headaches; she has work cut out with reviving the economy, saving the country's ailing banks and avoiding an international bailout. The EU's commissioner for enlargement, Stefan Fule, welcomed the news that a solution had been found to the dispute. "I consider this to be a good deal for both countries and a good deal for enlargement. This is also a very good example how joint efforts in the area of good neighbourly relations bring benefits for both sides and provide basis to solve open issues," Fule said in a statement.

I Southeast Europe

bne April 2013

"One side sees control from the other as a danger to its very existence"

opening talks about Serbia joining the bloc, and such a success would give a major boost to the government's efforts to turn around the flagging economy. The EU is due to decide whether to open accession talks with Serbia in June, following a progress report from the European Commission on the talks that are being overseen by EU foreign policy chief Catherine Ashton. A deal by mid-April would allow a positive report to be presented. Ashton talked about "good progress" at the last meeting.

While the government and president, Tomislav Nikolic, often like to talk about abandoning Serbia's EU ambitions if pushed too far on Kosovo and instead turn towards Russia – an attempt to play off one side against each other that has been practised for years by countries such as Kazakhstan and Ukraine – Belgrade in reality has little choice if it's to fix its economy. Russia might provide some cheap loans, but the investment and reforms necessary to return the economy to sustained growth will have to come from the EU.

Graham Stack in Berlin

mbezzlement on a massive scale uncovered at Moldova's stateowned savings bank means it will go under by end of March unless decisive action is taken, according to a leaked International Monetary Fund (IMF) report. But the collapse of the governing coalition in March means the chance of a timely solution is almost non-existent.

"The financial situation at the Banca de Economii a Moldovei (BEM) has been deteriorating since mid-2009, as a consequence of apparently fraudulent lending," reads the apparent rough draft of a report by the IMF filed in January and subsequently leaked to the press and internet. "In fact, if the National Bank of Moldova had not relaxed its provisions for seized assets 1 December 2012, BEM

Southeast Europe

I 41

The Serbian economy is estimated to have contracted 2% in 2012; the government is hoping for growth of 2% for this year. Such a turnaround in the economy would bolster the Progressives' prospects of being able to win a proper majority at the next elections, and junk its current coalition with Dacic's Socialist Party.

branches, particularly those in villages where a majority of inhabitants live. BEM also holds the deposits of almost all public agencies and institutions, such as hospitals and schools, with a total of MDL707m (€43.65m) in insured deposits, while the state's deposit guarantee fund contains a total of only MDL134m, reads the leaked IMF report.

A deal over Kosovo will be painful for these former ultra-nationalists to accept and a few years ago a compromise over the issue would've been electoral suicide. But a combination of time and circumstance means that now it could reward them at the ballot box.

This makes it a disaster that the bank has been the centre of massive embezzlement over the last three years, which now threatens to drag it under.

Bulgarian President Rosen Plevneliev on March 12 appointed a technocratic caretaker government. Headed by diplomat Marin Raykov, the administration will face the continued anger of the population until elections set for May 12.

According to its 2012 financial results, the bank lost around $25m in 2012 due to provisions for bad loans, a huge sum for a Moldovan bank, with the bank's problems resulting from criminal fraud. And Grant Thornton wrote in December that its discovery of systematic fraud at the bank from 2009-2012 meant it was pointless to continue its audit. The auditors detailed one example of obviously fraudulent loans – just under €10m paid to Moldovan companies that had been secured by fake real estate. The funds were then transferred to accounts offshore. "There is a large probability that there are more such transactions," read the accountant's report.

Plevneliev said in a statement that the caretaker government, led by Bulgaria's current ambassador to France and including the central bank's Deputy Governor Kalin Hristov as finance minister, would take office on March 13. The temporary administration replaces the centre-right government led by Boiko Borisov, which resigned in February in the midst of huge protests over austerity policies and high utility prices.

would have already become insolvent and its licence withdrawn… On the basis of subsequent significant provisions and with lack of recovery of major non-performing loans or seized assets or an injection of capital, it is expected that BEM will become insolvent by March 31, 2013."

Moldova's misery deepens

bne April 2013

A letter also leaked to the press in early February detailing an interim audit by Grant Thornton found that at the end of September 2012, BEM had been in violation of national bank regulations concerning minimum capital requirements, risk-weighted capital adequacy, the ratio of the ten largest borrowers to the total loan portfolio, net exposure to a group of people acting in concert, and the sum of all large exposures. Both the IMF and Grant Thornton have refused to deny or confirm the authenticity of the leaked documents. Social bank BEM is only Moldova's sixth largest bank by assets, holding around 13% of total deposits, but its key position in Moldova's banking system is its monopoly on paying out pensions and other social payments, thanks to its majority state ownership and extensive network of

The IMF in its report spoke of the "omnipresent activity of fraudulent crediting" at the bank, implying involvement of all departments of the state-owned bank, and that despite a change in top management at the bank in April 2012, many implicated in the fraud remain in their old positions. A final straw for the authorities has been growing evidence the bank was used to launder funds embezzled from the Russian budget in the so-called "Magnitsky case". In February, Moldova became the sixth country to launch a probe into the notorious $230m fraud case that involved the death of anti-corruption lawyer Sergei Magnitsky while in Russian custody. Switzerland, Cyprus, Estonia, Latvia and Lithuania are conducting similar investigations, while the US Congress last year adopted the "Magnitsky Act", which imposed asset freezes and barred from entry to the US anyone suspected of a role in his death.

Bulgaria's interim solution

bne

The preparation of fair elections and stability of state institutions will be the main tasks of the government, Raykov told reporters. He also vowed to stick to the 2013 budget and is committed to maintaining a currency peg to the euro. "While we follow strictly the 2013 budget framework, we will take steps to improve the incomes of pensioners and the poorest," the interim prime minister added. Analysts say the caretaker government needs to urgently restore trust in state institutions or risk exacerbating an already dire economic situation in the EU's poorest country. "If protests continue and political instability drags on, it is set to pose problems for the economy by pushing new investors away and prompting those already here to postpone any development plans," Institute for Market Economics analyst Kaloyan Staykov told AFP. Borisov's government was marked by fiscal discipline, which involved keeping the lev pegged to the euro. It also squeezed the public deficit down to just 0.5% of GDP in 2012 and public debt to 15-19%, one of the lowest across the 27-nation EU. But those successes came at the price of drastic government spending cuts. Public sector salaries have remained frozen at an average of ¤400 over the past three years, while pensions have sat at just ¤138. Hence, a sharp rise in utility bills in February prompted thousands to take to the streets in the biggest upsurge of public discontent in 16 years, with demonstrators fighting running battles with riot police. Three people have died after setting themselves on fire. Yet Borisov's decision to throw in the towel has failed to soothe people's anger, with several thousand taking to the streets of Sofia and other cities on March 10, brandishing banners reading "Out with the Mafia," and other slogans making the population's anger and distrust of the country's politicians clear. Bulgaria's agony promises to continue for some time yet.

I Southeast Europe

According to the IMF report – apparently penned by David C. Parker, an expert on closing down defunct banks – there are now two options facing Moldova's financial authorities, one of which must be taken in the coming weeks: either Moldova creates a bridge bank or it recapitalises BEM. The report says both options "would require significant state funds calling

bne April 2013

The Alliance's majority was dependent on the small Democratic Party and this kingmaker position allowed the party to take control of the crucial law-enforcement offices of General Prosecutor and the Anti-corruption Office. Plahotniuc's critics have alleged, and gathered some damning proof, that the oligarch has been raiding Moldova's banking system with impunity over the last three years, protected by his control of prosecutor

"Today we witness a campaign of sacrificing the interests of the state in the name of the interests one of single shadowy person"

for an amendment of the budget." But, crucially, the bank is only 66% owned by the state, so a capital injection could either see public money benefitting murky private interests, or in the event of diluting the private owners, the certainty of legal action against the move. And given that no one understands the extent of the bank's losses, "this would be a classic example of sending good money after bad," warns the report, which comes down on the side of setting up a bridge bank. Political crisis Yet Moldovan politics is the last place to turn for a swift solution to a banking crisis. On March 5, the governing Alliance for European Integration collapsed due to feuding by the parties within it, not least because of the corruption scandal at BEM. Prime Minister Vlad Filat lost a confidence vote in the parliament that had been called by the opposition Communist Party after the latter managed to garner the support of one of the Alliance members, the Democratic Party. The Democratic Party is widely viewed as a pocket party of the very oligarch, MP Vlad Plahotniuc, who is accused by opponents of the looting of BEM and numerous other banks.

and anti-corruption offices, and aided by his influence over the economic bloc of the government and the National Bank of Moldova. While there is no documented link between Plahotniuc and the fraud at BEM specifically, the bank figured in 2010 and 2011 as one of a group of banks where minority share packets were expropriated by dodgy court decisions in Moldova, and transferred to non-resident companies, chiefly in the UK. In the case of one of the other banks affected, Victoria Bank, litigation in London subsequently established that Plahotniuc was now the beneficiary owner of the UK shell company owning the share packet. Plahotniuc says that the UK documents bearing his name are forgeries. "Today we witness a campaign of sacrificing the interests of the state in the name of the interests one of single shadowy person, who has purchased a place in politics and now wants to buy the country," Prime Minister Vlad Filat raged in a TV address on February 13, announcing he was taking his Liberal Democratic Party (PLDM) out of the coalition agreement. "For him notions such as rule of law, democracy, European integration and welfare of citizens are words without meaning… I tell you I am not interested in one individual or

bne April 2013

Southeast Europe

another or their identities: I am concerned about the criminal system they have set up."

Renewable energy producers rushed into Romania in recent years to take advantage of the generous subsidies, boosting the country's wind power capacity to around 1.8 gigawatts (GW). A study by Ernst & Young published in January named Romania as one of the most lucrative wind power markets in the world. However, since Bucharest revealed it's relooking at the subsidies, plans to add another 1GW or so in 2013 are being put on hold. CEZ announced in late February that it will lower plans to build another 1,000MW by 2016 to 300MW. E.ON hinted that it could pull a planned 100MW wind farm.

Filat's Liberal-Democratic Party, together with the Communist Party, voted together at the opening session of the Parliament on February 15 to abolish the post of first deputy speaker of parliament, which was held by Plahotniuc, thus sparking the crisis that ended with the coalition collapse on March 5. "The loss of his high official position weakens the legal and diplomatic insulation that Plahotniuc could have enjoyed in relation to a number of alleged financial investigations run against him in several EU countries," says Dumitru Minzarari, a political analyst. The political situation in Moldova remains fluid – Filat is regarded as the only credible prime ministerial candidate and likely will form another government – yet the whole mess is only likely to deepen the misery in this poorest corner of Europe. Minzarari worries Moldova will head the same way as Ukraine, falling back into authoritarianism and directing its political compass towards Russia. He argues that the failure of Ukraine's Orange Revolution can be explained by its leaders not having sufficient internal resources to feed democratic reforms and resist the transition's pressures and lures; neither did they receive much-needed support from the outside. "Moldova's AIE coalition is today in a very similar situation, with the state's institutions too weak and compromised to be able to constrain the political misbehavior of the AIE's members," he says. "Moldova needs its Western allies and partners to take off the velvet glove and strongly pressure and incentivize the AIE members into accepting real institutional reforms, starting with the law enforcement agencies."

Roman ruins Tim Gosling in Prague

n the years before the crisis hit in 2008, the Czech state-controlled utility CEZ pursued an ambitious strategy devised by its former CEO Martin Roman to turn itself into the biggest power group in the region. But that dream is in tatters as first its Albanian and then its Bulgarian businesses have buckled under government pressure, and now it risks losing out in a third Balkan country as Romania looks to cut renewable energy incentives.

Prevailing winds The Romanian government's move makes sense, say analysts in the Czech Republic, a country where consumers still suffer from an over-generous scheme to support solar power that was redressed in 2010. As the economic crisis rages on, Spain, France, the UK and Germany have all cut incentives recently for renewable energy in order to relieve the upward pressure on consumer prices as these countries try to hit EU targets on CO2 emissions.

Amid growing unrest over power prices in the region, Romania announced in late February that it's set to slash overly generous incentives for wind energy. That casts huge uncertainty over several projects that arrived as part of a gold rush in the past few years, including CEZ's Fantanele and Cogealac (FaC) wind farm.

The left-leaning Romanian government will make its decision as it watches political chaos unfold in its southern neighbour Bulgaria due to rising electricity bills, with CEZ's distribution business there a focal point of public dissent. Energy prices are also

Wind power investors face a drop of up to 75% in overall subsidies. The Romanian regulator ANRE is widely reported to be considering reducing both the ceiling on green certificates (from $55 to $30) and slashing the number of the index-linked tradable certificates available for each megawatt hour (MWh)of power by up to half (from two to one). The lowered ceiling is likely to be introduced in July, Romanian officials have said, with the cut in certificates – should it appear – to follow at the start of 2014.

I 43

Jan Ondrich of the Prague-based advisory firm Candole Partners points out that much Romanian legislation is pushed through using "emergency" powers, meaning less consultation with parties like electricity producers, and also notes that the country has decent renewable energy alternatives to wind. That leaves wind investors and producers arguing the line that Romania needs to protect its investment image and not do anything hasty to threaten it. "Romania benefits from a stable and predictable environment, and the law and regulatory changes are discussed with foreign investors in order to be fair and transparent," CEZ tells bne. While Romania clearly intends to reduce the support on offer – Energy Minister Constantin Nita calls the €500m that renewable energy subsidies cost consumers in 2012 a "price too

"We haven’t thought about sale of our assets in Romania so far" prompting geopolitical tussles in neighbouring Ukraine and Hungary. That only raises the pressure on Romania to keep a lid on power prices, despite the likely best lobbying efforts of wind farm operators in the country, which include GDF Suez and CEZ.

big for Romanians" – the big question for CEZ and other current investors is whether the cut in the number of green certificates will be retroactive or not. Petr Bartek of Erste Bank – who estimates Romania's current scheme offers electricity producers total

I Southeast Europe

bne:infrastructure

The economic crisis has hurt all the economies of the world, but now governments across the Central and Eastern European region are planning to spend trillions of dollars on infrastructure investment as the most effective form of economic stimulus to put their economies back on a sustainable growth path. This investment was badly needed even before the crisis hit 18 months ago. Decades of work lie ahead, which presents a unique opportunity for investors of all kinds. Every two weeks, bne will publish an online a round-up of the main investment projects, analysis, commentary, regulatory changes, investment plans, and funding news in bne:infrastructure.

bne April 2013

revenue of €150-160 per MWh compared with a European average of €100 – suggests that the "investment image" argument will prove powerful. He also notes that green certificates are still trading at around €53, illustrating that the market is far from convinced a large cut is on the way. By way of contrast, Ondrich appears to firmly believe all cuts will be implemented on all projects. He points to the current political climate in the region, and what he believes is a determination in Bucharest to respond rapidly to avoid the sort of problems that Prague is still facing. "You can't move in Bucharest without someone telling you what they're preparing for unsuspecting wind investors," he remarks ominously. Despite admitting it is "waiting for the final version" of the amendment, CEZ insists "any change will be applied only to green producers to be commissioned after the potential change of the law," although it does not back up the claim. End of the gold rush However, CEZ, which announced the completion of Europe's largest wind farm – the 600MW FaC – in November, clearly runs the highest risk of all investors. That will hardly cheer its shareholders, who have watched the company's Balkan assets crumple one by one. Following a long fight, Albania withdrew the operating licence of CEZ's local distribution subsidiary early in the year; the Bulgarian regulator is due to decide on a similar move in April. Ondrich says a retroactive cut in the number of certificates would drop the internal rate of return on FaC from around 20% to just 6%. Taking financing costs into account, the project would then become unprofitable, he claims, and plunge its net present value into the red by around $365m. Bartek, following the CEZ line that only the ceiling will be cut, is less pessimistic. Although he suggests a 50% drop in revenue to around €90m that will still cover the cost of capital, and would only hit the wider group for around 2% of Ebitda, or cash flow.

bne April 2013

Southeast Europe

The Czech giant has no one but itself to blame, insists Ondrich – a regular and trenchant critic of the company – saying that smart investment demands getting the fundamentals right, with subsidies then viewed as the cherry on top. "The Klondike business model is over," he says, "but a smart investor will still be able to make wind work in Romania. It will be much harder, but Romania will get better investors." CEZ faces Catch 22 in Romania, however, as it also owns a major power distributor there. If wind producers and investors manage to convince Bucharest not to cut incentives, it could look instead to trim the population's electricity bills by lowering tariffs, as just happened in Bulgaria. All in all, considering the relatively small size of the Czech utility's assets in the Balkans, its struggles across all the region's markets and the ongoing financing difficulties over the expansion of the Temelin nuclear plant at home, CEZ could be tempted to cut and run, suggests Ondrich. "Of course, if the cuts are the deepest, everyone will be looking to sell Romanian wind farms," he says. "Buyers could be local businesses, particularly those that could combine them with industrial assets that need the green certificates, but whoever it is, CEZ would take a hit on the price." However, as long as Bucharest holds back from making the cuts retroactive and assures investors that the action is a one-off, Bartek says the Czechs will hold onto their Romanian assets, including FaC, which he estimates currently offers double the revenue of the distribution business in the country. "CEZ will still see it as providing stable cash flow from a regulated business," he suggests, "which makes it an attractive hedge against price falls in the wholesale market." "We haven’t thought about sale of our assets in Romania so far," CEZ says, without expanding. So far, anyway.

I 45

infrastructure deal in a bid to get a higher price, appear destined to exacerbate this. In reverse After managing to push through a deal in December at the fourth attempt, the Turkish government in February cancelled the $5.7bn privatisation agreement for a package of toll roads and bridges because it did not meet its pricing expectations. The decision followed comments earlier in the month from Prime Minister Tayyip Erdogan that the price agreed for the country's second largest privatisation deal was far below the government's expectations. Hurriyet Daily News reported that officials had told the PM that the tender could be worth $20bn.

Turkey strives for more investment bne

he most recent figures for Turkey's balance of payments reveal what many economists fear: that the trend of big falls in the country's vertiginous current account deficit are at an end and the economy could be at risk again of landing with a bump. January data showed the country had a $5.6bn current account deficit, bringing the 12-month rolling deficit down to $46.8bn from $46.9bn in December. That's still falling, but not as fast as the plunge in 2012 to $48.9bn from the massive $77.2bn in 2011, which made it then about the highest in the world outside of the US. Turkish imports have begun spiking again this year, though the government is at pains to point out that Turkey is set to see another record year for exports. Assessing an increase of 5.6% year on year in exports in February, Economy Minister Zafer Caglayan stressed on March 1 that Turkey's record-breaking performance in 2012 is likely to be repeated this year.

The problem for the Turkish government is that foreign direct investment (FDI) is falling, meaning that the deficit needs to be increasingly

The decision was a blow to the government's privatisation strategy. The deal agreed two months previously with the consortium made up of local companies Koc Holding and Gozde Girisim, alongside Malaysia's UEM Group Berhad, was the state's fourth attempt to sell the infrastructure package, which includes 25-year operating rights for 1,975 kilometres of toll roads, including those on the Bosporus and the Fatih Sultan Mehmet Bridges that both cross the Bosporus

"The problem for the government is FDI is falling, meaning the deficit needs to be increasingly underwritten by the more flighty portfolio funds" underwritten by the more flighty portfolio funds. The rating agencies point out that this leaves the country heavily exposed to any shocks for the Eurozone's vulnerable banks, which provide the bulk of the financing to cover the deficit. The net inflow of FDI fell from $13.7bn in 2011 to $8.3bn in 2012, while the rolling 12-month figure edged down further in January to $8bn. Yet the government's policies toward foreign investment, which included scrapping a previously agreed

Strait in Istanbul. The assets also include the Edirne-Istanbul-Ankara highway and the Ankara ring road. In the days following the cancellation, Turkey's Privatization Administration began work with the transport ministry to form a holding company for the package of road assets, with Finance Minister Mehmet Simsek saying an IPO could be on the cards. Ominously, he said Ankara might look to cancel other recent privatisation deals on infrastructure.

I Southeast Europe

Turkey has struggled with pushing through privatisations in recent years, mostly due to issues that potential buyers encountered in trying to finance their plans. However, the hurdles have lowered since last year as the government managed to engineer a soft landing of the economy from the rapid growth seen in 2011 and financing options became more readily available. Those improved conditions saw a series of stalled projects and privatisations

bne April 2013

start to trickle through in 2012. While the secondary public offering of a 24% stake in state-controlled Halkbank for $2.5bn late last year would likely have proved popular regardless, the government has struggled to offload infrastructure assets in particular. Perhaps with this in mind, Turkey's government is now apparently preparing share sales in two other state banks, Vakifbank and Ziraat Bank. Ankara will look to sell the stake in the

country's largest state-run lender Ziraat Bank next year, in what it hopes will be one of the country's biggest stock market listings, unnamed sources told Reuters. It is also expected to seek a secondary share sale in state-run lender Vakifbank in the third quarter of 2013, according to a source with knowledge of the subject. "It's being planned for 2014... The planned initial free float rate will be between 20-25%," one of the sources told the newswire.

spent the last two weeks trying to stitch together a new majority administration in the 90-seat National Assembly, Slovenia's parliament. Bratusek, leader of the centrist Positive Slovenia (PS) party, eventually managed that on the evening of March 13, cobbling together a coalition with the the Social Democrats (SD), the Pensioners' Party (DeSUS) and the Citizens' List (DL) party, representing 66 MPs, thus giving her sufficient political clout to push through much-needed socio-economic reforms.

Slovenian politicians skirt around mounting problems bne

t speaks volumes about the increasingly fractious nature of Slovenian politics that the nomination of Alenka Bratusek at the beginning of March as a candidate to be the new prime minister was treated with almost undisguised scorn by her political rivals. In most countries, the news that a woman had been mandated for the first time ever to form a government would be welcomed as proof of its social progressiveness.

no confidence at the end of February, gave the lie to that assertion with his catty prediction that Bratusek's term as the head of any future administration would last "as long as her skirt" – a none-too-subtle reference to the fact that in the still largely male-dominated political arena in Slovenia, the sight of a professional woman wearing an abovethe-knee skirt still ranks as something shocking.

But outgoing premier Janez Jansa, who was ousted from power by a vote of

The 42-year-old Bratusek, who boasts a master's degree in management, has

Or not as the case may be. In the run-up to the formation of the new government, the parties that supported Bratusek's nomination for prime minister had already called for a delay in the passage of legislation that would have provided the framework for an accelerated privatisation of state-owned companies proposed by the outgoing Jansa-led government. In the face of widespread opposition by employees, trade unionists and opposition politicians, the authorities in Ljubljana had already shelved plans to sell off government stakes in the likes of drug firms Krka and Novo Mesto, port operator Luka Koper, rail outfit Slovenian Railways and toll motorway firm Družbe za avtoceste v Republiki Sloveniji (Dars). The delay in the passage of the proposed accelerated privatisation law means that there will be continued uncertainty about the future ownership structures of major enterprises such as telecommunicatios operator Telekom Slovenije, oil company Petrol, insurance company Triglav and flag carrier Adria Airways.

bne April 2013

Matej Lahovnik, a professor at the Faculty of Economics in Ljubljana criticised the decision to shelve the proposed legislation for the moment, saying he felt it perfectly illustrated the type of political impasse that has resulted in Slovenia failing to emerge from a double-dip recession, which last year saw Slovenia's economy contract by 2.3% as unemployment hit 12%. "When rowers in the same boat are rowing in a different direction, the boat just stands still or moves in a circle," he was quoted by STA newswire as saying, referring to the fact that some parties in Bratusek's proposed government are opposed to state sales while others are in favour. With regard to future economic policy decisions, Lahovnik said that he believed that there is unlikely to be any major departure from the history of past, failed policies. "I'm afraid that we will again be faced with tax rises and increase public spending, which is not promising." Bank bailouts Meanwhile, on the banking sector front the situation continues to go from bad to worse. Although the final figures for 2012 have yet to be announced, analysts believe that banks in Slovenia racked up a record-breaking €600m or so of losses last year on the back of rising bad loans, which are estimated to have hit the €7bn mark, roughly equivalent to 20% of the country's annual GDP. That's a far cry from the pre-crisis era, when the Slovenian banking sector recorded a profit of €540m in 2007, for example. One of the biggest villains of the Slovenian banking sector piece continues to be the country's leading player NLB,

Southeast Europe

which recorded a loss of €273m in 2012 that has further eroded its capital base, despite a state-funded capital injection of €383m last July. Consequently, with a Tier 1 capital ratio of 8.77% as at the end of 2012, the bank remains below the European Banking Authority regulatory mininum, prompting the need for a further capital injection this year. As a result, this week rating agency Moody's Investors Service cut NLB's long-term deposit rating from 'B2' to 'Caa2' with a negative outlook, citing concerns that the bank's creditworthiness profile has been "further weakened by the necessity of a further capital injection, ongoing material losses undermining its already weak capital base, and expectation of further losses in 2013." The ratings downgrade was announced on the same day that Belgian bank KBC formally ceased to be a part owner of NLB, with the final conclusion of the sale of a 22% stake to the Slovenian government for just €2.76m. KBC had originally bought a 34% stake in state-owned NLB for €435m back in 2002 and had hoped to eventually secure majority ownership of the bank at a later date. However, in 2006 a previous administration led by Janez Jansa opposed any increase in KBC's ownership of the bank, leading to tensions between the two owners. Under the terms of an EU-funded bailout of KBC in 2008-2009, the Belgian bank was obligated to offload stakes in non-core subsidiaries such as NLB. The paltry price it got won't do much for KBC's bottom line, but getting out of the dire situation that is now engulfing Slovenia probably will help in the longer run.

"When rowers in the same boat are rowing in a different direction, the boat just stands still or moves in a circle"

I 47

I Eurasia

bne April 2013

the investment agreement grows increasingly likely. The world's largest private coal miner Peabody Energy is enjoying little better treatment from the government. After receiving a formal invitation from the government to prepare the 888m-tonne coal resource West Tsankhi for mining in October, it was announced in February that domestic firm Khishig Arvin would instead be preparing the top soil, putting into question whether or not the government had changed its mind over Peabody's involvement.

Anglo American steps into Mongolia Terrence Edwards in Ulaanbaatar

s foreign investment in Mongolia falls by the wayside and investors continue jumping ship, the question one has to ask oneself as Anglo American arrives on the Mongolian steppe: what does it think it knows that its competitors don't? The diversified miner opened its representative office in Mongolia in February, which will be headed by a figure well-versed in Mongolian operations and already familiar with the top officials in government. Graeme Hancock, who worked for 15 months as chief operating officer to the government-owned mining firm controlling the Tavan Tolgoi coking coal deposit and before that as chief mining sector specialist for Mongolia to the World Bank, said Anglo is most interested in metallurgical coal and copper assets in Mongolia. "The timing is interesting," Hancock tells bne. "I think when there was analysis of whether we should establish our presence, it was during the leadup to the last elections. Then was the announcement of the 'SEFIL' [Strategic Entities Foreign investment Law], but that has not discouraged the company.

We will make workable conditions for ourselves." Indeed, it's as curious as it is intriguing that Anglo should decide to enter now, just as the world's second largest miner Rio Tinto feels the sting of its government partner's capriciousness and after two other major international mining groups have bowed out. Laws of the land Much of the international ambivalence towards the mining opportunities in Mongolia stems from what many feel is an increasingly hostile environment for foreign investment. This includes a proposed Minerals Law that companies argue leaves no room for profits, and a vague foreign investment law rushed through the parliament last year that has kept many companies at a standstill. This new law on foreign investment, SEFIL, means government approval is required for investments above 33% in mining assets. Many are unsure how to act for fear of dire consequences, including having their right to operate revoked. The embassy of Canada, Mongolia's second biggest foreign investor with $5bn worth of investment funnelled

mostly into the mining sector, said there was indeed evidence that foreign direct investment (FDI) had fallen since the passage of SEFIL because of the uncertainty it had created, but could not produce any specific figures. The US embassy anticipated that sentiment in a 2012 statement on the business climate in the country, saying the law directly contributed to the impression that Mongolia was becoming a "demonstratively riskier place in which to invest and operate." One of the two other major mining outfits left in Mongolia, Rio Tinto, is now quickly sinking into a quagmire of disagreements over the Oyu Tolgoi copper/gold mine with its joint venture partner, the Mongolian state. The government's list of grievances is long, but for starters includes wanting an explanation from Rio Tinto, the controlling partner in Turquoise Hill Resources which holds 66% of the Oyu Tolgoi mine, for allegedly going $2bn over budget for project development. Since the beginning of the year, Turquoise Hill stock has lost about a quarter of its value as it became clear the relationship with the government is strained and a renegotiation of

Eurasia I 49

bne April 2013

Brazil's Vale is currently making a quiet exit from Mongolia as it tries to sell off its remaining coal assets, while BHP Billiton, which once held the rights to develop the Oyu Tolgoi project, left in 2009, similarly without comment. Observers say the resource-rich nation, which needs to plug holes in the country's finances, will have to make clear signals if it wants to see foreign investors return. Mongolia has hinted it may do that with plans to ease restrictions to SEFIL. Also, Mongolian President President Tsakhia Elbegdorj, whose office drafted the proposed mining law, announced in February it has decided to pull the bill for further revision and that a new working group to implement changes would be formed. Back to Anglo, although cautious about revealing his plans so early in the game, Hancock is unfazed by this tough investment climate that has sent other mineral explorers packing. Speculating that the current aggressiveness of the government can be partly put down to attempts to impress voters before the upcoming presidential election in June, Hancock says: "We're seeing a particularly challenging period with the elections and political rhetoric. I'm optimistic that after the elections we'll have a more balanced environment for investment." "More junior companies might find the environment threatening, but as a major we don't think we'll have the same problems," he concludes.

All in a name

bne Now that Mongolia is firmly on the international investment map, an online campaign has been launched to ensure that the country's capital is spelled correctly, as "Ulaanbaatar". With massive projects going ahead in the natural resources sphere, including the development of the Oyu Tolgoi copper-gold deposit and the Tavan Tolgoi coalfield, Mongolia is rarely out of the headlines in the business press, especially with the ongoing struggle for supremacy between the Mongolian government and mining giant Rio Tinto. But many Mongolians have been irked by the continuing use of the Russian spelling of their capital, Ulan Batar or Ulan Bator, not to mention numerous other variations. While Mongolian, like Russian, uses the Cyrillic script, the two languages have different spellings for the Mongolian capital, with the Mongolian version correctly transcribed into Latin as "Ulaanbaatar". The name Ulaanbaatar - the Mongolian translation of "Red Hero" â&#x20AC;&#x201C; was given to the city in 1924, when it became the capital of the Mongolian People's Republic. Previously, the settlement had several titles including Urga and Khuree. Munkhdul Badral, owner of the Cover Mongolia newswire, has even launched an online campaign at the change.org website, urging the English speaking world to, "Please spell Mongolia's capital correctly, 'Ulaanbaatar' not 'Ulan Bator'." As of March 18, the petition had attracted 343 supporters, some posting comments including "Ulaanbaatar is the capital of Mongolia and this is the way we Mongolians spell it". Munkhdul Badral is also the initiator of a another petition linked with spelling, "It's 'Chinggis Khaan' not 'Genghis Khan'," pointing out to English speakers that, "Genghis is just simply not how it's pronounced. How would you like it if George Washington was spelled Jorj Vashington?"

"More junior companies might find the environment threatening, but as a major we don't think we'll have the same problems"

I Eurasia

bne April 2013

election report from the Organisation for Security and Cooperation in Europe/ Office for Democratic Institutions and Human Rights (OSCE/ODIHR) observer mission concluded that the election was "generally well-administered and was characterized by a respect for fundamental freedoms." The February 18 report did note, however, "a lack of impartiality of the public administration, misuse of administrative resources, and cases of pressure on voters", as well as "undue interference".

Court ruling dashes hopes of Armenian opposition Clare Nuttall in Astana

rmenia's Constitutional Court in March rejected an appeal by Raffi Hovhannisyan, the runner-up in the February presidential elections, effectively bringing to an end opposition efforts to prevent Serzh Sargsyan's re-inauguration. Hovhannisyan has declared he will fight on, but the court's ruling has ended expectations of mass unrest on the scale that followed the last presidential election in 2008. As Armenia waits for Sargsyan to be inaugurated on April 9, the more lasting impact of the opposition protests may be in creating pressure for reform during his second term as president. The court upheld the Sargsyan victory in the first round of voting on February 18, despite claims from Hovhannisyan, leader of the Heritage Party and a former finance minister, that the result had been rigged. The court said that there had been no violations during the election that could have affected its result. Hovhannisyan, the runner-up with 36.7% of the vote to Sargsyan's 58.6%, claimed that he was the real winner

of the election. Immediately after the election, his supporters said they had observed violations of the voting process including ballot stuffing and the removal of stamps from voters' passports. In the weeks since the election, Hovhannisyan's supporters have organised a series of demonstrations in the capital Yerevan, with the largest attracting up to 5,000 people. As support for his protests gradually dwindled, on March 10

Hovhannisyan did take considerably more votes than was predicted. An opinion poll carried out by Gallup International on February 2-5 put him in second place with an expected 24% of the vote â&#x20AC;&#x201C; well below the 36.7% he received on election day. The decision by fellow opposition leaders such as former president Levon Ter-Petrossian and Prosperous Party leader Gagik Tsarukian meant that the anti-Sargsyan vote was concentrated on Hovhannisyan, with no other candidate taking more than 3%.

bne April 2013

New term Sargsyan is now preparing for his inauguration on April 9, and is set to start the new term on a firmer footing than when he first became president in 2008. None of the opposition protests were as large as those seen after the February 2008 elections, which were violently put down by Armenia's security forces resulting in 10 deaths. These events seriously tarnished Sargsyan's legitimacy at the start of his first term in office. There are now expectations of greater reform following his re-election. The economy has performed relatively well in recent years, rebounding strongly from the depths of the economic crisis in 2009, with the International Monetary Fund estimating 3.9% GDP growth in 2012. On the political front,

Eurasia

Sargsyan has opened a dialogue with the opposition in an attempt to heal the breach caused by the 2008 elections, and the country has made modest progress in fighting corruption, rising on Transparency International's Corruption Perceptions Index from 120th place in 2009 to 105th in 2012. Given the unrest after the 2013 elections, Giragosian tells bne that the government could take the right lesson that it's very dangerous for any incumbent government to ignore popular demands for change. "Counter-intuitively, this may have a positive impact on the government by accelerating reforms," he says. Key changes on the cards include working towards agreeing a free trade area and association agreement with the EU.

"Despite higher levels of discontent, the opposition reaction is both leaderless and rudderless"

Turkmenistan launches modest privatisation drive Clare Nuttall in Astana

Hovhannisyan started a hunger strike and called on Sargsyan to step down before April 9. However, the court's verdict is bolstered by reports from international election observers that said whatever violations of the electoral process occurred, they were not sufficient to have affected the end result of the election. The post-

Giragosian, director of the Yerevanbased Regional Studies Center, tells bne. "Despite higher levels of discontent, the opposition reaction is both leaderless and rudderless. Instead of focusing on the May 2013 municipal elections, which represents an opportunity to build a power base, they are demanding the resignation of the president which is not only unlikely but impossible."

There are also signs that Sargsyan is planning top-level personnel changes. Under the Armenian constitution, the government has to resign on inauguration day, which takes place 50 days after the presidential election. A prime minister has to be appointed within 10 days of inauguration, and a new government no more than 20 days later. In late February, rumours emerged in the Armenian press that Sargyan was planning to replace Prime Minister Tigran Sargsyan. Former Yerevan mayor Karen Karapetyan, who is now vicepresident of Russia's Gazprombank, was reported by Zhoghovurd to have returned from Moscow to Yerevan for talks with Sargsyan's Republican Party of Armenia sparking speculation that he is a possible candidate.

of car service shops. Turkmenistan's notoriously secretive authorities have not disclosed how much in total was raised in the auctions.

Hovhannisyan's campaign to have the result overturned also provided a unifying force for Armenia's fragmented opposition, with other leaders including Ter-Petrossian saying they considered the election to have been rigged. Following the constitutional court's ruling, however, the opposition seems to have run out of steam. "It is clear now that things are returning to normal," Richard

I 51

urkmenistan launched a new privatisation drive in a modest way on March 9, selling off a handful of assets, none of which were valued at over $2m. Later rounds that are planned over the next five years as Turkmenistan's economy tentatively opens up could include companies in potentially lucrative sectors such as telecommunications, though Ashgabat seems determined not

to relinquish control of the crucial oil and gas sector, which forms the backbone of the country's economy. In the first round of auctions the most expensive asset on sale was the Veset shopping centre, which was valued at around $2m. Other items included the Kopetdag-Lada carpet factory, food processing plants and a chain

The privatisation programme for 20132015 was approved by the Turkmen government in November, with auctions open to international as well as domestic investors. Two further waves of privatisation are due to take place in 2014-2015 and 2016. There is speculation that larger companies could be sold off or partially sold at the later stages, although the government says it is drawing up a list of strategic assets that will remain in state hands. Lilit Gevorgyan, political analyst at IHS Global Insight, believes that the prospect of privatisation of companies in the energy sector within the next few years is "next to none". Barriers to entry Outside the oil and gas sector, the government has indicated that companies in the construction, transport and communications sectors may be sold off in future, potentially giving international investors access to Turkmenistan's fast-growing telecom sector. The UAE's Etisalat expressed an interest in the Turkmen telecom market back in 2011, thought it is not clear whether Etisalat will still be interested now that Russia's

I Eurasia

bne April 2013

MTS has returned to the country. Construction is another burgeoning sector, given the government's ambitious infrastructure plans. However, there are numerous obstacles to entering Turkmenistan; the country is ranked 170th out of 174 countries on Transparency International's 2012 Corruption Perceptions Index, and is not even included on the World Bank's "Doing Business" survey. Given the challenges of entering the market, Gevorgyan forecasts that the privatisations will mainly be of interest to the handful of investors already active in Turkmenistan. "Foreign businesses – particularly Russian, Ukrainian, Chinese, Turkish and Kazakh which are already present in the Turkmen market are well positioned to take advantage of the state asset sales. Being accustomed to difficult operational environments,

"Berdymukhamedov has announced many reforms that never materialise so I think we should remain extremely cautious" they could benefit most from the new privatisation drive," she says. "However, for all investors, both domestic and foreign, corruption, very poor protection of investors' rights and ineffective state apparatus will remain key challenges." The programme does, however, appear to be part of a series of tentative reforms announced in Ashagabat, the most isolated and tightly controlled of the former Soviet republics. At the time the programme was approved, Turkmen state media quoted President Gurbanguly Berdymukhamedov as saying that, "privatisation will contribute to further enhancement of the Turkmen economy's competitiveness, efficiency and profitability of industrial production, as well as the dynamic development of private entrepreneurship in the country." As yet, the economy is almost totally state controlled and isolated from

bne April 2013

Eurasia

international markets, so even small-scale privatisations are a major step. While Turkmenistan's economy has consistently been among the fastest growing in the Eurasian region, achieving 8% growth in 2012, according to the International Monetary Fund, this growth is almost entirely driven by its vast oil and gas reserves. Sebastien Peyrouse, research professor at the Institute for European, Russian and Eurasian Studies (IERES) at George Washington University's Elliott School of International Affairs, and author of "Turkmenistan. Strategies of Power, Dilemmas of Development", says that the privatisation progress is perhaps a good indication given the government has been extremely averse to such economic reforms since its independence. However, he warns that, "Berdymukhamedov has been announcing since 2007 so many reforms and changes which actually never materialise that I think we should remain extremely cautious." There is also the danger that the privatisation process could be used as a means to line the pockets of the Turkmen elite rather than as a genuine tool for reform. It is, however, being accompanied by other reforms in the economic sphere. In March, the parliament unanimously backed a new housing code that will partially privatise the sector. Ashgabat has also promised to adopt international accounting standards in 2014, and set up a stock market by 2016. In the political sphere, Berdymukhamedov has also initiated some reforms, most significantly changing the law to allow a multi-party political system; the Party of Industrialists and Entrepreneurs was created in August 2012, though there are no signs of a genuine opposition being allowed to exist. He has also gradually removed the most visible symbols of his predecessor Saparmurad Niyazov's personality cult. But not everything has changed. In February, Berdymukhamedov announced plans to plant 3m trees to transform his desert country into a "blooming garden" – a scheme as bizarre and grandiose as those initiated by Niyazov, the self-styled "leader of all the Turkmens".

I 53

of Tbilisi – a trend that appears to be taking its toll on local chains despite their greater accessibility for the capital's populace. Populi, one of Georgia's oldest and largest supermarket chains, appears to have been the first notable casualty of Carrefour's arrival. The 45-shop retailer sold 88% of its shares to a competitor, Ioli, in February for an undisclosed amount. Ioli is 100% owned and operated by two foreign investment funds, SEAF and the Caucasus Growth Fund.

Georgians acquire taste for Carrefour Molly Corso in Tbilisi

hen French retail giant Carrefour opened its first store in Tbilisi last year, shoppers and economists expected the hypermarket to bring better a selection of goods, lower prices and a hook for more big name investors to the market. But six months on, it appears Carrefour's biggest impact so far has been on local Georgian supermarket chains: two have sold controlling stakes to a foreign fund and at least one more is rumoured to be shopping for a buyer overseas. In 2012, Carrefour chose Georgia, one of the poorest countries in the former Soviet Union, for its second regional store, after entering the Caucasus through oil-rich Azerbaijan. The move built on Carrefour's recent interest for emerging markets; the chain also has a presence in Romania and Bulgaria, though has sold out of the more developed Emerging European markets like the Czech Republic. While plans to expand in Armenia have stalled after the company encountered problems with local competitors, Carrefour opened its first store in Georgia in 2012 and the people there have embraced the retailer and its

hypermarket format. The move built on Carrefour's recent interest for emerging markets; the chain also has a presence in Romania and Bulgaria, though has sold out of the more developed Emerging European markets like the Czech Republic. But Georgia's supermarket scene is already crowded, with a half dozen local chains competing for the country's reported GEL400m (€186m) grocery sector. With an estimated 80% of all grocery shoppers opting for bazaars and small mom-and-pop stores over the

Meanwhile, Georgian media has also reported that Goodwill, Georgia's first local hypermarket chain, is shopping for a foreign buyer. Goodwill representatives did not respond in time for publication, although the chain's general director, Miheil Charkviani, has denied the store is suffering from Carrefour's ability to lower prices. Esben Emborg, the managing partner at the Caucasus Growth Fund, stresses that Populi's decision to sell was due to poor management, rather then a Carrefour-inspired market crunch. "At any given time, the company has had different problems. It has been a chain that either was not supplying what was wanted… it was criticized for being too expensive, criticized for being a bad payer – there has always been something, but nevertheless it has been a successful chain for many, many years," he says. "We don't see them [Carrefour] in direct competition

"I think what supermarket chains in Georgia need is real professional management" cleaner – but pricier – modern chain stores, the competition is stiff. Stealing customers On weekends, queues form as Georgians line up at Carrefour for deals on sugar or other consumer goods, undeterred by the store's distance from the centre

in that sense because it is a different format of stores, the hypermarket… We are an around-the-corner convenience store, which means we have a lot bigger network, much more shops… We believe that, even though there are new players on the market, there is still a lot of space to grow for everyone."

I Eurasia

bne April 2013

Jon Copestake, chief retail and consumer goods analyst at the Economist Intelligence Unit, notes that smaller stores often try to draw a distinction between their wares and Carrefour when the French retailer enters a market, in an effort to alleviate

personal service," he says, adding, however, that it is "difficult" to compete with French chain. SMART, another local Georgian chain, however, is optimistic about its future in a Carrefour-influenced market. With

"I think what supermarket chains in Georgia need is real professional management" the blow to their customer base. He says Carrefour has typically had a "negative" effect on smaller local chains when it moves into a new market, with local stores trying to offset Carrefour's "deep pockets" and global distribution chain by offering products and services the retail giant does not. "Smaller stores try to compete with Carrefour by offering different products, different services. For instance, offering products Carrefour doesn't or offering more

ten stores open across the country, the retailer is planning an additional seven or eight storefronts over the next year, according to SMART's press service. The chain's management believes its strategy of adding stores to its existing gas stations or opening fast food restaurants next to the grocery stores will help attract clients. Rusudan Kbilashvili, the marketing manager for the chain's parent company

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

Eurasia

Traditional practices like poor relations with workers, ineffective handling of products and poor store design simply won't cut it as the Georgian market develops, warns the Caucasus Growth Fund's Emborg. "I think it is inevitable where the market is going to go – the market is going to go toward more controlled modern trade where the consumer has a better guarantee for fresh, clean environment. Eventually, we will compete on things like assortment, service, and accessibility," he says. "I think what supermarket chains in Georgia need is real professional management. I think it is attention to detail in the shops, so that is how the shop is run – the client satisfaction of being in one of your stores. Is the service okay? Are the goods stocked right? … Stuff like that, just basic, basic stuff," he says.

www.bne.eu

I 55

shops, the French patisserie is a relatively new concept. The market is still far from saturation, and high-end shops and cafes do well among the monied elites of the two cities. "In our experience, everything in Kazakhstan is expensive, but not everything is good. We are not serving cheap products, but we are serving good products, with the ingredients imported from France at an affordable price," he says. "There is not a lot of competition yet. Although companies like Paul have now launched in Almaty, Kazakhstan is big enough for a lot of patisseries! It's a new business, and still growing."

Wissol Group, tells bne that SMART is counting on "western management standards" and a strategy based on consultations with foreign retail specialists to win over clients.

What you need to know

bne April 2013

Kazakhstan's taste for French cakes

New layers Within Kazakhstan, in addition to the plans to open a cafe in Almaty, La Tartine is targeting the corporate market, and hoping to serve coffee and croissants at business meetings. Thorel is also one of the partners in Almaty restaurant La Grenouille. "There are a lot of opportunities in Kazakhstan, and it's easy to grow quickly," he says.

Clare Nuttall in Astana

French patisserie launched in Kazakhstan in 2011 has grown rapidly both at home and abroad. Initially serving Kazakhstan's French community, who sorely missed the croissants, baguettes and flans available on every street corner back home, La Tartine is now opening in countries from Georgia to the UK to Mozambique. La Tartine was set up by a Kazakh and a French investor duo who had already brought brands including Yves Rocher to Kazakhstan. They brought in Matthieu Thorel, who had worked in the Kazakhstani food sector for two years, as director of the new business, and started by opening a takeaway in downtown Almaty in June 2011. The second outlet was opened in Astana a year later. Thorel says the patisserie immediately proved popular both with expats and Kazakhstanis. "Whenever I land in France, I immediately go to buy a baguette sandwich and a flan – you can't get them in Kazakhstan. So opening a patisserie was a solution for us, and for

the other French in Kazakhstan. Also, many Kazakhstanis have visited France and they appreciate our country's culture and its cuisine," Thorel tells bne. "We have experimented with different types of outlet. Our first project, in Almaty, was a takeaway street retailer. The second was at a shopping mall food court in Astana. We have observed the market, and next plan to open a cafe in Almaty." Thorel notes that while the affluent cities of Almaty and Astana have numerous chain and private coffee

La Tartine's Kazakh origins have also provided the springboard for what is becoming a business with outlets in an eclectic range of cities worldwide. While La Tartine was created in Kazakhstan, branches have now opened in the British cities of London and Windsor, as well as Kyiv and Tbilisi. There are also projects underway in North America and Mozambique. Explaining the geographic spread of the business, Thorel says: "Most of these have been opened by people we know. La Tartine is a project between friends, which means we keep the spirit."

"In our experience, everything in Kazakhstan is expensive, but not everything is good"

Opinion

bne April 2013

One thing that should be very well understood about economic migration is that at least in Romania's case, the most affected is not the recipient country but rather Romania itself. The massive workforce drain in the past five years has reached a point where five working people support six pensioners, or 1.2 retirees per worker, seriously threatening any state-run pension plan for many years to come. Plus there is now a lack of well-qualified personnel at home.

Romanians flooding into UK – myth or reality?

PM Ponta claims the big wave of migration has already ended, but he fails to explain what might happen on three fronts.

Bogdan Preda in Bucharest

n a guest piece published in The Times on February 25, Romanian Prime Minister Victor Ponta claimed his new government has plans to create enough jobs that will keep Romanians at home and not head off in droves to the UK from the end of this year. In reality, there are facts that contradict both the migration sceptics and those fearing a flood of immigrants in the UK. Will there be more Romanians – and even more Bulgarians – likely to show up in the UK to "grab the jobs" of the British by accepting lower wages? Yes, there will be. But will they be "flooding" the UK labour market? Probably not. Worries about a "giant wave" of Romanian and Bulgarian migrants stems from the fact that as of next year the UK will have to open up its labour market to workers from these two countries. Until now, Romanians and Bulgarians, unlike Poles for example, had to go through a lot of official paperwork in order to work legally in the UK. Lots of Romanians or Bulgarians could go to the UK freely after their countries joined the EU in 2007 as tourists and then work illegally; those who wanted to work in the UK badly enough had to go through a lot of bureaucracy. From next year, they will be able to apply for work almost as easily as they do at home. Beleaguered nations Romania and Bulgaria, the two formerly communist neighbouring countries, are the poorest in the EU, according to available data. While governments in both countries are under EU pressure to completely liberalize their energy markets, resulting in unbearable rises in utility bills, they simply haven't been able to generate the right policies and amount of economic growth needed to raise incomes fast enough. Following the toppling of communist regimes across the Soviet bloc at the end of the 1980s, tens of thousands of those countries' citizens immediately migrated to countries in Western Europe. Many more decided to wait for the situation

bne April 2013

to improve at home, given the new freedoms and the marvels of the new market-oriented economy, which they hoped would generate a decent living. However, living standards in countries like Romania and Bulgaria have failed to improve considerably, at least for the average worker. Formerly state-owned companies and large construction projects were dismantled with nothing new to consistently replace them. The case was similar for various professions, including engineers, teachers and especially doctors, who after 10 years of school woke up to the reality of being paid no more than €300-400 net per month. Such a reality prompted more Romanians and Bulgarians to leave their countries to seek better lives. In the case of Romania, which has a population of roughly 21m, about

"The economic crisis is transforming the emigration from Romania into a life horizon"

three times larger than Bulgaria, official statistics cited by PM Ponta indicate that "after our 2007 EU accession, about 3m Romanians gradually left the country to work abroad'', especially to countries with Latin-based languages such as Italy, Spain and France, as Romanian is also Latin-based. Separately, according to statistics supplied by Romania's Chamber of Medics, about 10,000 Romanian doctors left the country over the same period. The situation is so bad that Romanians with enough money no longer rely on specialised care at home but seek it abroad.

Family matters Ponta is right when he says that the biggest wave of migration has already taken place. What he fails to take into account, however, is that Romanians living and working in Spain and Italy are now desperately looking for jobs elsewhere, because those economies are among the EU's most troubled. Will they return to Romania or will they move on to the UK if they can find a better paid job there than at home? All of the almost 3m certainly won't move to the UK, but thousands, if not tens of thousands, are surely already considering this option rather than returning to Romania to sweep the streets for €200 a month. Another aspect overlooked is that each Romanian who chose to move abroad to work still has relatives back home. Among them are relatives who then were reluctant to leave, but are now ready to move if the opportunity arises. Romania has tens of thousands of cases of citizens who have pulled many more family members abroad, and this will continue happening for as long as the EU preserves its principles of free movement of labour and Romania remains as unattractive as it is. And finally, there is the case of very well-trained professionals who stubbornly hoped that things would change for the better in their country and are now realizing that they have wasted half of their professional lives waiting for changes that either didn't happen or are taking place too slowly. Such people could also head off to the UK. "The economic crisis is transforming the emigration from Romania into a life horizon," the German foundation Friedrich Ebert said in a study released by its Bucharest office in 2012. "Emigration is triggered not only by the low level of income, but also by the lack of trust in the institutional system and decision makers." Besides their Latin-based language, which helped them cope with integration in Spain, Italy or France, Romanians also have an extra skill when compared to Bulgarians. Even the very average citizen speaks and understands the most common words of the English language, and that's a Ceausescu-era legacy. The use of English language in Romania dates back to 1968 when, following the invasion of former Czechoslovakia by the Soviet-led Warsaw Pact troops, the then-communist dictator Nicolae Ceausescu prevented his country's army

Opinion

from joining the occupation troops and even criticized the move, which prompted Queen Elizabeth II to decorate him and US President Richard Nixon to pay a visit to Romania the following year. In the same year, as part of an anti-Soviet stance, Ceausescu was hailed as a more liberal communist by western powers as he removed the practice that made it mandatory for Russian to be taught in Romanian schools, but allowed the study of English, German, French, and even Spanish and Italian in elementary schools. Moreover, the state-run television started airing Hollywood movies, crucially with subtitles rather than being dubbed. The subtitling habit, which continues to this day, has helped most of the younger Romanian generation to become more familiar with the English language, to the extent that most youngsters that have graduated from high

"Emigration is triggered not only by the low level of income, but also by the lack of trust in the institutional system"

school can read and write basic English. Bulgaria, on the other hand, has most of its English-language movies dubbed in Bulgarian and the result is visible: much fewer people there speak or understand English, making it also more difficult for them to settle in the UK. Bottom line. Yes, more Romanians will move to the UK. But those who do choose to leave Romania for the UK this time will be the ones that still have some good skills and are professionals, such as doctors, engineers and the like, who have wasted enough of their professional lives hoping for better times in their own country. The others likely to move to the UK will be those currently living in other EU economies that are suffering from the Eurozone crisis, such as Italy and Spain.

I Special report

bne April 2013

Special report I 59

bne April 2013

Photo: Demotix.com

Not quite Spring in Azerbaijan Special Report: Azerbaijan

Andrew MacDowall in Baku

he demonstration ended with rubber bullets, water cannon, baton charges and arrests â&#x20AC;&#x201C; an all-too-common denouement to protests in Azerbaijan. But were the scenes in Baku on March 10 the sign of a swelling popular movement that could topple President Ilham Aliyev, as the opposition would have us believe? Or were they merely a minor drama involving a small rent-a-mob bent on provocation and with little support within the country, as the government argues? Certainly the anti-government movement seems to be growing in confidence, and an undercurrent of popular disquiet at corruption and authoritarianism runs stronger than the authorities would like to admit. But the Aliyev regime looks firmly entrenched, supported by a substantial proportion of the Azerbaijani population, networks of patronage and international allies reluctant to rock the boat. Aliyev, the son of father-of-the-nation figure Heydar Aliyev, faces an election in October, but seems set to be returned to power. The March 10 demonstrations were called in protest at a spate of unexplained deaths

of young conscripts in the army that the opposition claim are due to bullying, corruption and brutal initiation ceremonies. Khadija Ismayilova, an award-winning investigative journalist, tells bne that there have been more than 100 deaths in the past year, of which only 16 were known combat casualties; she says that others may be suicides of persecuted young soldiers, or even assassinations by senior officers. In the opposition's opinion, the

in mind the fact that front-line troops are "under constant psychological pressure" due to clashes with Armenian troops around the border with Nagorno-Karabakh â&#x20AC;&#x201C; an ethnic Armenian enclave that is actually Azerbaijan territory, but over which it has not exercised power since a war between the two sides in 1991. The government says that the protest was broken up as it was illegal, but asserts

"Serious work is being done to fight corruption in the country" situation epitomises much of what is wrong with Azerbaijan: authoritarian hierarchies, graft and a lack of transparency. In a statement sent to bne, government representatives say that, "the Ministry of Defence and the Military Prosecutor's office are doing all it can to prevent these deaths", that conditions are improving for soldiers and that critics should bear

that permission would have been granted had the demonstration been held at another location, rather than in the heart of the city. But the opposition, as well as their international supporters such as Human Rights Watch and Amnesty International, say that the "disproportionate" use of force by the police demonstrates the lack of freedom of assembly in Azerbaijan, and that several organisers were

I Special report

arrested before and after the demonstration on trumped-up charges. In any case, the turnout was not that high. International press reports suggest 300-500 people, possibly based on official figures, while Emin Milli, a prominent dissident activist and blogger, tells bne that it was more like 1,000-2,000 – though he was not present himself. Milli has spent two spells in prison; US President Barack Obama is understood to have made a personal appeal for his release. To the few, the most Milli and Ismayilova see the March 10 demonstration as the latest in a series of increasingly vocal displays of popular discontent against the Aliyev regime. This year there have already been protests by merchants against corruption in the customs regime, and disturbances in the provinces against regional governors, some of whom behave like "feudal lords" in Milli's words. In January, riots broke out in Ismayilli, capital of a province of the same name, after an incident involving a businessman linked to the governor, which ended in a hotel being burned down and a local government office being attacked. According to Ismayilova, the incidents were triggered by a situation that is common in Azerbaijan's regions – local politicians divvying up the commanding heights of the economy between their family members and associates, while the rest of the population endures low incomes and poor prospects. The protestors demanded the governor's resignation, which was soon forthcoming – the government not unreasonably portraying his sacking as a sign of its responsiveness to citizens' demands. While officially Azerbaijan's image is of a booming economy presided over by the benevolent Aliyev, Ismayilova and Milli say that this is a façade behind which lies a tormented society. Ismayilova says that the country is "a mediaeval monarchy with elements of Soviet dictatorship", in which public officials must be bribed and "white elephant" public projects, such as the world's highest flagpole (swiftly outdone by Tajikistan), are handed out to favoured companies linked to the ruling family. The pervasive culture of bribery means that many public employees,

bne April 2013

Special report

bne April 2013

I 61

including teachers and medics, can be accused of corruption and sacked if they step out of line; it also opens the door to international organised crime. Milli claims that the cash flows right to the top, in a pyramid system of bribes.

and that the movement is gathering funding from a number of sources. The goal is a secular parliamentary democracy, investor-friendly and outward-looking, though Milli is more vague about how this change will come about.

end of the military occupation," Baku is willing to offer "the highest possible autonomy within Azerbaijan… to reconcile territorial integrity and selfdetermination" and that its position is still open to negotiation.

The problem of corruption has been highlighted by Elshad Abdullayev, a former university rector now in exile in France, who has posted a series of videos apparently showing incidents of high-level bribery, including one of himself discussing a $1m payment for a parliamentary seat with a representative of the ruling party.

Unfazed and unbowed For its part, the government isn't fazed by the new opposition. One senior presidential advisor says that Aliyev's approval rating tends to range from 70% to 90%. He argues – as does the government as a whole – that after 80 years of Soviet rule, followed by war with Armenia, democratisation cannot come overnight. There are also dark hints that opposition movements are funded by Russia, and a rejection of the suggestion that Azerbaijan must change by US or EU diktat. "For the purposes of democracy, it is foremost important to provide the economic independence of the country as a poor country is not likely to build a democratic society quickly," the government statement says. "It is important to make changes to the mentality of the people, improve the system of education, etc."

Currently, he says, the suspicion is that Armenia is using the sporadic peace talks as an excuse to maintain the status quo rather than to make concrete progress towards a solution.

"Serious work is being done to fight corruption in the country," was the government's response to bne's questions about corruption and the perceived impunity of the powerful. "A special department to fight corruption has been created at the Prosecutor General's office. Since 2005, this department has started more than 1,000 criminal cases and 700 people have been held accountable. Only last year, 212 people were arrested by this department. The country has adopted a programme combatting corruption." But in Milli's view, there is growing public discontent in Azerbaijan that risks boiling over into more violent incidents like those in Ismayili. He says that the Aliyev government has gone from being a "guarantor of stability" respected in the West to a reason for the chaos. Due to the weakness of Azerbaijan's parliament, where there is little or no genuine opposition, "the only way to communicate dissatisfaction is to riot," says Milli. The fact that the opposition has been fragmented has often been cited as a reason for its failure to gain traction, by its supporters and critics alike. But Milli speaks of a new united opposition that has put aside its differences to focus on the shared goal of regime change. The movement has yet to appoint a formal leader – Milli says that they want to avoid creating "a saviour figure" – but prominent figures include Bakhtiyar Hajiyev, a 30-year-old Harvard graduate who has also spent time in prison. Milli says that he is "90% sure that we can remove Aliyev by the end of the year"

While the opposition rubbishes the government's claim to popularity, Michael Taylor, senior Eastern Europe analyst at Oxford Analytica, is deeply sceptical about the chances of regime change. "Unless there's a political earthquake, Aliyev will win a sweeping majority this year, even if the opposition is united," he tells bne. "The broad mass of the Azerbaijani population is grateful to the Aliyevs for bringing stability after the unrest of the early 90s. Heydar Aliyev brought the country back from the brink. The opposition have to be optimistic, but something has to go badly wrong for the regime to fall." But he adds: "It's not a very healthy political scene, with a group of clans in power, with the regime skimming a lot off at the top. But it's not monolithic, as the clans compete." Azerbaijan's future, therefore, may hinge on how effectively its rulers can leverage its hydrocarbon resources to deliver real benefits to the population, while gradually easing up on the repression and allowing some political pluralism.

Azerbaijan treads a cautious diplomatic path

Internationally, few believe there is much hope of a breakthrough anytime soon. "Negotiations will continue and will be promising from time to time, but barren of results," says Charles Fairbanks, an American academic and Caucasus expert currently based in Tbilisi. "The side which won is understandably very reluctant to give up its gains, even if it winds up being isolated; I'd bet very heavily against any resolution."

Andrew MacDowall in Baku

zerbaijan is in a situation that Poles can sympathise with – wedged between two powerful and occasionally belligerent neighbours, both of which have occupied and ruled it in the past. But while it has in common with Poland a difficult relationship with Russia, on its other flank lies not liberal democratic Germany, but theocratic and difficult Iran. Azerbaijan's foreign policy, therefore, seeks to maintain cordial relations with both Moscow and Teheran, while resisting the powerful duo's attempts to exert a baleful influence within its borders. The third big power on the doorstep is Turkey, with which there are close linguistic and cultural ties. Azerbaijan, a country of just 9m people, is in the fortunate position of having abundant hydrocarbon resources that make it important beyond its immediate region; growing energy ties with Europe should boost its external security, while allowing it quietly to build economic and diplomatic influence in emerging markets. But ask Azerbaijani officials what their single biggest foreign policy priority is,

and many will say something else: the issue of Nagorno-Karabakh, a mountainous region internationally recognised as part of Azerbaijan but occupied by Armenia. The two countries fought a war over Nagorno-Karabakh between 1988 and 1993 as the Soviet Union crumbled, and since then this has remained one of the world's most intractable frozen conflicts: frozen, that is, apart from sporadic but all-too-frequent fatal cross-border shootings. The region was majority-Armenian before the war and today, following ethnic cleansing and flight, even

Michael Taylor, senior Eastern Europe analyst at Oxford Analytica, an analysis and advisory firm, points out that the Armenian military has the advantage of being literally dug in in the forested mountains of Nagorno-Karabakh, but argues that economics and demographics could play to Azerbaijan's advantage in the long term. Baku has not ruled out a military assault to retake its territory. But while, according to Azerbaijani government sources, Azerbaijan's annual military spending exceeds Armenia's whole budget, Taylor says that the army's effectiveness is questionable. "War could break out by mis-

"Negotiations will continue and will be promising from time to time, but barren of results" more so. Even so Baku insists on it being restored to Azerbaijani rule, in line with Soviet-era borders. Elnur Soltanov, assistant professor at the new Azerbaijan Diplomatic Academy, which has close links to the government, tells bne that while Azerbaijan seeks "the

take," he tells bne. "But the international community, and particularly Russia, will do everything they can to prevent it." Balancing act Baku's uneasy relationship with both Moscow and Teheran is not unconnected

I Special report

Final countdown

bne It's been years in the making, but final submissions for the tender to choose which pipeline will carry gas from the second phase of Azerbaijan's giant Shah Deniz field to Europe are due by the end of March, with an initial decision seen in June and a final deal by October. The choice before Azerbaijan and the Shah Deniz consortium – in which BP, Norway's Statoil and Azerbaijan's Socar are the main players – will be to pick one of two pipelines that will carry 10bn cm/y of gas earmarked for Europe (6bn cm/y will be kept for Turkey's domestic use) from the Turkish border to the EU markets. The gas will first be sent from the Shah Deniz field to the Georgian-Turkish border via an existing pipeline, from where it will hook up to the planned Trans Anatolia Natural Gas Pipeline (TANAP) that's being built by Azerbaijan and Turkey, which will then transport the gas to the Turkish-European border. The two candidates to take the gas from there on to Europe are the Trans Adriatic Pipeline (TAP) and Nabucco West. TAP is a private sector project that will run from the Turkey-Greece border via Greece and Albania and onward under the Adriatic Sea to southern Italy. TAP's current shareholder structure includes Axpo of Switzerland (42.5%), Norway’s Statoil (42.5%), and Germany’s E.ON Ruhrgas (15%). Kjetil Tungland, TAP's managing director, is increasingly optimistic that his ¤2.5bn pipeline will get the nod, as it is no longer the underdog to Nabucco. "I think the odds are highly in our favour because we were more in front technically and commercially all the time, but politically we had to catch up," Tungland said in a recent interview. Indeed, Nabucco West is the remnant of an ambitious – and ultimately doomed – EU-backed plan to bring gas all the way from the Shah Deniz field to Austria. It had huge political backing, but simply wasn't economically or practically feasible. The shorter version of 1,300 km will pick up from TANAP at the Turkish-Bulgarian border and run to the gas hub at Baumgarten near Vienna, via Romania and Hungary. At present, the six equal shareholders in Nabucco West are Austria's OMV, Hungary's Mol, Romania's Transgaz, Bulgarian Energy Holding, Turkey's Botas and Germany's RWE. Analysts too say that on the face of it, TAP looks a better bet, since it offers a shorter route with fewer transit countries and fewer partners to complicate matters. However, a growing number of experts are speculating that both pipelines could end up getting built – a view given some weight by recent comments from BP and Socar. Andrew Neff, senior energy analyst at IHS Energy, says the fact that TANAP is open to having two exit routes, to Bulgaria and to Greece, seems to suggest that both Nabucco West and TAP could be built in the end. "There is a growing expectation now that Nabucco West versus TAP is not an 'eitheror' proposition so much as a 'which comes first?' decision – with the June decision on which route will be built first and will carry Shah Deniz 2 gas, while the ‘loser’ option could yet be built one to two years behind.

bne April 2013

to their support for Armenia. While the close relationship between Russia and Armenia is well known, Iran's influence is significant but often overlooked. Azerbaijani officials are fairly straightforward about their desire to maintain independence from Russia, and about their suspicions that the Kremlin resents this; some claim that it backs opposition movements. Similar fears are expressed about Iran's support of militant groups. Iran's religiosity and unpredictability unnerves Azerbaijan, a secular country that seeks security above all. The substantial Azeri population in Iran (estimates vary between 12m and 30m, the latter probably including other Turkic groups) is seen as providing a degree of insurance against Iranian aggression. Soltanov says that "two out of three" of Azerbaijan's big neighbours (the other being Turkey) "have not scored well" on respecting its sovereignty and territorial integrity. But as both Fairbanks and Taylor note, Russia's power and importance in the Caucasus and beyond is a reality. Azerbaijan cannot entirely detach itself from its former ruler and instead seeks cordial relations, while seeking allies elsewhere to balance against Moscow's influence. Turkey has historically been a rival to Russia and Iran in the Southern Caucasus, and is a natural ally for Azerbaijan, a secular Muslim country with a mutually intelligible Turkic language. Azerbaijan has benefitted from Turkey's economic and diplomatic Drang nach Osten (German for "yearning for the East") since the collapse of the Soviet Union, and particularly in recent years as Central Asia's energy wealth and strategic importance have risen. The Baku-TbilisiCeyhan BTC) oil pipeline in particular has proved beneficial to both countries and their trading partners. But both countries realize that the Baku-Ankara link cannot be so close as to crowd out other relationships. "Turkey continues to be very important for Azerbaijan," says Fairbanks. "But it no longer plays the role of dominant patron.

Special report

bne April 2013

Turkey's reconciliation with Armenia was ruined in the end, but the fact that it was even contemplated shows how independent of Azerbaijani interests the [current Turkish] AKP government is. Azerbaijan may need Turkey more than Turkey seems to want Azerbaijan." Well oiled The key to Azerbaijan's security and independence arguably lies in its hydrocarbon resources – and not (just) because they can buy quite a lot of weaponry. The country's oil and gas helps secure powerful friends beyond the Black Sea/ Caspian region: the EU and US are well aware of the country's potential as an alternative source of energy to diversify Europe's supply and reduce its dependence on Russia. Azerbaijan's state energy firm Socar is gearing up to supply the EU's planned Southern

Gas Corridor, which would take Azeri gas into the heart of Europe via the Balkans. If executed, it would provide an alternative to, or at least supplement, Gazprom's planned huge South Stream pipeline that will deliver Russian gas to the same markets. The scale of European, and particularly British, investment interests in Azerbaijan – BP is the single biggest source of foreign investment – also contributes to Western support for the country's independence and sovereignty, if not for massive efforts to resolve Nagorno-Karabakh in Baku's favour. But it's not only Europe that Azerbaijan can sell energy to. Quietly, the country has established a remarkably close relationship with Israel, which sourced 40% of its oil from the Caucasus country via the BTC pipeline last year. In return, Israel sells arms that some Western countries are too squeamish to export.

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

Finally, hydrocarbon cash is helping fund both overseas investments and "soft power" initiatives. The State Oil Fund of Azerbaijan (Sofaz), a sovereign wealth fund, has a diversified portfolio worldwide, including a £180m office block in Mayfair, London, and other governmentlinked firms are scoping out opportunities in sectors including tourism. As for soft power, oil money is helping turn central Baku into something of a set-piece capital of the Caspian and South Caucasus. And subtly, or otherwise, Azerbaijan is raising its profile through charitable projects. In Belgrade, for example, not only has the city's only remaining Ottoman mosque been restored with Azerbaijani money, but much to many locals' bemusement a chunky statue of the late Heydar Aliyev (father of the current president) stands in the historic Tasmajdan Park, which was renovated thanks to Baku's largesse.

What you need to know

I 63

www.bne.eu

I Special report

bne April 2013

Soviet Union, the Azeri SSR was one of just four republics where computers and chips were manufactured. But when the Soviet Union broke up, the industry virtually disappeared, with the government of the newly independent country focusing instead on developing its oil and gas reserves.

Baku pushes Azerbaijan's high-tech sector how much money companies will be given. The fund's aim is to encourage innovation and entrepreneurship, Velizadeh said, according to Azernews. It also ties in with the government's policy of helping small businesses to develop in the Azeri market, which is dominated by giant holding companies spanning most sectors of the economy.

"At the moment, the performance of the economy, including its fiscal and current account balances, are extremely dependent on the oil gas sector. This dependence has become all the more clear over the past years, when falling oil output has resulted in dramatic slowdown in overall growth, as the non-oil sectors of the economy have not been able to compensate for much of the oil output stagnation," Sipila tells bne.

Humble beginnings In recent years, ICT, starting from a small base, has grown rapidly. The sector has doubled in size every three years since 2004, data shows. In 2012, the ICT sector grew by 18%, far

According to a 2012 report by Rasim Aliguliyev, director of the Azerbaijan National Academy of Sciences' Information Technology Institute, and Galib Girbanov of the Azerbaijan Internet Society, "the industry is now

Clare Nuttall in Astana

state-owned venture capital fund is poised to start making its first investments in Azerbaijan, where the government is aggressively pushing the development of its information and communications technology (ICT) sector as part of efforts to diversify the economy. In recent years, technology has emerged as one of the fastest growing bits of the Azeri economy, but with the growth largely driven by state spending, there are questions about whether this pace of growth can continue. Aimed at IT start-ups in Azerbaijan, the State Fund for Development of Information Technologies is due to begin operations in the near future, the deputy minister for ICT, Elmir Velizadeh, told a mobile technology conference in Baku on March 13. The fund, which was created under a March 2012 government decree, will be financed through the state budget. An official at Azerbaijan's ICT ministry, which manages the fund, confirmed it will start investing in the near future, but declined to comment on when the first investments would be made and

It was not until more than a decade later, when it was becoming evident that Baku needed to diversify to ensure that the economy was sustainable even after the country's oil and gas stocks are depleted, that the government again turned its attention to the ICT sector. Venla Sipila, principal economist, Europe and CIS Economics at IHS Global Insight, points out that it is "extremely important" for Azerbaijan to diversify away from the oil and gas sector, since dependence on commodities makes the economy "very vulnerable".

"Dependence on commodities makes the economy very vulnerable"

Special report

bne April 2013

opportunities for new companies. As of 2012, Azerbaijan had at least 16 medium- and large-sized companies producing computer hardware, accounting for 60% of hardware sold within the country. A further 40 companies are active in software development, web hosting and design and related areas, and 27 companies are involved in the production of telecoms equipment, Aliguliyev and Girbanov's report says. International firms have also entered the Azeri market to supply the sector â&#x20AC;&#x201C; most recently in March, South

Korea's LS Cable & System announced plans to build an optical fibre factory in Azerbaijan. According to state investment promotion agency Azpromo, the telecom sector is the second largest recipient of foreign direct investment after the oil and gas sector. Like other parts of the non-oil economy, to a certain extent the ICT sector's growth has been driven by the demand of Azerbaijan's increasingly affluent population for new products services. However, spending by the government and state owned AzerTelekom remains the primary driving force, which raises

This hasn't always been the case. Back when Azerbaijan was part of the

experiencing a re-birth". While the launch of the Azersat communications satellite in February is the most highprofile event recently, on a smaller scale government investments into areas such as telecom networks have created

the question of how sustainable growth in the ICT sector is â&#x20AC;&#x201C; and whether it will continue when Baku stops investing. Sipila considers that the recent growth in the non-oil economy is mainly due to government spending. "The government has a plan for developing the ICT sector further, so it probably will continue growing rapidly in the coming years. However, with the development of this sector so tightly controlled by the government, there really are no guarantees of a competitive operating environment in the long term," she says.

The satellite was sent into orbit by Azercosmos, an Azerbaijani stateowned company and the first satellite operation in the Caucasus. Established in 2010, Azercosmos implements the launch, operation and exploitation of Azerbaijani satellites. It is planned that the 3.2-tonne satellite, currently in a Malaysia-owned an orbital slot as part of an arrangement between Azercosmos and MEASAT Satellite Systems of Malaysia, will be controlled by local Azeri specialists at the control centres in Baku and Nakhichevan, the hometown of country's president. Provided by Orbital Science Corporation, the ground control systems will include the ground antennas, radio-frequency electronics and computer platforms to monitor and control Azerspace-1.

Azerbaijan's ambitions in space Jahan Hoggarth in London

outstripping growth of 9.7% in the nonoil sector and just 2.2% in the economy as a whole, according to state statistics.

I 65

n February, Azerbaijan launched its first commercial communications satellite Azerspace-1. Designed and built by the Orbital Science Corporation, the US manufacturer of spacecraft and

missile defence boosters, Azerspace-1 is designed to tap into the massive demand for high-quality broadband internet, data and broadcasting services across the Caucasus, Central Asia and Africa.

This space project is part of Azerbaijan's attempts to double the country's nonoil economy over the next decade. The Azerbaijan economy is heavily dependent on oil and gas, with the sector accounting for about 50% of GDP. Its share of tax receipts and exports is even higher â&#x20AC;&#x201C; about 75% and 95% respectively. As part of a government programme, almost 200 Azerbaijani students are now studying space sciences at universities in the US and France. And to push things along, a presidential decree declared 2013 to be a year for information and communications Technology (ICT) in Azerbaijan. "The growth rate for the ICT

I Special report

bne April 2013

sector in Azerbaijan was 18% in 2012. It is remarkable that there has been a twofold increase in ICT every three years since 2004, which is 2.5-times more than the world average," says Rashad Nabiyev, CEO of Azercosmos. Azerbaijan's decision to jump on the space bandwagon shouldn't come as much of a surprise given the economics. According to a 2012 report from the US Space Foundation, the global space industry was worth a total of $290bn in 2011, up 12% from 2010 and up 41% since 2006. According to the same report, Russia, India and Brazil grew their space spending by 20% in 2012, while traditional players like the US and Japan saw their budgets remain largely

"The government hopes to recover the satellite's costs by leasing out space on the satellite" unchanged. The increase in budgets can be explained by the growing demand for home broadband and satellite television in emerging markets. Costing the country over $200m, Azerspace-1 is Azerbaijan's opportunity to tap into the rapidly growing demand for satellite-based communication services, including e-government, in this mountainous region. "It isn't only a question of connectivity though," says the US-educated Nabiyev. "Given the current growth rate of ICTs in Azerbaijan, we expect to achieve the economic growth and long-term cost avoidance in our satellite projects." The government hopes to recover the satellite's costs by leasing out space on the satellite. In an interview with Azeri news service APA, Azerbaijani Minister of Communications and Information Technologies Ali Abbasov said that Azerspace-1 will bring in $650m of the revenue over its 15 years of mission life. The optimism surrounding Azerspace-1 is reflected in Azercosmos ambitious future plans. "Alongside Azerspace-1,

Special report

bne April 2013

we plan to launch the 'Earth Observation', a low-earth orbiting satellite, in 2015 and Azerspace-2, the second communications satellite, in 2016," Nabiyev says.

renowned investment bodies, such as the European Bank for Reconstruction and Development (EBRD), in almost all of our projects," says Aliyev. Together with the Islamic Development Bank and Islamic Corporation for the Development of the Private Sector, AIC is involved in one of the country's biggest projects in the financial sector – the Caspian International Investment Company, which acts as a joint equity fund. Based on Sharia principles, the fund was created for investments in the non-oil sector and to attract prominent institutional investors from the Middle East.

While Azerspace-2 will increase the capacity of telecommunication services, the "Earth Observation" is planned to assist agricultural and environmental monitoring, mapping, transport infrastructure, offshore oil exploration, and managing emergencies and natural disasters. Azerbaijan's big ambitions for its space programme have attracted interest from existing players. Azerspace-1 was launched using an Ariane 5 rocket, part of the French satellite launching system, and Azercosmos has enjoyed strong support from other leading French companies. "Azercosmos has enjoyed close relations with companies from France in almost every stage of Azerspace-1 implementation. We ensured financing from highly esteemed banks including BNP Paribas and other French intermediary banks," Nabiyev says. The Orbital Science Corporation's $205m contract with Azercosmos claims to have supported 1,500 US jobs and "is an example of the bilateral relationship between the US and Azerbaijan, America's largest trade partner from the South Caucasus," according to the Virginia-based Corporation. President Aliyev's plan to turn ICT into Azerbaijan's second main business after the oil and gas industry may seem a tad bit too optimistic – total investment in the ICT industry last year was $414m, accounting for just 2% of total investment in economy. Yet Azerbaijan is rapidly becoming a regional hub for the industry as it aims to become one of the leading nations in other large-scale regional projects, such as TASIM (TransEurasian Information Super Highway) and EPEG (European-Persian Express Gateway). These fibre-optic cable networks are planned to connect Europe with the Middle East and Eastern Asia. Via Azerbaijan, of course.

I 67

Promoting Azerbaijan Jahan Hoggarth in Paris

hile businesses are figuring out what to make of the investment opportunities in Azerbaijan, the country is hard at work at finding ways to attract investors and encourage the growth of its non-oil sector. Since 2003, there's existed the "onestop-shop" investment agency Azpromo, which was set up by the Azerbaijani government to provide international investors with knowledge about the investment opportunities and market characteristics of the country. To help things along, the Azerbaijan Investment Company (AIC), a state-owned investment fund, was formed in 2006. Overseen by the Minister of Economic Development, AIC's primary mission is to assist the development of the non-oil sector via investments into greenfield and brownfield projects in Azerbaijan. By putting money in such projects, the authorities are trying to encourage the growth of the domestic capital market – a key ingredient for attracting a wider range of investors. "We encourage competitiveness through innovations and know-how in the non-carbon

sectors. We are also very selective of the product we invest in, which can be both the established industries aiming to diversify their output, or the projects that have been created to design a completely new industry," Ilham Aliyev, deputy executive director of AIC (and no relation to the president), told the

One of AIC's largest current projects is the construction of the "only modern shipbuilding and ship repair facility on the Caspian Sea." The project – owned by AIC, state oil and gas firm Socar, and Singapore's Keppel Offshore and Marine Company – the project is seen as crucial for the future of country's economy. "Azerbaijan needs such a shipbuilding facility," says Afgan Isayev, director of Socar Georgia investment and a former executive director of AIC. Awarded with a 25-year contract, Keppel is expected to train local experts who will eventually take over the management of the facility.

"If the investors are looking for the next big thing in Azerbaijan, AIC could be their potential partner"

"Business Forum 2013", organised by The European Azerbaijan Society, that was held in Paris in March. Worth over $1bn, AIC's investment portfolio ranges from agricultural and alternative energy to heavy industry and financial projects. "In addition to investing directly in business, we also operate as a fund of funds, with the pool of international investments and we are proud to partner up with globally

Worth $400m, the shipyard will supply Azerbaijan and other countries bordering on the Caspian Sea with new ships and large tankers, especially important in this oil-producing region. Food and energy The much-needed economic diversification in Azerbaijan means a lot of cash is needed for the non-oil sector. That includes finding and developing new sources of green energy, such

I Special report

bne April 2013

as solar and wind, while AIC is also looking to invest in recycling projects, including the recycling of tyres, car batteries and paper. Playing off Azerbaijan's favourable geographical location and the wide range of agricultural produce available, there's good potential in food processing and packaging. Some of these projects

"The crisis made us more efficient in managing our economy"

can turn a historically imported product into a locally produced export, as was the case with salt. In 2010, AIC teamed up with Azersun Holding, the country's largest agricultural firm, to develop the first salt production facility in Azerbaijan using local raw materials. Logistics is another sector of interest to AIC, as Azerbaijan's advantageous geographical location also provides the potential for turning the country into a regional transport hub.

When choosing where to invest, Aliyev says the AIC requires projects and companies that must be fully compliant with international financial reporting standards and adhere to corporate governance best practices. Once the new project achieves a successful track record, AIC sells out of the project in order to reinvest the money into new enterprises. "When we exit a project, we follow clear exit strategy guidelines agreed with the co-investors at the onset of the project. As a company with the stateowned investment fund, we are here to encourage businesses. And if the investors are looking for the next big thing in Azerbaijan, AIC could be their potential partner," says Aliyev. While many parts of the world continue to be squeezed by the economic crisis, Isayev insists Azerbaijan has a lot to offer. "The crisis made us more efficient in managing our economy. For this reason Azerbaijan was able to propel itself into a position as one of the top destinations for foreign investment. This is also boosted by its rich natural resource reserves that are great for local production. Azerbaijan has become the most attractive country in the region due to its political, economic and social stability."

bne April 2013

Special report

I 69

I Events

bne April 2013

Events I 71 The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS

bne April 2013

Upcoming events 2013 Sixth Astana Economic Forum

The 16th annual Russian Automotive Forum (9 - 11 April) Adam Smith Conferences, +44 20 7017 7444 World Trade Centre Moscow, Russia events@adamsmithconferences.com www.adamsmithconferences.com

World Anti-Crisis Conference with support of U.N.

May 22-24, 2013 www.astanaforum.org

Wealth Management and Private Banking Conference (9 - 11 April) Adam Smith Conferences, +44 20 7017 7444 Moscow, Russia events@adamsmithconferences.com www.adamsmithconferences.com 3rd Annual Conference Russian Arctic Oil and Gas (15 - 17 April) Adam Smith Conferences, +44 20 7017 7444 Marriott Grand Hotel, Moscow, Russia events@adamsmithconferences.com Russian CFO Awards & Dinner (25 April) Adam Smith Conferences, +44 20 7017 7444 Moscow, Russia events@adamsmithconferences.com www.adamsmithconferences.com

Social Development

Commodity Prices and Infrastructure, Global Growth in 2013

Innovation and Technology

Global Competitiveness Financial Systems, Risks and Policy Response

What you need to know

02150000000000001000655430000002146512135464100000000054000 0215000000000000100065543000000 00000010006554300000021465121354641000000000540004441235123 2146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 00000010006554300000021465121354641000000000540004441235123 54641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002 146512135464100000000054000 00000010006554300000021465121354641000000000500000040000004441235123 0215000000000000100065543000000 00000010006554300000021465121354 2146512135464100000000054000 021500000000000010006554300000021465121354641000000000000054000 000000100065543000000214651213 641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 0215000000000000100065543000000 54641000000000540004441235123 0215000000000000100065543000000 2146512135464100000000054000 0215000000000000100065543000000 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002 000000100065543000000214651213 0215000000000000100065543000000 2146512135464100000000054000 0215000000000000100065543000000 54641000000000540004441235123 2146512135464100000000054000 146512135464100000000054000 2146512135464100000000054000 000000100065543000000214651213 00000010006554300000021465121354641000000000540004441235123 0215000000000000100065543000000 02150000000000001000655430000002 000000100065543000000214651213 2146512135464100000000054000 00000010006554300000021465121354 54641000000000540004441235123 2146512135464100000000054000 146512135464100000000054000 54641000000000540004441235123 000000100065543000000214651213 0000001000655430000002146512135 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 00000010006554300000021465121354 02150000000000001000655430000002 641000000000540004441235123 54641000000000540004441235123 0215000000000000100065543000000 02150000000000001000655430000002 54641000000000540004441235123 641000000000540004441235123 146512135464100000000054000 02150000000000001000655430000002 2146512135464100000000054000 4641000000000540004441235123 146512135464100000000054000 0215000000000000100065543000000 02150000000000001000655430000002 0215000000000000100065543000000 00000010006554300000021465121354 0000001000655430000002146512135464100000000054000440041235123 000000100065543000000214651213 00000010006554300000021465121354 146512135464100000000054000 146512135464100000000054000 2146512135464100000000054000 641000000000540004441235123 2146512135464100000000054000 54641000000000540004441235123 0215000000000000100065543000000 00000010006554300000021465121354 0215000000000000100065543000000 00000010006554300000021465121354 0000001000655430000002146512135 0215000000000000100065543000000 0215000000000000100065543000000214651213541100064100000000054000 641000000000540004441235123 02150000000000001000655430000002 0000001000655430000002146512135 2146512135464100000000054000 641000000000540004441235123 4641000000000540004441235123 2146512135464100000000054000 641000000000540004441235123 146512135464100000000054000 0215000000000000100065543000000 2146512135464100000000054000 000000100065543000000214651213 0215000000000000100065543000000 0215000000000000100065543000000 0000001000655430000002146512135 0215000000000000100065543000000 4641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354 2146512135464100000000054000 54641000000000540004441235123 2146512135464100000000054000 2146512135464100000000054000 4641000000000540004441235123 2146512135464100000000054000 641000000000540004441235123 000000100065543000000214651213 0215000000000000100065543000000 02150000000000001000655430000002 0000001000655430000002146512135 000000100065543000000214651213 0215000000000000100065543000000 0215000000000000100065543000000 0000001000655430000002146512135 0000001000655430000002146512135 021500000000000010006554300000021465121354600000000000000004100000000054000 146512135464100000000054000 4641000000000540004441235123 54641000000000540004441235123 2146512135464100000000054000 2146512135464100000000054000 2146512135464100000000054000 4641000000000540004441235123 4641000000000540004441235123 54641000000000540004441235123 00000010006554300000021465121354 0215000000000000100065543000000 02150000000000001000655430000002 000000100065543000000214651213 0000001000655430000002146512135 0215000000000000100065543000000 0000001000000065000000543000000214600000051000000021354641000000000540004441235123 000000100065543000000214651213 0215000000000000100065543000000 641000000000540004441235123 2146512135464100000000054000 146512135464100000000054000 54641000000000540004441235123 4641000000000540004441235123 0215000000000000100065543000000 02150000000000001000655430000002 000000100065543000000214651213 000000100065543000000214651213 02150000000000001000655430000002 2146512135464100000000054000 2146512135464100000000054000 54641000000000540004441235123 0215000000000000100065543000000 021500000000000010006554300000021465121354600004100000000054000 2146512135464100000000054000 54641000000000540004441235123 ]54641000000000540004441235123 146512135464100000000054000 000000100065543000000214651213 2146512135464100000000054000 000000100065543000000214651213 02150000000000001000655430000002 0000001000655430000002146512135 02150000000000001000655430000002 02150000000000001000655430000 000000100065543000000214651213 146512135464100000000054000 54641000000000540004441235123 000000100065543000000214651213 54641000000000540004441235123 4641000000000540004441235123 146512135464100000000054000 002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 ]54641000000000540004441235123 146512135464100000000054000 54641000000000540004441235123 02150000000000001000655430000002 0215000000000000100065543000000 000000100065543000000214651213 000000100065543000000214651213 02150000000000001000655430000 000000100065543000000214651213 02150000000000001000655430000002 02150000000000001000655430000002 146512135464100000000054000 000000100065543000000214651213 2146512135464100000000054000 ]54641000000000540004441235123 54641000000000540004441235123 002146512135464100000000054000 000000000021500000000000010006554300000021465121354600000000004100000000054000 146512135464100000000054000 146512135464100000000054000 000000100065543000000214651213 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000 000000100065543000000214651213 ]54641000000000540004441235123 ]54641000000000540004441235123 000000100065543000000214651213 000000100065543000000214651213 54641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 54641000000000540004441235123 ]54641000000000540004441235123 00000010000000000006554300000021465121354641000000000540004441235123 ]54641000000000540004441235123 02150000000000001000655430000 02150000000000001000655430000002 000000100065543000000214651213 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000 ]54641000000000540004441235123 02150000000000001000655430000 02150000000000001000655430000 146512135464100000000054000 54641000000000540004441235123 54641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 002146512135464100000000054000 02150000000000001000655430000 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000 000000100065543000000214651213 002146512135464100000000054000 000000100065543000000214651213 000000100065543000000214651213 002146512135464100000000054000 ]54641000000000540004441235123 000000100065543000000214651213 002146512135464100000000054000 002146512135464100000000054000 54641000000000540004441235123 54641000000000540004441235123 000000000010006554300000021465121354641000000000540004441235123 54641000000000540004441235123 02150000000000001000655430000 000000100065543000000214651213 00000010006554300000021465121 02150000000000001000655430000 000000100065543000000214651213 000000100065543000000214651213 54641000000000540004441235123 02150000000000001000655430000 02150000000000001000655430000 002146512135464100000000054000 54641000000000540004441235123 354641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 54641000000000540004441235123 021500000000000000001000655430000002146512135460004100000000054000 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000 02150000000000001000655430000 00000010006554300000021465121 002146512135464100000000054000 000000100065543000000214651213 54641000000000540004441235123 02150000000000001000655430000 54641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 354641000000000540004441235123 000000100065543000000214651213 002146512135464100000000054000 54641000000000540004441235123 02150000000000001000655430000 000000100060000554300000021465121354641000000000540004441235123 00000010006554300000021465121 000000100065543000000214651213 02150000000000001000655430000 002146512135464100000000054000 54641000000000540004441235123 02150000000000001000655430000 02150000000000001000655430000 002146512135464100000000054000 354641000000000540004441235123 54641000000000540004441235123 000000100065543000000214651213 002146512135464100000000054000 002146512135464100000000054000 02150000000000001000655430000 000000100065543000000214651213 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000 000000100065543000000214651213 0215000000000000000100065543000000214651213540000064100000000054000 00000010006554300000021465121 54641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 54641000000000540004441235123 54641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 54641000000000540004441235123 354641000000000540004441235123 00000010006554300000021465121 02150000000000001000655430000 000000100065543000000214651213 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000 02150000000000001000655430000 0000001000655430000000214651213546410000000005000000040004441235123 02150000000000001000655430000 000000100065543000000214651213 002146512135464100000000054000 54641000000000540004441235123 54641000000000540004441235123 002146512135464100000000054000 354641000000000540004441235123 002146512135464100000000054000 002146512135464100000000054000 002146512135464100000000054000 00000010006554300000021465121 02150000000000001000655430000 0215000000000000100065543000000 000000100065543000000214651213 02150000000000001000655430000 02150000000000001000655430000002146512135400000054000 000000100065543000000214651213 54641000000000540004441235123 00000010006554300000021465121 354641000000000540004441235123 002146512135464100000000054000 2146512135464100000000054000 54641000000000540004441235123 00000010006554300000021465121 002146512135464100000000054000 54641000000000540004441235123 02150000000000001000655430000 000000100065543000000214651213 00000010006554300000021465121354641000000000540004441235123 0215000000000000100065543000000 354641000000000540004441235123 02150000000000001000655430000 000000100065543000000214651213 354641000000000540004441235123 000000100065543000000214651213546410000000005400000010006554300000021465121354641000000000540004441235123 002146512135464100000000054000 02150000000000001000655430000 54641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 2146512135464100000000054000 002146512135464100000000054000 02150000000000001000655430000 54641000000000540004441235123 000000100065543000000214651213 0215000000000000100065543000000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000 000000100065543000000214651213 02150000000000001000655430000002146512135000464100000000054000 02150000000000001000655430000 002146512135464100000000054000 54641000000000540004441235123 2146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 002146512135464100000000054000 54641000000000540004441235123 002146512135464100000000054000 02150000000000001000655430000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 002146512135464100000000054000 000000100065543000000214651213 0215000000000000100065543000000 0000001000655004300000021465121354641000000000540004441235123 002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 00000010006554300000021465121 000000100065543000000214651213 2146512135464100000000054000 54641000000000540004441235123 000000100065543000000214651213 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 54641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 54641000000000540004441235123 02150000000000001000655430000 54641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 0215000000000000100065543000000 0215000000000000100065543000000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000 002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 2146512135464100000000054000 2146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 0000001000655430000002146512135464100000000050000004000440000041235123 02150000000000001000655430000 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 54641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 02150000000000001000655430000002146512135464100000000054000 002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 0215000000000000100065543000000 54641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 0000001000655430000002146512135464100000000050000000000040004000040041235123 2146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 0215000000000000100065543000000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 54641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 2146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 002146512135464100000000054000 021500000000000010006554300000021465121354641000000000054000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 000000100065543000000214651213 0000001000655000004300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 54641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 0215000000000000100065543000000 00000010006554300000021465121354641000000000540004441235123 00000010006554000300000021465121354641000000000540004400000000041235123 2146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 000000100065543000000021465121354641000000000540004400000000000000041235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135464100000000054000 00000010006554300000021465121354641000000000540004441235123 00000010006554300000021465121354641000000000540004441235123 02150000000000001000655430000002146512135464100000000054000 02150000000000001000655430000002146512135404441235123 00000010006554300000021465121354641000000000540004441235123

www.eelevents.co.uk

Registe r now!

3rd edition

Tel.: +421 2 3220 2200 Fax: +421 2 3220 2222 E-mail: cfo@ebcg.biz Web: www.ebcg.biz

ACCA CERTIFIED Attendees rewarded by 16 CPD Points

Turkey Private Equity & Venture Capital Summit

accessing new markets - developing new opportunities June 2013

Turkey, venue tbc

Conference & Workshop

Why EBCG’s CFO Forum? 1. Gain the most up-to-date knowledge from C-level strategists, thought leading market experts and the key drivers who will deliver keynote presentations, real-life case studies and interactive sessions. 2. Build your own network with peers during the interactive sessions, open panel discussions, networking luncheons and cocktail reception.

3. Find out how other CFOs: manage their financial team to create value cooperate on sustainable improvement and lead their company to success protect, forecast and manage risk deal with recent financial landscape, and share your opinion in interactive panel discussions

Official Legal Partner

n n

+ 16 Speakers 16 CPD Points + 100 Attendees 2 Streams

Media Partners

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