bne:Magazine - April 2015

Inside this issue: Grimaces behind the smiles in Crimea Oh! What a lovely hybrid war Hungary’s ‘silent’ emigration April 2015 www.bne.eu

The Turkish president’s war on interest Nazarbayev’s march to victory (again) Special Report Exchange-traded funds

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Contents

bne April 2015 Senior editorial board Ben Aris (Moscow) +7 9162903400 editor-in-chief baris@bne.eu

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James R Hammond (Boston) +1 6178525441 publisher jhammond@bne.eu Nicholas Watson (Prague) managing editor

+42 0731582719 nwatson@bne.eu

Robert Anderson (Prague) news editor

+42 0603517867 randerson@bne.eu

Liam Halligan (London) +44 7801799279 editor-at-large LHalligan@newsparta.net Central Asia Naubet Bisenov (Almaty) bureau chief Eastern Europe Nicholas Allen (Berlin) bureau chief

+7 7015933810 nbisenov@bne.eu

+49 15730395872 nallen@bne.eu

Central Europe Tim Gosling (Prague) bureau chief

+42 0720180811 tgosling@bne.eu

Southeast Europe Clare Nuttall (Bucharest) bureau chief

+7 7073011495 cnuttall@bne.eu

Advertising & subscription Elena Arbuzova (Moscow) +7 9160015510 business development earbuzova@bne.eu Michael Dragoyevich (London) +44 7715412938 commercial director mdragoyevich@bne.eu Design Olga Gusarova (London) art director

+44 7738783240 ogusarova@bne.eu

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COVER SECTION

Print issue: €499 / year.

CENTRAL EUROPE

6 The month that was

32 Oh! What a lovely hybrid war

8 The Insiders

35 We need to talk about the euro

10 Russian money infects London 13 Flighty Cyprus

37 A listing business in Poland 38 Wild East is too wild for Polish business

16 Perspective 39 Londongrad’s Mayfair set 17 Chart of the month 41 Hungary’s ‘silent’ emigration

EASTERN EUROPE SOUTHEAST EUROPE 18 Debaltseve counts its dead – and blames Ukraine 19 IMF cash can’t hide grim reality for ordinary Ukrainians 22 Grimaces behind the smiles in Crimea

44 Balkan states look east as well as west 45 EU energy dream made real 47 The Turkish president’s war on interest

23 Little green lies

49 Bulgarian IPO showcases ICT strengths

25 Russia’s VTB sees pain but opportunity in sanctions

51 Bulgaria’s strange bedfellows

27 Emerging from the rubble

52 Romania’s anti-graft drive reaches ever higher

29 Trade credit insurers in waitand-see mode on Russia bne IntelliNews is the property of New Sparta Media.

New Sparta Media | 27a Floral Street, 3rd Floor, London, WC2E 9EZ, UK

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Contents

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EURASIA

SPECIAL REPORT

54

Nazarbayev’s march to victory (again)

55

Kazakhstan – one steppe forward, two sideways 70

Erdogan – a victim of hubris

58

Reincarnation of Adam in Kazakhstan

72

How many Putin’s Russias are there?

Tajik opposition dies in the street and in parliament

74

US glowers as allies hop aboard China’s AIIB

A bad smell in Mongolian mine auctions

76

Russian hearts do not demand change

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63

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ARTS, CULTURE & PEOPLE

Exchange-traded funds

80

Oscar win for "Ida" reopens old wounds in Poland

OPINION

81

George Friedman finds Europe’s “Flashpoints”

83

“Mr Putin: Operative in the Kremlin” – an updated version

84

Nemtsov's death and the failure of the opposition

86

NEW EUROPE IN NUMBERS

90

UPCOMING EVENTS

Emerging Europe’s party is about to end

Follow us on twitter.com/bizneweurope

6

I The Month That Was

Ukraine will channel an additional $3.8bn to defence in 2015 after months of intensive military operations against pro-Russian rebels in its eastern regions. This year the defence budget will grow to 5.2% of GDP from the current 1.25%, Finance Minister Natalya Yaresko said.

Moody's downgraded Ukraine to ‘Ca’ from ‘Caa3’ – the second-lowest level.

The agency attributed its decision to the probability of external private creditors suffering considerable losses as a result of the government's plan to restructure most of its outstanding Eurobonds. The negative outlook mirrors Moody's anticipation that government and external debt levels will remain very high, despite the debt restructuring and intentions to introduce reforms.

Ukraine needs to restructure its debt by the end of May in order to hold on to its international bailout, Finance Minister Natalie Jaresko said in an interview on March 24. Investors understood the necessity of bringing the target forward by a month, Jaresko added. As a part of an IMF rescue to plug a $40bn hole in the country’s finances, the Ukrainian government has to restructure $15bn of its debt before creditors over the next four years. The IMF expects creditors to go along with some restructuring, but government moves toward a significant haircut have hardened objections.

Ukrainian President Petro Poroshenko fired the powerful governor of the Dnipropetrovsk region, Ihor Kolomoisky, who has so far been a crucial ally of Poroshenko in containing the armed conflict in East Ukraine. The

bne April 2014

firing marks the first major rift in the coalition of pro-Western forces that took power in February 2014 following the ousting of former president Viktor Yanukovych by opposition protests.

Nabiullina suggested that under a base scenario ($50/b oil price), forex/gold reserves would decline by $50bn in 2015.

Russia has refused to restructure $3bn of Ukrainian Eurobonds and expects repayment in December, Finance Minister Anton Siluanov said on March 16. "We have stated our position several times and are not changing it," Siluanov said. "We expect $3bn in December of the current year, as was promised by the Finance Ministry of Ukraine."

Vladimir Putin would win Russia's next presidential election in the first round if it were to be held on held on March 8, according to a recent poll by the country's Levada Center. Conducted on February 20-23 among 1,600 respondents, it showed that 59% would consider voting for Putin. Among those who had already made their choice, 80% will vote for the current president.

Crimea will receive RUB23bn ($400mn) of investments from the Russian budget, Crimean Prime Minister Sergei Aksyonov said. Infrastructure projects, including the construction of roads and the bridge across the 5km Kerch Strait, will get RUB5bn of the sum. “Crimea has never seen that amount of funds… [it’s] more than enough,” Aksyonov said, adding that in total the region will have to construct and renovate 704 projects in 2015.

The forex reserves of the Central Bank of Russia (CBR) continued declining as of the week ending March 13, losing $5bn or 1.4% w/w to reach $351.7bn – an eight-year low. Recently, CBR head Elvira

Chinese investment in Russia is expect to match that from Europe within two to three years, head of the Russian Direct Investment Fund, Kirill Dmitriev, said on March 11. The trade between the two countries grew by 6.8% in 2014 despite the ruble’s devaluation, reaching $95bn.

Hopes that Kazakhstan would be able to join the WTO in early 2015 risk being dashed. Remarks by WTO Director General Roberrto Azevedo made at a Stockholm School of Economics campus in the Latvian capital Riga reveal that Kazakhstan’s membership in the Eurasian Economic Union (EEU) – which involves being in a customs union with Russia, Belarus, Armenia and soon Kyrgyzstan – makes the process more complicated than expected.

In 2015 the South Caucasus’ economies will continue to feel the heat of Russia’s slowdown and low oil prices with regional geopolitical developments leaving the outlook highly uncertain, the Asian Development Bank stated in its “Asian Development Outlook 2015”

The Month That Was I 7

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report. Average growth in the region is forecast at 2.2% in 2015 and 2.5% in 2016.

The disgraced eldest daughter of Uzbek strongman Islam Karimov, Gulnara, allegedly extracted nearly $1bn from mobile telecom firms for entering the Central Asian nation's lucrative market, new records unearthed by the Organised Crime and Corruption Reporting Project (OCCRP) show.

Turkish PM Ahmet Davutoglu said he held separate meetings with Deputy PM Bulent Arinc and the mayor of Ankara, Melih Gokcek, in an attempt to end the war of words between the two leading members of Turkey’s governing AK party. Arinc accused Gokcek of corruption; in return, the mayor of Ankara said the Deputy PM was working together with President Recep Tayyip Erdogan’s foe Fethullah Gulen to undermine the government and the president.

Turkish lender Finansbank could hold its secondary public offering in the first half of 2015 if Turkey’s Capital Markets Board gives its approval. The SPO will see National Bank of Greece’s current 99.8% stake fall to 73%, said Finansbank in a statement in March.

The World Bank approved for Serbia a $100mn development policy loan to support the ongoing reform of its state-owned enterprise sector. The financing represents the first tranche of a $200mn loan aimed at supporting the Serbian budget and alleviating the social costs of resolving the status of firms under restructuring.

The Moldovan government is to dismiss deputy central bank governor Emma Tabirta and head of the National Financial Market Commission (CNFP) Artur Gherman amid ongoing banking fraud investigations. The document quoted by local press appears to explain how frauds were carried by Banca de Economii a Moldovei (BEM), Banca Sociala and Unibank – all of which have been under central bank administration since the end of 2014.

Poland could have huge recoverable deposits of "tight gas", according to a report released by the Polish Geological Institute (PGI) on March 17. The country might have up to 200bn cubic metres (cm) of technically recoverable gas locked in porous sandstone, PGI suggested. That would trump Poland's currently proven conventional gas reservoir of 134bn cm.

Polish financial watchdog KNF said it will seek to block dividend payouts at banks with large portfolios of CHFdenominated mortgages. The Swiss central bank's removal of the cap on the franc in January has hit the 550,000 or so Poles with CHF loans hard. The government has recently suggested it won't force lenders to help out, but there is clear political pressure for them to lend a hand to help borrowers, while the government is also keen to see consumers continue to spend.

Hungary saw 6,000 people protest against Prime Minister Viktor Orban’s government on March 15, as crowds voiced anger over allegations of corruption, Orban’s lean towards Moscow and policies many say undermine the country’s democratic checks and balances.

The Czech Republic has ejected or blocked three Russian diplomats in the last nine months after intelligence agency BIS identified them as spies, local media reported on March 12.

Citing unnamed government sources, the weekly Respekt claims Prague forced two Russian diplomats to leave the country. A visa was denied to a third who was about to join embassy staff.

The IMF has lowered its forecast for Bulgaria's GDP growth in 2015 to 1.25% from the 2.0% projected in October. The anaemic growth, slowing from 1.7% last year, should be supported by private consumption and continued EU funds absorption, while net exports are expected to be neutral, the fund said in a concluding statement of its 2015 Article IV Mission.

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I The Insiders

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In Eurasia, devaluation is first line of defence

Chris Weafer of Macro Advisory

R

ussia is not the only economy suffering from the combination of the oil price collapse and sanctions; most of the countries in the Commonwealth of Independent States (CIS) are also feeling the pain. For some it is because they have also waited far too long to start diversifying away from oil and gas dependency, while some others never properly cut the economic umbilical cord from Mother Russia after the Soviet Union ended. It means that all are now experiencing lower growth rates for their economies and all have, or are expected to, devalue their currencies in order to remain competitive against cheap imports from Russia and from other CIS states that have already devalued their currencies.

In some instances the weakening economy has led to nervousness in government, and many are using both devaluation and a tightening of political control in order to head off the threat of a public backlash. It seems that the memory of the Tulip, Rose and Orange revolutions keeps many of the region’s elites awake at night.

The countries of the CIS, excluding Ukraine but including Turkmenistan for this exercise, can be split into two main categories; those which have significant revenues from hydrocarbons and which have not reformed their economies in any material way since independence; and those which are resource poor, but are very dependent on trade or subsidies from Moscow or remittances from workers in Russia. Most are now suffering because of either the lower oil price or the recession in Russia, and all are feeling painful contagion from the ruble collapse.

Don't come back, now!

Worst hit are those economies that depend on remittances from their nationals working in Russia. Those workers are now more vulnerable to losing their jobs, especially as many are employed in the construction sector, which has been particularly hard hit across Russia. But even those that have secure employment have seen a big drop in their take-home pay when translated into their home currency. Many of those workers have simply decided that it is no longer worth their

while to be in Russia and are either heading home or to other countries, especially China, in search of better paid jobs.

The impact of this is felt both in the Russian economy as well as in their home countries. Workers from Tajikistan and Kyrgyzstan, the two countries with the greatest exposure to remittances from Russia, fill many jobs in, for example, the retail and services sectors. As they leave, those sectors are suffering because it is not easy to either find Russians willing to take those jobs or other immigrant workers willing to take the devalued ruble salary. The problem in their home countries is not just the loss of remittance income, but also the fact that hundreds of thousands of workers are, or may soon, return home and that has considerable risk for incumbent governments in terms of social instability

“The memory of the Tulip, Rose and Orange revolutions keeps many of the region’s elites awake at night" and political backlash if the returning workers cannot find alternative employment at home or in another country relatively quickly. Devaluing their respective currencies is also an effort to minimise the gap between the ruble wages and the translated value back home in the hope that this keeps many workers in Russia rather than on the bus to an uncertain future back home.

But even countries that have very little vulnerability to worker remittances from Russia, such as Armenia and Belarus, are still very much impacted by the ruble collapse.

As the ruble fell, Russian goods became much cheaper for consumers in the CIS countries with, as the table shows, the three countries that have joined Russia as members of the Eurasian Union, most exposed. The volume of Russian goods flowing into these countries in the fourth quarter

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of last year is reported to have increased significantly – for example, Kazakhs bought over 50,000 cars in Russia during November and December alone – while exports to Russia have become less competitive. Both factors are contributing to the slowdown now evident in these economies.

The response from all of the countries has been to devalue their currencies in an effort to offset the loss of competitiveness. Kazakhstan has not yet taken this step, but is widely expected to do so very quickly after the April 26 presidential election. That election has been called almost 18 months early because, it is widely assumed, of the government’s concern that the slowdown in the economy and the expected devaluation could lead to further instances of social unrest this year.

Even the states that have relatively little exposure to the Russian economy, such as Uzbekistan and Turkmenistan, have been caught up in the regional turmoil and forced to devalue their currencies in order to try and head off a steeper decline.

Lack of choice Apart from devaluation, what can governments across the region do to finally start weaning their economies off Russia and/or hydrocarbons? The available evidence so far is “very little”. Several states, most notably Kazakhstan and Azerbaijan, have rolled out a number of development plans in recent years with the aim of creating a more diverse economy, but little progress has actually been delivered. In reality both countries appear to be waiting for the big boost to hydrocarbon revenues from projects near completion; the Kashagan oil deposit in the case of the former and phase 2 of the Shah-Deniz gas field in the latter. Turkmenistan is in a similar position as it plans to more than double gas exports to China by the end of the decade.

states, and those expected to join, but the birth of the EEU has, so far, only served to raise concerns about the dominance of the Russian economy and the difficulties for other member states when the ruble collapses.

This is looking like a slow delivery project at best.

China investment also has some major flashing question marks over it. While the initial expectation was for a flood of Chinese investment helping to boost and broaden economies across the region, the reality has been more selective. China is indeed investing in the region, but the money is mainly for projects in energy or other materials sectors where the product is then shipped eastwards to help secure the Chinese economy. Money is also going into infrastructure projects that will help boost Chine exports to Europe and the Gulf.

There is very little investment beyond those categories. China is also limiting the flow of workers from the mostly Muslim

“Worst hit are those economies that depend on remittances”

Central Asian states especially into its already restive western provinces. It prefers to resettle Han Chinese from elsewhere in the country into these provinces.

The Eurasian Economic Union could deliver some of the promise of regional economic expansion for the member

It appears that whether by choice, or a lack of choice, the countries in the Russia/energy space are building their monetary defences in an effort to limit the contagion from the ruble collapse and also limit the flow of returning workers. In short, riding out the storm and hoping for an oil price recovery.

CIS economies vulnerable to worker remittances

Trade with Russia

% based on total Inflow

% based on Russia inflows

Tajikistan

42.0%

25.0%

Kyrgyzstan

31.5%

24.8%

Uzbekistan

12.0%

Armenia Azerbaijan

Source: World Bank

% of Imports

% of Exports

Armenia

24.8%

19.6%

Azerbaijan

4.1%

0.5%

11.5%

Belarus

59.3%

35.4%

21.0%

9.1%

Kazakhstan

33.3%

6.6%

2.5%

1.3%

Kyrgyzstan

17.7%

14.6%

Tajikistan

22.0%

10.6%

Turkmenistan

12.6%

0.5%

Uzbekistan

20.7%

14.7%

Source: E.I.U, and Macro Advisory Ltd.

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I Cover story

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W

alk down Oxford Street into Knightsbridge and the signs "we speak Russian" are pasted inside the windows of many high-end shops. Bishops Avenue in north London has become one of the world's most expensive addresses and is home to several oligarchs in exile. The lingua franca in the Novikov restaurant in Mayfair, belonging to Russia's most famous restaurateur, is Russian. And most of all, the City of London is replete with clever young Russian bankers bringing in billions' worth of business for their firms. London is awash with Russian money.

It seems that every Russian oligarch who has made his fortune aspires to a house in London and a place in one of the UK's exclusive public schools for their children. London has become to modern Russia what Paris was to the princesses and grand dukes of the Tsarist times.

Russian money infects London Ben Aris in Moscow

But there is a dark side to the Russians’ love of London: since the 1970s, London has attracted an estimated £133bn of "dark" money and a big chunk of that is Russian cash looking for a new home. "There is strong evidence that a considerable chunk of the UK’s £133bn of hidden capital inflows is related to Russian capital flight," say Oliver Harvey and Robin Winkler, authors of a Deutsche Bank report, "Dark matter: the hidden capital flows that drive G10 exchange rates", published in March, who add that London has become the preferred destination for money launderers due to its extremely light reporting touch on many transactions.

"Inflows have accelerated in recent years, tracking at around £1bn per month since 2010… While not significant for the overall balance of payments, hidden inflows may have been marginally supportive of the pound in recent years, and are another factor behind the UK’s extremely large current account deficit."

Hidden flows that are sufficient to skew the value of the pound or distort the current account should be more than enough reason for the authorities to tighten up the regulations and force more of the inbound capital

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through proper channels. But the sheer volume of inbound money raises the broader question: are British banks and lawyers ignoring the apparently criminal way that some Russians have earned their millions for the sake of the fat fees on offer?

London has become an attractive destination for flight capital for everyone and not just Russians, so not all the "dark money" flowing in is Russian. "[The Deutsche Bank report] shows that it is not just Russian dark money that is coming into the UK, but also from Qatar, Saudi Arabia and China," says Ben Judah, author of ‘Fragile Empire: How Russia Fell in and Out of Love with Vladimir Putin’.

"This money is definitely undermining British corporate governance and the legal system, but even more important is that it is an untaxed flow of money at a time when the government is imposing tax and austerity."

The chart from Deutsche Bank shows quite clearly that the UK's NEOs track Russian capital flight pretty closely since the fall of the Soviet Union in 1991. But also Russian money cannot explain all of the UK's hidden cash flows, as Russia's annualised NEOs are less than half those in the UK. Dark money No one doubts a lot of Russian money in London got there by questionable means. But how much of this is actually criminal money remains an open question. As the Bank of New York scandal in the late 1990s showed, where the bank was used by Russians to launder billions of dollars, a large part was simply cash escaping Russian taxes. However, some of this money was linked to Semion Mogilevich, a famous gangster also known as the "Brainy Don", who ran prostitution rings in Germany amongst other things, and is now wanted on murder charges by Interpol, but lives free in Moscow.

In light of the heightened political tension between Russia and the West, and the sanctioning of dozens of allegedly corrupt Russian individuals, the calls to "do something" about the dark Russian money flowing into the UK have risen in volume.

The problem has become so bad that a "Nemtsov law" is needed to keep Russian "funny money" out of the City, wrote Jim Armitage, city editor of The Independent in an editorial in March. This law would parallel the US' Magnitsky law that imposes sanctions on Kremlin officials linked to the death of anti-graft lawyer

laundered by criminals and foreign officials buying upmarket London properties through anonymous offshore front companies – making the city arguably the world capital of money laundering," corruption watchdog Transparency International (TI) concluded in what it says is the biggest

"Billions of pounds of corruptly gained money has been laundered by criminals and foreign officials buying upmarket London properties” Sergei Magnitsky. The US Congress also proposed in March to add names associated with the investigation of the assassination of opposition leader Boris Nemtsov in February to those listed under the Magnitsky law. "Nemtsov was a huge admirer of Margaret Thatcher, and the Anglo-Saxon capitalism she represented. So it must have been all the more galling for him to have seen Britain, and particularly London, becoming a willing enabler of the corruption he deplored," said Armitage.

The most obvious signs of Russian money in London are the gorgeous houses. It is de rigueur for any selfrespecting Russian oligarch to own the most spectacular property in London and Chelsea FC owner Roman Abramovich is as good an example as any. In 2011 he bought a house on Kensington Palace Gardens for a reported $90m, adding to his growing collection of luxury homes. After taking possession, Abramovich planned to add a new underground floor, a tennis court, a spa and a car museum – all of which were given planning approval by the council.

One of the biggest items in the net errors and omissions line of national accounts is real estate deals, as there is no centralised registrar for deals and so data is extremely hard to gather. And because London property prices are so high, real estate is a gift for would-be money launderers. "Billions of pounds of corruptly gained money has been

survey into the origin of funds invested in the London property market, released in March.

The flow of corrupt cash has driven up prices, but also led to a “widespread ripple effect down the property price chain and beyond London,” the report says.

That is not to say that all deals are dodgy: when the Azerbaijani sovereign wealth fund was given permission to invest in more than foreign treasury bills, the first thing it did was to acquire property in London. But, TI claims, a big chunk of real estate deals is likely to be money-laundering schemes.

The Metropolitan Police Proceeds of Corruption Unit found that 75% of UK properties owned by people under criminal investigation for corruption are held through secret offshore companies, TI said. Companies House records show that about a third of corporate-owned properties, some 36,000 London houses, are owned anonymously by legal entitles in the BVI, Jersey, Isle of Man and Guernsey, according to TI. However, again this is not just Russian money – everyone who wants to clean cash is doing it.

"We estimate that Russian buyers accounted for an average of 7% of total sales of properties over £1mn in prime London. Given that overall sales in Prime Central London in 2012 was around circa £8bn, the proportion of sales to Russian buyers would be some

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£560mn," says Tom Mundy, head of research at Jones Lang LeSalle.

While this is large in absolute terms, house buying is still relatively small compared to the total volumes of cash moving through London. However, Deutsche Bank's study also backs up the link with dark capital showing there is a correlation between London house prices and the British NEO, and even

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classes across the G10 countries, but especially in the UK, Sweden and New Zealand. "Systematic trends in NEOs occur in half of all G10 economies. At some point, Switzerland, Norway, the UK, New Zealand and Sweden have all displayed cumulative NEOs above 5% of GDP," Deutsche Bank reports.

"In the case of Sweden, measurement errors are vast, with NEOs having reached nearly 40% of GDP when

“A considerable chunk of the UK’s £133bn of hidden capital inflows is related to Russian capital flight" though Russian money accounts for a 16th of London's high-end real estate market, given there are just under 200 countries in the world, then that is an extremely big share of the market.

Sin of omission Property in London is only the most obvious and simple entry point for black money looking for a home in the UK, but Deutsche Bank shows the problem is much wider and includes other asset

cumulated from the early 1990s. In the US, Eurozone, Japan, Canada and Australia, by contrast, cumulative NEOs have not reached above 5% of GDP." Sweden is prone to large NEOs partly because it has such a high proportion of rich people; Deutsche Bank shows there is a correlation between millionaires and large NEOs. In other words rich people are prone to cheat on their taxes.

Unfortunately, the report didn’t produce

a similar analysis for Russia's rich and Moscow, which has more billionaires per square kilometre than any other city in the world.

The rich have been moving their money out of Russia. In the 1990s hundreds of billions of dollars left Russia, but in 2014 alone a record $150bn fled Russia. Again, not all of this is illegal or even unreasonable: as Russia's banks and companies are cut off from the international capital markets they cannot refinance their debt and paying down debt accounts for around $50bn of this money. The outlook for this year is about $90bn is expected to leave.

Another source of dark money is the common practice of underestimating the value of export goods and overestimating the import value. Such "transfer pricing" is a (technically legal) scam that is well known to the Russian authorities. In the 1990s Russian oligarchs routinely exported oil priced at $1 per barrel only to sell it on the international markets at over $25, booking the profits in some offshore tax haven. Deutsche Bank speculates that the UK is increasingly being infected by the same practice and other related schemes. "One

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possible source of such a discrepancy is a systematic reporting error of inflows by financial institutions. Another is that increasingly sophisticated tax avoidance and accounting methods make it difficult for reporting bodies like banks to trace the true beneficial owner of portfolio securities. UK equity securities are increasingly held in multi-ownership pooled accounts, making it impossible to precisely determine the nationality of the owner," Deutsche bank said.

Crackdown Incongruously, the Kremlin would agree with the substance of its Western critics that dark money fleeing Russia for London is a bad thing. With economic growth in a tailspin, the Russian government is suddenly hungry for revenue and looking for ways to increase its tax take without raising the rates.

Cracking down on all the tax scams is the obvious place to start.

While Russia has a poor reputation for reforms – it is amongst the hardest place in the world for getting a company connected to the power grid or obtaining a construction permit – the same is not true for financial reforms. It is a reputation the Kremlin is keen to preserve

Cover story

Flighty Cyprus

Nick Kochan in Limassol The Republic of Cyprus is in the eye of the storm over Russian plans to bring home companies and wealth that have moved offshore to avoid Russian taxes or worse.

Russia’s “de-offshorisation” law, which came into effect at the beginning of the year, is a critical piece of legislation for President Vladimir Putin as his country’s economy and currency come under intense pressure from the fall in the oil price and Western sanctions.

The law’s key impact for offshore centres like Cyprus is its requirement for the foreign-controlled company (FCCs alone can enjoy the benefit of the double taxation treaty with Russia) to have its “place of effective management” on the island. The law requires the company to have a “strong economic substance, in the offshore jurisdiction.” According to Katarina Charalambous of Eurofast, the accountants, companies will need a “physical office, local staff, domain and economic substance”, rather than the now notorious “brass plate” on the door.

Companies will not qualify as FCCs if they are “conduit foreign companies with a registered address of an accountancy office or a legal firm, effectively managed from abroad and factually presented only in paper format for using the benefits of the tax treaty,” Charalambous says. Companies that “ignore the fact of the economic substance in the foreign company may well lead to an increase of the tax burden for the whole group.”

Some Cypriots are talking up the strength of the island’s frail economy to deal with the impact of the new Russian law on its offshore centre. But most are less sure. “Fewer high net worth individuals will come to Cyprus.

They are scared of what Putin will do,” according to one local Russian observer who did not wish to be named.

The responses of Russian companies to the new law are being watched with interest. They vary considerably. Metal producers Rusal and Metalloinvest, telecommunications giant MTS, electricity generator RusHydro and vehicle manufacturer Kamaz announced as early as late 2013 that they would play ball with Putin, by either stopping using their offshore entities or relocating their operations back to Russia altogether.

The approach of Eurochem, the giant Russian fertiliser and mining firm, is at the other end of the spectrum. Its owner Andrey Melnichenko, the Russian oligarch and owner of MDM Bank – who controls the company through a network of paper companies based in Cyprus, the British Virgin Islands and Switzerland – has recently announced a $1.5bn investment in a mining scheme in the US state of Louisiana. While there has been recent talk that Eurochem might not proceed with this investment, Melnichenko shows no sign of leaving the island or changing his corporate structures, say local observers.

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because both state-owned companies and oligarchs need to access the international financial markets to move their massive wealth about without restriction.

In 2000, Russia was placed on the Financial Action Task Force (FATF) black list as a money launderer, an international club established to crack down on illicit cross-border moneylaundering operations. Then-finance

bne April 2015

and a raft of amendments, including the Criminal Code, which defines money laundering as a crime, the Banking Law and the Securities Law, which all went into effect in 2002 and 2003.

In October 2004, Russia kicked off the Eurasian Group on Combating Legalisation of Proceeds from Crime and Terrorist Financing (EAG), which has as its members Belarus, China, Kazakhstan,

“It must have been galling for Nemtsov to have seen Britain, and particularly London, becoming a willing enabler of the corruption he deplored" minister Alexei Kudrin was rapidly dispatched to a G8 summit in Genoa in 2001 to get Russia off the list. By 2002 a new "Law on Combating Money Laundering" that copied the FATF recommendations almost verbatim was in place, and later that year Russia was removed from the list.

The new law did not just pay lip service to a watchdog, as Moscow followed up with the ratification in 2001 of the Council of Europe Convention on Laundering, Tracing, Seizure and Confiscation of Proceeds from Crime.

That led to a new money-laundering law

Kyrgyzstan, Tajikistan and Uzbekistan in addition to Russia.

The point of all these reforms is that Russia, like the West, is battling a nasty terrorist problem and is as keen to cut them off from their funding as Washington is to throttle Al Qaeda financially.

All these changes were steps in the right direction, but as has so often been the case in the past, the problem in Russia is not the ideas or the laws, but the implementation. Russia remains on the UK’s Financial Conduct Authority (FCA) list of "high risk" countries, which is any country that scores less than 60 on

Russian capital flight has tracked UK hidden inflows since fall of Soviet Union

Source: Deutsche Bank, Macrobond, Central Bank of Russia

Transparency International's ranking, (Russia scored 27 last year, one point better than in 2013 and is ranked by TI in 136 place out of 175 countries).

Russia simply has too many banks for the regulator to police them efficiently. While the central bank has been actively closing banks in the last two years as part of its financial sector reforms, there are still just under 800 in a country that needs only about 200-300. Stiff competition and a lax inspection regime mean smaller banks are tempted to make big profits from doing shady transactions.

Coming home Since Putin returned as president, he has taken the fight against money laundering and dark money flows to a new level, targeting companies.

Despite the conventional pessimism and characterisation as a "Mafia State", Russia is trying to deal with its problems, of which corruption is the worst. The previous central bank governor, Sergei Ignatiev, caused an uproar in 2013 shortly before the end of his tenure when he told Duma deputies that $49bn a year is routinely laundered from Russia via banks and sham companies, half of it by a "single group of money launderers".

No one misunderstood the reference: he was talking about government officials. In

Tax plays a role in capital flight

Source: Deutsche Bank, World Bank, Macrobond

bne April 2015

Cover story

his last speech to the Duma, he described one scam that used 1,173 shell companies to channel $24bn to foreign banks. Before the end of the same year Putin introduced a ban on any government official holding offshore banks accounts or foreign assets.

Since then, the law has been expanded and extended to cover state officials, managers of state-owned companies and most recent to the top tier of the regional administrations.

Last year this campaign took another direction when the de-offshorisation campaign was applied to companies – both public and private. In Russia it has been standard practice to own assets using a "non-dom" holding company domiciled abroad (typically Cyprus).

Putin, like every leader in Europe, is keen for companies that make their profits based on physical assets and production in Russia to actually pay their profit taxes there too.

Since January 1 this year, companies now have to declare to the Russian authorities all their Controlled Foreign Companies (CFC) and have until the end of March to complete the process (although there is likely to be an extension as so many companies are not going to meet the deadline, say lawyers).

Without getting into the technicalities, the goal is to make all Russian

companies confess to owning CFCs and find out who the ultimate beneficial owners are, so both the company and the owner can be taxed and prevented from hiding profits overseas. "The new law places an obligation to Russian tax residents to disclose by notifying the Tax Authorities, of any direct or indirect holding in foreign entities that exceeds 25% or 10% if such foreign entity is by more than 50% controlled collectively by Russian Tax residents. For 2015 there is a relaxation in the law and the percentage of control is set at 50% during this one year transition period," the Klnanis law firm said in an explainer to clients.

In this sense, the de-offshorisation law is not an anti-money laundering measure, but its effect will be to greatly

reduce the amount of dark money on the move so the effect will be the same.

The main question is: will it work? Will oligarchs declare all their myriad offshore companies? "It will work – eventually.

But not now, because if you cheat, how are they going to find out?" points out

1,200

1092 1058

1,050

1007

1,000

955

950

922 897

900

859

850

804

800 750

2006

2007

2008

Source:Central Bank of Russia

2009

2010

Clearly a lot of oligarchs and super-rich businessmen are going to ignore the law and as the Russian authorities have little experience of investigating financial flows overseas, it will be extremely difficult for them to check if anyone is lying. On top of that, the showdown with the West over Ukraine means it is even easier for Russian businessmen to hide money abroad.

"Before all this started [in Ukraine], the US was pushing Russia to improving its anti-money laundering effort, but now the tables are turned: Russia wants to track

oligarch flight capital, but no one, least of all the US, wants to share information with the Kremlin," says Konigsberg.

And even before that, the UK was not known for being particularly helpful.

The French investigating magistrate Eva Joly has complained in the past that the City “has never transmitted even the smallest piece of usable evidence to a foreign magistrate.”

Author Ben Judah damns the government saying the British political elite are also beneficiaries of this system of dark money inflows and have little motivation to do anything about it. "The British political elite are richer than they appear, and the British elite are both the creator and beneficiary of this system."

1143

1,100

Stephen Konigsberg, a legal advisor and former council to investment bank Renaissance Capital. "Everyone is making this risk assessment now. It’s a mess, as the old law overlaps with the new one and there is not a lot of guidance."

"The British political elite are richer than they appear, and the British elite are both the creator and beneficiary of this system"

Number of bank credit institutions allowed to provide banking operations in Russia (by licence)

1,150

I 15

2011

2012

2013

Sep '14

The geopolitical standoff has created the perfect fog for oligarchs to move their money and avoid the scrutiny of the Russian taxman. And it is happening when the political chaos has stoked capital flight to a record $150bn in 2014. Where will all this money go? Well, you can be sure that London is on the top of most people's list.

16

I Perspective

bne April 2015

Tony Blair’s eastern connections Nick Kochan in London

T

he appointment of former British prime minister Tony Blair as an adviser to the government of Serbia gives him another toehold in Central and Eastern Europe. Blair’s empire, which reaches into many government offices, continues to expand, as does its balance sheet, which today stands (according to some estimates) around the €150mn mark.

As I disclose in my just-published book, “Blair Inc: The man behind the mask”*, Tony Blair Associates already advises Nursultan Nazarbayev, the president of Kazakhstan, President Ilham Aliyev of Azerbaijan, the government of Mongolia and several businessmen, including Victor Pinchuk, the Ukrainian oligarch. Now he will support Prime Minister Aleksandar Vucic’s campaign to bring Serbia into the EU fold.

But what is the source, and credibility, of Blair’s power?

Blair’s key credential is his decade of experience at the helm of the UK government, which culminated in his discredited role in the Iraq war. Blair claims to have modernised the UK, although many would attribute that to Margaret Thatcher.

Yet Blair is apparently advising leaders of emerging countries how to manage their cabinets, their political advisers and their parliaments, using a model based on the centralisation of power around the leader and careful management of the delegation of power. Other members of Blair’s team are former colleagues, including his former press official, Alastair Campbell, and his former chief of staff, Jonathan Powell.

Blair’s purported capacity to open doors in Western capitals is also attractive to autocratic leaders of the former Soviet bloc looking to win international acceptance. President Nazarbayev has used Blair to initiate a visit by the British PM David Cameron to Kazakhstan.

Blair has five operatives on the ground in Astana, occupying offices in the building of Karim Massimov, the prime minister. Local sources say Massimov has used Blair to persuade Nazarbayev to push through plans to build up Islamic banking in the country. Blair has known Nazarbayev since 2000 and Blair’s writ runs in his office. Blair also introduced Sir Dick Evans, the former head of British Aerospace, to the Kazakh president to run the national airline. Evans has been on the board of Samruk-Kazyna, the Kazakh sovereign wealth fund, since 2006. Kazakhstan pays Tony Blair Associates £8mn a year for his services.

The addition of the Serbian contract suggests Blair’s role in CEE is expanding. But one prop of his empire of consultancies has just been removed. His pro-bono job as representative of the “Middle East Quartet” of Russia, the US, EU and the UN (tasked with channelling investment to the

Palestinian territories) was a calling card to enter the highest echelons of Middle Eastern governments. In particular it cemented his position in the United Arab Emirates, where he is a close confidant and paid servant of the ruling family and its sovereign wealth fund Mubadala. It is understood the UAE is funding other Blair contracts including that with Serbia, which also enjoys close ties with the UAE. Blair’s relationship with Serbia is laden with irony, as he pushed for the bombing of Belgrade in 1999 during the Kosovo war. Serbian PM Vucic was information minister then and is listed as editor of a book titled, “English Gay Fart Tony Blair”. The book was written by Vojislav Seselj, a nationalist politician languishing in a jail in The Hague on suspected war crimes. In fact, Blair has rebuilt his bridges with Serbia and his team have made regular visits to Belgrade, with Campbell giving a lecture there at the end of January.

Rival Serbian politicians say Blair is a “bizarre” choice of adviser to Vucic, given the previous fierce criticism.

Borko Stefanovic, leader of the largest opposition group in parliament, said: “How can you say such things about someone and now present him as a key factor in making our government more efficient?”

The Ukrainian oligarch Victor Pinchuk funds Blair’s Faith Foundation. The relationship enables Pinchuk to call on Blair to visit his factories as well as give speeches at his conferences.

Blair has made numerous visits to the steel mills of Interpipe, Pinchuk’s largest concern. Amid mutual congratulation between the two men, Blair said during one visit, “I have visited a huge number of Great Britain [sic] mills. Interpipe Steel is undoubtedly an outstanding creation.”

Blair’s Faith Foundation also cooperates with The Victor Pinchuk Foundation in educational conferences. The same mutual adulation occurs at conferences organised by Pinchuk at the Black Sea resort of Yalta. The Ukrainian uses these events, and Blair’s presence, to press Ukraine’s case for membership of the EU. That said, observers have commented that Pinchuk was noticeably slow to support the protesters that ultimately removed former Ukrainian president Victor Yanukovych in 2014.

The sustainability of Blair’s consultancy businesses has yet to be tested. Privately, leaders say he recycles other people’s ideas and spends insufficient time in any single cabinet office or with any leader to make any noticeable difference. What is not in doubt is he has found a recipe to make quick, big money.

Who pays and what they get for it will not bother the British showman.

Chart I 17

bne April 2015

Poorer CEE/CIS nations are fertile ground for public-sector graft CHART:

T

corruption and money laundering combined with low GDP per capita.

It is occupied almost exclusively by Western Balkan states whose postSoviet redevelopment was hindered by drawn-out conflicts in the 1990s, and CIS countries that have little scope for any real political opposition to their current government.

the International Centre for Asset Recovery’s Anti-Money Laundering Index, which measures a country’s propensity for money laundering and terrorism financing.

ransparency International’s annual Corruption Perceptions Index (CPI) measures the perceived levels of corruption in different countries across a number of studies. Comparing the results of the 2014 CPI with per-capita GDP across Central and Eastern Europe/ Commonwealth of Indepedent States (CEE/CIS) reveals a clear correlation between poverty and corruption.

As the bne:Chart shows, countries with low per-capita GDPs appear to suffer higher CPI scores. The same trend exists when GDP is held up alongside

The bottom-right quadrant of the chart represents countries that enjoy a high level of GDP per capita as well as a low score for corruption perceptions. Not a single non-EU country occupies it, while only two EU member states – Romania and Bulgaria – fall outside of it.

The top-right quadrant of the chart represents countries that enjoy a higher income alongside high perceptions of corruption. The two notable occupants of this area are Russia and Kazakhstan – both big oil and gas producers.

The undesirable top-left quadrant represents high perceptions of

The impact of corruption on GDP per capita Comparing per capita GDP to Transparency International's Corruption Perceptions Index 2014 (CPI) and the International Centre for Asset Recovery's The impact of corruption on GDP per capita Anti Money Laundering Index (AML) illustrates a clear correlation between Comparing capita to Transparency International's Corruption Perceptions Index 2014 (CPI) and the International Centre for Asset Recovery's wealth andper levels ofGDP corruption/propensity for money laundering.

Anti Money Laundering Index (AML) illustrates a clear correlation between wealth and levels of corruption/propensity for money laundering.

Index measure All

EU member

Anti-Money Laundering Index 2014

Non-member

Corruption Perceptions Index

85

80

Tajikistan Uzbekistan

75

Tajikistan Ukraine

Kyrgyzstan

70 Corruption Perceptions Index score

Turkmenistan

Kosovo 65

Belarus Azerbaijan

Armenia

Serbia

Albania Macedonia

Uzbekistan 50

Kosovo

Armenia

Russia

Bosnia and Herzegovina

Bosnia and Herzegovina 55

Kazakhstan

Albania

Moldova

60

Russia

Azerbaijan

Bulgaria

Turkey

Kazakhstan

Romania

Median CPI/AML score

Turkey

Belarus

Croatia

Serbia

Latvia

Slovakia

Georgia

45

Macedonia

Montenegro

Romania

Hungary Croatia

Hungary

40

Latvia Poland

Czech Republic

Slovakia Czech Republic

Lithuania

Slovenia

Poland

Bulgaria 35

Lithuania Estonia Estonia

30

Slovenia

Median GDP 0K

2K

4K

6K

8K

Sources: International Centre for Asset Recovery; Transparency International

10K

12K GDP per capita ($)

14K

16K

18K

20K

22K

24K

18

I Eastern Europe

bne April 2015

Sparse attendance at a celebration of the town's 'liberation'.

Debaltseve counts its dead – and blames Ukraine Graham Stack in Debaltseve

D

ebaltseve is still counting its dead following the eastern Ukrainian town’s capture by Russian-backed rebels on February 18 after weeks of heavy shelling. Life has started to return to normal, but the townspeople are still traumatised – and counter-intuitively blame Ukrainian forces that had been defending the town for the intensive shelling.

“I promised to check she was buried properly in a marked grave,” Sergei says as the purple-clothed casket is lowered

30-year-old manager Sergei Rudenko watches beside rows of new crosses at Debaltseve cemetery as a coffin is lowered into a grave. Rudenko and his friend are the only people attending the burial. “She was the mother of a friend, I didn't actually know her,” he tells bne IntelliNews. He says the friend had contacted him from Russia and asked him to attend the burial of her mother, killed during the shelling of the city.

into the thick clay soil. Gravediggers fill in the grave and place a cross with nameplate over it. According to the date on the cross, the woman died on February 21, after the end of the shelling. “This is the date the body was recovered,” Sergei explains.

around 80, which roughly matches the estimated number of fresh graves. But the number is not final, as a long trench

“Everyone is very frightened and will tell you the Ukrainians shelled the town”

Bodies still being counted At the city cemetery, municipal undertakers say they have buried

excavated in the graveyard for further burials indicates.

The head of the Debaltseve municipal morgue, who says he preferred not to be named, tells bne Intellinews that new corpses are still being delivered to the morgue, nearly a month after the pro-Russian rebels captured the town, as many as four a day. During the shelling, with the former morgue

bne April 2015

staff having already fled the town, the deceased were hastily buried in shallow graves, he explains, which are only now being exhumed for official registration and burial, according to information becoming available.

Vadim Shevchenko, newly appointed as head of the city police by the rebel authorities of the self-proclaimed Donetsk People's Republic, tells bne IntelliNews that the municipal morgue had registered 105 corpses of civilians since resuming work on February 23.

“The number includes not only those killed as a direct result of shelling, but those who died during the shelling, often people such as pensioners with frail health for whom the shock was too much,” he says.

Some corpses of those who died in Debaltseve were taken to other towns for processing, before the Debaltseve morgue resumed work. Corpses were also taken to Enakievo, Torez and Stepnoe, the selfstyled 'mayor' of Debaltseve, Aleksandr Afendikov, said in a press interview at the end of February, acknowledging that “very many” civilians had been killed by shelling in the town, without naming a figure. He added that 2,500 out of an original population of around 25,000 had stayed in the town throughout the shelling, and around 5,000 had returned since the shelling ended.

30 corpses of civilians who had died in the village of Vuglegirsk close to Debaltseve – marked by widespread destruction as a result of heavy fighting – were registered by the morgue at the municipal hospital at nearby Enakievo, according to the head of the morgue, who preferred not to be named.

US Permanent Representative to the UN Samantha Power on March 6 said that around the bodies of 500 civilians had been “found in in the cellars of houses in Debaltseve”. And the UN in a March 2 report said it estimates that over 200 civilian casualties as a result of the fighting at Debaltseve and at Donetsk Airport in January and February. Neither the Red Cross nor the OSCE has figures for the civilian dead in Debaltseve.

Eastern Europe I 19

IMF cash can’t hide grim reality for ordinary Ukrainians

Kateryna Killyashenko in Kyiv and Nick Allen in Berlin After the International Monetary Fund’s (IMF) approval on March 11 of its $17.5bn loan package to Ukraine, with $5bn due to flow immediately to bolster Kyiv’s dwindling coffers, the population could be forgiven for thinking the material hardships of recent months will start to ease. Wrong, as President Petro Poroshenko has made abundantly clear.

"Life won’t improve shortly," Poroshenko warned in televised comments a day before IMF chief Christine Lagarde blessed the crucial injection of funds.

"If someone understands the reforms as improvement of people’s living, this is a mistake," he added, also announcing a four-fold increase in defence spending that will inevitably impact already limited means for social welfare and pensions.

At the same time, the broader cost of the loan and another $7.5bn expected from other international organizations is sinking in hard to consumers.

Under austerity measures demanded by the IMF, gas prices, for example, will be brought into line with EU levels, soaring 280% by 2017. “I didn’t know they will increase, especially that much,” said pensioner Valentina Podenko, 77. “I’ll just have to stop eating I guess,” she added with a gallows humour laugh that often accompanies such blows in the former Soviet republic.

Overall, the picture for Ukraine remains grim by a whole pile of yardsticks: rampant inflation – officially hitting 34.5% last month but likely much higher in reality – casualties from the fighting (more than 6,000 killed), endemic corruption and towering foreign debt, to name a few. Repayments on the latter in 2015 will effectively gobble up the first tranche of the IMF loan.

Ukraine has to make some $5.4bn of foreign debt repayments this year, with central bank reserves down to just $5.6bn on March 1.

It all makes for the perfect storm for Poroshenko as he navigates his first year in power. Since the confectionary tycoon was elected last May, his initially healthy public support began to tail off from November. In February, his detractors overtook his supporters, 46% to 45%, according to a recent survey by R&G Group. But for now he is still going strong enough to have his government push through requisite austerity measures. “He is the best we have at the moment and we will not get anyone better in the near future. At least the world is talking to him,” says Yelena Pazyna, 52, a housewife from western Ukraine.

But the population is under no illusions that all the foreign aid will be used wisely and properly. Memories are fresh of the institutionalized kleptocracy that thrived under ousted president Viktor Yanukovych and a succession of leaders and governments before him, whether pro-Russian or proEU. Many people think the new authorities are as bad across the board, despite some visible efforts under the gaze of foreign lenders to combat corruption.

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bne April 2015

Sparse attendance at a celebration of the town's 'liberation'.

Pointing the finger The weeks of shelling of Debaltseve finally prompted the Ukrainian forces holding the town to pull out in a chaotic nightime retreat in the early hours of February 18. Most buildings in the town show some signs of damage, although two of its most prominent constructions – the railway station, and the Russian Orthodox church named after Aleksandr Nevsky – seemed to have escaped the shelling quite lightly.

Ukraine's defence ministry said on March 3 that the rebels had already succeeded in restoring some train connections.

Kyiv and the West have blamed Russia and the rebels for the shelling, and even Russia has largely not disputed that the rebels attacked the town.

Rebel leaders had themselves declared that they intended to take the town, and excluded the Debaltseve 'pocket' from a ceasefire agreed in Minsk on February 11. Oleksandr Zakharchenko, head of the Donetsk People's Republic, acknowledged on February 14, hours before the ceasefire was due to take effect, that his forces would adhere to

the ceasefire "throughout DPR territory except internal areas –Debaltseve," and that "the Minsk agreements don't say a word about Debaltseve”.

Even studiously neutral reports from the Organization for Security and Cooperation in Europe recorded its observers directly witnessing on February 18 outgoing shell fire from

According to Rudenko, the Ukrainian forces were responsible for shelling the town. “I saw with my own eyes how Ukrainian troops fired mortars which exploded within the town,” he says.

“And we saw in January and February when there was shelling every day how Ukrainian TV crews would be on the scene of any shell impact within minutes.”

“Of course it was the rebels that were responsible, but these people are traumatised” DPR multiple-launch rocket systems such as Grad or Urugan in Yasynuvata, at a time when Debaltseve was the most likely target within range.

But town residents questioned by bne IntelliNews counter-intuitively blame the shelling and destruction of the town on the very Ukrainian forces that were ostensibly protecting the town – some perhaps out of confusion, others perhaps out of fear.

“Everyone knows this in the town,” he adds. “Ask anyone you want they will say the same.”

Rudenko's claim surprisingly turns out to be true. Railway accountant Ludmilla, who declines to give her last name, gives bne IntelliNews a 10-minute tirade on the death and destruction visited on the town by what she alleges was Ukrainian shelling. According to Ludmilla, the Ukrainian nationalist Pravy Sektor

bne April 2015

Eastern Europe

I 21

saying that the rebels should have shown restraint – and how they changed what they said as soon as anyone from outside asked them. Of course it was the rebels that were responsible, but these people are traumatised,” she says.

Serhiy Garmash, pro-Kyiv editor of the Donetsk region independent news resource ostro.org, says that there are a range of reasons for the people's siding with the rebels. Some, he says, are afraid of speaking out against the separatists, while others are suffering from Stockholm Syndrome – the condition of supporting one's own kidnappers.

“Others are pro-Russian separatists and refuse to acknowledge any mistake in their views, and perhaps some really did suffer at the hands of the Ukrainian army,” he says.

Unsurprisingly, the story that the Ukrainian forces themselves caused the destruction in Debaltseve and nearby Vuhlehirsk has featured heavily on state-owned Russian TV and local rebelcontrolled TV.

Rebels hand out food to the locals.

organisation was based in number of camps on the outskirts of Debaltseve and responsible for most of the shelling inwards – and also for mowing down Ukrainian forces when they finally fled Debaltseve on February 18. Like Sergei, Ludmilla claims that, “we were here and saw it with our own eyes,” while also acknowledging she spent most of the bombardment in a bomb shelter.

Taxi driver Roman Maksimov, 31, who stayed in the cellar of a housing block during the shelling, tells bne IntelliNews a similar story: “Of course it was the Ukrainians that bombed here. Why would the militia bomb here when they were planning to retake the town because of its strategic importance?

They sent special forces units in to take the station and other locations.”

“The Ukrainians wanted to make sure that not a stone was left unturned before they pulled out. And when they pulled out, we saw how their tanks fired on houses directly,” he adds.

Traumatised Confusion among civilians on the

ground often arises during intense exchanges of artillery fire between defenders and attackers, with these people taking incoming fire to be the impacts of outgoing fire.

Ivan Maksimov, a former rebel who remained in Debaltseve during the shelling, admits to bne IntelliNews that it was the rebels' shelling that had left the town in ruins. “It's obvious: our guys [in the DPR] had encircled Debaltseve and were trying to knock out the Ukrainians from the town – war is war,” he says. “But everyone is very frightened and will tell you the Ukrainians shelled the town.”

A hotel receptionist a Enakievo backs up Maksimov's explanation. “We had around 150 displaced persons here from Debaltseve, and I heard how they talked amongst themselves about the shelling,

The fact that townsfolk – even after heavy shelling by the rebels themselves – appear to remain loyal to the rebel cause may come as an unpleasant surprise to the Ukrainian authorities in Kyiv, who are engaged in a battle for hearts and minds in East Ukraine.

Ukrainian government media pursued a similar strategy of spin in the summer of 2014, when Ukrainian forces were on the offensive around Luhansk and Donetsk, and shelling caused scores of civilian casualties in Luhansk, as bne IntelliNews reported. Ukraine governmentbacked media claimed the rebels were themselves firing on the towns that they held, allegedly for propaganda purposes.

But in contrast to Debaltseve, few in Luhansk at the time believed in this version of events.

"The Ukrainians wanted to make sure that not a stone was left unturned before they pulled out"

22

I Eastern Europe

bne April 2015

Think of a number Riding a wave of jubilation at its bloodless land grab, Russia last May approved a RUB680bn (around $20bn) Crimean development programme that will run to 2020. Although Economic Development Minister Alexei Ulyukaev said Crimea would be spared government budget cuts as Western sanctions began to bite, it wasn’t to be. And amid reported claims of mass illegal property theft by the new authorities, the general number crunching became increasingly nebulous in recent months.

Igor Golovniov / Shutterstock.com

Grimaces behind the smiles in Crimea Anna Kravchenko in Moscow and Nick Allen in Berlin

A

year on from its whirlwind absorption by Russia, Crimea’s change of flag was on March 18 celebrated with a ‘rebranding’ and a splash of festivities across the world’s largest country.

“I’d like to congratulate people in Crimea and all Russian citizens once again on this occasion and to say thank you to those who live in Crimea, in Sevastopol, for the courage they showed a year ago,” President Vladimir Putin said during a Kremlin meeting with Crimean officials.

While most of the international community condemns Crimea’s effective annexation by Russia after a hasty local referendum last March, Moscow regards the matter as done and dusted, a long-overdue restoration of historical justice.

The pen Putin used to ink the document that returned the peninsula to Russian

control is now in a Moscow museum. And amid speeches and Russian flag-waving parades, March 18 saw the launch of a new Crimea logo that will adorn local signs and wine labels. Designed by a top

The main infrastructure project launched since March 2014 was the bridge across the 5-kilometre Kerch Strait from mainland Russia. In the past year, the cost of the project more than quadrupled from RUB50bn to RUB228.3bn, making it Russia’s most expensive bridge when – if – it is completed in 2019.

On March 16, Russian Minister of Crimean Affairs Oleg Savelyev also warned of delays in building new infrastructure targeted for 2020 due to budget limitations. “We will commission the major highways a bit later than was planned," Savelyev told RBC news agency.

But if better roads can wait, the need for power can’t after Ukraine cut electricity

"The new authorities are taking property and giving it to businessmen who are close to them" Russian art studio, authorities wanted the logo to “symbolize an original tourist product of high quality".

But although the peninsula can still count on its fine wine, sunny weather and hefty injections of money from Moscow for its military facilities, plans to turn Crimea into what its Moscowappointed prime minister, Sergei Aksyonov, calls the “best region in Russia” are spiralling over budget.

supplies. Parallel to the bridge project, installation of a power line across the Kerch Strait will now start this year rather than 2017, it was announced.

Regardless of the difficulties, many Western companies are ready to invest in Crimea, Savelyev claimed. “The entire world is interested in Crimea.

But many, including Europeans, cannot enter [the market] due to the existing sanctions. Nevertheless, many

bne April 2015

businessmen and companies from various countries come to the peninsula – from Turkey, Israel, the Netherlands, Finland and Italy.”

Prior to the one-year anniversary of the referendum, PM Aksyonov said Crimea had signed the first $30mn contracts with investors in the energy sector. There were also 200 pending investment requests, he added.

Waylaid Crimea’s story has some parallels, especially seen in the context of the ongoing armed conflict in eastern Ukraine. Russia has previously used breakaway regions to strengthen its positions in the former Soviet space. In 2008, it recognized the self-proclaimed republics of South Ossetia and Abkhazia. But after the fanfare, pledged funds failed to materialize or were “diverted”.

The signs are that Crimea’s new authorities are as partial to the windfalls of office as are Moscow’s proxies in South Ossetia, or those running the 2014 Olympic Games in Sochi, which are said to have seen huge amounts of funding go astray. It’s not idle ‘Russia bashing’ either. The rampant nature of corruption in Russia has been a stock feature of Putin’s state of the nation address since he came to power in late 1999 – at least until last year, when it was not mentioned by name.

In February, Aksyonov pledged an end to the wave of "nationalisations" of valuable assets in recent months, from mobile operators to banks, shipyards and energy concerns. By the end of 2014, some 4,000 enterprises, organizations and agencies had been affected, according to Ukraine's Justice Ministry. "The new authorities are taking property and giving it to businessmen who are close to them," Sergei Mitrokhin, leader of Russia's liberal Yabloko Party, told The Moscow Times.

Prices are also marching upwards. But whatever the disappointments for the population at present, Crimea’s strategic importance will always up the ante –

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I 23

Little green lies

bne IntelliNews Russian President Vladimir Putin confirmed in a new documentary on the annexation of the Crimea what was widely assumed but always denied by the Kremlin and its supporters: that Russia sent in unmarked soldiers, the so-called "little green men" of world media reports, and de facto took the peninsula by force.

In the three-hour documentary, "Crimea: Homeward Bound", broadcast on Russia's First Channel on March 15, Putin explained that troops, including special forces, were sent in to protect Russian military personnel stationed in the disputed peninsula, which was transferred to Ukraine's territory in 1954. “We monitored the situation and had to bring in our equipment,” Putin said. “[Russian troops already stationed in Crimea] would have been wiped out after the first salvo.”

The president made a number of other key confessions in the pre-recorded documentary. Top of the list was his admission that the soldiers wearing unmarked uniforms that appeared across Crimea in the run-up to a rushed referendum on secession were indeed Russian regular forces. A longstanding treaty with Ukraine allowed Russia to station just over 20,000 troops in Russian military bases on the peninsula. But ahead of the vote these soldiers moved out into the streets and towns, creating an atmosphere in which international observers said a free and fair vote on secession could not be held.

Putin also said that he had been prepared to go to the brink over Crimea – including putting Russia's nuclear weapons on stand-by – and faced down a welter of calls from Western leaders during the annexation. He responded by saying Crimea was "our historical territory", that Russians living there "were in danger and we cannot abandon them", but because he was so direct added that, "no country was in the mood to start a war" with Russia over Crimea.

The documentary was aimed at a domestic audience and was replete with what has become the standard rhetorical position for the Kremlin: he blamed the US for masterminding the Maidan protests in Ukraine and the subsequent "coup" that ousted former president Viktor Yanukovych, calling Washington the "puppeteers".

"Formally, the opposition was primarily supported by Europeans, but we knew very well… that the real puppeteers were our American partners and friends. It was they who helped prepare nationalists [and] combat troops," Putin said, adding that he ordered the Russian security services to prepare to take over Crimea the day after Yanukovych fled the country. Russia's goal was to secure control over its main warm water naval port in Sevastopol.

Ukrainian Prime Minister Arseniy Yatsenyuk called on the International Tribunal in The Hague to take the documentary as evidence of Russia's premeditated invasion of Crimea, which is illegal under international law.

He has also called for tougher sanctions on Russia.

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and the cash flow – to maintain it. So intent was Russia not to back down last year, that “we were ready” to put Russia’s nuclear forces on alert during the Crimean operation, Putin said in the documentary “Crimea: Homeward Bound”, aired on state television on March 15.

Meanwhile, supporters of the annexation turned out at around 140 celebratory events across in Russia, according to the interior ministry.

"For Crimea it is a long-anticipated holiday of homecoming," Aksyonov said in a message of greetings to compatriots. "Russia has defended our legitimate right to self-determination, to unity with our historic Motherland.”

The gift that stopped giving Crimea was a part of Russia from 1784 until 1954, when Soviet leader Nikita Khrushchev transferred it to the USSR republic of Ukraine as a gift. After the 1991 Soviet collapse, Crimea remained part of independent Ukraine until the disputed referendum held in Crimea on March 16, 2014. While Moscow cites the wish of more than 90% of those who voted to rejoin Russia as justification for its actions, critics note than many thousands boycotted the rush vote.

“90% is a complete and utter lie. Most of our friends didn’t participate in that ‘referendum’,” says Irina, 52, an entrepreneur from Crimea’s southern coast.

And despite Putin’s insistence that Crimea is Russia’s "historical territory”, the international community will not let it lie. Speaking after March 16 talks in Berlin with Ukrainian President Petro Poroshenko, German Chancellor Angela Merkel said the annexation of the peninsula was a violation of international law that "called the peaceful order in Europe into question".

It was essential to “not rest until the full sovereignty and territorial integrity of Ukraine is restored, and of course this includes Crimea," she said.

Punch those nostalgia buttons Among the new education and cultural projects, there was solid funding for Artek, a famous Soviet-

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era summer camp on the peninsula.

Such projects play the nostalgia card very successfully, as generations of Russians holidayed in Crimea every summer and know every pebble there. “[Crimea] is for people who like hiking, wild beaches, meditation in the forest – so for those who don’t ask for much service-wise,” says Natalia Latkina, 30, a journalist from Moscow.

But whether yesteryear memories and the breezy new logo will work their magic, the next few seasons will show. For many, holidays across the Black Sea in Bulgaria or Turkey are more enticing in terms of service and price. “I would go if Crimean holidays cost significantly less than holidays abroad,” says Dmitry Vasilyev, 37, an IT manager in Moscow.

“There is definitely a drop [in trade], prices grew several times while pensions were raised only one and a half to two times… Only people from Crimea and some Russians come [as tourists] from time to time. Last year’s high season failed,” says Stanislav, 54, a pensioner from the resort of Yalta.

Others disagree. “Wages in the public sector grew at least twice, pensions grew as well. There is improvement in healthcare,” Sergei Meshkovoi, 36, told gazeta.ru in Simferopol. He also praised anti-corruption measures, especially in law enforcement. “When we were in Ukraine, it [corruption] just was ignored,” Meshkovoi said.

There is no disputing that a significant part of the Crimean population (the Kremlin claims the vast majority), is happy to be part of Russia, especially in such traditional Russian bastions as the naval port of Sevastopol. But many Crimeans have had to take a rigid stand against what they cannot agree with.

“I am half Ukrainian, half Russian, and now I feel more Ukrainian than ever,” says Andrei, a 42-year-old international company sales manager also from Yalta but now living in Kyiv. “There is no legal, human or common sense reason for one country to annex a huge territory of another, and then even start

war in another territory of the latter country, bringing heavy weapons and armed regular army forces to kill ‘good former neighbours’.”

Come fly with me With its Black Sea trade routes and proximity to markets, Crimea has clear economic potential. But its physical distance from the Russian ‘mainland’ and political isolation currently offset many of those advantages.

Until the bridge is built, there are no road or rail links to mainland Russia and Crimea that does not pass through Ukraine, so an extremely overburdened ferry from Krasnodar to the peninsula is the most popular mode of transportation. "Up to 2,000 cars queue for the Kerch ferry, with a twoday wait, and that's in good seafaring weather," says one 53-year-old resident of the peninsula who did not want to be identified.

Expanded air connections to Crimea took off last June, only to nosedive six weeks later. In 2014, Russian airlines said they would introduce cheap flights to Crimea from 30 Russian cities, tripling the number of flights over 2013.

In a government-pushed bid to woo holidaymakers and business travellers, Aeroflot promised a cut-price link from Moscow to the Crimean capital Simferopol from June through its budget subsidiary Dobrolet (“Goodflight”). But the airline was grounded by EU sanctions in August.

Aeroflot’s new low cost airline Pobeda then said in February that it wouldn’t fly to Crimea.

For some Crimeans now living across the new border in Ukraine, home now seems a world away. “I now have to seriously think twice to decide upon travelling to Crimea to see my homeland and the graves of my parents,” says the sales manager Andrei. “There are occasional cases of Ukrainian citizens being arrested or taken into custody in Crimea for no obvious reasons. I feel as though a piece of my heart was torn away.”

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Russia’s VTB sees pain but opportunity in sanctions

INTERVIEW:

Ben Aris in Moscow

T

he outlook for Russia's economy recently got worse after the central bank downgraded its economic forecast for this year again to a 3% contraction, with the recovery not expected to begin until 2017. Things are bad and Herbert Moos, deputy president and chairman of VTB Bank Management Board, tells bne IntelliNews that he is not optimistic they will get better any time soon.

VTB, Russia's second largest lender, was the first of Russia's banks to report its 2014 IFRS accounts on, of all dates, Friday, March 13. The results were appropriately bad. Profits on the bank's core lending business were down 56% from the year before and it reported big losses on other business lines like investment in securities. The only reason the bank didn’t book an outright loss was thanks to a large and cheap loan from the state Deposit Insurance Agency.

The sanctions on Russia were, of course, to blame – a situation unlikely to change soon. "I don’t see sanctions ending any time soon. They are a game changer," says Moos.

Sanctions have made doing business immeasurably more difficult, especially for VTB, which is explicitly named as one of those banks that has had its access to international financial markets restricted.

"The problem in the way the sanctions are framed is that they apply to either an EU ‘person’ or a US ‘person’. That includes corporate entities," says Moos.

"The two financial sanctions regimes pretty much mirror each other. However, every major European bank normally

has an entity in the US, which makes it subject to the US sanctions as well."

That means even if the EU sanctions expire in June, VTB and other stateowned banks on the list will still be unable to tap the international capital markets even in the EU. Thanks to the global nature of the international financial system, the sanctions are effectively viral, irrespective of where they were originally imposed.

And there are already examples of how contagious the sanctions are. The rules preclude sanctioned banks issuing new securities like bonds. However, it was common for holders of global or American depository receipts (GDRs, ADRs) to convert them into the locally traded underlying shares and make money on the difference, or go the other

argument that GDRs represent “securities”, and securities issuance is restricted by sanctions.

The restrictions have also affected the Russian banks at the personnel level.

Moos is actually a German national and so under the sanctions is not allowed to advise his own bank on issuing debt or equity, despite him being the chief financial officer. So VTB has had to hire an advisor to deal specifically with this sort of question.

But what has really put a spanner in the Russian banking system's works was the US regulator's decision to fine French bank BNP Paribas just under $9bn for doing business with Russia, following French President Francois Hollande's refusal to cancel a multi-billion-dollar contract to sell two Mistral-class

“VTB believes in Ukraine long term, which is why we still have a bank there" way to tap the greater liquidity on the international markets. The trouble is it is not clear if these depository receipts count as "new securities" or not. VTB Bank has requested a clarification from US authorities and received a positive opinion on the basis that GDR conversion does not generate any new capital for VTB, it is a service for investors. EU regulators (after thinking about it for over six months) said “no” on the basis of a purely “bureaucratic”

helicopter carriers to Russia – a decision that Russian President Vladimir Putin called "blackmail".

The Kremlin was outraged, but bankers are now just fearful. The fine has made the entire Russian banking system toxic, as no compliance department is willing to risk being hit by that sort of fine on the basis of what are clearly very confused sanctions rules. "The psychological impact on any European

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person [of the BNP Paribas decision] is enormous and the cost of the judicial action was excruciating," says Moos.

Hit in Ukraine VTB Bank has more than doubled its provisions for bank loans in the last quarter as the economic slowdown, falling consumer demand and income, as well as 1990s-style high inflation bites into profits. VTB's provision for bad loans has more than doubled, going from RUB96.9bn (€1.5bn) in 2013 to RUB255.4bn in 2014.

But the provisioning on bad debt in Russia, which still remains manageable, is nothing compared to the provisions that VTB has had to make at its Ukrainian business, where it has tucked money away to cover bad debt equivalent to threequarters of its entire loan book. "We have been trying to wind down our positions and we had some non-performing loans

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being realised," says Moos, who remains pessimistic about any short-term rapid recovery in Ukraine. "There have been so many chances for Ukraine to flourish in the past but they were all squandered. Now there is another opportunity. I really hope they seize this one, as Ukraine's enormous economic potential is obvious. Indeed, VTB believes in the country's long-term, which is why we still have a bank there."

Russia's prospects In comparison to Ukraine, Russia's economic outlook looks much better, but it too is suffering heavily compared to the boom years in the noughties. Of all the body blows that Russia's economy has received in recent months, Moos says the hike in interest rates to 17% in December was the most damaging. "Russia is in an unusual position because for much of the last two decades it has had negative real interest rates. Today we find ourselves with huge positive rates, which make it

“This is a unique opportunity to restart the investment story and re-engineer the economy" but we have provisioned for 75% of our corporate loans, or about RUB50bn ($820m)," says Moos. "Of course, we are still trying to recover the debt but I'm not very optimistic."

Although Russia is effectively at war with Ukraine, Russian banks accounted for a third of the country’s entire banking system assets before the fighting began, with a collective exposure of some $30bn.

And following the exit from Ukraine by many European banks, that share has gone up. Incongruously, Russian banks are now the backbone of Ukraine's financial system.

If the situation in Ukraine stabilises, then Russian banks will find themselves at the fore in financing the subsequent growth and recovery. But Moos remains pessimistic about any short-term rapid recovery in Ukraine.

"The new [Ukrainian] government was a glimmer of hope but the hope is not

impossible to borrow," says Moos.

Even with the subsequent 3-percentagepoint cut in rates, Russian companies are facing commercial borrowing rates north of 20%. "Who can afford that?" asks Moos. "No one."

Thus VTB, like all Russia's leading banks, finds itself in a dilemma: the customers it would like to lend to can't afford the cost of the money, and those customers willing to borrow at any cost the bank doesn't want to lend to. "Our loan portfolio has stopped growing," says Moos.

That's bad news for Russia's economy, which will struggle until the cost of borrowing comes down to a point where loans can once again grease the wheels of industry. The Central Bank of Russia (CBR) has already cut rates twice this year to 14%, but Moos would like it to go even faster. On March 12, the CBR lopped another 1 point off the prime rate, but the banks were pushing for a 2-point cut.

Crisis plan Still, the picture is not entirely black.

Moos points out that such a steep devaluation of the ruble will give the economy a fillip and should improve productivity and competitiveness – both of which are badly needed and hard to realise while the ruble was strong and the state's coffers full. "Wages have been rising pretty continuously over the last 10 years despite the fact that in the last couple of years there has been almost no increase in productivity," says Moos.

"Therefore, the more painful the current devaluation episode is, the more likely it is to force changes in the way that Russia works. In good times people get complacent. It's human nature."

Moos also points out that the devaluation has killed off imports and this will have a double beneficial effect in first clearing the market of imported competition, and secondly reducing the costs of investment and production into local versions of the same goods.

Some import substitution has already been seen, with the agricultural sector in particular seeing a sharp spike in growth in November. And the dearth of imports means Russia will run a current account surplus of some $50bn this year, "enough to cover debt redemptions and capital flight," says Moos.

But there is a big difference between Russia today and 1998, the last time there was a big devaluation. Russia's economy is now a lot bigger and more sophisticated, but the benefits of devaluation will be less. So while a full-blown crisis is unlikely, no one is expecting the situation to normalise soon. "Sanctions is a multi-year story – just look at Iran," says Moos. "While they are in place, Russia's economic potential has been taken down a step and will remain so for the foreseeable future. Different industries react differently. There may be a net positive effect of devaluation on companies in the consumer sector, but the more complicated and sophisticated sectors will be hurt. We were too myopic previously. However, this is a unique opportunity to restart the investment story and re-engineer the economy."

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bne:FX

Emerging from the rubble Ben Aris in Moscow

A

fter crashing in December, Russia's ruble has made a remarkable comeback since February by rising over 15% against the dollar, making it the best performing currency amongst the 14 in Emerging Europe so far this year, according to Bloomberg. And the appreciation of the ruble is not over, argues Alfa Bank chief economist Natalia Orlova; the ruble could appreciate by as much as a third over the rest of this year – though there are several factors that will determine whether we get that hoped for trend or something better or worse.

You don’t need a PhD in economics to see that the ruble was oversold during its collapse from the mid-50s in November to a low of RUB80 to the dollar in the depths of the panic in December. "Based on this metric the ruble fair value came out at RUB56/$ by the end of 2014, with this indicator providing correct signal of the ruble depreciation. However, and similar to previous benchmarks, it has underestimated the scale of the ruble’s slump, [and] did not justify a drop to RUB80/$ that was seen in December," said Alfa Bank's Orlova in a report entitled, "Ruble 2015: Appreciation Is In The Air", which was released at the end of February, referring to one of several methods she used to estimate the fair value of the ruble.

In general, Orlova concludes that the ruble was overvalued by about 20% in line with other emerging market peers, but the 40% fall in its value was exceptional. Accepting that the ruble was oversold, the difficult part is working out exactly where the "fair value" of the ruble should be now, once investors switch back from judging the situation using their spleens to using their heads.

Good start After falling to as low as RUB70.05 to the dollar on February 1, the ruble has done a lot better since than anyone could have hoped for. By March 19 it had strengthened to around RUB60 against the dollar, bringing its loss in 2015 down to only 1.5%.

However, the ruble still has a lot more ground to make up, as it remains 41% down on where it was at the start of 2014 when it stood at about RUB34 to the dollar.

The fall of oil prices by 44% in the last year is largely to blame for the collapse of the ruble's value, but it’s not the only culprit; Brent oil was trading at $60.72 on March 4 having recovered from lows of below $50 in December.

The collapse of the ruble has been a nightmare for the Central Bank of Russia (CBR), which is caught on the horns of a choice

between fighting inflation and defending the ruble's value by hiking interest rates, and slashing rates to spur moribund economic growth; Russia's economy grew by a pathetic 1.1% in January according to the latest data.

The upshot is that the CBR’s carefully laid policy plans, and a switch to inflation targeting in particular, have all gone out of the window. The "free float" of the ruble formally introduced on November 10 has turned into a "dirty float", as the bank has regularly been intervening into the market to "smooth" the excessive volatility of the currency – something it is now trying to avoid.

"Four months [after the debacle in December], it is clear that the ruble exchange rate can exhibit extreme levels of volatility, building a preference for a dirty float approach as opposed to the announced free-float policy," says Orlova. "This is

“Even if the CBR is not present directly on the forex market, it is hard to see the current regime as a free-float in the full sense of the word” confirmed by the authorities’ decision to force exporters to sell their export revenues on the market, as well as by more active Finance Ministry forex sales. Even if the CBR is not present directly on the forex market, it is very hard to see the current regime as a free-float in the full sense of the word."

Abandoning the exchange rate corridor (a pre-set forex trading ban maintained by the CBR) has always bled Russia of its hard currency reserves in previous crises, as the CBR is obliged to intervene when the exchange rate bumps up against the boundaries, creating a one-way bet for forex traders. Last year in October alone the CBR was forced to spend $30bn to keep the ruble in the band, before finally abandoning the exchange corridor in November, two months earlier than planned. However, the central bank's total absence from the market in December as the ruble crashed was widely criticised, making the sell-off even worse than it might have otherwise been. The ruble/dollar exchange rate

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plunged from about RUB54 to the dollar in the autumn of 2014 to a low of RUB80, before recovering to around RUB60 in late March.

Where is fair value now?

Alfa Bank predicts a possible 30% upside for the ruble over the course of this year. But guessing what will actually happen is fraught with difficulties, simply because so many unknown factors go into the calculation.

There are various ways of estimating the fair value of a currency and comparing it with other emerging markets or other petro-economies is a good place to start.

On this basis the ruble does very well and should have a fair value of RUB50 and RUB45 respectively. "A comparison of the ruble with other EM currencies shows that its depreciation was mostly in line with its peers from 2002 to 2014," Orlova said in her report. "However, mapping a currency against the average is a very vague approach. Russia’s macro fundamentals are strong as opposed to a number of EMs; particularly it has very little state debt of 16% of GDP, suggesting that the ruble should tend to be one of the stronger EM currencies. At the same time, the country’s growth potential is weakening, putting pressure on the ruble’s performance. An additional and new issue is to what extent Russia can be treated as part of this country group under sanctions."

Another way of looking at the value of a currency is to use a purchasing power parity (PPP) approach; equivalent goods should be worth the same in different countries, as made famous by the Economist's Big Mac Index. But this doesn’t work well for Russia, as the Big Mac Index has suggested the currency should appreciate by 70% for most of the last decade – although the numbers are confused by two sharp devaluations in 2009 and 2014.

Alfa also tried the "money metric" approach, which is basically working out what would happen if every single ruble in the country is converted into foreign exchange (a function of M2 and M0 money supply, the value of CBR loans to banks, as well as the size of the hard currency reserves). "Inflation becomes a crucial assumption here: under 10% CPI growth and $60 [oil] the fair ruble value should be RUB61 while with inflation at 15% it should be RUB63 in 2015," Alfa Bank concluded.

Lots of factors are weighing on the exchange rate, but oil prices remain the dominant force; with nearly two-thirds of the federal budget revenue derived from oil export taxes, clearly the value of the ruble is heavily dependent on the price of a barrel of oil. With Opec apparently in a fight with US shale oil producers for market share and an uncertain outlook for the global economy and hence oil demand, the prospects for a higher oil price are uncertain. On March 13, the US Energy Information Administration forecast that Brent crude oil prices would average $59 a barrel in 2015 and $75 in 2016.

Orlova calculated the ruble's value on the basis of $60, $80 and $100 oil and estimates the ruble/dollar exchange rates at RUB63, RUB55 and RUB49 respectively. "Both the monetary and the real exchange rate metrics imply that if oil stays above $60/bbl on average in 2015, the ruble has strong upside potential. This take is in line with our current RUB55/$ 2015YE exchange rate forecast, which we reiterate," says Orlova.

While a further rise in oil prices by $10 or $20 from the current $43 a barrel would be more than welcomed by the Russian exchequer, even this will not help if the central bank cannot get control of inflation as a prerequisite to launching the investment growth needed to increase productivity and drive GDP growth, says Orlova. And that is something the CBR does have control over.

Method

RUBUSD implied rate

Comparison to EMs average

50

Comparison to petro-economies average

45

Money metric (inflation 10%)

61

Money metric (inflation 15%)

63

Oil ($60 per barrel)

63

Oil ($80 per barrel)

55

Oil ($100 per barrel)

49

Alfa bank estimate FY2015

55

Source: bne, Alfa bank

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Trade credit insurers in waitand-see mode on Russia Iana Dreyer in Brussels

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typical EU fudge over extending the sanctions on Russia means the global trade finance sector, on which Russia’s external trade is highly dependent, will continue to keep its options open on Russia.

On March 19, the EU voted to link the extension of sanctions on Russia to the fulfilment of the two Minsk ceasefire agreements, but stopped short of immediately re-imposing the sanctions regime, which is due to start expiring in July.

A formal, legal decision on whether to extend the sanctions on Russia's financial, defence and energy sectors will only be taken at the next EU summit in June.

Trade finance has not been directly targeted by the West.

Trade per se has only marginally been affected: there is an arms export embargo and a ban on sales of equipment for oil and gas projects to Russia. Moscow adopted counter-sanctions on European food exports, but the bulk of trade between the EU, Russia’s biggest trading partner by far, is in industrial goods and fossil fuels – sectors not affected by the sanctions.

Yet trade finance professionals are clearly feeling the tremors linked to the earthquake that has struck Russia’s economy since last year: an oil price plunge, a recession, ruble devaluation were all aggravated by the sanctions.

Trade between the EU and Russia, which stood at €320bn in 2013, fell by 12-13% in 2014, according to preliminary EU Commission estimates.

It is very difficult to isolate the effect of sanctions on the trade finance sector in all this. “It is far too early to imply any conclusions about the impact of sanctions on Russian borrowers,” Kai Preugschat, secretary-general of the Londonbased Berne Union, a grouping of 48 major governmentowned and private export credit insurers and guarantors, tells bne IntelliNews.

Robert Nijhout, executive director of the Amsterdam-based International Credit Insurance and Surety Association (ICISA),

Robert Nijhout, executive director of the Amsterdam-based International Credit Insurance and Surety Association

which represents 95% of the world's private credit insurance business and covers 15% of world trade, also says there are “no hard figures” on this, and agrees with Preugschat that in as much as Russian-related trade finance business has been negatively affected during recent events, the main causes of this are macroeconomic.

“We see a decrease in demand, and the majority of our members have seen a drop in demand [for trade credit on Russia transactions] by more than half. The re-insurance companies see a decrease in ceded business with regard to

“What we see is premium rates are higher than they used to be, but they want to do business” Russian risks,” Nijhout said, adding that there has been a concurrent increase in demand for cover against the risk of the withdrawal of export or import licences.

To Nijhout, due diligence pressures from sanctions mean that credit insurers have become “a bit hesitant to take risks”. Many credit insurers no longer accept new Russia-related business so as to minimise their risk exposure, although they continue to manage existing business. Banks for their part are hesitant to give credit because they are concerned that transactions might not be sanctions compliant.

Confidence despite medium-term risks Looking ahead, exposure to Russia risk for the trade business remains high. Berne Union members’ mid- to long-term exposures to the Russian market stood at more than $39bn in 2013, their second highest level of exposure after the US market.

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Any further escalation of sanctions would not be without its risks for the sector. A much-debated, though not among the most likely, measure under discussion is cutting off Russia from the global financial transaction messaging system SWIFT. Proponents of such a measure refer to the precedent set by Iran’s cut-off from SWIFT transactions in 2012, which many believe contributed to Teheran’s decision to negotiate with the West over its nuclear programme. In 2013, Iran shortterm claims on Berne Union members soared to 191 that year.

Iran became their first source of insurance payment claims.

An equivalent decision regarding Russia “would clearly be damaging,” says Preugschat. But “both the diversity of Russian borrowers and their various sources of revenues and funding versus the same situation in Iran makes it next to impossible to compare the two.”

Exporters are hoping for an improvement in the situation in Russia. “They try to maintain their connections as much as possible. They want to be ready to continue business as usual once the sanctions are lifted. From the underwriter’s side it’s a matter of risk appetite. What we see is premium rates are higher than they used to be, but they want to do business,” says Nijhout.

If the EU’s financial and investment sanctions are extended this summer, the largely Western-dominated trade finance business does not appear to worry that this could significantly increase competition from emerging market financial

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institutions based in countries which haven’t put sanctions on Russia. Firms operating from financial centres like Hong Kong or Shanghai, for instance, seem aware of reputational risks and of the global reach of the Western regulators (the US in particular). Asian-based private financial institutions’ international shareholding structures could expose them to compliance risk, says ICISA’s Nijhout.

“Credit insurers have become a bit hesitant to take risks”

Nor does the private Russian financial sector operating with the ruble yet seem to have the financial depth needed to replace global financial institutions in financing Russian imports.

Overall, the industry’s outlook for their Russia-related business is not bleak. “The Russian sanctions are not the only sanctions that we are dealing with,” says Nijhout. “Trade needs to happen anyway. People live, people consume, and the consuming element is what makes it relevant for us. Trade will find a way. There are other ways of doing trade where you are not breaching the sanctions. Or certain measures are lifted.”

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Oh! What a lovely hybrid war Mike Collier in Riga

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t used to be so easy to tell when you were at war. The prime minister would go on the wireless and say “We are at war!” in a voice resonant with history and fate. The newspapers would print “WAR!” on their covers in headlines as big as the pages would allow. Grandfathers would light pipes and mutter “Oh, not again,” between puffs.

kaite told the BBC on March 7: “The first stage of confrontation is taking place. I mean information war, propaganda and cyber attacks. So we are already under attack. Will it be extended to conventional confrontation? Nobody knows.”

Today, when having to stick to the ‘rules’ of war might be regarded as an infringement of one's freedom of expression, things are a lot more freeform. In fact, according to the proponents of ‘hybrid war’ – this season's most fashionable form of conflict – things have changed so much that you can be at war without even noticing it. Similarly, your opponent can declare hybrid war and launch his hybrid army at you all the while holding his hands out and saying: “Who, me?”

Below the radar What exactly is 'hybrid war' anyway? Perhaps unsurprisingly for a phenomenon that is designed to confuse and confound, it depends who you ask.

Are the Baltic states at war with Russia or not? Lithuanian President Dalia Grybaus-

For all his faults, at least Kaiser Bill sent a telegram to confirm that hostilities had commenced.

One the chief experts in the field is James Sherr of the UK think-tank Chatham House, who told bne IntelliNews that hybrid war could be defined as: “A form of warfare that is designed to cripple a state before that state even realises the conflict has begun. It's a model of warfare designed to slip under Nato's threshold of perception and reaction.”

For the Baltic states, that boils down to “intimidation with a political aim behind it,” says Sherr. “The political aim is to destroy confidence between the Baltic states and the Nato alliance that they are part of, and the European Union that they are part of, and in doing so to change the internal political balance here so that parties that have a cordial relationship with Moscow are seen by the public as the parties that can offer real safety.”

“The mayor of Riga [Nils Usakovs] recently said that as long as he was mayor there would be no Russian threat here.

This is what Russian policy is designed to encourage, to persuade not just the Baltics but others too that Putin is on the verge of going crazy and if you stand up to him, you will provoke him into a very dangerous escalation which can include swift occupation of the Baltic states.”

Building client states in Europe by investing huge amounts in Eurosceptic and “illiberal” political movements is another

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key part of the hybrid strategy, Sherr says, predicting that it takes place on a far greater scale than is currently known.

“I think Russia is investing more heavily than we're even able to estimate at the present time. What we have seen so far is probably the tip of an iceberg. This has gone on far longer and is far more extensive than we suspect. I think we will be truly shocked at how much they have been investing at undermining us from within,” Sherr says, “There was an old Soviet axiom: look for your vulnerabilities and there you will find the KGB.” But if hybrid war is a mixture of military threat, propaganda, bribery and selfdoubt, how sophisticated is it? Is Putin's hybrid war a mushy kasha in which as many noxious ingredients as possible are chucked into the pot and endlessly stirred? Or is it more sophisticated: Casserole a la Poutine using only the finest ingredients and a precise recipe?

“It looks more sophisticated than it is because the people exposed to it do not understand the rules of the game that Russia is playing. Once you understand Russia's methodology, a lot of what they are doing looks very clumsy,” says Sherr.

That's not precisely the line taken by Janis Berzins of the Latvian Security and Strategic Research Centre, who insists Russia has the methods of hybrid warfare down to a fine art. “The Russians have a mechanism they call 'reflexive control', which means making your opponent do what you want without the opponent

they are ready to do things we are not ready to do any more. For example, you cannot think of Nato having a special operations force specialising in blackmail, assassination and kidnapping. We don't do things this way, but they do. Sending an army out without insignia is against international law – but they are not ashamed to do that.”

“To put it simply, it's like the Mafia. What does the Mafia do? It exploits your weaknesses,” says Berzins. “So what Latvia needs to do is shield itself, meaning it should address its own weaknesses.”

Masters of the airwaves Those weaknesses include the media, Latvian Defence Minister Raimonds Vejonis tells bne IntelliNews. With a quarter of the country ethnically Russian and around 40% of Latvian residents able to speak Russian as a first or second language, Moscow's huge selection of TV, radio and internet channels dwarfs the handful of local stations, not only in number but in the amount of money they spend. “The purpose of hybrid war is to undermine the nation,” Vejonis says. “One of the most concerning issues is the negative external impact on our audio visual space by countries that are outside the EU and outside Nato. We must stress the importance of audio visual regulations in Europe and avoid such threats.”

That's harder than it sounds with several major Russian TV networks legally registered in places such as the UK and

"It's like the Mafia. What does the Mafia do? It exploits your weaknesses" realising it. The Russians have made almost a special discipline of this reflexive control and they have been discussing it since the 1960s and 1970s. This is part of their concept of hybrid warfare,” Berzins explains.

“The thing which is most important is how Western society is not prepared for this. That's not entirely bad, but it means

Sweden, making restricting their output difficult.

Compounding the problem are restrictive laws governing the use of “unofficial” languages (which is how Russian is classed in Latvia) in broadcasts, which exacerbate rather than mollify the divisions within Latvian society. Generally, Latvians and Russians inhabit completely

different media spheres. “There have to be public media networks in which Latvian citizens can talk in languages that are not the state language,” says Olga Dragileva, one of the leading journalists in the country, who works in Latvian, Russian and English on Latvian statefinanced media channels.

“Russian stations broadcast 24 hours a day – we only broadcast for a few hours.

Unless we are serious about addressing this, we cannot compete. People have to see themselves represented in the national media – if they do not see themselves and their neighbours depicted there, they will turn elsewhere,” she says.

Coincidentally, one of the key institutions charged with unpicking the confusion of hybrid war is Nato’s Strategic Communications Centre of Excellence (STRATCOMCOE) based in Riga, which has been operational for less than a year.

Its director Janis Karklins has some down-to-earth advice on the best way to counter the hybrid threat, which includes “the weaponisation of social media”.

“Counter-propaganda is not an efficient way to counter propaganda,” Karklins says, “We need to develop our own story.”

Russia's real cleverness has been in taking advantage of a situation in which the economic model of the media itself has changed, so that readers and viewers expect everything to be free of charge. As a result quality journalism is declining, and readers and viewers turn to whoever is providing free content and plenty of it.

Russian media is great at tagging its stories, so that they appear at the top of internet searches, and at providing content quickly online. Western media is still stuck in old-fashioned modes of information distribution, he says. “When thinking about how to get our message across, we need to factor these things in because the old recipes are not effective any longer,” Karlins says. “We need to change our way of thinking and adapt to this new situation... we need to develop messages that resonate with different audiences, in their mother tongue. We need to think how to address Russian populations in Nato member states.”

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“One way to do this is to develop skills of media information literacy and critical thinking in our education system to make it harder for adversaries to disorient the population. When people are disoriented they are easily manipulated,” he argues.

It is as if the well-known phenomenon of the “fog of war” that disorients troops in combat and frequently leads to them fighting their own side has seeped off the battlefield and into the corridors of power via covert financial backing, into homes via overtly propagandistic media and into the world of business via travel bans, sanctions and product boycotts – all of which brings to mind Putin adviser Vladislav Surkov, credited by British documentary maker Adam Curtis as elevating the art of social disorientation to a black art.

But there are a couple more interesting things about hybrid war. Andis Kudors of Latvia's Centre for East European Policy Studies points out a couple of basic and brutal truths: “Hybrid war is relatively cheaper than traditional warfare, though still you need to put resources into your media. Hybrid war does not require as many lives of your soldiers. If you use volunteers, separatists and criminals, they can die instead of your soldiers. That means fewer critics of your government when caskets with dead bodies start to come from the battlefield.”

Boots on the ground What hasn't changed is the likelihood that for all its twists and turns, hybrid war must in the final instance still be countered by conventional means. That means troops, tanks and guns, all of which were in evidence on March 9 in the port of Riga, where the US Army was unloading a sizeable collection of M1 Abrams tanks, Bradley fighting vehicles and APCs to complement the Stryker transporters already in the country. The following day, the US announced 3,000 troops were heading to the Baltic for exercises.

In such circumstances, figures like Major General Jack O'Connor, standing dockside, are probably worth more than all the foreign policy wonks in the world put together. Emanating good old-

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fashioned blood-and-guts attitude (and quoting Ronald Reagan in the process – who else quotes Reagan these days?), O'Connor is the kind of guy you would want in your trench.

“Russia has attacked and crossed into sovereign territory of Ukraine. So as a response, working through Nato, we have brought formations from the United States to Europe to demonstrate our resolve against Russia's attack,” O'Connor said. “The purpose is to establish peace boundaries. And those boundaries go from Estonia down to the Black Sea. We intend to demonstrate to Russia that we are here training with our allies in order to help Putin make decisions not to further incur into Ukraine.”

But bearing in mind what James Sherr said about hybrid war working to position Moscow-friendly parties as the “reasonable” choice, it was interesting to note the presence of Riga Mayor Nils Usakovs alongside O'Connor on the dockside. His Harmony party is the only one in the EU to have a formal cooperation agreement with Putin's United Russia, which Usakovs defends, arguing that it keeps lines of communication open.

Asked by bne IntelliNews whether it wasn't strange to have a US general lambasting a valued partner in such a way, Usakovs unleashes one of his trademark withering stares. “Different people have different degrees of emotion when they talk about events between the West and Russia,” he says.

With Ukraine being used to hone Russia's hybrid warfare skills, the last word should go to Oleksiy Melnik of the Razumkov Centre in Kyiv, who points out that President Putin isn't just the man controlling hybrid war: he is the embodiment of it. “Mr Putin is the key player and he is quite successful at playing a hybrid of aggressor and peacemaker at the same time. Being party to the war, Russia presents itself as a mediator that's fighting not against Ukraine, but against the USA and Brussels.”

“The biggest problem is that he's allowed to do this,” Melnik concludes. “In calling this war a hybrid war we are trying to describe how it is being fought, but we are still hesitating to give it a proper name.

In my opinion this is the beginning of a World War conducted by Russia not just against Ukraine, but against the rest of the world.”

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power from 2005-2007, was allergic to giving up the national currency. The collapse of Lehman Brothers just days after Tusk's speech put paid to Polish thoughts of joining.

The steep depreciation of the zloty during the crisis was one of the factors that helped the country narrowly avoid a recession in 2009. The subsequent disarray in the Eurozone made the common currency a taboo subject for most politicians and increasingly unpopular among many Poles.

We need to talk about the euro Jan Cienski in Warsaw and Robert Anderson in Prague

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hen the EU expanded into Central Europe in 2004, the new member states committed to adopting the euro, though no deadline was imposed.

While the smaller economies of the Baltic countries, Slovakia and Slovenia have all adopted the euro in recent years, today, more than 10 years after accession, the three largest economies – Poland, the Czech Republic and Hungary – look no closer to joining than they ever were.

Minister Viktor Orban, it shows more interest in looking east than in joining the Eurozone.

For Hungary, the failure to join the euro is part of the country’s sad relative decline from when it was perceived as one of the pacesetters in economic transformation after the collapse of Communism in 1989. Joining the euro is today not even a live issue: the country does not meet the public debt criterion required for adoption; it has made only feeble steps to converge with the rest of the EU in real terms; and, under the all-powerful Prime

Poland’s slow shift in thinking The closest Poland came to joining was in September 2008, when the then prime minister, Donald Tusk, promised that Poland would be a member by 2012. One of the spurs to action was Slovakia's successful accession in 2009. But Poland had lost too much time. Unlike the Slovaks, who used the post-2004 economic boom to fulfill the criteria, Poland's rightwing Law and Justice party government, in

But for Poland and the Czech Republic, the lack of any concrete steps to join the euro is more surprising. Now as the Eurozone finally begins its slow recovery from the global financial crisis and its own subsequent sovereign debt crisis, policymakers are starting to consider whether to join in the near future.

Despite the recent accession of the Baltic countries and the apparent calming of the Eurozone crisis, the situation in Poland is little changed today. “The evident positive balance of costs and benefits in favour of adopting the common currency in a country like Lithuania, which has had a fixed exchange rate for over a decade, is different for a large country with a bigger internal market like Poland,” Mateusz Szczurek, the finance minister, said in a recent radio interview.

The government and the central bank have devoted almost no effort to selling the idea of the euro in recent years and opinion polls show the results. A poll taken by the CBOS organisation last year showed 68% of Poles are opposed to joining the euro.

As Szczurek mentioned, the business argument for joining is also less clear than for some of the smaller Central European members. Poland's internal market is large – merchandise trade as a percentage of GDP comes to 77%, while in the three Baltic countries and Slovakia it ranges from 101% to 170%, a sign of how much more those economies rely on imports and exports.

However, many business leaders are wary of the effects of Poland's fluctuating zloty, which lends uncertainty to business decisions.

There is a slow shift taking place in official thinking, especially in the ranks of the ruling Civic Platform party, in part driven by security worries because of Russia's aggression in Ukraine and in part fuelled by worried

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that a consolidating Eurozone will leave it permanently on the outside.

In an election year – the presidential election takes place on May 10 and the parliamentary vote this autumn – the centrist Civic Platform is using the euro to differentiate itself from Law and Justice. That party's presidential candidate, Andrzej Duda, has said Poland should not join the euro until “our salaries are on a European level”,

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probable government formed after the elections, will have anything like the votes needed to push through such an amendment. “A specific Polish problem is that our constitution does not allow us to join the Eurozone,” said Komorowski.

Political obstacles paramount For the Czechs, it was even more galling to see their poorer neighbours, the Slovaks, leap over them to join

"Adopting the euro is a political decision it will not be taken by economists but by political leaders"

something likely to take decades.

Bronislaw Komorowski, the incumbent backed by Civic Platform, has said instead: “Our fundamental problem is first to rebuild popular support for Poland's entry into the Eurozone.”

Poland is also edging closer to meeting the criteria for joining. At the moment it meets interest rate and inflation targets, but is under the EU's excessive deficit procedure for running a deficit above 3% of GDP. However, the finance ministry estimates that the deficit this year will be below the EU's 3% limit. Public debt, at about 53% of GDP, is well below the EU's maximum of 60%. That means by next year the decision on whether or not to join becomes more one of politics and less of economics. “Adopting the euro is a political decision,” Marek Belka, the central bank governor, recently said in Brussels. “It will not be taken by economists but by political leaders.”

The problem is that Poland's constitution makes such a decision very difficult. The constitution grants the National Bank of Poland the right to issue currency and set monetary policy, and changing it to give those powers to the European Central Bank requires a two-thirds majority in parliament. Neither the current coalition led by Civic Platform, nor any

the Eurozone in 2009, but it did not spur them into making more vigorous efforts to adopt the single currency.

The country meets all the Maastricht criteria for joining except for the requirement to be in the ERMII exchange rate mechanism for two years. This means keeping the koruna stable against the euro and not devaluing in the two years prior to entry, a task that is not insuperable in present conditions.

The country is also currently in good economic shape, with growth of 2.6% expected this year; it is competitive in export terms; and it has 80% of the average GDP per capita in the EU, though the convergence has stagnated since the global financial crisis. Czech business is also much more dependent on the Eurozone than most of the new member states – 30% of exports go to Germany alone.

The obstacles in Prague are mainly political, with arguments based on how the currency should be stronger, or how public debt should be reduced further, or how structural reform is needed, acting merely as economic excuses for political prevarication.

Much of the resistance to the euro can be traced back to Eurosceptic former

premier and president Vaclav Klaus, whose thinking lives on in the rightwing Civic Democrats that ruled from 2007-13 and the current central bank board that Klaus appointed.

Milos Zeman, the current president, and the ruling Social Democrats (CSSD) favour the euro, but the coalition has agreed not to join in this parliamentary term, instead talking in terms of 2020. “We must overcome the legacy of Mr Klaus,” Jan Mladek, the Social Democrat economy minister, told bne IntelliNews at the end of last year.

Pavel Telicka, foreign affairs spokesman of their junior coalition partner ANO – which is currently leading opinion polls – also supports entering the ERMII in the next parliamentary term, but warns: “It is not just fulfilling the criteria and then entering the Eurozone; it’s about being sustainable and that is a more difficult issue.”

Though the CSSD-ANO coalition looks likely to win re-election in 2017, it is still far from certain that it will be able to take the country in. Adopting the euro does not require a change to the constitution (which needs a threefifths majority in both houses) or a referendum, but a nervous government might feel the need for this kind of political backing, which would be very hard to win.

Three-quarters of Czechs currently remain opposed to the euro, according to recent opinion polls. They fear that they will have to pay for Eurozone casualties such as Greece, or that prices will rise, or they desire a stronger exchange rate for the koruna before they agree to give it up. The Civic Democrats are likely to fan these fears as a way to regain popularity after the ignominious collapse of their last government in scandal.

It will take a strong, courageous government to overcome this political resistance to adopting the euro, and the Czechs have lacked such a government for 20 years.

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Europe’s leading exchanges for IPOs in volume if not value. But the treasury ministry’s slimmed down privatisation programme has seen significantly fewer new issues on the WSE than in recent years. Furthermore, Ukraine’s descent into war and economic chaos has cut down on the interest in Ukrainian companies wanting to list in Warsaw, ending what had been a promising source of new listings.

A listing business in Poland Jan Cienski in Warsaw

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or a decade, the ambition of the Warsaw Stock Exchange was to become Emerging Europe’s financial hub, sucking up the region’s largest companies and eclipsing its rivals in the region. Optimistic prognosticators revelled when Warsaw passed the much older Vienna bourse in size and started taking aim at bigger rivals like Istanbul. A symbol of that predatory drive was an enormous aquarium in the CEO’s office filled with piranhas. But over the last couple of years the WSE’s goals have become significantly more modest.

A proposed merger with the rival Vienna Stock Exchange, which owns bourses in Prague, Budapest and Ljubljana, that would have left Warsaw as the region’s dominant exchange has been scrapped.

While in the past Ludwik Sobolewski, the exchange’s chief from 2006-2013, would troll regional capitals looking for promising companies wanting to list in Warsaw, Pawel Tamborski, the new

CEO, is looking closer to home. Even the WSE’s mission statement is more diffident. It now calls on the bourse to be “The market of first choice for investors and issuers in central and eastern Europe”.

“In this way the WSE is setting itself up as a potential takeover target by one of the large exchange operators,” writes Krzysztof Kolany, lead analyst for the bankier.pl portal.

Insipid public offerings One sign of the WSE’s retrenchment is in the lacklustre number of initial public offerings. For years, the WSE’s claim to fame was that it was one of

Last year, the WSE saw only 13 IPOs on its main market with a value of €313mn, a 72% drop from 2013. When IPOs on the WSE’s troubled small companies NewConnect exchange are added in, there were 35 IPOs in Warsaw last year, compared with 54 in 2013, according to PwC’s annual IPO Watch Europe report. The bourse’s own numbers are a little different, as it lumps together companies moving up from NewConnect to the main market as well as foreign companies adding a Warsaw listing to true IPOs. Warsaw was only the fourth largest new issuer in terms of volume in Europe last year, and in value terms it was 11th, eclipsed even by the Bucharest exchange’s single IPO of the Electrica utility worth €444mn. Bucharest is now being run by Sobolewski, who was fired from the WSE in 2013 after being accused of soliciting investors for a film starring his girlfriend – allegations he has denied.

“The WSE’s fall in the ranking of European exchanges in terms of the value of initial offerings is primarily the result of a lack of privatisation offers in 2014,” said Filip Gorczyca, PwC’s deputy director for capital markets, in a statement.

“In earlier years transactions conducted by the state treasury were responsible for the lion’s share of resources gained by the exchange and ensured the WSE a leading position in Europe. However,

"The WSE is setting itself up as a potential takeover target by one of the large exchange operators"

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Wild East is too wild for Polish business

Jan Cienski in Warsaw For years Polish business has looked east to Ukraine as a promising market. It saw there similar characteristics to Poland's “Wild East” period of the early 1990s, when there was chaos on the market, but where fortunes were made for those able to predict that within a few years Poland would become a normal Western European country.

Ukraine had well-trained workers who were even cheaper than Poles, a large domestic market and tight trade links with Russia, which allowed for exports to that significantly larger country. Enthusiasm for Ukraine saw Polish banks like PKO BP and Getin invest in Ukraine, while production companies like Nowy Styl, a furniture maker, and Sniezka, a paint company, set up factories in Ukraine. The Warsaw Stock Exchange invested time and money luring Ukrainian companies to list on the WSE, providing a cheaper alternative to the larger bourses of Western Europe, but one with similar standards of probity.

However, that gamble has not paid off. Battered by war against Russianbacked separatists, and facing an economic collapse, Ukraine in no way resembles the primitive but promising Polish market of 25 years ago.

The WSE set up an index of Ukrainian companies in 2010. But since that optimistic time, the index has lost 72% of its value; it has dropped by 21.6% in the last year alone. In comparison, the exchange's blue chip WIG30 index lost only 1.9% over the last year.

In all, Polish companies lost PLN120mn (€29mn) in Ukraine last year.

For example, Nowy Styl has complained about the difficulty of using its Ukrainian factory, located in Kharkiv, just a few kilometres from the Russian border, to export three-quarters of its production to Russia.

Instead, it is investing in a new factory in Russia to serve that market.

Sniezka reported that its net profit was down by 14% last year, with a large part of that due to problems in Ukraine, where the company's sales fell by 41% when calculated in hryvnia.

Faced with problems in the east, Polish companies are starting to hunt for more promising markets elsewhere. Polish farmers are already making the switch. The embargo saw Polish food exports to Russia fall by 14% last year, with further falls expected in 2015. However, food exports to Africa, the Middle East and Asia have soared. Pork exports to Hong Kong are up by 114%, while overall food sales to Africa, largely wheat and grains, almost doubled. That means despite the problems in Russia, Polish food exports last year were up by 4.5%, breaking €21bn for the first time.

With a predicted recession in Russia this year of about 3% of GDP and a Ukrainian downturn ranging from 5.5% to as much as 11.9%, all combined with what is likely to be continued fighting in the east of the country, the prospects of Polish business returning to the east are remote.

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over the longer term it is difficult to expect that the Warsaw market will be able to rivalise with global markets like London and Euronext in terms of IPOs.” Private suspicions There are few indications that there is a new wave of IPOs in the offing. The treasury has more or less completed its privatisation programme, and the companies which remain under state control like copper miner KGHM, leading bank PKO BP, insurer PZU and refiner PKN Orlen are considered strategic assets, which as such will not be completely sold off.

One of the exchange’s problems is that it has been unable to make inroads into the private businesses that have sprung up in Poland over the last two decades, relying instead on government asset sales. Entrepreneurs tend to be suspicious of the exchange, fearing losing control of their companies and of being driven by the pressure to produce quarterly results instead of planning for the long term. “I have no interest at all in listing my company. I don’t need the money and I want to build a long-term business,” said Henryk Orfinger, one of the founders of the Irena Eris cosmetics group, during a recent meeting of top Polish business leaders.

The government’s 2013 decision to shift much of the assets held by privately run pension funds into the state-run pension scheme also disheartened investors. The private funds had been one of the mainstays of the market and were especially keen participants in IPOs, making the idea of listing in Warsaw attractive for new entrants.

The prospects for a revival seem remote. Poland’s Financial Supervision Authority, the financial markets regulator, reportedly has 38 IPO prospectuses pending, of which 18 have been suspended. “We expect a similar number of IPOs to 2014,” Tamborski said in a recent television interview.

And of course the hungry piranhas are long gone from his office.

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the gaming rooms, the “Dream Bar” and “Jewel of Mayfair” restaurant – and wait until you get to the goldplated bathrooms. “In keeping with the property’s exuberant style, the bathrooms have been fitted with a selection of luxurious gold-plated products,” according to bespoke bathroom fitters Bagnodesign, who say they supplied gold-plated bidets, basins and even whole gold-plated WCs to the casino. The “request for all products to be plated in gold was a challenge of course but one that we felt more than confident to undertake”, Bagno's press service said.

Londongrad’s Mayfair set

Melniks has invested a whopping £15mn into the premises, according to contractors CLA Urban, who oversaw the refurbishment over a tight time frame of only six months, through to the casino’s opening in November 2014.

A low profile and air of discretion may in fact be ideal to attract the size of wallets needed to make a high-end casino tick, say gaming industry insiders. Moreover, Melniks is personally well connected among 'Londongrad' – London's wealthy Russian-speaking community – and may look in this direction for clients, according to a bne IntelliNews source who attended a Melniks presentation in the casino. Melniks claims to be related to top Ukrainian officials, according to the source, while it is a matter of public record that in May 2014 Russian President Vladimir Putin awarded him the Russian 'Order of Friendship'.

The results, by all accounts are impressive. A stately entrance opens on to a marble staircase rising to

The Hilton itself is a beloved place for rich Russians to stay while in London: Melniks himself is reported to be a

Graham Stack in Berlin

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atvian Vasilijs Melniks is the first Eastern European businessman to own a major casino in the UK, bne IntelliNews can reveal. The casino opened in November in London's leading hotel, the Park Lane Hilton, at the heart of Mayfair, with a view across Hyde Park, and a stone's throw from Buckingham Palace.

Melniks' coup was to snatch the only casino licence in London still available, according to casino manager Bob Walker. London's exclusive Mayfair district is already home to a cluster of exclusive casinos frequented by the rich and famous such as Les Ambassadeuers and Crockfords, both within walking distance of Park Lane Casino.

The casino occupies the entire lower floors of the Park Lane Hilton, but has a

Backing a dark horse But despite the prime location, extravagant fittings, and a staff of 250, the casino has kept a low profile – its opening in November was off the public radar, it has a rudimentary website, and the casino remains a dark horse to gaming experts in the capital.

Underscoring how publicity-shy the new casino is, Melniks did not answer calls to his mobile phone or emails, and managers at the casino did not return calls.

separate entrance and is not associated with the hotel, a spokesperson for the casino said. The premises are rented from the owners of the entire building, according to a bne IntelliNews source.

"Like football clubs, casinos are more often a trophy than a profitable business"

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Doctor in the zoo Obesity is a growing problem across Europe, including the new member states like the Czech Republic. And at a time of constrained healthcare budgets, where to treat these people is becoming an urgent issue. Step forward Prague Zoo, which Czech health officials say is the only place that has the facilities large enough to handle such outsized patients.

According to local newspaper Lidove noviny, the zoo in the Czech capital is set to build a special health centre for the country's 80,000 'super obese' people, after those patients complained of being treated in the same place and using the same equipment as that normally reserved for animals like the elephants and hippos.

Stepan Svacina, a doctor at the General University Hospital in Prague, told the Czech newspaper in February that certain procedures demanded bigger tools. "We have special weight scales for those people who are extremely overweight, but we cannot do computer tomography or magnetic resonance imaging on them because they do not fit in the devices. Some of the obese patients have had to undergo these treatments in the local zoo."

Obese patients will be given special surgery rooms with reinforced operating tables, stiffer and larger chairs and special beds, XXL lifts, and other medical equipment, the paper reported.

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frequent guest, and his friend, Russian billionaire Peter Aven, president of Alfa Bank, is also well-known to the Hilton staff.

Melniks may be the first Eastern European to own a West End casino, but he is not the first foreign multimillionaire to set himself up in London in this way. According to London author Mark Hollingway, who has written extensively on both the British capital's plutocratic Russianspeakers, as well as Mayfair's elite

banks. But his London casino business is unknown in his native country, where the talk is of Melniks' recent apparent shortage of funds. His main asset, Latvia's largest industrial company Riga Shipyards, with a workforce of around 600, narrowly escaped bankruptcy in 2014, after making â‚Ź1.6mn losses in 2013 and an estimated â‚Ź1.5mn losses for 2014.

The losses are not just puzzling, juxtaposed with the flamboyant casino investment in London. They are also

"In keeping with the property’s exuberant style, the bathrooms have been fitted with a selection of luxurious gold-plated products" casinos, West End casinos may follow English football clubs as the new musthave for the global nouveau riche.

Like football clubs, casinos are more often a trophy than a profitable business: casino margins are declining because of tougher anti-money laundering (AML) laws, meaning expensive compliance hires and computer technology. In January, 2015, as part of a crackdown on money laundering via casinos, US government anti-money laundering agency FinCen imposed its biggest ever fine on a casino, fining the Trump Taj Mahal casino in New Jersey $10mn for failing to properly identify clients, according to the Wall Street Journal.

Shipping losses Melniks owns the casino via his Latvian structure Eiroholdings Invest, which in turn owns the UK holding company Silverbond Enterprises, according to its last corporate filings. Eiroholding told bne IntelliNews that Melniks was on vacation and would not be able to respond to questions.

Melniks, 47, is a prominent figure in Latvia, where he was even finance minister for four days in 1997, and has interests ranging from knitwear to

puzzling after Riga Shipyard in 2011 won a massive $400mn Ukrainian state tender to supply an offshore drilling rig, which at the time billed as a turnaround in the shipyard's fortune.

The deal was controversial because Riga Shipyard, an intermediary in the deal, sourced the rig from a Norwegian leasing firm for only $225mn. According to Riga Shipyard, the costs for transport of the rig from the shipyard in Singapore to Ukraine, engineering work needed to transit under the Bosphorus bridges, and extras bumped up the total order volume to just under the $400mn received from Ukraine's energy company Naftogaz.

The rig was delivered to Ukraine in the last days of 2012. In the first three months of 2013, Riga Shipyard's UK subsidiary transferred $47.5mn to an obscure Turkish some-time ship repairer, ostensibly for work performed on the rig. In an interview with bne IntelliNews in 2014, the ship repairer acknowledged that he did not even have his own workshop. Both he and Riga Shipyard say there was nothing unusual about the transaction.

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The couple's determination paid off: they soon linked up with the booming Berlin start-up scene, and three years after securing their first jobs, both now have a secure future in marketing and communications positions in expanding companies.

On the surface their story is hardly unique – after all, millions of Poles, Romanians and other east Europeans have upped sticks in the past two decades for a better life in the West.

But Magyars, whether due to limited linguistic skills or an immobile nature, had appeared reluctant to relocate even within Hungary, let alone emigrate.

However, the economic downturn of 2008, coupled with the political upheavals which followed the election of Prime Minister Viktor Orban and his Fidesz party in 2010 appear to have changed all that.

Hungary’s ‘silent’ emigration Kester Eddy in Budapest

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he job market was bleak indeed when Andras Kovacs graduated with a degree in business from Budapest's prestigious Corvinus university in 2011. “I was earning HUF50,000 [then about €180] as a part-time sales intern in a sports shop, but it was no good as a full-time job.

I had job interviews, but there was nothing else available,” he tells bne IntelliNews.

So Kovacs (not his real name), along with his partner, decided to find work in Germany, moving to Berlin that September. But the cold start, without contacts, meant the going was tough, despite the couple's passable German skills: and efforts to secure interviews with the big name professional service firms met with a depressing lack of replies.

However, a visit to Budapest that Christmas reaffirmed their decision to move abroad: both were appalled at the Fidesz government ramming a new constitution through parliament, and what they saw as blatant cronyism at the top. “[For this government] power is the important thing: 'we do it because we can do it'. They don't care about [ordinary] people at all, the main reason they are there is to make money,” Kovacs says. “We didn't have a job, but this made it absolutely sure we would go back [to Berlin].”

Who’s gone?

In truth, nobody knows the full extent of emigration: the government points to data from the Hungarian statistical office which estimated some 350,000 Magyars had moved away between 1989 and early 2012.

However, a commonly quoted figure of 500,000 gained traction when Gyorgy Matolcsy, then minister of economy, cited this number early in 2013. (In truth, some 100,000 Hungarians living at home, but commuting to work abroad, mostly in Austria, would account for much of the difference between these two estimates.)

What is beyond doubt is that many migrants are well educated. “All my friends abroad went to college or uni,” Zsuzsa (not her real name), who with an MA in business moved from Budapest to London in early 2014 to work in public relations, tells bne IntelliNews.

"These are well-trained, multi-lingual, specialised and creative people who see no choice in their motherland"

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net remittances from Hungarians abroad, valued at €622mn in 2010, almost quadrupled to €2.2bn in 2013, Portfolio.hu reported in February, citing revised data from the National Bank of Hungary.

For Hungary, with a population of barely 10mn, of whom some 4.4mn are of working age, the loss of so many workers – along with the tax and social security contributions – is a “real disaster”, according to Bertalan Toth, co-leader of the opposition Socialist parliamentary group. “These are [in many cases] well-trained, multi-lingual, specialised and creative people who see no chance in their motherland. Hundreds of thousands leaving… has to be damaging to the economy long-term,” Toth tells bne IntelliNews.

temporary. Zsuzsa in London says that as many as five of her seven close Magyar friends were planning, or had already returned home.

The Orban government, while admitting concern for certain hard-hit sectors, such as health and IT – for which it says “individual policies” are needed to address the worker shortfall – is otherwise seemingly nonchalant about the issue. “The government’s standpoint concerning migration is that employment abroad is fundamentally not harmful,” the Prime Minister's Office (PMO) tells bne IntelliNews when asked to comment for this story.

"I have a feeling that just like in the good old communist days, they will find me and hold me responsible for my criticism"

The increasing numbers of migrants is primarily the result of the EU opening its borders, while Magyar numbers remain proportionally well below those of, for example, neighbouring Romania, the PMO asserts. Moreover, it says, no specific labour shortages have developed in Hungary (although this goes against dire warnings of staff shortages by medical associations) and employment abroad is “mostly temporary”.

As for the PMO assertion that emigration has ceased, he retorts: “It's great that our government see improvements back home... but for sure, we can see more Hungarians in Berlin day by day.”

Indeed, the government says data (not cited) reveal that “between 2013 and 2014 the increase of labour force outflow from Hungary has stopped,” while official German statistics in 2013 showed 58,000 Magyars at work, with 34,000 de-registered. This “clearly shows” a high proportion of returnees, in part due to the government's success in creating jobs in Hungary, the PMO argues.

Permanent residency Anecdotal evidence certainly indicates that some of this emigration is

But equally, people like Kovacs and his partner appear permanent expatriates, at least until a change of government in Budapest. “There is no security in Hungary. They can nationalise the pension system, or your company. If I compare with Germany, for example, there is real discussion and debate about issues

there. Reasons and counter arguments are heard. In Hungary, they don't want that: decisions are made without any evaluation [as to the consequences]” he says.

The financial statistics also weigh against the government's arguments:

With salaries in London and Berlin typically five or more times what can be achieved in Budapest, emigration is likely to be an issue for years to come.

Perhaps, though, the most insidious result of this story is the reluctance of Hungarians to go on the record.

Of the four interviewed for this story, all declined to have their real names published. As “Klara”, an assistant public relations manager living in Glasgow (and who otherwise did not feature in this story) put it: “It's funny, but I have a feeling that just like in the good old communist days, they will find me and hold me responsible for my criticism.”

“Klara”, now 28, was three years old when communism collapsed in Hungary.

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Balkan states look east as well as west Clare Nuttall in Bucharest

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he slowdown of the Eurozone economies since the 2008 crisis has encouraged Southeast European countries to look to Turkey, the Middle East and other regions for investment, though their primary orientation remains towards Western Europe.

Turkey is already the largest economic power in Southeast Europe, and its clout will increase with the opening of new pipelines transporting gas from Azerbaijan and Russia to the region.

Both Turkey and Azerbaijan will take on a greater role as energy suppliers to Southeast and Central Europe within the next decade. From 2019, Azerbaijan will start exporting gas from the offshore Shah Deniz field to Europe via the Trans-Anatolian Natural Gas Pipeline (TANAP) and Trans Adriatic Pipeline (TAP). As well as being a transit state for Azerbaijani gas through TANAP, Turkey

could also start transporting Russian gas on to Europe when a new pipeline starts operating. The Russia-Turkey pipeline, or ‘Turk Stream’ as it’s been dubbed, was announced in December 2014 after Moscow scrapped South Stream, a rival project that would have delivered Russian gas across the Black Sea to Europe.

Several countries from Southeast Europe not currently included in the pipeline projects are considering options to plug into them. These include the GreeceBulgaria-Romania vertical gas corridor agreed between the three countries’ energy ministries in December.

More recently, Russia’s Stroytransgas announced plans to build a pipeline across Macedonia that in future could connect to the Russia-Turkey pipeline.

Turkey’s new role as a gas transit state for Southeast Europe can be expected

to further increase its importance in the region. “A greater role in transit of natural gas will give Turkey more bargaining power in other fields, bringing more inter-dependence in Turkey’s relations with the Western Balkans,” Mehmet Uğ ur Ekinci, foreign policy researcher at the Ankara-based Foundation for Political, Economic and Social Research (SETA), tells bne IntelliNews.

“Construction of the pipelines will mean the region depends on Turkey in the same way that it now depends on Ukraine,” agrees Vito Komac, CEO of the Slovenian Turkish Business Club (STBC).

The degree to which the new pipelines will affect Turkish-Balkan relations is uncertain, as it will depend partly on future demand for gas in the region, where governments are also exploring other options – from liquefied natural

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gas (LNG) terminals on the Adriatic to renewable energy generation – in an attempt to reduce their dependence on Russian exports via Ukraine.

Old Ottoman ties Turkey is already economically important for Southeast Europe, ranking among the top 10 investors and trading partners of most countries in the region.

However, despite its geographic proximity, Turkey generally ranks below EU economies. Komac believes this is due to the different business cultures in Turkey and the Balkans. “All too often Slovenian businesspeople assume that Turkey has the same mentality as the Balkan countries, but this is not true,” he says.

“Our businesspeople are often surprised by the high level of development and industrial growth in Turkey.”

As a result, relatively few attempts by Turkish companies to invest in Slovenia have been successful and even fewer in the opposite direction, despite efforts by both countries’ governments to boost mutual trade and investment. The STBC, a non-profit organisation, was set up to address these obstacles. By contrast, Macedonia, which is geographically closer to Turkey and has a 100,000-strong Turkish minority, has been more successful in attracting Turkish investment.

The assumption of a common business culture stems partly from the long shared history of Turkey and the Balkan region, much of which was under Ottoman rule for hundreds of years. Part of this legacy remains today, with substantial Turkish minorities in several countries and Muslim populations in Albania, BosniaHerzegovina and Kosovo. Even in countries that are largely Orthodox Christian such as Serbia, phenomena like the huge popularity of Turkish soap operas highlight the enduring cultural ties.

However, the Balkans’ Ottoman history is a double-edged sword. While in some countries it fosters a closer relationship with Turkey, almost a century after the disintegration of the Ottoman Empire there is still wariness in the region and a lingering perception of Turks as invaders. The concept of neo-Ottomanism, which has been associated with Tur-

EU energy dream made real David O'Byrne in Kars region, Turkey Turkey on March 17 formally broke ground on the construction of the 31bn cubic metres a year (cm/y) Trans Anatolian Gas Pipeline (TANAP), which when operational by the end of 2018 will carry Azerbaijani gas to European markets and reduce the bloc's energy dependence on Russia.

The pipeline of 1,850km will initially carry 16bn cm/y of gas from Azerbaijan's Shah Deniz gasfield, with the remaining 15bn cm/y of capacity expected to be filled with gas from other Caspian fields or elsewhere in the region.

At the ground breaking ceremony in Turkey's Kars region, attended by presidents Tayyip Erdogan and Ilham Aliyev, the importance of the project for Europe was stressed by Maros Sefcovic, vice president in charge of the energy union for the European Commission. “This project is of immense importance for Europe, as it will supply the only new source of gas currently available,” he said.

Erdogan for his part stressed the importance of the pipeline for the whole Eurasian region. “[The EU energy project] the Southern Gas Corridor, when it is fully implemented, will provide a strong link between the Caspian and Eurasia region and Europe,” he said.

Of the 16bn cm/y that TANAP will initially carry, 6bn cm/y will be taken by Botas and supplied to consumers in north-west Turkey. The remaining 10bn cm/y will be transited to the Turkey-Greece border, from where it will be transferred to the planned 20bn cm/y Trans Adriatic Pipeline (TAP), which will carry the gas through Greece and Albania, and then across the Adriatic to Italy, from where it can either supply the domestic Italian market or be transited to Central Europe.

That 16bn cm/y of gas will be supplied from Azerbaijan's Shah Deniz field, which is being developed by a consortium led by BP (28.8%) and with major shareholders including Turkey's state oil company TPAO (19%) and Socar (16.7%).

The ground breaking ceremony for TANAP brings to an end more than 15 years of discussions on how to realise the EU's long-mooted "Southern Gas Corridor” – a project borne out of the bloc's increasing dependence on imports from Russia beginning in the late 1990s, which prompted the EU to launch proposals for a new route for imports from the Caspian and North Middle East via Turkey.

With the construction of TANAP guaranteed by Baku and Ankara, and 16bn cm/y of gas secured from the consortium developing Azerbaijan's Shah Deniz gasfield, the development of TAP is also now certain, and the development of the long-planned corridor also now guaranteed. The only question remaining is how to fill the remaining 15bn cm/y of TANAP’s capacity.

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key’s current prime minister, Ahmet Davutoğ lu, has been in evidence in recent years, mainly among those sceptical about Ankara’s ambitions abroad.

To a large extent, these ambitions are economic rather than political. For several decades, Turkey has pursued a strategy of export-led growth, encouraging investors and businesses to be more active in Southeast Europe along with other regions. Turkey’s top trading partners in the region include Romania and

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Arab allies In further signs of the Balkan countries’ engagement with states to their southeast, United Arab Emirates-based companies have dramatically increased their investments into the region.

Serbia has become the primary target for UAE investors, a surprising development given the UAE’s earlier backing for the Nato bombings of Serbia in 1999 and its early recognition of Kosovan independence. The recent rapprochement, which

"A greater role in transit of natural gas will give Turkey more bargaining power in other fields" Serbia, which account for a much larger share of trade than the smaller majority Muslim countries.

Furthermore, Turkey has become a natural economic engine in the region, given its size and strength even as major West European economies stagnated. “Turkey is building economic relations with every actor, as part of its aim of increasing inter-dependence with the region.

Ankara has also been quite active in cementing soft power in all parts of the Western Balkans,” Ekinci says. “However, after the Arab Spring it is no longer a political priority for Turkey. Urgent security issues have resulted in a shifting of Turkey’s interest to the Middle East, though relations with the Balkans are continuing to expand and diversify.”

Alongside Turkey, Azerbaijan can also expect an increase in its economic influence in the region to follow the launch of gas exports and the construction of TAP. So far, Azerbaijani investment has been spearheaded by the State Oil Company of the Azerbaijan Republic (Socar). The company already owns a network of petrol stations in Romania and is currently working on plans to develop the gas grid in Albania, one of the TAP transit states. Outside its core business, Socar is also investing into a €500mn resort at a former military base in Montenegro via its subsidiary Azmont Investments.

is attributed to Serbian Prime Minister Aleksandar Vucic’s friendship with Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al Nahyan, has brought billions of euros worth of investment and loans to Serbia.

In 2012, Al Dahra Agricultural Company bought up 20,000 hectares of Serbian agricultural land as part of the UAE’s plans to boost food security by investing in farmland abroad. The following year, Etihad Airways took a 49% stake in Serbia’s struggling Jat Airways and embarked upon an ambitious rebranding and modernisation programme partly financed by the Serbian state.

This had knock-on effects for Serbia’s main international airport in Belgrade, which reported record profits in 2014.

Plans for Belgrade Waterfront, a massive mixed-use development on the Sava river, are now underway. The project is being developed by Emaar Properties, the investment fund of UAE businessman Mohamed Alabbar, at a cost of over €3bn.

While Serbia has been the main recipient of UAE investment, other countries are also starting to benefit. In Bosnia, Dubai-based Buroj Property Development recently announced plans to build a €2.3bn luxury resort near the site of the 1984 Sarajevo Winter Olympics.

Local media in Croatia reported in early March that the government is in talks

over a possible $2bn loan from the UAE to fund debt refinancing.

The recent global crisis that particularly hit economies in Western and Central Europe is part of the reason why Southeast European governments have started looking to Turkey and the Middle East for investment, as well as further afield for example to China. But for the most part the EU remains the greatest influence on regional economies, given that EU countries top the lists of trading partners and investors across the region.

Aside from Southeast Europe’s four existing EU member states, all countries from the region – including Turkey – are aiming for EU membership, though they are progressing at different rates. In future, Turkey’s relationship with the Balkan region could depend on whether it follows countries from the region into the EU and on its relationship with Brussels.

Turkey has already made substantial progress in aligning legislation with the EU, but the dispute with Greece over Cyprus and concerns over the growing authoritarianism of President Recep Tayyip Erdogan’s rule are holding back progress. Some European politicians also fear that the entry of a large, majority Muslim state straddling Europe and Asia could change the culture of the EU. Meanwhile, Turkey enjoys a high level of trade with the EU, while still enjoying benefits of being a non-member, namely a greater ability to protect its domestic economy.

“Ideally, Turkey and the Western Balkans will progress together towards the EU, which will contribute to stability in the region. Even if some countries enter ahead of Turkey, I don’t foresee any problems because currently some 80% of Turkey’s trade in the Balkan region is with EU members,” says Ekinci.

“However, if Turkey’s membership prospects get lower and there is a difference of opinion between Turkey and Brussels over political or economic policy, governments in the Western Balkans could be forced to pick sides. At the moment I don’t see Turkey as a pole in the region in the way that Russia is, but Turkey could arise as a real pole in future.”

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that the cuts should have been greater also accused the bank of "treason" and issued a thinly veiled accusation that Governor Basci was working to the orders of an unnamed external influence.

The "influence" referred to is widely assumed to be that of Fetullah Gulen, the US-based Islamic cleric whose shady Hizmet organisation Erdogan blames for the police's corruption probes that rocked his administration a little over a year ago and whose influence he increasingly sees behind every move by anyone deemed to be in opposition to his regime.

The Turkish president’s war on interest David O'Byrne in Istanbul

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resident Tayyip Erdogan has never been one to mince words – and his recent attacks on Turkey's central bank have been typically forthright. These perversely have helped worsen Turkey’s economic problems with the lira on March 5 falling to yet another all-time low against the dollar.

Speaking to reporters on a trip to Saudi Arabia on March 1, Erdogan restated his oft-repeated belief that "interest rates cause inflation" and warned that both the central bank, which sets Turkey's interest rates, and Deputy Prime Minister Ali Babacan – to whom central bank chief Erdem Basci reports should "get their act together".

The central bank, he went on, should make decisions aimed at fostering growth and stability. "They should not

act according to the wishes of Western powers and the instructions of the interest rate lobby," he warned darkly.

Such intemperate comments from Erdogan are nothing new. The February

Behind this though is a longer term and more deeply held objection of Erdogan to "interest rates" per se, which most observers ascribe to his staunch Islamic religious beliefs. These first surfaced in the wake of the 2013 "Gezi Protests" that Erdogan, despite evidence they were in direct response to his increasingly uncompromising policies, chose to blame on a nebulous and previously unknown entity he dubbed "the interest rate lobby".

More serious than Erdogan playing to the gallery was the announcement on February 28 by Economy Minister Nihat Zeybekci signalling that the government could change the central bank's remit from targeting price inflation to one that also encompasses growth, employment and trade. This would effectively end its position as the sole official body not directly under

"They should not act according to the wishes of Western powers and the instructions of the interest rate lobby" 24 decision by the central bank to cut the top end of its interest rate corridor by only half a point and the lower end and the benchmark rate by just a quarter point was roundly condemned

by Erdogan, who in repeating his belief

government control, as the switch would oblige it to cut interest rates to encourage growth at the expense of price stability. This could have serious implications for the long-term health of the Turkish economy.

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TRYing times What is clear is that the recent attacks on the central bank have already had an effect as investors worry the mounting political pressure on the central bank will force policymakers to cut interest rates too far, too fast. On March 5, the lira depreciated past TRY2.5920 against the dollar, which Tim Ash of Standard

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effect has been cancelled out; Turkish Energy Minister Taner Yildiz already announced that falling gas prices will not be reflected in consumer bills, citing the need to pay off debts accrued by state gas importer Botas.

Similarly, Turkey's energy regulator EPDK has blamed petroleum distributors

"Everything he is doing is in order to get enough votes to change the constitution to a presidential system"

Bank called “an emerging Turkish lira crisis – made at home”.

“Reminds me very much of 2006 in Turkey, where self-inflicted policy errors/ personnel changes created a market sell-off and ended up with the [central bank] having to hike policy rates to stabilise the situation,” Ash wrote in a note to investors.

While most emerging market equities rose during February, Turkey's fell by over 6% and government bond yields rose over the same period. The Turkish markets' performance is worse than that experienced by most other emerging markets and comes despite Turkey being highly dependent on imports of oil and gas and so one of the markets most expected to benefit from tumbling energy prices.

Indeed such has been the effect of the recent criticism of the central bank that some analysts have concluded the combined results of lower interest rates and a weaker lira might actually be the government’s aim – in order to give a short-term boost to exports and exporters without harming consumer confidence ahead of Turkey's June general election.

The most noticeable effect of a weak lira against the dollar would normally be rising energy prices. But with oil and gas prices falling, that

for failing to pass on falling oil prices to consumers, going to the extent of introducing a mandatory retail price ceiling that analysts suggest is aimed less at forcing distributors to pass on the effects of falling oil prices and more at covering up the fact that the benefits of those falling oil prices have been largely swallowed up by the falling lira.

Certainly, the falling crude price helped reduce Turkey's trade deficit, which in January was $4.3bn, down from $6.9bn a year earlier.

Boomerang But many are warning that a strategy of lowering interest rates and weakening the lira will eventually backfire. "Even

News. "Turkish exporters have to import a lot in order to be able to export and many have FX debts.”

The question though seems to be exactly when the strategy will be seen to backfire, with analysts concurring that the aim of Erdogan's current strategy doesn't go much further than polling day and that his war on "interest" is at least in part a war "of self interest". "Everything he is doing is in order to get enough votes to change the constitution to a presidential system," argues Deliveli.

Passing the necessary constitutional reforms would require Erdogan's ruling Justice and Development Party to take two-thirds of the seats in parliament, or failing that to get the support of two-thirds of those deputies elected – a tough call even with a pre-election boost to the economy.

Whatever the result at the June 7 election, few are betting that Erdogan's attacks on the central bank will end until he gets what he wants, or that Governor Basci will see out the full five years of his term, which ends in 2016.

“Basci is expected to remain in office until the polls, even if calls for substantive interest rates cuts by the president and his sycophantic advisers will likely increase in the weeks ahead, posing a threat to the Turkish Lira’s stability,” says Wolfango Piccoli, managing

"There is a significant risk that key economic policy-making positions will be given to individuals on the basis of their closeness and allegiance to Erdogan" in the unlikely scenario that consumption surges in response to lower rates, Turkey’s economic vulnerabilities would be rekindled: imports would rise, and the dependence on capital inflows would continue," warns Emre Deliveli, economic columnist on the English language daily Hurriyet Daily

director at Teneo Intelligence. “Looking beyond 7 June, however, there is a significant risk that key economic policy-making positions will be given to individuals on the basis of their closeness and allegiance to Erdogan rather than for their competence and skills.”

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Bulgarian IPO showcases ICT strengths Andrew MacDowall in Belgrade

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n IPO by one of Southeast Europe’s biggest and most successful information and communications technology (ICT) companies will give investors the chance to participate in a sector in which Bulgaria has displayed remarkable strength in recent years.

Racking up double-figure annual growth in some cases, Bulgaria’s ICT sector is capitalising on a communist-era legacy of excellent technical education and technology development, the EU’s lowest labour costs, a favourable business climate and a strategic geographical location.

Executives at Sofia-based Sirma Group Holding (known as Sirma or SGH) hope that the share offering will not only act as a springboard for their company’s further expansion, but encourage other budding ICT firms to list on the Bulgarian Stock Exchange (BSE) and act as a fillip to the small and relatively illiquid bourse. The listing is a break from a more common model of venture capital funds investing in young, go-getting Bulgarian companies, before exiting through sales to international players.

On February 19, Sirma announced that it would launch an IPO to raise capital to fund an expansion. The company was founded in 1992 and has delivered projects on five continents for partners and clients including Microsoft, IBM, Oracle, Hewlett Packard, Siemens, and public and governmental institutions. Its flagship products include subsidiary Ontotext’s dynamic semantic publishing technology (that helps computers to parse textual data), which has been used by clients including the BBC, the Financial Times, the British Museum and AstraZeneca.

“We believe the time has come for Sirma to make the next big step in its corporate history,” SGH chief executive Tsvetan Alexiev tells bne IntelliNews. “The IPO will give us the momentum to invest in new technologies and markets as well to further develop our current successful business units.”

“I believe the successful IPO of Sirma Group Holding will also provide confidence to more Eastern European IT companies to think bigger. We believe that with a pool of successful IPOs of technology companies we can grow further the tech industry in Bulgaria,” Alexiev says, adding that the company’s strategy included “strategic investments” in companies with technology R&D capabilities with a “global impact”.

In December, Sirma’s board agreed to offer potential investors 16mn new shares, priced in a range of BGN1.20 to BGN1.65 (€0.60-0.84). The aim is to attract foreign investors who are keen to tap into the growth of a rising player

"I believe the successful IPO of Sirma Group Holding will also provide confidence to more Eastern European IT companies to think bigger" in a burgeoning sector. “Sirma can offer the regional and international investors the benefits of joining the journey of a reputable technology player from the emerging markets to becoming a strong multinational,” says Alexiev.

Pavel Ezekiev, co-founder of tech venture-capital fund NEVEQ and a former outsourcing entrepreneur, says that the dynamism of the sector in Bulgaria bodes well for investors, provided Sirma can strategise wisely. “The company operates in a sector which is 2% of GDP, up from less than 1% three to five years ago,” he tells bne IntelliNews. “Growth opportunities are there, so at this stage companies which execute best will win. I have been involved with local companies growing from 50% to 200% per annum, once they define focus,

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abandon ambitions to conquer the world with technology and focus narrowly on what the customers need.”

He cites as an example Ontotext, an affiliate of Sirma, which grew over five times in five years once the management set sights on specific product niches, from media (FT, BBC) to life sciences (AstraZeneca). He also mentions Telerik, a Sofiabased application platform developer, which was recently acquired by Nasdaq-listed Progress Software for $265mn.

Exits Deals like the Telerik one are much more common than stock market listings in the Bulgarian tech startup world. The ecosystem has classically relied on bright young graduates from institutions like the American University in Bulgaria and Sofia University, supported by angel investors such as the Bulgarian Business Angels Network (which has more than 400 projects) and seed fund incubators like Eleven and LAUNCHHub (with over €20m between them). Local VC funds like NEVEQ then come into play with the more successful companies, with international counterparts including Intel Capital (part of the global ICT giant) and Summit Partners also participating. The investors then look to exit through a sale to a major international partner.

In 2014, Nasdaq-listed TeleTech acquired Bulgaria’s leading outsourcing company, Sofica, which Ezekiev co-founded.

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TeleTech said that the takeover would help it expand its “footprint and language capabilities”. Other international players that have acquired Bulgarian startups (thus providing exits for their private-equity and VC funders) include TelecityGroup and US-based VMware. “Cash is king, while IPOs

"The company operates in a sector which is 2% of GDP, up from less than 1% three to five years ago"

are about timing, book runners, competition,” says Ezekiev.

“What happens if your top competitor came up with a major win, just as you go public? M&A of a valuable business can provide cash for attractive investment opportunities beyond the waiting game, which public markets require.”

Furthermore, the Bulgarian Stock Exchange is a relatively small and illiquid market, which took a substantial hit in the financial crisis. Its total market capitalisation is BGN7.275bn (€3.7bn). For purposes of comparison, the market cap of the Bucharest Stock Exchange is around €30bn (Romania’s economy is three times the size of Bulgaria’s), while that of the Warsaw Stock Exchange, Central and Eastern Europe’s largest bourse, is just over €300bn.

But Sirma’s Alexiev says that an IPO on the BSE fitted his company’s strategy best, while hinting at a possible future exit through a sale to an international player.

“The size of the current capital increase is relatively small, therefore the size of the IPO is insufficient to address a bigger and more liquid market,” he said. “The IPO aims to attract new capital to help SGH implement its investment strategy. Any potential sale to a foreign strategic buyer would have required a bigger stake, possibly majority, which may be the goal after we have done our job well.”

Miroslav Stoyanov, director of investment banking at local brokerage ELANA Trading, which is managing the IPO, echoes Alexiev’s view that the Sirma listing could be a harbinger for further offerings from the sector – to the benefit of the BSE. “The local stock exchange has unfortunately witnessed only a few IPOs and SPOs in the last couple of years,” Stoyanov tells bne IntelliNews. “A quality company, such as Sirma, may be the catalyst that will revive these instruments as a way to raise capital not only for companies from ICT sector, but from the entire economy. A successful IPO of Sirma will definitely send a positive signal to the rest of the players from the industry. We believe that such companies will be eager to consider that option as a way to fund their plans for development.”

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ment of Bulgaria (GERB in Bulgarian), with 84 MPs. And there was Reformist Bloc (RB), a somewhat precarious collection of right-of-centre parties, with 23 parliamentarians tied together, in large part, by profound misgivings about Borissov’s slipperiness and willingness to fudge reform.

There was also the Patriotic Front (PF), with 18 MPs, one of two rather strident nationalist formations in parliament, which RB insisted on having on side for the sake of a solid majority, where a minority government might allow Borissov to do side-deals. Signed up to a detailed coalition programme, the PF abstained from holding government office.

Photo: Cylonphoto

Bulgaria’s strange bedfellows Sandy Gill in Sofia

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lmost four months on from its painfully negotiated debut in November, the Bulgarian coalition government of Boyko Borissov is in curious shape – but the wily centre-rightist prime minister is still getting his way.

At the end of February Borissov managed to get approved a debt management deal involving a majority of around two-thirds of the country’s 240-member unicameral parliament, including one major and one minor opposition party. Some of Borissov’s friends appear less comfortable than his foes, with one nationalist junior ally involved in lacklustre abstention and another from the centre-left engaged in a last-minute turnabout that could cause major repercussions in this relatively new

formation. Borissov has prevailed for the moment: whether it bodes well for his government longer term is another matter.

Four in a bed Formed in November last year, more than a month after elections that had produced a complicated parliament with the unprecedentedly high number of eight parties, Borissov’s government had necessarily involved strange bedfellows. There was Borissov’s party Citizens for the European Develop-

The reverse was the case with the fourth party in this crowded bed, the Alternative for Bulgarian Revival (ABV in Bulgarian) – a leftist formation with 11 MPs which had broken away in early 2014 from the mainstream Bulgarian Socialist Party (BSP). Under a loose partnership agreement, ABV offered the government support and one of its most capable politicians, Ivaylo Kalfin, as social minister and deputy premier.

The outsiders This left four parties without the benefit of blankets. There was the Movement for Rights and Freedoms (DPS in Bulgarian), classically the party of Bulgaria’s ethnic Turks, though increasingly popular also with its Roma (gypsy) population.

The DPS had been rendered, for the moment, toxic by its recent record in government: an attempt to appoint its oligarch-MP Delyan Peevski to head a key security agency had provoked months of demonstrations, while Peevski was also widely perceived as connected with the collapse of the major Corporate Commercial Bank

"Strange bedfellows the governmental parties may have been, but their capacity to avoid a falling out has been quite impressive"

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Romania’s anti-corruption drive reaches ever higher

David O'Byrne in Istanbul Romanian Finance Minister Darius Valcov resigned on March 15 after being targeted in a corruption probe. Prosecutors have launched a criminal investigation into Valcov, who is suspected of accepting around €2mn in bribes between 2010 and 2013.

Valcov, finance minister since the government’s post-election reshuffle in December, is the latest high-ranking serving official to be targeted by prosecutors, who have become increasingly active in recent years. The scandal comes at a bad time for the coalition government, which has been shaky since Prime Minister Victor Ponta lost the November 2014 presidential election to centre-right candidate Klaus Iohannis. The Democratic Union of Hungarians in Romania (UDMR) defected from the ruling coalition shortly after the election, and it is not clear whether the Ponta’s Party of Social Democrats (PSD) can manage to stay in power until the next round of parliamentary elections in 2016.

Several potential replacements are being considered, but Ponta indicated that Valcov will not be replaced until he has finished work on the new Fiscal Code. The government wants to push the revised code, which will introduce a raft of tax cuts, through parliament as quickly as possible despite criticism from both the opposition and the International Monetary Fund.

Valcov was detained for questioning on March 13, according to a statement from the Romanian National Anticorruption Directorate (DNA). The accusations of influence peddling relate to Valcov’s former position as mayor of Slatina, a position he held from 2008 to 2012 before entering the senate as an MP with the ruling PSD. Valcov is accused of favouring a local company for public works contracts, in exchange for a 20% cut of the proceeds.

According to the DNA, he received a total of around €2mn. Valcov has denied the accusations.

Chief prosecutor Laura Kovesi said in February that 2014 had been a record year for the DNA, which had seen the largest number of indictments, convictions in the investigated cases, and investigations into high-level public officials. During the year, the DNA asked the parliament to approve the pre-trial detention of nine MPs and submitted 12 requests for approval of criminal investigations into ministers and former ministers.

On February 11, Romania’s High Court of Cassation and Justice approved a prosecutors’ request to detain MP and former presidential candidate Elena Udrea in police custody for 30 days. A close ally of former president Traian Basescu, Udrea is being investigated by prosecutors in several corruption cases, including the “Microsoft case”, in which software was sold to schools at above market prices. Several former ministers and other high-ranking officials have also been named in the case.

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(KTB) in June 2014. Nevertheless, with 36 MPs it had been able to make the Mephistophelean offer to Borissov of 300 days’ “unconditional” support if he’d dispense with the “un-European” PF – precisely the sort of situation the RB wanted to avoid. Borissov declined.

Then there was the BSP, with a catastrophically low contingent of 38 MPs, the partner of the DPS in government and traumatised both by government failure and by DPS assertiveness and duplicity. There was the radical nationalist Ataka (11 MPs), combining antiTurkish and anti-Roma rantings with an anti-EU, pro-Russian and economically leftist agenda that differentiated it from the rather pro-business PF. And there was the Bulgarian Democratic Centre (BDC) with 14 MPs, a formation based on the whimsically populist but oligarch-backed Bulgaria Without Censorship movement of former journalist Nikolay Barekov – who had won a European Parliament seat in June and, not too long after broke with his colleagues, it having been made clear that he now lacked support, subvention and welcome in Bulgaria. Including parliamentarians backed by controversial energy magnate Hristo Kovachki, BDC was rather directionless.

Getting along Strange bedfellows the governmental parties may have been, but their capacity to avoid a falling out has been quite impressive.

Just a couple of weeks into the government’s life, the Patriotic Front threatened to withdraw when the Reformist Bloc-aligned defence minister, Nikolay Nenchev, appointed as his deputy Orhan Ismailov, a member of a predominantly ethnic Turkish party within the Bloc. Potentially an agent of Ankara and representing a party close to Turkish President Recep Tayyip Erdogan, the PF huffed and puffed. But it accepted the compromise of leaving Ismailov in place while appointing another, PF-friendly deputy in the ministry. The PF also bore with relative equanimity rejec-

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tion in December of its nominee as chair of parliament’s cultural committee, nightclub owner Slavi Binev – a figure scandalously unacceptable to the artistic community.

Maybe the PF hasn’t felt so out of place in the government. Its obsession with an anti-refugee fence on the Turkish border has been indulged.

Curfews for refugees have been introduced. And remarks by RB-aligned health minister, Petur Moskov, in December that had NGOs and the DPS

– this was variously interpreted. It was a commonsensical measure to give people choice. It was an attempt to ease state finances by gobbling up private funds. Or it was a move by sinister DPS-linked forces to move in on the biggest of the private pension funds. Whatever the truth, it was furiously attacked by the RB and especially its radically reformist co-leader Radan Kanev. Result: potentially creative compromise. While the measure stood, the sub-legislation needed to implement it was delayed, pend-

"Meanwhile, the business of government has been going on fairly smoothly"

hopping mad will have been music to PF ears: reacting to attacks on ambulance personnel by saying that ambulances wouldn’t be sent into risky areas without protection, Moskov had observed that most such attacks took place in Roma neighbourhoods. Certainly popular with ambulance crews – and probably with a lot of ethnic Bulgarians too – Moskov got off with little more than a public suggestion from Borissov that he should choose his words more carefully.

Meanwhile, December also saw a potential bust-up between Borissov and the RB avoided – though a reminder, too, that Borissov wasn’t immune to Faustian temptations.

With pension contributions for those born after 1959 divided (unequally) between a pay-as-you-go state fund and private funds, some GERB MPs moved that citizens should be able to move funds from private to public – and the unexpected motion was passed with DPS help (along with the votes of those Kovachki). Supported retrospectively (and surely sanctioned in advance) by Borissov and his finance minister, Vladislav Goranov – a GERB man widely suspected by the “chattering classes” of closeness to the controversial Delyan Peevski

ing a general review by end-March of reform of the pension system – which badly needs it.

Meanwhile, the business of government has been going on fairly smoothly. Ministers have been busy elaborating reform plans and putting forward reform drafts – especially RB ministers, who have taken the portfolios most in need of reforms. And EU funds, restricted by Brussels’ displeasure with the government’s BSP-DPS predecessor, have begun to flow quite nicely again – especially in the bigspending ministries that have tended to go to GERB. Not all is smooth flow, though. There’s been quite some turbulence over the question of foreign debt in the last month or so. And it’s raising questions about who’s in the bed, who’s really providing the blankets, and who might find themselves feeling the chill a bit.

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Photo: yakub88

Nazarbayev’s march to victory (again) Naubet Bisenov in Almaty

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azakh President Nursultan Nazarbayev, who has ruled this Central Asian nation with an iron fist for more than a quarter of a century, has agreed to his Nur Otan party's nomination to stand for another term. The 2007 amendment to the Kazakh constitution abolished term limits for Nazarbayev, as first president, technically allowing him to stay in power for life – and at 74 years old, that may well be the case.

Nur Otan convened an unscheduled party conference in Astana on March 11 to nominate Nazarbayev as presidential candidate. This followed a request in February for the president to call a snap presidential poll to re-elect him in the face of a "new wave of the financial and economic crisis"

and "serious geopolitical tension" in the region caused by Russia's annexation of Crimea and support for rebels in eastern Ukraine. Kazakhstan will go to polls on April 26.

"I've come here to speak to you and perhaps agree with your nomination of my candidacy with only one aim of proposing [to solve] new tasks, complicated tasks that we are facing," Nazarbayev, 74, told the party conference. "As to the question of how to be president and who should be president, I've said that a person should go for election if you have a set of programmes and goals through which you want to improve the life of your people. If there is no such goal or objective, there is no need to go there."

Candidates The same day as the president accepted the nomination, he passed the Kazakh language test without a "single mistake" and submitted over half a million signatures in his support to the Central Electoral Commission. On March 15, the commission registered Nazarbayev as an official presidential candidate. Out of 27 hopefuls, five have managed to pass the language test and have started collecting signatures in their support. According to the law, they need to collect support representing 1% of the electorate (or 93,012 signatures) in two-thirds of the country's 14 regions and cities of Almaty and Astana by March 25.

While most of the official candidates are little-known independents, the

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political opposition – demoralised by the 7-year prison term of Vladimir Kozlov, leader of the opposition Alga! ("Forward!") party in 2012 in connection with the violent riots in Zhanaozen, western Kazakhstan, which claimed at least 15 lives – are not fielding a single candidate.

independent opinion in Kazakhstan that contradicts the Kremlin's official line of what’s happening in Ukraine.

Nazarbayev is facing something of a challenge from Zharylkap Kalybay, an editor of Kazakh-language magazines who is a vocal critic of Nazarbayev's pro-Russian policies and integration with Russia within the framework of the Eurasian Economic Union (EEU). Highlighting the anxiety the administration has over Kalybay's criticism of Russia, Kalybay had an issue of his Anyz Adam ("Legendary Person") magazine confiscated in April 2014. The Russian and Kazakh authorities alleged "propaganda of fascism" when the fortnightly magazine devoted its April issue to the 125th anniversary of Hitler to draw parallels between Hitler's behaviour in the 1930s to that of Putin in 2014 when Russia annexed Crimea and started supporting rebels in eastern Ukraine. Kazakhstan watchers believe the attack on Kalybay and Anyz Adam was a deliberate attempt to quash

"The authorities rightly fear Kalybay’s election campaign could provide an opportunity for him to air his anti-Kremlin views"

Kalybay passed the Kazakh language test and is now required to collect signatures to support his candidacy.

Given Nazarbayev’s high popularity level (largely thanks to state media propaganda), Kalybay won’t present a serious challenge to the president’s re-election. Nevertheless, the authorities rightly fear that his election campaign could provide an opportunity for him to air his anti-Kremlin views – and thus they may yet block him from standing (by disqualifying the signatures he collects as invalid, for example).

Challenges ahead The presidential poll was brought forward from 2016 because analysts

believe the authorities are afraid that Nazarbayev's re-election would have been hampered by the deepening economic crisis in the country and potential social discontent over falling living standards. Kazakhstan is currently facing serious economic

challenges caused by the low price of oil and rising pressure to devalue the currency, the tenge, from the weakening Russian ruble since Moscow annexed Crimea a year ago. Russia is Kazakhstan's main trading partner, accounting for a third of its imports.

Since the near 50% drop in the value of the ruble and the price of oil since 2014, the central bank has come under increasing pressure to devalue the tenge, but the government has put off the move. The National Bank of Kazakhstan devalued the tenge twice – by 25% and 19% – in 2009 and 2014,

COMMENT:

Kazakhstan – one steppe forward, two sideways Chris Weafer of Macro Advisory Kazakhstan will hold its presidential election on April 26, almost 18 months earlier than previously planned.

President Nursultan Nazarbayev said that the early election is necessary to end the uncertainty over succession and to create a greater sense of national unity at a time when the country faces a sharp slowdown in its economy. Both reasons are certainly valid; ever since the last election in 2011, the debate has been mostly about succession rather than how to boost investment and reforms, while the macro indicators are almost all in decline right now.

President Nazarbayev has been in charge of the country ever since independence back in 1991 and is not subject to any term limits. He should comfortably win the April election (he secured 95.5% of the votes at the last one) and is expected to reveal his preferred (eventual) successor early in his next term. Clear favourite for that nomination is the president’s daughter, Dariga (51 years old), and following her most likely her son, Aliyev, who is now only 40 and is precluded from the presidency until he becomes 50. So, assuming there is no attempt at a palace coup or a people’s revolt, it seems that the president’s political legacy should be safe for some time. That is something which is important not just for the president but for all of

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both times in February. The currency is now trading at slightly over KZT185 to the dollar, but in January Morgan Stanley predicted the rate will fall to KZT260 by the end of the first half of 2015.

The announcement of the snap poll has postponed a decision on devaluation until at least after the election and possibly until even after the inauguration, as it would be hard for Nazarbayev to sell his re-election as a guarantee of prosperity and stability to the population if people's savings had been wiped out.

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The economic difficulties that Kazakhstan is currently facing have also forced the government to cut its budget twice in the past four months due to the unpredictable fall in the price of oil.

The oil and gas sector generates about a quarter of the country's GDP and a half of budget revenue.

is expected to be re-elected with a similar share of the vote: anything lower than his performance in the previous election will be seen as a drop in popular support for the ageing president. Kazakhstan has never held any election judged free and fair by the Organisation for Cooperation and Security in Europe.

The re-election will give the president a vote of confidence at a time when the ruling elite is afraid that the growing deterioration of society's mood could undermine support for the president.

Nazarbayev, who was re-elected in 2011 with 95.5% of the vote on a 90% turnout,

The other key reason for the early election is the complicated international situation caused by the Russia-West standoff. Nazarbayev's re-election should help dispel concerns over the medium-term foreign policy course of the country.

those who have benefited hugely from being part of the country’s so-called elite over the past 25 years.

And that’s the problem right there, and probably the key reason for calling the election early.

Devaluation blues The economy is slowing and the country is certainly at risk of sliding into recession if the oil price were to fall below $50 per barrel for more than a few months, or Russia’s ruble was to move back towards the low point that it reached in mid-December. If that were to happen, then the government in Kazakhstan would be forced into deeper cuts than the 10% average budget cuts already announced and the devaluation of the tenge would also have to be much bigger than expected.

Central bank and other government officials have either denied a currency devaluation is “imminent” or are being deliberately vague on the issue. The fact is that, unless the oil price climbs back towards $80 per barrel and the ruble stages an equally impressive recovery, the tenge will have to be devalued by at least 25% in order to maintain the competiveness of the country’s manufacturing sectors and to prevent the budget deficit from ballooning. The economy cannot for long sustain a strong currency that only encourages people to cross the Russian border to buy cheaper goods. Over the last two months of last year, Kazakhs bought and imported over 50,000 new vehicles in Russia, which has forced the government to provide emergency aid to the country’s auto manufacturing sector.

Unlike in February 2014 when the tenge was devalued by almost 20% in a surprise move, this time it is widely expected. Apart from spending money inside the Russian border, more than two-thirds of retail deposits in

Kazakhstan were converted to a foreign currency deposit during the fourth quarter of last year.

The immediate danger is that this combination of a slowing economy – with all of the implications for inflation, wages, social payments and job security – and currency devaluation could lead to more public protests such as that which took place in the country’s oil rich region in 2011. That was directly linked to social inequality, even though it happened in a year when real GDP grew by 7.5%. That grievance is expected to get worse as the economy slides.

Last year real GDP in Kazakhstan grew by 4.3%. Retail sales was the main driver of that growth, rising by over 12%, and the consolidated budget ran a surplus equal to 3.2% of GDP. This year, because of the lower oil price average and the contagion from Russia, the government expects growth to slow to 1.5%. That is probably optimistic. If Brent were to average $55 per barrel, which implies a ruble-US dollar average of approximately RUB65 to the dollar, the growth in real GDP is expected to be no more that 0.5% and the consolidated budget would run a deficit equal to over 2% of GDP, even with the cuts already announced.

Kazakhstan’s problem, and reason why the government is so fearful of a public backlash against budget cuts and a devaluation, is that it suffers from the Russian disease of over-reliance on revenues from hydrocarbons. Its problem is actually a mixture of Russia and Azerbaijan problems in that, like the latter, it has not felt the urgency for change in the economy because it has been waiting for a big boost to hydrocarbon revenues to materially improve its financial fire-power and, therefore, investment options. In the case of the government in Baku, it is waiting for the doubling of gas export volumes to Europe from phase 2 of the Shah-Deniz gasfield, while in Astana the government

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The silence that enveloped Nazarbayev's election plans since the announcement of the election on February 25 had given rise to rampant speculation in the commercial capital, Almaty, that Nazarbayev might campaign for Dariga. The suicide of her former husband, Rakhat Aliyev, one of the most hated figures in the Kazakh establishment, has reduced objections to keeping the presidency within the family. However, Dariga's lack of executive experience – she has never been appointed regional governor or held a government post – would have still made her a controversial choice.

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"The economic difficulties that Kazakhstan is currently facing have also forced the government to cut its budget twice in the past four months"

has been waiting for oil to flow from the giant Kashagan oilfield, located just offshore in the Caspian Sea.

All three of those numbers are very similar to their counterparts in the Russian economy.

At full production that field is capable of doubling the country’s current oil export volume to close on 3mn barrels per day. That would mean over $33bn of additional oil revenue (at today’s price) to be shared between the producers and the national budget. The problem is that the project has been plagued with expensive delays and is now expected to start producing only in late 2016 or early 2017, ie. about 10 years late.

Year of social stability?

The question for both portfolio and business investors is also similar to that being asked about Russia: “is this the crisis which finally shakes the complacency and leads to a more serious effort to attract investment, reform the economy and start to reduce oil and gas tax vulnerability?”

It’s not that the government is unaware of the need for reforms and economic diversification; over the past few years it has adopted no less than five major development programmes aimed at, eg. boosting the agriculture sector, creating a more diverse economy with greater wealth distribution, and substantially expanding and modernizing the country’s infrastructure network.

Of those targets the only area where there has been any real progress is in the transport infrastructure. The country has built or upgraded thousands of kilometres of roads and railroads, and has already seen a big boost in road freight transiting the country from China to Russia and to other Central Asian states. China has been a big investor in the country’s transport infrastructure, including the transport of oil and gas into its western province, as the Beijing government pursues its goal of creating a latter day silk road to Europe and the Middle East via Kazakhstan and Russia.

But the success in the transport sector has not materially altered the economy or created any diversification. Over 30% of GDP is still linked to the oil and gas sectors today. Over 50% of last year’s budget revenues came from these two sectors, which also account for approximately 60% of the value of exports.

That brings us back to the reason why the president has called the election early, or rather leaves us with a question as to the real reason for the move: is it because the president fears the possibility of a public backlash against budget cuts, a worsening of economic conditions and the expected currency devaluation? Or, is it because he wants to get more serious about the development plans and needs to be rid of the distraction of succession in order to get the government and elites more focused on these projects?

Kazakhstan undoubtedly has huge potential for business development and for investors. True its population of just over 17mn is small, especially for a country the size of Europe. But it has a very sizeable mineral resource base and Kashagan will eventually start producing. It also has huge agriculture potential and is right up against the country with a growing appetite for both food and materials imports.

One of its biggest resources is its location, between China, which needs to export more efficiently and import everbigger volumes of raw materials, and Russia, Europe and the Gulf region. All it needs is social stability and political determination to get on with the job. Maybe this is the year it starts.

Chris Weafer is Senior Partner at Macro Advisory, which offers bespoke Russia-CIS consulting

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Be human 2.0 The departure of Yergaliyeva, 63, who is a brand in her own right in Kazakh journalism, will not undermine the magazine's "principles of objectivity and independence", and the new publication will continue to publish without sponsored material or adverts, the new editor Sharipbayev says. If Adam is indeed objective and independent, it will stand out in the Kazakh media sector because most "publications one way or another are financed by either financial groups or the state and depend on them," Sharipbayev tells bne IntelliNews. "Advertisers shy away from us because we have a stance that our publication offers material without fear of reprisal from financial groups or government officials."

Reincarnation of Adam in Kazakhstan Naubet Bisenov in Almaty

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uppressing critical voices is nothing new in authoritarian Kazakhstan, but the latest attack on one of the few remaining independent media outlets has shades of the Kremlin's attempt to control the information space following its offensive against Ukraine.

to get rid of Yergaliyeva, who explains that she decided to leave the media project, which had been run under seven different titles over the past decade, after the authorities took issue with her view on the military conflict in eastern Ukraine that contradicted the Kremlin line on the invasion and war there.

On March 13, a weekly magazine that was previously published as Adam Bol (in Kazakh "Be Human") until it was closed down by a November court ruling, hit the newsstands under the new title of Adam. But the new incarnation was without the media project’s longstanding editor and trenchant critic of President Nursultan Nazarbayev and his administration, Gulzhan Yergaliyeva.

Yergaliyeva decided to hand the reins to her son Ayan Sharipbayev and in February she announced that the publisher had received a new certificate of registration for the magazine under the name Adam. "The licence to publish Adam is the authorities' indirect admission that Adam Bol was closed down illegally with bias and on political orders," she said. "I don't anymore want this project to be a hostage of [the authorities'] settling personal scores with me, which is why I've decided to leave the post of editor-in-chief."

The court action by the authorities is widely believed to have been designed

The lack of advertisers means that the new magazine will have to find other resources to stay afloat. The choice of the title, Adam, is one of the ways to capitalise on the magazine's popular brand, which before Adam Bol was published as Adam Reader's and nuradam.kz (a pun on the Nur prefix, which is associated with Nazarbayev like his party Nur Otan and policy Nurly Zhol). "When readers look for our magazine they don't ask for Adam Bol or Adam Reader's, they simply ask for Adam," Sharipbayev explains.

The magazine's popularity with readers who seek an alternative to the government propaganda gives it a relatively large circulation for such a small media market. Yergaliyeva told bne Intellinews in February that the magazine with a circulation of slightly over 16,000 before its closure had covered 85% of its costs and would have been self-sufficient within the following few months, adding 500 copies a week.

The shortfall, her son explains to bne IntelliNews, was covered by his mother’s savings and the funds that she received as compensation for the involuntary sale of her enormously popular weekly Svoboda Slova ("Freedom of Speech") in 2011, which sold nearly 100,000 copies every week.

Sharipbayev notes that for his magazine to be self-sufficient it needs to have a

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circulation of 20,000, which he hopes can be reached within the next four or five months. The first issue of Adam, published on March 13, had a print run of 15,150.

A newspaper seller in central Almaty said that she had ordered 20 copies of Adam to test the demand. "I managed to sell half of it by lunchtime," she bragged to bne IntelliNews. "It is Adam and there is huge demand for it."

The new editor also said the drive to be self-sufficient had forced the magazine to minimise costs by stopping the use of

distribution of Adam is not even throughout the country: it is mostly distributed in the politically active Almaty, the densely populated southern regions and the oil-rich west, where a labour conflict at an oilfield led to violent clashes in the town of Zhanaozen between protesters and the security forces in December 2011, resulting in at least 15 deaths. There is, however, little demand for the magazine in the country's north, including the capital city of Astana, "which is dangerously apolitical,” says Sharipbayev. "The left bank of Astana [where government buildings are housed] is not apolitical because they are

"The licence to publish Adam is the authorities' indirect admission that Adam Bol was closed down illegally with bias and on political orders"

equipment that needed costly servicing and laying off some staff. The editorial office is now comprised of just seven full-time staff members – five writers, a designer and a manager who doubles as secretary and accountant. "We have a number of loyal contributors who agree to publish their articles without pay and wait until we are able to do so," Sharipbayev says. ... and go digital Sharipbayev explains that Adam Bol did not maintain an online presence because the authorities could easily block access to it. According to Freedom House's “Freedom of the Net Index”, Kazakhstan ranks "partly free" with a score of 60 out of 100 (with 0 being the best score, 100 the worst). In 2014, the country adopted legislation that allows the authorities to block access to websites without even obtaining a court ruling.

At the same time, the three months that the magazine was not published since the closure allowed the publishers to think about expanding access to the magazine by going digital.

Sharipbayev explains that the geographic

not interested, but because there is an unwritten ban on liberalism."

The demographics of Kazakhstan’s regions also explain the reach of the magazine: Kazakhstan's south and west are mostly Kazakh-speaking, which means that they are less inclined to buy the government propaganda relayed by the state-run media, whereas the country's north and east are mostly Russian-speakers, who are more prone to believe that freedom and democracy lead to events like those in Ukraine and that Nazarbayev is a guarantor of prosperity and stability.

So in order to boost access to its content in the regions and abroad, the magazine has applied for a grant to develop a mobile application from the Soros Foundation-Kazakhstan. In contrast to the internet, the authorities cannot control access to the Apple Store or Google Play Store.

The Kremlin's hand Magazine editors and other media observers blame the closure of Adam Bol on meddling by Russia in Kazakhstan's internal affairs. Adam Bol had been

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critical of the Kremlin’s annexation of Crimea and its support for the rebels in eastern Ukraine. And when the magazine presented an alternative view on the military conflict in an interview with Kazakh activist Aydos Sadykov who resides in Ukraine, pressure from the Kremlin forced Astana to shut it down, critics claim.

Sharipbayev points out that since the beginning of the Euromaidan protests in Kyiv the Kremlin's view on the events in Ukraine have predominated in Kazakh media. "This point of view has been relayed to Kazakhstan from all [Russian] television channels which are present here widely," Sharipbayev notes. "They [the Kremlin] justified their aggression with the imaginary fight against imaginary fascism."

The editor draws parallels between the attack on Adam Bol and the hysteria in the Russian-language press around the Kazakh-language Anyz Adam's April 2014 issue devoted to the 125th anniversary of Hitler's birthday, which the Russian Foreign Ministry and Kazakh war veterans condemned as "absolutely unacceptable".

The magazine's editor-in-chief, Zharylkap Kalybay, said last year that his magazine was simply looking at how Putin's Russia had adopted a "nationalist-chauvinist ideology" and was covering the cases of racism in today’s Russia. "These are facts, everyone knows about them.

Unfortunately, if we are guilty because we just wrote about this, then what?

Are we living in Kazakhstan or in Russia?" Kalybay asked.

"All of a sudden, the Russian-speaking population realised that the Kazakhlanguage media has influence and has its own views," says Sharipbayev, in reference to the widely-held belief of the Russian-speaking population that the Kazakh-language media and critical publications of the government are a niche market and enjoy little attention.

If the circulation figures of the latest incarnation of Adam are sustained, that belief is clearly misplaced.

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and opposition leader] politician Rakhat Aliyev have lost their lives in the former post-Soviet space, and regardless on whose orders they were killed, these events blacken the political atmosphere in their countries," the leader of Islamic Revival, Muhiddin Kabiri, told the Asia-Plus news agency.

Tajik opposition dies in the street and in parliament Naubet Bisenov in Almaty

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or some, there’s no doubt who was to blame for the murder of the Tajik tycoon and opposition leader Umarali Quvvatov. A banner unfolded during Quvvatov’s funeral at Istanbul's Kilyos cemetery on March 9 read: "The killer of Tajik opposition leader, martyr Umarali Quvvatov, is dictator Emomali Rahmon”.

The timing of the businessman's murder, on an Istanbul street on the night of March 5, coincided with the parliamentary elections in Tajikistan on March 1, which were overwhelmingly won by

Rahmon's ruling party but judged by the Organisation for Security and Co-operation in Europe (OSCE) as failing to meet basic democratic standards. So it was no surprise that the political opposition has labelled the assassination as "political".

The country's main opposition party, Islamic Revival, drew parallels between Quvvatov's killing and the recent violent deaths of Russian and Kazakh politicians. "Like Quvvatov, opposition-minded Russian politician Boris Nemtsov and Kazakh [the president's former son-in-law

On March 6, Amnesty International said Quvvatov and his family had previously told the London-based human rights group that they had received threats and there had been 'orders' to harm them, allegedly from the highest levels of the Tajik government. "Umarali Quvvatov’s killing sends a chilling and extreme message to Tajikistani political dissenters both at home and abroad. The Turkish authorities must lead an impartial, effective and prompt investigation into his unlawful killing, reveal the full truth, and bring the perpetrators to justice,” Denis Krivosheev, Amnesty International’s deputy Europe and Central Asia programme director, said in a statement. "We have received reports of death threats and attempted assassinations of dissenters from Tajikistan in foreign countries in recent years, but this is the first actual killing of a Tajikistani political activist.

It begs the immediate question: how many more are at risk?"

Quvvatov was killed by an identified man at 22:30 local time in Istanbul's Fatih district. According to RFE/RL, Turkish police have detained three Tajik men on suspicion of involvement in the murder.

Falling out Quvvatov, a businessman and one-time associate of the president's son-in-law Shamsullo Sohibov, had been living abroad since 2012, when he left the country first for Russia and then for the United Arab Emirates. Tajikistan requested his extradition from the UAE in 2012 on suspicion of committing fraud, and he was detained in Dubai and spent 10 months in prison in 2013, but was not extradited to Tajikistan.

UAE law does not allow extradition to

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a country where a defendant can be tortured or killed. After that Quvvatov moved to Turkey where he was jailed in December for violating visa rules.

He was released on February 4 and killed a month later.

Together with Sohibov, Quvvatov had been involved in supplying fuel and lubricants to Nato forces in Afghanistan between 2001 and 2012,

Reform party two seats (7.6%) and the Socialist Party one (5.5%).

To enter parliament, there is a 5% electoral threshold, so Islamic Revival failed to clear the hurdle as, according to the Central Commission for Elections and Referenda, it received only 87,112 votes, or 2.3% of the total. Another party critical of the government – the Social Democratic

"We have received reports of death threats and attempted assassinations of dissenters from Tajikistan in foreign countries"

but a conflict with his partner forced him to leave the country.

In 2012 he set up the Group 24 opposition movement, which the Supreme Court of Tajikistan labelled as "extremist" and banned its activities in the country in October.

The movement called for large-scale protests against the Tajik authorities on social media. Quvvatov was also accused of fraud, kidnapping and misappropriation of property.

On March 4 a court in the Tajik capital, Dushanbe, sentenced a member of Group 24, Umedjon Salihov, to 17.5 years in prison on charges of extremism and insulting the president.

Election farce Quvvatov was murdered four days after the elections in Tajikistan, in which Rahmon's ruling People’s Democratic Party of Tajikistan won 51 out of the 63 seats in the lower chamber, the Majilisi Namoyandagon or Assembly of Representatives. The ruling party won 35 out of 41 singleseat constituencies and a further 16 mandates out of 22 available on party lists. It won 65.2% of the vote on a turnout of 87.7%. The pro-presidential Agrarian party received three seats (11.8% of the vote), the Economic

party – got 18,875 votes or 0.5%. The Communist Party and Democratic Party also failed to get into parliament on party lists with 2.3% and 1.7% of the vote respectively. In the outgoing parliament, which was elected in 2010, the Islamic Revival party had held two seats and the Communists had one seat – all won on party lists.

According to the election commission, the Agrarian Party won a further two seats in parliament in single-

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Observer Mission said on March 2.

"Engagement by various political forces in this campaign was, unfortunately, not enough to result in truly competitive elections. Uneven treatment by the authorities and remaining legal restrictions limited the space for debate on the real problems facing Tajikistan," said Marietta Tidei, special coordinator and leader of the OSCE observer mission. "The voters, many of whom I was pleased to speak with yesterday, deserve more genuine discussion about the future of their country."

"I was pleased to observe that the vote took place in a calm and peaceful manner, however significant shortcomings, including multiple voting and ballot box stuffing, and disregard of counting procedures meant that an honest count could not be guaranteed," said Norbert Neuser, head of the European Parliament delegation. "I encourage the authorities to introduce the changes necessary to make the voting procedure transparent and credible."

Indirectly pointing to the election being a foregone conclusion, the leader of the Communists, Shodi Shabdolov, said the elect commission had denied to him that his party would get only 3% of the vote. "[Commission

"I don't know who advises the president, but it is a mistake and it will have a negative impact" seat constituencies, as did the Communists; while the Economic Reform party won one constituency.

The election campaign was marred by numerous irregularities and there were concerns that the votes would be rigged on election day. Despite opposition participation in the election, it took place in a restricted political space and failed to provide a level playing field for candidates, the OSCE Office for Democratic Institutions and Human Rights (OSCE/ODIHR) Election

chairman] Shermuhammad Shohiyon told us that this was just rumours and we would get our mandate in parliament. This way he simply forced us to keep meeting voters so they would go to the polls," Shabdolov said. "I don't know who advises the president, but it is a mistake and it will have a negative impact."

He said his party would not contest the results of the election because the law enforcement agencies and judiciary were dependent on the president. "We

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A crap hedge The 40% plunge in the currency of Kazakhstan's largest supplier, Russia, has prompted a Kazakh shopping spree in the neighbouring country.

Kazakh shoppers have flooded Russian border areas to snap up bargains from cars and furniture to white goods and foodstuffs – and also toilets.

Bloomberg reports that one Kazakh businessman who sells toilets and urinals in the country's commercial hub, Almaty, has doubled his orders for Russian-made products in order to take advantage of the weak ruble and put pressure on his competitors. While the Russian ruble has fluctuated unpredictably in the past year under the weight of Western sanctions and the low price of oil, Kazakh authorities have maintained a tight grip on the tenge's exchange rate ahead of an early presidential election on April 26 – though after that who knows, thus businesses are taking advantage of the situation while they can.

“We spent the equivalent of about $200,000 to double our stock,” the businessman Marat Mukhamedov, 37, told Bloomberg. “Now, we have a price advantage against some of the competition.”

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will not complain to anyone because all courts and prosecutors are subordinate to the head of the country, our President Emomali Rahmon, himself.”

Unlike his authoritarian peers in Uzbekistan, Kazakhstan and Turkmenistan, Rahmon has allowed his political opponents to stand for parliament. But fearing that the opposition poses a real threat to the president's power, the authorities employ a wide range of tactics to undermine opposition parties and candidates. This time there were numerous restrictions placed on them and the government even called on mosques to promote the ruling party and discredit the main opposition force, which is, ironically, the Islamic Revival party.

RFE/RL said that it had obtained the text of a sermon penned by the Tajik Committee for Religious Affairs, a government body overseeing the religious sphere, which was designed to be used by imams of Tajik mosques during Friday prayers on February 27 – the last Friday before the election. It harshly criticised Islamic Revival and praised Rahmon's People's Democratic party. According to the country's constitution, religion is separated from the state.

The authorities also disqualified opposition candidates – more than half of the 160 candidates fielded by Islamic Revival were disqualified by the electoral authorities, according to AFP – and allegations of sexual misconduct against Islamist party candidates were circulated on social media and state

television. At least two candidates from the Social Democrats were charged to prevent them from standing in the election, EurasiaNet.org said. At the same time, the OSCE said in its interim report in February that Islamic Revival had lodged a complaint that the electoral authorities had registered at least two candidates – presumably from parties loyal to Rahmon – who had criminal records.

The 63 seats in the lower chamber were contested by 288 candidates, fielded by eight political parties registered in the country, including 103 candidates contesting 22 seats on party lists and 185 candidates contesting 41 seats in single-seat constituencies.

In the 2010 parliamentary election, Rahmon's People's Democratic Party won 70.6% of the vote (45 seats) and the Islamists 8.2% (two seats), with the Communist party, the Agrarian party and the Economic Reforms party winning two seats each. Three other parties – the Democratic Party, the Socialist Party and the Social Democratic Party were not represented in the previous parliament, according to the OSCE/ODIHR. Tajikistan, like Kazakhstan, Uzbekistan and Turkmenistan, has never held a parliamentary or presidential election considered by the OSCE as free and fair.

The electoral commission said more than 4.3mn Tajik citizens had registered to vote in nearly 3,200 polling stations.

A further 35 polling stations were set up in 27 countries for Tajiks living abroad.

"The government even called on mosques to promote the ruling party and discredit the main opposition force, which is, ironically, the Islamic Revival party"

Eurasia

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and copper. The country’s economic growth slowed to just 7.8% last year – still relatively robust but a far below the world-beating 17.5% of three years ago – and a big factor has been the waning interest in the country's minerals and mining sector amid public disputes with investors.

But this latest attempt at generating interest in the mining sector with new exploration opportunities hasn't resulted in any sea change in investors' appetite for Mongolia’s vast natural resources. The government's claims of open and transparent auctions to win licences to explore 10.1mn hectares of land have been refuted by foreign investors, who claim the process has been unfair and opaque.

A bad smell in Mongolian mine auctions the government is making available to exploration. “So even if I fill out the form fast, it's not enough.”

A former deputy mining minister, Oyun Erdenebulgan, told bne IntelliNews last September that Mongolia could attract up to $1.5bn in 2015 from investments into exploration. But the more likely end result, investors say, is that the licences will fall into the hands of speculators who will sit on them until they can be flipped for a tidy profit.

Baatar reckons he and his uncle were outclassed by companies that were armed with more capital, technological

Mongolia had drawn up strict criteria for the kind of companies that could compete for the licences in order to bar

Terrence Edwards in Ulaanbaatar

”H

ow fast can you type?” That was the question Baatar received in a phone call early one February morning. It was the first time in more than four years that Mongolia was accepting new applications for mineral exploration licences, and his uncle headed one of dozens of mining outfits scrambling to get their application submitted online before everyone else.

Although Baatar – who did not want his real name printed over fears what might happen to his uncle's company – is technologically savvy and light on his fingers with the keyboard, his skills were of no help. The Mineral Resources Authority of Mongolia (MRAM) was no longer accepting applications by the time he made his first go at it. “There's many coordinates, but many overlap, too,” says Baatar of the map locations

Problems from day one Although the government boasted that the online platform for the auctions would prevent corruption, investors claim the whole process has been hobbled by dodgy implementation and unfair advantages given to certain groups.

"Even if I fill out the form fast, it's not enough" might and – crucially – political connections.

Mongolia had hoped to attract a mass of new foreign investment when it announced last year that it was lifting a 2010 moratorium for new licences to explore for minerals such as gold

speculators and poor-quality investors from participating. That included clean criminal and tax records, no outstanding debts to government agencies such as the social insurance agency, and a bank statement showing that the company held enough funds to undertake a legitimate exploration operation.

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However, the strict criteria were dropped just days before the applications process was launched. The requirements had “created quite an uproar [which] essentially pressured MRAM to drop those requirements by Friday night,” read an internal memo of one of the mining companies involved that was shared with bne IntelliNews on condition that the firm’s name would not be revealed.

MRAM has accepted applications on select days for a pre-selected set of coordinates since late January. But a disastrous launch of the website because of technical problems soured investors from the outset. Investors complained that the website was down

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that it was looking into the licensing process by MRAM, but declined to comment while the investigation was ongoing. MRAM was contacted for comment but has not responded in time before publication.

Reputation on the line For many investors, the licence application process has been more of the same rather than the new start that they were promised.

Mongolia has struggled to rid itself of the whiff of corruption that swirls around its business environment. A report on corruption published in March 2014 by local pollster the Sant Maral Foundation reported that nearly

"The strict criteria were dropped just days before the applications process was launched"

for the first ten minutes on the morning of launch day, on January 26. And many foreign and local investors were enraged when they failed to even access the website before it closed out 19 minutes after its launch, when the first 30 applications had been received.

Shortly before MRAM began accepting applications, local software companies had begun touting offers that their software could guarantee that applications would reach MRAM within the window. An IT engineer working for a mining company that was applying for licences said he knew of one piece of software that cost MNT4mn to buy, plus an additional MNT500,000 per application that was submitted to MRAM. “I don't think it's illegal, but I don't know how much of a conflict of interest it is either for the software developer. Maybe they have contacts with MRAM,” he said, adding that the window has been expanded to accept the first 120 applications, but that takes less than a minute to happen.

Mongolia's Agency for Fair Competition and Consumer Protections confirmed

30% of respondents said that giving bribes would help an individual or company beat “unjust regulations,” while 38.2% said bribes were needed to overcome bureaucracy.

Mongolia's reputation as a place for doing business has also suffered from

the numerous disputes with miners.

The government is still deadlocked over the $127mn (later reduced to $30mn) in various taxes and penalties that it says it’s owed for the country's largest project, Rio Tinto's Oyu Tolgoi copper-gold mine. Three foreign former employees of another Rio asset, SouthGobi Resources, received prison sentences for tax evasion. In both instances the charges have been denied.

Disputes in the mining sector are no doubt headaches for Mongolia's top government officials, who some investors believe genuinely seem interested in directing change.

Mongolia's president pardoned the three SouthGobi employees a month into their sentences, each of which was for more than five years. And Prime Minister Chimed Saikhanbileg has been careful not to harp on about the tax dispute at Oyu Tolgoi, preferring to stick to the idea that Mongolia is willing to do whatever it takes to end the dispute and get work at the project started again.

Despite these efforts, the influence of government chiefs can only reach so far into the depths of Mongolia's byzantine bureaucracy. How well it responds to the corruption allegations will send a message as to the kind of investors it wants to see return to the country.

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Special Report: Exchange-traded funds

Special report I 67

bne April 2015

Russia-focused ETFs not for the faint of heart Alex Nowacki in Warsaw

H

aving weathered a horrendous year of geopolitical and macroeconomic instability, Russia-focused exchange-traded funds (ETFs) are enjoying a strong rebound. But even as investors pile in, fund managers warn the moment in the sun might not last long.

The perfect storm that hit investors in Russian assets in the wake of the Kremlin’s annexation of the Ukrainian region of Crimea in March 2014 served as something of a test of the robustness of the ETF model in emerging markets, say fund managers.

ETFs, essentially index-tracking mutual funds that are traded on exchanges con-

tinuously like equities, are potentially exposed to a serious liquidity mismatch between their assets, which may not always be easy to offload at a short notice, and their shares, which investors

portfolio investors in the overall market can make for enhanced volatility.

So the developments in Russia over the past 12 months have given grounds for

“Volatility is high even for the largest of Russocentric ETFs� can sell at any point. This worry is especially prominent in emerging markets, where risks tend to be larger than in the developed countries, liquidity lower and a relatively large proportion of foreign

concern that ETF investors could dump their holdings at a rate that would force fund managers into panic selling, leading both to greater market volatility and fund insolvencies, warns a manager

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at one of the largest ETF firms. As the markets fretted about the mounting tensions and even the prospect of war, economic sanctions followed, both from the US and, more painfully, from the EU. But it was the simultaneous rapid slide in the price of oil that really sent the Russian ruble into a tailspin, forcing Russia to mobilise its foreign-exchange reserves and created the potential for market panic.

But nothing of the sort materialised, note several fund managers. Even as some Russia-focused ETFs lost half their value, in line with the ruble’s dire performance, investors mostly held their nerve. When more investors want to sell shares in an ETF than to buy them, the fund turns to an “authorised participant” (AP), usually a bank, which acts as market maker: the AP sells shares it holds in the ETF to the fund and in return receives a bundle of the underlying assets, known as a “redemption basket”. Even when the ruble seemed in free-fall in the final weeks of last year, trades between investors comfortably outnumbered the so-called “primary trades” between the funds and their APs, say several fund managers.

Since they are not stock pickers, instead passively tracking underlying indices, ETFs have little influence over the per-

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Return of interest Although the performance of each fund is determined by the underlying index, fund managers can show their reading of the market by choosing assets to underlie specific funds. Thus Direxion Investments, a US firm, has set up a Daily Russia Bear 3X fund, whose performance has unsurprisingly been reverse to that of most Russia-focused funds. After healthy gains last year, the fund is down nearly 50% since the beginning of 2015 (see table). In stark contrast, Direxion’s triple-leveraged Daily Russia Bull 3X fund has seen a 16% jump in the year to date, while still remaining at a mere quarter of the value it boasted 12 months ago.

As leveraged plays on an already volatile market, both Direxion funds are openly high-risk, high-return propositions, says a manager with the firm. As of March 6, the fund’s 52-week range was $9.4464.70, reflecting the potential for wild price swings.

Volatility is high even for the largest of Russocentric ETFs, Market Vectors' Russia ETF, which invests in large-cap Russian stocks. Its performance over the first two months of this year put it at the top of the global league tables, although it was more subdued during March. The fund’s assets were up 19% in the January-February period, while the

“You may like what happened in February, but you can’t give me a good reason why it couldn’t be reversed in a week” formance of individual funds, though they offer retail investors relatively cheap exposure to interesting assets thanks to low management fees. These tend to be slightly higher in emergingmarket ETFs, which can have higher operating costs due to lower liquidity and harder market access, including higher fees for trades. But the differences tend not to be very significant and management fees remain well below the 1-2% typically charged by mutual funds.

number of shares outstanding soared 14% to an all-time high of 107.3mn, driving total assets up to $1.88bn. ETFs investing in Russian stocks and bonds collected $222.2mn in February, according to Bloomberg, leading emerging markets by a wide margin.

Market Vectors is glad it persisted with the Russian market through the annus horribilis of 2014 and has since seen a return of interest, says Ferat Oeztuerk, a manager at the firm.

While the share of Russian assets has declined over the past 12 months across the funds managed by Market Vectors, that has not been true for all funds or asset categories, says Oeztuerk. Since the beginning of this year, investors have shown themselves keen to take advantage of the extremely low valuations of Russian equities. Stocks on the Russia Trading System (RTS) trade at 5.9-times projected 12-month earnings, less than half of the levels for even the poorest performers among developed markets.

Investing in Russia can often seem like a leveraged bet on oil prices, notes Oeztuerk, but Market Vectors is keen on the potential of the Russian consumer.

With consumer spending at a mere 50% of GDP, among the lowest of all big economies, there is potential for those companies that cater to the Russian consumer.

But a manager at Black Rock, the world’s largest manager of ETFs, retorts: “That is an extremely optimistic view”. He explains that the country’s extreme disparities in wealth make for a small group of high spenders with second homes in London and savings parked in tax havens, while many people can ill afford to buy anything but necessities.

And the fragile fiscal position means the state will struggle to support incomes in the way it has over the past years, which will also put a lid on consumer spending growth. “There are strong structural reasons for the low contribution of consumer spending to the Russian economic growth,” he says. “Like it or not, Russia remains primarily a play on the oil price.”

Volatile days are here to stay While the past 12 months have been extreme, wild swings of sentiment are nothing new to managers of Russiafocused funds, says the manager at Black Rock, whose iShares MSCI Russia Capped fund has returned 9% since the beginning of the year, while remaining nearly a quarter down on a year earlier.

Russian funds have long displayed elevated volatility even by emerging-market standards, with Black Rock’s product over 1,000 basis points (bp) more volatile than is typical for its other funds.

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speculation about his health, a coup or even death, served to underline the continuing political risks, says a fund manager at Vanguard, one of the world’s largest ETF managers, which does not run a purely Russian fund.

The Market Vectors Russia ETF has a three-year standard deviation of over 27% or 1,200bp higher than the average for the MSCI Emerging Markets Index over the same period, the manager points out. “That is the price of investing in Russian ETFs,” he says.

“I don’t think it’s going to change in the near future. It’s not for the faint of heart.”

Moreover, the country remains fragile from a macroeconomic standpoint with high inflation, continuing recession and

“That is the price of investing in Russian ETFs – it’s not for the faint of heart”

Investors have been cheering a stronger ruble and firming oil prices, but the recent “farce” of President Vladimir Putin’s disappearance from public view for a week, which prompted widespread

a wobbly currency. The central bank reserves are down 26% on a year ago, the Vanguard manager notes. “You may like what happened in February, but you can’t give me a good reason why it couldn’t be

reversed in a week,” he says, referring to the ruble’s 14% gain in that month. Last year, the Russian currency was down 46%.

Russia-focused EFTs offer investors a great opportunity for quick returns that many, especially small investors, may struggle to find, says the Direxion manager. Equally, however, they require an ability and willingness to absorb large short-term losses, which may be recouped over a longer time period.

“One of Direxion’s funds is going to be a star performer at any given time,” says a fund manager at another firm. “But you may not necessarily make any money, unless you can tell, which one. And that, to me, seems impossible.”

Until, perhaps, someone comes up with an ETF that instead of tracking a Russian stock or bond index has an index of its volatility as its underlying asset. But that would be an entirely different financial product.

Performance of Russia-focused ETF Name

Category

Year-to-date

1M % return

3M % return

1Y % return

Trading volume

% return Direxion Daily Russia Bull 3X ETF (RUSL)

Trading-Leveraged Equity

15.96

-28.94

-5.42

-76.54

1,535,087

Market Vectors® Russia ETF (RSX)

Miscellaneous Region

11.14

-9.47

6.99

-24.59

11,460,164

SPDR® S&P Russia ETF (RBL)

Miscellaneous Region

8.77

-10.54

5.78

-25

25,948

iShares MSCI Russia Capped (ERUS)

Miscellaneous Region

8.63

-9.91

8.63

-22.34

492,170

Market Vectors® Russia Small-Cap ETF (RSXJ)

Miscellaneous Region

6.35

-5.8

10.5

-25.77

52,177

Direxion Daily Russia Bear 3X ETF (RUSS)

Trading-Inverse Equity

-47.4

25.79

-53.38

-29.42

691,218

Source: Morningstar

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BEYOND THE BOSPHORUS:

Erdogan – a victim of hubris Suna Erdem in London

T

hey’re banning Minecraft in Turkey. Great, I’m moving back. Shame they had to un-ban Twitter and YouTube.

They should go the whole hog and prohibit the internet – then we parents could flock there, safe in the knowledge our children won’t be trolled, shamed or groomed online.

But paranoid parents apart, most would judge a ban on Minecraft to be ridiculous. It’s also arbitrary. If you worry about violent games, ban Call of Duty, not a children’s construction game where they blow up the occasional pig.

However, like many eye-catching stories that emanate from Turkey, it’s not quite true.

Much uttered about Turkey in recent years has the flavour of a joke – stories of criminalising adultery and banning abortions turned out to be false. The hapless parliamentary speaker Bülent Arınç recently said ludicrously that women shouldn’t laugh in public, and an outcry ensued when the government restricted alcohol advertising. Yet women still guffaw with impunity and a friend who owns a restaurant says obtaining an alcohol licence is easier than ever.

These stories are entertaining – and I had great fun during my years as Turkey correspondent of The Times – but the regular reference to the government’s perceived Islamist ambitions often disguises what’s really happening.

Prime minister-turned-President Recep Tayyip Erdogan’s party came to power in 2002 and was for many years one of Turkey’s best ever governments. It presided over a remarkable economic turnaround and improved Turkey’s international standing.

I’ve interviewed Erdogan a few times, and his charisma is undeniable. But he’s also like many authoritarian Turkish men I knew and was irritated by while growing up there. He

delights in a brashness he believes to be authentic and is quick to take umbrage – as the many he sued for satirizing him can testify. If you dent their pride, these men burn boats.

Early on, Erdogan broke taboos and invested much political capital in changing Turkey’s hard line policy on Cyprus and securing candidacy for EU membership. He felt snubbed when Europe allowed Cyprus to become a veto-wielding EU member while still divided, and again when Angela Merkel and Nicolas

“Erdogan looks like he has fallen prey to hubris after three terms in power, and neglected the things that matter”

Sarkozy openly opposed full Turkish membership, reinforcing his view that the EU doesn’t want a Muslim state in the fold.

At home, Erdogan was also under siege from a vocal urbanised elite worried he would put their daughters in headscarves. I spent many a dinner party arguing this was unlikely and was called desperately naïve by people who believe 9/11 was a conspiracy by “the CIA and the Jews”.

The fears persisted, and in 2008 the Constitutional Court nearly shut down Erdogan’s Justice and Development Party (AK) for alleged Islamism. Then came the shock of military intervention in the presidential elections. Erdogan’s government stormed the ensuing snap polls, but his paranoia increased as he felt slighted at home and abroad.

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This is where his politics started going wrong, and the wild stories written about him began to converge with the truth.

Erdogan teamed up with a wily Muslim cleric to neuter the politically overactive military and its anti-democracy supporters. But the cause expanded to encompass those Erdogan or his allies simply didn’t like. He also took control of much of the media through his cronies. The brutal crackdown on young anti-government protesters in Istanbul’s Gezi Park two years ago was a defining moment. From campaigning against the media-controlling establishment, Erdogan suddenly personified everything he was supposed to be fighting against.

With eyes only for his grassroots supporters, Erdogan is now surrounded by sycophants. “He doesn’t care any more what people think of him,” one of his close aides told me, “or what the West thinks.” One wonders what might have happened if he’d felt more welcomed by the EU – whose demands on human rights and the economy had been a great driver for Turkey’s early 21st century renaissance.

Economic strength Despite his international fall from grace, Erdogan clings on.

Detractors talk about his iron grip, crushing of dissent and promotion of backward, knuckle-dragging Islamists. But the main reason his support remains strong is the economy. It was no coincidence AK was elected in 2002 after Turkey’s worst post-war economic crisis – and, under Erdogan, GDP per head has grown from $3,000 into double figures. Many voters care little about YouTube bans, but like what they see – new roads, bridges, shopping centres, public transport, houses, mortgages, landscaped kerbsides, the power of the lira in their pocket…

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When I worked in Turkey for Reuters in the 1990s – dark years of state violence and a dismal economy – my wages increased by several million lira each month. AK has managed to knock six zeroes off the currency. A senior opposition politician told me that even his mother won’t support him: “She doesn’t care how rude Erdogan is – as long as she can afford better vegetables at the market, he gets her vote.”

Turkey is on tenterhooks, as the economy is now struggling.

Moody’s has the country on its lowest investment grade rating, Baa3, with a negative outlook. The current account deficit remains wide and both Fitch and Standard & Poor’s could also soon issue a downgrade. This is probably why Erdogan has been unusually reticent after being slapped down by Deputy Prime Minister Ali Babacan, as well as the central bank chief, for trying to force a vote-winning interest rate cut.

The most recent polls show more Turks oppose AK than support it and many are undecided. Fears of an impending economic crisis are widespread. As he battled real and imaginary demons, has Erdogan taken his eye off the ball and forgotten to insist on good governance?

So forget the headlines about headscarves and alcohol and a supposed sympathy for Isis, Erdogan looks like he has fallen prey to hubris after three terms in power, and neglected the things that matter. It’s something that has happened to many a leader, from Thatcher to Blair. Simple, quotidian and devoid of any conspiracy or dangerous Islamism. How disappointingly boring.

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STOLYPIN:

How many Putin’s Russias are there?

Mark Galeotti of New York University

"P

utin's Russia” is a convenient term for today's Russia, to distinguish it from the ramshackle anarchy of his predecessor, Yeltsin, and also to name-check the man who now seems to have become synecdoche as much as tsar, the epitome of this contradictory country. And yet – and I say this as someone who has used the term many a time – it is also a dangerous expression, one that fails to capture the complexities of Russian politics.

The swirling and still speculative narratives about the Boris Nemtsov murder remind us that while this may not be a political pluralism, after all, it certainly has political pluralities.

First of all, “Putin's Russia” accepts a questionable narrative that the Kremlin itself has so often fought to impose: that Putin is the omniscient, omnicompetent father and strategist of the nation. This is a powerful and self-aggrandizing myth that the man himself has sought to instill, from the carefullyprepared factoids with which he lards his interviews and public performances (it helps when you generally get to vet or write the questions your tame journalists will ask) to the regular set-piece interventions when he descends on some town or factory to upbraid local administrators and magically bring funds and political capital to resolve some problem.

The sky is high and the tsar is far, went the old Russian proverb, but under Putin the tsar is at once unassailable in his political commanding heights and yet also intimate in his relationship with the people, in his potential nearness. The massive bureaucratic apparatus devoted to reading letters and email from the Russian public and spinning his image to them attests to the importance of such myth making.

Putin is unquestionably the decider, the central figure in a political system that owes more to the medieval court

than modern democracy. Individuals, institutions, factions, businesses, cabals and conspirators desperately seek the ear and favour of the tsar, because that can divert massive revenue streams into their pockets, make investigations and rivals disappear with equal speed and rotate national policy on a proverbial kopek.

However, Putin is just one man, and a man who furthermore enjoys his free time and his very distance from the seat of government. After all, these days he essentially reigns in state

“No one who knows Russia needs to be told about their tendency to scheme and fragment” from his palace at Novoe Ogarevo rather than sitting in the Kremlin. He relies on what people tell him, a bureaucratic camera obscura that shows him a dim and often distorted view of Russia and the world. He is at once master and prisoner of the system he has created.

Thus, Putin’s very centrality also fosters a system in which interests and institutions also have massive practical autonomy. When the tsar is absent, or not interested, or not informed, then the boyars can have their fun. And ultimately, it is always possible retrospectively to gain sanction or forgiveness.

So behind the facade of austere centralization, “Putin's Russia” seethes with all kinds of initiatives and activities that at best lack the approval of the centre and at worst actively work counter to the interests and ambitions of the tsar.

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The murder of Nemtsov, or at least the circling debates and speculation about the whos and whys behind it, perfectly exemplify this.

Murder most complicated On the one hand, there are those who believe that not a sparrow falls, but that Putin is behind it, much less an opposition politician. It was in Moscow, it was in view of the Kremlin, so of course it must have been on his orders, or at least at his encouragement.

It may be that this was the case, but it is hard to see quite why him (he was, after all, a non-person on Russian TV, of significance largely to Westerners and metropolitan liberals), why then (it made the protests larger and more serious than they would otherwise have been, and ensures his posthumous report on Ukraine will get more attention than ever), and why that way (for all the talk of the “professionalism” of the hit, it was hardly that). Of course there are limits to trying to understand any regime, not just Russia's, as a purely rational actor, but it’s probably the best analytic tool we have.

Many of the alternative hypotheses, though, focus on the multiple and often competitive forces at potentially murderous play.

The “lunatic jihadists” line has looked threadbare from the first, especially given that the ostensible prime mover, Zaur Dadaev, was an officer in Chechen President Ramzan Kadyrov's security forces. Maybe Nemtsov was killed on Kadyrov's orders. After all, there was bad blood between then, and Kadyrov has been linked to assassinations in Moscow and beyond, ones that suited his rather than Moscow's interests.

For example, his political-military rivals, the Yamadaev brothers, were all murdered, one of them in central Moscow.

The Yamadaevs had been cultivated by the GRU, Russia’s military intelligence, as a possible counterweight to Kadyrov, and he was clearly having none of that.

Then there is the variant that has the Federal Security Service (FSB) aware of a Kadyrov plot but willing to let it go ahead, so that he could discredit himself in Putin’s eyes. Or rogue nationalist FSB officers hatching a plot themselves. Or ultranationalists. And so it goes on.

The point is that regardless of where the truth lies – and it is doubtful if we will ever know for sure – what this

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demonstrates is a state in which power is negotiated between interests more than simply exerted from the top.

Does this matter, when Nemtsov is still dead and Russian troops are still in Ukraine? Absolutely.

First of all, we can better try and understand Russia's likely future actions when we see it as more than just the geopolitical extension of a single ego. Putin is absolutely the decider, but it is others who define the information and advice that flows his way, the choices on which he is asked to rule.

“’Putin's Russia’ accepts a questionable narrative that the Kremlin itself has so often fought to impose” It also affects attempts to influence Russia. Policies meant to change Putin’s mind, for example, have to be structured rather differently than ones intended to persuade and empower specific elements within the elite. I cannot help but feel there’s a confusion between the two that’s creating a degree of incoherence within the sanctions regime.

No one who knows Russia, who has had to deal with Russian companies or bureaucracies, needs to be told about their tendency to scheme and fragment. A country which has intelligence services whose responsibilities deliberately overlap, where the Presidential Administration sometimes seem to act like a shadow government, and which can even swap president and prime minister for four years without meaningfully changing the pecking order is no stranger to fluid, constantly redefined and negotiated power. When we forget that, when we succumb to the strange alliance between Putin's most devoted fans and his most rabid critics, who both elevate him to the status of the sole agent in Russia, we do ourselves and the country a disservice.

Mark Galeotti is Professor of Global Affairs at the Center for Global Affairs, New York University.

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INVISIBLE HAND:

US glowers as allies hop aboard China’s AIIB Liam Halligan in London

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he UK is guilty of “constantly accommodating” China, hissed an anonymous White House official in midMarch. The British government had just announced the UK would become a founder member of a new China-led financial institution that one day could rival the World Bank.

Ever since Beijing launched the $50bn Asian Infrastructure Investment Bank last October, US officials have insisted Western countries “could help shape the standards and rules” this institution will adopt “by staying on the outside”. The real reason for Washington’s lack of engagement, of course, actually lay in fears the AIIB will become an instrument of Chinese foreign policy. That, after all, is precisely the role the World Bank has played for the US for the best part of 70 years.

Despite its “special relationship” with Washington, though, the UK has defiantly decided to join the AIIB at the outset.

“Forging links between the UK and Asian economies to give our companies the best opportunity to work and invest in the world’s fastest growing markets is a key part of our long-term economic plan,” declared British Chancellor George Osborne.

“Joining the AIIB at the founding stage will create an unrivalled opportunity for the UK and Asia to invest and grow together.”

Since October 2013, when he made a high-profile visit to Beijing, Osborne has openly declared his determination to “change Britain’s attitude to China”. That very month, the UK conducted a renminbi-denominated sovereign bond issue, the first by a Western government.

British officials have subsequently toned down considerably their previously frequent criticism of Chinese human rights abuses. Ministers have also avoided chiding Beijing for its rough handling of Hong Kong’s pro-democracy protesters.

Prime Minister David Cameron has made clear he has “no further plans” to meet the Dalai Lama, Tibet’s spiritual leader, after a 2012 meeting provoked Beijing’s scorn. The City of London, meanwhile, is actively promoting itself as a platform for overseas business in the Chinese currency as it starts to play a bigger global role, gradually challenging the dollar.

In early March, Prince William, The Duke of Cambridge no less, visited Beijing to launch a “UK-Chinese year of cultural

exchange”. And then, just days after, the UK delivered its bombshell, becoming the first G7 member to take the AIIB plunge and provoking an extremely rare public spat between London and Washington.

New institutions All this shows how serious the UK now is about pursuing Chinese trading opportunities, even if that means upsetting the US. The UK is running an external deficit equal to 6% of GDP, the second-largest in over half a century, and the Eurozone – with which the UK currently conducts around half its trade – remains on its uppers. If not quite a “pivot to Asia”, this newfound AIIB solidarity shows a fresh determination by London to engage with the fast-growing emerging markets.

The Chinese, for their part, have long seethed about American influence over the World Bank and International Monetary Fund (IMF), the two so-called Bretton Woods institutions, set up just after the World War II, at the zenith of US power.

“If not quite a pivot to Asia” this AIIB solidarity shows a fresh determination by London to engage with the fast-growing emerging markets” Beijing also complains that Japan, still the US’ key Asian ally, has far too much control over the Manila-based Asian Development Bank – which anyway focuses on poverty reduction, lacking the financial firepower vested in the AIIB that will enable it to bankroll major infrastructure projects.

As such, Beijing is now assiduously building a Sino-centric global financial system to rival US hegemony. Along with AIIB, there’s also the New Development Bank – widely known as the “Brics Bank” – launched together with Russia, India, Brazil and South Africa and located in Shanghai.

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Then there’s a planned IMF-style contingent reserve facility, together with another development bank linked to the Shanghai Co-operation Organization – a six-country Eurasian political, economic and military grouping dominated by China and Russia. At last November’s Asia-Pacific Economic Co-operation (Apec) summit, hosted in Beijing, the Chinese also unveiled a $40bn “Silk Road Fund” to finance a network of railways and airports linking China with Central Asia – another area where the US has long asserted political and military influence.

While it’s interesting the UK decided to defy Washington and join AIIB, what was really eye-catching was how quickly other European powers followed suit. Within days of Osborne’s announcement, France, Italy and Germany had confirmed that they, too, would become AIIB founding members.

China is already Germany’s biggest trading partner outside of the Eurozone. While the EU as a whole runs a substantial deficit with China, Germany runs a surplus in goods trade with the People’s Republic. Accounting for 5% of Germany’s exports, official estimates show a 10% German export share by 2030, as the relative importance of its EU trading partners declines. The UK, for its part, is lagging, sending just 2% of its far smaller export haul to China. Perhaps that’s one reason why, when it came to backing AIIB, London chose to go first.

Having watched the Europeans climb aboard, others are now likely to jump on China’s AIIB bandwagon. Australia and South Korea were close to doing so back in November at Apec, but were dissuaded by vigorous US lobbying. Both are now widely expected to join anyway – and again, for entirely understandable reasons, seeing as each countries’ biggest trading partner is now China.

China rising That Beijing should seek to exercise power across Asia, and beyond, is hardly surprising. China, after all, is the world’s second-largest economy, a major global growth engine and bankroller-in-chief to the US government. The Chinese central bank currently holds an estimated $1.27 trillion of US Treasuries, up from just $50bn back in 2001.

While the likes of the UK and Australia see China mainly as a potential growth market, much of the US political elite sees instead a strategic and military adversary. Since the mid-20th century, the US Navy’s Pacific Fleet has guaranteed Asia’s security. While Beijing used to accept that, China is now increasingly kicking against US dominance. “China will make our due share of contribution to regional peace and stability,” President Xi Jinping said recently, challenging the presence of US military bases in South Korea and Japan. “It is for the people of Asia to… uphold the security of Asia,” Xi declared.

As military relations turn spiky, American efforts to contain China commercially are also provoking a response.

Washington continues to push, for instance, the Trans-Pacific

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Partnership, a 12-country trade deal that excludes both China and Russia.

Beijing, in return, is promoting its own Free Trade Area of the Asia Pacific, which includes the US, but also has China and Russia at its heart. It would appear Beijing is winning. Until recently, the US refused to accept China’s treaty, blocking efforts to include the approval of an FTAAP feasibility study on the Apec agenda. As the summit closed, though, it was announced that Beijing’s trade deal was now supported “by all 21 Apec members” – and that includes the US. The US has legitimate grievances towards China, not least when it comes to intellectual property rights. There’s also something to be said for trying to shape an embryonic

“Having watched the Europeans climb aboard, others are now likely to jump on China’s AIIB bandwagon” institution from the sidelines, exerting pressure to establish governance and procedural norms, then joining only if such conditions are met. Certainly, there could be lax environmental and human rights safeguards for AIIB-funded projects.

The reality is, though, that the US is widely seen to have bungled the diplomacy not just of the AIIB’s launch, but the broader issue of granting the emerging giants of the East their due share of influence in the rule-setting bodies that govern the global economy.

Just days after ticking-off London, US Treasury Secretary Jack Lew warned Congress that the US would lose its remaining ability to shape international economic rules if lawmakers didn’t finally pass reforms, agreed back in 2010, to give the large emerging markets more say at the IMF and other leading multi-lateral institutions. “Our international credibility and influence are being threatened,” he said. “To preserve our leadership role at the IMF, it is essential these reforms be approved.”

Washington has long under-estimated the frustration – not just across the emerging markets, but elsewhere – at the lack of the reform to the Bretton Woods organisations, the governance structure of which reflects the world of mid-1940s, not the commercial realities of today. And when it comes to the AIIB, Washington now has no good option. A refusal to join would make the US look petulant; but if it does come in, the forced concession will be clear.

Liam Halligan is Editor-at-Large of bne Intellinews.

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Russian hearts do not demand change Julia Reed In Moscow

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he street where I live, about 8 kilometres from the Kremlin, is dug up at least once a month by an unknown company. Roadblocks and signs are set up, and work begins for a few months. Only a few weeks after the tarmac is laid back, a new team comes along and starts digging again.

Nobody knows what is going on, who is behind the works, who operates them, when it will all end or how much it all costs. There is no publicly available plan for what is going to happen to my street in the next five years. There is no public discussion or debate about the nature of these works or whether reasonable to spend money digging up this road so frequently.

The hill by the metro where the local children sledge in the winter used to have a small wooden church next to it. Now this common area has been fenced off and closed to the public because they are building a bigger church. No sledging anymore. Who made this decision in our secular multicultural society and on what basis? Again, no answer, no information.

Residents shrug shoulders, muttering something about corruption. At best, they may write to the local authority only to receive a formulaic response – if that.

These mundane examples illustrate how people have no stake in the places where they live in Russia.

A nation killed by television With the Soviet-era mindset that everything belongs to the state and nothing belongs to the people, Russians generally do not get involved in local issues. They are more likely to worry about Ukraine than about the quality of their children’s school lunches.

Today’s television has managed to instil two additional views into the public consciousness. View number one: Russia and its leader is the anchor of stability and Christian values in a bigger world fraught with double standards, American colonialism and sodomy. Even if we have occasional problems, the problems of the greater world are much more fundamental and serious. Therefore, if there is a piece on any social issue in

Photo: Vlad Karavaev / Shutterstock.com

the Russian news, it will be immediately followed by a story of inequality and human rights abuse abroad. View number two: those who rock the boat inside Russia are fifth columnists and foreign agents acting on foreign requests to destabilise Russia and bring it to economic collapse.

“I don’t usually go to elections and felt neutral about Putin before, but now I’d be more likely to vote for him because with

“I wouldn’t go to any street protests because I think they have no effect”

his politics Putin presents a counter force to the American dominance in the world,” says Elena Zhilova, 39, a beautician.

“Look what happened in Yugoslavia, Iraq, Georgia and Ukraine… People maybe were unhappy about certain issues in their countries, but with American money and political interference they had revolutions. It takes money to raise a wave of opposition. Normal people would not take to the streets in protests; they mainly share their problems privately.

Broad public outrage is designed and orchestrated from the outside, and Putin is trying to stop it from spreading to Russia.”

With her physiotherapist husband, Elena occasionally follows the news on the internet, buys only healthy foods and goes on holiday to the seaside resorts in Thailand and Spain. A former professional volleyball player, she is one of many Russians who follows the philosophy of non-involvement and family harmony.

“I wouldn’t go to any street protests because I think they have no effect, mainly because very few people go to them, and also I’m not interested in politics. The only incident when I can imagine myself doing any fighting is if my family or close friends were under threat. But there is nothing like this at the moment.”

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Elena’s point of view is very typical: for as long as I am fine, there is no need to get involved. If I get in trouble, I will have to use my connections to solve my problems. People’s lives run in parallel to their government’s and to the life of their country at large. They do not feel they have any voice or can make any difference. Social apathy is a major characteristic of postSoviet Russian mentality.

A few rock the boat Three years ago, Alla Frolova, a deputy headmistress and now Duma deputy aide, 50, found out that the local public surgery where her daughter used to receive treatments was going to be closed down due to ‘optimisation’ and the children were advised to transfer to different surgeries in Moscow. This was against the law, which states that all residents have the right to be treated in their catchment area. What’s more, the decision only became public knowledge once it had already been made by the health authority.

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supporters follow suit. “The public is not ready for change.

I know I’ve got a long way to go, but I don’t mind.” Under a new law, Galperin is now under criminal investigation for his frequent protests and detentions. He may get up to five years in jail for being arrested more than three times in 180 days for making an unauthorised protest.

Needless to say, Galperin’s desire and method for change are radical and do not have the popular vote. “People can be pressured if they are afraid for their lives, jobs, security or their families. Even though I am afraid, I’ve made a decision to continue.”

People like Frolova, Averushkin and Galperin are unusual.

In the nation destroyed by television, television rules… “Our hearts demand change”, went a popular Russian 1986 song.

Not anymore. The name of the game is stability.

This incident triggered Frolova to successfully fight the closure of the surgery. In November, following a leak on the internet that some 26 out of 60 hospitals were going to be closed down without any public scrutiny in Moscow, Frolova and her fellow campaigners managed to get some 8,300 people on to the street to protest.

With the Gaidar reforms, privatisation and the breakup of the Soviet Union widely regarded as an evil Western plot and a failure, Soviet nostalgia is on the rise. Soviet-themed restaurants are abundant and heaving. Even those who were too young to live in the Soviet Union miss it. TV is full of remakes of Soviet books, films and soaps. With an unpredictable future, Russians look backward for comfort.

Three years on, an engineer by training, she is now one of the best-known Russian experts on grassroots street protest. “This injustice, be it hospitals closed down to become commercial property, or people going to jail for their beliefs, has the same root. Our government needs to go. We need new presidential and Duma elections. We need the government that will put the interests of the people first,” says Frolova.

Western sanctions do not seem to be having the effect they were aimed at. Again, they are seen as an outsider plot to force proud Russia to submit to an encroaching West. Worried about rising consumer prices, Russians do not mind a smaller variety in their shops. Outside pressure and the 'Kyiv junta' regime unite them as never before. National pride is the ultimate value of today.

“The only thing which is effective is public street protest,” echoes Alexander Averushkin, a 36-year-old journalist for a medical publication and a healthcare reform campaigner.

“After a series of protests organised by us, the Moscow health ministry launched a public discussion on how to run the reform in the shape of a crowdsourcing project where members of the public can contribute specific ideas; now some 58,000 people joined the project.”

“I’ve come to the conclusion that elections or small-scale topicbased campaigns are not effective in bringing about change.

What we need is a general all-Russia peaceful revolt which will bring about revolution,” says Mark Galperin, 46, a former marketing manager, now a civil activist who has come to the attention of the media having spent 30 days in jail following his picket with a ‘Je suis Charlie’ sign on Manezhnaya square.

“When the media hears about revolt and revolution, they get frightened, it won’t be broadcast. I posted an offer on social media inviting journalists to interview me, and my phone is quiet.”

Every day, Galperin comes to the centre of Moscow with a sign demanding change of government, yet only a fraction of

"What we need is a general all-Russia peaceful revolt which will bring about revolution”

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What's next in aging Europe:

AGING WITH GROWTH IN CENTRAL EUROPE AND THE BALTICS

COMMENT:

Emerging Europe’s party is about to end Mark Adomanis in Philadelphia

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he World Bank on March 10 released a report with the charmingly straightforward title, "What's next in aging Europe?" – the product of a large and accomplished group of economists – it focuses on what is going to happen in the "new" EU members – Poland, the Czech Republic, Slovakia, Slovenia, Bulgaria, Romania, Latvia, Lithuania and Estonia – over the next several decades.

The report, in general, echoes what I’ve been saying about the region almost down to the letter. That’s not because of any special brilliance or erudition on my part, it’s simply because I accurately presented the same summary demographic data that the report’s authors do. This data, despite the shocking frequency with which it is either ignored or misrepresented, is readily available to anyone with an internet connection and a work ethic. You certainly don’t need to be a World Bank economist to look at it and draw the obvious conclusion: the region is in trouble.

For some reason that I just cannot understand, when it comes to demography in Emerging Europe, most Western analysts are fond of bizarre counterfactuals. The Western business press has fallen over itself to offer the most lavish praise to the “Baltic tigers” or to other successful economic reformers like Poland and Slovakia.

In the past, whenever I have made observations such as “everyone says that Russia is ‘dying’ but its population has actually fallen by a lot less than most other countries in the region”, I got responses like the following: “well Central Europe has actually performed a lot worse than Russia, but just imagine what would have happened if Russia had joined the European Union!” The obvious truth that Russia not only didn’t join the EU but never will is ignored in favour of an alternate reality in which Romania and Bulgaria aren’t emptying out but Russia is. Mercifully, the World Bank report doesn’t engage in any kind of similarly baseless speculation.

Demographic renewal It is true that, in general, the World Bank report is a bit more optimistic than I am in its predictions for the future. It notes the very real economic strain that will inevitably accompany workforce shrinkage, but it doesn’t think this will be insurmountable. However, to a very great extent this reflects not any disagreement about the underlying demographic processes, but rather the authors’ confidence in the success of future policy adjustments. Emerging Europe will be okay, the authors say, if it rapidly institutes a broad-based programme targeted at demographic renewal.

“On average, the Baltics have lost 20% of their total populations since 1992” In a narrow sense the authors are entirely right. Emerging Europe probably will be okay if it is able to implement programmes that can successfully boost fertility, encourage immigration and force people to work longer before retirement. Other countries, particularly Sweden and France, that once faced seemingly nightmarish demographic future have, through a combination of targeted assistance to mothers and generous immigration policies, managed to right the course.* The problem is that the region’s track record suggests that complacency and inaction are likely to continue indefinitely.

Just consider the fact that, on average, the Baltics have lost 20% of their total populations since 1992. That’s not a typo.

Out of every five people who were living in the Baltics in 1992, one has either died or moved away. That is a shocking level of depopulation, losses that are completely unprecedented for countries not involved in a major interstate war.

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But despite these losses, despite demographic trends that are some of the direst ever recorded, the Baltics haven’t done anything. They haven’t managed to meaningfully boost fertility, they haven’t done anything to fix their underfunded pension systems, and they are still experiencing massive outmigration. If that level of demographic decline wouldn’t spur the Baltics to more urgent action, what will?

Debating about the future can quickly become futile: there’s obviously no way, in 2015, of knowing what the Lithuanian prime minister will do in 2025. But considering how far many Emerging European countries have already gone down the road to demographic disaster, there’s not a particularly good reason to expect that they will suddenly snap into action.

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To the extent it makes people more aware that so many seemingly successful countries are heading for crisis the World Bank report is invaluable. But, at the same time, it likely exaggerates the extent to which the region’s governments can or will respond to the steadily worsening demographic problems now on their doorstep.

Mark Adomanis is an MBA/MA student at the Wharton School of Business and the Lauder Institute. Follow him on Twitter @MarkAdomanis

Low Fertility and High Emigration Have Led to Falling or Stagnating Populations in Central Europe and the Baltics Cumulative population change 1990-2010, in percent

Notes: The natural increase in the population is defined as births minus deaths. Net migration is the net total of migrants during the period, that is, the total number of immigrants less the number of emigrants.

Source: Based on United Nations’ Population Division (2013).

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FILM REVIEW:

Oscar win for "Ida" reopens old wounds in Poland Jo Harper in Warsaw

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olish film director Pawel Pawlikowski has succeeded where the big guns of Polish cinema all failed. His film "Ida" won best non-English language film at this year’s Oscars, while illustrious names such as Krzysztof Kieslowski, Andrzej Wajda and Agnieszka Holland were never Oscar winners. But no sooner had the celebrations ended than the accusations of anti-Polonism started to fly – again.

Pawlikowski takes us in "Ida" to a world that is now gone but still causes pain. A month after the 70th anniversary of the Soviet liberation of Auschwitz, and amid continuing Polish complexes about the use of language, especially the Western press’ use of the term “Polish concentration camps”, the Oscar win reopens old wounds. For some it is a Hollywood version of Polish history, a Hollywood largely built by Polish Jews. In this narrative, Polish sensitivities, as usual, come second.

Criticisms from right-wing and nationalist groups include the fact that the director is actually British, having moved to the UK with his mum as a 14 year old in 1971. “Made by Jews for Jews. We don’t want this Oscar,” a right-wing news service Polonia Christiana wrote. A similar news outlet, Wirtualna Polonia, called the film “a self-harming portrait of Poland.”

The Polish Anti-Defamation League (Reduta Dobrego Imienia) has launched a petition against the movie, addressed to the state-funded Polish Film Institute, which financed it. “The viewer is left with no understanding of history and may leave the film with the idea that the blame for the Holocaust lies with Poles,” the RDI writes. It demands that information be added to the beginning of the film, making clear that Poland was under German occupation from 1939-45 and that hiding Jews was a death-penalty offence during that period. Over 29,000 people have signed the RDI’s petition.

Multi-layered "Ida", a Polish-Danish co-production about a young nun in 1962, communist-era Poland who discovers that her PolishJewish family was murdered during the war by their PolishCatholic neighbours during the Nazi occupation, is many things rolled into one.

It is at one and the same time a road movie, a rites-of-passage movie, a study of loneliness and tradition, as well as being – quite unavoidably – also a movie about the Holocaust, and in particular Poland's often confused and confusing role in it.

There have been a spate of Polish films about the war examining Poles’ part in the Holocaust and its aftermath. The Dutch 2010 movie "In Darkness" takes us to the sewers of wartime Lviv, then in occupied Poland, with Jews being hidden from Nazis by a Polish sewer worker. Borys Lankosz’s recent

“The film is a self-harming portrait of Poland” film, 'A Grain of Truth', tells a similar story of Polish-Jewish relations, while Wladyslaw Pasikowski’s 2012 film "Aftermath" tackles Polish-Jewish relations head on.

Thus "Ida" steps into a contested field. The film speaks of ancient relations played out in Polish lands over a millennium, Judaism and Christianity, a dialogue apparently ended by the war and reopened since 1989.

The examination of Catholic Poland’s relationship with Polish Jews in particular during the war started in 1999 with the publication of a book about a massacre of Jews at a small town in north-east Poland, Jedwabne, by US academic Jan Gross.

His book, "Neighbours", reopened old debates and questioned above all the overriding Polish narrative of martyrdom and non-culpability in the Holocaust. The Museum of Polish Jewish History, which recently opened in Warsaw, also touches issues that had been buried for many years.

Set against a slice of nostalgia for the Polish People's Republic and a John Coltrane jazz score, Pawlikowski tells an intimate story. There is a touch of Roman Polanski’s "Knife

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in Water" (1961) about it with its black and white stylish cinematography, small cast and jazz score, high and low games, semantic and emotional.

The eponymous Ida is a novice nun who discovers her Jewish roots with the help of an aunt, Wanda Gruz, a character based on Helena Wolinska-Brus, a Stalinist-era prosecutor and a communist resistance fighter. "Red Wanda" had sent "men to their deaths" she tells us.

“Wanda is a tragic character and different emotions are pulling her apart,” Agata Kulesza, who plays Wanda in the film, says.

“I had to accept the fact that there were real women – as in this case – who did evil things, but who could also remain charismatic and very easy to relate to. In preparation I got myself acquainted with the history of Julia Brystygier [an officer in the People’s Republic of Poland whose brutal practices gave her the nickname Bloody Luna] and Pawel [Pawlikowski] told me about Helena Wolinska-Brus, who was an attorney, as is my character, and who in real life did a lot of harm... but all in all what we see is this solitude and longing for a human connection.”

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Agata Trzebuchowska, who plays Ida, meanwhile had never had any acting training. She was discovered by a friend of Pawlikowski's, who saw her sitting in a cafe in Warsaw reading a book.

“Pawel Pawlikowski was looking for Ida for a couple of months. I was invited into the project in an unusual way.

“For some it is a Hollywood version of Polish history” Another Polish film director Malgorzata Szumowska spotted me in a Warsaw cafe, apparently took my picture and sent it to him. When he responded that he would be interested she left her details for me with the barista. After that it all moved very quickly,” Trzebuchowska says.”

BOOK REVIEW:

George Friedman finds Europe’s “Flashpoints” Peter Szopo of Erste Asset Management

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n his new book “Flashpoints: The Emerging Crisis in Europe”, George Friedman writes about Europe – its rise since the 15th century, its downfall in the 31 years between 1914 and 1945, and its subsequent resurrection. The latter is closely linked to the creation, expansion and deepening of the European Union, which the historian Cristopher M. Clark (of “Sleepwalkers} fame) in a recent speech called euphorically “one of the biggest achievements in the history of mankind” (my own translation from German). Friedman is more sceptical. While he acknowledges that the EU has achieved its main goal of pacifying France and Germany, he does not seem convinced that after centuries of fragmentation and after the horrifying wars in the 20th century the potential of renewed conflict has been erased. He concludes, “that Europe’s history of conflict is far from over” (p.251) – which also summarizes

the book’s main thesis. The supposedly frozen conflict in Ukraine and Jean-Claude Juncker’s recent call for the creation of a European army in order to show Russia “that we are serious about defending European values” are signs that Friedman’s fears are not unfounded.

The technical term for what Friedman delivers, I guess, is a “tour de force”. He covers some 600 years of European history, elaborates on Luther’s and Bacon’s contribution to the Enlightenment, and has something to say about places as far apart as Cabo di São Vicente, the most Western part of Portugal, and Ani, an ancient city in the Turkish-Armenian borderland – all in little more than 250 pages. Friedman’s writing, to paraphrase Roger Daltry from The Who, is not always good, but when it is good, it is very good. Some

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parts of the books were seemingly written in haste and are probably based on some of the shorter pieces the author wrote in his capacity as an expert for Stratfor, the thinktank he founded. Many sections of the book, however, are exceptionally well argued and full of original and quotable insights.

Europe – a continent full of flashpoints?

The key theme, which also gave the book its title, is the author’s search for flashpoints – places that in the past were focal points of repeated and often severe conflict between nations or religions. Unsurprisingly, one finds them in borderlands, of which there are many in Europe, given the continent’s ethnic and religious fragmentation as well as

“Europe’s history of conflict is far from over” the long history of expanding and shrinking empires. Some of the most contested places in the past are seemingly quiet now – the Alsace, for example, or the Channel – but other places with a bellicose history, are again or still sources of instability. Prime examples are the Mediterranean Sea plus neighbourhood, the Turkish-Kurdish borderlands and, of course, Ukraine.

As a geopolitical observer, Friedman is a realist. His arguments are mostly based on geography, access to resources, national interests and international trade. In his attempts to understand and explain the relations and confrontations between nations and religions, he rarely refers to ideology, to the role and intentions of individual political leaders, or to international law. While many commentators framed the conflict in Ukraine as the attack on ‘European values’ by an aggressive, humiliated Russian leader with traits of madness, Friedman prefers to point to the fact that extending Nato membership to Ukraine would result in the Western alliance’s getting almost as close to Volgograd (formerly known as Stalingrad) as Hitler had in World War II. Even if Europe and the US had “only the most benign intentions… [t]he Russians know from their history how quickly intentions and even capabilities change.” (p.253).

Friedman claims that “Russia is looking to secure itself, not expand” (p.179), although he develops a scenario where even a defensive Russia could be drawn into or seek a war in the Baltics, resulting in Russia’s occupying any of its three neighbours. The fear in the region of a war with Russia is certainly real.

Four Europes Friedman worries that the EU will lose its pacifying force that it has played in recent decades, simply because he is

bne April 2015

sceptical that the bloc will be able to recover from its current crisis. The EU’s problems, as the author sees them, are “structural and will lead to failure” (p.148). Many conflicts have been buried under a veil of wishful thinking without really going away, according to the author, who believes that the EU’s institutions are too complex and inefficient to deal with issues such as the growing North-South divide or the challenges related to the growing share of Muslim immigrants.

The critique of European institutions is nothing new. In the aftermath of the European debt crisis, it focuses on the EU’s inability to pursue an appropriate macroeconomic policy, reflecting the lack of political union and ultimately triggering the euro’s downfall. Alternatively, EU-sceptics emphasize the lack of democratic legitimacy (see eg. the excellent account of the late Peter Mair), allowing a bureaucracy to “stealthily impose Europe-wide solutions without even a vote” (p.111). Friedman mentions those issues, but he does not add any fresh insights and they are not key to his argument. His Euro-scepticism rests more on the fragmentation within the EU that keeps old conflicts alive and prevents the adoption of policies requiring member states’ further surrendering of sovereignty. Friedman sees in fact four unions – Germany and Austria, the rest of Northern Europe, the Mediterranean states, and the states in the borderlands, with France, in economic terms, quickly drifting from the Northern to the Mediterranean bloc.

“Each region experiences reality in a different way, and the differences are irreconcilable” (p.257).

Whether one agrees with Friedman’s pessimism or not, anybody interested in the future of Europe and the EU should read this book. And yes, dear editors, an index would have proved useful. * George Friedman, “Flashpoints: The Emerging Crisis in Europe”, Doubleday, New York, 2015

“Even if Europe and the US had only the most benign intentions, the Russians know from history how quickly intentions and even capabilities change”

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I 83

“Mr Putin: Operative in the Kremlin” – an updated version

BOOK REVIEW:

Timothy Ash of ICBC-Standard Bank

"M

r Putin: Operative in the Kremlin”, the new and expanded version by Fiona Hill and Clifford G. Gaddy, (Brookings Institute Press, 2015), is sold as a biography, but if you want a standard chronological recap of the life of Vladimir Putin I would suggest that you look elsewhere. But Fiona Hill and Clifford G. Gaddy do a really excellent job in trying to piece together elements of Putin's past to try to understand the man – what makes him tick. And given that Putin has been put back centre stage by events in Ukraine, and by Russia's new and much more confrontational approach toward the near abroad and the West, I think this analysis adds real value and is an essential read for anyone with interests in Russia and the region.

man, and George W. Bush's quip that he shook Putin's hand and had felt his soul, probably said more about Bush than of Putin himself. Again this was perhaps Putin only revealing to Bush what he wanted Bush to perceive, and that this was useful at the time in delivering on his objectives at the time.

The broad thesis of Hill/Gaddy is that Putin was critically shaped during the period of the collapse of the USSR, and by the chaos and centrifugal forces that emerged in Russia during the Yeltsin era. He viewed this as a real tragedy, and from his perspective it was the erosion of the state apparatus that was at the core of the demise of the Soviet empire built around Moscow. The recreation of a strong state has thus been central to Putin's subsequent vision and long-term strategy for Russia.

Events over the past 12-18 months suggest Russia and Ukraine are going to have a broader regional and geopolitical impact.

This book helps in not only understanding that, but will also help Western policymakers construct countermeasures against a much more aggressive and confrontational Russia. The book is in fact an update to an earlier version that now takes account of events in Ukraine, so does help signal future actions therein.

Hill/Gaddy construct an image of a man who is not particularly ideological, but rather pulls elements from Russian history to suit his vision to recreate a strong and powerful Russian state.

They highlight that he is an avid reader of history, and notable amongst his heroes is Piotr Stolypin, the former Tsarist prime minister and bureaucrat.

The authors have a wealth of experience in covering Russia, coming from different disciplines, ie. Soviet/Russian studies/ political science and Russian political economy. They both studied Russia through the late Soviet era, perestroika, the Yeltsin era – times which were important in shaping Putin the man and then president. They have also had significant interaction with Putin and his entourage, eg. through the Valdai seminars.

Putin is pro-market and indeed has allowed the development of an oligarchic class, but these oligarchs are allowed to operate by the Russian state only as long as they represent Russian state interests. Where oligarchs have had a different "vision" and shown greater independence from Putin's Kremlin, they have been brought down to size by the use of the levers of the state.

But loyalty is prized and rewarded by Putin – loyalty is returned.

An operator In this work, Hill/Gaddy present an image of a man who is an archetypical "operative" or spy, whose modus operandi is one of concealment of his own ulterior motives and his tracks. There are in fact few, if any, detailed accounts of his early life as a KGB operative in the GDR in the late 1980s and through the period of perestroika in Russia. But this period appears to have been so instrumental in shaping his current view of the world and vision for Russia and the region.

Hill/Gaddy suggest that Putin's vision of Russia is not an ethnically unified one, but he sees Russians as a mix of ethnic groups and religions, sitting under the state umbrella, and resident in the geographical location of Russia – although they do not attempt to define its boundaries, and whether it includes currently independent former Soviet states.

One particular lynchpin event in his own life, a fracas at a GDR/ KGB office in Dresden during the fall of the Berlin Wall, has been re-spun to suggest that Putin cleverly talked down a potentially hostile crowd of demonstrators. Other accounts differed, suggesting a more confrontational approach, but the truth has been blurred by history and spin. Similarly, the new Kremlin PR machine has built an image of a president for all Russia's people – the environmentalist, the sportsman, the security/ military man and the diplomat. But very few people really know the

Putin is portrayed as a powerful man, managing an image of always being in control, having a strategic vision for Russia, and applying varying tactics to deliver it. The book is by no means sycophantic, and it critically appraises the way he exercises control. The publication is perhaps lacking in terms of an assessment of his potential vulnerabilities; arguably the ongoing crisis in Ukraine presents the biggest single challenge to Putin's rule, and could well shape history’s judgment of Putin, "Great" or otherwise. While the Kremlin spins a version of events as being planned/managed by Putin, Kyiv’s Maidan and Donbas suggest this is a much more dynamic and unpredictable process with an uncertain outcome.

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OBITUARY:

Nemtsov's death and the failure of the opposition Ben Aris in Moscow

T

he last time I sat down with Boris Nemtsov, Russia’s best known opposition leader who was gunned down on February 27, was in October 2010 when we had a long conversation about the future of Russia. Russian President Vladimir Putin was in power for a decade and Nemtsov had just released a damning report accusing him and his cronies of fleecing the country.

I had followed Nemtsov's career for more than a decade and a half since he sprang to prominence as the dynamic liberal governor of Nizhny Novgorod in the 1990s. This time we met in his extremely modest office on the small, leafy Zoologicheskaya Ulitsa, across the road from the Moscow City Zoo. Outside were some young activists practising slapping large protest stickers over the windscreens of a moving car – what they intended to do to drivers who were breaking the law.

The office was a classic Russian apartment on the first floor bare of anything other than a few cheap chairs and a desk with a computer. A bunch of people was smoking in the kitchen.

Nemtsov looked out of place. He was a tall, well-built man with a penchant for designer jeans and expensive leather boots. He commanded the room with his rugged good looks, deep basso voice and powerful charisma. But he looked out of place in an office that was obviously not somewhere he spent a lot of time – it was devoid of personal touches, paperwork or the detritus of a normal work routine.

Nemtsov was obviously a sincere opponent of Putin and proponent for radical change. He had just released a report, "10 years with Putin", that was filled with chapters like "Corruption is Eating Russia Up", "The Country is Dying Out", "Dead-End in the Caucasus", and "A country of screaming inequality". It was promptly banned by the authorities on the risible grounds of being "extremist literature". Most of the report was a dull statistical account of Russia's economic development over the previous decade – all of it scrupulously researched and based on official statistics, even if it lacked the shocking insider-dealing details that investor-turned-Kremlin nemesis Bill Browder used to dish up when still living in Moscow.

Throughout the years Nemtsov's message did not change; his complaints then were the same as those he made on the eve of his assassination. "After 10 years, the people are tired of

Putin. One of his key claims to success is that he has ended the instability in the North Caucasus, but during his regime the number of terrorist attacks has gone up six-fold," Nemtsov told me. "At the same time, the corruption in Russia is on a par with Africa."

After talking we travelled across town to the square by the Chistye Prudy metro where Nemtsov sat at a small trestle table to sign copies of his report. A queue quickly formed of people that included not just impoverished babushki who have borne the brunt of the Soviet collapse, but also middle-aged men carrying children, teenage girls with digital cameras to snap a selfie with Nemtsov and a knot of Asiatic men, probably Kazakh as the embassy is just round the corner – normal people basically. Nemtsov scrawled his name in the report's flysheet and reduced one old woman to schoolgirl giggles as he bantered with the small crowd. Two policemen on the other side of the square looked on, but did nothing despite the fact that distributing the report was technically illegal.

Rum company Nemtsov appeared well placed to challenge Putin: the looks, the brains (a PhD in Physics), the oratory skills and most importantly – and almost uniquely amongst the opposition leaders – the experience.

Nemtsov was the star "young reformer" of the 1990s, rising through his dynamic efforts to reform Nizhny Novgorod where he previously studied physics before being made regional governor by Yeltsin. The late president then brought him to Moscow to be a first deputy prime minister in 1997.

"He was one of the brightest and most dynamic of the team of reformers at that time, including Yegor Gaidar who passed away a few years back. Those reforms ultimately failed, and ended in Putin's rise to power in 1999," says Tim Ash, head of emerging market research at Standard Bank. "Nemtsov struggled to regain popularity across Russia due to Russians' memories of the failed reforms under Yeltsin and a widespread impression that they benefited only oligarchs and the West ultimately by further weakening Russia.”

Indeed, Nemtsov’s association with Yeltsin gave him credibility in the West, but was a distinct disadvantage in Russia where

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the majority of people associate the 1990s with economic misery and the rise of government-sponsored kleptocratic oligarchs. Nemtsov's money and business connections also set him apart as belonging to the elite. His cheap apartment on Zoologicheskaya Ulitsa jars with the high-end Bosco restaurant where he dined with Anna Duritskaya, a 23-yearold Ukrainian model, on the night of his death.

Another problem that Nemtsov and today's other opposition leaders face is that many are tainted by corruption allegations.

Fellow opposition heavy hitter and former prime minister Mikhail Kasyanov was dubbed "Misha 2%" while serving as finance minister. Duma deputy and member of the Just Russia parliamentary fraction Ilya Ponomarev, another leading light in the opposition (the only member of the Duma to not vote in favour of the annexation of Crimea last year), used to work in the IT department at the oil company Yukos of Mikhail Khodorkovsky between 1996 and 1998, during that oligarch’s notorious corporate governance abusing period. More recently, Ponomarev was caught up in a lecture fee scandal after accepting $750,000 from the government-sponsored Skolkovo foundation in fees.

Nemtsov himself was embroiled in a book fee scandal in 1997 along with another leading "young reformer" Anatoly Chubais, when the investigative newspaper Novaya Gazeta published a telephone transcript allegedly showing Nemtsov asking for a $100,000 book advance. More recently, in the noughties Nemtsov explained an income of several million dollars as coming from speculating on soaring Gazprom shares after the so-called ring fence was removed, special rules that precluded foreign investors from owning the stock directly.

This is despite the fact that Nemtsov had been an academic in the 1980s and was a public servant until 1998 and a politician ever since.

Nemtsov also suffered from his close association with several of the leading oligarchs from the 1990s. One of his first political parties – the Union of Right Forces (SPS) set up in 1999 together with other former members of Yeltsin’s team – was closely linked to the privatisations of the 1990s, a time when the oligarchs were resisting Putin's attempts to rein them in. In particular Alfred Kokh was the head of the State Property Committee when Norilsk Nickel was privatised in oligarch Vladimir Potanin's favour during the notorious loans-for-shares scam, and went on to become SPS' campaign manager. Likewise, Khodorkovsky is on record as one of the financial backers of SPS. A prominent club promoter told bne IntelliNews during this period that he organised several parties at Potanin's dacha, attended by Nemtsov, that consisted of "a DJ, a PA and a whole lot of girls." Potanin's former aide de camp, who went to work for Sberbank, confirmed these stories separately.

In this light, Nemtsov is seen by Russians as less of an icon of probity and more like an Eastern Europe politician cut from the same cloth as former Ukrainian prime minister and Orange Revolutionary leader Yulia Tymoshenko – dubbed the

ARTS CULTURE & PEOPLE

I 85

"gas princess" for her murky ties to the corrupt gas trading business despite her liberal credentials.

In Russia corruption allegations do not necessarily sound the death knell for a political career, because graft is deeply woven into the fabric of Russian public life, from the imperial era through communism and to the present day. All the people of Eastern Europe, not just Russia, expect their leaders to steal.

Given the legacy of centuries of corrupt autocracy, Russians simply don’t expect anyone, including opposition leaders, to do anything different.

Missed opportunities Russia's opposition has had many opportunities to take the lead and prove their credentials to the people. Unfortunately most of these have been fluffed. In the 1990s, the early opposition leaders such as Grigori Yavlinsky and Irina Khakamada vied with each other for the mantle of Russia's liberal alternative to Yeltsin. However, internecine fighting and intellectual arrogance prevented them from ever working together, relegating them to the fringes of the political spectrum and eventual obscurity.

This was the community out of which Nemtsov emerged, however he too was a victim of the intensely fissiparous nature of liberal politics and ended up being a member of a dizzying number of parties and movements during his long career.

The young reformers were given a golden opportunity to make a material change to the way that Russia was run at the end of Yetsin's administration. In 1997 Nemtsov was elevated to first deputy prime minister along with Anatoly Chubais, who was put in charge of the electricity giant UES. At the start of 1998, Yeltsin created a “dream team” by appointing Sergei Kiriyenko as prime minister. But this group had no time to make a difference, as by August that year the country went into financial meltdown. Nemtsov quit the government soon after.

The next best chance of a liberal alternative appeared in 1999 when then Moscow mayor Yuri Luzhkov and former prime minister Evgeny Primakov joined forces to fight against the government of then prime minister Putin, creating the Fatherland-All Russia party to stand in the 1999 parliamentary elections. Going into the polls, the new party had a decent chance of actually taking power. However, the vote was fixed by the active lobbying of oligarch Boris Berezovsky, who at the time was the main agent promoting Putin, and the party was eventually hijacked by the Kremlin to become the now ruling and Kremlin-backed United Russia party.

Since then, new players have come to the fore, most notably corruption blogger Alexei Navalny and former chess world master Gary Kasparov – both of whom have come from outside the system. But like Nemtsov, neither of them has managed to unite the fractious liberal opposition around any sort of meaningful reform platform. As time goes on, ousting Putin becomes increasingly difficult because for all his many flaws, he has proved himself to be a consummate politician with a fine sense of what the Russian people want.

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I New Europe in Numbers

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Poll shows political apathy isapathy rife among Ukrainians (March 6-16, 2015)(March Poll shows political is rife among Ukrainians

Candidate popularity Petro Poroshenko Yulia Tymoshenko Oleh Lyashko

Party popularity 19.2%

5.3% 5.0%

Self Reliance 'Samopomich' Party Radical Party of Oleh Lyashko Fatherland 'Batkivshchina' Party

5.7%

Opposition Bloc

5.3%

Serhiy Tihipko 2.1% Arseniy 1.7% Yatsenyuk

Against all

Freedom 'Svoboda' Party

2.7%

People's Front

2.5% 5.4%

Other 20.1% 23.9%

A recent poll by Kyiv-based sociological researchers R&B Group has revealed an overwhelming sense of political apathy among Ukrainians.

Looking at the chart on the left, with 19.2% Poroshenko also led the poll for individual candidate popularity when respondents were asked whom they would vote for were an election held. Even this

5.6%

4.4%

10.1%

Don't know

8.0%

Right Sector

6.3%

Would not vote

13.2%

Petro Poroshenko Bloc

Anatoliy 4.2% Hrytsenko Oleh 2.1% Tyahnybok

Other

6-16, 2015)

Would not vote

23.1%

Don't know

24.1%

rating fell short of the 20.1% who said they would not vote for any of the current potential candidates. 23.9% were undecided.

As the chart on right shows, a meagre 13.2% rating was enough to see incumbent president Petro Poroshenko’s ruling bloc lead the party polls, yet this figure fell short of the 23.1% who said they would not vote for any of the parties or the 24.1% who were undecided.

Percentage change in share price since date of IPO

Continued woes for Russian IPOs 800% 600% 400% 200%

MegaFon NOVATEK Rosneft RusPetro plc VTB Bank Yandex N.V.

0% 2006

2007

2008

2009

The bne IntelliNews IPO tracker above looked at performance data from 88 Russian IPOs since 2005, with rather depressing results. Of the 88 companies measured, only six were selling at a higher share price than at the time of their IPO. The average change in share price across all companies was -48%.

The bne:Chart above shows the performance of six of the more

2010

2011

2012

2013

2014

2015

well-known IPOs, with gas producer Novatek being one of the few companies to have continued growing after its offering.

The technology and communications sector was the only one to record a positive figure for average change in share price since the time of IPO, at +16%.

New Europe in Numbers

bne April 2015

No sign of respite for Ukrainian inflation 40.0

43.5

34.5

I 87

2015 BANKING OUTLOOK: Jirí Staník, founder of Helgi Library Henry Kirby in London

28.5

24.9 20.0

0.0

-0.3 2013

2014

Jan '15

Feb '15 2015 max

Retail customers’ investment conservatism could see the Czech banking sector suffer if the reluctance of Czechs to move their money out of current accounts continues, according to Jiri Stanik, founder of the Helgi Library and former equity research analyst.

Ukraine and Russia feel the squeeze

“It is becoming more and more difficult to monetise the retail [banking] clients, yet Czechs have the second-highest share of financial assets in deposits in Europe, at 75%,” Stanik says.

Despair Index Score

Ukraine’s rocketing inflation rate is set to increase further, according to new forecasts by the Ukrainian government. A worst-case estimate has been set at 42.8% for 2015, following 2014’s 24.9% rate.

40

EM avg.

Ukraine

Russia

USA

47

Retail customers do indeed dominate the Czech banking sector, with retail deposits making up 55% of total deposits in the Czech Republic as a whole. Twothirds of those deposits sit in current accounts with an average interest rate of 0.15%, which, while appearing to be a low-cost source of liquid capital for banks, is symbolic of a wider problem of consumer inertia in investment terms.

34 30 32 21

20 2009

2011

2013

2015

In December, bne Intellinews published its Despair Index – a combination of inflation, unemployment and poverty – to survey the relative prosperity of various countries, with many emerging market nations standing toe-to-toe with their Western counterparts.

Since then, Russia’s score worsened considerably, from 24.1 to 31.5 – more than a 30% increase since the year began. Ukraine has continued to suffer as the conflict in the east shows little sign of ending. Its 2013-2014 score rocketed over 113% from 16.5 to 35.2.

Russians U-turn on East Ukrainian sovereignty

The Czech National Bank (CNB) has maintained an effective-zero interest rate of 0.05% since November 2012, spurred on in no small part by the country’s six consecutive quarters of negative growth between the third quarter of 2012 and fourth quarter of 2013.

40 % respondents

30

48 35

10

26 25 23 21

16 17 13 19 15 Jan '15

If the results of a recent poll by the independent Levada Center are to be believed, Russian’s views on Eastern Ukraine’s sovereignty have changed drastically over the last year.

The percentage of respondents who would like to see East Ukraine become an independent state has fallen from 48% in March 2014 to 15% in February 2015.

Feb '15

Dec '14

Sep '14

Nov '14

Aug '14

Jul '14

Jun '14

Apr '14

May '14

0 Mar '14

While consumers seem content to leave their money sitting in current accounts, Stanik says one of the few growth areas in retail terms is in mortgages. “Mortgage lending is the only area that is growing. Between 2004-2014, the mortgage loan book increased fourfold. In the last couple of years, though, the growth rate has dropped to around 10%, so it is really slowing down,” he notes.

“The ultimate question for the banks is: what happens when it drops even further?”

50

20

“Banks are trying to push their customers into alternative investments, so feegenerating options such as investment funds or pension funds, for example,” Stanik explains. “From the banks’ point of view, what do you do? You have plenty of deposits – the loans to deposit ratio is below 80%, so lots of liquidity – and the sector is very profitable, in double-digit numbers, but the demand just isn’t there.

People just aren’t willing to spend much.”

However, even the prospect of such low financing costs has not stirred an otherwise trundling economy into an increased level of borrowing. “Banks have to sell more loans, but the demand for them is small. The low interest rate hasn’t led to a higher demand for consumer lending,” Stanik says.

The low-cost borrowing hasn’t succeeded in boosting corporate lending, either, with the market growth “virtually flat, year on year,” according to Stanik.

“The Czech economy is heavily dominated by foreign, multinational companies.

These companies are more likely financed by their mother companies or on the international markets,” he says. “Sooner or later, if volumes and consumer activity do not pick up, then the interest rate will bite into these banks’ numbers, and profitability will fall.”

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MACROECONOMIC INDICATORS

GDP composition (%)

Gross domestic product ($mn) Country

Total (2014)

YoY (% annual)

YoY (% qtr)

2015 Forecast

Per capita ($)

Agri.

Indus.

Albania

13,175

2.1

+0.7

+3.4

4,549

22

Armenia

9,529

5.9

5.9

+3.3

3,551

Azerbaijan

75,188

1.4

1.4

+3.4

Belarus

75,925

4.1

2.4

Bos/Herzegovina

19,191

1.1

Bulgaria

55,733

Croatia

57,639

Czech Republic

186,877

Estonia

Budget deficit

Current account

Inflation (CPI) Unemployment Ind. prod.

Serv.

Bud% GDP

% GDP

Latest, YoY

Last year

%

YoY

15

63

-5.2

-14.9

+2.3 Feb

1.7

17.0

+11.6

22

31

47

-1.3

-5.5

+5.4 Feb

7.1

17.1

-1.0

8,060

6

62

32

-0.5

17.6

+0.3 Jan

2.7

4.9

+1.8 2013

+3.4

7,685

9

42

49

1.0

-0.9

+16.9 Feb

15.4

0.6

-5.4

+0.6

+3.4

4,735

8.1

26.4

65.5

1.6

-5.6

-0.8 Jan

-0.5

43.7

+3.2

2.3

-6.9

+0.8

7,418

6.7

30.3

63

-3.4

-4.6

-0.5 Feb

-1.6

11.0

+0.2

-0.4

-8.0

+0.5

13,415

5

26

69

-5.0

23.7

-0.4 Feb

1.1

20.3

-6.5

4.4

-8.7

+2.5

19,295

2

38

60

-3.9

0.5

+0.1 Feb

1.0

7.5

+2.9

25,916

4.1

-3.7

+2.3

18,988

4

29

67

-2.1

2.5

-0.8 Feb

2.1

4.7

-0.7

Georgia

16,898

4.7

+4.9

+3.2

3,785

9

24

67

-0.8

-5.4

+1.3 Feb

0.2

14.6 (2013)

+11.1

Hungary

137,104

2.8

-5.6

+2.4

13,182

34

28

68.7

2.3

5.3

-1.1 Feb

1.4

7.4

+5.3

Kazakhstan

234,065

4.3

-6.4

+5.0

13,438

5

38

57

-3.4

-2.6

+6.2 Feb

4.9

5.0

+1.6

Kosovo

7,308

5

-0.6

+3.8

4,022

12.9

22.6

64.5

n/a

-11.5

-0.2 Feb

0.2

30.0 (2013)

n/a

Kyrgyzstan

7,515

4

+3.6

+4.5

1,279

20.8

34.4

44.8

n/a

-14.2

+11.6 Dec

6.0

2.4

-10.4

Latvia

31,920

3.6

-5.2

+2.9

15,973

4.9

25.7

69.4

-9.5

-1.4

-0.1 Feb

-0.4

9.0

-5.6

Lithuania

43,911

3.8

-5.4

+3.0

16,206

3.7

28.3

68

-0.5

0.1

-1.8 Feb

0.4

9.6

+1.2

Macedonia, FYR

11,327

5.2

-5.5

+3.4

5,066

10

26

63

-3.4

-0.4

-1.1 Feb

1.3

27.9

+1.1

Moldova

8,337

4.6

+11.2

+3.4

2,284

15

17

69

n/a

-6.2

+2.2 Feb

3.9

3.3

+6.7

Mongolia

12,419

7.8

+7.0

+7.5

4,069

16

33

50

n/a

-12.5

+10.7 Dec

9.9

6.4

+14.8 2013

Montenegro

4,547

2.7

+3.5

+3.0

7,334

10

20

70

-3.0

-14.2

-0.4 Jan

1.8

15.1

+5.9

Poland

543,255

3.3

-6.4

+3.2

13,888

4

33.3

62.7

-1.5

-1.2

-1.6 Feb

1.0

12.1

+1.7

Romania

199,903

4.3

-4.2

+2.7

9,794

6

43

50

-7.5

0.3

+0.4 Feb

1.9

5.5

+1.2

Russia

1,261,604

7.2

-31.3

-3.8

14,421

4

36

60

-8.1

2.7

+16.7 Feb

6.3

5.5

-1.4

Serbia

43,866

-3.6

+0.6

0.0

5,890

7.9

31.8

60.3

-3.5

-6.1

+0.8 Feb

4.9

17.6 Sep

-2.4

Slovak Republic

99,795

2.2

-5.7

+2.5

18,090

3.1

30.8

47

-5.6

-1.9

-0.5 Feb

1.0

12.5

+1.6

Slovenia

48,051

2.6

-6.7

+1.8

23,262

2.8

28.9

68.3

-2.4

6.7

-0.4 Feb

1.3

9.7

+3.3

Tajikistan

9,019

6.7

+6.7

+5.8

1,105

27

22

51

n/a

-2.1

+7.4 Dec

3.6

2.5

+7.1

Turkey

843,173

2.8

+0.4

+3.3

10,852

9

27

64

-1.3

-6.1

+8.2 Dec

7.7

10.7

+2.6

Turkmenistan

46,371

10.8

n/a

+11.5

7,875

7.2

24.4

68.4

n/a

0.2

+6.0 '13

5.3

n/a

n/a

Ukraine

162,881

-8.2

-5.3

-2.3

3,792

10

27

63

12.0

-9.2

+34.5 Feb

-0.1

9.5

-21.3

Uzbekistan

60,828

7.6

+8.1

+7.1

1,995

19.1

32.2

48.7

1.3

3.9

+11.2 '13

7.0

4.9 (2013)

+8.1

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Development Bank; National Statistical Committee of the Republic of Belarus; Haver Analytics; bne IntelliNews

*All data are latest available official figures or independent estimates

SPACE FOR AD/HOUSE AD SHOWING OTHER..

I 89

New Europe in Numbers

bne April 2015

FINANCIAL INDICATORS

SOCIAL Total market cap., all publicly traded equities

Stock market

Literacy

Tertiary edu.

Month

12-month

Ytd

52-wk low

52-wk high

P/E

Latest $mn

YoY %$

YoY % local curr.

% adults

% pop.

Albania (-)

-

-

-

-

-

-

-

-

-

96.8

55.5

Armenia (-)

-

-

-

-

-

-

-

-

-

99.6

46

Azerbaijan (-)

-

-

-

-

-

-

-

-

-

99.8

20.4

Stock market index

Belarus (-)

-

-

-

-

-

-

-

-

-

99.6

62.6

Bos/Herzegovina (SASE)

+0.6

-4.4

-1.2

677.3

738.1

-

-

-

-

98.2

37.7

Bulgaria (SOFIX)

+4.4

-15.5

-3.1

476.4

622.9

9.5

4,172.5

-31.7

-17.1

98.4

91.4

Croatia (CROBEX)

-0.8

-2.0

-0.9

1,644.3

1,930.3

10.1

18,570.3

-15.8

+4.1

99.1

64.1

Czech Republic (PX)

+2.4

+6.0

+9.1

901.3

1,049.9

14.4

27,393.8

-13.3

+7.6

99

76.6

Estonia (OMXT)

+1.0

+7.5

+13.1

729.0

870.5

7.5

2,110.7

-18.9

-0.2

99.9

27.9

-

-

-

-

-

-

-

-

-

99.7

61.6

Hungary (BUX)

+3.8

+14.2

+17.1

15,686.7

17,817.1

13.9

15,125.6

-14.2

+3.3

99.4

59.6

Kazakhstan (KASE)

-1.6

-22.6

-13.7

759.6

1,312.8

5.2

12,604.3

-40.9

-28.3

99.7

44.5

Kosovo (-)

-

-

-

-

-

-

-

-

-

0

41.3

Kyrgyzstan (-)

-

-

-

-

-

-

-

-

-

99.2

-

Latvia (OMXR)

-0.7

+3.4

+4.3

405.8

461.7

6.0

988.2

-26.6

-9.6

99.9

73.9

Lithuania (OMXV)

+2.2

+8.7

+8.3

492.0

447.5

n.m.

4,164.0

-9.9

+4.4

99.8

65.1

Macedonia, FYR (MBI10)

-2.5

+3.4

-3.4

1,586.1

1,877.0

24.1

263.7

-80.2

-78.6

97.5

40.1

Georgia (-)

Moldova (-)

-

-

-

-

-

-

-

-

-

99.1

38.4

Mongolia (MSETOP)

-5.1

-20.3

-11.7

12,962.5

17,196.3

-

-

-

-

98.3

-

Montenegro (MONEX20)

+3.6

+16.3

+7.7

9,665.6

12,610.1

-

-

-

-

98.4

61.1

Poland (WIG)

+2.8

+7.8

+6.0

49,593.7

55,636.8

31.2

163,945.6

-21.1

-3.1

99.7

73.1

Romania (BET)

-4.4

+11.7

+0.4

6,248.7

7,337.8

15.1

21,997.4

-6.7

+11.0

98.6

51.5

Russia (MICEX / RTS)

-8.7 / -0.1

+24.7 / -22.2

+12.7 / +15.6

1,838.2 / 629.15

1,280.1 / 1,421.07

1828.6

485,319.3

-30.8

+15.1

99.7

76.1

Serbia (BELEXLINE)

0.0

+16.7

-1.6

562.5

706.6

n.m.

3,088.2

-5.4

+21.2

98.2

52.3

Slovak Republic (SAX)

-4.8

+9.9

+8.3

202.9

267.5

n.m.

47,082.0

+71..

+830.1

99.6

55.1

Slovenia (SBITOP)

+2.0

+14.2

+2.9

698.8

839.4

120.1

6,943.5

-4.4

+17.6

99.7

86

-

-

-

-

-

-

-

-

-

99.7

22.4

-5.4

+28.8

-4.0

63,710.5

91,412.9

12.0

249,923.7

+16.0

+30.6

94.9

-

-

-

-

-

-

-

-

-

-

99.6

69.3

Ukraine (PFTS)

-2.0

+14.4

+8.5

363.6

483.3

3303.0

1,706.6

-95.0

-55.1

99.7

79.7

Uzbekistan (-)

-

-

-

-

-

-

-

-

-

99.5

-

Tajikistan (-) Turkey (XU100) Turkmenistan (-)

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat

*Official figure or independent estimate

AD SPACE TO BE CROPPED OUT AD SPACE TO BE CROPPED OUT

90

I Events

bne April 2015

Upcoming events 2015 Annual Investmet Meeting 2015 (March 30 - April 1) Dubai, United Arab Emirates www.aimcongress.com/en

Kazan Sukuk Conference 2015 (9 of April) Kazan, Russia www.kazansukuk.com

Cash, Treasury & Risk Management in Turkey (20-21 April) Istanbul, Turkey www.eurofinance.com/conferences/turkey

European Bank for Reconstruction and Development (EBRD) 24th Annual Meeting of Board of Governors and Business Forum (May 14-15) Tbilisi, Georgia www.ebrd.com

XII CIS and Baltic Region Bond Congress

The Banking Association for Central and Eastern Europe (BACEE) will hold the

May 21–22, 2015, Baku, Azerbaijan

“Risks and New13-14 Business AprilOpportunities 2015, Budapestin CEE/SEE/CIS” 13-14 April 2015, Budapest

Hosted by:

30BACEE 30 BACEE ubileeB ankingConference J ubilee J BankingConference th th

CELEBRATE WITH US!

• CIS and BalƟc Region Bond Congress – is the leading event, which serves to discuss the development of bond markets in CIS countries.

• Congress is held in the 12th Ɵme. The number of parƟcipants is up to 350.

• TradiƟonally, the Congress is accompanied by bright informal program.

Agenda, sponsorship: Sabir Rzaev rzaev@cbonds.info Phone: +7 (812) 336-97-21 *121 Participation: Elena Mokritskaya elena@cbonds.info Phone: +7 (812) 336-97-21 *104

www.cbonds-congress.com/events/263

v The BACEE Conference has been one of the biggest international gatherings for bankers, analysts and supervisors dealing with CEE/SEE/CIS countries and banking sector since more than 10 years. v The “30th Jubilee BACEE Banking Conference” will focus on: risks and new business opportunities in the CEE/SEE/CIS region, forecast for 2015, update on the situation in Russia, Ukraine and other CIS countries, foreign banks’ strategies and success recipes for banks in the region. v For participation or sponsorship opportunities, please visit: www.baceeconference.com or call: +36 1 356 85 81 or send an email to judit.turza@bacee.hu or anett.biro@bacee.hu

We look forward to meeting you at our Conference!