bne:Magazine December 2013

Inside this issue: Putin struggles to contain corruption Latvia's warning shot to whistleblowers Is Serbia headed for snap March elections?

December 2013 www.bne.eu

All aTwitter in Uzbekistan

One man's meteoric rise exposes the murkier side of Ukraine

bne December 2013

Contents

Editor-in-chief: Ben Aris (Moscow)

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Managing editor: Nicholas Watson (Prague)

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News editor: Tim Gosling (Prague)

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Eastern Europe: Graham Stack (Kyiv) Anna Kravchenko (Moscow) Central Europe: Jan Cienski (Warsaw) Mike Collier (Riga) Tom Nicholson (Bratislava) Kester Eddy (Budapest) Southeast Europe: David O'Byrne (Istanbul) Ian Bancroft (Belgrade) Bogdan Preda (Bucharest) Guy Norton (Zagreb) Andrew MacDowall (Belgrade) Eurasia: Bureau Chief: Clare Nuttall (Almaty) Molly Corso (Tbilisi)

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COVER STORY 6 The Insiders

CENTRAL EUROPE 28 A warning shot for whistleblowers

8 The Wizard of Gaz +7 7073011495

Advertising & subscription: Elena Arbuzova +7 9160015510 Business Development Director Tatiana Alexeeva

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Alec Egan Business Development Director (International)

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Design: Olga Gusarova-Tchalenko

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14 Perspective

31 Lithuania's brilliant smear campaign – against itself

15 Chart of the month

33 Kellner calls home 34 Extending the Temelin timeline

EASTERN EUROPE 16 Putin struggles to contain corruption

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35 The CNB's unconventional move 36 Shuffling the PO pack

17 Taxes in space 19 Cadogan looks to help wean Ukraine off Russian gas

38 BayernLB's Hungarian "problem child"

21 A memorial day few Russians want to remember Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu All rights reserved. No part of this publication may be reproduced, stored in or introduced to any retrival system, or transmitted, in any form, or by any means electronic, mechanical, photocopying, recording or other means of transmission, without express written permission of the publisher. The opinions or recommendations are not necessarily those of the publisher or contributing authors, including the submissions to bne by third parties.

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23 Dog days on Russia's internet 25 Brunswick Rail aims to catch liberalization train

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bne December 2013

Contents

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44

SOUTHEAST EUROPE

EURASIA

40

Serbia headed for snap March elections

50

All aTwitter about a power struggle in Uzbekistan

42

Kosovo elections – if at first you don't succeed‌

51

Customs Union-ised

53 43

A strong showing in Kosovo

TAPI pipeline depends on Turkmen concessions

44

Croatia and Hungary step up fight over INA

55

A New Silk Way between China and Europe

46

No dumping on Albania

57

Kcell rides Kazakhstan's hot pursuit of smart phones

48

Turkey's privatization lottery 59

49

A new energy on Bulgarian streets

Breaking bad loans in Kazakhstan

60

Tajik take four

62

UPCOMING EVENTS

Follow us on twitter.com/bizneweurope

I5

6

I The Insiders

bne December 2013

Russia's faltering pension reforms

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A

fter Chile launched its pension reforms in the 1980s, it saw pension assets under management soar from 3% of GDP to over 65% in about five years. Russia made its last stab at pension reform in 2002 and nearly a decade later the amount of pension assets under management are still at 3% of GDP. Russia’s capital markets have soared since the exchanges were set up in 1995, but they remain bizarrely lopsided: accounting for half the market capitalisation of the entire former Soviet Union, there is still no long-term domestic institutional investors. Poland’s stock market is much smaller than Russia's, but in every other way it is much more mature, with domestic pension and insurance funds accounting for a third of the entire market capitalisation. With trading in Russia dominated by international hedge funds and local banks with spare cash on their accounts, everyone in the Russian market is a speculator, which is one of the reasons why Russian share prices are so volatile.

And time is running out for the Kremlin. With the federal budget likely to go into deficit next year and with a long ‘to do’ list when it comes to infrastructure projects, the government desperately needs that long-term money to finance rebuilding the country. The lack of pension reform is only adding to this financial pressure.

Daniil Khavronyuk, head of PR and communications at Raiffeisen Pension Fund

for the first time in 20 years after the birth rate turned positive in 2008, creating more taxpayers to pay for the pensioners. However, the respite will be temporary as the deep demographic dink caused by the collapse of the Soviet Union in 1991 works its way through and those people who were middle aged two decades ago begin to retire. In Soviet times, there were two workers to pay for one pensioner, but that ratio is set to fall to one worker for one pensioner in the coming years – known as the “Russian Cross.”

A gap between what the state has promised to pay its aging, swelling retirement community and the amount of money actually available in the Pension Fund of Russian Federation (PFR) has already appeared and is eating up about 5% of GDP of budget spending – a huge bill for any state. Much of this spending is self-inflicted: during the parliamentary election campaign in 2011, then Russian Prime Minister Vladimir Putin increased pensions by about half, widening that gap.

On the flip side, getting pension reforms right can be transformational for an economy. Access to cheap longterm financing opens up a new world to companies and governments, which both increases prosperity and creates a solid floor for asset prices (as pension funds tend to buy and hold securities), thus reducing the gut-wrenching swings most emerging markets suffer from.

“The current pension age – 60 years for men, 55 for women – is clearly something the country’s economy struggles to afford, but the government is adamant and will not raise it upfront, although measures to stimulate delayed retirement are coming into effect. Why so adamant? Because the pensioners are the biggest single electorally important constituency,” says Daniil Khavronyuk, head of PR and communications at Raiffeisen Pension Fund. “Another little known feature of the system, a Soviet heritage actually, is that a lot of employees are entitled to an early retirement, so the average retirement age now is 54 for men and 52 for women.”

Maths homework Organising a pension system properly is all about the numbers: so what does Russia’s maths look like?

The situation is made even worse by the country's demographics. Russia’s population has returned to growth

Although Russia has a flat tax system with 13% on individual income (plus higher social taxes), there is also a RUB568,000

“The pension tax rate for most of the workforce is 22%, assessed at the source of income on top of salaries, and it goes to the PFR,” says Khavronyuk. “For all those born in 1966 and earlier, the whole of it goes straight through to a pay-as-yougo (PAYG) system. For 1967-ers and their juniors, 16% goes to PAYG and 6% to OPS, the funded component of the Russian pension system.”

bne December 2013

ceiling for the full-rate pension tax in 2013; any income exceeding this ceiling is taxed at a 10% rate, and the proceeds go solely to PAYG. However, as the government is already short of cash it decided to raid the pension system for investment cash last year.

“Although there were many calls to nix the funded component contributions entirely, in the end it was decided to reduce the payment rate for the 'molchuny' (the silent ones) to 2%, which seemed a generous compromise,” says Khavronyuk. “The 6% rate was supposed to remain for all those who either filed a special request with PFR or had moved their account to an privately run non-state pension fund (NPF). But the window

"Why so adamant? Because the pensioners are the biggest single electorally important constituency"

of opportunity to move accounts to private funds will be shut right in their silent faces on December 31, 2015.”

As of the end of 2012, about a quarter of Russians in the funded part of the system (or 20m people) had made use of the option to move the investible part of their pension contributions from the state-run to private-run funds.

But the wrangling is over. More recently, the state has dithered over whether to keep the 2% payments at all. “The current

alternative looks like a toss up between 6% versus 0%,” says Khavronyuk.

And that is not all. Next year the contributions to the funded part of the system will simply be expropriated by the state to make up for an expected federal budget deficit and to finance the gap in the PAYG system between liabilities and cash in the state pension fund, while in the second half of 2013 contributions will be frozen and transferred to the NPFs only after respective funds receive a CBR’s clearance for going joint-stock company and joining the national pensions accumulations’ insurance framework. . “Starting 2014, no payments to the funded component will be made for “molchuny” and all 22% will go to finance PAYG payments.

If they wish to continue those payments, however, they will have two more years to make their choice and migrate their accounts to a private fund,” says Khavronyuk.

It could be worse. In other countries of the former Eastern Bloc, like Hungary and Kazakhstan, the squeezed budgets have led to the state simply taking over the private pension business in toto, so the fact that the Kremlin has tried to compromise at all is something. But the monkeying about with rates and cash-grab all smack of short-term solutions, when the larger problem of building up a big and healthy pension system to serve the needs of both the state and the people is still being ignored.

“The key objective of the current reform is to reduce the budget deficit of the PFR,” says Khavronyuk. “Currently, the pension taxes collected cover about half of pension payments made, while the other half is covered by a special transfer from the state budget which keeps growing, and which is a matter of acute concern for the government.”

The Russian Cross (mln people) 55 53 Pension tax payers

51

Pension payees

49 47 45 43 41 39 37

Source: Sberbank

2050

2048

2044

2042

2040

2038

2036

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

35

8

I Cover story

The Wizard of Gaz One man's meteoric rise exposes the murkier side of Ukraine Graham Stack in Kharkiv, Ukraine

bne December 2013

Cover Story I 9

bne December 2013

M

ost of the headlines about Ukraine right now concern how the country is being pulled in two directions by the EU and Russia. But a reminder of how oddly Ukraine would sit in the European fold can be found in the story of the meteoric rise of one Serhiy Kurchenko.

long list were connected to GazUkraine group, which itself did not exist as a legal entity. A short-lived GazUkraine website claimed the group had existed since 2003, and aimed to become the leading fuel trading company in the country, but provided no information about the group structure.

A year ago, no one had heard of the fresh-faced 27-year-old trader of gas.

Now Kurchenko is a household name, having in the space of a year acquired a big oil refinery, a major football club, industrial and financial assets, as well as the media outlets that brought him to the attention of the public. His youth, unknown origins and apparently bottomless wealth have turned him into a major newsmaker. But none of the coverage of Kurchenko's mysterious and meteoric rise has found convincing answers to the main questions: who is Serghiy Kurchenko - the man dubbed Ukraine's "Wizard of Gaz" – and who is behind him?

In March this year, Kurchenko announced that his structures would be reorganised under the umbrella of VETEK Group – East European Fuel Trading Company, or SEPEK in Ukrainian. According to Kurchenko, the new entity has an annual turnover of a whopping $10bn. But again, things are as clear as mud: in fact, there are two identically named companies VETEK founded on the same date, but with different registration codes, according to the state register.

Buying the messenger Kurchenko was first named publicly in October 2012 by Forbes Ukraine as a major player running fuel trading structures under the umbrella name of GasUkraine, which had cornered the liquid gas market in Ukraine and made rapid inroads into the far larger markets of natural gas and oil product trading. Competitors complained that customs authorities were blocking their fuel imports on the border, and state companies were also showing the company favouritism in auctions of propane.

Right from the start confusion has reigned over what companies are part of Kurchenko's holding – and where the revenues are coming from. When Forbes Ukraine broke the story in 2012, a source provided the magazine with a list of over 50 companies comprising the GazUkraine group, none of which were owned or run

by Kurchenko directly – not even the apparent flagman GazUkraine 2009, which had cornered Ukraine's autogas (propane) market already in 2010. But a spokesman for GazUkraine denied that most of the companies on the

VETEK is now pulling out all the stops to disassociate the company from the GazUkraine group, despite Kurchenko being first contacted by journalists via GazUkraine. "GazUkraine is not a part of VETEK," Kurchenko's press service told bne in a statement. VETEK is "focused on investments into the oil and gas industry of Ukraine and Europe," and the strategy is "to create a vertically integrated company."

Kickoff In December 2012, Kurchenko bought his first assets – his hometown Kharkiv's

Sceptics have pointed out that all these assets are in poor financial health.

And Kurchenko's most controversial investment has been downright value destructive: in June, Kurchenko acquired the UMH media holding that owns the Forbes Ukraine franchise, as well as another leading weekly publication, Korrespondent.

Forbes Ukraine during its brief existence had become the brightest star among Ukraine's investigative media – and was the publication which broke the Kurchenko story in 2012. On November 13, 14 journalists including the chief editor announced their resignation due to interference in editorial policy. Ten days later, the editorial team editor at Korrespondent, who had published the only interview with Kurchenko to date, followed suit. The team that had investigated Kurchenko at Forbes Ukraine had already resigned immediately on the deal being announced in June, claiming they had received physical threats during their investigation of the source of the 27-year-old's wealth and to whom does he owe it.

Kurchenko, in his only major interview to date, told journalists from Korrespondent that he was a self-made man from a poor family who had started working at the age of 16 and had never stopped. Kurchenko said he had risen from sales manager at the age of 16 in

"The influence of economic elites on Ukrainian politics is fundamental, the penetration of the state by business is a reality" football team, the leading Ukrainian club Metallist. In March this year, VETEK continued the shopping spree, announcing it had bought the Odesa refinery, one of Ukraine's largest. To date, the 27-year-old has now added the Kherson oil transshipment port, and the mid-sized Brokbiznesbank and regional Realbank.

Kharkiv firm Expogaz, to become deputy director in charge of the autogas (liquid petroleum gas or propane) wholesale department by the age of 20.

He then left to set up his own business in 2005, Kaskad KSV, and started investing in real estate during the credit bubble years. "Those were years when

10

I Cover story

prices on the real estate market rose 200-300% per year. Banks gave loans to everyone who asked, to completely normal people like myself, at 7-8%," he told the weekly.

With the revenues, he launched his own gas trading business and bought out Expogaz. "Perhaps one pillar of my success comes from having worked 11 years in one and the same business," he told Korrespondent. "Another factor has been the continued ability to source cheap credit."

The logical next step was to start importing oil products alongside autogas, which Kurchenko told Korrespondent helped his business reach an annual turnover of $200m in 2008. bne spoke under condition of anonymity to a former manager in Kurchenko's structures who worked with him from the beginning, who confirmed Kurchenko's timeline.

But according to the source, Kurchenko's deceased father played a key role in his vertical takeoff. "Serhiy's father was a diplomat in a Ukrainian embassy in the Balkans. He would arrive once or twice a year to sign papers. He carried himself like a nobleman, smoked a pipe, walked with a stick and wore a greatcoat. He had tremendous bearing and we all bowed down before him. If he took a dislike to some one working for Serhiy, Serhiy would fire that person. His word was law."

According to the source, despite the father's dominance, Serhiy had strained relations with him and never visited him abroad. The strain may have derived from the youngster's failure to shine academically, as a result of apparent severe dyslexia – in Ukraine an underdiagnosed condition often equated with illiteracy. "Perhaps this is why he is now buying print media," suggests the source, who adds that perhaps to compensate for this Kurchenko has developed a phenomenal ability to win friends and influence people. "He can make friends with anyone in the space of five minutes."

"It was Serhiy's father who got Serhiy his job at Expogas at the age of 16, he

bne December 2013

was acquainted with the owner. Then it was his father's connections in Russia that got the wholesale business started: he arranged privately with managers at Russia's Tyumen Oil Company (TNK) for import to Ukraine of autogas at incredibly cheap prices. First of all the scheme was implemented through Expogaz, with whom he was on good terms. Then his father set Serhiy set up on own his own when he turned 21. We earned UAH1.2 on every litre sold."

"Serhiy saw the chance to occupy the mid-size wholesale niche," the source says. "We were selling to 50-60 clients, each of whom controlled 10-20 filling stations. We had the whole of the surrounding region in our hands. The whole business ran on cash, and had us shifting 50-60kg of hryvnia notes per day."

"In 2006-2007 we started to win tenders, using traditional means. We won the contract to supply autogas to the entire city transport system for one year. That was $500,000, paid upfront.

The price at which we sourced the gas was around $50,000," according to the source. "Serhiy owned 3,000 square metres of central office space – but the rental revenues were nothing compared to what we earned on gas."

Business became less easy after the death of a key manager in a car crash in February 2007. Then in 2008 Kurchenko was himself struck by family tragedy, when his father died in a bizarre domestic accident. "Serhiy was devastated," bne's source recalls.

In 2009, Kurchenko abruptly announced he was moving to Kyiv, saying he had won a large contract there – and fired almost the entire management team in Kharkiv. "The evening after I had been fired, a top official from Kharkiv's economic crime squad came to me at home in an SUV with private registration, and warned me never to say a word to anyone about what had been going on," the source says. "I never heard from Serhiy again until I saw him on TV in 2012 when he bought Metallist – you can imagine the shock. But I want to pay tribute to Serhiy, who is an

outstanding personality and gave me the best years of my life."

Funny money So what had happened in the intervening three years, between suddenly leaving Kharkiv and the triumphal return in 2012 to purchase Metallist?

Public records show that after Kurchenko's move to Kyiv, his Kharkiv firms continued to function on paper.

Indeed, they apparently snowballed, with court records showing they acquired trading relations with dozens of small firms in Kharkiv and the Crimea, none of which had any clear business profile. Hundreds of millions of dollars started to percolate through this network of companies.

In late 2011, Kurchenko's Kharkiv firm, Kaskad KSV, achieved mention of a sort in the media. The firm was listed among 38 companies which an anonymous internet post on a smear site claimed were "officially approved"

by Kharkiv tax authorities as providers of tax evasion and money-laundering services – often referred to in Ukraine as "conversion centres" of bank funds into "black cash" and vice versa, using networks of brass-plate companies and fictive supply contracts. Such "conversion" services are used by owners of private business for tax evasion, and by managers at stateowned business for embezzlement.

Kurchenko vehemently denies any links to tax evasion. "This is all exaggerated by our competitors. Their PR and legal departments invent all this, [arguing] because we have a large share of the market it means we don't pay taxes," he said in the interview with Korrespondent in May. bne established that one contact number for the alleged "conversion centre" was that of Evgen Zhilin, a former officer in Ukraine's security service and antiorganised crime squad, who spent three years in police custody in connection with high-level assassination attempts.

He now runs a self-styled "fight club" in Kharkiv, and a political movement with a pro-Stalin line. Without mentioning

bne December 2013

him by name, the internet leak may have targeted Zhilin, whom other publications have linked to Kharkiv "conversion centres".

Zhilin, who calls himself a financier, sang the praises of Kurchenko when contacted by bne. He said that Kurchenko had also started as a financier and they had previously collaborated, but Kurchenko had now moved on "to a far higher level of business than a simple businessman like myself."

Cover story

"I know for a fact that law enforcement organs here have no complaints about him, and all his financial schemes are legal," Zhilin assured bne. Zhilin said that talk of links to "conversion centres" was simply denigration of Kurchenko

I 11

by those jealous of the young man's success and outstanding capabilities.

"Serhiy has a talent for making friends and forging ties quickly."

Other sources contradict Zhilin's

"I know for a fact that law enforcement organs have no complaints about Kurchenko and all his financial schemes are legal" positive assessment. Ukraine's financial regulators cracked down on "conversion centres" in 2011-2012 in an effort to shore up tax revenues and the exchange rate. This resulted in a slew of court cases relating to such centres and fictive firms, shedding light on the shadow financial economy – and suggesting Kurchenko's links to one of the most secretive and powerful families in Kharkiv and Ukraine.

Family business Some of the scores of court cases underscore links between Kurchenko's Kaskad-KSV and companies on the Forbes list of alleged GazUkraine companies. Others point to links between the firms from the GasUkraine list and money laundering, as well as to apparent protection by law enforcement – including cases where tax police have started investigations of these firms, only to be prosecuted themselves for exceeding their powers. One company on the Forbes GazUkraine list, TOV Business Consult, registered at the same address as GazUkraine 2020, was named in a criminal case in 2013 as laundering bribes extorted by tax police.

However, the volume of money passing through these companies far exceeded just that, rising to the tens of millions of dollars. So where has all this money been flowing from?

Apart from the motor fuel and autogas trading businesses, a major source of revenue in 2010-2012 appears to be tenders at state-owned energy company

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I Cover story

Naftogaz – Ukraine's largest company accounting for around 10% of the economy.

In total, according to the state tender database, firms listed on the Forbes list of GazUkraine companies received a whopping $220m worth of Naftogaz tender awards starting 2010. The lion's share of these was sourced from Naftogaz's offshore drilling subsidiary called Chornomornaftogaz. NGOs monitoring state tenders have argued that many of these tenders were rigged.

bne December 2013

behind Kurchenko. Volodymr Katsuba was head of the Dergachi district administration in 2006-2012. A close ally of the family, Vasily Salygin, former chairman of the Kharkiv regional assembly, became deputy head of the customs' service in 2010.

Elder son Serghiy Katsuba has held top positions in procurement in Naftogaz and state nuclear power company Energoatom since 2003.

From 2010-2012, Serhiy Katsuba was deputy CEO of Naftogaz, with

in Ukraine – where law enforcement organs often do the exact opposite of what they are supposed to do. Such troubling issues inevitably call into question whether Ukraine is at all ready to deepen its relations with the EU through the signing of association and free trade pacts at any time in the forseeable future.

In many ways, Ukraine still far more closely resembles Russia's corrupted centralised system of government and business, where the political and security service elites are deeply entrenched. It's more natural therefore, argue some, that Ukraine should plump for Russia with its immediate offer of cash with few reforms or questions in return for joining its Customs Union trade club instead.

"In Ukraine there is a symbiotic relationship between power and politics, without visible borders between the two. The influence of economic elites on Ukrainian politics is fundamental, the penetration of the state by business is a reality, which leads to weak institutions and

Even TOV Business Consult – named as laundering bribes for tax police – was awarded $11m worth of tenders by Naftogaz. bne has previously written how in 2011 Naftogaz purchased an offshore rig at an inflated price from a UK shell company linked to a Luganskbased "conversion centre" that is connected to a sprawl of Luganskregistered fictive companies, such as the breathtakingly named Lugpromstroisantekhmontazh. Further court cases resulting from the 2012 state crackdown on "black cash" point to the Lugansk cluster intersecting with the Kharkiv/Simferopol sprawl in shifting huge sums of money around, suggesting it was part of the same large operation, sapping funds from the ailing cash cow Naftogaz and other state companies.

One of Kharkiv and Ukraine's most powerful and secretive families is the Katsubas, which could be the power

"Kurchenko can make friends with anyone in the space of five minutes." overall responsibility for procurement.

Katsuba named his younger brother, 26-year-old Oleksandr, as deputy CEO of Chornomornaftogaz, also with oversight of procurement.

In 2012, Volodymr and Serhiy Katsuba won seats in parliament. The Katsubas were contacted via their parliamentary offices, but failed to respond. In a Forbes Ukraine interview in December 2012, Serhiy Katsuba denied any existence of corruption in Naftogaz's procurement.

What a state The Kurchenko story serves to illustrate to many just how little rule of law exists

corruption as a pattern of the Ukrainian state," Stefan Meister of the Brussels think-tank the European Council on Foreign Relations tells bne.

"I don't think that measures such as signing [an EU] Deep and Comprehensive Free Trade Agreement or Association Agreement will change that situation, as long as rule of law is not working, transparent structures do not exist and political institutions like the parliament are full with business people and the same is true for the government," he argues.

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14

I Perspective

bne December 2013

Emerging Europe's rising prosperity Ben Aris in Moscow

D

espite its current financial woes, Slovenia is the most prosperous country in Emerging Europe, according to the latest annual prosperity index from the Legatum Institute.

While income is an important part of prosperity, the institute has broadened the definition to take into account of some of the non-material things that make life worth living, as defined in sub-indices such as "Safety & Security", "Personal Freedom", "Social Capital", "Education", amongst others.

“Traditionally, a nation’s prosperity has been based solely on macroeconomic indicators such as a country’s income, represented either by GDP or by average income per person (GDP per capita)," the institute says on its website. "However, most people would agree that prosperity is more than just the accumulation of material wealth, it is also the joy of everyday life and the prospect of being able to build an even better life in the future."

"The Prosperity Index is distinctive in that it is the only global measurement of prosperity based on both income and wellbeing,” it adds.

The US may be the richest country in the world, but it ranks a poor 11th out 149 countries in Legatum's Prosperity Index.

Norway, on the other hand, was ranked the most prosperous country in the world this year for the fifth time in a row.

Germany has recorded the highest increase in overall prosperity since 2009, but most of the rest of Western Europe bucked the trend and has seen its prosperity fall for two years in a row. However, following on close behind Germany as the fastest improvers are the new EU members from Emerging

Europe. “The evidence indicates that many of these states are becoming increasingly entrepreneurial, helping them to improve their level of overall prosperity," the institute said in its report, released October 29. "This could presage a change in the landscape of European prosperity over time.”

Slovenia is the standout winner in Emerging Europe in this year’s index, retaining its ranking as the 24th most prosperous country in the world and putting it head and shoulders above all the other countries from the region. It has the highest percapita income at $27,474 and scored best with the "Education" (9th) sub-index. But given its current financial crisis, unsurprisingly it scored worst in the "Economy" (53rd).

Prosperity in CEE/CIS CENTRAL EUROPE

CENTRAL ASIA

CZECH REPUBLIC

29

KAZAKHSTAN

47

POLAND

34

MONGOLIA

57

ESTONIA

36

UZBEKISTAN

63

SLOVAKIA

38

KYRGYZSTAN

80

HUNGARY

41

TAJIKISTAN

94

LITHUANIA

43

LATVIA

48

EASTERN EUROPE

SOUTH EASTERN EUROPE SLOVENIA

24

BULGARIA

49

BELARUS

58

CROATIA

53

RUSSIA

61

ROMANIA

55

UKRAINE

64

SERBIA

76

MACEDONIA

79

AZERBAIJAN

81

ALBANIA

83

GEORGIA

84

TURKEY

87

ARMENIA

95

Perspective I 15

bne December 2013

There are other surprises. Czech Republic may be mired in political turmoil and a stubborn economic downturn, but it beat out the foreign investors’ darling of Poland (34th) to be the most prosperous country in Central Europe (29th). It does best in the "Safety & Security" sub-index (23rd), but worst in "Personal Freedom" (50th)

"The only countries in the CEE/CIS region improved their score were Estonia, Belarus and Georgia" It will come as no surprise that Kazakhstan was ranked the most prosperous country in Central Asia, but its 47th place

Indeed, the biggest surprise in Eastern Europe is that Belarus is ranked higher than Russia in 58th place, thanks to the more diversified and manufacturing-oriented nature of its economy, which favours workers over the handful of superrich Russian oligarchs that dominate Russia's economy.

Perhaps the biggest surprise is how badly Turkey, which has been the doyen of the region as far as investors are concerned for the last two years, does on the Prosperity Index. Its 87th position is better than only Tajikistan (94th) and Armenia (95th) in the entire Central and Eastern European/Commonwealth of Independent States region.

Even Uzbekistan (63rd) is found to be more prosperous than Turkey by Legatum’s definition.

EBRD offers cold comfort

Baseline

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-8 Dec 12

Secondly, the spread is extremely wide. In the best (and most unlikely as it is in the 90th percentile) case scenario, growth

50th percentile

Sep 12

Firstly, that baseline is actually near the top of the range surrounding the 50th percentile (the spread that has a 50% chance of happening). In other words, there is a 50% chance that average growth this year will come in around 0.5 point higher, but by the same token growth could also fall, only much faster. The spread has the regional average dropping to 0% in summer 2014.

90th percentile

Jun 12

However, those are the baseline predictions. This month's chart shows a little more of the EBRD's thinking, including the spread of uncertainty in its forecasts. It's significantly more worried than the poor baseline prediction suggests.

Transition region real GDP Growth (%, quarterly, year-on-year)

Mar 12

The EBRD reduced its average GDP growth forecast for the region in 2013 by 0.2 percentage points from the last prediction made in May to leave it at 2.0%. That's slower than the 2.7% growth posted last year. The forecast for 2014 has been cut by 0.4 point to 2.8%.

could rise as high as some 6% next year. But if things go really wrong, then the region would contract by around 3%. That's a 10-point spread around a prediction of 2.8% baseline growth only six months ahead. Not a very comforting outlook.

Dec 11

T

he European Bank for Reconstruction and Development (EBRD) released its latest outlook for the Central & Eastern Europe/Commonwealth of Independent States (CEE/CIS) region on November 11, which showed that while growth is expected, it will be slower than previously thought. Looking closer, the forecast is even more downbeat.

Sep 11

CHART:

also puts it ahead of the laggard in Central Europe, Latvia (48th), as well as all the other former Soviet countries in Eastern Europe, including Russia (61st).

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bne December 2013

Putin struggles to contain corruption Ben Aris in Moscow

R

ussian President Vladimir Putin is frustrated with the slow progress in his anti-corruption drive and struggling to take charge of the situation. His answer has been to tighten the screws, though in ways that are upsetting the business community.

After ignoring the problem for over a decade, Putin has been forced to deal with the problem of graft because Russia can no longer afford to waste so much money. Despite the $100-plus oil price, the federal budget is only just in profit and actually fell into deficit in October, according to the finance ministry. Twin current account and federal budget deficits are set to become a permanent fixture in a near future, say economists, due to the rise of the middle class and a “new normal” of slower

growth. However, the anti-corruption programme launched by then-president Dmitry Medvedev in 2008, and taken over by Putin since, is not producing the desired results.

In the latest move by the president, the Russian Economic Development

would be a significant step backwards for improving Russia’s business climate if adopted. “The absence of norms in Russian Federation legislation… allows foreigners, stateless people and Russian companies where foreigners or stateless people hold 50% or larger stakes to acquire ownership and administration

"We think the Federal Tax Service of Russia has more than enough powers"

Ministry proposed on November 18 to re-introduce permits for foreigners who want to own Russian property, which

rights for real estate whose turnover is not restricted and located on the territory of the Russian federation

Eastern Europe I 17

bne December 2013

without control, including land plots, flats, other premises, buildings, factories and complex properties, which may also create danger for Russian security,” the ministry said, reports Prime.

In other words, people are buying property and the state has no idea who they are, where their money is coming from and where it is going.

Reverse course The Economics Ministry proposal is in the same vein as another controversial proposal by Putin submitted to the Duma on October 11 that will also increase the control of the state over the economy. Putin wants to reverse a liberalisation of the criminal code pushed through by Medvedev in 2011 and make punishments for economic crimes significantly harsher.

The idea behind Medvedev's reforms was to prevent rival firms using bent officials and the criminal laws in attacks on each other. But Putin claims that Medvedev’s relaxation of the criminal code has failed and public officials convicted of bribery under current law now just get off with fines – most of which are never paid. Medvedev's reform also cut the amount of time police can hold a suspect in jail, some classes of economic crime were eliminated and the penalties on other crimes were also reduced.

The clearly frustrated Putin has reverted to type and prefers the cudgel over the carrot: one of his suggestions to is to allow any investigator to instigate tax investigations on their own authority again. (Following the reform, only officials from the tax service can do this.)

The idea has caused wails of protest and even Putin’s new ombudsman for business, Boris Titov, signed a letter asking the president not to do it, as giving this power to any investigator is regarded by many as a major source of corruption. "We think that the Federal Tax Service of Russia, which administers the matter at the moment, has more than enough powers, and the government should simply define the problem more clearly,” Titov and other business groups said in their letter to Putin.

Taxes in space

bne Roll over Yuri Gagarin. Russia just notched up another space-first: earlier this year, cosmonaut Pavel Vinogradov paid his taxes online from the International Space Station, the first time anyone has ever made a payment from space to a bank on terra firma.

Russia did extremely well in the recent World Bank Doing Business ranking, shooting up to 92nd place and overtaking China (96) in the process to become the easiest country for doing business amongst the BRIC countries. (India was ranked 158, Brazil 159).

Russia still scores very poorly on some of its traditional problems – specifically, it is still nearly the worst place in the world to get power to a factory, dealing with customs remains a nightmare and setting up a business is extremely difficult. But when it comes to paying your taxes not only did Russia beat almost all the emerging markets, it is easier to pay taxes in Russia than it is in the US. Russia’s total tax take is 50.7% of corporate profits, which is still higher than the global average of 43.1%, but it only takes 177 hours to file a complete tax return and only a total of seven payments are required, compared with the global average of 268 hours and 26.7 payments respectively.

The latter two results in particular are responsible for Russia’s 56th place out of 178 countries in a survey by PriceWaterhouseCoopers that was released in November. Russia was better placed even than the US in 64th place.

There are two reasons for this strong performance. The first is Russia’s simple flat tax regime of 13% for individuals and 24% for corporations.

What drives the total tax take number up is the still high labour and social taxes. But Russia, like all the emerging markets, is working to cut these taxes to spur growth.

The other factor is that the government has put filing tax returns online and Russians have taken to this with enthusiasm. Last year three-quarters of tax returns were filed online.

Unlike the US' ill-fated HealthCare.gov launch that quickly turned into a farce, the Russian government's tax service portal is so easy to use you can even pay your bills from space.

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Trying to gag Lady Gaga A women that went to a Lady Gaga gig in St Petersburg with her 13-year-old daughter successfully sued the international pop star for promoting homosexuality to minors, with a Russian court ordering the singer to pay a RUB20,000 ($625) fine.

The plaintive Nadezhda Petrova claims that she and, more importantly, her young daughter were forced to witness dancers simulating lesbian sex acts.

Russia’s recently enacted laws covering homosexuality do not persecute LGBT people specifically, but are framed in the context of preventing minors from being exposed to alternative sexualities, otherwise dubbed "gay propaganda" by Russia.

Lady Gaga's promoter Planeta Plus is also being sued by a member of the anti-gay Trade Union of Russian Citizens, one of a number of groups that unsuccessfully pursued Madonna for promoting "homosexual propaganda" at a gig in August 2012.

Given Lady Gaga’s shows are well known for their outrageousness, the whole case begs the question: what on earth was Petrova expecting to see when she bought the Lady Gaga tickets? And why did she take her daughter to the concert if her sensibilities are so easily offended? Petrova also complained the singer encouraged her fans to consume alcohol.

Imagine it: telling Russians they might have a good time if they had a drink. How shocking!

However, what probably really caused the problems was Lady Gaga’s onstage display of support for Russia’s LGBT community, a sensitive political topic as Madonna found out when she was last in Russia.

bne December 2013

Action man While the Kremlin’s commitment to seeing through real anti-corruptions measures is widely questioned, Putin’s proposals that came out of the blue are a clear sign he wants to see results: the economy and finance ministries were both unaware of the plans and both, unusually, publicly criticized it.

Putin’s main complaint is that since the 2011 reform came into effect, the volume of charges filed for tax-related crimes has fallen substantially. However, the pro-reform camp counter that the number of successful convictions has risen and argue that the fall in cases means there are a lot fewer spurious cases than there used to be.

Whichever way the fight over Putin’s proposals goes – and increasingly the president and his government are engaged in an open policy debate about what is best for the country, rather than Putin simply dictating what he wants

to own foreign property or hold foreign bank accounts) to state officials in general, and more recently employees of state-owned companies, who have also been made personally responsible for malfeasence occurring at their companies.

Another idea floated in November is a bit more loopy and so far not gaining much support in the Duma. Russian lawmaker Mikhail Degtyarev, from Vladimir Zhirinovsky’s nationalist LDPR Party, suggested the ownership restrictions on owning dollars should be resuscitated from Soviet times.

He cited the importance of protecting Russian citizens from, “the American debt pyramid” by simply taking away their dollars, which Russians can legally hold in currency accounts at most Russian banks. “The proposed restrictions can be treated as a declaration of a start of a new, dollar-less international currency system, giving

“The proposed restrictions can be treated as a declaration of a start of a new, dollar-less international currency system" to happen – the stream of initiatives will continue as the state attempts to effectively institutionalize the fight against corruption, rather than just sling dodgy officials into jail.

the status of the world’s reserve currency to the Russian ruble, and eliminating the resident banks’ dependency on the American dollars,” the explanation attached to the bill said.

Foreign investors will hate the Economic Ministry’s idea of re-introducing permissions to own property, but Putin’s proposal on November 3 to levy a 30% tax on dividends is far more welcome and won’t affect foreigners who are open to declaring the ultimate beneficial ownership of equities.

Degtyarev is a colourful character and was recently defeated in the elections for Moscow mayor where he ran on a platform of fighting for the forces of Good in the coming Armadgeddon. “I believe that we’ll defeat the Antichrist – I’m sure of it – and that Russia will lead the fight against the Antichrist,” he said.

Most of the Kremlin's ideas are eminently sensible. The list of those who have to declare their income (and that of their immediate family) has been steadily extended from Duma deputies (who also are not now allowed

Expect more of the same in the future, but hopefully some of the better ideas will stick.

bne December 2013

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Cadogan looks to help wean Ukraine off Russian gas INTERVIEW:

Ben Aris in Moscow

U

kraine is finally trying to break its addiction to Russian gas and Cadogan Petroleum is one of those companies well placed to make that happen.

A medium-sized independent oil and gas producer, Cadogan was responsible in 2011 for bringing Italian energy giant Eni into Ukraine to start a $55m exploration and production programme on two gasfields in Ukraine’s DniproDonets eastern basin, the traditional home of the limited domestic gas production the country already has.

Subsequently in 2012, Cadogan and Eni signed Ukraine’s first unconventional gasfield agreement concerning the western Lviv gas basin, which looks the most likely to be first to realise the country's shale gas potential next year.

A pilot production project could be sanctioned within three years should the exploration activity be successful.

Obviously given the running battle that Ukraine has been fighting with Russia since 2006 over the price of gas imports, the government in Kyiv has become extraordinarily interested in increasing domestic production. “In the last three years the government has done very well on opening the door to the majors.

It’s a big step for the country. There is a change in policy since 2011 via PSA [production sharing agreements] which are giving significant support to the industry,” Cadogan’s chief operating officer, Adelmo Schenato, tells bne in an exclusive interview in Moscow, arguing that Ukraine’s gas business has finally come of age.

Domestic bliss The country badly needs to wean itself off Russian gas imports, which are draining the cash-strapped country of precious hard currency. It is easily the most energy inefficient country on the Continent, making it the 14th largest consumer of gas worldwide and fifth largest in Europe.

Currently, Ukrainian demand for gas is on the order of 55bn-60bn cubic metres a year (cm/y) of gas. However, the country has pretty significant gas reserves: 969bn cm of gas in addition to 395m barrels of oil, according to official estimates.

And it has been producing oil and gas since Soviet times: currently annual production of gas is 18.5bn cm/y along with 81,000 barrels of oil per day (b/d).

That's enough to cover 37% of Ukraine’s gas needs with Russia supplying the

change rapidly. Cadogan and Eni broke the ice, but a string of other deals have been done in the last year, the most recent a $10bn PSA with US majors Chevron and ExxonMobil that was signed on November 7, which should increase domestic production by half again to total nearly 30bn cm/y.

Energy Minister Eduard Stavytskyi said at the signing ceremony in Kyiv that Chevron will extract shale gas in the Oleske field, while an Exxon-led group will explore the Skifska field in the Black Sea. Chevron will initially invest $350m in geological surveys and then “billions of dollars” as it plans to drill at least 2,000 wells, the minister said. The production could yield 5bn-10bn cm/y, he estimated.

If these projects work out, “the cost of gas production will be at least threetimes lower than what Ukraine is paying

"The cost of gas production will be at least three-times lower than what Ukraine is paying for Russian imports" remaining 27-50bn cm/y at enormous expense due to a bad deal signed by former Ukrainian prime minister Yulia Tymoshenko in 2008.

The state-owned Naftogaz is responsible for 90% of the gas produced today. But with the government’s new attitude to foreign investors that will probably

for [Russian] imports,” Stavytskyi told journalists gleefully during the press briefing.

Ukrainian President Viktor Yanukovych followed up with the boast that not only will Ukraine be able to cover its entire domestic needs by 2020, but may even become a gas exporter.

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Whatever the final outcome, clearly things have started to move in Ukraine’s gas business.

want to get all the institutional investors back into the shareholding structure that should be but are not,” he says.

Pioneer Cadogan is at the forefront of the shift to raising commercial production of gas in Ukraine. The company was originally set up in the 1990s by some Ukrainian entrepreneurs and floated on the London Stock Exchange in June 2008 with a valuation of about $1bn. Under new management since early 2011, today 29.9% of the company is owned by the company SPQR Capital Holdings, with the remainder in the hands of smaller institutions, high net worth individuals and retail investors.

Back in business Ukraine has two gas basins in the east and west of the country that were well explored in the Soviet-era, thanks to their proximity to Western Europe, which has always been the main consumer of gas from the region.

However, there is a third basin in the Black Sea that was barely touched by the communist regime. And this is not to mention the unconventional gas deposits that were also ignored until recently, as the technology to develop them simply did not exist.

Operating in one of the wildest markets in the former Soviet Union, Cadogan has not had an easy time of it. There were "management issues" early on and some disappointing exploratory wells as well as technical problems.

Cadogan has a total of nine licences in Ukraine’s two traditional gas basins, in which Eni holds 30% of the Pokrovskoe license and 60% of the Zagoryanska license. Exploratory wells have already been sunk in these two fields, but the

“The question is if US shale gas techniques can be transferred from the US to Ukraine – it's hard to say” Cadogan’s problems are all too visible in the company’s share price, which has plummeted since the IPO: today, Cadogan’s market capitalisation is a mere $33m, a 50% discount to the company’s cash pile of $63m.

Still, Schenato, an Italian national who has worked on gas projects all over the world, says that Ukraine’s gas sector is entering a new phase thanks to the changing attitude of both the government and international energy companies. The so-called "shale gas revolution" sweeping the world has fundamentally changed the terms of the gas business.

Schenato and his team were in Moscow as part of an international tour to reintroduce the company to investors and analysts, as they have a lot of good news to present that will, they hope, turn Cadogan’s fortunes around. “We

initial results have been somewhat disappointing so far, according to analysts. Work-over is continuing nevertheless to try to put the wells into production.

However, it is the shale gas joint venture signed with Eni in 2012 that continues to attract the most interest. Eni took a 51% stake in the company Westgasinvest, which holds licences to develop highly promising shale gas deposits in the Lviv basin. Of the remaining 49%, 34% is held by the state-owned company NAK Nadra and 15% by Cadogan. Drilling on the first exploratory wells is expected to commence in the middle of 2014, with Cadogan being carried for its 15% of the exploration costs.

Cadogan is doing the work on the ground at the two conventional joint ventures, while at Westgasinvest it is

Eni taking the lead, bringing in modern technology and expertise from its US operations and elsewhere. “The Lviv Basin is considered to be one of the most attractive basins in Europe for the exploration of unconventional gas, being a continuation of the Lublin Basin in Poland which has already attracted substantial interest from the hydrocarbon industry,” Eni CEO Paolo Scaroni said at the time of the deal.

The first exploratory wells are going to be drilled in middle of 2014. “The question is if US [shale gas] techniques can be transferred from the US to Ukraine – it's hard to say,” says Schenato. “There will be a two- to three-year exploration period after which there will be a pilot production. Only then will we be able to answer the question. But we have a unique opportunity to develop a reference model in Ukraine – a model that all the other international companies can come in and copy.”

With three projects already in hand, Cadogan is already starting to think about the future. It still has half a dozen other attractive licences to exploit. “We are looking for partners for some of the other major licences,” says Schenato, who is not just an operations man, but has built up a reputation for being good at the business-side too in his previous jobs. “The most expensive in terms of capex are also the most promising fields, especially the Monastyretskaya and Bitlyanska field, which have in the range 400m barrels of oil equivalent.”

Both these fields are close to Polish border and benefit from all the existing transport links and infrastructure. The Borynya field, part of the larger Bitlyanska licence, was drilled twice in the 1980s by Soviet engineers and although several interesting gas bearing intervals were assessed, severe technical problems with both wells hampered further progress.

In 2009 under previous management, Cadogan drilled a new well and also ran into difficulties with a "gas kick" (influx caused by rapid pressure increase while drilling), however with a new technical and sub-surface team already in place, Schenato is confident that all these problems can be overcome.

bne December 2013

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I 21

Indeed, it seemed as if every third person that came to the microphone would call out the names of their family members. Along with each name came the age, occupation and date of the execution. The occupations were strikingly ordinary: worker, shopkeeper, janitor, guard, usher, vet, priest, secretary, low-level government employee. Some of them were junior NKVD (the Soviet secret police in the 1930s and 40s) officers. No famous names or important jobs.

A memorial day few Russians want to remember Julia Reed in Moscow

"W

ho was killed in your family?" A man in a beret in his early 60s asked me as he joined the long queue of people.

We were both attending the annual recital of the names of the victims of political repressions in Russia by the Solovetsky Stone in Moscow's Lubyanka square, right next to what was the KGB headquarters. This stone was brought from the Solovki Islands in the icy seas off the far northern coast of Russia, where the first Gulag prison camp was opened in 1919. (Bizarrely, the RUB500 bank note pictures the islands' monastery.)

I wasn't ready for this question since I somehow assumed that repressions should concern all members of the society and not just the families of the victims. Yet a large number of people in the queue held photographs of their loved ones. The man next to me had a small self-published booklet that contained photocopies of the verdicts and even names of the people who gave evidence or signed the papers that led

to his father being executed and his older sister sent to Mordovia, one of the locations of the Gulag prisoner camps (and where until recently Pussy Riot leader Nadezhda Tolokonnikova was being held).

"Last year I waited for three hours," said Arkady Grymov, 62. "It's because many people do not just read out the

"Perhaps you know somebody?" insisted the same man behind me in the queue. I realized that I could not think of anyone who I was certain was repressed, and this was telling of the environment of secrecy and avoidance that surrounded my Soviet upbringing.

Unwanted history If you have never heard that October 30 is a memorial day to commemorate the victims of political repressions in Russia, you are not alone. In fact, only a fraction of Russians know. This is not surprising: not only does this date not come up in the top news of the state television channels, it hardly even makes it into the liberal internet news as a newsworthy discussion topic.

Yet just in Moscow there are archived records of 30,000 people killed between 1937-1938. Soviet leader Nikita Khrushchev's landmark speech denouncing Stalin in March 1956 made the fact of repression in the USSR public and gave rise to the process of

"There is no family in Russia who have not been affected by the repressions" names they are given (by the members of Memorial, a history preservation society that researches and archives information on repressions in the Soviet Union and about the Gulag system), but they also recite poems, make speeches and add the names of the victims they knew personally."

rehabilitation and release for the victims.

The topic became widely publicized and debated again in the 1990s with the collapse of the Soviet Union, when even the ban on the Communist Party was being discussed but rejected by the Constitutional Court.

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However, Russia's mass media pay little attention to the subject. It is safe to say that today's Russians have chosen to ignore the darkest days of their history.

"My mother told me when I was 15 that my great grandfather was repressed during the war for wanting to build a church in his village, but I never gave it much thought because I was told that it was a regular event for such times," says Natalia Belova, 35.

There are reasons for that. The current political climate does not favour any other view of the Soviet past other than as a period of heroism and dedication by

bne December 2013

Even the families of the repressed continued to join the NKVD and write letters to "Great Comrade Stalin" in those days. The generation who are now in their 60s – the sons and daughters of those who lived under Stalin – still don't see him as evil; the truth of his crimes and the revelations of this macabre period in the Russian history have not transformed their psyche. "Those who worked for NKVD had no choice, they were just recruited there. If they protested, they would be killed themselves. Such were the times – they were also the victims of the regime", says Lyudmila Kozlova, 66.

"It is safe to say that today's Russians have chosen to ignore the darkest days of their history"

the people. This year on the annual day when members of the public can come to the Solovetsky Stone to remember the victims, the state channels dedicated airtime to Putin giving out awards to distinguished members of society in the Kremlin Palace and to the celebrations of the 90th anniversary of the Komsomol (the youth division of the Communist Party of the USSR).

Soviet history is being rewritten in soft and warm tones, portraying life in the Soviet Union with its normal ups and downs, great enthusiasm and romanticism of large national construction projects involving the youth, with a strong emphasis on the real achievements of the "socialist paradise": the rapid industrialization of the economy, the victory in World War II, and Yuri Gagarin's first flight into space.

Unlike in Germany where there was an official denunciation of Nazism, Stalinism has never been officially denounced. Stalin is still largely perceived as an effective hardliner who won the war and built the nation and is, if not exactly a source of pride, at least not a source of shame either.

Today's older generations perceive Stalin as akin to Peter the Great or Napoleon: probably lacking some humane qualities, but a strong-willed patriot who did good things for the country.

Memorial holds tours of the sites in the centre of Moscow that are associated with Soviet terror. None of these places are known to the Russian public and only a few are on tourist maps, like the KGB building (which houses the successor FSB) or the Solovki stone.

Tours that give an insight into the history of repressions are not routinely conducted in schools, institutions of higher learning or Moscow-awareness tours. What's more, some of these buildings that should have become memorial museums, such as the Military Council of the Supreme Court of the Soviet Union, (where 31,456 people were executed in 1936-1938), have been privatised and turned into offices and commercial property.

Political repressions of today This year's memorial service at the Solovetsky Stone sparked a little more interest than usual from that small

segment of the public concerned with the plight of the more recent political prisoners such as jailed oligarch Mikhail Khodorkovsky, his partner Platon Lebedev, the jailed members of punk rock band Pussy Riot, and the protestors arrested and imprisoned following the clashes with the police during the protests in May last year.

Stalin-style policies of sacrificing individuals for the sake of grand ideas or persecuting those who are seen as different have not only not been denounced, but have taken strong root in the Russian mentality and are silently accepted by the majority. This is seen in the adoption of new laws restricting the freedom of gays, NGOs and in daily treatment of migrants.

Human life continues to have little value in today's Russia, much the same as it was under Stalin, and the judicial and prison systems have experienced little reform since the Gulag times.

Prisons are still characterized by harsh, undignified conditions and almost slave labour, as described in a recent letter from a prison in Mordovia by Pussy Riot's Tolokonnikova. Her observations are echoed by many other former inmates of Russia's prisons.

Putin is expected to endorse a new unified version of a Russian history textbook soon. One can only wonder if it is going to be history described from different points of view or continue the trend of emphasizing Russia as a "Great Country" and ignoring the suffering of its people.

"There is no family in Russia who have not been affected by the repressions," says Irina Ostrovskaya of Memorial.

Indeed, as I started writing this piece thinking that no one was affected by repressions in my family, I discovered that my great grandfather spent 10 years in jail, was released severely ill and was only rehabilitated in 1991, years after his death.

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Eastern Europe

Dog days on Russia's internet Ben Aris in Moscow

A

n airport book can change your life. So, it happens, can Yorkshire terriers. At least that was the case with Yuri Cherednichenko, the co-founder of Yorkme Inc and exactly the sort of young entrepreneur the Kremlin is trying to encourage to help remake the top-heavy Russian economy.

Yorkme makes specialist shampoos for Yorkshire terriers. “People love their dogs and are willing to spend a little extra on them. We chose the Yorkshire terrier as it is not a dog – it is a toy.

People’s relationship to terriers is very different from that with the two most popular dogs: Labradors and Golden Retrievers,” says Cherednichenko seated by the window in a downtown Moscow café.

It all started when Cherednichenko was stuck in Abu Dhabi airport on a stopover on his way to Indonesia for a holiday. “I picked up a book by Tim Ferriss called ‘The Four-hour Workweek: escape the 9-5, live anywhere, and join the new rich’ – a self help-guide to business,” says Cherednichenko.

But unlike most readers of waitinglounge pulp, he took the book’s advice to heart: after he got back from his holiday he went into business.

His first venture was also a "how-to" book. Born in the regional city of

I 23

the entrance exams – he already held an undergraduate degree in Physics – he flunked the English test, a prerequisite to enter the institution.

After succeeding on his second try, Cherednichenko wrote his own book on how to get through MGIMO’s English entrance exam. “We persuaded the guy who ran the bookstore on the campus to take the book. He asked us how much it cost and I told him RUB500. When I came back a few weeks later we found he had sold out, but had assumed I was talking about the wholesale price while he had charged RUB750 for the book.

I had no idea what I was doing,” says Cherednichenko, who still made about $8,000 on the one and only issue of the book; the university took umbrage and forbade the deal so that scheme died.

Cherednichenko began to look around for another idea. “Ferriss’ main point was to find a narrow niche and exploit it,” says Cherednichenko So he came up with the idea of a specialist dog shampoo, and chose Yorkshire terriers after spending an afternoon online and discovering that as a top-three breed there are up to a million Yorkshire terriers in Russia served by approximately 1,300 pet stores in the whole country.

“You don’t want to waste your time washing your dog. Most dog shampoos

“To market the Yorkme shampoo we produced a free booklet: Seven things you need to keep your Yorkshire terrier healthy and happy"

Petrozavodsk on the border with Finland (that is named after Peter the Great, not petrol), like many young Russians seeking a career he moved to Moscow in his early 20s and tried to get into the prestigious MGIMO (Moscow State University for International Relations), which used to be a breeding ground for the Soviet-era elite.

While he sailed through most of

are concentrated, which means you have to get the dog wet first,” says Cherednichenko. “We designed a readymade foam that you can rub straight on the dog. Then you rinse the foam off again. The whole process only takes a few minutes.”

Developing the foam turned out to be easy, as Cherednichenko turned to an old family friend, Valentina Ivanova,

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Balls to the wall A radical artist caused a stir in November when he sat naked in the middle of Red Square and nailed his testicles to the cobblestones.

“Dear citizen, please stand up,” said the first policeman to approach Pavlensky, caught on video by a bystander and later posted online. The seemingly befuddled officers eventually draped a blanket over Pavlensky and he was taken away in an ambulance for psychological assessment, as he was clearly displaying “suicidal tendencies,” the police said in a statement.

Having deemed him sane, Pavlensky was released, but will be charged with hooliganism, a catch-all charge the police have used often against political protests.

For his part, Pavlensky said that he was simply protesting against Russia’s slide into a “police state”, which is turning the country into “one big prison camp,” and his action was timed to coincide with the police forces' national holiday on November 10. "It's not the bureaucrats' lawlessness that robs the society of an opportunity to act, but our fixation on our defeats and losses is nailing us to the Kremlin's cobbles," he said in a statement.

This is not the first time Pavlensky has been in the limelight. During the December 2011 protests he sewed his lips together to protest against the lack of free speech in Russia.

Happily, Pavlensky didn’t sustain any lasting injuries. The 12-inch nail was driven through the skin of his scrotum and avoided any major veins before being hammered into the soft earth between the cobblestones.

bne December 2013

a renowned chemistry Professor who works in a commercial laboratory now developing Russian cosmetics. It also turned out Cherednichenko had some relatives in Moscow who owned a small factory that could manufacture the foam. Yorkme was launched in 2011.

Dogged pursuit of success As there are still relatively few pet stores in Russia, distribution turned out to be pretty easy too. In the West, the retail sector is so competitive that distributors force margins of only a few percent on any but the biggest producers, but in Russia all anyone cares about is if the product will sell.

Cherednichenko went to see the four biggest distributors who could cover all of Moscow and the distribution was expanded to Russia’s far-flung regions over the next two years.

In the meantime, the bulk of the sales have moved online, with Yorkme selling directly to customers, many of whom frequent Russian-language Yorkshire terrier chatrooms. “To market the shampoo we produced a free booklet: ‘Seven things you need to keep your Yorkshire terrier healthy and happy’ that is distributed online and of course contains adverts for Yorkme,” says Cherednichenko.

Cherednichenko doesn’t expect to get rich off Yorkme, as it is a bit of a one-trick pooch as far as products go.

And by his own admission, the owners of other "non-toy" dogs are less likely to pay the RUB500 a pack of Yorkme shampoo costs. The company has also launched a second version of the foam "Bare Beauty" for hairless cats, but that is an even smaller market than for "Yorkies", as Cherednichenko affectionately refers to the dogs. So it was back to Russian search engine Yandex.

Skin deep He quickly came across the word “psoriasis” – a chronic and incurable skin disease. It is not lethal, but is very unpleasant as it itches. “Psoriasis is the number three skin problem in Russia that affects about 3% of the population,” says Cherednichenko.

That’s a much bigger market, roughly 14m people, than those with Yorkies.

Together with Ivanova, the company developed another cream, this time designed to alleviate the symproms of psoriasis, launching CreamMe in 2012.

There are already several other products on the market, mostly derivatives of axle grease. While they initially alleviate the itchiness by trapping water next to the skin, this leads to bigger problems further down the road, as the skin eventually stops releasing water, which leade to even drier skin. CreamMe moistens the skin and doesn’t suffer from this side effect. “At first we oversold it by calling it a ‘remission stabilizer’, but the client retention rate was less than 5%; people had high expectations and were disappointed,” says Cherednichenko.

“So we changed tactics. Now we emphasise CreamMe is a cosmetic and not a pharmaceutical. We also explain to the customers that it won’t cure them; indeed, we won’t sell it to them unless they say they understand this.

But the result is now the retention rate is over 75%.”

Cherednichenko says the biggest problem with YorkMe is connecting with the customers. However, the advantage of CreamMe is that as “psoriasis” is such a highly rated search term finding potential customers online is easy. “We sell CreamMe entirely online, but you can’t sell everything online. In Russia the poor logistics mean your product has to cost at least $40 to make it worthwhile,” says Cherednichenko.

The idea seems to be taking off. In August, Cherednichenko was contacted by some entrepreneurs based in Slovakia who are now launching CreamMe in Europe, as psoriasis is a problem across the continent.

Cherednichenko also has plans to export YorkMe. “We’ll see how that goes,” says Cherednichenko. “But I don’t really want to be known for making cosmetics. What I really want to do is solve problems.”

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different [from the short shock in 2008] and has been going on for more than a year. The forecast for the next six to 12 months is for turbulence, but after that we hope things will start to improve.”

Squeezed from all sides Transport companies are being squeezed from all sides. In addition to the lower volumes of goods to carry, they are also being forced to buy new freight cars by fresh regulations imposed by the government to support the makers of rolling stock.

Brunswick Rail aims to catch liberalisation train Ben Aris in Moscow

"W

Gondolas, the simplest kind of freight cars, have 22 years of useful life fixed by law. In the past, an operator could look forward to doubling the useful life of the cars by renovating them at the end of this period. However, under new rules introduced this year, even if you renovate a car after 22 years of use, it can only be used for another year before having to be repaired again. The rule is an administrative way of forcing operators to modernise their fleets or pay a heavy de facto tax to continue using old cars.

e are in the midst of a crisis now and it is worse than the crisis of 20082009,” the CEO of Brunswick Rail, Russia’s biggest privately owned rail freight operator, tells bne in an exclusive interview.

In the first quarter of this year, the cost of renting a gondola was $16-17 a day, but even though this price has since recovered to $20-22, that is still way off the peak price of $46-$48 seen in the first quarter of 2012. The volume of freight carried in Russia is also down

Set up by US investors Martin Andersson and Gerald De Geer, who made a fortune after they sold their investment bank Brunswick to UBS in 2003, Brunswick Rail was founded a year later as Russia's only independently owned leaser of freight rail cars in order to cash in on the state’s liberalisation of the rail sector.

"Russia’s economy is still dependent on the price of commodities and transport is a derivative of this”

The company is unusual, as it was created from scratch in a sector dominated by companies left over from the Soviet era and is run entirely along western principles. But life has been hard for the last few years.

Brunswick's business is dependent on the commodity cycle and the economic slowdown over the last two years has hurt commodity prices and spilled over into the freight sector.

by 3.5% on year, says Genin, but over the last nine months was down by only 1.5% so the trend is now going in the right direction. “Russia’s economy is still dependent on the price of commodities and transport is a derivative of this,” says Genin sitting in his modern offices suitably overlooking the Paveletskaya train station. “The global price for commodities – especially coal and ore – is depressed. The current crisis is very

The changes have hurt the biggest companies the most, which have the highest proportion of old cars, mostly close to the maximum of 22 years against the industry average of 15 years.

“The cost of repairing a car has also gone

up. The economics of the sector are now totally different. You have to weigh the cost of renovating a car to get one extra year against the cost of buying new cars,” says Genin.

On this score Brunswick Rail has a big competitive advantage, because it has the youngest fleet in the sector with an average car age of only five years.

Owners of old cars are trying to salvage

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what they can from their aging rolling stock. Selling an old car for scrap nets some $5,000-$7,000 and you can strip them out for spare parts, but a new gondola still costs about $50,000, which is a significant outlay for all the companies in the sector.

plans to raise more debt over the next two years, up to $300m, from international capital markets. And we also have our own cash resources,” says Genin, who says many of the major international banks are ready to offer the company funding.

From the government's perspective, the policy seems to be working. The Tikhvin Freight Car Building Plant, a leader in the industry, has invested heavily in state-of-the-art equipment and can produce rolling stock to the highest international standards, as well as making cars under a US licence. At the

The company's own resources are significant. Revenue last year was $306m, while operational cash flow, or Ebitda, was $241m. Results for this year will be less good due to the continuing crisis, down by some 20% to 25% Genin predicts, but should recover by next year.

"It is safe to say that today's Russians have chosen to ignore the darkest days of their history" same time Uralvagonzavod (best known for making the T-90 main battle tank) has developed its own high-tech cars that are going into production now and are supposed to be as good as anything produced outside Russia. Brunswick Rail is taking delivery of its first 62 Uralvagonzavod cars this December to see how they perform and will order more if they live up to their promise.

Expansion plans One man’s problem is another man’s opportunity and Genin says that this is now the perfect time to grow. The company hopes to double the size of its fleet over the next few years ahead of a possible IPO. “We have very ambitious plans. It's best to grow in the midst of a crisis, as the prices for new cars are low,” says Genin, adding that the company hopes to go from the current 24,300 cars to about 40,000 by 2018, which would give it a 5% market share.

That will cost a lot of money. Last year the company issued its first Eurobond, an innovative deal involving preferred equity – a first for Russia. Brunswick is also in advanced talks with the European Bank for Reconstruction and Development, which is reportedly intending to invest $150m. “We have

The company also has plans to IPO, but the time is not yet ripe. “We could IPO now, but what would we get?” asks Genin. “It's better to grow now and then we can present a much prettier picture in two or three years when we have

4-5% market share and a more stable operating environment.”

And the company could go through a major transformation by then. Brunswick operates freight cars, but state-owned Russian Railways (RZhD) has a monopoly over the locomotives that pull them. That is about to change; as part of reforms that are supposed to put the sector on a commercial basis at the start of November, Russian President Vladimir Putin ordered the government to draw up a plan to liberalise the locomotive services market by the end of this year.

Nothing is decided yet, but investors are watching closely to see whether the reforms happen. Brunswick is not waiting around; despite RZhD’s monopoly, there are already some private companies operating under special exemptions and Genin says that the easiest way into the business is to form partnerships with these operators. “It will be a huge change,” says Genin. “We can transfer our business model for the freight cars to the locomotive business, expect there the yields are even higher and the payback times even shorter than the best possible deals for rail cars.”

Naftna industrija Srbije : Simbol i logotip

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Photo: Ernests Dinka, Saeimas Kanceleja

A warning shot for whistleblowers Mike Collier, Zanda Zablovska in Riga

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ttempts to take an acclaimed Latvian whistleblower to court more than three years after he released embarrassing tax details of the country's elite are raising serious questions about due legal process in the Baltic state.

In 2010 a whistleblower known only as "Neo" – a pseudonym taken from the Matrix series of movies – obtained 7.5m classified files from Latvia's tax authority, the State Revenue Service (SRS), after discovering a relatively simple flaw in its electronic security system.

He then released selected data into the public domain to show that many senior state employees were continuing to pocket huge wages and dubious bonus

payments at a time when their own departments and ministries were laying off hundreds of lower-paid workers and slashing wages as part of a brutal austerity drive. His disclosures included senior staff at bailed-out Parex Bank, the financial regulator (FKTK), the Latvian central bank and state-owned power utility Latvenergo.

Months later, Neo's identity was revealed to be Ilmars Poikans, a researcher and computing expert at the University of Latvia. Public reaction to his disclosures was overwhelmingly positive, with Poikans named "European of the Year" in one public vote.

However, despite his disclosures clearly being in the public interest, attempts to

punish Poikans for embarrassing the elite continue. He is due to appear in court in April 2014 on charges of obtaining and publising private data and could face a possible jail term if convicted.

And in a worrying twist to a case concerned with what constitutes appropriate secrecy, the name of the financial institution that is actually bringing the case against Poikans has been censored in official court documents, raising the possibility that a high-profile whistleblower could be tried with severe reporting restrictions in place, in what amounts to a closed court thanks to an anonymous plaintiff – a situation reminiscent more of Latvia's time as a Soviet republic than a progressive member of the EU.

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However, analysis of official documents seen by the investigative journalism outfit Re:Baltica (where this article first appeared and from whom bne has been given permission to reprint it in its entirety) does offer clues to the identity of the ‘credit institution’ pursuing the case against Poikans.

Redacted On documents confirming the decision to prosecute Poikans, the plaintiff's name has been redacted but clearly consists of two parts, the second of which is appears to be consistent with the letters "AS" (short for "Akciju Sabiedriba" or "Joint Stock Company").

According to data from financial regulator FKTK, only five Latvian banks have 'AS' as an official suffix to their names: ABLV, Baltikums, Swedbank, M2M Europe and Rigensis Bank.

M2M Europe only began operating in July this year, so could not be the mystery bank. Of the remaining four, Baltikums, Swedbank and Rigensis Banks all confirmed to Re:Baltica that they have no connection with the criminal case against Poikans.

That leaves just ABLV, whose spokesman Ilmars Jargans told Re:Baltica that the bank "cannot make any comment about this case."

Founded in 1993 when it was known as Aizkraukles Bank, ABLV Bank is currently the largest privately-owned bank in Latvia with offices in many countries of the Commonwealth of Independent States (CIS), including Russia, Ukraine, Kazakhstan, Belarus, Tajikistan, Uzbekistan and Azerbaijan.

Aiga Senberga, press secretary of the State Prosecutor, told Re:Baltica the name of the credit institution acting as plaintiff had been redacted from documents in accordance with the law's duty to protect personal privacy and commercial confidentiality.

Despite several Re:Baltica requests for clarification on how disclosure of a bank's name could constitute a trade secret, no further explanation was provided.

"I find it strange and of questionable motivation that a bank can claim to be a victim of 'Neo' even though none of the published material has done them any injury, yet now they are worried about their identity getting into the public domain," Poikans told Re:Baltica.

In August 2013 preparations for the criminal case against Poikans were completed, along with an admission that he had not done any harm to the tax authority's IT system, from which he took the data.

Poikans himself had redacted sensitive data from the disclosures he released into the public domain, but did publish specific details of payments made to individuals and some clients of state institutions. As a result, he is accused

been a victim would be more interested in pursuing a case against the SRS for "negligently making it possible for the data to be publicly available."

Whether any actions have been launched against the SRS is not known. Poikans himself claims that in April 2010 one particular bank (which he refuses to name) asked the SRS if documents the bank had submitted to the SRS were now in the possession of a third party.

The SRS answered in the affirmative. A few months later the bank approached the State Police and asked if this data was still in the possession of third parties. The police responded by saying all data was now in its own possession, "thus completely eliminating any future illegal action and violations of individual human rights," according to Poikans.

"What informal relationships exist between banks, politics, police and the special services?"

of illegally acquiring and disclosing the data of individuals and commercial entities. The possible penalties for such offences include forced labour, a fine or imprisonment of up to two years.

Until the "injured" credit institution made its belated appearance, Poikans was accused only of illegally obtaining individuals' data and damaging the tax authority's database. Given that the prosecutor's office had already admitted that Poikans had not harmed the database, proving that Neo had maliciously harmed specific individuals might have proved difficult. "In this context the appearance of an injured credit institution might have been predicted," says Martin Birks, an attorney who has made a thorough investigation of the Neo case. "The only issue is why it suddenly felt itself to be a victim more than a year after the start of the criminal proceedings."

As Birks points out, logic would seem to dictate that a bank feeling itself to have

A year later in June 2011, the State Police sent a letter to the bank in question asking if it wanted to participate in criminal proceedings against Poikans as the injured party.

The bank said that it did want to do so provided that it was not named.

Whistleblower Poikans says legal documents he has seen show that police actively sought to recruit banks to the case, "even re-sending their requests until a bank would agree to become a 'victim'."

"I assume that the bank has a formal motivation to pursue the Neo case, but what is true? What informal relationships exist between banks, politics, police and the special services?

We'll see how things progress when the Neo 'exorcism' makes its way through the courts – if all of the different parts of the system will work in concert," Poikans tells Re:Baltica.

It is worth remembering that in 2010 State Police raided the home

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of investigative reporter Ilze Nagla, the journalist who had been helping Poikans get his revelations into the public domain while protecting his identity. Police took away a number of electronic storage devices. The raid was condemned by international journalists' groups such as Reporters Without Borders as a threat to free media.

Nagla complained to the Riga Central District Court but had her case rejected,

Convention with regard to freedom of expression and ordered that she be paid compensation of €20,000.

Neo case – a warning to others The case being brought against Poikans could dissuade other potential whistleblowers from coming forward with information in the public interest.

Aldis Alliks, one of the lawyers defending Poikans, believes this is the real reason behind the case, the actual

"If people know all they will get is the sack or will be told they are stupid, it's no wonder that many facts only emerge when it is far too late," says Voika.

"Despite his disclosures clearly being in the public interest, attempts to punish Poikans for embarrassing the elite continue" forcing her to take it to the European Court of Human Rights (ECHR), which ruled that the Latvian state had violated the European Human Rights

objective being to make "an example" and give a clear message to the public – that revealing the failure within Latvia's system of state power is not acceptable.

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

"Latvia has a big problem as the understanding of whistleblowers and the protection given to them is close to zero," says Inese Voika of Delna, the Latvian branch of open society monitor Transparency International.

"Whistleblowers run the risk of losing their jobs or being transferred elsewhere," she says, describing an absurd situation in which managers would rather take action against people raising problematic questions than tackling the root problems themselves.

By international standards, Poikans is a classic "white hat" whistleblower. The information he leaked was of undoubted public importance and he did not use the information he garnered for personal profit in any way. But that may not prove enough to protect him from being made an example of – in secret.

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bne December 2013

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a row about energy independence with Russia's Gazprom.

Both statements confirmed a story by the Baltic News Service (BNS) the same day that said Grybauskaite would be the target of a disinformation campaign. BNS quoted anonymous intelligence agency sources – a journalistic norm – as well as named officials.

Lithuania's brilliant smear campaign – against itself Mike Collier in Riga

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f Russia really was thinking of mounting a propaganda and disinformation campaign against Lithuania in general and President Dalia Grybauskaite in particular ahead of this month's Vilnius EU summit, they needn't bother – Lithuania's law enforcement forces have done their job for them already.

On October 31, at a meeting of the three presidents of the Baltic states at Birini castle in Latvia which bne attended, Grybauskaite herself flagged up the claim that summit host Lithuania and some Eastern European states hoping to sign EU free trade and association pacts were already the victims of what she called an "information and propaganda attack"

by Moscow.

"We are talking about cyber security, informational security, which we [Baltic States] are under attack periodically in one or another country.

Today it is Lithuania under these

attacks and provocations," Grybauskaite said. "It is unprecendented pressures which Eastern Partnership countries are today fighting with. I mean economic wars, trade wars, information and propaganda attacks on Eastern

To the peroxide president, such a whispering campaign is nothing new.

Her presidential election campaign was characterised by seedy insinuations about her sexual preferences and the nature of her relationship with the Soviet authorities during her education at the elite Leningrad University.

But events since have taken a puzzling and worrying twist.

Prosecutorial pressure In the week since the story broke, Lithuania's Special Investigation Service (SIS) has raided BNS offices and the home of an editor, and called no fewer than six different journalists in to answer questions about the their unnamed sources. Computers and data storage devices were also confiscated.

News of the raids only emerged on November 8 when BNS took the brave step of condemning them in a

"Persecution of the media is characteristic of undemocratic countries" Partnership members and also on Lithuania. These pressures are unprecedented in the 21st century."

Minutes later her office put out a separate statement saying that she had been informed that "information provocations" will continue against Lithuania, herself and the six Eastern Partnership countries, which include Ukraine and Moldova, owing to the current Lithuanian EU presidency and

public statement. "BNS condemns the pressure exerted by law enforcement institutions, which violates the rights of journalists to keep their information sources secret... Such scale of unprecedented procedural measures of violence interrupted BNS operations and are, furthermore, disproportionate and unacceptable. Persecution of the media is characteristic of undemocratic countries," BNS said, maintaining that it would not reveal its sources.

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Good press is expensive stuff in Hungary

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One of those questioned – who spoke to bne under condition of anonymity – said the questioning had been polite enough, but centred on a demand to know the names of sources.

Hungarian government policy may leave many scratching their heads, which is perhaps why the country's central bank has felt moved to draw up a contract for a massive HUF6bn (¤20m) tender to run its public relations.

But even with the reputational hole into which Lithuania was sinking getting bigger by the minute, the SIS and public prosecutor kept on digging.

The Public Procurement Gazette in November published a Magyar Nemzeti Bank (MNB) tender notice that invited bids in a HUF6bn public procurement tender for communications, in what it said would be the largest contract ever seen in Hungary’s PR sector.

On November 8, the prosecutor said that even reporting a pre-trial investigation was taking place could be a crime so that BNS' disclosure of the raids – plus, presumably what you are reading now – was illegal.

The Fidesz government of Viktor Orban has take a number of populist measures since it came to power in 2010 (bashing banks, utilities, telecom firms, banks again…), though until now had not displayed much sympathy for the hard-pressed PR men and women of the country. However, this huge contract follows the previous record of HUF2.5bn communications contract for the state debt management company in 2011, so clearly the government is worried about this struggling segment of society. Critics say it's certain that some of this money will also find its way into the pockets of other demoralised parts of the population, such as those with close ties to the increasingly unpopular Fidesz party.

If so, they will have to take an awful lot of people to court, possibly including Prime Minister Algirdas Butkevicius, as bne managed to ask him about the matter in Riga during a meeting with his Latvian and Estonian counterparts.

The MNB said it's seeking a media firm to handle general communication tasks, particularly its "Funding for Growth" lending programme, which will see the central bank provide up to HUF2 trillion in interest-free funding to retail banks to lend to small firms, to go with the HUF701bn it has already lent this year.

Asked if the press crackdown wasn't sending a rather nasty message to Europe at a time when Lithuania has the presidency of the European Council, he replied: "This question is not very easy for me because I haven't been in Lithuania since Tuesday. I have been in Paris and then Poland and now Latvia.

But I have had some information from my office and we will meet this evening and have all the information from the justice institutions. I called them an

hour ago and asked them to prepare documents for me," in what sounds like a classic case of 'When the cat's away the mice will play.'

The issue is clearly troubling the PM. In a later interview published November 10, he said: "When I was in Lavia, in Riga, the first thing that we spoke in the news conference was not energy, Rail Baltica, other important things, but why Lithuania, holding the EU presidency, acts in such a brutal manner, make searches at BNS and other journalists' homes.”

It is not the first time Lithuania's security services have played fast and loose with the much-vaunted EU values.

In 2009, it emerged that they colluded with the CIA to build a secret prison near Vilnius to be used for the rendition and detention of terror suspects from around the globe. Whether any suspects were actually held there was never definitively confirmed by a parliamentary investigation.

The greatest irony is that the whole BNS affair smacks precisely of the sort of muzzling and harassment of journalists that the EU likes to complain about with regard to Russia. And with events in Ukraine scuppering any chance of success in Vilnius, we shall have to wait a little longer to see if Russia really does have the goods on Grybauskaite.

However, given that the target audience of this MNB programme is the banks themselves rather than the general public, the daily Népszabadság questions why the central bank needs to spend so much on PR. Then again, with the central bank, led by Governor Gyorgy Matolcsy, spearheading the government's "unorthodox" economic policymaking that looks to soak the banks and others in order to balance the budget and boost the economy, then maybe it does need more help getting its message across.

"It is not the first time Lithuania's security services have played fast and loose with the much-vaunted EU values"

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Central Europe

Kellner calls home Tim Gosling in Prague

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PF Group on November 5 sealed a deal to buy a majority stake in the Czech Republic's largest mobile operator Telefonica CR from the Spanish telecommunications group. The agreement could put a dent in the Czech regulator's hopes of encouraging greater competition on the market; it might also herald a new chapter in the emerging markets telecom space.

The Netherlands-based PPF, controlled by the Czech Republic's richest man Petr Kellner, is to buy a 65.9% stake in the company that operates under the O2 brand for a total of CZK63.6bn (€2.47bn). That translates as CZK305.6 per share, according to the buyer – 2.1% below Telefonica CR's closing price on November 4.

PPF said in a statement that it will launch a mandatory offer for the rest of the shares once the acquisition is complete. Telefonica SA, however, will keep hold of its remaining 4.9% stake, and work as an "industrial and commercial partner for the next four years," the Spanish company said in its statement. With PPF hardly the most open to shareholder scrutiny, analysts fully expect Telefonica CR to be delisted.

The overall price of the deal for the Czech telecom operator, which is also a major player in Slovakia, is well ahead of forecasts made when talks between Telefonica and PPF were revealed in October. It had been predicted that it would go through at a relatively low price due to the fact that no other suitors were reported. Telefonica's need to shift the asset to reduce debt and fund acquisitions elsewhere in Europe was seen as another driver, as was the Czech regulator's efforts to introduce more competition on the market.

That said, PPF will pay only €2.06bn initially. A further €404m is "deferred."

While neither statement made mention

of any conditions on that payment, some analysts had previously suggested that given the uncertain outlook on the Czech mobile market, there could be some kind of performance-related mechanism included in the deal. Still, analysts at Erste Bank note that it could be better news than feared for minority shareholders facing the buyout offer, with the valuation implying "a considerable premium to CEE incumbents".

Renaissance Capital concurs. "We expect PPF to make a mandatory offer to minorities… at the same price, although one could argue that the Telefonica SA offer included a control premium," they note. "Still, we doubt shareholders

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The CTU has recently defeated legal challenges from the big three to the reservation of space for a new operator in a forthcoming frequency auction.

After the trio managed to derail the sale earlier this year, the bandwidth went on the block on November 11.

However, the regulator may also have lost (at least) one of its two potential entrants.

PPF said in September that it would not take part in the auction because the tender bans any new entrant from merging with another market participant for 15 years. It then sold the unit it had set up for that purpose to CEO Tomas Budnik, who renamed it Revolution Mobile. The company is one of the two non-incumbent bidders registered to take part in the sale.

There has been speculation that the move was sparked by PPF's interest in Telefonica CR, designed to both pressure the seller and give PPF a back-up plan in the event the talks failed. Some analysts suggest that

"The transaction could imply a new chapter in the emerging markets telecoms space" would accept less than CZK305.6 [per] share, especially if PPF wants to delist.

The Spanish seller said it 'may dispose of its shares subject to certain conditions once the mandatory offer is over'."

the other bidder in the bandwidth auction – Tasciane, which is a unit of another closely-held Prague-based investment group KKCG – could also be a decoy.

Disconnected?

While Telefonica CR and Telefonica Slovakia will change their names after the deal goes through, they will continue to operate under the O2 brand for a maximum of four years, according to the agreement. The closure of the deal will need approval from Czech regulator CTU.

In addition to sating Kellner's desire for a major presence on the Czech telecom market, Renaissance suggests that the purchase is likely to offer synergies to the other companies held by the somewhat murky group, particularly its recent startup lender Air Bank. Going further, the deal could represent a new telecom model for the region, and drive further M&A.

With PPF having no Czech telecom assets currently, the regulator looks to have few grounds to object. But it's unlikely to be too happy at the same time, because it has been pushing against resistance from the three major incumbents – Telefonica, Deutsche Telekom and Vodafone – for some time in a bid to shake up a market that suffers some of the highest mobile costs in the EU.

"The transaction could imply a new chapter in the emerging markets telecoms space," Renaissance says, "demonstrating the relative value of telecoms companies (with their superior CRM [customer relationship management], distribution and billing systems) to modern consumer-finance-oriented companies.

We think this is unlikely to be the last transaction of this sort in the space."

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Hinkley nuclear power station," says Mladek, referring to the commitment from the UK government that the nuclear power produced at the EDF plant will be bought at the price of £92.50 per megawatt hour (€110.20), more than double today’s wholesale spot price in Europe of around €40/ MWh.

Extending the Temelin timeline Nicholas Watson in Prague

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new Czech government is in the final stages of being formed, but its make-up will probably mean further delays at the very least for the state utility CEZ's huge nuclear tender.

Czech President Milos Zeman in November gave a mandate to Bohuslav Sobotka, head of the Czech Social Democratic Party (CSSD), which won the inconclusive parliamentary election in October, to form the next government. Sobotka is in talks with the big winner of the election, the new ANO 2011 party founded by Slovak-born billionaire Andrej Babis, and the centrist Christian Democrats (KDU-CSL).

Jan Mladek, a CSSD heavyweight and possible member of the new cabinet that should be in place by New Year's Eve, tells bne that out of the nine working groups put together by the possible coalition partners, eight have reached "a lot agreement", though the crucial one on taxes and the budget is still far from a deal.

On the biggest energy issue, CEZ's controversial project to double the capacity at the Temelin nuclear

power plant at an estimated cost of €8bn-12bn, the new government is likely to stick to the line that it should be completed, but that further delays to choosing a winner are inevitable.

Currently, the Russian-Czech

That spells trouble for the Temelin expansion, because no one, not even CEZ itself, believes the project is economically viable without some form of state guarantee. Candole Partners, a Prague-based consultancy (whose clients include CEZ's competitors) that has been a persistent critic of the project, claims the break-even price of the Temelin expansion is close to €115/ MWh. "This selling price will have to be sustained in real terms… for the full operational life of the plant to ensure capital costs are covered. Neither we nor potential equity investors consider this realistic," Candole says in a recent report on the economics of the project.

An industry insider who declined to be named admits the project is "weak", having relied on "over-optimistic predictions" from the outset. "It could've done with another strategic

"It could've done with another strategic investor in there from the start"

consortium of Atomstroyexport, Skoda JS and Gidropress is fighting it out with the Japanese-US firm Westinghouse for the contract, after France's Areva was turfed out of the tender under controversial circumstances in October 2012.

"Written in our programme is that we favour finishing Temelin, but it should make economic sense. Mr Babis is also in favour of finishing Temelin, but it should make economic sense and be without subsidies, including those like the British government agreed for the

investor in there from the start," he says.

Another insider close to CEZ says a combination of Czech politicians' unwillingness to put more financial burdens on Czech households already reeling from recession and austerity, the fraught international politics of the project, and the worsening financial plight of CEZ mean the project won't be completed.

Mladek admits that while the current situation is not favourable for the

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nuclear tender and further delays or even restarting it are possibilities, it does not mean the project is dead.

Brussels probe However, others argue that even within CEZ itself there is a growing acceptance the project in its present form is dead in all but name. CEZ did not answer questions put to it by bne, though sources say support for the project within the utility's management, never that unanimous, has fallen as the economics behind it deteriorated and the tender's legal problems stemming from Areva's ejection mounted.

The latest setback came on November 11 when the European Commission announced it has begun a preliminary investigation into CEZ's decision to exclude Areva from the tender for alleged "serious shortcomings" in its preliminary bid. "No infringement procedure has been launched," a spokesperson for the Commission was quoted as telling reporters. "It is still very much at the stage of preliminary investigation."

That investigation is a victory for Areva, which has been busy since its ejection from the tender filing lawsuits against the decision and trying to get Brussels to look into the issue. Areva's record in the Czech courts has been mixed, but its suits are proving a fly in the ointment for the tender. The latest legal hiccup came on October 22 when the Czech Regional Court in Brno issued an injunction preventing CEZ from signing a final contract with a winner in the tender, though a court spokeswoman Miroslava Sedlackova said CEZ could still choose its preferred candidate.

The series of legal challenges have already forced CEZ to delay selecting that candidate. CEZ was to have picked a preferred bidder by the autumn, but the director of CEZ's strategy division, Pavel Cyrani, revealed in July that a final contract might not be signed until the autumn of 2014.

That is now looking increasingly optimistic.

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The CNB's unconventional move

Tim Gosling in Prague After months of trying to talk down the Czech koruna and much handwringing over a move into unconventional monetary policy, the Czech National Bank surprised markets with the launch of direct currency intervention on November 7.

As deflation fears grow, the CNB voted at its monthly meeting to ease monetary policy further via intervention in the foreign exchange market to weaken the crown. Few details were provided, except that the central bank aims to keep the currency "close to" CZK27 to the euro.

At a press conference, Governor Miroslav Singer said the CNB would be willing to purchase any amount of foreign exchange to weaken the koruna and that forex intervention would stay in place "for as long as needed".

Immediately following the announcement, the CNB went directly onto the market to buy around 造500m at CZK26.6. The crown lost around 4% against the euro, dropping to CZK26.8.

The launch of intervention was somewhat of a surprise because the original motivation for such a move from what is an inherently conservative central bank has steadily dissipated in recent weeks. It was first discussed publicly close to a year ago as the CNB sought extra tools to offer stimulus to an economy in recession. With exports a huge driver of the Czech economy, weakening the currency was an obvious move.

Left as the sole source of economic stimulus during the government's harsh austerity measures over the last few years, the central bank has cut interest rates to effectively zero (0.05%). However, the economy finally emerged from recession in the summer and has begun to exhibit signs of a building recovery.

Yet like many other European central banks, the CNB has been eyeing the threat of deflation recently. Consumer prices fell to 1% in September, from 1.3% in August, to hit their lowest since March 2010.

Analysts are divided on the move. Some argue that with Czech manufacturing at three-year highs, the real economy needs no further support. However, Danske Bank suggests the CNB has little choice, and in fact should have moved some time ago due to the growing risk of deflation not only in the Czech Republic, but in the wider neighbourhood and across the Eurozone. "We have been calling for the need of further monetary easing in the Czech Republic for more than a year," they note. "The actual risk of a possible deflation has increased considerably lately."

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The outgoing Rostowski has proven instrumental in pushing through reform in Poland. He drove through a controversial plan for raising the retirement age to 67 despite widespread popular discontent.

Meanwhile, he has unsettled the markets somewhat by planning a reduction in the role and assets of private managers in the Polish pension system – a plan only given the final green light by the cabinet 24 hours before losing his job.

Shuffling the PO pack Wojciech Kosc in Warsaw

P

olish Prime Minister Donald Tusk reshuffled his cabinet on November 20 in a bid to revive his government's fading approval ratings.

Speculation has been rife for some time that Tusk would shuffle his deck midway through his second term.

The move aims to address the chronic drop in popularity of his coalitionleading Citizens' Platform (PO) party, which is trailing in the polls to the opposition Law and Justice Party (PiS).

The pressure is growing as PO seeks momentum going into the next election due in 2015.

On November 20, Tusk made his move. Altogether six ministers were let go. The main topic of interest for investors was the replacement of Jacek Rostowski as minister of Finance by Mateusz Szczurek.

The 38-year-old Szczurek, who will leave his post as chief economist for Central Europe at the Dutch bank ING,

has some big shoes to fill. "I'm glad that one of the most talented – some say the most talented – Polish economists will

That latest draft law, the ultimate goal of which is to allow the government to offer stimulus to the economic recovery by improving Poland's fiscal and debt position, appears at odds with Rostowski's track record for marketfriendly policy that has angered many sections of Polish society. The market reaction to the legislation has been ambivalent as the bill makes its way towards parliament.

The plan aims to reverse pension reform conducted in the 1990s by diverting flows away from private pension funds (collectively known as OFE) towards the state pension institution ZUS. In addition, from February OFE will be banned from

"I'm glad that one of most talented – some say the most talented - Polish economists will take on this difficult challenge"

take on this difficult challenge," Tusk said at a press conference.

Ryszard Petru, head of the Polish Economists' Association, says Szczurek was Rostowski's own candidate for his replacement and, given the fact that the 2014 budget and major reforms like that of the pension system have already been decided, he will be a minister of continuity. "He's going to have to step into Rostowski's shoes," Petru says.

investing in state bonds or other debt instruments guaranteed by the treasury, with current holdings of sovereign debt transferred to ZUS. Yet the cabinet's approval of the reform plan on November 19 actually goes against the trend in polls. A growing number of Poles appear to be rejecting the move – which clearly has populist overtones – and say they are in favour of keeping their premiums in OFE.

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A senior official from the European Bank for Reconstruction and Development (EBRD) – whose overriding mission is to promote the development of capital markets in former communist economies – suggested to bne in an interview that it is not unduly concerned with the proposed law. Manfred Schepers, the EBRD's CFO, said the plan won't necessarily hamper Poland's development of its domestic capital market.

"Poland is a large economy, its fiscal position is relatively under control, it has a strong relationship with the German economy. Of course, the reform will have an impact on the pension funds' participation in the domestic capital market, but this will be offset by the continued interest in the Polish economy as a whole," Schepers said. "It's not that there will be no prospect of capital inflow," he added.

More reforms ahead There are other more difficult reforms ahead for Poland and the wider Central European region, the EBRD official insisted. These include the reduction of the administrative burden and reform of the labour market. One would hope that the appointment of new ministers for administration, science, education and digitalization will help to start to address these issues.

More of a surprise was the sacking of Marcin Korolec as environment minister just as the UN climate talks

Central Europe

in Warsaw are heading towards their decisive stages. Maciej Grabowski, formerly deputy minister of finance, will replace him. Amid Poland's struggle against tighter EU environmental legislation as it looks to continue exploiting its significant coal reserves, Korolec will now be tasked exclusively with running Poland's presidency of the UN climate negotiations.

Elzbieta Bienkowska – minister for regional development, and therefore responsible for disbursing the majority of the EU funding that Poland takes in – not only retained her post, but was also made deputy prime minister.

However, the finance ministry is centre stage as Poland seeks to continue reforms while also trying to foster the economic recovery. While investors appear happy enough with Szczurek's economic qualifications and experience, they worry he's a political novice. Without any political capital built up, he's likely to be tied to the apron strings of a PM already fighting to remain in office.

"I'm sure he's a good economist, but at a ministerial position he will have to withstand enormous pressure from lobbyists from other ministries," Petru suggests. "As a young minister, he's also running the risk of becoming too dependent on his ministry's officials.

In other words, he may have big issues like the budget or the pensions reform laid out in front of him, but he's in for a difficult time."

"As a young minister, he runs the risk of becoming too dependent on his ministry's officials"

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Around the world in 9 months Estonia's Mait Nilson, a mechanical engineer and entrepreneur, is almost a month into his attempt to circumnavigate the globe in an amphibious vehicle. After departing November 2 from Tallinn in Estonia, Nilson had just crossed the Moroccan border in his "Amphibear" on November 23.

If the venture is successful, Nilson will cover 60,000 kilometres in nine months and establish several new world records for amphibious crossings. The Amphibear – a rebuilt Toyota Land Cruiser that has a maximum speed of 8 knots on water, 110 km/h on land – will be the first selfmade amphibious car to circumnavigate the globe, and the second time in history for an amphibious vehicle to make the journey (the first was in 1958 when Australian Ben Carlin circumnavigated the globe in a modified factory amphibian Ford GPA christened Half-Safe).

Unlike Carlin, Nilson and Amphibear will make the journey from east to west, traveling through these countries: Estonia, Latvia, Lithuania, Poland, Slovakia, Slovenia, Italy, France, Spain, Morocco, Mauritania, Senegal, Cabo Verde, Brazil, Argentina, Chile, Peru, Colombia, Panama, Nicaragua, Honduras, Guatemala, Mexico, US, Canada, Russia.

You can follow his progress here: http://www.amphibear.com/.

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debt due to previous lending policy and current economic conditions, Hungarian banks are being additionally battered by the government.

BayernLB noted that MKB operates in an economic and political environment that remains difficult. "The sluggish economic recovery in Hungary and a cautious climate for consumer and capital spending dampened operating income, as did a sharp drop in the base interest rate and a weaker local currency," the earnings report said.

BayernLB's Hungarian "problem child" Tim Gosling in Prague

G

ermany's Bayerische Landesbank said November 13 it plans to split up its troubled Hungarian unit MKB Bank, hiving off the nonperforming corporate debt into a newly created "bad bank", in a bid to help sell the remainder of the lender. However, the list of potential suitors for any Hungarian bank at the moment is short.

BayernLB told a conference call, according to Portfolio.hu, that it now plans to break up MKB to improve the chances of a sale. The discussion followed the release of third quarter results showing MKB lost €181m while its core business contributed €602m in pre-tax earnings. BayernLB has until 2015 to offload MKB under a 2012 agreement with the European Commission in relation to a bailout from the State of Bavaria in 2009, but is clearly struggling as the Hungarian sector struggles due to punitive government policy.

"We have achieved a great deal in the past few years. The transformation process at BayernLB is well underway and large parts of it are almost complete.

However, our Hungarian subsidiary MKB is still the group's problem child for

which a solution will have to be found," said CEO Gerd Haeusler, according to Portfolio.hu.

Under that "solution", MKB's retail and corporate banking activity will be bundled into one unit, while problematic corporate debt – mostly connected to real estate – will be spun off. "It has turned out that MKB cannot be sold as a whole," dpa cited CFO Stephan Winkelmeier as saying. Parts of the Hungarian subsidiary will be transferred into a so-called "bad bank", which will make the sale more "digestible".

However, the banking sector has been additionally weighed down since Prime Minister Viktor Orban and his Fidesz party took office in 2010 by special taxes that the banks say are the highest in Europe. On top of that, a financial transaction tax was introduced last year.

Meanwhile, the government is pushing to reduce household debt denominated in foreign currency. A scheme in late 2011 cost the banks huge losses, and another plan is being built. "[T]he Hungarian government is planning more political interventions with regard to outstanding foreign currency loans while for another, additional restructuring at MKB will result in further charges," BayernLB's report noted. "To comply with the EU Commission requirements, the stake in MKB must be sold in full. To achieve this, more work on MKB's shareholding and loan portfolios will be necessary."

The "bad bank" will most likely affect MKB's project finance division. CEO Pal Simak told Portfolio.hu in the spring that these real estate loans are mostly of a long maturity (3-10 years) and the size of the portfolio was around €2bn. That represented nearly 40% of MKB's full corporate exposure at the time.

Slow exit The exit of foreign banks to give Hungarian companies a greater role in the sector is a clearly stated goal of the PM, who appears unperturbed by the fact that lending has ground to a halt. In a scenario that looks to resemble the ongoing push to rid the utilities sector of foreign players, the plan now seems to be to hammer down valuations to the point where the state can afford to buy them out.

BayernLB agreed to sell MKB's Bulgarian unit last month, and is in talks to sell its Romanian unit, but the Hungarian subsidiary itself has proved much harder to offload. While all three of those markets are struggling with bad

After pledging repeatedly they are in for the long haul, foreign banks are slowly coming out of the woodwork to admit they've had enough. Italy's largest retail bank, Intesa Sanpaolo, said in March that it might call it quits, and the likes

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of Raiffeisen Bank International have announced severe cuts in investment.

However to date, just one deal has happened: Italy's Banco Popolare agreed to sell its small subsidiary to Hungary's MagNet Bank for just €500,000 in April.

Others are ready to go, the central bank claimed on November 7. "If this situation [low profitability in Hungary] becomes permanent, the consolidation of the banking sector could accelerate," Marton Nagy, the central bank's managing director, told reporters, according to the Wall Street Journal.

"Big banks are deleveraging massively and shedding their external exposure," he said, without specifying which banks may leave the country.

However, the exodus will take some time while balance sheets are unwound, he admitted. Foreign parent banks currently hold around €10bn at their Hungarian units to finance operations, he said, and that is clearly too large an amount of capital to withdraw suddenly. Therefore, banks will only be able to sell once they deleverage, meaning any consolidation of the sector is likely to be gradual.

Central Europe

hunt for acquisition targets has fallen by the wayside in recent months.

Formerly seen as close to Orban, OTP CEO Sandor Csanyi has had a very public falling out with the ruling Fidesz party over its plan to revisit the foreign exchange debt issue. Csanyi has issued alarming warnings – far more nightmarish than those from any of his foreign peers – about a potential meltdown in the Hungarian banking sector and the wider economy, and he and many of his OTP cohorts have dumped huge volumes of OTP shares.

The central bank's Nagy offered a hint of the state's plan in his presentation to reporters, noting that while the country's large foreign-owned banks continue to struggle, smaller and partly state-owned banks are faring better.

Most are avoiding losses this year, he claimed, crediting the central bank’s interest rate cuts and its "Lending for Growth" stimulus programme.

Such lenders include Takarekbank, he noted, which is controlled by the state with a 55% stake. The savings cooperative bank was recently beefed up

"If low profitability in Hungary becomes permanent, the consolidation of the banking sector could accelerate" The rest of Emerging Europe is still busy fighting deleveraging, which was earmarked as a prime channel by which the Eurozone crisis would hit CEE.

by being handed control of the country's huge network of small municipal banks.

Granit Bank and Szechenyi Bank, both 49% state owned, were also mentioned.

At the same time, the list of suitors to buy the likes of MKB – which as Hungary's fourth-biggest bank could be worth as much as €1bn according to some estimates – looks limited. Most of Hungary's major banks are foreignowned. The one exception is OTP, the country's biggest lender, which was reported to be in talks with Bayern LB, as well as the foreign parents of several other smaller lenders, back in May. However, news flow surrounding OTP's

These banks will replace the big ones quitting the market, Nagy said. "The question is whether the small banks and Takarek will be able to beef up their liquidity, capital positions and personnel to grow up to that tall order," he added.

Budapest has pledged to inject HUF100bn (€335m) into Takarekbank, although that may have to wait until after elections in spring next year, with the government needing funds ahead of the vote to keep a lid on fiscal indicators.

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Is Serbia headed for snap March elections?

Harriet Salem in Belgrade

F

rom the chandeliered dining rooms of Dedinje's grandiose mansions, to the sleek interiors of Dorcol's upmarket café-bars, Belgrade's rumour mill is working overtime. Word on the street, amongst those "in the know," is that the Serbian Progressive Party – the dominant power in the country's coalition – will call an early election for March.

Sipping a chilled dunja rakija (quince brandy), one official close to the Progressive party leadership tells bne that, "a March election is almost certain."

Another, unaffiliated insider agrees that Vucic is gearing up for an election: "I am hearing this from all sides now."

Aleksandar Vucic may only be Serbia's deputy prime minister, but the leader

of the Progressives has rapidly risen to become by far the country's most powerful politician.

A splinter party formed in 2008 by politicians from the ultranationalist Serbian Radical Party disillusioned with their leaders' anti-EU line, the Progressives are a centre-right party of free marketeers, libertarians and nationalists with a smattering of oldstyle state dirigistes. Fusing conservative rhetoric with a pro-European integration stance and tough talk on the economy and corruption, the SNS has quickly found resonance with Serbian voters who are frustrated with politicians' inaction on big issues. Fighting its first election campaign in 2012 as part of the "let's get Serbia moving" political coalition, the fledgling party emerged the surprising

winners, finishing with 24% of the vote – slightly ahead of Boris Tadic's incumbent Democratic Party which took 22%. Rounding off the victory, the Progressive's then-party leader, Tomislav Nikolic, also won a simultaneous presidential election, beating Tadic in the second round of voting.

Yet despite the party's immediate success, forming a coalition government on the back of such a slim majority has proved costly. In return for his Socialist Party's parliamentary support to the Progressives, Socialist leader Ivica Dacic demanded a high price: the post of prime minister.

Old dog, new tricks While the Progressive Party may be the newcomer in town, Vucic – who

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recently renounced his ultranationalist past, which included a cabinet position in the government of late dictator Slobodan Milosevic – is an old-timer in Serbian politics and accustomed to navigating the region's rough-andtumble politics. And in true Balkan style, the deputy PM has made the best of a bad situation.

Since the Progressive-led government came to power last year, the smoothtalking Vucic has picked his battles

Certainly, Vucic's cosy relationship with Europe has not reined in the deputy prime minister from doing politics Serbian style at home. Clever political manoeuvring saw the threat of a previous autumn snap election averted in favour of a cabinet reshuffle that handed the Progressives two key ministerial positions for economy and finance. Meanwhile, Belgrade has been bizarrely left without a mayor following a successful ousting of Dragan Djilas, who as well as being mayor of

"Vucic is like a vicious little stoat watching a kitten and waiting to pounce" wisely, publicly tying his name to the popular anti-corruption campaign while leaving Dacic to take the flak over the domestically controversial issues such as relations with its erstwhile province of Kosovo. Recent opinion polls published in local media Politika found that Vucic was Serbia's most trusted politician, with a solid 68% saying they thought he should be prime minister.

His willingness to reflect on the past and engage in realistic dialogue about Serbia's economic problems has also endeared the deputy PM to the international community. The British newspaper The Independent recently described Vucic as "the West's go to man in Serbia and increasingly the region", while the headline credited him as being "the man bringing Belgrade in from the cold."

Andrew Roberts, managing director of Eastern Europe Economics, a regional finance and business consultancy, explains that what Vucic has done very successfully has been to set himself up above party politics - as being some kind of saviour of the Serbian people. "He has shown he is willing to tackle these big issues like corruption, and of course this is very popular with the public," explains Roberts. "Serbia, like Russia, appreciates a strong leader or a figurehead, there is not a long history of fully functioning democracy here."

the capital is also the new head of the opposition Democratic Party. Thus, the main opposition is severely hampered right now.

Vucic has also taken significant steps to consolidate his power in the last few months. But, according to a foreign businessman with substantial experience in the region, the powerhungry deputy PM is simply no longer content to play second fiddle to Dacic. "Vucic is like a vicious little stoat watching a kitten and waiting to pounce," says the source. "He needs to

Economic iceberg But while an early election will likely see Vucic fulfil his political aspirations, analysts warn a premature trip to the polls could damage Serbia's economic development. "This is an exceptionally short-termist strategy," says Andrews.

"The economic situation is so horrific at the moment the last thing the country needs is an election."

Serbia's economy is balanced on a tightrope. Public debt is at around 70% and rising, significantly higher than both the country's supposed legal limit of 45% and the EU Maastricht Treaty of 60%. With a bloated and inefficient public sector, Serbia desperately needs to impose some tough austerity. "The situation has been ignored by repeated governments, and reforms just cannot be delayed any longer. A six- to-nine month delay caused by the practicalities of going to the polls and forming a new government would be disastrous," argues Andrews.

It's also politically dubious, as the economic situation is likely to get much worse before it gets better. "The [Progressives] don't need elections – they are already in a very powerful position and should be able to push through reforms without bringing down the government," says Andrews.

"The reality is after an election they

"A six- to-nine month delay caused by the practicalities of going to the polls and forming a new government would be disastrous" get his timing right; not too early and not too late. And he thinks March is the best time to make his play."

The opening of Serbia's EU accession talks, scheduled for January, will provide the already popular politician a further boost in the polls. "We can say that the seeds have been sown and that spring will be the time to reap the harvest" a member of Serbia's elite business class tells bne.

would just have the same problems to deal with – fiscal overshoot and a weak dinar – but no one to share the blame with."

But others say this misses the point.

"Vucic is tough and ambitious, he thinks he can ride out the storm. This is not about the [Progressives] or Serbia – this is about him. He is desperate for power," says the foreign-business insider.

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Kosovo elections – if at first you don't succeed…

Harriet Salem in Pristina, Nicholas Watson in Prague

I

f the goal of the Kosovo local elections in November was to finally get the Serbian minority to participate, then they can be judged a success. However, few doubt that even after the elections Kosovo remains a country divided.

The initial set of local elections held on November 3 were, for the most part, a notable achievement for this post-conflict state. A former Serbian province that unilaterally declared independence in 2008, Kosovo saw its majority ethnic Albanian population turn out in large numbers, around 60%, to vote for mayors and local councillors – a boost for democracy in this fragile new country. The OSCE mission chief, Claude Schlumberger, declared the vote a "success."

Crucially, this was the first set of elections to be held right across the territory since independence in 2008. Previous elections – including those held in 2009 and 2010 – were boycotted by much of Kosovo’s minority-Serb population at the bequest of Belgrade, which instead organised elections of local representatives in separate polls. However, Serbia's attitude to its former province has changed radically since a new government, a mix of former ultra-nationalists and socialists, came to power in 2012. Finally telling truth to the Serbian people about the reality of the situation in Kosovo, the new government has thrown its weight behind a campaign to secure Kosovo Serbs’ participation at the ballot box in return for getting the EU to start talks soon over Serbia's ambition to join the bloc.

An EU-brokered deal between Kosovo’s Prime Minister Hashim Thaci and his Serbian counterpart Ivica Dacic signed earlier this year to commit to the

“normalisation of neighbourly relations” forms the basis for the new detente.

In practical terms, it meant Belgrade had to dismantle its controversial parallel institutions in Kosovo – which administered healthcare, education and utilities to ethnic Serbs – effectively signalling an end to Serbia’s financial support to their kinsmen south of the disputed border.

Despite being an emotive subject for all Serbs, who say they will never accept losing what they believe is the cradle of the Serb nation and will continue to refuse to recognise Kosovo as a separate nation, the ethnic Serbs in most of Kosovo turned out to vote in reasonably large numbers. In ethnic

vests after masked men stormed three polling stations, smashed windows, released tear gas and stole ballot boxes.

The intimidation – believed to have been orchestrated by local politician Marko Jaksic, a member of the nationalist Serbian opposition party DSS and a leader of the boycott campaign – caused turnout to be only 3-4% (though the figure for the Serb turnout across the whole of the northern municipalities was up above 20%).

The suspension of the polls in North Mitrovica meant a re-run on November 17, which went ahead amid tight security with the Kosovo Police supported by hundreds of armed international peacekeepers.

Ahead of the vote rerun, Belgrade officials did their best to deliver on Serbia’s commitment to ensure participation by Serbs in northern Kosovo, warning that the divided Mitrovica could end up with an ethnic Albanian mayor if they failed to vote.

Serbian Prime Minister Ivica Dacic visited the region in person two days before the repeat vote, telling voters: “You need to

"It’s slightly unusual to vote in a school-crocodile"

Serb areas to the south of the Ibar river, turnout in the southern Serb-dominated municipalities was consistently around 50%. "Serbs in municipalities south of the Ibar river... turned out in numbers that are indistinguishable from the majority Albanian population around them. Voting in Kosovo-run elections is no longer an issue for the southern Serb community," said the Balkans Policy Research Group, a regional NGO. The situation to the north, where the country's 40,000-50,000 Serbs are concentrated, was very different.

Violence marred the local elections in northern Kosovo, with OSCE staffers forced to flee the divided town of Mitrovica in helmets and bulletproof

help us in order to help yourselves, so that we can continue helping you – that is why you need to go to the polls.”

It mostly worked: almost 23% of the ethnic Serb population turned out to vote, with the preliminary results showing that the mayor of northern Kosovska Mitrovica would be a Serb.

Yet while overt intimidation against voting was largely prevented, some local media reported Serbs feeling another, more insidious form of intimidation – this time to vote. Some locals told Balkan Insight that they had been more or less ordered to show up – or risk losing their jobs. The civil service is a major employer in the region; over

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5,000 people in North Mitrovica alone work in jobs financed by the Serbian state. “I have received so many phone calls in the last two or three days telling me I must go and vote, and that it’s my patriotic duty,” Dejan, a resident of North Mitrovica, told Balkan Insight, as he cast his ballot at the Technical School polling station. “This is not democratic."

The British ambassador to Kosovo, Ian Cliff, who visited polling stations in North Mitrovica, praised the healthy turnout, but admitted to Balkan Insight that he had heard "of one or two" slightly organised visits to the polling station.

“It’s slightly unusual to vote in a schoolcrocodile,” the ambassador said.

Problems subsiding So it's clear Kosovo remains a country divided, both between ethnic groups as well as geographically between the north and south. The idea of northern Kosovo seceding and joining Serbia proper has certainly not been banished by this election.

Still, some are more optimistic for the longer run. Shpetim Gashi of the Council for Inclusive Governance, an NGO, points out that the initial 20% of Serbs in the north who voted in the November 3 polls is quite impressive when considering the intimidation campaign. "By resorting to violent means on voting day, the anti-integrationists acknowledged their failure to convince voters to boycott the election through democratic means…

Their support among the Serb population in the north is at an all time low."

He points out that intimidation and threats will most likely characterize every stage of integration between north and south Kosovo, though with subsiding intensity. "Many were surprised with the violence on election day given Belgrade’s support for the process, and speculated that perhaps Belgrade’s influence in the north was overestimated," he says. "It was not. What was overestimated was the time it will take Belgrade to dismantle what it has built for 14 years."

And only Serbia is in a position to deal with this problem, he adds. "It will take some time but Belgrade will prevail."

Southeast Europe

A strong showing in Kosovo

bne If political satire is a hallmark of a mature democracy, then Kosovo's can be said to have come of age in the November local elections.

In the heated atmosphere of the first Kosovo elections that were to include the northern Serb-dominated towns, the spoof Partia e Forte (The Strong Party) made its first, mad appearance and provided some much-needed light relief.

Formed by a group of friends in a Pristina café and led by the charismatic so-called "Legendary Chairman" Visar Arifaj, the Strong Party's satirical take on politics in this unstable, poor corner of Europe appealed to its large population of people under 25, some 40% who are unemployed and very disillusioned with the corrupt mainstream parties that have dominated since the country unilaterally declared independence from Serbia in 2008.

The unemployment issue illustrates well the party's tactics. "We don’t think it is a problem that 40% are unemployed," says Arifaj, "we think that the 60% who do work are the main problem."

"What we will try to do is make everyone not have to work. Everything should be done by computers, so people can get their salaries just by sitting at home," he explains.

Then there's the raft of new of universities that have sprouted all over the impoverished state, a result of EU money landing in the lap of shady opportunists. "The prime minister appears to want universities in every village – well, we’re going further," Arifaj said, pledging to build a college in every single neighbourhood.

This kind of mockery, Arifaj believes, is a highly effective form of protest. "If you just criticize, you are not doing anything new. By not opposing them, by becoming one of them, we are showing how ridiculous they are," he tells the Christian Science Monitor.

Some other campaign policies include: selling advertising space on state symbols, including the flag and coat of arms; outlawing marriage as a means to reduce the rate of divorce; possibly renaming the country to the Strong Republic of Kosovo; decriminalizing marijuana to ensure citizens have a more accurate perception of, and are happier with, a government led by the Strong Party.

But beyond the laughter, the party has hit a nerve and looks as though it could actually have gained at least one seat on the city council. And the party said it now intends to contest the 2014 general election – a bigger stage, bigger targets.

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prime minister Ivo Sanader was given a 10-year prison sentence after being found guilty of accepting a €10m bribe from the Hungarian company in return for awarding it that control.

As the two sides geared up for another round of talks, Zagreb stepped up the pressure in early October by issuing an Interpol warrant for MOL chief executive Zsolt Hernadi for what it claimed was his involvement in the case. MOL and the Hungarian government strenuously deny any wrongdoing and are sheltering Hernadi.

Croatia and Hungary step up fight over INA Tim Gosling in Prague

O

n November 26, Hungary's MOL Group took the latest shot in the standoff over control of Croatia's INA Group as it launched an arbitration case against Zagreb – another move to gain the upper hand in talks over operational control of the Croatian oil and gas firm. This protracted battle looks set to drag on for some time yet.

Earlier in the month, Croatian Economy Minister Ivan Vrdoljak reiterated his government’s desire to buy back MOL's 49.1% stake in INA. “We certainly want to get INA back in Croatia’s hands as it is our strategic company, but we need to approach that task very seriously given that our public debt surpasses acceptable levels,” Vrdoljak said, adding that one option could be for Croatia’s pension funds to help fund the acquisition.

The minister’s remarks follow comments from MOL on November 8 that the Hungarian state-controlled company is ready to sell its stake if it can’t reach a favourable agreement with Zagreb in the talks over the future of INA that have been dragging on for months.

The issue surrounds management control of INA whose value as an oil and gas producer in the Adriatic region will grow if new resources worth hundreds of billions of dollars are revealed by an ongoing seismic survey of more than 21,000 square kilometres of the Adriatic seabed. The company conducting the survey, Norwegian company Spectrum, says it is scheduled for completion in April 2014 and said is confident the

In fact, the MOL-INA relationship has never been an easy one in the years since Zagreb privatised a 25% stake in 2003 that was bought by MOL for $505m.

MOL complains the Croatian side has not lived up to its promises, which include taking back under public control Ina’s loss-making midstream gas business Prirodni Plin. For its part, Zagreb claims that MOL has only ever treated INA as a subsidiary and not invested in the company’s promising upstream business.

Too much at stake As the talks stutter on, both sides are guilty of bluster. MOL's share price fell to a two-year low on November 11 after its suggestion that it might look to offload the stake, as investors regard the Croatian assets as an important element in the Hungarian company’s future performance. Standard & Poor’s warned recently that a divestment of

"It is in nobody’s interest for the talks to drag on until mid-2014" venture will pay off, noting the area shows “high promise”.

After building up its stake in INA to 49.1%, MOL secured management rights in the company in 2009 despite holding less than 50% (the Croatian state holds a 44.8% stake in INA). The Croatian public has long suspected skulduggery and last November former Croatian

the INA stake would increase MOL's exposure to the weak Hungarian economy. “Under these circumstances, we would probably not continue to rate MOL one notch above our ‘BB’ sovereign long-term rating on Hungary,” the rating agency said.

Zagreb’s room for manoeuvre is also limited. Analysts put the value of

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MOL's stake at €2bn-3bn – a stretch for a government whose finances are struggling in the teeth of a stubborn recession. On November 11 the government raised its budget deficit forecast for 2013 to 4.3% of GDP, leaving Vrdoljak to admit his government’s “bad” financial situation is a stumbling block to buying the INA stake.

Tamas Pietser, an energy analyst at Erste Bank, reckons the Croatian government would need to accumulate 4-5% of GDP to buy the stake, which would push debt/GDP past 60% and also perhaps see the EU start excessive deficit procedures against the country.

“The pension funds could maybe take a quarter of the stake or similar – they have no money either really,” he notes.

This means that if MOL decides to sell the stake, it would have to be to a third party. Yet that would not suit either side, as the only potential suitors will likely

come from Russia, who would drive a hard bargain with MOL and then not run the company any more to Croatia’s liking. Both Gazprom and Rosneft have so far denied any interest, though many

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MOL says it still hopes for an agreement “through which we can increase the value of INA”. And Vrdoljak said the Croatian government wants to continue talks over the management rights

“Russian companies are definitely interested in moving into this part of the world”

believe that could change. “Russian companies are definitely interested in moving into this part of the world,” says Pietser.

Such scenarios are proving enough to keep both sides at the negotiating table – thus the very public battle to gain extra leverage in the talks.

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

regardless of decisions on ownership.

“If we manage to resolve that issue by the end of this year, all other issues will be much easier to deal with. It is in nobody’s interest for the talks to drag on until mid-2014,” Vrdoljak claimed.

Yet with so much at stake, analysts say neither side appear interested in a quick deal.

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No dumping on Albania bne

E

U wannabe member Albania is doing its utmost to be a useful partner for the West, so a request from the US to help destroy Syria's chemical weapons on its soil at first seemed to open up a good opportunity for the new government in Tirana to prove its worth. That's not how it worked out, however.

On November 15, Prime Minister Edi Rama bowed to widespread anger and protests over the news the week before that it was one of several countries the US had held discussions with about helping it destroy Syria's chemical arsenal of about 1,000 tonnes, which was agreed under a September UN Security Council resolution.

"It is impossible for Albania to get involved in this operation," Rama said in a televised address to the nation.

"We lack the necessary capacities to get involved in this operation."

The reason Albania was on that list is because it has an existing facility that could've be used for this purpose, which was built following the discovery in 2002 of 16 tonnes of chemical warfare agents hidden in a bunker dating from the era of Communist dictator Enver Hoxha. The US, through its Defense Threat Reduction Agency, spent about $45m building an incineration plant in Albania to dispose of the stores, meaning that by 2007 the country had been declared free of chemical arms.

Under difficult circumstances, the Organization for the Prohibition of Chemical Weapons said it met a November 1 deadline to disable all the 'Syria's declared production facilities, but analysts warn the harder task of disposing of the chemical agents themselves by June 2014 is still to come.

"The Americans held an exploratory working brief in early October with

Belgium, Norway, France and Albania to see what capacities each might have to treat chemical weapons," a Belgian foreign ministry spokesman was quoted

by AFP as saying November 7, adding that no formal request had been made to any of those countries.

Albanian parliamentary speaker Ilir Meta confirmed in a TV interview on Top Channel on November 7 that while Albania had indeed been contacted by the US, "no decision has been made yet… and will be made transparently and will take into account the interest of the country."

The public quickly made clear its thoughts about where Albania's interests lay. In the week leading up to the PM's November 15 announcement, thousands took to Tirana's streets and squares to press their case that Albania didn’t have the capacity to do what even other much bigger and more developed countries had declined to do. Albania, they argued, should not be a dumping ground for others' problems.

Too big an ask Analysts say the protestors had a point – one the new government of Rama, only in power for two months, could not ignore, even though the refusal marked an unprecedented break from successive government's traditionally staunch allegiance to Washington.

Gary Kokalari, founder of Albanians for a Democratic Albania, which is involved in fighting corrupt practices in the country, described the request as "hair brained", arguing the size of the task was way beyond Albania's capabilities.

The US government, he pointed out, is building in a rural area of Kentucky a facility to store chemical weapons that amount to only half the amount estimated to be in Syria. Even this is proving to be an enormous challenge even for the military of the most

powerful, wealthiest and technologically advanced country in the world.

"Albania is under no obligation to bend to every outrageous demand made by the US and EU. And the request for Western governments to now dump weapons of mass destruction in Albania is as immoral as it is irresponsible, to say nothing of the grave international security threat this poses to Americans and Europeans by placing these weapons in a country that some consider to have the least effective law enforcement and the most porous borders in the world," he said.

He also cited the country's inability in the past to demilitarize relatively simple ammunition without seeing 26 people killed – a reference to the 2008 explosions that occurred as US and Albanian experts were preparing to destroy stockpiles of obsolete ammunition at an ex-military ammunition depot in the village of Gërdec. "This is a place where people smoked like chimneys while taking apart ammunition at Gerdec," he said.

Others, however, see a missed opportunity for Albania, which is a Nato member that's only just managed to convince Brussels it should make it a candidate country to join the bloc. EU governments will decide on whether to formalise candidate status at a summit in December, which comes three years after the European Commission rejected Albania's first application.

Dan Kaszeta, a former officer in the US Army Chemical Corps now working as an independent consultant, admitted that Albania's position as a poor country with security and corruption issues didn't make it an ideal choice, but that it presented "the least bad option."

"It might take many years for a facility built to burn 16 tons of chemical agents to get through 1,000 tons. Yet the date of final destruction isn’t as important as getting the material in the hands of international inspectors and out of the war zone. That makes Albania the least bad option for disposing of Syria’s chemical weapons stores," he concluded.

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Thus analysts are left scratching their heads over just whom the government expects to bid this time around.

That the lottery is profitable is not in doubt. Last year saw post-tax profits reach TRY1.879bn (€691m), up from TRY1.47bn reported in 2008. That's a 27% increase in lira terms, but it takes no account of the 45% price inflation in Turkey over the five years to 2013 or the 28% depreciation in the lira against the euro over the same period.

Turkey's privatisation lottery David O'Byrne in Istanbul

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hey are a familiar sight on every Turkish high street: the lottery ticket sellers with their peaked caps and trestle tables covered in brightly coloured "Millipiyango" lottery tickets have been a fixture since the state lottery was first started way back in 1939. But they could become a thing of the past if government plans to privatise the lottery by the end of January come to fruition, with private sector operators widely expected to ditch the traditional ticket sellers in favour of more modern marketing strategies.

After lengthy speculation, a formal notice advertising the sale was finally published on November 26. It detailed the sale of a ten-year license to operate all six of Millipiyango's games for an annual fee of 25% of gaming income and 28% of income from related sales activities.

However, in a change from previous announcements, non-Turkish companies will apparently be allowed to bid, subject to their meeting existing legislation on foreign investment. Whether that will result in greater interest in the sale, though, is debatable.

If you don't succeed…

A previous attempt at selling the lottery

in 2007 saw only five groups pre-qualify for the tender.

Of these, three were non-Turkish companies or consortia. OPAP – the Greek national lottery – was itself only recently privatised, while another Greek company, Intralot, has extensive gambling operations in the Greek half of Cyprus, which in the light of recent tensions could complicate its attempts to invest in similar operations in Turkey.

This only leaves Austrian lottery group Österreichische Lotterien Gesellschaft as having no obvious reason not to renew its interest in Millipiyango.

Analysts concur that revenues could easily be increased with more modern marketing and sales techniques.

However, there are questions over whether the lottery's new owners will be encouraged to increase sales or even allowed to do so unimpeded.

The first news of the impending sale came earlier in November from Turkish Prime Minister Tayyip Erdogan, who chose to bill it as the end of "the era of state involvement in gambling." This description may appeal to Turkey's more hard line Islamists in the coming election cycle of local, general and presidential elections scheduled over the next 18 months. However, it may also serve to make the sale less appealing to potential buyers who will be looking to increase sales rather than bow to religious mores.

Of the other two interested parties in the previous attempted sale, the joint venture between Turkey's Dogan media group and Italy's Lottomatica withdrew its interest after the former was hit with a multi-billion-dollar tax bill, while the final applicant was a consortium led by Turkey's biggest mobile phone operator Turkcell, a company which following a boardroom meltdown has for the past six months been under direct state control.

According to Inan Demir, chief economist at Turkey's Finansbank, a successful sale of Millipiyango may give the government some much needed cash to fund pre-election spending, but only if the sale actually goes ahead. "It's far from clear if there will be sufficient interest and anyway, the financing issue will be important," he says, pointing out that the challenging global financing environment has resulted in a number of Turkish privatisation sales failing after the winning bidders were unable to raise capital to complete their purchases.

Only one of three bids actually received matched the government's $1.622bn reserve price for the lottery, causing the sale to be cancelled.

According to Demir, more likely candidates for pre-election fundraisers are Turkey's remaining state-owned power plants.

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Power to the highest bidder Following the successful sales of three major thermal power plants earlier this year, the end of November saw the Privatization Authority (OIB) launch sales for four more all coal-fired plants: the 630-megawatt (MW) Kemerkoy plant, the 630MW Yatagan plant, the 420MW Yenikoy plant and the 300MW Catalagzi plant – all of which are expected to be completed by the middle of 2014. A further four state-owned thermal plants totalling just under 2,000MW have been transferred to the OIB for eventual sale.

Other candidates for quick sales are more difficult to identify, however.

"Following the success of the Emlak Konut [secondary share offering], they could be persuaded to go for another public offering," says Demir, referring to the recent successful offering of a 26% stake in Turkey's state-owned real estate development company.

That sale was indeed successful, being oversubscribed by 2.3-times and raising a cool $1.6bn, making it the third biggest offering in Europe this year.

One candidate for a share sale might be national carrier Turkish Airlines in which the state still holds a 49% stake. The company has gone through a remarkable transformation over the past decade and a half, from unsellable basket case to one of Europe's most successful carriers, recording a profit of $625m this year. However the recent weakness of the Turkish lira coupled with increased competition from budget operators such as Turkey's Pegasus have this year hit profits, meaning now might not be the best time for a sale.

Timing is also a factor that will affect the sales of the most valuable of Turkey's state companies, the three state banks Ziraat, Halk and Vakif, which have reportedly attracted interest from major Gulf-based banking groups. "In terms of infrastructure, Vakifbank is most ready of the three, but I'm not sure a sale could happen at [the previously high] multiples," says Demir. "Sentiment for banking stocks in Turkey should turn more favourable before the government decides to offer them."

Southeast Europe

A new energy on Bulgarian streets

bne Is Bulgaria, the EU's poorest state, becoming ungovernable?

That seems to be the view of the country's president, Rosen Plevneliev, who warned November 19 that the intensity of political confrontation in the country has reached crisis levels. "We are in an emergency situation, though I hope things will calm down," Plevneliev was quoted as saying.

Plevneliev was referring to the upsurge in the intensity and violence of the daily demonstrations that have been going on for almost half a year now.

December 1 will be the 171st continuous day of protests.

Demonstrators have convened each day at the parliament as part of a rolling campaign to dislodge the Socialist Party-backed government, which took power earlier this year after inconclusive snap elections in May. That vote was prompted by the resignation of the centre-right minority government led by Boyko Borisov, an event which itself came in the face of large protests against at first high energy bills, though this later morphed into more general discontent at corruption and poor living standards.

The initial spark for the protests since the last election was the attempt by Bulgaria's new government to appoint the shady media tycoon Deylan Peevski to head up the national security agency in June. Peevski's appointment was quickly reversed, but the protestors had already scented that the new government was no different from its predecessors in its dodgy ties. They are refusing to abandon their crusade to clean up Bulgaria's woeful politics.

The protests, after a lull during summer, appear to be gathering steam again.

Since late October, students have held a sit-in at Sofia University. About 500 of them squat in the lecture halls, demanding the resignation of the government and calling their movement the Moral Revolution. On November 12, several hundred students marched from the university to the main square outside the parliament building, which resulted in violent clashes with police. The protesters tried to prevent MPs leaving the building following a parliamentary session, according to local news, but riot police pushed them back.

Then on November 20, the 160th consecutive day of protests, an estimated 4,000 Bulgarian workers joined the students to protest against low wages and a lack of jobs, in what analysts say could be a sign that opposition to the Socialistled cabinet is now spreading beyond its student base. In fact, public opinion polls show about two-thirds of Bulgaria’s 7.3m people support the protesters.

On November 19, a poll showed that the Socialist-led government has seen a fresh drop in support, with some 65% of Bulgarians now disapproving of it.

With so much discontent in the country, hopeful predictions by British government officials that there won't be a repeat of the enormous immigration by Poles 10 years ago when the UK opens up its labour market to Bulgarian and Romanians from January 1 look increasingly forlorn.

With little at home to keep them there, why would young Bulgarians opt to stay?

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All aTwitter about a power struggle in Uzbekistan Clare Nuttall in Astana

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s a power struggle in Uzbekistan intensifies, Gulnara Karimova, daughter of Uzbekistan's aging dictator, has taken to Twitter to accuse her enemies of launching a leadership struggle and, without a hint of irony, human rights abuses.

On November 4, Karimov tweeted that the security services have arrested some of her former bodyguards and either have subjected them to torture or will do so.

"Today Khayot Sharifutdinov arrested former guards," she was reported by Radio Free Europe/Radio Liberty (RFE/ RL) as saying, referring to Khayot Sharifkhujaev, chief of the internal security service, who is believed to be one of at least three rivals vying with her to succeed the 75-year-old President Islam Karimov, whose health has been the subject of intense speculation recently.

She later posted a doctor's note dated

February 2, 2013 that described a person whose ribs had been broken. Karimova claimed the person, himself a member of the security services, had been beaten by internal state security, RFE said.

another contender in the succession struggle, National Security Service chief Rustam Inoyatov. Karimova has openly accused her rival of launching an attempt to become the country's leader,

"Gulnara Karimova is the single most hated person in Uzbekistan" Those are the same security services that have kept her father in power for 23 years and on which she has been noticeably silent until now, point out her critics.

These latest tweets follow others that were made in response to official probes into her business and charity activities, which are full of accusations against

tweeting on November 1 that Inoyatov "has started his struggle to become Uzbekistan's next president."

She has also claimed to be the victim of an assassination attempt, writing that an unnamed attacker tried to poison her "with heavy metals like mercury".

On November 4, her online campaign against Inoyatov continued, with

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accusations of "racketeering" and illegal trade in alcohol and tobacco connected to the security service.

The accusations follow a series of investigations targeting Karimova's assets and the shutdown of four television channels linked to her charitable organisation Fund Forum.

TV-Markaz, NTT, Forum and SoFTS have been off the air since October 21. Initially, in an October 24 statement TV-Markaz claimed that the shutdown is "[d]ue to a switch to a new broadcasting format." However, Karimova later confirmed on Twitter that the channels had been closed down by the Uzbek press agency over violations of its rules.

The accounts of media holding company Terra Group – which is also linked to Karimova – have been frozen while an investigation into financial irregularities is underway, RFE/RL reported on October 30. There are also reports that Fund Forum is under investigation by several government agencies for alleged tax fraud. The investigations were unexpected because Karimova is believed to have immunity from prosecution, along with other members of the president's immediate family.

While Karimova's prolific Twitter feed has so far targeted Inoyatov, he is just one of several contenders – including Karimova herself – to succeed her father, with Deputy Prime Minister Rustam Azimov believed to be the most likely candidate.

Despite the official silence on the issue, rumours emerged from Tashkent in mid-2012 that Karimov had actually selected Azimov, who effectively runs the Uzbek economy, as his preferred successor. Azimov controls the $11bn Republican Fund of Reconstruction and Development, where hard currency revenues from gas, cotton and other commodities are stashed. He has held a central role in the Uzbek financial sector since the 1990s when he headed the National Bank of Uzbekistan (NBU), which controlled almost all of the country's hard currency.

Customs Union-ised

bne Kyrgyzstan and Armenia are to accelerate their move towards membership of the Russian-led Customs Union, a Kremlin official said on November 12, while Uzbekistan expressed its first interest in joining the Eurasian trade club. The news comes as Moscow races to convince several former Soviet states that their destiny lies toward the east rather than the west.

Kyrgyzstan and Armenia are set to agree roadmaps for their accession to the Customs Union before the end of 2013. Russian presidential advisor Sergey Glazyev said on November 12, according to RIA Novosti. The same day, a senior Uzbek official said Tashkent is "positively disposed" towards membership.

Moscow has been keen to swell membership of the bloc – in which Russia is currently joined by Belarus and Kazakhstan – as it bids to deter Kyiv from signing an association and trade pact with the EU on November 28. Moldova and Georgia are also expected to sign preliminary agreements with Brussels at a summit hosted by Lithuania.

Kyrgyzstan's roadmap for entry is expected to be completed by the end of the year, Glazyev said. Armenia, which was also set to sign up with the EU before it made the shock announcement in September that it will join the Russianled alliance, is expected to complete the process even more quickly. The roadmap for Yerevan is now due to be developed by the end of November.

Kyrgyzstan was the first country aside from the three founders to express an interest in joining the Customs Union, which was launched in 2010. Kazakh President Nursultan Nazarbayev announced on May 29 that the small Central Asian state is on track to become the fourth member of the Customs Union on January 1, 2015.

Meanwhile, in Yerevan, following a summit meeting with Russian counterpart Vladimir Putin on September 3, Armenian President Serzh Sargsyan annoiunced his country also intends to join. The decision followed pressure from Russia, including a steep increase in gas export prices. However, Moscow almost instantly dropped export tariffs following the announcement, and Armenia has since benefited from soft loans to update infrastructure.

While the jury is out on whether such carrots will be enough to bring Ukraine – seen as a lynchpin for the Russian project – back in from the cold, they clearly have lips licking amongst Central Asia's other authoritarian regimes.

Despite the often troubled relationship between Tashkent and Moscow, Uzbekistan is the latest from the region to express its interest in the Customs Union.

Speaking at a press conference after a meeting with his Russian counterpart in Tashkent, Uzbekistan's Senate speaker, Ilgizar Sobirov, said the Uzbek government is "positively disposed" towards joining the Customs Union launched by Russia, Belarus and Kazakhstan, RIA Novosti reports.

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Prime Minister Shavkat Mirziyayev is also a possible successor. A regional hakim (governor) until he was elevated to prime minister in 2003, Mirziyayev had retained the position for the last decade, making him Uzbekistan's longest-standing premier.

In March, a "dress rehearsal" for the succession was played out – mainly behind closed doors but also on Twitter and other websites – when the exiled head of the opposition People's Movement of Uzbekistan (PMU) published a rumour that Karimov had suffered a heart attack. However, after a week-long absence from public appearances that raised speculation he could even be dead, Karimov was shown on Uzbek state television meeting with Kazakhstani Foreign Minister Erlan Idrissov.

At that time, Azimov was the target of Karimova's Twitter accusations, as she sought to discredit him by

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roles in Europe and establishing herself as a fashion and jewellery designer. A member of the international jet set, she has released pop videos under the stage name Googoosha, as well as serving as Uzbekistan's ambassador to Spain and the UN. However, in July Karimova quit her position as Uzbekistan's permanent representative to the UN in Geneva, saying she would "be able to concentrate more on Uzbekistan."

The Karimov family has been plunged into controversy recently. Karimova's cousin Akbarali Abdullaev was arrested in October on embezzlement and tax evasion charges, with the arrest order reportedly issued at the highest levels of government. Abdullaev was one of the country's most influential businessmen and a potential presidential candidate himself before his arrest.

In a further sign of family troubles, Karimov's younger daughter, Lola

"There is no history of a democratic handover of power in Uzbekistan"

publishing claims about "secret" and "not transparent" dealings connected to the construction of a solar cell plant at the Navoi free economic zone.

While Karimova has long been seen as a potential successor to her father, she is an outside candidate because of her deep unpopularity among both the Uzbek population and the country's elite. A US government cable published

by Wikileaks called her "the single most hated person" in Uzbekistan, and dubbed her a "robber baron" who has "bullied her way into gaining a slice of virtually every lucrative business in the country."

After accumulating a vast fortune – estimated by Forbes at $570m – within Uzbekistan, she stepped away from domestic politics, taking on diplomatic

Karimova-Tillyaeva, revealed a rift between the sisters in an interview with BBC Uzbek in September. KarimovaTillyaeva, who is serving as Uzbekistan's ambassador to Unesco, claimed she had not spoken to her sister for 12 years.

"There are no family or friendly relations between us," she said, also dismissing her sister's chances of becoming Uzbekistan's next president. "I would assess these odds as low."

The comments sparked a public family row, with Karimova using Twitter to accuse her sister of "destructive behaviour" and "ties to sorcerers."

In addition to the investigations into her business dealings within Uzbekistan, Karimova's business activities are coming under scrutiny in a growing number of European

countries. A scandal surrounding payments made by Scandinavian telecommunications group TeliaSonera to Takilant, a Gibraltar-registered offshore company linked to Karimova, has claimed the head of the company's former CEO Lars Nyberg. Following an internal investigation, Nyberg resigned in February when it was revealed the company had failed to follow its own guidelines in acquiring 3G licences for its Uzbek subsidiary.

Meanwhile, in France a probe has been launched into Karimova's purchase of a €30m penthouse overlooking the Bois de Boulogne in Paris. French investigators found the purchase, made in 2009 at above market price, suspicious, according to LePoint.fr.

Investigations have also been launched in Russia and Sweden. Opposition website Uznews speculates that after the freezing of her bank accounts in several countries, Karimova is virtually "penniless".

There is no history of a democratic handover of power in Uzbekistan, where Karimov has ruled uninterrupted since the break-up of the Soviet Union in 1991, raising concerns about potential unrest. Dissent within the country has been stifled and unrest ruthlessly crushed. In 2005, government troops opened fire on rare mass demonstrations in the two of Andijan, killing over 500 people.

After the Andijan massacre, Karimov has become increasingly dependent on the army and security forces to shore up his position. At the same time, he has launched some political changes including increasing the powers of the parliament. Officially described as moves towards democratisation, they are more likely intended to reinforce Karimov's position against other members of the elite.

The changes have had no real impact on the Uzbek population, who have suffered from the country's isolation, high corruption and basic issues such as power shortages. A power struggle won't do much for them either.

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2013. “We are having very productive discussions with the Turkmens on how they can best move forward with international oil companies. Once we have progress on that, the oil companies can come in to work on the project and identify commercial opportunities,” she says.

TAPI pipeline depends on Turkmen concessions Clare Nuttall in Astana

T

here are signs that restrictions in Turkmenistan on foreign ownership of oil and gas fields could be at least partially lifted in order to pave the way for international oil companies to join the TAPI (Turkmenistan-Afghanistan-PakistanIndia) gas pipeline project.

There is a high level of political support for TAPI, which will deliver Turkmen gas to the energy-hungry markets of south Asia. However, access to Turkmenistan’s oil and gas reserves, together with security concerns in Afghanistan, have held back the project's launch.

The planned 1,735-kilometre TAPI pipeline will run from Turkmenistan’s Caspian oilfields via Afghanistan and Pakistan to India. Both the US government and the Asian Development Bank are firmly behind the project, which they believe will contribute substantially to regional development.

Washington is keen to get the private sector to play a “lead role” in the project, Fatema Sumar, US Deputy Assistant Secretary of State, tells bne in an interview in Astana. However, no major

oil company has yet signed up, despite a series of roadshows held in New York, London and Singapore in 2012, attended by representatives of companies including BG Group, BP, Chevron, ExxonMobil, Petronas and RWE. The main sticking point for potential private sector participants is Turkmen legislation preventing foreign companies from taking stakes in its oil and gas fields. This has held back foreign investment in Turkmenistan's energy

AfPak problems The other big stumbling block is the question of securing the Afghan section of the pipeline, and the uncertainty surrounding Afghanistan’s future following the withdrawal of international forces in 2014. Admittedly, construction of infrastructure such as roads and irrigation systems has gone ahead in Afghanistan in recent years, and back in the late 1990s US oil company Unocal was considering participation in TAPI even while the Taliban was in power. However, the security needs are likely to push the costs up further, with estimates of the project costs ranging from $7.5bn to as high as $12bn.

Nor is Afghanistan the only security issue. Although India and Pakistan are both participating in the project, the two countries remain at loggerheads over the region of Kashmir. In August, Pakistan boycotted the latest round of talks on TAPI after an increase in tensions over ceasefire violations in the disputed territory.

However, the growing need for energy in both countries has forced them to work alongside each other on the

"We are having very productive discussions with the Turkmens on how they can best move forward with international oil companies" sector, despite it having the world’s fourth largest gas reserves, according to a 2008 audit by consultants Gaffney, Cline & Associates.

However, Sumar claims that there has been “positive momentum” on TAPI in

project. All four of the participating countries are keen to accelerate TAPI and – with no clear idea of if or when construction work will begin – have already signed purchase agreements for future deliveries of Turkmen gas. In July, ministers from the four countries

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also signed a protocol agreeing to set up a Dubai-based special purpose vehicle – the TAPI Ltd consortium – whose role will include selecting a company to manage the project.

set to become the largest single source of global oil demand growth after 2020.

Meanwhile, natural demand is expected to increase by 5.4% per annum between 2007 and 2030.

India is expected to account for a substantial share in the increase in global energy demand, which is forecast to rise by one-third by 2035, according to the main scenario set out in the International Energy Agency’s 2013

To meet this demand, India is looking to access the oil and gas rich Caspian region. ONGC Videsh Limited (OVL), the overseas arm of Indian state oil company ONGC, acquired a 25% stake in Kazakhstan’s Satpaev field in 2011,

"The other big stumbling block is the question of securing the Afghan section of the pipeline" World Energy Outlook. “The shift in global energy demand to Asia gathers speed, but China moves towards a back seat in the 2020s as India and countries in Southeast Asia take the lead in driving consumption higher,” says the report, published November 12. India is

and in 2013 bought Hess Corporation’s stakes in both Azerbaijan’s Azeri-ChiragGuneshli project and the Baku-TbilisiCeyhan pipeline. However, OVL lost out in an attempt to buy into Kazakhstan’s giant Kashagan field, when the Kazakh government blocked the Indian

company’s deal with exiting shareholder ConocoPhillips in favour of bringing China’s CNPC into the project.

Meanwhile, Bangladesh has also indicated an interest in joining TAPI. The country has a daily shortfall of 500m cubic feet (14.2m cubic metres) of gas, according to the Financial Express.

However, extending TAPI to include Bangladesh would add around 2,000km to the already ambitious pipeline project.

Meanwhile, from the Turkmen side TAPI will help the country further diversify its gas export markets away from Russia.

China is Ashgabat’s primary interest, as the country has become China’s top gas supplier, and the two countries are also keen to push ahead with expansion of the Central Asia-China gas pipeline.

However, Turkmenistan is also mulling construction of a pipeline to Baku under the Caspian Sea, which would allow the export of gas to Europe, bypassing Russia, as well as the southern TAPI route.

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combining railway, port operation and marine operation. This isn’t only a consolidation of assets; it’s bringing new competencies and changing people’s mindsets, as we make the transition from a railway business to a logistics business.”

A New Silk Way between China and Europe Clare Nuttall in Astana

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azakhstan is planning a major push to capture a larger share of the transit trade between Europe and China. State railways operator Kazakhstan Temir Zholy (KTZ) is spearheading the project, part of modernisation plans that will see as much as $60bn spent on Kazakhstan’s transport and logistics infrastructure.

into KTZ – expanding what is already Kazakhstan’s largest company into a vast conglomerate spanning rail, air and sea transport. In total, over $60bn will be invested into modernisation of Kazakhstan’s transport and logistics infrastructure, KTZ's president, Askar Mamin, told the New Silk Way forum in Astana on November 7.

At present just 60,000 tonnes of freight carried between China and Europe goes through Kazakhstan each year, which is just 0.05% of the more than 100m tonnes total. By 2020, annual trade between China and Europe is expected to grow by 1.5-times to reach $1 trillion, with Astana aiming to have 8% of that transported through Kazakhstan, according to Kanat Alpysbayev, KTZ’s vice president of logistics.

While Kazakhstan represents a more direct route between China and Europe, KTZ is competing with both cheaper sea freight carriers

The Kazakh government launched the New Silk Way project in 2013 with the aim of reviving trans-continental trading routes and establishing Kazakhstan as a transit hub, especially between China and Europe. One of the first steps taken was to merge air and marine transport infrastructure

Existing lines KTZ already operates container trains on the Chengdu-Lodz and ChongqingDuisburg routes, which take 13 and 16 days respectively, compared to up to 45 days by sea. “The price by rail is higher than for sea freight, but we are working specifically with companies that produce high value added products such as computers, which allows them to use rail to get their goods from China to Europe,” says Alpysbayev.

A partial shift in Chinese manufacturing away from the coastal cities to Xinjiang, around 2,000 kilometres closer to European markets, is also benefiting Kazakhstan, which borders western China. According to Alpysbayev, the company is “very positive about the development of Kazakhstan as a transit hub because of drivers such as the Chinese government policy to develop western China. Beijing wants to invest over $1 trillion in development of the Xinjiang region, which borders Kazakhstan.”

Hewlett-Packard, for example, has started to move some of its plants from coastal china to Xinjiang, where laptops and inkjet printers are now produced, the company’s senior vice president,

“Kazakhstan’s geographic location alone is not enough" and a northern rail route via Russia.

“Kazakhstan’s geographic location alone is not enough. All of the relevant competencies need to be concentrated together to provide a logistics service, and KTZ was chosen as the backbone for this,” Alpysbayev said in an interview with bne. “It’s very important to provide a one-window service,

Tony Prophet, told the New Silk Way forum. HP has also switched from air to rail transport, working with KTZ to transport its goods to Europe.

Most of Kazakhstan’s recent investments into new railway lines have been to reorient the network on an eastwest axis, since the railway Kazakhstan

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inherited from the Soviet Union ran mainly from north to south. Today, while Kazakhstan also wants to be part of international north-south routes, the majority of transport is between China and Europe.

In 2012, Kazakhstan’s second rail connection with China, the Almaty-Korgos

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complex than the land route, it gives a much faster journey time to Turkey and Southeast Europe.

Landlocked Kazakhstan is also investing in sea terminals abroad. During his visit to Kazakhstan in September, Chinese President Xi Jinping gave the go-ahead for Kazakhstan to build a $100m

"China wants to invest over $1 trillion in development of the Xinjiang region, which borders Kazakhstan" line, started operation; this was followed in 2013 with the launch of construction on the Zhezkazgan-Beineu line, which will reduce the distance travelled from the Dostyk border crossing with China to the port of Aktau by 800 km.

A sea change In addition to building new railways, KTZ’s plans now include investment into ports, airports and logistics facilities. There are plans to invest around $160m to expand the port of Aktau on Kazakhstan’s Caspian coast, opening up a second route to Europe.

While the sea crossing makes this more

terminal at the Yellow Sea port of Lianyungang, with construction due to start in 2014. Kazakhstan already has a presence on the Black Sea through state oil company KazMunaiGas’ terminal at Batumi, and KTZ is looking at various options to develop its activities on the Baltic coast.

Eleven airports in cities including Astana (though not Kazakhstan’s largest city Almaty) are also being placed under KTZ’s control, and the company is working with international firms including Lufthansa Consulting, Swissport and Zurich Airport to develop

the air transport sector. Growth of up to 500% in passenger traffic and an even larger increase in cargo transportation are being targeted by 2030. However, the first step will be getting Kazakhstani airlines off the EU’s air safety blacklist – a major obstacle to development of the sector.

KTZ already has a management agreement for the Port of Aktau and the Korgos-Eastern Gate special economic zone on the border with China.

Construction of first a logistics zone, then an industrial zone at Korgos is due to start in 2014. On November 7, KTZ signed an agreement with Dubai-based DP World, one of the world’s largest marine terminal operators, to develop both Aktau and Khorgos. Speaking at the New Silk Way forum, DP World's chairman, Sultan Ahmad Bin Sulayem, compared the opening up of crossKazakhstan routes to the opening of the Panama Canal or Suez Canal.

Meanwhile, in 2014 and 2015, KTZ will build a network of transport logistics centres, with A and B class facilities, across Kazakhstan. These will cover all major cities in Kazakhstan, in some cases working with private sector logistics companies, to meet the country’s pressing need for better logistics facilities.

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INTERVIEW:

Kcell rides Kazakhstan's hot pursuit of smart phones

Ben Aris in Moscow

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azakhstan may not be booming, but it is prospering. And nothing shows off personal wealth better than the status symbol of the 21st century: the mobile phone.

Kcell has operated in Kazakhstan since 1998 and today is the country’s largest mobile operator by both revenue and number of subscribers. Growth is limited by the size of the population – Kazakhstan has less than half of the people in next-door Uzbekistan – but Kcell’s 13.5m subscribers give it just under half the whole market, and these are the most affluent subscribers in Central Asia. But more importantly, the government has provided the best business environment in Central Asia in which to work. “Kazakhstan has one of the most liberally managed countries in the region. And it is not just in our industry,” says Kcell's new chief executive, Ali Agan, in an exclusive interview with bne.

A Turkish national, Agan came to Kazakhstan from Ucell, the Uzbek subsidiary of the giant Scandinavian telecommunications group TeliaSonera, which took full control of Kcell in 2011.

Ucell is the second largest operator in Uzbekistan, where Agan was CEO from September 2012. Prior to that, he was CEO of Azercell, the leading mobile operator in Azerbaijan, another subsidiary of TeliaSonera. “There is a vision for Kazakhstan that is well designed and executed. It’s a soccer

game where there are professional teams and an honest referee,” he says.

Kcell finds itself in a sweet spot following an IPO on the London Stock Exchange at the end of last year, which raised $525m from selling 25% of the shares to investors and valued the company at $2.1bn. TeliaSonera remains the parent company and retained 61.9% of the shares.

Kcell has two brands: the Kcell brand, which is targeted primarily at corporate

Fund. “The market is limited by population, but the GDP/capita income ratio in Kazakhstan is very high,” says Agan. “There are market opportunities in all the countries of the [Commonwealth of Independent States], but after Russia Kazakhstan is the most promising."

This dynamism of the market shows in the company’s results. The topline revenue growth was up 44% in the third quarter from the year before to $1.2bn and the value-added share of this was up 22%. The Ebitda margin was down a

“There are market opportunities in all the countries of the CIS, but after Russia Kazakhstan is the most promising"

subscribers (including government subscribers), and the Activ brand, which is aimed primarily at mass-market subscribers. And it is the latter that provides the company with its future.

Handset ownership is reaching saturation in Kazakhstan, but the economy is recovering nicely from the 2008 economic crisis: it is expected to grow by more than 6% this year, according to the government’s most recent predictions, and by 5.2% in 2014 predicts the International Monetary

bit from earlier in the year, but still came in at a fat 55%. There are few telecom markets in the world that are turning in results like these.

And the fast growth is also visible in the company’s share price, which is up by over half since the IPO in December 2012: the companies share price was $18.10 at the time of writing, well ahead of its $10.50 floatation price. The share price performance has been helped by Kcell's dividend policy, with a minimum of 70% of net income to be paid as

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dividends to shareholders and analysts are expecting another good dividend payment following this year’s good results.

Kcell is also receiving international plaudits. On November 7, the big CEE/ CIS investor East Capital announced that Kcell was among its winners of the East Capital Awards 2013, which have been held since 2004 to reward the progress of outstanding companies in the region. Kcell was awarded the Best IPO Award on the back of the 67% return for shareholders. "Though the company operates in a very competitive environment, with cuts experienced in the sector both in new mobile subscription as well as contract termination rates, Kcell has managed to keep its subscriber market share of 50% and its profits intact," East Capital noted.

Data and smart phones While everyone who wants a phone in Kazakhstan probably has one by now,

growth means one in two Russians now has a smart phone, but in Kazakhstan the trend is only now starting to gather momentum. “It depends a bit on the economy,” says Agan. “GDP per capita has reached $13,030 in Kazakhstan, which is the level where people start trading in their old phones for smarter ones."

Agan says Kcell will focus its Kazakhstan strategy on expanding its thirdgeneration (3G) network, which now reaches 45% of the population. The next phase will be the switch to the even faster fourth generation (4G) network that has begun to appear in other CIS countries. But in Kazakhstan the punters will have to wait a bit longer for their super-fast mobile downloads.

More people need to own smart phones before the incumbents start investing in the new 4G networks. “Currently most handsets in Kazakhstan are not even 3G,” says Agan. “We are still building the 3G platform, however we have the

"The trend is the same as in Russia, but the penetration of smart phones is still much lower than in Russia."

there are two trends that will continue to drive Kcell's revenue growth.

Like other CIS countries, consumers in Kazakhstan are upgrading to better and more sophisticated smart phones.

As these phones are internet enabled, this will also drive the growth in data traffic, which is already showing up on Kcell’s bottom line. “Data traffic has growth by 40% in the second quarter of this year,” says Agan. “Handsets are at close to saturation levels, but data is growing very fast. The trend is the same as in Russia, but the penetration of smart phones is still much lower than in Russia."

In the Scandinavian counties of Kcell's parent, smart phone penetration has already topped out and in Russia fast

technology, the frequency allocations and we are ready to launch 4G – all we are missing is the license,” says Agan.

Kcell is in talks with the regulator and expects the licence to be issued soon.

Currently only one company has a 4G licence, Altel, a subsidiary of the state-owned Kazakhtelecom, but Agan is confident the government will issue more licences in the visible future. “As the prices [of handsets] fall, then more people will change over. But we are not in a rush and not having 4G now is not a problem for our business,” says Agan.

“Actually, there is an advantage to being behind, as it means the costs will fall. In Europe companies paid billions for a 4G licence, but many of them are regretting it now.”

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substantially reduced the proportion of bad loans.

Breaking bad loans in Kazakhstan This total includes KZT1.7bn of bad debts at BTA Bank, Kazakhstan’s largest bank before the crisis. A 2012 report by the World Bank showed that Kazakhstan had the highest level of NPLs among the 73 countries surveyed.

Almaty-based investment bank Visor Capital forecasts that substantial changes in asset quality in the 2014 financial year are “unlikely”, though the year “could mark a turning point for the Kazakh banking sector” if the central bank acts decisively. “From talks with the banks, we understand that the recovery process in Kazakhstan will be both time-consuming and complicated, due to a number of bureaucratic and legal issues, which is one of the reasons for the slow recovery in Kazakhstan,” Visor analysts wrote in a November 18 note.

Borrowing binge The high ratio of NPLs has remained even though Kazakhstan’s economy has returned to steady growth after a brief slowdown in 2009, with the

The other legacy from the crisis is the state’s presence as a shareholder – through sovereign wealth fund SamrukKazyna – in several of Kazakhstan’s largest banks. In February 2009,

Clare Nuttall in Astana

T

he high level of bad loans at Kazakh banks is a worrying legacy from the recent crisis, persisting despite strong economic growth over the last four years. The central bank says it is taking a tough line on non-performing loans (NPL), and government support is likely to be offered to address the problem.

Kazakhstan’s new central bank governor, Kairat Kelimbetov, who took over from Grigory Marchenko on October 1, said on November 15 that NPLs were one of the three main challenges the bank needed to address, alongside implementation of Basel II regulations and the fast growth of consumer loans.

Kelimbetov told a conference marking the 20th anniversary of Kazakhstan’s currency, the tenge, that the bank will ask the government to take steps including introducing tax breaks to encourage write-downs of bad loans and amending bankruptcy laws, Bloomberg reported.

As of October 1, Kazakhstan had KZT3.8 trillion ($24.5bn) worth of loans overdue by more than 90 days, equivalent to 29.6% of banks’ total loan portfolios, according to the central bank.

Part of the problem is that while consumer lending is booming at a rate that has alarmed the government, many of Kazakhstan’s banks are still cautious about corporate lending while their NPL ratios remain high. “The National Bank and the government recognise this as a problem that will continue to cause stagnation in the banking sector. The unfortunate aspect is that the banks have not made progress, and the last three years have proved that they can’t grow themselves out of this situation,” the EBRD's first vice president, Philip Bennett, tells bne in an interview.

"The central bank will ask for steps like introducing tax breaks to encourage write-downs of bad loans and amending bankruptcy laws" European Bank for Reconstruction and Development (EBRD) recently raising its 2013 GDP growth forecast from 4.9% to 5.6%. Most of the debt-laden problem projects, including those in Kazakhstan’s real estate sector, which was the first part of the economy to succumb to the crisis back in 2007, have now been completed. Yet this has not

Samruk-Kazyna took over BTA Bank, its subsidiary TemirBank and Alliance Bank, as well as taking minority stakes in Halyk Bank and Kazkommertsbank. Halyk’s main shareholders have since bought back the stake, and KKB announced on November 22 that it has returned more than half the funds it received through the government’s anti-crisis programme.

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While there were initially hopes of getting either foreign strategic buyers or distressed asset investors to take on Kazakhstan’s troubled banks, nearly five

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banking business, but they have three fairly significant banks to deal with, and this stagnation has caused a lot of external actors to be reluctant to get

"The last three years have proved that banks can’t grow themselves out of this situation" years on from the nationalisation this no longer appears a realistic option, and the high level of NPLs naturally makes the sector less attractive to potential investors. “The government is committed to moving Samruk-Kazyna out of the

involved in NPL restructuring,” says Bennett. “We would love to see external capital involved in some of these bank resolutions, but at this point we expect Samruk-Kazyna and the National Bank will find a domestic solution.”

In late 2013, there has finally been progress with Alliance and TemirBank, as on October 10 Samruk-Kazyna confirmed it is in negotiations with Verniy Capital owner Bulat Utemuratov, who already owns two banks – Forte Bank and Kassa Nova. If the acquisitions go ahead, Alliance and TemirBank may be merged with Forte.

It is still unclear what will happen to BTA, Kazakhstan’s largest bank by assets until the crisis. The government had proposed offloading it onto Halyk, but on November 18, Halyk announced that talks with Samruk-Kazyna over a possible sale of BTA had ended “by mutual consent”.

the incumbent enjoyed either a high profile within Tajikistan or ran active campaigns. As a result, Rakhmon actually increased his majority compared with the last election in 2006, when he was re-elected with 79% of the vote.

Tajik take four

At a press conference in Dushanbe, international observers pointed to a lack of choice for voters. “While quiet and peaceful, this was an election without a real choice… Greater genuine political pluralism will be critical for Tajikistan to meet its democratic commitments,” said Gordana Comic, who led a short-term Organization for Security and Cooperation in Europe/ Office for Democratic Institutions and Human Rights observer mission.

Clare Nuttall in Astana

P

redictably, Emomali Rakhmon, Tajikistan’s president, was re-elected for a fourth term with an overwhelming majority in a patently flawed election.

While Tajikistan may be the poorest country of the former Soviet Union, its importance is set to grow. The region is preparing for the withdrawal of Nato troops from neighbouring Afghanistan in 2014, China is battling with Russia to increase its influence, and the Tajik government is pressing on with plans for a giant dam that could inflame tensions

in an already jittery part of the world where water is an increasingly precious resource.

Rakhmon took about 84% of the vote in the November 6 election on a turnout of over 86%, according to results released by the Central Commission for Elections and Referenda of Tajikistan. Ismoil Talbakov, runner-up candidate for the Communist party, took just 5%.

Analysts complained ahead of the election that none of the five candidates that made it onto the ballot to challenge

The mission’s post-election report criticized the registration process for weeding out credible opponents to the incumbent: "Restrictive requirements, including the unreasonably large number of signatures potential candidates must gather to qualify, present significant obstacles and are at odds with OSCE commitments and other standards for democratic elections."

Oynihol Bobonzarova, candidate of the Islamic Revival party, which came in second in Tajikstan 2010 parliamentary elections, was seen as the most credible challenger to Rakhmon. But she failed

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to collect the 210,000 signatures needed to qualify. She claimed police had harassed her supporters to prevent them gathering signatures.

A report from the OSCE/ODIHR in October also criticized unbalanced media coverage. While the president’s pre-election activities were covered “extensively and positively,” there had been “no visible campaign” from the other candidates, the observers claimed.

Rakhmon, who has ruled Tajikistan since 1992, was widely expected to cruise to victory, especially without the inconvenience of serious challengers.

His Moscow-backed forces defeated the United Tajik Opposition in a civil war between 1992 and 1997 civil war.

He has since been elected president in 1999 and 2006. He won a 2003 referendum allowing him to serve for two further seven-year terms, despite

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the Tajik Aluminium Company (Talco).

According to US Embassy cables published by Wikileaks, revenues from the plant “end up in a secretive offshore company controlled by the president, and the state budget sees little of the income.”

There are also concerns about Tajikistan’s security once Nato forces leave Afghanistan next year; many fear this will leave the region more vulnerable to the dual threats of terrorism and drug trafficking. Tajikistan is particularly at risk because of its long and porous border with Afghanistan.

Rakhmon’s sometimes bizarre schemes – Dushanbe is home to the world’s largest tea house, for example – also threaten stability in the region. The president is pushing to build what will be the world’s tallest dam at the Rogun hydropower plant. This is causing a rift with Uzbekistan, which lies

“While quiet and peaceful, this was an election without a real choice" complaints from the opposition that the move was illegal. Under the Tajik constitution this will be his final term as president.

Problems ahead The main challenges for the Tajik government remain the same: lifting the country out of poverty, improving energy supplies for industry and households and maintaining stability.

Despite a recent increase in GDP per capita to over $1,000, more than a third of the population remained below the breadline in 2012.

The country also suffers from rampant corruption, ranking 157th out of 174 countries on Transparency International’s 2012 Corruption Perceptions Index. The president’s family and cronies control much of the economy, including Tajikistan’s largest and most lucrative business,

downstream on Central Asia’s two great rivers, the Amu Darya and Syr Darya.

The dam threatens to disturb the fragile balance of water management that has existed between the five Central Asian republics since the breakup of the Soviet Union. Uzbekistan also claims such construction is foolhardy in an earthquake-prone area.

In a region where change is seldom peaceful, that makes the issue of succession an ever-present worry.

There is speculation that Rakhmon may be grooming his elder son, Rustami Emomali, as his successor. At just 25 years old, Emomali is deputy head of Tajikistan’s state customs service and is often seen on television beside his father. Rakhmon’s daughter Ozoda, the eldest of his nine children, is deputy foreign minister.

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A novel personality cult in the making Turkmenistan's president, Gurbanguly Berdymukhamedov, has totted up a number of achievements since coming to power in 2006 following the sudden death of the previous incumbent under murky circumstances. The latest of those is completing a novel.

In what is looking increasingly like a repeat of the personality cult that was cultivated around the late but unlamented Saparmurat Niyazov, the propaganda department that surrounds Berdymukhamedov is building a list of notable achievements that it hopes will present to the downtrodden citizens of this isolationist postSoviet state what an accomplished polymath and sporting hero the president is. Turkmenistan is one of the nine worst countries in the world on human rights issues, according to Freedom House.

Earlier this year the keen horse-rider Berdymukhamedov beat a number of kids in a horse race at an Ashgabat racetrack – though rather spoilt it by falling spectacularly off his horse seconds after crossing the finishing line, and then having to be taken away by ambulance.

The novel writing emerged in October when state television reported that Berdymukhamedov had completed the novel he's been working on since childhood. "The Bird of Happiness," tells the life story of the leader's father, Myalikguly Berdymukhamedov, whom in August had a fivemetre bronze bust of himself erected in honour of his 81st birthday.

The book adds to a growing compendium of works by the president, which include tomes on traditional medicinal herbs and Turkmenistan's much-admired Akhal-Teke horse breed.

For dictators everywhere, publishing books is an essential tool. Niyazov too penned books, with his Rukhnama spiritual guide forming a central pillar in the personality cult as it became mandatory reading for government officials and schoolchildren alike.

The position also guarantees book sales, which must be gratifying.

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Upcoming events 2013-2014 Telecommunications and Information Technologies Exihibition (2 - 5 December 2013) Iteca Baku, Azerbaijan www.bakutel.az/2013

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