bne:Magazine - December 2014

Inside this issue: The 50-year fight for gay rights Shining a light on Ukraine’s shadowy arms industry Belarus benefits from east-west clash December 2014 www.bne.eu

Orban the acrobat No balancing act in Serbia A toxic mix in Central Asia Special focus Ukrainian agriculture

EUROPE DIVIDED AGAIN Trading blocs and blows as Russia’s EU forms

bne December 2014 Senior editorial board Ben Aris (Moscow) editor-in-chief editor@bne.eu James R Hammond (Boston) publisher hammond@bne.eu

Contents

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Robert Anderson (Prague) news editor anderson@bne.eu

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Liam Halligan (London) editor-at-large LHalligan@newsparta.net

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Eastern Europe Graham Stack (Kyiv/Berlin) bureau chief stack@bne.eu Central Europe Tim Gosling (Prague) bureau chief gosling@bne.eu Southeast Europe Clare Nuttall (Bucharest) bureau chief nuttall@bne.eu

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30 COVER STORY 6 Europe divided again

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CENTRAL EUROPE 30 Out and about in Latvia

10 The 50-year fight for gay rights

31 If Estonia is so great, why is everyone leaving?

12 Perspective

33 Poland's king of post and flyers

13 Chart of the month 35 Poland's yesterday man arrested

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Advertising & subscription Elena Arbuzova (Moscow) +7 9160015510 business development director (CIS) arbuzova@bne.eu Design Olga Gusarova (London) art director ogusarova@bne.eu

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EASTERN EUROPE

36 Forex loans spotlight shifts to Poland

14 That (ruble) sinking feeling 15 Could bad news for Russia spell good news for investors?

37 Roughing up shareholders in the Czech Republic 39 Orban the acrobat

17 Shining a light on Ukraine’s shadowy arms industry 20 Russian stocks' secret membership of Euroclear 22 "Restoring Names" in Russia 24 Belarus benefits from eastwest clash 25 Belarus tops CIS in UN Human Development Index 27 Profit in a time of crisis

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bne December 2014

Contents

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SOUTHEAST EUROPE

EURASIA

40

An upset in Romania

52

A toxic mix in Central Asia

42

No balancing act in Serbia

53

Move on up to the frontier

43

Old enmities die hard

55

Death of a reform guru in Georgia

45

Bulgaria's new govt gets down to business, but for how long?

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Georgia’s political crisis – much ado about nothing?

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Turkey's Yildiz takes the Biscuit

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Turkish government acts on industrial safety

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OPINION 66

2015 likely to be Russian economy's “Annus Horribilis”

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Corruption is Putin’s Achilles’ heel – and golden opportunity

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Russia’s economy isn’t doing well but neither is it collapsing

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Summits that matter, summits that don’t

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Rolling into Kazakhstan

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Kazakhstan's new defence minister - big position, big ambitions?

Croatia reaps bitter harvest from illegal plant trade

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Kazakhstan raids oil fund for extra $3bn a year

Why is next Czech PM surrounding himself with police, spooks?

Slovenia looks to resurrect corporate life after debt

63

Mongolia changes “Government of Change”

SPECIAL FOCUS

Follow us on twitter.com/bizneweurope

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Ukrainian agriculture

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NEW EUROPE IN NUMBERS

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UPCOMING EVENTS

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wenty-five years after the fall of the Berlin Wall and the dreams of a unified global community, enjoying the prosperity of peaceful democracy have been dashed. The world is being divided once again into an increasingly antagonised battle between east and west with competing geopolitical goals.

On January 1, 2015 Russia's version of the European Union comes into being: the new Eurasian Economic Union (EEU) that unites several nations of the Commonwealth of Independent States (CIS) and breaks the European Continent into blocs again.

The EEU institutionalises a break that runs through the heart of Europe. During the Cold War the guards at the gates along the Iron Curtain were soldiers, but in this new Cold War the guards will be replaced by tax it's inspectors and customs officials. Its an economic war that will be fought not with missiles but "Most Favoured Nation" status, import tariffs and sanctions.

Europe Divided again Trading blocs and blows as Russia’s EU forms Ben Aris

Ukraine's EU versus EEU choice precipitated the crisis. Russian President Vladimir Putin “anti-EU” makes little economic sense without Kyiv's participation. Putin won the first round of the battle with Brussels when he got former Ukrainian president Viktor Yanukovych to pull out of an EU deal at the last minute in November 2013. However, he lost the war when the Maidan protests in Kyiv ousted Yanukovych the following spring. A period of tit-for-tat sanctions then escalated from a war of words into a war of bullets, as Russia annexed Crimea and then started backing separatists in the east. A year after the confrontation began, initial symbolic sanctions on Russia look now to be a permanent feature of European trade with the east and a shaky ceasefire looks like a frozen conflict.

On the eve of the appearance of the EEU the mood is black. Nato reported Russian troops were massing on the Ukrainian border in November, and German Chancellor Angela Merkel, after meeting with Russian President Vladimir Putin at the G20 summit in Brisbane she gave an

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unusually outspoken speech suggesting the sanctions regime could become a permanent feature of European trade and financial relations with Russia.

"Russia could seek to destabilise vast areas of Eastern Europe if it is not challenged in Ukraine," Germany's Merkel warned in a speech to Sydney's Lowry Institute for International Policy Studies, the day after the end of the G20 summit. Russia's annexation of Crimea, and subsequent destabilisation of eastern Ukraine has, she said, "called the whole of the European peaceful order into question. This isn't just about Ukraine. This is about Moldova, this is about Georgia, and if this continues, then one will have to ask about Serbia and one will have to ask about the countries of the Western Balkans."

Merkel's tough talk is particularly worrying as Germany has by far the most to lose from an end to friendly relations with Russia. With literally ten-times more companies working in Russia than any other Western European country, Germany has already lost about a third of its business with Russia and exports there fell 16.6% to €20.3bn in just January-August. The business lobby has been beating a dent in the Chancellor's office door, but she is increasingly turning a deaf ear to their entreaties to roll back sanctions.

The mood in Kyiv is resolute, hardened by nearly 4,000 deaths in the fighting in the east. Tim Ash, head of emerging markets research at Standard Bank, said following a November visit to Ukraine that the Ukrainians he met, from East and West, Russian and Ukrainian speakers, was that: "they did not want to be ruled from Moscow again, or a return to a Yanukovych-style regime set up, and even if that meant a prolongation of the conflict.”

The fight has gone too far and the damage done too significant for anyone to be able to engineer a climbdown without someone losing face. Diplomacy is likely to move from the tete-a-tete meetings in exotic locations to meeting rooms of international institutions like the European Commission in Brussels

and the EEU headquarters in Moscow.

That is bad news for everyone. Russia's economy is hurting – and so is that of Europe, which is slipping back into recession. Putin's decision to pursue geopolitical goals over domestic economic reform has cost Russia dearly. The ruble has lost quarter of its value this year, capital investment is stagnant, growth is meagre and inflation is soaring. The fall in the oil price over lower-than expected global demand, amongst other things, is squeezing the life out of the Russian economy. Some commentators are giving Russia two years before the money runs out and the entire house of cards collapses.

Things are not much better in Europe.

Italy is already in recession and France and Germany are likely to join it in 2015. The European Bank

Belarus and Kazakhstan, with Kyrgyzstan and Armenia about to join. The total population of 170mn consumers, mostly Russians (143mn), is dwarfed by the EU's 500mn-strong consumer market. And the size of the EU economy of €14.3tn is seven-times bigger than that of the combined GDP of the five EEU states.

If the EEU is designed to challenge the EU, then it’s a match between David and Goliath, without the sling.

But the EEU is not an entirely stupid idea. The formation of a free trade zone amongst the CIS countries, with the unfettered flow of capital, labour and goods, will increase their wealth and also act as a spur for reform. The members have already done a lot of real integration work during precursory the stage of the Customs Union that was set up in 2010.

In November 2012, the EBRD judged the Customs Union a "success" in its annual

"Russia could seek to destabilise vast areas of Eastern Europe if it is not challenged in Ukraine" for Reconstruction and Development (EBRD) has identified Russia as "an investment node" and problems in Russia quickly spill over to affect the whole of the CIS. If Russia collapses, then it will take much of the Commonwealth of Independent States (CIS) with it. Countries like Armenia and Kyrgyzstan are already on the brink, while more robust countries like Kazakhstan are also feeling the pain. Ironically, crushing the Russian economy would also tip Ukraine's economy over the edge. Moreover, Europe's "punishment" of Russia has boomeranged on Western Europe.

Russia is already a lot more integrated into the fabric of Europe's economies than most would like to admit.

The anti-EU At first glance the EEU looks like a poor copy of the EU. Less of a "union" and more of a "Russia plus a few baubles."

Russia towers over the other members,

Transition Report. "The Customs Union of Russia, Belarus and Kazakhstan is the first successful example in regional economic integration between countries of the former Soviet Union, according to EBRD economists," the EBRD said in the report. "While many benefits of the union remain to be seen, it is clear that common tariffs and reduced non-tariff barriers are affecting trade both internally, between the three members, and externally with the rest of the world."

First and foremost the EEU is a trading bloc that will capitalize on still close ties between the countries of the CIS. In the longer term global trade is fast expanding: trade's share of global GDP has risen from 39% in 1990 to 61% in 2010 thanks to globalization, bne wrote in its EUski cover story on the bloc in 2012. The EU leads, accounting for a fifth of global trade volumes, followed by developing Asia, which is quickly closing the gap. But Putin's insight –

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which may prove prescient – is that the fastest growing global trade route is that between the EU and Asia, and much of this will have to pass through the EEU territories, rising from today's trillions of dollars to hundreds of trillions by 2050, according to Citigroup.

But the point of the EEU is not just commercial, but also to enhance Russia’s position in geopolitical terms.

Nicu Popescu, a senior analyst at the European Union Institute for Security Analysis (EUISS), argued in a recent paper "Eurasian Union: the real, the imaginary and the likely," that there are actually two EEUs – an economic one and a geopolitical one. Most of the countries that have already signed up voluntarily joined for economic reasons.

Kazakh President Nursultan Nazarbayev, who has been pushing for a Eurasian trade club for more than a decade, said in November that membership of the EEU was purely a "practical choice."

But Kyrgyz Prime Minister Djoomart Otorbaev admitted to delegates at the EBRD's annual meeting that Kyrgyzstan didn’t really have a choice, as it is too

But the geopolitical version, launched by Putin in an article in Izvestia in October 2011, is, according to Popescu, "not just to foster a new round of post-Soviet reintegration: [Putin] also wanted to turn the Eurasian Economic Union into one of the ‘building blocks’ – on a par with the EU, NAFTA, APEC and ASEAN – of global development.”

For this reason, Putin has badgered other countries that didn’t want to become pawns in a Kremlin-led political project. Tajikistan has stayed on the fence and plucky little Moldova rejected Moscow’s offer out of hand, only to be immediately punished earlier this year with trade sanctions. And of course Ukraine has endured a de facto invasion by Russian forces and economic collapse following its decision to go west, not east. "There is no alternative to European integration," Ukrainian President Petro Poroshenko said during a visit to Moldova to show solidarity

in November. "Moldova and Ukraine, supported by Poland, will continue their advancement towards the EU." But Putin's geopolitical vision for the EEU sits very uncomfortably even with Russia's closest allies of Belarus and Kazakhstan, both of which refused Russia's demand to impose trade sanctions on Ukraine. Moreover, both countries continue to try and develop trade ties with the EU despite Russia's confrontation. There is a future for the EEU as a trade promotion vehicle, but Putin's geopolitical vision for the bloc looks like it may have been still born, especially as it seems Ukraine will never join now.

Shirtfronting Australian Prime Minister Tony Abbott said he would "shirtfront" Putin at the Brisbane G20 meeting (and didn’t) but in effect the east and west have been shirtfronting each other all year.

In theory the EU sanctions are easy to drop as, they were set up with a built-in expiration date. If the Eurocrats want sanctions to go away, all they have to do

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7

11.8

23

Trading partner Kazakhstan Turkey

USA

China

Ukraine

Russia

EU

Ukraine

12

Uzbekistan

9.7

33

6.8

Turkmenistan

Tajikistan

Moldova

KKyrgyzsta

Kazakhstan

Azerbaijan

Armenia

0

12

14

17

32

28

Georgia

29

20

29

46

54

14

36

21

45

19

12

51

47

6.7

40

6.3 7.1

7.6

60

23

% of total trade volume

9

15

7

8.5

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far from the EU. Russia bullied Armenia into joining through a combination of threats and bribes. Only Belarus has been a willing and eager participant.

Belarus

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is nothing and wait for the deadline to expire.

The US sanctions are more permanent, as they were put in place with by presidential executive order and will need another order to remove them – something that would be extremely embarrassing for President Barak Obama to do. Now the Republicans control both the Senate and House following the mid-term elections, there is talk about passing more sanctionsrelated legislation on Russia, which could see the sanctions in place for decades.

The Russians are taking an increasingly hard line too. Putin told German broadcaster ARD on the eve of the G20 that the US was not trying to contain Russian but "subjugate" it. He suggested that if the West doesn’t want to make up, "so be it – Russia will continue to develop its relations with the other half of the world.” That's fighting talk.

And there is the rub. Putin can only walk away from the West if he has somewhere else to go. Putin's bet is that he can replace the EU and US with closer relations with China. While the West takes it as axiomatic their democracies are the most desirable and attractive on earth, they have also just become the poorer half of the world this year. "The GDPs of the BRICS countries calculated at purchasing power parity are greater than those of the G7," said Putin in his German interview before the G20 meeting. "As far as I know, the GDP of BRICS is $37.4tn, while that of the G7, $34.5tn. What if they (G7) are told: ‘No, thank you, we shall be doing this and that here on our own and we don’t care how you will carry on?’ There will follow nothing but worse imbalance. If we really wish to decide something, we should decide it together."

A recent piece in the New York Times rubbished the idea of a meaningful Sino-Russian relationship, quoting one unnamed government official as saying: "Putin’s efforts at accord with China are seen as a jab at Washington, but one fraught with a complicated

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history, mutual distrust and underlying economic disparity that ultimately makes it untenable. They’ll use each other. And when one of them gets tired or sees a better deal, they’ll take it.”

Russia and China have always been rivals – amazingly during the Cold War they failed to unite against their common enemy, the "decadent running dogs" of capitalism. However, the new relationship is built on two solid pillars of mutual interest.

The first is Russia's huge reserves of energy and raw materials, which China almost completely lacks. "It’s the best synergy on the planet," crowed Kingsmill Bond, strategist at Sberbank, last year.

The second is their shared concern with the US' unipolar view of the world, where Washington calls the shots. Both Moscow and Beijing want a "multipolar" world, where the influence of countries is meted out in proportion to their military and economic might.

By contrast, if any relationship with China is artificial, then it’s surely the one with the US. America takes the benefits of "freedom," "individual choice" and "democracy" as axiomatic, whereas China is a pretty good approximation of the antithesis of these values. In terms of value systems, the two countries have almost nothing in common. The main appeal of the US to China is its rich consumer market, technology and its money.

For an "artificial" relation, Russia’s one with China has recently produced a lot of concrete results. Their trade turnover reached $90bn this year, with China overtaking the EU to become Russia's biggest trade partner. Russia has taken in something like $600bn of Chinese investment and Putin signed off on a $400bn energy deal with Beijing earlier this year. And in November the two countries announced they would start holding joint military exercises.

Russian Defence Minister Sergei Shoigu said the Sino-Russian militaryindustrial cooperation with China is "acquiring a special significance," while Colonel General Xu Qiliang,

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vice chairman of China's Central Military Commission added, "The strategic partnership between China and Russia has entered a new stage of development, which makes us very happy," reported the Moscow Times.

All this contrasts with Barack Obama's meeting with Chinese Premier Xi at the G20 summit where the two counties signed off on a landmark deal on climate change.

Black mood in Moscow The EEU is also a boon to Putin at home. Putin has masterfully played on the restoration of Russians' sense of national pride, as the annexation of Crimea went a long way to undoing the humiliation most felt at the loss of super power status following the fall of the Soviet Union. In November Putin enjoyed an 88% approval rating, while the propensity to protest fell to 7%, close to its all time low, according to a poll by the independent Levada-Center. The nascent opposition movement that took to the streets in December 2011 for the first time in a decade has been entirely crushed as a result.

But the elite are not happy and these are the businessmen that the government needs to make the growth-building investments. "The food sanctions, travel bans and personal sanctions were all largely symbolic, but the financial sanctions – now those really hurt," the CEO of the family office of one of Russia's richest men, who didn’t want to identify his company or boss' name, tells bne. "[My oligarch] is not on the sanctions list, but even we can't access Western money. No one will do business with us."

The race is on. The Kremlin has to make the EEU work in order to remove the pain of the sanctions and restore domestic business confidence in the future development of the country inside two years – or there is a possibility the entire system created by President Putin will collapse.

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The 50-year fight for gay rights Ben Aris in Moscow

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t was entirely predictable: the same day that Tim Cook, the CEO of Apple, came out and declared that he was the first openly gay boss of a Fortune 500 company, the Russian Duma said they would ban him from Russia for life.

“What could he bring us? The Ebola virus, AIDS, gonorrhea? They all have unseemly ties over there,” St Petersburg city council member Vitaly Milonov said, who is famously homophobic. "Ban him for life."

Russia has been lambasted for its homophobic attitudes. The so-called "gay propaganda" law that was passed earlier this year is nominally designed to protect minors from what the authorities have in effect painted as a sexual perversion. The law nearly makes explicit a link between homosexuality and paedophilia, which has long ago been proven to exist only in the minds of homophobes.

Iron-clad views While Russia's anti-gay stance has caught most of the headlines, the problem of sexual discrimination is a big problem in the whole former Soviet bloc. Stuck behind the Iron Curtain during the 1950s and 1960s, the whole of Central and Eastern Europe is just starting to grapple with the civil rights issues that the West has more-or-less put behind it.

Just this year the governments in both Moldova and Kyrgyzstan floated their own versions of Russia's anti-gay propaganda law; the authorities in the Serbian city of Belgrade tried to ban a gay pride march; Georgia considered a ban on same-sex marriage; videos emerged of Ukrainian gays being viciously beaten with impunity by local homophobes; an Armenian court allowed a newspaper to publish a "gay blacklist" outing homosexual public figures; a young man in Azerbaijan killed himself after his parents found out he was gay; and Albania was dubbed

"Europe's most homophobic country."

That’s a sample – the list is very long.

What is behind this intolerance is not illiberalism per se, but simple ignorance and the fundamentally conservative nature of almost all eastern European societies. The Kremlin's new "antipropaganda" vehicle, the newswire Sputnik, summed up the clash in cultures very neatly in a November 12 editorial entitled, "Five things that drive the West mad about Russia."

"Russia is a conservative country and is becoming more and more so with every passing day," wrote RT commentator Peter Lavelle. "Religious belief is on a comeback in Russia and in a very big way... The vast majority of Russians have become disenchanted with the West and its messages. Bearded women, gay marriage and non-traditional notions of the family are ideas from afar and not realities most in Russia accept at home.

This does not mean there is an absence

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of tolerance. Non-traditional lifestyles and alternative beliefs are accepted, but not promoted by the state. This is a popular and supported position."

never back such legislation in their countries. And these sorts of laws remain anathema anywhere to the east of the Baltics.

Russians are against same sex marriage with only 5% for it. And both pollsters found the trend is towards less, not more, tolerance.

The conservatism of all CEE societies is in no way a justification for the intolerant attitude to minorities that most of these countries have adopted (not just to the LGBT communities), but it does present a nasty problem for the West of how best to address the issue.

The entire region remains conflicted to different degrees by the broad set of civil values we take for granted in the West, torn between the duty to adopt European values that comes with EU membership, and the extremely conservative values that are grounded in the Orthodox church.

What's to be done? How can a deeply conservative and traditional country like Russia make progress on this, one of the most divisive debates in society? And how can the West help?

However, change is afoot. The authorities in Belgrade were forced to back down by the EU-aspirant government and the city held its first ever gay pride march in September. The same thing happened in Moldova, another wannabe EU member, which also held its first gay pride march in October.

Clearly association with the EU is good news for the LGBT communities in the former Soviet bloc, but the progress remains a top-down process driven by pressure from Brussels. In the most recent example, on November 6 Latvian Foreign Minister Edgars Rinkevics came out on Twitter, the first sitting minister to openly admit he is gay, not only in the somewhat more liberal Baltics, but of any state in CEE. However, despite the Baltics' reputation for being the most "western" of the eastern European states, even Rinkevics was anticipating a storm of reaction. ”Our country must create a legal framework for all types of partnerships, I will fight for it, I know that there will immediately be megahysteria but #Proudtobegay," Rinkevics wrote on Twitter. As it turned out, instead of being demonised, Rinkevics received overwhelming support for his bold stand by the twitterarti following his declaration – though not, needless to say, by Russian politicians.

Estonia leads the pack on putting sexual minorities on the same legal footing as everyone else. Its parliament approved same-sex partnership legislation on October 9 that will go into effect in 2016. But the fight is still uphill: all the mainstream parties in Latvia and Lithuania immediately said they would

Georgia is probably the best example.

Probably the most Westernised country east of Tallinn, former prime minister Bidzina Ivanishvili told journalists that sexual minorities should have equal rights in May this year, though a gay pride march in Tbilisi the same day quickly became violent when anti-gay groups attacked the crowd. Home to more churches per square kilometre than any other city in the world, 12 people were taken to hospital, including three policemen and a journalist.

50-year fight Homophobia has been institutionalized in Russia and several other countries in the region. And the current break with Europe will only make things worse for Russian gays.

Boris Yeltsin reluctantly decriminalised homosexuality in 1993, but only because it was a prerequisite for joining the Council of Europe. The government didn’t announce the fact at the time and the news only leaked out gradually as the police stopped arresting gays.

Homosexual sex between consenting adults remains legal, but the terms of the recent gay propaganda law are so vague it is now in effect illegal in Russia to even talk to your children about LGBT issues.

RT's Lavelle is right in that the already conservative Russian society is becoming more conservative as Putin rallies the population to the nationalist flag. A survey from the independent Levada Centre found earlier this year that 68% of Russians support the gay propaganda law and only 7% were against it. A similar poll by the state-owned VTsIOM earlier this year found that 85% of

We know how to fight bigotry in the West, as we have been doing it for 50 years: confrontation and blind condemnation is not the way forward.

In the November 2013 issue of the Atlantic magazine, Jonathon Rauch, a gay activist and contributing editor, took on homophobic author Orson Scott Card by condemning a call for a boycott of his newly released book-turned-movie Ender's Game. "I have been advocating gay marriage and gay equality for more than 20 years… In a roundabout but important way, bigoted ideas and hateful speech play an essential part in advancing minority rights. Even if we have every right to boycott Ender’s Game, gays are better served by answering people like Card than by trying to squelch or punish them," Rauch wrote.

US President Barack Obama snubbed Vladimir Putin's invitation to the Sochi Olympics over the gay rights issue (among other things), but Rauch argues that confrontation goes nowhere; you have to engage your enemy.

In 2004 Rauch was on a radio talk show to promote a book on gay marriage debating a prominent gay marriage opponent. After the show, a listener called in complaining, "Your guest is the most dangerous man in America, because he sounds so reasonable."

"In hindsight, this may be the greatest compliment I have ever been paid. It is certainly among the most sincere," Rauch wrote. "Despite the caller’s best efforts to shut out what I was saying, the debate he was hearing – and the contrast between me and my adversary – was working on him. I doubt he changed his mind that day, but I could tell he was thinking, almost against his will."

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I Perspective

Is Washington about to lose Prague, as it did in 1948?

James de Candole of Candole Partners

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here are many remarkable insights offered in “On the Edge of the Cold War”, the definitive study of the failure of US diplomacy and intelligence in post-war Prague by Professor Igor Lukes of Boston University. Perhaps the most instructive is the way in which Washington’s economic diplomacy turned a means of bolstering the Czechoslovak democratic system into a means of accelerating its destruction.

The US offer of reconstruction aid, originally conceived as a way to help Czechoslovak democrats steer a middle course between the Soviet Union and the West, became instead Washington’s way to punish the Communists. This had the effect of driving the democrats into Communist hands and, in all too many cases, to their deaths as well.

The root cause of American mishandling of its economic support to Prague was an argument over how to extract compensation from the Czechoslovaks for the US-owned properties and assets, whose value was estimated at between $30mn-50mn, that had been expropriated by the Czechoslovak state in October 1945.

The demand for compensation soon became a reason not to grant the Czechoslovak request for reconstruction aid in the form of US loans and credits. The US State Department was split between those who wanted to separate the two issues, and those, like Ambassador Laurence Steinhardt, the US ambassador to Czechoslovakia, who insisted that they be joined, with no aid offered without a Czechoslovak commitment on compensation. Many of these expropriated properties were owned by Steinhardt’s clients – he ran a law firm in New York.

bne December 2014

US aid for European reconstruction. The Soviet deputy foreign minister denounced it as an attempt to "bring about the economic enslavement of Europe." The Czechoslovak delegation, led by then foreign minister Jan Masaryk, applauded these provocative remarks.

Washington was outraged. In a public statement soon after Masaryk’s fateful applause, then US secretary of state James Byrnes declared that no more aid would go to Eastern European countries that, “vilified the US and distorted its motives and policies.” American aid, he declared, should be used to help its "friends" and not to subsidize "Communist control of Czechoslovakia."

But Czechoslovakia was not yet under Communist control in the summer of 1946. However, what the US did next helped to ensure that it soon would be. The State Department broke off negotiations, rejected Prague’s request for a $50mn loan and conditioned all future help on a reduction in the number of Communists in the Gottwald government. The Communists were jubilant, having brought about through provocation and threats just the result they had been hoping for.

Russian influence returns 65 years later and there is no doubt that the Czech political and business elite has fallen back under Russian influence.

The attraction today is not ideological, though: it is driven by vanity, personal greed and a pragmatic recognition that business dealings with Russians are free of the burdensome bribery measures imposed by their own governments on Western corporate executives operating abroad.

The single most important vehicle driving Czechs into the embrace of Vladimir Putin’s Russia is the persistent desire of the Czech politicians and industrialists to build more nuclear reactors. This desire is being fuelled not only by the Kremlin, but by Washington and London as well.

The foreign expansion of Russian nuclear holding Rosatom, lavishly funded by the state, is an integral part of Russian foreign policy. Winning a Czech nuclear contract would please Rosatom’s Yuri Ushakov, who served as Russian ambassador to Washington and is today one of Putin’s closest aides. But more important than installing a MIR1200 reactor in southern Moravia is the opportunity that the Czech desire affords Russia to co-opt Czech politicians and businessmen to the Kremlin’s cause of weakening Nato and the EU.

The matter was fudged, with the US State Department finally offering Prague a watered-down package of aid, the effect of which was to weaken their democratic friends in the Klement Gottwald government and to embolden the Communists.

British economic diplomacy towards Prague is heavily influenced by Rolls-Royce’s business partnership with Rosatom and by its ambition to see Rosatom’s MIR1200 consortium win any new tender to build more reactors; US economic diplomacy is centred around getting the Czechs to choose the bid from the US-Japanese firm Westinghouse.

The fatal blow came in August 1946 at a gathering of US, Soviet and European foreign ministers in Paris to discuss

This is short sighted in the extreme. Consider the consequences of a Czech failure to select Westinghouse. How

Chart I 13

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would Washington react if Prague were to follow Hungary and sign up Rosatom without holding a tender? Would it take umbrage, as Secretary of State Bryne took umbrage in 1946?

Would Washington complain, as the recently departed US ambassador in Prague Norman Eisen complained when the Temelin tender was cancelled earlier in 2014, that: “as close friends and allies, we are concerned about the signal this may send to US investors.” Indeed, would Washington seek to ‘punish’ the Czech Republic for its decision, and how would this help those few public figures left in Prague opposed to Putin’s spreading influence in the city?

A wiser reaction would have been for Washington to acknowledge that the official reason for abandoning the nuclear tender (an unwillingness to burden Czech households with much higher electricity bills) was commendable, and then to focus its diplomatic efforts on removing the Czech desire for more nuclear reactors altogether. In this way, Washington might manage to derail the best vehicle that Russia has for extending its influence over Prague.

CHART:

The great concentration of economic and political power that would result from expanding the Czech nuclear fleet can hardly be in US interests given the near certainty that much of this power would end up in Russian hands. Much wiser would be for US diplomatic efforts to be directed at encouraging the Czechs to pursue a policy of de-concentrating its electricity generation sources on nuclear, and embrace a broader mix including renewables.

Professor Lukes in his book professes astonishment at the glibness of US diplomats in post-war Prague, pointing out that none seems to have anticipated the Communist coup in February of 1948, believing until the last moment that the democrats, with whom they associated, would prevail.

That glibness remains. What is obvious to all Czechs – that Rosatom is a vastly more attractive partner for the class of politicians and businessmen running their country today – appears to be lost on the US diplomats that inhabit Prague’s splendid Schönborn Palace. The last thing the Czech nuclear lobby wants is a US corporation, hamstrung by anti-graft laws, breathing down their necks.

Popularity up, protest down

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recent poll by Russia’s Levada-Center has shown that despite rocketing food prices, the desire to protest in Russia is close to an all-time low at 12%, while support for President Vladimir Putin has matched the all-time high approval rating of 88% – a figure last seen in September 2008.

This popularity comes despite sharp rises in food prices caused by Russia’s ban on food imports from countries that have imposed sanctions on it; the cost of meat and poultry rose by 16.8% in September, according to Russia’s state statistical agency Rosstat.

Inflation hit 8% in September, while the ruble’s value had plummeted to around RUB46 to the dollar by end-November.

% respondents

Putin approval rating

Desire to protest

Oct '13 Source: Levada-Center

Feb '14

Apr '14

Jun '14

Aug '14

Oct '14

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Russia moves to free-sinking currency Ben Aris in Moscow

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fter controlling the ruble-dollar exchange rate for more than two decades to ease the pain of the transition to a free market, on October 9 the Russia’s central bank finally let the ruble go. The Russian currency is now a fully floating currency, but it is also tanking as the Western sanctions start to bite and the economic slowdown deepens, causing some to predict another financial crisis is in the offing.

The Central Bank of Russia (CBR) has come in for a lot of flak over its handling of the latest ruble crisis. But looking bank to 2009, the last time the ruble dropped, and not much has changed.

Russia had its "Minsky moment" in the week beginning on November 7 when the currency went into free fall to the point where it is down about 30% so far this year against a basket of currencies, the CBR has spent about $100bn managing the ruble lower and oil prices are now below $80 a barrel for the first time in years – five years to be exact.

"Free float? More like a free sink: ruble now close to 54 on a basket basis – quite incredible, and where is the CBR?

The basket was at 39 in June! This is a huge, huge move. Five figures (10%) this week," Tim Ash, head of emerging markets research at Standard Chartered, wrote in November. "The CBR policy response has been confused. It was trying to manage the currency weaker initially, but then finding that they were being a bit too successful, and that they had created a vicious cycle and panic. We saw the emergency rate hikes, which failed, intervention, which failed and now a lack of clarity as to what the new FX regime

February 2009, then chief economist at Renaissance Capital, and now deputy finance minister.

In that month, the ruble fell some 30%, the most in six years, the CBR spent about $100bn managing the currency lower, and oil dropped into the $40s. "As an economist (and a good son), I told them that the devaluation of the ruble is the natural result of the new realities of the world economy and the sharply lower price of oil,” wrote Moisseev.

"Free float? More like a free sink” is. Why bother keeping the exchange rate bands as they are totally ineffective?"

The ruble went through almost exactly the same crash in February 2009. "Since the ruble began its dramatic slide in value in August, I have been bombarded with the same question from nervous investors, confused journalists and even my mother: What is happening to the ruble?" wrote Alexey Moisseev in

“Then I quickly launched into a critique of the Central Bank's approach of stepby-step devaluation of the ruble, which has cost the country $100bn in reserves, raising the total reserve loss since the beginning of the crisis to $210bn."

So today’s moves represent a full-on meltdown? Well, not so fast. A few months later, Moisseev was admitting that maybe he had been too hard on

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Russia's central bank. "What is needed, I and other economists insisted somewhat self-righteously, is for the Central Bank to step aside and allow a dramatic one-off devaluation," Moisseev argued.

"Today more and more economists, including myself, are eating our words to a certain degree. We have to admit that the Central Bank's gradual devaluation policy has largely been vindicated. Yes, it has been costly in terms of reserves, but it looks to have succeeded in insulating the population from the kind of economic shock and pain they have experienced more than once in Russia's modern history."

The parallels between the two episodes are similar, except oil prices are about twice the level now that they were in the worst of the post-Lehman's debacle, and the CBR has today freed the ruble, whereas in 2009 the so-called currency corridor was maintained for another five years – albeit widened by 5 kopeks each time the CBR was forced to spend about $350m intervening to keep the currency inside its pre-determined band.

Prone to panic attacks Russia remains prone to panics because of its recent history. The crash of 1998 is still fresh in most people's minds and the even worse crash of 1991 is also well within living memory. In 2008, Russia's economic growth went from 7% growth to a 7% contraction in a matter of months. The population has been robbed of its life savings through devaluation and hyperinflation at least twice in the last two decades, so it is no wonder they rush to the exchange kiosks whenever the ruble looks shaky. They did in 2009 and they did so again this time round.

The first panic buying of dollars appeared in March when the currency began to fall – sales of dollars reached $4bn that month, four-times its normal volume, peaking in November when some exchange offices said they ran out of cash dollars. Likewise the local press is reporting a boom in the sales of SUVs and apartments as Russians try to put their spare cash into something tangible that will hold its value in a crash.

The CBR tried to head off a panic with

Could bad news for Russia spell good news for investors?

Henry Kirby in London Investors could achieve returns of up to 50% on Russian equities in 2015 if tensions in eastern Ukraine abate and current sanctions are lifted, predicts Russian investment bank Renaissance Capital.

Speaking to bne, Charles Robertson, Chief Global Economist at Renaissance, argues that: “Russia may well offer some of the best returns you will get in 2015... The ruble is oversold, the market is down, heavily, and we assume that sanctions will ease in 2015. So, there’s very good reason to see the market rising. We’ve been talking about a 25-50% improvement. Certainly, buying when markets have been hit hard or currencies are cheap is very attractive.

You could get 20% on the currency [regaining value against the dollar] alone.”

As the chart shows, Russia continues to boast a low forward price/earnings ratio, a measure that compares a company’s share value with its profits.

Recently the RTS index, Russia's leading dollar-dominated stock market index, had a P/E of 5, which would mean that a buyer pays $5 for every $1 of earnings. Compare that with the FTSE 100’s P/E of 15.3 and Russian equities look very cheap.

High dividend yields on Russian equities also make the market attractive to longer-term income investors, with yields sitting at around 4-5%. “When you have dividend yields that high and P/E ratios that low, you’re talking about a market that is incredibly cheap, and markets that are very cheap have a tendency to rebound once people decide that things aren’t quite as bleak as they expected,” Robertson says.

Volatility in the Russian market has led to huge returns for investors in the past. The value of the RTS more than doubled between December 2008 and December 2009, when its value rocketed from 644 points to 1450, but the index has subsequently fallen back again and was trading at 1,001 at the time of writing on November 14 because of the tensions with the West over Ukraine and the non-stop bad economic news domestically.

RTS forward price-to-earnings ratio and dividend yields

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a large and unexpected rate hike of 1.5% at the very end of October – well ahead of the 50 basis points the market was expecting – but the ruble sailed downwards as if nothing had happened.

The lack of action on the CBR's part in November unnerved traders who were expecting a "big bazooka" moment, but also probably saved Russia a pile of cash. Economists say there is no point protecting the exchange rate if the fundamentals demand the exchange rate should go lower. Falling oil prices suggest the ruble should fall.

More to lose?

What next? Will the currency continue to collapse and spark a full blown financial collapse? Probably not, although economists are striking a note of caution, just as they did in 2009.

Chris Weafer, CEO of Macro-Advisory, points out that from a purely economic point of view the ruble has fallen much further than it should. "The ruble has gone from RUB40 [to the dollar] to almost RUB49 in a month, but in the same time the price of oil fell no more than 50 cents. From an economic point of view the ruble should rebound towards RUB40 to the dollar, but this

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isn’t about economics any more."

Fear has gripped the currency markets as uncertainty grows over oil production and prices. The International Energy Agency’s prediction that oil could fall further in 2015 as new supplies of crude from Libya arrive amid lower-thanexpected oil demand, stands in stark contrast to the confident assertion from leading investment banks that oil prices will recover to $95 next year. Indeed, the Russian budget assumes an oil price of $95 and the CBR's pessimistic scenario says prices will fall to $80, but not less.

But Russia was grappling with all these problems in 2009 as well. One of the side effects of the collywobbles then was capital flight spiked to $130bn in 2009 – exactly the same amount that the CBR predicts will leave this year. And the uncertainty over where oil prices will go next is as old as the industry.

"The problem is that it is much harder to predict with any certainty what the oil price will do in the short-term," Moisseev wrote in the first week of February 2009. "Earlier this week, it was down below $40. If it dipped close to $30, the Central Bank would effectively be forced to abandon its defense of the ruble. We expect oil to recover, and the

exchange rate to recover along with it – to RUB29 to the dollar by the end the year. If, however, the oil price recovery takes longer than we expect, or worse, if it declines further, a free float of the ruble will become hard to postpone.

At present, [central bank governor] Ignatyev is targeting a free float of the ruble in 2011, which in these chaotic times is so far off it feels like never."

This analysis applies as much today as it did then (if you add $40 to the oil prices and RUB15 to the ruble value). Except this time round the CBR has already freed the ruble. Does that make a difference? It should make all the difference. Weafer's point that the ruble has fallen a lot faster than the oil price means that Russia is, almost uniquely in the world, currently running a triple surplus.

Asks Alex Nice, an analysis with the EIU: "When was the last time a country with a structural current-account surplus and balanced budget experienced a currency crisis?" Indeed, of the six emerging markets vulnerable to devaluation, the EIU identifies Brazil, Turkey, South Africa, Indonesia, and India. Russia is the only one that has a triple surplus; all the others have large budget and current account deficits.

Ruble trade corridor and dual currency basket value: 2009 to date

Sources: Central Bank of Russia; Renaissance Capital

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the plane was owned by a little-known Georgian operator Air West Georgia, leased by a New Zealand shell company, SP Trading, and chartered by a Hong Kong firm.

But investigators quickly traced the plane back to its previous owner from Kazakhstan, Aleksandr Zykov, whose local firm East Wing allegedly supplied the crew, with Air West Georgia and the Hong Kong charter both smoke screens.

Zykov had a past history linking him to sanctions busting arms transfers.

Shining a light on Ukraine’s shadowy arms industry Graham Stack in Kyiv

T

he shadow of organized crime hangs over Ukraine's defence industry. bne investigations trace links between gangs and the defence sector that stretch back over 20 years of arms smuggling to Iran and North Korea.

Ukraine's military prosecutors and the SBU security service in early November searched the houses and offices of former and current heads of the state arms exporter Ukrspetseksport, and seized documents from a number of state defence firms, pointing to a crackdown on the traditionally murky defence sector by Ukraine's new reform-minded authorities.

The moves follow an October raid by the SBU – backed up by an elite SWAT unit – on the head office of Ukraine's state arms holding Ukroboroprom.

The crackdown sparked hopes that Ukraine may be finally getting serious about pushing organised crime out of

its arms industry, although there is no confirmed information as to what investigators are looking for.

The latest shock to Ukraine's defence sector came in 2013, when UN investigators named a Ukrainian aviation executive in connection with the illegal attempted transfer in 2009 of around $16m worth of rockets, rocketpropelled grenades and man-portable air-defense systems from North Korea to Iran – even though both countries are under an international arms embargo.

The attempted transfer grabbed world attention in December 2009 when Thai authorities seized an Ilyushin-76 plane numbered 4L-AWA at Bangkok airport, and found it stuffed with the North Korean arms bound for Iran apparently via Ukraine – the first cargo of North Korean weapons to have been seized under sanctions. Then the paper chase began: according to its documents,

That left only the New Zealand shell company SP Trading to account for.

And in 2013 the UN investigation produced a surprise, by alleging that an unknown Ukrainian, Yury Lunov, had masterminded the transport together with Zykov.

But while Zykov's role as provider of the plane seems clear, what was Lunov's?

The trail leads to a small office in Kyiv: A fax number provided for SP Trading in the cargo documents matches the number provided in Ukraine's company register for an obscure local firm called GST Ukraine, which Lunov also told a UN panel was his place of work.

A guest of GST GST Ukraine is registered at Frunze Street 19-21 in Kyiv's Podil district.

Embarrassingly for Ukraine, the address is the seat of the country's State Service for Export Control – the very state body that controls the export and import of military technologies. The address – a former Soviet government department building – also houses the state-owned Ukrainian Cargo Airways, the country's largest freight carrier, and state-owned Ukraine Scientific Research Institute for Aviation Technology. Thus it forms a trinity of air transport, dual-use technologies and export controls, around which a whole swathe of smaller, often private companies such as GST Ukraine have sprouted up.

GST Ukraine's current office lies behind an unmarked door in an adjacent building, which also houses the very hush-hush Ukraine Scientific Research Institute for Aviation Technology

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(UkrNIIAT). bne found GST Ukraine's director, Vyacheslav Kaplunenko, at his workplace in a cluttered one-room office. According to the state company register, Kaplunenko has run the company since its founding in 2004, with Yury Lunov's son Boris a co-owner.

Responding to bne questions, Kaplunenko calls GST Ukraine an "air freight" business. When asked what projects they were currently working on, Kaplunenko complains that, “there

bne December 2014

“Ukrspetseksport” and “Yuzhmashavia” – the former the state arms trader, the latter an aviation company owned by Ukraine's producer of intercontinental ballistic missiles, Yuzhmash. "Folders are folders, they don't say what's inside," Kaplunenko shrugs. The wall of Kaplunenko's office displays a poster detailing munitions and packaging sizes. "It’s a souvenir," he explains.

The Kazakh operator linked to the plane seized in Bangkok in 2009, East Wing,

"The CIA reported that it Nordex deals in various schemes from illegal arms trading to money laundering for the Russian mob" is no work at the moment. Due to the war in the country, we just sit and read the news. When will it all end?”

Kaplunenko claims Yury Lunov – named by the UN in connection with the 2009 North-Korea to Iran arms deal – no longer works at GST Ukraine, adding that Lunov handled the aviation side of the business, while he only ran the commercial side. Kaplunenko also says he knows of no investigation into his company.

Kaplunenko insists GST Ukraine has no business relationship with the State Export Controls Committee, UkrNIIAT, Ukrainian Cargo Airways or any other state organisations. “The only relationship we have is purely commercial, being that we rent the office from UkrNIIAT,” Kaplunenko says, adding it was a “coincidence” that GST Ukraine was in the same line of business as its landlord and larger neighbours. UkrNIIAT, contacted later by telephone, also denied that GST Ukraine was connected, saying they rent office space to a number of firms.

But belying such words, Kaplunenko's office is full of files suggesting he works directly for Ukraine's state defence sector, many labelled, for instance,

was originally named GST Aero, a close match to GST Ukraine. UN experts in 2013 wrote that GST Ukraine is “an entity that the Panel has reason to believe is related to [Kazakh operator] Zykov.” Apart from the 2009 case, UN experts have linked Zykov's GST Aero/East Wing to deliveries of arms, ammunition and vehicles to Somalia in 2006, Chad in 2007 and to Darfur rebels in 2008.

Moreover, the GST Ukraine fax number matches both that of the New Zealand shell company SP Trading as well as that of Air West Georgia, which the UN calls a "ghost operator."

in Bangkok – also operated on paper operated by Air West Georgia, but currently in storage near Kyiv.

Kaplunenko hems and haws when queried about the plane, and then decides it is time for your correspondent to leave his office, haranguing the guard on the way out for having admitted a “CIA spy” to the premises.

Blast from the past GST Ukraine was set up in 2004 at Frunze 19-21, but this was not Lunov and Kaplunenko's first acquaintance with the address: records show that both men in the 1990s were shareholders in another company at the same address run by Lunov called Antonov AerotrackAviaservice, the subsidiary of a major cargo flyer at the time called Antonov Aerotrack Aviation. “You've done your homework,” Kaplunenko acknowledges.

Despite being wound up in 2001, Aerotrack Limited at the Frunze 19-21 address was listed as consignee on the waybill for the 2009 4L-AWA flight.

In the 1990s, the CIA accused Antonov Aerotrack of having flown Scud missile launcher parts from North Korea to Iran via Kyiv, in 1995. "That was a long time ago and I know nothing about it," said Kaplyunenko.

Antonov Aerotrack was a partly stateowned company that has ties with leading Ukrainian aviation and defence producers such as legendary plane

"Write what you want about me, but get my name right" Kaplunenko denies that his company has any relationship to Air West Georgia. But one folder on Kaplunenko's shelf bore the registration number of a single plane, an Antonov 12B, registration number 4L-BKN. Aviation databases show this plane to be a sister to the 4L-AWA plane seized

producer Antonov, and Progress turbine builder from Zaporizhzhya.

But besides the links to the state, Antonov Aerotrack also had links to alleged organised crime structures: Ukraine's company register shows that a significant stake in the business was

bne December 2014

held by a notorious Viennese company, Nordex GmbH, run by Grigory Loutchansky, a legendary figure from the 1990s. "The CIA reported that it [Nordex] deals in various schemes from illegal arms trading to money laundering for the Russian mob," the US embassy in Kyiv wrote in a Crime Digest circular from April 1999.

Although based in Vienna, and often associated in the media with Russia, Nordex had strong Ukrainian links: Loutchansky's partner in Nordex was Israeli-Ukrainian oligarch Vadim Rabinovich, according to Rabinovich's own testimony in an authorised biography. GST Ukraine's Kaplyunenko said that his company had no connection to Nordex or Rabinovich.

Eastern Europe

1995 Nordex GmbH (Loutchansky, Rabinovich)

Oleg Soskovets Albert Salamatin

Cargo: SCUD launcher parts to Iran

State defence sector

Antonov Aerotrack Aviation

2001

In 1996, CIA sources told Time magazine that in 1995 Nordex had flown Scud missile launcher parts from North Korea to Iran, using a Ukrainianregistered Antonov Aerotrack plane, via Kyiv. CIA sources were also quoted as saying said that Nordex had transferred nuclear materials to Iran in 1993-94.

State defence sector

Loutchansky admitted having visited North Korea and owning the plane, but said he had nothing to do with the cargo, because the plane was leased at the time to a Bulgarian firm.

Rabinovich, when asked about the incident in his biography, added that Nordex was at the time no longer owner of the plane at the time, having sold it to Aerotrack.

State defence sector

Rabinovich, in an early 2014 interview with Russia's radio station Ekho Moskvy, made light of past allegations of arms trading, such as in 2001 having sold 300 tanks to the Taliban via Pakistan. "At that time, for the first time ever, the Ukrainian state stood up for me: the head of the National Security Council declared that we simply didn’t have that many tanks," Rabinovich said. He also reminisced: "I once left my hotel in Jerusalem holding a paper with the headline 'Rabinovich sold arms to Iran.' A local saw the headline, my picture and me, and said: 'Congratulations!'" His advice to journalists? "Write what you want about me, but get my name right."

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GST Aero (Zukov)

Cargo: Cruise missiles to Iran

2009 GST Ukraine (Lunov / Kaplunenko) Cargo: RPGs, Man Pads rockets to Iran East Wing (former GST Aero)

2010

?

Dmitry Salamatin, Ukrspetseksport 2010, MOD 2011-2012

State defence sector

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up Russia's capital markets to the global financial system.

Being able to buy and sell bonds and stocks through Euroclear makes an enormous difference – it negates the need to open an expensive brokerage account in Moscow (and so will speed the death of the already dying local investment banks), and it allows traders to react much faster to price-moving news.

Russian stocks' secret membership of Euroclear Ben Aris in Moscow

R

ussian stocks are now clearable by the two biggest international settlement systems, Euroclear Bank and Clearstream Banking. At the press of a button earlier this year it became possible to buy shares in Russia's blue-chip companies listed in Moscow from the comfort of a chair on a London trading desk. It is a huge change in the way that Russia's capital market operates – not that you’d know it from the lowkey way the landmark innovation was introduced.

confirmation from Euroclear that this is the case."

Clearstream announced July 27 that from the following week it would give foreign investors direct access to the Russian equity market. Though just two weeks prior to that, Euroclear said it was delaying its plans to offer the service.

First step Euroclear, based in Brussels, is the largest provider of securities settlement services. It began settling Russian

Then on September 18, Alexey Zabotkin, an equity analyst with VTB Capital, informed his clients in an email that he had seen a document published on Euroclear’s website detailing how access to Russian equities was now available. "We believe this indicates that the depositary bank is to start settling Russian equities.

However, there has been no official

As the news spread and bankers began to ask questions, Bloomberg picked up the story and reported that Euroclear confirmed it had started trading accounts for some Russian stocks.

"We are waiting for a comment from Euroclear, which has not confirmed this yet, but apparently settlement started on Monday [September 15]," Zabotkin wrote somewhat bemusedly.

The effect on the bond market was immediate. International bond traders held about 4% of outstanding Russian state bonds in 2012, the so-called OFZs. But following the link-up to the Euroclear system, their share has soared to 25% of the total outstanding cheap but high-yielding OFZ's, according to the Central Bank of Russia (CBR).

The plan was always to add equities to the international system, but the government wanted to study the bond market reaction first, afraid that being able to buy and sell Russian stocks directly in London would accelerate capital flight. Equities were supposed to be included in the first half of 2015.

It seems that the cash-strapped Russian government accelerated its plans.

The slowing economy and the stalled privatisation plan, launched in 2008 by then president Dmitry Medvedev, cajoled the government into making the switch almost a year early.

But of course this is not a good year to be buying Russian stocks, while many in the West don’t want to be seen climbing into bed with the Russian government with the Ukrainian crisis still raging. And the Kremlin is currently embroiled in a very

“There has been no official confirmation from Euroclear that this is the case" domestic government bonds in early 2013, and Russian corporate bonds in January this year. The change was part of the government's plan to transform Moscow into a financial hub and hook

public spat with the leading US credit card companies VISA and MasterCard, after passing a law earlier this year that effectively expels the two unless they can find a local partner. Given all that,

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Eastern Europe

the last thing Euroclear and Clearstream wanted to do was to draw attention to their new Russian business.

Clearstream has been quietly handling Russian equities since July. There was no press conference, grand announcements or party at the Moscow Exchange.

Instead, the market found out following a few terse statements made to Russian daily Kommersant. The Moscow Exchange confirmed that Clearstream made the first settlements for Russian local shares on July 7.

Euroclear remains more cautious and has said nothing publicly so far. It turns out that while accounts have been set up, full trading will not start until some more amendments to Russian legislation come into force on January 1, 2015, according to press reports. The new laws allow depositories to vote shares they hold on trust at shareholder meetings on behalf of their beneficial owners.

Still, the entry of the globe’s two leading clearance and settlement firms is a

landmark event, even if it is not certain how much of a difference it will make in the short term. If equities follow the bonds' lead, then clearly the volume of Russian stock trading will increase. But by how much remains anyone's guess.

Foreign portfolio investors have always played a much bigger role in Russia's stock market than in its bond market, traditionally holding about half of all the tradable shares. Moscow Exchange said it has already seen a bump in volumes in July, but didn’t say by how much.

"The demand for such settlements from old and new customers of Clearstream exceeded expectations," the exchange said at the time.

Even if the volumes don’t quadruple, one tangible change will be to close the spread between the locally listed shares and the depository receipts, or international proxy shares, listed in places like London.

An emerging market calling card, the best emerging market companies have used the DRs, as they are known,

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

to allow them to tap international markets using these proxies based on their underlying locally traded shares.

Differences in the markets' mentalities and size of the respective free floats affect the prices, which are usually a bit different – up to 20% in some of the better names.

Giving international investors direct access to the local underlying shares should squeeze that spread over the DR. The system is up and running, but clearly it is not firing on all cylinders yet as the spreads remain wide: the spread on the mobile operator MTS pair (which trades in both Moscow, and London as a DR) was 16% at the end of September before the recent selloff, and for the supermarket Magnit pair it was 14%.

"The immediate impact of Euroclearability on the market might well be muted, as other events have taken centre stage and are unlikely to fade away," says VTB's Zabotkin. "That said, the improvement of accessibility to Russian equities is positive."

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Tales of grandchildren In an attempt to spark a debate in a society whose modern history is seen through the prism of victory in the Great Patriotic War of 1945 and Yuri Gagarin’s first flight in space in 1961, Polivanova put together a documentary play, named “Grandchildren”, based on interviews with grandchildren of those who took an active role in repressions.

"Restoring Names" in Russia Julia Reed in Moscow

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rimes? What crimes? In 1997, the then prime minister of Sweden, Goran Persson, heard on the radio the results of a survey that Swedish youth knew next to nothing about the Holocaust. Outraged by the finding, he got the support of parliament to create a national Holocaust awareness programme for schools. The aim of the programme was not only to spread the knowledge of the Holocaust, but also to organize a nationwide debate about democracy and tolerance. The programme has become known as "Living History." In 2010, another national programme was launched that focused on the awareness and memory of the crimes of Communist regimes, notably those in Cambodia, China and Russia. Swedish researchers came to Russia looking for evidence and examples.

Alexandra Polivanova worked in the cultural department of the Swedish Embassy in Moscow where she first heard of the Living History. Her job took her to the remote corners of Russia, including the Gulag camps, where locals looked surprised to hear about the crimes of the communists.

It was common to talk about Nazi atrocities, sometimes even about a ‘few’ mistakes made by Stalin, the occasional repressions, but never about full-blown crimes against humanity by the state perpetrated against its own citizens. “It was like a trauma that you want to forget and it got pushed out from people’s psyche,” comments Polivanova, now a curator of cultural programmes in Memorial – a history society that holds archives and spreads knowledge of Soviet repressions.

Memorial is also an organizer of an annual "Restoring Names" event when members of the public meet on Lubyanka square – the headquarters of the Communist-era KGB and still the headquarters of its replacement, the FSB – to read out the names from the list of 40,000 people repressed or executed during the Soviet era in Moscow alone. “I was inspired by Sweden's example and became involved in projects that raise public awareness of our tragic past, because this is unfinished business for many Russians,” explains Polivanova, whose relative, the Russian philosopher Gustav Shpet, was executed in Tomsk in 1937.

In one such account, a grandson tries to reconcile his household memories of his grandpa in socks and dressing gown with the knowledge that he was the head of a prison camp. At the end of the play, members of the audience are invited to speak. And this is when the actual relatives of the victims can meet the relatives of ‘those who did it.’

Another ongoing project, called “The Family Journey,” looks into “how to restore what was taken away from us.”

Its goal is to get children from as young as nine to learn about their family life in the Soviet Union by getting to know the objects and household items from the Memorial’s museum archive and the things they brought from home and to reflect on their findings.

But for larger-scale projects than these, the Moscow City government’s approval is hard to get. “We wanted to install plaques with the names of executed Muscovites on the houses where they lived, similar to what they did in Berlin,” says Polivanova. “At first, Memorial's idea was met with understanding in the Mayor’s office. Then they changed their mind. They want Moscow to be known by its bicycle tracks and not as a memorial site,” she laughs.

Polivanova sounds upbeat in the environment of the state hostility toward internationally sponsored NGOs – the so-called "foreign agents" law. Memorial has also found itself in the firing line; the Ministry of Justice has threatened to shut down the NGO on the grounds that it has a "legally inappropriate structure."

Polivanova comments with pride: “We had some success this year: we [Memorial] were authorized to install an

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outdoor exhibition featuring the sites of Moscow associated with the repressions right on Lyubyanka square, next to the Solovetski memorial stone – a large stone brought from the Solovetsky Islands off Russia's northern coast and home to the first Gulag. The exhibition is going to run for a month and a half, starting from October 29, the eve of the day of the victims of the political repressions in Russia.”

“And my mother…”

A long line of people of all ages gathered next to the Solovetski Stone on October 30 holding candles and flowers, looking solemn. A few have pictures of their loved ones held against their chests.

Some with children, some on scooters, others on their way home from work lugging full shopping bags.

Russians have been gathering at this spot since 1974 on October 30 to commemorate the victims of political repressions. The tradition started with a hunger strike organized by the inmates of Mordovia and Perm prison camps and until 1987 the day was commemorated with annual hunger strikes in cities across the country. One of the biggest demonstrations was held in 1989 just before the fall of the Soviet Union when about 3,000 people surrounded the KGB building in a line of candles. Since 1991, October 30 has been officially recognized day of the memory, but there is little official acknowledgement of the day.

The Solovetski Stone was brought from Solovetski monastery, where Stalin sent the first political prisoners, and installed on the square in 1990 as a reminder of Soviet political oppressions. In an annual all-day event that has been taking place since 2006, ordinary people come to the Stone and read out the names, ages, occupations and the dates of execution from a list of 40,000 Muscovites who were put to death.

The two names I was given to read were: Alexeev Victor Petrovich 32 years of age garage mechanic executed on November 13, 1942.

Eastern Europe

Alexeev Ivan Ivanovich 53 years customer service engineer at Electrostal plant executed on August 20, 1938.

Sometimes the readers’ voices break as they tack on to their name “… and my mother” or “… and my father.”

A tiny old woman, with a microphone placed too high for her to reach comfortably, broke out: “… and my father was shot in the basement of this building,” pointing at the newly painted former KGB building behind her. Her pointed finger looked more like a fist.

But the building said nothing, standing quietly, like it always has. “And me and my mother lived in exile till 1958…” She fell silent then walked away. The pain in her voice was audible, the suffering of her family visible on her face. Young people in line tried to hold back tears.

Memorial estimates there are today 800,000 surviving victims of Soviet repressions, including children who lost their parents. These people are still waiting for an official apology from the state, but in today’s political climate of re-emphasising the power of the state and reviving former Soviet glories, they have little chance of receiving one.

“Why do you still talk about it? It’s now common knowledge, so much has been said about it,” says a Russian friend on Facebook.

And yet even today it’s not uncommon for people to be completely unaware of the fact their own family members have been through the Gulag system.

“I only found out by accident that my grandfather’s father spent seven years in a prison settlement after the war. My parents never told me because this kind of information cost people jobs,” says another Russian friend.

The civil activists of today Not everyone wants to keep a low profile. One young couple came out publically and published their story via social media. In the quite provincial town of Arkhangelsk, some 200km from the site of the Solovki camp, Alexandr Popov, 31, head of the university

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digital communications lab, and Anna Zvezdina, 32, a Russian teacher, stand on the crossroads of two streets every week to protest against the detention of political prisoners still incarcerated following clashes with the police in the demonstration of May 6, 2012 in Moscow, known as the Bolotnaya prisoners.

“We started with Anna in November 2013. We always come to the same spot at 5:00pm because it’s well lit even in the dark. About 5 to 10 people come out every week, one or two people stand more than a metre away from the others with signs (since individual pickets do not require a city permission and to count as "individual" protests must stand at least 1m apart), and the rest just stand there without saying anything.

Sometimes passers-by ask questions or make comments. We say that we want to raise awareness of the case; we explain how members of the public can help, for instance, by writing letters to the prisoners, and we want the town’s people to know that Bolotnaya prisoners are just citizens who fought for their civil rights”, explains Popov. “Only a handful of people come to our pickets every week but we will continue because the Bolotnaya prisoners know about us and it’s great support for them. Our town looks, quiet but after the presidential elections of 2012, some 3,000 people took to the streets, which is a lot for Arkhangelsk.

These people felt like citizens then.”

When I spoke to Popov, his wife Anna was in hospital having just had a baby girl. Something told me that these new parents would be raising their daughter Sasha differently to the previous generations of Russians. They will not be hiding the truth about their country’s past and present from their child. They will not continue with the tradition of Soviet-style silence and cynicism. In fact, this family is in the process of creating a new culture for Russia, which Sasha, hopefully, will inherit, a culture of openness and social responsibility.

Yet, according to a recent poll by the state-run VTsIOM, more than 50% of Russians believe that repressions are likely to come back. Fatalism is, it seems, as strong as ever in Russia.

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obtained financial support from Russia and Russia-backed financial institutions such as the bailout fund of the Eurasian Economic Community.

In late September, Belarus obtained a $1.55bn Russian government loan aimed at beefing up its international reserves as well as servicing its external debt. In July, Russia provided a $450m loan to Belarus.

Belarus benefits from east-west clash

Nadezhda Ermakova, Belarus’ central bank governor, tells bne that Russia’s total support of $2bn means the country’s current level of foreign reserves is adequate. As of October 1, Belarus’ reserves stood at $6bn, which is close to the equivalent of two months’ of import cover. That is enough for the stability of the domestic currency in today’s conditions, but it does not guarantee protection from any external or internal shocks.

hile the row over events in Ukraine continues, neighbouring Belarus is trying to balance two opposing forces. On the one hand, Belarus is one of Russia’s last remaining close political allies in the post-Soviet space and is dependent on Russian financial support; on the other, it has shown a desire to improve relations with the West by playing the role of mediator in the Ukrainian crisis.

are prepared to make decisive changes to their current policies over the coming months to achieve such a strong package, the Fund stands ready to commence work towards a new programme.”

However, Ermakova is sceptical about the chances of agreeing a new IMF support package for Belarus in the near future. “Personally, I doubt that it’s possible,” she says. Previously, Ermakova has repeatedly pointed out that there could be problems having any loan approved by the Western nations represented on the IMF Executive Board, due to the West’s strained political relations with the Belarusian authorities.

The IMF has been setting such conditions for Belarus since late 2010,

On the other hand, Ermakova hails the IMF’s potential offer of advisory

An International Monetary Fund (IMF) team visited Belarus in late October as part of a process to agree a new economic support programme for the country. David Hofman, head of the IMF mission, acknowledged that the Belarusian authorities have requested a new loan, but said the multinational lender wants to see structural reforms first. “A new programme would continue to require a credible commitment to a comprehensive package of consistent and strong macroeconomic policies and deep frontloaded structural reform that could be supported by IMF membership,” he said. “If the authorities

“Showing to the world that the IMF works with us is even more important than the money they can allocate to us”

Sergei Kuznetsov in Minsk

W

when the previous stand-by loan programme for the country ended and the government launched fresh attempts to get aid to help pay back its debts and support the economy.

While the IMF has refrained from doling out any more money, Belarus

assistance to the government, considering it a way to send a positive signal to international investors after the financial meltdown of 2011 and the fragile recovery thereafter. “Showing to the world that the IMF works with us is even more important than the money they can allocate to us,” Ermakova says.

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Thaw in relations?

Despite Ermakova’s scepticism, some signs of a thaw in the West’s relations with Belarus have appeared over recent months.

A US-Belarus investment forum took place in New York in late September, during which Mikhail Myasnikovich, the Belarusian prime minister, noted positive signals from the US about a change in attitude to Belarus. “Suffice to say that almost every event of the forum was attended by representatives of the US State Department, who thereby demonstrated to businesses that it is worth working with Belarus,” Myasnikovich said, according to his media office. He added that the US representatives didn’t rule out the policy of “small steps” to improve trade and economic relations with Belarus.

Christopher Panico, political and economic counsellor at the US embassy in Minsk, told the Belarusian magazine Delo that the US authorities, “hope that the forum laid the foundation for discussions on how to increase the flow of investment to Belarus and trade with it.”

The softening of US rhetoric towards the Belarusian authorities has coincided with EU officials restraining from taking too tough a line. This has happened against the background of Belarus' active involvement in the EU-RussiaUkraine peace negotiations that took place in Minsk. Previously, Belarus had been targeted by financial and visa sanctions against a long list of Belarusian companies and officials with links to President Alexander Lukashenko.

In an interview with journalists on October 17 in Minsk, Lukashenko said that he “did everything” to arrange the EU-Russia-Ukraine dialogue in the Belarusian capital. “And it seems that our view on Ukraine gave an incentive and an opportunity for sensible people in the West, in America, to declare their cooperation with us,” the Belarusian president said.

However, it looks like Lukashenko is prepared for the long haul. “They [the

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Belarus tops CIS in UN Human Development Index Henry Kirby in London Belarus has emerged from this year’s UN Human Development Index (HDI) as the highest-ranking nation in the Commonwealth of Independent States, sitting 53rd out of 187 countries.

Having climbed seven places in the last five years, Belarus now sits three places above Russia with an HDI score of 78.6, compared with Russia’s 77.9, as the chart shows. On the inequality-adjusted index, which factors in the distribution of development benefits across a country’s population, Belarus sits six places higher, at 47th in the world.

Nearly a decade ago, the then US national security advisor Condoleezza Rice described Belarus as one of six “outposts of tyranny,” alongside North Korea, Burma, Cuba, Iran and Zimbabwe. Now, the supposed last dictatorship of Europe outperforms most Central and Eastern Europe/ Commonwealth of Independent States (CEE/CIS) and, for some measures, even Western Europe on the index.

Indeed, for enrolment in tertiary education Belarus far surpasses both the world and Western Europe averages, with 91% of its school-age population entering higher education. Alongside Russia, it also outperforms the West for both youth and adult literacy rates, at 99.8% and 99.6%, respectively.

Its gender equality record also impresses in comparison with other CEE/CIS nations. At 29.5%, its share of parliamentary seats held by women is just 1% lower than the average for Western Europe, nearly 10% higher than the CEE/ CIS average, and more than double the Russian figure.

Despite these positives, Belarusians’ perceptions of wellbeing were consistently lower than the CEE/CIS average in the Gallup World Poll across a number of measures. These included education, healthcare and employment, although they registered overall life satisfaction figures that were higher than the world average, CEE/CIS average and Russia figures.

Belarus: CEE/CIS high achiever HDI score 2013 88.1

Western Europe average Belarus

78.6

Russia

77.8

76.2

CEE/CIS average World average Source: United Nations Development Programme

68.6

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US and EU] considered me as a dictator and continue to consider me this way.

But now it’s not so convenient to voice this idea,” he underlined.

Most likely, the EU and Belarus will remain locked in a situation of “neither peace nor war” for the near future: European nations are hardly ready to abandon their quest for Belarus to improve the human rights situation, while Lukashenko doesn’t appear willing to embark on any wholesale political and economic liberalization.

This view is supported by the EU’s recent decision, announced on October 30, to extend for another 12 months a package of travel and financial sanctions against companies and officials related to the Belarusian government. “This is because not all political prisoners have been released and rehabilitated, and the respect for human rights, the rule of law and democratic principles has

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Union (EEU) from January 1, 2015.

And this brings with it Russian support in certain areas. In particular, Russia and Kazakhstan agreed that Belarus has the right to leave in place capital outflow controls as well as the obligatory sale of foreign currency earnings of Belarusian firms inside the country, Ermakova says. “Both Russia and Kazakhstan have already been removed these regulations,” she explains.

In October, Russia agreed to compensate Belarus for any possible losses from recent tax changes regarding oil extraction in Russia.

According to the changes, taxes on the extraction of oil will be increased and export duty on oil and oil products reduced. Currently, Belarus purchases oil in Russia for its refineries without duty (as a Customs Union member), but channels most of its export duties to Russia’s budget. As a result of the

“The West considers me as a dictator and continue to consider me this way. But now it’s not so convenient to voice this idea” not significantly improved in Belarus," the Council of the European Union explained in a statement.

Russia’s support Lukashenko has also openly expressed his disagreement with Russia’s annexation of Crimea in March. "It is unacceptable for a state to violate the territorial integrity of another country, to take away a part of that country," he said. However, the president tempers such criticism with statements of loyalty to Russia, and to Vladimir Putin personally. “If we need to stand back to back with Russia, with Putin, we will do it,” Lukashenko said.

Even more importantly, Belarus is one of the founding members of the Customs Union trade bloc (together with Kazakhstan and Russia), which will deepen into the Eurasian Economic

manoeuvre, the country could face losses of up to $1bn in the next year.

After negotiations between the two governments, Russia has agreed that export duty on oil products made using Russian oil in 2015 will be fully credited to the state budget of Belarus.

However, despite the favourable resolution of this situation, Lukashenko has slammed Russia over what he perceives as “abnormal relations”.

“In neighbouring countries, former republics of the Soviet Union, [Russia’s] behaviour is often branded as imperialistic ambition,” he said.

Oleg Andreyev, managing director of investment banking at Minsk-based EnterInvest, tells bne that Russia provides financial benefits to Belarus as a sign of gratitude for its commitment to post-Soviet integration. “On the other

hand, Belarus is fixed into Russia’s oil processing chain. Belarus has two large refineries, and according to my sources, Belarus has agreed that a large amount of Russian oil should flow back to Russia in the form of oil products, which helps to ensure that any shortage of petroleum there is avoided,” Andreyev says.

Re-export of banned food Despite Lukashenko’s recent caustic remarks towards Russia, the Belarusian government tries to be a reliable partner for Moscow in its tit-for-tat trade war with the West. “The re-export [of Western food banned in Russia from the territory of Belarus] is impossible – it’s closely tracked,” Lukashenko said in an interview on October 17, refuting suspicions that Belarus will use its membership in the Customs Union and future EEU to cash in from re-export “grey schemes.”

At the same time, Lukashenko has underlined that Belarus retains the right to process banned Western food products and sell them on the Russian market. As Andreyev points out: “Obviously, Belarus has no desire to make an extra profit by unfair means.

But private companies have their interests there, and sometimes they try to involve state-owned firms in these schemes. Sometimes, for example, private companies turn to state-run cheese factories requesting to re-export prohibited [Western] products [under Belarusian brands].”

However, it’s impossible to say that such schemes are rife, Andreyev adds.

“The Russian regulatory authorities work closely with the Belarusian ones.

And as soon as the volume of transit of food through Belarus or food exports to Belarus from the EU increase sharply, the Belarusian authorities promptly respond to the situation,” he explains.

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construction-related businesses, which gives it a hedge against the vacillations of the Russian real estate market.

And despite the economic downturn in Russia, the company has been doing extremely well: sales grew by an impressive 69% in 2013, and especially appealing for portfolio investors the company doubled its dividends, paying out a whopping 80% of net income, implying a dividend yield of 6.7%.

Profit in a time of crisis, finds East Capital Awards Ben Aris in Stockholm

E

ven in a time of crisis and economic malaise, people continue to turn up for work, make products and go shopping at the weekend for things their families need.

The headlines may be depressing, but on the night of November 5 in Stockholm, East Capital, the largest fund specialising in Emerging Europe, celebrated for the 11th year the companies that continue to do better than anyone else.

Our consistent research and extensive company visits in emerging and frontier markets enable us to identify companies each year that have achieved impressive results and demonstrated exciting potential. We are delighted to be honouring those companies today," said Peter Elam Hakansson, the founder and CEO of East Capital, at the black tie event, the East Capital Awards 2014, held at Stockholm's Grand Hotel.

Emerging markets are volatile by nature and part of becoming a successful company in this environment is how management cope with rocky conditions. The fund managers at East Capital, which has several billion euros under management, spend most of their time travelling around the region to visit companies and see with their own eyes what makes the firms that it invests in tick. At the end of each year, it then gives out awards in categories: Best Growth, Best IPO, Discovery of the Year, and more recently Best Corporate Governance.

Best Growth The Best Growth award was won by Russian construction company LSR

“These awards recognise noteworthy achievements of companies that are part of East Capital’s investment universe.

"We have finished our extensive capital investment programme and fully modernised all our production," Molchanov told bne at the party. "Sales are still strong and we can finance all our operations out of retained earnings, so why not return some of the profit to shareholders?"

Best IPO IPOs have become something of an endangered species in recent years, but Romania's Romgaz was one of the exceptions in 2013.

The IPO of Romgaz at the end of 2013 was a landmark event for the Romanian market, which is rapidly gaining a reputation as one of the most attractive investment destinations in Central and Eastern Europe, thanks to its EU accession, ongoing reform programme and economic growth.

The deal raised $520mn for the company with dual listings in London and Bucharest, and was the largest in Romanian history, as well as the first ever Romanian GDR listed in

“Over the past year East Capital has made some of its most profitable investments in Greece” Group, one of the largest real estate developers in Russia. A vertically integrated company that as well as building billion-dollar residential projects in Moscow, St Petersburg and Yekaterinburg, the firm also produces construction materials and other

London. The IPO brings the company cash to modernise, but will also spur development of the Romanian economy by introducing the country to a new class of institutional investors in the international capital markets. The deal, run by the consortium of domestic and

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international investment banks, was more than four-times oversubscribed, with the stock jumping 15% on the first day of trading.

Discovery of the Year Discovery of the Year, as the name suggests, is a new company that joins the East Capital family of investments for the first time. This year's winner, Folli Follie, an "affordable luxury retailer", comes from Greece, which until recently counted amongst the developed markets and outside East Capital's traditional stomping ground – but not anymore.

Over the past year East Capital has made some of its most profitable investments in Greece, including into Greek debt, Jacob Grapengiesser, a partner and fund manager, told bne.

Set up in the 1990s, FF, as the company is commonly known, floated on the Athens stock exchange in 1998 with $10m of turnover, but expects to top

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$1bn of revenues this year, CEO George Koutsolioutsos told bne during the ceremony.

In the last decade the company has made several acquisitions including Links of London and also inherited several retail outlets in the Balkans where it is now rapidly expanding.

"More recently FF acquired the exclusive wholesale and retail distribution rights for Juicy Couture in continental Europe, UK, Ireland and Cyprus.

In addition, the Group is active in the beauty & cosmetics sector, while it also continues to have a key role in the global travel retail sector through a strategic alliance with Dufry. Altogether, the company is now operating in 28 countries globally.

Best Corporate Governance The award for best corporate governance is a recent addition to the award categories and this year went to Turkey's AK Bank.

Corporate governance has always been an issue for investors in Emerging Europe. But as companies in the region have developed, their interest in corporate governance increased because the owners realise that adopting international best practices materially improves their stock's performance.

"Akbank has impressed year after year with their clear and consistent aim to create value for all shareholders," Hakansson told the assembled investors.

"This includes a strong respect for the rights of minority shareholders, a stable dividend policy, and a transparent and open approach to communicating with external stakeholders on all relevant and material issues."

The bank's focus on building up its reputation as a solid and reliable institution has contributed directly to its business where it has emerged as one of Turkey's leading commercial banks serving more than 13mn customers.

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Out and about in Latvia Mike Collier in Riga

A

t risk of being flippant, at least this is one thing the Estonians didn't do first. When Latvian Foreign Minister Edgars Rinkevics came out as gay via Twitter on the night of November 6, it marked a first not only for Latvia and the Baltic states, but for Central and Eastern Europe as a whole: a government minister (and an important one at that) who stated not only that he was gay, but that he was proud of the fact.

In fact, Estonia could take a small part of the credit (or blame, if you are that way inclined) for Rinkevics' decision.

When the Estonian parliament, or Riigikogu, approved legislation on October 9 that will give legal status to same-sex partnerships in Estonia from 2016, it fundamentally changed the landscape

of the gay debate in the region, moving it on from theological discussions of what God wants us to do (or not do), to whether same-sex couples can have legal protection like everyone else, pay taxes like everyone else and feel part of society the same as everyone else.

The English-language tweet quoted by most Western media as Rinkevics' coming out moment was actually preceded by another in Latvian an hour or so earlier, which was far more interesting. �Our country must create a legal framework for all types of partnerships,

"I know that there will immediately be megahysteria" In Latvia and Lithuania, all mainstream parties immediately said they would never back such legislation, but the genie was out of the bottle. Incidentally, no-one knows if genies are gay or not.

I will fight for it, I know that there will immediately be megahysteria but #Proudtobegay," Rinkevics wrote.

He was referring not only to the lead

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given by Estonia, but to the out-ofdate rules in Latvia which have been exposed by last year's disaster at a supermarket in the Riga suburb of Zolitude when the roof collapsed, killing 54 people. Some of the bereaved were not married to loved ones they had lost and in the absence of a UKstyle common-law-spouse status or an Estonian registered partnership model, they have been left shut out of legal claims and compensation payments.

Fear of Russian outing Rinkevics' announcement was unexpected, though rumours about his sexuality have occasionally been whispered in the corridors of power, sometimes with the implicit encouragement of his political opponents.

Not too long ago, opposition Harmony party leader and Riga mayor Nil Ushakov was hinting about Rinkevics' supposed “psychological problems,” yet he was also among the first to say he respected Rinkevics' coming-out and wished him luck in his future career.

One theory doing the rounds is that, following Rinkevics' decisions to ban a string of Russian entertainers from Latvia for extremist anti-Ukraine and anti-gay statements (such as actor Ivan Okhlobystin's advice that gays should be burned in ovens), Russia was preparing to out him in such a way as to cause maximum embarrassment ahead of Latvia's presidency of the EU during the first six months of 2015. The idea seems credible, particularly bearing in mind similar claims about Russian 'black propaganda' being prepared to 'out' Lithuanian President Dalia Grybauskaite as a lesbian (which she denies) in the run-up to Lithuania's EU presidency.

But whatever the reason for the timing, the decision itself remains a landmark. It is true that anonymous message boards in Latvia and elsewhere quickly filled with abusive comments.

With sad predictability, Russian posters were particularly venomous, many as a result of their clear inability to differentiate homosexuality and paedophilia. But no major politicians suggested Rinkevics should resign and

If Estonia is so great, why is everyone leaving?

Mark Adomanis in Washington Earlier in October, the New York Times published the latest in a long series of optimistic profiles of Estonia. By this point so many similar pieces have been written in outlets like The Economist, The Wall Street Journal, and Bloomberg BusinessWeek that one can identify a recipe. First the journalist takes a breezy trip through Tallinn, noting its “European feel” and its clean streets, cobblestones and old churches. Next the journalist speaks with an entrepreneur in the technology community, highlighting the country’s business-friendly tax policies and its successful incubation of firms such as Skype. Finally, the journalist will offer an extended meditation on Estonia's sleek, high-tech, and internet-friendly government.

The NYT’s article followed this recipe to a T. In language that sounds almost as if it was lifted from Estonia's economic development agency, the article highlighted a “society that lives first and foremost online” where “everyone files taxes on the web within minutes.”

The NYT piece, and the virtually identical articles that have appeared in the publications highlighted above, all make Estonia sound as if it has discovered some sort of secret recipe. Who wouldn’t want to live in a society in which every government service is provided online? Who wouldn’t want to skip the line at the DMV? What person in their right mind would like to continue using arduous paper forms to pay their income taxes?

The problem is that all of these articles miss the forest for one particularly interesting-looking tree. The simple reality is that Estonia is not, as it might appear, a dynamic and forward-looking place, but one of the most demographically distressed countries on earth. Over the past 20 years Estonia’s population has cumulatively decreased by almost 15%. That’s right: one out of every seven Estonians living in the country in 1992 has either died or emigrated. In fact, this supposedly hip, modern and internetsavvy population has fallen much more rapidly than “dying” Russia’s over the past 20 years.

What is particularly noteworthy is that this population decline has actually accelerated since the onset of the global financial crisis. After reading The Economist or the NYT, one would be forgiven for thinking that Estonia has successfully attracted hordes of aspiring entrepreneurs and that Tallinn is some sort of nascent Silicon Valley. Fortunately or unfortunately, reality is precisely the opposite. Unlike “failing” countries like France, Belgium, or even Russia, Estonia is a net emigration society: more people leave the country than arrive from abroad.

Does any of the above negate Estonia’s (real and praiseworthy!) accomplishments in e-government? No. Bureaucracy is time-consuming and expensive, and any reduction in its soul-deadening reach ought to be cheered. It would be wonderful if more governments followed Estonia’s lead in cleaning up and streamlining their operations. But it’s deeply mistaken to see Estonia as some sort of rising economic power because… well because it very simply isn’t.

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a couple of public officials who did quickly had their own suitability for their positions questioned.

On Twitter itself where users are more readily identifiable, Rinkevics received overwhelming support – a far cry from the 'megahysteria' he had predicted.

That itself says something about the maturity and increasingly westernized orientation of large parts of society in CEE. Inevitably, President of Estonia (and de facto president of Twitter) Toomas Hendrik Ilves was among the first officials

unassuming man will probably not be comfortable. But with Riga set to host the major Europride festival from June 15-21 next year, just as Latvia's EU Presidency draws to a close, he will be under intense pressure to nail his colours to the mast all over again for a global audience.

And while many in the West like to pretend that being gay simply isn't an issue any more, it was noticeable that Western media were if anything even more voluminous in their reporting of Rinkevics' step out of the closet than local media. Certainly there was more

"Russia continues to troll Latvia's Foreign Minister for coming out" to offer support tweeting: “A very brave man and a very good foreign minister.”

He later noted how, “Russia continues to troll Latvia's Foreign Minister for coming out. Pretty weird, I'd say.” As if to prove Ilves' point, Russian Deputy PM Dmitry Rogozin – who had already told Rinkevics he “had nothing else to be proud of” – then tweeted to Ilves: “I say you're having a get-together”, which Ilves himself cleverly re-tweeted in case Rogozin got the idea of deleting it.

Newly-installed EU foreign policy supremo Federica Mogherini delivered such strong support for Rinkevics it would be interesting to know what they thought of it back home in Italy: “Proud of you @edgarsrinkevics! Hope we'll make it possible for all to say so, without necessarily being strong and brave (as you are!).”

Figurehead Now that he is out of the closet, perhaps the biggest challenge Rinkevics will face will be to carry on in his role as a more than ordinarily competent foreign minister. The pressure will be on for him to become a figurehead for gay rights, a role with which this quiet and generally

coverage of this one man's personal lifestyle choice than there was of the results of the recent parliamentary elections.

Of course Western media have the inbuilt alibi that they were reporting it not because it was big news to them but because it must be big news 'over there' in the East where everyone must be grabbing flaming torches and heading out for a gay-bashing pogrom.

In fact, if there was any hysteria at all it was more mini- than mega-. Before anyone in Brussels, London, Washington or Paris gets too worked up, they might like to consider how many members of their own executives are openly gay.

Of course there's German Foreign Minister Guido Westerwelle and... er...

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proper market economy. The market was actually such a familiar concept to him that he became the family expert on its intricate workings. His parents had been employees of Rafako, a power generating equipment manufacturer that was one of the main employers in their home town of Raciborz. As such, they received a packet of shares when the company was floated on the Warsaw Stock Exchange in 1993. The shares were worth the enormous sum of PLN200,000, and the parents made the curious decision of allowing their 15-year-old son to speculate with their nest egg.

Poland's king of post and flyers Jan Cienski in Warsaw

P

oland is Europe's most successful post-communist country, growing faster for longer than any of its neighbours over the past quarter century. Much of that expansion is the result of a wave of business creation that started 25 years ago, when Poland was a bankrupt, hyper-inflationary basket case.

That entrepreneurial drive, which makes Poles in some respects more similar to Americans than to most of their fellow Europeans, is not over, as a conversation with Rafal Brzoska attests. Brzoska turned a flyer delivery business into the main competitor of the Polish post office called InPost, and is now creating an international parcel delivery company to take advantage of the surge in internetdriven sales.

Sitting in his office in suburban Krakow, Brzoska – worth PLN700m (¤167m) at the tender age of only 37, according to the list of wealthiest Poles complied by the Forbes magazine – is an example of Poland's next generation of business success. These are the people who missed

out on the chaos of transformation but still made a fortune.

“There was a general feeling that the people who started a decade earlier selling on the streets and in the stadiums, that that was when the fortunes were made,” Brzoska says, a grinning man who sports the close cropped hair popular with many Poles. “There was a feeling that the market was occupied and that all the easy stuff was done. That's the same thing I hear from young people today. But

The result was about the same as handing the keys of a sports car to a teenager.

Brzoska hung on to the shares, which soared in value for three weeks, but then the market hit its first downturn since its creation in 1991. Poles had seen the bourse as a one-way bet, but the bear market put a swift end to get-rich-quick dreams. Brzoska's parents' shares lost 90% of their value. “I promised them I would their money back and I did,” says Brzoska.

It took him almost seven years of trading on the stock market, though. He would buy business newspapers, study the market, and make canny trades, slowly clawing back the family money.

A high flyer His bruising brush with the market so entranced him that he ditched the idea of studying medicine and instead took on economics in Krakow. That gungho appreciation of capitalism wasn't overblown. In 1999, in the third year of

"The truth is the market is changing all the time so there are always opportunities" the truth is that the market is changing all the time so there are always opportunities. If you have an idea, work hard and have ambitions – you can scale any peak.”

He was only 12 when communist rule crumbled in Poland, and came of age in a

university, Brzoska, his girlfriend (and now wife) and some friends saw an opportunity in the rapid expansion of supermarkets and hypermarkets, which were opening new locations around the country. The food retaillers turned to the same methods of advertising that

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have filled mail boxes across the western world – junk mail.

The three began to distribute leaflets.

The field was crowded, but Brzoska hit on two new ideas. One was to offer a low price, and the second was to guarantee timely delivery so that the pamphlets would actually end up where they were

have started this business,” says Brzoska.

“A lack of knowledge is a common characteristic of many entrepreneurs. But once you start you can't retreat – then it's like on the Eastern Front.”

By 2008, InPost was making a profit. By 2012, by which time the metal tabs were no longer needed thanks to EU pres-

"We are still a society that wants to achieve and works hard" supposed to go. “This was innovative for the time,” says Brzoska. His company, Integer, exploded in size and in less than five years had about 7,000 part time workers, delivered more than 1m pamphlets yearly and had one of the largest market shares in Poland.

But a solid share of such a small niche wasn't enough to keep Brzoska happy. In building the flyer delivery business, he had acquired people, trucks and a really good sense of logistics. With that experience he decided to aim very high – at the Polish Post Office, a sluggish and expensive state-owned outfit with a monopoly on all mail weighing less than 50g.

Taking a close look at the law, Brzoska had an idea. Why not add something to envelopes so that they weighed more than 50g, allowing companies like his new outfit, InPost, to make deliveries?

He decided to glue on metal tabs that pushed the envelope's weight above the post office's threshold. Brzoska invested PLN6m and launched his new service in 2006, expecting to start breaking even in only three months.

But the initial start was very tough.

People who had delivered flyers turned out to have problems with the greater precision needed for delivering mail.

Instead of fat profits, InPost struggled through two years of losses. But fuelled

by PLN20m in additional investment gained from Integer's IPO, Brzoska soldiered on. “If I had known how strong our opponents were, I probably wouldn't

sure to liberalise the postal market, the upstart had captured more than 15% of Poland's letter deliveries. In 2013, InPost won a contract to deliver official mail from courts and prosecutor's offices. The company is planning to take part in an upcoming tender to deliver all first class mail, and also expand overseas. easyPack As InPost has grown, Brzoska launched another business called easyPack. And took aim at conventional courier companies. “We saw that waiting around for the courier was the 'narrow throat' of the business,” he says.

Instead, he came up with an idea to set up automated package centres.

Scattered around Poland, they allowed a customer to drop off a parcel, write in the phone number of the recipient and pay by credit card. Delivered by the same people and vans and trucks already used for the mail, by the next day the parcel would be stashed in one of compartments at an EasyPack box close to the recipient, ready to be opened with a code sent by SMS. easyPack now has 4,000 stations in nine countries, and plans to have 16,000 by 2017. The idea is to capitalise on the growing demand for e-purchases.

Brzoska feels that stories like his could still be repeated in Poland today. “We have a lot of people hungry for success,” he says. “We are still a society that wants to achieve and works hard. The energy is still there – the volcano is still bubbling.”

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If convicted, Gawronik faces a possible life sentence, marking his final fall from grace.

Transformation Gawronik, a tough-looking man with close-cropped grey hair who favours thin, wire-framed glasses, seemed to be one of the biggest winners of Poland's economic transformation. He had left the Communist Party, and his short period of work as a secret police agent, by the end of the 1970s. Instead of ideology, he spent the next decade trying to make money in Poland's shortageplagued economy, eventually joining in the black-market currency trade in Poznan in central Poland.

Poland's yesterday man arrested Jan Cienski in Warsaw

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he November arrest of Aleksander Gawronik brought back the wild and violent days of Poland's early economic transformation, when shady former (and often not so former) communist secret agents rubbed shoulders with gangsters, businessmen and politicians in the mad scramble to make a fortune as Poland lurched from dead-end communism to unregulated capitalism.

Gawronik was all of those things. A lawyer, a Communist Party apparatchik and former agent of Poland's feared security service, who became a businessman in the 1980s, raising mushrooms and fixing cars before hitting the big time in 1989, when he used his top-level contacts to open Poland's first chain of legal money exchange offices. By 1990, he was the richest Pole.

His fall was just as swift. The police were hard on his heels by the early 1990s.

He was convicted three times, and has so far spent nine years in prison after being sentenced for tax fraud and other economic crimes.

He now faces his most serious charges; he is accused of arranging the murder of investigative journalist Jaroslaw Zietara, who disappeared in Poznan in 1992 at the age of 24. No trace of him has ever been found and authorities are convinced he was killed.

Gawronik, 66, was arrested in early November and was placed in preventative custody as prosecutors build a case against him. He denies all charges. “The evidence gathered by us indicates

His chance for really big money came in 1989, when Mieczyslaw Rakowski, Poland's last communist prime minister, tried a last-gasp attempt to revive the country's failing economy. Rakowski turned to Mieczyslaw Wilczek, a nonideological businessman and inventor, who became his minister of industry.

Wilczek, who died earlier this year, pushed through radical reforms ending most restrictions on economic activity.

Those steps came too late to save the Communists, who were trounced in partly free elections held in June 1989, but they did unleash a wave of entrepreneurial activity. In those early days there were almost no rules, and access to the powerful could make a quick fortune.

That was when Gawronik acted, using his connections to get to Rakowski and got permission to open the first private network of currency exchange bureaus.

"If convicted, Gawronik faces a possible life sentence, marking his final fall from grace" that it was actually Aleksander G (as Gawronik is referred to under Polish public information laws) who persuaded concrete people to undertake the kidnapping and murder of Jaroslaw Zietara,� Piotr Kosmaty, a prosecutor, told reporters.

According to the Polityka news weekly, Gawronik also promised powerful interior ministry generals that their people would get jobs in his new business.

The day before new regulations allowing the legal exchange of zlotys was to come

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Forex loans spotlight shifts to Poland Jan Cienski in Warsaw The Hungarian government's move to put an end to its long-running problems with loans denominated in foreign currency is shifting the forex spotlight to Poland, which will now become the region's leading holder of the dubious financial products.

Ahead of the global economic crisis, Hungarians were the most enthusiastic adopters of loans not denominated in their local currency. The attraction was that borrowing in Swiss francs (and euros to a lesser extent) was much cheaper than high interest forint loans.

At their peak in 2009, forex loans - the vast majority mortgages - made up more than 70% of total Hungarian household debt, higher than almost anywhere else in Central Europe. The problems caused by the forint's subsequent plunge against the franc and the euro helped bring Prime Minister Viktor Orban to power in 2010 on a platform of attacking the mostly foreign-owned banks.

Orban has hammered away at the banks over the last few years, but the issue is now being brought to a close as the government essentially forces the banks to convert hundreds of thousands of foreign currency loans to forints. With more than 90% of such loans likely to be switched in the first half of 2015, Poland will become the region's leading foreign currency loan holder overnight.

Polish regulators were more wary of forex loans than their Hungarian counterparts, and kept them from spiralling to the same dimensions. At their peak in 2011, non-zloty loans, the vast majority in Swiss francs, came to 41% of household debt. That has now dropped to about 30%.

But with more than half a million Poles still holding foreign currency mortgages, the issue is starting to spill over into politics. The opposition Law and Justice party has made noises over the last year on the need to help those struggling to meet the hiked repayments.

The Polish Peoples Party, junior partner in the ruling coalition, has expressed concern in recent days. Leader Janusz Piechocinski has suggested a "compensation programme" to help borrowers.

However, unlike in Hungary, where about a quarter of forex loans were in trouble, fewer than 3% are non-performing in Poland. The main reason for that is that the Polish loans are pegged to the Swiss National Bank's interest rate, which is currently zero; the Hungarian loans are not. At the same time, the bulk of the Polish forex loans were taken by wealthier urban residents, who have largely done well through the period of the economic crisis.

Unsurprisingly, the banks are keen to head off any political alarm. "These loans are being very well serviced," says Krzysztof Pietraszkiewicz, head of the Polish banking association.

That suggests any Hungarian-style relief is unlikely in Poland.

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into effect, Gawronik sent a fleet of taxis and workers to western Poland, quickly opening six offices close to crowded border crossings.

The new currency exchange offices proved to be an enormous hit, helped by an agreement with a German company which allowed Poles shopping in Germany to get their VAT back immediately.

Instead of quietly ruling the incredibly lucrative currency exchange market, Gawronik quickly sold out, and jumped to take over Art-B, a shady conglomerate built by two Poles who had fled the country in 1991 after being investigated by prosecutors.

Gawronik also became the subject of police investigators, who accused him of stealing money and art from the company. His trial was to begin in 1993.

Unlike the Art-B founders, who had fled to Israel, Gawronik escaped into politics, winning a seat in the Polish senate in 1993, which afforded him immunity from prosecution.

He left the senate in 1997, and was convicted in 2002, 2005 and 2007 for a variety of economic crimes. He last left prison in 2013 for a period of house arrest after failing to pay a large fine.

While Gawronik tangled with the courts, Poland's slow and often very ineffective police system slowly looked into Zietara's disappearance. Zietara had been looking into economic crimes in Poznan when he walked out of his apartment to go to work September 1992, and was never seen again. The authorities suspended their investigation in 1995, citing a lack of evidence, and again in 1999. Finally, in 2011, the editors of Poland's leading newspapers appealed to the government for more vigorous action, something former prime minister Donald Tusk promised to do.

The police began combing through old evidence, using modern techniques to hunt for DNA and fingerprints that were unavailable in the 1990s. By November, they were convinced that Gawronik was their man and that Zietara had been killed because of his work as an investigative journalist.

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7.16% in a buyout of minority shareholders at CZK295.15.

However, PPF rejected around half the applications from shareholders looking to take part. It claimed this was due to "formal shortcomings," but did not elaborate. In August, the local subsidiary of UniCredit Group stepped in to buy 5.68% from those investors still seeking to sell.

The process suddenly accelerated in the autumn, with PPF growing more pushy. On the last day of October it announced it had boosted its holding to 83.15%. UniCredit provided around 5.5%, with the assumption being that a further 4% or so was bought from Telefonica, which had retained 4.9% during the original sale.

Roughing up shareholders in the Czech Republic Tim Gosling in Prague

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he Czech Republic is now a "developed economy," according to the likes of the European Bank for Reconstruction and Development. But as the rough treatment of minority shareholders by one of the country's most powerful financial groups illustrates, there's still plenty of risk for investors.

There is "no reason to hold shares" in the Czech Republic's largest telecommunications company O2, analysts at Erste Bank stated on November 4. That dire warning comes in the wake of moves by PPF Group – which bought control of O2 12 months previously – that suggest it wants to squeeze out remaining minority shareholders and use the company to funnel cash to its other businesses.

The market has been wary of the intentions of PPF – the investment vehicle of the Czech Republic's richest

man, the reclusive Petr Kellner – since it agreed to pay Spain's Telefonica ¤2.47bn (or CZK305.6 per share) for its 65.9% stake in O2 in November 2013. Kellner's company negotiated a ¤2.3bn loan to fund the deal. Analysts promptly began speculating that O2

Milking the cash cow However, it was a move in mid-October that really caused consternation.

O2 announced on October 14 it had received a request from the majority shareholder, PPF, for a loan of CZK24.8bn (¤892m) to be used to pay down part of the debt it took on to fund the acquisition of the telecom firm.

This is a highly antagonistic move for minority shareholders, who have got used to high dividend payments under Telefonica. Additional interest in the stock had also been driven by the fact that O2 had very low debt, opening the way to speculation in recent years

"Now it seems that only the majority shareholder will benefit from increasing O2’s indebtedness" would soon be delisted, as PPF is not in the habit of operating under shareholder scrutiny.

That process looked to have begun six months after PPF took control of O2 in January. Following a drawn-out debate with the central bank over the pricing, PPF acquired in July a further

that the telecommunications company could borrow to improve its capital structure to the benefit of all. "But now it seems that only the majority shareholder will benefit from increasing O2’s indebtedness," says Josef Nemy at Komercni banka.

To add insult to injury, while the details

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of the loan are not yet public, O2 has said that interest will only be paid at maturity – the facility is for seven years. In other words, PPF – which is reported to be struggling due to its high exposure to Russia, whose economy is floundering as sanctions start to bite – would get an additional boost thanks to zero cash interest costs.

O2 now needs to call a shareholder meeting to approve the demand, but that emergency general meeting is likely to be little more than a rub-

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Bakala's blueprint Kellner is not the only Czech billionaire causing shareholders headaches.

Mining magnate Zdenek Bakala's New World Resources pushed through a rights issue in September as it struggles in the face of weak global coal prices. The shares were sold at a discount of over 80% to the price of NWR shares in July to raise ¤118m.

Bondholders will also take a hard hit.

While Bakala is immensely unpopular in his home country, with both politi-

"PPF could theoretically do the same anywhere in the EU" ber stamp. "The quorum needed for approval is two-thirds of participating shareholders, according to law," points out Petr Bartek, head of equities research in the Czech Republic for Erste Bank. "PPF has a 73% stake in O2, so it will be a formality." The only two significant minority shareholders in O2 at the time the loan was proposed were its bank UniCredit and Telefonica.

The rough treatment of minority shareholders looks to be part of a strategy by PPF to collect the rest of O2 stock at a knock-down price and take it private. Without a chance of fighting the loan proposal, minority shareholders face years without a dividend, and that will depress the value of their shares.

Lowering Erste's target price for the shares from CZK300 to just CZK225, Bartek's colleague Vera Sutedja predicted in a note on November 4 that, "PPF might launch another bid with a price lower than the previous bid of CZK295.15".

Delisting is possible if 75% of shareholders approve. Meanwhile, PPF could trigger a squeeze-out of minority shareholders if its stake reaches 90% of the share capital and voting rights.

cians and the public – he is considered the Czech billionaire most likely to have gained his fortune unscrupulously, according to a poll by the weekly Tyden published in early November – his name may not be so muddy amongst international investors. His holding company CERCL Mining did itself put in ¤75m in during the issue, and Bartek insists that the restructuring of the company "was a tough fight, but fair".

However, investors in some other Czech companies have more reason to complain. One high-profile case was that of second-hand car trader AAA Auto. The company drove into a brick wall almost immediately following

manage to pull AAA off the main stock market in Prague, despite some effort by investors to resist the move, points out Nemy. That sent the shares tumbling, and minority shareholders were offered just CZK23 a share. Private equity fund Abris Capital Partners announced in October that it was buying a majority stake in AAA at CZK94 a share.

Still, Bartek suggests that events at PPF should not necessarily raise wider concern over the risks of investing in the Czech market. "PPF's request is certainly not friendly to minority shareholders," he admits. "However, it is legal and our law is in line with EU standards. PPF could theoretically do the same anywhere in the EU." He also points out that despite the warnings from across the market, and even his own bank's suggestion that there is no reason to hold onto shares in the telecom firm, PPF is yet to twist the knife. "We don't know O2's future dividend policy," he says.

"The loan would be acceptable (ie. not that high) if O2 continues to pay solid dividends. I thus would not draw any broader conclusion from this single case."

Nemy draws a different conclusion, however. "All in all," he sighs, "I'm afraid this case once again supports the concerns of some investors that corporate governance is weaker on emerging markets, including those in Central and Eastern Europe."

“This case supports concerns that corporate governance is weaker in emerging markets like those in CEE” an IPO at CZK55 per share in 2007. In early 2013, CEO and majority shareholder Anthony Denny announced plans to delist.

Although Denny failed to get to the 90% squeezeout threshold, he did

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Orban the acrobat Tim Gosling in Prague

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ungarian Prime Minister Viktor Orban has used a visit by Azeri President Ilham Aliyev to throw his weight behind European efforts to diversify away from dependence on Russian gas. Orban and Aliyev signed a raft of bilateral agreements in the Hungarian parliament on November 11, then declared that more effort should be made to bring Azeri gas to Central and Eastern Europe.

Orban complained to the lower house, in which his Fidesz party holds a constitutional majority, that current contracts only guarantee the delivery of Azeri energy to southern Europe. The giant Shah Deniz field is set to start sending 10bn cubic metres (cm) of gas via Turkey and across the Balkans to a hub in Italy by 2019.

"Our job in the next few years is to create the conditions for Azeri gas to come up from the south to central Europe, too," the Hungarian PM said, according to MTI. The only way to succeed is for neighbouring states to link up their pipeline networks, he said, and urged member states of the EU to form a common energy market, "the first step being nothing other than the connection of pipeline networks of neighbouring states."

Third blink Those words represent a remarkable turnaround, and confirm that Orban is in one of his occasional conciliatory moods. The Hungarian PM has recently climbed down on plans to introduce the world's first internet tax, while banks in the country are sleeping easier after the government announced that the forced conversion of forex loans will be made at the current exchange rate.

EU efforts to diversify energy supplies away from reliance on Russia - which includes building an internal market with interconnectors - is the topic that has put Orban in the West's crosshairs.

His comments on bringing Azeri gas to Europe appear to show that once again he is blinking in the face of domestic or international criticism.

Earlier this year, just days after Orban met Gazprom CEO Alexei Miller and secured increased deliveries from the Russian gas giant, Hungary announced that it was halting the transit of EU gas supplies to Ukraine. Miller, meanwhile, came away talking confidently about South Stream, the 63bn cm pipeline from Russia that the EU is blocking.

With the rising geopolitical tension in the region, Washington has not beaten around the bush. Since that September deal with Moscow, Hungary has been compared with Egypt and other authori-

conciliatory statements have always been quick to arrive when it looks like the bloc may take action.

Double standards Budapest can't seriously complain about the US president's criticism, given that Orban said in the summer he aims to build an "illiberal" democracy modelled on the likes of Russia and China. Yet Orban clearly sees the double standards in the West's approach.

Hungary has no gas, and is not in a vital strategic position for transporting energy to Europe, leaving the authoritarian PM a target for his moves towards Russia, rough treatment of international companies and heavy handed legislation. His guest Aliyev, though seen as a genuine

"Orban is in one of his occasional conciliatory moods"

tarian states by President Obama, and six Hungarian officials have been barred from entering the US over alleged corruption - the first ever such action against a Nato ally.

Budapest has reacted testily, pushing through legislation to take construction of South Stream out of EU oversight and filing charges in a highly public case against NGOs. Yet encouraged by the US pressure, the internet tax plan has sparked street protests against the government that threaten to persist and expand.

Orban appears to sense that this is a moment to pause and offer up the necessary rhetorical concessions. As his track record shows, he has often stepped back to await calm and the chance to push through his original policy. The EU has been bickering with him over policies for years. However,

despot by many, faces relatively muted international criticism, while Azerbaijan is seen as the great hope for EU energy diversification. The Azeri leader was welcomed by European Commission President Jose Manuel Barroso in June 2013; and hosted him on a return visit a year later for more discussions on energy.

Nora Hajdu from the Egyutt party unwittingly summed up the complications currently plaguing regional diplomacy. Neither the German nor the British nor the French premiers are standing in line to visit Hungary, yet "we are delighted" if the Azeri president comes over, she said, according to MTI. The liberal-green opposition MP added that while the world and Europe are celebrating the 25th anniversary of the collapse of the Berlin Wall, Hungary's premier is hosting a president that is rarely a guest in EU countries.

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Photo: salajean

An upset in Romania

Photo: Dusan Milenkovic

Clare Nuttall and Iulian Ernst in Bucharest

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omania is set to face severe political turmoil after Victor Ponta, the country's centre-left prime minister, lost the presidential election in a shock result on November 16.

Thousands of people took to the streets of Bucharest and other cities to voice their anger at Ponta's government late on November 16 and demanded its resignation.

Klaus Iohannis, the low-profile mayor of Sibiu in Transylvania, won the election with about 55% of the vote in the largest turnout since 1996. Iohannis, 55, is a protestant ethnic German and a former physics teacher, who has been mayor since 2000.

Voters saw him as clean and independent, though he is vice-president of the centre-right National Liberal party and had been nominated by them and the Democratic Liberal party. He will take office on December 21.

In the first round on November 2, Ponta held a clear lead on 40%, followed by Iohannis on 30%. An opinion poll from CSCI/Infopolitic published on November 13 had shown Ponta with a 10-point lead over Iohannis in the run-off. In conceding defeat, Ponta vowed that, “The people are always right… My colleagues and I will do our duty towards the country as long as we are in public office.”

Expat effect An estimated 300,000 votes cast by Romanians living abroad, and not included in exit polls, may have swung the balance decisively in Iohannis’ favour. Some 160,000 of the diaspora voted in the first round.

Ponta had also been harmed by a scandal over the way many of the Romanians liv-

ing abroad – who are estimated at some 4mn – were denied the right to vote in the first round because insufficient ballot stations had been set up. Huge queues and chaotic scenes were reported at embassies in London, Paris and other cities with a large Romanian diaspora, with many voters unable to enter the polling booths before the polls closed for the day.

This ignited big protests across the country. Past elections have shown that the majority of the Romanian diaspora typically vote for right-wing candidates.

In 2009, for example, diaspora votes were critical in securing the presidency for President Traian Basescu. On November 2, Iohannis took 46% of the votes from Romanians voting from abroad, compared with just 16% for Ponta.

"The people are always right. I called Mr Iohannis and congratulated him on his victory"

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Both Ponta and President Basecu blamed the first round chaos on Foreign Minister Titus Chorlatean, who resigned on November 11.

Ponta was also harmed by a series of corruption scandals including a probe into the sale of software licences and IT equipment to schools – dubbed the “Microsoft case” – which has cast suspicion on top politicians and businessmen, including nine former ministers.

There were also concerns that with a relatively solid parliamentary coalition behind him, on becoming president

position is now precarious. Although the PSD is the largest party in parliament it relies on support from smaller parties to form a majority. The next regular elections are not due until 2016, and with his position weakened by the November 16 result he may struggle to hold onto power until then.

The first task of the government after the presidential vote will be to plan the 2015 budget. While discussions have been underway within the current cabinet, finance ministry officials have said that plans will be discussed with the International Monetary Fund (IMF) in

"Ponta was harmed by a scandal over the way many Romanians living abroad were prevented from voting in the first round" Ponta might have gone down the road of “Putinisation” as seen in other countries in the region, with examples such as Hungary’s Victor Orban and Turkey’s Recep Tayyip Erdogan. Instead, Iohannis' win will most likely replicate the oftentense cohabitation seen between Ponta and Basescu over the last two years.

December and endorsed in January by the new cabinet. Romania’s economic performance this year has been a concern, after the country fell into technical recession in the first half of 2014.

While it is still unclear whether there will be significant changes to the gov-

ernment, fiscal tightening is expected now that the elections are over. Teneo Intelligence points out that, “The IMF has postponed the Romanian stand-by program review over Ponta’s fiscal policy loosening in the run-up to elections.

The review will probably resume in late November and consolidation measures will likely be worked into the budget proposal for 2015,” the consultancy says.

There is also pressure on the government to make better use of EU cohesion funds and boost infrastructure investment, though this would conflict with plans for a tighter budget. Along with neighbouring Bulgaria, Romania has the lowest absorption rate in the EU. During the 2007-2013 EU budgetary period, Romania absorbed only 37.2% of the ¤19bn available to it, spending around ¤7.1bn.

Other important decisions being put off until a new government is formed concern Romania’s ongoing privatisation programme. Following the successful IPOs of Electrica, Romgaz and Nuclearelectrica in 2013 and 2014, another major energy company Hidroelectrica is due to be sold off in 2015. Decisions are also expected in early 2015 on the privatisations of Constanta Port, Bucharest Airports and salt monopoly Salrom.

Iohannis made it clear that, if he won, he would like to appoint a new businessfriendly government. But with Ponta's PSD the largest party in both houses of parliament, Iohannis may not be in a position to topple the current government. “Iohannis campaigned on a platform promoting his record of pursuing good governance and improvements in the business environment in his role as long-term mayor of the Transylvanian city of Sibiu. While he will likely try to pursue this agenda also in his new office, the responsibility for economic policies rests with the prime minister. Therefore, it is likely that Iohannis will be an active critic of Ponta’s government, but his actual influence in these areas will remain limited,” says Otilia Dhand, vice president of Teneo Intelligence.

On November 16, PM Ponta openly stated that he would not resign but his

Photo: salajean

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No balancing act in Serbia Andrew MacDowall in London

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erbia is not attempting to balance EU ambitions with close ties with Russia, Serbian Prime Minister Aleksandar Vucic told bne, indicating he would toe the Western line when it comes to issues like halting the Russian-led South Stream gas pipeline.

Vucic, speaking to bne in London on October 29, strongly implied that Serbia would not progress with Gazprom’s controversial South Stream gas pipeline through the Balkans without EU consent, even though he admitted it might take eight years for Serbia to achieve EU membership. “[South Stream] is between the EU and Russia – if they agree on this, we’ll have it, we’ll provide the project,” Vucic said.

“If they don’t have that agreement, we are not going to harm anyone, particularly not our European friends. We made a good contract with Russia, but we did not start any construction.”

Vucic was speaking after signing a deal with the European Bank for Reconstruction and Development to launch an initiative intended to improve Serbia’s business climate.

Earlier, he had addressed a conference in Westminster, pledging to lower barriers to business and push forward reforms entailing thousands of job losses, and calling for British businesses to invest in Serbia.

But two weeks earlier, Vucic had welcomed Russian President Vladmir Putin to Belgrade with great fanfare, and reiterated that Serbia would not impose sanctions on Russia over the conflict in Ukraine. Vucic and Serbian President Tomislav Nikolic spoke of long ties between Serbia and Russia, and Putin’s visit was marked by Belgrade’s biggest military parade for almost 30 years, ostensibly held on the 70th anniversary of the city’s liberation by the Red Army.

Serbia is seeking to boost trade ties with Russia, despite coming under pressure from the EU to impose sanctions. “We are not balancing,” Vucic insisted to bne. “As I said in front of Vladimir Putin – not because I’m here [in the UK], our strategic goal, our strategic aim, is our EU path. And I do not lie to anyone, all the politicians from all over the world know that.”

Stream dream South Stream would carry Russian gas to Central Europe via Bulgaria

and Serbia, bypassing Ukraine – the traditional transit country for Russian gas exports to Europe but one Russia is trying to cut out of the trade. The EU has ruled that the pipeline in its current format breaks competition laws, and there have long been concerns that it would merely increase Europe’s energy dependence on Russia, rather than help diversify Europe’s energy imports as is Brussels’ stated goal.

South Stream had been progressing more quickly than EU- and US-backed

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rival pipeline projects, but the Ukraine crisis changed the equation. In August, Bulgaria reluctantly suspended work on the pipeline under substantial pressure from Brussels, having staunchly backed the project to the extent of redefining it as an “interconnector” rather than a “pipeline” in an almost comic attempt to circumvent EU legislation.

Serbia has also stood by South Stream, but on October 8 Vucic admitted that “it makes no sense” for the country to start work on the project. Perhaps not coincidentally, that was the same day a European Commission report on Serbia’s EU accession process suggested that progressing with construction might harm the country’s membership prospects.

Nonetheless, Vucic and Foreign Minister Ivica Dacic, who are seen by some as having long had a close relationship with the Kremlin, have both expressed hopes that South Stream can get back on track. Many in the region expect the project to restart if and when the Ukrainian crisis starts to fade – and a bitter winter with gas shutoffs could expose Europe’s lack of options.

Nonetheless, Serbia’s close relations with Russia may affect attitudes towards it, says James Ker-Lindsay, senior research fellow focusing on Southeast Europe at the London School of Economics. “While Russia may not want its immediate neighbours in the EU, it does help to have friendly countries in the club,” Ker-Lindsay says. “Moscow will therefore be keen to see Serbia advance along the accession path. But this is precisely what many EU members will be worried about. They will be asking themselves whether they will be letting in a Russian Trojan Horse.

Unless relations between Russia and the EU improve during Serbia's accession process, Belgrade may find itself facing calls to prove its loyalty to the EU or face the possibility of having its membership blocked.”

Dark past Vucic was once an ultranationalist and was Slobodan Milosevic’s information minister during the Kosovo War in the late 1990s. On his visit to the UK, he

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Old enmities die hard bne Hopes that Albanian Prime Minister Edi Rama’s visit to Belgrade on November 10 would herald a new era of better relations between Albania and Serbia were dashed when Rama clashed with his Serbian counterpart Aleksander Vucic at a joint press conference.

Rama’s visit – the first by any Albanian leader to the Serbian capital for almost 70 years – appeared to go well, until Rama brought up the issue of Kosovo. “As for Kosovo, we have two completely different views, but the reality is one and invariable,” Rama said. “Independent Kosovo, recognized so far by 108 different countries across the world and supported by the International Court of Justice, is an undeniable and inalienable regional and European reality.”

Kosovo was formerly a region of Serbia and has a largely ethnic Albanian population. Serbia is adamant that it will not recognise Kosovan independence.

Rama’s words sparked an angry response from Vucic. "What does Albania have to do with Kosovo? Kosovo is not part of Albania and it will never be,” Vucic said, adding that Serbia “won’t be humiliated in the heart of Belgrade."

Rama responded by saying that the sooner Kosovo is recognised "the faster we can move on.”

While relations between Serbia and Albania worsened during Kosovo’s battle for independence from Serbia in the late 1990s, there is a long history of conflict between the two countries. The last visit of an Albanian leader to Belgrade was Enver Hoxha’s visit to Yugoslavian President Josip Broz Tito back in 1946.

Up until the press conference, both sides had seemed keen to improve relations. This is at least partly motivated by both countries’ progress towards EU membership, which has provided a fresh impetus for peacemaking in the Balkans. For Serbia, normalisation of relations with Kosovo is one of the key conditions for entry to the bloc.

While improving diplomatic relations in the Balkan region was naturally the main focus of the meeting, economic cooperation was also on the agenda. “We want Serbian investors to visit Albania, not only related to the energy sector but also to other fields of mutual interest,” Vucic said. He proposed that the two countries jointly present major infrastructure projects such as the BelgradeTirana railway to the EU to increase their chances of securing funding.

Rama and Vucic had originally been scheduled to meet on October 22.

However, on October 14 a brawl at the Euro 2016 football championships between the two countries held in Belgrade sparked a diplomatic row. The match was interrupted when a drone carrying an amended version of the Albanian flag was flown into the stadium. The flag showed a map of “Greater Albania,” drawn to include parts of Greece, Macedonia and Serbia. Fighting broke out on the pitch when Albanian players tried to defend the flag from their opponents, and the match was abandoned. Further complicating the issue, Rama’s brother, Olsi Rama, has been accused by Serbian officials of being responsible for sending the drone into the stadium, though he has denied the charge. The violence on the pitch on October 14 was followed by a series of attacks on ethnic Albanian targets within Serbia in the following days.

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faced strong questioning at the London School of Economics over allegations of authoritarianism and media control.

it would be rational for them to doubt Vucic's dedication to embracing the EU policies and values. Vucic's major inter-

"I do not lie to anyone, all the politicians from all over the world know that"

Opponents claim that Vucic aspires to Putinesque rule in Serbia, with control of the media and muted dissent.

“No doubt that Vucic would like to take credit for Serbia's desired accession to the EU, because there's no other viable alternative for Serbia,” Srecko Sekeljic, a civil society activist, tells bne. “But

nal policies are aimed at keeping him in power for as long as possible. His actions consistently show that he’d like to be seen as the Serbian Putin.”

Sekeljic says Serbia’s history and recent polls point towards a desire for a strong leader, and indeed Vucic has an overwhelming parliamentary mandate.

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

Dimitrov But Western diplomatsPhoto: have Boby taken a generally relaxed stance to Serbia’s relationship with Russia, saying that they are confident the country is moving towards the West and its norms of liberal democracy.

Vucic’s message in London was that Serbia is a Western-facing country open to business and prepared to push through difficult reforms, including the privatisation of more than 500 companies and public sector cuts. “We hope that if we do our homework, we’ll be able to join the EU in 2020, it might be 2022,” Vucic told bne. “It’s not up to us, but we have to do everything [we can], not to get mercy from the EU, but to be proud people from a proud country that will enter the EU, and that’s why we are doing these reforms.”

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Photo: Ju1978

Bulgaria's new govt gets down to business, but for how long?

Sandy Gill in Sofia

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o far, so good. Two weeks after being voted in by the most complicated parliament in Bulgaria’s post-communist history, what may be the country’s strangest ever government ever appears to be holding together satisfactorily – despite ominous rumblings among both free-market and ultra-nationalist rightists.

The government – or at any rate its support – is a curious combination of four elements.

First, there’s the largest parliamentary grouping to emerge from October’s parliamentary elections, with 84 MPs out of a total of 240 in Bulgaria’s unicameral parliament, the National Assembly.

That’s Citizens for the European Development of Bulgaria – generally known by its Bulgarian-language acronym GERB – a right-of-centre formation

with a somewhat populist style and a still-charismatic leader in the person of mouthy “action man” Boiko Borisov. He was prime minister between 2009 and 2013, when he was pushed out of office by popular demonstrations at high electricity bills. After a period in colourfully vocal opposition, Borisov is now serving his second term as PM.

tional party rivalries and degrees of ambivalence toward Borisov, RB had been united by the desire to avoid the electoral catastrophe that division had produced last time, when groups and parties running separately had all fallen under the threshold of 4% of the total vote needed to qualify for parliament. This time, they had cleared

"Borisov will need to change his style if he’s going to make a coalition work" Second, there’s parliament’s fourthlargest group, the Reformist Bloc (RB), an uneasy coalition of five more conventionally right-of-centre parties. Divided by personalities, tradi-

that hurdle comfortably, with 8.89% and 23 MPs. The RB has six ministerial seats to the 12 that were at GERB’s disposal.

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Third, there’s the Patriotic Front (PF), a relatively new radical nationalist formation with 19 MPs. One of two nationalist groups in parliament – the erratic Volen Siderov’s Ataka being the other – the PF has, well, some quite forthright views on issues affecting the country’s Turkish and Roma minorities, as well as a strong line in a “patriotism” that, unlike Siderov’s, isn’t especially well-disposed to Russia.

Dominated by the National Front for the Salvation of Bulgaria – led by the Burgasbased businessman Valeri Simeonov – the PF is also decorated by the venerably historic VMRO (the Bulgarian acronym for “Internal Macedonian Revolutionary Organisation”). Though a signatory to the coalition agreement, the PF has eschewed ministerial office, concentrating instead on getting its elements into the programme and, it promises, keeping an eagle eye on implementation.

ment, was insistent on “accepting voters’ verdict” that it should stay in opposition.

Finally, there’s the ABV (Bulgarian for “Alliance for Bulgarian Revival”), a breakaway from the mainstream Bulgarian Socialist Party (BSP) formed earlier this year by former president Georgi Parvanov, and scraping into the parliament with 4.15% and 11 MPs. Quite open about its reservations about supporting a “right-of-centre coalition” and its belief that a GERB-BSP coalition would have been a better solution, it’s supporting the coalition more gingerly than the PF, but one of its most capable politicians – former foreign minister, presidential candidate and MEP Ivaylo Kalfin – is serving as deputy premier and minister of labour and social affairs.

Doing deals Putting the coalition together was a tough and lengthy process, finalised over a month after the October 5 elections. Quite how long a government put together so painfully and out of such disparate elements can last is an interesting question. For now, ministers

The excluded Putting that combination together was partly a logical – if difficult – conclusion drawn from the fact that the remaining four formations (of a record eight in parliament) were, for various reasons, unacceptable.

Surprising most observers by qualifying for parliament with 4.5% of the vote and 11 MPs, Ataka, high on shrill “anticolonial”, anti-Western and pro-Russian rhetoric, wanted to talk to no one – a sentiment generally reciprocated.

The BSP, with a humiliating 39 MPs following a disastrous 14 months in govern-

The Movement for Rights and Freedoms (MRF), largely ethnic Turkish in its support base though with a fair number of ethnic Bulgarians on its leadership, had governed in precarious coalition with the BSP between 2013 and 2014 – and gained little in reputation as a result.

The final grouping was the coalition gathered around Bulgarian Without Censorship (BWC), a rather whimsical populist formation formed by talk-show host Nikolay Barekov. Notably successful in May’s European Parliament elections – which had diverted Barekov and most of his attention to Strasbourg – BWC and its allies did less well in October, qualifying for 13 MPs (of whom one has since defected and gone independent).

ensure that the country’s roads are ready for winter. European Funds Minister and Deputy Premier Tomislav Donchev – another GERB veteran – and various branch ministers are trying to ensure that very substantial EU funds are spent by December deadlines, while an early triumph has been registered by reactivation by Brussels of the suspended Environment Operational Programme. There are obvious things to do.

Longer term, though, is stability in prospect? Perhaps the immediate prospects of instability aren’t so great. All participants in the coalition are deriving some political benefit from it, if only because forcing Bulgarians to the polls again wouldn’t be popular. Counting one referendum, one European Parliament election and two parliamentary elections, that would have been the fifth visit in two years, and record low turnout in October (48.7%) suggests that people are getting sick of voting, or of politicians, or of both. In those circumstances, one needs to think before rocking the boat. In addition, three political forces – ABV, Ataka, and BWC/BDC – are close enough to than crucial 4% to be unsure

"The government is a curious combination of four elements" – and parliament – are buckling down to urgent tasks arising from political deadlock in the last couple of months of the BSP-MRF government and the limits to what the subsequent caretaker government could do without a parliament in place.

They’re updating an annual budget that probably overestimated revenues from the start – and now has to take account of sizeable depositor compensation costs in the Corpbank case. The conspicuously capable regional development minister Lilyana Pavlova – one of several extremely experienced GERB-aligned ministers appointed by Borisov – has been taking energetic measures to

of re-entering parliament. And there’s some public scepticism of the larger opposition parties – BSP and MRF – that could limit their capacity (and taste) for extra-parliamentary rabble-rousing.

And the man at the top? Well, Boiko Borisov – used to giving orders and pronouncing on policy matters “off the top of his head” – will need to change his style if he’s going to make a coalition work. He might be getting there. Those who observe such things closely say that he’s far less prone nowadays to be mouthy and categorical on camera.

Maybe that will go in cabinet meetings too. Or maybe diplomacy can be left to Bachvarova.

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said Yildiz chairman Murat Ulker. "We want to grow United Biscuits to be a global player as part of Yildiz. This will include enhancing its position in the UK, where Yildiz currently has minimal presence."

Turkey's Yildiz takes the Biscuit David O'Byrne in Istanbul

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urkey's leading confectionary and biscuit maker Yildiz Holding has made another big international foray by agreeing to buy UK-based biscuit and snack maker United Biscuits. The family behind Yildiz has strong ties to Turkey's leading Islamist politicians and the president's Justice and Development Party (AKP), but their company has an international flavour to it.

The deal, which if completed would make Yildiz the world's third biggest biscuit manufacturer, was realised through a competitive bidding process with US-based Kellogg and Canadian pension fund, Ontario Teachers. Yildiz has not confirmed the sale price, although media reports have suggested that the sellers, US private equity consortium Blackstone Group and PAI Partners, had been in talks over a price of around $3bn.

In a statement confirming the purchase, Yildiz said that the acquisition is in line with its strategy of international diversification, and complements its existing confectionary and food manufacturing businesses.

Yildiz's main Turkish manufacturing arm, the 70-year-old Ulker Biskuvi

Sanayi group, is Turkey's biggest biscuit and snack manufacturer, and already distributes its products to 85 countries, giving it a strong presence in North America, China, Japan and the Middle

United Biscuits is not Yildiz group's first major foreign purchase. In early 2008 the group bought upmarket Belgian chocolate manufacturer Godiva for $850mn, since when it has succeeded in growing the brand in both Europe and the US, raising revenues from $49mn in 2008 to an anticipated $769mn this year and with plans to exceed $1bn in 2016.

That purchase raised eyebrows, not just because it is a rare example of a Turkish company buying a global consumer brand and making a success of it, but also because of Yildiz's long-standing reputation as a conservative Turkish company with strong Islamic values – not a prime candidate to buy a manufacturer of luxury liqueur chocolates.

Yildiz's purchase of Turkish supermarket chain Sok in 2013 was swiftly fol-

"The deal will make Yildiz the world's third biggest biscuit manufacturer" East & North Africa region, and has manufacturing operations in six countries including Saudi Arabia and Egypt.

In recent years Yildiz has expanded from biscuits and chocolate into beverages, margarine and dairy products, as well as frozen and other convenience foods.

According to Yildiz, its operations complement well United Biscuits' strong presence in Europe and the UK. “The addition of United Biscuits’ market-leading portfolio of brands will further strengthen Yildiz Holding’s position as a leading global consumer goods group, combining two highly complementary geographical footprints and opening significant opportunities for further growth,"

lowed by the disappearance of alcohol from the chain's shelves, for example.

Similarly, Yildiz still holds an 11% stake in Islamic finance house Turkiye Finans, and both the Ulker family and its companies have long and close relations with Turkey's leading Islamist politicians.

Connections Yildiz chairman Murat Ulker himself was in the same class at the prestigious Istanbul boys' school, Istanbul Erkek Lisesi, as current Turkish prime minister Ahmet Davutoglu, while the family of current Turkish president, former prime Minister Tayyip Erdogan, have long been shareholders in businesses distributing Ulker products.

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Such contacts did not go down well with Turkey's former secular elite, with the Turkish military for many years being widely reported to have boycotted products produced by Ulker and other Yildiz subsidiaries.

Despite this, in an interview in October 2013 Murat Ulker denied that his companies were "conservative" in their operations, pointing to its success with the Godiva brand. And Yildiz's internet site makes great play of the company's commitments to the values of Turkey's secular republic, with its social activities including sponsorship of sports and arts projects for children, and continuing support for turkey's main environmental charity TEMA, which it helped found.

On the corporate side too, Yildiz differs from many traditional family run Turkish companies. Although headed by family head Murat Ulker, the company's five-man board also includes former Eastman Kodak and Black & Decker executive Jim Zaza as Group President for Corporate Strategy, Global Marketing, International Operations and Beverage; and MIT-educated Cem Karakas, a former senior executive at Turkey's fiercely secular military pension fund Oyak. While at Oyak, Karakas was instrumental in the group's purchase of Turkish steel producer Erdemir and his experience of M&A is believed to have played a significant role in Yildiz continuing purchasing spree.

This broader outlook has been noticeable especially in Yildiz's main Turkish operation, Ulker Biskuvi Sanayi.

Although long-established as one of Turkey's biggest food companies, Ulker until about five years ago enjoyed little interest from international investors, explains Irem Okutgen, the food and beverage analyst at Istanbul brokerage Garanti Yatirim. "The structure of their operations was unwieldy and not so transparent, and especially foreign investors found them confusing," she says, explaining that this changed after the company brought in international consultants. "Ulker's share price jumped from between two to three lira in 2010 to TRY17.5 today."

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Turkish government acts on industrial safety bne Turkish Prime Minister Ahmet Davutoglu has announced a package of reforms aimed at improving the country’s poor worker safety record, after a series of deadly accidents in Turkish mines and construction sites this year.

Turkey has one of the world’s worst records on industrial safety, with at least 1,235 people killed in workplace accidents in 2013 alone. This year the country’s worst ever industrial disaster occurred at the Soma coal mine, where 301 people were killed. This and other fatal accidents that followed have put pressure on Ankara to act.

At a press conference on November 12, Davutoglu talked of the need to stop the exploitation of labour. However, he also referred to the protests sparked by industrial disasters this year, saying that protesting is easy, but workers, and above all employers, need to make a mental transformation. “We are faced with a three-stage problem. The first mentality. The latter process management. Third, the legal process," Davutoglu said.

The proposed package of legislation that has been submitted to parliament combines harsher penalties for companies which allow accidents to happen, combined with financial rewards for those who meet safety standards.

Prison sentences of up to two years will be imposed for fatal accidents if they are found to be due to negligence on the part of the employer. Companies where fatal accidents occur will also be banned from taking part in public sector tenders for two years. Meanwhile, companies operating in areas deemed to be very hazardous that manage to avoid accidents will be given a discount on their unemployment premiums, which will be cut from the usual 2% to 1%. An estimated 2.7mn employees are working in very hazardous occupations, and will be required to obtain vocational qualifications.

According to the International Labour Organisation (ILO), as of 2012 Turkey had the highest worker death rate in Europe and the third highest in the world. In the first half of this year, the death toll increased, with the Turkish Assembly for Workers’ Health and Work Security reporting that 979 people in the first six months of 2014.

Almost one third of these fatalities were at Soma, where 301 people were killed when an explosion caused an underground fire in the mine in May. The disaster was handled badly by Ankara, resulting in a backlash against the government from miners that drew support from across the country.

Residents booed Turkey’s then prime minister and now President Recep Tayyip Erdogan when he delivered an address outside Soma town hall on May 14, and a group of protesters attacked the local headquarters of the ruling Justice and Development Party, forcing Erdogan to seek refuge in a supermarket. Mass protests followed in both Ankara and Istanbul.

Another disaster followed on October 28, when 18 miners were trapped underground in the Karaman coalmine in southern Turkey when around 11,000 cubic metres of water flooded into the mine. Only two of their bodies have so far been recovered. Five people including the mine’s owner and other officials from the Has Sekerler Mining Company were arrested on November 11.

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Illegal pickers in contrast have been guilty of criminal trespass and have simply ripped up Immortelle by the roots, destroying any chance that the plants will regrow and leading to soil erosion on the environmentally sensitive Croatian archipelago. In August this year, for example, wildlife rangers on a visit to the uninhabited island of Prvic, which is a strictly protected botanical and zoological reserve with no public access, intercepted a band of pickers who had been illegally harvesting Immortelle.

Croatia reaps bitter harvest from illegal plant trade Guy Norton in Zagreb

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group of concerned citizens on the Adriatic island Krk held a demonstration at the toll bridge connecting their island home to the Croatian mainland on November 12 to air their concerns about the increasing environmental and financial devastation being wrought by the illegal harvesting of wild plants.

Front and centre of the good-natured protest by an assorted group of olive growers, wine producers, bee keepers, sheep farmers, war veterans and eco-warriors were concerns that the Croatian Ministry of Environment and nature protection has dismally failed to combat a growing wave of illegal harvesting of wild plants on the island, which is threatening not only environmental destruction, but is also imperilling the livelihood of traditional agricultural producers on Krk. The main bone of contention with the protesters has been the picking of the plant Helichrysum arenarium, better known by its poetic name of Immortelle.

A litre of essential oil from the plant which thrives on the rocky Croatian

coast and islands can command as much a ¤1,700, as it is in growing demand in the cosmetics industry, especially in France, which accounts for 90% of Immortelle oil exports. The rising cost of the oil has led to an explosion of interest in harvesting Immortelle and it has been claimed that experienced pickers can earn as much as HRK10, 000 (¤1,250) a month – almost twice the official average wage in Croatia.

While traditionally the harvesting of the plant has been carried out under official licences granted to companies and individuals by the government, the lure of short-term profits has attracted a growing band of illegal pickers who the protesters on Krk claim are leaving a trail of destruction behind them. Licensed harvesters are required to abide by a strict code of conduct that involves seeking the permission of landowners before cutting off the flower heads and upper stalks of the Immortelle, which are later boiled and distilled to produce the prized essential oil – around 7,000kg of fresh flowers are needed to produce a single litre.

Meanwhile, on inhabited islands like Krk, gangs of pickers from nearby mainland towns such as Ogulin and Karlovac have been illegally camping out in environmentally sensitive areas of the island that form part of the EU’s Natura 2000 protected habitats network, leaving behind rubbish, knocking down traditional dry stone walls and frightening livestock in their search for Immortelle.

Unenforced In response to the environmental destruction being wrought by roving bands of illegal pickers the Environment Ministry announced a complete ban on harvesting Immortelle on the Croatian archipelago in September. However, the protesters on Krk claim the prohibition has proved to be a dead letter in practice.

While local olive oil and wine producers on Krk claim that government inspectors from the labour ministry have this year been particularly zealous in checking that farmers have not been employing undocumented seasonal workers, they claim that in contrast inspectors from the Environment Ministry have been conspicuous by their absence, leaving them powerless to combat the illegal harvesting of Immortelle on their land.

According to reports by the local regional daily Novi List, members of the local police force on Krk are less than pleased to find themselves called upon to man the frontline in the battle against the illegal foragers, as they feel ill equipped to deal with legal niceties of a growing problem that should by rights be dealt with by inspectors from the Environment Ministry. Local media report that the police have found themselves caught between

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irate landowners complaining about criminal trespass and destruction of property, and illegal pickers, many of whom are reportedly either unemployed or retired, who have aggressively defended the opportunity to supplement their meagre incomes by picking Immortelle.

In the last couple of years the price that pickers receive for a kilogram of harvested Immortelle has rocketed from Hrk2.5 to Hrk10 and it is estimated that over 2mn tonnes of Immortelle is picked annually in Croatia. But that figure could come under threat from irresponsible harvesting methods.

Embattled minister The battle over the rights and wrongs of the lucrative business represents yet another headache for Environment Minister Mihael Zmajlovic, who since he was appointed two years ago has been widely criticised for failing to combat environmental abuses in Croatia and for financial profligacy, including leasing expensive cars and moving his ministry into a new, luxury office block development in Zagreb.

While there’s plenty of doom and gloom on Krk about the illegal trade in the country’s natural flora, elsewhere in Croatia there’s hope that the country’s entry into the EU last year might create the opportunity for an increase in the legal trade of commercially cultivated medicinal plants.

At present around 90% of Croatia’s roughly $10mn annual exports of medicinal plants consists of chamomile, which goes principally to Germany and Italy to make herbal teas. But a small band of pioneering companies are producing growing volumes of other plants and herbs such as milk thistle, St John’s Wort, black mallow, lemon balm and cornflowers for export. Given that earnings from such specialised herbs and plants can be over 10 times more lucrative than those for traditional, highly commoditised crops such as maize and wheat, it is hoped that increased production of such flora supported by government incentives could provide an opportunity for Croatia’s financially embattled agricultural sector to compete more effectively on a global level.

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Slovenia looks to resurrect corporate life after debt Guy Norton in Zagreb Having spent most of the past couple of years successfully fending off the threat of a complete meltdown in its bad debt-laden banking sector, Slovenia is now looking to make some headway on the equally tricky task of restoring its cash-strapped corporate sector back to financial health.

In the latest sign that bank creditors and corporate debtors may actually be able to finally agree on mutually beneficial solutions to the thorny issue of non-performing loans, which two years ago were running in excess of 30% of total lending, the creditors of car parts supplier Cimos, one of Slovenia’s biggest companies, recently proposed a revised debt workout plan.

The terms of the proposed deal include a debt-to-equity conversion worth ¤208m in favour of Cimos’ leading creditors, including the Bank Assets Management Company, the so-called 'bad bank' set up in March 2013 to address the alarming NPL problem in the Slovenian banking sector. In addition, Cimos’ creditors will provide the company with ¤40m in working capital. Cimos, which employs around 7,000 people, had debts of around ¤400m at the end of 2013.

The latest debt work scheme has been driven by state-owned Slovenian banks such as NLB and NBKM, which are owed around ¤184m. According to a statement by BAMC's head of credit management Janne Harjunpää, the mooted plan, which is scheduled to be completed in March 2015, will set the stage for the eventual privatisation of Cimos in which major creditors such as the BAMC and the International Finance Corporation will recover their financial claims through the sale of their equity holdings in the firm, while at the same time providing much-needed capital for Cimos.

Meanwhile, in the latest development in the still financially embattled Slovenian banking sector, the European Central Bank (ECB) announced on November 4 that three lenders in the country will come under its direct supervision as part of the Single Supervisory Mechanism (SSM), a new regulatory regime which has been adopted by the EU to shore up oversight of the Eurozone’s financial sector in the wake of the economic downturn in the EU. In Slovenia’s case the three credit institutions singled out for inclusion in the SSM are Slovenia’s state-owned NLB and NKBM alongside UniCredit banka Slovenija, the Slovenian arm of leading Italian private sector lender UniCredit Group. Under the aegis of the SSM the ECB will join forces with national regulators such as Slovenia’s central bank Banka Slovenije to supervise systemically important banks both in the Eurozone and the rest of the EU. In practice this means that Banka Slovenije will provide data and support to the ECB, which will grant banking licenses, approvals for acquisitions of shares in banks, and clearance for management board members. The ECB will also manage financial audits of the banks and determine the level of fines for any regulatory transgressions. The SSM will include 120 banks initially, but the list of lenders will be updated regularly to include key lenders in the EU. In addition to directly overseeing the three banks in Slovenia, the ECB will also supervise banking groups Intesa Sanpaolo, Societe Generale, Steiermarkische Sparkasse and Sberbank Europe, which all have subsidiaries in Slovenia.

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A toxic mix in Central Asia Olim Abdullayev in Dushanbe

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half of the drainage collecting in the Aral Sea in neighbouring Uzbekistan and Kazakhstan. According to the Tajik Ministry of Foreign Affairs, the country is the source of 60% of Central Asia’s water.

elations between Tajikistan and Uzbekistan have been less than congenial since the collapse of the Soviet Union. Rising tensions over water, exacerbated by climate change, have recently shown the potential to degenerate into armed conflict.

Transforming the situation is billions of dollars of Chinese investment pouring into both states, which is changing the balance of power in favour of Tajikistan while also creating an incentive for both sides to step down.

In parallel to this Chinese investment in Tajikistan’s transport infrastructure is slowly but surely undermining Tashkent’s one effective tool of non-military leverage over the Tajik government: its economic blockade.

At the heart of the diplomatic wrangle is the government of Tajikistan’s desire to build a colossal hydroelectric power dam that would massively reduce water flows to Uzbekistan. This has huge economic consequences, as the downstream country depends on vast amounts of this water for its thirsty cotton crops. If Dushanbe goes ahead with the project – a pillar of the government’s national development strategy – there is potential for an armed response from Uzbekistan.

“The decrease in water flow that Rogun’s construction would create would be disastrous for Uzbekistan’s cotton industry”

Row over Rogun According to Tajikistan’s Ministry of Energy and Water Resources, the country has approximately 46 cubic kilometres (km3) of water spread over 1,300

lakes. This water wealth is generated by flows from the mountainous terrain of the republic, fed by vast, high altitude glaciers containing some 845km3 of ice.

Water originating here contributes over

It is the threat of limiting this flow to Uzbekistan’s numerous cotton fields that has notably contributed to tensions between the two republics. The planned establishment of new dams to meet Tajikistan’s electricity deficit led to

a blockade in rail, power and road connections from Uzbekistan beginning in 2009. At the centre of this dispute is the Rogun Dam project, which the World Bank gave the green light to in

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feasibility studies published in June this year.

Earlier plans to develop Rogun, which would be the tallest dam in the world if completed, led to a rapid decline in relations between Tashkent and Dushanbe. The Soviet-era train, road and energy infrastructure connecting Tajikistan to the rest of the world all runs through the territory of Uzbekistan. With the Uzbek border closed, Tajikistan suddenly found itself not just doubly landlocked, but cut off from the vast majority of its overland transport infrastructure. The subsequent disconnection of gas lines originating in Uzbekistan rendered Dushanbe’s thermal gas plants inert.

Ironically, it seems that this move has made Tajikistan’s government even more focused on achieving energy independence and thus pursuing the Rogun Dam project. Already, during the last decade, an increase of 1,000 megawatts (MW) of installed capacity has been achieved to meet the country’s dire energy shortage, primarily through the rehabilitation of existing assets.

Regardless of the additional capacity that this rehabilitation has provided, the Rogun Dam would be a magic bullet capable of not just meeting Tajikistan's domestic power needs during winter, but also providing €120m in export revenues from clients in Afghanistan and Pakistan during the summer months, through the CASA-1000 power line. But the subsequent decrease in water flow that Rogun’s construction would create, especially as it fills, would be disastrous for Uzbekistan’s cotton industry.

Water falls Given the role that water plays in its relations with its neighbours, it is not surprising the substance sits at the centre of Tajikistan’s foreign policy.

Through the UN, the country has led a number of international initiatives aimed at supporting the resolution of water disputes. These platforms have enabled Tajikistan to voice its concerns on the issue and seek international support for a favourable resolution to its dispute with Uzbekistan.

Move on up to the frontier

bne Over the past two years it has become a lot more rewarding to invest in frontier markets – the next generation of emerging markets, spanning from Asia through the Middle East and Africa to Europe and Latin America – than traditional emerging markets. A sign of this are plans by the Swedish investment company East Capital to launch a new fund focusing on global frontier markets, with a start slated for mid-December.

Renaissance Capital said in a report earlier this year that frontier markets were a more profitable place to invest in 2013 than emerging markets – a trend which has continued this year. The most commonly used index, MSCI Frontier Markets, rose 26% in 2013, while the MSCI Emerging Markets Index actually fell 2%. In the first half of this year, the MSCI Frontier Markets index was up another 20.5%, while the MSCI Emerging Markets Index was up 6.3%.

According to East Capital, frontier markets, where it already has around $450mn in assets, are trading at a average price/earnings ratio of about 9x, compared with 15x for developed markets and 11x for emerging markets, making them attractively valued, which is pulling in more money.

East Capital says its new fund will invest in frontier markets as well as in fast-growing countries beyond the frontier – markets that today are unclassified but form the future of frontier markets. “At East Capital, we believe frontier markets are the next generation of emerging markets," says Peter Elam Hakansson, chairman of East Capital, who is personally heading the Frontier Market team. East Capital has strengthened its regional investment teams, and will open a Dubai office in early 2015.

"We have almost two decades of expertise in frontier markets such as the Balkans, the Baltics, Central Asia and have also entered Asian frontier markets more recently… Not only is this asset class very attractive, but more importantly our investment strategy based on fundamental research and stock picking is proven and works well,” Hakansson says.

If frontier markets were a continent, they would account for 13% of the world’s population but only 4% of global GDP. To close that gap, demographics are regarded as one of the key drivers. “No matter what, young and growing populations in frontier market regions will, in the next couple of decades, continue to boost economic activity and therefore offer a vital engine for growth," says Emre Akcakmak, portfolio manager at East Capital.

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This is especially necessary, because in addition to the construction of dams there is the melting of Tajikistan’s glaciers as a result of climate change, which further threatens to reduce water flow to downstream countries. Tajikistan’s glaciers have reportedly declined by 70% over the last 70 years, and snowfalls have decreased in turn, leading to even less downstream flow. During Tajikistan’s address to the 69th session of the UN General Assembly in September this year, Tajik Prime Minister Kokhir Rasulzoda used Tajikistan’s time-slot to draw attention to this issue.

Tajikistan

However, the disastrous TashkentDushanbe relations and the subsequent Uzbek economic blockade of Tajikistan is slowly being undone by big Chinese investment into the region. In the last three years alone, China has built infrastructure to link Tajikistan to its neighbours. These include the Pamir Highway to Western China, bridges to Afghanistan, and a proposed rail link that would connect Tajikistan to Turkmenistan and the Indian Ocean via Iran. This cut-off country is slowly but surely developing alternate overland trade routes.

Given that the blockade by Uzbekistan has not resulted in preventing upstream dam development, and that Tajikistan’s economy is witnessing 7% annual growth including massive energy infrastructure investment, it seems likely that Tashkent will have to make a bold policy decision soon. A show of force might cause Tajikistan to amend its plans, but rapprochement between the two neighbours is also a possible scenario, though it will leave Tashkent high and dry come harvest time. But does it have a choice? As a senior development official and Central Asia water expert in Dushanbe told bne recently, “the inevitable effect of climate change on water supplies could cause Uzbekistan and Tajikistan to work together.”

The need to find an end to this dispute is further reinforced by the breaking of ground of a new $3.2bn Chinese gas pipeline crossing through Uzbekistan to Tajikistan. This project promises to be a huge money-spinner for both governments, but will require extensive cooperation.

“Tajikistan generates 60% of Central Asia’s water”

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of Independent States (CIS) to do business during his tenure as first economy minister and then minister for reform coordination between 2004 and 2008. If there was no reason for a permit he nixed it, battling against the bureaucratic inertia of a whole generation of Soviet-era pen pushers.

Doing a Georgia Even today Georgia remains near the top of the list in global business rankings. In bne's Ethical Business ranking released in October, Georgia not only ranks highest in the CIS, its score of 71.8 out of a 100 puts it on a par or ahead of most of the leading Western European countries. That was largely Bendukidze's doing.

Kakha Bendukidze, Georgia’s reform guru

OBITUARY:

Ben Aris in Moscow

K

akha Bendukidze, a leading businessman in Russia turned star reformer in his native Georgia, has died in London at the age of 58. He had recently undergone a heart operation in Switzerland.

The last time I met Bendukidze, a man of frenetic energy, was at the Free University of Tbilisi on the outskirts of town, where he was rector in 2008.

Typically, I got the call from his assistant at 9pm on a balmy summer evening in the Georgian capital where he had returned several years before to head the country's reform drive.

Bendukidze was a large man. He waddled into the room and collapsed into a seat, closed his eyes and began a long conversation in his deep rumbling voice on the goals and problems of reforming Georgia's body of law to make life easier for business. "There are too many laws, regulations and permits – this is a permissive society, not an entrepreneurial one: you need permission to do everything and if you want to do something new where

there is no permit you can't do it. In the west if there is no rule preventing you from doing something then there is no restriction on it," Bendukidze explained

In essence, he created the template that other countries look to. "We are going to do a Georgia," Sergei Tigipko, the Ukrainian Economics Minister, told a packed room of investors in Kyiv shortly after the ousted Viktor Yanukovych took over as president in 2010, when hopes were still high that Ukraine would mend its ways.

And it was no surprise that Bendukidze was back in Kyiv in October, called in by current Ukrainian President Petro

"The patient's head is coming off, and there is a bucket of blood next to the bed" in his sonorous voice. "We have to change the basic approach of how both government and business people think about how life should be organized."

We drank tea and talked into the night about reform and the difficulties of changing the mentality of the Sovietera bureaucracy; how to convince the bureaucrats that had been running these countries for decades, and were mostly still in place, to change their ways.

Bendukidze slashed Georgia's red tape and transformed the country into the best place in the Commonwealth

Poroshenko's new government to give advice on what to do next. True to form, Bendukidze was blunt about the problems the country faces: "The patient's head is coming off, and there is a bucket of blood next to the bed," Bendukidze said. "What are the relatives doing?

They are vaguely worried about what the neighbours might think," he told a Bloomberg journalist who door-stepped him in a Kyiv hotel lobby two weeks ago.

Not untainted Bendukidze was born on April 20 1956 in Tbilisi, Georgia, and trained as a biologist. In 1988, as economic

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reforms launched by Soviet general secretary Mikhail Gorbachev took hold, Bendukidze opened a small business, producing biochemical samples for laboratory work before moving to Russia to make his fortune.

Bendukidze sprang to prominence in the mid-1990s where he turned a collection of Soviet-era industrial assets into the

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out as an exceptional example of a businessman who was trying to create something of value.

However, he sold up in 2003 and moved to Georgia in the wake of the Rose Revolution to join the newly formed government of Mikheil Saakashvili. While he never said explicitly why he left Russia, the

“The pro-privatisation slogan was ‘sell everything except your conscience’" Uralmash group and emerged as a leading industrialist.

The first time I met him was in the early 1990s in the coffee hall of the legendary Russia Economic Forum summits held in London, across the road from the Palace of Westminster, until the Kremlin quashed it and forced the business elite to switch to the government-sponsored St Petersburg Economic Summit instead.

Bendukidze was not untainted by the controversial privatisations of the mid-1990s, where he managed to take control of a swathe of heavy industry in the Urals region, with a total workforce near to 100,000. He consolidated the plants into the United Heavy Machinery Plants Holding, abbreviated to OMZ, which included the legendary Sovietera engineering giant Uralmashzavod, producer of mining, drilling and metallurgical equipment.

But those were heady days when everything was new and anyone with some entrepreneurial flair could become a multimillionaire literally overnight. But even in the 1990s Bendukidze was setting a benchmark for, if not quite Western standards of corporate governance, then at least making money from just doing business. He was never counted in with the seven oligarchs who sprang to prominence in those days and got rich from their ties to government.

Bendukidze was the man to seek

opportunity to give something back to his motherland probably played a role, as did the rise of Vladimir Putin: 2003 was the height of the Yukos scandal and a time when Putin was taking full control of the commanding heights of the Russian economy – not the place for a liberally minded businessman who made a point of keeping his distance from government when it came to running his empire.

In Georgia he oversaw the implementation of sweeping reforms that transformed Georgia from a wartorn failed state into a new paradigm

In his last job Bendukidze pushed Ukraine to enact the same reforms that had transformed Georgia – sweeping away legions of state administrators inherited from the Soviet Union, which he argued suffocated private business.

And he was clearly frustrated by the lack of progress and commitment by the new government to changing its ways and embracing reform. "You have a monstrous state sector here in Ukraine," he said in an interview in August. "The state is involved in everything possible.

It is physically impossible to create a police force, prosecutors, secret service, anti-corruption organs, able to monitor such a monstrously sized state."

"In Georgia, we eliminated a large part of state services, departments, agencies and committees etc. Until the number of state regulatory agencies is massively reduced, you will not be able to defeat corruption. Simply for physical reasons," Bendukidze warned in the interview.

Latterly Bendukidze expressed disappointment with the slow pace of reforms in Ukraine and the hesitancy and conformism of the new authorities.

"I tell people in the government about eliminating the energy subsidies, but I hear back that the people won't be

"Until the number of state regulatory agencies is massively reduced, you will not be able to defeat corruption" for ease of doing business and coined the pro-privatisation slogan "sell everything except your conscience."

But his close ties to Russia's business world aroused suspicion in Georgia, with allegations that he was trying to sell the country to the Kremlin, and in 2008 he left the post of economy minister to head the government chancellery, and then left government altogether, following Georgia's conflict with Russia in August 2008. He set up a new 'free university' in Tbilisi, and became a guru for reformers around the world.

happy," he told Bloomberg. "Who needs them when the government's sole function these days is to take money from the International Monetary Fund and pass them on in payment for Russian gas?" he asks.

Bendukhidze's death, while depriving Ukraine of crucial advice, may at least remind Ukraine's government that the time to act is limited.

Additional reporting by Graham Stack in Kyiv

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60% approval rating, while the PM lagged behind at 54%. Georgian social media had been buzzing over the rivalry: a portrait of Garibashvili as the evil queen in Snowwhite with the caption “Mirror, mirror on the wall, who has higher ratings than me?” went viral on the web.

Georgia’s political crisis – much ado about nothing?

Monica Ellena in Tbilisi

N

ever a dull day in Georgian politics of late. When Irakli Alasania, Georgia’s much-loved defence minister, was dismissed on November 5, commentators called it a turning point and the first major political crisis of the governing Georgian Dream coalition. But by November 10, subsequent events had left the coalition stronger, not weaker.

Georgia’s politics are often about drama, and the rhetoric surrounding Alasania’s departure appeared well grounded: two other ministers – Foreign Minister Maia Panjikidze and Minister for Euro-Atlantic Integration Alexi Petriashvili – resigned in protest at his dismissal, and Alasania’s Free Democrats party left the coalition, taking with it Georgian Dream’s 83-seat parliamentary majority. Alasania’s dismissal followed his reaction to two separate investigations into staff at his ministry, which he branded an “attack” on Georgia’s Euro-Atlantic aspirations.

Following suit, Petriashvili warned of an impending “dictatorship,” while Panjikidze hoped her resignation would clarify “the nature of the hazards faced by our country.”

Irakli Graibashvili, the prime minister, came out fighting. Rejecting the charges, he warned that Alasania’s “completely irresponsible, absurd” comments are “damaging the country” and slammed him as “traitor,” an “adventurer, stupid and ambitious.”

Yet it is unclear how far the rhetoric matches reality. The timing was indeed unfortunate. Georgia is deep into negotiations over the implementation

However, some of the government’s most pro-Western politicians chose not to follow Alasania into opposition. Tea Tsulukiani, the justice minister who is also affiliated with the Free Democrats, said on November 5: “I have… no reason whatsoever to think that our government is not pro-European.”

The next day, Davit Usupashvili, the parliamentary speaker, called Alasania's allegations “groundless.”

And in the end, the Georgian Dream government looks even stronger than it did before, because 12 independent MPs that had once belonged to the opposition United National Movement jumped on the government ship on November 10, giving it an increased majority of 87 seats.

Grey Cardinal Kakha Gogolashvili, director of EU Studies at the Georgian Foundation for Strategic and International Studies, explains that both Alasania and the Free Democrats were incompatible with the Georgian Dream coalition.

“They are independently-minded, not [accustomed] to be dominated,” he

“If rumours are to be believed and Alasania was pushed out for his independence, then it is certainly concerning” of pledges made at the Nato summit in Wales in September. Alasania is extremely popular both in Georgia and with the country’s Western allies, and had invested far more time than most of his predecessors in building relationships abroad. A survey carried out by the National Democratic Institute (NDI) in August gave him a

says. “The split just happened sooner than expected, and it was an explosion rather than a gradual and step-bystep distancing as it should be in a democratic process.”

The rift began soon after the October 2012 elections won by Georgian Dream.

Alasania was once a deputy prime

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minister until Bidzina Ivanishvili, the former prime minister and Georgia’s wealthiest man, demoted him in January 2013 over his alleged presidential ambitions. Yet Ivanishvili, who founded the Georgian Dream coalition in 2012, appeared to turn

play into the UNM’s hands, as Alasania has already said he does not intend to join forces with them in opposition.

Yet even though the government constitutional majority has increased in parliament, these recent fireworks

“Alasania is a traitor, an adventurer, stupid and ambitious” peacemaker, publicly rebuking Garibashvili for his bombast and meeting Alasania twice.

Ivanishvili’s role as “Grey Cardinal” in the whole drama “does raise questions about who are calling the shots in government and whether they represent voters' preferences,” says Michael Cecire, the Black Sea region analyst at the Philadelphia-based Foreign Policy Research Institute. “One way to think of Ivanishvili's role, and perhaps one he sees in himself, is as the [Georgian Dream] ‘venture capitalist’ – the wealthy broker with a tendency to sometimes intervene for certain ends.”

Performing behind the scene is dangerous in any democracy, warns Sergi Kapanadze, a former deputy minister under the Saakashvili administration and co-founder of Georgia’s Reforms Associates, (GRASS), a Tbilisi-based think-tank that is generally critical of the government.

“Democracy follows other rules – if decisions are taken behind the scene, who is to be accountable?” he asks.

An uncertain future How Alasania and his colleagues will handle being in opposition remains to be seen. Ivanishvili expressed his hope that they would form a “constructive” opposition, in contrast to the attitude he detects amongst the main opposition United National Movement, which governed Georgia for over a decade under former president Mikhail Saakashvili. Nor do events necessarily

have done little to strengthen Georgia's rather battered international reputation. This was already under scrutiny amidst repeated expressions of concern by the US and EU over the use of the public prosecutor’s office for political ends. Recent events have only strengthened that perception.

Doubts about the government’s competence in the business sphere are also emerging. “The executive is very prolific in passing bills which please either the right or the left present in the coalition,” says Lebanese-born Fady Asly, chairman of the International Chamber of Commerce (ICC) in Georgia, who is been investing in Georgia since the late 1990s. “This shows a lack of long-term vision.

The last couple of years, the business environment has worsened, laws are investors-unfriendly as the new immigration bill has showed.”

The Free Democrats’ departure may underline this. “If rumours are to be believed and Alasania was pushed out for his independence, then it is certainly concerning and speaks to the premium the government places on loyalty even over ability,” argues Michael Cecire.

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Expo 2017 national company in Astana knocked down six people standing on the pavement in Almaty with his fourwheel drive, killing one on the spot.

After the incident the young man drove away from the scene; he was eventually fined for an administrative offence, while criminal charges against him were dropped. This sparked outrage on social media. The handling of the case was seen as a "flagrant manifestation of corruption" in the country's justice system, and prosecutors in Almaty were forced into appealing the court ruling.

As a result, the driver was jailed for 45 days on administrative charges.

Photo: www.press.rolls-roycemotorcars.com

Rolling into Kazakhstan Naubet Bisenov in Almaty

T

he ultra-luxury car brand RollsRoyce has ridden into oil-rich Kazakhstan's commercial capital of Almaty, lured by the lingering gleam of an economic boom experienced in the noughties. Unfortunately, RollsRoyce’s first showroom in Central Asia is opening even as the economy continues to struggle and the country is plagued by petrol shortages.

At a news conference "celebrating such a landmark occasion" in Almaty on October 30, Torsten Muller-Otvos, Rolls-Royce Motor Cars’ CEO, said the country's oil-fuelled boom had created increasing demand from discerning customers for pinnacle luxury products such as Rollers. "[Kazakhstan] has witnessed a surge in the number of high-net-worth individuals and is also experiencing strong demand for luxury goods. It is fast becoming a major destination for top-end luxury products," Muller-Otvos said. "We see a lot of potential here in Kazakhstan and look forward to realising that potential together with our new partners here in Almaty."

Muller-Otvos said that the BMW-owned image-conscious brand had picked

as its Kazakh partner Astana Motors, which is already operating dealerships for BMW, Toyota and Hyundai, because it shared "the ethos of our founding fathers". "I have full confidence that we have chosen the most appropriate partner here in this country," he said.

While it has taken pains to carefully

This and other traffic incidents involving officials or their relatives have even spurred President Nursultan Nazarbayev to demand tougher punishment for children of government officials and public servants who violate the law. "I'd like to stress that there are many cases when traffic accidents involve children and relatives of well-known people. Everyone is equal before the law, which is why in such cases both children and parents should be punished more harshly," Nazarbayev said in March.

Asked by bne whether Rolls-Royce would apply the same diligence to its Kazakh customers as to its partner and

“Kazakhstan is fast becoming a major destination for top-end luxury products” choose a dealer to market Rollers in Kazakhstan, the company could have a bigger problem with the "very special clientele" who will own and drive the cars.

Bad drivers The driving habits of wealthy and influential people, mostly close to government, and their relatives has periodically caused public indignation in Kazakhstan.

Last December, for example, a 24-yearold son of a senior manager at the

whether he wasn't worried that some of them might generate headlines, MullerOtvos said that he saw the same pattern of ownership as the carmaker has in other markets: 80% of Roller owners worldwide are business owners who are "pillars of economic growth," with the rest being celebrities. "We welcome every customer at Rolls-Royce," he said. "Somebody who wants to fulfil his dream to buy a Rolls-Royce is a desired outcome for us and we are not, in a way, safeguarding [our cars from] what might be his background."

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However, observers in Kazakhstan point out that as well as business leaders and celebrities, Kazakh officials and government agencies with their insatiable appetite for huge and expensive cars could also be customers for Rolls-Royce – even at a time of economic belt-tightening due to lower-than-expect global oil prices.

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the purchase of a car for KZT12mn ($65,000). Muller-Otvos said the price of a typical Roller starts from €250,000 – not out of the reach of a particularly lavish ministry.

Belt-tightening With an engine size of around 6,000cc, petrol-gulping Rolls-Royces cruising

"We welcome every customer at Rolls-Royce" Tenders posted by local government departments and some ministries on the state purchases website often welcome bids to purchase cars worth millions of tenge (tens of thousands of dollars) for courtesy purposes to ferry esteemed visitors around. One tender posted by the South Kazakhstan Region administration this summer advertised

across Kazakhstan's congested cities will surely expose government hypocrisy.

In September in the midst of acute petrol shortages, Energy Minister Vladimir Shkolnik urged local motorists to stop "carrying the air" and pool cars.

"We should be saving [petrol] as the

rest of the world does. I call for this. If there is a possibility, then don't drive a huge SUV to work... but neighbours get into one car to drive to work," Shkolnik said. "Let's be more prudent. One should replace their cars with smaller ones, in particular this concerns all kinds of officials and people driving alone in SUVs and carrying the air."

But the calls made by Shkolnik, whose ministry is responsible for energy security in the country, appear to have fallen on deaf ears. The president of Astana Motors, Nurlan Smagulov, blamed a Soviet mentality for people being ashamed about wealth and hailed Rolls-Royce's arrival in Kazakhstan as sign of it "becoming a civilised country".

"We [still] feel shame about opulence," said Smagulov, who bragged about owning one of the first three Rollers the new outlet has sold. "We should stop feeling ashamed... and we should get rid of complexes and phobias.”

Photo: www.press.rolls-roycemotorcars.com

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profile dismissals. "Our army has been involved in selling and buying, and has been mired in corruption. There have been so many scandals and generals have been sacked in droves," Kasymov told Nur.kz news portal. "We need to draw a lesson... [Tasmagambetov] is capable of cleaning up the act."

Russian threat Russia’s annexation of Crimea has given rise to fears in Kazakhstan that Moscow could use the rights of ethnic Russians as a pretext to take over parts of Kazakh territory. In a televised interview on August 24, Nazarbayev tried to quell these fears. "Some fear that Russia will again invade us, but this is not true," he said.

Kazakhstan's new defence minister – big position, big ambitions?

Naubet Bisenov in Almaty

I

mangali Tasmagambetov, mayor of Astana and tipped as a potential presidential successor, has been appointed defence minister – regarded as a crucial post following Russia’s aggression towards Ukraine and a series of corruption scandals in the military.

The appointments were first announced on Kazakh President Nursultan Nazarbayev's Twitter account on October 22 and later confirmed by the presidential office. Tasmagambetov has previously held the posts of prime minister and mayor of Almaty, and he replaces Serik Akhmetov, who was appointed defence minister only in April after an 18-month-long stint as prime minister. Adilbek Dzhaksybekov is going to become the new Akim of the capital, returning to the position he used to occupy from 1997 to 2003.

Given the importance of the defence minister's job in the wake of Russia's annexation of Crimea and its

support to rebels in eastern Ukraine, Tasmagambetov's appointment as defence minister will be seen as a promotion and a sign of Nazarbayev's trust. As a competent manager, Tasmagambetov will be expected to increase the efficiency and fighting ability of Kazakhstan's armed forces, as the government became concerned over the state of the army after the Ukrainian

Yet he warned that Kazakhstan should be careful in promoting the Kazakh language at the expense of Russian.

More than 90% of Kazakhstan's 17.3m citizens speak Russian, but only around two-thirds claim to speak Kazakh.

Kazakhstan's constitution designates Kazakh as a state language, while Russian serves as a lingua franca and is allowed in official use. "If we adopt laws to ban all languages but Kazakh, we will turn into a Ukraine," Nazarbayev said in reference to the Ukrainian parliament's revocation of the official status of Russian in eastern and southern regions following the ousting of former president Viktor Yanukovych.

On August 29, Russian President Vladimir Putin, when asked by a student at a youth forum whether

"Some fear that Russia will again invade us, but this is not true" military showed it was woefully illequipped to fight the rebels.

Former senator Gani Kasymov links Tasmagambetov's appointment to a desire by the government to deal with corruption scandals that have rattled the Kazakh army and led to some high-

Kazakhstan could see a repeat of the "Ukrainian scenario" should it diverge from its current pro-Russian policy, Putin said Nazarbayev was a "very wise" leader who knew perfectly well that a "vast majority of Kazakh citizens favour the development of relations with Russia."

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Kazakhstan raids oil fund for extra $3bn a year bne Kazakh President Nursultan Nazarbayev has pledged to draw an extra $3bn annually from the country's oil fund to support the ailing economy over the next three years. Nazarbayev made the announcement in a surprise state-ofthe-nation address on November 11, indicating that the state of the national economy is dire and needs urgent attention.

The president explained that the cash would be taken from the National Oil Fund to "ensure stable socioeconomic development and protect the economy from external troubles," because the situation in the global economy had prevented the country from "achieving set goals without additional financial resources."

"It's high time we used [money from] our fund as Kazakhstan shouldn't repeat other countries' mistakes and should use the fund for economic growth most efficiently," Nazarbayev said. "I've taken a decision on additional allocation of up to $3bn from the National Fund annually in 2015-2017."

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At the same time, Putin made what appeared to be a veiled threat about the fragility of Kazakh nationhood. "He [Nazarbayev] made a unique thing. He has created a state on a territory where there had never been a state," Putin said. "Kazakhs didn't have statehood."

The Kazakh people need the Moscowled Eurasian Economic Union, due to come into being in January 2015, Putin continued, "because this is beneficial for them to develop the economy and to remain in the space of a great Russian [speaking] world.�

Ethnic Russians made up 21.5% of Kazakhstan's 17.3mn population at the beginning of 2014, according to the Kazakh Statistics Committee. The northern and eastern Kazakh regions on the border with Russia have sizeable ethnic Russian populations where their share ranges between 35% and 50%.

The delivery of the annual state-of-the-nation address is usually welladvertised and broadcast live, but the president explained that he had decided this year to give the address earlier so that the government could prepare in the remaining 50 days of 2014 to start work immediately in 2015.

The slowdown in the Russian economy and falling oil prices have forced the government to reduce a target of GDP growth from 6% to 4.3% for 2014 and to redraft the budget.

Kazakhstan and Russia are members of the Customs Union, which will be transformed into the Eurasian Economic Union in 2015. Russia is Kazakhstan's major trading partner, accounting for a third of Kazakhstan's imports. According to the Kazakh Statistics Committee, Kazakh exports to Russia fell by nearly 30% year on year to $3.3bn in January-August 2014, while imports contracted by 21.7% year on year to $8.7bn.

Despite the visible signs of the negative effect of the slowdown in Russia on the Kazakh economy, Astana tries not to draw attention to close economic links between the two countries, preferring to blame global economic trends for problems faced by the domestic economy.

The president did not clarify on what the additional $3bn would be spent but he said the investment from the fund should be "mandatorily" accompanied with structural reforms in the economy. He noted that international financial institutions such as the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development and the Islamic Development Bank were ready to allocate "about $9bn for 90 priority projects".

The government withdrew $10bn from the National Oil Fund to fight the consequences of the 2008 global crisis, most of which went toward bailing out the banks. In February, the president announced the withdrawal of a further KZT1tn ($5.5bn) from the Fund to be spent in two tranches of KZT500bn in 2014 and 2015.

"If we adopt laws to ban all languages but Kazakh, we will turn into a Ukraine"

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Mongolia's Khan Bank. “We can see now that Mongolia is one of the mostimpacted economies from the China slowdown, if not the most affected,” Munkhdul says.

In 2011, new jobs were being created as money poured in from around the world into Mongolia-based businesses. Today, however, companies are scaling back and introducing cost-cutting measures to stay afloat.

Mongolia changes “Government of Change” Terrence Edwards in Ulaanbaatar

M

ongolia finally passed a budget on November 15, just a day before the legal deadline. But the country is still being roiled by the recent political crisis and a battle is taking place within the ruling party at a time of faltering economic growth.

Mongolia's parliament passed a budget with MNT7.6tn (€3.3bn) worth of spending and an MNT500bn deficit after twice striking down proposals by former prime minister Norov Altankhuyag's government.

Spending is up by about 36% this year, despite projections that growth is on a downward slide. The budget was passed without a finance minister and with Deputy Prime Minister Zandaakhuu Enkhbold filling in as the acting head of government.

Mongolia's flagging economy in November hit a political breaking point after over two years of declining foreign investment. Mongolia's central bank reported a 59% decline in foreign investment for the year to the start of October from the year before, in part

because of delays to the giant Oyu Tolgoi copper-gold mine, which is a large reason why the growth of the miningbased economy has yet to come close to 2011's stellar 17.5%. “We first got an inkling that there would be trouble

Government reshuffle The solution of former PM Norovyn Altankhuyag, who was forced out on November 5, to Mongolia's economic woes was a complete government overhaul. Seven ministers were kicked out in October, including the ministers of finance and mining, while parliament approved Altankhuyag's proposal to consolidate government ministries to 13 from 16, and replace key positions in his cabinet.

However, the parliament didn't quit there and next voted Altankhuyag himself out of office. A caucus held by Altankhuyag's Democratic Party quickly selected a replacement in Rinchinnyam Amarjargal, but a committee that runs the party ignored that vote and instead put up the then cabinet secretary Chimed Saikhanbileg as its choice

“We can see now that Mongolia is one of the most-impacted economies from the China slowdown, if not the most affected” ahead for our commodities' exports in the second half of 2011, which was the peak year of economic growth,” says Badral Munkhdul, head of the Ulaanbaatar-based market intelligence firm Cover Mongolia.

China, the main consumer of Mongolia's coal and copper resources, has reduced consumption as its economy also slows.

That has contributed to a price decline of 21.7% for coking coal in the year to November, according to data from

for the parliament to vote on instead.

Saikhanbileg was duly elected the new prime minister on November 21 Saikhanbileg is regarded as someone who will maintain Altankhuyag's policies. Though some within the party are still smarting at Saikhanbileg’s elevation to the post, it might save Mongolia the strain of having to rebuild its government from the ground up.

“The fact that Saikhanbileg has been part of the government for the past

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two years suggests that he may well leave many ministerial posts [beyond the ministers themselves] alone, while Amarjargal’s maverick instincts might [have led] him to replace more people,” blogged Julian Dierkes, an associate professor at the University of British Columbia who observes politics in Mongolia closely.

bne December 2014

from 2009 to 2012, with the MPP as the majority party in the parliament.

Troubles ahead The World Bank has predicted 6.3% economic growth for 2014 – still buoyant but nowhere near the stratospheric growth rates of a few years ago.

"The World Bank has predicted 6.3% economic growth for 2014" He also reckons that the Democratic Party might swap its current grand coalition partners for the nowopposition Mongolian People's Party (MPP). That would allow for “more decisive action that would have a broad enough majority to not be threatened by caucus-internal debates,” he says.

Mongolia had a similar set-up under the Sukhbaatar Batbold government

Altankhuyag had hoped to turn the economy around with measures such as a new investment regime, a cut in the royalty tax for gold, and new laws for mining and pumping oil that he hoped would entice back investors. But little has changed.

Parliament had to pass a budget that pegs foreign debt below 40% of GDP. The debt ceiling is a new restriction

for next year that Altankhuyag had attempted to raise, but parliament wouldn’t budge. Mongolia currently has a debt/GDP ratio of about 49%, a civil servant familiar with this year's budgetmaking process told bne.

The cap on foreign debt can be kicked down the road, says the civil servant.

The law won't be enforced until the government reviews the 2015 budget in April, which will give whoever succeeds Altankhuyag time to make another attempt to raise the debt ceiling or bring down the external debt level.

“They are taking action to bring it down by the end of the year,” says the civil servant, “but they have expressed some concern that they might not be able to do so – they say it would be very hard to bring it down below 40%.”

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MACRO ADVISOR:

2015 likely to be Russian economy's “Annus Horribilis” Chris Weafer of Macro-Advisory

I

n a memorable speech delivered in late 1992, Britain’s Queen Elizabeth II described the year just ending as an “Annus Horribilis” as she referred to a year filled with misery and stress for the royal household. In economic terms, the year just ending in Russia may be similarly described. But better not to use that portrayal just yet. For the economy and companies operating in Russia, 2015 is looking increasingly likely to be more deserving of the dubious title. But for stock market investors, despite the miserable macro backdrop inevitable for the first half of 2015, this coming year may yet end up being described as an “Annus Mirabilis”.

just under 500 in late January 2009, but then doubled over the next three months (and quadrupled over the next two years), while the country’s macro indicators did not start to show a recovery until the autumn of that year.

Whether you are optimistic that sanctions against Russia will start to ease in mid-2015 and the price of Urals crude recover towards $90 per barrel, or you are pessimistic and assume some sanctions expansion, or extension, and lower crude prices, the one fact which both sides have no choice but to agree on is that most macroeconomic indicators for the economy will worsen through the next three quarters and will look a whole lot worse by the time we get to next summer. Where there can be more of a debate is about whether there will be meaningful recovery from next autumn, offering hope that the current slump will start to end as the next election season starts in 2016, or whether Russia’s economy faces several more years of stagnation.

"Russia is a market which rewards those who take the time to look past the headlines and who are prepared"

For investors in Russia’s capital markets that is a key question. If on the side of the optimists, looking at the start of a recovery from next summer, then one should start to add to Russia market exposure from early in the New Year.

One factor we have all learned over the past 16 years is that if you wait for solid evidence of economic recovery or an end to crisis in Russia, then you miss the first 30-40% of the rally.

During the last economic crisis, the RTS Index hit a low of

Tough times As mentioned, regardless off one’s view of the economic outlook in the autumn, the next three quarters are going to be tough for all and downright miserable for many. The

latest update from the Federal Statistics Service showed that GDP rose 0.7% over the first three-quarters of 2014. Not too bad given the battering that the ruble and capital flows have endured. The weak ruble and some sanctions have had a positive impact on demand for domestically produced goods, in particular in the food sectors, while the 33% increase in defense spending also boosted manufacturing. That has helped compensate for the much slower growth in retail sales, in the service sectors and the decline in investment spending.

But that trend is already starting to decline further. Retail sales in September were boosted because of a one-off rise in non-food sales as people used some of their depreciated

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rubles to buy goods at risk of scarcity or which might be priced higher over the winter. Some food items are certainly in both of those categories. Russia imports only about 35% of overall food consumption these days, down from nearly 50% in 2008, but that previous high percentage remains in the supermarkets and hypermarkets. Russia never has enough in adequate food storage facilities so higher prices and some shortages are inevitable as the summer/autumn supply ends.

Consumer inflation, which reached 8.5% by mid-November is set to breach 9% by year end and will very likely hit 12% or higher by the spring. Interest rates, pushed higher in 2014 as the Central Bank of Russia tried to control inflation and the ruble, are not going to start falling until there is clear evidence that inflation has started to fall. Again, probably coming into next summer rather than earlier.

High interest rates have eaten into household disposable income at a time when nominal wage growth is slowing.

Public sector workers, accounting for almost 20% of the national workforce, may expect a wage increase of 7.5% in 2015 or anywhere between a 3-5% real decline. High interest rates and a more difficult debt access market is also one of the reasons why investment by companies continues to fall.

On top of all that is the prevailing low level of confidence by not only consumers and business owners, but also by those Russians with money to invest and by foreign investors. Both categories will keep their wallets firmly shut for Russia until there is solid evidence that the crisis has ended.

Over the first half of 2015 we may see Urals crude in the $75-80 per barrel range, inflation at 12%, the ruble trading

in the range RUB55-60 against the US dollar (RUB68-75 against the euro), retail sales growth at less than 0.5% and a continuing slump in investment spending. That may translate into either zero GDP change or a small decline, with only the spending from the military-industrial complex and the modest positives from the weak ruble and sanctions providing some support to the headline number.

But that is where the bad news could end. At Macro-Advisory we are optimistic that full-year GDP growth in 2015 will reach between 0.5 and 1.0%, with most of the recovery backended to the second half. We expect inflation to peak in the second quarter and then to fall slowly to a year end rate of

"The next three quarters are going to be tough for all and downright miserable for many" 8.0%. We believe that while the ruble may trade in the mid50s against the US dollar and the high 60s against the euro, the year-end rates should be a whole lot better. The table shows our base case assumptions for 2015 -2017 and those based on a pessimistic scenario, which assumes low oil for longer and tougher sanctions. We dismiss as most unlikely the optimistic case proposed by Russia’s Finance Ministry in its recent 2015-2017 budget submission.

Base Scenario Assumptions

Russia - Macro Outlook 2013

2014E

2015E

Pessimistic Scenario Assumptions

2016E 2017E

2015E

2016E

2017E

Growth, real % YoY

1.3%

0.5%

0.9%

2.0%

3.5%

-0.5%

0.5%

2.0%

CPI - year-end, % YoY

6.5%

9.0%

8.0%

6.0%

4.5%

8.0%

6.0%

4.5%

-0.3%

-3.5%

0.3%

2.0%

4.0%

-3.0%

0.0%

2.5%

Gross fixed investment, real % YoY Retail sales, % YoY

3.9%

2.0%

1.5%

2.5%

3.5%

0.5%

1.0%

2.5%

Unemployment, % EOP

5.6%

5.0%

5.0%

4.9%

4.9%

5.0%

4.9%

4.9%

-0.5%

0.1%

-1.0%

-1.0%

-1.0%

-2.5%

-2.0%

-2.0%

1.6%

4.0%

3.5%

2.0%

1.5%

3.5%

2.0%

1.5%

32.9

46.0

41.0

37.0

36.0

55.0

48.0

46.0

Budget, balance % of GDP Current account, % GDP RUB/US$, year-end RUB/EUR, year-end Urals, US$ p/bbl, average

45.3

58.0

52.0

48.0

46.0

69.0

60.0

60.0

$108.0

$100.0

$90.0

$90.0

$90.0

$75.0

$80.0

$80.0

Source: State Statistics Agency, Central Bank, Macro-Advisory estimates

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how financial reserves may be deployed. We have not yet had a clear response but hope to see that coming up to the next St. Petersburg Investment Forum in the spring. Hardly much before then. Already we know that the government’s latest development slogan is “Import Substitution” and while encouraging for long overdue changes in such areas as agriculture, food production, pharmaceuticals and some manufacturing sectors, it is still all too vague to be able to assess the medium-term impact.

The factors that will determine whether we end up with a pessimistic or base case result will chiefly be: •

•

•

Sanctions: The only sanctions that have hurt the economy are those directed against the financial sector and they have hit hard since September. Interest rates are higher, the forex market is tight and access to capital is expensive. If the EU does not extend these sanctions when they end on July 31, there will be some improvement but only limited. If the US does not similarly drop its sanctions against Russia’s state banks at the same time, then EU banks will remain closed to Russia regardless of the official EU position. A unilateral EU move would help some areas of trade finance, but the US sanctions will be key to a full easing.

•

Confidence: This is a tough ingredient to call. So much is wrapped up in consumer, business and investor – domestic and foreign – confidence. That’s because it is a mixture or perception and reality. The only position we know for sure is that it is a whole lot easier to lose confidence than it is to recover it. This is one reason why, even under an optimistic view of Russia, sanctions and oil from mid-2015, a return to the targeted 4-5% annual growth will take several years.

Oil: Opec producers are suffering budget strains just as Russia is. But the bigger producers, eg. Saudi Arabia, are willing to put up with that for some time while pursuing some important internal Opec objectives and slowing US shale production. Ultimately, the price may be affected by a sharper slowdown in the global economy, but if International Monetary Fund/World Bank growth numbers and the International Energy Agency’s demand outlook prove correct, then we should see Urals back above $90 per barrel by mid-2015.

Russia is not a market that, beyond blind luck, rewards either the brave or the foolish, or those intransigent in their optimism or pessimism. It is however a market which rewards those who take the time to look past the headlines and who are prepared.

Policy actions: Government actions have been more reactive to the unfolding crisis this year. There has been a lot of discussion over what may be done and

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

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Opinion

69

Corruption is Putin’s Achilles’ heel – and golden opportunity

STOLYPIN:

Mark Galeotti of New York University

T

he latest Levada Center opinion poll has found that 39% of Russians think that corruption now is worse than it was 15 years ago, when Vladimir Putin was just coming into office for the first time, and only 20% think it has got better. Yet, ironically enough, the proportion who think Putin probably or definitely is implicated, while still a hefty 40%, is at its lowest for some years. In this seeming contradiction, there may be an opportunity for him – but only if he is willing to challenge the elite and repudiate the social contract he has maintained with them until now. That would be an undoubtedly bold step, but it may also prove to be the only way he can actually maintain his position, or at least secure his place in Russian history.

Putin has talked much about the need to fight corruption.

However, it is harder to see that he has matched words with deeds. To be sure, there is a steady stream of cases and convictions, but these are almost inevitably either relatively petty offenders or else those who have lost their political utility or protection. Not only do the most serious offenders

"Siding with the people against the elite is a dangerous populist move" enjoy seeming impunity, if anything the flow into their pockets of federal funds – still the most lucrative racket in the country – may even have increased of late.

So it is possible to read suggestions of a new campaign against corruption with a degree of jaundiced familiarity.

Nonetheless, according to some reports, Putin is preparing

in December to announce a serious and systemic crackdown on corruption, especially the predatory use of government oversight and inspection roles to extort payment from individuals and businesses.

Getting away with murder Facing the prospect of long-term economic pressure from international sanctions – adding pain to what in any case would have been a difficult time for Russia, not least in light of the slide in oil prices – then, the calculation goes, such a measure is necessary for both economic and political reasons.

It lessens the invisible burden on business, one inevitably passed on to consumers, which disproportionately burdens and deters small business. As well as hopefully providing a little respite to ordinary Russians watching inflation outstrip wage increases, it would also provide a powerful symbol of the Kremlin’s allegiance to the masses rather than the elite.

After all, the respondents in that Levada poll also pointed to the police and regional and local officials and politicians as the most corrupt.

So while we have heard it all before, there is a chance that this time Putin really means it. Of course only to an extent; the president’s inner circle and the grandees on which he genuinely depends would no doubt be exempt, while truly rolling back the culture of endemic corruption will be a generational challenge. But at the very least the implicit rules of the game may be rewritten. The permissible scale of abuse of office could be made much more manageable, the level of impunity granted officials, especially at the local level, diluted.

Up to now, after all, local leaders could get away with murder – in some cases quite literally – so long as they did not embarrass or seem to challenge the state. Then, the state demonstrated its ability to respond in no uncertain terms: consider the commando raid, backed by armoured vehicles,

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which saw Makhachkala’s hitherto-untouchable mayor Said Amirov arrested. But Amirov was just too obvious in his local empire-building ambitions, and made too many enemies in Moscow (not least, the Investigatory Committee, one officer of which he is accused of having murdered). Others tend to be rather more circumspect, and thus safer.

Given that the Amirovs are the exceptions rather than the norm, a campaign against corruption will mean attacking the generalised bribe-taking and extortion that remains endemic within the country. To put it another way, this means a war against the elite.

Putin has long capitalised on his ability to appear to be the “good tsar” siding with the people against the “greedy boyars,” the new aristocracy everyone loves to hate. However, moving from occasional stage-managed dressings down of local officials and fixing carefully-chosen problems to a systemic campaign to change the very basis of officialdom’s relationship with the state is something very different. On whom could Putin rely given that the monitoring and policing agencies appear to be amongst the worst offenders? And does Putin – for all his macho image a cautious and risk-averse leader in the main – have the courage and will to turn on the people who made him what he is and through whom he rules the country?

Of course if he does not, then Russians will continue to pay this invisible tax and resentment at the effects will likely mount. Although so far there is no widespread sentiment

bne December 2014

that connects the effects of corruption in people’s lives with policies decided in the Kremlin, 40% of respondents in the Levada poll felt that Putin was definitely or probably aware of, or even complicit in these abuses. Navalny may well have failed to strike a chord outside the metropolitan set with his campaigns, but where there have been local setbacks for United Russia, largely in mayoral elections, it is because the insurgent candidates managed to play the anti-corruption card. The risk is that there is a vast potential political energy present, which could rapidly and unpredictably manifest itself if some catalytic individual or event emerged.

Siding with the people against the elite is a dangerous populist move, though. Putin has to date not looked like a potential Juan Peron and in domestic policy at least has tended to shy away from dramatic moves. The odds are that any new anti-corruption campaign will be another compromise, with a few more sacrificial goats, some tough rhetoric, but little real change – and as a result, the hopes of a cheap boost for the economy and a chance to re-legitimize the Kremlin on a new basis will again be dashed. Some 38% of the Russians polled

by Levada felt that while the authorities would continue to the campaign, “corruption is indestructible.” Sadly, they are probably right.

Mark Galeotti is Professor of Global Affairs at the Center for Global Affairs, School of Professional Studies, New York University, who writes the blog In Moscow’s Shadows.

"Putin has talked much about the need to fight corruption, but it is harder to see that he has matched words with deeds"

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Opinion

71

Russia’s economy isn’t doing well but neither is it collapsing

Mark Adomanis in Washington

T

he architects of the US Cold War policy of “containment” are sometimes known as “the wise men.” Even among successful statesmen, they were possessed of uncommon wisdom, foresight and perspicacity. James Baker, George H.W. Bush’s secretary of state and the man chiefly responsible for setting American policy during the collapse of communism, was cast from a very similar mould.

Among Baker’s many wise observations was the following: “every achievement contains with its success the seeds

"While we were all panicking about Ebola, the bottom dropped out of the Russian economy"

of a future problem.” Baker had in mind the collapse of the Berlin Wall, which, while undoubtedly a triumph for the West, also created long-term risks for the US-Russia relationship.

Baker’s point, however, can also be taken in reverse.

Rephrased very slightly it would be something like the following: “every problem contains within itself the seeds

of future improvement.” Even situations that, at first glance, might appear uniformly bad also set in motion other trends that can counteract (or at least ameliorate) negative tendencies.

It's worth keeping this dictum in mind when examining Russia’s (genuinely weak) recent economic performance.

The growing weakness of Russia’s economy, combined with the dramatic confrontation over Ukraine, has gotten a lot of the Western media up in arms.

The New Republic's Julia Ioffe was, as usual, among the most outspoken. She painted an apocalyptic picture of a country that was on the brink of utter collapse: "While we were all panicking about Ebola... the bottom dropped out of the Russian economy... the ruble crashing won’t change anything today or tomorrow, but this is just the system starting to eat itself, this is just the system starting to crack... No one knows when one of those cracks brings the whole thing down, but there's a growing sense in Moscow that it will happen sooner than we all think. Putin seems intent on it."

There’s a little bit of hedging interspersed throughout the article; Ioffe is an intelligent and careful enough writer not to predict precisely when Russia’s economy is going to implode, but the overall takeaway is clear: due to the stupidity and fecklessness of its political class, Russia’s economy is finished. It’s no longer a question of if, merely of when the whole house of cards will come crashing down around Putin’s ears.

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Not much of an outlier Ioffe rests her case largely on two indicators: inflation and the exchange rate. Russia has, indeed, performed rather poorly on these fronts. On other fronts, though, the data are rather more upbeat. In the first two quarters of this year Russia’s GDP actually increased: it didn’t grow very quickly, but it grew nonetheless.

Alfa Bank, Russia's largest private bank, recently forecast that the highly-touted decline in oil prices would lead to somewhere between a 0.4% and 0.8% decline in GDP. Declines in GDP are, of course, best avoided entirely, but a less than 1% fall in output hardly seems as if it will be the death knell of Putinism. The system has already dealt with a far more harrowing crisis in 2008-09 when the decline in GDP was orders of magnitude more serious than anything currently being forecast.

And while the recent spike in inflation is also problematic, price growth actually remains substantially lower than it was throughout most of the 2000s. Polls indicate that Russians are sensitive to price increases, but it’s simply not true that the current growth in prices is somehow unprecedented.

Indeed, when you compare the recent performance of Russia’s economy to the performance of other European countries, you see that it’s really not that much of an outlier. Consider, for a moment, how Russia’s economy has performed in comparison to the Eurozone.

Yes the Eurozone attracts its fair share of derision and fearmongering, but no respectable news outlet would argue that

its “bottom has fallen out,” that its elite are “cannibalizing” each other, or that some kind of revolutionary systemdestroying collapse was swiftly approaching. Instead, when people talk about the Eurozone, they use dry, emotionless and, more often than not, desperately boring technical language. The conversation is about “sovereign risk spreads” and “structural impediments to growth” instead of “cracks [in the system] bringing the whole thing down.”

Russia’s recent policy has very clearly been sub-optimal.

There’s no point in defending moves like the ban on food imports because those moves have, even on their own narrow terms, been costly and self-defeating. But while the risks to Russia’s economy have unquestionably grown, the actual impact of these changes has so far been quite muted. Russian unemployment remains at a post-Soviet record low, wages are still (slowly) growing, and the economy has (so far) managed to avoid recession.

There’s nothing preventing this from changing in the future, and there is a significant likelihood of more serious economic problems in the future. The people dancing on Putin’s grave would do well to remember, though, that through the first half of 2014 Russia’s “collapsing” economy performed about as well as the Eurozone’s.

Mark Adomanis is an MA/MBA candidate at the Lauder Institute at the University of Pennsylvania. He regularly contributes Russia-related writings to a range of outlets such as True/Slant, Salon, Forbes and The National Interest.

Eurozone and Russia GDP 2006-2014 (Q1 2006=100)

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bne December 2014

73

INVISIBLE HAND:

Summits that matter, summits that don’t Liam Halligan in London

I

’m struggling to identify any agreement of real political or commercial significance that was struck during the twoday Brisbane G20 summit in mid-November.

Yes, a chunky 800-page communiqué was released as the various heads of government flew from Australia’s east coast. It consisted, though, of little apart from grand words and vague aspirations, with almost no costings, let alone information on sources of actual finance.

The leaders of the G20 nations – accounting for around four-fifths of the world economy – want an additional 2% of growth by 2018, we were told. Beyond the simple mention of “investment, trade and competition,” there were few details on how this extra growth would be achieved.

Emerging club The last time China hosted the APEC summit was in Shanghai in 2001. Back then, the People’s Republic was a fragile emerging market and still rather cautious in its diplomatic and geopolitical dealings. Today, China is the world’s second-largest economy, a major global growth engine and bankroller-inchief to the US government. Beijing now holds $1,270bn of US Treasuries, some 27 times more than in 2001.

So China now looks the US in the eye – as this APEC summit showed. Since World War II, the US Navy’s Pacific Fleet has guaranteed Asia’s security. While Beijing used to accept that, those days are gone. China is asserting itself against US dominance, but at APEC the Chinese president, Xi Jinping, said

Much discussion took place on whether climate change and the tragic West African Ebola outbreak should be in the communiqué. Both eventually were, even though Australian Prime Minister Tony Abbott let his concerns be known that climate change might “clutter” the document.

"China delivered a barrage of deals, spreading its influence across the region"

Again, though, for all the thousands of officials and diplomats who travelled to Brisbane, and the assembled world leaders, there were no specifics on resources, timeframes or targets. The entire summit seemed an exercise in public relations, specifically benign headline generation, rather than ironing out differences on issues of genuine urgency and substance.

his country would now “make our due share of contribution” to regional peace and stability. The US may aim to protect Taiwan, while upholding its military bases in South Korea and Japan. But in case Beijing’s message wasn’t clear enough, Xi spelt it out. “It is for the people of Asia to… uphold the security of Asia,” he told the rather thin Western press corps at APEC.

Perhaps it’s unsurprising little happened at the ninth G20 meeting in Brisbane, seeing as the main event – the 26th annual Asia-Pacific Economic Co-operation (APEC) summit – had taken place earlier the same week in Beijing.

The G20 gathering and the APEC summit look quite similar.

One comprises 20 of the world’s largest economies. The other is made up of 21 nations – large and small, from Indonesia to New Zealand, from Mexico to Thailand – that skirt the world’s largest ocean, the so-called Pacific Rim. Nine countries are in both groups, including the US, China and Russia. It’s quite clear, though, which is now the meeting where the genuine business takes place.

At the heart of this summit was an almighty Sino-US struggle not just for military influence in Asia, but commercial hegemony too, as Washington and Beijing hawked competing trade agreements. The US pushed the Trans-Pacific Partnership, a 12-country deal that excludes both China and Russia, while Beijing promoted its own Free Trade Area of the Asia Pacific – with itself and Russia and the heart.

Prior to APEC, the US blocked China's efforts to include the approval of an FTAAP feasibility study on the summit agenda.

By the closing ceremony, though, it was officially announced that despite “blockages and conflicts,” Beijing’s trade deal was now supported “by all 21 APEC members.”

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Determined not to be isolated from markets across its own region, China is fiercely rebuffing American efforts to box it in. While the US has legitimate grievances over intellectual property rights, particularly concerning IT, it was absurd to think China’s massive commercial influence could ever be usurped. The US remains the main military ally of economies like Japan and South Korea, but the biggest trading partner of both these export-dependent nations is now China.

It was interesting, then, that along with tectonic Sino-US trade battles, the Beijing APEC summit also saw a significant thaw in relations between Japan and China. President Xi and Japanese Prime Minister Shinzo Abe held the first formal talks between leaders of their respective countries in almost three years.

Relations soured badly in 2011 after Japan pressed claims to the disputed Senkaku Islands in the East China Sea. These uninhabited rocky outcrops matter not only due to fishing rights and potential energy reserves, but also because of their strategic position on vital shipping lines, as the US and China vie for military supremacy.

For now, Japan accepts US backing for its position on Senkaku, so upholding the US Navy’s access. Abe’s willingness

"While the G20 summit need not have happened, APEC is rapidly becoming the most important summit of the year" to meet Xi, though, and publicly shake hands, points to a lowering of tensions regarding the islands, and perhaps even some kind of deal that eventually calls into question the free passage of American military vessels.

Spreading influence far and wide Throughout the APEC summit, China delivered a barrage of deals, spreading its influence across the region. Beijing is spending $50bn to set up a new Asian Infrastructure Investment Bank and another $40bn was allocated to infrastructure development along “The New Silk Road” – a network of railways and airports across Central Asia. By far the most important event at APEC, though, was the signing of another major gas supply deal – the second in six months – between China and Russia.

Back in May, at the St Petersburg International Economic Forum, these two countries announced a $400bn agreement, under which Russia supplies 38bn cubic metres (cm) of gas to China over 30 years from 2018 along the new “Power of Siberia” pipeline, stretching from Eastern Siberia to China’s populous north-east, with Beijing and Moscow sharing the building costs. Ten years in the making, this deal seemed

bne December 2014

specifically timed to counter the Western narrative that Russia was “isolated” as a result of events in Ukraine.

This latest APEC summit saw another Sino-Russian megadeal – again signed despite ongoing Western sanctions against Moscow – to build a second major supply route to the Western Provinces of the People’s Republic, expanding the annual Chinese purchase of Russian gas to 61bn cm. Exploiting the huge synergy between China’s fast-growing population and Russia’s natural resources, these two countries are now building serious commercial ties across their 2,700-mile land border.

In 2009, Rosneft secured a $25bn oil swap contract with China.

Last year, the state-run Russian oil giant signed an additional $270bn deal, agreeing to send an extra 300,000 barrels a day (b/d) eastward for 25 years, doubling its crude supplies to China. Russia now sells 750,000 b/d to Asia as a whole, a fifth of its oil exports. Having previously relied on cumbersome freight rail, Sino-Russian oil trade now benefits from a direct link – the ESPO (East-Siberia-Pacific-Ocean) pipeline, which opened in 2010. These eastward energy flows from Russia pose questions for Western European energy security. The newly-agreed “Western route,” in particular, while it will take years to build, will allow fields that have traditionally pumped gas towards Europe to be easily diverted to China.

Moscow and Beijing signed no fewer than 17 major bilateral business deals at APEC. The contrast with the G20 could hardly be more stark. Beijing bought additional stakes in several Russian electricity-generation facilities, and Russia’s largest lender Sberbank and Export-Import Bank of China announced agreements on insurance and credit lines.

These Sino-Russian tie-ups aren’t only about commerce. Both powers have a mutual interest in demonstrating they reject any notion of a US-dominated “unipolar” world, dealing with each other on their own terms. In that sense, it was telling that Beijing and Moscow confirmed their future energy trades would be conducted in yuan and rubles, circumventing the dollar.

When the world’s biggest exporter of hydrocarbons and the soon-to-be largest economy conduct their business in their own currencies, the dollar’s petrocurrency role will be seriously undermined. That, in turn, questions the reserve currency status that allows Washington the “exorbitant privilege” to print money to pay off foreign creditors.

At APEC, Vladimir Putin railed against “the dictatorship of the dollar”. Just after, Beijing launched Shanghai Stock-Connect, finally providing a convenient link between Chinese markets and international investors, so removing a major obstacle to the yuan’s reserve currency claims. While the G20 summit need not have happened, APEC is rapidly becoming the most important summit of the year.

Liam Halligan is Editor-at-Large at bne IntelliNews.

bne December 2014

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75

Why is the next Czech PM surrounding himself with police and spooks?

James de Candole of Candole Partners “A young and ambitious worker who has some practical experience with commercial work," is how a Communist counter-intelligence agent described his Petrimex colleague, Andrej Babis, 30 years ago.

N

ever was a truer word uttered by a professional liar.

In the last two years, the business conglomerate, political movement and ministerial team of the now Czech Finance Minister Babis have recruited some two dozen senior police detectives, Communist counter-intelligence officers, and state security agents and their collaborators, according to my reckoning based upon a review of public sources.

If you include Babis himself, there are now at least 25 individuals in the Babis team with a skill set that encompasses the covert gathering and control of information, entrapment and the crushing of political dissent.

It is worth asking, then, why the likely next prime minister of the Czech Republic (Babis’ ANO 2011 party is today way ahead in the opinion polls, at some 35%) has such a pronounced preference for people with these sinister skills.

There are three reasons: personal loyalty, expedience and necessity. But before examining these reasons in turn, here is a quick reminder of how Andrej Babis actually became a billionaire.

Biting the hand In the early 1980s, Babis was employed in state-owned Petrimex, the monopoly importer of oil and chemical products to Slovakia. In 1990, he was appointed deputy managing director of the firm and by 1993, he was on the board.

In that same year, Petrimex established its Agrofert subsidiary.

Two years later, an obscure Swiss entity, O.F.I., quietly re-capitalised Agrofert, in this way wresting control of the business from Petrimex. Petrimex sacked Babis, suing him without success for allowing its stake in Agrofert to be diluted behind its back. Soon after, 100% of Agrofert miraculously belonged to Babis and the Swiss company was heard of no more. Where O.F.I. got the funds to dilute Petrimex's stake in Agrofert remains a mystery to this day.

Babis has used a similar manoeuvre, over and over again, to acquire his conglomerate of over 200 firms: a mysterious third party brought in to dilute Babis’ existing partner out, with Babis then taking full control.

Cut from the same cloth Andrej Babis was not a victim of Communism. Far from it. As a manager of a state enterprise specialising in foreign trade, he was one of the few beneficiaries of a totalitarian system that enslaved and impoverished the majority of his fellow citizens.

It hardly matters that, in the opinion of a Bratislava court, Babis did not knowingly serve as an agent of Communist state security. The essential thing is that, 25 years on, his upbringing within a Communist cadre must produce in him feelings of relief and solidarity, not revulsion, when in the presence of other cadre members. These people are cut from the same cloth and will never judge Babis.

Today, Andrej Babis is widely regarded as the country’s most determined anti-corruption crusader. It would be more accurate to say that Babis has hijacked the anti-corruption movement for himself, just as he seized Agrofert from Petrimex, with the help of his many associates in the country’s Communist and postCommunist intelligence and state security services. Associates such as Libor Siroky, chairman of the supervisory board of Agrofert Group. In 1981, Siroky was recruited to the part of the Communist state security services that focused on counterintelligence against internal enemies. This section worked closely with the KGB in eliminating dissent.

Siroky worked in what was called the "4th Department of X. Administration", responsible for "ideological diversion and emigration". The Western peace movement was his special area of interest. How many were imprisoned as a result of Siroky’s activities is not known.

Siroky went on to work as a lawyer in CKD Services, where he met Dagmar Negrova, who later became CFO of Agrofert. It was Negrova, apparently, who introduced Siroky to Babis, who was looking for a reliable lawyer. He was hired and within a short time was acting as the frontman for the hidden owners of that fateful Swiss firm mentioned earlier, through which Babis wrested control of Agrofert from Petrimex.

Then there is Radmila Kleslova, who runs the Prague chapter of his ANO party and is the controller of ANO’s Adrianna Krnacova, Prague's new mayor. From 1988 to 1990, Kleslova served as a Communist counter-intelligence officer responsible for the recruitment and training of spies in the West.

Kleslova has held several board positions in Agrofert companies and worked for years as Babis’ political ‘fixer’, embedded in the

76

Opinion

Social Democratic Party (CSSD), which until ANO 2011 came along had held power jointly and continuously with the Civic Democratic Party (ODS) for the last two decades.

Not all Babis’ spooks are Communists. Karel Randak has helped Babis since around 2011, always at one step removed to avoid compromising his mission, which is to legitimise Babis’ acquisition of Czech politics, and above all, his posture as a crusader against political corruption. Randak is the former director of the Czech Republic’s foreign intelligence service.

He also served in the Czech Security Information Service, or BIS, specializing in economic affairs and organized crime.

bne December 2014

But potential for what? A closer look at the work of these detectives suggests that the value of such people to Babis is their professional skills in gathering compromising information on his business and political competitors.

The most impressive detective on Babis’ payroll is Jiri Vesely, a member of the Agrofert board and its director of internal security. Before joining Agrofert in 2011, Vesely spent 20 years in the police, most recently as deputy director of the unit for combating corruption and financial crime (UOKFK).

Or Jan Beroun, the new head of military intelligence, appointed by ANO’s defence minister, Martin Stropnicky.

Before 1989, Beroun served as a detective chief in a district of Prague. He later served as Randak’s deputy in the foreign intelligence service.

Then there is Tibor Levai, head of security at an Agrofert poultry firm ("Chicken Run" fans will understand why a poultry business requires a highly trained police detective to watch over the hens). Levai worked at UOKFK and later at the police department for combating organised crime (UOOZ). He was involved in several cases related to Andrej Babis, none of which led anywhere.

Watching (and then hiring) the detectives The second reason for the preference Andrej Babis shows for police detectives and spies is expedience. Such people are obviously a useful tool for a businessman who does so much business with the state and the bent politicians who run it.

Libor Kazda is the new director of the financial analysis unit (FAU) of the Czech Ministry of Finance. Before joining Babis’ team at the ministry in early 2014, he had served for 17 years in the police, leading the Plzen branch of UOKFK since 2008.

He was recommended by Vesely, for whom he worked.

But their role is much more profound than simply helping Babis grow richer. These people are priceless for a politician with an instinct for absolute control and a contempt for collegial habits of behaviour.

Bronislav Schwarz is a member of parliament for ANO. He served as a police officer for 20 years. He chairs the longrunning parliamentary inquiry into Opencard, a showcase of municipal corruption that has been used to ruin the careers of many of ANO’s political competitors in Prague.

They have helped Babis to discredit some of his most prominent political competitors, most notably the country’s former prime minister, Petr Necas, who was forced to resign in 2013 after his chief of staff, who was also his lover, was shown to have been tasking intelligence chiefs to spy on the prime minister’s wife.

Efforts to convince us that these romantic antics were a threat to national security have not been convincing. But the NecasNagyova scandal paved the way for Babis, lending enormous weight to his anti-political stance. One day, when the archives are opened and historians set to work, it will surely be shown that the sting operation was not merely the result of good, oldfashioned police work.

Schwarz is also vice chairman of the security committee in the lower house of parliament, as well as a member of the parliamentary commission for control of the secret services.

Parliament lifted his immunity at the end of 2013 to allow him to face criminal prosecution for breaking into a house without a search warrant and handcuffing the occupants while serving as police chief in Most. Schwarz, despite his name, is not overly fond of people with dark skin apparently.

Recruiting senior police detectives and spies is an expedient way for Babis to manage his rise to power. It is also a deeply unprincipled way, in a political system built on liberal democratic principles, including, for example, the principle of the separation of powers.

The third reason why Babis has surrounded himself with former high-ranking detectives and Communist intelligence officers is necessity: he had very little choice. There is good reason to believe that Babis has employed these detectives not only because of what they know about his competitors, both in business and in politics (it is very hard to make the distinction in this country), but because of what they know about him.

A number of Babis’ past business transactions have been the subject of investigations by detectives whose colleagues he has now employed.

It is a measure of Babis’ cynicism that, whenever another senior police officer is recruited to his team, he explains that the man was being prevented from investigating crimes properly because of police corruption and interference from party politicians. In his eyes, he is liberating them in hiring them, offering them the chance to realise their potential.

As for the Communist intelligence officers, who can say for certain they are not in control? Babis is obviously a boss, but is he the bosses’ boss? No one knows where that Swiss entity O.F.I. got the money to allow Babis to kick Petrimex out of Agrofert and grab it for himself, thus launching his career that has made him finance minister today and, perhaps soon, prime minister.

Special focus: Ukrainian agriculture

bne December 2014

77

Ukraine pins recovery hopes on the black stuff Ben Aris in Kyiv

Ukraine's economy is on his knees after 20 years of neglect and robbery, but there is one sector that is already flourishing and could be an engine of recovery.

"Ukraine has no rival in the world in terms of untapped agricultural potential," says Leonid Kozachenko, president of the Ukrainian Agrarian Confederation.

Making use of only a third of its potential, the country is already a top-five grain producer and exporter in the world, and could triple its production with the right help.

Home to a quarter of the world's "black earth," the most fertile land on the planet, Ukraine has already seen several world-class agricultural companies emerge despite the dysfunctional nature of the economy and government. As farming is a low-margin, labour-intensive business, the sector was largely ignored by the incumbent oligarchs, who preferred to pick off the easy-to-steal metal plants and simple-torun banks.

It is a testament to the fertility of the land that this year Ukraine is expecting to harvest a record crop and is already the third biggest grain exporter in the world, despite the civil war raging in the east and the political chaos caused by the revolution earlier in the year. Unlike other sectors, agriculture remains the bright spot of the Ukrainian economy, putting in a solid 6.3% year-on-year growth over the first eight months of 2014, according to a SigmaBleyzer report. The government says Ukraine had harvested 53.8mn tonnes of grain as of October 27, which was almost 15% more than in the corresponding period last year.

Ukraine’s total grain harvest this year is projected at about 60mn tonnes, on a par with last year’s record harvest. Although the harvest will not compensate for the sharp declines in tax revenues from heavy industry and other sectors, coupled with a steep reduction in imports it should help alleviate Ukraine’s budgetary problems. "If we can harness agriculture, then Ukraine

bne December 2014

will go from being an object in geopolitical games to a player," says Oleg Bakhmatyuk, chairman of UkrLand Farming, the largest agricultural concern in the country. "Together with the US, we could account for 60% of the world's grain supplies in just a few years' time, and then 80%."

Special focus: Ukrainian agriculture

Open market Thanks to global population growth, the demand for food is expected to continually increase. Currently, Europe is self-sufficient in agricultural production, but that should change. With the global population expected to rise from the current 7bn to close to 12bn by the time our grandchildren are born, even Europe will go into deficit sometime in the next two decades, panellists at the SP Advisors’ investment conference

"Ukraine has no rival in the world in terms of untapped agricultural potential"

products to EU markets is actually limited to begin with, in order to protect the EU's own agricultural production. "About 40% of the EU budget goes on farm subsidies, whereas only 1.8% of Ukraine's budget is spent this way. If we move closer to the EU, we will not only change the market, we will change fundamentally the way they work," predicts Leonid Kozachenko, president of the Ukrainian Agrarian Confederation.

The agricultural lobby in the EU is entrenched and it is very unlikely Ukraine will be allowed to even apply for EU candidate status in 2020, as Ukrainian President Petro Poroshenko promised in October. The black earth soils of Ukraine are capable of hurting the heavily subsidised Western European agricultural sector.

"If we enter the European Union, we will change the model as it is not sustainable," says Kozachenko. "The agricultural lobby [in the West] has a blood-sucking instinct, whereas here agriculture could be the engine of growth."

Investment needs While the task of reforming the country’s agriculture sector looks daunting, there is actually a lot of money about given the pressure on the global food supply from the rising population.

78

in October speculated. Agriculture accounted for 9% of Ukraine’s GDP in 2013 and should do better this year, giving the government a welcome fillip from the relentless bad news.

Traditionally, Ukraine has been known as a steelmaker, but the metal sector is in decline. Moreover, many of the biggest and most productive steelmakers are in the war-torn eastern regions. Agriculture on the other hand has been much less affected and government policy is geared to promoting the sector, which is lightly taxed to encourage investment.

The chances of a quick turnaround are raised by the fact that agriculture is not a key sector in east Ukraine, though it remains important: Donetsk accounts for 27% of Ukraine's population and 38% of its food consumption. The ongoing conflict has hurt production, but not fatally. For example, egg producer Avantgard has four farms in the east affected by the fighting – at one, all the chickens escaped – but the bulk of its production lies further west. "We had to take losses, but they are locked in now and we can continue our business," says Bakhmatyuk, whose UkrLand Farming owns Avangard. "[The east] is not a critical part of the country; losing control of Donbass is painful, but it is not fatal to the agricultural sector."

Living closer to the EU is obviously a good thing for Ukraine's farmers. However as bne reported, under the terms of the free trade and association deal signed this year with the EU access for Ukraine's agricultural

Kozachenko estimates some $145bn is invested in agriculture globally every year, including $10bn in Brazil.

Ukraine could attract some $5bn-10bn of this money, reckons Kozachenko, as no one doubts its potential. But it remains a tall order, as the total FDI stock in Ukraine was $8.6bn at the end of 2013 and the country is unlikely to attract any serious investment this year.

Agriculture could provide the impetus for sweeping investment and reforms across the entire economy.

Kozachenko says that putting more investment into

“Losing control of Donbass is painful, but it is not fatal to the agricultural sector"

leading agricultural companies is pointless unless it is accompanied by associated investment into the supporting infrastructure; adding 10mn tonnes of grain production would be useless unless there are sufficient trains and hoppers to transport that grain to the borders for export. "Ukraine is only using a third of its total agricultural potential. Total production today is worth some $20bn, but that could rise to $75bn very easily, which means $50bn a year of potential exports," says Kozachenko, citing a number that would grow

bne December 2014

One key change for the agricultural sector is to finally push ahead with land reform. Ukraine has some 20mn

hectares of arable land, of which 10mn hectares belong to the government, which could be sold off.

However, no one is expecting this to happen quickly; the privatisation of land remains one of the most politically charged issues that any country has to deal with.

UkrLandFarming's golden harvest A short ride from the centre of Kyiv is the UkrLandFarming command centre – a warehouse-sized building with a control room that looks like the sound stage for a Doctor Strangelove remake.

Operators sit at screens wearing headsets, tapping away on their computers and chatting quietly to employees somewhere in a field or driving a truck in rural Ukraine.

There are large screens in the middle of the room displaying a map of Ukraine, which shows both the trucks moving grain about the country and individual tractors ploughing fields. Double-clicking on a combine harvester icon will give you a readout of everything from the average speed of the vehicle to the amount of grain it is carrying. This is probably the most sophisticated farming control centre in the world.

Oleg Bakhmatyuk, chairman of UkrLandFarming, one of the biggest agricultural concerns in the world with $2bn of sales in 2013, claims its HQ is unique. "After we decided to set up the command centre we travelled the world to see what has been done elsewhere. We took the ideas like GPS tracking of tractors from other countries, but what we found is nobody else had set up a totally vertically integrated control system. It took 100 software engineers to put this together – we had to write half the software ourselves - but now we can control the entire process down to the individual workers from our command centre," he says.

The charismatic Bakhmatyuk calls this technology "precision farming." Each worker is issued with a smartcard that identifies them and they have to login to their various facilities and vehicles when they start work. All the data then flows back to the 12 regional substations, which control the local operations. The information is also sent to the HQ where the operating team can control and monitor every aspect of the company's work.

This has already led directly to cost savings and productivity increases. The company has cut fuel costs by a quarter, and the productivity of the fields is now at international levels.

UkrLandFarming is already by far the largest agricultural company in Ukraine. The company's land bank is 650,000 hectares, with the 15,000 fields worked by 467 tractors to produce grain and other crops that are moved to silos and ports by a fleet of 215 trucks.

And the company doesn’t just produce grain. It is also growing sunflower seeds and sugar beet. It owns Avantgard, the largest egg producer in Europe that churns out 9mn eggs a year, and is the number one producer of beef and raw milk in Ukraine with 64,000 head of cattle that produce 100,000 tones of raw milk a year as well as 19,000 tones of meat.

"Ukraine is not about this crazy war and the current problems. It is about new companies and developing the sectors," says Bakhmatyuk. "The military phase of the conflict is nearly over. Now we need everyone in the country – the people, the government, the businesses – to get behind the idea of helping the country recover."

Special focus: Ukrainian agriculture

the Ukrainian economy by just under a third and erase Ukraine's current account deficit, which stood at about $12bn in 2013, at a stroke.

79

80

I New Europe in Numbers

bne December 2014

MACROECONOMIC INDICATORS

GDP ($mn)

GDP composition (%)*

Budget deficit

Current account

Consumer prices

Unemployment

Industrial production

Country

Total (2013)

YoY growth (% annual)

YoY growth (% quarterly)

2014 forecast

Per capita ($)

Agri.

Indus.

Serv.

% GDP

% GDP

Latest, YoY

Last year

Albania

12,904

+1.3

+0.4

+2.1

4,652

22

15

63

-2.9

-9.1

+1.5 Sep

+1.7

14.0 Mar

+6.0 Jun

Armenia

10,432

+3.5

+2.3

+5.0

3,505

22

31

47

0.0

-8.4

+2.2 Oct

+7.1

17.5 Jun

+7.5 Sep

Azerbaijan

73,560

+5.8

+6.0

+5.2

7,812

6

62

32

0.0

19.7

+2.3 Sep

+2.7

5.0 Mar

+1.8 Dec 2013

Belarus

71,710

+0.9

+1.6

-0.5

7,575

9

42

49

0.1

-9.8

+20.1 Sep

+15.4

0.5 Aug

+8.4 Sep

Bosnia and Herzegovina

17,828

+0.4

-1.2

+2.0

4,656

8.1

26.4

65.5

0.0

-5.6

-0.1 Sep

-0.5

44.1 Apr

+5.2 Aug

Bulgaria

53,010

+0.9

+1.8

+1.7

7,296

6.7

30.3

63

-1.4

2.1

-0.8 Sep

-1.6

10.5 Sep

+0.4 Sep

Croatia

57,539

-1.0

-0.8

-0.5

13,530

5

26

69

-2.5

1.2

-0.2 Sep

+1.1

17.7 Sep

+3.8 Sep

Czech Republic

198,450

-0.9

+2.5

+2.0

18,861

2

38

60

-1.5

-1.0

+0.7 Sep

+1.0

5.7 Sep

+8.3 Sep

Estonia

24,477

+0.8

+2.9

+2.0

18,478

4

29

67

-0.4

-1.0

-0.2 Sep

+2.1

3.9 Sep

+3.6 Sep

Georgia

16,127

+3.2

+5.2

+5.0

3,602

9

24

67

0.0

-6.1

+3.4 Oct

+0.2

14.6 Dec '13

+11.1 Jun

%

Latest, YoY

Hungary

129,989

+1.1

+3.7

+2.4

13,134

34

28

68.7

1.6

3.1

-0.5 Sep

+1.4

7.6 Aug

+7.6 Sep

Kazakhstan

224,415

+6.0

+4.0

+5.1

13,172

5

38

57

4.6

0.1

+7.6 Oct

+4.9

5.0 Sep

-0.7 Sep

Kosovo

6,960

+3.1

–

+2.7

3,816

12.9

22.6

64.5

0.0

-6.8

+1.4 Sep

+0.2

30.0 Dec '13

–

Kyrgyzstan

7,226

+10.5

+4.1

+6.5

1,263

20.8

34.4

44.8

0.0

-12.6

+7.3 Sep

+6.0

2.3 Sep

+10.3 Jun

Latvia

30,957

+4.1

+3.3

+3.8

15,375

4.9

25.7

69.4

-0.1

-0.8

+1.0 Sep

-0.4

8.2 Sep

+1.3 Sep

Lithuania

45,932

+3.3

+3.1

+3.3

15,538

3.7

28.3

68

-0.1

0.8

-0.1 Sep

+0.4

11.3 Sep

+1.5 Sep

Macedonia, FYR

10,221

+3.1

+4.3

+3.0

4,851

10

26

63

-3.1

-1.8

-0.4 Oct

+1.3

28.2 Jun

+9.1 Sep

Moldova

7,935

+8.9

+4.2

+3.0

2,230

15

17

69

0.0

-4.8

+4.7 Sep

+3.9

3.6 Jun

+3.9 Aug

Mongolia

11,516

+11.7

+6.1

+10.0

4,056

16

33

50

0.0

-27.9

+13.0 Sep

+9.9

8.4 Jun

+14.8 Dec '13

Montenegro

4,428

+3.5

+0.3

+3.2

7,126

10

20

70

-0.2

-15.0

-0.7 Sep

+1.8

14.5 Sep

+7.5 Sep +4.2 Sep

Poland

517,543

+1.6

+3.3

+3.3

13,432

4

33.3

62.7

-1.8

-1.8

-0.3 Sep

+1.0

11.5 Sep

Romania

189,638

+3.5

+1.5

+2.8

9,499

6

43

50

-0.8

-1.1

+1.5 Sep

+1.9

5.1 Aug

+4.7 Aug

Russia

2,096,777

+1.3

+1.0

+0.5

14,612

4

36

60

-0.8

1.6

+8.3 Oct

+6.3

4.9 Sep

+2.8 Sep

Serbia

42,521

+2.5

-1.1

+1.0

5,935

7.9

31.8

60.3

0.0

-5.0

+2.1 Sep

+4.9

17.6 Sep

-16.0 Sep

Slovak Republic

95,770

+0.9

+2.4

+2.2

17,689

3.1

30.8

47

-1.2

2.4

-0.1 Sep

+1.0

12.4 Sep

+2.7 Aug

Slovenia

46,833

-1.1

+2.8

+1.4

22,729

2.8

28.9

68.3

-11.9

6.5

-0.1 Oct

+1.3

8.9 Sep

+4.5 Aug

Tajikistan

8,508

+7.4

+6.7

+6.0

1,037

27

22

51

0.0

-1.9

+6.6 Sep

+3.6

2.5 Aug

+7.1 Sep

Turkey

820,207

+4.0

+2.5

+2.4

10,946

9

27

64

1.1

-7.9

+9.0 Oct

+7.7

9.8 Jul

+5.2 Aug

Turkmenistan

41,851

+10.2

–

+10.0

7,987

7.2

24.4

68.4

0.0

-3.3

+6.0 '13

+5.3

–

–

Ukraine

177,431

+1.9

-4.6

-5.0

3,900

10

27

63

-2.0

-9.2

+19.8 Oct

-0.1

8.2 Jun

-16.6 Sep

Uzbekistan

56,796

+8.0

+8.1 Q2

+7.0

1,878

19.1

32.2

48.7

1.3

1.7

+6.8 Q4 '13

+7.0

4.8 Sep '12

+8.1 Jun

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials

*Official figure or independent estimate

bne December 2014

New Europe in Numbers

FINANCIAL DATA

SOCIAL INDICATORS

Total market capitalisation, all publicly traded equities

Market data

I 81

Foreign direct investment

Literacy

Tertiary education

Stock index

Month

12month

YTD

52-wk low

52-wk high

P/E

Latest (mn $)

YoY ($)

YoY (local currency)

mn $

% GDP

% adult population

% population

–

–

–

–

–

–

–

–

–

–

1,225.5

9.5

96.8

55.5

–

–

–

–

–

–

–

–

–

–

370.0

3.5

99.6

46

–

–

–

–

–

–

–

–

–

–

2,632.0

3.6

99.8

20.4

–

–

–

–

–

–

–

–

–

–

2,232.7

3.1

99.6

62.6

SASE

1.3

-9.0

-6.8

677.3

805.0

–

–

–

–

331.7

1.9

98.2

37.7

SOFIX

-3.6

14.1

5.4

453.5

625.4

9.9

3907.6

-17.4

-10.5

1,450.4

2.7

98.4

91.4

CROBEX

-4.1

4.2

1.9

1734.9

1933.7

11.2

19410.0

-1.6

+7.2

580.1

1.0

99.1

64.1

PX

-1.0

-3.3

-1.2

931.1

1049.5

14.5

28473.0

-14.3

+0.4

4,990.4

2.5

99

76.6

OMXTALLIN

-0.7

-9.8

-7.6

792.0

855.3

12.8

2121.2

-19.1

-12.2

949.8

3.9

99.9

27.9

–

–

–

–

–

–

–

724.3

–

–

1,009.7

6.3

99.7

61.6

BUX

-3.2

-8.0

-6.6

15982.0

19702.8

35.6

14476.9

-24.2

-14.0

3,091.1

2.4

99.4

59.6

KASE

-12.9

14.5

14.4

863.5

1314.8

8.9

17480.5

+0.1

+17.5

9,738.5

4.3

99.7

44.5

–

–

–

–

–

–

–

–

–

–

0.0

–

41.3

KSE

-11.0

–

–

–

–

–

56.1

+16.1

+37.2

757.6

10.5

99.2

–

OMXRIGA

-1.5

-5.7

-9.5

405.5

487.3

12.8

1077.9

-13.5

-6.1

808.3

2.6

99.9

73.9

OMX Vilnius

-0.9

8.3

3.4

405.4

478.3

13.8

4426.0

+8.0

+16.9

531.1

1.2

99.8

65.1

MIB10

8.2

15.7

8.5

1556.6

1868.0

10.2

32.1

+37.2

+50.8

333.9

3.3

97.5

40.1

–

–

–

231.3

2.9

99.1

38.4

–

355.1

-43.5

-38.9

15,470.5

134.3

98.3

–

–

–

–

–

–

–

MSETOP

-1.6

2.7

-4.6

14240.6

17243.7

MONEX20

7.8

31.2

24.9

9008.9

12610.1

–

0.5

+75.1

+88.2

447.4

10.1

98.4

61.1

WIG

-2.5

-0.2

3.1

48765.5

55687.6

15.7

188825.2

-9.1

-0.8

6,037.7

1.2

99.7

73.1

BET

-3.1

16.0

9.3

6030.6

7309.1

10.7

27470.3

+47.5

+59.1

3,616.8

1.9

98.6

51.5

MICEX

5.5

-1.4

1.5

1182.9

1532.0

5.6

569066.8

-28.8

-4.6

79,262.0

3.8

99.7

76.1

BELEXLINE

5.0

33.7

25.5

1036.6

1399.9

8.0

3256.5

+7.0

+21.3

1,033.7

2.4

98.2

52.3

SAX

2.3

10.5

10.2

188.7

224.1

10.5

13540.6

+4.2

+12.0

591.0

0.6

99.6

55.1

SBITOP

-3.2

28.9

23.2

617.1

845.1

15.1

7636.5

+18.9

+27.8

678.6

1.4

99.7

86 22.4

–

–

–

–

–

–

–

–

–

–

107.8

1.3

99.7

XU100

7.5

3.8

20.3

60753.5

84536.4

11.5

281667.6

-3.6

+7.5

145,467.0

17.7

94.9

–

–

–

–

–

–

–

–

–

–

–

3,061.0

7.3

99.6

69.3

PFTS

3.2

46.8

46.6

285.0

486.6

11.4

15771.2

-23.3

+21.3

3,771.0

2.1

99.7

79.7

–

–

–

–

–

–

–

–

–

–

1,077.0

1.9

99.5

–

82

I Events

bne December 2014

Upcoming events 2014-2015 21st Russian Banking Forum (2 - 4 December) London, United Kingdom Adam Smith Conferences www.russian-banking.com/AS2333BNBNE

Russian & CIS Metals & Mining Week 2015 (10 - 12 February) Moscow, Russia www.adamsmithconferences.com/2339bnb

20th Anniversary Azerbaijan International Exihibition and Conference - Telecommunications and Information Technologies (2 - 5 December 2014) Baku, Azerbaijan www.bakutel.az

Ukrainian Energy Forum (2 – 5 March 2015) Kiev, Ukraine Adam Smith Conferences www.adamsmithconferences.com/as2349bnew

Catalyst Cap Intro: Emerging Markets – Macro Alternative Investing (8 December) New York City Catalyst Financial Partners +1 212 966 2993 cap-intro@catalystforum.com http://catalystforum.com/node/302

Events I 83 The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS

bne December 2014

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