bne:Magazine - February 2015

Inside this issue: Meet Russia's repo (wo)men Then they came for the foreign retailers‌ Murky business in Moldova

February 2015 www.bne.eu

Turkey tightens screws on critics A tenuous grip on the tenge Special Report Capital Markets Survey 2014

THE GREAT SUCCESSION GAME Who will take over from the ageing leaders in Central Asia?

bne February 2015 Senior editorial board Ben Aris (Moscow) editor-in-chief baris@bne.eu James R Hammond (Boston) publisher jhammond@bne.eu

Contents

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Robert Anderson (Prague) news editor randerson@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 gstack@bne.eu Central Europe Tim Gosling (Prague) bureau chief tgosling@bne.eu Southeast Europe Clare Nuttall (Bucharest) bureau chief cnuttall@bne.eu

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COVER STORY

8 The Great Succession Game 14 Perspective

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19 6 The Insiders

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

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Nicholas Watson (Prague) managing editor nwatson@bne.eu

Central Asia Naubet Bisenov (Almaty) bureau chief nbisenov@bne.eu

I3

CENTRAL EUROPE 29 Czech foreign policy in spotlight as Havel doctrine questioned 30 "Havel: A Life" – by Michael Zantovsky

15 Chart of the month 31 Then they came for the foreign retailers…

EASTERN EUROPE

32 Up in smoke

16 Ukraine moves ahead with reforms after slow start

33 Poland opposition’s frustration boils over

19 Russia to build it but will the multiplier come?

35 Central Europe's property markets show signs of life

21 Russia’s tech sector defies downturn

37 OUTLOOK 2015: Long shadows stretch across Central Europe

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

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23 Meet Russia's repo (wo)men 25 OUTLOOK 2015: Russia doomed to recession

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bne February 2015

Contents

I5

50

48

68

SOUTHEAST EUROPE

EURASIA

OPINION

50

A tenuous grip on the tenge

62

2015 will be Russia’s year of ruling dangerously

53

Will Mongolia's new PM also get lost in the wilderness?

64

Russia curries favour in its “pivot East”

Tavan Tolgoi – under new management

66

The rise and fall of the Eurasian Economic Union

68

Book review: Russia’s Mobutu?

70

Obituary: Jozef Oleksy

40

Turkey tightens screws on critics

41

Anadolu gobbles up Migros

43

Murky business in Moldova

45

A frozen squid grilled by Stepford wife

56

Kazakh classifieds

47

To boldly go

58

Georgia’s golden dilemma

48

OUTLOOK 2015: Political uncertainty rises in Southeast Europe

60

OUTLOOK 2015: Feeling Russia’s pain

54

SPECIAL REPORT

Follow us on twitter.com/bizneweurope

72

Capital Markets Survey 2014

78

NEW EUROPE IN NUMBERS

82

UPCOMING EVENTS

6

I The Insiders

bne February 2015

Assessing the impact of lower oil prices

Marcus Svedberg of East Capital

T

he oil price has dropped roughly 50% over the past six months and most analysts are now busy updating their macroeconomic and equity models with the new assumptions for the oil price. There is still a lot of uncertainty because there are supply as well as demand factors – and perhaps some politics in addition – behind the sharp correction. We believe the price will remain volatile in the coming months, possibly moving even lower from current levels, before recovering during the second half of the year.

Speculating about what the average oil price will be for the year may not be very productive at this point, but it should be clear the price will be significantly lower than in the previous few

“At the end of the day, it may be a year of two halves” years. But for the sake of the analysis, one can use consensus or forwards to argue that the average price for the year will be around $60 per barrel for Brent. That would mean the oil price will be roughly $40 lower than in 2014 and $50 lower than the previous three years when it was remarkably stable around $110.

The most obvious impact is that this is positive for oil importers and negative for oil exporters. And it is particularly positive for importers with large current account deficits or inflation problems, and particularly negative for exporters with high fiscal break-even limits that do not have large financial buffers.

But the most interesting thing about the falling oil price is that it is exacerbating a number of underlying trends.

Disinflation, deflation In general terms, it is putting even more downward pressure on inflation. Consumer prices in most major economies

started to decelerate in the second half of 2014, with the Eurozone even falling into deflation in December for the first time since the global financial crisis in 2009. This suggests that the European Central Bank (ECB) will be even more likely to embark on quantitative easing, possibly as soon as the end of January, while the US Federal Reserve’s expected first rate hike may be delayed even further. It is not only reinforcing the downward pressure on consumer prices, but also exacerbating weak producer prices, especially in a number of large emerging economies. The CE3 (Czech Republic, Poland and Slovakia) economies are already in deflation, while producer prices in Asia have fallen even deeper into negative territory lately.

Secondly, lower oil prices also point to the global economic recovery being even stronger. Lower oil prices are a global stimulus that will be more important for economic growth than the various financial stimulus packages. The International Monetary Fund (IMF) argues that it is a “shot in the arm” that will add between 0.3% to 0.7% to global Average Brent price (USD) 120

100

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40

20

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2009

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growth in 2015 and 2016 by boosting consumption and lowering the cost of production. The World Bank has come to a similar conclusion, arguing it will add 0.5% to global GDP in the medium term. The gains are, on the one hand, unevenly distributed between importers and exporters; and, on the other hand, between importers. Economies with little or no oil production as well as those with a high degree of energy intensity stand to benefit the most. Most emerging markets are winners in this respect, with India and Turkey perhaps the most obvious ones. Russia, Nigeria and the large oil producers in the Gulf are the most obvious losers.

Illustratively, the oil price drop is making an already bad economic situation in Russia and in a number of other energy exporters even worse, while the opposite is true for Turkey and other large energy importers, especially in Asia.

At $60 oil, Russian growth may contract more than 4%, while Turkish growth should be able to grow more than 4%. Similarly, inflation decelerated to 8.2% in December in Turkey, and should continue to fall in the coming months, while it accelerated to 11.6% in Russia. The Turkish central bank is expected to ease rates in the coming months, which should boost growth further, while the Central Bank of Russia may be forced to make another rate hike if the oil price continues to slide. The Russian market has, as a result, once again become a derivative of the oil price. The ruble is once again reacting very strongly to movements in the oil price.

This is not only a result of the oil price being more volatile, but also an effect of the Western financial sanctions and the fact that the currency is now floating.

The most obvious trade right now thus seems to be one that favours oil importers at the expense of exporters. In Eastern Europe, it is easily done by going overweight Turkey and underweight Russia. It is less clear cut in other parts of the world, even though there are some likely winners and losers. It is, at this point, important to emphasize the weak correlation between short-term macro and stock CPI (% yoy)

market developments. That Turkey is looking better than Russia from a macro perspective does not necessarily mean that the former market will outperform the latter. This is partly because some of this is already priced in, as the Turkish stock market was up more than 30% in 2014, while the Russian market was down more than 35% (both in euro terms).

Also, it is tempting to look back to 2009 when the Russian economy contracted almost 8% and the stock market rallied over 100%. Previous performance is certainly no indication of future performance, but at least the oil price, which arguably is the most important factor for the Russian market, looks

“The most obvious trade right now thus seems to be one that favours oil importers at the expense of exporters� set to repeat the 2008-2009 trend. But the political backdrop has changed and the sanctions game may make this year different.

At the end of the day, it may be a year of two halves. A first half of the year dominated by falling oil prices and ECB stimulus, while the second half of the year could be characterized by rebounding oil prices and the first US interest rate hike. That would mean that different markets are likely to perform at different times. In Emerging Europe, as is often the case, the new EU markets in Central Europe and the Baltics seem like the safest but perhaps not the most exciting bet, in-between the extremes of Russia and Turkey.

PPI (% yoy)

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I Cover story

bne February 2015

The Great I Succession Game Who will take over from the ageing leaders in Central Asia?

Naubet Bisenov in Almaty

n Kazakhstan and Uzbekistan, where ageing leaders run one-man shows that suppress any hint of opposition, the issue of succession resurfaces every time the autocratic presidents are reported to have travelled abroad for medical treatment. That these leaders hide succession plans under a veil of secrecy adds to worries about stability once they depart the stage. Neither has indicated he will step down or groomed a successor, fearing irrelevance when elites, investors and foreign powers start courting the future leaders.

Kazakh President Nursultan Nazarbayev, 74, and his Uzbek counterpart Islam Karimov, 76, have both ruled their

Cover Story I 9

bne February 2015

The Contenders: Kazakhstan Akhmetzhan Yesimov Almaty’s mayor is believed to share some kinship with Nazarbayev, but lacks charisma and popular support.

He also lacks managerial experience at the highest level.

Timur Kulibayev One of the country’s richest men and related to Nazarbayev via marriage to his second daughter.

Karim Massimov Experienced beyond his age, 49-year-old Massimov heads the government for the second time.

Despite an impressive record, questions surround his ethnicity.

Dariga Nazarbayeva Nazarbayev’s eldest daughter is a contender, but was married to accused murderer Rakhat Aliyev, who is awaiting trial in Austria. Conservative Kazakh society may not accept a divorced woman as president.

Nurtay Abykayev Regarded as a representative of the old guard, Abykayev is Nazarbayev’s nephew, who will likely only be able to come to power through force. He heads the National Security Committee.

Imangali Tasmagambetov A former head of government and governor of the three most important regions, his popularity with the public and intelligentsia, both Kazakh and Russian speaking, puts him among the most likely successors.

Kairat Satybaldy Another of Nazarbayev’s nephews, Satybaldy possesses significant potential resources and has the best chance of succeeding among those related to the president.

Adilbek Dzhaksybekov Astana Mayor Dzhaksybekov has only a slim chance of being president. He lacks charisma and experience in top-level government.

Kassym-Zhomart Tokayev Former head of government and foreign minister. As speaker of the Senate, he would replace Nazarbayev in case of his sudden death or incapacity.

Nurlan Nigmatulin Like Dzhaksybekov, Nigmatulin is little known for independent action and would lose his standing without the president’s support.

respective countries single-handedly since obtaining independence from the Soviet Union in 1991. They were appointed by Moscow to head the countries' respective Communist parties in 1989, which propelled them into the presidency. Apart from both presidents lacking male heirs and having only daughters, they are similar in that they both have chosen the authoritarian form of government with overly centralised powers and little tolerance towards dissent, freedom of speech and civil liberties.

Both presidencies have also been marred by brutal crackdowns on mostly peaceful protests: in 2005, Karimov's

government ordered troops to suppress a rally in the eastern town of Andijan killing officially 187 people (unofficial estimates put the toll in the hundreds); in 2011, Nazarbayev presided over the violent suppression of a protest rally by oil workers in the western town of Zhanaozen. Both tragedies now loom large over their legacies.

Despite both coming from similar Soviet apparatchik backgrounds, there has been a noted difference in economic systems they have imposed on their respective countries. Karimov has continued to pursue the planned economy, while Nazarbayev opted for building a free market economy, albeit

one based on oil and gas, that has seen the country become a regional economic powerhouse accounting for over half of the combined economies of Central Asia and the Caucasus.

Likewise in foreign policy there have been marked differences. In contrast to Karimov, who has chosen an isolationist policy that prevents Uzbekistan from establishing stable friendly relations with its neighbours and global powers (with the exception of perhaps China), Nazarbayev adopted a "multi-vector" open foreign policy, which has allowed the country to balance national interests with those of Russia, the West, China, Iran and other powers.

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However, the presidents share one significant trait: via various legislative tricks – Nazarbayev through his special status as Leader of the Nation, Karimov through endless amendments to the country's constitution – both presidents are exempt from term limits. With both reported to have health issues, the prospect of the presidents dying in office in the absence of institutional mechanisms for the transfer of power and a lack of checks and balances within the political system mean they themselves pose the greatest threat to stability in their respective countries.

Succession scenarios in Kazakhstan Historically, ethnic Kazakhs are divided into tribes, which in turn are grouped into zhuzes. The Great Zhuz, from which the incumbent president and some influential figures from his entourage hail, occupies the country's south and southeast, and given the Soviet-era capital city of Almaty was their political fiefdom, they traditionally enjoyed favourable access to government jobs. The Middle Zhuz Kazakhs live in the country's centre, north and east; the present capital of Astana is located in their historical lands. The Little Zhuz tribes live in the oil-rich west and are perhaps the most discontent with the current state of affairs, as there is a widespread belief the petrodollars benefit others more than them.

However, observers says there is little indication the historically-established clan system will play much of a part in any power struggle, as President Nazarbayev has tried to balance the interests of the regional elite groups in building the current system. For example, in 1997 he moved the capital from Almaty to Astana.

In October, the Kazakh Rating.kz research agency published a list of potential candidates that could succeed President Nazarbayev. According to a poll conducted by the agency among 38 "highly qualified specialists" of political and socioeconomic trends in Kazakhstan, the most likely candidates to success Nazarbayev are: Almaty Mayor Akhmetzhan Yesimov, 64, and Prime Minister Karim Massimov, 49.

Yesimov, who lacks charisma but is believed to be somehow related to the president, has significant financial resources to leverage via his son-in-law businessman Galimzhan Yesenov, whose fortune is estimated at nearly $450mn

by Forbes Kazakhstan magazine. At the same time, Yesimov has next to no experience at the top level of government; the highest post he held was minister of agriculture and cannot boast a record of crisis management.

By contrast, Massimov is a veteran politician who is heading the government for the second time in the past eight years, with his previous tenure being the

Central Asian post-independence GDPs per capita ($)

Post-independence GDP per capita ($) 13,172 13,172

longest in the country's modern history.

Despite having extensive experience of doing the highest government job and plenty of crisis management experience, including negotiations with oil majors on the crucial yet hapless Kashagan oilfield project, Massimov also lacks charisma and has a big image problem among ethnic Kazakhs; he is not regarded as a fluent speaker of Kazakh, one of the most crucial requirements set for presidential candidates. There is also a popular belief that he is ethnic Uighur, although officially his ethnicity is identified as Kazakh. In 2007, his office threatened to sue a website for saying: "It should be noted, however, that Karim Massimov is Uighur by ethnicity."

Says Rico Isaacs, senior lecturer in international studies at Oxford Brookes University: "It's evident that people in Kazakhstan feel that his ethnicity is a barrier to becoming president, despite all his experience, his inputs and the trust that the president has in him.”

Isaacs, who has extensively studied the Kazakh political scene, tells bne IntelliNews that a candidate's ethnicity will trump all other considerations when it comes to choosing the next president, limiting the pool of potential successors to ethnic Kazakhs.

In the second tier of potential successors, according to the Kazakh Rating.kz survey, are: National Security Committee chief Nurtay Abykayev, 67; the president's nephew Kairat

Post-independence GDP ($mn)

Post-independence GDP ($mn) Kazakhstan

Kazakhstan

224,415

224,415

Kazakhstan

Kazakhstan

10,000 10,000

150,000 150,000 100,000 100,000

5,000

5,000

Uzbekistan

50,000 50,000

Uzbekistan Uzbekistan 139

Tajikistan

139 1990 1990

’95 1995

’00 2000

’05 2005

2010 2010

Tajikistan

800

Uzbekistan

Tajikistan 800

Tajikistan 1990

Source: World Bank Get the data1995 1990

Source: World Bank Get the data

Source: World Bank

’95

Source: World Bank

’00

’05

2010

2000

2005

2010

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Cover story

Satybaldy; and Speaker of the Senate Kassym-Zhomart Tokayev, 61.

According to the poll, Abykayev could play a role in any forcible transfer of power due to his influence over the country's security apparatus, but he is extremely unpopular with the elite groups and little known to the general population. Tokayev, as a former diplomat, is considered to be a compromise candidate that would satisfy the interests of elite groups, but he lacks the political and financial resources of other potential successors.

As speaker of the Senate, according to the constitution, Tokayev would assume the presidential powers in case of Nazarbayev's incapacity or sudden death for the rest of the presidential term.

Of the president's relatives considered as potential successors by those polled, son-in-law Timur Kulibayev and eldest daughter Dariga Nazarbayeva both lack experience of doing political jobs, which means they also lack political influence. Nazarbayev's nephew Kairat Satybaldy, like Kulibayev and Nazarbayeva, possesses significant financial resources and has the best chance of succeeding Nazarbayev compared with the other two, according to the survey.

Further down the list of potential successors is the current defence minister, Imangali Tasmagambetov, 56. He has a good chance of becoming

Kazakhstan's next president, as he enjoys Nazarbayev's trust, has political influence and possesses financial resources (through his son-in-law Kenes Rakishev with an estimated $650mn fortune). Tasmagambetov is also extremely popular with the Kazakh intelligentsia and population: his tenures as mayor of Almaty and Astana, and governor of the oil-rich Atyrau Region are widely recognised as successes. His recent appointment as defence minister is seen by some experts as a demotion, because the defence sphere has been rattled by

corruption scandals that could taint his political career. But given the circumstances, the appointment shows Nazarbayev is trusting him with the reform of the armed forces, the state of which has acquired particular significance given the ongoing crisis in eastern Ukraine, which has worried Kazakhs about Russia’s attitude toward their country and its Russian-speaking population.

Post-independence GDP growth (annual, %) 13.5 13.5 Uzbekistan

Uzbekistan

Tajikistan

Tajikistan

Kazakhstan

0.00

Kazakhstan

-10 -10.0

-20 -20.0 -29 -29.0 1990 1990

’92 '92

’94 '94

Source: World Bank

’96 '96

’98 '98

’00 '00

Ultimately, though, all this conjecture about candidates’ experience and financial resources could be moot.

Amirzhan Kosanov, a Kazakh opposition politician, dismisses the rating of potential successors because ultimately Nazarbayev himself will decide on who will succeed him. "We can talk endlessly about particular names, but the decision will anyway be taken by Nazarbayev himself," Kosanov tells bne IntelliNews.

The opposition politician points to the strengthening of a triumvirate of PM Massimov, Astana Mayor

"The authorities have done everything to neutralise the opposition, but it doesn't mean opposition and fatigue of an irremovable government doesn't exist in the minds of ordinary Kazakh citizens"

Post-independence GDP growth (annual, %)

Source: World Bank Get the data

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2012 2012

Adilbek Dzhaksybekov and acting State Secretary Nurlan Nigmatulin, but stresses that "Tasmagambetov, in contrast to them, enjoys real electoral support," Kosanov says.

Isaacs agrees: "He is potentially the only one with a degree of charisma and popularity and he has some popular appeal so people can relate to him," the academic says of Tasmagambetov. "That kind of appeal, of course, represents a threat to Nazarbayev, especially when we talk about his time as akim [mayor] of Almaty."

Even though Isaacs questions the methodology of the ranking of potential presidential successors, he believes it is a useful tool to understand and put in context what has been going on in the country over the past few years, because "we don't really know what is going on behind closed doors."

Notably, the ranking doesn't include potential candidates from outside the current elite, such as the opposition, Kazakh nationalists and a small but growing group of Islamists. "The

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authorities have done everything to neutralise the opposition," Kosanov says, "but it doesn't mean the idea of an opposition figure and fatigue with an immovable government doesn't exist in the minds of ordinary Kazakhs."

He suggests that despite lacking legal channels to participate in government, "any well-known and influential member of the opposition in certain circumstances and conditions could lead the fight for power."

Kazakh nationalists, unlike their counterparts for example in Russia, are a liberal lot and the prospect of a Western-leaning, liberal government in Kazakhstan would inevitably prompt

a negative reaction from Moscow.

Nationalists showed their teeth when they mobilised against the concept of a "Kazakhstani nation" that was being pushed by the government-sponsored, unelected Assembly of Kazakhstan's People in 2010. Nationalists instead argued for titular status for ethnic Kazakhs. As a result of the opposition, the government abandoned the idea.

In February 2014, pandering to nationalists, President Nazarbayev floated the idea of turning Kazakhstan into a "Country of Kazakhs", which invited ridicule at the time and subsequently became a much more dangerous policy when Russia vowed

The Contenders: Uzbekistan Gulnara Karimova Karimov’s eldest daughter was placed under house arrest following her public spats with her mother and sister as well as the most powerful members of the elite. This virtually rules out any chance of her succeeding her father.

Rustam Inoyatov As head of the feared National Security Service, Inoyatov might have the ability to acquire power through force, but he is believed to suffer health problems.

Rustam Azimov The most recognisable Uzbek political figure abroad, Azimov has probably the best chance of succeeding Karimov.

Shavkat Mirziyayev Extremely unpopular and brutal, Mirziyayev would have to resort to force to retain power should he succeed Karimov. Compared to Azimov, Mirziyayev will need to run the country with an iron fist.

Ilgizar Sobirov Almost unknown to the general public, Senate chair Sobirov would temporarily succeed Karimov in case of his sudden death or incapacity. However, he is most likely to be sidelined as happened to the senate head in Turkmenistan during the power transition after the sudden death in 2006 of Niyazov.

to protect ethnic Russians and Russian speakers everwhere in the same way it is doing in eastern Ukraine. In August, Russian President Vladimir Putin appeared to warn Nazarbayev and his successor against diverging from Astana's current pro-Russia policy, saying that present Kazakh statehood was all about Nazarbayev. "He 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."

Karimov carried off The succession situation in neighbouring Uzbekistan is similar to Kazakhstan in that it will end sooner rather than later, but different in that he is increasingly being isolated from running the country and today doesn't hold any real power.

With Karimov yet to formally accept (or decline) the Uzbekistan Liberal Democratic Party's nomination to stand for another term in the forthcoming presidential election on March 29, his "mafioso and cronies” are trying to keep firm control to ensure a smooth transfer of power when he suddenly dies, one observer living abroad tells bne Intellinews.

Exactly for this reason, the Uzbek president's eldest daughter, Gulnara Karimova, was last year stripped of her assets and placed under house arrest, the observer, who requested complete anonymity, says. "It is impossible to predict which member of the elite will be installed when Karimov departs because the country is so isolated,” says the observer, “but it is important who will succeed him in that it depends on the person whether he or she will start reform.” Any reform, though, will be economic: “It's too early to talk about political reform in Uzbekistan, no one is ready for it."

Despite being a resource-rich country – Uzbekistan is the world's 17th largest producer of natural gas, ninth largest producer of gold and sixth largest producer of cotton – the country’s citizens are incredibly poor. GDP per capita was only $1,900 in 2013 against $13,200 in Kazakhstan.

The high levels of poverty and unemployment drive millions of Uzbeks

bne February 2015

Cover story

instead, he faced criminal charges and the parliament endorsed Gurbanguly Berdymukhamedov as the sole candidate for president. A similar scenario could well be repeated in Uzbekistan.

to work abroad. Karimov's successor will need to steer the country's planned economy towards the free market in order to improve living conditions, thus avoiding great social upheaval and reducing social tensions. However, if the political situation is freed up too hastily without any economic improvement, the new authorities will find it hard to control "masses of hungry and angry people,� the observer notes.

about how precarious their situation is.

"Azimov's presidential chances depend on how skillful he is as a politician, on his personal ambitions and on how he assesses his chances of getting the highest post or just staying in the system to have some influence," the Uzbekistan expert says of Azimov, an economist believed to be the most pro-Western top official. "It's hard to judge how strong he is within the

Unlike Kazakhstan, Uzbekistan doesn't have any strong personalities in politics except for two or three people, and Karimov's relatives are unlikely to join the fight for power. In the past, Uzbek politics was the preserve of competing groups representing regional elites, which have since become intertwined and each player is concerned only about protecting their business interests.

"Azimov's presidential chances depend on how skillful he is as a politician"

The president's eldest daughter Gulnara had been involved in a massive campaign to promote herself as a future leader in the media controlled by her, and in spring 2013 she made her presidential ambitions public. At the same time, Gulnara engaged in a dangerous game of discrediting the chief of the powerful National Security Service, Rustam Inoyatov, 70, as well as one of the most liberal and influential members of the Uzbek government, First Deputy Prime Minister and Finance Minister Rustam Azimov. But it was when she started a media war against her younger sister Lola Karimova-Tillyayeva and her mother Tatyana that her common enemies colluded to use against her investigations by Swiss and Swedish prosecutors into alleged bribery and money-laundering involving Gulnara's business associates. She was placed under house arrest with almost no contact with the outside world in February 2014, which marked her fall from her father's favour. In September Uzbek prosecutors announced that they had opened a criminal investigation into her alleged membership of an organised crime ring that was involved in blackmail, extortion, document forging and misappropriating state stakes in a number of enterprises.

Gulnara's downfall may intensify the succession battle, but could also serve as a warning to members of the elite

elite and whether the system will allow him to implement a pro-reform agenda."

In contrast to Azimov, Prime Minister Shavkat Mirziyayev is not seen as an independent politician but an executor of the system's day-to-day management.

Despite being part of the system, Mirziyayev lacks the intelligence to contest the presidency, so he is "not a desirable" candidate, given his "animalistic excesses" in dealing with people during his time as a regional governor, the expert believes.

While Inoyatov, as the security chief and the longest serving Uzbek top official, might not be seriously considered as one of the main contenders because of his own health problems, he might be instrumental in the choice of successor because he enjoys great influence.

According to the Uzbek constitution, in case of the president's incapacity or sudden death, presidential powers are transferred to the speaker of the Senate, until the election of a new president within three months. The current speaker of the Senate, littleknown Ilgizar Sobirov, could be a temporary figure until the system finds a suitable candidate to be elected in a presidential poll. In Turkmenistan, the sudden death of Saparmurat Niyazov, aka Turkmenbashi, in December 2006 didn't lead to the transfer of presidential powers to the then speaker of the Turkmen parliament, Ovezgeldy Atayev, as the constitution requires;

I 13

While nationalists are the outside contenders in any power struggle in Kazakhstan, it is Islamists who could challenge the Uzbek regime, and

indeed that of neighbouring Tajikistan, where a relatively youthful 62-yearold President Emomali Rahmon holds untrammelled power.

Uzbekistan saw a rise in Islamism in the early 1990s soon after independence, as many rediscovered Islam as part of their identity. But a crackdown by the authorities forced political Islam underground and many followers, especially among the youth, have since become radicalised. Two Uzbeks – Juma Namanganiy and Tohir Yuldosh – set up a radical Salafi group in 1991, which was re-established as the Islamic Movement of Uzbekistan (IMU) in 1998 with the aim of overthrowing Karimov and setting up an Islamic state in Uzbekistan. In February 1999, there was a series of bombings in Tashkent that the authorities blamed on Islamists, in particular the IMU. In 1999 and 2000, the IMU made two attempts to penetrate the Uzbek part of the Fergana Valley via Kyrgyzstan and Tajikistan.

In fact, hundreds of Central Asian jihadists are reportedly fighting in Afghanistan, Iraq and Syria, and sensing a power vacuum should any of these ageing regional leaders suddenly die, they could return to wreak havoc.

Thus these Central Asian leaders' grip on power and their deliberate silence on succession plans give rise to a legitimate question: does this silence represent the biggest threat to stability in their countries?

14

I Perspective

bne February 2015

It’s time for a new pan-European Security treaty Ben Aris in Moscow

W

e are in the middle of the worst political crisis since the end of the Cold War and there is a very real, albeit still remote, possibility of war in Europe.

Without attempting a detailed analysis of how we got here, in the broadest brush strokes Russia was on its knees in the 1990s and helpless to prevent the West doing anything it wanted to, such as expand Nato eastwards. But after an almost decade-long economic boom, Russia is now finding its feet again and starting to push back to protect what the Kremlin sees as its economic and strategic interests – especially, but not only, in Ukraine.

Following the West’s "victory" in the Cold War there are no effective rules governing relations in Europe. Like Germany following the Grunderzeit at the end of 19th century, Russia has enjoyed a rapid accumulation of economic clout, but its government remains immature and thin-skinned. On the other side of the fence, the long-standing Russophobia, also rooted in the 19th century, and a decade of being able to push the Kremlin around has not left the West in a mood to compromise.

But as we have discovered after the two sides started jostling each other, these attitudes lead to dangerous miscalculations that are manifest in the low-wattage proxy war currently being fought in eastern Ukraine.

The problem is that unlike the Cold War, there are no rules to govern relations in the middle of Europe. As commentators such as Mark Galeotti and Professor Stephen Cohen have argued, despite its adversarial nature the Cold War was governed by a set of unwritten rules worn smooth by long use, which prevented the war ever getting hot. But all of those mechanisms were destroyed in 1991. It is time for Europe to sit down with Russia and draw up a new pan-European security pact.

No rules And Russia is ready to negotiate. In 2008, Russian President Vladimir Putin took the initiative and ordered the foreign ministry to draw up a proposal, which the newly elected President Dmitry Medvedev in June of that year took with him on his first foreign visit to Brussels.

Medvedev proposed enshrining in international law the "principle of security, a legal obligation, under which no state or international organization in the Euro-Atlantic area could strengthen their security at the expense of other countries and organizations."

Copies were sent to the leaders of the countries concerned, as well as the executive heads of international organizations in the Euro-Atlantic area: to Nato and its eastern counterpart, the Collective Security Treaty Organization (CSTO), as well as the Commonwealth of Independent States (CIS) and the

“Refusing to even consider Medvedev's proposal was a huge missed opportunity for Europe” Organization for Security and Co-operation in Europe (OSCE), among others.

The document was very specific, based on the Charter of the United Nations and grounded in international law. The preamble of the draft opens with: "Reminding that the use of force or the threat of force against the territorial integrity or political independence of any state, or in any other way inconsistent with the goals and principles of the Charter of the United Nations is inadmissible in their mutual relations, as well as international relations in general."

But at the core of the document is the recognition of mutual respect of national interests: "Parties, including in the framework of any international organization, military alliance or coalition, shall be implemented with due regard to security interests of all other Parties," the draft says.

The Russians also proposed a three-step mechanism culminating in an Extraordinary Conference of all the signatories to the pact to resolve disputes.

According to bne IntelliNews diplomatic sources, Medvedev's proposal was simply binned: Brussels was not interested in

Chart I 15

bne February 2015

listening to Moscow's concerns and turned to the rhetorical device of Ukraine's "inalienable right" to choose its friends.

Moscow's line is that of Realpolitik where small/weak countries have to take the interests of their larger/more powerful neighbours into account or face the consequences.

The irony is that the three-way talks Russia called for in December 2013 have now started, although little progress is being made in the talks. These should be broadened and the Russian proposal taken up again, as the alternative is more tension and possibly war.

Refusing to even consider Medvedev's proposal was a huge missed opportunity for Europe, as the Russians themselves would have tied their own hands and prevented the Kremlin from sending troops or support to the rebels in eastern Ukraine.

"Decisions of the Conference of the Parties shall, if it is attended by at least two-thirds of the Parties to the Treaty be binding."

"Russia has always looked towards both the West and the East, and we will not abandon this tradition," Medvedev wrote in 2008 ahead of his trip. “But the whole system of European security is now under threat, as well as basic values, further globalization and, in essence, the whole concept of peaceful development."

EU fund allocation suggests windfall for Ukraine if it joins in 2020

CHART:

It is easy to see why the penniless Ukraine would want EU membership: it would be eligible for tens of billions of euros in EU funds that have transformed the economies of countries like Ireland and Poland. The 2007-2013 and 20142020 EU budgets have seen European Structural and Investment Funds to the tune of €156bn being awarded to Poland – more than twice the amount of the next highest recipient, Spain, at €72bn.

ESIF distribution 2014-2020

ESIF distribution 2014-2020 EU average Post-2003 member

4

Latvia

Pre-2003 member

3

Romania

Lithuania

Malta

Luxembourg

2

United Kingdom 1

2013GDP GDPgrowth growth(%) (%) 2013

W

ith the full implementation of Ukraine's free trade and association deal with the EU likely to take place at the end of 2015, the next step for Kyiv would be to then apply for full membership. President Petro Poroshenko said in December that Ukraine should be ready to join in 2020.

Poland

Bulgaria

Austria

Hungary

Estonia Slovakia Average GDP growth (%)

0

Netherlands

-1

EU average

Ireland

Czech Republic Croatia Slovenia

-2

-3

As the bne:Chart shows, EU funds have had a massive impact on the performance of the 2004 accession countries. Those with the higher levels of per-capita EU funding (based on 2013 GDP numbers) have enjoyed higher overall GDP growth.

-4

Total funding (€mn) 160

Greece

20,000 40,000

-5

60,000

Cyprus

89,039 0

500

Average funding per capita (€) 1000

Sources: European Commission; World Bank

Ukraine's combination of a low percapita GDP ($4,000 – a key criterion in EU fund eligibility) and high population (45.2m – the sixth largest in the EU) would mean that the funding it could eventually be awarded might exceed that of even Poland.

1500

2000

ESIF funding per capita (€)

Sources: European Commission; World Bank

ESIF funding per capita (¤)

2500

3000

3500

16

I Eastern Europe

bne February 2015

Ukraine moves ahead with reforms after slow start Graham Stack in Kyiv

U

kraine's new post-revolution authorities have taken the first steps in their ambitious reform programme, and more are promised in the rest of 2015.

Despite achieving power in late February 2014 after former president Viktor Yanukoyvch and his cronies fled into exile, Ukraine's new pro-EU government only got round to starting real reforms on October 14, after fighting off a Russian land-grab over the summer.

In its last sitting before dissolving for elections on October 26, parliament reduced the powers of the country's highest legal office, the prosecutor general, and laid the foundations for new anti-corruption institutions.

Reform of the Soviet-era powers of the prosecutor general – which included

'powers of supervision' over criminal investigations – by handing over all investigative decisions to a planned new separate organ, the State Bureau of Investigation, is a clear necessity if the country is to move closer to Europe.

The new law on the prosecutor's office duly transferred investigative powers to the new State Bureau of Investigation, the establishment of which will be one of the main tasks for government reformers in 2015. On the same date,

“The current constitution lacks full legitimacy, which is why we need a new one” The previous system had allowed the prosecutor to protect corrupt practices, which the incumbent was often connected to. The former prosecutor general, Viktor Pshonka, made a hasty departure from the country in February 2014 after the fall of Yanukovych’s regime.

October 14, parliament passed a package of anti-corruption laws, including the establishment of a dedicated National Anti-Corruption Bureau separate from the State Bureau of Investigation, with wide-ranging powers to tackle corruption. A law on lustration of Yanukovych-era officials was also passed.

Eastern Europe I 17

bne February 2015

How these two new anti-corruption bodies will be established and who will head them are likely to be a key political story in the first quarter of 2015, given the bodies' potential for political disruption. Ukrainian President Petro Poroshenko might back more foreigners to be appointed to these posts, following the naming of citizens from the US, Lithuania and Georgia to key government posts. The Italian Giovanni Kessler, head of the European Anti-Fraud Office (OLAF), has been already appointed to the commission that will help choose the candidate.

But there is already apprehension that the new investigative and anticorruption bodies might have their hands tied from the start. At the end of December, Ukraine's parliament passed a law expanding the powers of the National Security and Defence Council, including giving the council power of oversight over the new investigation and anti-corruption bureaux. The security council in turn is headed by political insider Oleksandr Turchinov, who was acting president immediately following Yanukovych's ousting, and then parliamentary speaker until the elections in October.

Poroshenko has also made a priority of the anti-corruption bureau the recovery of assets allegedly stolen by Yanukovych and his family, which critics see as a distraction from the task of combatting present corruption among the political elite. “Contrary to the president, we believe the main task of the anticorruption bureau is to investigate corruption currently occurring at the top levels of government,” says Concorde Capital analyst Zenon Zawada. “For its effective work, it should not fall under the purview of the National Security and Defence Council.”

Police powers Yury Lutsenko, head of Poroshenko's parliamentary group and a former interior minister, announced on January 8 the finalisation of plans to transform Ukraine's Soviet-era 'militia' police into a European-style police force, including mandatory tests for

all militia officers wishing to qualify for the new body. The new police force would be organized separately from the interior ministry, which will thus also be transformed from its Soviet roots into a European-style home ministry, Lutsenko promised.

Poroshenko's major project of constitutional reform is set to start in 2015, but could take “a number of years” to complete, Lutsenko said at a press briefing on January 3. The coalition has a constitutional majority on paper, but the parties themselves are all brittle new creations, with the exception of former prime minister Yulia Tymoshenko's

over whether Ukraine's current semiparliamentary constitution is really valid: it was restored by a majority in parliament at the time Yanukovych fled in February 2014, but not signed into law by the president at the time, for obvious reasons. “The current constitution lacks full legitimacy, which is why we need a new one,” Marina Stavniychuk, former adviser to Poroshenko on constitutional affairs, told bne in October.

Following reform of the police and judiciary, parliament will consider a proposed radical decentralisation of power to local administrations to

“Decentralisation has been one of Poroshenko's reform watchwords” Batkyvschina party. Already one of the coalition’s members, the third largest party Samopomich, has suffered a split in its ranks.

Moreover, at the late night voting on the budget on December 29, of the five coalition parties, only in two did a majority of MPs vote in favour of the bill.

This means that Poroshenko will proceed with constitutional reform in a piecemeal manner, Lutsenko said, starting with measures to crackdown on the judiciary by abolishing judges' immunity from prosecution, which could happen as early as January or February.

The move could also help bring pressure to bear on Yanukovych-era judges, who are seen as hostile to the new pro-EU authorities after the supreme court referred new laws on lustration of Yanukovych-era officials to the Constitutional Court in November. A decision by the Constitutional Court on the key law, under which scores of top officials have already been fired, is expected in January.

The Constitutional Court is seen as a lingering threat to the new authorities, not least because of the lack of clarity

be implemented by October 2015, parliamentary speaker Volodymyr Hroisman – himself a former mayor – said in an article published in the government bulletin Holos Ukrainy on January 6.

Decentralisation has been one of Poroshenko's reform watchwords, but it remains to be seen what is intended under the term. Ukraine's government claims its new budget for 2015 boosted the tax revenues assigned to local governments, but critics argue that in reality the budget drained financing for local government in order to shore up the cash-strapped central government.

Economic liberalisation On the economic front, some of the government action plan announced in early December was implemented in the budget law – passed in the early hours of the morning on December 29, despite MPs complaining they had not seen the full text of the law on which they were asked to vote.

Government pledges to slash the number of primary taxes from 22 to nine, to clamp down on tax-dodging transfer pricing practices and to introduce a reduced social insurance payment mechanism for

18

I Eastern Europe

companies that legalise their workforce, were all included in the budget.

Further economic reform is slated for 2015, according to the government action plan, and includes root and

bne February 2015

massive Soviet-era infrastructure.

The government has also pledged to introduce market tariffs for energy and abolish subsidies, but provides no timetable for doing so – although this is

"The government has pledged to introduce market tariffs for energy and abolish subsidies" branch reform of Ukraine's notoriously corrupt gas sector. The sprawling state-owned pipeline monopolist Naftogaz will be split into two new companies – Pipelines of Ukraine and Underground Storage of Ukraine – to make the gas sector conform with the EU's Third Energy Package, which is concerned with creating an internal EU gas and electricity market. The plan then envisages an international tender to be held to find investors for the group's

a key demand of international lenders – perhaps due to fears of a political backlash.

Small businesses are promised a break both from inspections for two years starting 2015, and a halving of the unified single tax paid by small firms, according to the government action plan.

In the agriculture sector, the government has promised to introduce legislation

for long-term lease of agricultural land of up to 50 years. But there are no plans to lift the controversial moratorium on the sale of agricultural land, which has prevented any real market in agricultural land emerging, and hampered investing in land and using it as collateral for bank loans. One reason for this may be opposition from politically powerful large landowners, who hold hundreds of millions of hectares of agricultural land via short-term leases of myriad land plots from small landowners, and fear that their highly leveraged companies lack the funds to buy out the smallholders en masse.

"Economic problems in 2015 will intensify political conflicts we saw over the budget law, and could cause the coalition to falter," Volodymyr Fesenko, director of the Penta think-tank, tells bne Intellinews. "But even in this case, it is likely we would see the coalition's reorganisation rather than the feuding that happened after the Orange Revolution of 2004.”

bne February 2015

Eastern Europe

I 19

“Global Infrastructure Investment: Timing Is Everything (And Now Is The Time)”.

Russia to build it but will the multiplier come?

Ben Aris in Moscow

T

his is a bean counter crisis in Russia. There have been no significant bankruptcies, no bank runs, no defaults, debt remains low and the budget is still in the black. The main victims so far have been tourist agencies as Russians en masse cancel their now increasingly expensive foreign trips.

Rather than dealing with a firestorm, the challenge the Russian government faces is what to spend its (albeit smaller) surplus on to help drag the economy out of recession this year and maybe next. "Infrastructure!" ratings agency Standard & Poor's answered in a report released on January 13.

published in 1936 during the Great Depression. “Thus public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment, if only from the diminished cost of relief expenditure,” Keynes wrote.

One of the quirks of the Russian budget is that because the government prices spending in rubles but earns about half a trillion dollars a year in dollars from oil taxes, the state is one of the biggest beneficiaries of devaluation. And there is no better place to spend that money than on roads, railways and airports to lift a spluttering economy, according to John Maynard Keynes in his now legendary book, “The General Theory of Employment, Interest and Money”,

"With global infrastructure investment needs now in the tens of trillions of dollars – figures that are essentially incomprehensible to most of us – it's easy to see the problem as insurmountable. The result is that too often, we forget that even a relatively small increase in spending on infrastructure can yield outsized returns – especially if investments are executed in a wise, targeted way," S&P said in the introduction to its report,

The US might have had its economic forecast upgraded by the World Bank on the same day as the S&P report came out to 3.2% from 3.0%, but global growth is now predicted to expand by just 3% this year and 3.3% in 2016, after predicting in June growth of 3.4% and 3.5%, respectively.

Panama effect The reasons infrastructure spending helps are two-fold. First is the relief it brings in the short run by boosting aggregate demand (economic output), putting pay in pockets and chickens in pots. Second, in the longer run infrastructure is an economic multiplier: S&P estimated that each dollar spent on infrastructure in the Eurozone will produce $1.4 worth of economic growth in the following three years. A study by International Monetary Fund economists last year came to a similar conclusion: a one percentage point increase in infrastructure spending leads to a 0.4% boost to output in the first year and a 1.5% increase four years out.

For a country like Russia that is facing a deep recession – estimates vary from Fitch Ratings's forecast of 2.9% to senior fellow at the Peterson Institute for International Economics Anders Aslund's estimate of an 8-10% contraction – the effect of infrastructure spending would be even more dramatic.

Following several generations of underinvestment in infrastructure, simply improving transport could produce the kind of effect that the Panama Canal had on international shipping when it opened.

And as luck would have it Russia plans to massively increase infrastructure spending; prior to the 2008 crisis, the Kremlin rolled out a $1 trillion infrastructure investment programme.

Since the 2008 crisis, this number has been greatly reduced; on January 15 the Kremlin said it would cut all spending, except defence, by 10%. But the government continues to talk about pumping hundreds of billions of dollars into infrastructure and is working on issuing infrastructure bonds to finance it.

Low multiplier A glaring omission from the S&P report is any mention of what happens if Russia spends on infrastructure.

Despite discussing Russia's BRIC peers,

20

I Eastern Europe

S&P gives no estimate for Russia's multiplier effect. Given S&P estimated the multiplier for the other members of the BRIC quartet at between 2.0 and 2.5 times, Russia presumably has a similar number.

But omitting estimates of Russia's multiplier perhaps has something to do with the size of it being a contentious subject. In their book, “Russia After The Global Economic Crisis”, Aslund, self-exiled top Russian economist

bne February 2015

enterprises and spend these funds for direct support of Russians suffering from the crisis," the academics argue in their book.

Will Russia's infrastructure spending make a positive difference? Now we will find out. The Kremlin has no choice but to make reforms and reduce corruption if it is to avoid a Latin American-style decade of stagnation. Long-term Russia watchers are hoping that Putin will replace Russian Prime Minister Dmitry

“All the benefit is eaten up by corruption and accrues to the oligarch lucky enough to win the contract” Sergei Guriev and fellow of the Centre for Strategic and International Studies Andrew Kuchins wrote: "Most recent detailed studies put the size of the multiplier at 1, ie. GDP increases only by a dollar in response to a dollar increase in government expenditures." The problem is that all the benefit is eaten up by corruption and accrues to the oligarch lucky enough to win the contract, rather than to the economy as a whole.

Russia is not alone in this problem; consultants McKinsey & Co. estimated in 2013 that even in the developed world infrastructure projects could generally be completed at two-thirds of current costs if they are evaluated, planned and executed more carefully.

However, in a worrying sign that nothing has changed in Russia, on January 14 the Kremlin announced that the winner of a tender worth billions of dollars to build the Kerch bridge to link mainland Russia with the newly annexed Crimea peninsula was Russian President Vladimir Putin's former judo partner and billionaire Kremlin insider Arkady Rotenberg.

Examples of demonstrably expensive infrastructure investments in Russia abound. "As we argued earlier, it is better to withdraw subsidies from inefficient

Medvedev with the well-respected former finance minister Alexei Kudrin to oversee the process. But more likely Putin will simply hunker down and spin out Russia's cash reserves for as long as he can. Keynes himself foresaw the essence of this problem: “The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

The future is probably not as bleak as Russia hawks like Aslund make out, as the Kremlin has already taken its first faltering steps towards cracking down on corruption and begun the process of making structural reforms.

Medvedev, speaking at the Gaidar forum on January 15, stated: "Russia needs to completely transform its economic model."

Keynes argued that ultimately it is hard to get the infrastructure spending completely wrong because ordinary people aspire to a better life and will find a way to cope, even if it takes time.

"This [Great Depression] is a nightmare, which will pass away with the morning.

For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life… and will soon learn to afford a standard higher still. We were not previously deceived. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time – perhaps for a long time," Keynes wrote in the “Nation and Athenaeum” published in 1930.

The Effects Of An Increase In Spending Of 1% Of GDP (Ranked by multiplier effect, highest to lowest) Country

Multiplier effect (2015-2017)

Projected job gains (maximum above baseline)

U.K.

2.5

343,000

Brazil

2.5

418,000

China

2.2

600,000

India

2.0

350,000

Argentina

1.8

68,000

U.S.

1.7

730,000

Japan

1.5

31,000

Canada

1.4

61,000

Italy

1.4

136,000

France

1.3

109,000

Mexico

1.3

193,000

South Korea

1.3

14,000

Germany

1.2

157,000

Indonesia

1.0

38,000

Australia

1.0

5,000

Eurozone

1.4

627,000 Source: S&P

bne February 2015

Eastern Europe

I 21

department stores, can now go on a virtual shopping spree in Moscow or Paris, relying on Russian Post to deliver their purchases within a few weeks at most.

Russia’s tech sector defies downturn Ben Aris in Moscow

M

ost of Russia's economy will be in the proverbial dustbin in 2015, except for the technology sector. The gadget-loving Russians have been driving the explosion of e-commerce in recent years, which is now starting to spill over into technological innovation and software development.

Instead of the ruble's fall killing off online businesses, the first thing that Russians reached for was their mouse. Russia's e-commerce sector now accounts for 10% of GDP and is expected to expand by another 20-25% to reach RUB1 trillion ($17bn) in 2016, almost double its size in 2013 of RUB520bn, according to Russia's Association of Online Vendors.

The penetration of online shopping leapt to the fore during the devaluation of the ruble in December. In the space of two days the ruble dropped from RUB53 to the dollar to RUB80 at its low point in the middle of December. Exchange ratesavvy Russians immediately logged on to online retailers to buy up things like computers and phones at the suddenly reduced prices before manufacturers had a chance to react to the collapse

of the ruble. Apple's Russia online store was forced to close after it was bombarded with orders for the latest iPads and iPhone 6, which (briefly) cost a third less than the same products in London or New York stores.

And a few days later, consumers in neighbouring Commonwealth of Independent States (CIS) countries, such as Belarus and Kazakhstan, went

Russia already has more internet users than Germany and growth of the internet in the regions is expected to drive overall growth this year. The AITC expects that the number of internet users in Russia will reach 73mn people by the end of 2015. Russia is currently in the "fat" part of the e-commerce growth curve, where a critical mass of users has started to buy things online, but online shopping is still not part regular shopping habits: only half of Russia's internet users purchase online, while in the UK the number is closer to 80%.

Heads-up Computers, smartphones and e-shopping have become part of everyday Russian life, creating the virtual platform for innovation. Despite its reputation for exploding televisions in Soviet times, modern Russia is starting to tap into its former prowess in the military and hard science fields to develop new technologies in the real world too.

In December Livemap, a small Russian tech start-up, launched the world's first 'smart' motorcycle helmet featuring built-in GPS navigation, complete with a Star Wars-like display on the helmet's windshield that is based on fighter pilot 'heads up' technology. The company was

“Yandex Search will become the default search experience for Firefox in Russia� on shopping sprees in Russian stores, snapping up the now comparatively cheap ruble-priced goods. Online orders for goods sold in Russian stores spiked to historic levels.

Russia's geography is partly why internet retailing is doing so well; even residents of the most remote regions, who were limited to their local produkti or the ubiquitous Universalnyi Magazin

raising money at the end of 2014 and the helmet is supposed to go into production this year.

Further advanced is the Russian-made Yota phone. Yota is a leading provider of mobile internet services. However, last year it launched the first ever Russianmade smartphone that has a regular screen on the front and an e-book reader on the back.

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I Eastern Europe

Beeline to Belarus online

Ben Aris in Moscow Frustrated with limited choice and backward stores, the increasingly techsavvy Belarusians are doing more of their shopping online. But with $3bn of hard currency flowing over the border as a result, the cash-strapped government in Minsk is unhappy with its citizens’ new shopping habits.

As with everywhere in Eastern Europe, the Chinese e-commerce giant Alibaba Group has been stealing a march on other online retailers. It reports that Belarus now ranks as its fifth largest overseas market, outspending even the US and Canada on "Single's Day" – a Chinese anti-Valentine's day that celebrates single people on November 11 and is one of the biggest shopping days in the world. This year Alibaba made $9.3bn in sales on Single's Day, with Russia spending the most of all its overseas customers.

Internet usage is growing fast in Belarus. The state has set up a highly successful technology park and the republic is earning good money from home-grown companies writing software for overseas clients. According to research by the Analytic Centre of the Presidential Administration, as of autumn 2014, 62% of Belarusians used the internet, and around 50% of them were mobile internet users. With the volume of online sales rising fast, last June the online payment provider PayPal established operations in Belarus to make online shopping even easier.

The Russian ruble crash has been a boon for Belarusians, who have rushed to buy electronics, consumer durables and cars with their Belarusian rubles after the Russian currency’s value collapsed at the end of 2014. And importing their purchases back home has become even easier after the last of the border restrictions were removed on January 1 as the Eurasian Economic Union came into being.

Foreign holidays have been in particular demand, as the falling value of the Russian ruble has forced Russians en masse to cancel their now increasingly costly foreign trips; Russian tourist agencies have slashed prices in response, and for Belarusians tickets to exotic locations have suddenly become much more affordable and they were snapping them up in December.

But it’s still early days for e-commerce in this still-isolated ex-Soviet state, with just one in five Belarusians shopping online and one in 20 shopping overseas, according to a study by MASMI, a British market research company.

And with only around $5bn in foreign currency reserves at hand, the Belarusian government is not happy with its citizens spending such amounts of hard currency overseas; in September, President Alexander Lukashenko threatened to introduce a special tax to curb such shopping habits. "[The West] criticises us for being a poor country, but our people send $3bn abroad annually and import goods which we also produce ourselves,” the president said. “So I have already ordered a decree – if you go abroad, you pay a $100 fee and then you are welcome to buy things. [This way] people would go to our shops and buy our refrigerators instead of carrying them from abroad."

bne February 2015

The device has been well received, but sales outside of Russia are mediocre. So the company launched a $100mn private placement in November to raise funds to develop the YotaPhone 2 and market it to the rest of the world. A spokesperson for industrial corporation Rostec, which holds 25% in Yota Devices, confirmed that the smartphone maker is looking for investors.

But the big gun in Russia's tech universe is Luxoft, Russia's flagship tech company. Luxoft split off from its parent, leading Russian software developer IBS Group, through an IPO that valued the company at $684m in June 2013 to concentrate on international clients.

Although the company has almost no brand visibility, the chances are that your mobile phone, car and the plane that takes you on holiday are running Luxoft software.

Luxoft's biggest market is the US, which accounts for a third of its revenue, followed by Germany with 17%, president and founder Anatoly Karachinsky told bne IntelliNews in an interview at the time of the IPO. And the company hopes to raise its revenue from $398mn in 2013 to over $1bn by 2019; sales in 2014 were $520mn and the company hopes to top $661mn of sales this year.

At the same time US companies are travelling in the other direction. Google expanded into Russia but has managed to gain only a fifth of the market for searches against Yandex's three quarters. In November browser-maker Mozilla decided to pre-install Yandex as the default search page for its Firefox browser in Russia. “Yandex Search will become the default search experience for Firefox in Russia… Google, DuckDuckGo, Ozon.ru, Price.ru, Mail. ru, and Wikipedia will continue to be built-in as alternate search options," Mozilla said in a statement. “Google has been the Firefox global search default since 2004. Our agreement came up for renewal this year, and we took this as an opportunity to review our competitive strategy and explore our options.”

bne February 2015

Eastern Europe

I 23

The bailiffs are back Russia's debt collection agencies (DCA) appeared almost as soon as unsecured lending did, pioneered by Rustam Tariko's Russsky Standart bank in 2001.

In those days anyone with a face and a passport could take out a short-term loan.

Elena Dokuchaeva cut her teeth working in the retail department of a Russian high street bank, but left to found Sequoia Credit Consolidation in 2003, today Russia's leading DCA. She is backed by a group of private Russian investors, and more recently US investment firm Goldman Sachs bought a "significant" minority share in the flourishing firm, says Dokuchaeva.

Meet Russia's repo (wo)men Ben Aris in Moscow

C

onsumer credit has been booming in Russia for more than a decade, but 2014 was a watershed year because the amount Russians spent on servicing their personal loans for the first time overtook the amount of new loans they took out. Having gorged themselves on the fruits of capitalism the consumer durables, foreign holidays and fancy smartphones – Russians who over-extended themselves have just met the unpleasant side of the market system: the repo man.

Retail loans soared in recent years because they were one of the most profitable businesses available to banks in an otherwise moribund economy.

But at the end of 2013 Alfa Bank's chief economist, Natalia Orlova, pointed out that Russians were increasingly taking out new loans simply to pay off old loans – from having virtually no debt for most of the last two decades, the Russian consumer was suddenly starting to look overleveraged.

Alarmed by the inflationary dangers of a potentially system-wrecking consumer

loan bubble, the Central Bank of Russia (CBR) poured a bucket of ice water over the business in 2014 by hiking prudential reserves requirements and capping the interest rates that banks can charge, which has just gone into effect, nipping the problem in the bud.

At the end of 2014 the CBR estimated the total outstanding consumer loans

Walking into Sequoia offices in central Moscow close to Mayakovskaya square is an anti-climax. Instead of lots of muscle-bound men sitting about in leather jackets smoking and drinking coffee, the modest office looks like any other as clerks pore over computers studying statistics or sending messages to the three call centres, one in Moscow and two in Russia's regions. It turns out that most people are willing to pay their debts off and only need some help in organising their finances. "Pretty much from the start we have tried to be ethical collectors," says Dokuchaeva. "We don't use strong-arm tactics and indeed often all that that is needed is to speak over the phone or send an SMS to convince people to pay. The occasions where

“We don't use strong-arm tactics and indeed often all that that is needed is to speak over the phone or send an SMS to convince people to pay” portfolio at RUB646bn ($10.7bn), of which 5.79% was delinquent. That was up from 3.7% at the start of the crisis period in 2009, and it will probably grow further in 2015, albeit modestly now the CBR has clamped down on the business. But banks are still left with the problem of collecting on bad debt.

we send representatives around to the house of the debtor is not very often, not to mention very expensive."

In 2007 Sequoia got together with several other leading DCAs and set up the National Association of Professional Collection Agencies (NAPCA), which

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now has 30 of the biggest companies as members – although there are more than 1,000 companies working in the debt collection business in Russia, many of them simply a couple of guys with phones.

The business is still essentially selfregulating because while court bailiffs exist in Russian law, the whole concept of private debt collector remains undefined. On July 1, a new law on consumer loans came into effect and more changes to the civil code are planned this year that will define the status of the DCAs and give them access to people's credit histories; currently only banks are entitled to look at someone's credit history.

In the meantime, the members of the NAPCA limit themselves to calling people during office hours and threatening behaviour is banned. If a representative is sent to someone's house, then they are obliged to leave a flyer that includes a company telephone number where the debtor is encouraged to report any abusive behaviour. "And we fire people for not following the code of conduct," says Dokuchaeva. "We have to, as it’s the only way you can be sure you can sleep at night" Numbers game There is no need to send the heavies round to collect overdue payments, because like most other business lines in consumer banking, debt collecting is more than anything a numbers game.

Dokuchaeva says the first thing Sequoia does is parse the accounts by type and then assign a method. In most cases little more than a few SMS messages or a phone call from the call centre is enough to prod the debtor into making payments. In the more difficult cases, the company might restructure the debt and concentrate on at least collecting the interest payments and leave paying off the principle part of the debt for later. The key, says Dokuchaeva, is to be cost effective and politely persistent.

"We are still trying to collect debts that people took out as long ago as 2007."

And Sequoia doesn’t have to collect

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many debts to make a profit. The business has grown exponentially in the last decade as banks increasingly outsource their debt collection efforts to the DCAs: estimates for the total value of problem consumer debts in Russia vary, but Dokuchaeva estimates banks sold a total of RUB200bn ($3.3bn) to DCAs in 2014 and gave the agencies authority to collect the same about on the banks' behalf on a commission basis, effectively outsourcing the job to the DCAs. These commissions make up around 85% of Sequoia's income. "About a third of the delinquent debt is placed with DCAs at any given time," says Dokuchaeva.

"However, estimating the size of the overdue loans is difficult because many of these debts are offered to several DCAs consecutively and so totting up the amounts outstanding mean that figures are counted several times."

Retail banks all have debt collection departments and typically try to collect the debt themselves several times before turning to the DCAs, which are paid on a commission basis. Finally, if that doesn’t work, the banks sell the very worst debt to DCAs, which were typically paying 2.33% of the face value of these debts last year. It sounds like a very deep discount, but Dokuchaeva points out that Sequoia can spend about five years on trying to collect the debt, which incurs significant personnel costs.

Financial illiteracy Russia's economic slowdown and the CBR's efforts to cool the business caught an increasing number borrowers out, while the central bank's decision to hike the policy interest rate to 17.5% in December will only make things worse for borrowers in 2015.

Even before the ruble currency crisis broke, Sequoia says the demand from the debt repayment departments in banks went shooting up and some banks are only waiting seven days before handing over the work of debt collection to the DCAs. Dokuchaeva complains that not only are banks offering more debts sooner, but the volatility and uncertain outlook for the economy is making it impossible for DCAs to price the debt that they buy from banks.

But the main problem remains that the average Russian is almost completely financially illiterate. "Based on the research we did, we found that most Russians only plan their finances one or two months in advance, and less than 10% plan for more than one year in advance, which is currently the average length of the loan," says Dokuchaeva.

Put in other terms: before the consumer debt bubble started to grow, the average Russian owed approximately one month's salary to banks, but that has doubled in the last two years to RUB70,000 ($1,200 at December exchange rates), or a bit more than two average monthly salaries. This remains a relatively low 17% of GDP and is the sort of sum that can be raised from friends and family if necessary; so the rise in consumer non-performing loans does not threaten the whole economy.

"The problem with the debt is not the size, but the fact that most of it is unsecured credits, credit cards, or point of sale debt. It's a very expensive form of borrowing and people were overloading themselves," says Dokuchaeva. "The easiest debts to collect are mortgages; there the recovery rate is up to 100%, but that needs a court case to resolve."

Sequoia estimated that Russians had an average of 1.7 loans each in November, up from 1.5 in 2013, but Dokuchaeva says the record was one man who had taken out more than 20 credits at once.

The amount of time it takes for people to get into trouble has fallen too: in 2013 loans went bad after seven months; in 2014 it took just 4.5 months.

"As a rule of thumb if someone has more than five bad debts simultaneously, then you can expect to never get your money back," says Dokuchaeva. "Collecting debts is important if Russia aspires to be a consumption-led society where people need to learn to borrow responsibly.

This is part of the learning process we have to go through. Still, in Russia there is a tradition to clear your debts before the end of the year and so we normally collect twice as much in December than any other month of the year."

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earnings growth, thanks to Russia's large and increasingly affluent consumer market.

That won't happen in 2015, as poor economic growth is putting pressure on earnings. Real incomes turned negative for the first time in a decade at the end of 2014, poor economic growth, high inflation and an absence of domestic investment are all going to push consumption down and so will drag stock prices down with them.

Finally, the Russian market has almost totally decoupled from the rest of the world's stock market performances and become a special case in the minds of most investors, pushing valuations down, as the news has been unremittingly bad.

OUTLOOK 2015:

Russia doomed to recession Ben Aris in Moscow

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he outlook for Russian equities in 2015 is at best unpredictable and at worst dire. The outcome will depend heavily on the outlook for oil.

Given the uncertainties over where oil prices are headed, it is already clear the previous highs set pre-crisis in May 2008 of 2487 for the RTS and the post-crisis record of just over 2000 will not be obtained in 2015.

The Russia story of consumer-led fast growth, high margins and increasing penetration has got lost in the Katyusha barrage of bad news. The economy and political news have become the main drivers for stock prices. "The Russian financial markets have become increasingly driven by domestic news flow rather than global sentiment," Uralsib said in a report.

Politics was written large over the stock market's performance in 2014. The market tumbled hard following Russian President Vladimir Putin's decision to annex Ukraine's Crimea in March, but then rallied through to September

5 when a summit in Minsk agreed a ceasefire. However, the failure for real peace to take hold subsequently meant the RTS Index remains bound in a range of approximately 1,100-1,400 and is unlikely to break out unless there is

According to Uralsib, the 52-week rolling correlation of the RTS with the MSCI World has dropped below 0.3, while the correlation with emerging markets remains just above 0.5, while the domestic story is being ignored. "The main factors that investors are reacting to these days are on the economic front.

These factors include the ruble dynamics, oil prices, capital outflows and indicators of the level of stress in the financial system," says Uralsib. "Political news with the potential to trigger new economic sanctions has become the second most

“If east and west can settle their differences in an amicable way, then Russian stocks should rally strongly by at least 20-30%� significant progress in the international diplomatic situation.

Bad news at home is also pulling prices down. Russian stocks have always traded on a price/ earnings (P/E) multiple in the single digits, whereas the other leading emerging markets have re-rated and trade on multiples in the teens. However, Russia's stocks have generally outperformed their emerging market peers on the basis of strong

important factor. The last time the Russian markets were correlated this weakly with the global markets was in 2002-04, when Russia was barely on the radar screens of international investors."

A clean outcome to the Ukraine conflict will be the big driver for the Russian stock market performance and is the only chance for an outperformance for stocks. If east and west can settle their differences in an amicable way, then

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Russian stocks should rally strongly by at least 20-30% just to get back to where they have always been.

Some funds were venturing back into the market at the end of 2014 simply because the stocks were so cheap that the downside risks seemed minimal, but the upside possibilities so large as to be tempting.

Oil on the road The oil price is the other wild card in 2015. The rule of thumb in the past is that the RTS should be 20-times the price of oil, but a bne study found that averaging the multiple over the entire

were roughly the same, but the two have diverged as the RTS is a dollardenominated exchange and MICEX ruble-denominated; devaluation has caused the RTS to fall faster than normal whereas the MICEX has seen gains.

This rule is far from perfect. In bad times the ratio of oil prices to the RTS Index value has fallen into the low teens and in boom times it has climbed as high as 30-times the price of oil. However, the ratio has been much less volatile than the RTS Index itself.

Despite the terrible news, the actual ratio of oil prices to the RTS Index was 13.26

“The Russian stock market has almost totally decoupled with the rest of the world's markets” history of the Russian stock market, the actual ratio is closer to 15.61-times the price of oil.

However, this rule has broken down somewhat in the closing months of 2014.

In the past the MICEX and RTS indices

in the middle of December. This is bottom of the range for the oil/prices ratio; the last time the ratio was below 13 was in September 2008, following the Lehman Brothers collapse, where it sank to 10.8 in October 2008, before slowly recovering to 20 again by the end of 2009.

The average oil/price ratio over the last five crisis years has been much higher at 16.5, despite all the horrendous news, which would imply a fair value for the RTS Index in December of 1,117 with $67.7 oil, or an increase of 5.7%. However, if oil returns to $80, as predicted by the 2015 budget, the RTS Index should trade at 1,320, or an upside of 25% from December's levels (assuming a crisis-years average multiple of 16.5 from between September 1, 2009 and September 1, 2014).

For comparison, Uralsib's base case scenario, which assumes oil at $102 and a stagnating economy, forecasts an RTS index of 1,190 for end-2015, barely above the level of December 2014.

This would leave the RTS Index inside the 1,100-1,400 range where it has been trading for most of the last three years and so doesn’t seem unlikely. However, for stock prices to break out of this range oil prices would have to return to close to $100 and the Kremlin would have to make some convincing structural reforms before investors took a bigger punt on Russian stocks.

A full version of this Outlook 2015 can be found at www.bne.eu

Russian foreign exchange reserves (excl. gold)

Russian foreign exchange reserves (excl. gold)

600,000

500,000

400,000 30 Nov, 2014: $361bn 300,000

200,000

100,000

Source: Central Bank of Russia

0 2002

2004

2006

2008

2010

2012

2014

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Photo: Yakub88

Czech foreign policy in spotlight as Havel doctrine questioned Robert Anderson in Prague

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wenty-five years after Vaclav Havel led the Velvet Revolution that brought down communism in Czechoslovakia, and three years after his death, the former president’s long shadow over Czech foreign policy is finally being seriously questioned for the first time.

Within the past two years, a new populist president and a Social Democrat-led government have begun to sketch out a new foreign policy that tries to balance Havel’s support for the US and concern for human rights with the country’s economic interests. This has sparked outrage from the opposition, the media and the diplomatic establishment.

This domestic battle is being played out as Nato and the Czech Republic face their most severe geopolitical challenge

since 1989 in the Russian aggression against Ukraine, raising the stakes for the country’s foreign allies.

There was a serious clash at the EU summit in August when the Czech Republic, Slovakia, Hungary and Cyprus refused to back stronger sanctions against Russia, only to back down a week later. It was “not impressive,” according to one Western diplomat in Prague.

As Prime Minister Bohuslav Sobotka prepared to visit Washington on November 18-19 for the unveiling of a bust of Havel in Congress, diplomatic sources told bne IntelliNews that there were frantic efforts to head off a threatened snub by US officials. In the event, Sobotka dutifully paid homage to Havel’s legacy and was rewarded with a longer than planned meeting with Vice President Joe Biden.

Lone voice The Czech Republic’s difficulties illustrate the problems that small European countries have when they try to change foreign policy and forge a distinctive stance that differs from the US line.

“The US does not allow anyone to oppose them, even if their own policy later changes,” says Jan Kavan, a former Social Democrat foreign minister, recalling US anger over Social Democrat opposition to siting a US anti-missile radar in the Czech Republic, even though these plans were subsequently abandoned by the incoming Obama administration.

Havel instinctively followed the US line as president, partly as gratitude for the US’ vocal opposition to Communism, but mainly because he viewed US and Czech interests as identical on the big issues.

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What was distinctive about his foreign policy was its emphasis on human rights, stemming from his moral stature as a dissident, but also consciously harking back to Tomas Garrigue Masaryk, the founder of Czechoslovakia.

"Havel: A Life" – by Michael Zantovsky

While Havel was president, his personal commitment to human rights and his close ties to the US enabled the Czech Republic to punch above its weight in foreign affairs. Yet the country never won the human rights credentials of, for example, Norway or Sweden, precisely because it remained too close to the US.

Václav Havel was an unlikely leader of the Velvet Revolution that brought down communism in Czechoslovakia. Self-critical and self-effacing, Havel looked with a playwright’s eye at his own performance and found it wanting.

“I am too polite to be a good dissident,” he once said.

Havel lost much international credibility by backing the controversial US invasion of Iraq in 2003 (when the then Social Democrat-led government was split).

He also tended to focus on human rights abuses in far-flung communist countries such as Cuba or Burma – where Prague had little historic connection or influence – and said little about arguably much greater crimes closer to home, such as Israeli killings in occupied Palestine.

His foreign policy had already lost much of its force under his rightwing successor, Vaclav Klaus, who like Milos Zeman, the current president, prioritised Czech economic interests during a period of the global and then Eurozone financial crisis.

At the same time, the automatic Czech identification with US foreign policy took a battering from US President Barack Obama’s switch of focus from Europe, and his cancellation of the missile shield policy, which had become a totem for the Czech right wing. “Czech Atlanticists have become disenchanted and disorientated,” Pavel Barsa, a researcher at the Czech Institute of International Relations (IIR), told a foreign policy symposium in Prague in November.

The result was a foreign policy that was still lauded by the media and the diplomatic establishment, but which had never had much popular domestic support and had now lost much of its political backing. “Havel’s foreign policy is no longer supported by any significant political force now,” says Kavan, who battled constantly with Havel while he was foreign minister.

Robert Anderson in Prague

But according to Michael Zantovsky’s definitive new biography, “Havel: A Life”, he was also the “only plausible candidate”. He shows how Havel, who died three years ago, was a “natural born leader” through the quiet force of his personality, and how he networked tirelessly during the deep slumber of Czechoslovakia after the 1968 Russian invasion.

Zantovsky, Havel’s one-time spokesman and currently the Czech ambassador to the UK, shows how Havel only felt compelled to enter politics once the 1968 invasion snuffed out the hope of ‘socialism with a human face’ that had been born in the liberalisation of the Prague Spring. Subsequently, Havel set out what Zantovsky calls his political manifesto in “The Power of the Powerless”, where he argued that citizens could defeat totalitarian regimes by “living in truth” and refusing to give them the empty public approval they crave. Now blacklisted, Havel patiently pursued this vision throughout the 1970s and 1980s, helping to found the Charter 77 dissident movement and going to prison in 1979 for nearly five years.

Yet Zantovsky exaggerates the importance of the Czech dissident movement, which was more of a counter-culture than a serious threat to the regime before 1989. The Charter 77 petition on human rights only ever succeeded in attracting 1,889 signatories.

By the autumn of 1989, the East Germans, Poles and Hungarians had already had their revolutions, and when a student demonstration finally sparked off the uprising in Prague in November that year, Havel was actually relaxing with one of his mistresses at his country cottage.

Nevertheless, once he had rushed back to Prague, he was the natural choice to take charge of the Civic Forum movement and then become president.

“The logic of the piece inexorably led him to assume the leading position,” writes Zantovsky. “He finally ‘fell’ into the role.”

Havel’s great achievements were to harness the tidal wave of revolt, and as the regime simply crumbled away without Soviet support, to make a peaceful, unified and joyful “velvet” transition to democracy. Afterwards this inevitably disappointed those who wanted a reckoning with the communists.

Zantovsky is more critical of Havel’s role after the revolution. His refusal to found, or at least bless, a political party to direct the transition allowed Václav Klaus – the technocratic finance minister who was later to become prime minister and then president – to push through a much more narrowly economic agenda. His other big failure as president was the division of Czechoslovakia in 1992. Here Zantovsky puts up a strong defence of Havel’s futile efforts to find a compromise and his controversial decision not to make a direct appeal to voters to stop the split.

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Rethink and reset In a sense, therefore, the new Czech government is starting a long overdue discussion on how to rethink a foreign policy that is increasingly divorced from political reality.

Under Petr Drulak, the wonkish deputy foreign minister who used to head the IIR, the foreign ministry plans to draw up a new blueprint before last Christmas, which will then be discussed with parliament.

Though Sobotka has been reportedly pressing Foreign Minister Lubomir Zaoralek to remove Drulak – and in Washington gave him a public dressing down by insisting that the country’s human rights policy would not change – he still enjoys the foreign minister’s backing.

The idea is to refine the concept of human rights, as Zaoralek explained to the IIR symposium: “A discussion about [human rights] does not mean the destruction of the principle.”

Foreign policy will continue to focus on human rights, but will aim to be more consistent, as shown by Zaoralek’s recent visit to Israel, where he met with the Palestinian side and dared to criticise the settlement-building programme. The Czechs have long been an EU outlier on policy towards Israel, but now pledge to be more even-handed in their approach.

“Policy based on one-sided anti-communist 'humanism’ risks being perceived as expedient and will lose credibility,” Drulak wrote in a commentary for the leftwing website Denik Referendum in January.

Secondly, the concept of human rights will be broader than just political rights – embracing social, economic, cultural, environmental and gender rights. “We have to look at the entire concept of human dignity,” Drulak told the IIR symposium.

Thirdly, it will be more focused on countries where the Czech Republic has some potential influence. The thinking is that there is no point antagonising China by gestures such as meeting the Dalai Lama, but it is worth funding Czech NGOs that work in Belarus.

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Most controversially, the policy will be integrated with the promotion of Czech economic interests, and aimed at achieving concrete results, rather than being pursued for its own intrinsic worth.

Drulak argues that there need not be an inherent conflict between human rights promotion and Czech economic interests – for example, Prague can use economic aid and advice to help countries develop, this can improve their respect for human rights, and eventually it will also benefit Czech companies.

Rather than ostracising countries, dialogue should be maintained. “We have to find a way to criticise without just shutting the door,” he told bne IntelliNews.

Break with the past However, rather than emphasising the continuities with Havel’s foreign policy, Drulak has publicly presented the shift as a conscious break with his legacy.

This has triggered fierce resistance from the country’s foreign policy establishment and worried the US. At the foreign ministry, which is the greatest believer of its own rhetoric about the country’s human rights mission, the new stance has led to resignations and demoralisation.

Critics argue the new stance risks destroying the country’s reputation as a human rights crusader and staunch supporter of the US. “Why should we change [our foreign policy], why should we make our allies doubt where we are heading?” said Petr Fiala, head of the opposition Civic Democratic Party (ODS), at the IIR symposium.

conflict in Ukraine a “civil war,” criticised Western sanctions, and recommended the country’s “Finlandisation” (an agreed neutral status between Nato and Russia).

PM Sobotka, on the other hand, has tended to flip-flop between resisting further Western sanctions on Russia, and then trying to patch up relations with the US. Zaoralek himself has pursued an unexpectedly tough line on Russia, encouraging the West in the hope that the Czech Republic can still be relied upon to fall into line, despite the discordant noise.

“When they have to step up to the plate in Nato they always do it,” says a Western diplomat in Prague.

But Zaoralek has a weak base inside the Social Democrats and a new round of tougher Western sanctions on Russia could make him a scapegoat for party unrest.

The timing of all this internal debate could not be worse, with Ukraine painfully highlighting the divisions. “It is dangerous to rebuild the ship while it is sailing, especially when the sea is not calm,” Jiri Schneider, Drulak’s predecessor as deputy foreign minister, told the IRR symposium.

The result is – as during the 1999 bombing of Serbia in the Kosovo conflict and the 2003 invasion of Iraq – that the Social Democrat government is struggling to pursue a coherent independent foreign policy.

To allies, the shift is made even more confusing by the way the country now presents three foreign policies, that of Zeman, Sobotka and Zaoralek.

Backing the US at least made the Czech Republic feel important – even if in recent times it has had little real influence – while bravely following its own path risks either irrelevance or accusations that it is toadying up to Moscow.

Unlike neighbouring Hungary, which under Viktor Orban parades its rebellion, Czechs still seem too tied to the US to strike out on their own.

The president, who according to the constitution is a key foreign policy actor, has bad personal relations with both the premier and the foreign minister, and in any case by nature often shoots from the hip. He belittles human rights concerns and appears to almost seek out dictatorial regimes for visits. He has called the

All this confusion risks accelerating the slide in Czech diplomatic standing since Havel’s departure. As Zaoralek plaintively told the IRR symposium, for small countries foreign policy continuity and consensus are vital: “If we want to push something through we have to be unified in our position, it is imperative.”

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tionals juggling costs to avoid paying justifiable taxes.

On January 12, Tesco, the country's largest retailer and pioneer of 24/7 trading in Hungary, gave its judgment on the package: the UK-based hypermarket chain said it would close 13 out of a total of 222 stores in Hungary, with the loss of “about 500” jobs.

Then they came for the foreign retailers…

Kester Eddy in Budapest

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he Hungarian government had a decidedly upbeat New Year message for any high-flying executive pondering a move into Central Europe. “Foreign investors continue to regard Hungary as an attractive business destination,” Antal Nikoletti, deputy state secretary for external economic relations at the Ministry for National Economy, told state news agency MTI on the eve of 2015.

tions of a package of new laws that will seriously affect their business risk and profitability.

Leaving town In a carefully constructed interview on YouTube, Nigel Jones, chief executive of Tesco Hungary, said that while his business had been “pretty much the top performing country in the whole of the Tesco group,” recent legislation meant “we can't trade on Sundays… or overnight,” which, along with “various other taxes and supervision charges,” threatens profitability. “We must stay profitable here to continue to be able to operate,” he continued, in an apparent reference to the legal threat of closure.

Hence the “tough decisions” that had to be taken.

Zoltan Kovacs, the Hungarian government spokesman, attacked the Tesco reaction, saying it was “unfair” to blame store closures on government measures.

Rather, Tesco's “aggressive” and unprofitable expansion programme in Hungary, along with massive losses in the parent company's UK operation, were the reasons for the cuts. Kovacs said Hungary would continue to view Tesco as a strategic partner, but its management “must be restrained and tell the truth.”

Not only is Hungary “in the forefront among European countries as an investment destination,” he argued, but reports of a supposed “unpredictable legal environment” are well off the mark: there is “continuous dialogue” between the government and foreign investors, he stressed.

Specifically, legislation passed before Christmas bans Sunday and overnight trading at all but small shops: inspection fees for businesses with incomes of over HUF50bn (€160mn) are to become progressive, leading to a leap in total fees for the largest companies from HUF2bn in 2014 to HUF30bn this year: and, from 2017, any business above the same HUF50bn threshold that reports losses for two consecutive years must be closed down. The government said Hungarians should be free to rest on Sundays, and justified the financial measures as necessary to help Hungarian-owned small businesses and combat large multina-

From these words, it would appear unlikely Nikoletti shared a wee Hogmanay dram with any of Hungary's large foreign-owned retailers, whose bosses spent December frantically trying to fight, and fathom, the implica-

"I know some incensed managers went to the ministry to protest, but by then the decisions had been made"

But Tesco is not alone. Dutch retail chain Spar, ranked by Trade Magazine as Hungary's fourth largest retailer with turnover of HUF454bn (¤1.5bn) in 2013, has also announced it will slash investment this year from a planned ¤59mn to €25mn, all down to the legislative changes. Spar said it expects the costs of the inspection fees to hit HUF9bn

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Up in smoke Kester Eddy in Budapest While foreign investors in Hungary – from banks to utilities to retailers – have long complained about their treatment under the governments of Prime Minister Viktor Orban, they had ample warning: after his sweeping election victory in 2010, the government announced its intention to “restructure” and “reclaim” ownership of various sectors which, in the eyes of his Fidesz party, were somehow 'strategic' or where foreign owners had supposedly abused their powers.

Less well known are the government’s controversial moves to re-order various segments of the local economy: independent media dubbed the most notorious of these moves in 2013 the trafik mutyi, a Magyar euphemism that roughly translates to “our little tobacco fiddle”. This was an attempt, the government said, to reform the sale of tobacco products in the country.

According to government talk at the time, the reform was both to help create “family businesses” and to protect minors from the evils of cigarettes. Under the new system, the general sale of tobacco would be banned, and only specially licensed shops, acting under a state monopoly, would have the rights to such trade nationwide.

Fine on paper, perhaps, but even during the licensing process conditions abruptly changed – including the right of the new outlets to sell, for example, alcohol and ice cream (which, as critics pointed out, was an interesting method to deter interest from minors).

And pretty soon, many traditional Hungarian tobacconists – who in theory were guaranteed a seamless transition into the new system – found themselves disenfranchised, their particular family businesses now outlawed.

While smokers grumbled about higher prices, opposition media pointed to numerous cases where friends of Fidesz had won the new concessions. It was, said critics, the perfect example of legalised theft-cum-cronyism.

But a small group of incumbent tobacconists did not take kindly to their loss: centred on Laszlo Vekony, who had been a tobacconist in the western city of Sopron since 1994, they appealed to the European Court of Human Rights.

And on January 13, the court gave its damning judgment, ruling that the procedure of awarding tobacco concessions “appears to have been devoid of elementary transparency and of any possibility of legal remedies.”

Ordering the state to pay Vekony ¤15,000 in compensation and ¤6,000 in trial costs, the Court noted the transformation of the sector “was introduced by way of constant changes of the law and with remarkable hastiness, the loss of the old licence was automatic, and the non-acquisition of a new one was not subject to any public scrutiny or legal remedy.”

But while Mihaly Varga, the economy minister, said the government recognised the ruling and would pay the required compensation, the damage remains permanent: after 18 months of litigation, Vekony has not got his business back. Nor has the case helped remove doubts about the reliability of the business climate in Hungary.

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(€29mn) this year, some 28-times the figure in 2013.

Left-liberal opposition parties have condemned the ban on Sunday and overnight trading, saying it will cost jobs and restrict individual freedoms. “[These measures mean] about 20,000 workers in retail will lose their jobs, and about 100,000 workers on Sundays will lose their bonuses, worth an extra €20 per person,” Zoltan Lukacs, vice-chairman of the Socialist Party, tells bne Intellinews.

“Back in 2011, [Prime Minister] Viktor Orban himself admitted that while people are unable to make ends meet on a regular five-day working week, there was no way to close shops on Sundays.

It's the same today. We cannot agree to a Sunday [trading] ban in these circumstances,” he says.

Gyorgy Vamos, general secretary of the Hungarian retailers association (OKSz), calls the new measures “unfortunate” and “disproportionate”. “You must understand, this will affect not just the [stand-alone] supermarkets, but also the shopping centres and malls, which all contain supermarkets.”

As a result, loss of customers will inevitably have a knock-on effect on “all sorts” of associated businesses, from cinemas to cobblers, hotels and catering, he says.

Furthermore, Vamos argues that the measures “really only affect seven big foreign players” – namely Aldi, Auchan, Tesco, Metro, Lidl, Pennymarket and Spar, since the three large Hungarian supermarket chains – Coop, CBA and Real – are all structured in a way that none of their businesses exceeds the HUF50bn threshold. “You could say this all targets the foreign companies,” he says.

Asked if the Hungarian government had conducted negotiations with the multinational retailers, in line with Nikoletti's New Year statement asserting “continuous dialogue” with foreign investors, Vamos retorted: “They never consulted with us, not beforehand. After the legislation was passed, I know some incensed managers went to the ministry to protest. But by then the decisions had been made.”

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the Solidarity movement that ended up defeating the communists.

Chanting anti-communist slogans popular during the 1980s about chasing out the “red scum,” the crowd listened to Kaczynski comparing the current centrist government of Prime Minister Ewa Kopacz to that of the communists before 1989. “We have to remove the bag of rocks which is this government from the backs of our nation,” he said.

Photo: De Visu

Poland opposition’s frustration boils over

Allegations Kaczynski is trying to build his appeal by questioning the outcome of the local elections narrowly won by his party. The vote was marred by a very high percentage of spoiled ballots – almost 18% of those cast for regional assemblies. There were also problems with the vote count, which took a week to publish, and with the computer system of the agency in charge of running elections. Finally, the outcome was also surprising, differing from exit polls published right after the vote and giving an unexpectedly high level of support to the Polish Peoples Party, the junior member of the ruling coalition which finds its strongest support in villages and small towns.

Jan Cienski in Warsaw

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oland’s Law and Justice party (PiS) finally won an election in December after nine years of trying, but the victory was so marginal, squeezing out only a half percentage point win over the ruling Civic Platform party and taking fewer seats in regional assemblies than their centrist foes, that the party treated it more like a defeat than a win. Sensing its inability to win this year’s parliamentary elections and oust the hated Civic Platform from power, the PiS leader Jaroslaw Kaczynski has instead turned to the streets – but is this playing into the government’s hands?

To the frustration of the right-wing opposition party, it will only rule in one of Poland’s 16 regions – the same one it ruled before the November election.

No other party wanted to join it in a coalition, fearing their reputation for swallowing up the supporters of smaller partners. The outcome, with PiS win-

ning 26.85% of the national vote, also underlined that Kaczynski has been unable to break out of his party’s natural base – which tops out at about a third of the electorate.

Although there is no proof that the vote was rigged, that has not stopped Kaczynski from complaining that the election was “falsified.” During the march, he also attacked the judicial system, saying that judges were in cahoots

"The more radical Jaroslaw Kaczynski is, the greater the fear of Civic Platform voters and the greater their loyalty to it in the next elections" So on the December 13 anniversary of the 1981 declaration of martial law, when communist dictator Wojciech Jaruzelski used the army to crush the Solidarity labour union, thousands of Kaczynski supporters crowded into central Warsaw to denounce the government and the conduct of the November local elections. The irony is that both PiS and Civic Platform have their roots in

with President Bronislaw Komorowski to cover up vote fraud. The government had undertaken a campaign to “influence the courts: one could even say to terrorise the courts, and this with the participation of the president”, Kaczynski declared.

That particular comment prompted a sharp response from some of Poland’s

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Orban the (accidental?) genius Hungarian Prime Minister Viktor Orban is regularly called a Viktator, a patsy for Moscow and a corrupt administrator feeding his cronies at the expense of investors. On January 15, though, he looked more like a financial genius.

Central European markets were sent into a tailspin that day as the Swiss central bank dropped its cap holding down the value of the Swiss franc against the euro. Loaded with as much as CHF12bn of Swiss franc debt – a consequence of Hungarian borrowers having taken out lots of mortgages in the currency – Hungary was an "obvious risk hotspot,” noted Tatha Ghose of Commerzbank.

Until the turn of the year that is.

A controversial government scheme to force the conversion of such forex loans into forint was finally pushed through in December. Thus Hungary escaped by the skin of its teeth. Not so Poland – the much admired "star" of the region – which was left to take the biggest hit.

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most senior judges, who wrote that they were offended at Kaczynski’s accusations. The attacks smack of techniques popular with the government of Hungary’s Viktor Orban, whose right-wing Fidesz party has seized control of almost all of the state’s institutions, something that has alarmed pro-democracy groups and the EU. That is no coincidence. Kaczynski and his allies have called for “Budapest on the Vistula,” hoping to replicate Orban’s success in rebuilding Poland if they ever come to power again (PiS ruled briefly from 2005-2007).

The problem for PiS is that Poland’s other political parties well remember that short stint in power, during which it absorbed the followers of two smaller coalition partners, sent anti-corruption police against the leaders of one of those parties, and in the end destroyed both of them. That has made all other Polish parties wary of joining in a coalition with PiS. With no ability to form a coalition, PiS has to win this year’s parliamentary elections to both the Senate and the Sejm probably to be held in October.

But as the results of the local elections show, the party has a natural ceiling of support that it has been unable to shatter despite a decade of effort. PiS traditionally finds the bulk of its backing in the poorer and more conservative

east of the country, and generally does worse in the wealthier west and in larger cities. The latest election did show an uptick in support from voters too young to remember PiS’s controversial twoyear government, but Kaczynski is still far from being able to return to his old desk in the prime minister’s office.

However, by taking to the streets, Kaczynski ends up spooking the centrist voters who could help him increase his vote share. For years, Civic Platform has built the main thrust of its election campaigns less on a positive message of how to improve the country, but rather in warning of the disaster that would follow if Kaczynski were elected. Kopacz’s untried government is again seizing on that opportunity. The prime minister has already accused Kaczynski of trying to “set the country on fire.”

“Poles do not want more scenes of hate, they want calm in the country,” Kopacz said. “Kaczynski guarantees neither one nor the other.”

Michal Szuldrzynski, a columnist of the Rzeczpospolita newspaper, feels that Kaczynski is actually playing into Kopacz’s hands. “The more radical Jaroslaw Kaczynski is, the greater the fear of Civic Platform voters and the greater their loyalty to it in the next elections, despite their earlier disenchantment with the party,” he writes.

“We have to remove the bag of rocks which is this government from the backs of our nation”

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the Netherlands to discuss with shareholders the options for the fund going forward.

The choice is basically between liquidating the fund – “we reckon we can get 75% of NAV, but we’re going to have to write off all the costs that were invested in the structure and sell relatively quickly,” says Barker – or taking the necessary first step in getting the share price up from its current roughly €8, which is to pay a dividend.

Photo: Matthi

Central Europe's property markets show signs of life

BRICKS & MORTAR:

Nicholas Watson in Prague

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almer Capital, the UK-based real estate fund manager which beefed up its Central European business in 2012 by acquiring Middle Europe Investments, might not be about to build 5,000 apartments in a small town outside Prague as local media were reporting in November, but its plan to build 22 apartments in Uvaly is nevertheless a sign of the uptick in demand for Czech residential property.

“We took over this development project in Uvaly near Prague two and a half years ago and it’s been a millstone around our necks since then. But while the numbers may be another thing, the market is now showing that there is demand for those kind of units there,” says Ben Maudling, managing director of Palmer.

This project, along with many others, has been part of a huge effort by Palmer to restructure the struggling Dutch real estate fund manager that it acquired two and a half years ago, which at the time had €232m of assets under management in various markets of Central and Eastern Europe.

The bulk of that restructuring was to the main fund, the Emerging Europe Property Fund, which is listed on the Amsterdam NYSE Euronext exchange and consists of a variety of Czech and Slovak properties, mostly class-B and class-C office buildings. The financial restructuring is almost complete – “we led a savage attack on costs,” says Guy St John Barker, managing director of Palmer – and in December an extraordinary general meeting was held in

“To produce a dividend we would have to sell the poor properties – out of the 14 remaining properties we have identified seven as core and seven as non-core. We would sell the non-core, reinvesting the proceeds in new, more modern retail park properties in the Czech Republic and Poland, enabling us to diversify away from secondary offices and Slovakia,” says Barker, adding the goal is to have 40% of the portfolio invested in Poland, 40% in Czech Republic and 20% in Slovakia, with 40% in retail and 60% in office. Hungary, Palmer feels, has "decoupled" from the convergence states of Central Europe – Czech Republic, Poland and Slovakia – and is now more in keeping with Bulgaria, Croatia, Romania and Serbia.

And the shareholders’ views on the options for the fund? “There is some sympathy for liquidation [of the fund], but not overwhelming support,” notes Barker.

New money around The restructuring effort has also involved the refinancing of the existing funds, the outcome of which illustrates the extent to which most of the real estate markets in the region have recovered over the last few years. “Eighteen months ago we were struggling to get any banks other than existing financing banks to talk to us. But since then we’ve seen a definite recovery in the debt financing market and so we are now in talks with three or four new banks, which is providing some competition in terms,” says Maudling.

On December 18, Palmer refinanced the bigger portfolio of 55 properties with

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"What we haven’t yet succeeded in doing is to raise new funds with new investors for the region: that’s the next target"

Raiffeisen Bank International, the terms of which Palmer said would not have been possible a year ago. “There’s no doubt the financing has got a lot easier over the last 12 months,” says Barker.

As regards equity finance, Palmer reports seeing a lot more equity coming into real estate from a variety of sources, including sovereign wealth funds, Asia and the Middle East. That flood of money has gone largely into core property and into the established markets of Western Europe, but is also spreading into Spain and the Netherlands, where there are still distressed opportunities, and there is now evidence of that buying pressure pushing other institutions into looking at core Central European property markets.

Tajikistan

“The region is not attracting sovereign wealth funds from, say, South Korea, but the next tier down of institutional purchasers are perhaps being encouraged to buy core property in Prague with a yield of 5%, rather than in London where you are now down to about 3.0-3.5%,” says Barker. “You are seeing increasing

numbers of deals and increasing prices of core properties across the established markets of Central Europe. The question is, will that then spill out into a general upswing in pricing and demand across the whole region for all types of property?”

“Our view is that it will, but that this process has only just started,” he adds.

To sound a note of caution, Palmer says it is still not easy to raise fresh money from outside the region for new projects and funds in the region. “In our funds what we are finding is that we can raise new debt much more easily than we were able to, we can also raise new equity from our existing investors in our existing funds, and this year we’ve been able to raise new equity from new investors for existing funds, for example we launched a convertible bond for a property fund, a substantial part of which was taken up by new investors,” says Barker. “What we haven’t yet succeeded in doing is to raise new funds with new investors for the region: that’s the next target.”

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tion over the medium term. That has the bank offering a reasonably bright outlook of 2.5% next year and 2.7% in 2016. "We expect these broad trends to continue into Q4 and 2015 – that is, moderate economic growth driven by domestic demand," writes Deutsche Bank. "Household consumption should continue to grow at a reasonable pace as inflation remains low and labour market conditions continue to tighten gradually.

Investment will likely continue to the be the main driver of growth, both due to expanding private investment in the low interest rate environment and a pickup in government investment (mainly associated with a drawdown of EU funds).

On the other hand, net exports should continue to have a small negative contribution to GDP."

OUTLOOK 2015:

Long shadows stretch across Central Europe ong shadows stretch across the economies of Central Europe as they head into 2015. There was optimism a year ago that a fullyfledged recovery was finally underway.

However, stuttering growth in the Eurozone and the Ukraine geopolitical crisis have dampened export prospects, creating a challenging scenario for the small, open economies of the Visegrad Group of the Czech Republic, Slovakia, Poland and Hungary. That leaves it up to domestic demand – in the doldrums for so long – to pick up the slack.

zone for exports, leaving it vulnerable to a slowdown. Further, the overwhelming weight of the auto sector in the economy makes it susceptible to industrial cycles. A 9.9% drop in output from the auto industry in November led overall Czech industrial production growth to slow sharply.

The European Commission is slightly more optimistic, suggesting a reduction in the tax burden should help domestic demand continue to expand, Overall, it expects real GDP to grow by 2.5% in 2014, and to strengthen slightly to 2.7% in both 2015 and 2016. It believes growth in government consumption should strengthen further in 2015 on the back of a relatively strong increase in healthcare expenditure and higher absorption of EU funds. A planned increase in public sector wages and pensions and VAT and tax changes should also help keep domestic demand afloat, it says.

The economy remains exposed to external factors, said Capital Economics in December. "Sluggish demand from the Eurozone is still taking a toll on the industrial sector," it noted. "Com-

Hungary government driving solo Hungary’s economy outpaced all but the most optimistic expectations through 2014. However, the recovery remains overwhelmingly state-led, and analysts

Finally breaking free from its longest ever recession in the second quarter of 2013, the Czech Republic motored on strongly in 2014, driven by the central bank's suppression of the crown, which has helped exporters. Domestic demand is also finally perking up after several years, helped by the centre-left government’s easing of fiscal policy, adding another motor to drive economic growth.

"Hungary’s economy outpaced all but the most optimistic expectations through 2014" ing alongside strong retail sales data, it looks like domestic demand is becoming an increasingly important driver of the economy."

worry that without an upturn in investment from the private sector and bank lending, economic growth is set to fade in 2015 and beyond.

However, the country is still heavily dependent on demand out of the Euro-

Deutsche Bank plots Czech GDP growth at 2.4% for 2014, with little devia-

GDP growth in 2014 was robust, moving the European Commission to plot

Tim Gosling in Prague, Mike Collier in Riga

L

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economic expansion of 3.2% for the year. However, that strong performance is seen as almost exclusively due to government efforts. Strong state investment using EU funds has contributed most to stimulate the economy and the Magyar Nemzeti Bank's "Funding for Growth" remains the only meaningful lender.

Adding to that, the threat of the Eurozone slowdown is palpable for Hungary due to its strong exposure to demand for exports out of the single currency area. The main driver of growth in the private sector in 2014 has been expansions of capacity at its car plants, run by European manufacturers, and the associated supply chain.

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demand in Visegrad's biggest market has long set it to one side in the region.

While the country is still heavily dependent on demand for exports out of the Eurozone and – in terms of trade volume at least – is more exposed to Russian sanctions than most, domestic demand made it the only EU country to avoid recession in 2009.

The European Commission expects Hungarian growth to slow to 2.5% in 2015, and then further to 2% the following year. Deutsche Bank puts expansion at 2.4% for both.

The European Commission forecasts GDP growth will finish 2014 at 3%, before pulling back to 2.8% next year. A climb back to 3.3% is due in 2016 as exports revive, it suggests. Tipping Poland be the region’s best performer over the next few years, Capital Economics also looks for 2.8% GDP growth in 2015, but then predicts a surge to 3.8% in 2016. Citigroup is of similar mind, expecting a quicker return to growth for exports. That would see economic expansion relatively flat at around 3% in early 2015, before "significantly accelerating".

Capital Economics expects the crunch to deepen. "The government is likely to tighten fiscal policy following a blowout ahead of [the April 2014] election, which will remove a prop to domestic

Slovakian shoppers to the fore Domestic demand finally woke up in 2014, to offer Slovakia's large car plants some help in pushing the economy forwards. That's just in time, with the

"The Baltic states will find their 'upside' scenarios in 2015 to be modest and the 'downsides' to be potentially terrifying"

demand," the analysts write. They see growth sagging to 2% next year, before a slight revival to 2.4% in 2016.

Poland seeks solid growth drivers Poland’s economy lacked strong momentum in 2014. Robust recovery in the early months gave way to a summer lull in confidence caused by the raised tension with Russia. But better-thanexpected growth in the third quarter of 3.3% was accompanied by healthy data on retail sales and the labour market.

That suggests the Polish consumer is finally getting into gear, with investment also surging. The strength of domestic

country one of the most exposed in the region to demand out of the Eurozone.

The economy also suffers from a lack of diversification; its big-ticket exports led by cars, and to a lesser extent consumer electronics, are unlikely to fare well in the event of a deep slowdown in Europe. Capital Economics worries about "renewed weakness in Germany," in particular, predicting it "will weigh on exports over the coming quarters".

Consumption and investment is expected to do most of the heavy lifting. After three years of decline, and boosted by low interest rates and inflation, as well

as a relaxation of recent state austerity, domestic demand has already picked up this year. Those same elements are expected to continue to push in 2015.

The European Commission predicts growth at 2.4% this year, growing to 2.5% in 2015, and then 3.3% the following year. Citigroup and Capital Economics are both in broad agreement.

Baltics hope for best, pray worst doesn’t happen As neighbours and the stage on which Russia's conflict with, well, pretty much everyone is played out in a Phoney War way with Russian planes and ships buzzing the borders, the Baltic states will find their 'upside' scenarios in 2015 to be modest and the 'downsides' to be potentially terrifying.

While the mutual sanctions between Russia and the EU have hit certain sectors such as dairy farmers and logistics hard, they have not produced the complete meltdown some were predicting.

And there are signs that the crisis could have had the positive side effect of forcing exporters to seek out new markets, particularly in China.

According to Danske Bank's Baltic analyst, Rokas Grajauskas, “Domestic demand will be the key driver of economic growth in all three Baltic states in 2015-2016.”

“Despite China’s impressive economic growth over the previous decade, export shares to China have remained close to zero. Great export potential remains untapped not only in China but in other major growing markets, such as South East Asia, India or the MENA countries [Middle East and North Africa].”

In 2015, Danske expects growth figures for the Baltic trio of 2.3% (Estonia), 2.7% (Lithuania) and 2.9% (Latvia) in 2015, while Swedbank opts for 2.5% (Estonia), 3.3% (Lithuania) and 2.6% (Latvia).

A full version of this Outlook 2015 can be found at www.bne.eu

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Photo: Dusan Milenkovic

Photo: Faraways

Turkey tightens screws on critics David O'Byrne in Istanbul

T

France's Charlie Hebdo has made a career of ridiculing.

urkish Prime Minister Ahmet Davutoglu on January 11 took his place alongside his Western counterparts marching through Paris at the head of the demonstration organised in the wake of the brutal killing of 17 people at the satirical journal Charlie Hebdo and subsequent incidents. However, while Davutoglu’s presence at the demonstration against extremism and in favour of freedom of expression was likely welcomed by the European leaders he walked alongside, it struck something of a discordant note given recent events in Turkey.

Erdogan – an arrest that Davutoglu has publicly defended. Then there was the barring of members of Turkey's professional chambers from attending overseas congresses without government permission, pending a new law designed to replace the existing chambers with a new body under firm government control.

These include the arrest of two prominent figures in the Turkish media and a Dutch journalist on suspicion of promoting terrorism, and the arrest of a 16-year-old student on charges of insulting Turkish President Tayyip

"They just don't want anyone to criticise them"

These moves are less in keeping with the tone of the Paris demonstration of inclusiveness, freedom of expres-

sion and transparency, and more with the kind of unabashed hypocrisy that

Commenting on the presence of Davutoglu and representatives from other countries with poor records on media freedom, Christophe Deloire, secretarygeneral of press freedom group Reporters Without Borders, pointed out that Turkey ranks 154th out of 180 in terms of press freedom. “It would be unacceptable if representatives of countries that silence journalists were to take

advantage of the current outpouring of emotion to try to improve their inter-

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national image and then continue their repressive policies when they return home."

Je suis arrêté Davutoglu returns to a country where 845 reporters are reckoned to have been sacked since the anti-government protests that swept the country in mid2013 and where over 70 journalists are facing prosecution for reporting on allegations of government corruption.

The recent arrests on terrorism charges of Ekrem Dumanli, editor-in-chief of Turkey's Zaman newspaper group, and Hidayet Karaca, head of the Samanyolu TV group, are perhaps the most indicative of the way Turkey is moving.

Both organisations are strongly affiliated with exiled Turkish religious leader Fetullah Gulen, whose shady "Hizmet" organization was until around three years ago a prominent supporter of President Erdogan's governing Justice and Development Party. But their subsequent fallout led to the launching by police on December 19, 2013 of a surprise anti-graft investigation, and the emergence of evidence of widespread and deep-seated corruption in the higher echelons of government. The investigation resulted in the forced resignation of four senior ministers, which in turn resulted in the government furiously purging senior police and prosecutors responsible for the probe, and the eventual dropping of all legal efforts to have the corruption claims investigated.

Blamed for the launch of the probe and the subsequent leaking of tapped phone conversations implying yet more corruption, Hizmet was labelled first by the government as "the parallel state" and subsequently accused of terrorism, allegations which culminated in the above arrests on December 19 – the first anniversary of the launch of the graft probe. Timing scarcely less sinister than Hizmet itself, whose supporters blithely refer to it as "the movement" – albeit one which has no offices, no officers and no formal membership, and whose current predicament has worried many in Turkey more for the process it results

Anadolu gobbles up Migros

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

Anadolu Endustri will pay Migros' current majority owners, international private equity group BC partners, TRY26 per share, a premium of 36% on the share price on October 2 when talks between the two started, valuing the company at around ¤2.3bn. With 19.5% of Migros stock traded on the Istanbul Stock Exchange (BIST), this leaves BC also holding a 40.25% stake through it's affiliate Moonlight Capital, making it equal partners with Anadolu. In a statement the two companies confirmed that they plan to run Migros in partnership.

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

Buying into the group makes sound commercial sense for Anadolu Endustri on more than one level. Irem Okutgen, food and beverage analyst at Istanbul brokerage Garanti Yatirim, points to Anadolu Endustri's other business interests and those of the group's owners, the family holding companies of Turkey's Yazici and Ozilhan business dynasties, which between them own 43% of Anadolu Efes, Turkey's biggest brewer, as well as the fifth biggest in Europe and tenth biggest globally.

With over 70% of the Turkish beer market, largely through its flagship Efes Pilsen brand, Anadolu Efes has been particularly vulnerable to the policies of Turkey's ruling Justice and Development Party, which over the past few years has abandoned its previous laissez faire pluralist policies in favour of its own brand of increasingly authoritarian Islamic nationalism.

The past two years have seen the introduction of a blanket ban on advertising and sponsorship by alcohol producers, with Anadolu Efes forced to change the name of its basketball team Efes Pilsen to Anadolu Efes, and to abandon its Efes Pilsen music festival after 23 years. Less obvious and less advertised has been the effect on alcohol sales of changes in Turkey's retail sector, which is increasingly dominated by conservative family-owned companies that disapprove of alcohol on religious grounds.

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

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"It would be unacceptable if representatives of countries that silence journalists were to take advantage of the current outpouring of emotion"

from and less for the fate of those arrested, whose own record on supporting media freedom is less than spotless.

versive articles. Unfortunately freedom of expression has fallen to a very low level in Turkey.”

Commenting on the prosecution of journalists in an interview published in 2013, Bulent Kenes, editor of Zaman's English-language daily Today's Zaman, offered this: “Those who are jailed... are not people accused and convicted of journalism. Being a journalist cannot allow you to commit crimes.” A statement he shamefacedly admitted in a press conference in late December following the arrest of his colleagues was a "mistake."

Torturing the chambers More worrying even than increasing pressure on the media is the move by Davutoglu's government to clamp down on dissent from within the country's professional chambers – many of which have been at the forefront of launching legal challenges against government policies.

Whether or not those arrested have committed any crimes remains to be seen. However, if the arrest of Hizmet supporters on allegations of terrorism represents a new twist to Turkey's chequered record of press freedom, the arrest in January of Dutch journalist Frederike Geerdink on charges of making propaganda for a terrorist group is a sad return to an earlier paradigm of accusing anyone who reports on the PKK Kurdish terrorist group, of supporting it.

Unusually, Turkey's professional chambers are organised under the constitution, making them simultaneously part of a state apparatus that regulates and codifies the professions and NGOs, which operate independent from and often in opposition to the government.

Over the past decade the main chamber, of Engineers and Architects (TMMOB), which acts as an umbrella for 23 separate chambers, has emerged

as an increasingly independent voice of opposition, repeatedly challenging everything from privatisations, approval for construction projects and even government legislation. "Of the 23 chambers [under TMMOB], only one is pro-government," notes Oguz Turkyilmaz, head of TMMOB's energy committee and the organisation's former deputy head, explaining that the government has become increasingly angered by the chamber's legal challenges.

That anger has resulted in new regulation barring TMMOB members from attending events outside Turkey without permission from the environment ministry, and the enacting of a decree formulated by the military junta that ruled Turkey after the 1980 coup allowing the government to audit and inspect the chambers' operations. "That decree was never implemented – for 60 years the chamber has been entirely self governing," says Turkyilmaz, adding that the government recently published plans to abolish the 23 chambers altogether and replace them with one national body, organised through local offices.

"They just don't want anyone to criticise them," he sighs.

Geerdink's arrest has been widely condemned for lacking any justification, with the reporter herself claiming on her blog that the "evidence" against her consisted of no more than any "15-yearold" could have compiled in half an hour on the internet.

None of this is particularly surprising to those at the sharp end of the government’s actions. “Silencing the opposition, or free speech, by terror, killings or by law has a long, sad history in my part of the world,” wrote Turkish novelist Orhan Pamuk in The Times on January 12. “One of my earlier books The Black Book, published in Istanbul in 1990, tells the story of the killing of a newspaper columnist who wrote sub-

Photo: Journalistanbul

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(EBRD), which has been a shareholder in the bank since 1995, said on January 19 that it is prepared to increase its stake in Victoriabank in an attempt to restore effective corporate governance.

The EBRD, which currently owns 15.06% of Victoriabank, is planning to acquire a large enough stake to allow it to call an extraordinary general shareholder meeting and re-establish corporate governance at the bank. The EBRD said it has applied for and received regulatory approval to acquire up to 50% of Victoriabank’s shares.

Henry Russell, EBRD director for Moldova, Belarus, Ukraine and the Western Balkans, said in a January 19 statement that the bank is aiming to take a “significantly larger stake” in Victoriabank.

Murky business in Moldova Iulian Ernst and Clare Nuttall in Bucharest

C

oncerns about the stability of Moldova’s banking sector are growing as major banks were taken over by the central bank at the end of 2014 after the sector was targeted by murky offshore entities linked to local oligarchs, resulting in the hostile takeovers of several banks. However, international financial institutions active in the country are fighting back, pressing Chisinau to adopt new legislation and improve enforcement.

Moldova’s banking sector has seen numerous ownership changes in recent years, with many acquisitions carried out by un-transparent offshore-registered companies, purchasing small blocks of shares that fell just below the National Bank of Moldova’s threshold for approval. bne IntelliNews reported in 2013 that this strategy had resulted in the takeovers of two of the country’s largest banks, Banca de Economii Moldova

(BEM) and Moldovan Agroindbank.

Former shareholders in the two banks claim they were the victims of "raider attacks," or illegal expropriation. As of mid-2014, around 72% of Moldova’s banking sector by assets was estimated to be foreign-owned, which includes just four international banking groups.

An early victim was Victoriabank, where unidentified shareholders took control

“We are determined to try to prevent Victoriabank from being taken over by non-transparent shareholders. Increasing our stake will give us a more solid base to exert influence for more effective corporate governance at the bank,” Russell told bne IntelliNews. Ultimately the EBRD hopes “to prevent Victoriabank being abused by non-transparent shareholders, and in the long term to attract a long-term strategic partner.”

Message of support By stepping in to protect Victoriabank, the EBRD hopes to send out a strong message that it will not stand idly by while such murky interests take over and run into the ground one of Moldova’s largest banks. As well as the direct impact on Victoriabank, “this action will be positive for the sector as a whole, and we hope it will encourage the government to take action," Russell added.

"We are determined to try to prevent Victoriabank from being taken over by non-transparent shareholders" of the bank’s supervisory board back in 2006. However, the European Bank for Reconstruction and Development

The EBRD and other international financial institutions active in Moldova have already responded by cutting lending to

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the sector. The EBRD reduced its funding to Moldovan banks from ¤40mn in 2010 to just ¤10mn in 2014. “There has been virtually no new lending to local banks with non-transparent ownership in the last 18 months, because lenders don’t know who the new shareholders are or who is responsible for running these banks. This will continue if the situation does not improve,” Russell said.

Russell added that the EBRD would continue to work closely with the Moldovan government and regulators to ensure that only “transparent, reputable and sound investors” can hold shares in Victoriabank and other Moldovan banks.

The situation has been damaging both for the banking sector and for economy as a whole, as several of Moldova’s largest banks have redirected lending to entities connected to their new owners.

Unlike many countries in Central and Eastern Europe, Moldova’s banking sector emerged relatively unscathed by the international economic crisis. However, the wave of takeovers is now undermining the financial health of the sector.

Under new management The International Monetary Fund warned in December that, “Severe governance problems in the banking system

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continue to represent a risk to financial stability,” and called for “vulnerabilities in [Moldova’s] banking sector, and strengthening the financial sector regulatory framework and its enforcement” to be addressed as a matter of urgency.

At the end of 2014, the central bank took three banks under special supervision after a series of large transfers between the banks that left them short of liquidity.

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

Boby Dimitrov Banca Sociala. The sizePhoto: of the resources transferred was around MDL17.8bn (¤937mn) – more than 10% of the country's annual GDP.

Chisinau has also taken positive steps in introducing new legislation, most importantly by reducing the threshold for share transactions in banks and financial institutions requiring central bank approval from 5% to 1%.

There are also hopes that the expected formation of a pro-European govern-

"There has been virtually no new lending to local banks with non-transparent ownership in the last 18 months" agement, at Unibank, the country’s fifth largest bank. This followed similar measures taken at BEM and Banca Sociala on November 29. As a result of these moves, 30% of the banking sector by assets is now under central bank administration.

The central bank cited unusually large deals involving Unibank, which has a 9.8% market share by assets, BEM and

ment following the November 2014 elections will lead to more progress on this issue. However, fears remain about the enforcement of existing rules, while disagreements among the three pro-European parties represented in the new parliament could lead to delays in forming a new government, which in turn may put off much needed reforms in the banking sector.

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a riposte to critics in Western Europe that the enlargement of the EU into the Balkans has been a misguided venture.

Nevertheless, in her victory speech Grabar Kitarovic sounded a defiant note, claiming: “First of all I would like to say that when I entered into this fight I was constantly hearing how I was going to lose, but I knew that I would win. In the same way I will win for Croatia. Croatia will be among the most developed countries of the EU and the world, I promise you.”

Photo: Dario Vuksanovic

A frozen squid grilled by Stepford wife Guy Norton in Zagreb

F

or a country famous as one of Europe’s favourite sun-drenched Technicolor summer hangouts, on January 11 Croatia managed to deliver one of the continent’s dreariest, albeit closest fought, political contests on an overwhelmingly grey and cloudy wintry day. More interesting, though, is what the result says about the parliamentary elections set for the end of this year.

Incumbent centre-left President Ivo Josipovic – dubbed the ‘Frozen Squid’ by his political opponents by virtue of his lacklustre character – narrowly failed to fight off the challenge from an equally dull centre-right candidate in the shape of Kolinda Grabar Kitarovic, who had been dismissed as a ‘Stepford wife’ candidate by her detractors.

Grabar Kitarovic edged the presidential runoff with around 50.4% of the

vote, succeeding in becoming the first female president of this troubled former Yugoslav state, which has been mired in economic recession since the end of 2008.

The face-off between one-time legal professor Josipovic and career diplomat Grabar Kitarovic failed to deliver much

The new president will be sworn into office on February 19 and it is expected that as the candidate of the main opposition Croatian Democratic Union (HDZ) party she will adopt a much more critical attitude towards the ruling centre-left coalition government, which supported Josipovic’s candidature.

Omens Arguably the most fascinating aspect of the presidential race concerns the pointers it gives for the likely outcome of the much more important parliamentary elections scheduled to take place at the end of this year. As such, the result delivered a welcome fillip for the opposition HDZ, which has spent the last three years putting together a rightwing grouping of parties in the hope of defeating the incumbent centre-left government in December.

For Prime Minister Zoran Milanovic’s Social Democratic Party (SDP), which is the major partner in the serving fourstrong coalition government, Josipovic’s defeat, albeit by the narrowest of mar-

"Croatia will be among the most developed countries of the EU and the world, I promise you"

excitement. The presidential role has little influence over the running of a country that since its entry into the EU in July 2013 has singularly failed to deliver

gins, is yet another warning sign that it will have to up its political game if it is to avoid a much more serious electoral defeat later this year.

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In the run-up to the January 11 presidential poll, senior members of the government attempted to rally support

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bankruptcy. “Croatia is one of the few European countries that on the eve of joining the EU have saved their ship-

"The HDZ led an incompetent, improper and partially corrupt government" for Josipovic with a high-profile press conference that sought to highlight its economic achievements and denigrate those of the previous HDZ-led government, which lost power at the end of 2011.

Deputy PM and minister of regional development and EU funds, Branko Grcic, highlighted the fact that despite Croatia remaining in recession – GDP is forecast to have shrunk by around 0.5% in 2014 – there is evidence of the first green shoots of recovery. Industrial production has begun to rise for the first time since 2008, while the country is beginning to reap the benefits of its EU membership, with Croatia withdrawing ¤87mn more than it paid into the EU budget in 2014.

While Grcic acknowledged that the heavily indebted construction sector remains a drag on economic growth – some 70% of all bad debt in the country’s banking sector is related to the property market – he claimed that Croatia is now on a much sounder economic footing than when the current government came to power in December 2011. “Croatia's economy has been successfully reconstructed from a rentier one to one based on exports,” claimed Grcic, pointing to a near 13% uptick in exports in 2014.

For his part, Economy Minister Ivan Vrdoljak claimed that with tenders for oil and gas exploration off Croatia’s Adriatic coast and the planned construction of a liquefied natural gas terminal on the island of Krk, the current government had laid the ground for Croatia to become a major energy player in Europe, while it had also managed to save its domestic shipbuilding industry from

building industry,” Vrdoljak said. "This is primarily thanks to this government."

There was also an upbeat message from Tourism Minister Darko Lorencin, who noted that Croatia continues to attract growing numbers of visitors, despite a year characterised by unsettled weather at home and economic uncertainty abroad. “Tourism is the most stable sector of the Croatian economy and the upward trend in the sector continued last year, in which the number of arriv-

als increased by 5% and the number of overnight stays rose by 2% compared to 2013.”

In the most blatant piece of electioneering on behalf of his party colleague Josipovic, the Business Minister, Gordan Maras, launched a blistering attack on the HDZ’s record of support for entrepreneurs when it was in power. “50,000 businesses and companies in this country collapsed into a black hole called the HDZ, while we have in turn created 44,000. It was an incompetent, improper and partially corrupt government,” Maras said.

Such strong words of criticism however proved ultimately insufficient to defeat the electoral challenge posed by Grabar Kitarovic, whose promise of a better tomorrow proved just enough to win the day amid the still largely grim economic realities in Croatia.

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main global markets because they are driven by their own dynamics, says Umberger.

FUNDS:

To boldly go

Nicholas Watson in Prague

O

ver the past two years it has become much more rewarding to invest in frontier markets – the next generation of emerging markets, spanning Asia through the Middle East and Africa, to Europe and Latin America – than traditional emerging markets.

Consequently, Swedish investment company East Capital on December 15 launched a new fund focusing on global frontier markets.

The new East Capital (Lux) Frontier Markets Fund, East Capital says, will focus on young and fast-growing markets that have an emerging middle class and strong consumption growth. As such, the traditional Emerging Europe fund management firm will expand its investment universe to include Africa, the Middle East and Latin America.

East Capital already manages around $450mn in regional frontier assets, drawing on what it says is its longstanding track record and experience working in such markets. Peter Elam Håkansson, chairman of East Capital, who is personally heading the Frontier Markets team. says for nearly two decades East Capital has successfully identified and invested in many companies across emerging and

frontier markets that were in an early stage of development. “This period has taught us valuable lessons and has given us the expertise to spot the real longterm growth drivers, trends and investment opportunities,” he says.

East Capital points to its investments in the Balkans as an example of what frontier markets can offer. Many of the countries in its East Capital Balkan Fund, which in September won the "bne Best Equity Fund 2014" with an annual return of 26%, would be eligible for inclusion in the new frontier fund.

“The global frontier fund will definitely invest in four of the Balkan Fund markets: Slovenia, Croatia, Romania and Serbia. And we will consider Bosnia, Bulgaria, Macedonia and Montenegro – not in a major way, but we a have a track record in all these,” says Tim Umberger, senior advisor at East Capital, who is involved in both the Balkan and frontier funds.

Insulated What enabled the Balkan Fund to flourish in 2014, up 23.7% over the first 10 months, is also what sets other frontier markets apart, which is that to a large extent they are uncorrelated with the

While the International Monetary Fund was in October warning of “stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets,” the MSCI Frontier Markets Index – which includes large and mid cap stocks from 24 frontier market countries – was up 17.05% over the first 10 months of the year.

Compare that with the MSCI Emerging Markets Index, which was up just 3.63% over the same period. Over a three-year timeframe, the MSCI Frontier Markets Index was at end-October up 15.73% compared with the MSCI Emerging Markets Index up just 3.24%.

“Sentiment for the Balkan markets is quite good and at the same time the outlook is positive,” says Umberger, adding that most of the economies have started to show significantly better growth numbers, which together with relatively low valuations have combined to create good conditions for the stock markets to perform. According to East Capital, frontier markets have an average price/ earnings ratio of 9x, while developed markets have a P/E of 15x and emerging markets have a P/E of 11x.

Of course, Umberger notes, there are different drivers for different markets.

“The main market driver in Slovenia is that there will be a lot of large privatisation deals that will bring additional revenue for the government, but also more liquidity to the stock market. In Serbia it is very low valuations that make the market appealing, while in Romania the companies are trading at a very healthy dividend yields of between 7% and 10%,” he says.

The Balkans investment story is also much more about economic convergence with Western Europe, rather than the main one for frontier markets, which is demographics, as the young and growing populations there boost economic activity. “If frontier markets were a continent, they would account for 13% of world population but only 4% of world GDP," says Håkansson.

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The unexpected defeat of Prime Minister Victor Ponta in the Romanian presidential elections in November has raised questions about his government’s future stability.

The threat to the region from spillovers from the Russia-Ukraine conflict proved to be over-stated. Current indications are that even countries such as Moldova and Montenegro, with strong economic ties to Russia, have not been badly hurt

by Russian sanctions, though the picture will become clearer when full-year statistics are published in 2015.

Political uncertainty rises in Southeast Europe

OUTLOOK 2015:

Outside the region’s four existing EU member states, the prospect of EU membership is top priority and an incentive for reform for governments across Southeast Europe. Serbia is expected to open its first EU accession chapters in 2015, while Moldova plans to apply for membership.

Clare Nuttall in Bucharest

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orecasts for 2015 GDP growth vary widely across the region.

Serbia, hit by flooding in May and now embarking on an austerity programme, expects zero or negative growth in 2015. Croatia, in its first return to positive growth after years of recession, is expected to grow by just 0.2%, according to the European Commission’s 2014 Autumn Forecast.

At the other end of the scale, some of Southeast Europe’s smaller economies have the best prospects for 2015, with Bosnia and Herzegovina, Macedonia and Montenegro all expected to expand by at least 3%.

A problem facing states across the region in 2015 will be securing natural gas supplies after Russian President Vladimir Putin announced in December that Russia was pulling the plug on the planned South Stream gas pipeline that would have supplied gas to many of the countries in Southeast Europe. Without the prospect of South Stream, they will continue to rely at least for the next few years on notoriously unreliable exports of Russian gas routed via Ukraine. Losing South Stream is a particular blow for Bulgaria and Serbia, both of which depend on Russian gas, and would have

benefitted not only from cheap exports but also from substantial transit fees and potentially lucrative contracts for local companies that would have helped boost their economies.

Romania, meanwhile, was not included in South Stream, and may end up gaining from inclusion in alternative transport projects – Bucharest signed a deal with Greece and Bulgaria for the Vertical Corridor inter-connector in December – while at the same time continuing to develop its offshore Black Sea resources.

Political instability is another source of concern. Both Bulgaria and Kosovo enter 2015 with newly formed governments in place, bringing to an end lengthy periods of political uncertainty in both countries. However, following the October elections, Bosnia has not yet formed a new national government.

Governments across the region plan, to a greater or lesser degree, to continue with privatisations in 2015. Both Serbia and Slovenia have strong pipelines of major companies up for privatisation in 2015.

Polarised Turkey gears up for crucial election year The main event of 2015 in Turkish politics will be the general election in June.

President Recep Tayyip Erdogan wants to move Turkey to a formal presidential system – a move that would require a decisive election victory by his Justice and Development Party (AKP) to change the constitution. For this ambitious plan to materialise, Erdogan and the AKP will need strong GDP growth, while at the same time keep peace talks with the Kurdish militant group PKK on track at least until the elections. The government continues to keep pressure on opposition

"The unexpected defeat of PM Ponta in the Romanian presidential elections in November has raised questions about his government’s future stability"

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groups and promote a religious agenda in social life, which is keeping the country divided and polarised.

Turkish GDP growth slowed markedly in the third quarter of 2014 amid weak consumption and investment, while exports and government expenditures were the main drivers. It is universally expected that the Central Bank of Turkey (CBT) will cut interest rates next year, as lower oil prices will help Turkey reduce its large current account deficit and inflation. But the prospects of higher US interest rates will haunt emerging markets, including Turkey, putting pressure on local currencies.

The economy grew at an annualised pace of 2.7% in the first nine months of the year. After a surprisingly fast rate of 4.8% on year in the first quarter, GDP growth slowed to 2.2% in the second, reflecting ongoing geopolitical tensions, and more importantly sluggish demand from Europe, Turkey’s main export market. GDP contracted on a quarterly basis (-0.5% - calendar & seasonally adjusted) for the first time since the first quarter of 2012. And in the third quarter of 2014, GDP growth slowed further to 1.7% on year, sharply below the market forecast of 3%.

Households’ final consumption that accounts for 65% of GDP rose only 0.2% on year in the third quarter of 2014 and increased by a weak 1.3% on year in January-September. Private investments disappointed too; after contracting 3.5% on year in the second quarter, investments came to a virtual halt in the third quarter. Private demand started to decline in the first quarter as a result of monetary tightening and government measures aimed at curbing consumer borrowing.

Exports and public expenditures have been the main drivers behind GDP growth in the first nine months of 2014.

Exports grew 8% on year in JanuarySeptember, while public expenditures rose 6.6%, according to the statistics office TUIK’s latest GDP figures. Net exports’ contribution to GDP growth was 2.5 percentage points in the third quarter, versus private consumption’s

Southeast Europe

paltry 0.1 percentage points. Government final consumption added another 0.6 percentage points to headline GDP growth in the third quarter.

Given the sluggish economic recovery in Europe, domestic demand should be the main driver of growth next year, according to some analysts. “We still look for the demand composition to change in favour of domestic demand in quarters to come, especially with the lagged impact of the loosening the Central Bank delivered in May-July period,” Yatirim Finansman Securities, a local brokerage house, said on December 10 in a research note on the third-quarter GDP data.

The key concern remains as self-induced tightening of financial conditions if the lira loses ground in tandem with the global uncertainties, Yatirim Finansman added.

Deutsche Bank has a similar view on growth dynamics next year. “Domestic demand is set to become the main driver of growth in 2015… private consumption will be supported by the credit impulse turning finally positive,” the bank said in a report in December.

Goldman Sachs said on December 10 that: “As for 2015, we maintain our GDP growth forecast at 4%, underpinned mainly by disinflation, easier domestic financial conditions and a fall in energy prices.”

Public expenditures are likely to increase in the run-up to the June general election, providing further stimulus.

But, Deniz Investment, another local brokerage house, has some doubts: “as financing conditions get tougher, it is hard to generate a private sector driven GDP growth in the near future, while looser monetary policy might somewhat help in the first quarter. Yet, this is likely to be short lived as FED’s normalization would lead to further pressure on exchange rates and deteriorate real sector confidence in the second half of next year.”

A full version of this Outlook 2015 can be found at www.bne.eu

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A tenuous grip on the tenge Naubet Bisenov in Almaty

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alling oil prices and the currencies of its major trading partners are piling pressure on Kazakhstan's national currency, but against all the odds the tenge seems to be holding its hold.

Despite reassurances by the Kazakh government about its ability to maintain financial stability and defend the currency within its trading corridor, this might not last long, as it has become customary for the government to devalue the tenge in February, by 19% in 2014 and 25% in 2009.

Oil, which together with other raw materials accounts for 17% of Kazakhstan’s annual GDP and fourfifths of its exports, has more than halved to around $50 per barrel since the summer of 2014. This drop in the oil price has devastated the currency of its neighbour Russia, which at one point in December had hit an all-time low of RUB80 to the dollar. Although the ruble is now trading at around RUB65 to the dollar, with few signs of a rebound in the oil price, some like Goldman Sachs predict little relief for the Russian currency anytime soon.

The euro is also trading at nine-year lows against the greenback on fears of

a "Grexit" and the European Central Bank's quantitative easing plans.

The EU and Russia are Kazakhstan's major trading partners, accounting for 30% and 13% respectively of the country's total foreign trade in 2013.

Russia is Kazakhstan's largest supplier, accounting for a third of Kazakh imports in money terms last year.

Despite central bank chief Kairat Kelimbetov's public denials last year, the Kazakh government is now frantically discussing various measures to come up with a response to the falling oil price and weakening ruble, a source close to government circles tells bne IntelliNews on condition of anonymity. "As soon as a compromise on these measures will be reached, I hope, at the end of January they will officially announce measures which will make it possible to defuse all tension," the source said.

When the National Bank of Kazakhstan (NBK) devalued the national currency from about KZT155 to KZT185 to the dollar in February 2014, it cited uncertainty about the exchange rate of the Russian ruble, which had begun weakening at the end of 2013, and the need to maintain the balance of

payments amid growing imports as reasons for the devaluation. In early September Kelimbetov said that the tenge, "will be fine at the ruble's rate of 40-42" to the dollar. His former adviser, Olzhas Khudaybergenov, suggested in October that "the next critical level is RUB52 to the dollar".

Aware of the challenges the faltering Kazakh economy is facing because of the weak demand for the country's main exports, low oil prices and the uncertainty surrounding the ruble and the Russian economy, Astana claims it is prepared for all kinds of worst-case scenarios.

Chairing a special crisis meeting in Astana on January 15, Kazakh President Nursultan Nazarbayev noted that notwithstanding all the difficulties, the economy managed to achieve growth of 4.3% in 2014. However, he urged the government to monitor the situation in Russia and the EU to prevent "social tension in neighbouring countries" from spilling over onto Kazakhstan. "We should not allow this," Nazarbayev warned, ordering the government to have "clear plans for all possible cases" by the time of the next government meeting he will attend in late January or early February.

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At the same January 15 government meeting, Kelimbetov boasted that the country had managed to build up a "significant" cushion for the economy in 2014, with its gold and foreign currency reserves at $102bn. Kelimbetov, who repeatedly denied rife speculation of a "second wave" of devaluation last year, then continued to recite his mantra that, "the National Bank intends to prevent sharp fluctuations of the exchange rate this year."

However, this invited ridicule from Kazakhstan watchers. "I am tempted to ask by which calendar they are talking, Chinese? Kurdish? I think Kurdish New Year is in March," Timothy Ash of Standard Bank commented at the time in a note to investors. "Anyway, maybe with this Astana Ukraine peace summit slated for the end of January, they will try and hold the line until then at least," he said in reference to Kazakhstan's proposal to host Ukraine peace talks in the frozen, unwelcoming Kazakh capital.

Indeed, the image-obsessed Astana, which styles Kazakhstan as an island of economic and political stability in the Commonwealth of Independent States, would not want to draw unnecessary media attention to domestic problems during any international get-together, should the public again use the devaluation as a pretext for protests over its economic policies that have resulted in falling living standards.

Tools at hand Analysts question the decision of the Kazakh central bank to devalue the tenge in February 2014 when the price of oil hovered around the $100 mark, but is resisting the call to do so now. "The NBK is afraid that letting the tenge float would create a vicious cycle between expectations of devaluation, panic and actual devaluation. That is one way to rationalise the actions of the NBK," Sabit Khakimzhanov, head of research at Almaty-based investment bank Halyk Finance, tells bne IntelliNews. "But one can only guess why the NBK devalued [the tenge] in February [2014] when the oil price was high and resists at such high costs to the economy now, when the oil price is so low."

With sufficient tools at hand to maintain the level or trajectory of the exchange rate, Khakimzhanov believes the central bank can keep the tenge strong for as long as it sees it fit. "But in order to achieve that, it would have to sacrifice reserves, the stability of interest rates, financial stability and competitiveness – usually in that order," he says.

Since the February 2014 devaluation, the NBK has operated in the area of a trade-off between forex reserves and interest rates. "Financial stability is not yet at stake. But at some point the central bank will have to choose between devaluation, letting banks fail or capital controls," Khakimzhanov suggests.

While ensuring the competitiveness of Kazakh goods on the domestic market is a valid concern, it has a lower priority relative to the stability of the national

Revenue Committee, Kazakh citizens imported over 22,000 cars from Russia in the last two months of 2014 alone. And that figure is only preliminary; according to Zhambyl Suraganov, a spokesman for the committee, the deadline for declaring goods imported in December expires on January 20 and so importers still have time to raise that number further. VAT paid on cars imported from Russia during the last two months of 2014 stood at over KZT4bn ($22mn), which at the 12% rate translates into KZT33bn ($183mn) or KZT1.5mn ($8,300) per car. The establishment of the Eurasian Economic Union on January 1 cancelled the need to pay VAT on cars imported from fellow member states Russia, Belarus and Armenia.

This buying frenzy has had other consequences. It has pushed up the

"The NBK is afraid that letting the tenge float would create a vicious cycle between expectations of devaluation, panic and actual devaluation" currency or the financial system, analysts argue. Despite the fact that the economic climate for Kazakh producers has deteriorated as a result of the ruble's devaluation in the short term, growth in the physical volumes of imports is offset by a decrease in their dollar value, believes Kasymkhan Kapparov of the Almaty-based National Bureau for Economic Research. "As a result, pressure on the balance of trade will be felt only if the ruble stabilises and physical volumes of Russian imports start growing," he tells bne IntelliNews.

Consumer benefits While the authorities debate whether or not to devalue the tenge, Kazakh consumers are taking advantage of the strong tenge by shopping north of the border in neighbouring Russian regions.

The weak ruble has prompted Kazakhs to go on a shopping spree in Russia, snapping up everything from foodstuffs to furniture to cars. According to the Kazakh State

buying of rubles in Kazakhstan: according to Tengrinews agency, in November Kazakhs bought the Russian currency to the tune of RUB16bn ($336mn) – or 45% more than in October. It has also invited the ire of local businessmen, who have urged the government to protect local businesses against the falling ruble. "The collapse of the ruble has put our local producers in unequal competitive conditions, especially in the border regions," Abylay Myrzakhmetov, chairman of the National Chamber of Entrepreneurs, complained on January 14. He cited the Association of Car Producers figures that showed domestic sales of cars falling by 60% on year in recent months.

The upshot is that should the oil price remain low and the ruble continue to weaken for a prolonged period, threatening public finances, exports and local jobs, the Kazakh government will have little choice but to devalue the tenge.

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coalition by inviting a fifth party to join the government, the main opposition Mongolian People's Party (MPP). With the MPP on board, the new government comprises all but three independent MPs in Mongolia's 76-member parliament. “The key thing from our perspective is that while the creation of a ‘unity’ government is being portrayed as a positive for the investment environment, the test for Mongolia will be in implementation,” says Neil Ashdown, an analyst for IHS Country Risk Analysis.

Photo: Loca4motion

Will Mongolia's new PM also get lost in the wilderness?

Terrence Edwards in Beijing

M

ongolia's recently dismissed prime minister, Norov Altankhuyag, is known as an outdoor enthusiast who unknowingly set off a media frenzy by getting lost in the remote Mongolian wilderness during the winter after taking office in 2013. The ordeal became a huge and expensive embarrassment after a search-andrescue team and chopper pilots had to be called in to extract him from Mongolia's remote pine forests.

Lost in the wilderness is a fitting image for his term of office, which was hobbled by a complex system of alliances within his cabinet. And the new prime minister, fellow traveller and ally

Chimed Saikhanbileg risks repeating his predecessor's mistake of forming too many alliances as he heads down even more tortuous paths to rescue the flagging economy.

Saikhanbileg, officially installed as PM on November 21, is putting together an even more crowded and complicated

The goal is to jump start the resourcebased economy's largest mining projects and resolve some looming fiscal problems. Protectionist actions taken by previous governments over the country's vast natural resources were popular among voters, but not with foreign investors. As a result, Mongolia saw a 57% decline in foreign investment in the first 11 months of this year compared with the same period in 2013. At the same time, waning demand for commodities from China, which consumes most of Mongolia’s minerals, has also taken its toll.

“When we're in a mess like this, I think it's best to have all your political groups aligned together trying to resolve things,” says the head of newswire Cover Mongolia, Badral Munkhdul, who is positive about the new government.

He reckons that having unity in the parliament takes away the opportunity for an opposition party to capitalise on what will undoubtedly be politically unpopular decisions to help more foreign companies exploit Mongolia's natural resources.

Altankhuyag's government-leading Democratic Party in 2012 allied with the Mongolian People's Revolutionary Party (MPRP), as well as two lesser

"The new prime minister risks repeating his predecessor's mistake of forming too many alliances as he heads down even more tortuous paths to rescue the flagging economy"

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partners in the Mongolian National Democratic Party and Civil Will-Green Party. Altankhuyag then parcelled out a proportionate number of ministerial posts to each party. The alliance worked for a time, but Altankhuyag had a hard time managing so many competing voices in his cabinet. In the end, when his popularity was at its lowest ebb because of economic troubles, it proved his undoing.

Band of revolutionaries The Democratic Party's ranks are filled with the revolutionaries of 1989, who helped topple Communism and push the country towards democracy and a free market economy. However, they did not start off as a consolidated group to match the old powers, who aligned into what is today the MPP. Instead, they broke off into numerous splinter factions of free thinkers that have often bumped heads.

Eventually, they came together as a loose coalition to run a government in 1996, the first time the MPP was taken out of power by the Democratic Party.

But they wouldn't form as an official party until a decade later.

The Democratic Party now has five or six main factions dominating the party, says Tsoggerel Uyanga, chief financial officer at Ulaanbaatar-based real estate firm M.A.D. Investment Solutions, “but there's a myriad of smaller and unofficial allegiances, factions and secret agreements” that further complicate the political landscape.

“Each faction has a nominal leader who gathers influence, yields power and favours, and lobbies for greater responsibility,” she says.

Former and current government heads Altankhuyag and Saikhanbileg both belong to a group known as Polar Star.

President Tsakhia Elbegdorj, on the other hand, doesn't have any official faction of his own to claim, but Uyanga thinks he plays a role moving between them and sometimes pitting them against each other to further his own political agenda. “Over the past two to three years [Elbegdorj] has been active

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Mongolia's Tavan Tolgoi coalmine – under new management Terrence Edwards in Ulaanbaatar Mongolia is brokering its second-largest investment with a foreign consortium to help develop the troubled state-owned Tavan Tolgoi coalmine – a deal likely to set the tone for foreign investment under the new government headed by Prime Minister Chimed Saikhanbileg.

A deal that would put a group of investors that includes China Shenhua Energy in charge of Mongolia's largest coking coal deposit is expected to conclude before Mongolia's Lunar New Year celebrations begin on February 18. The strategic partnership with state-owned mining company Erdenes Tavan Tolgoi will put in motion the PM's plan to use this high-profile mining project as a means of restoring foreign investor confidence and boosting economic growth.

China Shenhua Energy and Japan's Sumitomo Corporation have teamed up with a mining unit owned by the Ulaanbaatar-based firm Mongolian Mining Corporation to come up with $4bn in investment to develop the mine in partnership with the state. That kind of foreign investment is sorely needed after it fell 71% in the year to November 2014 compared with the same period the previous year.

Jim Dwyer, executive director to the Business Council of Mongolia. says the investment into Tavan Tolgoi could have a similar impact on Mongolia's $12bn economy as the initial $6.5bn investment between 2009 and 2013 into the country's other giant mine, Rio Tinto's Oyu Tolgoi copper-gold mine. The investment into Oyu Tolgoi had a multiplier effect, he says, that created about $3 for every dollar spent on the project. “It's hard to quantify, but it could be two to three times the amount of investment,” says Dwyer.

Located in the southern Gobi desert, about 200 kilometres from the Chinese border, the mine holds some 1.8bn tonnes of high-quality coal – with a wider resource amount put at around 7.8bn tonnes. Despite the introduction of import duties on coal imports, China is still in need of higher grades of coal that pollute less – essential as the world's second largest economy struggles with choking air quality in cities such as Beijing.

Despite this, Tavan Tolgoi remains a troubled project. Poor management and government policy and a softer coal market have combined to hit the company developing the coalmine, the state-owned Erdenes Tavan Tolgoi, hard.

The 1.8bn-tonne of high-quality coal reserves are divided into the East Tsankhi and West Tsankhi mine sites. Coalmining from the eastern block hasn't been profitable because it has only been used to pay back an upfront purchase and loan from Aluminum Corporation of China (better know as Chalco) totalling $350bn. The West Tsankhi part has been even less of a success. Mining was only launched last year, three years after Mongolia scrapped a strategic investment plan with a different group of investors that also included China Shenhua Energy. That plan was similar to the one being negotiated today, except it only granted control of the West Tsankhi mine.

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behind the scenes in forming factions, setting them against each other, promoting and demoting at will, and stirring public opinion,” she explains.

Democratic Party are not the only destabilising concerns, however. The MPRP and MPP have their own scores to settle.

An example of that was when the rival Falcon faction, named after Mongolia's national bird, teamed up with the president to help push Altankhuyag out of office when he wouldn't leave quietly.

Five members of the faction didn't show up for a confidence vote on November 5, which could have saved his job.

The MPRP was formed in 2010 when former president Nambar Enkhbayar stormed out of the MPP after falling out with the party leadership. The two parties' names are conspicuously similar for good reason: the MPP used to be called the MPRP but changed its

Outside of those groups are alliances with some of the country's wealthiest individuals. Former judo star Khaltmaa Battulga was the industry and agriculture minister for most of Altankhuyag's term, and until recently led the Mongolian Democratic Union.

He is also chief executive of diversified holding company Genco and was listed as Mongolia’s third wealthiest man with a net worth of at least $1.2bn in a 2013 survey of the country's 100 richest, published on the Mongolian website 24tsag.com.

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the biggest gain for the Democratic Party, says Munkhdul. Many felt the splitting of the vote between the two led to the strong victory by the Democratic Party in 2012, and then Democratic presidential candidate Tsakhia Elbegdorj to win a second term in 2013.

Challenges ahead The main goal of the new ‘unity government’ is to relaunch work at the country's two largest mines, Tavan

"When we're in a mess like this, I think it's best to have all your political groups aligned together trying to resolve things"

name in 2009 as a symbolic move to signal changes in the party. Enkhbayar, knowing the value of name recognition in such a vast country come election time, retook the name for his breakaway party.

Tolgoi and Oyu Tolgoi. Both mines, one coal the other copper-gold, are billiondollar investments that are critical for this fledgling economy, which slowed to an annualized 7% in the first nine months from 12.8% last year.

Luvsanvandan Bold, who was foreign affairs minister, is the head of the Northeast Asia Faction in addition to being the founder of the massive holding company Bodi International. He was listed in eighth place on the same rich list, with an estimated net worth of $800mn.

“Most of the voter base for MPRP are those who used to support MPP,” says Munkhdul. “I guess you could say the MPRP flipped MPP voters from people who were supportive and loyal to Enkhbayar.”

Outside interference Battles within the government leading-

The division between the two parties has been a weakness for the MPP – and

The government must also focus on new debt restraints that, if not heeded, could cause Saikhanbileg's government to fall apart. Saikhanbileg has until next April to either raise the debt ceiling or bring the debt to below 40% of GDP; the last estimate of public debt was around 49%.

Meanwhile, the latest complex network of alliances will likely put a huge strain on the coalition. The MPP demonstrated its capriciousness by joining Saikhanbileg's government after protesting his confirmation by not appearing for the vote.

Tough decisions will undoubtedly have to be made, so it makes sense that Saikhanbileg would want to remove any opposition that could stand in his way.

How long he can keep such a large and diverse group content, or if he too will find himself lost in the wilderness, is anyone's guess.

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Avito.ru. "With the arrival of the international investor in the person of Baring Vostok, our company has acquired much greater opportunities for future successful development and expansion of its market positions," Lomtadze said at the time.

The weekly Kolesa car and Krisha property newspapers, launched in 1996 and acquired by Lomtadze and partner Vyacheslav Kim in February 2013, had become very popular with Almatynians because they offered targeted, niche adverts unlike "horizontal" classified newspapers that covered everything from cars and housing to pets, Nikolay Babeshkin, director of Kolesa, explains to bne IntelliNews. "The newspapers immediately gained momentum quickly, becoming flagships in Almaty and offering a model for regional outlets," he says.

Kazakh classifieds Naubet Bisenov in Almaty

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The newspapers developed well until broadband internet started booming in Kazakhstan: in 2006, after some hesitation, the owner of the titles decided to set up websites to mirror adverts placed in the hardcopy online.

"The websites quickly became No. 1 in terms of hits, as there was little content available on the Kazakh internet," Babeshkin says.

The scope and room available on the websites for flats and car sale ads vastly improved the quality of the product, allowing users to use various filters to narrow their searches. As such, the company decided to separate the online and offline versions of kolesa.kz and krisha.kz, Babeshkin

wo of Almaty’s biggest classified ad newspapers will go digitalonly from next year. After 18 years in print, the decision to kill the hardcopy sisters of the country's most popular websites kolesa.kz and krisha. kz – car and property marketplaces, respectively – has been prompted by losses and the growing trend in Kazakhs buying goods online.

referring to private equity firm Baring Vostok Capital Partners' investment in the firm that owns the classified ad papers and websites.

The popularity of these websites with Kazakh netizens is so great that they attracted foreign investment worth $15mn in April, in one of the biggest internet deals seen so far in the Central Asian country. "This is the hugest deal in the entire history of the Kazakh internet," declared Mikhail Lomtadze, chairman of Kaspi Bank's board of management and co-owner of the websites, in April,

"This is the hugest deal in the entire history of the Kazakh internet"

When it invested in Kolesa LLP, which owned the newspapers and websites, Baring Vostok had already

enjoyed several successes with wellknown internet companies in former Soviet states, such as Russia's largest search engine Yandex.ru and Russian classified ad websites Ozon.ru and

explains. "This also marked a fall in the circulations of the newspapers, because they were limited to Almaty, whereas the websites developed rapidly as they could cover the

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entire country," he says. "The more successful the websites became, the more the newspapers deteriorated."

The first investors in the company, Lomtadze and Kim, foresaw the death of print and have invested money exclusively in the development of the online editions over the past two years, because "no one will invest in newspapers with falling circulations," Babeshkin says.

About two-and-a-half years ago, the revenue of the websites overtook that

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many users are willing to post their adverts for another seven days, even at a paltry $0.25. Despite this, those who value their time spent on creating a new ad make up the numbers: on average krisha.kz publishes 15,000 new ads a day and extends 14,000 existing ads daily, while kolesa.kz's numbers are 17,000 and 11,000, respectively.

The extension of ads and paid services, such as bringing the ad to the top of the list and marking it to stand out, make up 90% of the

"The more successful the websites became, the more the newspapers deteriorated" of the newspapers; the company's overall revenue grew by 30% a year on average, with 80% growth in online revenue compensating for the losses made by the hardcopy editions. This led to the decision to end the print editions from January 2015. "When we close the newspapers our profits will remain the same, but our revenue will slightly fall," Babeshkin sighs.

"But this is a strategically correct decision, as it will enable the team to fully focus on the internet."

With the closure of the newspapers, the company will have to shed 50 members of staff whose skills are not applicable for online only. However, Babeshkin hopes the company's revenue will start growing again

by March, as January and February typically show sluggish sales anyway.

Revenue sources The company's online revenue mainly comes from two equal sources at the moment: the placement of classified ads and online commercials it sells to corporate advertisers. Babeshkin says revenues will rise if the company adjusts the fees it charges for the placement of classified ads; with the first seven days of an ad posted on the websites free-of-charge, not

company's revenues raised from classified advertising.

Another possible source of revenue, Babeshkin tells bne IntelliNews, could be a fee that the company would charge motorists and homeowners for helping them sell their cars or flats.

"But the market is not yet ready for this," he complains.

According to J’son & Partners Consulting, there are 11.5mn mobile internet users in Kazakhstan, marking a penetration rate of 67%. This has boosted demand for the company's mobile apps, which caused a drop in the number of unique users who visit its websites: 100,000 people use Kolesa's mobile app daily, versus about 300,000 unique users kolesa. kz receives per day on average. "This is a huge number [of mobile app users] because the website's counter counts the same user accessing it from different IP addresses as different users," Babeshkin explains.

As the internet has killed the newspaper business, so the app will kill many internet businesses.

However, advertisers are not yet ready to place their commercials in apps, because companies still lack mobile

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versions of their websites. "Even we don't have our mobile versions at the moment, but they should be launched within the next six months," Kolesa's director promises.

Investors bring know-how The $15mn new investment from Baring Vostok puts the value of the company at between $30mn and $60mn, allowing it to launch a new website for classified ads outside the car and property markets. The new website, market.kz, covers jobs, hobbies, pets, electronics and other areas where the company hopes to make money in the future. This latest online marketplace, launched in April, already boasts 85,000 active adverts, which are posted free-of-charge.

The investment has also enabled the company to promote the websites in the regions of Kazakhstan, thus growing its client basis and offering new services and products. For example, Babeshkin says, the kolesa. kz website has started offering freeof-charge checks of cars put up on sale by approved garages, in order to speed up the sale of the car and ease the process of obtaining a loan from a bank for the buyer. This allows the website to earn a commission from the bank. "We are also thinking of ways to make transactions between home sellers and buyers more comfortable, so that they receive adequate services for commissions they pay estate agents," Babeshkin says, referring to the fact that estate agents charge both sides a commission of $1,000 for their intermediary services.

The new investors have also already suggested innovations that they have tested in other markets for adoption by the Kazakh marketplace. "We are receiving fascinating ideas from our investors. Moreover, they tell us what results we will achieve if we implement their ideas and this is fantastic," Babeshkin says.

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first survey,” says Professor Thomas Stöllner in a phone interview from Germany with bns Intellinews.

Professor Stöllner heads the Institute of Archaeological Studies at RuhrUniversity of Bochum in Germany and has been studying the Georgian site for over 10 years. “The walls clearly show fire-setting and crushing work with hammers, plus we found hundreds of typical mining tools like hammer stones.

Successive analysis, including carbon 14, dated the findings to 3,000 years ago,” he marvels.

Georgia’s golden dilemma

the parliament backed a proposal to launch an ad-hoc investigative probe into the launch of drilling activities on Sakdrisi-Kachagiani.

The authorities at first shared the archaeologists’ enthusiasm. Two years after excavations started, SakdrisiKachagiani was added to the list of protected heritage sites. But in March 2013 the Ministry of Culture removed it with then-president Mikheil Saakashvili's approval. One year later, the Ministry lifted the protected status of the archaeological site, paving the way for opencast mining activities by RMG to begin.

Pre-historic Eldorado Although archaeologists claim the gold mine dates back to the 4th millennium BC, its recent history starts in 2004 when a group of German and Georgian

That decision was challenged in court

by Tbilisi-based legal advocacy Georgian Young Lawyer’s Association (GYLA), and as an interim measure, pending final verdict, the court ordered in early June

Monica Ellena in Tbilisi

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akdrisi-Kachagiani is a grassy hill in southern Georgia’s Kvemo Kartli region, which is best known for the earliest hominid site discovered outside of Africa. But archaeologists claim the hill also contains the world’s oldest gold mine and its fate is now hanging by a golden thread as the site lies in a mining area licenced to Russian copper and gold company Rich Metal Group (RMG).

On December 12, RMG re-started excavations in the area following a decision from the Georgian Ministry of Culture to lift the protected status on the site, sparking fury among archaeologists and conservationists, and stirring a heated political debate on the country’s cultural and environment protection policy. Prime Minister Irakli Garibashvili slammed criticism as “very irresponsible and groundless,” but on December 25

Stöllner, a leading archaeologist, believes the mine offers a new picture on pre-historic societies, as mining gold may have meant social prestige as far back as over 5,000 years ago.

Alongside Georgian scientists, led by Irina Gambashidze, Stöllner unearthed hundreds of artifacts currently displayed at the Georgian National Museum in Tbilisi.

"The artifacts found prove the human interference in the site, not that it was a gold mine" researchers began excavating work there with funding from the Volkswagen Foundation. “We realized it was a prehistoric mine when we entered for the

2014 a suspension of any operations at the disputed site. Then in December, the green light was given for excavation work to resume.

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Economic interests Deputy Minister of Culture Levan Kharatishvili defends the decision to restart work, saying that part of the site has already been fully examined for archeological purposes and the remaining side of the hill is at threat of collapse, which makes it impossible to carry out any further archeological excavations. “It was not the ideal decision,” Kharatishvili, who heads the

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community. “Our obligation is to protect and preserve the cultural heritage and do as much as possible to do so,” he says, adding that the company remains under obligation to stop digging in case of more archaeological finds and to report to the ministry.

According to Kharatishvili, assessments conducted by world leading specialists like Italian Claudio Margottini, who also

"It was not the ideal decision, but it was the optimal decision in these circumstances"

Ministry’s Cultural Heritage Strategy, admits to bns Intellinews, “but it was the optimal decision in these circumstances, preserving what can be preserved in a nearby museum,” which will be financed

by RMG in the nearby town of Bolnisi.

He also stressed that there is no evidence over the actual use of the site as a gold mine and that there is no agreement among the scientific

advises Unesco on geological heritage, showed that the unexplored part of the hill is collapsing and could only be secured by concrete poles, “inevitably spoiling the site”. “The artifacts found prove the human interference in the site, not that it was a gold mine,” he explains.

There is then “the argument to say that it is an important archaeological object and that’s why we have been so active in trying to balance all the interests here.”

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Campaigners who formed the Public Committee to Save Sakdrisi claim the government has given in to economic interests. Certainly Georgia faces a dilemma. With investment lagging and unemployment at 16.3%, the $300mn so far invested by RMG and the 3,000 people that the company employs are a boon for the local community and the wider economy. Gold is one of Georgia’s top ten exports, bringing in $35.3mn in the first 11 months of 2014.

The controversy around SakdrisiKachagiani has slowed down operations at RMG, whose products, according to the company’s website, include copper concentrates and gold alloys, and make up about 10% of Georgia's total exports.

The company, whose board comprises several former government officials, did not respond to interview requests.

The contested hill takes up 9 of the 193 hectares that RMG is licensed to exploit.

However, the company’s commercial director, Soso Tsabadze, said last year that Sakdrisi-Kachagiani is key for its operations, as 30% of the 14 tonnes of gold estimated in the area lie under the knoll.

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in the region to do likewise as the ruble continued to fall in the new year.

The Kazakh authorities already devalued the tenge in February 2014 by 19% to relieve the pressure from the falling ruble, which led to protests against the government's economic policies. With the oil price now below $50 per barrel and the ruble still trading as low as RUB63 against the dollar in January, the Kazakh government will have to deal with maintaining the value of the tenge while keeping its promise not to slash spending on social programmes.

OUTLOOK 2015:

Feeling Russia’s pain

Naubet Bisenov and Jacopo Dettoni in Almaty, Monica Ellena in Tbilisi

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he Asian Development Bank, in its latest "Asian Development Outloook Supplement" published on December 17, cut the growth outlook for Central Asia to 5.1% from the previous 5.6% for the full-year 2014 and to 5.4% from the previous 5.9% for 2015. The countries in the region most exposed to Russia – Kazakhstan and Kyrgyzstan – are feeling the full effects of the crisis there, while the more closed economies appear more sheltered from the problems, though are still being hit by the fall in remittances.

Falling oil prices and geopolitical tensions in the region, as well as the weaker demand for Kazakhstan’s exports from the country's main trading partners, are painting a bleaker picture for Kazakhstan’s economic growth in 2015. The stagnant oil and gas sector due to repeated delays in production from the giant Kashagan oilfield and lower global prices of oil and metals has meant industrial output fell in the first 10 months, picking up only in November to give a meagre increase of 0.1% for the January-November period.

"Central Asian economies are feeling the impact [of the slowdown in Russia] through reduced remittance inflows and muted external demand, which is undermining growth in Armenia, the Kyrgyz Republic, and Uzbekistan," the report reads. "Positive news in Tajikistan (where robust construction is more than compensating for the effect of the slowdown in the Russian Federation) and in Turkmenistan (where climbing gas exports are expected to boost 2015 growth) is insufficient to offset slowdowns in the rest of the subregion."

The collapsing ruble is putting a huge strain on the Kazakh currency, the tenge, as Russia accounts for a third of the country's imports. Turkmenistan devalued its currency by 19% in January, putting huge pressure on the other states

Government concern over the state of the country's economy has forced Astana to cut its growth forecasts to 4.3% from 6.0% in 2014 and to 4.8% from 5.0% in 2015. Although the government retained the Brent price at $95 per barrel for the 2014 budget, it cut it to $80 per barrel in the 2015 budget.

This means that should the price of oil remain below or around $60 per barrel for an extended period of time in 2015, the government will have to revise down again its forecasts for GDP growth, budget revenue, expenditure and other indicators in the first half of 2015.

Rest of Central Asia The development of Turkmenistan’s still-nascent domestic gas industry is helping to shore up economic growth in this isolated country, though the falling ruble forced the government to devalue the manat by about 19% in January. The country posted 10.3% y/y economic growth in the first 11 months of the year, according to government figures, and the IMF sees economic growth at 11.5% y/y in 2015.

In just five years since the first trunk of the $7.3bn Central Asia-China gas pipeline (CACGP) came online in

"The Asian Development Bank cut the growth outlook for Central Asia to 5.1% from the previous 5.6% for the full-year 2014 and to 5.4% from the previous 5.9% for 2015"

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December 2009, Turkmenistan has turned into China's largest gas supplier, shipping 24.4bn cubic metres (cm) to China in 2013, which made up 47% of Beijing’s total gas imports. Export volumes will go up to 65bn cm per year by 2020, when a fourth trunk of the CACGP is expected to be ready.

Uzbekistan too is weathering the storm, with economic growth of 8.1% recorded in the first nine months of 2014, and an expected 8% seen in 2015, at least according to government figures. Even though Uzbekistan’s economy is relatively closed, it was showing steady growth due to its energy (particularly gas) and metals (especially gold) resources. Revenues from these key industries allow the government to control the economy through investments in services (accounting for 48% of GDP) and industry (accounting for 40% of GDP). Uzbekistan is currently the world’s fifth largest producer of cotton, but is attempting to diversify its agriculture towards fruits and vegetables.

Tajikistan is also showing some resilience to the troubles affecting Russia. Annual GDP growth is expected to slow slightly to 6.5% in 2014 from 7.5% in 2013, and remain at 6.0% in 2015, the IMF estimates. “Growth this year is being supported primarily by an extraordinarily rapid expansion of construction (over 27% y/y through September)," the IMF said in a statement following an official mission to Dushanbe in November.

However, the country has to deal with falling remittances from Tajik migrants working abroad, which made up 42% of GDP in 2013, World Bank figures show. The inward flow of remittances fell by almost 5% in the first half of 2015, according to figures from the Central Bank of Russia, and have likely decreased further in the second half of the year as Western sanctions and falling oil prices take an additional toll on the Russian economy and the ruble.

On the other hand, Kyrgyzstan is feeling the chill coming from the Russian freeze; its economic growth has quickly

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decelerated and the Kyrgyz som is steadily losing ground against the US dollar.

Kyrgyzstan's economic growth is expected to fall to 3% in 2014, down from 10.5% in 2013, and will not exceed 5% over the next three years, according to World Bank estimates.

“The medium-term outlook has become more challenging reflecting structural deficiencies in main trading partners, as well as more tense foreign trade relations, including from stricter enforcement of custom union regulations,” the World Bank said in its latest country report, referring to Kyrgyzstan’s preparations to join the Russia-led Eurasian Economic Union (EEU) in 2015.

Tighter customs controls at the KazakhKyrgyz border designed to ensure duty-free access only to Kyrgyz-made products are affecting the re-export of Chinese products, a key part of the economy. Almost 80% of local businesses deal in the re-sale of cheap Chinese products, including massmarket goods, fruit and vegetables, and other mass-market goods. Every year

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Inflation is put at 8% in 2015, according to World Bank estimates.

Caucasus The economies of the South Caucasus face challenges given the fallout from the geopolitical tensions and the difficulties that the Russian economy is facing. The heat is stronger on Georgia and Armenia, whose economies registered weaker trade and a decline in remittances from workers abroad, given their strong economic ties to Russia. At the end of 2014, their currencies – the Georgian lari and the Armenian dram – felt the shockwaves sent by the ruble quake.

According to Fitch Ratings, the high dollarization in both republics is a distinct weakness – the financial sector is well capitalised and liquid, but further weakening in the exchange rate could weigh on financial stability. The falling oil price is Azerbaijan’s primary enemy, and further declines could slow growth and potentially cause financial and economic distress in the country.

Tensions between Armenia and Azerbaijan escalated in November

"The collapsing ruble is putting a huge strain on the Kazakh currency" Kyrgyzstan re-exports $10bn worth of Chinese products, according to figures in the local press. Should Kyrgyzstan join the EEU, import duties for goods coming from China will double, local observers warn, further affecting the country's re-export potential.

The Kyrgyz currency lost 14.5% against the dollar in 2014, forcing the country's National Bank to carry out 390 operations in the currency market to support the som. At the same time, the weakening currency caused inflationary pressures to rise as the import bill went up, with the annual growth of the consumer price index reaching 9.7% in November compared with 4% in 2013.

when Azerbaijani forces downed what Baku said was an Armenian military helicopter east of the disputed NagornoKarabakh enclave. The action, which Armenia vowed to avenge, killed three crew members and it was the first aircraft shot down in the conflict zone in the past 20 years.

However, growth across the South Caucasus is set to continue. For 2015, the International Monetary Fund (IMF) forecast Armenia’s economy to expand by 2.6%, Azerbaijan by 4% and Georgia by 5%.

A full version of this Outlook 2015 can be found at www.bne.eu

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2015 will be Russia’s year of ruling dangerously

STOLYPIN:

Mark Galeotti of New York University

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ontrary to some Western hopes and the more feverish rumours within the Moscow intelligentsia, there is no imminent threat to Russian President Vladimir Putin.

However, his rule is strong but brittle, and a combination of systemic pressures are eating away at the regime’s social, economic, political and geopolitical reserves. This will leave the Kremlin much less able to weather future shocks and unexpected turnarounds. As a result, 2015 will be dominated both by efforts to protect and restore those reserves and also the uncertain lurch from threat to crisis.

It is clear that the Kremlin did not anticipate the implications of its Ukrainian adventures. The Crimean land grab was a piece of inspired opportunism, taking advantage of ideal conditions, including a distracted and uncertain new government in Kyiv. While the decision was spur of the moment, the plans had been long drawn-up. However, the lack of even token resistance encouraged Putin to go further

"It is time for Russia to acknowledge its dearth of reliable allies"

and intrude into so-called “Novorossiya.” This had not been game-planned militarily or politically, and mired Russia in a conflict in which defeat is unthinkable, but victory – without a massive escalation – appears unwinnable.

Crimea was an expensive piece of real estate, not in the capture but in the harmonization to Russian standards. All the costs are magnified by the wider economic crisis brought

about by the slump in oil prices, and hardly helped by the unexpectedly (for Moscow) deep and enduring Western sanctions. After all, the Kremlin had banked on a re-run of the response to the 2008 incursion into Georgia: a few months of splenetic rhetoric and then a “re-set.”

As it was, 2014 thus saw Russia battered by a perfect storm of macroeconomic, military and political pressures. This is inevitably having an impact on the finances of state and public alike. Reserves have fallen from $510.5bn at the start of 2014 to $388.5bn by the end, largely because of efforts to sustain the ruble. This is still a respectable stash, but when one considers the accounting sleight of hand that means “rainy day” funds are included, then Russia’s external debt obligations over the next two years alone will consume these reserves.

The government has introduced a 10% cut across most government departments (although the military and security agencies have so far been protected), which across 2015 will begin to have an effect on public services. Even the military, though, is beginning to have to come to terms with potential future budget cuts, with long-term projects such as the roll-out of the PAK DA strategic bomber already being earmarked for delay.

However, the bulk of cuts will be in public services and this will begin to have an impact on life for most Russians over time. Just as the ruble’s tumble has not led to immediate and dramatic changes in most people’s lives but instead a slow constriction as prices rise faster than wages, so too these cuts in state funding will manifest themselves gradually over time.

This strikes at the very heart of Putin’s implicit social contract with the Russian people: political quiescence in return for a

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steadily improving quality of life. Russians under Putin have lived better than Russians have at any point in their history and it is this, rather than national glory or even his barechested mythology, that explains the very real esteem in which he is generally held. However, as that social contract begins to be broken, Russians may begin to express their discontent, at least with the situation, even if not yet with Putin himself.

More serious will be the pressures on the separate bargain struck with the elite: loyalty for the opportunity to live a good life, not least through embezzlement and corruption. Either the Kremlin will have to attempt to force a renegotiation of the “acceptable limits of corruption,” or else it will have to continue to swallow a practice that consumes possibly as much as a quarter of Russia’s GDP.

Opinion With the Kremlin increasingly lacking in ideas and strategy and its resources running low, 2015 is likely to be a tense, dangerous year for Russia. Putin must just hope for, well, not too much stuff to happen.

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

This will sharpen and trigger intra-elite feuds, of the sort that have flared up periodically through Putin’s era, over access and assets. The long-running scandal over the Interior Ministry’s economic crime division – as the Federal Security Service and Investigations Committee try to take over this lucrative portfolio – and the arrest of Vladimir Yevtushenkov and dismemberment of AFK Sistema are likely signs of things to come.

China as loanshark Meanwhile, Russia’s geopolitical situation is also parlous.

However much it may try to present China as an ally, its ruthless negotiations over credits and energy supplies show Beijing is not so much Moscow’s banker as its loanshark. When even Belarus is trying to distance itself – President Alexander Lukashenko acidly told newly-appointed Prime Minister Andrey Kabyakau that, “yes, Russia is our brother, our friend.

But you see how they behave lately” – then it is time for Russia to acknowledge its dearth of reliable allies.

Finally, even the internal resources of the Russian leadership – imagination, decision, wisdom – appear tapped out.

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

It is important to stress that this does not in itself mean some imminent threat to the regime. Instead, it means that its capacity to weather shocks and challenges becomes increasingly limited. This could be anything: a resurgence and expansion of Navalny’s protest movement, open clashes within the elite, a financial scare, an upsurge in terrorism or even health problems for Putin. The point is that stuff happens.

The measure of a government is its capacity to respond to the unexpected, and the intellectual, political and social reserves on which it can draw to do so.

"East Ukraine was not gameplanned militarily or politically, and mired Russia in a conflict in which defeat is unthinkable but victory appears unwinnable"

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INVISIBLE HAND:

Russia curries favour in its “pivot East” Liam Halligan in London

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ussia’s recent “pivot East” has become a geopolitical cliché. It’s now widely understood that one of the most significant consequences of sanctions imposed by the US and (less enthusiastically) the EU has been significantly to strengthen relations between Moscow and Beijing.

Enemies for much of the Cold War, Russia and China have been building serious commercial and diplomatic ties across their 2,700-mile border for well over a decade. Since 2002, their bilateral trade has grown seven-fold, to almost $100bn annually, as both sides recognize the economic synergies between the world’s largest energy exporter and the biggest and most populous manufacturer on the planet.

Such Sino-Russian co-operation, though, has lately accelerated as Moscow seeks to lessen the commercial impact of Western sanctions by deepening trade relations to the East.

Far from shunning the Russians, the People’s Republic has become closer to its vast neighbour since EU/US travel bans, assets seizures and other trade restrictions were imposed on Russia last spring.

Back in June, following the annexation of Crimea, Western politicos and business bosses boycotted Russia’s flagship St Petersburg summit. The Chinese, though, very publicly turned up to sign a $400bn, 30-year gas deal with President Vladimir Putin. That was followed by another Russia-China bilateral energy contract, sealed at November’s Apec summit in Brisbane, despite the presence at that meeting of President Barack Obama himself.

Moscow and Beijing, in fact, struck no less than 17 bilateral deals at Apec – involving not just energy, but also electricity generation, insurance and import-export credits, while extending non-dollar settlement of the growing trade between them. So, amid ongoing claims of “Russian isolation,” these two eastern giants spent 2014 getting on with business, making crystal clear their shared interest in rejecting any notion of a US-dominated “unipolar” world. All this is now well recognized in the West, if not widely commented upon.

Far less understood has been the warming of post-sanctions relations between Russia and that other eastern giant – India.

Putin’s passage to India In late November, Indian Prime Minister Narendra Modi welcomed Putin to New Delhi. While the Russian delegation was looking to further diversify eastern interests, the Indian hosts were keen to talk, above all, about burgeoning domestic energy needs.

It was a visit involving considerable diplomatic bonhomie, with Modi thumbing his nose at any Western distaste about doing business with Moscow. “Times have changed, but our friendship has not,” proclaimed Modi’s Twitter account, in Russian, as he entertained Putin. “The importance of this relationship and its unique place in India's foreign policy will not change… we stick together through thick and thin.”

Amidst the niceties, commercial contracts worth over $100bn were signed, including a $50bn oil-and-gas agreement, a $40bn nuclear energy tie-up and deals in other sectors ranging from defence to fertilizers and space travel.

State-controlled Russian energy monolith Rosneft agreed a 10-year fixed-price contract to supply India with oil. Zarubezhneft and Oil India also signed a deal on joint exploration, production and transport. Rosatom, meanwhile, is to build 12 nuclear

"The growing bond between China and Russia is among the megatrends of our time; the deepening of ties between Russia and India isn’t far behind" reactors on the Indian subcontinent over the next two decades, while Russia and India will also cooperate on the production of 400 advanced twin-engine Ka-226T military helicopters.

Over 20 agreements were announced, including with Russia’s Alrosa diamond-mining group, which wants direct access to India’s huge cutting and polishing industry that now processes

bne February 2015

nine-tenths of all polished diamonds sold worldwide. Putin and Modi ended the summit by predicting bilateral Russian-Indian trade will reach $30bn by 2025 – small by Sino-Russian standards, but still representing a three-fold increase over 10 years.

While there’s been little discussion of the growing détente between Russia and India in the Western media, it could prove of similar significance to that between Russia and China. The two countries were Cold War quasi-allies, of course, with India a leading member of the “Nonaligned Movement” of Soviet-sympathizing developing nations. During the late 1960s and 70s, India saw the USSR as its main supporter on the UN Security Council and there was extensive collaboration across the scientific and defence sectors, with warm relations developing between Soviet and Indian elites. The collapse of the USSR, then, was traumatic for India, leading to a surge of economic cooperation with the US, as business between India and Russia withered.

That trend is now being reversed. Bilateral trade is expanding fast despite – or even partly because of – Western sanctions against Russia. Modi went as far as to declare his “opposition to sanctions imposed on Moscow without UN endorsement” during his summit with Putin, openly chiding the EU and US. He even expressed interest in joining the Russiadominated Eurasian Economic Union, as well as the Shanghai Cooperation Organisation – an increasingly important trade and security organisation linking China, Russia and the Central Asian former Soviet states.

Many arms of Vishnu Defence will definitely feature heavily in the growth of Russian-Indian trade, building on shared history. India, which bought its first MiG fighter jet from the USSR in 1963, is now the world’s biggest arms importer. Already, during the four years to 2013, two-fifths of Russia’s weapons exports were sold to the Indian subcontinent. That very substantial defence sector trade is now developing into co-production and technology-sharing agreements. Russia and India have previously teamed up to develop a fifth-generation fighter jet.

And this most recent round of agreements will see specialized Russian production facilities moving to India to build state-ofthe-art helicopters in situ, a $3bn deal that is part of Modi’s flagship “Make-it-in-India” scheme.

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"Far less understood has been the warming of post-sanctions relations between Russia and that other eastern giant – India" economic clout. With 1.2bn people, and already the world’s tenth-largest economy, India is on course to rank second behind China by 2040 – with the US by then coming in third.

On a purchasing power parity basis, adjusting for living costs, India is already the third-largest economy on earth.

Back in 2013 India looked vulnerable, with spiralling inflation, stagnating growth and an external deficit approaching 7% of GDP. Since then, the country’s headline performance has been transformed. The world’s third-biggest crude importer behind the US and China, India is benefitting from oil prices that have fallen to a five-year low. That’s eased inflation, narrowed the external deficit and flattered the budget balance. A new UN report just forecast Indian growth of 5.9% in 2015, up from 5.4% last year, rising to 6.3% in 2016 – rates of economic expansion over twice those predicted for the US and four-times those of the EU. In elections last May, Modi’s BJP broke the rule of India’s Congress party, which had held power for most of the time since independence in 1947. After campaigning as a probusiness candidate, vowing to tackle rampant corruption and India’s stultifying civil service, Modi now leads the first majority government in three decades. As a result, and boosted by lower oil prices, India is experiencing a strong feel-good factor, a wave of domestic hope it can grow strongly and take its development to the next level. Recent deals with Russia, not least on energy security, will do little to harm that cause.

Back in 1770, as the Western world’s industrial revolution began, India accounted for no less than 15% of global output. Over the next one or two decades, the subcontinent, with its burgeoning population, tech-savvy business elite and ubiquitous shopping malls will become an economic superpower once more.

Putin clearly views weapons, one of Russia’s few internationally-competitive export sectors, as a way partially to replace energy export revenues in the wake of lower oil prices. Closer Russian defence ties work for Modi too, given India’s need not only for security but also weapons technology often denied to it by the West. It’s noteworthy that all three branches of India’s armed forces have conducted joint exercises with Russia since sanctions came into force. “Even as India's options have increased,” said Modi during Putin’s visit, “Russia will remain our most important defence partner.”

The EU and US have tried to punish Moscow with sanctions that have triggered steep drops in the ruble against the dollar and euro. Yet Modi, like China’s President Xi Jinping, has decided to ignore the West and use the sanctions as an opportunity to strengthen commercial and diplomatic relations with Russia instead. The growing bond between China and Russia, given their shared interests, is among the mega-trends of our time. The deepening relationship between Russia and India isn’t far behind.

India’s newfound audacity – as shown by Modi’s embrace of Russia and general West-baiting – stems from growing

Liam Halligan is Editor-at-Large of bne Intellinews.

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The rise and fall of the Eurasian Economic Union

Mark Adomanis in Washington

T

he Eurasian Economic Union (EEU), which came into being on January 1, is an idea that looks great on paper. Clearly based on the European Union’s successful efforts to break down economic and trade barriers between its members, the EEU was supposed to create unified markets in capital, labour and goods. It was, to ape a famous phrase, technocratic capitalism with Russian characteristics.

The EEU was (obviously) not an elixir for the economic problems of the former Soviet Union. In moments of truth

"It’s not too simplistic to say that we can now count the EEU among the victims of the war in Ukraine"

even its most fervent advocates would admit as much. By itself, the EEU had no authority to do anything about the insecure property rights, corrupt bureaucracies and weak judiciaries that place such a heavy burden on business throughout the post-Communist world. Even if everything went according to plan, administrative pressure on the private sector was going to remain a very significant problem.

However, to the extent that mutually beneficial economic exchange makes the world just a little bit better, the EEU was a small step in the right direction. I’ve yet to hear from any of the more skeptical voices – upon its announcement the EEU drew reactions from the Western foreign policy establishment that ranged from sputtering outrage to simple contempt – about how maintaining the status quo would have helped anyone. It seems pretty clear that substantial tariff barriers between, say, Armenia and Russia or barriers to capital between Kazakhstan and Russia weren’t actually a good thing. If the EEU successfully removed such barriers, then it would be better than nothing.

Soviet reincarnation Western critics of the EEU, most prominently then-US Secretary of State Hilary Clinton, proclaimed that it was nothing more than an attempt to re-animate the Soviet Union’s rotted corpse. In this understanding the EEU was a wolf in sheep’s clothing, a vehicle for Russian imperialism dressed up as an economic arrangement. Any country unlucky enough to be caught in its grasp would soon be under Moscow’s direct control.

On a certain, surface, level this analysis had some plausibility. Vladimir Putin and the Russian government clearly are keen on expanding their influence throughout the former Soviet space. It is fair to say that the EEU was part of a larger and more comprehensive effort to return Moscow to a privileged position of regional leadership. The problem, however, is that such critiques did not take into account the nature of the governments which were actually involved.

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One can say a great many things about Belarusian President Alexander Lukashenko or Kazakh President Nursultan Nazarbayev, the other two leaders who were instrumental in drawing up the blueprints for the EEU. By most independent reckonings, the governments over which they preside are even more repressive than Russia’s. One thing one can absolutely not say about them, however, is that they are in any hurry to yield even an ounce of real power.

Ever since they first came to power, they have painstakingly put themselves in positions of supreme influence in their own countries, and have studiously worked to undermine

"The EEU can only work if the other governments are willing participants"

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But ever since Russia’s annexation of Crimea, both Belarus and Kazakhstan are (quite understandably!) wary of Russian intentions and they are increasingly balking at the deeper economic integration that is the EEU’s job to accomplish. There have been increasingly blatant signs of push-back on the part of both the Kazakh and Belarusian governments. According to the Financial Times, Belarus even went so far as to reinstate previously dismantled border controls.

Russia is more powerful that either Belarus or Kazakhstan, but it is not so much more powerful than it can simply force them to do whatever it wants. The EEU can only work if the other governments are willing participants, and Russian behaviour has convinced them that the risks of participation far outweigh the benefits.

Russia faces a very difficult, and at this point probably impossible, struggle to convince its partners that the EEU is compatible with their sovereignty and economic wellbeing.

any and all potential challengers. It beggars belief to think that either Lukashenko or Nazarbayev would yield power under any but the most apocalyptic circumstances.

It’s not too simplistic to say that we can now count the EEU among the victims of the war in Ukraine.

And so the EEU was faced with a simple but potentially existential problem: its success was predicated upon it not being viewed as a vehicle for Russian imperialism. It would only work if it were received in Minsk and Astana as a “rising tide lifts all boats” bit of technocratic economic governance.

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.

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BOOK REVIEW:

Russia’s Mobutu?

Derek Brower in London

C

orruption in Vladimir Putin’s Russia has sprouted its own sub-genre for Western publishers. Few of the many books, though, have the laser-like focus or amass the same devastating detail as Karen Dawisha’s “Putin’s Kleptocracy: Who Owns Russia?” (Simon & Schuster, New York: 2014).

Thanks to Britain’s libel laws, the book is already notorious.

Cambridge University Press, Dawisha’s long-term publisher, probably feared the inevitable lawsuits when it turned down the manuscript. Dawisha, an academic at Ohio’s Miami University, found an American publisher, and the timing was good. Her book explains why the US government, responding to Russian involvement in Ukraine, has issued sanctions not against the Russian state itself but against a host of men and companies close to its president.

For Dawisha, these men are the Russian state, and they designed their elaborate system to plunder the country and enrich themselves. That’s a familiar theme in Western writing about Putin’s Russia. But Dawisha goes further: this was, she argues, always Putin’s purpose. He planted the roots in Dresden, watered them as the “grey cardinal” in Anatoly Sobchak’s corrupt St Petersburg mayoralty in the 1990s, and ensured they would flourish in Moscow first as prime minister and then with the Kremlin’s power behind him.

This teleology won’t convince all readers. No one, perhaps least of all the humourless St Petersburg bureaucrat himself, expected in the 1990s that Putin would so quickly rise to the top of Russian politics. Charting it all almost solely in terms of greed and graft doesn’t wholly explain Putin’s success in bending Russia to his will or his genuine popularity.

The book’s scope is narrower than that. Its relentless focus is Putin, his cronies and how they pulled off their heist. It yields a forensic catalogue of the graft. Dawisha rejects the dewy-eyed view of the Yeltsin era found in many accounts of modern Russia – the 1990s were a “gangster’s paradise,” she writes – but in chronicling Putin’s misdemeanours in the St Petersburg days, the book says little about the wholesale appropriation of state assets that was already underway in Moscow. That sale of the century is probably old hat for

"There has been a partner in this kleptocracy, and that partner is the West"

many readers of Dawisha’s book. But compared with all that, Putin’s alleged behaviour in St Petersburg was pick-pocket stuff.

Nonetheless, in Dawisha’s account it was in Dresden and St Petersburg that Putin established both his behaviour and the coterie of fellow plunderers that she says now runs – and owns – most of Russia. Among his St Petersburg chums were Dmitry Medvedev, who would become chairman of Gazprom, a prime minister and president of the country; Igor Sechin, who would run Russia’s oil sector and become chief executive of Rosneft; Victor Zubkov, another prime minister; Viktor Ivanov, now head of Aeroflot; German Gref, formerly the economy minster and now head of Sberbank; and Aleksei

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Miller, chief executive of Gazprom. Others, such as Nikolai Tokarev and the ex-Stasi member Matthias Warnig, worked with Putin when he was a foreign intelligence agent in Dresden. Tokarev now runs Transneft, the Russian pipeline firm, and Warnig is managing director of Nord Stream, which built and operates the pipeline between Russia and Germany.

The power and wealth of these men is well known. Many are now under sanctions. Putin was loyal to his cadre. The president’s own wealth is also alleged to have flourished.

Dawisha repeats many of the rumours: the stakes in Gazprom and Surgutneftegaz, the luxury watches, the 58 planes, the 20 presidential palaces. Dawisha recounts how Gennady Timchenko and Putin forged their relationship when the former was involved with the Kirishi refinery in St Petersburg. His co-owned trading firm, Gunvor, rose to global prominence, alongside Rosneft, following the destruction of Yukos. Putin, claims Dawisha, owns as much as 50% of Gunvor.

Proving all this or other claims in her book is difficult, as any recipient of a threatening letter from London libel lawyers can attest. This is why UK publishers won’t touch the book, the initial pages of which would hardly pass a British lawyer’s sniff test. Many of Dawisha’s claims rely on material published elsewhere. She joins the dots with aplomb, but a crime-scene of smoking guns the book is not.

Eyes opened Russia is also more complex than it seems in Dawisha’s book. She rightly traces the origins of the clampdown on free media to the assault on Vladimir Gusinsky’s Media-Most empire in mid-2000, seeing it as part of Putin’s campaign to establish the ”vertical of power” on which state corruption would thrive. But much of Dawisha’s own research relies on Russian reporting, or the work of the anti-corruption activist Alexei Navalny. For Dawisha, Putin has subjugated an entire country. But her own work shows this job is not complete.

The imposition of sanctions against many of the rogues in Dawisha’s gallery suggests the West’s eyes have at last opened to Kremlin-sponsored malfeasance – but too late.

“There has been a partner in this kleptocracy, and that partner is the West,” writes Dawisha, a couple of paragraphs into the book before a picture of a grinning Gerhard Schröder, the ex-chancellor of Germany who now works for Nord Stream. Western intelligence had long known of the rampant corruption in Putin’s circle, she claims. It was only recently, following Russia’s aggression in Ukraine, that governments began to act.

Does the corruption matter or is Russia simply another country that will muddle along despite its rapacious elite?

Tenuously, Dawisha links Russia’s low birth rate to the graft.

More plausibly, she calculates the opportunity cost. Itera and Eural Trans Gas, two intermediaries for Gazprom gas

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sales, siphoned off wads of cash that should have gone to the Russian treasury, she alleges. Half of the $50bn spent on the Sochi Olympics passed into the hands of Putin cronies, she says. Construction of Germany’s half of the Nord Stream pipeline cost €2.1mn per kilometre; Russia’s cost ¤5.8mn.

Money that could have been spent in the Russian economy on schools, hospitals, or infrastructure, instead sustained the country’s billionaires. Given the rampant capital flight from the economy in recent months, not much of their cash has been recycled locally either.

For some readers, these claims will be old news. But the scale and breadth of Dawisha’s allegations are still shocking.

It wasn’t just Gunvor, she suggests – over decades Putin’s fingers have reached into many pies, from gambling to real estate to energy and banking. In Dawisha’s account, Russia’s president was a cheat in Dresden, a crook in Petersburg and a fraud in the Kremlin. “If you want to steal, steal a little in a nice way,” said Sese Seko Mobutu, the Zairian president who despoiled his entire country. The thieving in Putin’s Russia has been neither nice nor little.

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OBITUARY:

Jozef Oleksy, Polish premier who was accused of being an informant Jan Cienski in Warsaw

J

ozef Oleksy considered entering the priesthood before he eventually became a communist apparatchik and later a prime minister in democratic Poland, and that swing of fortune remained a hallmark of the life of one of Poland’s most prominent leftwing politicians.

Oleksy, 68, died on January 9, killed by the cancer he had spent years battling. But the memories he left were of a man who gracefully adapted to his circumstances, leaving a positive glow that few in Poland’s turbulent and often vicious political world could match.

“I am saying a sincere farewell, because he was a person who created good thoughts, good associations, good feelings,” said Bronislaw Komorowski, Poland’s president and a one-time anti-communist dissident, adding that Oleksy “in his person illustrated the changes taking place in Poland".

Oleksy was raised in a pious family, even twice taking first communion, before starting his studies in a seminary. But the government’s decision to shut the school sent him in an altogether more secular direction. He ended up studying at the country’s main economic planning school and joined the Communist party. He also informed for military intelligence in the 1970s, something that haunted him decades later in a completely different political system.

“Yes, I was an opportunist,” he admitted in an interview with the Rzeczpospolita newspaper. “I have regrets but so what?

That was how my life went, and it could have been different.

Understand that I wanted to be active, to achieve something.”

Oleksy built himself a career as a regional party functionary before becoming a minister in the final Communist government of Mieczyslaw Rakowski. He took part in the 1989

Photo: Jarosław Roland Kruk

round table talks with the Solidarity labour union which led to the party losing control of the country later that year. The economic reforms unleashed by the Solidarity government of Tadeusz Mazowiecki helped turn Poland into a capitalist success story, but the social costs were so high that the relabelled ex-communists managed to get back into power by 1993 – to the dismay of anti-communist activists who had spent most of their lives fighting the old system.

The gravel-voiced and ostentatiously bald Oleksy served as a good humoured speaker of parliament before taking over the government in 1995. However, he held office for less than a year before being ousted after he was accused of being a Russian agent using the code name “Olin”. He always denied the allegations and they were never proven, but they did cast a permanent shadow over his later career. After his death, Lech Walesa, the Nobel laureate, Solidarity leader and former president, said he was sorry that he had never properly apologized to Oleksy for the accusations.

Oleksy returned as interior minister and again parliamentary speaker during a second leftwing government that ruled from 2001 to 2005. A boozy 2007 lunch with well-connected millionaire Aleksander Gudzowaty made Oleksy a pariah with his old comrades. The spicy conversation between the two, filled with innuendos and accusations against other senior leftwing figures, was recorded and made public. Aleksander Kwasniewski, a former two-term president, called Oleksy a “traitor” for that.

In later years Oleksy retreated from public life, spending more time with his family. However, he ended up becoming the grandfatherly symbol of a communist made good – a man who had made his peace with the political and economic changes that have transformed Poland over the last quarter century.

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Special Report: Capital Markets Survey 2014

Special report I 73

bne 2015 bne February May 2008

2014 in CEE/CIS proves rich in risk, relatively poor in reward Guy Norton in Zagreb

2

014 proved to be an extremely testing one for issuers, lead managers and investors in the Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS) region, dominated as it was by the political-economic fallout from the bitter standoff between the US and Europe on the one side and Russia on the other side over the bloody events in Ukraine. Add in one-off fears about the general health of the global economy, the plummeting price of oil, uncertainty over the continued use of quantitative easing and renewed concerns over the fate of the embattled Greek economy, and the capital markets environment in 2014 ultimately proved to be as challenging as when the credit crunch and associated global economic slowdown hit home in 2008-2009.

As such issuers, lead managers and investors in CEE/CIS had to have their

wits about them if they were to be successful. Arguably a crystal ball-like ability to read which way the political winds were blowing and having nerves of steel proved to be every bit as important as

chaos in Ukraine paid off for the selling shareholders in Russian supermarket chain Lenta, which yielded the largest equity market issue of the year from the region. On the basis that

“2014 ultimately proved to be as challenging as when the credit crunch and associated global economic slowdown hit home in 2008-2009� having a strong credit story to tell when it came to capital markets success.

Equity Nowhere was that more true than in the equity markets, where the decision to press ahead with a landmark initial public offering (IPO) at a time of rising

fortune favours the brave, bookrunners Credit Suisse, JPMorgan, VTB Capital, Deutsche Bank and UBS were arguably vindicated in their decision to proceed with a deal, which although it just failed to achieve the landmark issue volume of $1bn, did nevertheless actually make it to market, which a

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II Special Central report Europe

And the winners are…

bne IntelliNews Best Bank for M&A 2015

Goldman Sachs

bne IntelliNews Best Bank for Equity Capital Markets 2015

Deutsche Bank

bne IntelliNews Best Bank for Debt Capital Markets (Sovereign/Local Authority) 2015

Citi

bne IntelliNews Best Bank for Debt Capital Markets (Corporate) 2015

bne 2015 bneFebruary May 2008

great number of mooted Russian issues singularly failed to do.

Although the share issue that valued the company at $4.3bn was priced at the lower end of the Lenta's indicative price range of $9.5-11.5 per global depository receipt, the deal nevertheless reaped a decent return for the selling shareholders – private equity groups TPG Capital and VTB Capital, alongside the European Bank for Reconstruction and Development (EBRD).

And although for most of the year the issuance environment for Russian equity issuers proved to be less than ideal, Russian stock market operator Micex and Qiwi, the operator of Russia’s largest instant payment system, both managed to launch sizeable additional share offerings in 2014 following on from the success of their IPOs in 2013.

Elsewhere, new issue activity was fairly limited. However, Georgia’s TBC Bank capitalised on the good reputation of the Georgian banking sector to join Bank of Georgia on the London Stock Exchange with a deal worth $256mn.

And after a number of botched privatisation sales, Romanian power company Electrica’s IPO on the London and Bucharest bourses proved a highlight from a country which also spawned follow-on issues by real estate devel-

Russia, and the prime issue this year will be whether those offerings can be resurrected if sentiment towards Russia improves.

Debt Sentiment in the syndicated loan market in 2014 remained relatively robust for entities from CEE/CIS, with a wide range of borrowers from the region able to secure jumbo-sized transactions.

Although with the honourable exception of mobile operator VimpelCom, sizeable syndicated loans from Russia were notable by their absence, but borrowers from other countries tasted success.

Sovereigns Bulgaria and Turkmenistan took advantage of improving sentiment towards them to launch landmark deals, while well-known oil and gas companies from the region, including Hungary’s MOL alongside Poland’s PKN Orlen and PGNiG, also secured sizeable transactions with deals that ultimately proved well timed given plummeting commodity prices at the end of the year. As did Turkey’s Star Rafineri, which offered syndicated lenders a relatively rare opportunity to grab a large slice of Turkish corporate risk.

On the sovereign Eurobond front, 2014 witnessed some notable successes, with Slovenia taking advantage of improving sentiment towards the country after

“The prime issue this year will be whether cancelled equity offerings can be resurrected if sentiment towards Russia improves”

VTB Capital

bne IntelliNews Best Bank for Debt Capital Markets (Financial Industrial Group) 2015

Societe Generale Corporate & Investment Banking

oper New Europe Property Investments and energy company Romgaz. Finally, towards the end of the year insurer AvivaSa Emeklilik ve Hayat provided some welcome diversification with a relatively rare IPO from Turkey.

Overall, though, 2014 proved to be a disappointing year on the equity front, principally due to the cancellation of a large number of potential deals from

it successfully averted a meltdown by securing close to $6bn in funding, while Poland, arguably the safe haven play of choice in the region, raised just under $7.5bn.

While other regular issuers such as Hungary, Turkey, Romania and Slovakia all tasted success, the return of Kazakhstan to the international bond markets after more than a decade with a $2.5bn issue

bne 2015 bne February May 2008

was undoubtedly one of the highlights of the year. The success of that offering was undoubtedly key to state oil and gas firm KazMunaiGas being able to issue the biggest corporate Eurobond of the year out of CEE/CIS, with the launch of a $1.5bn offering in the wake of the popular sovereign deal.

Although both Russian Railways with a brace of deals totalling over $1.4bn and Gazprom with a $1bn equivalent issue were able to access the international bond markets, Russian issuers as elsewhere in the capital markets were largely starved of market access in 2014. Whether that continues in 2015 – and with few signs of the Western sanctions being removed anytime soon, most likely it will – will have a major influence on corporate bond issuance volumes this year.

Other issues of note beyond a flurry of benchmark issues from Central European energy companies from Poland,

Special report

Slovakia and the Czech Republic included Turk Telekom offering up a rare opportunity for investors to access Turkish corporate Eurobond risk with a $1bn issue.

In terms of financial sector issuance, Turkish banks proved to be the pick of a bunch, launching a series of well-

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and Sberbank both raised over $2bn apiece in the first half of the year, the combination of the deterioration in investor sentiment towards Russia and the imposition of sanctions on banks from the country in the second half of the year meant that 2014 once again proved to be a disappointment from a Russian perspective.

"The return of Kazakhstan to the international bond markets after more than a decade with a $2.5bn issue was one of the highlights of the year" received transactions from well-known and respected lenders such as Garanti Bankasi, which kicked off the bank funding party for the country’s lenders with a $750mn deal in April. While Russian banking titans Gazprombank

That ultimately proved to be the principal leitmotif in the capital markets in CEE/CIS in 2014, and the multi-billion-dollar question this year is whether that theme will be reversed or not. Only time will tell.

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Rankings 2013 v 2014 Central and Eastern Europe M&A Advisor Rankings 2014 Rank

Full Year 2013 All Advisor Parent

Deal Value $ at

%share

No.

Rank

All Advisor Parent

Deal Value $ at

No.

%share

Announcement (m)

Announcement (m) 1

Goldman Sachs

15,848

11

16.2

1

VTB Capital

31,896

24

18.8

2

Deutsche Bank

14,209

14

14.5

2

Barclays

24,375

18

14.4

3

Morgan Stanley

13,380

8

13.6

3

JPMorgan

20,807

14

12.3

2013 v 2014 Central and Eastern Europe ECM Bookrunner Rankings 2014

Full Year 2013

Rank Bookrunner

Deal Value ($m)

No. %share

Rank

Bookrunner

Deal Value ($m)

No.

%share

1

Deutsche Bank

840

8

11.7

1

Citi

3,088

12

13.5

2

SG Corporate & Investment Banking

580

6

8.0

2

Goldman Sachs

2,349

10

10.3

3

UBS

506

6

7.0

3

VTB Capital

2,250

7

9.8

2013 v 2014 Central and Eastern Europe Syndicated Loans Bookrunner Rankings 2014

Full Year 2013

Rank Bookrunner

Deal Value ($m)

No. %share

Rank

Bookrunner

Deal Value ($m)

No.

%share

1

ING

2,701

24

4.0

1

Citi

3,820

20

3.3

2

UniCredit

2,193

18

3.3

2

BNP Paribas

3,670

19

3.2

3

SG Corporate & Investment Banking

1,756

12

2.6

3

Deutsche Bank

3,426

13

3.0

No.

%share

2013 v 2014 Central and Eastern Europe Syndicated All Total DCM Bookrunner Rankings 2014

Full Year 2013

Rank Bookrunner Parents

Deal Value $

No. %share

Rank

Bookrunner Parents

Deal Value $ (Proceeds) (m)

(Proceeds) (m) 1

Citi

10,552

40

10.5

1

VTB Capital

17,661

121

10

2

JPMorgan

9,432

29

9.4

2

Deutsche Bank

15,317

53

8.7

3

SG Corporate & Investment Banking

6,499

39

6.5

3

Gazprombank

14,252

73

8.1

2013 v 2014 Central and Eastern Europe Syndicated All Sovereign and Local Authority DCM Bookrunner Rankings 2014

Full Year 2013

Rank Bookrunner Parents

Deal Value $

No. %share

Rank

Bookrunner Parents

Deal Value $

No.

%share

(Proceeds) (m)

(Proceeds) (m) 1

Citi

6,801

13

13.8

1

Deutsche Bank

8,478

16

17.2

2

JPMorgan

6,595

12

13.4

2

BNP Paribas

4,617

9

9.3

3

HSBC

4,699

9

9.6

3

HSBC

4,015

8

8.1

2013 v 2014 Central and Eastern Europe Syndicated All Corporate DCM Bookrunner Rankings 2014

Full Year 2013

Rank Bookrunner Parents

Deal Value $

No. %share

Rank

Bookrunner Parents

Deal Value $

No.

%share

(Proceeds) (m)

(Proceeds) (m) 1

VTB Capital

2,306

11

11.2

1

Gazprombank

10,467

48

12.9

2

Citi

2,041

14

10.0

2

VTB Capital

8,240

51

10.1

3

JPMorgan

1,490

9

7.3

3

Sberbank CIB

7,158

51

8.8

No.

%share

2013 v 2014 Central and Eastern Europe Syndicated All FIG DCM Bookrunner Rankings 2014

Full Year 2013

Rank Bookrunner Parents

Deal Value $

No. %share

Rank

Bookrunner Parents

Deal Value $ (Proceeds) (m)

(Proceeds) (m) 1

SG Corporate & Investment Banking

2,167

20

8.5

1

VTB Capital

4,729

32

15.4

2

Citi

1,611

12

6.3

2

JPMorgan

2,153

19

7.0

3

Gazprombank

1,577

8

6.2

3

Gazprombank

1,956

10

6.4

bne 2015 bne February May 2008

Special report

I 77

Deals 2013 v 2014 Central and Eastern Europe M&A Advisor Rankings Pricing Date

Issuer Name Deal Nationality

28.02.14

Total Value $ Incl NonDeal (m) 974

Lenta Ltd

Russian Federation IPO

28.02.14

637

CEZ

Czech Republic

Convertible Utility & Energy

27.02.14

604

Electrica SA

Romania

IPO

Deal Type

General Industry Exchange

Retail

Utility & Energy

Bookrunner Parent

London, Moscow (MICEX) Credit Suisse, JPMorgan, VTB Capital, Deutsche Bank, UBS Budapest Barclays, Deutsche Bank, HSBC, SG Corporate & Investment Banking Bucharest, London Citi, Raiffeisen Bank International AG, SG Corporate & Investment Banking

2014 Top Ten Syndicated Loans from Central and Eastern European Issuers Credit Date

Deal Value ($m)

Borrower

Deal Nationality

25.04.14

2,765

PKN Orlen SA Poland

11.06.14

2,500

29.05.14

2,424

KGHM Polska Poland Miedz SA Slovak Republic Slovak Gas Holding BV

Deal Type

General Industry Borrower Type

Investment Oil & Gas Grade Leveraged Mining Leveraged

Utility & Energy

Bookrunner Parent

Private sector industrial

Mitsubishi UFJ Financial Group, ING, UniCredit

Private sector industrial

BNP Paribas, Citi, Credit Agricole CIB, HSBC, ING, Intesa Sanpaolo SpA,PKO BP, SG Corporate & Investment Banking, Santander, UniCredit

Private sector utility

Citi, RBS, SG Corporate & Investment Banking, UniCredit

2014 Top Ten Syndicated All DCM Deals from Central and Eastern European Issuers Deal Pricing Date 10.02.14 01.04.14 08.01.14

Deal Value Issuer $ (Face) (m)

Deal Nationality

Deal Type

General Industry Issuer Type

Deal Bookrunner Parent

3,500

Slovenia

Sovereign,

Government

Central government

JPMorgan, Goldman Sachs, Barclays

Government

Central government

HSBC, Barclays, SG Corporate & Investment

Government

Central government

2,753 2,725

Republic of Slovenia Republic of Slovenia Republic of Poland

Local Authority

Slovenia

Sovereign,

Banking, Commerzbank Group, UniCredit

Local Authority

Poland

Sovereign,

BNP Paribas, SG Corporate & Investment Banking, Citi, UniCredit

Local Authority

2014 Top Ten Syndicated Corporate Deals from Central and Eastern European Issuers Deal Pricing Date 31.10.14

Deal Value Issuer $ (Face) (m)

Deal Nationality

Deal Type

General Industry Issuer Type

Deal Bookrunner Parent

1,500

Kazakhstan

Corporate Bond-Investment-Grade Corporate Bond-Investment-Grade Corporate Bond-Investment-Grade

Oil & Gas

Public sector industrial

Oil & Gas

Public sector industrial

Telecommunications

Private sector industrial

UBS, Deutsche Bank, Credit Suisse, Citi JPMorgan, Gazprombank, Credit Agricole CIB JPMorgan, Deutsche Bank, BNP Paribas, Barclays, Emirates NBD PJSC

National Co Kaz MunaiGas ZAO

19.02.14

1,029

Gazprom OAO

Russian Federation

13.06.14

1,000

Turk Telekomu-

Turkey

nikasyon AS

2014 Top Ten Syndicated FIG Deals from Central and Eastern European Issuers Deal Pricing Date 26.06.14

Deal Value Issuer $ (Face) (m)

24.06.14

1,356

19.02.14

1,000

1,362

Deal Nationality

Deal Type

General Industry Issuer Type

Gazprombank Russian Federation Corporate Finance Bond-InvestOAO ment-Grade Finance Sberbank of Russian Federation Corporate Bond-InvestRussia OAO ment-Grade Finance Sberbank of Russian Federation Corporate Bond-InvestRussia OAO ment-Grade

Private sector bank

Deal Bookrunner Parent

Deutsche Bank, SG Corporate & Investment Banking, Credit Suisse, Gazprombank

Public sector bank

Deutsche Bank, BNP Paribas, Barclays, Sberbank CIB

Public sector bank

Deutsche Bank, Credit Suisse, Bank of America Merrill Lynch, Sberbank CIB

78

I New Europe in Numbers

bne February 2015

bne-Intellinews Forex Tracker 0%

20%

22,4%

40%

If a new presidential election was held next Sunday, which candidate would you be most likely to vote for?

Dec 2014

Nov 2014

Oct 2014

Sep 2014

Aug 2014

4 4.00

3 3.00

1 1.00

0 0.00

0 0.00

0 0.00

Gennady Gennady Zyuganov

Vladimir Vladimir Zhirinovsky

Sergei Sergei Shoigu

Dmitry Dmitry Medvedev

Sergei Sergei Mironov

Mikhail Mikhail Prokhorov

55 55.00

49,5% 60%

40 40

80% 90,4% Jan 14

Mar 14

May 14

Jul 14

Belarus (Ruble)

Czech Republic (Koruna)

Russia (Ruble)

Ukraine (Hryvna)

Sept 14

94,4% Jan 15

Nov 14

Hungary (Forint)

20 20

Vladimir Vladimir Putin

Putin

Zyuganov Zhirinovsky

Source: Levada Center Get the data

Shoigu

Medvedev

Mironov

Prokhorov

Source: Levada Center

bne IntelliNews' forex tracker shows that few countries in Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS) have escaped from the current currency fracas. The bne:Chart shows the percentage change in units of currency per USD since a base date of January 5, 2014.

No currency has plunged more than the Russian ruble, which has lost about half its value over the past year. The only other currency that comes remotely close to doing as badly as the ruble is Ukraine's hryvnia, which has fallen as much as the ruble in several large stepdowns over the last year.

Despite being three years away, the next Russian presidential election will see Vladimir Putin re-elected in a landslide, according to a study by the independent Levada Center.

The results of the poll, published on January 15, found that if a general election were to take place this weekend, Putin would eclipse all other potential runners, with 55% of those surveyed opting for the current president, as the bne:Chart above shows.

bne-Intellinews Despair Index 2014

bne Despair Index 2014 44.8

45.0

40.0

40.0 37.3

37.5 37.1 Despair Index Score

Change since 05/01/2014 base %

19%

If a new presidential election was held next Sunday, which candidate would you be most likely to vote for?

December 2014

41.3

36.6 36.8

36.2

35.0 32.9

33.3

28.7

28.5

30.0

27.6

27.7

26.9 26.2 25.0

30.2

29.9

30.0

26.6

27.1

26.3

26.7

26.3

25.0

24.4

23.6

2009

27.0

26.1

2010

2011

BRICS average

EU

United Kingdom

EM average

Russia

United States

21.5

21.6

2012

2013

24.1 23.1 22.9

2014

The Despair Index – a combined measurement of inflation, unemployment and poverty – is bne IntelliNews' answer to the more traditional Misery Index, which aims to track prosperity in a given country, but ignores poverty levels.

As the bne:Chart shows, Russia outperformed the EM, BRICS and EU averages, narrowly missing out to the US and UK. Were it not for sanction-fuelled inflation, its score would likely be considerably better than it’s Western counterparts.

bne February 2015

New Europe in Numbers

2015 MACRO OUTLOOK: Yaroslav Lissovolik, Chief Economist at Deutsche Bank, Russia Henry Kirby in London

Any Russian recovery in 2015 will hinge on a stable ruble and a bounce-back in oil prices, but Moscow can ride out the storm for a while longer yet, says Yaroslav Lissovolik, Chief Economist at Deutsche Bank, Russia.

Speaking to bne IntelliNews, Lissovolik explains that any talk of Russia’s 2015 hopes will be framed within the context of the current oil crisis and ruble devaluation, with their respective knock-on effects shaping not only the macroeconomic prospects for the country, but also the stock market. “Equity valuations have been low for quite some time and there are risk factors and headwinds going into this year, including things linked to the low oil price,” he explains.

The price of Brent crude appears to finally be bottoming out around the $50 per barrel mark, after a swift and steep fall from the $100/b price where it was trading as recently as October last year. “As we know, the Russian stock market is significantly skewed towards the oil and gas sector and then that in turn affects the earning scope for many companies. In light of the global situation [Westernled sanctions], there are also concerns regarding the funding possibilities for corporates,” he says.

The freeze-out by the US and EU of Russia from the international capital markets leaves its huge, state-owned energy firms in a vulnerable place, which is exacerbated further by revenue losses due to the low oil prices.

Lissovolik also cites the instability of the ruble as a major factor that must abate before the Russian stock market can attract foreign investment and reverse the capital flight that has occurred over the last 12 months. “The ruble is hugely undervalued. That in itself could be a trigger for investors looking at Russia, but currently it is one of the barriers due to its instability. Unfortunately, that uncertainty escalated tremendously in December [when rates hit lows of RUB80 per dollar]. If it moderates, I think it provides a potential entry point for investment.”

According to Lissovolik, the fate of the equity market is not just at the mercy of external factors. Adjustments on the policy and corporate governance fronts are key if it is to become attractive to investors once again, also paving the way for a more successful growth in import substitutions. “It is micro reforms, it is corporate governance, and at this stage I think that macro factors of course still matter, but for greater credibility and for trying to operate in this very difficult environment you need a policy adjustment and one that is focused specifically on how state companies are run. If that driver does materialize, it harbours some prospects for the markets to recover.

“It’s crucial to deliver on some of the goals that Putin talked about in December, specifically with regards to performance criteria for state companies in terms of being able to control costs and to come up with more efficiency,” he adds.

Lissovolik’s broader prognosis for Russia is one of negative growth: “I think we’re talking about several years of negative growth and economic decline of several percentage points. In the case of oil prices persisting at levels of $50-60, we could see an economic decline of more than 3%. The outlook is recessionary.”

I 79

Polish banks saw their share prices plunge as the Swiss franc surged.

The SNB lifted the cap on the currency, exposing the 550,000 Polish households holding Swiss franc mortgages.

There is also worry the issue could hit consumption and economic growth.

Hungary escaped by the skin of its teeth thanks to a conversion programme launched in November. The forint was still hit hard, however.

The US plans to give Ukraine $2bn in loan guarantees this year as long as it sticks to the reform package thrashed out with the IMF. The EU offered Kyiv ¤1.8bn in January. Ukraine has already received $1.1bn in two tranches of a European Commission loan and $4.6bn in two tranches from the IMF, with two more of the latter to come, totalling $2.7bn. Kyiv says it needs an additional $15bn on top of the $17bn two-year programme already agreed with the IMF. Russia's Finance Ministry sold $1.3bn in forex market interventions on December 30 and on January 5, 6, 8 and 9, the bank's press service said.

Russian authorities spent $76bn and ¤5.4bn euros ($6.4bn) defending the ruble in interventions in 2014.

Ukraine's gross international reserves fell 63% in 2014, the biggest fall since the collapse of the Soviet Union. Reserves were $7.5bn as of January 1, down from a high of $38.4bn in April last year and enough to pay for only five weeks of imports. Kyiv is negotiating for an immediate $4bn payout from the IMF and more if it can get it.

Hungary recorded its first annual deflation in close to 50 years in 2014.

The CPI sank deeper in December to a fall of 0.9%. That left inflation at -0.2% for 2014 – the first deflation over a full year since 1968 – raising the likelihood of a return to monetary easing.

The National Bank of Serbia (NBS) will keep its key policy rate unchanged at 8.0% for the second month in a row as inflation remains below the lower end of the target band. The NBS last changed the rate unexpectedly in November, cutting it by half a percentage point, in the first rate alteration since June.

80

I New Europe in Numbers

bne February 2015

MACROECONOMIC INDICATORS

GDP composition (%)*

Gross domestic product ($mn)

Budget deficit

Current account

Inflation (CPI) Unemployment Ind. prod.

Country

Total (2013)

YoY (% annual)

YoY (% qtr)

2014 Forecast

Per capita ($)

Agri.

Indus.

Serv.

Bud% GDP

% Gdp

Latest, YoY

Last year

%

YoY

Albania

12,904

1.3

+1.7

+2.1

4,652

22

15

63

-2.9

-9.1

+1.7 Nov

1.7

17.0 Sep

+11.6 Sep

Armenia

10,432

3.5

+5.3

+5.0

3,505

22

31

47

0.0

-8.4

+4.6 Dec

7.1

17.1 Sep

+6.1 Q3

Azerbaijan

73,560

5.8

+5.9

+5.2

7,812

6

62

32

0.0

19.7

+1.3 Nov

2.7

4.9 Sep

+1.8 2013

Belarus

71,710

0.9

+2.7

-0.5

7,575

9

42

49

0.1

-9.8

+2.6 Nov

15.4

0.5 Nov

+6.2 Oct

Bos/Herzegovina

17,828

0.4

-1.2

+2.0

4,656

8.1

26.4

65.5

0.0

-5.6

0.0 Nov

-0.5

43.7 Sep

-1.3 Sep

Bulgaria

53,010

0.9

+1.9

+1.7

7,296

6.7

30.3

63

-1.4

2.1

-0.6 Nov

-1.6

10.8 Nov

+0.9 Sep

Croatia

57,539

-1

-0.5

-0.5

13,530

5

26

69

-2.5

1.2

+0.2 Nov

1.1

19.2 Nov

+2.8 nov

Czech Republic

198,450

-0.9

+2.4

+2.0

18,861

2

38

60

-1.5

-1.0

+0.6 Nov

1.0

6.0 Nov

-0.4 Nov

Estonia

24,477

0.8

+2.3

+2.0

18,478

4

29

67

-0.4

-1.0

-0.6 Nov

2.1

4.3 Dec

+4.9 Nov +11.1 Q2

Georgia

16,127

3.2

+5.5

+5.0

3,602

9

24

67

0.0

-6.1

+2.0 Dec

0.2

14.6 Dec '13

Hungary

129,989

1.1

+3.1

+2.4

13,134

34

28

68.7

1.6

3.1

-0.7 Nov

1.4

7.4 Oct

+5.8 Nov

Kazakhstan

224,415

6

+4.0

+5.1

13,172

5

38

57

4.6

0.1

+7.4 Nov

4.9

5.0 Dec

+1.9 Dec -

Kosovo

6,960

3.1

単

+2.7

3,816

12.9

22.6

64.5

0.0

-6.8

+0.1 Nov

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

+10.2 Nov

6.0

2.4 Nov

-10.4 Oct

Latvia

30,957

4.1

+2.4

+3.8

15,375

4.9

25.7

69.4

-0.1

-0.8

+0.9 Nov

-0.4

8.5 Dec

-0.9 Nov

Lithuania

45,932

3.3

+2.7

+3.3

15,538

3.7

28.3

68

-0.1

0.8

+0.2 Nov

0.4

9.4 Nov

+4.9 Nov

Macedonia, FYR

10,221

3.1

+4.8

+3.0

4,851

10

26

63

-3.1

-1.8

-0.3 Nov

1.3

27.9 Sep

+5.8 Nov

Moldova

7,935

8.9

+5.9

+3.0

2,230

15

17

69

0.0

-4.8

+4.8 Nov

3.9

3.3 Sep

+7.4 Sep

Mongolia

11,516

11.7

+9.7

+10.0

4,056

16

33

50

0.0

-27.9

+11.5 Nov

9.9

6.4 Sep

+14.8 2013

Montenegro

4,428

3.5

+3.5

+3.2

7,126

10

20

70

-0.2

-15.0

0.0 Nov

1.8

15.0 Dec

-19.8 Nov

Poland

517,543

1.6

+3.4

+3.3

13,432

4

33.3

62.7

-1.8

-1.8

-0.6 Nov

1.0

11.5 Dec

+0.3 Nov

Romania

189,638

3.5

+3.2

+2.8

9,499

6

43

50

-0.8

-1.1

+1.3 Nov

1.9

6.5 Nov

+2.8 Nov

Russia

2,096,777

1.3

+0.6

+0.5

14,612

4

36

60

-0.8

1.6

+11.4 Dec

6.3

5.2 Nov

-0.4 Nov

Serbia

42,521

2.5

-3.5

+1.0

5,935

7.9

31.8

60.3

0.0

-5.0

+2.4 Nov

4.9

17.6 Sep

-8.7 Nov

Slovak Republic

95,770

0.9

+2.5

+2.2

17,689

3.1

30.8

47

-1.2

2.4

+0.1 Nov

1.0

12.6 Nov

-3.3 Nov

Slovenia

46,833

-1.1

+3.1

+1.4

22,729

2.8

28.9

68.3

-11.9

6.5

+0.2 Dec

1.3

9.6 Nov

+3.0 Nov

Tajikistan

8,508

7.4

+12.0

+6.0

1,037

27

22

51

0.0

-1.9

+6.8 Nov

3.6

2.5 Nov

+7.1 Sep

Turkey

820,207

4

+2.6

+2.4

10,946

9

27

64

1.1

-7.9

+8.2 Dec

7.7

10.4 Oct

+0.7 Nov

Turkmenistan

41,851

10.2

単

+10.0

7,987

7.2

24.4

68.4

0.0

-3.3

+6.0 '13

5.3

-

-

Ukraine

177,431

1.9

-5.3

-5.0

3,900

10

27

63

-2.0

-9.2

+24.9 Dec

-0.1

9.5 Sep

-16.3 Oct

Uzbekistan

56,796

8

+8.1

+7.0

1,878

19.1

32.2

48.7

1.3

1.7

+11.2 '13

7.0

4.9 Dec '13

+8.1 Q2

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat

*Official figure or independent estimate

SPACE FOR AD/HOUSE AD SHOWING OTHER..

bne February 2015

I 81

New Europe in Numbers

FINANCIAL INDICATORS

SOCIAL Total market cap., all publicly traded equities

Stock market

Literacy

Tertiary edu.

Month

12-month

Ytd

52-wk low

52-wk high

P/E

Latest $mn

YoY %$

YoY % local curr.

% adults

% pop.

Albania (-)

-

-

-

-

-

-

-

-

-

96.8

55.5

Armenia (-)

-

-

-

-

-

-

-

-

-

99.6

46

Azerbaijan (-)

-

-

-

-

-

-

-

-

-

99.8

20.4

Stock market index

Belarus (-)

-

-

-

-

-

-

-

-

-

99.6

62.6

Bos/Herzegovina (SASE)

-0.2

-3.5

0.3

677.3

742.8

-

-

-

-

98.2

37.7

Bulgaria (SOFIX)

-5.6

-7.3

-4.1

494.5

622.9

5.9

4,914.2

-7.5

3.9

98.4

91.4

Croatia (CROBEX)

1.6

-2.1

1.6

1,644.3

1,930.3

12.3

21,464.5

-11.0

1.1

99.1

64.1

Czech Republic (PX)

0.3

-7.7

-1.5

901.3

1,046.1

8.8

30,905.1

-8.1

4.9

99

76.6

Estonia (OMXT)

3.9

-6.1

2.4

729.0

843.0

5.1

2,035.0

-20.8

-10.5

99.9

27.9

-

-

-

-

-

-

-

-

-

99.7

61.6

Georgia (-) Hungary (BUX)

5.3

6.4

-0.2

6,135.6

7,278.0

14.9

14,383.6

-25.4

-10.6

99.4

59.6

Kazakhstan (KASE)

1.7

-10.3

-10.3

831.9

1,312.8

14.3

15,208.5

-20.9

-7.6

99.7

44.5

Kosovo (-)

-

-

-

-

-

-

-

-

-

0

41.3

Kyrgyzstan (-)

-

-

-

-

-

-

-

-

-

99.2

-

Latvia (OMXR)

1.4

-11.6

3.1

408.0

487.1

5.0

1,300.1

-19.6

-8.9

99.9

73.9

Lithuania (OMXV)

0.9

3.0

1.1

477.6

414.2

11.8

4,343.9

3.4

9.6

99.8

65.1

MIB10

0.8

8.8

0.2

1,586.1

1,877.0

1,354.3

-79.9

-80.1

97.5

40.1

Macedonia, FYR (MBI10) Moldova (-)

-

-

-

-

-

-

-

-

-

99.1

38.4

Mongolia (MSETOP)

0.0

-6.6

-1.6

14,473.4

17,243.7

-

-

-

-

98.3

-

Montenegro (MONEX20)

-0.5

11.6

-2.3

9,665.6

12,610.1

-

-

-

-

98.4

61.1

Poland (WIG)

-0.9

-2.1

-2.3

49,520.9

55,636.8

12.8

168,659.3

-13.6

1.6

99.7

73.1

Romania (BET)

5.8

6.9

0.3

6,135.6

7,278.0

14.9

22,830.0

13.5

29.0

98.6

51.5

Russia (MICEX / RTS)

+10.2 / +22.4

+7.5 / -44.9

+10.9 / +1.1

1,237.4 / 629.15

1,606.8 / 1,421.07

6.1 / 6.7

550,268.0

-30.8

-9.4

99.7

76.1

Serbia (BELEXLINE)

-1.0

15.4

-1.2

560.0

706.6

-

3,567.5

9.9

-30.8

98.2

52.3

Slovak Republic (SAX)

2.2

15.3

1.0

194.8

230.7

76.7

2,545.0

-5.3

2.9

99.6

55.1

Slovenia (SBITOP)

3.8

11.6

0.5

685.5

839.4

15.3

7,228.7

9.0

23.3

99.7

86

-

-

-

-

-

-

-

-

-

99.7

22.4

10.4

30.8

2.3

61,189.2

87,416.4

13.7

186,873.8

-21.2

-14.3

94.9

-

-

-

-

-

-

-

-

-

-

99.6

69.3

Ukraine (PFTS)

7.4

32.7

1.4

287.9

483.3

2.9

3,941.5

-89.8

-53.4

99.7

79.7

Uzbekistan (-)

-

-

-

-

-

-

-

-

-

99.5

-

Tajikistan (-) Turkey (XU100) Turkmenistan (-)

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat

*Official figure or independent estimate

AD SPACE TO BE CROPPED OUT AD SPACE TO BE CROPPED OUT

Idea 2.2

82

I Events

bne February 2015

Upcoming events 2015 Russian Insurance Forum (February 16 -17) Moscow, Russia www.russian-insurance.com CONFERENCE &

EXHIBITION

Ukrainian Energy Forum (March 2 – 5) Kiev, Ukraine Adam Smith Conferences www.adamsmithconferences.com/as2349bnew Northeastern European Real Estate Awards (NEE Awards) (March 26 - 27) Minsk, Belarus www.europaproperty.com Client: Charles Maxwell Annual Investmet Meeting 2015 (March 30 - April 1) Dubai, United Arab Emirates www.aimcongress.com/en

European Bank for Reconstruction and Development (EBRD) 24th Annual Meeting of Board of Governors and Business Forum (May 14-15) Tbilisi, Georgia www.ebrd.com

The agenda will be exploring technological advancements, innovations and experience across Poland and cEE. We will be uncovering geological and legislative advancements in lithuania. The conference will also sharing information regarding other shale gas plays such as Germany, romania and ukraine.

We will also be taking a look out the economical, political and environmental climates and challenges across the region. Š www.stylographicdesign.co.uk 2014

9-10 March 2015 radisson blu, WarsaW

W W W. c E E s h a l E G a s . co M @ c E E s G o s

March 26/27, 2015 Renaissance-Marriott Hotel,

Minsk Belarus

City Investment/ Development tour - March 28 Republic of Belarus:

Premier Partners:

Supporting Partners:

International Media Partner:

Venue Partner:

BRITISH - BELARUS

CHAMBER OF COMMERCE

Diamond Sponsor

Silver Sponsor

www.NEEAwards.com For further information contact: Craig Smith / +48 604 144 769 / craig@europaproperty.om Mikhail Borkowskiy / +48 697 401 397 / russia@europaproperty.com

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