Bne magazine july 2013

Inside this issue: Fear and sloth in Emerging Europe Creeping ivi in Russian homes Testing the economic waters A small step forward in Albania July 2013 www.bne.eu

Kazakhstan's new mining frontiers

SHAKEN BUT NOT STIRRED

How to invest in Eastern Europe and China

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bne July 2013

Contents

Editor-in-chief: Ben Aris (Moscow)

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COVER STORY 6 The Insiders

26 Latvia's ready, steady, euro!

8 Shaken but not stirred

27 Better rated

10 Fear and sloth in Emerging Europe

31 Stepic out 32 Unhappy Pole numbers 13 Chart of the month 33 Polish stocks' "pension premium" in danger

14 Creeping ivi in Russian homes 15 King of the Russian talk show

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29 Testing the economic waters

12 Perspective

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CENTRAL EUROPE

34 Taxed to the hilt in Hungary 35 A Czech scandal too far?

36 Nuclear friction within the Czech Republic

17 Uralkali adjusts to changing fertiliser world 19 Innocents in Putin's purge 21 Russian orphans trapped in poverty 23 VTB stays home for share sale

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bne July 2013

Contents

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40 SOUTHEAST EUROPE

EURASIA

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A small step forward in Albania

48

Kazakhstan's new mining frontiers

40

An oily stain in Albania

50

An alternative Kazakhstan

42

Same old faces in Moldova

51

Because, because‌ you're fired

44

Romania's leaders at loggerheads again

52

Kyrgyzstan on edge after days of protests

Bulgarians back on the streets

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Turkmen parliament welcomes first "opposition" MP

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Central Asian artists gain international interest

55

Armenia snubs Russia after gas price hike

57

ENRC takes step closer to delisting

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UPCOMING EVENTS

45

47

Green light for Serbia

Follow us on twitter.com/bizneweurope

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I The Insiders

bne July 2013

Protests in Turkey and Russia – different but the same Marcus Svedberg of East Capital

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ne should always be careful in drawing parallels between seemingly similar events in different countries. But there are a number of striking similarities between the current protests in Turkey and the recent events in Russia.

These are two radically different emerging markets, but there are common denominators among the protestors as well as in the regimes, especially their leaders, but also in the triggers and the underlying causes for the protests. One of the conclusions that the protests are not about economics but economic development, is one of the explanations as to why it is happening now. This may seem paradoxical so it may help to start with theory.

Does economic development foster democracy?

Academics have been wrestling over the question of whether there is a positive relationship between economic development and democracy. There is a huge amount of literature dedicated to the question and, as always with academics, a considerable amount of disagreement. But there seems to be a lot of support for the idea that the emergence of a middle class is positively correlated with political activism.

One scholar summarized the so-called modernization research neatly by arguing that, “after a period of record economic performance, the rapidly expanded middle class is no longer content to enjoy unprecedented personal freedom and prosperity; they also crave liberty and voice in the governing of their countries."

The economic performance applies neatly to both Russia and Turkey, as both countries have seen GDP per capita go from low single thousands to double digits over the past decade, while inflation has moved in the opposite direction. There is thus a base for political activism in both countries, which brings us to the cause for the protests.

It is not about economics but politics Revolutions and protests are born from several causes. One is

obviously from desperation or hunger in the face of poverty or economic mismanagement. But neither Russia nor Turkey fits this profile, as their economies have been doing relatively well recently. Both economies have slowed down recently, but there is no problem with unemployment and anecdotal evidence from the protests suggest that people are not upset about the state of the economy. It is, actually, possible to argue that protests have been delayed by the strong economic performance. Some academics argue that citizens may tolerate authoritarian tendencies longer if the economy is strong. This “performance legitimacy” is especially strong for oil-exporting countries like Russia.

Rather, the protest movement in Russia and Turkey is rather born out of prosperity. It is very much led by a middle class that has profited from the economic success. These students

"In a way, Putin and Erdogan have become victims of their own success" and professionals want their leaders to do to politics what they have already done to economics. Protestors are unhappy about the political system and protest against abuse of power in general, and against legal repression and corruption in particular. Protesters do not buy the stabilization argument, which is often used in both Russia and Turkey, and criticize the oppression of the opposition and the media.

The triggers are weirdly similar The most obvious trigger for protests would be elections.

And it is true that the Russian protests intensified after the parliamentary elections in December 2011 and that Turkey is entering a political season with three upcoming elections over the next two years. But the protests were triggered by environmental concerns or more specifically with a forest in Moscow and a park in Istanbul.

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The first street protests in Russia started when the authorities planned to build a high-speed road through the Khimki forest in the summer of 2010 and the Istanbul protest began over plans to build a shopping centre in Gezi park.

The protests quickly spread and were transformed to deal with the larger issue described above. In early 2012, there were protests in more than 100 Russian cities and towns, and the Turkish protests quickly spread across Turkey and internationally.

Regimes are similar but different Russian and Turkish politics are very different, but there is one important similarity: President Vladimir Putin and Prime Minister Recep Tayyip Erdogan have been in power for over ten years and plan to stay in power for the foreseeable future. Putin has swapped jobs with current Prime Minister Medvedev in order to avoid breaking the constitution, while Erdogan wants to change the constitution to remain the most powerful when his third terms expires.

Both take credit for stabilizing their respective countries, which were marked by political and economic chaos in the 1990s, and both are criticized for being too authoritarian.

The opposition is weak and divided in both countries (although arguably more sophisticated and institutionalized in Turkey) and they have few advisers that can say no to them (except perhaps current Turkish Deputy Prime Minister Babacan and former Russian Finance Minister Kudrin).

Ultimately, it is a good thing that the middle class is becoming more politically assertive, even if it creates some uncertainty and volatility on financial markets in the short term. The Russian and Turkish economies have improved tremendously over the past ten years and there is now a growing demand for political reforms as well. Political transition is important in its own right, but many analysts also believe that such political change is necessary for these countries to move to the next stage in their economic development as they have exhausted most of the “easy” catch-up factors.

In a way, Putin and Erdogan have become victims of their own success. They did what was needed when assuming office a decade ago. A strong state involvement was arguably important to stabilize the Russian and Turkish economies ten years ago. But Putin and Erdogan now have to pull the state back a step and nurture rather than dominate their economies and people. That may prove difficult but there is no other choice if they want to avoid getting stuck in transit.

Marcus Svedberg is senior economist at East Capital.

The protestors are young, urban and educated It is the middle class in a broad sense that have taken to the streets in Russia and Turkey. The crowds tend to be young, urban and educated. These groups have not necessarily been politically active previously and may belong to different political parties or no parties. It is more of a civil society movement than a political movement, and it is organized online. They mock the state’s control of mainstream media and get their information from the internet and foreign sources. The protests have also been predominantly peaceful although some rockets were thrown in Turkey as a response to the heavy force used by the police.

The protestors are not a majority though, and would struggle to form a joint alternative to the incumbent leaders even if the playing field was even. Putin and Erdogan may have lost some popularity lately, but they remain the most trusted politicians in Russia and Turkey.

Conclusions It is premature to believe that the street protests in either country will lead to any immediate change of power.

However, it is very difficult to go back once the Pandora’s Box of protests has been opened and both regimes will have to operate in a more complex political environment going forward. The first real change may be the election for mayors of Istanbul and Moscow in 2014 and 2015 respectively.

"It is the middle class in a broad sense that have taken to the streets in Russia and Turkey"

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s a journalist based in Turkey for 25 years I’m used to the unexpected. But as with the majority of the Turkish population, the speed with which the ongoing protests against the government of Prime Minister Recep Tayyip Erdogan exploded from being a small demonstration against the destruction of a tiny Istanbul park into major countrywide protests in which hundreds of thousands have spontaneously taken to the streets, took me by surprise.

Equally surprising, not to say frightening, has been the brutal response of the police. As a business reporter it had never occurred to me that I would ever require a gas mask, let alone find myself running from stick-wielding vigilantes, taking refuge from tear gas-firing riot police in a branch of Burger King, or crawling around the floor of my flat with two friends screaming and rubbing lemon juice into my eyes after a tear gas canister inexplicably exploded outside my bedroom window. I live a quiet life, or so I thought.

Environmental demonstrations in Turkey are not usually headline news, least of all for major international media outlets. But a combination of extraordinarily vicious policing, together with staggering inept and insensitive comments from Erdogan and some of his senior ministers and officials have ensured the protests have become a news story of international import.

Erdogan shaken but not stirred David O'Byrne in Istanbul

These protests not only highlight the increasingly authoritarian and worryingly Islamist nature of Erdogan’s government, but have also thrown into question Turkey's long-mooted role as a model of parliamentary democracy to be followed by Middle Eastern countries newly emerged from under the boot of brutal dictatorship.

Contradictions With Erdogan having now publicly denied previously announced plans to destroy the park, the protests have become largely focused on the nature of his government’s response to them, not to say his own plans to rewrite the Turkish constitution to

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allow him to be elected as president with executive powers. This would be a role which observers note closely models that of the Middle Eastern regimes whose downfall two years ago Erdogan was – albeit somewhat slower than his western counterparts – quite happy to herald as an opportunity for the establishment of genuine representational democracy.

This is only one of a number of glaring contradictions in an administration now in its third term and displaying all the symptoms of a regime devoid of ideas and ambition beyond tightening its grip on power and punishing those who fail to adhere to its own narrow interpretation of Sunni Islam.

Indeed, as the events of the past few weeks unfolded, it has become increasingly difficult to recognize this as the government of the same Justice and Development Party (AKP) that was elected in 2002 on the promise of safe stewardship of the economy and of improving the quality of Turkish democracy.

Now having effectively ended the role of the Turkish military as the ultimate arbiter of political legitimacy through a series of widely criticized “show trials,” Erdogan and his party have apparently turned their attention to that part of Turkish society which does not support it. “If you listen to the prime minister, he uses quite worrisome and antagonizing terminology when speaking to his supporters – he keeps referring to 'they, they, they'. This is very unhealthy for democracy," says Cengiz Aktar, professor of European Union studies at Bahcesehir University in Istanbul and a columnist on the broadly anti-government daily Taraf, pointing out that the "they" in question appears to refer to anyone Erdogan considers to be opposed to his government.

With much of Turkey’s mainstream media either directly controlled by the state or owned by companies either closely connected to the AKP or apparently beholden to the AKP, criticism of this change of focus has, until the recent spontaneous protests, been muted to say the least. “We can safely say

that there is no single check or balance left which can balance the power of Mr Erdogan – all existing institutions have been stripped of their power,” says Aktar.

It has been left to protesters on the streets to denounce recently passed laws banning any form of promotional activity by companies producing alcoholic drinks, banning the sale of alcohol from shops after 10:00pm, and effectively demonizing companies engaged in what are still legal manufacturing activities; laws passed – but later rejected by the constitutional court – limiting women’s access to abortion and caesarean section, a personal call by Erdogan himself for all Turkish women to “have three children for Turkey;” and in response to the continuing protests, mooted but yet undefined legislation aimed at restricting or limiting the use of social media by protesters.

As such the size and severity of protests can be expected to decline over the summer as many leave the cities on summer holidays.

But with current evidence suggesting the government will use the intervening lull to further antagonize those already angry with its policies, a resurgence of protests in the autumn seems likely. However, whether what have to date been grassroots protests can succeed in creating a credible broad-based movement for change is still debatable.

Dissent within the AKP itself though seems unlikely to force a change of tack or a change of leader. Turkish President and AKP founder Abdullah Gul and Deputy Prime Minister Bulent Arinc may not share Erdogan’s taste for confrontation or his hunger for an executive presidency, but they appear unlikely to challenge him.

Erdogan also appears unlikely to garner

“We can safely say that there is no single check or balance left which can balance the power of Mr Erdogan" All of which begs the question of where exactly Turkey is going and whether it’s long hoped-for accession to the EU can ever be realised.

Summer lull To date, the protests have been mainly confined to educated middle- and working-class Turks who hold down responsible jobs and take to the streets at weekends, minimizing the effect on the economy. “The protests are mostly evening and weekend affairs, because those protesting are educated, tech savvy, middle class, white collar workers who have responsible day jobs – they have a stake in the economy, they’re not trying to undermine it,” explains Inan Demir, chief economist at Turkey’s Finansbank.

But that is not to say that the continuing protests present no risk for the Turkish economy. “Turkey has $150bn of debt maturing in the year beginning next April and so is particularly vulnerable to any retrenchment in liquidity and risk appetite,” he cautions.

parliamentary support to help implement an executive presidency in time for next year’s presidential election, and will likely have to choose between standing for election as non-executive president or amending AKP statutes to allow him and his senior ministers to serve more than the three parliamentary terms they are currently limited to, nominating someone else to stand for president.

What does appear clear is that barring more surprises, the AKP’s electoral support will decline in next year’s scheduled local elections, as well as in the general elections scheduled for 2015, but which could end up being called early next year. "It seems unlikely that parliamentary elections will be called this year, with the focus instead on local elections in March 2014, and presidential elections in July 2014. PM Erdogan seems likely to run in the presidential elections, and could then look to reinforce the AKP's grip by calling early parliamentary elections possibly for autumn 2014.

Thus, 2014 is shaping up to be a key year for elections," says Tim Ash of Standard

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Bank, who visited Turkey in June, meeting with AKP government officials, the central bank, the undersecretary of the Treasury, the International Monetary Fund, a range of Turkish banks and industrial groups, foreign diplomats, as well as foreign and local journalists.

According to Professor Aktar, the whole electoral process seems to have been subsumed to the aims of one man, Prime Mininster Erdogan, and that individual mayoral candidates in next year’s elections will be basically irrelevant. “He has accumulated so much power, he will effectively be the sole candidate even in the local elections,” Aktar says.

Many Turks who voted AKP largely on

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its handling of the economy have been shocked by recent events and Erdogan’s increasingly shrill authoritarianism, and might be persuaded to vote for other parties in protest. The main beneficiary appears likely to be the main secular opposition party, the Republican Peoples’ Party (CHP), despite the relative anonymity of party leader Kemal Kilicdaroglu and its worrying lack of clarity on main policy issues. However the signs are, barring unforeseen events, the AKP will remain the largest party, albeit possibly without an overall majority.

The hardline taken by the government and its subsequent rhetoric has prompted the EU, at the behest of Germany, to postpone the restart of

EU-Turkey accession talks from June 26 until at least October. The European Commission’s annual progress report in October is expected to contain strong condemnation of the brutal crackdown on the protests, and with successive reports highlighting worries about the government’s failure to meet expected standards of democracy, the question remains how long the EU can be expected to continue the process.

Ultimately, it appears increasingly that the success of Turkey’s European project lies not with existing politicians, but with those Turks who have taken to the streets to voice their opposition to a flawed political process that has failed to address their hopes and aspirations.

as you can get. Many are former socialist countries now democracies, while many also still have despotic governments. You can't even blame rampant corruption, because while this is a big problem in most emerging countries, protests in India and Indonesia at least were sparked by cuts to fuel subsidies.

Fear and sloth in Emerging Europe Ben Aris in Moscow

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ear, greed and sloth are the driving forces of history. It is not a particularly flattering view of human nature, but Professor Ian Morris of Stanford University makes a convincing argument that all of human history since the time of the troglodyte through to the 21st century can be understood in these terms in his book, “Why the West Rules – For Now.” And the idea is perhaps useful in trying to understand why countries as vastly different as Brazil, Bulgaria, Romania,

Russia and Turkey – to name a few – are all being wracked by huge and dramatic protests simultaneously. Little seems to unite these countries, yet in all of them – and many others – the people have taken to the streets in vast numbers in the last year or two to take issue with their governments and call for change.

Protests, demonstrations and revolutions seem to be sweeping through the world.

What is driving these protests? Several of the countries are Islamic, but clearly that is not the defining factor because India and Brazil are about as un-Islamic

The world has been going through an unprecedented transformation that Morris would argue is a function of shrinking geography caused by globalisation.

Location, location, location The process began with the rapid catch-up of the periphery countries that entered the EU in the 1970s and 1980s, and was mirrored by the transformation of the Asian Tigers in Southeast Asia at the same time. The process continued, but became more violent following the collapse of the Soviet Union at the end of the 1980s, which was followed by coloured revolutions and a wholesale abandonment of the socialist ideology as a model for government in both the former Soviet Union and in Asia.

What unites all these countries? On the face of it, not a lot, but clearly something profound is happening.

Morris went back to the caveman in his book to try to discern what stands behind the development of eastern and

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western societies. He concluded that while biology and sociology determine the path of history of each region, it is geography that determines where things happen first and shape the manifestation of that. The west, in the Fertile Crescent along the banks of the Euphrates, had a two-millennium head start over the east on the edge of the Yangzi because it had more than twice as many plants that were edible and animals that could be domesticated.

Ever since, the interplay of sociology and geography – the effect of which changes as social development advances – has determined the course of history.

Trimaranes on the Mediterranean was the foundation of the trade that drove the rapid development of the Roman Empire. But dependent on rivers, the Chinese regions were slower to catch up until they started building canals. The invention of frigates and the springwound watch coupled with the Atlantic trade winds later created the oceanbased economy that underpinned Great Britain’s rapid rise. And the industrial revolution gave this region a massive boost again in the 19th century, the benefits of which we are still enjoying.

However, in just the last couple of decades globalisation has begun to radically transform everything, and for the first time in history geography is becoming irrelevant. Humanity is entering new and uncharted waters, argues Morris.

Advantages of backwardness In the past, it was the periphery that was always the undoing of the various historical “cores.” As the core became powerful, it also became ossified, bogged down in bureaucracy and vested interests.

Taking advantage of their relative freedom to innovate, the nomads and Mongols of the steppe brought the various Chinese empires down; the Germanic Visigoth, Vandal, Vikings and other tribes on the periphery did the same in Europe. At some point, periphery states usually made use of the “advantages of backwardness” to overthrow the increasingly sedentary cores, says Morris.

It could be argued that a similar process

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is going on today. Since the days of Elizabeth I, a trans-Atlantic empire, “the West”, has dominated the globe. But since the fall of the Berlin wall in 1989, the periphery states in the socialist bloc that stretched across Asia to the Pacific Ocean have been making use of the advantages of their backwardness – primarily cheap labour and material costs – to rapidly effect a catch-up with the West.

Morris articulates a mechanism in his eponymous Morris Theorem: "Change is caused by lazy, greedy, frightened people (who are mostly the same wherever you are) looking for easier, more profitable and safer ways to do things. And they rarely know what they're doing.”

This quite neatly encapsulates the experience of most of the emerging markets. Take Russia, for example. The fall of the Soviet Union in 1991 was a disaster for most Russians. bne’s despair index (the sum of inflation, unemployment and poverty) soared to over 2,500 points against the approximately 20-30 points enjoyed by developed nations. The scared residents of Russia now cling to the promise of stability offered by incumbent Russian President Vladimir Putin in a way the western democracies find hard to accept, simply because they believe anything is better than going through the early 1990s again.

Greed has also marred the transition of all the emerging markets; if it is possible to steal and enrich yourself, those in power have always done so. Ancient Rome was not a democracy but a plutocracy dominated by super-rich individuals like Crassus, Ptolemy the Great and Julius Caesar (once he returned from his lucrative campaigns in France). Even the US' young democracy was plagued by snollygosters, politicians who sought office purely to enrich themselves, in the early days, before the necessary checks and balances were put in place. None of the emerging markets have had time to build these sorts of institutions yet.

And these countries are lazy if they can get away with it. Russia’s natural mineral wealth means the Kremlin has ignored deep and painful structural reforms simply because it could afford

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to. Notably, countries with no natural advantages whatsoever, like the Baltic states or Georgia, are the leading reformers. But this doesn’t apply to everyone, as there are plenty of poor but still dysfunctional countries like Kyrgyzstan and Albania.

In 1989, half the world’s population lived in a free market, but that year the size of the global market doubled when another 3bn people living in socialist countries abruptly joined the capitalist world. Since then, the per-capita income in many of these countries has risen to $12,000$18,000, which puts them on the cusp of the poorer developed markets. The catchup process is not over, but a new phase of more difficult reforms lie ahead.

Most of the last two decades have been spent hammering out new systems to cope with this change, but the governments that put their countries on the road to improvement are now losing their relevancy.

In 2002, only a handful of governments had been in power for more than two years, but now the majority of ruling parties and presidents have been there for a decade or more. The advantages of backwardness has led to a rapid rise in living standards and the emerging markets seem to have reached a point where the newly minted middle classes are not as scared or as lazy as they once were. Now they are prepared to give up more improvements in the standard of living in exchange for a greater say in the political process of running their respective countries.

The calls for change in each country are very different and depend on the sociology of that country, as Morris points out. In Russia and Ukraine, the opposition wants a greater say in politics. In Turkey, the people are worried by the creeping Islamization of the state. And Brazilians are protesting against poor social services and wasteful government spending on things like football competitions.

However, underpinning all these demands is the unifying idea of creating a more representative and inclusive government that respects and protects all its citizens, irrespective of their status.

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bus or tram, nobody had any money and Russia was only just emerging from the ravages of the Cold War. Contrast this with today, over 20 years later. Now everyone has a new car of the latest model, brand and description; the buildings are clean, colourful and shiny; the night sky lights up with neon lights displaying well-known western brands; and there are new restaurants and night clubs everywhere.

67% of Russians are defined as "middle class", household consumption has grown by over 10% a year for the last 10 years, and unemployment is at its lowest level ever (5.3%).

Russia has to look East rather than West David Thomas, BRIC Expert

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s a keen observer of the BRICs, and spending most of my time working with investors and businesses in the Asia-Pacific region, I don’t spend enough time in Russia. I constantly scour the western media looking for unbiased and objective perspectives, and regularly devour the reports from Russia-based bloggers, investment analysts and local commentators, but nothing beats being on the ground to refine your own views and perspectives!

So it was with some delight and anticipation that I gleefully accepted the invitation from my friends at East Capital to attend their annual summit with a small group of investors from around the world, mainly from Europe and Scandinavia, who all gathered in Moscow in May. Over four busy and packed days, we met, mixed and listened to local analysts, economists, fund managers and the senior directors and executives of some of Russia's most iconic and well-known companies, including Aeroflot, Lukoil, Sollers, Sberbank, M.Video and Yandex.

As usual, I left Russia with the challenge of trying to make sense of all the views, data, charts, forecasts and opinions expressed to form my own coherent view of Russia's current and future direction. It is indeed a puzzle, but here's a summary: Russia is on the move On the bus sitting next to my friend, Karine Hirn, she gave me fascinating insights into her time in Moscow in 1991 when she lived and worked there as a young student. In those days, Moscow was a very grim, grey, dark and gloomy city, with drab and nondescript buildings, no cars, and only three places to go out to eat and have fun. Everyone travelled by

Yet, despite the above, the Russian consumption story still has a long way to go. By western standards, Russia seriously lags in key sectors like air travel, retail banking, logistics, pharmaceuticals, cars, media and online advertising, which is 50% or less than the European average penetration. Longterm investors, entrepreneurs and business leaders have the opportunity to participate in this long-term growth story at a historically low entry price. They will be handsomely rewarded over the next decade or two if they get in now.

Russia has many problems to overcome There are many short-term challenges, and we constantly hear about them. The need to deregulate certain industries, accelerate privatisation, improve corporate governance, boost competition, smash corruption and increase investment in infrastructure were recurring themes over the four days in Moscow.

Economic growth has slowed to 1.1% a year, inflation is too high (over 7%) mainly due to an increase in food prices caused by a poor harvest in 2012 (food represents one-third of consumer spending) and, while the consensus view was for GDP growth in 2013 to improve to 2% to 3%, there is even talk of a possible

"I was amazed by the lack of attention being given to China during my visit to Russia" recession. Russia’s GDP per capita of $16,000 is reaching the point at which fast growing emerging countries typically hit the “middle-income trap”, a sure sign that economic growth will slow to lower levels in a band of between 2% to 4% max.

In my view, the fact that these problems are so widely acknowledged, discussed and aired is a sure sign that they can and will be addressed. Over 800 corrupt government officials are languishing in Russian jails (a fact which was highlighted

by President Vladimir Putin in his recent National Address) and there are early signs of improving corporate governance, increasing dividend payments and the protection of the interests of minority shareholders. There is of course more to do, but the trend is in the right direction and, as we were told, Russia usually "surprises on the upside".

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Go East From my perspective, many of the more gloomy forecasts were over pessimistic. Russia’s growth to date has been largely due to its relationship with the Western European consumer (representing 60% of current exports), which is clearly unsustainable. Europe’s economic and fiscal problems are well known and are unlikely to be resolved in the near term.

The future depends, to a large extent, on Russia’s ability to engage with its Asian neighbours for trade, investment and the opening up of new markets, pipelines and channels for its vast supplies of oil and gas. Yet these opportunities were barely mentioned during our visit.

need to start getting used to this. It represents enormous opportunities and also a few threats. Old and dated views, a lack of trust and negative perceptions need to be cast aside by governments, companies and entrepreneurs who have no choice but to engage in the "Asian Century."

I was amazed by the lack of attention being given to China during my visit to Russia. Russia needs to seriously engage with China (and India) to overcome its short-term growth problems. The decision by new Chinese President Xi Jinping to choose Russia as the destination for his first official overseas visit is a move in the right direction and I expect to see more bilateral engagement in the next few years. Russia is a member of the BRICS for a reason (an abundance of land, people and capital, to name three!) and its future lies to its East rather than its West. A more proactive and committed engagement with China would be a good first step.

In my part of the world (Asia), it is impossible to talk about the economy or the future without mentioning the significant impact that China will have over the next decade or two. China's positive influence is everywhere, in investment, infrastructure, consumption and manufacturing.

When China "sneezes" (eg. new data comes out which is lower or weaker than expected) the whole of the region starts speculating on the likely impact on each local economy, and everyone starts speculating on whether this is a short-term blip or a longer-term trend. Whether we like it or not, China is the new global growth engine and we all

BRIC Expert, Speaker, Entrepreneur and Thought Leader, David Thomas is well known in the Asia-Pacific region for his experience, credibility and passion for identifying, building and facilitating business and investment relationships between developed and emerging countries. For more information: www.davidthomas.asia

Economic data a warning to Turkish PM

CHART:

As well as data showing weak exports and economic growth that's highly dependent on public investment, April's balance of payments figures paint an equally bleak picture.

The annual current account deficit has surpassed $50bn.

If the protests drag on, tourists could be scared away and this would widen the deficit further because tourism is 81,200 1000000 USD 72,400

Portfolio & Short-term

63,500 54,700 45,900 37,000 28,200 19,400 10,500

Direct Investment & Long-term

1,700 -7,200 -16,000

2 -1

7 -0

12 20

12 20

20

12

-0

9

4 20

11

-0

1

-0

20

11

-1

6 20

10

-0

1

10 20

20

10

-0

8

3 20

09

-0

0

-0

20

09

-1

5

08

-0

2

08 20

20

07

-1

7

2 20

07

-0

9

-0

20

07

-0

4 20

06

-0

1 20

06

-1

6 20

05

-0

1

05

05

-0

20

2

Source: Turkey data monitor

-24,800

20

Summary Capital Account Balance (million USD) (12-m rolling)

Furthermore, almost 85% of the $94bn of capital flows over the past 12 months has been of a short-term variety.

If these flows slowed because of domestic or international developments, Turkey would have problems financing its current account deficit and growth.

20

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the largest revenue item in the current account. Anecdotal evidence suggests that tourists have been cancelling holidays en masse, threatening a sector which usually brings in around $20bn a year.

ecent Turkish data releases show exactly why the government has to end the street protests in a peaceful manner.

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bne July 2013

Creeping ivi in Russian homes Ben Aris in Moscow

I

t has been called the Netflix of Russia. Since its launch in 2009, ivi.ru (known as Ivy in Russia) has become the nation's premier site for watching movies. With revenues doubling every year, the company is due to go into profit and is one of a growing number of candidates for a billion-dollar IPO in the foreseeable future.

"We are positioned in the movie business and closer to Netflix than [US online TV broadcaster] Hulu, but we also have some TV shows, music and a kids' portal.

But movies is our main thing," says Oleg Tumanov, CEO and chairman of ivi.ru.

Netflix and ivi.ru would be identical except for one thing – piracy. In the US, strong intellectual property rights mean

the leading movie sites charge their punters on a pay-per-view basis and pocket the cash directly. In Russia, video piracy is so rampant that it is impossible to ask a Russian consumer to pay to

movies is through advertising. "It is a monumental challenge to get people to pay for content," says Tumanov. "You can ask, but the user will not answer enthusiastically," he adds wryly.

"It is a monumental challenge to get people to pay for content"

watch a movie. They will simply go and download it from one of the multiple peer-to-peer file sharing sites chock full of illegal copies of the movie. Thus, the only way to make money out of online

Coming to a TV near you But the market is changing very fast.

Only a few years ago, Russia was awash with illegal CD, DVD or video copies of the latest Hollywood blockbuster,

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available in every kiosk on every corner.

But in recent years these movie stalls have mostly disappeared as the business migrated to the internet. More than half of Russia's 143m-strong population is now online and last year Russia became a larger internet market than Germany. "The market is moving very fast in Russia," says Tumanov. "Videos have moved from the web and now increasingly to mobile and smart TVs." In Russia, sales of smart TVs, which are internet enabled, are soaring and 99% of those sold in Russia now come with a ivi.ru application pre-installed.

"Sales of smart TVs is exploding and is already in the millions. We have 7m ivi.ru applications installed on mobile and smart TVs," says Tumanov, "which together account for two-thirds of the views of our service."

Tumanov says that despite the widespread access to pirated copy, the company's strategy is to create a great user experience. A catalogue of over 65,000 TV shows and 10,000 movies also helps thanks to the ease of finding something worth watching. Most of the TV catalogue is Russian shows. Thanks to the rapid rise in TV advertising spending, local production companies have been rolling out an increasing number of home-based soaps and shows tailored to local tastes, so there is plenty to choose from.

Movies are different, as Russia's legendary Soviet-era film-making industry is still struggling to find itself; only 10-15% of movies in the county's theatres are currently Russian-made, with the bulk still produced in the US. This mix is reflected in ivi.ru's catalogue.

This also causes a problem for new releases, which are obviously the most attractive part of the movie industry, and it is the one place where ivi.ru does charge per view. However, often ivi. ru has new Hollywood movies on its service shortly after the DVD is released by the studio and before it is available to similar services in Western Europe.

"The difference between America and Russia is the cable companies. In the US, the cable companies generate about

King of the Russian talk show

bne Iconic American talk show host Larry King is to front a new show on the Kremlin-backed RT (formerly Russia Today) news channel – inevitably, to much scorn in the international press.

A clip of King making the announcement was released on YouTube on May 29, with King using the station's catch phrase "question more". "I would rather ask questions to people in positions of power instead of speaking on their behalf. That's why you can find my show, Larry King Now, right here on RT. Question more," he said in the clip.

King will follow in the footsteps of WikiLeaks founder Julian Assange, who hosted a series of interview shows on RT last year to much opprobrium from the international media; celebrity Russia-basher and Guardian correspondent Luke Harding called Assange a "useful idiot" in an op-ed that slammed the station.

King's appointment received a similar reception. "Hey, Larry King: Have You Ever Watched Russia Today?" screamed the headline in a Foreign Policy piece by J. Dana Stuster, with the tagline, "seven crazy clips the former CNN host should have checked out before joining Kremlin TV." Assange's show was not a great success; the man currently holed up in Ecuador's London embassy is neither a journalist nor a natural presenter.

The exact opposite can be said of King who is a master of his art and is probably the best-known interviewer in the US following a 25-year career at CNN. "Politics with Larry King", which is slated to begin in June, is a coup for the seven-year old station, which despite its rough edges has been getting better, although it is still heavily criticized for its softly-softly approach when it comes to reporting on domestic Russian politics.

It does dodge some very obvious bullets (barely ever mentioning the word "Khodorkovsky", for example). And some of the reporters can be amateurish, hackish or just plan bad.

However, it is gaining fans abroad, especially in the US, for its alternative view and critical position on international affairs. The station really came into its own during last year’s Occupy Wall Street movement. While the US mainstream media were slow to take up the story, RT gave it blanket coverage from the early stages and it was nominated for an Emmy for its reporting. That story brought in a lot of new American viewers, which RT has managed to hang on to.

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$4bn of revenues a year for the studios, so they have a lot of power and want to delay releases to online services until they have had a chance to air a new movie," says Tumanov. "In Russia, cable has barely developed and only generated about $50m last year, so the cable companies don't have any power and we can release the movies earlier."

Because of its reach and the fact it pays studios a share of the advertising revenue, ivi.ru has found the western distributors keen to hand over the rights to show their movies. The way it works is an advertiser will pay per 1,000 views and this money is pooled with ivi.ru, who agrees to pay the owner of the copyright a share of the revenue depending on the number of views of the adverts, which appear at the start, in the middle and at the end of a movie. "We hope the business will develop, as for most copyright owners it is one of the few ways they can earn real money from their intellectual property rights in Russia," says Tumanov.

Intelligence and experience ivi.ru has some competition, but it is already the largest player in the segment. The company was founded by Tumanov while he was still working for Russian tycoon Leonid Blavatnik and his Access conglomerate, where he was the CEO. He bought the company from Blavatnik at the start of 2009, together with Dmitri Alimov who was working for RuNet at the time, but now holds his shares through his newly launched Frontier Investments fund.

They brought in oligarch Vladimir Potanin's media holding ProfMedia

"It would be nice to get to a billion dollars before we start to think about selling"

as a financial investor in 2010 and raised more money in 2011 from the international technology investment fund Tiger Group. In the last round of financing, the firm raised $40m from a broader group of investors that includes Russia's premier private equity fund, Baring Vostok Capital Partners. "None of the shareholders has a majority stake," says Tumanov. "This structure works best, as it is not about power, but intelligence and experience."

However, all his investors are financial ones, who will want an exit at some point. Tumanov says that he is prepared to sell to a strategic investor or carry out an IPO, but that is still several years down the road. "I am not ruling out an IPO, but not before three years, as we need to reach critical size," says Tumanov. "We should be an attractive asset to a strategic buyer, one of the international media companies that is looking to enter the Russian market.

Or to a telco that needs content or perhaps to a tech platform like Google or Yandex."

Currently, the site has 3m registered viewers and 18m-19m unique views per month to all its services. Using the Facebook IPO rule of thumb of $35/user as a guide, that would value the company at between $280m and $665m at the moment, but Tumanov says it would be "nice" to get to a billion dollars before they start to think about selling.

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years to increase its annual production to 19m tonnes by 2021.

Uralkali adjusts to changing fertiliser world Ben Aris in Moscow

R

ussia has been mining potash, a pink rock that increases crop yields by up to a third and can lie as much as a kilometre under the surface, since Tsarist times. These days it is big business. Developing a major potash deposit costs many billions of dollars and there are only a handful of viable deposits scattered around the world. But for all this, over the last two decades it has been a quiet business.

Three companies – Uralkali in Russia, Belaruskali in Belarus and PotashCorp in Canada – account for over threequarters of global production.

However, things have started to change.

A raft of greenfield projects are due to start coming on line in 2018 that will break up the de facto cartel between the three incumbents. And China, the world’s biggest consumer of potash, is already playing hardball over price and has injected yet more uncertainty into what has been a very profitable sector.

Potash is the remnants of prehistoric inland oceans that evaporated, leaving behind potassium salts which make ideal fertilisers. The deposit of pink and white marbled, 17km by 4km potash that is the basis of Uralkali’s production

lies two and half hours drive from the city of Perm in the Urals and is the biggest producer in the world.

In 2005, Uralkali tied up with Belarus' Belaruskali, which exploits the other giant potash deposit in the territories of the former Soviet Union, to form the Belarus Potash Company (BPC)

But the current global slowdown has mucked up these plans, as demand has fallen, pushing prices down. Uralkali was forced to reduce production from the 10.8m tonnes it produced in 2010 – almost its full capacity at the time – to 9.1m tonnes last year. Its key customer China, which buys about 5m tonnes of potash a year, is holding out on signing the next contract. Uralkali wants to increase prices, but China is hoping to drive the price down from the $400 per tonne it paid last year. A new supply contract was supposed to be signed in June, but the two sides are still negotiating (There is a six-month contract in place running from January as a stop gap measure.) "China is more difficult as we have many different options. It is possible there will be a contract in the second half of this year. We are more cautious than our competitors on the prospects," says Vladislav Baumgertner, Uralkali's CEO. "We could sign a contract in the third quarter, but it would have to be at a discount to the current contract and we would like to avoid that. It depends on if the competition is ready to decrease the price or wait with us for a more favourable market and at least a roll over price or even a better price."

"Potash producers have been riding the global wave of agricultural shortages that is sending food prices soaring" joint venture. This handles the trading for both companies and affords some monopolistic powers over pricing.

Earning money hand over fist – Belaruskali was reported as the most profitable company in Belarus at the end of May – the two companies have been investing heavily in expanding their operations. Uralkali has already increased its output from about 10m tonnes a year to 13m now, and intends to spend $600m a year for another eight

Baumgertner went on to say that if no contract is forthcoming, the company will simply reduce its production. And the prospects are not good: Uralkail recently revised its production estimates for this year down to 9.5m tonnes, which assumes no Chinese deal.

A lot depends now on what the other big players in the market will do: will they also hold out on China or cave in and strike a discounted deal? Baumgertner says he is taking a conservative view and

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expects global demand for potash to be 53m-54m tonnes this year, whereas the North American companies are predicting 57m tonnes. "The difference between these two estimates is exactly the demand from China," says Baumgertner.

Further out Potash producers have been riding the global wave of agricultural shortages that is sending food prices soaring, and the expectation is for heavy investment into more food production as the world's population keeps growing. Naturally, most potash miners are planning to expand. Uralkali has two new mines at Ust-Yayvinsky and Polovodovsky in the works. Work on digging the shafts at Ust-Yayvinsky has already started and when complete in 2020, this mine should add 2.8m tonnes of potash to Uralkali’s annual production.

And there are a slew of others, such as an ambitious project in York in the UK that is supposed to produce 5m tonnes,

bne July 2013

"However, after 2018 it is very difficult to forecast what will happen. There is a lot of uncertainty over the new projects, but we will definitely increase production if there is enough demand to make the utilisation rates of [the various facilities in development] economically viable."

Baumgertner says that Uralkali, like everyone else, will have to play it by ear and is prepared to suspend the development of some projects if there is an oversupply. Uralkali needs potash prices of at least $270-300 per tonne (depending on the location) for a mine to be economically viable – still cheaper than many of its rivals.

The fate of BHP Billiton’s Jansen project, slated to be the world’s largest potash mine, will be particularly significant. A $14bn investment into a giant potash field in Canada’s Saskatchewan province will initially produce 4m tonnes a year when it comes online as soon as 2015, rising

"After 2018, when the EuroChem mine comes online, then rail transport becomes a big problem for us" as well as the giant Jensen project by BHP Billiton in Canada, which could be given the go-ahead in just the next few months. In Russia too, EuroChem has already dug 570m of a 1km deep shaft to reach a very rich deposit of potash near Volgograd and a second mine near Perm is due to start producing in about 2017. Together, they will add another 4.6m tonnes a year of supply to the market when at full capacity sometime around 2022.

to a peak of 9m tonnes. Work on the mineshafts has already begun, but the project is still pending final approval by the company’s shareholders.

All these new players and new volumes have created a great deal of uncertainty for the existing players. "Until the new greenfield projects go online in 2018, the structure of the market will remain the same and so there will not be big changes," believes Baumgertner.

Currently, Uralkali ships much of its potash to China by train, and the other customers around the world are supplied out of the ports in St Petersburg. Usually the company sends about 150,000 tonnes a month by train to China, but at the moment it is

Bottlenecks Even if all these supply issues are resolved and global demand does continue to increase at the 3% a year it has grown over the last decade, Uralkali still has major infrastructure bottlenecks to overcome.

operating at minimum capacity of “not more than 50,000 tonnes a month,” says Baumgertner.

The trouble is the capacity of the supporting rail connections is not enough to cope with the company’s own expansion plans, let alone manage to carry all of EuroChem’s potash as well. Between them, the two companies will be moving about 27m tonnes of potash a year at peak production.

Some serious investment has to go into expanding the railways and one of the unresolved question is: who is going pay for this? "Rail is a problem for us. We can increase the capacity to 14m tonnes by the end of 2014 and then further to 15m tonnes if Russian Railways [RZhD] modernises the infrastructure. After 2018, when the EuroChem mine comes online, then rail transport becomes a big problem for us. It means we have wait for a decision from RZD before we can make a decision on Polovodovsky or Ust-Yayvinsky," says Baumgertner.

Finally, the cartel agreement with Belarus also seems to be breaking down under the pressure of falling prices. The Chinese supply deals are done on the basis of long-term contracts, but trading with Southeast Asia and Brazil is based on spot prices. If all these greenfield projects come on stream, then the potash business will go a long way to being transformed into a commodity business.

The partners in the Belarusian Potash Company have already tried to shore up their relations and formed a new trading company called Soyuzkali that will be registered in Switzerland, but run out of Minsk. Soyuzkali is expected to take over the trading operations from the middle of next year. But trading relations have become strained, as Uralkali already has its own eponymous trader that Baumgertner says is purely a technical thing necessary to raise trade finance. However, the Belarusian side have accused Uralkali of using the trader to sell potash outside of the cartel agreement. Once more potash production comes onto the market after 2018, these cartel relations will be even harder to maintain.

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the US philanthropist George Soros and, worse, by jailed oligarch Mikhail Khodorkovsky. The Prosecutor General of Russia has started an investigation into this funding as part of a wider crackdown on foreign funding of nongovernment organisations (NGOs).

However, Guriev's association with opposition figure and anti-corruption blogger Alexei Navalny may also have been a factor in the case, investors who know Guriev told bne.

Innocents in Putin's purge bne

R

ussian President Vladimir Putin's anti-corruption drive that escalated last November with the dismissal of the defence minister is starting to take on the appearance of a classic 1930s-style Stalinist purge.

The latest victim is Sergei Guriev, Russia's top liberal economist and a close associate of Prime Minister Dmitry Medvedev, who fled to France at the end of May in fear of being arrested.

Professor Guriev is the rector of the New Economic School (NES), one of Russia's top universities, and has been leading much of the thinking behind the government's reform programme.

He was also responsible for writing the speech Medvedev gave at the 2009 St Petersburg Economic Forum that re-launched the privatisation drive, and he's closely involved with the Kremlin's economic policymaking. In short, he is one of Russia's most respected thinkers and his advice was widely sought from all sections of the elite: from the liberals, through to the oligarchs, and on into the government.

But at the end of May Guriev resigned from his job at NES and also withdrew his name as a potential independent director on the board of Sberbank

As pressure grew on Guriev, he even approached the Kremlin for help, according to bne sources, but found no solace there. By the weekend of May 25, he had decided that the risk of arrest was too great and fled to Paris where his wife, also a professor of economics, lives. "Everything is fine. It's better in Paris than in Krasnokamensk," Guriev said on May 29, referring to the region where Yukos founder Mikhail Khodorkovsky languishes in prison.

(though, hilariously, as it was too late to remove his name from the ballot on May 31 the shareholders took their revenge on the Kremlin by voting him back on). He clearly has no intention of returning to Russia anytime soon.

Guriev was questioned a month ago as a witness in a case against Khodorkovsky, Svetlana Petrenko, a spokeswoman for the Investigative Committee, told Bloomberg, without giving any details.

Given his importance in the academic and policymaking worlds, the Russian government's reaction to the news was

In 2011, Guriev contributed an expert statement to a Presidential Civil Society and Human Rights Council report on

“Sergei is a qualified expert, and everything that is happening to him now is unfortunate"

restrained. Economic Development Minister Andrei Belousov described Guriev’s resignation as a “pity,” adding that “Sergei is a qualified expert, and everything that is happening to him now is unfortunate,” in what is something of an understatement.

Purged Although details are sketchy, NES and Guriev have been under mounting pressure from the authorities for some time, as the school is partly funded by

the legality of the second Yukos case. In this statement, Guriev maintained that Khodorkovsky was not guilty and also noted that he had no conflict of interest related to companies affiliated to Yukos or Khodorkovsky.

Clearly this annoyed the authorities.

Last year, Investigative Committee spokesman Vladimir Markin claimed that some of those involved in evaluating the legality of the second Yukos case were affiliated to

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bne July 2013

organisations that had taken Yukos funds, without naming names.

The NES was raided by investigators believed to be from the Office of the Prosecutor General, toward the end of May, who seized Guriev's computers and correspondence. It is not clear whether he is under investigation himself, or merely being questioned as part of an ongoing investigation. "It all smacks of a 1930s purge," complains one of Guriev's associates, who didn't want to be named.

"He could well have just been caught up in somebody's fight or desire to settle scores. That's the problem with purges: everyone is guilty and merely accusing someone of something is enough to get them out of the way."

Indeed, the Kremlin's insistence on labelling any organisation that receives foreign funds – and 95% of NGOs do – a "foreign agent" is very reminiscent of Stalin's campaigns to stamp out "spies" and "saboteurs", which were a convenient excuse for his failure to create a workers' paradise.

Putin is not Stalin, and his goal is probably a more mundane effort to take back control over a government that has run amok over the last decade,

"That's the problem with purges: everyone is guilty and merely accusing someone of something is enough to get them out of the way" drunk on the billions of petrodollars that functionaries have been siphoning off. In this sense, the current crackdown is more-or-less a repeat of 2000 when Putin first took office and immediately took on the oligarchs, who had overrun the Kremlin and were helping themselves to billions of dollars of state assets. The only difference this time is the target is not businessmen, but bureaucrats.

While most of the press attention has been focused on the plight of the

obviously worthy NGOs, state-owned companies and high officials are in just as much danger of getting caught up in the purge as liberals. Three senior Duma deputies have recently been forced to resign, the heads of stateowned utilities company RusHydro and Rostelecom have been put under investigation, and even the mighty Gazprom is being subjected to an audit and its subsidiaries are being investigated for graft. No one is being excluded.

If Putin's goal is to scare everyone, then it's working. Foreign investment in Russia has fallen to next to nothing, despite the basic good health of the economy, due to fear of political attacks. But private bankers tell bne that owners and oligarchs are tightening up their ownership structures and increasing transparency in order to strengthen their claims on their assets, which is a good thing and part of the point of the purge.

However, purges are by nature dangerous and unpredictable. Guriev is likely a victim, as really no one seems to have a bad thing to say about him.

He is outspoken on economic issues, but usually fairly reserved on political issues and is not publicly associated with the opposition movement.

However, as in Stalin's day, people can get purged on the basis of little more than displaying hubris.

Guriev's case is damaging for Russia's image, but not greatly, as he is not well known outside the country. However, the fear amongst investors is that First Deputy Prime Minister Arkady Dvorkovich, who is also on the board of NES as well as other vulnerable institutions, could be next in line. If that happens, then the banner headlines will be "Back in the USSR" the day after his arrest.

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doesn't swear or drink alcohol, has slightly chipped front teeth and just a small lisp. Her friend Sedov, with whom she was in the orphanage, is so smallframed that one would hardly believe he is more than 19 years old.

Russian orphans trapped in poverty Julia Reed in Moscow

M

uch has been said about the miserable plight of Russian orphans, especially following the recent ban on all American adoption in Russia in retribution for Congress' so-called "Magnitsky Act", which penalises some Russian officials on human rights grounds.

After decades of inaction, suddenly the issue has become a political tug-of-war between the state, which is largely against all foreign adoption, and the liberal opposition, which highlights cases of neglect and abuse in Russian orphanages.

Fuel was thrown on this fire in May when a video on YouTube showed a 17-yearold orphan girl whipping younger boys with a belt in an orphanage in the Amursk region in Russia's Far East.

The girl (herself an orphan) is facing criminal charges and the director of the orphanage has been sacked.

However, the video only throws into relief the problems of Russia's orphanage system, which are legion.

There are other videos of orphan children telling stories of routine sexual

and physical abuse, and few doubt that these cases are commonplace.

It has always been a commonly held view in Russia that to be in an orphanage is as bad as being in a Russian prison. According to the General Prosecutor's Office, 40% of orphans end up becoming alcoholics and/or drug addicts, 40% commit a crime and 10% commit suicide. Only a lucky 10% emerge from the orphanages and adapt to the outside world to lead relatively normal lives.

Friends reunited The story of Tanya Chernyshova, 23, and her childhood friend Misha Sedov, 26, is typical but also exceptional in certain aspects.

Chernyshova looks and talks younger than her age. She has pleasant manners,

Both Chernyshova and Sedov were born in Moscow. Sedov never met his parents and still doesn't know anything about them. Chernyshova once overheard that she lived with her parents until she was five and that her alcoholic mother used to hit her head against the radiator. Eventually she fell ill and was taken to hospital by her neighbours, but her parents simply didn't come to collect her after she recovered so she was sent to the orphanage. Eventually, the orphanage was turned into a cadet school and then a boarding school with a military bent, but the orphans remained.

Chernyshova felt uncomfortable in the school, given she was one of the few children who'd stay there over the weekends while the rest went home to their families. She didn't enjoy having to wear a military uniform all the time and didn't like her bunk bed in a tiny room she shared with three other girls, where the lights, music and noise never seemed to stop at night. But the school was as good as any other Moscow school and neither Chernyshova nor Sedov suffered from any stigmatization or bullying at the hands of the regular kids.

Still, the orphans stuck together and had little contact with other children.

When she was 14, Chernyshova approached a Russian charity worker Irina Borisova at a function and they struck up what became a life-long friendship. "I feel a lot closer to Irina than my own biological mother. I met my own mother once by accident a couple of years ago and I know that she turned my elder sister who lives

"It has always been a commonly held view in Russia that to be in an orphanage is as bad as being in a Russian prison"

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with her to prostitution. I was much better off in an orphanage and my cadet school than I would have been with her. Irina has become my second mother. I am the only one of all my orphan classmates who continued my education after high school," relates Chernyshova, who is a qualified hairdresser. "Other girls turned to drinking or prostitution. It's all because of Irina's support. I didn't want to let her down."

After finishing their cadet high school, both Chernyshova and Sedov were given one-room flats on the outskirts of Moscow by the state. They were lucky, as according to the Audit Chamber in 2012 only 22,454 Russian orphans received a flat from just under 100,000 that were eligible.

The flats only become the official property of the orphans after five years of use and their use is strictly regulated and regularly inspected by social services. Former orphans are not

bne July 2013

every business in her neighbourhood.

Chernyshova tried many jobs, including being a waitress in a bar, but is always the first one to be out the door. She is a lovely girl but can't survive on her own.

I hate to think where she'd be if it wasn't for me," says Borisova.

Sedov fell in love with another former orphan, Dasha, who already had a son of three, and together they had a daughter, Vika. A few months into living together in Sedov's flat, which still belonged to the state, Dasha ran away to follow her drinking habit and left Sedov with the two small children.

Sedov worked as a courier at the time earning RUB15,000 ($500) per month.

Having to look after two children singlehandedly, he could hardly go to work, but Chernyshova came to the rescue.

She looked after the baby, while Dasha's son would go to the kindergarten. "After three months I found that I was not able to look after two children. I rang Dasha and asked her to take her son back or

"Only a lucky 10% emerge from the orphanages and adapt to the outside world to lead relatively normal lives" allowed to rent their flats out, nor to have flat-mates. They have to be up-todate with their communal payments and must hold down a steady job.

Finding and keeping jobs is the most difficult challenge for former orphans.

It is a common practice to diagnose children from dysfunctional families with mental and cognitive disorders simply because they do badly on tests.

Their education is poor and when they leave the orphanage most are expected to get basic manual labour or service jobs. The social services arranged for Chernyshova to train as a hairdresser and Sedov as a carpenter. Neither of them pursued those careers. "With my constant prodding, Chernyshova went to the job centre, applied to just about

I would give him up to an orphanage and to keep our daughter," says Sedov.

"She took her son and left me with the daughter, but soon the neighbours called the social services because the poor boy was locked up alone in the flat while the mother was gone."

The social services took the son away and placed him in an orphanage. Dasha is now in the process of losing her maternal rights. The father is unknown. "The social services told me that the whole time Maxim, her son, is in the orphanage, she has only been to visit him once. She clearly doesn't need him," said Sedov.

Asked if he'd agree to take Maxim from the orphanage if he had proper financial support. "No, I wouldn't. They

would not have given me Max as I am not the father, and anyway I can't look after two children alone," he says.

Having been in an institution all their childhood, both Chernyshova and Sedov don't have any skills or knowledge of how to live in the real world. When they finished school, they both had no idea of their shoe size or that one must pay their community charges monthly to avoid being hit by an unaffordable bill at the end of six months. Borisova once had to bail out Sedov as he would otherwise have lost his flat because of the unpaid bill.

Orphans can seek help and free education from the state until they reach the age of 23 or until they get ownership of their property. And Chernyshova still heavily relies on social services for all kinds of benefits, due to her poor health and inability to hold down a job.

Chernyshova and Sedov, like many other orphans, lack initiative, have low confidence and expect to be helped all the time. The Russian orphanage system produces adults not fit for adulthood who cannot survive independently.

They often find themselves trapped in a cycle where they in turn give birth to new orphans, new prisoners, new alcoholics.

At the time of writing, more than five years after he got it, Sedov's flat still has concrete walls. He can't afford to do it up and he doesn't have the initiative to find a way to do it for free.

Lack of initiative and helplessness are the birthmarks of Russian orphans. It is not their fault but upon leaving an orphanage – many don't even known if they prefer tea or coffee, let alone how to go about simple daily tasks.

Even the lucky one-in-ten former orphans that don't go off the rails are marred as social invalids. It would be better to give the system a major overhaul rather than play political football with the fate of these poor children.

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only be included in the international settlement systems from next year at the earliest. VTB's SPO was a "wet run" partly designed to test the system. "It was a pioneering transaction," Herbert Moos, VTB's chief financial officer, says in an exclusive interview with bne. "All the shares sold were common ordinary shares paid for in Russian rubles with no GDR tranche, and there were many regulatory and financial infrastructure changes that were needed to make the deal possible for western investors."

VTB stays home for share sale Ben Aris in Moscow

I

t should have been a fairly routine bit of work. VTB completed a sale of new shares on May 23 that raised RUB102.5bn ($3.3bn), which provided the Russian bank with some fresh financial firepower to continue its global expansion. However, this secondary public offering (SPO) was offered exclusively on the Russian stock market, a trial run for further such share issues now that President Vladimir Putin wants these to be done solely at home rather than abroad, part of the ongoing effort to develop Russia's capital market and turn Moscow into an international financial centre.

In the end, the trial run didn't go entirely smoothly – but that was the point. The first job of the SPO was to raise badly needed capital for the bank. But the more important job was to knock some of the corners off the legal system governing the whole business of SPOs in Russia, so that the newly merged stock exchange can be better used by all of Russia's companies looking to raise money.

Russia's capital market was linked into the international financial system at

the start of this year. But as the first big equity transaction involving foreign investors - about half of the issue was bought by sovereign wealth funds from oil-rich Norway, Qatar and Azerbaijan, each of them making their first big investment in Russian equities - the VTB deal threw up a raft of technical problems.

The government launched a big reform effort to turn Moscow into an international financial centre in April 2008 and merged the main exchanges – the RTS and Micex – in 2011. The reform was made real in January when the Russian capital market was connected to the international

One of the main hurdles is that trades in Russia are settled on a "T+0" basis. This means that investors have to deposit the cash to pay for shares with a bank ahead of the deal so that the trade can be settled immediately; in the West, "T+2" is more normal, where the buyer of stocks has up to two days to pay for their shares or else the deal is cancelled.

"Investors are not comfortable with the settlement system on the Moscow Exchange in the T+0 regime, but the exchange is changing its technology and in spring this year introduced a pilot T+2 settlement cycle," says Moos.

The three aforementioned countries' sovereign wealth funds bought a majority of the shares, but according to Moos there were "hundreds of other funds that participated too," including many of the large institutional investors in places like London.

The deal is important, as these investors for the first time had to thrash through the Russian system: the devil is in the details, as the saying goes. "The law on pre-emptive rights imposes an impossible 45-days-long approval process, which exposes the investor

"It was a pioneering transaction"

settlement and clearing companies Euroclear and Clearstream. Foreign investors have rushed in, buying up some $20bn worth of state bonds since, but the equity market will

to tremendous volatility," says Moos.

"We were delighted that the Duma [parliament] reduced the period to eight days, so it is better than it used to be."

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Moos says the work is far from over and VTB is continuing to lobby the Duma for more changes that will streamline the legal regime and make it more accommodating to potential investors' needs. For example, under current rules Russian pension funds are forced to report a profit each year, says Moos, which in effect forces them to buy bonds and puts equities out of bounds – a rule that VTB is lobbying to have relaxed. "I have a long list of things that we want

bne July 2013

in anticipation of winning allotments of shares – allotments they didn't get.

"Lots of hedge funds were shorting the stock going into the transaction that was driving the price down, but after the issue they had to close out their positions which pushed it back up again," says Moos.

The bank's focus on quality and attracting committed investors scored it several firsts with this issue.

"I have a long list of things that we want to see changed" to see changed," says Moos. "Half of the work is done, but there is still a lot more to do."

First steps Investors that already own VTB's global depository receipts (GDR), a proxy share that is traded overseas, were nevertheless keen on the new share issue and accounted for over 60% of the purchases.

The issue was aimed at institutional and long-term investors in Russia.

One group that was excluded were hedge funds, which had already been shorting VTB's stock ahead of the issue

Amongst the sovereign funds was the Government Pension Fund of Norway with $500m. "These are very serious people and their due diligence on the bank took six months," says Moos. "I had to sit with them as they went through the books in detail. They don't make investments lightly and wouldn't invest unless they were satisfied. It was their first big investment into Russia."

Qatar's sovereign wealth fund also made its first big investment in Russia with $1bn, while Azerbaijan's new sovereign wealth fund likewise made its debut in Russia with a $500m investment.

Together, the three funds bought 55% of

the placement, existing investors bought 14% and the rest were new investors.

China Construction Bank was also a big investor. "We have been working with [the Azerbaijani sovereign wealth fund] on a real estate investment in Moscow, their first investment, and they have a 20% allocation to Russia so they made a strategic decision to invest in us and become a business partner," says Moos.

It should be a good deal for these investors, as the stock was sold at a 9% discount to the closing price on the open market the day the book was closed (although the discount was actually 3.2%, as the bank decided to exclude the new shareholders from the dividend payout).

This will not be the last VTB offer, but the Russian government still has not decided how far it will go in the privatisation of the country's secondlargest bank. After the SPO, the state's stake fell from 75.5% to 60.9%, but a roadmap for the bank's privatisation is under consideration at the moment and will be released soon, which is believed to call for the state to reduce its share to 50%+1 share by 2016. At that point, a second roadmap will be drawn up and only then will the state decide if it is going to sell off the bank completely or hang on to a majority share, says Moos.

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bne July 2013

Latvia's ready, steady, euro!

Mike Collier in Riga

V

aldis Dombrovskis looks tired.

It's hardly surprising, as the Latvian prime minister has had a busy week. On May 30, his country was officially invited to start preparing for membership of the Organization for Economic Cooperation and Development (OECD), after more than a year of relentless tub-thumping to win the invitation. Taking the edge off his mood two days later, his Vienotiba ("Unity") political party got a thumping of a different sort in local elections, slipping into a distant third place in Riga behind the pro-Russia Harmony Centre and the right-wing National Alliance.

But that didn't seem so important come June 5, when Dombrovskis secured what he, at least, regards as the biggest prize of all – backing from the European Central Bank (ECB) and European Commission for Latvia's adoption of the euro as its currency on January 1, 2014.

No sooner was the news confirmed than Dombrovskis embarked on a relentless series of media interviews to explain why he is so keen on getting

"I would say we should spare the celebration until July 9 [when EU finance ministers will vote on the matter] – even though we no longer

"I understand that for business, and exporters in particular, the sentiment is positive, whereas pensioners are justifiably scared about price rises" into the crisis-wracked Eurozone, so when bne sat down with him in his office a couple of hours after the decision was announced in Brussels and Frankfurt, the first call was for a cup of strong coffee.

have any technical obstacles in our way now that the Commission and ECB have said Latvia fulfils all the Maastricht criteria and is ready for euro adoption," says Dombrovskis who is now his country's longest-serving prime minister

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since the restoration of independence in 1991.

"We're working intensively with the Eurozone countries to ensure there is political support for Eurozone accession and so far things seem to be on track. We expect positive Ecofin [Economic and Financial Affairs Council] and European Council decisions, but those decisions still remain to be taken," he says.

Dombrovskis' work in turning Latvia's economy from a berserk basket case in 2009 into one that has the unique distinction of simultaneously recording the EU's highest growth rate (more than 5% in both 2011 and 2012 with 4% expected this year) and the lowest inflation (-0.4% in April) is certainly remarkable. So if things are all going so well, the obvious question is why risk entering the Eurozone maelstrom?

"We believe it will facilitate economic development in Latvia for several reasons," Dombrovskis says. "First, we will get lower interest rates for public lending and for the economy as a whole, and several ratings agencies have already said publicly that they will raise Latvia's credit ratings once we join the Eurozone. Second, we are a small and open economy and we do around 70% of our foreign trade in euros, so we would remove those currency conversion costs we are spending now.

That burden on the economy would disappear."

"And we expect it to stimulate foreign investment – something we saw in Estonia where after they joined the Eurozone in 2011, non-financial sector investment doubled. We would expect to see something similar."

Indeed, in Dombrovskis' judgment there isn't a euro crisis at all: just crises in some of the Eurozone member states.

"The euro is not the problem here. If you look at the euro as a currency, it's stable and closer to historical maximums than minimums. Our currency, the lat, has been pegged to the euro since 2005, so what happens to the euro happens to the lat anyway. So really, there aren't many reasons for us not to join."

Better rated

bne Less than a week after the Baltic state got the nod to join the single currency, Standard and Poor's raised Latvia's sovereign rating by a notch on June 10.

S&P increased Latvia's long-term government bond rating to 'BBB+', the third-lowest investment grade, but lowered its outlook to stable from positive. On June 5, the Baltic state got the green light from the European Commission and European Central Bank to its application to join the Eurozone, with a final decision from the Economic and Financial Affairs Council due on July 9.

"Eurozone membership would have a positive impact on the government's creditworthiness by mitigating foreign-exchange risks and providing the Latvian banking system with access to the European Central Bank as a lender of last resort and general provider of liquidity," S&P said in a statement. "Converting the lat to euro would eliminate the currency mismatch that exists in the Latvian banking system – most lending is already in euros."

Riga will likely be hoping to see Moody's Investors Service or Fitch ratings join S&P in offering an upgrade soon. That would help Latvia issue bonds at the lower end of the pricing range that it hopes to achieve, one of the major benefits of joining the currency bloc. June 10 saw Riga launch its "non-deal" roadshow to discuss capital markets funding opportunities for the year ahead with investors around Europe.

Latvia has said that it hopes to see borrowing costs sink and investment rise thanks to euro membership, and both Moody's and Fitch said ahead of the June 5 announcement that they would review their ratings should the country get the green light.

Moody's said on June 4 that, assuming Latvia got the nod, it would likely offer an upgrade based on the country's strong GDP growth – the highest in the EU in 2012 – and the strict fiscal discipline that has reigned over the budget since the economy fell off a cliff in 2008. The ratings agency said approval would reduce susceptibility to event risks and support the agency's positive outlook on its rating, which currently sits at the second lowest investment grade of 'Baa2'.

A full set of upgrades, and consequent strong debt sale, would also offer a response to those suggesting the country is mad to be joining the problem-riddled European currency. "The final decision on July 9 for Latvia to adopt the euro from January 2014 is nothing but a formality in our opinion," analysts at RBS wrote in June, "and should be a trigger for rating upgrades. We expect the Treasury to take advantage of these positive developments and tap international markets with a ¤1bn external placement in the coming few weeks."

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bne July 2013

Many Latvians remain to be convinced.

A June 6 survey by the Factum pollster for the finance ministry said that only 38% of Latvians support euro adoption. Other polls in recent months suggested similarly lukewarm levels of support, and in the local elections it was Harmony Centre – who are not strictly anti-euro but don't regard euro adoption as a priority – that racked up an astounding 58% of the vote in Riga.

Preparing for the euro Once Ecofin gives its assent on July 9, the preparations for euro adoption can begin in earnest. Advertising campaigns will bombard Latvians with information and the expectation is that pro-euro sentiment will gradually rise as fears are allayed.

According to Dombrovskis, it is practical issues that people fear rather than being against the euro on principle.

"People have been hearing about a Eurozone crisis for the last three years, so it's understandable that they have reservations. It's not a trivial matter," he admits. "There are basically two parts to this: why we are joining and how we are joining. The 'why' concerns the economy, foreign investment and so on.

The second part is the practicalities – what will happen with the lats in their pocket, their bank accounts, prices and so on. These are the practical worries that need to be addressed."

On an early-morning commuter train to Riga from the northern city of Valga, which straddles the Latvian-Estonian border with its twin town Valka, opinion on the euro is divided. Despite actually living on the Estonian side of the border in Valka, electrician Normunds Zvaigzne, 41, says he regrets the imminent demise of the lat. "My Estonian colleagues all say they miss the Estonian kroon. It was an important symbol of their nation, just as the lat is important to us – and they tell me that prices definitely did rise when they got the euro, so we expect the same thing," Zvaigzne tells bne.

Inga Svagrova, 32, from Sigulda, regional director of an international fashion house, proves that even with the government saying more education is needed to make public sentiment more positive, many Latvians are already well informed.

"My personal feeling, on a purely emotional level, is that I am against joining the euro at the present moment.

It seems strange to do so when there is still so much trouble and uncertainty," she says. "However, I also appreciate that we are members of the EU and need to continue on that course. It is the same with ordinary people too – I understand that for business, and exporters in particular, the sentiment is positive, whereas pensioners are justifiably scared about price rises."

"What happens to the euro happens to the lat anyway, so really, there aren't many reasons for us not to join"

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towns in the region of Bohemia – such as Melnik or Usti nad Labem – were not so lucky, with tens of thousands needing to be evacuated.

The floods of 2002 devastated much of the region, as water invaded major cities to bring them to a halt for days and destroy huge swathes of property.

That prompted states across the region to announce expensive programmes to improve defences. Eleven years later, the waters returned to test those claims.

Testing the economic waters Tim Gosling in Prague

A

round two weeks after torrential rains brought the threat of catastrophic floods to Central Europe, the swollen rivers had mercifully receded, the deluge headed for the oceans to the north and south.

The floods left behind around 20 dead and a trail of destruction to the tune of billions of euros. However, there is also hope that the clean-up could help pull some countries out of recession.

As the waters rose at the start of June, Austria, Germany and the Czech Republic – at the epicentre – held their breath, and prayed that the defences built in the wake of the 2002 disaster would hold. Despite the loss of life and damage, they did for the most part; a trend followed as the cresting water headed along river courses to the north and via the Danube through Slovakia and Hungary.

The Czech Republic announced a state of emergency on June 2 as the Vltava and Labe Rivers rose ominously following days of heavy rain. By June 12, the waters were (more gently)

ravaging towns in northern Germany as the swell in the Labe (by that point known as the Elbe) pushed onwards.

Meanwhile Hungarians were breathing more easily as the level of the Danube

According to Erste Bank, a total of €3.3bn was spent across Central and Eastern Europe in the intervening years, and that "helped them to reduce the losses significantly," the bank's analysts suggest. They estimate the economic damage from the latest episode at a fraction of the €6bn or so incurred in 2002.

Counting the cost The region's insurers are on the front line of all this. The Czech Insurance Association said on June 6 that it may have to pay out up to CZK7.5bn (€290m). Moody's Investors Service, the rating agency, said that although the losses are credit negative for those with exposure, "current information suggests

"¤3.3bn has been spent across CEE in the intervening years, and that helped to reduce the losses significantly" continued to fall from the 50-year high of 8.95 metres at which it had peaked two days earlier.

that total claims to insurers will be less than the €3.5bn" that the industry incurred following the 2002 disaster.

Despite spasms of storms prompting flash floods on June 9, the Mayor of Prague declared the same day that "the worst is over," and ordered the removal of the highest anti-flood barriers in the city to start. Thanks to those defences, the capital's greatest indignity was the closure of a large chunk of its transport infrastructure for several days. Other

Much harder to quantify is the effect on the wider economy, especially over the longer term. Large-scale operational stoppages were limited. However, it may never be known how many shops or fields were flooded, how many tourist trips cancelled, or how many deliveries and meetings failed to take place due to transport interruptions.

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Moods sour in Poland The mood of Poles is going in the same way as the economy: down.

In a recent poll by TNS OBOP, according to Poland AM, 77% of Poles believe that the country is heading in the wrong direction, which was 3 percentage points more than in the previous month. The poll also found that 79% of Poles believe the Polish economy is in crisis, while just 17% believe it's developing. Only 14% of the respondents expect their material status to improve, while 44% expect it to get worse and 38% say it will probably remain unchanged.

The cause of their misery isn't hard to find.

Recent data show that, for example, 80 firms went bankrupt in the first five months of this year, which was 7% more than a year earlier. A total of 877 firms went bankrupt in Poland in 2012, up 21% from 2011.

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Carmaker Porsche was forced to close a German production line, but not because either it – or its supplier of body parts in Slovakia – was under threat from the water. Rather, those car parts couldn't navigate their way through the blocked Czech transport system.

However, Erste was already having a bash at pinning down some estimates as early as the first week of June. Analyst Martin Lobotka suggested the tab would clearly be a lot lower than the CZK73bn seen in 2002, and is more likely to be around CZK30bn.

With waters still high in the Danube and other rivers in Slovakia and Hungary at the time of writing, the tally is less advanced in those countries. Thanks to the strong performance of Slovakia's flood defences, the negative effects on GDP are likely to be negligible, Erste reckons. Due to limited closures of major businesses, the negative impact on Hungarian GDP should be below 0.2%, the bank notes, adding the events will affect its economic forecasts for the country.

An annoying buzz On top of the clean-up, however, the worry by mid-June had turned to potential mudslides and an infestation of mosquitoes. While Czech authorities were mulling a plan to spray lying water containing millions of larvae, a new section of the D8 highway – still under construction, thankfully – was destroyed by a massive mudslide, with damage estimated in the hundreds of millions of crowns.

Czech National Bank put it, the floods may have wiped out wealth, but they should also offer a small – but possibly significant – boost to growth in a region crying out for some economic momentum.

The Czech government has pledged to spend CZK7bn on infrastructure and other repairs, and forgive another CZK5bn in taxes for affected firms. In effect, Prague's hitherto harsh austerity drive – widely criticized for helping keep the economy in recession since the start of 2012 – will be forcibly derailed.

Similar repairs and reconstruction will be needed in Slovakia and Hungary.

That may worsen budget deficits or state debt levels somewhat, but the stimulus it will offer the region's economies is more important right now.

On top of the repairs, Erste suggests the positive experience with the flood protection systems will prompt governments to invest more in this area in the coming years. The Slovak environment ministry has already announced a plan to apply for €400m in EU funds for further anti-flood protection measures to be completed by 2020.

While the potential boost to growth will clearly be limited – most estimates suggest a maximum of 0.2% of GDP – it could at least push the Czech Republic over an important threshold. With the Czech government forecasting a stagnant economy in 2013, the flood could end up lifting the economy out of its longest ever recession. Hungary is in a similar boat.

That presents the potential silver lining.

As Governor Miroslav Singer of the

"The worry by mid-June had turned to potential mudslides and an infestation of mosquitoes"

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– a campaign by the International Consortium of Investigative Journalists to expose the owners of secretive trusts in offshore centres – upset the apple cart. News, a partner in the project that began with a leak of documents unmasking the details of 130,000 offshore accounts in April, reported that Stepic owned mailbox firms Yatsenko International Ltd. in the British Virgin Islands, and Takego Holdings Ltd. in Hong Kong. The magazine quoted Stepic as confirming the information, although he stressed the firms named were "not offshore constructions" but "project companies" used to buy three flats in Singapore, with their income taxed in Austria. Even so he tendered his resignation in order to avoid any embarrassment to the bank.

Stepic out bne

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long with the departure of Herbert Stepic from Raiffeisen Bank International may well go much of the lender's emerging market strategy.

On June 7, the supervisory board of Raiffeisen Bank International (RBI) announced it had accepted Herbert Stepic's resignation as CEO of the Austrian bank and appointed his deputy and the head of global corporate banking, Karl Sevelda, to replace him.

Stepic had offered to resign on May 24 following allegations in the press concerning real estate deals using offshore structures. However, reports say the allegations provided fodder for Stepic's critics at some of the regional landesbanks that own Raiffeisen Zentralbank, the group's unlisted parent, who have been looking to oust the dynamic CEO who masterminded the push into emerging markets, and return power to the more staid centre.

In a statement, the president of RBI's supervisory board, Walter Rothensteiner, called the appointment of Sevelda, who has worked for the bank for 15 years, "an expression of the Supervisory Board's trust in the continuation of the current strategy". "We consider continuity in both management and business alignment as one of the key success factors especially in challenging times," Rothensteiner said.

While thanking Stepic for his "strategic vision and effective implementation skills played a vital role in building RBI into a leading banking group in Austria and Central and Eastern Europe," the sudden departure of the larger-than-life CEO leaves many questioning where the bank's strategic direction lies.

Trailblazer RBI was undoubtedly one of the pioneers of western business in the newly opened markets of Central and Eastern Europe, and Stepic the visionary behind that expansion. Under Stepic's leadership of RBI, the rather stuffy parent Raiffeisen

However, Reuters reported unnamed sources at RBI as claiming that the Offshore Leaks report was just "an excuse" for Stepic's internal critics at the bank, who have been manoeuvring to shift power back to the centre and rein in the risky eastern strategy, to get rid of him. "They were looking for an opportunity to get rid of him in a way that would not come back to them," one Raiffeisen veteran who asked not to be named was quoted by Reuters as saying.

A Stepic confidant was quoted as saying: "Stepic wasn't liked. This move was absolutely overdue. Offshore Leaks was just an excuse."

"Stepic wasn't liked. This move was absolutely overdue. Offshore Leaks was just an excuse" Zentralbank, which is controlled by eight provincial Raiffeisen banks or landesbanken, which is owned in turn by local banks, found itself with 14m new customers in 15 countries of Emerging Europe. Just a year ago, the then 65-year-old banker signed a further fiveyear contract to stay with RBI. However, reports by Austria's News on May 22 that Stepic's name had come up in the "Offshore Leaks" project

Regardless of the truth of these reports, a new broom is sure to re-evaluate the bank's strategy, especially given the continuing crisis in the Eurozone and new, stricter global banking rules over capital, which is putting pressure on RBI's sprawling empire. The centre of the debate is surely whether to retrench to its home market and surrounding area, and sell the operations in furtherflung and riskier places like Russia and Ukraine.

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The outlook for the economy is also getting worse. Last year there were widespread hopes for a rebound in the first months of 2013 – now most economists expect a lacklustre pickup in growth only next year. The European Commission expects growth this year of only 1.3% – worse than anytime since the crisis year of 2009.

Unhappy Pole numbers

The problem for Tusk is than in 2009, when Poland managed to eke out growth of 1.8%, it was by far the best performance of any EU country. Every other member of the EU was in a recession, and the government delighted in holding news conferences displaying a map of the EU as a sea of red with Poland the only green island of growth.

Jan Cienski in Warsaw

P

oland's unexpectedly sharp economic slowdown is hurting more than business – it is also affecting the country's politics, dragging down the popularity rating of premier Donald Tusk and setting off a crisis within the ruling Civic Platform party.

of Civic Platform's supporters. They are upset over the party's failure to push through social changes like legislation allowing for civil unions or a more liberal approach to in vitro fertilisation as Tusk steers a course between the social liberals and conservatives in his party.

Civic Platform has seen its poll numbers sink to their lowest levels since the centre-left first took power in 2007, and in recent weeks it has been overtaken by the right-wing opposition Law and Justice party (PiS). One recent survey has PiS at 28% compared with 25% for PO. In the last parliamentary election in 2011, Civic Platform took 39% of the vote compared with 30% for PiS.

Business, another key constituency for Civic Platform, is also grumbling that the government is being laggard in its reform efforts. "There seems to be a lack of vision of what to do with the economy," says Miroslaw Gronicki, a former finance minister who has become an increasingly pointed critic of what he fears is an approaching move by the government to gut pension reforms in order to shore up public finances.

Tusk faces a two-fold problem. The first is that his is the first democratic government in Polish history to win a second term in office. "The key is that no one in Poland – and I'm speaking about the period since 1989 – has gotten used to a government that lasts longer than one term," Tusk said in a wide-ranging interview with the Polityka weekly.

"We have rarely been able to accept long-running and strong governments.

What's more, such governments are unusual – Polish politics have usually been changeable and anarchic."

There are signs of growing frustration with Tusk and his party among the big-city moderates who form the bulk

Critics like Gronicki are unlikely to get much satisfaction from Tusk, who has long shied away from the dramatic and socially divisive reforms propounded by many economists. "I have always reacted negatively to cries of: More reform!

More reform!," he told Polityka.

Gloomy forecasts Overshadowing the whole political scene is the economy. Growth in the first quarter of this year came to an anaemic 0.4%, the slowest expansion since the near-recession of 2000-2001. Unemployment is above 14%, the worst level in five years, and is much higher among the young who are an important part of PO's base.

This time the contrast with the rest of Europe is much less jarring. Looking around the region, the Baltic countries and Romania are expected to have higher growth this year than Poland, while Germany, Poland's largest trading partner, is expected to grow by 0.5%.

The outlook for 2014 is even worse, with Poland falling behind a growing number of EU countries. That takes a key public relations tool out of Tusk's hands – he can no longer mitigate worries over slow growth at home by pointing out how much worse it is everywhere else.

Tusk has now seen both his personal popularity and the support for his government take a beating. A new survey by the CBOS polling organisation finds 57% of Poles are displeased that Tusk is in charge of the government, while 69% are critical of his government's economic policies. That is a huge difference from the recent past, where Tusk was more popular than his party. He helped lead Civic Platform to victory in the 2011 elections by embarking on a branded bus dubbed the "Tuskobus" and using his charm and charisma to sway voters.

That is shaking Tusk's control of Civic Platform, a party he co-founded in 2001.

He faces at least one challenger for the party's leadership at an upcoming convention – former justice minister Jaroslaw Gowin, and could face a more formidable foe in the form of his deputy Grzegorz Schetyna.

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exchange, potentially boosting their returns.

The problem was that over the decade following the initial reforms, subsequent governments did not follow through on promises to reform the pension system, ending special privileges for farmers, miners and uniformed services, as well as increasing the retirement age. As a result, the second pillar has needed additional financing to keep it solvent.

Polish stocks' "pension premium" in danger Jan Cienski in Warsaw

S

tocks listed on Poland's stock market have long enjoyed a "pension premium", the higher share price that results from Polish pension funds pumping cash into local shares. But that premium is now in danger as the government contemplates reforms to part of the pension system, trying to rejig the mandatory private pension scheme – the so-called second pillar – that it blames for driving up public debt.

"Over the past 14 years, the pension funds have helped to shape the Polish capital market, increasing its liquidity and attractiveness for foreign investors, and IPO-ing those companies looking for higher valuations," note Mateusz Zawada and Carsten Hesse of Wood & Company, a central European investment bank, who find that any dramatic changes to the current pension system could have negative consequences for Polish equities.

The current government, and particularly Finance Minister Jacek Rostowski – who has called the second pillar system a "trap" – have long had a very negative opinion about the pension reforms that were conducted in 1999.

The goal then was to remove the longterm danger to Polish public finances

caused by an ageing and shrinking population. The reforms partly switched from a pay-as-you-go system, in which today's workers finance today's pensioners, to one in which today's workers build up savings for their own pensions.

The reform was a model in its time, and was copied by other countries like Sweden. However, the onset of the financial crisis has forced a rethink in Warsaw, as the finance ministry gazes

Over the years, the second pillar funds have become increasingly important to Polish capital markets. They have assets of PLN280bn (€67bn) and are significant investors on the Warsaw Stock Exchange (WSE), often buying and holding stocks issued in IPOs, which makes them a stabilising influence. The funds are allowed to invest 47.5% of their assets in equities (currently amounting to about PLN112bn, a fifth of the WSE's market capitalisation), although that is supposed to rise to 62%. "Without [the funds] the Polish stock exchange would certainly not be the largest in the region," Witold Stepien, head of the Citi Handlowy brokerage, told a recent conference on the impact of pension funds on the capital market.

Warsaw's initial step in 2011 was less radical than the action of Hungary,

"Without the funds the Polish stock exchange would certainly not be the largest in the region" longingly at the billions transferred every year to the pension funds.

Broken promises In 2011, the government slashed the amount of money flowing to the second pillar, falling from 7.3% of workers' salaries to only 2.3% – although a promise was made to eventually start increasing the flow of money and to allow the funds to invest more aggressively on the stock

which completely scrapped their second pillar. It also allowed for a temporary easing of public finances because EU accounting rules do not give an offset for state contributions to private pensions; by keeping the money in the public system, it allowed the government to keep public debt from growing to dangerous levels.

However, the pressure is on the government again as the economy

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Taxed to the hilt in Hungary

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slows much more sharply than had been expected and public debt again rises. According to the government's calculations, debt is a smidgeon below the legal threshold of 55% of GDP, although according to stricter Eurostat definitions debt is already higher than that.

bne The Hungarian government shocked investors yet again in June as it announced increases for extraordinary taxes on the country's banks, telecom operators and miners. Budapest claims that the raised levies are needed to ensure the country's budget remains in the EU's good books, but most observers expect the revenue will be used to boost spending in the run-up to next year's elections.

Economy Minister Mihaly Varga said on June 17 the government would introduce a bill to parliament the same day proposing a hike in the financial transaction tax and the telecoms tax. The Economy Ministry told MTI that extra revenue from the tax hikes could total as much as HUF100bn (¤343m).

The government argues the tax increases are necessary to keep the country from sliding back into the EU's Excessive Deficit Procedure (EDP). At a meeting on June 22, Hungary sealed final approval to exit the monitoring programme for budget offenders for the first time since it joined the bloc in 2004. However, Varga said that recent drops in inflation to below expectations have thrown the government's revenue calculations out of whack. By the end of May, the state had received only 17% of the planned HUF300bn it hopes to raise from the financial transaction tax in 2013, he pointed out according to the Wall Street Journal, instead of the anticipated 42%. So to cross the line, Varga in May announced a HUF93bn spending freeze for 2013-2014, and promised a further HUF80bn in cuts next year if necessary.

However, implementing such large-scale spending cuts would be electorally harmful to the government ahead of the parliamentary elections that are due next year. The ruling Fidesz party is desperate to maintain the constitutional majority it has enjoyed since 2010, which has allowed it to follow its unorthodox policies and flex its nationalist muscles in its almost constant bickering with Brussels. The country's energy utilities – foreign-owned for the most part – have been put in harness to shoulder the cost of populist tariff cuts; analysts suspect the new extraordinary tax rises will be used to fund programmes such as a promised pay rise for teachers.

"The drumbeat of negative propaganda coming from the government has markets convinced the second pillar funds are in for a shake-up"

A preliminary report on the scheme leaked to the Polish press states that the second pillar is now less needed because the government's programme of selling off state companies is winding down. The government has also attacked the funds for charging high management fees and for generating lacklustre returns.

The government also calculates that if the funds did not exist, Poland's public debt would drop to only 38% of GDP, far below danger levels. "The higher the level of the [funds] in the pension system, the higher the probability of a future increase in taxes because of the higher costs of servicing the debt," said the preliminary report.

The drum-beat of negative propaganda coming from the government has markets convinced that the second pillar funds are in for a shake-up. The likeliest outcome is for second pillar funds to be forced to transfer the assets of a pensioner to the government system 10 years before a worker retires, as well as allowing workers to opt out of the privatised system altogether.

"We are very concerned," says a comment from Citi Handlowy bank.

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were offered jobs at state-controlled companies as inducements to leave after they refused to support a fiscal consolidation package last November.

Rudderless The immediate fallout is that the Czech Republic is left yet again without a functioning government at a time when the economy is still struggling to emerge from recession, while it's also becoming harder to convince investors to put their money in a place widely regarded as run by corrupt politicians, dominated by powerful local businesses and, worryingly, under growing Russian influence.

A Czech scandal too far?

The country's had six prime ministers since the now President Milos Zeman completed a four-year term in 2002, with one interim cabinet that lasted over a year from May 2009 to June 2010.

Nicholas Watson in Prague

P

etr Necas resigned as Czech prime minister on June 17 over a growing bribery and spying scandal, taking down his government with him and plunging the country into just the most recent of a succession of political crises.

The scale of this latest scandal has shocked even those inured to the seemingly endless catalogue of sleaze, corruption and intrigue that has dogged Czech politics, especially over the last decade. It's safe to say the political transformation of the Czech Republic has never quite matched the economic one, largely because the elite often act with impunity and with little regard for the law or the consequences of their actions. Even so, certain aspects of this latest affair give rise to hopes that things might actually be changing for the better.

The latest scandal erupted onto Czech television screens on June 13 when it emerged that in the hours previously about 400 police from the organised crime unit had raided the prime minister's office, several ministries, and the residences of various lobbyists, which reportedly turned up €4 million to 5 million in cash and several kilograms of gold. Eight people were

taken into custody, including former members of parliament, an ex-minister, and the current and former heads of military intelligence.

What sealed Necas' fate was the revelation that his closest aide – and, it's a public secret, his lover – Jana Nagyova was taken into custody over two separate investigations: one that she had successfully ordered the illegal surveillance by the security services

The current coalition of Necas' ODS and two other smaller centre-right parties, Top09 and Lidem, are gamely talking about trying to form a new government with a new PM, perhaps Martin Kuba, the industry minister, to serve out the rest of a term of office due to end next year.

However, the opposition Czech Social Democratic Party (CSSD) – a shooin to win any new election due to the coalition's unpopular austerity

"The scale of this latest scandal has shocked even those inured to the endless catalogue of sleaze, corruption and intrigue that has dogged Czech politics" of three people, including the prime minister's estranged wife, with whom Necas had only announced on June 11 that they would divorce; the other is whether Ms Nagyova was part of a bribery case involving three former MPs from Mr Necas’ Civic Democratic Party (ODS). The probe centres on whether the three so-called “ODS rebels”

programme and drip-drip of scandals since it came to power in 2010 – together with the new leftist President Zeman, who has the task of appointing a new PM and has already thrown constitutional caution to the wind in his first six months in office, will do their utmost to stand in the way of this and try to force snap elections.

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The problem for the coalition is that three years of power have taken their toll, and the three parties now control just 100 seats or fewer in the 200-member parliament. For Otilia Simkova, an analyst with Eurasia Group, the key is Top09, whose 42 seats under the leadership of Finance Minister Miroslav Kalousek and Foreign Minister Karel Schwarzenberg, will decide the fate of the next government. "For Top09, staying in power for another year is the best case scenario, but the calculation for its leadership might change if there are further revelations from the police that would in some way further implicate ODS," says Simkova. "The question will then be, do they want to go for a caretaker government or early elections?"

Longer term, some are wondering whether this scandal will go some

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way to fundamentally changing Czech politics for the better. For many, what makes this affair so shocking – never mind the scale of it – is that the political elite has been implicated in the misuse of power through the security services, especially heinous for a post-communist country. It is also another wearying example of the too-cosy relationship, a nexus, that exists between the moneygrubbing politicians, corrupt lobbyists and all-powerful business interests.

It's an irony that it is Necas, who is credited by many with doing much to create the kind of conditions that gave prosecutors the latitude to investigate the current scandal, who should have been one of the first to resign under this new regime. "He ended up falling under the wheels of his own policies that's for sure," says Eurasia Group's Simkova, "but the fact the prosecution was brave

enough and fast enough to reach into the core of our current government's political elite, that's a good sign – if not for the Czech politicians, then certainly for the system."

For Vladimir Dlouhy, a former economy minister and a candidate in the last presidential election, the scandal has provided a clear signal that it is not enough this time for just the prime minster to fall on his sword. "We need a compete generational change in Czech politics – and I'm not just counting in age but also years in politics, and be it in the centre-right of ODS or Top09, or the centre left of CSSD, people are just fed up with the current political elite," he says.

"I'm calling not only for new parties but existing parties should open themselves up to fundamental change."

CEZ is asking the remaining bidders to finance the €8bn-12bn nuclear expansion has cast further doubt on the whole project.

During a trip to Moscow, Necas told his Russian counterpart Dmitry Medvedev that, "The tender will be transparent and the best bid will win," according to CTK. That Necas felt it necessary to reiterate this says much about how tarnished the process has become.

Nuclear friction in Czech Republic

Following Areva's controversial disqualification from the tender back in October over what the statecontrolled utility CEZ called "serious shortcomings" in its preliminary bid, the Russian-Czech consortium of Skoda JS, Atomstroyexport and Gidropress is duking it out with the Japanese-US firm Westinghouse for the right to build two new reactors at the Temelin nuclear power plant. CEZ plans to sign the contract by the end of this year.

Nicholas Watson in Prague

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he then Czech prime minister assured his Russian counterpart on May 27 that the process for choosing the winner of the country's nuclear tender would be fair and

transparent. Yet the resignation of Petr Necas and his government in June, a continuing standoff with France's Areva after it was ejected from the tender, and sources saying

Yet doubts about the estimated €8bn-12bn outlay that CEZ will have to shoulder to double the plant's 2,000-megawatt capacity have reached beyond shareholders and the press, and into the heart of government.

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The government of Necas went spectacularly belly-up in June as a bribery and spying scandal unfolded.

On June 25, the leftist President Milos Zeman named his economic aide Jiri Rusnok as caretaker prime minister, setting up a clash with the outgoing ODS/Top09 parties who are trying to form their own centre-right government. The caretaker government could limp on for a year until a new election is scheduled for May 2014, or else a snap election could be called, but September is the soonest that could happen.

Rusnok named a number of "key tasks" for his caretaker government, such as a budget for next year, but appeared to rule himself out of making any call on the nuclear tender. "I won't make strategic decisions," he said when asked about the September deadline set by state-controlled CEZ for selecting a winner from the Russian and US/ Japanese offers. Hence, any extension of the caretaker government could disrupt the process.

But even before Necas' government collapsed, his coalition partners were sounding wobbly on the project. In an interview with Hospodarske Noviny published on May 24, the powerful finance minister, Miroslav Kalousek, who is the architect of the coalition government's austerity programme, wondered whether the nuclear expansion is an "efficient" investment given that electricity prices remain stubbornly lower than they were when the project was first drawn up. He also reiterated how "unpleasantly surprised" the government was with the price that the two contenders put in their bids.

Necas to the end remained wholeheartedly committed to the project, and likened himself to a statesman making tough long-term decisions while ridiculing Kalousek as a beancounter.

Yet nagging questions about the cost won't go away. Industry sources in Prague say CEZ is now asking the two consortiums to finance the project after the utility failed to get the government

Central Europe

to offer financial guarantees, which critics say are essential to make the project even remotely economically viable. This is all a far cry from the days when CEZ officials were boasting the utility could fund the project using its own cash. Rosatom, the Russian nuclear holding, has stated in the past it would be prepared to offer full financing for the project; Westinghouse has ruled this out.

Then there is the open question of Areva, which is still smarting from its expulsion and is in the process of appealing the decision, possibly as far as the EU – a process that could take

had only one point. "It's astonishing that both bids got such very low grades on this," says one industry source.

"How can a contract be awarded when the evaluation on this is so bad? With such a low grade for Westinghouse, it should have been expelled."

In April, CEZ embarked upon the next stage of the process, in which CEO Daniel Benes said the utility would ask both bidders to raise "significantly" their offers in terms of the price and technical aspects. But for a growing number of critics, neither contender will be able to do enough to convince them that the project is viable.

"Necas likened himself to a statesman making tough long-term decisions, while ridiculing Kalousek as a beancounter" years. The French company has already lost several appeals, and is currently awaiting a decision on its latest from the chairman of the Czech competition watchdog. Areva was excluded because, in CEZ's words, it "had not fulfilled some other crucial criteria defined in the tender." Yet scepticism over the true reasons behind the French firm's disqualification grew in April when a leaked document appeared to show serious deficiencies in the two other contenders' bids.

Following a self-congratulatory statement from Westinghouse at the end of March that a preliminary ranking from CEZ showed it was ahead in the race, an internal tender document appeared in the local press showing Westinghouse had amassed a total of around 80 points out of a maximum 100 for the four criteria, while the Russian-led consortium had around 66.5 points. But under the criterion "Terms & Conditions", which covers guarantees during construction and the payment calendar, the Russian bid garnered only three points out of a maximum of 20, while Westinghouse

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www.edirama.al

A small step forward in Albania Nicholas Watson in Prague

A

lbania's path towards joining the EU looked a little straighter after an election on June 23 that ended with an opposition victory, a hoped-for smooth power transition and a qualified nod from international observers.

With most votes counted, the Socialistled coalition of Tirana's former mayor, Edi Rama, had won about 52% of the vote and secured enough to give it about 84 seats in the 140-member parliament, compared with 36% of the vote (12 points less than four years ago) and 56 seats for the centre-right coalition led by Prime Minister Sali Berisha's ruling Democratic Party.

Voter turnout was high; the Central Election Commission declared that 53.7% of 3.2m eligible voters had cast their ballot.

The result probably spells the end of the career of Berisha, who has dominated the political scene in Albania since the end of communist rule in 1991 and was bidding for a third term as PM, but at time of writing he had not actually conceded the election. Rama urged him to do so. "There always comes a time to lose, and today is the time to do it for the honour of Albania," he said, Reuters reported. "Albania must emerge from these elections holding its head up high... This is the moment in politics when the losers can take part in the victory of their country."

Since Albania's first post-communism election in 1991, the mostly Muslim country of 2.8m people has yet to hold a completely free and fair election.

The country was tense after a close race meant both sides claimed victory in the hours following the vote, while the Central Election Commission (CEC) was initially silent, a glaring sign of how troubled the run-up to the election was.

Despite Brussels making plain that a repeat of previous elections, which have typically been dogged by violence, votebuying and other electoral irregularities, would seriously harm Albania's hopes of being awarded the status of an EU

The Organisation for Security and Cooperation in Europe (OSCE), which sent 380 observers to join about 900 local and international observers, gave qualified approval of the vote, saying it had been the freest election since the end of communist rule over two decades ago, though it had been marred by an atmosphere of political mistrust, as well as incidences of violence.

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candidate country, an unseemly fight over the CEC in the run-up to the election left the election watchdog short-staffed and lacking credibility.

The CEC is a seven-member collegial body tasked with overseeing elections in Albania. Although its members are proposed by political parties, with a formula that grants the ruling coalition the right to propose four of the seven members, the CEC is considered an independent institution. As Gerald Knaus, chairman of the European Stability Initiative think-tank, put it: "Central Election Commission members are political appointees and voted in by parliament, but then they become something else, like US Supreme Court judges chosen by the president and the Senate: they become guardians of rules."

The scandal began on April 20 with a controversial vote in parliament pushed

by Berisha's ruling coalition that sacked a member of the CEC who had been proposed by the Socialist Movement for Integration, LSI. This was because the LSI had left Berisha's ruling coalition as a junior government partner in order to join the Socialist-led opposition ahead of the June 23 election.

However, members of the CEC cannot be removed for reasons unspecified in the Election Code, and the other oppositionnominated members of CEC quit the commission to protest at the sacking of a fellow commissioner, meaning the four remaining government-appointed members were not able to validate the election result. "There is a reason why [CEC commissioners] are appointed for six years and are not to be dismissed unless they commit a crime. They must act on the basis of the Election Code and defend it, not engage in party politics.

Will they want 'their' party to win?

Perhaps, but this should be irrelevant to how they do their job," says Knaus.

The campaign also saw some ugly rhetoric, especially from far-right nationalists, increasing tensions in an already volatile region still recovering from the breakup of the former Yugoslavia in the 1990s and the Kosovo War. While few observers foresee a

return to war to redraw borders, the spectre of a "Greater Albania" stalks the Balkans, and is used by politicians in other countries, especially Serbia, to rouse their own populations. In such a heated atmosphere, the EU struggles to get its conciliatory voice heard.

On the day of the vote, the most troubling incidence of violence was a shooting in the northwestern Lac region, in which an opposition activist was killed and a Democrat candidate wounded. Police said the victim of the shooting was 53-year-old Gjon Pjeter Gjoni, a supporter of the opposition Socialists, while Democratic Party candidate Mehill Fufi was also gravely wounded in the incident. Another man, Kastriot Fufi, was also injured.

Such election violence is not uncommon. When Rama lost the last parliamentary election in 2009, four people were shot dead by security forces when opposition protesters took to the streets. The incident led to months of political turmoil, government paralysis and more violent demonstrations, forcing the EU to step in and remind the Nato and aspiring EU member of its democratic obligations.

and committed Atlanticists. In fact, it's as a firm US ally that has enabled successive governments to avoid taking the necessary measures that would root out the corruption which blights the country; "The West's primary mandate is to maintain stability – not enforce democracy," says Gary Kokalari, founder of Albanians for a Democratic Albania, which is involved in fighting corrupt practices in Albania.

Rama says he will replicate the success he had in reviving Tirana when he was mayor to the rest of the rundown country. He has also talked of introducing a progressive tax rate, easing the burden on small businesses and taking steps to fight graft. According to The Economist, in an interview Rama said the problem with Albania is that the whole system had been corrupted during Berisha's eight years in power. "If you put Albanian civil servants in Germany they will not be corrupt because there is no space for it," he said, "but if you put bring Germans here, after a few months they would be. It is not about people but the system."

The preliminary view of the OSCE was that the vote went "relatively well, albeit with some procedural irregularities".

It also highlighted the atmosphere of mistrust between the Socialists and Democrats, which had "tainted the

"The West's primary mandate is to maintain stability – not enforce democracy"

electoral environment and challenged the administration of the entire electoral process."

Despite their deep-seated hatred and confrontational approach, the two big parties and their leaders differ little in overall policies. Both are pro-EU

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which also does advocacy work on behalf of the Albanian government in the US. Except bne revealed earlier this year that American Chartered issued no such bank guarantee for the 10% of Vetro's bid.

"American Chartered cannot discuss or disclose the specifics of its relationships with its customers, but I can confirm that American Chartered Bank was not involved in the transaction in question," American Chartered's legal counsel wrote in an email.

An oily stain in Albania Nicholas Watson in Prague

I

f one wants to find evidence of the brazenness with which Albania's elite seeks to thumb its nose at the EU's standards on transparency and accountability, look no further than the website, www.vetroenergy.com.

This dead website is that of the company that came out of nowhere in October 2012 to win the tender for state oil firm Albpetrol, the country's most valuable asset. Hailed by the government of Sali Berisha as an example of a foreign oil company making a big vote of confidence in Albania's development, Vetro Energy turned out to be owned by a local crony of the prime minister, who then failed to come up with a down payment on the €850m it had bid for Albpetrol, causing the tender to be cancelled, and leaving egg on everyone's faces – especially the government and its advisor US law firm Patton Boggs – and lots of unanswered questions.

In June, there were hopes that some of those questions might be answered by an inquiry into events by the Albanian Prosecutor General’s office. Albi Serjani, a spokesperson for the office, told Balkan Insight on June 13 that a probe into the failed sale is in the “initial verification stage… [but] it has not moved far enough in order to evaluate if a criminal proceeding is warranted."

Albanians should hope it will be. At the top of the list is a probe into a supposed bank guarantee worth 10% of Vetro's €850 bid, some €170m, that the company and its owner, oil tycoon Rezart Taci, had to have issued by an international bank in order to participate in the tender. The posting of such guarantees is crucial to any major privatisation, as it is evidence of good faith by the participating company and can be claimed by the government in the event the company

Doubts about the existence of the bank guarantee are also backed by Gary Kokalari, founder of Albanians for a Democratic Albania, which is involved in fighting corrupt practices in Albania, who tells bne that he contacted an official with the Chicago office of the supervisory division of the Federal Deposit Insurance Corporation (FDIC), a US federal body that guarantees the safety of a depositor's accounts in member banks. The FDIC then conducted an audit of American Chartered and found no evidence that the bank had provided any such a guarantee for Vetro to buy Albpetrol. Indeed, American Chartered is a local Illinois bank, with total assets at the end of 2011 amounting to $2.3bn – a guarantee of €85m would represent 5% of its total assets. "It's about 50% of the bank's core capital, and that

"A probe into the failed sale is in the initial verification stage, but it has not moved far enough in order to evaluate if a criminal proceeding is warranted" makes a mockery of the tender by, say, winning the tender and then not coming up with the money.

Vetro said its bank guarantee was issued by Chicago-based American Chartered Bank, the existence of which was unequivocally backed by statements from the government commission in charge of running the tender and the adviser to the tender Patton Boggs, a Washington-based law firm

American Chartered, a suburban Chicago regional bank with virtually no international exposure, would risk half of its equity in, of all places, Albania, is simply not believable. To say nothing of the fact that it would be a violation of the bank's regulatory tier capital requirement," says Kokalari.

Vetro's claim of an €85m bank guarantee from American Chartered certainly appears improbable. Patton Boggs has

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so far refused to comment on the issue, saying only through a spokesman: "Patton Boggs categorically denies that there was any misrepresentation of any matter to our client, the Ministry of Economy and Energy, and any suggestion to the contrary is simply not supportable. We must defer all other inquiries to the ministry." Yet Albania's energy ministry is also so far refusing to comment specifically on the matter despite repeated requests to do so.

More questions And the controversy over the bank guarantee is only one of a number of dubious aspects surrounding the ministry's handling of the whole privatisation process.

Bankers Petroleum, which offered just â‚Ź106m in the tender, explained in November that the large discrepancy in the size of the bids was down to the Albanian government extending Albpetrol's gas transmission rights from five years to 30 years just days before the deadline to submit bids on September 7. Bankers Petroleum, an executive claimed, had no time to redraft its bid.

Further, when Prime Minister Berisha announced the winner of the tender on October 3, it was presented as an international company that had won – the Chicago-based Vetro bidding through the Singapore-registered Vetro Silk Road Equity consortium. It was only two days later that it emerged that the winning consortium was actually 51% owned by Taci, who told a press conference he had kept his involvement in the bid secret from the public because he did not want it to have any influence on the bidding process. The energy ministry has refused to say whether it too was kept in the dark about Taci's involvement.

After invalidating Vetro's bid in February, the Albanian government clearly hoped that by immediately starting talks with Win Business Petroleum, which came second in the tender with a bid of â‚Ź298m, the tender could be rescued and not many embarrassing questions asked. But a few days after this decision, the government learned that the process was illegal because the bids had expired a month earlier.

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

Unfortunately for the Albanian government, questions are also being raised in Brussels. The European Commission is currently considering whether to formally open talks with Albania about it joining the EU, and has made reforming the judicial system, increasing transparency and fighting corruption key planks of any decision to do so. So far, the Commission has refrained from making any public statement on the matter, with sources saying talks on any specific matter of concern are always done behind closed doors. Nonetheless, the failed privatisation of Albpetrol will have done nothing to help Albania in its quest to join the bloc.

In the meantime, Albania's government is hoping the issue will get lost in the mists of time, so few hold out much hope of a truly independent investigation. And as for Vetro? Well, why bother paying to keep up a website when the charade is over.

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the big plus to the new coalition is that political stability has returned.

"After five months of infighting, the government can return to the work of reforms moving towards an association agreement with the European Union," he tells bne. "Hopefully there will also be a de-politicisation of law enforcement and that institutions intended to combat corruption will start to act independently of politicians."

Bank holdup However events parallel to the announcement of the new government cast doubt on any change for the better.

Same old faces in Moldova Graham Stack in Kyiv

M

oldova's richest man Vlad Plahotniuc, who has been linked in court documents to dodgy activities at the country's banks, has retained his power base in a new government coalition formed May 30, just as the European Bank for Reconstruction and Development (EBRD) made fresh accusations of shareholder illegal corporate raids on the country's largest bank.

Moldova's Liberal Democratic Party, the Democratic Party and a splinter group from the Liberal Party have signed up to "a pro-European coalition" that will form a new government, after the previous coalition collapsed on March 8. Iurie Leanca, a Liberal Democrat politician, will be prime minister. Former PM Vlad Filat, leader of the Liberal Democrats, the largest party in the coalition, had been banned from serving again as premier by Moldova's Constitutional Court. The coalition now has a waferthin majority of 53 mandates in the 101-member unicameral parliament.

The new coalition government will be seen as a victory for controversial oligarch Vladimir Plahotniuc, who funds and runs the Democratic Party. Only a

few months ago he and his party were at loggerheads with Filat and the Liberal Democrats, with mutual accusations of corruption escalating into raids by competing law enforcement organs.

This ultimately led to the collapse of the government in March, leaving parties scrabbling around for new partners to try to form a government.

However, Filat apparently failed to find any alternative to a coalition with Plahnotniuc's Democratic Party, after flirting with the idea of a minority government. Now Plahotniuc's Democrat Party is set to retain control of the economic block in the government – the ministries for transport, telecommunications and construction, and the post of deputy prime minister for economy – the crucial offices of prosecutor general and anti-corruption prosecutor, as well as holding influence over the courts and central bank.

Plahotniuc's opponents say he has used his political power ruthlessly for his own ends, in addition to the power he derives from his ownership of two TV channels and immense financial resources.

According to Nicu Popescu, foreign policy advisor to the prime minister,

On May 28, the country's largest bank Moldova Agroindbank (MAIB) and the EBRD, which uses the bank to funnel project funding, levelled fresh accusations of dirty dealings in the country's banking sector. MAIB declared in a press release that, starting February 2013, the bank, its organs and shareholders have become the target of new fraudulent actions, "backed by individuals who hold positions of responsibility in the state (administrative and judiciary)...

The scale and odious nature of these fraudulent actions are sufficient to undermine the financial stability of the bank and of the country."

Moldova's banking sector has been rocked by a series of such illegal corporate raids since 2011. Such an attack usually entails transfer of the ownership of shares without knowledge of the original owners to shell companies abroad, by means of legal skulduggery such as crooked court decisions and share depository manipulations.

MAIB accounts for around 20% of Moldova's banking assets, lending and deposits. It is the main recipient of EBRD funding in Moldova, with a minority stake held by a pool of Slovenian investors since 2006 (bank management hold 33%, portfolio investors 23%, private individuals 11% and treasury stock 7%).

The National Bank of Moldova shed more light on what had happened:

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in three successive waves in late March, mid-April and mid-May, a total of 24.85% of MAIB's shares had mysteriously changed hands, including May 14-18 the 18.2% stake held by a pool of foreign investors linked to Slovenia's Factorbank, the largest foreign investment in Moldova's banking system to date. Seven foreign companies registered in the UK, Cyprus and Latvia acquired the shares, and since each packet was under the 5% threshold and no common owner of the acquiring foreign companies declared, there was no application made for central bank approval of the transaction.

The exact mechanics of the transfer of shares are not clear, but MAIB is blaming a share depository that was implicated in a previous raider attack, that time on Victoriabank, having illegally transferred ownership of the shares. "If sufficient evidence points to a significant stake in the bank having been acquired (by one party), we will suspend the rights of the shareholders," the National Bank promised.

But the National Bank has done little in previous instances to prevent such attacks. Already in late April, the EBRD wrote to Moldovan authorities warning of the ongoing machinations, according to an EBRD letter leaked to media, authenticity of which was confirmed to bne. In the letter, the EBRD noted the "suspicious nature" of the transactions, saying they looked like a repeat of an attempted expropriation of MAIB shareholders in 2011. "MoldovaAgroindbank is our largest partner bank in Moldova, and we are monitoring the situation very closely," the EBRD tells bne.

That 2011 raid on the MAIB's shareholders was at the time beaten back by the combined efforts of the European diplomatic community, and finally reversed by a Moldovan Supreme Court decision. But this time round, the EBRD's warning to Moldova in April was apparently not enough to prevent the attacks continuing in May. The attack on MAIB in 2011 was in fact the only such corporate raid in

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Moldova's financial sector to have been reversed to date. The expropriation of stakes at other banks and insurance companies proved successful. A court case brought in London by apparently expropriated shareholders in Victoriabank, businessmen Victor and Viorel Topa, revealed that their stake in the bank had been transferred to a UK company, the owner of which was none other than Vladimir Plahotniuc, according to a court discovery order.

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Valeriu Zubco, and the subsequent arrest of the former CEO of Banca de Economii. A temporary alliance between Filat's Liberal Democrat Party and the opposition Communist Party abolished Plahotniuc's post of first deputy speaker.

Plahotniuc's press secretary earlier denied to bne any connection to the "raid" and said the documents produced by the discovery order in London had been forged.

But Plahotniuc fought back hard: the Anti-Corruption Office raised corruption allegations against Filat and his party colleagues, and the coalition collapsed weeks before it was due to sign a breakthrough Association Agreement with the EU, with the government resigning on March 8 after a vote of no-confidence in the parliament on March 5.

According to the Topa brothers, there were subsequently large capital outflows from Victoriabank in the form of tens of millions of dollars worth of loans made to offshores. In late 2012, the International Monetary Fund (IMF) expressed alarm at the situation in another bank targeted by corporate raiders, state savings bank Banca de

In April, in a bid to stave off pre-term elections, Filat attempted to renew the alliance with Plahotniuc's Democratic Party, again conceding control to Plahotniuc of the crucial Prosecutor General and Anti-Corruption posts. But making a mockery of such concessions, the Constitutional Court ruled April 22 that Filat himself could not return as

"The raider attacks and their legitimization it are a real risk not only for the market economy, but also for democracy" Economii. According to the IMF and independent auditors, tens of millions of dollars in unrecoverable loans made to offshores had brought the bank to the brink of collapse. The political crisis has paralysed attempts to recapitalise the bank.

Powerbroker Plahotniuc's role as kingmaker in the governing coalition left then-PM Vlad Filat powerless to stop the raiding of the country's banks. Only in early 2013 did Filat brave the collapse of the coalition to stop the oligarch's alleged shenanigans, when he used a scandal around a New Year's shooting party where a man died to remove Plahotniuc placemen like the prosecutor general,

prime minister, due to the allegations of corruption against his government raised by the Anti-Corruption Office, a decision strongly favourable to Plahotniuc.

Now Plahotniuc seems to have come out of the power struggle stronger than ever – and the litmus test of his new power may be whether the corporate raids on MAIB succeeds this time, where it was reversed in 2011. "The raider attacks are an attempt to seize and concentrate property. The next step will to legitimate it. It is a real risk not only for the market economy, but also for democracy," Tatyana Laryshin of Moldovan thinktank Viitorul tells bne.

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president and the mechanism by which the president nominates the PM. Parliament began discussing the president's request for the organization of the referendum on June 17. And many observers worry that the stage is now set for a repeat of the kind of standoff that has punctuated Romania's political scene in the past few years, which have paralysed government and hurt the fragile economic recovery.

Romania's leaders at loggerheads again

The previous bout was 2012 and only ended after the nine-member Constitutional Court on August 21, 2012, ruled that a July 29 referendum, called after Ponta and his USL managed to get parliament to suspend Basescu, was invalid because the turnout fell short of the required 50% of the 18.3m electorate. In the referendum, 88% of those who voted wanted Basescu out.

However, the turnout was only 46%, in no small part because Basescu had called for a boycott of the vote.

Nicholas Watson in Prague

T

he marriage from hell that's the cohabitation between Prime Minister Viktor Ponta's leftish government and the centre-right presidency of Traian Basescu looks set to descend into acrimony once again.

Just a year since an almighty fallout between the two ended up in an impeachment vote against the president, who lost the vote but managed to stay in power by dint of the fact that the turnout was too low, Ponta and Basescu are once again at loggerheads, this time over how the parliament should be reorganised.

Ponta on June 12 slammed the move

by Basescu the previous day to start procedures to organize a referendum on the introduction of a single-chamber parliament and cut the number of MPs to a maximum of 300. The president has previously tried to push these reforms through, holding a referendum in 2009 that around 70% of the electorate answered positively on, on the grounds that they believed political decisions would be made faster and public spending would be reduced.

Basescu's move is in opposition to the ruling USL coalition's own plans for reform of the constitution, under which parliament would have two chambers, with 300 MPs in the Chamber of Deputies and another 100 in the upper house, the Senate. “In my opinion, this attitude of the majority from the

That should have been an end to it, but this is Romania, where political standoffs drag on until all possibilities other than peace have been exhausted.

The USL government then claimed that the size of the total electorate was lower in reality than on paper, and that the turnout threshold had therefore been

"This is Romania, where political standoffs drag on until all possibilities other than peace have been exhausted" USL, which rejects applying the 2009 referendum, has nothing to do with democracy and with the people on behalf of which the Parliament says it works,� Basescu was quoted as saying.

The proposals for the parliament are part of plans by Romania to modify its constitution by the end of this year. A commission is working on this project, among which the main changes envisaged are revising the role of the

met. It then set about trying to push the Constitutional Court to agree, which resulted in complaints from the court to a judicial commission of the Council of Europe "about continuing pressure and threats against individual judges."

This got the EU involved, which accused Ponta and his government of trampling over democracy and undermining judges – massively counterproductive in a country where corruption is so rife

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and entrenched. The EU continues to keep a wary eye on Romanian politics, and is also gearing for its own fight against Romania's leaders – this time over fighter jets.

Flights of fancy On June 19, Romania's leftist government approved a plan to buy second-hand F-16 fighter jets from Portugal to replace its ageing fleet of MiG fighter jets. According to reports, Bucharest is to pay around €638m over the next five years for the 12 jets, which will be delivered from 2016. Romania's Defence Minister Mircea Dusa said a draft piece of legislation will be soon submitted to parliament for approving the acquisition procedure.

This decision flies in the face of the European Commission, which insists that under EU rules Romania – and other CEE countries – need to hold a transparent tender for such

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defence procurement, in which other manufacturers like Saab Gripen could compete. bne revealed in September that the European Commission had sent letters to the governments of Romania, Bulgaria and the Czech Republic to highlight EU laws concerning procurement, after it became concerned about possible moves by those member states to conclude major defence deals to buy supersonic fighter jets without holding an open tender.

The decision continues a three-year battle by Romania to try to avoid clear EU procurement rules, raising suspicions of high-level corruption.

The affair began back in March 2010 when the Romanian president's office announced that after a meeting of the Romania's Supreme Defence Council (CSAT) – an unelected advisory board that has no executive powers but is very

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influential by dint of its appointment by the president – it had been decided to send a proposal to parliament to acquire 24 used F-16 fighters from the US Air Force. President Traian Basescu in subsequent interviews said it was purely an economic decision, yet that didn't stand up to much scrutiny: Saab Gripen quickly released its proposal, showing it would offer 24 brand new multi-role jets, for the same price of around €1bn.

Saab Gripen was joined at the time by Eurofighter in stressing the need for a transparent tender under EU rules.

Following heated debates in the Romanian parliament and the media, the decision was shelved a few months later, with the president citing a lack of funds. However, over the subsequent years several Romanian officials indicated that the plan to buy the F-16s was still alive. And now it most certainly is.

Less than a month in power and Oresharski has already managed to shoot himself in the foot with an appointment of spectacular ineptitude, provoking mass demonstrations that, despite the reversal of that appointment, have now continued for 12 days and prominently feature demands that the government should resign. While there's no sign of a resignation yet, few Sofia pundits are betting on this government's longevity and some think it may be gone in weeks or even days.

Bulgarians back on the streets Sandy Gill in Sofia

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ith quite remarkable speed, the new government of Bulgaria is unravelling.

It's less than a month since Plamen Oresharski – the socialist-aligned finance expert touted as a "technocrat" and "the Bulgarian Mario Monti" – assumed the

premiership. He did so in the wake of an election campaign precipitated by protests in February over high electricity bills, and dominated by revelations about wiretapping and other alleged iniquities by senior members of the then ruling party GERB (Citizens for the European Development of Bulgaria).

Poisoned chalice It was never going to be easy; not with the parliamentary constellation produced by elections on May 12. With almost a quarter of voters opting for parties that didn't clear the 4% barrier needed to enter parliament, the four that did qualify for the 240-member unicameral assembly were a problematic bunch.

GERB had the largest contingent of 97 MPs, but was regarded as untouchable by the other three. The former communist Bulgarian Socialist Party (BSP) and the liberal and mainly ethnic Turkish Movement for Rights and Freedoms (MRF) were amicable enough, and had 120

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members between them – just enough to form a government, but not to ensure the parliamentary quorum needed to allow such formation to take place. With the fourth party being the ultra-nationalist and rabidly anti-MRF party called Ataka, that was a bit of a problem.

In the end, Ataka's temperamental leader Volen Siderov provided the vote needed for the quorum, on the grounds that a government, any government, was needed; that GERB had to be kept out; and that he would be watching the government's doings. With GERB talking gleefully of a "three-way coalition" and a "political Frankenstein" – and many nationalists dismayed at Siderov's actions – the Oresharski government was voted through.

Talked up in advance as "technocratic" or a "government of experts," the catchword mutated in the last few days to "hybrid" – partly expert and partly political. While a good many ministers weren't political figures, some appointments certainly were. Oresharski himself, once a right-winger, is a member of no party nowadays – and, arguably, isn't much of a politician – but he's been effectively aligned with the BSP since 2005. And, to take just one example, Economy and Energy Minister Dragomir Stoynev is not just a close associate of BSP leader Sergei Stanishev, but also has a background,

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ian FBI" and had just been enhanced by a law controversially transferring the police agency dealing with organised crime to its jurisdiction. The candidate was MRF-aligned MP Delyan Peevski and the result was uproar.

the few politicians in Bulgaria to enjoy much respect nowadays. He declared that the government had "exhausted its credit of confidence" with him – no mean feat for an administration less than three weeks in office.

It was partly a matter of Peevski himself.

Aged just 33, his experience outside parliament had been as a rather junior state investigation official and, briefly, a deputy minister who resigned – though was then cleared – over a corruption scandal. But in a year where "oligarchy" has been a favourite boo-word, his oligarchic credentials were rather more impressive. Along with his mother, Irena Krasteva, he controls the powerful New Bulgarian Media Group (NBMG). And NBMG is generally assumed to have the financial backing of the Corporate Commercial Bank – a bank much criticised of late for its more-than-healthy share in state enterprise deposits. Even Peevski's looks didn't work in his favour: if a Hollywood director were seeking to cast a fearless upholder of law, it's a fair bet that Peevski wouldn't make the shortlist.

Signs of a climb down began to appear almost immediately. Peevski professed himself willing to withdraw if asked to do by the governing parties. Though there were mumblings about Peevski's apparent quality of "determination" standing him in good stead and the desirability of having an "outside expert" in the DANS post, Oresharski was soon acknowledging that "we underestimated the controversial image that has been established for Mr Peevski". And so on June 19 parliament duly reversed the decision to appoint him. To date, there's been no new appointment and, ironically, there's some legal question as to whether Peevski – having been sworn in and served as DANS head even briefly – can now resume his seat in parliament.

But it was partly also the way the appointment was carried out. Parliament voted Peevski into the post just a quarter of an hour after he had been proposed, with no discussion whatever – let alone public consultation beforehand – and he was sworn in immediately. This

"While there's no sign of a resignation yet, few Sofia pundits are betting on this government's longevity" not in energy, but in social policy – a sphere from which he seems to have been excluded by the claims of MRF heavyweight Hasan Ademov.

While reviews of the cabinet were mixed, however, the big personnel faux pas came a fortnight later on June 14, when the government proposed its candidate for the State Agency for National Security. Known by its Bulgarian acronym of DANS, this is often – if imprecisely – described as the "Bulgar-

effect was admittedly helped by a GERB boycott of parliament, in which it said it has been denied its fair share of committee posts. But the uncritical silence of the government's supporters was shocking.

And, duly, shocked.

The same day, protests began on Bulgaria's streets, mobilised by social media – a Facebook group opposing Peevski had acquired 58,000 members within hours.

Daily protests continued, with the blessing of President Rosen Plevneliev, one of

But the retraction hasn't stopped the daily demonstrations, or reduced their size.

As with February's protests over electricity prices, their scope has broadened: key demands include the resignation of the Oresharski government and electoral reform. Social observers have noted the presence of the young, the educated and the middle class among the protestors.

And, though the 1990s anti-communist slogan of "Red trash" has been prominent among the chants, the atmosphere has been remarkably good humoured and peaceful, with children and even pets brought along by protestors. Dismissive remarks by a BSP-aligned psychology professor led to some protestors gleefully bearing signs identifying them as "internet lumpen."

In fact, almost the only violence reported in the course of the demonstrations reflected tensions between nationalist groups. Reliably shrill in his denunciation of "paid" protestors and GERB attempts to destabilise Bulgaria, Ataka's leader Siderov was himself denounced as a "janissary" for his role in enabling a government that included the MRF. Fisticuffs and some injuries ensued outside Ataka's barricaded HQ one evening. But

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demonstrators have generally heeded yet another slogan: "Ignore Volen."

Internal split Meanwhile, there has been fall-out on the left. Socialist leader Sergei Stanishev – unpopular with some comrades for excluding several BSP heavyweights from the election lists and heavily committed to the strategy of a non-party government – has come under attack from within his own party, with assailants including former president Georgi Parvanov, former interior minister Rumen Petkov and "red yuppie" Georgi Kadiev, finance expert and leading light of the Sofia BSP. Rightly or wrongly, Stanishev has been identified as the initiator of the disastrous decision to nominate Peevski. So far Stanishev has survived, fighting off a party no-confidence motion June 20.

But his position has been weakened and his embarrassment enhanced by the fact that, with ironically awful timing, the Party of European Socialism, which he currently chairs, had its annual meeting in Sofia last weekend amid the demonstrations.

With protests continuing, it's unclear what will follow. The Oresharski line is that the government has learned its lesson, but that there is serious business to get on with – for instance, negotiating European funds for 2014-2020 and ensuring cheaper electricity – and that elections soon will mean, at best, another hung parliament and, at worst, a return to power of the reviled GERB. That may or may not be so. While there's no sign as yet of a strong "protest party" emerging from the demonstrations, one or two of the parties that fell foul of the 4% threshold may be empowered by circumstances and the "conventional" right shows an inclination to sink differences that might be more than rhetorical. A few months might help these processes along.

Meanwhile, the government might well calculate that it can sit the protests out and wait for their energy to dissipate: Oresharski has just proposed an extra deputy premier, suggesting he doesn't intend to go anywhere soon.

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Green light for Serbia

bne Serbia's efforts to normalise relations with its erstwhile province but now independent Kosovo have paid dividends, as the EU in June granted a start date for the Balkan country to start accession talks.

On June 28, the heads of state in Europe agreed that Serbia should start its EU accession talks by January 2014. EU Enlargement Commissioner Stefan Fule said the talks would begin in January "at the very latest," but perhaps "as early as October."

Defying the cynics, Kosovan and Serbian leaders managed to stitch together an 11th hour EU-brokered deal on April 19 over normalizing relations. There had been worries that a deal was beyond the two foes. The province of Kosovo unilaterally declared independence from Serbia in 2008 after Nato helped stopped a civil war several years before between the ethnic Albanian and Serbian populations. And while many countries recognise Kosovo as an independent country, Serbia still does not and has been holding on through various means to the Serb-dominated north of the country. About 140,000 ethnic Serbs live in Kosovo out of a total population of 1.7m; about a third of them live in the north. And it was the fate of those Serbs in the north that was the main sticking point in the talks.

Kosovo too has gained from a deal that's complicated, but basically says that while Serbia does not recognise Kosovo as a state, it accepts its legal authority over the whole territory. In exchange, the Kosovo authorities have conceded a level of autonomy to four Serb-controlled areas of northern Kosovo, which will form one large community. This region will then receive broad rights and authority in issues pertaining to police, justice, education, health care and culture.

European heads of state also recommended starting talks with Kosovo on an accord that would bring closer ties and could eventually lead to EU membership talks starting. "This is a good day for both countries," Fule said. "They have exceeded our expectations in putting their relations on a new footing. And I see this decision today by the member states as another proof of the credibility of the enlargement process."

However, no one is under any illusions that the process will be quick.

Croatia is due to become the 28th member of the EU on July 1, but to get there it has taken the ex-Yugoslavian state almost eight years since it started the accession talks.

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Kazakhstan's new mining frontiers Clare Nuttall in Astana

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ith Kazakhstan about to start issuing its first mineral exploration licences in four years, there is a growing emphasis on metals and mining in the country and the Central Asian region as technological advances and changes in global demand make it worthwhile to develop previously overlooked deposits and explore new areas.

Before independence two decades ago, Kazakhstan had a greater focus on mining than hydrocarbons, but the launch of production at the offshore Tengiz oilfield marked a fundamental change in the country's economic structure. The lion's share of investment is now directed at the oil and gas sector, and oil makes up the bulk of Kazakhstan's export revenues.

Attention did, however, return to mining with the launch of the state

industrialisation programme in early 2010. As Kazakhstan emerged from the financial crisis, the programme was intended to reduce the dependence on oil and gas, and develop new sectors of the economy. Officials are now drawing up a development plan for the mineral resources sector for 2015-2019 – they are preparing the first new licences following a four-year suspension, which are due to be issued in the near future, while also drawing up a new tax code.

Astana is also planning to set up a new geological exploration centre in order to remove the twin bottlenecks of lack of support infrastructure and training facilities for mining companies in the country; at present many companies have to send their specialists to Russia or even Kyrgyzstan for certification.

New reserves Recently, officials have also started sounding the alarm about the need for

more minerals exploration, warning that at current production rates Kazakhstan could run out of some of its main commodities if new deposits are not discovered. Several major new projects are underway, including Kazakhmys' huge greenfield copper projects at Bozshakol and Aktogay, but the government wants more to be done to prevent a future falling off in production.

Speaking during the Minex conference in Astana on April 18, Kazakhstan Deputy Prime Minister Kairat Kelimbetov warned that: "The lack of replenishment of mineral resources is not helpful for development. We need to explore for more reserves. The growing needs in mineral resource markets worldwide requires us to develop the mining industry on a larger scale, find new deposits and possibly employ non-traditional methods of exploration and mining."

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Just a few days later, the directorgeneral of the Kazenergy industry association, Asset Magauov, followed this up with a warning that Kazakhstan may deplete its uranium reserves within 80 years at current production levels, sooner if production isn't stepped up as planned. Kazakhstan has been "very slow" to replenish its mineral resources base, Magauov said, according to the Primeminister.kz website.

Development of new technologies and new areas of demand has led to a new hunt for value in the mining sector, not just in Kazakhstan but the

Mongolia's Erdenes Tavan Tolgoi (ETT) found this to its cost. Having signed a $250m contract to supply coal to the Aluminum Corp. of China Ltd. (Chalco) in July 2012, ETT announced in January that it had suspended exports since it cost more to extract the coal and transport it to the Chinese border than the $53 per tonne Chalco was paying. Exports only resumed in April, after three months of talks between the Mongolian government and Chalco.

There are also issues with global demand at present, with the slowdown in China already affecting Kazakhstan

"Mining is becoming more and more important, not only in Kazakhstan but in the whole region comprising Mongolia, Kyrgyzstan, Uzbekistan"

whole of Central Asia. The regional industrial powerhouses China and India have driven demand for metals such as copper and iron ore, while Central Asia also has the potential to supply rare earths that are increasingly used in electronics, defence, hybrid cars and wind turbines. Rising prices mean that transport costs from the landlocked region are no longer the barrier they once were.

"Mining is becoming more and more important, not only in Kazakhstan but in the whole region comprising Mongolia, Kyrgyzstan, Uzbekistan and other countries. This is largely due to better technology," Siddharth Saxena, director of the Cambridge Kazakhstan Centre, told bne on the sidelines of the Astana Economic Forum on May 23.

"Technologies are now coming to a stage where metals can be extracted in a different way, which will make them cost-effective. Kazakhstan is in a tough neighbourhood – you can't simply send products on a train to the coast. Even when exporting to China, it's a long journey because most of the demand is in coastal China."

and Mongolia. The European Bank for Reconstruction and Development (EBRD) has already downgraded its 2013 forecast for Kazakhstan's GDP growth from 6.0% to 4.9%, while Mongolia's economic growth slowed dramatically in the first quarter of 2013, due to lower coal prices and demand from China. The economy grew by just 7.2% in January-March, compared with 16.7% in the same period of 2012.

of this demand driven by growth in India and China. International mining company Rio Tinto forecasts that Chinese steel consumption will peak at around 1bn tonnes a year by 2030 as the country transits from an investor to a consumer driven economy. Demand for rare earths is also increasing steadily.

But despite the investments into the mining sector, oil and gas will remain the main story in Kazakhstan. "Mining is growing, but it doesn't represent a challenge to the oil and gas sector's dominance of the economy, since there are so many ongoing projects, not just in production but in refineries and other areas," says Jean-Christophe Lermusiaux, managing director and head of research at Visor Capital.

"However, the two are not mutually exclusive."

The expected launch of production at the offshore Kashagan oilfield this year will help catapult Kazakhstan into the world's top oil exporters. With an expected ramping up of production at two other mega-fields, Tengiz and Karachaganak, in the next decade, Kazakhstan could become one of the top-five oil exporters in the near future, and is expected to hold this position for several decades.

"Mining is growing, but it doesn't represent a challenge to the oil and gas sector's dominance of the economy"

However, over the longer term the picture is better. AQM Copper forecasts a steady increase in demand for copper, with global demand rising from 18.1m tonnes of refined copper in 2007 to 37.9m tonnes in 2030, with much

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on May 22. "Kazakhstan is one of the world's top 20 oil producers, among the top 10 coal producers, and since 2009 the number one uranium producer, but the government is now talking about diversifying the energy infrastructure.

This is happening in the global context; it is part of a shift that is causing major economic ripples around the world."

Wind on the steppe The first few projects in this sector have started, although some obstacles have to be overcome, including revisions to existing legislation. Would-be investors have also discovered that some technologies, such as wind turbines, need to be adapted to the harsh conditions of the Kazakh steppe.

An alternative Kazakhstan Clare Nuttall in Astana

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azakhstan has set the highly ambitious target of generating 50% of its power from renewable energy sources by 2050, a goal that officials say will require investment of up to $3.2bn a year.

Despite its substantial reserves of oil, gas, coal and uranium, Kazakhstan has been steadily moving towards greater use of alternative energy in the last five years. However, even with the adoption of the 2009 law on support for renewable energy use paving the way for the sector to develop, as of 2012 renewable energy accounted for just 0.5% of the total.

However, in June, Kazakh President Nursultan Nazarbayev approved a new state programme to develop the alternative energy sector, which sets the target of 50% of the energy mix being renewables by 2050.

Commenting at a briefing on June 7, Environmental Protection Minister Nurlan Kapparov said that, "according to our estimates, total investments, state and private, needed to carry out this programme will amount annually to an average of $3.2bn until 2050, or around 1% of GDP."

In the shorter term, the government has drawn up investment plans for the next eight years. Outlined by Minister of Industry and New Technologies Asset Isekeshev in February, the plan's aim is to boost generation capacity by 1,000 megawatts (MW) by 2020, an increase in the share of renewables in the energy mix to 3%. Under a programme adopted

Despite these difficulties, construction of Kazakhstan's first industrial-scale wind farm is going ahead on the northern steppe not far from Astana.

The farm, which will have capacity of 45 MW, is expected to help power the "city" that will be built in Astana for the EXPO-2017. First Wind Power Plant, a subsidiary of state-owner power company Samruk Energy, is building the farm with a $94m loan from the Eurasian Development Bank. Also near Astana, in December 2012 Kazakhstan's first solar panel production plant started operations. The KazPV

"To use renewable energy, a lot of issues have to be resolved including the tariff issue" by the government in January this year, there are plans to build 13 wind farms, 14 hydropower plants and four solar power plants across the country.

Kazakhstan is not an obvious candidate for alternative energy, given its abundant reserves of fossil fuels. "Kazakhstan's energy agenda is amazingly ambitious," Jeffrey Ball, scholar-in-residence at Stanford University's Steyer-Taylor Center for Energy Policy, told a press briefing during the Astana Economic Forum

plant was set up by Astana Solar, a subsidiary of nuclear energy company Kazatomprom.

There is also considerable interest in the use of small-scale solar and wind installations to power remote settlements and households that are not connected to the national grid.

To encourage the use of alternative energy, Kazakhstan is expected to adopt legislation that will allow electricity generated from alternative sources to

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feed into the grid. A new law that would allow fixed tariffs to be set for electricity from renewable sources was approved by the lower house of parliament on May 8.

Kazakhstan's large industrial base, in particular sectors such as metallurgy, needs a stable supply of power, however.

So for the time being at least that means it must come from conventional sources, with coal expected to continue as Kazakhstan's main source of electricity generation for the foreseeable future.

Asset Magauov, general director of Kazakhstan's energy sector association Kazenergy, points out that many questions need to be addressed before renewables can contribute to a substantial share of Kazakhstan's energy mix. "To use renewable energy, a lot of issues have to be resolved including the tariff issue. Also, we need to introduce a capacity market like there is in Russia," Magauov told bne during the Astana Economic Forum.

At the same time, Kazakhstan has good conditions for several types of renewable energy generation. The southern regions have a high level of sunlight, while a "wind atlas" produced by the UNDP and Kazakhstan's Ministry of Industry and New Technologies demonstrates the potential for wind power generation at many sites across the country.

Siddharth Saxena, director of the Cambridge Central Asia Forum, points out that not only does Kazakhstan have favourable geographic conditions, the country's mineral resources and existing petrochemicals processing capacity could give it the potential to develop new technologies. "Kazakhstan has a petrochemicals-based economy, and is building up its capacity to produce polymers, plastics and other downstream products. It is also endowed with rare earths and other oxides, which are a very hot topic globally due to their importance in electronics, medical applications, space and other industries... Combining these things with geographical factors, Kazakhstan may have the chance to lead in this kind of sector," Saxena says, citing the example of emerging technologies such as plastic electronics in solar cells.

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Because, because… you're fired

bne He may have become an internet hit, mocked mercilessly for a cack-handed attempt to justify his government's pension reforms, but the baby-faced Minister of Labour and Social Protection Serik Abdenov couldn't withstand the ire of Kazakhstan's most powerful pensioner, the 72-year-old president.

With growing opposition to the Kazakh government's plans dooming a draft law on pension reform, the presidential office announced on June 10 that Abdenov had been sacked. His dismissal followed hot on the heels of President Nursultan Nazarbayev's return of a controversial draft law on pensions reform to the Kazakh parliament. That move came amidst the rise of rare protests against the government.

Plans to reform the system – in particular the decision to raise the retirement age for women – provoked a grassroots movement, with both men and women mobilising through Facebook, collecting petitions and heckling Abdenov and other public figures. Abdenov became a figure of fun after unsuccessfully trying to defend plans to increase the retirement age for women from 58 to 63 at a public meeting in the industrial town of Temirtau in April. Asked why the retirement age was being raised, the very boyish-looking 36-year-old Abdenov replied: "You have to work and work... because, esteemed fellow countrymen, because, because..." A video from the meeting went viral on YouTube and opponents of the pension plans launched an online campaign, with women posting photos of themselves carrying signs that say, "I must work and work until 63 years... Pa-ta-muchto, Pa-ta-mu-chto", a misspelling of "because, because" in Russian which sounds mocking.

The Facebook page dedicated to the campaign also carries other controversial posts including comparisons of pensions payments to the income of top officials and oligarchs, and the expected costs of hosting the EXPO-2017 world fair in Astana.

Kazakhstan's investor community also criticised the plans to merge Kazakhstan's eleven pension funds into a single state-controlled fund, and to temporarily restrict where funds can invest.

Nazarbayev returned the law to parliament on June 7, proposing that the start of phasing in the five-year increase in the retirement age for women be put back from 2014 to 2018. In a televised address, Nazarbayev said that while the reforms are economically sound, the government – in particular the labour ministry – had failed to get the population on side. He criticised the "clumsy" handling of the issue by government officials who had "ignored the social significance" of the bill.

The following day, Prime Minister Serik Akhmetov announced that a new working group would be set up, to draw up measures to modernise the pensions system, and to effectively invest pensions assets into promising sectors of the economy, according to Kazinform.

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of the country, putting up yurts and scattering gravel to prevent cars and trucks from passing. The situation in the region only returned to normal after a visit from Prime Minister Zhantoro Satybaldiyev, who persuaded protestors to wait for the outcome of talks between government officials and Centerra.

Kyrgyzstan on edge after days of protests Clare Nuttall in Astana

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he latest wave of protests in Kyrgyzstan have caused a further setback in the government's efforts to develop the economy and attract foreign investment. But although Kyrgyzstan's move towards democracy since 2010 has resulted in many citizens taking their grievances straight to the streets, any hopes the opposition harboured that the unrest would escalate into a third revolution appear to have been dashed.

Ten days of protests at several locations across Kyrgyzstan started on May 28, when residents of villages near Kumtor – Kyrgyzstan's largest gold mine – launched a local demonstration to demand compensation for alleged environmental damage. Egged on by the nationalist opposition, the protest steadily escalated over the following days, with demands for the mine, majority owned by Canada's Centerra Gold, to be nationalised added to the initial calls.

Villagers blocked the access road to the mine on May 30, and cut off the power supply from a nearby substation, forcing Kumtor to suspend operations. On May 31, security forces moved in. Several people were hospitalised during clashes between protestors and police, and several dozen arrests were made. President Almazbek Atambaev declared a state of emergency in the surrounding Zheti-Oguz region.

The situation in Zheti-Oguz quickly returned to normal, but protests in the southern Jalal-Abad region started on the same day in solidarity with the Kumtor protestors. Those events in the nationalist hotbed developed with much greater stamina, and continued for a week.

Jalal-Abad activists invaded the city's administrative buildings on May 31, and appointed Meder Usenov – a local leader of the nationalist opposition Ata-Zhurt party – as mayor. He was promptly arrested, adding to the protesters' anger. Daily demonstrations took place on Jalal-Abad's central square, with the crowds demanding the release of

While the government and security forces have remained on high alert since June 6, there has not been a further outbreak of violence, even when a Bishkek court turned down the appeal by the three Ata-Zhurt leaders against their sentences. The third anniversary of deadly ethnic clashes in Osh, Jalal-Abad and other southern towns also passed without further incidents, although the BBC reports that the yurts used during the protest have been kept in place on Jalal-Abad's central square – ready to be used again if necessary.

Striking a balance The protests came as the Kyrgyz government closed in on concluding negotiations with Centerra over the future of Kumtor. Bishkek opened talks in February, after MPs backed plans to renegotiate the 2009 investment agreement for the mine to get a better deal for Kyrgyzstan.

Centerra has proposed setting up a new joint venture that would own the mine, with the government exchanging its minority equity stake in the Canada-listed company for a stake of equivalent value in

"The opposition has capitalized on miners' grievances and economic difficulties but so far have failed to appeal to voters beyond their traditional base" Usenov and three Ata-Zhurt leaders – Kamchibek Tashiyev, Sapar Zhaparov and Talant Mamytov – who were jailed in March on charges of trying to overthrow the government.

At the nearby village of Barpy, residents blocked the main Bishkek-Osh highway that connects the capital to the south

the new Kumtor Gold Company. The size of the state's share in the venture has not been announced, but is expected to be at least 51%. On June 5, the parliament agreed to extend the deadline for negotiations until September 10.

The government is trying to strike a balance between popular demands of

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resource nationalisation and the need to reassure foreign investors following the country's two revolutions. The opposition Ata-Zhurt party – which includes many supporters of former President Kurmanbek Bakiyev among its members – is one of the most vocal advocates for nationalising the mine, and has tapped into and encouraged the growing mood against foreign investors among the population.

Along with Butun Kyrgyzstan and other nationalist parties, Ata-Zhurt has openly stated that it wants a third revolution, but according to Lilit Gevorgyan, analyst at IHS Global Insight, their leaders have miscalculated the level of support for their cause. "The opposition has certainly capitalized on miners' grievances and persistent economic difficulties in Kyrgyzstan, using these to bring people out onto streets and seek their own political objectives... However, thus far they have failed to appeal to voters beyond their traditional base, mainly in the southern Kyrgyzstan," she says.

The top cause of discontent against the government of Atambaev and Satybaldiyev is the high level of poverty, made worse by an economic slowdown in 2012 caused by a fall in production at Kumtor. However, at the same time, since the 2010 revolution Kyrgyzstan has made great strides towards democracy, holding Central Asia's two fairest and most open elections ever in 2010 and 2011. "The opposition is free to express its views both in the parliament and outside, and the government is more transparent compared to those of Bakiyev and [Kyrgyzstan's first president Askar] Akayev. While people see hope of improving lives through peaceful measures, they are most likely to avoid bloodshed that revolutions bring," says Gevorgyan.

But Jozef Lang of the Centre for Eastern Studies (OSW) believes the situation in Kyrgyzstan has “systematically deteriorated” in the last two months, with the recent protests demonstrating the weakness of the government and the risk of Kyrgyzstan becoming a failed state. “In the long term any further destabilization in Kyrgyzstan or the erosion of the state

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Turkmen parliament welcomes first "opposition" MP

bne Following a June 10 "by-election", a representative from Turkmenistan's second political party is set to enter parliament. It will be the first time more than one party has been represented in Turkmenistan in over two decades of independence.

Ovezmammed Mammedov, elected by a constituency in the Lebap region in elections to fill five empty parliament seats, will be the first MP not from the ruling Democratic Party of Turkmenistan – the successor to the Soviet-era Communist Party – to enter parliament.

Mammedov is the leader of the Party of Industrialists and Entrepreneurs.

The decision to set up the country's second party was proposed last year

by President Gurbanguly Berdymukhamedov. This former dentist assumed power in Turkmenistan in 2006 following the mysterious death of the quite mad Saparmurat Niyazov. While there have been some signs of opening up, especially in terms of the economy, Berdymukhamedov still retains much of the authoritarian infrastructure of his predecessor, who ran one of the most repressive regimes in the world.

Berdymukhamedov first proposed creating a multi-party state in 2010, suggesting that a Peasants Party be set up to support agricultural reforms.

Legislation to allow new political parties to be created was proposed later that year, but only approved in early 2012, by which time Berdymukhamedov had won a landslide re-election.

The Association of Industrialists and Entrepreneurs started to set up their party in March the same year, with the party registering five months later.

Despite the existence of a second party, and now an "opposition" MP in the parliament, there are no signs that Berdymukhamedov is ready to open up the country to genuine political pluralism. There are reports that Mammedov is actually a close friend of the president.

Meanwhile, Turkmenistan's legislation continues to block "real" opposition, analysts point out. It stipulates that political parties must have at least 1,000 members and have a governing structure "located exclusively on Turkmenistan territory". That clause excludes existing opposition movements, whose leaders all live in exile.

and the disintegration of the country pose a serious threat to the country and a great challenge for the remaining states in the region,” Lang writes.

He does, however, agree that a third revolution is unlikely given the opposition is still divided.

But with more than 1,200 protests and

demonstrations in 2012, and a similar trend in 2013, there are no signs that the high level of political activity will settle down in the near future. The Kumtor issue is still unsettled, with a decision now expected by September 2013, and opposition leaders are also trying to rouse popular activity over other issues including the future of the Manas airbase, currently leased to US forces, near Bishkek.

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but without the long history of painting that Russia has, the region's art scene has been influenced by new ideas as well as the revival of traditional crafts since independence two decades ago.

Central Asian artists gain international interest Clare Nuttall in Astana

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xhibitions at the top London auction houses and an increasingly professional approach from collectors in the region indicate the Central Asian art market is gaining more interest both at home and abroad. While it would be over-optimistic to say that Central Asia is about to follow in the footsteps of the highly successful Russian or Chinese markets, artists from the region are certainly starting to attract more attention.

The last three years have seen international auction houses begin to cultivate a collector base among high net worth individuals in the region and among its diasporas. Part of the appeal has been the mix of representational images with the influence of the region's decorative traditions, though with a broad region spanning two continents and eight countries it is difficult to pigeonhole what contemporary Central Asian art is.

In March, Sotheby's put on its first selling exhibition of works from Central Asia and the Caucasus. Titled "At the Crossroads", the exhibition was organised because of the developing art scenes in the region.

"A big collector base is emerging both locally and from the diasporas, especially in London. This meant it was a good time to explore the geography," says curator Suad Garayeva, who travelled across the

region visiting artists and gallery owners to put together the collection. Artists represented at the exhibition included Kazakhstani artist Almagul Menlibayeva, Kyrgyzstan's Alimjan Jorobayev and Georgian Merab Abramishvili.

Sotheby's did not disclose the amount raised, but prices ranged from $5,000 up to $500,000. The exhibition drew in a "very good mix" of local buyers and

"This is a vast region between east and west, between the Middle East and Russia, China and Eastern Europe, with a mix of western and eastern traditions.

After the collapse of the Soviet Union, Central Asian artists have been reviving ancient traditions, and the region is also tied to Oriental history, Islamic and decorative art. There are strong links to Iran and most of the region also has Turkic roots," Garayeva tells bne.

Layla Mahat, artist and founder of the Kulanshi art gallery in Astana, has strong views on what defines contemporary Kazakh art. "There are a variety of ways to call yourself a contemporary artist of Kazakhstan. It's not enough just to paint a yurt and a horse and call it Kazakh art," she says.

Mahat founded Kulanshi – the name means "he who runs with wild horses" – in 2008 on her return from Berlin to Kazakhstan, when she found no place in the new Kazakh capital to display her work and that of her colleagues.

Today, the gallery, which shows both

"Russia is a huge market with a big history of collecting art, so it's difficult to say if the situation will be the same in Central Asia" those with connections to the region, as well as the auction house's existing collector base, according to Garayeva.

The show follows a 2010 exhibition dedicated to works by Kazakhstani artists organised by rival auction house Christie's, which Angelika Akilbekova, head of the department of exhibitions at the Kasteev Art Museum in Almaty, describes as "a recognition of our art at the highest level."

Ancient traditions Originating in the same Soviet school

Kazakhstani and international artists, regularly draws in a crowd of trendy young Kazakhs for its openings every few weeks. Kazakhstan's former capital Almaty does, however, remain the centre of the country's art scene.

According to Mahat, local collectors are also evolving and becoming more sophisticated. "Collectors of contemporary Kazakh art used to be very spontaneous – they would see something they liked and buy it. In the last five to 10 years, some have started to think more about building their collections

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and their taste is rising to another level. Collectors have started to ask professionals to curate their collections, which is a good sign," she says.

Internationally, however, widespread awareness is simply not yet there for most artists from Kazakhstan and other countries in the region. Garayeva notes this has its positive aspects, pointing to the potential for growth. "Many of the artists are unknown in the West at the moment, so there is a big upside," she says.

Emulating Russia One of the biggest questions for anyone looking at the art markets of Central Asia and the Caucasus, is whether they will in time emulate Russia, where the combination of a long-established art

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scene and newly rich elite has sent the size of the market skyrocketing, despite a cooling off reported in 2012.

Despite traditions of textiles and decorative arts, Central Asia does not have the same history, and although the oil-rich countries of the Caspian Sea region have their share of newly rich buyers, there are not the same high-profile collectors and patrons of the arts that are now seen in Russia.

Local galleries in Kazakhstan say they often struggle to find sponsors for their exhibitions, and art critic Ardak Yussupova, who works with the Has Sanat gallery in Astana, notes the difficulties finding experienced support personnel in Central Asia, such as curators, promoters and critics.

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It is also rather early to predict how Central Asia and the Caucasus will develop in future. "Russia is a huge market with a big history of collecting art, so it's difficult to say if the situation will be the same in Central Asia. It's also too early to say whether Central Asia will develop as a region, or if individual countries will emerge," says Garayeva.

But, Mahat notes, that is not to say that the region couldn't suddenly emerge.

China, for example, has suddenly burst onto the international art scene in the last three years, briefly becoming the world's largest market in 2011, and despite a 40% fall the following year, still in second place in 2013.

July, sparking a wave of anti-Russian sentiment in this relatively poor country.

A small group of protesters gathered outside the Russian embassy in Yerevan on June 5 and at the PSRC building on June 7, calling for Gazprom to go home.

Armenia snubs Russia after gas price hike Clare Nuttall in Astana

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n apparent Russian attempt to use energy supplies to force Armenia, one of its closest allies, to choose membership of the Customs Union over closer association with the EU, appears to have failed. With a hike in the price of Russian gas coming into effect, Yerevan said it's looking at alternative suppliers like Iran and holding talks on the sale of its largest hydroelectric power plants to a US company.

Armenia's Public Services Regulatory Commission (PSRC) announced on June 7 that consumers will pay AMD156,000 ($374) per 1,000 cubic meters of gas, 18% higher than the current rate of AMD132,000. This figure is still well below the 60% price hike requested by gas distributor ArmRusGasProm after Russia increased its wholesale gas export price. Since Armenia generates some of its electricity at gas-fired power stations, electricity prices are also going up in

To avoid a more widespread popular backlash, the Armenian government has been forced to introduce costly subsidies for energy customers, with Prime Minister Tigran Sargsyan announcing on May 16 that the government would subsidise consumer gas prices by as much as 30%, as well as providing support for poor families. There are also concerns that the increase in energy prices will spark a sharp rise in inflation.

Given Armenia's high poverty rate, energy pricing is a highly sensitive political issue. Opposition MPs have accused the government of striking a secret deal with Russia not to increase gas prices until after the 2013 elections. The government only confirmed the widely anticipated price increase after Serzh Sargsyan was returned to the presidency in February, and his party emerged victorious in the May local elections. At a parliament session on June 12, Energy and Natural Resources Minister Armen Movsisyan even claimed he couldn't remember when the agreement had been signed, Arka reported.

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Choosing sides The decision to raise the gas price is believed to be linked to Armenia's pursuit of an EU Association Agreement, which includes the development of political, trade, social, cultural and security links between the two. As Yerevan moves closer to Europe, the prospect that Armenia will join the Russia-led Customs Union, which also includes Kazakhstan, Belarus and soon Kyrgyzstan, becomes less likely. While Ukraine is Moscow's top target for Customs Union membership, Armenia has long been one of Russia's closest allies, so the move westwards is a blow for Moscow.

"The gas price increase is part of a broader effort to switch to market conditions and end state subsidies, but there is also a political dimension," Richard Giragosian, director of the Regional Studies Cente in Yerevan, tells bne. "The scale of the price increase indicated that Russia is using

"The scale of the price increase indicated that Russia is using energy as leverage to deter integration with the EU" energy as leverage to deter integration with the EU." However, Giragosian believes that the pressure from Russia was "too little, too late", coming as it did when Armenia was already at an advanced stage of negotiations with the EU. "Armenia has made it clear to Moscow that it will proceed to the Vilnius summit," he says.

Having chosen its path towards the EU, the Armenian government has been looking for alternatives to the current dependence on Russian gas imports.

But because of the country's geopolitical situation, these are limited.

Armenia's neighbour Azerbaijan is one of the Caspian region's largest oil and gas producers, but the hostile relationship between the two countries effectively rules out any gas from there.

Azeri officials seem to have enjoyed

the plight of their neighbour, with the president of Azerbaijan's state oil company Socar, Rovnag Abdullayev, saying in an interview with ANS TV that Azerbaijan had enough gas stored in underground reservoirs to more than cover Armenia's entire annual consumption immediately. Socar followed up Abdullayev's comments with a June 10 statement that Armenia could "participate in regional energy projects" if Yerevan changes its position on the occupied lands around Nagorno Karabakh, an ethnic Armenian enclave that lies in Azerbaijani territory and over which the two fought a war in the 1990s.

Persian possibility The chief option being discussed in Yerevan is whether to look to Iran for gas imports. Armenia already imports some gas from its neighbour, exporting electricity in return. Potentially, Armenia could ramp up its imports of gas from Iran, but there are some obstacles, mainly the fact that even following the Russian price increase, Iranian gas is still more expensive. According to local press reports, ArmRusGasProm CEO Vardan Harutyunyan told a press conference on June 7 that the company would consider importing from Iran if the price was lower than that from Russia.

Giragosian points out additional problems. "Iran is an alternative, but there are questions about prices and the capacity of the pipeline. Armenia is also very hesitant about expanding its energy relationship with Iran at a time when sanctions are increasing."

Armenian government officials are also close to negotiating the sale of three of Armenia's largest hydropower plants to US-based energy company ContourGlobal – a surprising move in a sector previously seen as Russian territory. ContourGlobal, which has assets in other emerging markets including Latin America and Africa, said in a June 12 statement that commercial terms for the deal are still being finalised, and the purchase price is expected to be "very significant". Together, the three hydropower plants on the Vorotan river account for over 30% of Armenia's electricity generation capacity.

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The events that first hit the headlines in April have almost halved the share price and brought huge embarrassment to the Kazakh government, which is sensitive to its international reputation and is trying to convince foreigners that the Central Asian country is a safe place to put their money in a region not known for best practices.

ENRC takes step closer to delisting bne

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consortium that was formed by the founders of Eurasian Natural Resources Corporation (ENRC) and also now includes the Kazakh government has made a new offer to buy out shareholders and take the company private. While it would offer minority shareholders a worse deal than a previous bid that was rejected in May, the Kazakh miner Kazakhmys, which owns a 26% stake in the scandal-hit ENRC, conceded it might be the best option available.

The new offer, announced on June 24, values ENRC at around ÂŁ3bn.

Kazakhmys said in a statement that while it considers the offer may undervalue ENRC, acceptance is "the best alternative" for it and other minority shareholders. "The board of Kazakhmys... has concluded that there is no prospect of obtaining improved terms," Kazakhmys said in its statement. "Moreover, the board considers the prospects of realising greater value from ENRC in the short to medium term to be remote and the risks of further erosion in value to be considerable."

It concludes: "The board believes the offer is the best alternative open to Kazakhmys and other ENRC minority shareholders."

Eurasian Resources Group B.V., a newly incorporated company set up by ENRC founders Alexander Machkevitch, Alijan Ibragimov, Patokh Chodiev, and joined

by Kazakhstan's state property fund, has been trying for several months to buy out minorities to de-list ENRC from the London Stock Exchange (LSE).

The move followed a string of corporate governance rows and scandals that have seen the company investigated by the Serious Fraud Office as well as the UK Listing Authority. For example, the

In addition, the Kazakh government is mindful that the company remains a huge employer in the country, which has seen a growing number of protests sprouting up as people feel the ruling elite are taking most of the wealth and little is trickling down to the man on the street. ENRC is the largest iron ore mining and processing enterprise in Kazakhstan, and is the world's largest ferrochrome producer. It is also a major producer of alumina and has substantial reserves of chromium, manganese, iron ore, bauxite and coal. In addition to its operations in Kazakhstan, ENRC has operations in China, Russia, Brazil, the Democratic Republic of Congo, Zambia, Mozambique and South Africa.

The consortium of founders and the government, which currently owns 53.9% of ENRC, is offering $2.65 in cash, plus 0.230 Kazakhmys shares for each ENRC share. Based on Kazakhmys' closing share price on June 21, the deal values ENRC's shares at about ÂŁ2.34.

That's around 7.5% lower than the

"There is no prospect of obtaining improved terms" group was accused of taking a stake in a copper mine in the Democratic Republic of Congo that was alleged to have been stolen by the government there from the Canadian firm First Quantum Minerals.

Dealing in stolen property, in other words. ENRC eventually settled out of court by reportedly paying $800m to the Canadian group. The UK's Serious Fraud Office has launched a formal investigation into contracts worth $100m awarded to a company linked to ENRC's chief financial officer, Zaure Zaurbekova.

offer made in May, because Kazakhmys shares have dropped 20% since the original offer, and the dollar-sterling exchange rate is also different. The offer is conditional upon Kazakhmys agreeing to sell its 26% stake.

With Kazakhmys' latest announcement that this is the best deal shareholders are likely to get, that seems almost certain.

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Saint-Petersburg International Banking Conference (10 - 13 July) Promsvyasbank +7 495 745 79 20 http://spbconf.com

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