bne:Magazine - March 2014 by Ben Aris

Inside this issue: Not-so Brokbiznesbank Hungary's free, but probably not fair, election Assessing the risk of Balkan meltdown March 2014 www.bne.eu

Mongolian banks again under spotlight

PERSIAN HUGS Iran's growing ties with Eurasia and Turkey

bne March 2014

Contents

Editor-in-chief: Ben Aris (Moscow)

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Managing editor: Nicholas Watson (Prague)

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News editor: Tim Gosling (Prague)

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

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COVER STORY 6 The Insiders

CENTRAL EUROPE 26 Hungary's free, but probably not fair, election

8 Persian hugs +7 7073011495

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

12 Perspective 13 Chart of the month

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29 Bringing bitcoin down to earth 31 The fight for Poland's left

EASTERN EUROPE 14 Not-so Brokbiznesbank

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27 Europe's top court sides with Fidesz

15 Reversal of fortunes in Ukraine

32 Poland's nuclear ambitions lack money 34 Baltic bonanza in the offing

17 Battered and bruised in Ukraine 19 Interview with a titushki Please direct comments, letters, press releases and other editorial enquires to editor@bne.eu All rights reserved. No part of this publication may be reproduced, stored in or introduced to any retrival system, or transmitted, in any form, or by any means electronic, mechanical, photocopying, recording or other means of transmission, without express written permission of the publisher. The opinions or recommendations are not necessarily those of the publisher or contributing authors, including the submissions to bne by third parties. No liability can be attached to the publisher for these comments, nor for inaccuracies, errors or omissions. Investment decisions or related actions taken on the basis of views or opinions that appear herein are the responsibility of the reader and the publisher, contributors and related parties cannot be held liable for these actions. bne is the property of bne Media Ltd · Reg number: HE 185230 · Michalakopoulou 12, 4th floor, Suite 401, P.C 1075, Nicosia, Cyprus · Postal address: Schluterstrasse 19, Berlin 10625, Germany

21 Russia's bank consolidation is going surprisingly smoothly 22 Talk again turns to IMF help for Ukraine 24 Credit Bank of Moscow looks to IPO

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bne March 2014

Contents

SOUTHEAST EUROPE

EURASIA

Assessing the risk of Balkan breakdown

Anger as Kazakhstan devalues

Bosnia erupts, but to what end?

Progress but no clean slate for Kazakh banks

The Turkish economy â&#x20AC;&#x201C; handle with care

Mongolian banks again under spotlight

Turkey to sell relic of British car industry

Mongolia pushes North Korean ties

Has the Bulgarian government weathered the storm?

Uzbekistan's makeover is lipstick on a frog

A very progressive Serbia

Turkmenistan railroaded by Tajik-Afghan deal

Balkans sully Europe's reputation for press freedom

Turkmenistan slashes gas subsidies

Croatian toy story no child's play

Romania rockets to top of CEE recovery

OPINION 60

The triumph of Vladimir Putin

UPCOMING EVENTS

I The Insiders

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Russia takes on offshorisation

Artem Toropov of Goltsblat BLP

f you want to go offshore, be my guest, but the money stays here," President Vladimir Putin declared in his state of the nation address in December.

Russia, along with many developed nations, is finally trying to crack down on the scams and schemes that see corporate profits earned on purely domestic business leave the country, barely touching the ground, in what Putin dubbed the "offshorisation of the Russian economy." This year is likely to be a decisive one for the campaign to keep Russian money in Russia. For much of the last 20 years many Russian businesses have given their postal address as somewhere in an offshore jurisdiction such as the British Virgin Islands (BVI) or Cyprus. Now we are seeing a hard-line fiscal-driven trend to bring the eroded tax base back onto Russian soil. But with new measures being introduced from 2015, what will the de-offshorisation campaign really mean for business? The hunt for revenues With the Russian government expecting to run federal budget deficits again for the first time since the 1990s, the state is on the hunt for tax revenues. At the same time, capital flight is bleeding the country of badly needed investment capital and undermining the currency. However, the government doesn't have much room to manoeuvre: the Laffer curve says that at some pointing raising taxes produces less, not more, revenue. It's hardly surprising then that the Russian government is targeting large corporates and high net worth individuals (HNWIs) who hide profits in low-tax jurisdictions. Protecting recession-stricken tax revenues is of course a global issue and Russia's approach is in line with recent OECD calls for action on tax avoidance. A G20 joint communiquĂŠ last year pledged to fight "cross-border tax evasion and avoidance", highlighting that this is an issue on which there is international consensus at the highest level. However, coordinated global action is hard to both implement and enforce. The situation is particularly difficult in Russia,

where the reasons behind the use of offshore structures run much deeper than tax considerations alone. Russian commercial law is still a work in progress and many businesses look to English law in mergers and acquisition deals with all its tools like reps and warranties, which are also common in the offshore havens, such as the BVI, Cyprus, the Netherlands, Luxembourg and Switzerland. Russian companies like these jurisdictions, because if there is a commercial dispute they can expect a fair and impartial resolution. The government has reluctantly accepted the continued use of English law, non-Russian corporate vehicles and European bank accounts as a normal part of business in Russia.

"Now we are seeing a hard-line fiscaldriven trend to bring the eroded tax base back onto Russian soil"

However, the Kremlin intends to aggressively combat taxdriven structures that are specifically designed to simply keep profits out of the hands of the taxman. The new measures are also expected to make capital flight less attractive and more burdensome from a tax viewpoint. New laws on the books A key reform to watch is the development of the concept of corporate tax residence in Russian law based on the "place of effective management and control" test. New residence rules will bring onshore any paper companies that â&#x20AC;&#x201C; although technically registered abroad with overseas directors â&#x20AC;&#x201C; are in fact controlled out of Russia. How this will work in practice remains to be seen, as enforcement will likely be a real challenge. Obtaining conclusive proof to show where a company is controlled from is not going to be easy.

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Another important aspect of the reforms is the late arrival of the "controlled foreign companies" (CFC) rules to the Russian tax system. The rules are still being developed, and the Ministry of Finance will decide among "soft" and "hard" variants of such rules with "blacklist" and "whitelist" options. But whatever choice the ministry makes, it is likely that Russian corporates (including major oil corporations and state-owned companies), as well as individuals, will be required to inform the authorities of all the overseas subsidiaries and holding companies they control. They will be forced to pay Russian tax on undistributed profit from these holdings, even if the profit is accumulated abroad. No one realistically expects to see Russians rushing to their tax offices to disclose secret overseas holdings, foundations and trusts. However, it is expected that the CFC rules will increase the tax bills of major Russian public corporations that are in no position to conceal overseas structures, as well as increase personal tax and criminal liability risks for Russian HNWIs who use offshore structures.

This may, in turn, trigger an assets and employees transfer issue, contractual restructuring, dividend tax, thin capitalisation, transfer pricing, currency control and customs clearance issues. Compliant Western businesses that are affected by this reform should consider the problem in advance and work together to ensure the baby is not thrown out with the bathwater. Russia still has much work to do in building trust between the government and business community. It needs to give companies a genuine incentive to keep profits and their legal entities onshore or trust the Russian courts. The new antiavoidance legislation can create instability and dent business confidence. This may lead to a decline in investment and tax revenues, and actually increase capital flight rather than producing a reduction.

Finally, we can expect new rules that will force companies to disclose the ultimate beneficiaries of payments made as dividends, interest and royalties to companies in tax treaty jurisdictions. This would make it a lot more difficult for money to be channelled out of Russia through artificial offshore structures. All these changes are currently being finalised by the finance ministry and could be approved by the parliament in the first half of 2014. But it's not all bad news. Work is already underway on creating tax breaks for dividend income and capital gains from sale of shares by Russian holding companies. These reliefs, coupled with an increased tax burden on non-Russian structures, may give businesses a solid tax-driven incentive to bring corporate structures to Russia. Will it work? Protecting the Russian tax base and combating international tax evasion are laudable aims, but will this de-offshorisation drive have a real impact? It seems unlikely that the government's tax take will jump after the new rules go through. It will also take time for the Russian tax authorities to build up an information exchange and improve enforcement before rules on paper can start to work in practice. International investors are unlikely to be affected by these changes unless they are equally guilty of aggressively structuring overseas vehicles simply to avoid paying taxes in Russia. However, some Western business may become affected if they operate on the ground in Russia through foreign branch structures and have direct contracts with state-owned companies. Such groups may need to undertake expensive restructuring to continue operations using Russian legal entities.

"Some Western business may become affected if they operate on the ground in Russia through foreign branch structures"

I Cover story

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Persian hugs Iran's growing ties with Eurasia and Turkey Clare Nuttall in Astana, David O’Byrne in Istanbul, Ben Aris in Moscow

ran is the new kid on the formerSoviet Bloc. The possibility of a detente with the US has seen businessmen from across the region flock to Tehran, but Iran is already busy rebuilding ties with a part of the world it has known well for a millennium. On the face of it, Iran is a good match with surrounding nations in so much as it shares religious and historical ties. But the legacy of 70 years of Soviet rule, and the generally secular nature of those countries, undoes much of this particular advantage. At the same time, all the countries in the region have economies that need rebuilding, and after decades of domination and

isolation they could all do with local friends. Iran and Russia in particular are old acquaintances. In the 19th century, the Russian empire took much of the Caucasus from Iran, and even strayed onto its territory on occasion, the last time being 1941-46. For much of the Cold War Iran was a US ally, but that ended with the Islamic revolution in 1979. After the dissolution of the USSR in 1991, at first the new Russian leadership under Boris Yeltsin feared a resurgent Iran encroaching on its sphere of influence in Central Asia and the Caucasus, but in the last 20

years those fears have faded, opening the way to a new era of cooperation. My enemy's enemy At the Kazan Summit last year – an annual investment jamboree hosted by the government of Russia’s Tatarstan region – there were almost no European investors present. However, the Middle Eastern delegation was out in force, promising some $7bn of direct investment. Moscow has come round to the potential rivalry it faces in the region with Iran largely because it is highly interested in making friends that are enemies of the US as part of its

Cover Story I 9

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"multipolar" vision of geopolitics. Iran joined forces with Russia in 1997 to end the civil war in Persian-speaking Tajikistan, and Tehran also backed Moscow in the first war against Chechen separatists, when much of the rest of the Islamic world backed the rebels. The Iranian leadership even backed Moscow’s bid to join the Organisation of the Islamic Conference (OIC) – a co-sponsor of the Kazan event – as an observer in 2005. Iran could have aggressively sought to push its brand of Islam on countries like Shiite Azerbaijan or the fractious republics in the south of Russia, but relations have continued in a spirit of pragmatism. Iran has instead concentrated on building trade ties across the region. However, not all is rosy in the garden of Eurasia. “Moscow has been relatively unconcerned about Iran’s activates elsewhere in the Middle East,” says Dmitri Trenin of the Carnegie Moscow Centre in Moscow in his recent book Post Imperium. “But not everything in the Russo-Iranian relations is without controversy. The breakup of the Soviet Union raised the issue of the Caspian Sea, whose status had been governed by the 1921 Soviet-Iranian treaty.” The status of the Caspian Sea perfectly highlights the ambiguous nature of relations in the region. Tension flared in the 1990s, and Iran even threatened military action against Azerbaijan, which Moscow considers to belong to its sphere of influence. Russia insists the Caspian Sea is actually a “lake” under international law, which would extend national boundaries into the middle of the water. That would allow the littoral states to claim more of its oil-rich seabed, instead of leaving a patch of “international waters” in its midst. Yet despite the problems, it’s the pragmatism that stands out. Russia has been one of Iran’s few true friends in recent years, supplying the country with arms since the 1990s and even building the controversial Bushehr nuclear reactor, which in 2011 went online

despite howls of protest from the West. The row over the nuclear power station has been particularly divisive, but now appears close to resolution. On February 20, Iran and the “5+1” group – China, France, Russia, the UK and the US, plus Germany – said they had agreed on a timetable and framework for negotiating a comprehensive agreement to end the confrontation over Iran’s nuclear programme. The talks follow an interim deal signed in November, when Teheran agreed to concessions including suspending production of enriched uranium and allowing daily inspections by the International Atomic Energy Agency (IAEA). If no long-term agreement is reached by July however, stricter sanctions may be imposed. Whatever the Kremlin may feel about Iran’s machinations in its backyard, it is willing to stand behind it as a war between Iran and the US is clearly not in Russia’s interests. “The future of Iran’s standoff with the international community is a serious cause for concern in Moscow, not least in view of the potential impact of military conflict between Iran and the United States/ Israel in Central Asia,” says Trenin. Turkey struggles to cement relations As the biggest economy in Southeastern Europe, Turkey has the most to gain from a potential return to international trade by Iran. The Persian country

political and economic relations, both as a result of international pressure and local differences between Ankara and Tehran. That said, the apparently imminent relaxation of international sanctions on the Iranian regime offers hope. A visit to Tehran in late January by Turkish Prime Minister Tayyip Erdogan was rated an important step towards normalising trade relations by Bilgin Aygün, the vice chairman of the Turkish-Iranian Business Council at the Foreign Economic Relations Board of Turkey (DEİK). A new joint trade committee was set up, as Erdogan declared Iran his second home and that he wants to see bilateral trade reach $30bn by 2015, from the $14.5bn recorded in 2013. Whether that can be achieved so quickly is a moot point somewhat. Bilateral trade reached $22bn in 2012, but that was largely thanks to a system set up to evade the sanctions that have isolated the Iranian banking system. Revenues from oil and gas sales to Turkey were used to buy gold, which was then sent back to Tehran. Ignoring oil and gas, it's clear that trade relations between the two countries are particularly under-developed, but they still show enormous potential. As recently as 2004, Turkish exports to Iran totalled only $800m, a figure

"Turkey has the most to gain from a potential return to international trade by Iran" has precious oil and gas that Turkey’s burgeoning economy so badly needs. If geography and market forces were the only factors dictating trade relations, Turkey and Iran would long ago have become major partners. Nothing of course is that simple. Iran's perennial status as an international pariah state – and its confrontational foreign policy – has long hampered

which by 2011 – the last year not to be affected by the gold export scheme – had risen more than four fold to $3.6bn. Given Turkey's highly developed manufacturing sector, the scope for exports of everything from vehicles and white goods through to textiles and processed foods is enormous. Indeed, the 1990s and 2000s saw a number

I Cover story

of high profile joint ventures. They were later abandoned, but interest has revived and an increasing number of Turkish companies are interested in doing business with Iran. It may be a while though before that interest can be converted into actual business. US officials warn that sanctions still remain in place and companies breaching them will face punishment. In addition there remain a few bilateral issues which need to be solved. The scandal surrounding the use of gold to

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what Turkey pays for Russian gas, and over 40% higher than the price it pays Azerbaijan. For the past two years Turkey has been pursuing a case against Iran at the International Court of Arbitration in Geneva, demanding Iran reduce the price by as much as 30%. Ankara is also seeking as much as $2bn compensation for periods when the supply has failed to turn up. These include two months in the winter of 2011-12 when supply was cut for all but a few days, and more recently in

"Erdogan's recent visit to Tehran failed to secure a long-demanded reduction in the price of the gas" breach international sanctions is one. In this connection, an ongoing high level corruption case in Turkey has seen the arrest of Iranian businessman Reza Zarrab, along with Suleyman Aslan – the CEO of Turkish state-controlled bank Halkbank, which was at the centre of the gold trade. Iranian authorities are reported to have arrested a business associate of Zarrab's. Turkish officials deny the sanctions were broken, and Erdogan insists that the police investigation is part of a wider plot aimed at destabilising his government. That may well be the case, but it does nothing to answer any of the other legitimate questions which continue to hang over a trade which totalled $6.5bn in 2012, and around $2bn last year. More pressing still is the ongoing dispute over the gas Turkey imports from Iran under a 1996 agreement signed by Turkey's then radical Islamist prime minister Necmettin Erbakan. Erdogan's recent visit to Tehran failed to secure a long-demanded reduction in the price of the gas, which is reckoned to be around $490 per 1,000 cubic metres. That's as much as 30% more than

December-January, when the volumes were reduced without warning. Against those demands, Turkey has offered Tehran a deal that, should the dispute be settled, would see it increase gas imports. It is also offering to act as a transit route for Iranian gas to Europe – a possibility that is not as unlikely as it sounds since the EU-backed Nabucco gas pipeline project that was planned to connect Azerbaijan and Iran was abandoned. Turkey already has its own pipeline project planned to carry Iranian gas – the 34bn cubic metres per year Iran-Turkey-Europe pipeline being developed by Istanbul based Turang Tasimcilik. Although analysts question whether Turang – a subsidiary of petrol trader Som Petrol – has the ability to actually develop the line, the company has an exclusive agreement with Tehran, an exclusive 30-year licence to develop the Turkish section of the pipeline, and over $6bn in investment incentives. That portfolio should ensure Som Petrol plenty of suitors as and when sanctions are lifted and international oil companies are allowed to develop Iran's giant South Pars gas field.

Spaghetti junction Iran is also pushing relations in the Caucasus and Central Asia. While Teheran has never had the clout of Russia, China or the US, it has successfully built strong relations with several countries in the region including Armenia, Georgia, Kazakhstan and Tajikistan. As with Turkey, the benefits of closer ties with these countries is obvious: sitting at a nexus between Europe, Russia and the Middle East, Iran’s geography means it should be playing a large role in the region, all other issues being equal. But the region is complicated, already criss-crossed with numerous strategic alliances such as the Azerbaijan-GeorgiaTurkey axis on the one hand, and the tense relations between Azerbaijan and Armenia on the other. In addition, Russia always looms in the background. Adding a freely-trading Iran to this mix would make things even more confusing. “Alliances in the Caucasus region are very much steered by the geo-political situation,” Eugene Chausovsky, Eurasia analyst at Stratfor, tells bne. “We may see Iran becoming a stronger player in the region as a result of the still early, but potentially significant, negotiations over the nuclear agreement and alleviation of sanctions.” Tehran's good relations in the region have been reflected in the ambivalent attitude towards the international sanctions. Armenia has continued to step up cooperation in the energy sector, including through gas-for-electricity exchanges and plans to build hydropower plants on the Aras River, which marks the border between the pair. Armenian Prime Minister Tigran Sargsyan noted on February 13 that boosting ties with Iran is a foreign policy priority. While Christian Armenia and Georgia may not appear natural allies of Islamist Iran, they have formed a strategic alliance. In particular, Armenia’s hostile relations with Azerbaijan and Turkey leave it heavily reliant on Iran and Georgia.

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In mid-2013, Georgia came under scrutiny from the US over speculation that Iranian companies were trying to circumvent the sanctions using the Caucasian country. The number of Iranian businesses registered in Georgia leapt more than ten times in just two years when Tbilisi relaxed visa rules in 2010. That said, Prime Minister Bidzina Ivanishvili quickly reversed the regime following the US probe, illustrating clearly which way the wind blows. “Despite the relations between Georgia and Iran, Georgia’s foreign policy priority is towards the west,” says Nika Chitadze at the International Black Sea University. However, he adds that, “after the lifting of sanctions we may see more Iranian companies trying to invest into Georgia. Iran has already expressed an interest in using Georgia’s transport and port infrastructure, and ties could grow in other sectors from construction materials to tourism." In contrast to the friendly relations Iran has with the two other South Caucasus states, its relations with Azerbaijan are among of the most complex in the region. In many ways, the two countries look to be natural allies, given their cultural similarities and shared religion. On the one hand, Azerbaijan has built skiing resorts – specifically tailored for Middle Eastern holidaymakers – and its tourism sector is booming on the back of growing numbers of Iranian visitors. But political relations remain confused, due to an underlying rivalry. Iran’s good relationship with Armenia, and its support for Yerevan over Nagorno Karabakh, has infuriated Azerbaijan, which in turn has struck a strategic alliance with Israel. The pair is also at odds over ownership of several offshore Caspian oilfields, and both countries fear cultural influences from the other that could destabilise their regimes. However, the situation gets even more confused. Azeris make up Iran’s largest ethnic minority, with estimates suggesting the numbers living in Iran run from 12m to as high as 22m. Both figures are higher than Azerbaijan’s population of 9.6m. Recently, this

Cover story

minority has become more vocal; at mass protests this year, demonstrators carried banners insisting: “South Azerbaijan is not Iran”. Meanwhile, Tehran fears the influx of western cultural influences, such as music and films, from secular Azerbaijan on its population. During the Eurovision song contest hosted in Baku in 2012, Iran withdrew its ambassador, accusing its neighbour of “undermining Islamic values” and “hosting a gay parade”. Conversely, Baku is concerned about the threat of Islamic fundamentalism from Iran – a fear that has been stoked by attempted terrorist attacks on the Israeli embassy in Baku and other targets. Shortly before Eurovision, 22 Azeri citizens – allegedly trained by the Iran's Revolutionary Guard were arrested on suspicion of plotting terrorist attacks. However, since Hassan Rouhani's election as Iranian president in June, there have been some indications of a thaw in relations. Politicians from both

I 11

of President Ilham Aliyev’s authoritarian government. If Iran is no longer a threat, Washington may reassess its relationship with Baku. However, that's unlikely to happen, given Azerbaijan’s large oil and gas reserves, which are being exploited by US oil majors including Chevron and ExxonMobil alongside other international companies. Those hydrocarbons also allow Baku to maintain a foreign policy stance independent of Moscow. “In my opinion, the US will continue to be interested in Azerbaijan because of the US companies operating in the Caspian oil projects," Chitadze suggests. "Azerbaijan also shares a border with Russia, which is the main geo-political rival of the US in the region.” Finally, Azerbaijan – like Turkey – offers yet another potential route for Iranian gas headed for Europe. The Southern Corridor project, a European initiative to directly access gas from the Caspian and Middle East to allow it to reduce dependence on Russia, originally

"Iran's relations with Azerbaijan are among the most complex in the region"

countries have spoken optimistically on the issue. Rouhani said in July that ties are “based on friendship and mutual trust” and expressed a hope for the “development and strengthening” of relations. More recently, in February, the parliament speakers from the two countries met to discuss cooperation. At the same time, there is concern that should Tehran lose its pariah status, the US may back away from its support for Azerbaijan. As an ally of Israel and a Muslim state friendly to the West, Azerbaijan has been a valuable partner to the US – an alliance that has earned the White House criticism for its support

envisaged Iran as the main supplier. Iran’s proven gas reserves, at 33.6 trillion cubic metres dwarf Azerbaijan’s 900bn cubic metres. Since the project was hatched, however, Azerbaijan has supplanted Iran to become the initial supplier. The first supplies from the offshore Shah Deniz field are due to reach European customers by 2019, after agreements on the second phase development of the field and construction of pipeline infrastructure to carry the gas to Europe were signed in December.

I Perspective

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CEE takes the breath away bne

everal reports released in February show just how much of a problem corruption is becoming in the new member states of the EU.

The European Commission's admission on February 3 that corruption across the EU is "breathtaking" comes as no surprise to those like bne that have extensively covered the worsening problem. Nor does the fact it is most widespread in the states of Emerging Europe and the Mediterranean. A report by Global Financial Integrity (GFI) released the same day revealed that nearly $70bn in illicit financial flows – the proceeds of crime, corruption, and tax evasion – flowed into or out of emerging EU member states in 2011. In its "EU Anti-Corruption Report", the Commission estimates that corruption in the 28 member states costs the EU economy €120bn a year, just a little less than the annual budget of the EU. Three-quarters of Europeans think that corruption is widespread in their own country. The report explains that two Eurobarometer surveys were carried out in preparation for the report in early 2013, with the first looking at general perceptions of the prevalence of corruption and the second focusing on actual expectations of having to pay a bribe. At one extreme there are the countries like Denmark, Finland, Luxembourg and Sweden where the surveys confirmed a positive perception and low experience of bribery. These countries also appear among the good performers on the Transparency International Index, the report notes. Then there are a group of countries with a high reported personal experience with bribery, but with a clear concentration on a limited number of sectors. In Hungary (13%), Slovakia (14%) and Poland (15%) it is the area of healthcare where the bulk of instances of bribery are found. Corruption in a broader sense is also perceived as widespread in these countries (82% in Poland, 89% in Hungary and 90% in Slovakia). The countries where respondents are most likely to think corruption is widespread are Greece (99%), Italy (97%), Lithuania, Spain and the Czech Republic (95% in each), with

public procurement a particular problem area. "More than three out of ten (32%) companies in the Member States that participated in public procurement say corruption prevented them from winning a contract," it says. "This view is most widely held amongst companies in the construction (35%) and engineering (33%) sectors. More than half of company representatives from Bulgaria (58%), Slovakia (57%), Cyprus (55%) and the Czech Republic (51%) say this has been the case." Many of those countries also lag in scores concerning both perceptions and actual experience of corruption, particularly Croatia, the Czech Republic, Lithuania, Bulgaria, Romania and Greece. "In these countries, between 6% and 29% of respondents indicated that they were asked or expected to pay a bribe in the past 12 months, while 84% up to 99% think that corruption is widespread in their country," the report says. Corruption is most likely to be considered a problem when doing business by companies in the Czech Republic (71%), Portugal (68%), Greece and Slovakia (both 66%). In combatting corruption, the report says the achievements of some anti-corruption agencies have been "more sustainable" than others. It notes approvingly the work of the Slovenian Commission for Prevention of Corruption (CPC), the Romanian National Anti-Corruption Directorate (DNA), the Latvian Bureau for Prevention and Combating of Corruption (KNAB), and the Croatian Bureau for Combating Corruption and Organized Crime attached to the State Attorney General’s Office (USKOK). Looking at the individual summaries for each member state, Bulgaria and Romania are dealt with particularly harshly – two countries that, together with Italy, are regarded as hotspots of organised crime groups. At the other end of the spectrum, Slovenia is lauded as among the most active of the Central and Eastern European states in the fight against corruption, with a well-developed legal and institutional anti-corruption framework." A particular problem in what the EU calls "convergence countries" (ie. Emerging Europe) are the allocation and use of EU funds. "Their effective implementation poses a real challenge," the report says.

Perspective I 13

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It cites examples where control mechanisms have revealed cases in which officials used local government assets to conclude transactions with companies related to them. This is backed by an independent study by Czech, Polish and Slovakian watchdogs, also released February 3, entitled: "Public money and Corruption Risks". This study "identifies major gaps both in the national and EU legal framework that fundamentally increase the risk of political corruption and allow misuse of EU funds."

Analyzing major risks of political corruption in the management of public funds, the study sheds light on why millions of euros continue to be misused and why implementation of EU funds regularly ends up in criminal prosecution in all three studied countries. "It is not surprising that EU funds are linked with chronic political corruption in the three studied states since not even the basic rules against conflicts of interest are in effect. EU hasn't been successful in convincing the governments to do so,â&#x20AC;? comments Martin Fadrny, coordinator of the research team.

EM storm illustrates growing divergence across CEE

CHART:

ith the second half of 2013 offering building signs of economic recovery, this year was meant to see emerging markets show some serious gains for investors. However, a storm has hit instead. The question now is which economies are most at risk of crisis, or a longer-term malaise. Capital Economics suggests EMs can be split into five basic groups. CEE economies are scattered throughout, as the chart below shows, illustrating the growing divergences across the region. Economies that have either been serially mismanaged or have been living beyond their means are most likely to hit serious problems. According to the analysts' groupings, in CEE that puts Ukraine and Turkey amongst the most vulnerable. "These countries could face recessions at some point over the next couple of years," they add.

including Russia and its oil-dominated economy dominate this group, and they're in danger of a surge in inflation and mounting risks from overheating domestic credit markets. Less vulnerable to the end of quantative easing are the likes of Hungary, Romania and Bulgaria. However, a hangover from the pre-crisis credit bubble and strong financial ties to the Eurozone means that their banking sectors remain exposed to any re-escalation of financial stress in core Europe. However, the tightening of global monetary conditions is based on evidence that prospects for the developed economies are improving. That suggests those economies that are balanced, have strong banks and are most closely tied to the Eurozone i.e. the Czech Republic and Poland will continue to outperform the rest of CEE. That latter pair has indeed started to pull away in terms of macro indicators. At the same time, they have escaped the worst of the early year sell off thus far.

Others are at risk due to a lack of reform and movement towards renewing outdated economic models. The BRICS Key Emerging Market Groupings Grouping

Countries Included

Share of

EM GDP*

Global GDP*

1. Serially Mismanaged EMs

Argentina, Ukraine, Venezuela

10%

2. EMs living beyond means

Turkey, S. Africa, Thailand,

20%

10%

Key Issues Deep-seated competitiveness problems, severe strains in balance of payments, risk of currency crises.

Indonesia, Chile, Peru

Excess credit growth, unsustainable consumption, large current account deficits. Most vulnerable EMs to tighter global monetary conditions. Lat Am. & S. Africa vulnerable to falls in commodity prices.

3. EMs with legacy problems

Hungary, Romania, Bulgaria

4. EMs with domestic structural

Brazil, Russia, India, China

54%

27%

Korea, Philippines, Mexico,

10%

Fragile banking systems, vulnerable to re-escalation of Eurozone debt crisis.

problems 5. EMs where outlook brightening

Old growth models reaching limits. Excess credit growth in Brazil and China.

Poland, Czech Rep.

Growth likely to accelerate in 2014-15. Sources: Various; *At PPP exchange rates

I Eastern Europe

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Not-so Brokbiznesbank Graham Stack in Kyiv

he National Bank of Ukraine handed a UAH1bn bailout to Brokbiznesbank, the first major lender hit as the ongoing political crisis anatagonises an already perilous economic position. Questions remain however over the bank's ownership, and therefore where the rescue cash might finally end up. Brokbiznesbank, Ukraine's 18th largest bank by assets, announced on February 13 that it has received a UAH1bn (€82m) refinancing loan from the National Bank of Ukraine (NBU), and that it expects to be handed a second similar chunk of cash. The announcement was made by deputy chairman of the supervisory board Boris Tymonkin. The bank's "elder statesman" and former head of Unicredit's local unit, Tymonkin said the loan is collateralised by “some

securities we bought." Brokbiznesbank is set to pay interest of around 6.5%, according to market sources. Speculation had been swirling about the financial health of the bank ahead of the bailout. On the morning of February 11, customers had lined up outside branches

The speculation around the unfortunately named Brokbiznesbank comes against a background of an ongoing slide in the value of the hryvnia, banking liquidity problems, sovereign downgrades and widespread deterioration in the economy. A bank failure, warn analysts, could mark

"A bank failure could mark the start of a shift to a full-blown economic crisis in Ukraine"

across the country to withdraw funds, with bank cards no longer working at ATMs. Industry insiders told bne of the bank's failure to make payments starting late January.

the start of a shift to a full-blown economic crisis in Ukraine – something that has been feared since the political crisis erupted at the end of November.

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Brokbiznesbank quickly denied any problems. It acknowledged hitches with payments, but claimed this was solely due to a switch from the Visa payment system to the MasterCard Worldwide payments system. Market analysts disputed that version of events however, saying it was likely Visa had frozen payment processing due to the lack of cash coverage from the bank. Following the refinancing deal, Tymonkin stated that cooperation with Visa would now resume: “All payments that were held up will be completed and all autotellers will be filled up. Several days will be needed for this.” Tymonkin said that the bank had experienced a draining of deposits due to the 'artificially heated' situation around the bank. The bailout will be sufficient to stablise the situation, he stressed. Brokbiznesbank performs payroll services for a number of large companies and government organisations, in particular the interior ministry, and many clients hold its cards in order to draw down salaries. "The difficulties experienced by a number of clients of Brokbizbank are purely temporary and connected to technical work on reconfiguration of the payment system," the bank said in a statement February 13. “Brokbiznesbank asks citizens to assess the situation objectively and media representatives to refrain from publishing unverified data about the financial situation at the bank. Who's who? However, the ownership structure at Brokbiznesbank only encourages questions. Since July, the bank has apparently been owned by 28-yearold Serhiy Kurchenko, a Kharkiv fuel trader who emerged from nowhere in late 2012 to go on a spending spree. Alongside Brokbiznesbank, he has also bought hometown football club Metalist, the Odessa Oil Refinery, the Kherson fuel transshipment port, and major news outlet Ukraine Media Holding, In December, Kurchenkoowned weekly Korrespondent named its

Reversal of fortunes in Ukraine

bne In one of history's most stunning reversal of fortunes, the jailed Ukrainian opposition leader Yulia Tymoshenko left her prison cell in Kharkiv on February 22 and flew to Kyiv to address jubilant supporters. On the same day, her longstanding foe, President Viktor Yanukovych, fled the capital for Kharkiv, effectively sealing his loss of power. After opposition forces had pushed through legislation in parliament effectively freeing her, Tymoshenko was soon addressing adoring crowds in Independence Square, known as the Maidan, who have been protesting there since late November when Yanukovych failed to sign a deal that would have taken the country closer to the EU. The atmosphere on the Maidan was electric as the crowd of around 75,000 chanted Tymoshenko's name. The former PM looked haggard and remained in a wheelchair due to a back condition resulting from her prison confinement. Her daughter Zhenya stood beside her and opposition leaders were grouped around them. Despite her frail physical appearance, Tymoshenko's speech showed she intends to play a big role in a post-Yanukovych Ukraine. She apologized for the failings of opposition politicians in the past – a reference to her crippling feud as prime minister with then president Viktor Yushchenko, in the wake of the Orange Revolution of 2004 that first brought them to power. And whilst there was no overt mention of political ambitions, she declared to applause, "I am back to work" – a hint at her election campaign slogan of 2010 when she ran unsuccessfully against Yanukovych: "She is working". By contrast, Yanukovych made only a brief appearance in an interview given to a little-known local TV channel in the east of the country. Appearing out of touch and rambling, Yanukovych refused to concede defeat, denouncing the protests in Kyiv as "vandalism, banditry, and a coup d’etat," and comparing the situation to a repeat of the 1930s when the Nazis came to power in Germany. Yanukovych said he would now tour the east and south of the country – his traditional strongholds – to sound the views of the population there, a thinly veiled threat to stoke separatist tensions between the proRussian east and the pro-European west. Indeed, the divide between east and west appears to be deepening. In Kerch, in the pro-Russian Crimea, a small Euromaidan solidarity demonstration on February 22 ended in violence as police had to defend demonstrators against attack by a large crowd. And in the Crimean city of Sevastopol, units of Berkut – the riot police unit held responsible for much of the violence against Euromaidan demonstrators in Kyiv – were given a heroes' welcome on their return home from deployment in the capital. The scenes were a jarring contrast to the funeral liturgies being sung in Kyiv for the scores of protestors who died after the security forces opened fire, and bodes ill for chances of reconciliation in this troubled country.

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owner as Ukraine's 7th wealthiest, with $2.4bn in assets. At the time of the bank's acquisition, local media were reporting its poor financial condition, citing sources who had conducted due diligence for the deal. Following the change in ownership, Brokbiznesbank completed

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a former head of the state tax service. A further 40% or so was to be held by four financial investors apparently independent of Vetek. Most analysts however believed that this second 40% block was in actual fact also to be held by Kurchenko and/or his holding company, giving the young tycoon a total stake of 80% in the bank.

"Brokbiznesbank's troubles coincide with problems at other Kurchenko projects"

recapitalisation in December, with an infusion of UAH11.5bn. Lending by the bank however soared in parallel, pushing UAH12.4bn higher, despite the economic contraction in the country. Kurchenko himself has made no comment on the problems at Brokbiznesbank. Tymonkin announced on February 14 that subsidiaries of Kurchenko's holding group will now place funds with Brokbiznesbank. Kurchenko's sprawling and opaque network of companies is purportedly consolidating under the umbrella of a new structure, East European FuelEnergy Holding, its Russian acronym being Vetek. “Vetek has recently become a shareholder of one of the leading and largest banks in Ukraine – Brokbiznesbank,” the holding confirmed to bne. “This demonstrates the group’s vision on not only developing its oil and gas operations, but also building the group’s financial activities.” However, an investigation by anti-corruption NGO Nashi Groshi indicates that neither Kurchenko nor Vetek are recognisably linked to Brokbiznesbank on paper. Following the July purchase, Tymonkin said Vetek would hold nearly 40% of the bank, while around 20% remains with the former owners – brothers Oleksandr and Serhiy Buryak, the latter

According to Brokbiznesbank disclosures, five Kharkiv companies – owning 41% of its share – delegated senior members of the management, supervisory and advisory boards, thus apparently representing the Vetek stake. But none of these firms bear any trace of either Kurchenko or Vetek. According to Nashi Groshi, they bear the hallmarks of shell companies, with apparent straw men acting as shareholders, including a nursery teacher. Information about the "independent financial investors" owning a 40% stake is entirely lacking. Wider problems? Even if Vetek were to be directly represented among Brokbiznesbank shareholders, this would also not lead

Kharkiv bank, Real Bank, with which the Kharkiv businessman was closely associated – a fact confirmed to bne by a controversial business associate of Kurchenko's: Evhen Zhilin. Kurchenko himself does not acknowledge the connection and has also never featured on paper among Real Bank shareholders. Brokbiznesbank's troubles coincide with problems at other Kurchenko projects. Construction of the Kharkiv Arena basketball stadium, a host venue for Eurobasket 2015, stalled at the end of January. Management at the time said the cessation of work was due to the extreme cold, but webcams at the site show that work has not yet been resumed despite current spring temperatures. Ukraine had horrible experiences with bank recapitalisation in 2008-2009 as its financial system unravelled under the impact of the global financial crisis. Billions of dollars in refinancing provided to politically-connected troubled banks, such as Nadra and Rodovid, were simply stolen by shareholders and moved abroad. The banks were finally nationalised. In this context, the lack of transparency in Brokbiznesbank's ownership and operations does not inspire optimism. The NBU meanwhile echoed Vetek in blaming the media for the problems at Brokbiznesbank: “The situation at the bank is under control. But

“The situation at the bank is under control"

to Kurchenko. He is not present in the Vetek shareholding structure, which instead features as 100% owner one of Kurchenko's sidekicks from his early days in Kharkiv fuel trading. Brokbiznesbank top management however do link to Kurchenko, being the former management of an obscure

if there is another such incident, I would prefer (media) to refrain from information attacks,” the head of the central bank's credit policy department Elena Scherbakova told journalists on February 14, warning that panicmongering would “hit across the entire financial sector”.

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detainees have now sought to access free legal aid. However, this is likely to be only the tip of the iceberg; Civic Maidan, an organisation monitoring human rights abuses connected to the antigovernment protests, have over 2000 cases on their books. "A lot of people just won’t complain at all," notes McGill. And despite the high profile nature of his case, Gavryliuk is amongst them. "I won’t press charges," he tells bne. "In the end God will judge them for their actions."

Battered and bruised in Ukraine Harriet Salem in Kyiv

hen bne meets with Mykhailo Gavryliuk, a charming Cossack from Chernivtsi in west Ukraine, he is surrounded by a group of gorgeous Ukrainian women. Sitting around a stove fire in Kyiv's Euromaidan camp, they hang onto his every word, giggling like schools girls. It’s easy to see why. With blonde hair and grey-blue eyes, Gavryliuk is ruggedly handsome, mild-mannered, with an electric sense of humour. But earlier this month Gavryliuk was the centre of attention for a much darker reason. On January 22, he was captured by the notorious Berkut special police unit on Hrushevskoho Street – the frontline of the violent clashes between the law enforcement officials and antigovernment protesters. In temperatures below freezing Gavryliuk was then stripped naked, beaten and humiliated as police officers took pictures on their mobile phones. Posted on YouTube, the video of the ordeal of the charming Cossack became a viral sensation with over 2m hits.

But while Gavryliuk’s treatment was perhaps the most brazen display of the extra-legal police violence against anti-government protesters, it was far from isolated. Since the demonstrations began in November, there are estimated to have been hundreds, if not thousands of victims of police brutality. "It is almost impossible to know figures in this chaotic environment," says Heather McGill, a researcher at the European and Central Asia project for Amnesty International. "But incidents appear to have been widespread." Online amateur film footage shows multiple examples of protesters being brutally beaten by police even once immobilised on the floor. And according to a recent report by Human Rights Watch, there is evidence that police deliberately targeted medics and journalists during clashes in central Kyiv, shooting them with stun guns and rubber bullets. Figures provided by the Ukrainian Parliamentary Human Rights Ombudsman show that more than 250

He claims the police are looking for him. "The only reason they haven’t taken me is because I’m here [at the Euromaidan camp] and they are afraid to come here," he says. Fly like an eagle Gavryliuk’s persecutors, the notorious Berkut – which means Golden Eagle in both Ukrainian and Russian – have been at the forefront of the police violence both during and prior to the protests. Earlier this year, two off-duty police officers from the special unit beat and raped a 29-year-old woman from Vradiyevka. The incident sparked protests locally. The display of police brutality during the Euromaidan protests, sparked by President Viktor Yanukovych's refusal at the end of November to sign off on a longstanding deal to bring Ukraine closer to the EU, has only served to further underscore the population’s existing distrust in Ukraine's law enforcement agencies. "The relationship between the police and the public was already at a catastrophically bad level even before these [Euromaidan] protests erupted," says Amnesty’s McGill. The overhaul of the Prosecutor General’s Office has been a requirement for Ukraine since it joined the Council of Europe in 1995, though little progress towards the goal has been made in the last decade. "This is an issue at the forefront of Amnesty’s campaigns for a long time," McGill tells bne. "But there is not a willingness for reform. The Prosecutor General’s Office is not independent. It functions vary much like a Soviet-era Prosecutor’s Office, it is not compatible with the rule of law."

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The case of activist and journalist Tatyana Chornovol is just one such example. In December, Chornovol was dragged from her car and severely beaten, with the incident filmed on her dashboard camera. Five men have now been arrested for the assault, including Andriy Zinchenko in the Russian Federation on February 6. But the Prosecutor General's Office ruled that the incident was simply "road rage" caused by Chornovol "cutting up a car." The journalist responded by calling the conclusions "absurd," stating on her Facebook page that the attack was clearly related to her work. "Those in the top levels of the police believe they are above the law," says Mykola, a former Interior Ministry police officer who recently quit his job because of the "moral corruptness" that he says permeates the institution. "Corruption is rampant in the higher levels of the police. People at the bottom will not quit because they are afraid,

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working with supposed law enforcement officials shows how dangerous the situation has become." Earlier in February, the Verkhovna Rada repealed a repressive package of legislation curtailing media freedom and activities related to protest, an apparent concession to the opposition. But reports from the ground suggest that in practice the laws are still being enforced. "My car was stopped more than ten times yesterday," says Anton, a member of the Automaidan patrol unit. Fourteen leading Euromaidan activists are still on the "wanted listed" posted on the Interior Ministry’s website. "Amnesty, what amnesty?" laughs Gavryliuk. "How many people have been hurt, have been injured, we cannot trust the government, the police any more." Confidence in the rule-of-law is now so low that several leading Euromaidan activists and journalists critical of the government have fled the country.

"The relationship between the police and public was already at a catastrophically bad level even before these protests erupted" they do not realise they have any power. There is a fear that if you leave they will bring a [fake] case against you and you will go to prison, that you will be hurt or even killed," he tells bne without providing his surname. In the context of the Euromaidan protests this corruption has also reportedly manifested itself in the police's collaboration with the so-called Titushki – civilian government-hired thugs – as the "fourth column" of the government’s defence. Multiple YouTube clips show the street-bandits attacking anti-government protesters either under the noses of, or even alongside the police. "The climate of lawlessness is permeating the country more and more," says Oleh Shamshur, former Ukrainian ambassador to the US. "That there are thugs protected by, or even

Among their number is the leader of Automaidan, Dmtroy Bulatov, who was kidnapped and tortured for more than eight days by unknown assailants. Bulatov fled to Lithuania on February 1 in fear for his safety. Speaking about his decision to leave at a press conference in Vilnius on February 6, Bulatov said: "I was afraid that the militia [Ukraine police] and authorities might do something wrong to me… I had huge fear and distrust." He added that following being questioned by the police in hospital, he had become "very scared" that if taken into custody his health would deteriorate rapidly. Radicalised The violent crackdowns have fuelled the desire for radical action in some corners of the Euromaidan camp, which had a giant catapult on standby on

Hrushevskoho Street ready to launch fireworks and Molotov cocktails across the police line. Full combat gear, protective headgear and baseballs have now become the normal dress code for young men on Kyiv’s Independence Square. Praviy Sector, Afghan veterans and Spilna Sprava – all groups reportedly leading the protesters' violence in January – have notably grown in popularity while the three more moderate opposition leaders have been booed and catcalled by their supposed supporters. Meanwhile, in the east of Ukraine groups of young men – often associated with the football hooligan group Praviy Sector – are organising anti-Titushki patrols where they hunt for the government’s supporters; confrontations often end in violence. Yet despite the vicious attack on him, Gavryliuk remains committed to the ideal of peaceful protest. "It's not the right thing to fight the police because the police should be with the people," he tells bne. "The police are not free people, they are serving, their commanders and Yanukovych." Amnesty International is calling for a full investigation into each and every allegation of violence. "This is the only way to start to rebuild trust," says McGill. "An international component in this could certainly ensure that the process had more credibility and that more challenging questions could be posed." At the moment there are two options on the table: either a Council of Europe-backed advisory panel with representation from government and opposition forces, or a fact-finding mission by Organization for Security and Co-operation in Europe. The OSCE option would circumvent the sensitive political issue of the Russia, Ukraine and Europe triangle. But both at present remain pipeline dreams. And the major concern is that while the bruises on victims’ bodies will fade, the wounds inflicted on Ukrainian society will take much longer to heal.

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we're dealing with – I have regularly participated in defending Kyiv streets against titushki often protected by the police." People's patrols Titsuhki became a part of the political vocabulary when opposition to President Viktor Yanukovych's domestic and foreign policies metamorphosed into full-blooded mass protest in late November, which culminated in scores of protestors dying at the hands of security services. Ukraine's opposition media was rife with reports of titushki roaming the winter darkness – with regular attacks on demonstrators by masked men justifying the fears.

Interview with a titushki Harriet Salem and Graham Stack in Kyiv

kraine's ruling Party of Regions is controversially deploying hired muscle to back up police units against opposition protestors. Nicknamed "titushki", the activity of the hired hands is undermining the government's already precarious legitimacy. bne spoke to a member of the titushki. There is nothing new about the paid employment of heavies from Ukraine's sprawling combat sport scene outside the ring. In the chaotic 1990s, the term "sportsman" was synonymous with gangsterism. In the next decade, as bandits ceded the stage to oligarchs, business drew on heavies when implementing hostile corporate takeovers – enforcing a crooked court decision to seize control of a contested plant, for instance. Currently, many sportsmen find work as uniformed guards in security companies. In contrast to ex-police, "sportsmen" do not need firearms to intimidate. But only in 2013 did these sportsmen begin to play a notable role in politics – spawning the now notorious titushki. Last year, the pro-government Party of Regions found itself faced by increasingly militant opponents,

especially from the nationalist party Svoboda, who frequently clashed with their ideological foes. In response, the Party of Regions activated networks of sportsmen as guards for their own demonstrations, which often consisted of paid supporters bussed in from East Ukraine. The now-ubiquitous term titushki was coined in May of last year by journalists when one of their own fell victim to the phenomenon. During clashes between Party of Regions supporters with nationalists at a demonstration, one "sportsman" guarding the Party of Regions march, 18-year-old Vadim Titushko, a member of a combat sports club in a small town near Kyiv, beat up a female journalist filming him. Pictured alongside him during the attack was the head of the Party of Regions youth cell for that town. Subsequently, the term titushki has even made its international debut. Attending the 2014 Munich Security conference at the end of January, Ukraine opposition leader Vitaly Klitschko wrote on Facebook that: "Today bandits are out on the streets, beating, kidnapping, arresting peaceful citizens… and burning their cars. I have seen who

When opposition activists upped the ante mid-January, throwing petrol bombs in Kyiv and seizing regional state offices, Party of Regions officials went into titushki overdrive as they organised the defence of regional administration buildings across the country: numerous video clips show police mingling with masked civilians armed with clubs and bats in a standoff against demonstrators. Authorities even acknowledge such collaboration between titushki and police. Kharkiv's hard line authorities announced February 4 the founding of a "national guard" in collaboration with local sports clubs. Dmitro Kolesnikov, head of Dnipropetrovsk region where apparent titushki with baseball bats were filmed alongside police inside the regional administration headquarters, claimed to journalists that, "social organisations have organised themselves into people's patrols, they are registered and entirely legal." Kolesnikov went on to explain that, "law-enforcement organs had no alternative." A quick check of the state register shows that such a "people's patrol" is indeed registered in Dnipropetrovsk – but only as of January 30, the eve of the clashes, and listed at the address of the regional administration itself. Meet the titushki bne met with a titushki called Misha

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from Kharkiv. The 28-year-old Misha is currently deployed in Kyiv guarding the Marinsky Park, where pro-Party of Regions demonstrations are held. Misha has two gold teeth as a result of a boxing career, and the number 13

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Oplot, who has declared open season on anti-government protestors and claims to have organised forays to Kyiv to attack opposition "extremists". "Those guys are my friends," Misha says. "[Zhilin's] Oplot is a real fight

"I have regularly participated in defending Kyiv streets against titushki often protected by the police" tattooed on his neck in connection with an unhappy childhood, he explains. Misha tells bne he is a champion welterweight boxer who works as a security guard. But he assures us that he is here as a volunteer out of conviction, not for money. Fifteen others from his boxing club obviously share his convictions since they have come too, he says. Misha insists that he is only there to guard peaceful citizens, to maintain public order and to protect the monuments – the latter a reference to nationalists' controversial toppling of a statue of Vladimir Lenin in December in central Kyiv. Other titushki encountered in Marinsky Park echo the same sentiments, raising the suspicion they had been prepped by the party. Misha acknowledges that the progovernment Party of Regions camp in Marinsky Park adjacent to Ukraine's parliament, the Rada, had attracted undesirable elements who drank and were aggressive, but says his group got rid of them. According to Misha, titushki are misunderstood and oppressed by the anti-government Euromaidan activists. "Twenty of them cornered two of us – what could they do against those odds?" he complains about a recent clash with the other side. Misha denies he would attack peaceful demonstrators, only defend against "extremists". But his eyes light up at mention of Evhen Zhilin, the prominent owner of a Kharkiv fight club called

club like in the movie – fighters bandage their hands but nothing more. Blood can flow." In a controversial interview given by the fight club owner on February 3, Zhilin said that his fighters were entitled by law to attack antigovernment protestors who seized state buildings, and to inflict light to medium injuries in the course of "arresting criminals". "I want criminals to know

Yanukovych as president. Klitschko was himself acquainted with this sportsmen scene in his early career in Kyiv in the 1990s. "I respect Klitschko as a fighter, and I respect his right to his own opinion. But I have a different opinion from him," Misha says. Misha says he is angry about the opposition's answer to the titushki: mobilisation of the hooligan sections of Ukraine's football clubs. At recent anti-government Euromaidan Sunday rallies, opposition leaders reeled off lists of football clubs whose hooligans have declared war on the titushki. "These guys are crazy and the main thing is they cannot fight without weapons," Misha tells bne disparagingly. "I am here because of my convictions," Misha repeats. But what those convictions are is hard to pinpoint. Misha seems oriented towards big people, state power and Russia, where his family come from. He relates with pride his career-high to date: how as a security guard at Europe's biggest summer dance festival, Kazantip in

"I want criminals to know that I can break one leg completely and incur no criminal responsibility doing so"

that I can break one leg completely and incur no criminal responsibility doing so," he warned in the interview. Zhilin also claims that he can call on 350 fighters in Kharkiv and 2,000 across all Ukraine. "We sportsmen are a real community, in Ukraine and in Russia," Misha explains. "We hang together and can all rely on each other. Anywhere I go I can find other sportsmen and I know I can rely on them." Misha hesitates when asked about Ukraine's most famous sportsman, however, boxing world champion Vitaly Klitschko – one of the leaders of the opposition who is tipped to replaced

Ukraine's Crimea, he escorted one of Russia's richest men, oligarch Mikhail Prokhorov, who had come to groove to the electronic beats. The only sign of Misha having strong convictions is when we prepare to leave and bne dons a fake Nike hat acquired on an outdoor market. Misha dons an Adidas hat and jacket – to complement the trousers and shoes that all bear the recognisable three white stripes. "Adidas is better," he says, his gold teeth glinting in a rare smile.

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German economy is about the same size as Russia's but only has 250 banks. "It means that some financial institutions must increase their capital and assets in order to feel themselves more secure and fight for the quality of their loan portfolio."

Russia's bank consolidation is going surprisingly smoothly Ben Aris in Moscow

ussia's central bank moved in on its latest two victims on February 11, pulling the banking licences from Moscow-based European Trust Bank (Eurotrust) and Link-Bank. Eurotrust was already a zombie. The bank stopped taking in new retail customers last November due to the tough economic conditions, the bank said at the time. And Link-Bank was closed down because it was knee deep in dodgy dealings. The Central Bank of Russia (CBR) said its investigators had uncovered RUB20bn ($580m) worth of loans and transfers in 2013 that the bank could not adequately explain. Moreover, Link-bank had ignored CBR rules on provisioning for bad loans and trashed the regulator's corporate antimoney laundering rules. The closures are the latest examples of the new broom being wielded by the CBR's recently appointed governor,

Elvira Nabiullina, who took the helm in June and has already closed 29 banks, leaving a total of 923 banks still functioning at the end of last year. And more closures will soon come. Stanislav Volkov, director for bank ratings at Expert RA, believes another 50 will be shuttered this year alone.

Keep calm What is so amazing is that both the banks and population at large have taken the new drive so calmly. When the CBR cancelled Sodbiznesbank's licences in 2004 for money laundering, the first time the regulator had ever cancelled a banking licence, it sparked a mini-banking crisis that saw major retail player Guta Bank collapse and threatened to take out top-10 player Alfa Bank as well. But this time barely anyone noticed the demise of Eurotrust or Link-Bank. The closure of Master bank in November, the first retail bank of any real size to be closed, did send shock waves through the sector. However, Nabiullina called in all the senior bankers to the CBR for a meeting and reassured them that everything was under control and liquidity would be made available to anyone that needed it. The population was also unsettled by the shuttering of Master Bank, but not that badly. Both Master Bank and the two banks closed in February are covered by the deposit insurance scheme that guarantees the first RUB700,000 ($20,590) of deposits, so most of the bank's customers are unlikely to be affected.

"Now we have about 1,000 banks, or slightly less. Of course, it is a large number for our economy" Indeed, Russian President Vladimir Putin was explicit about this goal in a speech in January. "Now we have about 1,000 banks, or slightly less. Of course, it is a large number for our economy," Putin said, noting that the

"Russia's deposit insurance agency last year paid out a record RUB110bn (â&#x201A;Ź2.4bn) in compensation, depleting the deposit insurance fund by half," says Bank of Finland's Seija Lainela. "The deposit insurance agency,

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Talk again turns to IMF help for Ukraine

bne Whoever ends up running Ukraine, the first issue will be to shore up the crumbling economy. The government desperately needs cash to prop up the local currency, the hryvna, which has lost more than 10% of its value since the start of the year. Kyiv has a steep debt repayment schedule, with over $60bn in short-term debt falling due. But its finances look wretched. The central bank said at the start of February that reserves had fallen below $18bn – or about 2.3 months of import cover – while its current account deficit of 8.9% of GDP in 2013 was the largest in the region. "With limited reserves, and in the absence of external support, the currency sell-off could easily spiral out of control, creating systemic risks in the banks, public finances and across the broader economy," writes Tim Ash of Standard Bank. With reserves covering no more than about 25% of total external debt – coverage should be closer to 100% – the risk of a devaluation and/or default are veering off the scale. "We have reviewed the probability of default in Ukraine, and conclude that the risks are being under-estimated," Ash reckons. Just how things will play out from here is not clear. Russia could make a huge difference if it resumes its promised lending programme. The entire $15bn of a loan was due to be paid out this year (it has so far disbursed $3bn), but the Kremlin now says it will wait to see the makeup of a new government before making a decision. With the pro-European opposition in control of the country, there are few signs Russian President Vladimir Putin will want to do them any favours. Indeed, Russian Finance Minister Anton Siluanov said February 22 that Ukraine should turn to the International Monetary Fund (IMF) for a loan to avoid an imminent default. Since the onset of the global crisis in 2008, the IMF has twice offered Ukraine loan packages, but President Viktor Yanukovych's administration were unwilling to take the painful reforms steps – like raising the price Ukrainian customers pay for gas and reducing spending on government salaries and pensions – that would be necessary for the multilateral lender to agree to provide fresh loans. Finance ministers from the G20 were meeting in Sydney, Australia as the dramatic events were unfolding in Ukraine, and on February 22 discussed the possibility of Ukraine asking again for IMF assistance. The IMF's chief, Christine Lagarde, said that if Ukraine applied for financial and economic help, the Fund would be ready to provide it – as long as reforms were in the offing. That message was repeated by the EU's top economic official, Olli Rehn. "The EU will be ready to provide substantial financial assistance for Ukraine and the Ukrainian people once a political solution – on the basis of democratic principles, a commitment to reform and a legitimate government – is in place,” said Rehn. Where there's a will, there surely is a way.

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nevertheless, estimates that it will have sufficient funding this year to cover its obligations without having to hike fund contributions of banks." Still, some Russians have already started moving their accounts to the stateowned banks that dominate the sector, just to be sure, increasing their share of the sector to 53% of total assets by end-2013. At the same time, the CBR has flooded the banking sector with cash: liquidity was at a record high in February. Since the campaign started, the CBR has been offering banks cash through a tide of repo deals and expanded the list of securities that can be swapped for cheap money. The easy and almost unlimited access to money has meant the rest of the banking sector is pretty sanguine about the disappearance of their smaller peers. Nevertheless, closing so many banks is a tricky thing to pull off. While the bottom 700 banks hold only about 5% of all assets, they are heavily dependent on the interbank market for most of their funding, a crucial piece of Russia's financial infrastructure. If the interbank market freezes, as it did in 2008 and 2004, then it can quickly cause a system-wide crisis. But it has to be done. The huge number of pocket banks is a massive burden to the regulator, which has to supervise them all – something it in fact fails to do. And as bank profits fall, these outfits are wont to take more and more risks or offer increasingly dodgy services, both of which undermine the stability of the system. The flip side to the closures is that the big banks are going to be encouraged to grow larger still. In January the CBR drew up a list of 15-30 "systemically important banks" that are presumably thought to be too big to fail (which has since been expanded to a list of 50 names), but will also be supervised even more closely. While several lists of names have been circulated, the CBR has not issued a definitive list yet, mainly because it would be a death sentence for any bank that doesn't find its name on the list.

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New requirements The next big hurdle will come at the start of 2015 when the CBR says the minimum capital requirement for banks will be increased to RUB300m from the RUB188m in force now. Currently there are 179 banks that don't meet this requirement and Fitch Ratings said in a recent report that half of these banks will probably fail to increase their capital in time and so be forced to close. Standard & Poor's, another rating agency, noted that the number of offers to sell small banks increased sharply in the second half of last year and expects that trend to grow. But even the bigger banks are under pressure, as effectively the CBR has introduced a killing field for any bank outside the top 50. Banks not only need to beef up, but to identify niches where they can compete with the state's titans such as Sberbank and VTB Bank.

In the middle of February, Bank Saint Petersburg, in Russia's top 30 by assets, closed a deal to buy 100% in Kaliningrad-based Bank Evropeisky that will strengthen its business in Russia's northwest region and allow it

already easily in the top 50, but Otkritie is not. However, while Nomos is largely a retail player, Otkritie comes with some useful investment banking lines that will round out the combined bank's services and give it a niche serving the

"Some Russians have already started moving their accounts to the state-owned banks just to be sure" to focus more on small and mediumsized enterprises. A few days later, Otkritie Financial Corporation bought out the 14.3% stake in its own retail arm Bank Otkritie held by the World Bank's IFC subsidiary for RUB4.2bn ($123m) and handed it to its merger partner Nomos Bank. Nomos was

medium-sized companies that don't want to open their books to stateowned banks. More deals are surely in the pipeline.

Liquidity provision is at a historical high

5000

4000

3000

2000

1000

0 Sep 08

0 Sep 09

Sep 10

Sep 11

Sep 12

Direct repo

MinFin deposits

Other credits

Uncollateralized

RUONIA, % (rhs)

Fixed Repo, %

Fixed Deposit Rate, % Source: CBR, Haver Analytics, Morgan Stanley Research

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Sep 13

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hard-to-get direct exposure to Russia's burgeoning middle class. MKB could have been tailor made for these investors: the bank has seen its ranking rise from 56th largest Russian bank by assets in 2010 to 13th, thanks to its dominance in servicing Russia's leading retail and distribution companies. Set up in 1992 during Russia's "wild-cat" banking phase, when anyone with a pocket full of dollars could open a bank, it was bought by businessman Roman Avdeev in 1994.

Credit Bank of Moscow looks to IPO Vladimir Chubar, Ben Aris in Moscow

nless you live in Moscow and are in the retail business, you probably haven't heard of Moskovsky Kreditni Bank (Credit Bank of Moscow, in English). But you will do soon. A top-20 Russian bank, MKB is joining the increasingly long line of Russian companies that want to IPO on London's stock exchange. A string of banks have sold shares in the last couple of years and more are expected to throw their hat into the ring as Russia's IPO momentum continues to build. Nomos Bank got the ball rolling with the first ever IPO of a Russian commercial bank in April 2011. The state-owned retail giant Sberbank followed up with a $5.1bn secondary public offering in September 2012. Mid-tier Promsyvazbank tried, and failed, to get an IPO away last year (though says it will have another crack when the market improves). And more recently Tinkoff Credit Systems (TCS), Russia's leading online bank, raised an astronomical $1.1bn with an IPO in

London in October last year. MKB could well be next. "We are contemplating an IPO, but have not decided on specific timing or plans," MKB's CEO, Vladimir Chubar, tells bne in an exclusive interview. "It depends on if the market improves, as the current valuation levels for Russian banks are not necessarily attractive. We are still

Avdeev made his fortune from kiosks, the prefab booths that used to crowd the pavements across Russia in the first brush with consumerism. Kiosks sold everything from cigarettes and beer, through to flowers and food, to car parts and theatre tickets. The former mayor Yuri Luzhkov swept these kiosks off the streets about a decade ago as retail became more organized, but Avdeev moved with the times, riding the wave of Russia's exploding consumerism, and MKB became the go-to bank for retailers. Quite apart from Avdeev's own experience in the business, the bank has a firm grip on the business today thanks to its extensive 200-strong fleet of armoured cars, second only to Sberbank's. Understandably, Russian retailers and distributors get extremely nervous about

"We are contemplating an IPO, but have not decided on specific timing or plans" growing, we have one of the lowest cost/income ratios and the return on equity of about 18-20% is one of the best in the sector. We feel like we are still quite a young bank and will wait for the right window of opportunity to open." Shopaholic Russia Banks are very appealing to global portfolio investors who want some

having to ship large amounts of small denominations in what remains a fairly lawless city, so the bank's excellent reputation and decades of experience is a key selling point. MKB's cash-handling business is the backbone of its retail offering (it also offers risk-management tools based on the cash flows that flow through

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MKB's hands to help the clients avoid trouble), but its business only really took off after the 2008 financial crisis. "We actually went into the crisis in good shape, and Avdeev injected more capital. More importantly, the postcrisis landscape was much clearer and we took the opportunity to grow the business quickly," says Chubar, who says the bank picked up new clients from different segments after the crisis started. At the same time, the slower pace of growth – Russia's bank sector assets grew by about 19% in 2013 against the 40-50% they were growing pre-crisis – means other banks have abandoned their costly cash-handling services and subcontracted the business out to MKB instead; the bank now services 30 other banks. "Credit and debit card use is growing, but Russia remains primarily a cash economy. Our cash handling network is number two in Moscow, right after Sberbank," says Chubar. Today, the cash-handling business contributes 20% of the bank's fee income and is up six-fold since 2010, although the bank only opened two new branches last year. Retail lending – one of the main business lines driving MKB's growth – has also expanded three-fold. And the bank has not ignored the rest of the retail banking businesses. MKB has some 60 branches in Moscow city and the surrounding region. It launched retail loans in 2003 about two years after pioneer Russky Standart showed everyone else the way. But unlike the majority of consumer credit specialists, MBK has been more conservative, focusing on high quality, low risk borrowers. "We like to know our customers. Only one in five of the applications for a loan by people that walk off the street are approved," says Chubar. Express cash loans have been one of the few really profitable businesses for Russia's banking sector in the last couple of years, growing at over 40% a year until the increasingly worried Central Bank of Russia (CBR) tightened the rules last year to slow the growth.

Eastern Europe

But most banks have focused on pointof-sale lending where a bank sets up a booth in a big retailer. As MKB was already servicing retailers at a corporate level, it concentrates instead on not only doing the company's payroll, but also offers credits and other bank services to the company's employees. The quality of the bank's retail lending is also improved by MKB operating Russia's largest payment terminal

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single-digit coupon rate – a feat that only Sberbank has been able to match. MKB also moved into car loans early and quickly became the third largest lender in Russia. But the attraction of this business has paled in recent years thanks to an increasing number of specialist banks set up by the leading car manufacturers. More recently, MBK has refocused on mortgage lending, which took off after the 2008 crisis and

"About one in two borrowers are in our system thanks to the terminals, which gives us some insight into payment history and means we can target lending" network – a sort of ATM in reverse that can be found in most stores and malls. These machines accept payments for mobile phone services, internet providers etc., so in effect collects valuable data on retail customers. "About one in two borrowers are in our system thanks to the terminals, which gives us some insight into the payment history and means we can target lending," says Chubar. Not-so bad loans The upshot is the share of nonperforming consumer loans (NPLs) in MKB's portfolio have remained around 1% of the total, while NPLs for the rest of the banking sector began to rise at an alarming rate last year as Russians became over-extended for the first time. Likewise, funding has been hard to find for most banks, which has cut into their capital – the average capital adequacy ratio for the Russian banking sector has fallen from over 20% in the boom years to about 13.5% last year. But thanks to a capital injection and ready access to the local and international bond markets, MKB has maintained a capital adequacy ratio of about 18%. Currently, the bank has 11 ruble bonds outstanding and three Eurobonds, including an issue last year with a

can be offered as an additional service to the existing customer base. Today, 60% of its retail portfolio is made up of consumer credits, 20% from car loans and the same amount from mortgage lending. A further attraction for investors is that the bank has worked to improve transparency and meet international standards of corporate governance. Adveev owns 85% of the bank, but in 2012 MKB brought in the World Bank's International Finance Corporation (IFC) and the European Bank for Reconstruction & Development (EBRD), which both bought a 7.5% stake each. "Taking in high-quality investors like the IFC and EBRD is a central part of our strategy to offer the best in the way of corporate governance and transparency," says Chubar. "In addition, we have five independent directors on the board, produce quarterly IFRS accounts and so on." And for most Russian business that is still a novelty.

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Hungary's free, but probably not fair, election Kester Eddy in Budapest

arely had the ink dried on the January agreement between the fragmented Hungarian leftliberal opposition parties to fight April's general election in an alliance, when a massive negative advertising campaign was rolled out across the country. This includes giant posters on the walls of offices and housing blocks, featuring past and present Socialist leaders, along with a clown and the slogan: "They don't deserve another chance". The images "remind" voters that the Socialist-led coalitions â&#x20AC;&#x201C; most notably under Ferenc Gyurcsany, the bĂŞte noire of the governing Fidesz party â&#x20AC;&#x201C; had eight years to govern Hungary, during

which, according to right-wing views, the country was led to ruin. To the uninitiated, this would appear just part of the rough and tumble of modern election campaigning. Except

Part of this could be down to the tardiness amongst the opposition groups to unite. After all, it was only in the New Year that the Socialists (under Attila Mesterhazy) and Together (headed by former prime

"The opposition complains the new election law benefits Fidesz in numerous ways" there is little by way of response from the opposition alliance, certainly nothing equivalent to giant poster campaign.

minister Gordon Bajnai) accepted the necessity of including, amongst others, Gyurcsany's Democratic Coalition, into

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a broader opposition alliance named Unity2014. The alliance also has less money. But most importantly, claims the opposition, the laws and regulations governing campaigning have been continually revised by Prime Minister Viktor Orban's government, ultimately severely restricting political parties from getting their message out. For example, the latest rules limit the campaign advertising on public television to a little under eight hours during the 50 days of the official campaign, and commercial channels cannot charge for political advertising. According to the government, the new rules attempt to "level the playing field by limiting political campaign ads on radio and television, and thereby attempting to limit the influence of money on political campaigns," says Ferenc Kumin, a government spokesperson. Fine on paper, but the opposition maintains that with state channels already acting as government propaganda machines, Fidesz doesn't need the advertising. In another change, no political posters can be pasted onto lampposts, poles or trees on public highways. So how to explain the giant posters denouncing the alliance hanging from buildings in town? The answer is that these are not funded by a political party, but by the Civil Unity Forum â&#x20AC;&#x201C; a supposedly independent association that has a remarkable track record for organising large, pro-government marches. And there are no restrictions on NGOs advertising in the street either. No level playing field Such legal niceties that favour the ruling party are not consigned to advertising. The opposition complain that the new election law, drawn up by the government with no crossparty consultation, benefits Fidesz in numerous ways. For a start, the new downsized Hungarian parliament, comprising 199 instead of the previous 386 seats, will include 106 first-past-the-post

Europe's top court sides with Fidesz

bne The Hungarian government received a boost on February 12 in its battle to push the country's banks into concessions on foreign currency loans before elections in April, when an advisor to Europe's top court said Hungarian courts are entitled to change exchange-rate margins on the loans if unfair. Advocate General Niels Wahl of the European Court of Justice (ECJ) said in a non-binding opinion that local courts can examine the fairness of exchange-rate margins and "replac[e] the term at issue with a supplementary provision of national law." The Luxembourg court will now discuss the case. It generally takes three to four months to deliver a ruling, with advocate opinions followed in the majority of cases. The announcement is a blow to the country's mostly foreign-owned banks, who are fighting government attempts to subsidize losses of Hungarian borrowers who took out forex mortgages in Swiss francs and euros during the boom, but have since seen their instalments rise as the forint weakened. A temporary scheme in late 2011 saw the banks forced to shoulder huge losses. Prime Minister Viktor Orban has pushed Hungarian courts to offer his government a legal framework for a new scheme that it says will wipe out all forex debt from the country. The ruling Fidesz party believes the scheme will give its popularity a further boost in the run-up to the April elections. Late last year the Kuria - Hungary's top court - ruled that overall the contracts behind the loans were valid, but said it would wait for a ruling from the ECJ on clauses within loan contracts which allow the banks to adjust exchange rate margins. It is "for the national court to determine whether the consumers were in a position to understand that they would be subject to additional expense by reason of the difference between the two rates of exchange," the statement from the ECJ said. The ECJ adviser's opinion "boosts the government's case for having these contracts amended," writes Tim Ash at Standard Bank, suggesting the Kuria's decision "is now likely to come in line with the EU view." "This will boost the government's position in on-going negotiations with banks over resolving the still difficult issue," he adds. "All told this is not great for foreign banks ... and will further the process of bank deleveraging out of Hungary."

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Latvian central bank gets panned Fresh from helping to usher in Latvia's euro accession, the country's central bank has suddenly had to face some tough questions – though luckily not about the currency switch. First, Bank of Latvia Governor Ilmars Rimsevics put in a testy performance when he finally deigned to take part in a serious live interview on Latvian TV. In the hot seat of the Viens Pret Vienu (One Against One) show, the normally ice-cool governor was literally made to sweat by interviewer Inga Springe on a range of subjects including his unopposed re-election for a third consecutive term in charge of the country's piggy bank, whether he was really worth more money than the recently departed US Federal Reserve chief Ben Bernanke, and why a financial whizz would buy an upscale apartment at the peak of the housing boom in euros rather than the lats currency for which he was responsible. But far more sensational was the revelation a few days later by the Neatkariga newspaper that the central bank – one of the loudest advocates of Latvia's brutal austerity measures – last year spent ¤2,538 on a single frying pan. Speculation that the pan in question might be a wok with a 10-metre diameter, or even something used for checking the quality of Latvia's gold reserves proved wide of the mark however, with bank spokesman Martins Gravatis telling the paper that the pan had been bought to replace one that had done sterling service since 1996. Viewed in that context, the pan will cost a mere ¤150 a year if it manages to last the same length of time, with the next replacement due around about the time Rimsevics – who has been at the bank since 1992 (even longer than the pan) – begins his sixth consecutive term as governor.

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individual constituency MPs – a higher proportion than the current system – which naturally favours the largest party.

– the main question would appear to be whether Prime Minister Orban will command a two-thirds super majority, rather than merely win the election.

Moreover, the newly drawn constituency boundaries have been created either so that the "solid" left-wing seats are made up of larger numbers of voters than average – thereby eating up opposition votes – or so that left-wing voters are subsumed into districts with a right-wing majority. "This is straight out of the first pages of any gerrymandering guidebook," says Viktor Szigetvari of Together.

This is an astonishing achievement, given Hungary's struggling economy – which has only begun to show signs of growth since the second half of last year – and the well-publicised scandals that so greatly favoured government supporters, such as the tobacco shop franchise.

The government protests that it has succeeded in downsizing a parliament far too large for a country of just

Csaba Toth, director of the Republikon Institute, a liberal-leaning political think-tank, says government-mandated utility price reductions in the past 18 months have been hugely influential in maintaining voter support. Despite

"Models show that if Fidesz and the alliance get an equal 40% share of the vote, it will leave Fidesz with around 10 more seats" 10m people, and correcting the large inequalities in constituencies, which in the worst case meant the largest contained two and a half times more voters than the smallest. It also points to other countries, such as the UK, which only use first-past-the-post voting systems.

mostly benefiting households with the largest bills, ie. high-income housholds, the move has brought "pocketbook benefit" to most voters. "Even though the economy is not improving significantly on the macro level, people can actually save on their monthly bills," Toth says.

Kim Lane Scheppele, a constitutional expert from Princeton University in the US who has studied the new election law in detail, admits that almost all its features can be found in other democratic electoral systems, but says it is "beyond doubt" that the entire package "is heavily slanted" to favour Fidesz in the context of the current political environment. "Models show that if Fidesz and the alliance get an equal 40% share of the vote, it will leave Fidesz with around 10 more seats in parliament," she says.

Meanwhile, the opposition has been struggling to find the unity needed to mount anything like an effective challenge to Fidesz under the new election rules.

But with Fidesz well ahead in opinion polls – with 50% support of committed voters and 30% of the total electorate

Last but not least, Toth points to Fidesz's "resource advantages" in the election. "The two-thirds majority enjoyed by the government in terms of finances, media opportunities and their ability to use constitutional changes for electoral tampering – all these make the elections themselves free, but not fair," Toth concludes.

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The virtual currency has come in for no little bad press. It is reported to be a domain dominated by drug deals and online gambling. More sinister are assertions that it is also regularly used for money laundering and financing terror groups.

Bringing bitcoin down to earth Tim Gosling in Prague

rugs, terrorists, hackers and scammers: the forces that blight virtual currency bitcoin are myriad, but one Czech company hopes to take at least a couple out of the equation. Investors spent early 2014 dumping Emerging European currencies with almost evangelical zeal. Investment company Marlyle exhibits similar levels of enthusiasm in its bid to spread the word on bitcoin. Marlyle announced in late January that it has purchased three bitcoin ATMs from US manufacturer Robocoin Technologies at a cost of around CZK1.5m (€54,450) and hopes that one – destined to take up residence in the Smichov area of Prague in April – will be the first of its kind in Europe. The machine, which will allow users to access (almost) instant exchange for buying and selling the virtual currency, will be accompanied by human staff. The idea is to "enable digital currency trading to those people who are thinking about it today, but have been discouraged by concerns related to the safety of their investments,” said Marlyle CEO and investor Martin Stransky in a press release.

The project was inspired by Stransky's experience in investing in bitcoins, and the potential he sees in solving security concerns, says Denisa Marcekova, who is involved in business development as one of a number of Stransky's "friends" donating their time to the project. Introduced in 2008 as a global currency outside the control of central banks and separated from the issues affecting financial markets, bitcoin brings its

Protection While a very limited number of legitimate businesses around the world accept the currency in payment for goods and services, its use as a financial investment is seen as the major aboveboard use of bitcoin. The volatility of the market offers ample potential for that strategy. Around a year ago, one bitcoin was valued at around $15; in November, the value had passed the $1,000 mark for the first time. On February 11, the virtual currency was quoted at $645 per coin on Bitstamp's exchange. Playing that risk is one thing, but online assets can equate to Russian roulette, and bitcoin's image in the Czech Republic has taken a battering recently. In November, hackers emptied 4,000 "wallets" at bitcash.cz. The same month, a Czech-based online bazaar announced BTC5,400 lodged in its system by vendors and buyers had been stolen. The consensus, however, is that the site itself was simply one large scam. "Our aim is to protect investments from hackers, scams or even just losing

"There are thousands that would be interested in putting small amounts into such a high-risk investment but are put off by the security issues" own issues. The volatility of the market – which sees massive and rapid swings in their value – and the ambiguity of regulatory issues are elements that Marlyle's media representative, Tomas Vrbik, admits the company has little control over. However, he insists the company can deal with the security issues, though is still unwilling to discuss the details.

your computer [which contains the encrypted certificates]," Marcekova says. Marlyle can't do anything about the volatility, she laughs, but points out that bitcoin investment remains outside the usual market risks. "There's unlikely to be a Lehmans or insider trading." The plan then is to attract investors by not only dealing with the security

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issues, but by offering to hold their hand as they try it out. The spirit of bitcoin – which as supporters point out is independent of political or regulatory influence – is clearly also seen as a selling point to young professionals seeking a means of playing an alternative market. Marcekova clearly believes this image – born in the entrepreneurial fires of open source computing – is an additional attraction.

putting small amounts into such a high risk investment but are put off by the security issues. We want to bring virtual currencies down to earth so they can 'touch it'." Down to earth Should that instinct pan out, however, it will present the group with another issue. Right now, regulators have yet to get to grips with virtual currencies, but

"Our aim is to protect investments from hackers, scams or even just losing your computer"

However, the mood is somewhat ad hoc. "We have no research really on the number of potential investors into bitcoin," says Vrbik, "but we sense from our personal experiences that there are thousands that would be interested in

that will quickly change should bitcoin put on a growth spurt. "Something will happen in the Czech Republic, and we're open to that – although not calling for it – in order to introduce more transparency," points out Vrbik.

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

"Right now, they don't know who should be in charge of it. They don’t even know what it is: a currency? A commodity?" Regulators are clearly uncomfortable with that confusion. As a bastion of e-government, Estonia's view carries some weight, so criticism from the country's central bank on January 31 that virtual currencies could prove to be little more than a "Ponzi scheme" could prove particularly damaging Despite the company's enthusiasm for the "lack of boundaries" offered by the virtual world, it's a situation that Marlyle is also watching with regard to placing the other two Robocoin machines it has ordered. The mundane detail of bringing bitcoin into the physical world also appears to create borders, with Marcekova suggesting that Slovaks and Germans will next be offered an introduction to the virtual currency.

What you need to know

www.bne.eu

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The fight for Poland's left Annabelle Chapman in Warsaw

oland's elections for the European Parliament, scheduled for May 25, will above all be a contest between the ruling centre-right Civic Platform and the conservative Law and Justice. However, another rivalry is being played out on the left – between the Democratic Left Alliance (Sojusz Lewicy Demokratycznej, SLD) and Your Movement (Twój Ruch) – which could have big repercussions for the 2015 parliamentary elections. "The European Parliament elections could decide on the hegemony on the left," Joanna Sawicka, a political analyst at Polityka Insight, a Polish think-tank, tells bne. "If [Your Movement] fails to cross the electoral threshold, it could cast doubt on its future." The SLD is no newcomer to Polish politics; it originated as a socialdemocratic alliance in 1991. Its current leader, Leszek Miller, who was re-elected to the post in December 2011, is also a veteran of left-wing politics, with a career dating back to the Communist Party. Over the last two decades Miller has held many positions, including prime minister in 2001-2004, and experienced many ups and downs. Further revelations in the Washington Post in January regarding a secret CIA prison built on Polish territory in 2003, when Miller was prime minister, appear so far to have left him unscathed. Your Movement, the younger of the two, was founded in 2011 by Janusz Palikot, a former Civic Platform politician known for his outspoken liberal and anticlerical views. Initially called Palikot's Movement, the party changed its name to the apparently more inclusive Your Movement in October. The SLD has been leading on the left for two years, after a low point following the 2011 parliamentary elections when

the party won a mere 8.2% of the vote (In the same election, Palikot's party finished with 10%). Since early 2012, its ratings have been in the 8-12% range, while Your Movement's have hovered around 2-6%. Yet a TNS Polska poll for TVP's "Wiadomości" news programme, published on February 12, put Your Movement one percentage point ahead of the SLD (11% and 10% respectively). Although further polls will be needed to verify this surprising result, it suggests that SLD's dominance is not carved in stone. In this context, the elections to the European Parliament will be a test for both parties. SLD will be trying to win as many MEPs as possible; last time round, it won 12.3% of the vote, which gave it seven MEPs. For Palikot's party, the focus will be on crossing the electoral threshold of 5%. Your Movement will be running as part of Europa Plus, an alliance of left-wing groupings set up in February 2013 by Palikot and others specifically for the European Parliament elections. It is presenting itself as a pro-European party, with the slogan "More Europe on the banks of the Vistula," a reference to Poland's main river. Yet the name of the alliance – and whether the words "Twoj Ruch" (Your Movement) should feature in it – has already proved contentious. Moreover, the role of Aleksander Kwasniewski, Poland's president in 1995-2005, is ambiguous. The former SLD politician was one of the founders of the Europa Plus alliance, yet he will not be running for the European Parliament himself. Miller did not join the Europa Plus alliance because he was counting on marginalising Palikot ahead of the parliamentary elections, when he hopes to form a coalition with the Civic Platform, says Sawicka. "So far the polls suggest that this strategy could work."

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The real deal The European elections are of course a warm-up to the real race, which will be the parliamentary elections set for late 2015. Polls indicate these will be won by either Civic Platform or Law and Justice – yet neither of these may have enough seats to govern alone. This is where the SLD, currently third in most polls, could come in – as long as it maintains its dominance over Your Movement. A coalition between SLD and Law and Justice is difficult to imagine – as Miller himself has said. "We would have to recognise that the Polish president [Lech Kaczynski] was murdered in Smolensk; that it was a terrorist attack, not a plane crash," he said in an interview with Rzeczpospolita published February 13, referring to the party's obsession with the conspiracy theory that the Russians somehow were involved in the fatal air crash that killed the president, the twin brother of the Law and Justice leader Jaroslaw Kaczynski. Miller went on to cite other differences, but admitted that there are people within his party who wouldn't turn down the chance to form a coalition with Law and Justice. An SLD coalition with Prime Minister Donald Tusk's Civic Platform is more plausible, if Tusk's party can overturn the polls and beat Law and Justice. But the SLD seems to be hoping that Civic Platform will see it as a more equal partner and, according to Sawicka, it changed its strategy toward the ruling party last autumn. "Miller began attacking the Civic Platform and Tusk, hoping to attract voters away from the weakened ruling party," she says. A December poll by Millward Brown conducted on behalf of TVN Fakty, a news programme, would seem to support the idea of change in the relationship between the two parties. Asked whether Tusk or Miller would make a better prime minister if the Civic Platform were to form a coalition with SLD, 43% of respondents plumped for Miller, with only 31% choosing the current prime minister.

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the establishment of the domestic consortium [with Tauron, ENEA, and KGHM]".

Poland's nuclear ambitions lack money Wojciech Kosc in Warsaw

he Polish government hailed the adoption in late January of a programme to develop nuclear energy as a decisive step towards the construction of two power plants by the mid-2030s. But the political decision to adopt the 152-page document was the easy part; finding the financing is likely to prove more difficult. Under the programme, Poland will build two 3,000-megawatt (MW) nuclear plants of by 2035. Drawing on the cost estimates of 11 new nuclear plants underway in the US and Europe, the government assessed the cost at PLN40bn-60bn (€9.5bn-14.3bn). Poland's biggest energy company, the 61% state-controlled Polska Grupa Energetyczna (PGE), has been tasked with leading the project. But the nuclear programme will stretch the finances of an already hard-pressed utility, which has been pressured by the government to push on with a 1,800MW, PLN11bn coal-fired plant in Opole. PGE is also a key member of a group of state firms picked by the government to explore for shale gas in northern Poland. To ease the burden of the nuclear project, PGE entered into a loose agreement in the autumn of 2013 with three of its state-controlled siblings – energy firms

Tauron and ENEA as well as copper and silver mining group KGHM – to sell a 10% stake in nuclear power unit SPV to each. While one condition for the agreement to go ahead – namely, the adoption of the government programme – has now been met, it still requires the green light from the boards of the three partners. According to Tomasz Chmal, an energy expert with the Sobieski Institute, having state firms cooperate on such an expensive project might not work. "A similar effort about shale gas fell through. Unless there's a stable political

The identity of that strategic investor remains unclear. In the ongoing nuclear project in Lithuania, for example, the strategic investor will be Hitachi, the provider of the technology. In September 2011, PGE held a conference with several leading nuclear power technology providers, but the results were not made public. Westinghouse, GE-Hitachi, Mitsubishi, Korean Power Electric Corp, Mitsubishi, Areva, Atomic Energy of Canada and ATMEA – a joint venture between Areva and Mitsubishi Heavy Industries – took part. The government document says state support will be necessary, in the form of credit guarantees from the treasury and regulatory solutions that will ensure the plants' profitability. To complete the financing, loans could come from multilateral institutions such as the European Investment Bank, the European Bank for Reconstruction and Development, or EU nuclear agency Euratom. Chmal suggests the government might look toward the UK for inspiration. London is working to convince the European Commission to approve a support instrument known as Contracts for Difference (CfDs). CfDs guarantee the purchase price of energy, with the

"Give the project a stable environment and money will be found" and regulatory environment, pressing companies to go into the nuclear project won't be effective," he says. Guarantees required Politics aside, the government document only gives very general guidance on how PGE is going to secure the billions required for the nuclear project. The programme says that development of nuclear power installations will have to involve a strategic investor "after

state paying the difference if the price falls below a certain level. However, on February 3 the Commission issued a scathing report on the UK proposal. It argues that, "the CfD effectively insulates NNBG [the subsidiary created by EDF Energy to build and operate the nuclear power stations in the UK] from the market". Says James de Candole of Prague

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advisory firm Candole Partners: "The Commission dismisses every single argument put forward by the UK government to justify the scheme, in a written masterpiece of impeccably controlled intellectual scorn. I would not normally recommend anyone to read a European Commission document, but this one is diamond-sharp." Price of failure Other analysts point out that the current weakness of European power prices are likely to make the financing of Poland's nuclear energy ambitions tricky. "A nuclear plant has a lifespan of about 50 years. For the investors to get their

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the country's power infrastructure is ageing; on the other, EU policy to reduce emissions regularly clashes with coalhappy Poland. According to Jan Haverkamp, Greenpeace's nuclear energy and energy policy expert, plumping for nuclear power as a means of reducing emissions is misguided, because it's too expensive compared with the potential. "[SPV] will not be strong enough to find finances on the markets for this. They will need a strong support in the form of guaranteed fixed (high and long-term) prices and at least a partial government guarantee, as well as some form of hedging against

"It would be much better and cheaper to invest in renewables" returns, the energy price should be at PLN300 (€71) [per megawatt hour] throughout the plant's lifespan. It's currently at around half that price," one London-based analyst tells bne on condition of anonymity. However, according to Chmal, new power generation installations aren't just commercial ventures. "Company balance sheets aren't everything. There's energy security of the country as well," he says. At the same time, he notes the Polish government's energy policy offers additional risk. "The government must ensure stable market conditions, but also – and it's even more important – a stable political situation, i.e. that the next government won't back out from the project. The problem is there's hardly any discussion about the project between the government and the opposition," Chmal says. "Give the project a stable environment and money will be found," he believes. A factor contributing to the government's relentless pressure on PGE – which is controlled by the state but also listed on the stock market – is that Poland's power generation capacity is being squeezed. On the one hand,

cost rises and construction overruns. I don't think that is all feasible," he says. "It would be much better and cheaper to invest in renewables." The renewables push, however, remains in limbo in Poland, with the government struggling to adopt a new support law for over three years now. Virtually the only certainty about Poland's energy strategy is that in most of the long-term scenarios, coal will remain the staple of the Polish energy mix. Despite the challenges, Warsaw's recent adoption of the nuclear programme signals a determination to try to push the project through. Work on the first unit of the first plant is slated to begin by 2019. The full plant is planned for completion in 2030. Construction of the second plant will begin in the meantime, to finish in 2035. Poland's nuclear complex will be located in either Choczewo or Zarnowiec, both in northern Poland. Zarnowiec was the site of Poland's first attempt to develop a nuclear facility in the 1980s, using Soviet technology. That project was abandoned in 1990, in the fallout of the Chernobyl disaster of 1986 and protests of local residents and green activists.

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Borderline music The border between Estonia and Russia has long been a bone of contention – and it's now the subject of a choral work. As diplomats from Estonia and Russia prepared a border treaty that was signed in Moscow on February 18, composer Eugene Birman and librettist Scott Diel came up with "No. 289" – a nine-minute choral work written for "50 voices and one megaphone." “No. 289” takes its name from the number that the League of Nations assigned to the 1920 Tartu Peace Treaty, which established the border between Estonia and Russia. Some Estonian nationalists regard the 1920 treaty as sacrosanct, and the new border treaty signed as a grave error, as it does not follow the original 1920 line. Compared to the end of the War of Independence that year, Russia nets about 2,600 square kilometres of territory, according to Estonian Public Broadcasting. Birman stresses that their choral work is not concerned with saying "what belongs to whom, or what should belong", but that without music this whole event will become merely a footnote in history. "With ‘No. 289’, the story will live on for future generations," Birman says. The two American collaborators says the choral work features a chorus of "Russia unreservedly recognizes" in Russian, English, French, and Estonian –which represents Russia’s renunciation in perpetuity of rights to the territory of Estonia. "No. 289" premieres on April 1 in Tallinn, and will be performed by the Estonian National Male Choir conducted by Benjamin Kirk, a music student from the UK.

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might be placed in a special purpose vehicle (SPV) within its corporate structure. "We are discussing different alternatives. It is possible scenarios that existing stations, sites and infrastructure could be transferred to the special purpose vehicle," he says. "But also, cooperation with existing heating companies not owned by the state is under consideration."

Baltic bonanza in the offing Ben Seeder in Riga

fter half a decade of abandoned privatisation plans and scaledback financing, governments and state enterprises across the Baltics have recovered from financial woes and now look ready to provide investors with billions of euros of opportunities over the next five years. These opportunities range from big government privatisation deals in Latvia, to ambitious development plans by state energy companies in Lithuania and Estonia that need financing. Based on rough calculations by bne, total financing and privatisation values in the region could exceed â&#x201A;Ź2bn by 2020. Most of the activity is taking place in Latvia, where the previous government's privatisation schedule was thrown into chaos with the advent of the global crisis in 2008. Now, after years of stringent cost cutting and its recent entry into the Eurozone, Latvia's new government is looking to continue where it left off. In Estonia, the country's state-owned power company is likely to seek additional financing in future

if it wants to realize its ambitious shale oil developments. And in Lithuania, scandals over the high price of winter heating prompted Prime Minister Algirdas Butkevicius in February to propose nationalizing the heating industry in Vilnius and Kaunas. Ironically, this measure could present opportunities for portfolio and strategic investors, says Darius Kasauskas, a

He says if the plan is realized, then Lietuvos Energija would maintain only 51% control of the SPV. The power company would then seek to raise up to LTL1.5bn (â&#x201A;Ź434m) by selling off the remaining 49% stake, he says. "This would be to finance the developments in the heating sector. So we will be seeking to get investors for this vehicle... through a range of means," he says. The price of heating became a top political issue in Lithuania during the last election, when the present government came to power with the promise of making heating more affordable. Average monthly bills during the winter of 2012-2013 exceeded the level of the monthly minimum wage for the first time, making it difficult for the country's poorest to keep warm, according to Ignas Zokas, general manager of Spinter Research in Vilnius. "Many in winter have to choose between paying their rent or paying for their heating," he says. Lietuvos Energija's proposed heating subsidiary isn't the only investment

"We favour listings of bonds in Lithuania to aid in the development of the local capital markets" board member at Lietuvos Energija, Lithuania's state-owned power producer, and the company slated to control the "nationalised" heating assets. Kasauskas says this government proposal is still being formulated, but the heating assets that could come under Lietuvos Energija's control

opportunity the company is putting forward. Kasauskas confirmed that the company could seek to raise an additional LTL3bn by 2020 via bond issues and bank loans, to finance its development plans in traditional and renewable power generation, as well as in new areas, such as gas. "We favour listings [of bonds] in Lithuania to aid

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in the development of the local capital markets," Kasauskas says. You can be sure of shale Meanwhile, rival Estonian state-owned power producer, Eesti Energia, says it will continue with its own plans to develop oil shale mining operations in Jordan and the US, as well as constructing a number of additional oil plants in its home territory to turn shale into lucrative synthetic crude oil. Company spokeswoman Eliis Vennik says Eesti Energia has sufficient financing

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Latvia's government abandoned many of its plans to sell off state enterprises, including national phone company Lattelecom and its partly owned mobile division, LMT. And as the economic crisis in the Baltic country deepened, the state came to take on new assets – including the good parts of failed Parex Bank, later renamed Citadele, and the nationalised airBaltic, which had been caught up in the collapse of local bank Krajbanka. But three years on, with Latvia the Eurozone's latest member and the economy now experiencing solid

"airBaltic has now come back into the black, making it more attractive to buyers" options for the moment. The company took bank loans and sold €300m worth of bonds on the London Stock Exchange in 2012, and issued another €100m late January. These were to finance the power company's new shale-based generating station at Auvere. But further investments into oil plants and its mining operation in Utah could require hundreds of millions of euros in additional financing. And the company's cost of money could be higher in future, after ratings agency Moody's Investors Service in January downgraded Eesti Energia's credit rating to 'Baa2'. Moody's cited concerns over the company's shale oil expansion, and the vulnerability of its power generating business to volatile carbon prices and competition from Scandinavian producers exporting via new cable connections to Estonia. In Latvia, the opportunities for investors in coming years are bigger, and more focused on the country's privatisation programme that was stalled by the global crisis. Combined, the estimated value of the Latvian companies up for sale ranges from €400m to over €1bn. After signing its $7.5bn International Monetary Fund-led bailout in 2009,

growth after years of belt-tightening, the new government in Riga believes conditions are right to resume privatisation. Gunters Karklins, spokesman for the Latvian Privatisation Agency, confirmed the government had appointed French Bank Societe Generale as lead advisor for the sale this year of the state's 75% stake in Citadele, while the decision over Lattelecom would likely come after

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elections, scheduled for October. He also confirmed local press reports that Russian group Sistema has expressed interest in buying Lattelecom and LMT. The Latvian state owns 51% of Lattelecom, while the remainder is controlled by Scandinavian firm Teliasonera. Karklins said that in the case of Citadele, neither a share market IPO or a sale to a strategic buyer have been ruled out. The European Bank for Reconstruction and Development controls the remaining 25% share in Citadele. Latvia is also keen to sell airBaltic, the airline nationalised in 2011, after the collapse of local bank Krajbanka, which was linked to the owners of the airline at that time. State secretary at Latvia's Ministry of Transport, Kaspars Ozolins, is upbeat over the long-delayed plan to sell the government's 99% stake in the airline. He confirmed the government had discussed its sale with several potential strategic buyers – none of which were European carriers. The Latvian government had intended to sell the then loss-making airline in 2012, but was unable to find buyers. "In terms of profits, [airBaltic] has now come back into the black... making it more attractive to buyers," he says. The company reported net profit of €700,000 in the first nine months of 2013.

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Assessing the risk of Balkan breakdown Harriet Salem in Belgrade

n the weekend of February 8 in Bosnia-Herzegovina, plumes of black smoke billowed across Sarajevo’s skyline as anti-government protesters took to the streets in their thousands, setting administrative buildings and police cars ablaze. The anger on the faces of hooded youths hurling rocks was palpable. Women with tear-soaked faces begged riot police to abandon their helmets and join the protesters' side. The scenes, in a country lying on the periphery of EU, were shocking but apparently predictable; in November, metadata released by the Economist Intelligence Unit (EIU) listed the Balkans and Southern Europe, alongside the Middle East and North Africa, as amongst the regions most likely to see social unrest in 2014.

Bosnia raised the biggest red flag with a rating of “very high risk”, whilst EU newbie Croatia received a "high risk" rating. Serbia, which opened its EU accession talks on January 21, was ranked "medium risk".

defined entities of the Bosnian Serbian Republic (Republika Sprksa) and the largely Muslim and Croat Bosnian Federation as part of the peace deal – has struggled to find a way forward. Unemployment in Bosnia is variously

"Of particular importance in sparking unrest in recent times is an erosion of trust in governments and institutions: a crisis of democracy" Bosnians certainly have much to feel enraged about. Since the Balkan wars ravaged the country in the 1990s, this divided state – split into two ethnically

estimated at between 25% and 45%, with the proportion of young jobless generally regarded as being over 50%. The average monthly net wage is

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just 828KM (€423), according to the most recent official figures, with the minimum wage less than half that. The country’s financial woes alone, however, do not entirely explain the outbursts. “Economic distress is almost a necessary condition for serious social or political instability, but it is not a sufficient one… Trouble is [often] accompanied by other elements of vulnerability,” Laza Kekic, regional director for Europe at the EIU, tells bne. Such factors include: wide income-

with EIU's [very high risk] estimates on Croatia, where the macroeconomic situation is improving,” says Luka Oreskovic, a researcher in Southeast Europe at Harvard. “In my opinion, which comes from my background as a political economy researcher, elections and change tend to be the biggest trigger of unrest.” In comparison to many of its neighbours, Croatia, which last July celebrated its entry into the EU, has enjoyed a prolonged period of relative political

“The Balkans score poorly on most factors associated with the risk of social unrest” inequality, poor government, low levels of social provision, ethnic tensions and a history of unrest. But, of particular importance in sparking unrest in recent times, says Kekic, is “an erosion of trust in governments and institutions: a crisis of democracy”. Certainly all the above variables, particularly the latter, are present in Bosnia, where a political system divided along ethnic lines is exploited by an elite who use every available opportunity to line their pockets though nefarious means. They are also, however, to varying degrees, characteristic of all the countries in the region. “The Balkans score poorly on most factors associated with the risk of social unrest,” Kekic says. Where next? But let’s not jump the proverbial gun; using metadata to foretell protests, and other social phenomenon, is still in its exploratory phase. Analyses of 2007 predictions by the EIU show a 66-70% accuracy rate – not bad, but certainly not foolproof either. According to critics, the formulations used for the calculations are insufficiently nuanced to make sense of local political peculiarities and history. "I would be rather hesitant to agree

stability. The Western Balkan country has not had a premature trip to the polls or an unexpected break of a coalition government for over a decade. But under, as well as overestimations of social unrest may also be in play. “The government in Slovenia [rated “medium risk”] is unlikely to outlast the fall,” reckons Oreskovic. And as the 2012-13 Maribor protests have shown, the “populace has a tendency to bring its general discontent to the streets," Oreskovicsays, adding that this suggests "there is more risk for social unrest here than in Croatia.” Serbia (rated “medium risk”) may also be in for a rougher ride than the EIU data anticipates. In January the country’s government announced early elections, scheduled for March 16. The last trip to the polls was only 18 months ago, and while the snap vote is ostensibly aimed at securing a popular mandate to implement a much-needed programme of tough economic reform, in practice it also reflects the growing power struggles in Serbia’s fragile governing coalition; particularly Deputy PM Aleksandar Vucic’s desire to oust PM Ivica Dacic and his Socialist Party from power. With election campaigns already well underway, Serbian politicians will

Banksy of Bulgaria gives Russian statue makeover An unknown artist or artists in February painted a Soviet Army monument in the Bulgarian capital the colours of the Ukraine flag in the latest of a series of spray-painted political makeovers of this statue. The statue in Sofia was built to mark the Soviet Union's liberation of the country in 1944, but has since become a target for political activists against Russian influence in the country. The monument depicting the Soviet Red Army has previously been painted pink and transformed to depict American comic book heroes in statements of dissent against Russia. Last year, the statue was covered in pink on the 45th anniversary of the Prague Spring, which saw the Soviet Union invade Czechoslovakia. Moscow urged Bulgaria to "expose and punish the hooligans behind vandalism" when the figures were painted as Superman, Ronald McDonald and Santa Claus in 2011.

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certainly be looking anxiously over their shoulders for any signs of spillover from next-door. “Belgrade is clearly concerned about these developments and would certainly be far happier if all this was not happening,” says James Ker-Lindsay, a senior research fellow focusing on Southeast Europe at the London School of Economics. Whilst the incumbent Serbian administration has reduced its meddling

or if the Bosnian Serb leadership does something that then has to be managed,” adds Ker-Lindsay. “And if this were to happen it would create an unwelcome new complication just at the time when Serbia is trying to press ahead with EU accession.” Plenums not plumes Yet there is a glimmer of good news amidst the gloom. In Bosnia, workers’ plenums have quickly replaced the

"Economic distress is almost a necessary condition for serious social or political instability, but it is not a sufficient one" in Bosnia’s affairs of late, they “could well be sucked into the situation politically if events get out of hand,

smoke plumes. The abandonment of violent protest in favour of voicing longhushed political demands in assembly

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halls may not seem so revolutionary, but it is a crucial development for the region. Civil society in all the former Yugoslav countries was badly fractured as a result of decades under socialism and the brutal wars of the 1990s, and has been slow to recover. “People are afraid of each other [in Bosnia],” says Jasmin Mujanovic, a Balkans research at York University. “So even though nearly everyone has agreed for a long time that the political establishment as a whole is hopelessly corrupt and profits from stove-piping conflict, when it comes time to actually organise a response to this it has previously been timid.” In this context, if 2014 does deliver social unrest, in certain situations it may not be all bad. A reawakened political consciousness would certainly be a positive indication of a revitalised and maturing civil society finally remerging, after nearly two decades of silence, to provide a much-needed check on power.

What you need to know

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One diplomatic source in Bosnia agrees. "That Bosnia should witness such protests comes as no great surprise given the persistence of unemployment, corruption and deepseated dissatisfaction with governance structures."

Bosnia erupts, but to what end? Andrew MacDowall in Belgrade

he Presidency Building set alight, a regional government building razed, politicians' cars torched and hurled into the river: the remarkable scenes in Bosnia-Herzegovina during February have startled many outside the country. But to many the events are a long-supressed outpouring of visceral rage at a venal and incompetent political elite, a system that serves the few rather than the many, and a wretched economy with unemployment hovering around 40%. Insiders suggest the protests were also fuelled by political machinations ahead of hotly contested elections due in October. Bosnia was calmer toward the end of February after demonstrations that began on February 5 that left hundreds – mostly police – injured, saw rubber bullets and tear gas fired at protestors, and put this beleaguered and divided nation back onto the front pages for the first time in years. The protests were sparked by fury over job losses and unpaid wages at failing privatised companies, including three

chemicals firms, a salt manufacturer and a wood processor. After privatisation, the enterprises went bankrupt, fuelling anger both at official incompetence and corruption, and at unemployment and poverty. On February 7, those protests spread to Sarajevo and other towns,

Unemployment in Bosnia is variously estimated at between 25% and 45%, with the proportion of young jobless generally regarded as being over 50%. The average monthly net wage is just 828KM (€423), according to the most recent official figures, with the minimum wage less that half that. Real GDP growth was around 0.5% in 2013 and expected to rise to just 1.5-2.0% this year, a far cry from the rate of 5%-plus in 2003-2008, and possibly not enough to translate into real income growth. In a grim economic environment, it has become harder to paper over the cracks in Bosnia's unwieldy political system, bequeathed after the 1992-1995 war. This divides the country into two ethnicallydefined entities – the Bosnian Serbian Republic (Republika Sprksa, or RS) and the largely Muslim and Croat Bosnian Federation, with the latter further divided into 10 cantons. Conflict between the RS and the Federation has often led to legislative hold-ups, including the so-called "babylution" last year when it was for a period impossible to register

"The country is marginally less viable than Lebanon" becoming riots in what some portrayed as a Bosnian equivalent of the Arab Spring – though by others as mindless thuggery by hooligans. Elite problems The consensus is that there are real grounds for anger at the political and business elite, as well as at the chaotic political system. Kurt Bassuener, Sarajevo-based senior associate at the Democratisation Policy Council, tells bne that "the fuel for the recent unrest has been building-up for many, many years."

newly-born children for healthcare. The country's tripartite presidency (to take into count the three main ethnic groups) also complicates matters, and has led to the EU suspending funding for the way that it excludes minorities such as Jews and Roma. Disagreements between Croats and Muslims in the Federation, and between largely Muslim-backed parties in shapeshifting coalitions, have exacerbated the political confusion and further delayed legislative progress, while

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multiple layers of government staffed by unhelpful bureaucrats mean that decision-making at administrative level is poor. One long-term observer says the country is "marginally less viable than Lebanon" – another post-conflict society with an ethnically-defined constitution. A senior opposition figure tells bne that the current unrest is a combination of two main things. "First, social dissatisfaction with the lack of progress

orchestrate the demonstrations to put pressure on the incumbent parties. The extent of anger is such, however, that such events cannot necessarily be curtailed or controlled, taking on a dynamic of their own on the back of Ministerial resignations and a heavyhanded police response. What is clear is that the dysfunctional Federation is in need of urgent reform." The Democratisation Policy Council's Bassuener warns that the protests seem

"This comes as no great surprise given the persistence of unemployment, corruption and dissatisfaction with governance structures."

since the Dayton peace accord from 1995... Second, the political parties that abused the veto powers in the Parliamentary Assembly of BosniaHerzegovina, especially in the last five years have ensured the social ticking bomb to go off right at the time of someone else's choosing." He adds that privatisation imposed by the UN High Representative has led to the "disintegration of Bosnia's economic system." Though some might respond that it is difficult to see how the country could continue to support top-heavy state enterprises, the process of privatisation, as elsewhere in the region, can legitimately be called into question. Hard to contain Both the diplomat and the opposition figure question whether the protests are as spontaneous as they seem – but both warn that, now momentum is gaining, they will be hard to control. "The key questions therefore are why now, with elections scheduled for October, and why only in the Federation?" says the diplomat. "One possibility is that certain political factions – particularly those that have sought to distance themselves from government – have helped

"to be hijacked by hooligans, riding on a wave of legitimate public discontent", and adds that the Republika Sprksa may not remain immune from the demonstrations for much longer. Hopes have been raised that the outpouring of anger could lead to real change in Bosnia at last. Early elections are a possibility. On February 9, around 1,000 people gathered in front of Bosnia’s tripartite presidency building in Sarajevo, demanding the resignation of the government and calling for new elections. The problem with this, point out some, is that governments have been toppled through street protests in Romania and Bulgaria in recent years, but few citizens of either country would argue the system has been transformed as a result. The difference in Bosnia, perhaps, is the remaining role of the international community, which may now look to press for talks on constitutional reform. "But Bosnia has always been unpredictable and no one can be sure what the outcome of the unrest, or any future conference on Bosnia, is going to be," says the opposition figure.

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February, citing political uncertainty and predicting a "one-in-three likelihood for lower ratings within the next 12 months". "Turkey appears to have suffered an unanticipated erosion of institutional check and balances and governance standards," S&P noted, revising its projection for GDP growth down to 2.2% from 3.4%.

Internal vulnerabilities are certainly a problem Turkey is familiar with, two months on from the eruption of a major corruption scandal that has prompted unprecedented government intervention in the police, judiciary and the media.

The media was full of talk about how a downgrade from another rating agency (Fitch Ratings and Moody’s Investors Service have promoted Turkey out of junk status) could lose Turkey its investment grade status, which in turn could lead to an exodus of funds that track bond ratings. But Ozgur Altug, senior economist at the Istanbul office of BGS Partners, argues it is still too early for such predictions of doom. "Global developments and domestic politics will determine whether Turkey will face a hard landing or not," he writes in a briefing note, pointing out that of 22 of the most frequently updated indicators, only three signal that the Turkish economy is contracting. Of the remainder, 13 signal a slowdown, while five – including the number of newly established companies – actually signal growth. He predicts that Turkey's GDP growth will fall from around 4% in the last quarter of 2013 to 1-2% in in the first quarter.

Arguably, the full ramifications of the past two months have yet to hit home, but they have already proved enough to send the local currency, the lira, tumbling and prompted a major policy volte face in

Current problems There was further bad economic news for Turkey on February 13 with the publication of the balance of payment figures for December. At $8.3bn, the

The Turkish economy – handle with care David O'Byrne in Istanbul

nly a few years ago Turkey was the rising star of emerging market economies, boasting political stability few others could match and registering growth rates that developed nations could only dream about. Now it looks increasingly likely a combination of external and internal factors will conspire to cause a "hard landing". Most worrying perhaps is the opinion of the US Federal Reserve, which in its Monetary Policy Report to Congress on February 11 listed Turkey as the most vulnerable among 15 emerging markets – a conclusion also reached last year by the International Monetary Fund (IMF), which ranked Turkey as the most vulnerable of 17 such markets. Accepting that its own signals last year about "tapering" its bond buying programme had prompted the selloff of emerging market assets, the Fed also cautioned that the extent of the effects in individual emerging markets were down to their own vulnerabilities, and warned that stopgap measures wouldn't be enough to protect from future shocks.

"Global developments and domestic politics will determine whether Turkey will face a hard landing or not" the form of a sharp rise in interest rates, which for the time being at least seems to have introduced a measure of stability. However, that stability was not enough to prevent rating agency Standard & Poor's from revising its outlook on Turkey's 'BB+' rating to negative in

current account deficit was considerably worse than market predictions of around $7.6bn and brought the deficit for the whole of 2013 to $65bn, a 34% increase on the $48.5bn reported in 2012. The December figures, though, came before the sharp fall in the value of the

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lira in January and February and the central bank's sudden hike in its interest rate corridor, which raised effective rates from around 7% to around 10% – a move which seems so far to have helped the lira to stabilise at around TRY2.2 to the dollar.

David O'Byrne in Istanbul The announcement of a tender to sell Turkish vehicle manufacturer BMC looks set to end a chapter in not just the Turkish automotive sector, but also that of the British automotive sector. On February 4, the Turkish government-administered Saving Deposit Insurance Fund, or TMSF, said it will hold a tender on April 10 for the sale of commercial and military vehicle manufacturer BMC for around TRY985 million (¤327m). BMC was declared bankrupt and confiscated by TMSF in May after its parent company Cukurova Holding failed to meet certain financial obligations. Founded in 1964 as a joint venture between local partners and the British Motor Corporation (later British Leyland) from whose initials it took its name, BMC is the third oldest of Turkey's 15 vehicle manufacturers. The company continued to produce Leyland-designed vehicles under licence following Leyland's pull out in 1979 and in 1989 was bought by Turkey's Cukurova group, from which it was last year seized in lieu of unpaid debts. Under Cukurova, the company's fortunes initially appeared assured. But along with the rest of the Turkish automotive sector, BMC was hit hard by the global economic crisis of 2008 and the subsequent Eurozone crisis. It's into this market that the TMSF hopes to sell BMC, with the fund having published a guide price of TRY985m – a price analysts concur is high despite the brand still having a long history and a high recognition factor in Turkey. "Turkey remains a very tight market for commercial vehicle manufacturers and 2014 looks like it will be a difficult year," reckons Onur Marsan, automotive analyst at Istanbul brokerage Garanti Yatirim. Worse for BMC is that its own financial position is far from clear. Having won an order in 2009 to supply the Turkish military with 468 of its own designed "Kirpi" mineproof troop carriers, the company subsequently failed to deliver 175 of the ordered vehicles after experiencing difficulty paying staff salaries on time, a failure which led to its being seized last year. And with BMC currently not filing production figures to Turkey's Automotive Manufacturers Association (OSD) it is unclear whether it is actually still manufacturing. The most recent figures available show that in 2012 BMC sold fewer than 1,500 vehicles, suggesting a sale might be difficult to finalise at any price. If, as many expect, BMC cannot be sold in an open tender, it seems certain to be wound up and its Izmir factory and other assets sold off individually, spelling the end of the historic BMC marque.

Coupled with new restrictions on credit growth, the central bank appears to be gambling that the combination of higher interest rates and a weaker lira should reduce local demand for imported goods and hence help reduce the deficit. At the same time, reduced domestic demand is expected help to dampen inflation, which reached 7.5% in December. However, lower demand could prove tricky for some of Turkey's corporations, whose net foreign-exchange debts stand at around $170bn – a figure which has almost doubled over the past two years. Part of this rapid increase can be explained by major infrastructure and energy projects, as well as privatization purchases funded by forex credits from local banks. Of the rest, some corporations with forex positions do generate forex income, but those whose income is in Turkish lira could face difficulties. Even before the sudden fall in the lira, a fall in demand was expected as a result of the coming election cycle, which will see local elections in March followed by Presidential elections in August and general elections in 2015. The cycle has already caused considerable uncertainty and if, as expected, the March elections indicate a drop in support for the ruling AK Party, it could well further heighten tensions and reduce private sector appetite for investment. The coming elections do pose a risk for economic activity, points out Inan Demir, chief economist at Turkey's Finansbank. "Arguably these are the first elections since 2002 where there is considerable uncertainty over the outcome," he says, explaining that this is likely to cause companies to postpone or cut back investment, which in turn will hurt domestic demand.

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polls suggest it might not qualify for parliament if they happened soon, with the rival National Front for the Salvation of Bulgaria outstripping Ataka. Meanwhile, Ataka has its own rationalisations and political theatre to pursue.

Has the Bulgarian government weathered the storm? Sandy Gill in Sofia

ong qualifying for the adjective of "beleaguered" in the face of large and persistent demonstrations last year, Bulgarian Prime Minister Plamen Oresharski's Socialist-led government looks a shade less so troubled now. On February 12 it comfortably survived the third vote of no-confidence so far in its tenure of less than eight months. Moved by the only opposition force in parliament – the centre-right GERB party of former prime minister Boiko Borisov – the motion received just 93 votes in the 240-seat parliament, with 116 MPs against and eight abstentions. A majority of all MPs, present and absent –that is, 121 votes – would have been needed for success. Nobody was surprised. The topic – security and crime – wasn't too intelligently chosen. Accusations that the government had mishandled an influx of Syrian refugees last year (officially put at 12,000-13,000) were easily countered by reference to the last (GERB) government's failure to put

the necessary infrastructure in place. And rising crime against property, especially in remote localities? Well, say government supporters, that began under GERB and, coincidentally or not, there's a 14-point action programme just now being put into effect on precisely that topic. But there's party logic too. Neither Oresharski's Bulgarian Socialist Party (BSP) nor its junior ally the liberalinclined, mainly ethnic Turkish Movement for Rights and Freedoms (DPS) – which have exactly 120 MPs between them –feels like going anywhere at present. Conflicts over abolishing the flat 10% income tax and restarting the frozen Belene nuclear power project seem not to be toxic (and, for the moment, to have been resolved in favour of the DPS, which is pro-flat tax but against Belene). As for the fourth party in parliament, the 23-strong extreme nationalist party Ataka, that seems to have no interest in precipitating elections. Recent

Magdalena Tasheva, one of Ataka's more outspoken MPs, dismissing the vote of no confidence, said that the government's trouble was that it had been too nice to refugees. And Ataka's leader Volen Siderov, apart from espousing the (almost certainly hopeless) cause of lower VAT on Bulgariangrown foodstuffs, was boosting his nationalist credentials on the day of the no-confidence vote by demonstrating in the south-eastern town of Haskovo against a DPS-nominated governor. But, for reasons that haven't been made clear, Siderov hasn't followed through on promises to raise the divisive issue of the planned and scrapped Belene nuclear power plant in parliament. Anti-government demonstrations, too, seem to be at a low ebb, no doubt partly for seasonal reasons. With a two-month occupation of Sofia University abandoned on January 10, a reoccupation in late January turned out to be the work of a rather small hardline student faction – opposed by the mainstream of the "first occupation" – and was abandoned within three days. Protests against a proposed pay-rise for MPs, too, seemed lacklustre. Presidential moves Nevertheless, there's been movement at the presidency. Businessman-turnedminister-turned-president Rosen Plevneliev was elected with GERB support in 2011, though his relations with the blunt Borisov have often been tense, while he's been criticised as too political in a supposedly "unifying" job and too close to particular business circles. "Political" he certainly seems to be: at end-January, to general surprise, he announced his attention to ask parliament to hold a referendum, simultaneously with late May's scheduled European Parliament (EP)

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elections, on three questions of electoral law. First, that of compulsory voting (a GERB proposal that Plevneliev seems not to agree with). Second, that of using the majoritarian, rather than party-list, principle for electing some MPs. And third, that of online voting: this would ease voting for Bulgaria's rather large and mostly not pro-BSP diaspora – besides gratifying the president's love of all things "e". Reactions have been mixed. Some BSP figures dismissed it with annoyance as an attempt to scupper an electoral law currently in its last stages of voting – though, embarrassingly, now said by the Venice Commission, the international authority on such matters, to be inapplicable to any elections as soon as May. It was also asked why the president

of which could be just what the doctor ordered for galvanising the protest movement again. Meanwhile, on the left, not everything is going the way of the mastermind behind the present government, BSP leader Sergei Stanishev. Faced with the decision in January of comrade and erstwhile president Georgi Parvanov to run an alternative leftist ticket in the coming EP elections, Stanishev has huffed and puffed, persuading the party's top council to "withdraw confidence" from Parvanov and 12 others – a decision that falls short of expulsion but bars them from party office for a year. Opinion polls, however, suggest that Parvanov may be onto a good thing. One carried out in the third week of January,

"Anti-government demonstrations seem to be at a low ebb, no doubt partly for seasonal reasons" had waited so long to take this initiative when election law debates had been underway for months. Questions were also raised whether compulsory voting was even constitutional. Among those expressing reservations was Plevneliev's own deputy, lawyer Margarita Popova. And election law votes since Plevneliev's declaration have ruled out both online and compulsory voting. The extra-parliamentary Reformist Bloc as well as GERB, however, expressed support for the referendum idea, with GERB's Borisov declaring that, if parliament didn't approve the referendum, his party might start collecting signatures to force the issue. The situation escalated February 12, when first social media and then Plevneliev pointed to a clause in the Transitional and Final Provisions of the electoral law that appeared to envisage presidential elections in 2014 – not, as due in the normal course of events, 2016. Constitutionally unlikely to work, this would seem to be lousy drafting if it isn't breathtaking sneakiness. All

but published near the end of the month, by Alfa Research – one of Bulgaria's least distrusted pollsters – suggested that Parvanov's grouping would enjoy the support of 7% of respondents if EP elections were held now, compared with 17.8% for GERB and 15% for the BSP. With about half of that 7% coming from former BSP supporters and half from elsewhere, Parvanov's arguments that his initiative could enlarge the overall leftist vote would seem to be borne out. If such results were to continue, potential dissidents within the BSP might become bolder – and a way out of the present curious configuration might begin to emerge. And with Parvanov's supporters making progressive taxation a key demand, there's a sign that Stanishev is feeling uneasy: though Prime Minister Oresharski remains publicly vocal against abolishing the flat tax, one of Stanishev's reactions to Plevneliev's initiative was that referendums might be a good idea on things people really care about – like the flat tax.

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A very progressive Serbia Nicholas Watson in Prague

ew doubt the Serbian Progressive Party will win the snap elections to be held in March – the question is by how much. Latest opinion polls suggest it should be able to rid itself of current coalition partner the Socialist Party, but may nevertheless bring onboard smaller parties to build support for the deep reforms it says it's looking to undertake. According to a new Faktor Plus Agency/ Politika poll, 43% of those sampled plan to vote for the Progressives. This would be a significant improvement on the 23% the new party won in the May 2012 election, and a vindication of Deputy Prime Minister Aleksandar Vucic's decision to call an early election. Coming in second would be a coalition comprising the Socialists, the Party of United Pensioners of Serbia and United Serbia with 13.1%. This would be followed by the Democratic Party, the current main opposition party that is beset by infighting, with 11.6%. Part of that disarray has been caused by a squabble between its current leader and the recently ousted Belgrade mayor Dragan Djilas, and its previous leader, former president Boris Tadic. The latter has since quit the party he helped found and dominated for the past decade to form a new bloc called the New Democratic Party, which the poll suggests would get 6.8% of votes. The final two parties that would cross the 5% threshold to enter the 250seat parliament would be the hardline Democratic Party of Serbia with 7.0% and the Liberal Democratic Party with 5.2%. Great power, greater responsibility The parliamentary election on March 16 will coincide with the municipal elections in Belgrade, which should result in the Progressives dominating Serbia's political landscape with control

of the parliament and the capital, as well as the presidency and central bank; President Tomislav Nikolic is a founder and former president of the Progressives, while National Bank of Serbia Governor Jorgovanka Tabakovica is a former deputy president of the party. Such a result would give Vucic the premiership and the mandate to push through the economic reforms he feels are vital to securing the type of sustainable recovery that Serbia has lacked since its period of international isolation ended when the late and unlamented strongman Slobodan Milosevic was ousted in 2000. To gain a broader mandate, analysts believe the Progressives will bring on board some of the smaller parties. Otilia

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seam of disgust many Serbs have with the country's venal and incompetent politicians, and the attendant corruption that was associated with them. A broadening anti-corruption campaign that has snared many of the figures perceived to have done too well out of the post-Milosevic years, such as the country's richest man Miroslav Miskovic, together with a too-rare period of straight talking to the electorate about the problems that need to be fixed, has won praise from many quarters, including foreign investors. Serbia has proved an appealing destination for large investments from Russia, China and the Middle East over the past few years, the credit for which Vucic is not shy to take. In the first 11 months of 2013, the net inflow of foreign direct investment (FDI) amounted to €643m, which followed about €2bn the previous year. Invest in Serbia estimates the country has received around $26bn of inward FDI since 2000. However, the economist Stojan Stamenkovic estimates that

"The IMF deal is considered a key indicator on whether the government intends to maintain its reformist zeal" Dhand of Teneo Intelligence notes that the ethnic minority Union of Vojvodina Hungarians (VMSz/SVM), which does not need to cross the 5% threshold to enter parlaiment, has no political ambitions beyond those relevant to the Hungarian minority and would make a convenient junior ally for the Progressives.

Serbia needs €1.7bn-2.0bn of FDI annually to stimulate sustainable growth – and warned that an election will only hinder this effort.

The Progressives' march toward the domination of Serbian politics in little more than five years since its split from the ultranationalist Radical party has been a combination of a variety of factors. It is led by a group of strong and popular leaders like Vucic and Nikolic, who have mined the rich

With the budget deficit running at 6-7% of GDP and the public sector debt/GDP ratio at just under 60%, the fiscal consolidation effort needs to be continued and stepped up in order for the government to secure another stand-by loan deal with the International Monetary Fund (IMF).

To create a better investment climate, the Progressives need to tackle major structural and fiscal reforms that for too long were put off by craven politicians.

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Balkans sully Europe's reputation for press freedom bne

eporters Without Borders' (RWB) "World Press Freedom Index 2014" highlights major declines in media freedom around the world, with some parts of Europe like the Balkans accused of routinely abusing freedom of information, while Central Asia continues to keep a tight rein on its media, jailing journalists who step out of line. Despite the EU's overall good showing in the press freedom index, the NGO notes "regrettable developments" that have sullied the performance of some countries. Alongside Greece, Hungary under Prime Minister Viktor Orban has seen a significant erosion of civil liberties, above all freedom of information. "The Orban government used its two-thirds majority in parliament to get a highly restrictive media law adopted in 2011. It introduced fines for the creators of content that is not 'balanced' – a concept deliberately left vague – and established a dangerous media regulatory authority with statutory links to Fidesz, the conservative ruling party. This 'Media Council' guaranteed just one thing – political interference in news and information content," RWB says The EU subsequently managed to get the Hungarian government to rescind some of its provisions, it notes, but not the most draconian ones. The Washington-based NGO cites the example of what it terms the "witchhunt" against independently reported news from sources such as the Budapest-based news and talk radio station Klubradio. It says the newly established Media Council refused to renew its licence, despite its years of existence and hundreds of

thousands of listeners, and reassigned its frequency to an unknown station. "After a major campaign in support of the station and several court rulings, the Media Council finally gave Klubradio a longterm licence in March 2013," it adds. Hungary apart, many EU states in Central Europe and the Baltics beat some of the bastions of freedom further west when it comes to press freedom, according to the index. Sitting top of the Central and Eastern European (CEE) region for a second year running, Estonia remains one place outside the top 10, just as it did in

Romania was ranked in top place in terms of press freedom in the Balkans, in 45th place out of 180 countries in the survey. Last year, Romania came in at 42nd position. Serbia came next after Romania, in 54th place, climbing up from 63rd position last year. It is followed by Croatia, at 65, dropping from 64th position in last year's report. Bulgaria was the lowest ranked EU country in the 2014 report after a year dominated by anti-government protests and political tension. "Reporters were repeatedly the victims of police violence during these demonstrations calling for the government’s resignation," says RWB, citing the example of harassment to investigative reporters that can take the form of arson attacks on their cars. The EU's newest member, Croatia, has seen major improvements in the six years prior to its accession in July, though RWB argues much more needs to be done. "The state radio and TV broadcaster HRT has been criticized for a lack of independence after reforms carried out under centre-left Prime Minister Zoran

"Balkan powder keg for journalists"

2013. However, its Baltic cousins lag far behind, with Lithuania bogged down at 32nd place – just ahead of the UK – and Latvia at 37 – just two spots ahead of France. Rated as "satisfactory," the latter pair are the only states in Central Europe – apart from outlier Hungary – to fail to qualify as offering a "good situation" in the survey. Rising three places to 13th, the Czech Republic is the second best country in CEE to work as a journalist, according to the index, which sees it standing in front of Germany. Poland and Slovakia are grouped together at 19th and 20th spots. Bombs in Balkans RWB expresses particular concern at developments in the Balkans, in a section entitled "Balkan powder keg for journalists".

Milanovic," it notes. "The head of HRT, the members of its supervisory board and its administrators are now appointed by parliament. This gives the ruling party political control over broadcast content." In the Balkan EU-wannabes the situation is far worse. In Macedonia, for example, the NGO argues that the democratic window-dressing of the past few years is not enough to hide the many freedom of information violations. It cites cases of journalists being jailed, particularly that of Zoran Bozinovski, who is regarded as the country's Julian Assange, the founder of Wikileaks, but was arrested in Serbia on an Interpol warrant for spying. "Bozinovski has done a great deal of investigative reporting on Sashe Mijalko, Macedonia’s intelligence chief

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and relative of Prime Minister Nikola Gruevski," RWB notes. Journalists' operating environment and safety continues to be a major concern in Montenegro, the report says. Even as the politicians master the language of the EU's institutions and put on show of striving to be more democratic, threats, insults and even violence are regularly employed as a means to silence dissenting voices. It cites the example of a bomb attack against Tufik Softic, an investigative reporter who has been writing about clandestine organizations and drug trafficking in Montenegro for years, often implicating government officials in his articles. "In August 2013, a TNT charge exploded outside the home of Softic, who… was not hurt but the bomb could have been fatal if it had gone off a few minutes earlier." The further east you go in Europe, the worse it gets, according to RWB. The eyes of the world might be on the Winter Olympics in Sochi – with the international press awash with criticism Freedom of the press worldwide in 2014

Southeast Europe

of facilities and corruption, while the Russian press complains of inaccuracies and propaganda – but RWB accuses the Kremlin of waging an "increasingly repressive" war on civil society and the press. While criticism of President Vladimir Putin's regime is not uncommon, it notes, "media self-censorship is far from disappearing," and that the major TV stations remain under state control. Meanwhile, following mass demonstrations in 2011 and 2012, the “return of politics in Russia” has seen new restrictions introduced. "Defamation has been criminalized again, websites are being blacklisted and the range of activities that can be construed as 'high treason' is now much broader," RWB points out. "'Traditional values' are used to justify new restrictions on freedom of information, including the criminalization of 'homosexual propaganda' and 'insulting the feelings of believers'." While the international press coverage around the Olympics focuses on twin toilets and Putin's personality cult, Russian reporters have been locked

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up for looking into corruption, widescale abuse of local residents' property rights and organized crime in the region. "Continuing impunity sustains a climate of violence, especially in the Caucasus," the report concludes. "At least 33 journalists have been murdered in connection with their work in Russia since 2000." At 127th place, Ukraine has slipped one spot in the ranking. However, given recent events surrounding the ongoing protests in Kyiv and other cities – at which it is claimed journalists have been targeted by the Berkut riot police – it seems likely that the country is set for a big fall in 2015. "The political crisis that began in December 2013 and the government’s sudden adoption of very repressive policies came after the period covered by this index," RWB points out, "but will clearly have an impact on Ukraine’s ranking next year." Away from the frontlines, the concentration of control over the country's media by oligarchs close to the regime of President Viktor Yanukovych has only limited editorial independence further.

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threatening to pass the psychologically important 400,000 mark in the next few months. That's a frightening figure for a country with a population of just 4.3m, and suggests that less than 50% of adults in the country are in full-time employment. Unsurprisingly, with no effective end to the country's economic downturn in sight – the consensus among economists is that GDP will increase by 0.1% at best in 2014 – that means there's no real prospect Croatians will be more disposed to opening their wallets and spending their hard-earned cash on non-essential consumer items such as children's toys.

Croatian toy story no child's play Guy Norton in Zagreb

nyone looking for the story of the steep decline in Croatia's retail market need look no further than the specialist toy store segment, where former leading companies have recently fallen on very hard times. While most Croatians were looking forward to receiving warm greetings from their nearest and dearest on Valentine's Day, 130-odd employees of the One2Play toy store chain were greeted with the news that their services would no longer be required. That day, the firm announced it had failed to agree with creditors on the rescheduling of HRK128m (€16.6m) worth of debt and would therefore be closing its stores across the country. Having once been a high-profile retailing story – One2Play was a major press advertiser as well as a main sponsor of popular TV entertainment shows such as Croatia's Got Talent – the firm has witnessed a sharp decline in its financial fortunes over the past couple of years.

The country's increasingly cash-strapped consumers have reined in spending at a rate of knots, leaving Croatia's retail sector mired in recession since 2009. While Croatian GDP has dropped 10% over the past five years, consumer spending is estimated to have plummeted by as much as 30%. The key

Toxic toys Consequently, it was always going to be a tall order for One2Play to convince its creditors of a positive turnaround in the company's finances in the near term. Rather, the future was likely to remain blighted by a toxic combination of declining revenue allied with growing debt and servicing costs. The high fixed cost of its stores, mostly located in prime high street or shopping centres, was only set to worsen the situation. Last summer the company initiated discussions with creditors over a corporate restructuring plan under which they were asked to agree to write off 70% of One2Play's obligations. The remaining 30% of the debt would then have been repaid over the following two years.

"One2Play's poor employees will now join a jobless queue that currently exceeds 380,000"

factor behind that drop in spending has been the increase in unemployment, principally in the private sector of the economy. One2Play's poor employees will now join a jobless queue that currently exceeds 380,000, and which is

One2Play's principal creditors include French-owned Splitska Banka with HRK22m in claims and Austria's Raiffeisen Bank International, which is owed HRK21m. The company was also in debt to the government for HRK2m. The rise and fall has been rapid. As

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recently as 2011, One2Play was widely regarded as a success story, reporting a record HRK137.7m in revenue. Founded in 2000 as a wholesaler, the company later morphed into a retailer, and in 2007 its operations were rebranded under the One2Play name and it recorded income of HRK76m. However, with creditors refusing to play ball, the company will now be consigned to history, following a HRK30m loss last year. The company's demise was greeted with a degree of shock by retail market analysts as, despite declining by 20% since the onset of recession in 2009, the Croatian toy market is still reported to be worth around HRK400m annually. That however has not proved to be enough to sustain the survival of specialist toy retailers, which have seen their market share squeezed by increasing competition from the likes of leading supermarket chain Konzum and kiosk operator Tisak, both owned by Croatia's richest businessman Ivica Todoric. Tisak, for example, has succeeded in establishing exclusive distribution agreements for toys related to a number of popular TV programmes. Typically, these tend to be low-price items that have proved to be better sellers in recessionary times than some of the high-end goods offered by the specialist stores. One2Play is not the first victim of the squeeze. One-time rival Magma – established by former economy minister Goranka Fizulic and at one time valued at €150m – effectively went out of business two years ago. Unlike One2Play owners Alen Magdic and Dejan Macesic, Fizulic recently reached an agreement to reschedule HRK537.5m of Magma debt and is now looking to revive his own fortunes pioneering the adoption of 3D printing technology to manufacture toys. With both One2Play and Magma gone, the only significant Croatian toy retail specialist left standing is Denis, which boasts stores in 11 Croatian cities as well as a presence in Serbia and Bosnia. How long playtime lasts for Denis remains to be seen.

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Romania rockets to top of CEE recovery

bne Central and Eastern Europe took a huge stride in its economic recovery in the fourth quarter of 2013, according to flash estimates on growth released on February 14. Amid a raft of strong data, Romania stood out with GDP growth of 5.2% year on year. It was Romania's strongest quarter in five years, and pushed the economy towards a full-year expansion of 3.5%. Agriculture played a large part in Romania's progress. But it's the wider implication that the country's improved competitiveness has seen it plugged into EU supply chains that lends the real optimism. "External demand… most likely remained the main growth driver in 4Q, as in all of 2013," suggests Banca Comerciala Romana (BCR). On top of the improvements in the real economy, inflation has backed off, dropping to an all-time low of 1.1% in January, and the large investor appetite for Bucharest's $2bn sovereign bond in January illustrated the confidence in the revived economy and strengthened fiscal consolidation. "Romania continues to bask in the limelight as the market's darling, having successfully implemented successive IMF reform programmes which have boosted competitiveness," Standard Bank notes. However, there could be a sting in the tail. The obvious question to ask is what Romania is doing right that Bulgaria – which managed a year-on-year rise of just 1.0% in the fourth quarter – is not. The easy answer is that it has enjoyed a strong reform-minded government rather than political logjam. But that might not last too much longer. Romania's ruling alliance that has shepherded reform over the last couple of year looks at risk of coming to an end. With the leading Socialist Party apparently seeking to oust its Liberal Party partner, a breakdown is on the cards. November's presidential election is seen as the ultimate hurdle for continuing the cooperation, but ING Bank talks of "good risks that the alliance will be split over the coming days and a new one installed quite quickly." That, alongside uncertainty over the level of domestic demand and stability of agricultural output, suggests Romania's time in the sun could prove short. "We see the local economy easing its growth to around 2.3% in 2014, as more evidence is needed in terms of the domestic demand recovery (monthly sentiment indicators are pretty soft)," writes BCR. "Industry and exports will continue to underpin the economic advance, but agriculture may come up short of last year’s benchmark, as it still displays highly erratic behavior from one year to the next."

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Anger as Kazakhstan devalues Clare Nuttall in Astana

azakhstan's central bank announced February 11 that it will allow the national currency, the tenge, to depreciate to around KZT185 to the dollar, a fall of around 19%. The bank cited several factors including the reduction in quantitative easing in the US and the fall of the Russian ruble for its decision. The governor of the National Bank of Kazakhstan, Kairat Kelimbetov, on February 12 defended the decision to devalue the tenge, insisting in the face of mounting public anger that it was the right decision due to continued pressure on emerging market currencies. Kelimbetov told a press conference in Astana that he has "no doubt" that allowing the tenge to devalue was the

right move. The central bank said on February 11 that it would no longer maintain the currency in its previous range of KZT145 to KZT155 to the dollar, and allow it instead to trade at around KZT185, with a range of plus or minus KZT3. While the decision has already boosted major Kazakh mining companies, such as Kazakhmys, whose main costs are salaries paid in tenge, there is growing anger among the population, who have seen their purchasing power fall. Kelimbetov, however, said that the devaluation had been carried out "flawlessly". "A banker's work is not appreciated," he claimed. "I have no doubt that we did the right thing. All the complaints will stop in a year or two."

Kelimbetov sought to allay fears of a further fall in the value of the tenge and threatened reprisals against exchange offices that over-charge for foreign currencies. "Unfortunately, provocateurs say that a second wave of devaluation will hit in Kazakhstan," the central bank head said. "Many bureaux de change hiked their prices to KZT200KZT215 to the dollar, but there will not be another devaluation." Falling off the peg Pressure for a devaluation has been growing in Kazakhstan, which like Russia and other emerging markets was hit by an outflow of funds. However, rather than allowing gradual depreciation, as the Central Bank of Russia has done, the Kazakh authorities have been spending heavily

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to support the currency. "The national bank… was probably burning $300700m a month last year, and $2.2bn in January as pressure has increased," Jean-Christophe Lermusiaux, head of research at Almaty-based investment bank Visor Capital, told bne. "While the tenge has been kept pegged to the dollar for quite a long period of time, the ruble and other emerging markets

has sparked anger around the country, where most of the population is faced with a sudden fall in purchasing power and the value of savings in the national currency. Prices for food and consumer goods are already rising, but salaries are not expected to increase. Meanwhile, the high dollarisation of the economy

"I have no doubt that we did the right thing. All the complaints will stop in a year or two" currencies have already started to depreciate."

means those renting housing will see an immediate increase in costs.

Reasons given for the decision by the NBK include the reduction in quantitative easing in the US, which has led to an outflow of funds from investors. The bank also cited uncertainty about the exchange rate of the Russian ruble, which has continued to weaken against the dollar since the start of 2013.

In response, the government has stressed it will monitor prices to ensure that the devaluation is not used as a pretext for price hikes. The mayors of both Astana and Almaty have promised additional inspections. The agriculture ministry will also monitor prices of bread, dairy products and other basic foodstuffs.

Kazakhstan's balance of payments is another factor, as although the current account remains positive, the country has seen an increase in imports in particular consumer goods. Those countries with the largest imbalances – Turkey is prime candidate in the region – have been hardest hit by the EM storm seen in early 2014, as they will find it harder to raise the cash to plug that gap as global financing becomes tighter.

However, many retailers are ignoring the warnings, and reacted immediately to the devaluation by closing their doors on the afternoon of February 11 to reset prices. As customers rushed

"The need to restore the external competitiveness of the tenge exchange rate, the balance of trade of the economy, and maintain the competitiveness of domestic producers has necessitated changes to the national bank's monetary policy," the NBK statement announcing the devaluation said. Price hikes There is a feeling of déjà vu in Kazakhstan, where almost exactly five years ago the tenge was allowed to fall by 18%. The latest devaluation

the NBK's headquarters in Almaty on February 12. According to Interfax, around 40 people took part. The head of the Kazakhstan Muslims' Union, Murat Telibekov, told the newswire that demonstrators had come to call for Kelimbetov's resignation. Mixed business Meanwhile, the impact on Kazakh business is likely to be mixed. Lermusiaux points out that for the massive mining sector, where the top cost is labour, the depreciation is "like a present". Shares in miner Kazakhmys spiked 17.7% in London the day of the NBK announcement. "It's a similar situation for KazMunaiGas, unlike international oil companies whose salaries are mostly dollarised," the analyst adds. "However, the news was a significant negative for telecoms companies such as Kcell and Kazakhtelecom, which have revenues in tenge but [capital expenditure] in dollars, and overall a moderate negative for the banking sector. While the devaluations will make Kazakh exports more competitive, many industrial companies have high levels of debt, much of which is in foreign currency. "We think a more optimal depreciation would have taken the tenge to around KZT165 to the dollar. Indeed, while

"While some industries have benefited, a depreciation that is too fast or to steep can create collateral damage" to buy in the immediate aftermath of the devaluation announcement, some of the country's biggest retailers –of cars, white goods and groceries – were scrambling to change the prices on their imported goods. In addition to growing online criticism of the government and central bank, a small demonstration took place outside

some industries have benefited, a depreciation that is too fast or to steep can create collateral damage and potentially fuel inflation to unnecessary levels," Lermusiaux adds.

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Progress but no clean slate for Kazakh banks Clare Nuttall in Astana

azakhstan entered 2014 with a banking sector that has edged closer to shuffling off the legacy left from the 2008 financial crisis, with deals to sell off the state's holdings in three nationalised banks close to completion and targets set to bring down the heavy burden of non-performing loans. However, problem loans are still by far the highest in the Commonwealth of Independent States and a recent skewing of growth towards consumer lending means the sector still has a lot of issues to work through this year and beyond. Sovereign wealth fund Samruk-Kazyna's announcement in December 2013 that it had finally found a buyer for BTA Bank, Kazakhstan's largest bank before the crisis, was a major milestone for the sector. Previous attempts to sell off the troubled bank first to Russia's Sberbank then to Kazakhstan's Halyk Bank fell through. However, on December 23 Samruk-Kazyna announced a nonbinding agreement to sell BTA to Kazkommertsbank and Kazakhstani investor Kenes Rakishev, with the fund retaining a minority stake. The deal was announced just days before the end of 2013 – the deadline set by President Nursultan Nazarbayev to sell off the three banks that were taken over as the crisis financial crisis swept through Kazakhstan. Of the three – BTA, Alliance Bank and Temirbank – the former looked to be the most difficult to shift, as 80% of its total loan book is composed of 90-day overdue loans, according to Visor Capital, and many of these are unlikely ever to be recovered. Earlier in December, Samruk-Kazyna had already announced another deal to sell stakes in Alliance Bank and Temirbank to Verniy Capital owner Bulat Utemuratov.

The fund has sold a majority stake in Temirbank while keeping a controlling stake in Alliance Bank, in a deal that is expected to receive regulatory approval in 2014. While Samruk-Kazyna met the deadline, this is not the end of the story for the three banks, as Agris Preimanis, senior economist for Central Asia at the European Bank for Reconstruction and Development (EBRD), points out. "While the consolidation and sale of state stakes in banks can be positive, what's really key is that after the sale the banks have

structural problems and a level of NPL seen in very few countries. Against that backdrop, I am quite positive about the re-energised efforts to tackle NPL since the appointment of the new central bank governor," Preimanis tells bne. "Overall, we expect to see some progress on tackling structural problems in the sector within the next year, but this will be the start rather than the end of the process." Meanwhile, a potential new problem has arisen, namely that consumer lending grew at an alarming pace over the last two years. The International Monetary Fund (IMF) warned in June that the volume of consumer loans was rising at around 40% a year, albeit from a relatively low base figure. This is a lucrative business for Kazakhstan's banks, which typically charge interest rates in the range of 25% to 40% a year on consumer loans, and a growing number of Kazakhstanis

"While consumer loans are rising, corporate loans are down and small business lending is meagre" enough capital and are viable in the long term, and that the new shareholders are really committed and ready to provide capital when and if needed," he says. In addition, Kazakhstan's government and central bank are still struggling with the legacy of non-performing loans (NPL). At 35.8% of Kazakhstan's loan portfolio, or $30.7bn, the proportion of NPL is among the highest in the world. In November, Kazakhstan's newly appointed central bank governor, Kairat Kelimbetov, announced that the bank's main target would be to bring down NPLs. The bank is currently in talks with banks with the aim of lowering the proportion of NPLs to 15% by January 1, 2015 and 10% by January 1, 2016. New legislation to make it easier for banks to write off bad debts and for companies to declare bankruptcy is due to be prepared by June 2014. "Kazakhstan's banking sector is in a very difficult situation with significant

are keen to take out loans for anything from a new washing machine to a lavish wedding party. However, concerns within the government mounted steadily during 2013. Preimanis agrees that there are "some early signs of overheating" within the sector. However, he notes that, "This has been picked up by the central bank, which has already issued some new regulations. While growth in consumer loans may not be a problem per se, continued growth could increase the banks' sensitivity to slowdowns in the economy." While no formal cap was introduced, Kelimbetov said February 3 the central bank had agreed with commercial banks not to allow consumer lending to rise by more than 30%. "We have agreed with second-tier banks to reduce the overheating in the consumer loan segment… consumer lending shouldn't grow by more than 30%."

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resolved. According to the February 12 statement from Golomt, reports also misrepresented Credit Suisse's investment, which it says was a $10m convertible bond that has since been repaid. "Golomt Bank does not have any shareholders seeking repayment of loans, these are equity investments in our bank and none of our investors have signalled any intent to leave the bank," the statement said.

Mongolian banks again under spotlight Terrence Edwards in Ulaanbaatar

eaks to international media about investor concerns with management at Mongolia's third largest bank have again called into question the level of governance that exists in the country's financial sector, which has suffered three bank failures since 2008. Golomt Bank on February 12 responded to what it claimed were “misleading and false allegations” in the press about the standard of governance at the bank, and said that it does not have any shareholders seeking loan repayments. Golomt Bank found itself in the headlines in January and February when media published documents purportedly showing serious failings at the bank and that a fund under the control of Abu Dhabi Investment Council, Stanhope Capital, was moving to cancel early its $25m debt agreement with Golomt, citing poor management and a breach of their investment agreement. The Reuters report that first broke the story on January 27 came four months after Moody's Investors Service withdrew its credit rating of the bank, explaining "it currently does not have

sufficient or otherwise adequate information to support the maintenance of the rating." Both Abu Dhabi Investment Council and Switzerland's Credit Suisse have accused Golomt of violating lending terms by failing to have their 2012 financial results audited by a top-four global accounting firm – instead pursuing audit results from the world's fifth-largest

Golomt's CEO Galsan Ganbold said in an interview translated and published in Business-Mongolia.com that the reports appearing in the media were "biased". But media bias does not explain why Bloomberg reported February 5 that Golomt's management never alerted its board to guaranteed payments to Itochu that allegedly exceeded the banks share capital when made in 2007 and 2008. There is also the matter of management figures still reportedly working in the bank who allegedly deleted banking records and emails. A founding partner of the Bodi Group holding company that owns Golomt has also had a row with management. Last April, Luvsanvadan Bold, who also serves as the country's top diplomat as minister of foreign affairs, had his lawyer write an official letter of complaint to the governor of Mongolia's central bank about these issues after reviewing a report by FSI Capital. In the end,

"Golomt Bank does not have any shareholders seeking repayment of loans" auditor, BDO. The two investors are seeking the return of loans and have engaged in arbitration proceedings over loans made to the bank, Bloomberg reported on February 5. The main point of disagreement centres around letters of credit guaranteeing payment on behalf of Mongolian gold miner Altan Dornod to Japan's Itochu Corp for mining equipment – issues that Golomt claims have long been

Bold and his partners restructured the ownership of Bodi so that Bold's interest was removed from the bank. When loans go bad A lack of restraint within management has cost banks dearly in the past. Last year Mongolia saw Savings Bank fail – the third bank to collapse in the country since 2008. bne reported in August that before the Savings Bank's collapse, Anod Bank filed for bankruptcy in 2008

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Mongolia pushes North Korean ties

bne Mongolia on February 7 ratified a raft of deals to increase economic ties with North Korea. The agreement is part of an ongoing push by Ulaanbaatar to boost cooperation with the isolated state. Under the agreement given approval by the Mongolian government, the two countries will increase their economic ties, with a focus on industry and agriculture, state news agency Montsame reports. Mongolia will help North Korea develop livestock husbandry, while Pyongyang will offer assistance in setting up industries utilising Mongolia's raw materials, such as wool and coal. The deal was initially signed during Mongolia Industry and Agriculture Minister Battulga Khaltmaa's visit to Pyongyang in October. The Central Asian state eyes its reclusive neighbour as an aid to improving energy security and diversifying market reach for its growing mining output. According to the Mongolian presidential website, agreements were signed on cooperation in the roads and transport sector, as well as culture, sport and tourism. A 2013-2015 cooperation plan between the Postal Authority of Mongolia and the North Korean Computer and ICT Centre was also agreed. Mongolia has relatively good relations with the pariah state, given the two countries' shared communist history, and Mongolia has often supplied food aid to North Korea in recent years. Meanwhile, somewhat ironically, it's the potential access to international markets that cooperation with the closed-off country could offer that is enticing Ulaanbaatar. Mongolia, which is increasing production of coal, copper and other commodities, has expressed an interest in gaining access to North Korea's ports. The two countries are already linked by a rail line connecting Mongolia to the port of Rason. Last year, Mongolian oil trading and processing company HBOil acquired a 20% stake in the operator of North Korea's Sungri refinery. HBOil will supply crude oil to the refinery for processing, then re-import the products. Officials involved in the HBOil deal told bne in July that access to international shipping lanes via North Korea could soon expand. That would offer Mongolia's growing minerals output reach to new markets. Currently China consumes more than 90% of the country's mineral exports, but with the Asian giant's growth slowing, access to Japan, South Korea and India would hedge Mongolia's risks.

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followed by Zoos Bank 2009. Anod and Zoos both folded because the Mongolian firm Mongol Gazar had defaulted on loans that used the Olon Ovoot gold mine as collateral. The Savings Bank failure, too, was a result of a bad deal with Mongol Gazar, which sold the Olon Ovoot gold mine to the bank's parent company, Just Group. The Olon Ovoot mine failed to produce as much gold as Just Group head Sh. Batkhuu had expected, leaving Just Group unable to repay a $109m loan to Standard Bank. Mongolia's government subsequently absorbed Savings Bank into government-owned State Bank. The brouhaha surrounding Just Group prompted the rating agency Fitch to say in a statement: "We believe that much greater rigour is needed in implementing existing related-party/ concentration limits to maintain financial stability, as Mongolia's volatile economy could suffer from rapid credit deterioration." Observers note that the lack of discipline is symptomatic of a market still developing just two and half decades after transitioning to a market economy. "They don't have clear guidelines," says Michael Preiss, a guest lecturer at the Banking and Finance Academy of Mongolia. "Then you have middle management which doesn't know how to go about these things in a procedural way." Given that the $25m loan from the Abu Dhabi fund represents just 1% of Golomt's assets, the bank looks to be clear of any present danger. However, the bank will need to overhaul its governance structure to prevent any future disaster. In January, Golomt's board made two new appointments, with former Deutsche Bank banker Luvsandorj Bolormaa taking on the role of chief investment officer and executive vice president, while former Asia Foundation Country director Chultem Munkhtsetseg was appointed chairman. "Changes on the Board are allowing us to better pursue our strategy of becoming a public

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company which is at the epicenter of the growing Mongolian economy," said Ganbold in the February 12 statement. The bank also in February joined the Asian Financial Corporation Association, a regional group that claims to help members maintain compliance with standards and address risks. Pulling in investment The banks in Mongolia will have to clean up their image if they are to pull in the investment needed to keep up with Mongolia's rapid pace of growth. Tight liquidity has been a recurring problem in Mongolia, with Moody's naming it as a likely issue in an April 2013 outlook on the country's banking system. Preiss, who is also managing partner at Mongolia Asset Management, said although the bad press won't be doing Golomt any favours, it really shouldn't

Eurasia

be the final word on the bank. "The franchise is quite profitable. Overall it's a good bank," he says. "Investors will do their own due diligence and look at the case for themselves." Mongolia's banks will also increasingly have to compete with foreign entrants to the market. Bank of China and Japan's Sumitomo Mitsui Banking Corporation have opened representative offices within the past six months, while Bank of Tokyo-Mitsubishi UFJ and Standard Chartered have also applied to open their own branches in the capital. ING was the first foreign bank to set up shop here, last year observing its five-year anniversary. Still, those banks are at a decided disadvantage to the local banks, according to a note from the Ulaanbaatar branch of the global law firm Hogan Lovells. "With respect to

Uzbekistan's makeover is lipstick on a frog Clare Nuttall in Astana

here have been several signs recently that Tashkent is stepping up its efforts to attract foreign investors, with new legislation adopted and a statement from President Islam Karimov that the government needs to do more to improve the business

environment. While the country has abundant natural resources and Central Asia’s largest population, there are still serious concerns about the security of investments in the country and concerns that the latest changes may be mostly cosmetic.

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the entry of foreign banks into the Mongolian market, the Bank Licensing Regulations impose greater restrictions," reads a July 2012 note on updates made to the country's banking law. The note says Mongolian law prohibits representative offices from profit making, and that those offices must be in operation a year before they can establish Mongolian subsidiaries. They are also expected to have a minimum share capital of $50m, "which is much higher than the minimum capital requirement [$12m] for an existing Mongolian bank." With such controls in place, foreign banks might prefer to buy into existing local banks rather than open their own subsidiaries. Bringing international practices to their new acquisitions would in itself help solve the current problems with transparency and governance.

At a cabinet session on January 17, Karimov criticised the Uzbek business environment, saying that conditions “do not fully meet the requirements and principles of the free market economy”, Uznews reported. He singled out both infrastructure shortcomings such as irregular energy supplies and poor road infrastructure in rural areas, and the high number of state inspections, calling on the government to cut red tape and take more services online. Three days later, Karimov signed off new legislation on foreign investment that includes the introduction of a simplified visa regime. This follows improvements made during 2013 that were reflected on the World Bank’s latest doing business index, where Uzbekistan advanced by 10 points – though at 146th out of 189 economies it is still close to the bottom of the table. The greatest gain was in the index’s starting a business category, where Uzbekistan leapt up 66 places to reach 21st place worldwide, as well as rising 24 places in the getting credit category. A January 2014 report from the Heritage Foundation also says

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Uzbekistan has made improvements in business freedom and control of government spending during the last year, though the country remained in 163rd place out of 178 countries on the conservative think tank’s economic freedom index. Better late than never According to Lilit Gevorgyan, analyst at IHS Global Insight, both Uzbekistan and neighbouring Turkmenistan

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in Tashkent. “The main goal of the new law signed on January 20 was to codify existing provisions on investor protection... In practice there are few changes,” she says. “I think that Uzbekistan is interested in putting their legislation into line with the need of modern business, ensuring that foreign investments are protected and that investors can take their investments back home. The

“The recent limited measures are belated steps to catch up with regional peers rather than a serious drive to boost private investment” have taken steps to increase their attractiveness to foreign investors, although “major hurdles” remain, in particular poor protection for investors’ rights. “The recent limited measures are belated necessary steps to catch up with their regional peers rather than a serious drive to boost private investment,” she tells bne. “Lack of a level field for businesses and of course, notorious corruption are further obstacles that the recent cosmetic improvements are unlikely to change. In the case of Uzbekistan, the uncertainty over the political succession is an added deterrent for investors.” The new legislation on foreign investment addresses several points including introduction of a single window principle for registration of enterprises with foreign capital, simpler visa rules for investors, and a ban on government organisations, banks and law enforcement agencies from imposing extra restrictions on foreign investors. While the legislation sends out a message that conditions for foreign investors are being improved, most of the provisions had already been introduced via presidential or government decrees, points out Olga Kim, associate at Colibri Law Firm

government is aware that improving the legal framework will help to attract more foreign investment,” says Tatiana Minaeva, head of Russia and CIS group, at law firm Stephenson Harwood. However, Minaeva points out that the government is still mulling an additional amendment to the legislation to clarify that it does not signify consent to arbitration – an area of key concern to foreign investors who want to make sure that in a case of a dispute they can take

statistics committee. At just $1,717 as of 2012, Uzbekistan’s GDP per capita is well below that in Kazakhstan where it reached $12,116 the same year, World Bank data shows. However, if incomes rise there is scope for growth. Unfortunately, businesses targeting the potentially lucrative consumer market have sometimes got caught in the political crossfire. The Uzbek arm of Russian mobile telecoms company MTS was shut down in mid 2012; the company has since filed for bankruptcy after fines of around $600m were set by the Uzbek authorities. The following year the Uzbek outlets of several western clothing brands that were part of Karimov’s daughter Gulnara Karimova’s business empire were shut down when Karimova became embroiled in a power struggle with national security services chief Rustam Innoyatov. Currently, the main driver for growth in Uzbekistan, which remains one of the fastest-growing economies in the CIS along with other regional oil and gas producers, is heavy state investment. The IMF forecasts growth of around 7% in 2014, with the head of an IMF mission to Tashkent, Veronica Bacalu, stressing the importance of government investment spending. “Despite deteriorating external

"Uzbekistan remains in 163rd place out of 178 countries on the Heritage Foundation's economic freedom index"

it to international arbitration rather than going through the local courts. Tashkent has had some success in attracting foreign investment in recent years, in particular with the flagship GM Uzbekistan automaking joint venture. Uzbekistan also has by far the largest consumer market among the five Central Asian republics, with the population passing the 30 million mark in 2013, according to the state

environment, economic growth is projected to surpass 7% in 2013-14 supported by government’s large scale modernisation investment programme,” Bacalu said in a statement at the conclusion of the visit. Tashkent has already announced a further increase in spending in 2014, which will include $568.6m on railways, $647.5m on roads, and $872m for state power company Uzbekenergo.

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with the foreign ministry in Ashgabat complaining it was not included in the decision. "It is well known that, in accordance with international standards, harmonization of multilateral projects must be carried out on an equal footing and with mutual respect by all parties involved in their preparation and implementation," the statement says.

Turkmenistan railroaded by Tajik-Afghan deal Clare Nuttall in Astana

lans for a new railway linking Turkmenistan and Tajikistan across northern Afghanistan were announced in March 2013, with all three countries enthusiastically behind the project. A year later, the line is the cause of a diplomatic row between the three countries, after Ashgabat was excluded from a key agreement on the route of the railway. In a January 31 statement, Turkmenistan's ministry of foreign affairs "expresses its extreme concern and misunderstanding." The irate statement followed an announcement from the head of Tajik Railways, Amonullo Hukumatullo, who told journalists Dushanbe and Kabul have reached agreement on the route for the Afghan section of the line, which will link Tajikistan and Turkmenistan via Afghanistan. Kabul has agreed to drop its preferred route in favour of an alternative route proposed by Tajikistan, the official said on January 28. The railway will now run from Kelif on the TurkmenAfghan border to the Tajik town of Hoshadi, rather than Sher Khan

Bandar on the Afghan-Tajik border, Hukumatullo said. "The Afghan delegation agreed to compromise after we explained how important the new railway is to Tajikistan, which is currently experiencing great difficulties due to the blockade of goods by Uzbekistan," Hukumatullo told journalists. Dushanbe has long claimed that Uzbek border and customs officials are deliberately holding up cargos on

"The statement by the head of the Tajikistani state organisation on the harmonisation of the railway section with access to the Turkmen- Afghan border without the participation of Turkmenistan is biased and completely unacceptable to the Turkmen side," it continues. "In this regard, the Turkmen side expresses its strong protest and notes that such statements are counterproductive." Five days after the press conference, Hukumatullo was pensioned off by Tajik President Emomali Rakhmon. As well as offending the Turkmen government, he has been at the centre of Tajikistanâ&#x20AC;&#x2122;s worst political scandal for many years, after his 16-year-old son was accused of killing three people in a hit and run in downtown Dushanbe shortly before the November 2013 presidential election. While Rakhmon was re-elected with 84% of the vote, the scandal has persisted. With no official reason given for Hukumatulloâ&#x20AC;&#x2122;s departure, the implications for the rail project are

"The Turkmen side expresses its strong protest and notes that such statements are counterproductive" the only international railway into Tajikistan to put pressure on the Tajik government to drop plans for the Roghun dam. Sidelined However, Hukumatullo's statement has drawn fire from Turkmenistan, the third participant in the project,

unclear. While all three countries were keen supporters, the Turkmen government appeared the main driver in accelerating plans to build the 400-kilometre railway. The presidents of the three countries signed an agreement to build the line in March 2013. Three months later, Turkmenistan hosted a groundbreaking ceremony for

I Eurasia

Turkmenistan slashes gas subsidies

Clare Nuttall in Astana Turkmenistan has raised the price charged to households for natural gas as the government seeks to phase out some of its energy subsidies. Already China's top gas supplier, Ashgabat says exports to Europe are now a priority. According to the government website, households will still receive 50 cubic metres (cm) of gas per person per month. However, any consumption over that threshold will now be charged – though at an extremely low 20 manat ($7) per 1,000 cm. The new pricing structure, set by presidential decree, came into effect February 1, though there is little way of gauging how much gas each household uses. Gas meters are due to be installed in all homes across Turkmenistan to measure gas consumption and encourage more efficient power usage, President Gurbanguly Berdymukhamedov announced on January 18. Turkmen households have received free electricity, gas and water since 1993. While these generous subsidies are believed to have been a factor in reducing popular discontent with the authoritarian regime, there have been growing signs the government is re-thinking the costly policy, especially in the energy sector as it looks to increase exports to international markets. Ashgabat started tackling the high level of subsidies in August 2012, when the government removed subsidies on flour after an increase in global wheat prices. Generous allowances of free petrol for drivers have also been steadily cut back. Is the gradual removal of subsidies part of a wider process of change in the authoritarian state? Probably not, says a January report from the European Union Institute for Security Services. "Earlier this month, the head of the state gas company was fired for failing to diversify the gas sector, and within a week the introduction of gas fees for the population was announced… Although these developments could be interpreted as potential signs of change, significant reforms or the emergence of an effective opposition are still lacking.” However, Ashgabat is increasingly keen to market its gas internationally. Since the opening of the Central Asia-China gas pipeline in 2009, Turkmenistan has become China's largest gas supplier. Late last year it was announced that the country plans to increase exports to the Asian giant to 65bn cm/y by 2020. And an article by state news agency Turkmen Dovlet Khabarlary says energy exports to Europe through the "Southern Gas Corridor", an EU strategy designed to reduce European reliance on gas routed through Russia, are now one of the government's priorities. Ashgabat is keen to build the planned Caspian sub-sea pipeline, which would allow the export of Turkmen gas across the Caspian, where it would feed into the existing Azerbaijani pipeline network and planned new pipelines to carry Azeri gas across Turkey and Georgia to Europe. However, the project faces a number of obstacles, including opposition from Russia, one of the five Caspian littoral states.

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its stretch of the line, even though at that stage the route had not yet been finalised. The Turkmen stretch of the line will run from Atamyrat in southeast Turkmenistan into Afghanistan, from where it will run east to Tajikistan. The Asian Development Bank said in a January 16 statement that it plans a $313.9m assistance programme for Tajikistan in 2014-16, which will include developing the railway. “The proposed regional railway project, in particular, is expected to bring major socioeconomic benefits for Tajikistan,” says the statement. Earlier in January, the project appeared to be progressing well, with Turkmen state television channel Altyn Asyr reporting that it would be completed by 2015 instead of late 2016 as originally planned. It is not clear whether the new dispute between Turkmenistan and the two other participants will hold up the project.

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The triumph of Vladimir Putin bne

he day before the winter Olympics in Sochi opened, The Economist ran a cover story with the same title as above. It was meant to be sarcastic and the article was what has become a standard rant against all the ills that Russia suffers from. But in this case, the piece was probably a step too far. In the days before the Games began, bored correspondents who had arrived early spent their time hunting down any flaws they could find, culminating in the now infamous "double toilet" in the Olympic Biathlon Center. And then something strange happened. A backlash began against the increasingly vitriolic stories that were threatening to turn the Games into a celebration of hate rather than one of human endeavour. Cover illustrations that aped those from the 1980 Soviet games and parallels to Hitler’s Olympics in 1936 were coming thick and fast as each publication attempted to outdo the last. But clearly a line had been crossed. Russia is not a happy place for many reasons, but clearly it is not in the same league as Nazi Germany. And as one Russian commentator pointed out, to compare Russia to the Nazis “is insulting, as every family in Russia lost a relative in the Second World War.”

Suitably chastised, the media backed off the euthanasia of stray dogs stories and water-that-looks-like-piss pieces, and everyone settled down to enjoy the opening ceremony – which was spectacular (unopened rings notwithstanding). The positive reception that the Games then began receiving was more than Russian President Vladimir Putin, the architect of the whole project, could have wished for. After all, the region has had a hard time of hosting international events of late. Ukraine’s co-hosting of the European football championships in 2012 was a disaster after a Daily Mail piece planted the meme that gangs of vicious racists were roaming the streets looking for black people to kill. As the rest of Fleet Street picked up the thread and ran with it, by the time the first football was kicked half the fans had cancelled their tickets the ones that came had a brilliant time. The same thing happened in Baku when Azerbaijan hosted the Eurovision song contest in 2013. The Azeris were super excited as for the first time in 20 years the country was going to bask in the Klieg lights of international media attention.

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The government invested over $1bn in giving Baku a facelift. Then the BBC found a story of residents that had had their houses knocked down by the national oil company Socar to make room for stadiums being built in the capital. And that was that for any positive coverage of the competition. Sochi was a sitting duck for this sort of treatment. And on top of that the Kremlin doesn’t do PR. The $51bn price tag put on the Games by the international media was a deliberate misunderstanding of what the money had been spent on. While the media revelled in stories of rampant corruption, the Kremlin made (almost) no effort to explain that the high number was because the entire region's infrastructure needed rebuilding.

Opinion

Games achieved what Putin must have hoped they would: to reintroduce the world to modern Russia, complete with its warts and stuck rings, as well as its successes and opportunities. Of course it didn’t last long. As Kyiv went up in flames on February 20 after snipers opened fire on an unarmed protestors, The Economist was at it again with its next cover, “Putin’s inferno.” $51bn is a lot to spend for 2 weeks in the sun, but then the sun shines so rarely on Russia.

But for once it was the western press, in their ever-eager quest to demonise the ever-popular (at home anyway) Putin, which shot itself in the foot. The backlash forced the press into a rare mood of objectivity – and Russia rose to the challenge as it is, and always has been, good at these big set pieces. The opening ceremony showed off Russia’s good side – its excellence in the arts, sports and science. The alphabetical roll call of great Russians alone was a tour de force of achievement and the medal count as the games drew to a close had Russia in first place, testament to how much progress the country has made in the last decade. The

"$51bn is a lot to spend for 2 weeks in the sun, but then the sun shines so rarely on Russia"

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