bne:Magazine - May 2015

Inside this issue: The rise and fall of the Russian oligarchy Sale of the Citadele Big fat Gypsy orchestra fight May 2015 www.bne.eu

That’s som devaluation The ingenious gentleman Don Erdogan of Ankara Special Report Companies in transition

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Contents

bne May 2015 Senior editorial board Ben Aris (Moscow) +7 9162903400 editor-in-chief baris@bne.eu

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James R Hammond (Boston) +1 6178525441 publisher jhammond@bne.eu Nicholas Watson (Prague) managing editor

+42 0731582719 nwatson@bne.eu

Robert Anderson (Prague) news editor

+42 0603517867 randerson@bne.eu

Liam Halligan (London) +44 7801799279 editor-at-large LHalligan@newsparta.net Central Asia Naubet Bisenov (Almaty) bureau chief Eastern Europe Nicholas Allen (Berlin) bureau chief

+7 7015933810 nbisenov@bne.eu

+49 15730395872 nallen@bne.eu

Central Europe Tim Gosling (Prague) bureau chief

+42 0720180811 tgosling@bne.eu

Southeast Europe Clare Nuttall (Bucharest) bureau chief

+7 7073011495 cnuttall@bne.eu

Michael Dragoyevich (London) +44 7715412938 commercial director mdragoyevich@bne.eu

+44 7738783240 ogusarova@bne.eu

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

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New Sparta Media | 27a Floral Street, 3rd Floor, London, WC2E 9EZ, UK

Print issue: €499 / year.

CENTRAL EUROPE

6 The month that was

34 Big fat Gypsy orchestra fight

8 The Insiders

36 Czech party congresses mask political realities

10 Georgian lessons for the CIS

Advertising & subscription Elena Arbuzova (Moscow) +7 9160015510 business development earbuzova@bne.eu

Design Olga Gusarova (London) art director

28 COVER SECTION

16 Stuck in transition to re-engaging with reform

37 Poll shows Czechs have little to no trust in government 39 Sale of the Citadele

18 Perspective 19 Chart of the month

41 Polish consumer puts media in the spotlight 43 Smolensk plane crash continues to divide Poles

EASTERN EUROPE 20 The rise and fall of the Russian oligarchy 24 Return to the ruble 26 Trials and tribulations of Crimea’s Tatars 28 “Cronyburger please, easy on the austerity” 29 Sberbank results: devil in the details 31 Not all EU-Russia trade disputes are about politics

I3

SOUTHEAST EUROPE 44 Romania sets example in corruption fight 45 Romania’s investment problem 47 A loveless triangle 49 Croatia’s Vrdoljak slams ecowarriors as economy flatlines

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I Contents

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EURASIA

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Georgian, Romanian banks are hot for the summer

Azerbaijan gambles on European Games

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HelloHungry moves for Balkan acquisitions

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In today's Russia, "Nothing is true and everything is possible"

Agriculture eases Ukraine’s economic pain

75

The lessons Russia learnt in Chechnya

PZU eyes building Polish banking giant

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Stanislav Gross, the youngest Czech prime minister

OPINION

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NEW EUROPE IN NUMBERS

68

The Moscow disconnect

82

UPCOMING EVENTS

70

Opening up the Persian pearl

72

The ingenious gentleman Don Erdogan of Ankara

That’s som devaluation

SPECIAL REPORT 57

ARTS, CULTURE & PEOPLE

United Wagon Company – Russia's most modern engineering firm

60

Central Europe's industrial space is magic

62

Hidroelectrica defeats the smart guys

Follow us on twitter.com/bizneweurope

6

I The Month That Was

bne May 2015

Politics & News Putin has been named this year’s most influential person by Time magazine with 6.95% of the vote. The Dalai Lama was second with 1.7%, followed by Pope Francis (1.5%) and US President Barack Obama (1.4%).

Leading Russian environmentalist Yevgenia Chirikova fled Russia for Estonia at the end of April, claiming the authorities were threatening to take her children from her. She is best known for preventing a friend of President Putin from building a motorway through the Khimki forest in Moscow.

Russian poverty will grow for the first time since the 1998 crisis in 2015-2016 to 14% and 14.1% respectively, according to the World Bank. Real income growth turned negative for the first time in 15 years at the end of last year and poverty has ticked up from 10.8% of the population in 2013 to about 11.0% in 2014.

The Kremlin released a report naming and shaming Russia's most corrupt regional governors as part of its ongoing anti-corruption campaign. The head of the Sverdlovsk region Yevgeny Kuivashev came in at the bottom of the list and the governors of the Samara, Nizhny Novgorod, Orlov and Primorye regions were all in the bottom five on the list.

There were red faces in Stockholm in April after the Swedish high command admitted the Russian submarine thought to be lurking in Swedish waters in October was actually a pri-

vate boat called "Time Bandit�. Sweden spent millions of euros on the hunt for the supposed sub.

2016. All citizens have to take a medical test once they reach 18 years of age, but the bill does not bring back compulsory national service.

15 Russians have been killed by wild fires in the Siberian Khakasia republic while hundreds more have been hospitalised. Almost 1,300 houses in 34 villages and towns across republic have sustained varying degrees of damage from some of the worst fires on record.

A Polish prince challenged Ukip leader Nigel Farage to a duel in Hyde Park. Brandishing a sabre, Janek Zlinski blamed the nationalist party's antiimmigration rhetoric for encouraging violence against Poles in the UK.

The five-year anniversary of the Smolensk plane crash was marked by political opportunism and bickering in Poland. The April 2010 disaster that killed then president Lech Kaczynski and 100 others was either the fault of those on board or a plot by the Russians, depending on which party was talking ahead of Polish elections in the autumn.

Nato launched large-scale military exercises in Lithuania on Russia's border in mid-April as sabres continue to be rattled. They follow similar largescale exercises by the Russians in recent months.

Billionaire Czech Finance Minister Andrej Babis was in the firing line over a conflict of interest. His agriculture conglomerate Agrofert received CZK1bn in subsidies from the Czech state in 2014, a rise of CZK128mn over the previous year, when he was not in office.

The Czech government approved a bill reinstating a military draft. The government can once again call up men and, for the first time, women from

Lithuania is full of Russian spies, the Baltic state's intelligence agency claims in a report, with one-third of Russian diplomats in the country there for espionage.

Lithuania has been invited to open negotiations to join the OECD after a 12-year wait since it first applied for membership. It is unlikely to complete the process until 2017. Membership will boost investor interest and the wider economy, claimed President Dalia Grybauskaite.

Latvian law-making ground to a halt on April 16, after MP Dainis Liepins from the opposition Regional Alliance snuck into parliament and refused to leave the chamber. Liepins has been barred as he is under criminal investigation for fraud.

Bulgaria has scrapped a $7bn project to expand its sole nuclear plant after it failed to reach agreement with supplier Westinghouse. The project envisaged the construction of a 1,000MW reactor at the Kozloduy nuclear plant.

Milan Bandic, mayor of Croatia’s capital Zagreb, has launched a political party, despite being held in police custody on corruption charges. "Milan Bandic 365 The Labour and Solidarity Party" will run in parliamentary elections later this year.

The Month That Was I 7

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Business & Finance 23 Russians fell off the country’s billionaires list in the last year because of the economic problems, says Forbes.

The number of Russian billionaires fell from 111 to 88 over the last year, while the total net worth of Russia's top 200 wealthiest businessmen shrank by $73bn.

Almost all net capital outflow from Russia in the first quarter went to pay off private debts. Of the $32.6bn of capital flight in January-March, $29.8bn went to pay debts, the Central Bank of Russia (CBR) said in April. Net capital outflow from Russia in the first quarter of the year was a third of the $72.9bn that fled in the same period a year earlier.

Russia's foreign trade turnover plummeted 30.1% on year in JanuaryFebruary to $84.7bn. Exports of goods declined by 25% to RUB56.7bn, while imports fell by 38% to RUB28bn.

Ukraine banned Russian investors from participating in its upcoming privatisation drive. The ban includes sales of both primary sales and on the secondary market. Among assets on the list are 50% in oil producer Ukrnafta, 99% in the chemical plant Sumykhimproms, 75% in turbine producer Turboatom, blocking or controlling stakes in about 15 energy companies, about 40 packages in gas supplies and gas distribution companies.

46 banks went bankrupt in Ukraine in the last year, according to the Ukrainian Deposit Insurance Fund, which blamed “immoral behaviour of bank managers” as the main cause.

Polish media group Wirtualna Polska is seeking a valuation well above €1bn in its upcoming IPO. WP set a maximum share price of PLN37 (€9.2) and intends to sell 9mn new shares. The operator of

the country's top internet portal plans to spend the proceeds on acquisitions.

Poland sold €1bn in 12-year Eurobonds late on March 30, with a recordlow average yield of 1.022%. A finance ministry statement described it as “the lowest yield in the history of Polish bonds on the euro market”.

The IPO of Poland's Idea Bank flopped due to heightened banking risks. Owner Getin Holding said it has scrapped a plan to sell 7mn existing shares, and will buy a chunk of the 20mn new shares it plans to issue. The offer price sank to the bottom of the range of PLN24 per share.

Travel Service has completed the acquisition of a 34% stake in struggling Czech flag carrier CSA. The deal sees the state's stake drop to 20%. Korean Air, which owns 44% of CSA, used an option – agreed when it bought into CSA in 2013 – to buy the stake and then transfer it to the Czech budget airline operator.

pointing to robust growth in the region's vital manufacturing sector on the back of increased momentum in the Eurozone, particularly in Germany.

The zloty and forint rose to multi-year highs and government bonds strengthened in the second half of April. Assets in the region are benefiting from strong economic data, the ECB's asset-buying programme, as well as a delayed tightening by the US Fed.

The EU suspended Hungary's €2.3bn of development funds over concerns about the project selection process. While Budapest insists the issue is only temporary, EU funds have played a crucial role in the recent state-led economic recovery and their suspension could hurt growth.

The $500mn China-CEE Investment Cooperation Fund is close to making its first investments in Southeast Europe.

Its first investments in Bulgaria, Serbia and Romania are expected by the end of 2015.

Cable operator Telemach, controlled by US private equity firm Kohlberg Kravis Roberts, has completed a 150mn takeover of Slovenia’s third largest mobile firm, Tusmobil.

Slovakia will float its 49% stake in Slovak Telekom on the Bratislava and London stock exchanges. The price range was set at €17.7-23.6 per share valuing the company at €1.5bn-2.0bn. The plan may be part of a government effort to raise money to secure a majority in power producer Slovenske Elektrarne.

Central European PMI's for March extended their strong start to the year,

Bulgarian internet media Sportal Media Group acquired mobile application Betscores. This is the second mobile application the company bought in less than two months.

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I The Insiders

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Is Gazprom’s changing export strategy a threat to Europe?

James Henderson of Oxford Institute for Energy Studies

T

he visit of Chinese Premier Xi Jinping to Moscow in May to celebrate the 70th anniversary of the end of World War II could also mark the next stage in Russia’s “pivot to Asia” if, as some expect, the November agreement to complete a second Russia-China gas export pipeline via the Altai region is confirmed.

Russia has already begun construction of a first line from East Siberia that is expected to be in operation by the end of the decade, carrying 38bn cubic metres per annum (cm/y), and the Altai line would allow a further 30bn cm/y of exports, not only making China Russia’s largest individual gas customer but also giving it access to gas from West Siberia that could otherwise be flowing to Europe.

This shift in Russian gas export strategy is a direct result of issues that Gazprom and the Kremlin have seen emerging in Europe over the past decade, and has been specifically catalysed by the crisis in Ukraine and the EU response to it, which has been to call for a diversification by European gas customers away from Russian supply. In the short term this would appear to be a viable strategy, as demand has been in decline and availability of gas supply is set to increase, but over the longer term the EU will need to be aware of the risks inherent in its strategy.

Pressure builds Over the past five years the pressure has been building on Gazprom to adjust its European export strategy. A slowdown in European gas demand due to economic stagnation, rising use of renewables and the availability of cheap coal has combined with the impact of the US shale gas revolution and the high price of Russian gas (linked to high oil prices) to reduce the natural demand for Russian gas on the continent.

Gazprom has responded by offering price discounts and contract renegotiations, which generated a rebound in its exports in 2013, but 2014 saw a reversion to the new norm with a fall of more than 10% due to warmer weather a further decline in overall European demand.

However, a more important trend has emerged in the form of

EU legislation and legal activity that has called into question Gazprom’s entire activities in Europe. Implementation of the Third Energy Package has effectively caused the cancellation of the South Stream gas pipeline and blocked full use of the OPAL pipeline in Germany, despite the fact that the legislation has yet to be fully sanctioned, while EU Competition Authority investigations into Gazprom’s business practices in a number of Central and Eastern European countries have raised questions about oil-linked gas pricing and anti-competitive behaviour.

Gazprom’s response has the potential to radically alter its export strategy. Firstly, it has switched the direction of its trans-Black Sea pipeline from the South Stream route to Bulgaria and Southeast Europe towards a Turkey-focused

"Gazprom’s response has the potential to radically alter its export strategy" route, now known as Turkish Stream. This will allow it to focus on the one growth market for gas in Europe, but has also created the opportunity to catalyse a debate about new delivery points for Russian gas across the continent.

Gazprom has announced that it wants to deliver all the gas that it currently sends through Ukraine via the new Turkish Stream route to a “hub” on the Greek-Turkish border from 2019, when its current transit contracts with Ukraine end.

At first glance, this appears to be fraught with legal and operational difficulties.

Gazprom claims that, under the Third Energy Package, infrastructure should be built to collect the gas from its new “hub” for delivery to existing customers. However, a number of customers have responded by stating that they have no

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desire to receive their gas via a different route. Furthermore any change in the delivery terms could catalyse a complete renegotiation of the contracts in their entirety, and would also mean that any new contracts would have to abide by Third Energy Package rules (the current Gazprom contracts are grandfathered through the TEP until their natural expiry dates).

The consequence of this rather complex set of drivers is that Gazprom appears to have set a negotiation in place concerning its export sales to Europe that is likely to continue through to 2019. Its suggestion of a Turkey-Greece hub seems to be a concession that new delivery points are an option, potentially at the border of Europe rather than at the borders of consuming countries. Indeed, Gazprom CEO Alexei Miller has conceded as much in recent statements where he has declared that: “The principle of our strategy in relation to the European market is changing. The decision on stopping South Stream is the beginning of an end to our operation model of the market [sic] within which we oriented ourselves towards supplying [gas] to the end consumer.”

However, a change in delivery point is likely to mean a renegotiation of contracts that could imply a change in price formula (to hub-based pricing) and a change in contract terms, with delivery to hubs in Europe suggesting that the take-or-pay element in contracts may no longer be needed. It is too early to say that this is a definitive Gazprom strategy, or a series of consequences that seem inevitable if Gazprom continues to pursue its current Turkish Stream plan, but in either case it would appear that there is at least some concession to the underlying principles of EU legislation.

Pros and cons The interesting question is what the impact of this may be on Europe. In the short term at least, the answer would appear to be a positive one, although this may be less to do with the implementation of the Third Energy Package and more to do with the imminent arrival of a wave of liquefied natural gas (LNG) from the US, Australia and other new potential suppliers. If Russia has chosen to adapt to EU legislation on market liberalisation, then it will be forced to compete with this new gas on the basis of hub prices, creating a buyers’ market in Europe.

However, one consequence may be that it chooses to create a price war and to use the low cost of its gas supply, further reduced by the impact of ruble devaluation, to at least maintain its market share in Europe, and perhaps even increase it in some countries. The benefit to Europe, of course, would be low prices, while the risk would be further reliance on Russian gas. This risk may then be exacerbated as we move towards the end of the decade and into the 2020s as the surge of new LNG supply slackens (in particular if oil prices stay low, undermining the economics of oil-linked contracts for LNG projects). Then Europe could find itself with a reliance on Russian gas at higher prices, while Russia will also have the insurance policy of its growing sales to

Asia which can further strengthen its bargaining power. In reality, these eastern contracts should not provide a volume threat, as there is plenty of gas in Russia to serve both markets, but psychologically it may give Russia a stronger hand in any gas-related negotiations.

In truth there is a certain inevitability about this outcome, irrespective of Russia’s export strategy. Europe’s gas import requirements are set to rise as demand gradually recovers and indigenous supply continues to decline. In the face of this reality, Russia will always have a strong bargaining position, as alternatives to its gas for Europe are limited.

So what is the logical response? In reality it is close to the latest ideas presented in the Energy Union concept in February. Not the coordinated negotiating institution supposed to present a unified force against the might

"Europe could find itself with a reliance on Russian gas at higher prices" of Gazprom, but rather the concept of increasing interconnectivity between European countries, expansion of supply diversification opportunities where possible and implementation of competition and market rules to ensure that a level playing field will allow customers to make choices that can keep prices reasonable.

If, in this world, Russian gas is the cheapest option, then extra supplies will arrive, with Europe having the comfort that they will have had to better the price of the most competitive alternatives and can be replaced by them if any security of supply threat emerges. Furthermore, Europe can also take comfort from the fact that it will continue to remain a vital market for Russia, even as the latter pivots to Asia, as it is unlikely that any country would want to be dependent on as powerful a negotiating opponent as China for too great a proportion of its export sales.

James Henderson is Senior Research Fellow, Oxford Institute for Energy Studies.

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I Cover story

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Mark Adomanis in Philadelphia

T

he tiny Caucasus republic of Georgia is arguably the former Soviet Union's star reform pupil.

It is close to the top of the World Bank's “Doing Business” ranking, well ahead of many EU countries, and retains the enviable title of the “world's fastest reformer”. Georgia has thrown itself into the arms of the EU project to such an extent that it withdrew from the Commonwealth of Independent States (CIS). And it will have a chance to bask in its glory in mid-May when over 2,000 delegates will descend on its churchstudded capital Tbilisi to attend the European Bank for Reconstruction and Development (EBRD) annual general meeting.

The EBRD get-together will be a chance for the plucky little republic, which was invaded by Russia in 2008 and has lost several regions to separatism, to both showcase its wares as well as take stock of its reforms.

One obvious conclusion in looking at Georgia is that despite its rapid and impressive progress, it is still a very long way from converging with Western European standards of living. The population is still relatively poor, huge amounts still need to be invested into basic infrastructure and its government institutions, while vastly improved, remain well below par. Finally, the last few years have shown that building a

true democracy in the region remains an extremely messy process due to both internal divisions and regional instability.

Polarisation Russia's annexation of Crimea in 2014, and the proxy war it has been fighting with Kyiv in the Donbas ever since, has heavily impacted coverage of all other countries in the CIS. Fairly or unfairly, virtually all reporting of Georgian politics in the West is influenced (and more often than not, severely distorted) by Western perceptions of Russia. As a small country in a far-away corner of the world there’s

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very little desire among the mass media to try to comprehend Georgia’s inner workings on their own merits. Instead, everything is viewed through the prism of being “pro” or “anti” Russian, and then lumped into categories of good and bad accordingly.

The journey from a centrally planned adjunct of the Soviet Union to a liberal free market economy with a mature and accountable political system was never going to be a straight line.

However, the inevitable turbulence accompanying Georgia’s transformation is often confused for being a binary fight between Russia and the West. That is to say that when Georgia is seen to be liberalizing, it is thought of as the West’s; and when it is seen to be regressing, it is thought of as moving back towards Russia. The blanket conflation of liberalism and anti-Russian foreign policy (and, conversely, illiberalism and pro-Russian foreign policy) has very little basis in objective reality, but is nonetheless depressingly common.

Georgia’s Rose Revolution of US-educated Mikheil Saakashvili that swept out the corrupt old school administration of Eduard Shevardnadze in 2003 was greeted with exultation in both Brussels and Washington. But the 2012 electoral triumph of Bidzina Ivanishvili and his Georgian Dream coalition came as a rude surprise.

Saakashvili and his United National Movement (UNM) enjoyed rock star status in Washington and broad bipartisan support. Georgia's aspiration to adopt Western values was intimately connected with Saakashvili personally.

By contrast Ivanishvili, a billionaire who made his money in Russia in the 1990s before selling up and moving back to his homeland to go into politics, was seen as somehow being a Russian plant. The knee-jerk assumption was that anyone who was anti-Saakashvili was antireform and, in essence, pro-Russian.

One high-profile conservative columnist for the Washington Post even went so far as to call Ivanishvili “Putin's man in Tbilisi”. However, Georgian Dream went on to win additional electoral victories

in 2013 and 2014. By mid-2014, after a clean sweep of municipal elections, the party was in control of every level of government and its influence over Georgian politics was at an all-time high.

Saakashvili, like Russia's Boris Yeltsin and Mikhail Gorbachev before him, was popular in the West but deeply unpopular where it counted: at home.

Conversely, Russian President Vladimir Putin, who has explicitly rejected the Western values for an Orthodox conservatism, is despised in the West, but after a seven-fold increase in Russian incomes, is virtually canonized at home.

Predictably, this tendency towards Manicheanism based on ideological choices rather than economic results has resulted in some exceedingly poor political analysis and quite a lot of misunderstanding.

Consider Azerbaijan, which, objectively, has a far worse human rights record than Russia, but which is nonetheless treated as a “responsible stakeholder” by the US and the EU (which is desperate to get access to Azeri natural gas). Most recently, both Brussels and Washington have dropped the “last dictator in Europe” label of Belarusian President Alexander Lukashenko after he showed tentative signs of rebelling against Russia's bullying of its co-members in the newly established Eurasian Economic Union (EEU).

Georgia's “pro-Russia” turn in policy never materialized after the change in government. Most governments in the region are, at the end of the day, more

they were dealt following the collapse of the Soviet Union. Russia's relative prosperity despite explicitly rejecting Western mores, and Georgia's relative poverty despite explicitly embracing them, highlights this problem. It should also serve as a warning for a country like Ukraine, where the political leadership seems to think that loud protestations of “common values” will have an economic benefit.

Given the geopolitical cataclysm unleashed by Ukraine's quest for a free trade and association deal with the EU, Georgia’s signing of a broadly similar agreement in the summer of 2014 attracted bizarrely little attention. Its adoption of the Deep and Comprehensive Free Trade Area (DCFTA) this year will open up the local market to European investors and it hopes this will attract significant investment.

While there are reasons to be suspicious of the Association Agreement’s actual economic merits – since tariffs between Georgia and the EU were already quite low, the impact of eliminating the remainder is unlikely to be very large – from a political standpoint it is a major step forward in the Caucasian country’s quest to join Europe. From an institutional standpoint, certainly, Georgia has never been more in tune with the EU. And that is the first important lesson that Georgia holds for the rest of the CIS: each country’s politics needs to be understood on its own terms, and not simply as part of a proxy fight between

“Despite its rapid and impressive progress, Georgia is still a very long way from converging with Western European standards of living” interested in economic development than in signing up to a particular ideological camp. Their success depends partly on the political system they choose, but more important is the sort of hand

Russia and the West. Yet this mistake is regularly repeated not only in Georgia, but in the Baltics, Poland, Bulgaria and other Eastern European members of the EU and Nato.

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Expecto properitum!

Georgia’s recent progress on the economic front has been a bit slower than in the immediate aftermath of the Rose Revolution, but despite recent accusations that Georgia's business climate is deteriorating – The Economist in particular has been witheringly critical of Georgian Dream's economic stewardship – it remains the best postcommunist performer on the World Bank's “Doing Business” survey.

Georgia finished in 15th place in 2015, ahead of famous reform stalwarts like Poland, Estonia, Latvia and Lithuania, and substantially ahead of laggards like Bulgaria and Romania, as the first chart shows.

Few other countries anywhere in the world, let alone those saddled with a baleful communist legacy of a corrupt and omnipresent bureaucracy, have achieved anywhere near Georgia’s progress in cutting red tape, paring back the state’s reach, and improving

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Monetary Fund (IMF) figures (which have also been adjusted for purchasing power parity), Georgia's 2013 per-capita income ranked 118th in the world, lagging well behind Kazakhstan and Belarus. On the flip side of the same coin, Russia is only slightly behind Poland in per-capita income even after the current bought of stagnation set in.

After a decade of rapid growth, Georgia was at essentially the same level of per-capita income as its famously dysfunctional Caucasian neighbour Armenia. Georgia was actually poorer than countries like Morocco, Swaziland and El Salvador – hardly a who’s who of international economic juggernauts.

This isn’t fault of either the UNM or Georgian Dream – it’s simply a testament to how far behind the country started (See chart 2).

The disjuncture between Georgia’s bestin the-world performance in the “Doing Business” survey (no country has made a bigger jump in the rankings over the

“Georgia shows slashing bureaucracy and cutting red tape is a necessary but not sufficient condition for economic prosperity” the predictability and transparency of business regulation. Georgian Dream, then, has largely preserved the previous government’s signature accomplishments in the economic sphere.

However, several other countries that retain repressive political regimes have also made significant progress on this metric, including Kazakhstan and Belarus, which was one of the fastest risers through the ranks in 2014 (See chart 1).

The problem is that a high "ease of doing business" score in the World Bank survey doesn’t translate directly into lots of profitable business. By any objective criteria, Georgia remains an extremely poor country. According to International

past decade) and its still-terrible percapita income needs to be kept in mind.

The UNM lost the 2012 parliamentary election to Georgian Dream in large part because of widespread concern among the Georgian public over highunemployment and extreme economic inequality. Economic growth after the Rose Revolution was real, but the perception persisted that it was not being broadly shared. This, obviously, was a problem.

All too often Western experts imbue liberal economic reforms with a nearly magic ability to improve the average citizen’s quality of life. Other factors driving growth must include natural resources, the current state of industrialisation, the workforce’s

education level, the existence of basic infrastructure and even proximity to developed markets. These factors aren’t easy to change, but all weigh as much, if not more in the development of the economy as the World Bank’s business index.

Despite all of the laudable improvements in Georgia's business environment, the transport infrastructure (the ports, roads, railways, and communications systems necessary to support international trade) is rated by the World Bank as even worse than that of Russia or Belarus, and much worse than other successful post-communist reformers like Estonia, Lithuania and Latvia. Progress on the infrastructure front is much more difficult than moving up the World Bank’s “Doing Business” index, but ever more necessary if Georgia is to advance higher up the economic ladder. There are certain ways, like public-private partnerships, to help smooth this path. But the simple fact remains that building roads and railways is a core state function and that private enterprise cannot solve this problem on its own (See chart 3).

Can’t escape history By dint of history and geography almost all the countries in Emerging Europe – including Georgia – remains extremely vulnerable to Russian economic and political pressure. The fates of all the countries in the region are, like it or not, inextricably linked to Russia's fate, which the EBRD's former chief economist Eric Berglof identified as one of the crucial "investment nodes" in the region.

A 2006 Russian ban on Georgian wine, mineral water and agricultural imports was lifted at the end of 2013, and Russia swiftly returned to its traditional position as one of Georgia's largest trade partners (preliminary data indicates it was Georgia’s third-largest trade partner in 2014). There is a strong possibility that Russia could re-impose trade sanctions in the future – a step which would have an obvious and highly negative impact on Georgia’s growth prospects.

Many other CIS countries, due to their Soviet inheritance, still have strong

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Ease of Doing Business (EDB) Belarus 31

68

China 36

EM/CEE/CIS average

63

42

68 EU average

64

Georgia Kazakhstan

79 65

Poland

61

Russia 27

74 67

Turkey 45

69

CPI average

25

30

74

52

29

35

40

United States

EDB average

45

50

55

60

65

74

70

82

75

80

CPI/EDB score (High score = positive)

GDP per PPPcapita, (USD): 1992-2014 Chart 2. capita, GDP per PPP (USD): 1992-2014

20K

Belarus

Poland

China

Russia

Georgia

Turkey

22,201

18,408 16,327

Kazakhstan

16K

15,767 15,219

12K

7,371 6,596 6,231 4,374

4K

6,570

4,138 1,186

2014

2013

2011

2012

2010

2009

2008

2006

2007

2005

2004

2002

2003

2001

2000

1999

1998

1996

1997

1,339 1995

8K

10,695

1994

Georgia’s experience shows that Russia’s influence can be weakened, but that ending it is virtually impossible.

Saakashvili was famously irascible in his dealings with Russia, routinely castigating the Kremlin and making plain the contempt he felt for Putin and the rest of the Russian government.

Corruption Perceptions (CPI)

Levels of corruption and ease of doing business

1992

Ukraine finds itself in an even more uncomfortable position. Officoal data shows that in January Ukraine’s yearover-year export of Ukrainian goods to EU markets fell by 31%, but those to Russia dropped by 60%. The Russian market is now effectively closed to Ukraine and it cannot easily redirect sales to Europe. In the short term, Ukraine’s low-quality manufactured products can only be sold to Russia and have no other realistic markets, irrespective of the generosity of the DCFTA terms: German car manufacturers aren’t suddenly going to use Soviet-designed diesel engines no matter how cheap they are.

Chart 1. Levels of corruption and ease of doing business

1993

economic, cultural, and political ties to Russia. Given Russia’s demographic and economic heft (it is several times larger than the next largest post-Soviet state), these ties mean that Moscow has a great deal of practical leverage. Even if we don’t like it, Russia will inevitably continue to play a leading role in the region.

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Source: International Monetary Fund

Chart 3. Unemployment rate, %: 1992-2014 Unemployment rate, %: 1992-2014 20.0%

Belarus

Kazakhstan

Turkey

China

Poland

United States

Georgia

Russia

15.0%

14.6% 13.5%

13.6%

10.0%

9.7% 8.0% 7.5%

7.6%

7.5%

6.2%

5.0%

5.2%

0.8% 0.5%

Source: CEIC Data

2014

2012

2011

2010

2009

2008

2006

2007

2005

2004

2002

2003

2001

2000

1999

1998

1997

1996

1995

0.5%

1994

1992

0.0%

1993

People problem Russia's “dying population” has been incessantly cited as one of the country's major problems – despite the fact that the population is naturally growing for the first time in two decades. But deteriorating demographics is a problem shared by almost all of the countries across the region.

5.2%

4.1%

2.3%

2013

Georgian Dream’s policy, on the other hand, has been much less vocal, but much more effective; it has embraced restarting trade with Russia, but is gradually moving the economy closer to Europe. Other CIS states looking to distance themselves from Russia would be wise to keep that experience in mind: to work deliberately to cultivate economic and defence ties with the West while, in public, staying mum.

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Chart 4. Life expectancy, Life expectancy, 1992-2013 1992-2013 78.0

Belarus

Georgia

Poland

Turkey

China

Kazakhstan

Russia

United States

78.8 76.8 75.4

76.0

75.2

74.0

74.1

72.0

72.5

70.0

71.1 70.5

68.0

66.0

2012

2013

2011

2010

2009

2008

2007

2006

2005

2004

2002

2003

2001

2000

1999

1998

1996

1997

1995

1993

1994

1992

64.0

Source: CEIC Data

Annual population growth rate, % Chart 5. Annual population growth rate, % 2.5

2.6

2.0

Georgia

Poland

Kazakhstan

Russia

1.5

1.4

1.0 0.5

0.6 0.2 -0.1 -0.1

0.1 0.0

0.0 2009

2010

2011

2012

2013

Source: CEIC Data

As in the rest of the former Soviet Union, Georgia’s poor demographic situation is set to become an economic headwind in the coming years, though one that is rather less severe than in most of the other former Soviet republics. The situation is worst in Ukraine (due to low life expectancy and high death rates) and Estonia (due to high emigration rates, especially amongst the young, who are almost exclusively leaving for London).

While Georgia did experience a decrease in its total fertility rate during the 1990s, this decline wasn't as steep or as sharp as it was in Russia, Ukraine or the Baltics. Added to the fact that Georgian fertility in the 1970s and 1980s was substantially higher than in the core Slavic republics, the result is that the country has not experienced sustained

natural population losses (though it did suffer from significant emigration) (See chart 4 and 5).

However, while Georgia is not suffering a demographic crisis nearly as severe as those in other European parts of the former Soviet Union, it must confront the reality of a population that is swiftly aging. According to projections from the US Census Bureau, the share of Georgia’s population older than 65 is projected to grow from the current level of 15% to more than 20% by 2028. By 2050, a full quarter of the Georgian population is projected to be older than 65 (for comparison’s sake, that’s roughly the same share as Japan today).

Thus even in those post-Soviet countries like Georgia, Azerbaijan and the “stans” of Central Asia that have relatively good

demographics – Uzbekistan is expected to overtake Ukraine to become the third most populous county in Eurasia by 2020 – the future will see a structural change in population composition that will inevitably put significant pressure on healthcare and pension systems that are already significantly underdeveloped. Demography isn’t simply a concern for places like the Baltics, Russia and Ukraine – it is a region-wide concern that will absorb increasing quantities of high-level political attention.

Tough decisions ahead Georgia’s experience shows both how far the region has come since communism first collapsed and that, despite this progress, the task of transforming the post-Soviet world into a “normal” part of Europe, with efficient bureaucracies, dynamic economies and robust democratic political institutions, remains an amazingly complex and difficult one.

In particular, Georgia shows that slashing bureaucracy and cutting red tape is a necessary but not sufficient condition for broadly-shared economic prosperity. After corruption has been eliminated, or at the very least constrained, and after the grasping hand of the state has been put on a leash, there are much more difficult (and much more expensive!) tasks that remain.

Georgia has, in some ways, provided a textbook of how to make changes that are so badly needed across the region.

When Viktor Yushchenko took over from Leonid Kuchma as president of Ukraine following the Orange Revolution in 2005, he told the first group of foreign investors to visit the country: "We are going to do a Georgia”.

However, in order to meaningfully converge with Western Europe, CIS countries including Georgia must also enhance their state capacities so that they are capable of effectively managing large-scale infrastructure projects. That’s not going to be easy, but it’s where the region needs to head.

With additional reporting by Ben Aris in Tbilisi and Henry Kirby in London.

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LH: Poland, of course, has been growing well – along with Czech Republic and the Baltics. Can that be maintained?

SC: These countries took tough early measures when the financial crisis hit – so were able to ride out the worse of it.

They show that public administration really matters. The EBRD is a private sector-oriented organization, yet for business to flourish you need a decent regulatory framework and consistent policies. In Poland, the Czech Republic and the Baltics, even when the party of government has changed, they’ve stayed on the right market-oriented path. That’s given investors confidence.

LH: Your EBRD tenure has seen headwinds from both sides of the region, with the Eurozone lurching from crisis to crisis and the Russian economy suffering too. How have EBRD relations with Russia changed over the last 18 months, as political tensions have risen?

Stuck in transition to re-engaging with reform

INTERVIEW:

SIR SUMA CHAKRABARTI is president of the European Bank for Reconstruction and Development, which operates in over 30 countries across Eastern Europe, North Africa and the former Soviet Union. A Bengali-born Brit, he is the sixth president in the EBRD’s 26-year history and the first not to hail from either France or Germany.

Ahead of the EBRD’s annual summit in Tbilisi on May 14-15, Sir Suma took time to talk with bne IntelliNews’ Liam Halligan.

Liam Halligan: Soon after you became president in 2012, the EBRD’s annual report was rather bluntly entitled: “Stuck in Transition”. Are there still “stuck” countries within your region?

Suma Chakrabarti: Some EBRD members, since that 2013 report, have reenergized their transition. Others are still stuck. Prior to that report, we’d had a decade and a half of really strong movement towards open market economies. Then came the [2008] financial crisis, people re-evaluated if they could move at the same pace and there was pushback among electorates. Since then, several countries have re-engaged with reform. One is Kazakhstan – a major success story over the last year. There are others, like Albania and Serbia – Jordan too.

These countries are moving back towards marketization, which makes me feel good.

SC: In Russia, a huge economy, the EBRD has been most successful in regions like Kaluga and Tatarstan, where reform-minded administrations have successfully attracted investment.

Kaluga’s automotive sector, for instance, is a huge success story – and the EBRD has supported investment and helped design policies. Last July, though, our board asked us not to initiate new Russian projects. So we’ve been managing our portfolio of 300 existing projects in Russia, remaining engaged with the private sector, but also with politicians and administrations in Moscow and the regions. We’ve maintained links as much as we can, ready for the day when, once again, we can start originating projects in Russia.

LH: Have the Russians co-operated?

SC: Yes, we’ve had cooperation from the Russia side. Since that July guidance, I’ve twice seen ministers in Moscow and spent time with ministers outside Russia too. Our Russia-based staff has also been working with the authorities and private sector – but, of course, not on new projects.

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LH: How about “South-South” investment – capital flows between emerging markets? Do you see these in the EBRD’s region?

LH: Despite being Western-led, the EBRD is somewhat above the political fray. Could other multilaterals learn from that?

SC: The data shows much more of this investment than mainstream business commentators realize. You can talk about Georgia and the Balkans area, from Slovenia down to Greece – a lot of these countries are attracting capital not just from Western Europe and North America, which they should, but also the Gulf, India, China. Georgia has won investments from Tata and Jindal Steel & Power of India, for instance. Serbia is drawing capital from the Middle East – Etihad is now involved with Serbia’s airline. The EBRD must engage with this change, trying to attract investors from across the world to be part of our projects. Our region is starved of longterm capital compared with Southern Asia, say, or even Sub-Saharan Africa.

We must tell our story better, why our region needs and deserves long-term capital, attracting sovereign wealth funds and other private investors.

LH: Hasn’t there been an assumption among Western multilaterals that capital originates only in the West, or mainly in the West?

SC: All multilaterals need to learn from each other and do more together.

But you’re right, we’ve managed to be relatively depoliticized compared to many others – maybe because of our private sector niche and expertise. We’ve always been a global institution in terms of membership. While the US is our biggest shareholder, South Korea, Australia, Mexico and Egypt are also founding members. What I find more and more, though, as I travel in our region, is an interest in different development models.

In Kazakhstan or Tajikistan, the moreguided East Asian models of Singapore, South Korea and Taiwan are popular – a culture more like theirs than, say, Britain or America. When I talk to youngsters from Poland and the Czech Republic, too, very successful economies in Eastern Europe, they’re also looking at a variety of development models.

LH: What did you think when some G7 nations, including the UK, joined the new Chinese-led Asian Infrastructure Investment Bank, against US wishes?

SC: That assumption, if it was the assumption, has been upended. The data shows something else is happening, not just with multilaterals but the private sector too. All multilaterals, including the EBRD, must engage with this. To not engage is a bit like King Canute on the beach, telling the sea to go away.

We’ve been mapping capital flows into our region from Singapore, India, South Korea, the Gulf and so on. While these are growing, such countries are still underweight. As a multilateral, it’s our duty to help investors that don’t yet know enough about our markets, to come in. It’s great to have capital from India or Singapore or South Korea coming into Russia, Georgia or Turkey.

These are countries they know and, often, there are historic ties – between Russia and India, say. Now we need to get them into countries they don’t know much about – Tajikistan, for example.

That’s the next step.

SC: Some emerging markets, like China, now have serious political and financial clout. New institutions are emerging due to a shared view that existing one aren’t doing certain things fast enough, or in an innovative way, as the emerging markets would like.

LH: You mean the failure of the US Congress to implement agreed changes to IMF voting rights?

SC: Yes, those kinds of things. Different models of economic development are also at play. I think it’s best to work with the AIIB, to engage – not just ourselves, but the World Bank and Asian Development Bank too. We’re actually all trying to get in on the ground floor to help the embryonic AIIB staff shape the institution.

We’ve held workshops advising them on environmental and social standards.

We’ve talked about governance. While all this is helpful, the priority for me, as the AIIB gets going, is to see if we can

I 17

co-finance projects together – in Central Asia, for example, where there is huge interest in this new institution. If we can, our standards would be aligned and much of this debate about differing approaches would go away. Embracing, rather than repelling, is the best way to change behaviour, or feared behaviour.

LH: Turning finally to Ukraine, Standard & Poor’s says default is almost inevitable, unless there’s a bailout of course. What form would a bailout take?

SC: The focus must be on private creditors – and [Ukrainian Finance Minister] Natalie Jaresko is doing just that. She was recently in London, meeting bondholders and making the case for debt restructuring. She also did a brilliant presentation to the EBRD board, arguing for investment in Ukraine. Reform is coming and the IMF programme provides the macro framework. While the banking and energy sectors have been behind in terms of reform, that’s now on the cards – so we can hopefully invest more.

LH: Surely we need realistic GDP assumptions, though, given that Donbas, a big chunk of the economy, has sustained serious physical damage?

SC: Yes – the Donbas region is obviously important to manufacturing and so on. But Ukraine’s greatest comparative advantage is agriculture. It was the Soviet Union’s breadbasket and can be again for much of our region. Egypt, for instance, now imports most of its grain from Ukraine. On the energy side, our calculations show that if Ukraine reaches Western European standards of energy efficiency over the next decade or so, it would import very little gas. So we need to invest massively in energy efficiency at the residential, company and district level.

LH: How about a proper reconciliation between Ukraine and Russia? Can the EBRD play a role in that?

SC: The EBRD can play a role in terms of economic issues. The domestic politics, though, and the geopolitics are probably beyond our pay-grade.

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Greece, SDR and the need for a new multilateralism Ousmène Mandeng in London

T

he International Monetary Fund/World Bank Spring Meetings in Washington DC over an April weekend felt mostly like a routine affair. Persistent concerns about a “mediocre” global economic outlook were voiced and duly corresponding policy recommendations made. At least two issues though were more unusual: the quinquennial special drawing rights (SDR) valuation review and a possible default of Greece to the IMF. Both have caused considerable background tussles.

Greece and IMF default The potential default by Greece to the IMF represents a major thorn in its side. A default may threaten the foundations of the IMF as a multilateral institution and severely dent the membership’s trust. This is not because a default causes significant financial harm, rather it would reveal the full extent of the folly that the Greek programme represents, not necessarily in terms of needed adjustments but in terms of complete lack of ownership by Greece, and also more importantly the governance deficiencies at the IMF.

“The SDR basket and Greece both highlight that reform at the IMF is urgently needed” Greece is due to repay the IMF on May 12 some €780mn.

This seems near impossible given the financial situation of the country. A default to the IMF, a preferred creditor, would mean a default on all of Greece’s external liabilities. With €23,131mn owed to the IMF, Greece would be the largest arrears case in the institution’s history. Because the IMF relies on 51 countries to finance its operations, it would directly affect a very broad group of countries, including many nonEuropean countries and emerging markets.

The set-up of the Greek programme has undermined severely the principles of the IMF. It is governed by the so-called Troika, including the IMF, the EU Commission and the European Central Bank (or Brussel’s group as of lately).

The IMF is a multilateral organisation where decisions are supposed to be taken at the IMF Executive Board, not in Brussels or for that matter in Berlin. Yet this was the case with the Troika, so the IMF lost de facto control of the programme.

This matters all the more as the IMF has been engaged on reforming its governance structure to give greater voice to a group of countries like China hitherto with less of a voice to strengthen legitimacy and effectiveness of the institution. The Troika has made a mockery of such efforts.

China and SDR The SDR valuation review is mostly about how China is increasingly trying to make its interests heard in international monetary affairs. In the present context it is also intimately related to the view of whether the IMF or its major shareholders will seek to defend the status quo or be perceived as promoting change.

The SDR is de facto a currency issued by the IMF representing an unconditional claim on freely usable currencies. There are €264bn SDRs outstanding used almost exclusively in transactions within the IMF. The SDR was mostly ignored though. China changed that amid repeatedly pointing to the role of the SDR as part of a broader reform of the international monetary system. The communiqué of the International Monetary and Financial Committee (IMFC), the IMF’s de facto steering body, of April 18 reflects that: “A new multilateralism for a sustainable future. Collective efforts to strengthen the international monetary system (IMS) and facilitate further integration of dynamic emerging market economies should be renewed. We look forward to the IMF’s work on the challenges facing the IMS, and on the upcoming SDR basket review.”

China has been pushing for some time to have the renminbi included in the SDR basket. In 2010 at the last SDR valuation review, it was declined. Recently, China heightened its efforts considerably. The IMF was apparently given a relatively narrow mandate to review the SDR mostly on the basis of the existing technical criteria. The criteria state that the SDR basket should comprise currencies issued by IMF member countries who have the largest exports of goods and services, and that are determined to be freely usable currencies, meaning a currency that is “widely used to make payments for international transactions and is widely traded in the principal exchange markets.” China naturally passes the first criterion, but may stumble on the second given continued broad controls on its international financial transactions. The IMF is now looking at how to make China squeeze past the second criterion.

China acknowledges that the renminbi remains not sufficiently freely usable. China’s IMFC statement of April 18 by People’s Bank of China Governor Xiaochuan Zhou, offers a relatively detailed explanation of what China intends to do to make the renminbi

Chart I 19

bne May 2015

more freely usable (no such explanation was given in China’s IMFC statement of April 2010). It says that China is prepared to take a series of targeted reforms to increase financial account openness; in 2015 those will include, for example, creating more channels for cross-border investments for individuals, widening the Connect programme to include the Shenzhen stock market, and make it easier for institutional investors to access China’s capital markets. Renminbi inclusion is likely to come down to whether the IMF perceives such commitments as sufficient, or whether it will insist on implementation first. Some major IMF member countries insist that the criteria need to be observed.

The trouble with the criteria is that they represent a strong dose of arbitrariness. The rules can be changed in any way if the IMF Executive Board decides to do so. In the past, other criteria prevailed and the basket included currencies that would not have qualified on the basis of the now stricter criteria (there were originally 16 currencies). The main problem is that the criteria are unduly aligned with the

The SDR basket and Greece both highlight that reform at the IMF is urgently needed, both to signal greater inclusion of China and other emerging markets, and to strengthen multilateralism. Neither insistence on the technical criteria for reviewing the SDR basket nor the set-up of the Greek programme is consistent with that.

Ousmène Mandeng is Senior Fellow of the Reinventing Bretton Woods Committee.

From Russia with pain

F

ormer Soviet states bordering Russia are suffering as the continued economic pressure on the country causes remittances by migrant workers to fall, according to data released by the Central Bank of Russia (CBR).

borders, the expenditure on and then exporting of Russian goods, or for other methods of moving money like the

Money transfers from Rusia to former Soviet countries, 2007-2014 Armenia

While the data does not account for the physical transit of cash across

Kyrgyzstan

Tajikistan

2,000.

Uzbekistan 823 602 1,129

701

1,500.

Russia annual GDP (USDmn)

The volume of remittances largely mimics the performance of Russia’s annual GDP, with a fall in volume just after the 2008 crisis and another in 2014, when the economy fell victim to a combination of a sharp ruble depreciation, low oil prices and punitive Western-led sanctions.

Azerbaijan

12,000

As the bne:Chart shows, a clear correlation exists between the performance of the Russian economy in GDP terms and the volume of crossborder remittances going from Russia to the former Soviet nations.

The CBR data details all cross-border money transactions executed in 20072014 by non-residents in Russia, often labour migrants from bordering nations.

hawala system, it is illustrative of the economic dependence on Russia of its close neighbours.

694

10,000

603 1,195

552 629

729

8,000

3,306

553

Russian GDP

726

1,000.

790

500.

589 460 436

1,461

0.

952

2007

491 403 498

1,726 2008

Source:Central Bank of Russia

1,109

2009

4,000

556 450 5,842

576 1,142

931

935

6,000

2,297

614 691

3,009

2,549

4,893

4,880 3,559

2,000

1,465

2010

2011

2012

2013

2014

0.

Totalcros-bordertransactionsbynon-residents(USDmn)

CHART:

narrow objective of the SDR as a reserve asset. It only ever played a most marginal role in that regard. A broader objective of the SDR as a framework for reforming the international monetary system and to facilitate an orderly integration of emerging markets into the international financial system would be considerably more useful. This should comprise not only inclusion of the renminbi in the SDR basket but also currencies from other leading economies. Sadly, this does not seem to be on the table for now.

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Photo: Drop of Light

The rise and fall of the Russian oligarchy Graham Stack

F

ifteen years after the then unknown Vladimir Putin took over the Russian presidency, analysts still puzzle over how he arrived in the position. Newly declassified documents from President Bill Clinton’s administration, released to bne IntelliNews, show how Putin's candidacy was a compromise after a fierce battle for power in Russia between pro-US oligarchs and pro-state conservatives.

At stake was not just power in Russia, but the crucial question of Russia's relationship with the West.

Russia's 'oligarchy' took power during Yeltsin’s re-election in 1996, when they used his reliance on funding from Russia's leading seven bankers to acquire the cream of the country's resource-producing assets. According

to the documents from the Clinton administration, which were released under a mandatory declassification review, one of the chief ideologists of Russia's freshly minted oligarch system was Russian-Israeli banker and media magnate, Vladimir Gusinsky, owner of Most Bank and TV channel NTV. Gusinsky came to a November 1996 lunch meeting with US embassy officials with an important message: the oligarchs were here to stay – but they should not be feared by the US. Oligarchy was a fitting governance system for Russia, and would put the country on a pro-US course.

"Russia, Gusinsky explained, was not a democratic or a European country; it is an Asiatic country," he said, according to

embassy records, with Gusinsky's name redacted but implicit. "The country was run by an oligarchy, of which businessmen like him were an integral part, and would be for some time," Gusinsky told the US diplomats.

"Our friends in the West" had been right to criticise the oligarchs in the past, he said, but now they had taken on "responsibilities for Russia's national interests”.

Gusinsky "did not deny that many Russian businessmen, including himself, had engaged in dubious activities, especially as they were setting up their operations and accumulating capital”, he told the diplomats. "Nevertheless, a number of big businessmen had now emerged – for example, Berezovsky's

Eastern Europe I 21

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seven bankers [Boris Berezovsky himself, Vladimir Gusinsky, Mikhail Fridman, Vladimir Vinogradov, Aleksandr Smolensky, Mikhail Khodorkovsky, Vladimir Potanin] – who were so big and influential that they no longer had to engage in such activities and no longer did," the document reads.

Gusinsky claimed that allegations of oligarchs' links to organised crime were spread by Russia's security services, with the aim of stemming capital flight.

Rule of seven bankers Of all the 1990s oligarchs, none was more powerful than Berezovsky, who coined the phrase "the rule of seven bankers”. Berezovsky attained high political office, allowing him to directly shape Russian domestic and foreign security policy – at the same time as being a citizen of Israel.

Berezovsky acknowledged that his power was based on his control over TV channel ORT. "90% of all TV influence is concentrated in the top three channels: ORT, RTR and NTV," Berezovsky told US diplomats in 2000, according to the declassified documents. Of these, his own ORT was by the far the most powerful, he said.

With ORT as his power base, Berezovsky set himself apart from all other oligarchs in terms of his political ambitions. He sought and gained influence not only on key domestic political questions, including the country's territorial integrity, but also directly on Russia's foreign policy.

At the height of his power, Berezovsky was deputy head of Russia's powerful security council, but, as the documents make clear, security council head Ivan Rybkin was merely his pawn.

In this capacity, Berezovsky actively sought US backing in 1996 for what he promised would be a "radically proWestern policy", according to an account to US diplomats in 1996 provided by then Georgian president and former Soviet foreign minister Eduard Shevardnadze.

Shevardnadze was backed in Georgia by Berezovsky's close business partner and

friend Bardi Patarkatsishvil, and appears to have acted as wingman for Berezovsky to approach the US in 1996.

In a meeting with a US ambassadorat-large in Tbilisi in November 1996, Shevardnadze told US diplomats that Berezovsky was an "extraordinary person”, who "wanted a radically different foreign policy, putting Russia squarely with the West”.

"He merited US support," Shevardnadze advised, but "support would have to be done in the right dosages”. In time, "he would develop into a necessary and useful man,” Shevardnadze said.

In particular, Shevardnadze said, Berezovsky was entirely free of any interest in expanding Russian influence across the post-Soviet space, for instance viewing embryonic plans for a postSoviet customs union as "nonsense”.

Berezovsky's plans for a pro-Western revolution in Russian foreign policy had to find a way of countering then foreign minister Evgenny Primakov. Primakov was a former head of the KGB and

US diplomats were well aware of the negative reports in both Western and Russian media alleging that Berezovsky, the so-called "godfather of the Kremlin”, was involved in corrupt schemes such as siphoning funds from state-owned national carrier Aeroflot, as well as benefiting from crony privatisations.

There is no sign in the documents they ever committed themselves to support him, as Shevardnadze wished. "Deputy security council chairman Berezovsky is a dangerous figure," Pavel Gusev, newspaper publisher and editor of leading Russian paper Moskovsky Konsomolets, told US diplomats. "He is a pure mafioso, and his appointment is proof that major criminal groups have reached the highest levels of government."

The only question of wrongdoing discussed in the declassified documents is Berezovsky’s admission that he held Israeli citizenship along with Russian, which was illegal and especially questionable for the deputy head of the security council. "I did it in 1993 and had totally forgotten about it," he told US diplomats somewhat implausibly.

"Russia was run by an oligarchy, of which businessmen like Gusinsky were an integral part, and would be for some time"

strongly sceptical regarding the West's intentions towards Russia. According to Shevardnadze, Berezovsky intended to undermine Primakov's position in that he "wanted to create something like a secretary of state within the Russian security council”. The powers of the security council were not defined in the constitution, and critics feared it could be used to create a parallel government outside any parliamentary control.

At the same time, Berezovksy sought to sideline Primakov. "Berezovsky felt Russian policy should radically change, and he understood this would be impossible without changes in personnel," Shevardnadze said.

He also claimed to have recently revoked his Israeli citizenship. "Judging by a phone conversation he had in pol/ int chief's presence, he was seeking to have the revocation antedated to precede his appointment to the security council," the dispatch commented drily.

'Do it quickly' The oligarchs came to power at the same time as Nato launched its controversial eastwards push.

US diplomats record encountering deep-seated antagonism to the move in Moscow. "Utterances about the undesirability of Nato expansion and the need for 'special agreements' were

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heard ad nauseum around town," American diplomats wrote in 1997.

With the US looking to overcome Russian suspicions, the oligarchs offered one obvious channel, given their monopoly on Russian TV and their search for international legitimacy. The oligarchs thus lost no time in showing themselves the strongest backers in Russia of Nato’s expansion. Berezovsky even backed an apparent offer to Russia to join the military alliance. "It was a mistake for Russia not to capitalise immediately on Nato's invitation to Russia to become a member, "

bne May 2015

the need for a deft hand in the present politically charged atmosphere," was the US takeaway from the encounter.

From Primakov to Putin Open oligarch support for Nato expansion may have deepened suspicion of the Western alliance among conservative figures in Russia's foreign policy and security elites, who feared that the oligarchs were ready to sell out their country to the West.

The diplomatic dispatches show how competing foreign policy positions – pro-US vs Russia-centric – were quickly

"Berezovsky would develop into a necessary and useful man" Berezovsky told US diplomats later at a meeting in February 1999.

Berezovsky said at the meeting that there was considerable support for the US in Russia among the intelligentsia, both "as the carrier of democratic ideals as well as a powerful country with global plans”.

enmeshed with the domestic struggle over power and money at the end of the Yeltsin era. Berezovsky's struggle for political supremacy with Primakov, whom he called his "ideological enemy", ran parallel to Primakov pushing back against Berezovsky's business practices in 1999.

Igor Malashenko, right-hand man of Gusinsky and president of Gusinsky's flagship NTV channel, was even more gung-ho over Nato expansion than the US diplomats themselves. While US diplomats were prepared to work with Russia to overcome misgivings over the policy, Malashenko simply advised US diplomats at a meeting in 1997 to just "do it quietly”.

Primakov had become prime minister in September 1999 following Russia's default in August 1998. By early 1999 he was a strong favourite for the presidency, with elections due in March 2000, and Yeltsin barred from standing for a third time. Under Primakov, government agencies had carried out checks of Berezovsky's business empire.

Primakov at the same time opposed the West over military action against Slobodan Milosevic's Serbia.

Malashenko compared Russia's position relative to the West in the 1990s to Germany or Japan's position after their World War II capitulations, but said that the country's leadership failed to recognise this. "Russia lost the Cold War, but you will never hear any of our leaders say this," Malashenko said, as quoted by the US diplomats.

"Malashenko's injunction to the US to just get on with Nato enlargement ‘but do it quietly’ is a useful warning of

Berezovsky directly tried to enlist US support to oust Primakov from the post of prime minister in May 1999, and thus to scupper Primakov's presidential ambitions, the documents reveal.

At a crucial meeting with US diplomats in February 1999, following the first government checks of his business, Berezovsky warned that, "Primakov actually is as red as a tomato'" and that,

"Primakov would not serve as prime minister beyond May”. Berezovsky said he was moving "indirectly" to oust Primakov and sought assurances from the US that they would support what he called a "soft landing" for Primakov in favour of a new government.

Berezovsky then switched to English to ask for US support for a new government. "Such a government would understand and have a 'clearer' approach on who and how the economy should be led. In this case, he asked, would the US be ready to help stabilise the situation in Russia? Would the US be able to move the country forward?" the documents relayed.

US diplomats were cautious about getting caught up in domestic feuding, despite the foreign policy advantages it promised them. "Berezovsky's thinlyveiled query about US support in such a circumstance and his well-developed penchant for scheming should be interpreted as a warning to be extra cautious about reacting to rumors or events in the coming months too quickly," they wrote.

In the event, Yeltsin fired Primakov on May 12, sending shockwaves through Russian politics. Yelstin appointed Sergei Stepashin to succeed Primakov, only to replace him six weeks later with the politically unknown Vladimir Putin.

One year after Berezovsky had conspired to oust Primakov, Vladimir Putin was president and Berezovsky on his way out.

Death of an oligarch Why did Berezovsky miscalculate Putin so badly? The main reason cited in the US diplomatic dispatches is exactly Berezovsky's longstanding feud with, and fear of, Primakov. "Putin is better than Primakov," Berezovsky told US diplomats bluntly in 2000. In contrast to Primakov, Putin had said he would not revise the controversial privatisations of the 1990s, through which oligarchs acquired ownership of key assets in the resource industries.

Berezovsky appears not to have anticipated that Putin would clip the

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oligarchs’ political wings, perhaps because for him and his fellow oligarchs political and economic power and were one and the same. Putin's ideological mix of capitalism and conservative authoritarianism was new in Russia, which was used to a binary opposition of pro-Soviet statist forces and supporters of pro-Western laissez-fair policies.

Berezovsky was slow to catch on. "Putin is going down the path of Peron or Pinochet – not seeking an authoritarian state per se, but pursuing the goal of a democratic state via an authoritarian path," Berezovsky told US diplomats in late 2000.

Eastern Europe

that the oligarchs have "no instrument of influence over him”.

Soon Berezovsky realised that his efforts to keep Primakov out of office had backfired, and that his power was in decline. "We understand that from an early stage in the Putin administration, Berezovsky lost his privileged access to the Kremlin, and was required to apply for permission each time he wished to visit there," US diplomats wrote in 2000.

Not only was Putin against the oligarchs, but he was also suspicious of their pro-US policy preferences.

"Putin fears neither the US nor Nato, but thinks the US holds positions that run counter to Russian interests," Berezovsky warned the US.

Berezovsky put on a typical show of bravado, boasting of his willingness to resist the Kremlin. "They can put me in jail but it won't help," he boasted to diplomats. In the end he left the country to avoid jail on fraud charges relating to Aeroflot and the car dealership LogoVAZ that he controlled, and settled in the UK, from where he continued attempts to organise opposition to Putin.

Contrary to reports that Berezovsky had selected Putin as presidential candidate, Putin and Berezovsky seem to have had little contact with each other before Putin became president, which may have been another reason

Only once did American diplomats see a different, anxious Berezovsky, which may have presaged his suicide from depression in 2013, after a devastating London courtroom defeat to former partner Roman Abramovich in 2012.

Berezovsky’s obvious signs of worry were reflected on the face and in the voice of the reputed oligarch for Berezovsky's misjudging him.

Berezovsky himself told US diplomats that he backed new foreign minister Ivan Ivanov to succeed Primakov as prime minister in 1999, although Putin eventually got the nod, after an interlude of six weeks.

Oligarch banker Pyotr Aven confirmed to US diplomats that there was no special tie between Putin and Berezovsky, even "noting that he himself had introduced the two”, US diplomats wrote. "Putin knows no-one," Aven told the diplomats, while at the same time acknowledging

After Primakov's government had ordered the first checks on Berezovsky's businesses in 1999, spelling the beginning of the end of his business empire, Berezovsky’s "obvious signs of worry [were] reflected on the face and in the voice of the reputed oligarch”, who "spoke in hushed tones”, the US ambassador wrote of his troubled guest.

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Introducing the ruble as legal tender will also facilitate secret direct funding of the self-proclaimed DPR and LPR by Moscow, say analysts. Moscow denies sponsoring the Donbas rebels, who claim the ruble influx is caused by tax revenues from local exporters, and locals who left in large numbers to work in Russia and send money home.

Ruble rolling Officials were quoted in the local press as saying that the total sum of ruble payments made by the DPR in April was RUB1.9bn ($30mn).

Galina Sagaidakova, head of the rebels' 'DPR Pension Fund', told bne IntelliNews that the shift to the ruble was a pragmatic decision. “We began to pay out pensions in rubles from April 4, after the decree from the head of the republic March 25th, 2015. We pay out according to the pension law, simply multiplied by two because we’re paying out in Russian rubles,” Sagaidakova said.

Return to the ruble Graham Stack in Kyiv and Mari Bastashevski in Donetsk

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he Russian ruble is gaining ground against the hryvnia across rebelheld parts of East Ukraine's Donbas region, 19 years after Kyiv introduced the national currency to end the country's membership of the ruble zone.

As Eastern Ukraine heads towards becoming a frozen conflict, the ruble is in widespread circulation after Russian-backed separatists who control the self-styled Donetsk and Luhansk People's Republics (DPR/LNR) launched payments of pensions and salaries in the currency at the start of April.

While the symbolism of the ruble's resurgence in the east is strong, the move may reflect as much economic necessity, as well as a political desire

to integrate with Russia, after Ukraine severed financial ties.

Cash-strapped and wracked by conflict, Kyiv excluded rebel-held territories from the national payment and banking system, making it impossible for pensions and state salaries to be paid out. It also introduced controls on traffic and passage to and from the disputed areas, leading to a shortage of food products. Meanwhile, supplies of hryvnia cash are also dwindling.

Sagaidakova emphasised that the DPR is paying Ukrainian pensions, not Russian.

“In truth the pensions should be paid out by Ukraine, even the ones that we’re paying out now,” she said.

According to Sagaidakova, the reason pensions are being paid in rubles is simply that “we’re paying out in the currency that we have because we get money in rubles.” The rubles in turn are coming from the DPR, she said, declining to say where the DPR was receiving ruble funds.

Sagaidakova said that the DPR pension fund even exchanges information with Ukraine's state pension fund.

“Until recently it was a one-way correspondence, we were notifying them, but I think in due time this is going to work, because the Ukrainian pension fund also began to contact us and request the files," she told bne IntelliNews.

"Of course using rubles makes me think we're more part of Russia, but prices here remain Ukrainian"

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Shops now display prices in rubles and hryvnia, and many have set up cash desks for rubles.

With many of those remaining in the rebel-held territories pensioners, the sudden flow of rubles starting on April 4 has caused rubles to appear in circulation very quickly, on a par with the hryvnia.

Eastern Europe

being paid in rubles. “We started to receive salaries [in rubles] recently,” said a librarian at the district library on Tchemoskinov street, requesting not to be named.

Initially DPR officials spoke of allowing dollars and euros alongside ruble and hryvnia, but there is no evidence of pricing in, or circulation of, euros or dollar.

“For seven months we received nothing,” she said, adding that she also received three months back salary paid by the DPR along with the April salary. “We’re all law-abiding citizens, first of all we paid off the rent and the utility bills. We paid that to the DPR,” she said. “It’s not enough [money] but that’s how we live now. Those who survived the 90s have some experience,” she said.

Payment of pensions by the rebel authorities is still only partial. According

“In the last month we got paid in rubles,” said Artem Neizvestny, a

"We’re paying out in the currency that we have because we get money in rubles" to government announcements posted in Donetsk announcing the advent of DPR pensions, “no pensions will be paid to those who have applied to receive pensions in Ukraine”. Pensions are paid out at the 'Central Republican Bank,' which comprises former branches of Ukraine's state-owned banks on the rebel-held territories, now commandeered by the rebels.

43-year-old park worker. “We spend it on food and clothes, we're not exactly happy, but it sort of works,” he said.

“Of course using rubles makes me think we're more part of Russia, but prices here remain Ukrainian,” said 30-yearold Nastya Golodets, the employee of

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an international hotel chain in Donetsk, who had also worked in Moscow for a number of years. Nastya said she had savings in rubles, and her mother received a pension payment for April in rubles, while because of hotel closure she received a third of her former salary paid in hryvnia.

Increasing use of the ruble symbolises the rebel-held territories’ slow drift towards Moscow, and may also accelerate the drift. With Kyiv alleged by locals to have introduced a de facto blockade of the rebel-held territories, food products may now be easier to source across the border, while exports of coal to Russia are growing, according to recent reports by OSCE monitors on the Russia-Ukraine border.

Kyiv-appointed governor of Donetsk Oleksandr Kikhtenko, in a newspaper interview on April 10, said that Kyiv should restore economic relations with the rebel-held territories, in order to reintegrate them in Ukraine.

But Ukraine's interior minister Arsen Avakov furiously rejected the idea. “I call to break off Kikhtenko's economic relationship with state service,” Avakov blogged, calling Kikhtenko a “collaborationist” and demanded he be fired by President Petro Poroshenko.

Since many local pensioners still hope to get payment for arrears on Ukrainian pensions, they were wary about talking about their receipt of ruble pensions in DPR. “I got 1,000 rubles in aid payment because of the pensions I have missed, and then my pension for April, in rubles at a rate of 2 rubles to the hryvnia,” said Tanya, an 80-year-old resident of Donetsk city center, who declined to give her last name in case she loses pension entitlement in Ukraine. Despite receiving her pension, she was standing in line for humanitarian aid provided by local oligarch Renat Akhmetov.

Drifting to Moscow Not only pensions, but also salaries to state employees are increasingly

Photo: Drop of Light

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to manipulate a “family drama” that took place in 2013, when Jemilev’s son Heyser “shot a friend of the family using my carbine”. After the annexation of Crimea, Russian lawenforcement agencies accused Heyser of premeditated murder and relocated him from Crimea to Russia’s Krasnodar for trial. According to Heyser and his lawyer, the killing was a result of negligence.

Trials and tribulations of Crimea’s Tatars Sergei Kuznetsov in Kyiv

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he Kremlin likes to champion the fact that over 95% of Crimeans voted to return to the Russian fold in the illegal referendum of March 2014. But that left the rest of the peninsula’s population, mostly Crimean Tatars, who either voted ‘no’ or boycotted the vote, and are still vainly resisting the annexation amid deepening repression by the Russian authorities.

According to Crimean Tatars, since the very beginning of the annexation the Kremlin has employed two different strategies to gain the loyalty of the local Tatar community, estimated to be about 12% of the population. The first was to try to gain the support of the Mejilis, the representative body of the Crimean Tatars, with promises of money and investment. When this failed, they say, the Russian authorities switched to an alternate strategy: the stick of repression and the offer of carrots to split the Crimean Tatars.

Freedom of expression and the press have unsurprisingly been among the first casualties. At midnight on

March 31, the most popular Crimean Tatar television station, ATR, went off the air. Since October the station had been trying to obtain a new broadcasting licence, demanded by the new Russian administration.

But given Crimea's Kremlin-backed prime minister, Sergei Aksyonov, had already accused ATR of inciting discord, this was never going to be issued. "Those who decided to shut down ATR are targeting the whole of our people, not just the TV station," the last presenter on air told the audience. Likewise, the Crimean Tatar news agency QHA did not receive a licence either, and has since moved its operations to Kyiv.

According to Mustafa Jemilev, one of the most influential leaders of the Crimean Tatars, Russia is now preparing fresh elections to the Mejilis, “which is trusted by 90% of the Crimean Tatars”, in an attempt to create a “puppet” Crimean representative body.

Then there’s the individual repression.

Jemilev tells bne IntelliNews that the Russian authorities are trying

Jemilev says that in mid-July one of Vladimir Putin's aides came to him in Kyiv with a proposal to meet with the Russian president. "He said that if I agreed, then the next day all doors [to Russia] would be open for me. And, most importantly, the next day my son would be home.”

This invitation was the second attempt by the Kremlin to foster negotiations between Putin and Jemilev. In March, before the illegal referendum on Crimea’s incorporation into Russia, Jemilev had a phone conversation with the Russian president during a trip to Moscow on the invitation of Mintimer Shaimiev, the former president of Tatarstan, a Russian autonomous region. “Roughly speaking, Putin wanted me to become somebody like [Ramzan] Kadyrov [the president of Chechnya, loyal to the Kremlin] for the Crimean Tatars.”

Exile and exodus The result for Jemilev has been exile, something he is all too acquainted with: he was deported by Stalin to Central Asia in 1944 along with virtually all the other Crimean Tatars.

After 15 years in Soviet prisons and labour camps, he returned to Crimea in 1989. Jemilev has now been barred again by the Russian authorities from entering Crimea. “De facto, they have refused me entry to Crimea [since April 2014], but they haven’t provided me with any official document to this effect,” he says.

Jemilev and his lawyer are currently appealing to the Russian courts in an attempt to obtain an official decision from the Russian authorities barring him from entering Crimea. Their aim

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is to use this document to appeal to the European Court of Human Rights (ECHR). “My wife and relatives remain in Crimea. However, it’s hardly appropriate to talk about discomfort resulting from the fact that I am not allowed to go back to my home, when dozens of Ukrainians are perishing every day in eastern Ukraine,” Jemilev says.

Jemilev is a member of the Ukrainian parliament, representing the bloc of President Petro Poroshenko, and last year he was appointed by Poroshenko as the presidential envoy on Crimean Tatar affairs.

Many other Crimean Tatars are joining Jemilev abroad. According to international organisations, up to 20,000 residents fled Crimea in 2014.

“More than half of them are Crimean Tatars,” Jemilev sighs, adding that for the most part those who left have headed to the western regions of Ukraine. “I believe that the exodus

Eastern Europe

not to leave Crimea, “no matter how difficult it is,” Jemilev says. “However, mothers fear for their children,” he adds, pointing to incidents in which Crimean Tatars have disappeared or allegedly been kidnapped, and in some cases later found dead.

He also stresses that the Crimean Tatar leaders are "strongly opposed" to the relocation of Tatars to Turkey, a country which is close to the minority both linguistically and culturally, and where there is already a large Crimean Tatar diaspora living. “Turkey has better living conditions; if the Crimean Tatars leave for Turkey, they will not come back [when the occupation is finished].”

Jemilev believes that Turkey is trying to avoid taking a tough stance towards Russia, because of close economic and investment ties, as well as its dependence on Russian energy.

“However, as a Nato member Turkey is ready to fulfil all decisions taken by

"Putin wanted me to become somebody like Kadyrov for the Crimean Tatars" will go on, we are unlikely to be able to stop it. This especially applies to intellectuals and students – those who feel the lack of freedom more acutely than ordinary workers.”

An additional stimulus for Tatars to leave Crimea is conscription into the Russian army. “I do not know a single Crimean Tatar who would like to serve in the Russian army. Although [the Russian authorities] have promised that draftees will not be taken out of Crimea before 2017, nobody believes them now,” Jemilev says. “And taking an oath of allegiance to the occupant is a difficult act, from the moral point of view.”

Such an exodus suits the Russian authorities, so the Mejilis has appealed to members of the Tatar community

the alliance. So far, however, Nato has refrained from taking any decisions with regard to the aggressor.”

The absence of any decisiveness on the part of Nato is among the factors why Turkey refused to move its navy close to the Crimean coast during the first weeks of the crisis. Jemilev says that he made such a request of Recep Tayyip Erdogan, the then prime minister of Turkey, in March 2014.

Turkey currently has a declared strategy of using its special relations with Russia to make life easier for the Crimean Tatars. However, Jemilev is sceptical. According to him, Turkey is able to make everyday life easier for the Crimean Tatars, but the country “cannot convert Crimea into a democratic island within

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non-democratic Russia”. “More importantly, there are no prospects for Crimean Tatars in this country [Russia]. The only solution is to do everything possible to force Russia to leave our territory.”

Forlorn hope And that is what Jemilev and other Crimean leaders, against the odds, are still working towards.

While many in the West now pay only lip service to the idea of Russia handing back the Crimean peninsula, Jemilev and others have not given up and are pushing for Western sanctions against Russia to be front and centre in the process of getting the peninsula returned to Ukraine. “Sanctions could damage Russia to the point that it would want to return Crimea,” he argues. “And the West should step up its [sanction] efforts.”

“It would be a major threat to the international community if this situation, in which a military stronger neighbour has seized the territory of another country, went unpunished. We are talking about the protection of the West itself,” Jemilev underlines, though admits that the “de-occupation” of Crimea will take a long time and the issue is likely to remain a frozen dispute for the foreseeable future.

Significantly, Jemilev does not rule out that some Western nations have an interest in spinning out the crisis with the aim of further weakening Russia through sanctions and political isolation. “The more Crimea will be a part of Russia, the more the country will be weakened and vulnerable,” he says.

Jemilev concludes that a military solution to the crisis would be the most undesirable one for the Crimean Tatars, due to fears that their lives would be in danger if hostilities were to break out. “Even if the Tatars didn’t show clear pro-Ukrainian sentiments," he says, "the Russians believe that the Crimean Tatars are a ‘fifth column’ there.”

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Konchalovsky’s wife Yulia Vysotskaya, who presents a home cooking TV show by the same name, and uses it to sell frozen vegetables and berries.

Putin, known to occasionally socialise with the directors (who are brothers and the sons of the man who composed the words of the Soviet and Russian anthems), had Deputy Prime Minister Arkady Dvorkovich handle the proposal, which was promptly approved.

Photo: Cinemafestival

“Cronyburger please, easy on the austerity” Nick Allen in Berlin

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he trademark meat dish could perhaps be called “The director’s cut”: two prolific Russian film directors recently sought a $19mn state credit from President Vladimir Putin to launch an unlikely new national fast-food chain as a counterweight to McDonald’s and other foreign operators. And they got it.

Combining their profile, chummy ties with the Kremlin boss, the buylocal mantra and rising anti-Western sentiment, Andrei Konchalovsky and Nikita Mikhalkov landed almost RUB1bn for Yedim Doma! (“Let’s Eat at Home!”), after plugging its “sociopolitical nature” in a letter to Putin in March, Kommersant reported.

Nice work, said rivals, given the parliament voted on April 10 to cut the federal budget for the first time since 1998 in view of the immense financial pressures on the country. “To develop a business using the state’s money and placing the risks on its shoulders

is probably the dream of every entrepreneur,” Mikhail Kudryavtsev, marketing director of Russian jacket potato chain “Kroshka Kartoshka”, told the slon.ru website after the news broke that Let’s Eat at Home! will be dining out.

Giving such a label to a fast food start-up might seem like calling a trekking company “Couch Potato” to this 17-year veteran of the Russian

70% of the cash needed for construction of two factory kitchens, 41 cafes and 91 stores selling prepared meals will now come as a state-guaranteed loan, which the directors claim can be recovered in about five years. The remaining 30% will be private investment, according to Russian media reports.

Rivals off the table The Russian fast food market was worth RUB1.131 trillion ($21bn) in 2013, according to Kommersant. Helpfully for domestic brands, economic hardships and tensions with the West have cleared some of the competition since Russia’s annexation of Crimea from Ukraine in March 2014.

As US and EU economic sanctions kicked in, McDonald's closed its three restaurants on the peninsula, citing "manufacturing reasons independent of” the corporation. This prompted demands in the parliament in Moscow that the fast-food giant exit Russia altogether.

As the Ukraine crisis deepened, so did scrutiny of America’s most famous

"To develop a business using the state’s money and placing the risks on its shoulders is probably the dream of every entrepreneur" market. “Nonsense”, was its marketing director’s verdict – with one vital qualification: the brand is already known to the public, since it belongs to

eatery. In July, Russia's consumer rights watchdog accused McDonald's of misleading customers about the energy values of some burgers and said it had

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found coliform bacteria in its wraps and salads. Shortly after, a second authority opened an investigation into the cheese used by McDonald's.

Having in 2010 announced plans to open 180 restaurants across Russia, US hamburger chain Wendy's said last summer it was withdrawing from the country. The decision had nothing to do with politics and was brought about by the new management's lack of interest in the Russian market, the company said.

And in January, California-based fast-food chain Carl's Jr. said it would shut down more than 30 outlets in three Russian cities amid the volatile economic environment.

You can’t have your burger and eat it While 56% of the population have eaten in McDonald’s, a survey conducted in September by the FOM pollster found that 67% supported calls for the company’s ejection from the country.

But in the same poll, Russian chains did not even make the top five favourite choices of respondents who regularly tuck into fast food. McDonald’s took 40%, followed by KFC, assorted pizzerias, Burger King and Subway.

No companies serving Russian food garnered more than 2.5%.

It’s all a far cry from the heady days of 1990, when the concept of fast food was alien but the Soviet Union allowed McDonald’s to open its first restaurant in Moscow amid détente with the West.

Huge numbers of people queued for hours to spend several days’ wages on a taste of the outside world’s most famous forbidden fruit.

Empire strikes back But as people will jump to tell you, fast food is partly a Russian invention anyway, with the English word “bistro” coming from the Russian bystro, meaning quick. As the story has it, impatient Imperial troops who had just defeated Napoleon in 1814 would bark this at Parisian waiters, embedding the word in international usage.

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Sberbank results: devil in the details

Mark Adomanis in Philadelphia After VTB revealed its 2014 profits fell by more than 90% and a loss was avoided only through the extension of a generous government loan, all eyes were on Russia’s largest lender Sberbank.

Sberbank’s results released March 26 weren’t great by any stretch of the imagination, but they weren’t nearly as bad as many had been expecting: profit was down by roughly 19%. In an ordinary year that kind of performance might cause an outcry, but 2014 was a crisis year.

At first glance, Sberbank’s loan portfolio held up much better than VTB’s.

But particularly when it comes to large banks, there is a need to dig a little deeper into the weeds. And when you dig into the weeds you see that the picture is a bit more complicated.

A (very brief!) digression into accounting is necessary before proceeding further. An asset's "fair value" is the price it would fetch in an orderly transaction in the marketplace. However, different kinds of assets have different kinds of markets, some of which are much more liquid than others.

Assets are placed into one of three categories based on how their “fair value” is determined. Level 1 assets are the most liquid: cash, cash equivalents and things (like US Treasuries or German Bund) that trade on very large, liquid and high-functioning markets. These assets can be easily “marked to market”. Level 2 assets are occasionally bought and sold on markets, but the markets aren’t very deep or liquid. These assets are, in the lingo of finance, “marked to model”: their fair value is what a model says. There's a bit more uncertainty than in Level 1, but there's nothing particularly esoteric going on.

Level 3 is where things get tricky. These assets are extremely illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges.

Level 3 assets are, by definition, “not based on observable market data.” A Level 3 asset’s “fair value” is an inherently subjective estimate.

At the end of 2014, Sberbank had RUB25,200bn in assets. Of that total, it disclosed fair values for RUB18,196bn. Of that RUB16,791bn (or 92%) were Level 3. In other words, the value of 66% of Sberbank’s total assets was determined through ways that were “not based on observable market data”.

That’s an awful lot of value tied up in assets whose value is highly subjective.

Sberbank’s liabilities tell a broadly similar tale. Of the RUB21,660bn of liabilities for which the bank disclosed fair values, fully RUB13,540bn (or 62%) were Level 3. The bank’s liabilities, then, were a bit more liquid and predictable than its assets, but there was still a high degree of uncertainty about their value.

What does all this mean? What it does not mean is that Sberbank has pulled a fast one on investors. Everything it did in its 2014 financial statement is completely allowed. What the above does suggest, however, is that Sberbank’s management has an extremely high level of discretion in determining the worth of its assets and liabilities, and thus in presenting the company’s ‘real’ value.

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"The irony is that these guys will have to hire foreign management anyway"

This story featured in the conception of one of the first Russian fast food chains Russkoe Bistro, which opened in 1995 to offer high-quality cuisine in a cheaper format than foreign competitors. Its logo showed a uniformed Cossack, evoking tradition and great victories, but also a questionable dash of Russian nationalism. The chain failed due to shoddy products, but roll the clock forward 20 years and the imagery is the flavour of the day again as the country squares up to the West.

The new Kremlin-blessed venture already seems to have stuck in the public’s throat, though, despite the current patriotic climate. In an online poll of more than 1,800 people by the Rossbalt news website, 88% said they do not agree with allocating so much state money to the project.

But 9% still support it. "It is a great initiative, since in Russia we do not have a national fast-food network.

In the 90s we already tried to do it with Russkoe Bistro but failed," says Andrey, a top manager with a Moscow telecoms company, who did not want his surname used. "The irony is that these guys will have to hire foreign management anyway, since Russians do not have one historically, not in fastfood operations at least. It's common knowledge that there are three areas where we don't make the grade, hotels, tourism and fast food – not even after 25 years of practice!"

Meet the new New Russians After years of emulating Western mores, Russians may just be getting fed up with fast food anyway. They are becoming healthier, and drinking and smoking less thanks to government initiatives and a public health awareness campaign. Almost 30% of Russians now also exercise regularly, according to polls, up from 20% in 2012. “In our family we encourage our kids (aged 15 and 5) to regard fast

food as 'junk', no matter if it’s foreign or local, and not to be consumed on a regular basis,” adds Andrey.

Yedim Doma! might yet hit the right spot in the fast evolving new environment.

Russians are genuinely interested in supporting home industry – if it cuts the mustard. The success of the brother directors’ pitch reportedly owes much to its promotion of localism, with around 35% of ingredients sourced in the region, and produce also to be supplied to nearby orphanages and boarding schools.

But people should also be aware that very little Russian produce these days is really all-Russian, notes Kroshka Kartoshka’s Kudryavtsev. “You have to understand that ‘Russian products’ is a myth,” he told slon.ru. “With our company there would be no eggs and meat without imports of chicken feed and so on. So to build a brand on ‘hurrah patriotism’ is nothing more than a PR stunt.”

The new chain can easily go the same way as others before it, Kudryavtsev believes: “Everyone shouts about it when the press release goes out, and two weeks later it’s forgotten.”

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Not all EU-Russia trade disputes are about politics Iana Dreyer in Brussels

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t looks like part of the trade war, but it isn’t. The World Trade Organization is about to set up its fourth dispute settlement panel in two years between Brussels and Moscow. One could mistake this as a sign of the growing trade tensions amid the political crisis between Russia and Europe, but in this case recourse to the WTO is a sign that the many old trade gripes between the two sides are now finally being dealt with in a neutral, non-politicised forum.

On March 25, the WTO accepted the EU’s second request to set up a dispute settlement panel regarding the import duties that Russia applies to various paper products, palm oil and refrigerators.

The EU brought the case to the WTO last November after consultations between Brussels and Moscow failed. A first panel ruling for this dispute is not expected before 2016.

The EU alleges that Russia applies 10-15% import duty levels on various paper products such as kraft paper (a coarse paper used for packaging), light coated paper, paper rolls and paperboard, even though it had committed to a level of 5%. Brussels also accuses Moscow of applying wrong tariff levels on palm oil, refrigerators and freezers. The methodology used to determine tariff rates by the Eurasian Economic Commission – the Russian-led trade bloc that includes Armenia, Belarus and Kazkhstan – is allegedly not in line with that agreed by Russia at its accession to the WTO. This results in Russia overcharging for imports.

The EU exports about $700mn worth of paper products to Russia a year and $190mn worth of freezers. Palm oil exports dropped from $118mn in 2012 to $63mn in 2013, according to UN data.

Russia is the only country to have been a defendant in so many trade cases over such a short period of time since becoming a member of the Geneva trade body. The paper, palm oil and refrigerator case follows three previous

Photo: Martin Good

ones concern a recycling fee on imports of cars, a ban on pork imports and anti-dumping measures on commercial vehicles. Japan has filed a separate case against Russia on certain investment measures. Russia’s import bans of EU food products as a counter-measure to Western financial sanctions last summer is undergoing a mediation procedure in the WTO. Russia has also brought trade disputes against the EU, though not quite as many. One case concerns Brussels’ antidumping duties on Russian fertilizer exports, for which a dispute settlement panel will soon be established. The other concerns EU energy market regulations, which few believe will go beyond the mandatory consultation phase before formal dispute settlement panels are established. None of these disputes has been resolved yet.

Bog-standard dispute The latest dispute brought by the EU has reinforced accusations that Russia, which joined the WTO only three years ago, is not abiding by the many commitments it took in its close-to 600-page accession documents.

But technically and politically, this dispute is the least problematic of all the Russian cases handled so far by the Geneva-based trade body. “As trade disputes go, this is a garden-variety one. This is a very straightforward commercial dispute on the application of tariffs, and the application and customs duties and rules on customs valuation,” says Brendan McGivern, partner at the law firm White and Case in Geneva, explaining that this is not one of the big disputes that sometimes blow up like those involving environmental measures or national security issues.

Critics of Russian trade policy have argued that the country has become more protectionist over the last few years, but McGivern takes a nuanced view on this issue. “There’s been pent-up demand about the way Russia has conducted its trading relationship, which before were subject to negotia-

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tion and now are subject to adjudication through the dispute settlement system,” he says.

some of the investments they have made over the last years.”

An example of such an evolution in EU-Russian disputes is the paper industry. There’s a relatively long history of trade disputes in a sector in which the EU and Russia are highly inter-dependent. Russia is among the top three export destinations for Europe’s paper producers, most of them based in Finland, Sweden, Germany, and Austria.

Those investments seem to have borne fruit to some extent: Russian paper production rose 5.9% between 2010 and 2014, but this progress is minor compared with production increases in China (+16%), India (+20%) or Indonesia (+8%) over the same period.

In 2008, Russia introduced export taxes on timber in a move to allocate resources to upgrading its wood industry as it tries to get away from exporting raw wood only to having a more sophisticated processing industry. A hike on these tariffs was averted after negotiations with the EU, which resulted in both sides agreeing to a quota. This has allowed the EU paper producers to continue to source Russian wood, a product vital to them.

Another dimension to Russia’s industrial policy in the paper sector is protection from imports. “From the very first day of WTO membership, Russia has been infringing its tariff commitments, namely those on coated graphic paper and coated carton board,” says Bernard Lombard, industrial policy director at the Brussels-based Confederation of European Paper Industries (CEPI). “The policy of Russia is to protect

Politics intrude Trade disputes involving the EU and Russia are generally very difficult to disentangle from the deteriorating political relationships between Moscow and the West over the last years.

The EU is trying to keep discussions on this trade case as technical and insulated from politics as possible, and EU industries behind this case want it to be so too.

“The healthy part of this is that before there were negotiations, which went nowhere, [but] now you’ve got a legal framework, this tends to depoliticise disputes,” White and Case’s McGivern says. But “it does require a bit of time to allow these cases to work their way through the system.”

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© Andras Farkas

Big fat Gypsy orchestra fight Kester Eddy in Budapest

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hey have enchanted audiences from Dublin to Moscow to Tokyo, and many cities in between: clad in colourful traditional apparel, for over three decades musicians of the Budapest Gypsy Symphony Orchestra (BGSO) have built up a dazzling stage performance and won rave reviews.

The orchestra – which also plays under the name “A Hundred Gypsy Violins” – began life in 1985 when the leading gypsy musicians paid tribute to Hungary's most famous Roma soloist of the day, Sandor Jaroka, at his funeral.

From this was formed an all-Roma orchestra led by Laszlo Barki, who was the conductor at the Hungarian national Ensemble until his death in 1997. The BGSO, which plays without sheet music, and includes 60 violins, 9 violas, 10 basses, 9 clarinets and 6 cymbals, is a “flagship” for both Hungarian and Roma culture, says Nandor Beke Farkas, BGSO president. “We are ambassadors. People

only talk positively about us,” Farkas tells bne IntelliNews, keen to stress that his orchestra has also won official state recognition as a “Hungaricum” – a unique element of Hungarian culture.

Except now there are two. Or, as Farkas puts it, there is a “fake” rival ensemble “rapidly thrown together”, using its

who, until May last year, served as the exclusive international promoter for the BGSO. But when, citing declining concert bookings, the BGSO management removed that exclusivity last year, Dubuc moved to found the 'fake' orchestra, illicitly using the original

“The new ensemble is not a 'clone' or 'fake' orchestra” marketing material and damaging the reputation of the “genuine” Gypsy Orchestra.

Spot the difference The “clone”, as Farkas also terms the new ensemble, has been formed by Xavier Dubuc, a French impresario

name and promotional materials to attract larger audiences, Farkas alleges.

As a result, the BGSO petitioned a court in France last January, winning an order to prevent Dubuc from using the French name “100 Violons Tziganes de Budapest” and any BGSO marketing material.

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With that under his belt, Farkas says he is now suing Dubuc for what he terms “financial and moral” damages caused by the Frenchman's gypsy band. “The audiences were expecting the faces on the promotional material. Our members got emails: where are you?” Farkas claims.

Over in Lyon, France – a somewhat surprising base for a Magyar Gypsy musical operation – Dubuc has been complying with the court order. In the past six weeks, the website for what he now calls the Gypsy Philharmonic Orchestra has been steadily re-designed, shedding any reference – at least directly – to both the BGSO and A Hundred Gypsy Violins. A Google search for the 'Budapest Gypsy Symphony Orchestra' throws up lots of links to Dubuc's new orchestra, few for the original.

Far from avoiding media attention, as might be expected from some kind of illicit operation, Dubuc warmly welcomed bne IntelliNews’ enquiries into his project. “I’m really pleased to finally receive such a request after having been falsely attacked in the Hungarian media,” he wrote in an emailed response to questions.

However, his reaction to the main charges raised by Farkas is bulldoglike. “The new ensemble is not a 'clone' or 'fake' orchestra. It has its own personality, with younger musicians, a new name, a new logo, a new website and new pictures. It’s our interest to be totally different from the old orchestra to show it’s not the same,” he stated.

And far from seeking to exploit the BGSO name, he says the concerts in France earlier this year were originally booked for the Budapest orchestra, before the split. “I arranged these under the name of '100 Violons Tziganes de Budapest'. This was, in any case, a name that I [coined] 21 years ago when I first brought the orchestra to France,” he says.

According to Dubuc, the current row is a “betrayal” by a new generation of management at the BGSO following the death one year ago of Sandor Rigo Buffo, his friend and former orchestra president. The new leadership is totally

unaware of the efforts – and risk – he has taken over the past two decades, the Frenchman complains. “When I discovered this orchestra 21 years ago in Hungary, they were totally unknown abroad,” he says. Under his guidance, the BGSO performed in 32 different countries, including China and Japan, before his final concerts last summer.

Promoting tours with a 100-plus ensemble is also not for the financially faint-hearted. “To tour with so big a company without any public or private

the cause of gypsy orchestral music – or, indeed, its official Hungaricum status?

Balazs Weyer, a Budapest-based music critic and himself a promoter, argues it is hard to predict: “The gypsy orchestra are fine as musicians, but they are a difficult product in commercial terms.

And these days, the smaller the better – they are expensive to travel and move about.”

Weyer is dismissive over concerns about the Hungaricum status. “This is just

“If I were the 100 Gypsy Violins, I wouldn't be so concerned” support, that was a challenge. I took a lot of risk. Last June, in France, six concerts, including the Theatre des Champs Elysées, was a disaster: we lost €150,000,” he claims.

And along with the difficulties faced by every promoter, Dubuc says he also battled with racial prejudice. “It was often difficult to open markets, because of their gypsy origin,” he recalls.

not a USP [unique selling point] when touring in Europe,” he says, hinting the local orchestra should just knuckle down and compete on merit.

“If I were the 100 Gypsy Violins, I wouldn't be so concerned,” he says, “These things happen – it's not like an Apple versus Samsung [multi-milliondollar] trademark conflict.”

Space for duets Now, while waiting “serenely” for any new legal proceedings, the promoter notes that the French court, while ruling against his use of the both the BGSO material and use of the name '100 Violons Tziganes', nonetheless found for Dubuc over ownership the domain name 100violins.com.

And while BGSO president Farkas complains that fans and concert promoters alike have been confused by the appearance of the Gypsy Philharmonic Orchestra – he produces emails as evidence of this – and complains that the livelihoods of his members are at risk, Dubuc retorts that with other gypsy bands at work in Hungary, “Farkas does not have exclusivity on this concept”.

In the broader context, will the battle of the Roma bands enhance, or detract from

© Andras Farkas

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when they are deemed to underperform.

“It is not a grassroots movement, it’s astroturfed,” says Sean Hanley, lecturer in politics at the School of Slavonic and East European Studies, University College London.

At the party’s March congress Babis’ unanimous re-election as leader was reminiscent of the majorities that Central Asian autocrats like Islam Karimov of Uzbekistan rack up. Even Babis looked embarrassed at the spectacle. The party’s statutes – which were approved without discussion by 164 votes out of 173 – also give him virtually sole authority.

yakub88 / Shutterstock.com

Czech party congresses mask political realities Robert Anderson in Prague

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zech politics currently has an air of unreality. The Czech Social Democratic Party (CSSD) and the populist Ano party make a big show of disliking each other and acting more like rivals than coalition partners. Journalists speculate on when Ano’s leader, Finance Minister Andrej Babis, will pull the carpet from under Prime Minister Bohuslav Sobotka, and take advantage of his party’s opinion poll lead to seize the premiership for himself.

And yet there is a distinct lack of substance to the disputes within the government, which seem more like shadow boxing before the next election – not due until late 2017 – than signs of an imminent fracture.

The differences between the country’s two most popular parties were on full display at their respective annual conferences in March.

Babis’ Anofert subsidiary Ano’s conference was a poorly constructed Potemkin village. The party – only founded in 2011 – masquerades as a populist movement against corruption,

Moreover, many of the party’s key officials come from his company. The gap between Agrofert and Ano is so paper-thin that the deputy party leader, Jaroslav Faltynek – who was also elected unopposed – is able to be both party leader and an Agrofert director at the same time.

The party still lacks a clear ideology, though Babis uses this to differentiate Ano from the discredited traditional parties. Up to now it has struck a pragmatic, centrist stance, and in the absence of anything closer it joined the ALDE liberal group in the European Parliament. But now Babis has realised how few liberal voters there are in the Czech Republic and he is moving the party towards the right, where a huge

“Social Democrats project themselves as a kind of trade union for older, socially disadvantaged people” but is in reality the personal political project of the country’s second richest man.

It has barely any members (2,500) and Babis runs it like a branch of his agro-chemical conglomerate Agrofert.

Leading personalities or experts are hired as ministers or political figureheads after an interview with the leader, and are then fired or sidelined

space has opened up since the implosion of the last Civic Democrats-TOP09 right-wing government in a welter of corruption and spying scandals. Though he currently rules it out, this could eventually pave the way for a future centre-right coalition.

The lack of party democracy, or ideology, or even policies do not seem to

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harm Ano, which has around a 7-point lead over CSSD in the opinion polls.

Babis maintains an image as a strong, successful manager who has reluctantly – and generously – decided to take on the onerous task of cleaning out the Augean stables, besmirched by the country’s squabbling, incompetent and corrupt politicians.

Whether Babis will be able to keep up this act, without some evidence of good management or cleaning up corruption, is questionable. “It is difficult to play the anti-politics card for ever,” notes Hanley.

There is also a growing risk that the personalities he has recruited will demand more say in how the party is run. “It does not have any valves to let off steam,” says Jiri Pehe, who parodies the party as ‘Anofert’. “I can’t see how he can hold this together for a long time.”

The third danger is that Ano will eventually be damaged by the conflict of interest between Babis as finance minister, and Babis as a tycoon who is prospering in the country’s murky business environment. If the conflict does become visible, it could be devastating, as anticorruption is Ano’s main selling point.

So far Czech journalists have hardly begun to investigate these conflicts of interest – perhaps not surprisingly, given that Babis now owns two out of the four serious national newspapers.

Rotting at the roots The CSSD congress was also by its standards a very subdued affair, but not because there is any lack of internal opposition to Sobotka’s uncharismatic leadership.

Instead, the traditionally fractious leftish party appears stunned to find itself in such rude health after a deeply disappointing general election, followed by an attempted putsch orchestrated

by President Milos Zeman, the party’s estranged former leader.

CSSD – founded in 1878 – has been the strongest Czech political party for nearly two decades, only coming second at a general election once since Zeman led

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Poll shows Czechs have little to no trust in government Henry Kirby in London Czechs have little faith in public institutions and believe corruption to be widespread in many key areas of public life, according to new research by Prague-based polling company the Public Opinion Research Centre.

The study, published on April 10, asked a sample of 1,045 Czech citizens to rate various public institutions according to how corrupt or susceptible to bribery they deem them to be. As the bne:Chart shows, the majority of Czechs since the survey began in 2004 believe either the majority of or all public officials are corrupt or in receipt of bribes.

The latest poll showed a slight improvement from the previous year’s, with 27% of respondents believing that either very few or less than half of public officials engage in corrupt activity, up 7 points from just 20% in 2014.

That is likely due to the 2014 formation of a coalition government made up of the Czech Social Democratic Party and the new centrist Ano party of billionaire Andrej Babis, which fought the latest election on an anticorruption platform.

A massive 75% of respondents in 2014 believed that either the majority of or almost all public officials were corrupt – the highest proportion of negative responses since the study began in 2004 – as trust in government reached a nadir when former prime minister Petr Nečas' government collapsed in the summer of 2013 in a welter of spying and bribery allegations.

How widespread is bribery and corruption among public officials?

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Nie, ne to the euro With Greece’s future amongst the group of countries using the euro very much in doubt, it’s surely no shock that recent opinion polls show a majority of Poles and Czechs are against their countries – both legally obliged to switch under the terms of their 2004 EU entry – adopting the single currency.

The Czechs, by and large a euro-sceptic lot, are the most against the idea, according to an opinion poll in April conducted by the agency Ipsos. Some 85% of Czechs are opposed to the adoption of the euro within the next two years, with just 12% for joining in a short timeframe. University graduates were the group of respondents most likely to be in favour. Czech Prime Minister Bohuslav Sobotka says the nearest possible term for the Czech Republic to adopt the euro is 2020, though like all previous and no doubt future governments, there is no rush to set an official target date.

In Poland, a TNS opinion poll in March found that 52% of Poles think joining the Eurozone would be a bad idea, while a mere 15% support it and 23% believe it would be neither good nor bad. As many as two-thirds of Poles believe the euro would damage their economic standing.

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them to power in 1998. The left now is the dominant force from the presidency down to both chambers of parliament and much of local and regional government.

The collapse of the right-wing Civic Democrats (ODS), their traditional rivals since the restoration of democracy, left CSSD without serious opposition.

However, Babis’ creation of Ano stole from them the clear victory they should have achieved in October 2013, and gave Zeman his chance to revenge himself on the party’s leaders who had sabotaged his first tilt at the presidency in 2003.

Sobotka played that crisis well, and since then Zeman’s self-destruction, combined with the government’s relative stability and popularity, have kept potential rivals such as Interior Minister Milan Chovanec in check.

At the party's congress, the prime minister ran unopposed and won 85% of the vote. Sobotka also secured the re-election of lieutenants such as Foreign Minister Lubomir Zaoralek, who had been expected to struggle because of his strong backing for sanctions against Russia.

Yet this apparent success also masks the true state of the party. Membership is just 21,000 (though this is eight times Ano’s), and predominantly old and male.

Its support is strongest among this same demographic in small towns, rather than among younger, educated voters in large cities, which is the pattern for left-wing parties across Western Europe. This does not bode well for the party’s future vitality.

Unlike most Social Democrat parties in the region, CSSD is not the old Communist party renamed. And yet it is not a modern West European Social Democratic party either. It remains stuck in a defensive crouch, protecting welfare benefits while displaying little vision of the kind of country it wants to build that could attract young, progressive voters. “They project themselves as a kind of trade union for older, socially disadvantaged people,” says Pehe.

True, the party still has by far the strongest base in local and regional

government, but this could be an Achilles’ heel, as corruption is rife at this level. Babis’ newspapers have already tried to tar Sobotka with old controversies from the CSSD’s 19982007 governments. A fresh scandal here could furnish Babis with a pretext to leave the government, if he needs one.

Yoked together At his congress, Babis promised to be tougher on CSSD in the future and muttered darkly about how the party was “burdened by a controversial past”.

For their part, Sobotka and other CSSD leaders made noises about how the finance minister was blocking tax increases, and disparaged his democratic credentials. “He is at a permanent risk of conflict of interest," Sobotka said.

Yet the odds are that the coalition will hang together until the next election, but with increasing tension. Both parties are polling higher since the election – with Ano’s percentage in the high 20s and CSSD’s in the low 20s – and economic growth is accelerating.

The coalition has no major planned reforms or looming challenges that look like they could unsettle this picture, though the 2016 budget is bound to provoke more posturing.

Difficult decisions such as when to adopt the euro have been kicked into touch. The coalition appears content to drift on for another two years. “I do not see any progress [on reform] or even indications of preparations,” says Blanka Kolenikova, senior analyst at IHS. If Ano maintains its support until the election and afterwards can govern with the right, it may decide to do so, as a way of cementing its position as the new alternative to CSSD. But the votes may not be there, and even if they are, the squabbling rightwing parties may not be so eager to be cannon fodder. “There are not that many options,” admits Pavel Telicka, a member of the European Parliament on Ano’s ticket. So CSSD and Ano may just be stuck with each other.

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bne:Deal

Sale of the Citadele

Robert Anderson in Prague

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he privatisation of Citadele bank, which was finally completed on April 20, symbolises Latvia’s belated recovery from the collapse of the Baltic economic miracle.

The state put in €1.75bn of aid, including guarantees, while in April 2009 the European Bank for Reconstruction and Development agreed to inject €84m of equity, plus €22m of subordinated debt.

The failure of the bank – then named Parex – during the global financial crisis in November 2008 forced Latvia to seek a €7.5bn bailout from the International Monetary Fund and the EU, and came close to breaking the lat’s fixed exchange rate peg. “It happened at exactly the wrong time,” recalls Morten Hansen, head of the Stockholm School of Economics in Riga.

In August 2010 the bank was divided into a good bank, renamed Citadele, in which the state held 75% and the EBRD 25%, and a bad bank called Reverta. Shareholders were wiped out, but all bonds were honoured, with the exception of €76m of subordinated debt.

More than six years on, Latvia has recovered strongly (though GDP is still 6% lower than before the crash) and it was able to join the Eurozone in January 2014.

Latvia’s turnaround was a key draw for the winning bidder, Ripplewood Advisers, a US private investment company led

by Tim Collins, famous for his buyout of Japan’s insolvent Long Term Credit Bank in 1999. Ripplewood brought in 12 co-investors, reportedly including Paul Volcker, former chairman of the US Federal Reserve, James Wolfensohn, former head of the World Bank, and Egyptian construction billionaire Nassef Sawiri.

However, the failure to sell the rump of Parex until now demonstrates both the depth of the bank’s problems and the challenges of doing banking deals in Central and Eastern Europe since the global financial crisis.

Preserving value Parex, founded in 1992 by Valery Kargin and Viktor Krasovitsky, had grown to become Latvia’s second largest bank by assets through servicing Russian capital flight. But it also extended risky loans to clients from the former Soviet Union, and became overexposed to the Latvian property bubble. In the global financial crisis, it was unable to secure wholesale funding and, as rumours grew, it suffered a run on deposits and the state was forced to take it over.

In 2011 the state made its first attempt to sell the bank, using Nomura as an adviser. But the process was abandoned in

“If you put together the direct and indirect impact, the taxpayer can be quite happy” November after the collapse of Snoras Bank in neighbouring Lithuania and the deepening of the Greek debt crisis.

A second attempt was launched in July 2013, this time with Societe Generale as adviser. The financial climate was initially much more propitious but it worsened again in early 2014 as Russia invaded the Crimea, and the EU investigated whether Latvia had breached state aid rules in rescuing Parex.

“The clouds appeared and it started to rain,” says Vladimirs Loginovs, chairman of the Latvian Privatisation Agency.

Hard sell By mid 2014, a year into the new process, Societe Generale was faced with two serious time constraints. Latvia was to hold general elections in October, which would inevitably politicise the deal. Even more worryingly, though the EU had cleared Latvia of breaching state aid rules, it was still insisting

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that a buyer had to be found by September. “We were standing with our back against the wall and the investors knew that,” says Loginovs.

A share purchase agreement (SPA) was eventually drawn up by the EU deadline, but Loginovs’ predecessor at the privatisation agency resigned in October rather than sign it, further delaying the deal. The SPA was finally signed in November, once the government had been re-elected. Prime Minister Laimdota Straujuma said the price was “the best we could hope for”.

"The clouds appeared and it started to rain” The sale process has always been controversial and remains so (a parliamentary inquiry is still ongoing). “I have rarely seen a process under such scrutiny, both at the local and EU levels,” says Stanislas Lecat, who ran the process for Societe Generale.

“It was quite staggering.”

Partly this reflects the fact no well known strategic bidders took part in the tender. Latvia is a small banking market already dominated by Swedbank and SEB of Sweden. Banks already present in Central and Eastern Europe are currently more in the business of downsizing than expanding, while newcomers to the region are unlikely to start with a punt on an insolvent Latvian bank. “Banks are trying to decrease the geographies they are operating in,” says Loginovs. “Everybody is trying to concentrate on where they are strong.”

From the original 14 potential bidders who received the information memorandum, three finally submitted binding offers. “The Ukraine crisis was another constraint in managing the process, and played a role in reducing the appetite of some of the bidders,” says Lecat.

Ripplewood discounted the impact of the Ukraine crisis.

“The mismatch between market perceptions [of risk] and reality creates interesting opportunity for people like us,” says Elizabeth Critchley, Ripplewood’s managing partner.

Under an “investment club” model, Ripplewood agreed to take a 22.4% stake, and recruited 12 investors to buy the remaining 52.6%. The EBRD agreed to keep its 25% stake to provide comfort to the buyers, and extended its subordinated debt.

Price was the second main source of controversy. According to local media, Ripplewood’s bid was not the highest, but

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Loginovs says the three final bids were within 10% of each other, so other criteria were the deciding factors.

The price of €74m for the state’s 75% stake represents around 0.6 times book value. Even at today’s depressed valuations, that looks pretty cheap for a bank in which the bad assets have been carved out. However, this is partly explained by the fact that Citadele was undercapitalised because of EU restrictions.

Its tier one capital at the end of 2014 was 10.4%, compared to an average of 17.9% in the rest of the sector.

What made the sale even more stormy was that details of an EBRD put option, agreed in 2009, were leaked just a few months before the SPA was signed. In the event, on completion the state instead compensated the EBRD for the loss in value of its 2009 investment, which the development bank then reinvested in Citadele. The net result was that the state had to give the EBRD €74m, wiping out its proceeds from selling its 75% stake. The state had in effect sold its stake for nothing.

The final balance Yet despite the fact the sale took six years, the rescue of Parex did end successfully, especially considering the constraints the government faced.

“If Parex had not been saved it would have been an avalanche for the entire [banking] sector,” says Loginovs. He estimates that of the original €1.75bn in state aid, €1.2bn will eventually be recovered.

Moreover, Citadele has now been rebuilt as one of the strongest locally-owned players, with a relatively low exposure to nonresident deposits. It is the sixth largest bank overall, with €2.33bn of assets, compared with €4.9bn before Parex collapsed.

“If Parex had not been saved it would have been an avalanche for the entire [banking] sector” Now the EU restrictions are lifted, Ripplewood has ambitious long-term plans to increase the bank’s market share in the retail and SME segments, and to expand its footprint in Lithuania and Estonia, possibly by acquiring the operations of retreating Scandinavian banks.

“If you put together the direct and indirect impact, the taxpayer can be quite happy,” argues Guntis Belavskis, Citadele’s executive chairman.

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the country's top web portal WP.pl – confirmed it will carry out an IPO and list its shares on the Warsaw Stock Exchange (WSE) on May 8. Puls.TV – a pay TV network originally set up

by Franciscan monks – also said it is preparing to list in Warsaw in the second half of the year.

Praying for cash There are various forces driving the strategic sales and fund-raising efforts

by Polish media companies.

Polish consumer puts media in the spotlight Tim Gosling in Warsaw

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t's usually the other way round, but media exposure has taken on a new meaning in Poland. The Polish public’s growing consumer confidence is putting the country’s media sector in the spotlight.

Media across much of Central Europe is suffering as international investors flee mounting losses, leaving local oligarchs and politicians to take over.

Not so in Poland, where the sheer size of the market and a search for exposure to rising consumer spending is driving a mini-boom in the sector.

The six or so years since the 2008 crisis have seen international media groups that arrived in the region in the 1990s exiting neighbours such as the Czech Republic and Slovakia. Offering little financial attraction for potential investors, they have been replaced by powerful local figures keen to gain political influence, sparking fears over media freedom. However, the Polish market is a different beast. “Size matters,” states Tomasz Krukowski, who heads equity research in the region for Deutsche Bank. “The track record

shows the strength of the Polish market relative to the rest of the region.”

The sale of Poland's largest private broadcaster TVN illustrates the point.

A line of global giants including Time Warner, Century Fox and Discovery from the US, and Germany's Bauer and Axel Springer formed to purchase

In the case of WP.pl, it has been fighting onet.pl for internet supremacy for years. Having grabbed top spot late last year, Wirtualna Polska clearly feels some pressure to press home its advantage over its rival, in which TVN holds a sizable minority stake alongside Germany's Axel Springer. A chunk of the proceeds from the sale will be used to bulk up. “Competitors are breathing down our neck and we want to use the IPO money for acquisitions,” Wirtualna Polska's CEO Jacek Swiderski told a news conference in April. “We want to keep investing in e-commerce, which expands twice as fast as the internet advertising market.”

Meanwhile, Polish TV operators are chasing a window of opportunity since digitalisation to put pressure on the country's top two privately-owned rivals: Cyfrowy Polsat and TVN, which jointly

“The smaller players are trying to grab market share in the free-to-air segment since digitalisation” the 52.7% stake that was put up for grabs by local investment group ITI and France's Vivendi. The €884mn that the US’ Scripps Networks Interactive agreed to pay for the stake in March saw TVN valued well above European peers. Scripps suggests it's now preparing a buyout offer to scoop up the rest of the shares.

Hot on the heels of that long-awaited deal, Wirtualna Polska – operator of

hold a market share of about 50%. Puls TV runs two channels, directed mainly at Poland's large Catholic congregation, and has a 6% share of the market. “The smaller players are trying to grab market share in the free-to-air segment since digitalisation,” points out Deutsche Bank’s Krukowski. Poland switched off the last of its analogue transmissions in mid-2013. The Deutsche Bank analyst suspects that, “Puls TV needs cash for development in that context. It needs

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to invest in programming to take advantage.”

“The bourse is a tool and possibility to reach greater goals... Further dynamic development is our aim,” Puls TV CEO Dariusz Dabski said as he announced the plan to list in March. “The offer could equal tens of millions of zlotys rather than hundreds. If, however, there is suddenly a possibility of an interesting takeover, which will give us turbo power, it will be hundreds [of millions].”

Time to go?

Meanwhile, like ITI's sale of TVN, the listing of Wirtualna Polska is seen as a first step to an exit for its private equity shareholders. MCI Management says it will sell part of its holdings during the listing. “Now is very positive for techinternet IPOs in Western Europe and the US, and I expect this trend to accelerate also on the Warsaw Stock Exchange,” MCI Management's Tomasz Czechowicz told bne Intellinews.

The company hopes to raise up to PLN100mn from the sale of newly issued shares, with a further 23.5% stake to be sold by the current owners. Although some fund managers claim it's too much, Wirtualna Polska is chasing PLN37 per share, which would value the company

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at over PLN1bn. That would give a nice return on investment; private equity fund Innova Capital bought WP.pl from Orange Polskie in 2014 for PLN383mn.

Local fund MCI bought into the portal operator just afterwards, to the tune of PLN60mn.

Wlodzimierz Giller at PKO Bank Polski claims such exits are driven by specific conditions at the funds that are selling, rather than high demand from suitors.

Indeed, the likes of Scripps and its rivals interested in the acquisition of broadcaster TVN look to be happy to pay top dollar for the potential growth of Poland’s media market, with the Polish consumer expected to drive GDP growth over the medium term. “Consumers remain confident,” note analysts at Erste Bank, who forecast GDP growth of 3.4% in 2015, with domestic demand the main pillar of that growth as private consumption expands up to 4%. “We

“International players would still like to enter Poland but again, there aren't really any targets” At the same time, he suggests it's not the peak time to cash out. “The ad market equals around 0.4% of GDP at the moment; it hit around 0.6% in 200607.” That said, he admits the market is “probably at the bottom of the cycle.”

Krukowski predicts Poland’s overall advertising market will continue growing at mid to high single digits over the medium term. “It's a bet on Polish consumption over the longer term,” he says.

thus expect positive growth dynamics of private consumption, especially as labour market conditions keep improving.”

Giller is more circumspect, pointing out that at 5% growth per annum, the ad market's expansion is not too far ahead of GDP. However, that appears enough to drive positive sentiment for retail-facing companies, particularly in the internet segment. “The internet ad market is by far the fastest growing,”

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the PKO BP analyst points out. “It's around twice the speed of the traditional segment at 10%.” The TV advertising market grew by almost 6% to PLN3.8bn in 2014, according to the local Starlink media agency.

Big fish, small pond Adding even more potential for the companies now pushing onto the Polish media market is there's a very limited pool of candidates that could follow. “I don’t think there's many more companies to come,” Krukowki sums up.

“There are not many significant players.”

While 15 companies make up the WIG Media index, the four largest – which includes TVN, cinema operator Global City Holdings and Agora (publisher of newspaper Gazeta Wyborcza) – account for around 95% of the weighting. PayTV network Cyfrowy Polsat constitutes over 50% on its own, mainly thanks to its purchase in 2013 of mobile operator Polsat. “International players would still like to enter Poland I think,” Krukowki believes, “but again, there aren't really any targets. [Rupert] Murdoch is speculated to be interested in Puls TV, but I'm not sure how serious that is.” Murdoch’s News Corp held a 35% stake in the TV network for a couple of years until it sold to Dabski and the monks in 2008.

Certainly, TVN, WP.pl and Puls TV look to be the last available media outfits that can offer sizable exposure to the Polish consumer. Cyfrowy Polsat, the country's largest media group, is now a relative giant under the ownership of billionaire Zygmunt Solorz-Zak, and is still working on absorbing the country's second-largest mobile operator Polkomtel, which it bought in a PLN5.15bn all-share transaction in 2013.

Other names include Global City Holdings, which completed a merger of its core cinema holdings with UK-listed Cineworld in May. The WSElisted Agora's main asset is newspaper Gazeta Wyborcza, so it offers relatively little potential growth. “The print segment … is expected to significantly underperform the market,” Erste Bank notes.

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Smolensk plane crash continues to divide Poles Adam Easton in Warsaw The plane crash in Smolensk five years ago that killed Poland’s President Lech Kaczynski and all 95 others on board briefly united the nation in grief, such was the enormity of the tragedy. But that solidarity had vanished within weeks and the crash continues to divide the country to this day.

Law and Justice – the opposition party that suffered the most losses in the disaster, and is led by Lech Kaczynski’s identical twin, Jaroslaw – has boycotted official anniversary ceremonies for the last four years. As Poland’s president, prime minister and families of some of the crash victims paid their respects at Warsaw’s Powazki military cemetery on Friday’s fifth anniversary of the crash in April, Kaczynski and his supporters were doing the same outside the Presidential Palace.

Stoking the division is the fact this terrible tragedy has always been manipulated in a political game and is now being used to shore up votes ahead of May’s presidential elections.

All official investigations so far have blamed the crash on poor preparation, and poorly trained pilots who attempted to land at the military airfield in western Russia in dense fog despite their misgivings about the weather.

Each probe has ruled out sinister conspiracy theories. An ongoing Polish military investigation has published an expanded transcript of the cockpit conversations that added weight to the belief, held by many here, that the pilots were under pressure to make the attempt in order for the presidential delegation to arrive on time for a ceremony marking the 70th anniversary of the murder of Polish officers by the Soviet secret police in nearby Katyn.

But Kaczynski and his colleagues have encouraged Poles to believe the crash was an assassination carried out by the Russians and Lech Kaczynski’s political foes. “All opinions indicate there were simply explosions, so there is a high probability we had to deal with an assassination,” Kaczynski told the Radio Maryja radio station on April 9.

The station is popular with elderly Poles who live in small towns and the countryside, where Law and Justice traditionally draws strong support. A survey in April found that one in five Poles believe it was an assassination.

Securing that support is crucial now it appears that President Bronislaw Komorowski, who is supported by the governing Civic Platform, is less likely to secure a knock-out win in the first round on May 10.

Perhaps due to complacency in his camp, Komorowski’s main rival, Law and Justice’s Andrzej Duda, has been catching up in the polls. The choice of Duda is an attempt to attract new voters with a less aggressive and younger, more modern approach than Jaroslaw Kaczynski, who lost to Komorowski in 2010. So for Law and Justice, the Smolensk crash is a way to shore up its core constituency by promoting itself as a strong patriotic party that can stand up to Russia.

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Romania sets example in corruption fight Clare Nuttall in Bucharest

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series of high-profile investigations in Romania and the launch of a new anti-corruption strategy in Bulgaria suggests that both EU member states are finally getting serious about tackling corruption. The prospect of EU membership is also seen as an incentive to clean up elsewhere in Southeast Europe, where according to a recent survey the informal economy remains the top obstacle to doing business.

On April 3, Bulgarian Deputy Prime Minister Meglena Kuneva announced plans for the new anti-corruption strategy that will include the launch of a single authority to tackle corruption. Six priority areas have been identified, including countering top-level corruption, reducing petty corruption and building a climate of public intolerance to corruption. The new agency will be responsible for investigations into over 7,600 senior government

officials and magistrates, said Kuneva, a former European commissioner.

“The aim of the strategy is to turn Bulgaria into a country where petty corruption is limited largely to average EU levels, high-level corruption is not left unpunished, anti-corruption institutions work efficiently,” says a government statement.

Launch of the single agency would represent a considerable change in Bulgaria, where, according to Rositsa Dzhekova, coordinator of the security programme at the Sofia-based Center for the Study of Democracy, “There are many institutions tasked with fighting corruption but no single body to coordinate them, creating a situation of ‘shared irresponsibility’.”

The relative lack of progress in Bulgaria compared with Romania is one of the main motivations for the new strategy.

Prime Minister Boyko Borissov said on April 3 that within four months Bulgaria is aiming to overtake Romania. “In a sense, they were trying to catch up with us... What has happened in a year and a half is that Romanians are now given to us as an example; four years ago they were behind us,” Borissov said on April 3, local newswire Novinite reported.

High crimes and misdemeanors Borissov’s remarks follow a series of probes targeting high-ranking Romanian politicians and businesspeople launched by the country’s National Anticorruption Directorate (DNA). In March, Darius Valcov resigned as finance minister following the launch of a corruption probe. Other influential politicians that have become the target of corruption investigations include former presidential candidate Elena Udrea and former minister for large projects Dan Sova. Both the son of former

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Moldovan President Petru Lucinschi and the son-in-law of former Romanian president Traian Basescu are under investigation in a bribery probe, while Romania’s richest businessman Ioan Niculae was sentenced to 30 months in prison when he was found guilty of paying a bribe to the campaign staff of 2009 presidential candidate Mircea Geoana.

Some of these cases have already started to change Romania’s political landscape.

The Valcov case opened as the government was finalising its new fiscal code, which will introduce a package of tax cuts ahead of the 2016 elections. His resignation at this critical point forced Prime Minister Victor Ponta to take over the finance ministry for a few days.

Meanwhile, the opposition National Liberal Party (PNL) had hoped to find a potential coalition partner in a new party planned by two former members of the ruling Party of Social Democrats (PSD), Geoana and Marian Vanghelie.

However, plans for the party are now on hold after Vanghelie became the target of a corruption investigation, while Geoana has been implicated in the Niculae case.

This dashed the PNL’s hopes of ousting the PSD before next year’s parliament elections.

Bulgarian Deputy PM Kuneva visited Romanian institutions to learn from their experience, but the Bulgarian plan does not exactly replicate the Romanian system. In particular, Sofia plans to set up a new unit within the Office of the Prosecutor General rather than a fully independent anti-corruption prosecutor like Romania’s DNA. Bulgarians will, however, be looking to the Romanian example to assess the progress of their own anti-corruption institutions, specifically whether they are successful in pursuing top officials.

“The Bulgarian public has anti-corruption fatigue. There have been many initiatives but nothing has really worked,” Dzhekova of the Center for the Study of Democracy tells bne Intellinews. “There will be a lot of pressure on the new institutions to deliver, and proof of this will be whether they make the high-level convictions seen in Romania.”

Romania’s investment problem

Clare Nuttall in Bucharest With GDP growth slightly above the CEE regional average, the situation in Romania looks good on paper. But low investment – both public and private – threatens to hold back the country's long-term growth and prevent convergence with the EU. In 2014, public sector investment fell in just five European countries, according to UniCredit Group. Three – Croatia, Serbia and Ukraine – were in recession, while the fourth, Russia, experienced a severe slowdown amid the conflict with Ukraine and Western sanctions. The fifth was Romania, where despite positive growth, public investment dropped to its lowest level since 2010 – a year when the country made the largest fiscal adjustment in Europe, UniCredit CEE economist Dan Bucsa told the conference "Emerging Funding for the Real Economy" held in Bucharest on April 2, organised by The Associates.

Private sector investment was equally lacklustre. According to a February 13 statement from the Romanian central bank, net foreign direct investment (FDI) dropped from €2.9bn in 2013 to an estimated €2.4bn in 2014. FDI is expected to remain below 2% in 2015 and 2016.

Stefan Nanu, general director for treasury and public debt at the Romanian Ministry of Public Finance, acknowledged that in 2014 public investments were “less than expected”, but added that this year there is a “generous allocation from the budget” and the government has made a big commitment to improve. “The money is there and there is a large pipeline of projects outstanding. The focus should be on projects that will benefit from EU funds, and benefit the economy,” Nanu told delegates.

European Commission data shows wide variations in the absorption rates for cohesion funds in the 2007-2013 budget. Lithuania tops the list, having absorbed 93.7% of funds available, while Romania was in second-to-last place, above only Croatia. Inflows of funds to Romania have also been more irregular than in other CEE countries, with large chunks of funds typically arriving in December rather than evenly throughout the year.

The Romanian government has stressed the importance of boosting the absorption rate this year so as not to miss out on billions of euros worth of funding available under the 2007-2013 budget, which will expire at the end of the year. Romania’s absorption rate for the 2007-2013 EU budget hit 53.12% at the end of March 2015, according to a statement published on the Ministry for European funds' website on April 6. Bucharest had set the ambitious target of raising the absorption rate to 80% in 2015, which would require submitting an average of €500mn of invoices a month. However, Bucharest submitted invoices for just €12mn of funds in January, €57mn in February, and €100mn in March, the ministry said. Newly appointed Minister of European Funds Marius Nica has also indicated that the ministry's target is between 60% and 80%.

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Pressure from on high Both countries are under pressure form the EU to step up their efforts to fight corruption. Transparency International’s 2014 Corruption Perceptions Index puts them in 69th place, the lowest level of any EU countries, tied with Greece and Italy.

meeting of EU foreign ministers, Tirana launched a massive operation against the “marijuana mountain” at Lazarat, where an estimated €4.5bn worth of the drug is produced every year. By contrast, efforts to tackle the less visible and more difficult problem of narcotics trafficking have been relatively lacklustre.

Bulgaria made only slow progress on judicial reform and tackling corruption and organised crime in the last year, according to the European Commission’s

“In Albania they concentrate on the goal of EU membership rather than the behaviour that would get them membership and the good this could do for the

"They concentrate on the goal of EU membership rather than the behaviour that would get them membership" January 2015 report on progress under the Co-operation and Verification Mechanism (CVM), a tool created to assess steps taken in Bulgaria and Romania in these areas.

Romania’s report was significantly more positive although it singled out the parliament – the weak spot in the fight against corruption – for criticism after MPs voted several times to block investigations into ministers and parliament members.

The prospect of EU membership is seen as an incentive to tackle corruption among the prospective member states of Southeast Europe. Progress in this area is one of the categories measured on the EU’s annual enlargement reports.

Albania’s reputation for corruption and organised crime resulted in the country being turned down several times in its attempt to achieve EU candidate status, before its candidacy was finally endorsed

by EU foreign ministers in June 2014.

However, ministers warned that Tirana must make concrete progress against corruption and organised crime before the country can progress towards EU membership.

While successive governments have promised to tackle these problems, critics say their efforts have been largely cosmetic. In 2014, shortly before the

country, its economy and its people,” Gary Kokalari, founder of Albanians for a Democratic Albania, which is involved in fighting corrupt practices in Albania, tells bne Intellinews. He also believes that the EU could do more to put pressure on Albania, in particular to clean up its judicial system. “At the heart of this problem is a judicial system that is dysfunctional, corrupt and highly politicised.”

Highlighting the existence of top-level corruption and links to organised crime in Albania is the unfolding scandal that has dragged in top government officials and caused the resignation of the chief of police, Artan Didi.

It started in early March, when MP Tom Doshi claimed he and fellow parliament member Mark Frroku had been the targets of an “assassination plot” masterminded by the parliamentary speaker, Ilir Meta. After prosecutors launched an investigation – calling in Prime Minister Edi Rama and Interior Minister Saimir Tahiri among others for questioning – they concluded on March 20 that they suspected Doshi and Frroku of making up the allegations.

Shortly after, the two MPs were arrested and the Belgian authorities submitted a request for Frroku’s extradition. He and three others had been found guilty of the murder of Aleksander Kurti, who was

killed in Brussels on March 5, 1999, in what appeared to be a turf war between rival prostitution gangs. Didi resigned on March 31, after revelations surfaced about the police’s failure to cooperate with Belgian authorities in their attempt to have Frroku extradited.

While this is an extreme case, the more prosaic problems of corruption and a large informal sector are taking their toll on the economies of Southeast Europe.

The Business Environment and Enterprise Performance Survey, released by the European Bank for Reconstruction and Development and the World Bank on April 9 finds competition from the informal sector is the single largest challenge to doing business across the transition countries. This was the primary problem cited by company managers surveyed in four of the nine Southeast European countries, and among the top three problems in seven of the nine.

In Albania, the role of corruption in deterring investment has had a damaging effect on the economy. “Albania’s reputation can’t get much worse,” says Kolakari.

“Legitimate businesses steer away from Albania, and part of the reason is the rampant corruption and the fact that the judiciary is a joke.”

In Bulgaria, 51% of companies consider corruption to be a problem, while 94% believe close links between business and politics leads to corruption, and 66% say the only way to succeed in business is to have political connections, according to a November 2014 report by regional anti-corruption and good governance initiative Southeast Europe Leadership for Development and Integrity (SELDI).

Meanwhile, in Romania, the highly publicised efforts of the DNA have sent out encouraging signs to investors.

Standard Bank’s Demetrios Efstathiou listed the anti-corruption drive among 11 factors contributing to growth in Romania. “[The] political environment, following the recent election of President Klaus Iohannis, favours greater transparency and less corruption, positive for FDI and long-term growth,” Efstathiou wrote in an April 9 analyst note.

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one of the most contentious issues between the two countries. “Progress had been very limited, but we have seen positive developments recently,” Ali Sokmen, Europe analyst at Control Risks Group, tells bne IntelliNews, citing the agreement on the judiciary as well as Pristina’s “more positive stance” on minority rights.

Sokmen forecasts that such steps are likely to intensify over the coming months. “There is currently a window of opportunity in that both in Serbia and Kosovo there are governments committed to achieving the EU membership goal for their countries, for which a normalisation of relations is a prerequisite.”

Photo: Nebojsa Markovic

A loveless triangle Clare Nuttall in Bucharest

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wo years on from the signing of the landmark Brussels agreement, attempts to normalise relations between Serbia and Kosovo are moving slowly, despite the occasional breakthrough. At the same time, Serbia is also building a better relationship with Albania, but even with the incentives of EU membership and potential economic benefits, occasional clashes – mainly over Kosovo – still threaten to derail the process.

Probably the most visible sign of Serbia’s willingness to improve relations in the region was Foreign Minister Ivica Dacic’s visit to Pristina on March 25. Photographs from the Western Balkans six-ministerial conference showed Dacic and his Kosovan counterpart Hashim Thaci, a former guerilla in Kosovo’s war of independence against Serbia, drinking coffee together – an image that would have been unthinkable just a few years ago.

“It is undeniable that in the region of the Western Balkans, after much

turbulence, an essential progress has been achieved,” Dacic said in an address to the conference, which had been carefully stage-managed to avoid the use of state symbols that might provoke either side. “The vision of EU membership has been the main driving force of a series of reforms and positive development in the region.”

In another significant development following the signing of the Brussels agreement on April 19, 2013, Serbia and Kosovo reached agreement in February to set up ethnically-mixed courts

However, recent clashes within Kosovo in recent months indicate that toplevel support for reconciliaton is not sufficient to ensure harmonious ethnic relations within the country.

In January, Kosovo saw its worst outbreak of violence since independence when thousands of people took to the streets of Pristina to demand the sacking of Aleksandar Jablanovic, one of three ethnic Serb ministers in the government. Jablanovic angered many Kosovans when he described a group of Albanians who had tried to stop Serb pilgrims visiting a monastery during Orthodox Christmas as “savages”. The protests only stopped when Jablanovic was sacked on February 3.

Tensions between Kosovo Serbs and Albanians were further inflamed by plans to privatise the giant Trepca Mining, Metallurgical and Chemical

"Please Albanian leaders stop causing further instability in the region!"

in Kosovo’s northern Mitrovica region, which has a mainly ethnic Serb population. The EU-brokered deal resolved

Combine. The complex is also claimed

by Serbia, and Serbian Prime Minister Alexandar Vucic warned that any

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"The unification of Albania and Kosovo was ‘inevitable and unquestionable’" attempt at privatisation represented a serious threat to the normalisation process. Kosovan Prime Minister Isa Mustafa stepped in at the last minute, calling off a parliamentary vote on a new law on public enterprises on January 19.

There are now fears the situation could be repeated, albeit on a smaller scale, after Kosovo Minister of Trade and Industry Hikmete Bajrami signed a €409mn agreement with French consortium MDP Consulting Compagnie des Alpes on the development of a tourist centre at the Brezovica Ski Resort, which is also in a majority Serb area. The head of the Serbian government’s Office for Kosovo and Metohija, Marko Djuric, has already spoken out against the plans.

Tirana triangle The third side of this complicated triangle is Albania, and here again, there has been progress in mending relations with Serbia, highlighted by Albanian Prime Minister Edi Rama’s visit to Belgrade in November last year.

Rama was the first Albanian leader to make an official visit to Belgrade since Enver Hoxha’s meeting with Yugoslavian President Josip Broz Tito back in 1946. Despite a brief exchange of barbs when Rama raised the issue of Kosovo, overall both prime ministers indicated they were keen to improve relations, linking this to their ambitions for EU membership.

Economically, there have already been concrete results of the better relations between the two countries in the infrastructure sector. Albania and Serbia have agreed to cooperate on six regional infrastructure projects including a motorway linking the two countries via Kosovo. Having drawn up the list of priority projects, they plan to ask for EU funding at an upcoming conference in August.

However, the issue of Kosovo remains divisive. “Albania-Serbia relations have been unstable, and efforts to improve them have not always yielded the intended results. High-level meetings on issues such as infrastructure and regional cooperation have had positive outcomes, and are likely to continue,” says Sokmen. “Nevertheless, the main source of tension between the two countries remains Kosovo, and as such Kosovo-Serbia relations and inter-communal relationships in Kosovo will be the key determinant of Serbia-Albania relations in the near future.”

This was illustrated in early April when Rama said in a television interview that the unification of Albania and Kosovo was “inevitable and unquestionable".

With Albania’s local elections just two months away, Rama’s comment was most likely aimed at a domestic audience. However, Vucic responded swiftly with an angry post on his Twitter feed on April 7. “I promise to Prime Minister Rama ... Kosovo and Albania ... will never unite!” Vucic wrote “Please Albanian leaders stop causing further instability in the region!” he added.

Unsurprisingly, this was not helpful for the reconciliation process. Unification with Albania would threaten the already uneasy coexistence of Kosovo’s 100,000-strong Serbian minority alongside the country’s mainly ethnic Albanian population. Talk of unification also raises the spectre of “Greater Albania” – a political concept encompassing not just Albania and Kosovo, but also parts of Greece, Macedonia, Montenegro and Serbia with ethnic Albanian populations.

While Rama and other mainstream Albanian politicians do not advocate the creation of a Greater Albania, there have already been moves towards greater economic integration between Albania and Kosovo, including through plans to create a common energy market. The two countries are also coordinating their customs systems with the aim of launching a unified customs regime in May. Once the dust settles, Rama’s comment is not widely seen as being a serious obstacle to the improvement of relations with Serbia, but it does illustrate the political sensitivity of this process, and the great potential for setbacks. However, with EU membership the primary goal of all three governments, the slow and often irregular progress towards better relations is expected to continue.

Photo: Sergei Bachlakov

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will lose their jobs. Of course, there is lots of interest of companies who sell gas in the region.”

Sources have told bne IntelliNews that there are growing concerns about Russian influence in Croatia, including in policymaking regarding the energy sector. Russia’s Rosneft has been eyeing a stake in INA, the national oil company that’s currently the subject of a bitter battle between its two main shareholders – the Zagreb government and Hungary’s MOL.

Photo: Deymos.HR

Croatia’s Vrdoljak slams ecowarriors as economy flatlines

INTERVIEW:

Andrew MacDowall in Budva and Zagreb

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Croatia held its first offshore oil and gas tender last year and has awarded 10 of the 29 blocks on offer to three players – two consortia, and INA bidding alone. Some have viewed the tender as a disappointment, given the lack of supermajors and that 19 blocks remain on the shelf. But Vrdoljak, speaking at the first Adriatic Oil & Gas Summit in Budva, Montenegro in March, expressed his satisfaction with the results. “I’m very happy, we had two tenders offshore and onshore, that was in the last year.

Onshore was one of the most successful in the world in terms of the number of companies – we had seven bids for one block, tell me which part of the world has something like that? In the Adriatic Sea, we have companies like [Italy’s] Eni, which already has done a lot on its side [of the sea], and [the US’] Marathon, which didn’t know where Croatia was two years ago but is a respected big company that we needed.”

roatia’s economy minister has accused environmental opponents of the government's plans to explore for oil and gas of being tied to energy “producer interests”, while promising a brighter economic future for a country languishing after six years of recession, in an exclusive interview with bne IntelliNews.

“We’re paying a higher [energy] price than we would with our own production,” Vrdoljak said, directly blaming EkoKvarner, a prominent environmentalist group in the northern Adriatic.

“There are lots of interests that want to stop [exploration]. There is oil arriving

Ivan Vrdoljak, who looks unlikely to remain in his post after the election that's expected later this year, said some of those opposing oil and gas exploration were “definitely, definitely, definitely” linked to import interests, driving up prices for energy. He said that the government had painstakingly devised a new strategy for the economy, focusing on productive sectors, which he expected to start bearing fruit in the coming years.

"We have big investors from Japan, America, Europe, Turkey and Russia who have never been in Croatia before" from all over the world in the Adriatic Sea, and they earn lots of money on that. And in a few years [if oil and gas development goes ahead], they maybe

Vrdoljak, however, equivocated about the future of the 19 other offshore blocks: “I don’t know if it’ll be September, but

sometime in the second part of the year probably when we finish this one [current licencing round], we will see. I don’t know the situation, what will happen.”

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Election ahead A parliamentary election is expected by the year-end, in which Vrdoljak’s HNS, a junior coalition partner, is expected to struggle. Vrdoljak has been at the forefront of the hydrocarbon tender process, while Social Democrat Prime Minister Zoran Milanovic has taken a back seat and even suggested a referendum on offshore development that some fear could scupper the nascent industry. The two men are described as having at best “differences of opinion”.

Vrdoljak was keen to emphasise the benefits of hydrocarbon exploration for the region at a time when the need to diversify energy resources has become more pressing since the crisis in Ukraine, and as a boost to Croatia’s flagging economy, which has not posted real growth since 2008. “If we have production that we can export in Southeast Europe, then we give a new security level for the region’s energy supply. We will feel much less influence of the global situation. The second benefit is boosting industrial growth and employment in Croatia,” he said.

Vrdoljak also noted progress with the long-planned liquefied natural gas (LNG) terminal on the northern Adriatic island of Krk. Croatia has been accused of stalling on the project while LNG terminals on the Baltic coast press ahead.

But now there are signs of progress under the aegis of state-owned LNG Croatia, headed by Mladen Antunovic, a close ally of Vrdoljak’s.

“It’s progressing in a way that we are controlling,” the minister said. “We now have consulting for front-end engineering and design, and the business and financial model. We’re getting money for that from the EU and the CEF fund [Connecting Europe Facility, a European Commission infrastructure fund].

And when those jobs are finished at the end of the year, we will have a building perming and a business model that we can offer to private capital and start to build next year. LNG can bring gas from all over the world without connecting pipelines.”

Change below the surface Vrdoljak presides over the economic

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portfolio of a government that has been accused of failing to turn a flagging economy around. Growth has been negative for six consecutive years, and the International Monetary Fund (IMF) reckons the economy will eke out growth of just 0.5% in 2015, before accelerating slightly to 1% next year.

But Vrdoljak said incremental change has taken place, and that Croatia has a better base for long-term development than in the middle of the last decade, when boom fuelled by the construction sector inevitably turned to bust. This hoped-for economic rebalancing seems to be taking some time, though reforms to ease the process of “strategic investments” have been made.

“We’ve already done lots of things and investors can see that – today we have big investors from Japan, America, Europe, Turkey and Russia who have never been in Croatia before. Why? Because we have new laws for strategic investment, for investment enhancement, we are taking care of a lot of things like competitiveness,” he said.

and, like you, said, yes, it’s good. But it’s not good, because of the structure.

What after three or four years? Now we have the strategy that shows where we should go.”

Analysts and businesspeople in Croatia regularly lambast the current government for squandering its mandate.

They say it failed to implement structural reform and privatisation, despite its parliamentary majority and widespread public goodwill after it ejected the previous, conservative government, which was heavily tainted by corruption. But Vrdoljak insisted Croatia has succeeded in avoiding the swingeing cuts made elsewhere in Europe, and that critics exaggerate the need for change. “It’s not a question of [reform] being difficult to do; it’s a question of how big are the reforms that are needed. Croatia is not in a situation like Greece, we are not even in a situation like some of the bigger countries in the EU. Okay, our public debt is 75%, but the deficit can be controlled, next year it’ll be under control. It’s not a question that you should do radical reforms

"Croatia is not in a situation like Greece"

“Over the past three years, we needed to make strategic documents for energy, industry, investment and everything, and made some time for implementation. Now growth is in front of us, and the numbers show that. Last year, industry grew by 3.5%, export growth was 10%. The benefits of joining the EU you don’t get at first, but after three, four, five years. Now we are two years inside, and we will soon reach the growth potential we haven’t so far.”

He highlighted four sectors that the government has picked as growth drivers – metals, pharmaceuticals, ICT and electronics – vowing not to return to a model over-reliant on public spending stimulating the construction industry.

“People saw the numbers ten years ago

and cut everything in Croatia, because it’s not necessary – you can get the same benefit if you control the process and move in the right way, as we did in the past few years. We didn’t go down [economically] like many other countries – we would if we did some strong reforms. It’s not good to do it overnight.”

Vrdoljak’s supporters say that he has presided over one of the few areas of Croatian government that has been proactive over the past three years, particularly in the energy sector. Many, looking at the growth figures, are less convinced. In recent months, the prime minister has come out fighting for his political life. His economy minister will be fighting his corner too.

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Azerbaijan gambles on European Games Jahan Hoggarth in London

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uppressing critical voices is nothing new in authoritarian Kazakhstan, but the latest attack on one of the few remaining independent media outlets has shades of the Kremlin's attempt to control the information space following its offensive against Ukraine.

In less than three months, Azerbaijan’s capital Baku will controversially host the first ever European Games, giving the Caucasus republic an opportunity to hog the spotlight with its own glitzy, multi-discipline sports event. But the Baku 2015 European Games will be hosted against a backdrop of a crisis in relations between Azerbaijan and the West over Baku's seeming tilt toward Russia and its brutal silencing of critics, which has been stepped up as the Games approach.

The inaugural European Games will be held on June 12-28 and will feature over 6,000 athletes from 50 countries competing in 30 sports. The choice of

venue is a strange one; many people class Azerbaijan as Asia – there is no official definition of the boundary between Asia and Europe, and it gets lumped into both. Critics also cite Azerbaijan’s authoritarian rule, dismal human rights record and recent perceived shift towards Russia – a lessthan-ideal platform for hosting such an occasion.

The controversy that surrounds the Games has had a polarizing effect on the country and its critics, with some surprising twists: even the most prominent opponents of the Azeri leadership have indicated that international criticism is over the top and counter-productive. “The West

should engage with Baku on friendlier terms to help secure the release of regime critics,” says Murad Gassanly, a London-based member of the Azerbaijani opposition.

“Much of this criticism, however, is framed in geopolitical terms – the crackdown on Western NGOs and media organizations is condemned as is Baku’s shift towards Russia in the wake of the events in Ukraine. The issue of prisoners has taken a backseat to what appears to be a crisis in relations between Azerbaijan and the West,” says Gassanly, who last year became the first British-Azeri to get elected as a councillor at Westminster City Council.

"If the European Games are to show that sport can leave a positive legacy, then every journalist and activist detained should be released"

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much of Europe's dream.

Over the past 20 years, Azerbaijan has pursued a broad pro-Western course, actively promoting US and European interests in the South Caucasus and beyond, he notes. Baku sent peacekeepers to Iraq and Afghanistan, channelled US supplies to the latter conflict zone, and joined a plethora of Western-led international organisations. But seeking a strategic partnership with the West whilst simultaneously balancing relations with Russia is no easy task, especially when your immediate neighbour can make life tough for you at any time.

carried images of the barbaric culling of the animals.

Geographically locked between Russia and Iran, Azerbaijan's position requires a good command of high-end diplomacy.

Its crossroads location has meant it has had to get on with everyone in order to survive as a country. Yet when it comes to domestic politics, the country is ruled with an iron fist. Apart from its oil and gas wealth, Azerbaijan is best known to the outside world for its political intolerance, oppression and persecution of critics of President Ilham Aliyev and the government.

"Western media have recently carried images of the barbaric culling of the animals"

With each major international event, the excesses seem to grow in direct proportion with the event’s scale.

It is almost expected now by critics, with start of the European Games fast approaching, that Azerbaijan will work itself into a state of authoritarian hysteria, with accompanying ‘purging’ sprees of various kinds.

For example, it wasn't uncommon in the 1990s and early 2000s to see police in Baku wrecking cars parked on routes used by the cortege of then president Heydar Aliyev and his son-successor Ilham after him, as the vehicles raced through streets expected to be cleared before them.

Although huge oil revenues have since paved Baku's road network and produced state-of-the art infrastructure, things haven’t changed that much either. As if following the script for the Eurovision Song Contest held here in 2012, the country is again busily cleansing the political scene of government critics, not to mention stray dogs. Western media have recently

This has dismayed critics of the regime and other human rights organisations. “As the first country to hold this new major European sporting event, Azerbaijan is looking to project a progressive, modern image internationally,” said Jane Buchanan, associate Europe and Central Asia director at Human Rights Watch. “If the European Games are to show that

sport can leave a positive legacy, then every journalist and activist detained on politically motivated charges in Azerbaijan should be released well before the opening ceremony.”

Brand Europe is born Meanwhile, the European Olympic Committee (EOC) is getting closer to achieving its long-awaited goal – delivering to Europe its very own Olympics, conjured into existence in at the EOC General Assembly in Rome in December 2012. The European Games will tank as the third major athletic sporting event after the Olympics and Commonwealth Games.

The official launch heralded the start of “Brand Europe” – a term invented by Simon Clegg, the chief operating officer of Baku 2015, as the event is also billed.

Clegg, the former chief executive of the British Olympic Association, is currently hard at work in Baku developing the blueprint for the European Games, which will take place in a European country every four years.

Like a pop-up structure, portable and easy to erect, this “template” for continental games can then theoretically be applied to any country in Europe for years to come. Having bid unsuccessfully for the Olympics since 2002, Azerbaijan was only too happy to offer its services as host of the new games and to finance

But with falling oil prices pushing the economy towards crisis territory, the country’s sporting ambitions became painfully expensive. Adding to the reported $8bn cost, it was disclosed in February that Baku is also footing the bill for all participating athletes.

Meanwhile, sceptics question the need to hold yet another huge sporting event, especially since some sports

federations have declined to take part in Baku 2015, saying their calendars are already full and that athletes need sufficient recovery time. The EOC's answer to that was to strip Glasgow of the hosting rights for the European judo championship and beef up the European Games by incorporating the championship into the event.

Once judo is officially added – and the British Judo Association (BJA) has tried to get the decision reversed – 12 of 16 summer Olympic sports on the programme will also carry qualification opportunities for Rio de Janeiro's Summer Olympics next year.

According to EOC President Pat Hickey, the Committee's goal is to consolidate a number of continental events and make them part of the second Games in 2019.

“The EOC has always intended for the European championships to become part of the European Games,” says Hickey.

All of which tends to eclipse immediate and long-term concerns about Azerbaijan’s human rights record.

And with so much clout behind the new sporting extravaganza, a plea

by Human Rights Watch to political leaders across Europe not to endorse it by sending delegations to Baku unless its shapes up fast seems doomed to fall on deaf ears.

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bne:FX

That’s som devaluation

bne IntelliNews

C

ounting out money has become a time-consuming business in Uzbekistan.

People flipping through thick wads of Uzbek som banknotes can be spotted at any corner of the street all over the Central Asian country. No matter how small, any trade involves the counting out of dozens of banknotes on both sides. For larger transactions, like buying an airplane ticket, clients pull out of their bags neatly prepared wads of notes and pile them up on the counter. But what looks like a money-laundering paradise for drug barons is, in fact, a country almost exclusively relying on fast-depreciating UZS1,000 banknotes.

Introduced in 1994, the Uzbek som has emerged as one of the weakest currencies in the post-Soviet space and its continuous depreciation has become a hallmark of the 24-year tenure of President Islam Karimov. The depreciation of the som, like those currencies elsewhere in the region, has picked up of late because of the steep fall in the currency of the country’s largest trading partner, Russia. “The som is depreciating quickly, it has always been like that,” Aziz, an informal money exchanger in Tashkent who prefers to omit his surname for safety reasons, tells bne IntelliNews.

The som’s “street course” fell to about UZS4,000 to the US dollar in mid-April from around UZS3,000 six months earlier, Aziz confirms. The Uzbek currency then took an even deeper dive after the March 29 presidential election, when Karimov secured a fresh five-year mandate thanks to a rigged election, falling to about UZS4,200-4,300 to the dollar in a matter of days.

This rate contrasts sharply with the official exchange rate provided by the Central Bank of Uzbekistan, which quotes a price of UZS2,502 to the dollar, 68% lower than the street course. In more notorious cases of monetary mismanagement like Argentina, the same difference never exceeded 40%.

In denial One visible manifestation of this official denial has been the

reluctance of the government to introduce much needed higher denominations; UZS5,000 notes were finally introduced in 2013, but are still rare outside the capital of Tashkent. On the other hand, people avoid smaller UZS500 or UZS200 banknotes, as their value is just too marginal. Most of the monetary base thus relies on UZS1,000 banknotes, whose value is decreasing day by day as Russia’s troubles spill over into the rest of the region.

The denial to acknowledge the real pace of the som's depreciation also mirrors the government’s overly bullish attitude toward the economy. The authorities expect real economic growth to remain stable at around 8% in 2015, thus creating millions of new jobs for the impoverished nation. Inflation is also expected to remain under control below 10%. However, the quick depreciation the som on the black market tells a different story.

The Uzbek currency is suffering from decreasing inflows of hard currency that trace back to a combination of factors, such as falling remittances from Russia, which made up 12% of GDP in 2013 and fell by 16% y/y in 2014, the World Bank confirmed in a report on April 15; decreasing exports to Russia, with big exporters like carmaker GM Uzbekistan experiencing a 58% y/y plunge in sales to Russia in the first quarter of the year; and weakening commodity prices, which are reducing the value of major exports such as hydrocarbons, cotton and mining output.

The som weakness is building up pressure on consumer prices, with real inflation running between 20% and 30%, according to rare independent analysis; back in 2012, the CIA World Factbook put consumer price inflation (CPI) at 22%.

International observers like the International Monetary Fund (IMF) and the Asian Development Bank (ADB), which still largely rely on government figures for their forecasts on the Uzbek economy, have been adjusting down slightly their forecasts given the country’s deteriorating economic posi-

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tion. The IMF now expects economic growth to slow to 6.2% in 2015, and inflation to reach 9.5%, according to the latest figures published in its "2015 World Economic Outlook". The ADB forecasts economic growth at 7.0% and inflation at 9.5% in 2015, according to estimates published in the "2015 Asian Development Outlook" report.

another devaluation for months; there is a widespread belief that the authorities will finally carry out a new devaluation after President Nursultan Nazarbayev secures a new mandate in the presidential elections to be held on April 26. Just across the Caspian Sea, Azerbaijan devalued the manat by as much as 33.5% in February.

The Uzbek som is no exception among Central Asian currencies. The partially free-floating Kyrgyz som and the Tajik somoni have also fallen to historic lows as remittances from Russia, which make up an even larger share of GDP in those countries, plunge. In Turkmenistan, the central bank devalued the manat by 19% in January for the first time since 2009.

The National Bank of Kazakhstan also devalued the tenge by 19% in February 2014 and its population has been waiting for

All of this is leading to an increasing dollarization of local monetary bases, with bank deposits denominated in dollars making up 54.5% and 59.3% in Kazakhstan and Kyrgyzstan, respectively, and 67.7% in Tajikistan at the end of February, according to central bank figures. People in Uzbekistan have little official access to dollars and, at least officially, there is no ongoing dollarization of the economy. Yet money-changers in the bazaars across the country seem busier than ever.

Kazakhstan (bn Kazakh tenge at the end of the period)*

Jan 2015

Dec 2013

Total bank deposits in FC

6 146

3 772

63%

Total bank deposits in DC

5 120

6 314

-19%

Total bank deposits

11 266

10 086

55%

37%

Deposits in FC / Total deposits

Feb 15 / Dec 13

*Source: National Bank of Kazakhstan

Kyrgyzstan (mn soms at the end of the period)*

Jan 2015

Dec 2013

Total bank deposits in FC

49 411

32 848

50%

Total bank deposits in DC

33 885

34 486

-2%

Total bank deposits

83 297

67 334

59%

49%

Jan 2015

Dec 2013

Feb 15 / Dec 13

Total bank deposits in FC

4 510

3 773

18%

Total bank deposits in DC

2 153

1 748

25%

Total bank deposits

6 663

5 521

Deposits in FC / Total deposits

67%

68%

Jan 2015

Dec 2013

Feb 15 / Dec 13

Total bank deposits in FC

7 805

6 065

29%

Total bank deposits in DC

7 330

6 411

14%

Total bank deposits

15 135

12 476

52%

49%

Deposits in FC / Total deposits

Feb 15 / Dec 13

*Source: National Bank of the Kyrgyz Republic

Tajikistan (mn somoni at the end of the period)*

*Source: National Bank of Tajikistan

Azerbaijan (mn manats at the end of the period)*

Deposits in FC / Total deposits

*Source: Central Bank of Azerbaijan

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Special Report: Companies in transition

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United Wagon Company – Russia's most modern engineering firm Ben Aris in Moscow

U

nited Wagon Company (UWC) has done what all Russian companies should do but few have managed: the railway wagon company was set up from scratch three years ago, its owners invested over a $1.5bn to build a state-of-the-art factory that last year became the biggest producer of the world-class wagons in Europe and the Commonwealth of Independent States (CIS), and it has left the rest of its Russian competition in the dust.

The company was planning to cash in on its stellar growth and was due to offer the first IPO in Russia in three years on April 29. As bne IntelliNews went to press UWC announced a price range of

RUB650 ($11.86) to RUB750 per share, for the 5,556,000 additional shares on offer as part of the IPO. At the same time, the company’s sole shareholder, United Wagon Plc (Jersey), a fully

company said in a press release.

Russia has been investing heavily in reviving its railway system, spending tens of billions of dollars on the sector

“Despite the international sanctions and the poor economic conditions, exports of raw materials are actually still growing” owned subsidiary of ICT Group, was also going to offer shares in what will be a closely watched IPO. As a result of the offering, the company’s free float of the shares may stand at circa 14%, the

through the crisis years starting in 2008.

The railway system remains the lifeblood of the Russian economy: 86% of all freight is transported by rail in Russia, compared with 48% in the US, 20% in

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China and 18% in the EU, according to Russian Railways (RZhD) statistics.

It has also completed a partial privatisation of the sector; the state-owned RZhD is still the monopolist in the passenger business, but a large part of the cargo and freight sector has been sold off, enabling private companies to flourish.

Planning began in 2005 when the owners of ICT Group decided to get into the rail wagon engineering business. It took

bne May 2015

ICT is not as well known as some of Russia's other conglomerates, but it has its fingers in many pies. It belongs to Russian tycoon Alexander Nesis, who is one of the few big businessmen to make the transition from being successful in the wild post-communist years of the 1990s to continue that success in the more sober following decades. The group also founded NOMOS Bank and Polymetal International, a FTSE 250-listed gold and silver producer. ICT has since sold control in NOMOS to Otkritie Financial

“Within a year the company had become one of the major players on the market” two years of research to identify the best technology and negotiate the licence agreement with Standard Car Truck (currently part of Wabtec Corporation) – a 120-year-old company that basically invented the freight wagon, the Barber bogie. Then the plant in the Leningrad region was acquired, part of the old Kirov industrial complex that used to make the world's largest tractor and tank tracks, but had been shuttered in the 1990s. An entirely new facility was built on the site that finally went into production in 2012.

“Within a year the company had become one of the major players on the market and was the biggest producer of wagons in the CIS by the end of 2014,” says UWC's chief executive, Roman Savushkin, a fresh-faced young Russian who is one of the new generation that are increasingly running Russia's best firms.

Corporation , and now owns a 9.8% stake in Otkritie. It has also reduced its stake in Polymetal to around 20%.

Factory records Its key asset is the Tikhvin Freight Car Building Plant (TVSZ), located in Tikhvin in the Leningrad region. It contains 20 super-efficient production lines that use over 100 robots, which wouldn’t look out of place on a production line in Dusseldorf or Detroit. The heavy investment was a bold move, but it has paid off. “Russia has a fleet of about 1.2mn wagons, but the technology was very low. Compared to the US, Russia's rolling stock was about 70 years behind,” says Savushkin.

The wagons cost about 50% more to lease as its local competition, but the higher cost is offset by the efficiency and capacity gains that the modern wag-

ons provide. This plant has an annual production capacity of 16,000 innovative railcars (set to increase to 22,000 by 2016) and 30,000 car-sets of foundry.

Other parts of the UWC group include NPC Springs, which produces heavyduty rail springs for innovative bogies, the group’s own R&D centre, and a network of over 40 service depots across Russia, Kazakhstan and Belarus.

And it’s a market that is set to keep growing: the industry body INFOLine estimates that between 2015 and 2022 just over a third of all the wagons operating in Russia, or about 460,000 wagons, will have to be scrapped. Set this against the annual production of new cars that is currently running at about 50,000 a year, and producers are expecting the market to turn the corner soon. “The market has been tough, but we think we are at the bottom of the cycle now – the signs of new growth are already apparent,” says Savushkin.

But it is not just the modern production facilities that have made the company a success. UWC adopted international best practises in corporate governance from the outset and has three independent directors on its board. “Equal treatment of all shareholders and unconditional respect for their rights and interests is the foundation of UWC’s corporate governance system,” says Savushkin, adding the independent directors are the only members of the board on the company's Audit and Remuneration committees.

It has also developed an innovative business model that has allowed it to roll with the punches in the volatile market. “One of UWC’s key competi-

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tive advantages is its cyclical business model, which is unique among Russian companies. The financing, production and leasing elements of the cycle allow the company to easily adapt to changes in market conditions, meaning that it is able to secure predictable revenue streams, even in times of lower market demand,” says Savushkin.

Difficult times The market for wagons has been a hard one in recent years. The sector was roaring in the run-up to the 2008 crisis as freight operating companies rapidly expanded and modernized their fleets.

But the financial meltdown knocked the bottom out of the business and produc-

slump has affected UWC less, because it can charge up to 55% more for its high quality and larger capacity wagons.

UWC sells its new generation wagons through its own transport company, Vostok1520, which also provides rolling stock operating services.

Life for cash-strapped freight operators has only been made worse by the financial sanctions imposed by the West and so UWC’s leasing operations are crucial to the rail transportation operators. “UWC provides its leasing services through RAIL1520, the common brand for UWC’s leasing companies and one of Russia’s five largest lessors in this space,” explains Savushkin.

"Because of the strong demand for UWC’s high-tech wagons, it continues to enjoy steady demand"

tion slumped. A recovery in 2010-2012 collapsed again in 2013-2014 as the second wave of the current crisis hit. However, because of the strong demand for UWC’s high-tech wagons, the company continues to enjoy steady demand: Russia’s monthly production volume of new wagons had fallen in early 2015 to about 2,000 units per month, but up to 1,000 of those are being made by UWC. And the oversupply of wagons has led to a collapse in average leasing rates to below the cost of servicing the wagons in 2013, which has yet to recover. This

The combination of leasing and direct sales means the utilization rate of UWC’s fleet is nearly 100%, which has kept the bottom line healthy even in the current economic downturn. “Despite the international sanctions and the poor economic conditions, exports of raw materials – oil, coal, iron ore and fertilizer – are actually still growing. Russian rail turnover is already rising. The increase is not as fast as in 2010, but it is positive,” notes Savushkin. “At the same time, the number of rail wagons being taken out of service means that soon there will be a deficit on the market and prices will recover.”

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Based on management’s estimation, UWC generated consolidated IFRS revenue of RUB18bn (€335mn) in 2014, which is nearly a six-fold increase on the previous year's result. “The company intends to launch new, value-added products. In the medium-term, UWC plans to expand its range of innovative railcars to 60 models in 2017. The company’s strategy also includes diversifying its client base by both by geography and industry, as well as developing its service depots network and its own expertise in operating rolling stock. Gradually enhancing operating efficiency is another key area of focus for UWC,” the company has said.

The Russian state has also been doing its bit to support the sector. It has been promoting the domestic production of wagons by tightening the regulations on re-certifying old wagons, which is pushing companies to invest in new rolling stock by shortening the time span that old wagons can operate before requiring new certification and modernisation.

UWC also enjoys preferential borrowing rates. The company plans to invest $250mn over the next three years, three-quarters of which will be provided by bank loans. While commercial borrowing rates have soared to over 20%, making most investment projects unaffordable, as UWC works in a strategically important sector it is eligible for state interest rate subsidies that has kept its average borrowing cost at about 10%.

“The government continues to support the sector by offering reduction in tariffs for empty runs and subsidies for the purchase of innovative wagons, which will bolster demand further,” says Savushkin.

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That improvement is down to the economic recovery in the Central European region; Poland was the only EU economy not to fall into recession in 2009, while Czech Republic and Slovakia pulled quickly out of the nosedive, returning to positive growth the following year (though the Czech economy dipped back into negative territory in 2012) as the anchor economy in next-door Germany bounced back.

Central Europe's industrial space is magic Nicholas Watson in Prague

I

t’s been a difficult time for the industrial and logistics real estate business since the 2008 crisis. But the recovery in the sector that began in the US in late 2010 has fed through to Europe in the last 12-18 months, putting companies like Prologis back in the driving seat.

Looking at the two biggest industrial and logistics property markets in Central Europe, Poland and the Czech Republic, Colliers International reports that 2014 proved to the strongest year for this segment in terms of development completions since 2009, the depths of the economic crisis.

In Poland, industrial real estate projects with a total space exceeding 1mn square metres (sqm) were delivered to the market, a record amount that far exceeded the 400,000 sqm seen in 2013. In Czech Republic, a total of 356,000 sqm was completed, which was up 31% from the year before. “The vast majority of this new industrial space was pre-leased, as speculative development remained limited,” Colliers noted.

Prologis, which was formed out of a merger in 2011 between ProLogis and AMB Property Corporation to create one of the world's biggest industrial real estate firms, is playing a large part in that development. Poland is

As the region’s economic prospects have improved, Bannatyne says there has been a “wall of money” into Europe over the last 18 months from investors around the world looking to acquire industrial real estate assets. That money has anticipated the rise in occupier demand, which over the last year has seen the occupancy rate in the Prologis portfolio in CEE rise to 93.1% at the end of the first quarter of 2015. “Vacancy rates have decreased significantly over the last 12 months. [An occupancy rate] above 90% is good, above 95% is exceptional, so we are in good position,” says Bannatyne.

Poland has become the largest real estate investment market in CEE, accounting for over 50% of the total 120 transactions worth over €10.5bn carried out in 2014. “Poland has thus become

“Vacancy rates have decreased significantly over the last 12 months” about 50% of the company’s Central European portfolio, which totals 4.2mn sqm of industrial space in 44 logistics parks, with Czech Republic, Slovakia, Hungary and Romania making up the remainder. “In 2008 the music stopped.

Globally, the industry had a particularly challenging time, then the market came back in US in late 2010 and Europe only in the last 12 to 18 months,” says Ben Bannatyne, managing director and regional head of Prologis in Central and Eastern Europe, which has currently five buildings totalling 121,000 sqm under construction.

the leader in the investment market in Central and Eastern Europe, gaining a 30% share in value terms,” says Colliers.

2015 and beyond All the signs are that the region’s industrial property sector will continue to improve as the Eurozone economies and Germany continue to grow – if not exactly at a fast pace, then at least in a stable manner. For 2015, Moody’s Analytics forecasts Germany's GDP to increase by 1.4%, marginally less than the 1.6% recorded last year, while the Eurozone’s GDP growth should

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accelerate to 1.4% in 2015 from 1.0%.

The most recent ZEW Indicator of Economic Sentiment published on April 22 showed that expectations for the Eurozone economy rose to 64.8 from 62.4 (a reading above 50 is positive).

In Poland, at the end of December some 685,500 sqm remained under construction, of which around 70% has already been leased. “The majority of those projects will be delivered to

In Czech Republic, an unusually large number of pre-leases signed in 2014 means 2015 is on track to exceed last year’s supply levels and take the stock of modern industrial space to over 5mn sqm. “With positive economic growth (2.5%) forecast and a number of known occupier requirements on the market, demand should be around 1mn sqm for 2015,” Colliers says. A major source of that growth will come from the rapidly expanding e-commerce market.

“We are a developer-owner-investormanager – you don’t normally get those things under one roof” the market by the end of 2015,” says Colliers, noting that the supply of modern industrial space in major Polish markets now totals over 8.8mn sqm.

Prologis Park Prague-Airport DC1

Bannatyne reckons that with plenty of room for growth, Central Europe’s industrial and logistics property market could grow 30-40% over the next five

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years. “Poland is one of the top five or six emerging markets for industrial real estate in terms of growth, while Czech Republic and Slovakia are among the most stable markets. Hungary is a market that has really come back in last nine months, while Romania is still many years behind the rest of Central Europe,” he says.

Prologis is well placed to take advantage of that potential boom. Almost unique in the industry, it works across the business lines of the industrial property sector.

The standard industrial developer is a trader of properties, developing one site and then selling it before moving on to the next project. Prologis does some of that, though the majority of its developments it holds, operates and makes available for investors to participate in. “Prologis is almost unique in what we do. We are a developerowner-investor-manager – you don’t normally get those things under one roof,” says Bannatyne.

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under which it sold electricity at a loss to private traders. This has been the most difficult part of the restructuring and forced the company back into insolvency in 2013, delaying preparations for the planned IPO. Smartest guys in the room Hidroelectrica first entered insolvency in mid-2012, exiting in July 2013 after cancelling 11 loss-making contracts with private traders. These contracts are estimated to have resulted in lost profits of around €1.5bn for the company between 2002 and 2012.

However, Hidroelectrica later re-entered insolvency after several of the power traders launched lawsuits challenging the decision to terminate their contracts.

Hidroelectrica defeats the smart guys Clare Nuttall in Bucharest

R

omania’s largest electricity producer Hidroelectrica posted record profits in the first quarter of 2015, after carrying out a far-reaching restructuring programme. The company is now planning to hold an IPO next year, but can only do so after it exits insolvency procedures.

State-controlled Hidroelectrica announced on April 20 that it had achieved gross profits of RON405mn (€91.5mn) in the first quarter of 2015, more than double the RON178mn in the same period of 2014, which according to a company statement was the most profitable year in its history.

The company attributed the increase in profits partly to higher electricity production – up 37% on year – but said the major factor was the introduction of new management. Hidroelectrica is one of several major Romanian statecontrolled companies to have had new private sector managers installed as

part of a government drive to improve performance.

While the average price for the electricity sold by Hidroelectrica, which produces around 30% of Romania’s power, decreased in 2014, the company achieved a wider profit

Progress was finally made in early 2015, when Hidroelectrica won several court cases against the private power traders, which the company has dubbed “smart guys”.

In the most significant ruling so far, on February 12 a Bucharest court ruled in favour of Hidroelectrica in its case against a group of private power traders and the Sindicatul National Petrom-Energie trade union. The court ruled that the traders – Alpiq Romindustries, Alpiq Romenergie, Alpiq AG – and the trade union should pay costs incurred by both Hidroeelctrica and Romania’s Fondul Proprietatea, which owns 19.94% of the company.

“It was a tough fight. The process was difficult and delayed the obstinacy

“It was a tough fight” margin per megawatt hour as it reduced production costs. This followed a major restructuring programme in recent years that involved cutting the number of subsidiaries, laying off workers and selling off non-core assets.

However, the most important part of the turnaround at the state power company has been cancelling contracts signed under previous managers,

of the three Alpiq traders,” said the company’s administrator Remus Borza in a statement issued after the verdict.

“On the other hand, the solution was predictable because Hidroelectrica was really in a desperate financial situation...

The reorganization of the company and saving it from bankruptcy was not possible without denouncing the contracts with energy traders or without renegotiating disadvantageous contracts

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and identifying energy sales strategies to ensure the profitability of the company.”

Similar rulings were made in other cases in January and February, leaving Hidroelectrica better placed to press on with improving the business further this year. It is now planning to boost investment, and is considering expanding within the region. It expects to generate profits of around €300mn this year, provided it can maintain a high level of production.

The next big question for Hidroelectrica concerns the timing of its planned IPO, which cannot take place until six months after it exits insolvency procedures.

Greg Konieczny, executive vice president of the company managing Fondul Proprietatea for the government, Templeton Emerging Markets Group, told a press conference in January that no IPOs of major companies from the fund’s portfolio are expected this year.

Given that Hidroelectrica is still under insolvency procedures, Konieczny told journalists that even an IPO in 2016 “could be very challenging”.

A source close to the company confirmed to bne IntelliNews that Hidroelectrica is expected to exit insolvency in the autumn of 2015, which would pave the way for an IPO in the first half of 2016.

Hidroelectrica’s IPO will be the latest in a series of share offerings of major state-owned energy companies that has helped lift turnover on the domestic stock exchange and raise Romania’s profile among international investors.

The first to list post-crisis was Nuclearelectrica in 2013. This was followed by the IPO of natural gas company Romgaz later in the year, in which the government raised $520mn through the sale of its 15% stake in the company. The most substantial IPO was electricity distribution company Electrica, which started trading in Bucharest and London in July 2014. This raised RON1.95bn through the sale of a 51% stake in the company. Hidroelectrica’s upcoming IPO is expected to be on a similar scale to Electrica’s.

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Georgian, Romanian banks are hot for the summer

bne IntelliNews Romanian and Georgian banks are among the most attractive financial assets for investments in the former Soviet space, according to the emerging market investment bank Renaissance Capital.

"Georgia [is] the most relaxed post-currency-devaluation EM [emerging market] country we have visited. The main reason is stability in the liability base, which is predominantly dollar-biased," wrote David Nangle, head of research at Renaissance and a specialist in the post-Soviet banking sector.

"Romanian banks have been some of the best-performing bank shares in the EM and frontier space over the past three months. 2014 results highlight that the asset quality clean-up and credit growth recovery (albeit modest) trends are now visible."

Georgia boasts two A-list bank stocks for investors: the London-listed Bank of Georgia and TBC Bank, which joined its main rival on the London Stock Exchange in 2014.

The operating environment is still tough. By March the national currency, the lari, had depreciated by more than 20% against the dollar since January 2014. And the consensus forecast for economic growth in 2015 is expected to slow to 1.5-2%, although Renaissance is more optimistic, predicting 2.2% growth this year. But the slowdown has not had a major impact on the economy because it comes with a sharp fall in imports and the lower cost of oil, which has left the national accounts more or less balanced.

Analysts are not expecting much in the way of lending growth in 2015. But given the state of banking sectors across the region, just staying flat this year should be regarded as an achievement, before growth returns in 2016.

"Despite cutting our earnings-per-share (EPS) forecasts for [Bank of Georgia] and TBC, we actually expect flattish lari EPS for both year-on-year in 2015, which is impressive given the currency move and macro slowdown," said Nangle. "In 2016, we forecast Georgian banks are back in delivery mode."

The banking sector has also been underpinned by large dollar deposits, which have benefited from the recent appreciation of the greenback over most emerging market currencies. "Give the dominance of the dollar deposit base, liabilities have remained stable throughout the recent devaluation, while the risk is clearly to growth and asset quality," said Nangle.

Romania has come through a difficult 2014 in relatively good shape, and the economy seems to have turned the corner, creating fertile ground for banking sector growth. "Romania coming out of the credit-cycle trough, while system-wide earnings growth is primarily driven by an asset-quality recovery trend," said Nangle. "We always want to invest in banks when the credit cycle is about to turn/is turning and coupled with this, Romania remains one of the least financially penetrated countries in the EU."

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home market of Bulgaria is a recent phenomenon.

When Davchev launched BGMenu a decade ago, the concept was far ahead of its time. Davchev was living in Boston and originally planned to launch a restaurant delivery service to take on Diningin, the dominant player on the local market, but instead decided to return to Bulgaria. “We developed a genius platform able to handle thousands of orders a second, ignoring the fact that there was no market at that time,” Davchev admits. “We had to create the market.”

HelloHungry moves for Balkan acquisitions Clare Nuttall in Bucharest

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ince Bulgarian online food delivery service HelloHungry entered the Romanian market in 2014 through the acquisition of two local companies, it has almost doubled the size of its Romanian business through a combination of investment and the evolution of the e-commerce sector.

HelloHungry announced in last November that it had bought two Romanian food order platforms – higherend Quicky.ro and Oliviera, which caters to the mass market. Business through the two platforms has since grown by 70%, the company’s founder Vladimir Davchev said in an interview with bne IntelliNews.

In addition to persuading more restaurants to sign up for online orders, HelloHungry has invested in improving

quality of service as well as expanding out of Bucharest into Timisoara. It now plans to launch in other Romanian cities before long. At the same time, both Quickly and Oliviera are being migrated

Creating the market involved numerous experiments from setting up a delivery service to distributing a print version of BGMenu, since at that time few Bulgarians were e-commerce users. The business was forced to adapt again with the onset of the global economic crisis in 2008. “We targeted the middle and upper classes, only offering deliveries from good restaurants.

In 2008, the middle class started to disappear, so we had to recalibrate the business and open the platform to cheaper and fast food restaurants.”

Seeds to grow The turning point came at the end of 2013, when BGMenu secured funding from LAUNCHub, a seed fund supporting digital start-ups in Southeast Europe. This was followed six months later by a second round of financing, and the company is close to signing an agreement with a strategic investor for long-term financing. Altogether, HelloHungry has raised just over €1mn in the last 15 months. “In the last year

“We developed a genius platform able to handle thousands of orders a second, ignoring the fact that there was no market” onto the platform that already serves its original Bulgarian brand BGMenu.

However, the rapid growth achieved in both Romania and the company’s

we achieved more than in the previous 10 years. When we launched 10 years ago, the market was not there,” says Davchev. “A year ago we pressed the reset button. We came back with 10

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years of experience and more money in a more mature market.”

Growth in the last year has been approximately 50% organic and 50% through acquisitions, and the company plans to continue with this balance.

Probably the biggest step was the expansion into Romania, which according to Davchev is a less developed but larger market than Bulgaria. Despite the high level of emigration from Romania in recent years, its population currently stands at over 19mn, compared with just 7.3mn in Bulgaria.

Market research shows that up to 100,000 online food orders are placed per day in Romania, with Bucharest accounting for 20-25% of that. In Bulgaria, total orders are 20-30% lower, although the country has more e-commerce users per capita.

However, the markets in both countries are growing, and the sector proved to be remarkably resilient to the recent crisis. “Food deliveries kept on growing through the crisis,” says Davchev,

speculating that, “unlike when you go to a restaurant, you know in advance what you will get and how much you will pay for it. You have that predictability, but at the same time you are treating yourself.”

In Bucharest unemployment is low, and household incomes are increasing.

With both parents working in many families, households have less time but more disposable income. “People want a better quality of life, and one way to achieve that is not to cook,” says Davchev. “They are also becoming more health aware, so while they used to order pizza now they are looking for deliveries of food that is higher quality – which means higher priced.”

Tax cut The Romanian government’s April 7 announcement of a cut in the VAT rate on food from 24% to just 9% from June is also expected to benefit the sector.

Davchev forecasts that in addition to boosting profits for restaurants, this will also result in restauranteurs using the increased funds at their disposal to invest into better quality inputs, staff training and improving order management and

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food service. The tax cut does not apply to food delivery services, but according to Davchev “anything that benefits the restaurants will benefit us”.

Following the expansion into Romania, HelloHungry is now looking for further opportunities across Southeast Europe, which lags behind western markets.

Highly developed in the US, the food delivery market then gradually declines as you move from west to east, until you reach countries like Greece and Turkey where the sector is well established, Davchev explains.

HelloHungry was considering a move into Serbia last year, but opted instead to enter the Romanian market, while the dominant Serbian player Donesi was snapped up by international food delivery company foodpanda.

Instead, HelloHungry is now looking for acquisition targets in other Balkan countries, though it is not pursuing expansion at any cost. As Davchev says, “our main goal is to be the dominant player in the market, which is more important than going into as many countries as possible.”

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Agriculture eases Ukraine’s economic pain Sergei Kuznetsov and Ben Aris in Kyiv

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hile Ukraine’s steel, heavy engineering and power sectors have been crippled by the war in the east and the economic crisis, agriculture has become the country’s leading source of export revenue and the only sector putting in a positive performance. Ukraine has already produced some world-class companies such as UkrLandFarming and MHP, but farmers are today facing difficulties from the sharp devaluation of Ukraine’s currency and a lack of access to credit markets.

"Since [Russia’s] aggression against Ukraine destroyed the industrial potential of Donetsk and Luhansk regions, and caused a reduction in exports from the mechanical engineering and metallurgical complexes, the agricultural sphere has become a locomotive for export revenues," Petro Poroshenko, Ukraine’s president, said on March 30 during a meeting of the country’s advisory body on reform.

Indeed, last year agriculture became the leading source of export revenue for Ukraine, worth $16.7bn. Despite agricultural exports falling 2% from the year before, this sector surpassed metallurgy, whose exports dropped by 13% to $15.2bn. “Such a dynamic was the result of a record harvest, which led to an increased volume of exports that cancelled out the negative [global] price environment,” Ivan Dzvinka, research associate at Kyiv-based Eavex Capital, tells bne IntelliNews.

Agriculture was also the only economic sector showing a positive performance in 2014, at 2.9% growth, whilst the country’s economy as a whole shrank by 6.8%. “Other sectors demonstrated contraction by 10% and more,” Dzvinka notes.

However, 2015 will not be so positive.

Kyiv-based experts expect agricultural exports to decline by 5-10% as a result of a predicted smaller harvest and “sluggish” global prices for agricultural products. Ukraine, which is the world's sixth largest grain producer and third largest exporter of corn, produced 63.8mn tonnes of grain in 2014.

Reap what ye shall sow The annexation of Crimea by Russia seems not to have had too serious a negative impact on this year’s harvest, due to the peninsula being an insignificant area for grain cultivation (up to 30,000 hectares). However, the situation in eastern Ukraine, wracked by fighting between proRussian separatists and Kyiv-controlled troops, is more complicated. Up to 200,000 hectares of farmland are under the control of the Russia-backed separatists. Eavex Capital predicts that the area for spring grain sowing could be reduced by 5-7% this year, while the Ukrainian Agribusiness Club, a Kyivbased farmers’ association, estimates

markets amid rising production costs due to the devaluation of Ukraine’s domestic currency and a lack of access to debt markets. “When it comes to crop nutrition, Ukraine is dependent on imports [of fertilizers]. That is why the farmers are very much affected by the devaluation [of the hryvnia], which has practically doubled the cost of nutrition and crop protection. This is one of the reasons why farmers will rely on organic agriculture and extensive technologies [using small amount of labour and capital],” Jean-Jacques Herve, counsellor for agriculture to the board of directors at France's Credit Agricole Bank in Ukraine, tells bne IntelliNews.

The Ukrainian Agribusiness Club underlines that up to 39% of Ukraine’s farmers are experiencing a deficit of mineral fertilisers. “Due to the devaluation and the lack of sufficient loan resources, agrarians are suffering from a significant shortage of funds,” the association said. Herve also believes that Ukraine’s agriculture sector will have to endure a serious lack of investment for at least the next two years.

Global players One company that’s been at the forefront of Ukrainian agriculture’s technological progress is UkrLandFarming.

Oleg Bakhmatyuk, chairman of UkrLandFarming, one of the biggest

“Farmers are very much affected by the devaluation of the hryvnia, which has practically doubled the cost of nutrition and crop protection” that the sowing area will be reduced by 9%. In such a scenario, this year’s harvest could fall to 50.5mn tonnes, the association said in a press release published in March.

The Donbas crisis will add to the challenges faced by Ukraine’s farmers, who are struggling with low prices for agricultural products on global

agricultural concerns in the world with $2bn of sales in 2013, claims its command centre –a warehouse-sized building a short ride from the centre of Kyiv with a control room that looks like the sound stage for a Doctor Strangelove remake – is unique. "After we decided to set up the command centre we travelled the world to see what has been done elsewhere. We took the ideas like GPS

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tracking of tractors from other countries, but what we found is nobody else had set up a totally vertically integrated control system. It took 100 software engineers to put this together – we had to write half the software ourselves – but now we can control the entire process down to the individual workers from our command centre," he says.

Bakhmatyuk calls this technology "precision farming," where each worker is issued with a smartcard that identifies them and they have to login to their various facilities and vehicles when they start work. All the data then flows back to the 12 regional substations, which control the local operations. The information is also sent to the HQ where the operating team can control and monitor every aspect of the company's work. This has already led directly to cost savings and productivity increases. The company has cut fuel costs by a quarter, and the productivity of the fields is now at international levels.

UkrLandFarming is already by far the largest agricultural company in Ukraine.

The company's land bank is 650,000 hectares, with the 15,000 fields worked by 467 tractors to produce grain and other crops that are moved to silos and ports by a fleet of 215 trucks.

And the company doesn’t just produce grain. It is also growing sunflower seeds and sugar beet. It owns Avantgard, the largest egg producer in Europe that churns out 9mn eggs a year and is the biggest competitor to MHP, as well as being the number one producer of beef and raw milk in Ukraine with 64,000 head of cattle that produce 100,000 tones of raw milk a year as well as 19,000 tones of meat.

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PZU eyes building Polish banking giant

bne IntelliNews Polish state-controlled insurance company PZU is eyeing several acquisitions in the country’s banking sector in a bid to build a large new bank, local media reported on April 23.

The Warsaw-listed PZU is interested in the 25% stake in Alior Bank put up for sale by Carlo Tassara, according to Puls Biznesu. PZU already holds a 4.5% stake in Alior via its pension fund and investment fund units.

The insurance company is now conducting due dilligence on increasing its interest in the lender which has assets of around PLN30.1bn (€7.47bn). PZU could also count on the support of Alior's management, which holds 10% of voting rights, with which it has good relations, reports Erste.

At the same time, PZU came close to confirming that it is looking to take advantage of efforts by two other foreign owners to sell their Polish lenders - Raiffeisen Polbank and Bank BPH. “PZU is ready to take part in acquisitions in the banking sector, guaranteeing their financing,” a company spokesman told the newspaper.

Austria's Raiffeisen Bank International said early this year that it wants to sell Polbank, whose assets stand at PLN53.5bn. With the risks connected to exposure to Swiss franc loans having all but halted M&A in the Polish banking sector, GE Money Capital has gone quiet in recent weeks, but is still known to be keen to offload BPH, which boasts PLN31.6bn in assets.

Should PZU take over all three banks it is reportedly eyeing, it would create a bank with PLN115bn in assets, among the biggest in the country, Erste adds. "This would also be in line with plans of the Treasury Ministry, which would like to increase domestic ownership in the banking sector," the analysts point out.

At the same time, PZU could find it easier than other potential suitors to gain regulatory blessing to buy the banks. Watchdog KNF has vigorously opposed further consolidation of the bank sector.

Erste, meanwhile, suggests PZU could gain benefits for its core business by moving into the sector. “In its most recent strategy, PZU did not mention its interest in the financial services industry. In our view, the idea is good, as PZU could increase the frequency of contact with clients and potential clients, and hence have more chances of selling them its products,” the analysts suggest.

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STOLYPIN:

The Moscow disconnect Mark Galeotti of New York University

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n a hold-over from Soviet days, the mighty Kutuzovsky Prospect highway leading into Moscow’s city centre still has a special middle lane reserved for emergency vehicles or, more often, the motorcades of senior government officials.

Not for them the misery of the capital’s notorious traffic jams.

They whisk past, in a wholly separate world of smooth, fast and easy transit, protected by wailing-sirened police cars, incognito behind tinted windows. Russian politics likewise appears to be devolving into two distinct realms, as Vladimir Putin and his closest cohorts retreat from the increasingly problematic realities of the real world, into their privileged and secure haven, apart from the people who actually have to administer Russia for them.

It is hardly unusual for there to be disconnects between the rulers and the ruled, but not only are these times which require some tough and far-sighted policies, but even within the broad category of the “rulers” there is a distinct gulf.

Two of the prevailing themes that emerged from a range of meetings and conversations I’ve had in Moscow these past two weeks are a sense of drift and a lack of connection between even senior figures within business, politics and government, and the small circle who actually define policy. As one unusually forthcoming middle-ranking official put it, albeit wisely off the record: “Government has retreated from view, orders come from a secret court, and we don’t know who is making them, how and why.”

Secret Court Even those who are still confident in their president and claim optimism about the country’s future become coy when pressed about how far they feel that the channels to transmit their views up the power vertical are working well, and to what extent they feel their individual and collective interests are being represented within that “secret court”.

This is perhaps especially visible when it comes to the economy. An economist who in his day consulted frequently for the government threw up his hands and said: “Nothing's happening, we have no meaningful policy.” The people whose job it is to manage Russian macroeconomics do seem strangely uncertain, perhaps because they often don’t get to do their jobs. Multiple sources claimed that the governor of the central bank, Elvira Nabiullina, tried for over a week to schedule a meeting with Putin before last year’s ruble collapse, and Kremlin aides seem to have had at least as much influence over interest rates.

Meanwhile, there is an on-and-off war being waged in Ukraine, but neither the generals nor the diplomats seem either to know the intended end result – or be consulted about strategy. Both within the military and the Ministry of Foreign Affairs, their role seems to be simply to await instructions. These often come through Security Council secretary Nikolai Patrushev, former head of the Federal Security Service (FSB), which generals grumble now seems to be defining policy.

Although there is something of a cult of Foreign Minister Lavrov these days – you can buy We-Heart-Lavrov t-shirts in the Evropeisky shopping mall – even he does not seem to be playing much of a role in advising on policy, merely executing it. Consider, for example, Russia’s recent attempts to play the “nuclear card”, using a forum of generals to threaten a response up to and including atomic weapons should Nato deploy more troops into its own eastern member states. Apart from the fact that this is a hollow threat, it served only to harden resolve in the Nordic regions. Five

“Government has retreated from view, orders come from a secret court, and we don’t know who is making them, how and why” nations – the very kind of states Moscow presumably hoped to dismay and deter – came together explicitly to characterize Russia as the foremost threat they faced. As one recently retired diplomat sniffed: “Lavrov would not have made that mistake.”

Detached It is, of course, a disturbing development when not only the foot soldiers of the Russian state, but also its noncoms and field officers feel that their own commanders are out of touch and unwilling to listen to them.

Beyond that, though, this also speaks to a second, even more problematic issue. If the people making the final decisions seem detached from the processes of daily governance, this is

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not just a problem for the executive: that same distance makes it harder for the executive to really know what is happening, as a basis for effective policy. In other words: we do not know what Putin knows.

I tend to discount the kind of over-heated claims that he is irrational and erratic. However, a rational actor makes decisions based on the evidence and assessments with which he is presented. We have very little hard information about just how well Putin is being briefed, but another leitmotif of conversations in Moscow was scepticism from specialists of

“We do not know what Putin knows”

every stripe that he was being kept well informed about their particular area. The economists might accept that he is on top of geopolitics, but were anxious that he did not appreciate the real depth of the financial challenges ahead. The cops assumed everything was going to plan in the Donbas, but felt that the president did not understand the practical challenges they were facing – especially in light of the 10% personnel budget cut being imposed on them – and listened too much to the FSB. And so it went.

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Sometimes, the problem seems to be that no one wants to be the one to bring Putin bad news. Within the intelligence community, for example, each agency briefs separately and has learned that getting his ear and favour tends to mean telling him what he wants to hear. Likewise, the Presidential Administration, according to some people I spoke to, can be more interested in keeping everyone happy than ensuring the most accurate perspectives get to Putin’s desk. And a president who prides himself on not using the internet, who has housetrained the media, and who rarely now interacts with his people in anything other than carefully-scripted media events, is unlikely to get an independent take on the state of the nation.

Why should Russia’s rulers address traffic jams so long as they have their own lane? Indeed, do they even know how much time ordinary Muscovites waste in traffic, the frustrations and angers generated as a result? Is anyone telling them?

When policy is being determined by a small circle of people increasingly detached from the realities of the country’s situation, and whose own advisers appear determined to protect their isolation, then even the smartest and most rational leaders are unlikely to generate smart and rational policies.

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

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INVISIBLE HAND:

Opening up the Persian pearl Liam Halligan in London

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ong-standing international sanctions against Iran could be dropped. That’s pretty astonishing given that, in the eyes of many Westerners, the country remains a pariah.

The Lausanne framework agreement, which emerged after fraught negotiations in early April, means Iran – easily the world’s most significant isolated nation – could be returning to the global stage.

Even under sanctions, Iran’s $450bn economy is already among the top 25 largest on earth. Home to 81m people, it could soon get a lot bigger still. Since Hassan Rouhani became president in mid-2013, there’s been talk not only of Western rapprochement, but of Iran as an investment destination. The image Rouhani conveys – a moderate cleric, with a doctorate in law from a British university – contrasts sharply with that of his predecessor Mahmoud Ahmedinejad, a firebrand religious hardliner.

Rouhani wants Iran, in his own words, to “join the rest of the global economy”. At a series of international summits, including Davos, he has consistently positioned his country as “potentially, the most exciting emerging market on earth”.

That’s sparked hoots of derision from smug fund managers sitting in London and New York. But Iran’s formidable human and natural resources mean Rouhani’s claim stacks up.

In 2012, Iranian GDP shrank 5% and inflation surged above 30%. Gripped by sanctions, Iran endured its worst financial crisis for 20 years. That’s a big reason Rouhani prevailed in elections the following year and why Supreme Leader Ali Khamenei is backing economic reforms, including negotiations with America over an end to sanctions.

Growth has returned under Rouhani – just – in part because sanctions have slightly eased, but the economy is still massively under-achieving. Iran has a highly-skilled, nearuniversally literate workforce, with average wages running at $500 a month – less than China. The country’s numerous universities have a long tradition of producing well-qualified scientists and engineers. The population as a whole has a vigorous median age of just 28, compared with 37 in the US and 39 in the UK. Such fundamentals augur well for rapid economic expansion.

Then, of course, there’s the stellar resource endowment.

Iran boasts at least 157bn barrels of proven oil reserves – the third- or fourth-largest haul in the world, depending on how you count. There’s also 33,000bn cubic metres of confirmed natural gas – even more than Russia on the most recent estimates. As the long-term global shift from oil to gas use continues, an open, stable, well-managed Iran could eventually replace Saudi Arabia as the world’s energy lynchpin.

There’s speculation that if Lausanne is confirmed, the related easing of trade restrictions will result in Iranian oil exports quickly rising from 1.1mn to 3mn barrels a day – the average export level during the mid-1990s when sanctions were looser.

Back in the early 1970s, in fact, when the Shah was in power, and Western oil companies could do pretty much as they pleased, over 5mn barrels of Iranian crude hit global markets

“There’s been talk not only of Western rapprochement, but of Iran as an investment destination”

daily. Restoring those kind of flows would make Iran twice as important a supplier as Kuwait – doing a lot to help keep a lid on global crude prices.

While a gusher of Iranian crude would please Western oil importers, I doubt it will happen soon. I hear much excited chatter about the “tens of millions of barrels” Iran has loaded on tankers, ready for immediate sale once the embargo is lifted. Such volumes are tiny fractions of yearly global crude consumption, so will do little to impact prices.

Iran’s energy industry, inevitably, has suffered from chronic underinvestment since sanctions were imposed following the 1979 US Embassy hostage crisis in Tehran. Restoring

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productive capacity will take money and time, which is why any sanctions deal will see just a trickle of extra Iranian oil over the next two to three years, not a flood.

Back in the mid-1950s, Iran’s real per-capita GDP was just four-fifths that of Turkey, its ancient rival. Over the 20 years that followed, free trade and economic dynamism meant growth was strong, with GDP per head soaring to more than two-and-a-half times that of Turkey. Then came Ayatollah Khomeini’s 1979 revolution, with its theocratic clampdown on business, and the economy nose-dived.

As such, Iran missed the emerging markets revolution that, from the 1980s onwards, ignited the rapid expansion of China, India, Turkey and the rest of them. Iranians are, once again, much poorer than their Turkish neighbours – a trend Rouhani is determined to reverse. “Iran is open for business,” he repeatedly tells international investors. “Come visit and see the opportunities for yourselves”.

It may surprise some to learn that Iran has a stock market, capitalized at around $170bn – about two-thirds that of Turkey. While large state block-holdings means the free-float is much less, at around $30bn, that’s still above better-known equity markets such as Nigeria. Around $150m of shares are traded daily, and there are no restrictions on foreign holdings.

No certain deal The key to securing growth, of course, is to get sanctions lifted – in particular, the banking restrictions that block international hard-currency transfers. To do that, Rouhani will need to play ball, in terms of granting renewed access to Western oil- and gas-men. Above all, though, he must address fears (not least in Israel) that Iran’s uranium enrichment activities are aimed at building a nuclear weapon. Tehran denies this, but will still have to accept curbs and further monitoring of its nuclear program to get rid of sanctions.

In principle, the five permanent members of the United Security Council – the UK, US, China, Russia and France – have now agreed, together with Germany, to do that. No more Iranian sanctions would represent a rare diplomatic ray of sunshine across the Middle East, marking the end of a dangerous and economically debilitating stand-off.

Yet a deal is by no means certain. The specifics are due to be agreed by July, but that deadline is likely to slip. There are big differences between the post-Lausanne communiqués published by Iran, America and the UK, with each side seemingly having its own schedule for the sanctions-lifting steps – from the reduction in enriched uranium stockpiles to the modification of Iran’s heavy water reactor. Then there’s the reality that for powerful groups of naysayers – be they in America’s Congress, the Israeli Knesset or Iran’s Revolutionary Guard – any idea of a deal between Tehran and the West is anathema.

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Since Lausanne, though, the diplomatic wheels have been turning. Iranian officials have made high-profile visits to China, doing deals with oil-importing giant Sinopec, to highlight that Iran has choices. Beijing, in turn, confirmed Iran’s founder membership of the China-led Asian Infrastructure Investment Bank, a rival to the Washingtonbased World Bank.

Russia also announced the re-activation of a deal to send sophisticated air-defense missiles to Tehran. For the US and its allies, that spells danger, as the S-300 missiles can effectively quash any preemptive strike, often threatened by Israel, on Iran’s nuclear development.

For Moscow, this renewed missile defence system sale was mostly business – winning good will with Tehran ahead of the raft of commercial opportunities an end to sanctions could bring, in energy, petrochemicals, manufacturing, or Iran’s

“Iran missed the emerging markets revolution” large and sophisticated consumer market. Russia has also made other overtures to Iran since Lausanne, confirming an oil-for-goods program that will see up to half-million barrels of Iranian crude a day swapped for Russian grains and other products. Similar barter deals could follow, involving not only arms but also capital goods for the development of nuclear power plants.

The path from preliminary agreement to the actual lifting of sanctions on Iran will be rocky. Prime Minister Benjamin Netanyahu’s reaction to the prospect of rapprochement was to give a speech to Congress denouncing any deal, without consulting the White House. President Barack Obama subsequently declared Netanyahu to be “wrong” on a variety of fronts.

In the end, neutrals must hope Lausanne holds, with trade and co-operation between Iran and the West making potentially catastrophic military conflict a lot less likely – and take heart from the fact that, eventually, sanctions on Tehran will have to go. The only other way to get at the energy reserves, after all, would be to invade. And Iran is too big and powerful for that.

Liam Halligan is Editor-at-Large of Business New Europe.

Follow him on Twitter @liamhalligan

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BEYOND THE BOSPHORUS:

The ingenious gentleman Don Erdogan of Ankara Suna Erdem in London

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t’s possible to imagine that the Turkish president sees himself as a sort of Poldark (without the topless scything, please…). Recep Tayyip Erdogan – raging alone like the dashing Cornish ex-soldier in the popular BBC series. Fighting against what he sees as the unjust order of a world run by arrogant Western powers and their Middle Eastern despot puppets, championing the little man – the Palestinians, the Syrians oppressed by Bashar al Assad, the 52% of Egyptians who voted for deposed leader Mohammed Morsi.

Recently, however, he was compared to a somewhat less heroic figure – Don Quixote. It’s a comparison dreamed up by a caricaturist in Iran, which for years was led by the muchridiculed Mahmoud Ahmedinejad and for most of the past decade and a half could only dream of the kind of positive international profile that Turkey enjoyed. What a comedown, thought embarrassed Turkish politicians.

So which is he? An inspirational leader fighting against the odds, or a deluded loser making a mess at every turn?

Business wins If you believe Turkey’s opposition leaders and his sizeable coterie of foreign detractors, he is definitely the latter. His flagship ‘zero problems’ foreign policy to befriend and attract investment from neighbours towards which the country had previously been hostile was shattered as Syria and Iraq imploded. Turkey’s hopes to lead the post-Arab Spring region faded as new regimes stumbled into trouble, as in Egypt.

Ambitions to be a mediator in trouble spots were damaged by its partisan stance on many issues.

The more generous would say that he could hardly be blamed for catastrophes next door. He can, however, be blamed for his undiplomatic behaviour – from his blustering against Israel, to his attack on Iran for allegedly trying to bully its way to regional supremacy by supporting Shiite fighters across the Middle East.

These last comments, days before he was due to travel to Tehran, were what inspired the Iranian cartoons, and the headline: “Ottoman Don Quixote in Teheran”. They were also unusually blunt for a Turkish leader – despite being on opposite sides of the Sunni-Shia sectarian struggle, Iran and Turkey have managed to remain on reasonably civilized terms for centuries. Although Iranian politicians called for Erdogan’s

“So which is he? An inspirational leader fighting against the odds, or a deluded loser making a mess at every turn?” trip to be cancelled and the Turks considered a no-show, the summit went ahead. The two countries announced eight agreements to boost trade and economic cooperation, aiming to more than double bilateral trade to around $30bn by the end of next year.

So, as is often with Erdogan’s Turkey, business won the day. Turkey too has suffered from sanctions on Iran and is keen to capitalize on a possible resolution. Turkey used to export around $10bn worth of goods to Iran. On energy, they are interdependent. Turkey consumes about 90% of Iran’s natural gas and has been paying in gold and other precious metals to circumvent sanctions. Turkey’s crude oil refinery, Tupras, stands to benefit from Iranian oil, and Iran’s underdeveloped consumer and industrial sectors provide lucrative opportunities for Turkish companies. The end of sanctions on Iran, then, should be great news for Turkey.

In a business sense, yes. But politically, the outlook could be more mixed. If Turkey’s old imperial rival is re-embraced by

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the West, this means that Turkey would not have the regional stage to itself. Its political mistakes and emotion-driven outbursts could be more costly.

How to lose friends and alienate allies Going from King of the Arab Street in the early days, Erdogan has been rapidly losing friends and alienating people. He is on bad terms with the internationally-recognised leaders of Israel, Egypt, Libya and Syria. He has his reasons. He thinks it is about time someone stood up for the Palestinians more openly. As a populist Muslim leader in a country dogged by secularist army coups, he can’t bring himself to accept the military’s toppling of the Muslim Brotherhood’s Mohamed Morsi. He believes that the obscene violence of Islamic State militants should not gloss over President Assad’s own abuses, and wants him removed from power. Turkey’s military was criticized for standing by as IS pounded Kobani across the border in Syria, but in this way Erdogan avoided the votelosing consequences of having Turkish conscripts die while effectively fighting to help separatist Kurds so mistrusted by Turkey’s nationalistic voters.

Nevertheless, his relationship with the US has been hurt, Turkey’s EU dreams are retreating and the UK, a longstanding ally, is frustrated. Because of his stance on Egypt, his relationship with the wealthy Saudis and other Gulf states is also cool. Turkey’s exports to the Middle East have been declining, only partly due to wars. Egypt has cancelled an agreement that allowed Turkey to deliver exports through the country – alternative routes are more expensive – and Libya’s government has decided to cancel contracts with Turkish businesses there because Turkey supports a rival administration.

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73

Western diplomats say, however, that Turkey has begun to sober up. “They’re not stupid,” notes one. “A cold dose of reality has set in. They do find it uncomfortable and are clearly trying to do something about it.”

Despite the hiccups, Turkey continues to be a presence in councils dealing with problems from Syria to Libya, and international leaders, from the British Prime Minister David

“The Iranian trip could be seen as signalling a return to a more sanguine foreign policy” Cameron and EU presidents to Russian President Vladimir Putin, are still beating a path to Erdogan’s door. Is maybe too much sometimes read into the president’s melodramatic behaviour?

The Iranian trip could be seen as signalling a return to a more sanguine foreign policy. Having been accused of stoking sectarian fires by supporting sometimes extremist Sunnis in conflict zones, Erdogan used his visit to make a plea for an end to the divisions within Islam.

Maybe, with a regional rival re-emerging, Turkey will take the opportunity to rein in the more grandiose and divisive parts of its foreign policy and focus on more realistic steps – on a policy of pragmatism rather than quixotic tilting at windmills.

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BOOK REVIEW:

In today's Russia, "Nothing is true and everything is possible" Derek Brower in London

A

round mid-March, just about the time when Twitter and much of the Western media had decided that Vladimir Putin’s multi-day absence meant he’d been toppled in a palace coup, Vladislav Surkov set off on holiday.

First he was seen frolicking with his family in Hong Kong. A week or so later he popped up again in Russia, taking pictures in a banya at the source of the Volga. Then he was in Israel, for a night-time helicopter flight over Tel Aviv. A few weeks after Putin had decidedly not been toppled, Surkov was back in his beloved Moscow.

Or at least that’s what the stream of pictures on the ‘Natan_d’ Instagram account, purportedly Surkov’s, suggested he was up to. Nothing can be certain, especially about him and media.

Surkov, Putin’s ideologist-in-residence and probably Putinism’s pre-eminent exponent, has been playing media games for years, including letting everyone assume – without confirming – that he was the author of Almost Zero, a 2009 satirical novel to which Surkov wrote the preface. The dust-jacket says it is by Natan Dubovitsky, perhaps the same guy seen in those Instagram pics frolicking across the world with the Surkova women.

Surkov is the antihero of Peter Pomerantsev’s brilliant book, Nothing is true and everything is possible: Adventures in Modern Russia. It’s about Putin’s Russia – and it’s one of the best books on the subject to have emerged in recent years. But by my reckoning Pomerantsev doesn’t even name the president until page 111. He doesn’t need to. For this is a story about how Russia’s rulers have manipulated and twisted media and civil society with the wantonness of Stavrogin. Putin, of course, presides over it all, reinforced in the Kremlin by the magical manipulations of its “political technologists”, who have created a country that can feel like “an oligarchy in the morning, and a democracy in the afternoon, a monarchy for dinner and a totalitarian state by bedtime.”

Life in Russia in this account has something Bulgakovian about it. Appearances are deceptive; innocents are constantly manipulated, dreams thwarted. The Woland of this story, Surkov, stands in the middle, orchestrating just enough stability, just enough chaos. “He claps once and a new

political party appears,” writes Pomerantsev. “He claps again and creates Nashi, the Russian equivalent of the Hitler Youth.” Almost with admiration, he notes: “The brilliance of this new kind of authoritarianism is that instead of simply oppressing opposition, as had been the case with twentieth-century strains, it climbs inside all ideologies and movements, exploiting and rendering them absurd.” It means that one moment the Kremlin can lavishly fund civic

“An oligarchy in the morning, and a democracy in the afternoon, a monarchy for dinner and a totalitarian state by bedtime” forums and NGOs, and the next quietly support nationalist movements that accuse NGOs of being tools of the West. It’s tempting to think that Surkov – a fan of Tupac and the Beat poets – sees all of this as a bit of a game.

Vapid new ideology of power The book isn’t all about the genius propagandist and the fun he’s had making misery for so many others. Big oligarchs (Abramovich, Berezovsky) and noisy critics (Bill Browder) make an appearance. But Pomerantsev does not focus on them. It’s not a foreign correspondent’s book, laden with foreign correspondents’ cliches and the comforting insights of opposition politicians. Pomerantsev is half Russian – you get the feeling that he grieves for what has happened to his country – and feels a bit dirty for spending so long in the belly of the beast; the author worked for 10 years in Russian television.

It is the people Pomerantsev meets through his work making reality TV and feel-good documentaries that make the most compelling characters in his story. These are provincial girls seeking Moscow sugar daddies; vulnerable women captivated by scams and cults; disillusioned artists; entrepreneurs

bne May 2015

crushed by corruption; cynical TV execs. Their stories amount to a tragic picture of disoriented society.

In Moscow, Pomerantsev sees even the relentless rebuilding of the city as evidence of the vapid new ideology of power.

He cites the Triumph Palace, a new skyscraper built in 2003 to emulate the style of the Stalin-era vysotki, the neo-gothic skyscrapers that look over the capital. “Long before the city’s political scientists started shouting that the Kremlin was building a new dictatorship, the architects were already whispering, ‘Look at this new architecture; it dreams of Stalin. Be warned the evil empire is back’.” The history books now remember the old dictator not for the Gulag, mass deportations and killings, notes Pomerantsev, but as the great leader who won the war for the Soviet Union.

No-one Pomerantsev meets seems to believe in much of anything – an outcome of the collective disillusionment with a succession of grand narratives that have failed. He quotes one Ostankino TV executive: “Over the last 20 years we’ve

ARTS CULTURE & PEOPLE

I 75

lived through communism we never believed in, democracy and defaults and mafia state and oligarchy, and we’ve realised they are illusions, that everything is PR.” It is the favourite phrase of the new Russia, says Pomerantsev. And it makes fertile ground for Surkovian manipulation.

If any bien-pensant Westerners you know still harbour notions that Russia is simply on some bumpy journey towards liberal democracy, hand them Pomerantsev’s book. The irony, the cynicism, the manipulations have probably now gone too far. Russia’s is a “society of simulations” – not a country in transition but “a postmodern dictatorship that uses the language and institutions of democratic capitalism for authoritarian ends.” Pomerantsev may not be the first to reach that conclusion. But as a guide to how it all works on the ground, corrupting both those employed in the system and making victims of the rest, it would be hard to beat his book.

“Nothing is True and Everything is Possible: Adventures in Modern Russia.” By Peter Pomerantse, Faber & Faber.

BOOK REVIEW:

The lessons Russia learnt in Chechnya Nicholas Watson in Prague

A

s Russia begins a new period of military adventurism, it’s an opportune time to review what happened when the country previously waged war in its backyard, so Mark Galeotti’s Russia’s Wars in Chechnya 1994–2009 is a timely piece of work. Not least because many of the lessons that the Russians learnt to their heavy cost in Chechnya appear to have been applied to Crimea and East Ukraine.

Two times go to war Before getting into the meat of the two Chechen wars, Galeotti establishes the history of the Chechen people – a mountainous, feud-ridden raider people that were “politically fragmented but culturally united” – and their first real, unhappy contact with ethnic Russians in the 18th century.

Russian attitudes towards the Chechens, Galeotti describes, were “complex, a mix of fear, hatred and respect".

At first glance, it might seem the Russians are headed towards another disaster. As Galeotti begins his highly detailed yet very readable work: “In effect, it lost: a nation with a population of 147 million was forced to recognize the effective autonomy of Chechnya, a country one-hundredth its size and with less than one-hundredth of its people. A mix of brilliant guerrilla warfare and ruthless terrorism was able to humble Russia’s decaying remnants of the Soviet war machine.”

To the Russians, the Chechens were better left alone, their territory of no real interest or economic value to Imperial Russia. But once the real prize in the Caucasus, Georgia, was annexed in 1801, secure routes to its newest possession began to matter and so the Imperial court in St Petersburg decided it was time to extend its rule to the North Caucasus. Thus began the complex relationship that continues today.

Yet history does not repeat itself, but, as Mark Twain once remarked, it does occasionally rhyme.

Through 150 years of battles, victories, rebellions and other assorted setbacks and skirmishes – “generation after

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generation rose against Russian rule, only to be beaten back down” – Russia’s brutal attempts to bring Chechnya to heel culminated in the 1944 Ardakh, or Exodus. Stalin, worried that the Chechens might take the opportunity to rise up against the Soviets while it was preoccupied with fighting the Nazis, took the decision to deport the entire Chechen population over a single night of February 23, in Operation Lentil, scattering 480,000 (of whom 200,000 died) across Central Asia and Siberia. The Chechens were only allowed to return to their homeland in 1956, after Stalin’s death.

There followed a period of ‘hot peace’, 1996–99, until the unknown Vladimir Putin arrived on the scene. Keen to reassert central control and drag Russia back to becoming a world power, he needed a “high-profile triumph, some dramatic opportunity to prove that the Kremlin was now occupied by a determined and powerful leader.” Chechnya seemed ideal.

This time, though, Russia and its military was a different beast and prepared for the coming guerrilla war. “By 1999 the military and political leadership had learnt many of the lessons of their initial humiliation.”

All remained relatively quiet until Mikhail Gorbachev’s reforms inevitably rekindled dreams of independence. After the break-up of the Soviet Union in 1991, Chechnya was still formally part of the Russian Federation, though it became de facto independent. This state of affairs was enough to convince nationalist leader Dzhokhar Dudayev that Moscow had no stomach to fight to keep Chechnya within the federation, so immediately after winning a referendum in October 1991 held to confirm him as president, he declared the republic independent.

After a series of mysterious bombs that exploded in apartment buildings in Moscow – which some believe were intended to ‘soften up’ the Russian public for the expected casualties – a bombing campaign began that created more than 5,000 refugees.

“Draining the sea” of guerrillas, in Mao’s strategy, the borders were then sealed and three times as many men, both regular troops and special forces, than were used in the 1994 war were sent in. By April 2000, Grozny had been retaken and while there were still up to 2,500 rebels scattered around the country, “they posed relatively little serious challenge to federal control".

Russia under the late Boris Yeltsin rejected out of hand any independence moves and after several failed attempts to convince the Chechens of the dire consequences of its actions with small-scale incursions, on November 20, 1994 he signed Presidential Decree No.2137, ‘On steps to re-establish constitutional law and order in the territory of the Chechen Republic’. And so kicked off the First Chechen War (19941996), which ended in humiliating defeat for the Russians.

Ambushes continued, accompanied by persistent human rights abuses, though with puppet Akhmad Kadyrov appointed as head of the Chechen government it was going to be largely his problem to deal with on a day-to-day basis – until he was assassinated in 2004 and his son, Ramzan, who is rumoured to be causing so many headaches for the president today, eventually took over in 2007.

Asymmetric The main problem the Russians encountered, Galeotti identifies, was essentially two-fold: the federal troops dispatched to fight in the First Chechen War were part of “a war machine whose gears were rusty, whose levers were broken and whose fuel was sorely lacking". Unreformed and largely unfunded, it was “an exhausted fragment of the old Soviet armed forces”, whose poorly trained, motivated and equipped troops were geared towards fighting mechanised wars on the plains of Europe or China. “The painfully won lessons of Afghanistan had often been deliberately forgotten or ignored by a high command that thought it would never again be fighting a similar war. Likewise, the last specialized urbanwarfare unit in the Russian military had actually been disbanded in February 1994.”

The asymmetrical war left the Russian army resorting to indiscriminate firepower to fight an unseen, highly nimble enemy that was expert in using the lay of the land to its advantage. In the process, of course, while rebels were dying, others were signing up.

The First Chechen War ended with the Khasav-Yurt Accord signed between Russia and the new rebel leader Aslan Maskhadov in 1996, which shelved the question of Chechnya’s constitutional status, but instead recognised Chechen autonomy and ordered a full withdrawal of all federal forces

by December 31.

Throughout this tale, Galeotti intersperses his narrative with a cast of muftis, brigands and warlords who appear straight out of a Rudyard Kipliing novel: a Russian conscript who used the conflict to burn ‘the anger out of me’; Maskhadov, a brilliant guerrilla commander who couldn’t quite master Chechen

“The painfully won lessons of Afghanistan had often been deliberately forgotten or ignored” politics as well; and the innocent civilians, caught between the brutal occupiers and their puppets and the increasingly Islamist Chechen guerrillas.

The region continues to feel the effects of the historical subjugation of Chechnya, often in attacks in Moscow, but also today in neighbouring Ukraine, where a resurgent (or desperate, whoever you listen to) Russia is using its newfound military might to redraw the post-Cold War borders of Europe and project power across the Continent.

The main differences between the first and second Chechen wars were in Moscow’s preparations made beforehand, a

bne May 2015

willingness to adapt to Chechen tactics – such as by creating special ‘storm detachments’ for urban warfare and using Chechens to fight Chechens – and a more sophisticated overall strategy. And this neatly encapsulates the current strategy in Ukraine, which fell into two parts: a highly organized and planned Crimea operation, and a rather more ad hoc war on the cheap in the east of Ukraine. Both took many lessons learned from the Chechen wars and applied them to different effects. The Crimea operation was a resounding success, though East Ukraine is a much more fluid and broader conflict, and has mired Russia in a conflict in which, as Galeotti has written in bne IntelliNews, “defeat is unthinkable,

ARTS CULTURE & PEOPLE

I 77

but victory – without a massive escalation – appears unwinnable".

For the Chechens, Galeotti sees more than a glimmer of hope.

“Looking beyond Kadyrov, there is no reason why the Chechens could not take advantage of the autonomy he has carved out within the Russian Federation and build for themselves the kind of country they want to see – and to be able to do so without another round of murderous war and rebellion.”

“Russia’s Wars in Chechnya 1994–2009”. By Mark Galeotti, Osprey Publishing (2014).

OBITUARY:

Stanislav Gross, the youngest Czech prime minister Tim Gosling in Prague

S

tanislav Gross, the Czech Republic's youngest ever prime minister, died on April 16 aged just 45, after losing a battle against a rare chronic disease.

Gross had once been seen as the Social Democratic Party's "crown prince", the most promising representative of its younger generation, but his premiership ended in a corruption scandal that is symbolic of the failure to clean up the country's murky and avaricious political establishment.

Gross had been suffering from amyotrophic lateral sclerosis, according to media reports. Having withdrawn from the public eye, he and his family had refused to speak about his illness. However, local press reported in March that Gross believed that he may have been poisoned during his time as PM. One doctor told media the claim was nonsense, amounting to little more than paranoia.

The Social Democrats (CSSD) marked his death via a curt statement and the response from Gross's erstwhile colleagues was low key. Prime Minister Bohuslav Sobotka said he had recently seen the former PM, while President Milos Zeman expressed condolences to the Gross family.

Such brevity reflects the fact that rarely has a politician who has risen to take over leadership of a party and a government so quickly, disappoint to such a degree the hopes that had been placed in him.

An interior minister at just 30, Gross served in the CSSD-led

governments of both Zeman (2000-2002) and the following administration of Vladimir Spidla (2002-2004). He was both highly popular with the voters and a powerful and skilful operator behind the scenes.

Amid falling opinion poll ratings he mounted a coup against Spidla to take over as premier in July 2004, becoming Europe's youngest government leader at the time.

Coming to office just two months after the Czech Republic joined the EU to great fanfare, Gross was a symbol of the country's hopes of a bright future. His rise to the top was seen as a sign that the long dominance of Czech politics by Zeman and Vaclav Klaus of the rightwing Civic Democratic Party (ODS) could be coming to an end.

However, within a year he had resigned, leaving office in April 2005 when he could not satisfactorily explain the financing of his apartment and a business run by his wife.

The fall was so spectacular that he withdrew from politics the same year, aged just 35, afterwards becoming mysteriously rich through some opaque transactions.

With Gross having failed, Zeman and Klaus – who served two presidential terms before Zeman moved into Prague Castle in 2013 – have continued to loom over Czech politics, and only now is their dominance starting to wane.

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I New Europe in Numbers

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Impact of oil price drop ($105-$65) on trade account as % GDP

Impact of oil price drop ($105-$65) on trade account as % GDP 5.0%

Romania 0.8%

Hungary 1.5%

Turkey 1.3%

Poland 1.5%

0.0%

-5.0%

Russia -5.2%

-10.0%

Kazakhstan -9.7%

-15.0%

Azerbaijan -15.4%

Source: ICBC Standard Bank; BP

Source: ICBC Standard Bank; BP

CIS oil states’ trade accounts hit hard by oil prices The sharp drop in oil prices over the last 12 months has had varying effects on the trade accounts of CEE/CIS nations – some good, some bad. The bottom lines of net oil importing nations have benefitted as lower prices have boosted production and,

subsequently, export revenues. Net oil exporters, however, have not had such an easy time. Countries with oil-dependent economies, such as Azerbaijan and Kazakhstan, have born the brunt of the price decreases, with trade account balances – as a percentage of GDP – falling by as much as 15%.

Top five equities in the five largest CEE/CIS markets

Top five equities in the five largest CEE/CIS markets Country

Company

Russia

Gazprom

Turkey

Czech Republic

Kazakhstan

P/E

(MICEX:GAZP)

Oil and Gas

7.76

4.1

+/ (Month) + 6.8%

+/ (YTD) + 14.6%

+/ (year) + 15.0%

Market cap

(USDmn) $64,861

LUKOIL

(MICEX:LKOH)

Oil and Gas

6.29

6.7

- 4.2%

+ 15.8%

+ 37.6%

$36,729

(MICEX:SBER)

Banking

0.12

5.8

+ 12.1%

+ 32.1%

- 5.7%

$29,484

Surgutneftegas

(MICEX:SNGS)

Oil and Gas

Unav.

Unav.

+ 12.1%

+ 59.4%

+ 48.8%

$25,305

Magnit

(MICEX:MGNT)

Food Retail

Unav.

Unav.

+ 11.2%

+ 18.8%

+ 48.6%

$20,566

Adana Çimento

(IBSE:ADANA)

Manufacturing

0.16

16.5

+ 9.7%

+ 27.5%

+ 74.6%

$40,702

Turkiye Garanti Bankasi

(IBSE:GARAN)

Banking

0.31

10.0

- 0.8%

- 9.0%

+ 7.8%

$13,342

Akbank

(IBSE:AKBNK)

Banking

0.31

9.1

- 0.3%

- 10.6%

+ 6.2%

$11,476

KOC Holding

(IBSE:KCHOL)

Conglomerate

0.39

11.3

+ 8.0%

- 2.4%

+ 28.2%

$11,373

(IBSE:ISCTR)

Banking

0.27

7.9

- 2.1%

- 12.3%

+ 17.0%

$9,879

Bank Pekao

(WSE:PEO)

Banking

2.77

18.6

+ 0.3%

+ 6.0%

- 2.1%

$13,411

PKO Bank Polski

(WSE:PKO)

Banking

0.69

14.0

+ 3.3%

+ 0.7%

- 14.3%

$12,133

PZU Group

(WSE:PZU)

Insurance

9.22

14.2

+ 1.7%

+ 0.1%

+ 13.2%

$11,324

PGE Group

(WSE:PGE)

Utilities

0.52

10.8

+ 6.1%

+ 10.7%

+ 3.6%

$10,542

Bank Zachodni

(WSE:BZW)

Banking

5.38

18.9

+ 12.4%

- 1.6%

- 4.1%

$9,876

(SEP:CEZ)

Utilities

1.64

15.5

+ 5.4%

+ 10.0%

+ 11.1%

$13,609

Unav.

7.1

- 3.6%

+ 13.8%

+ 13.6%

$7,988

0.65

11.7

+ 7.5%

- 6.8%

- 27.4%

$2,641 $1,213

CEZ Komercni Banka

(SEP:KOMB)

Banking

O2 Czech Republic

(SEP:TELEC)

Telecoms

Philip Morris

(SEP:TABAK)

Tobacco

Unav.

Unav.

+ 0.1%

+ 4.2%

+ 6.6%

Unipetrol AS

(SEP:UNIPE)

Oil and Gas

Unav.

Unav.

+ 9.3%

+ 6.5%

+ 1.6%

$988

(LSE:KMG)

Oil and Gas

Unav.

Unav.

- 4.3%

- 24.1%

- 27.0%

$4,499

Halyk Savings Bank

(LSE:HSBK)

Banking

Unav.

Unav.

+ 31.0%

- 10.6%

- 15.6%

$2,109

Kcell

(LSE:KCEL)

Telecoms

Unav.

Unav.

+ 10.1%

- 8.0%

- 32.2%

$1,850

KazTransOil

(KAS:KZTO)

Oil and Gas

0.65

6.9

+ 19.7%

+ 13.3%

- 31.3%

$1,760

(LSE:KKB)

Banking

0.31

4.1

- 6.6%

- 15.3%

+ 19.3%

$1,108

KazMunaiGas

Kazkommertsbank

Source:CapitalIQ

EPS

Sberbank

Turkiye Is Bankasi

Poland

Sector

New Europe in Numbers

bne May 2015

Cross-border remittances from Cross-border remittances Russia Russia to CIS countries asfrom % 2014 GDP to CIS countries as % 2014 GDP

I 79

Political uncertainty and strong dollar limit benefits of cheap oil for Turkey Inan Demir, Chief Economist at Finansbank, interviewed by Henry Kirby

Azerbaijan

0.8%

Kyrgyzstan

Armenia

($603m) Uzebekistan

7.7%

17.7%

($729m)

($1,195m)

For net energy importer Turkey, a year in which Brent crude fell from a 2014 high of $115 to $65 per barrel should have seen Southeast Europe’s biggest economy cruising. Instead, a surging dollar and an uncertain political future in Ankara have all but stopped the cheap-energy gravy train in its tracks, says Inan Demir, chief economist at Turkey’s Finansbank.

7.9% ($4,893m)

Tajikistan

32.9%

The effects of the dollar’s recent rally – the lira has lost 15% of its value against the dollar since the beginning of the year – are myriad, impacting inflation, Turkey’s external balance and the overall rate of economic growth, Demir explained to bne IntelliNews.

($3,009m)

Source: Central Bank of Russia

Third of Tajik GDP in 2014 is money sent home from Russia The volume of Russian money entering former Soviet countries is in some cases as high as a third of the recipient state’s GDP, data from the Central Bank of Russia (CBR) has shown. The data for 2014 represents all cross-border money transactions executed by non-residents, who in most cases are labour migrants from bordering nations.

Uzbekistan received the highest nominal volume of remittances in 2014, at $4.89bn, representing 7.9% of its 2014 GDP. As the chart shows, the biggest recipient in GDP percentage terms was Tajikistan. The $3.01bn it received in 2014 was equivalent to 32.9% of its GDP for the same year.

Kyrgyzstan’s $1.19bn was equivalent to 17.7% of its GDP.

Russian inflation finally slowing 16.0

15.0

16.8

16.9

14.0

“The decline in the oil price has had a positive effect on the disinflation story,” he said. “Imports in Turkey are mainly in dollar terms, as it is a net energy importer, and energy makes up around 15% of the price inflation basket.”

Indeed, Turkish consumer prices have fallen at an almost identical rate to oil prices in the last year, with CPI slowing to 7.6% year on year in March after 2014 saw the monthly inflation figure hovering around 9%.

The benefits of a stronger dollar, however, end there, according to Demir, with both sovereign and corporate balance sheets suffering as a result of its recent ascent.

“Turkey’s external debt is mostly denominated in dollars – around 60% – and Turkish corporates are running sizeable short FX positions, mostly in dollar terms, so appreciation of the US currency could hurt balance sheets.”

“For corporates, these losses in turn will result in savings measures, which will come in the form of cutting back investment expenditure or postponing hiring decisions – both of which hinder economic growth.”

Were it not for low oil prices, the case could be much worse, says Demir, who explained the abating effect of cheap crude on the currency scenario: “As a rule of thumb, taken in isolation for every $10 drop in the oil price, it shaves around $4bn from Turkey’s external deficit, which is about half a percentage point of GDP – that’s a significant impact.”

12.0

Consumer inflation in Russia appears to finally be slowing down after months of sharp increases, according to data released by the Central Bank of Russia (CBR).

Since October last year, monthly year-onyear inflation figures increased by 0.4, 2.3, 3.6 and 1.8 percentage points, respectively, before slowing to at 0.1pp increase between February and March, when CPI grew from 16.8 to 16.9. The recent rally of the ruble will have been a contributing factor, hitting a 2015 low of RUB49.8 to the dollar earlier this month.

The stronger dollar is not the only cloud on Turkey’s macroeconomic horizon.

Turkey’s forthcoming general election – scheduled for June 7 – could potentially see current President Recep Erdogan’s AKP party re-elected with an absolute majority. Such an outcome would make possible constitutional reform and the granting of full executive powers to Erdogan – powers that he has suggested he could use to change the configuration of the central bank’s monetary policy committee.

“Such a concentration of power could undermine confidence in Turkey’s central bank. The markets would certainly be concerned by this,” Demir explains.

Oil price (USD per barrel) and year-on-year consumer inflation (%) 110

9.5

100

9.0

90

8.5

80 8.0

70

Brent crude

60

7.5

CPI

May

Jun

Jul

Aug

Sep

Oct

Nov

Sources: Turkish Statistical Institute; Nasdaq

Dec

Jan

Feb

Mar

CPI (%)

Feb 15

Mar 15

Jan 15

Dec 14

Oct 14

Aug 14

8.3

9.1 Nov 14

7.6

8.0 Sep 14

7.5 Jul 14

Jun 14

8.0

7.8

USD per barrel

11.4

10.0

80

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bne May 2015

MACROECONOMIC INDICATORS

GDP composition (%)

Gross domestic product ($mn) Country

Total (2014)

YoY (% annual)

YoY (% qtr)

2015 Forecast

Per capita ($)

Agri.

Indus.

Albania

13,175

2.1

1.1

+3.4

4,549

22

Armenia

9,529

5.9

5.9

+3.3

3,551

Azerbaijan

75,188

1.4

1.4

+3.4

Belarus

75,925

4.1

-22.94

Bos/Herzegovina

19,191

1.1

Bulgaria

55,733

Croatia

57,639

Czech Republic

186,877

Estonia

Budget deficit

Current account

Inflation (CPI) Unemployment Ind. prod.

Serv.

Bud% GDP

% GDP

Latest, YoY

Last year

%

YoY

15

63

-5.2

-14.9

+2.2 Mar

2.1

17.0

+11.6

22

31

47

0.4

-5.5

+5.4 Feb

7.1

17.1

+6.4

8,060

6

62

32

-0.5

17.6

+4.6 Mar

1.8

4.9

+1.8 2013

+3.4

7,685

9

42

49

1.0

-0.9

+16.3 Mar

16.2

0.7

+9.0

+1.3

+3.4

4,735

8.1

26.4

65.5

1.6

-5.6

-0.2 Mar

-1.7

43.7

-4.6

2.3

-6.9

+0.8

7,418

6.7

30.3

63

-3.4

-4.6

+0.1 Mar

-2.3

11.0

+2.4

-0.4

-8.0

+0.5

13,415

5

26

69

-3.0

23.7

+0.1 Mar

-0.4

19.7

+0.4

4.4

-8.7

+2.5

19,295

2

38

60

-1.8

0.5

+0.2 Mar

0.2

7.2

+4.6

25,916

4.1

-3.7

+2.3

18,988

4

29

67

1.0

2.5

-0.6 Mar

0.2

4.7

+5.1

Georgia

16,898

4.7

-0.8

+3.2

3,785

9

24

67

-5.9

-5.4

+2.5 Mar

3.5

14.6 (2013)

+11.1

Hungary

137,104

2.8

-5.6

+2.4

13,182

34

28

68.7

-2.6

4.2

-0.7 Mar

0.0

7.7

+5.9

Kazakhstan

234,065

4.3

+8.6

+5.0

13,438

5

38

57

-3.4

-2.6

+5.2 Mar

6.0

5.0

+1.5

Kosovo

7,308

5

-0.6

+3.8

4,022

12.9

22.6

64.5

Null

-11.5

-0.4 Mar

0.3

30.0 (2013)

n/a

Kyrgyzstan

7,515

4

+3.6

+4.5

1,279

20.8

34.4

44.8

Null

-14.2

+11.6 Dec

6.0

2.4

-10.4

Latvia

31,920

3.6

-5.2

+2.9

15,973

4.9

25.7

69.4

-1.3

-1.4

+0.5 Mar

0.3

9.0

-1.6

Lithuania

43,911

3.8

-5.4

+3.0

16,206

3.7

28.3

68

-0.5

0.1

-1.4 Mar

0.2

9.1

+5.4

Macedonia, FYR

11,327

5.2

-5.5

+3.4

5,066

10

26

63

-3.4

-0.4

-0.3 Mar

0.4

27.9

+3.1

Moldova

8,337

4.6

+0.9

+3.4

2,284

15

17

69

Null

-6.2

+2.2 Feb

3.9

3.3

+6.7

Mongolia

12,419

7.8

+7.0

+7.5

4,069

16

33

50

Null

-12.5

+10.7 Dec

9.9

6.4

+14.8 2013

Montenegro

4,547

2.7

+3.5

+3.0

7,334

10

20

70

-3.0

-14.2

+1.1 Mar

-0.5

15.1

+19.3

Poland

543,255

3.3

-6.0

+3.2

13,888

4

33.3

62.7

-1.7

-1.2

-1.3 Mar

0.8

11.7

+8.7

Romania

199,903

4.3

-5.1

+2.7

9,794

6

43

50

-3.0

0.3

+0.8 Mar

1.1

5.5

+3.2

Russia

1,261,604

7.2

-25.3

-3.8

14,421

4

36

60

-7.5

2.7

+16.9 Mar

6.9

5.9

-0.5

Serbia

43,866

-3.6

+0.4

0.0

5,890

7.9

31.8

60.3

-4.6

-6.0

+2.3 Mar

3.1

17.6 Sep

-2.4

Slovak Republic

99,795

2.2

-5.7

+2.5

18,090

3.1

30.8

47

-3.9

0.1

-0.3 Mar

-0.2

12.1

+3.2

Slovenia

48,051

2.6

-6.7

+1.8

23,262

2.8

28.9

68.3

-3.4

6.7

-0.3 Mar

0.6

9.7

+6.8

Tajikistan

9,019

6.7

+6.7

+5.8

1,105

27

22

51

Null

-2.1

+7.4 Dec

3.6

2.5

+7.1

Turkey

843,173

2.8

+0.7

+3.3

10,852

9

27

64

-1.3

-6.1

+7.6 Mar

8.4

10.7

+1.0

Turkmenistan

46,371

10.8

n/a

+11.5

7,875

7.2

24.4

68.4

Null

0.2

+6.0 '13

5.3

n/a

n/a

Ukraine

162,881

-8.2

-39.2

-2.3

3,792

10

27

63

-4.6

-9.2

+45.8 Mar

3.4

1.9

-21.2

Uzbekistan

60,828

7.6

+0.7

+7.1

1,995

19.1

32.2

48.7

1.3

3.9

+11.2 '13

7.0

4.9 (2013)

+8.1

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Development Bank; National Statistical Committee of the Republic of Belarus; Haver Analytics

*All data are latest available official figures or independent estimates

SPACE FOR AD/HOUSE AD SHOWING OTHE..

I 81

New Europe in Numbers

bne May 2015

FINANCIAL INDICATORS

SOCIAL Total market cap., all publicly traded equities

Stock market

Literacy

Tertiary edu.

Month

12-month

Ytd

52-wk low

52-wk high

P/E

Latest $mn

YoY %$

YoY % local curr.

% adults

% pop.

Albania (-)

-

-

-

-

-

-

-

-

-

96.8

55.5

Armenia (-)

-

-

-

-

-

-

-

-

-

99.6

46

Azerbaijan (-)

-

-

-

-

-

-

-

-

-

99.8

20.4

Belarus (-)

-

-

-

-

-

-

-

-

-

99.6

62.6

Bos/Herzegovina (SASE)

-0.1

-1.8

0.0

677.3

726.8

-

-

-

-

98.2

37.7

Bulgaria (SOFIX)

-2.2

-18.3

-4.8

476.4

605.6

215.4

4,095.1

-33.4

-15.3

98.4

91.4

Croatia (CROBEX)

+1.1

-1.1

-0.2

1,644.3

1,930.3

14.0

18,079.0

-16.5

+5.9

99.1

64.1

Czech Republic (PX)

+0.1

+4.7

+9.1

901.3

1,058.4

14.1

26,477.6

-18.3

+5.0

99

76.6

Estonia (OMXT)

+3.4

+11.9

+16.3

729.0

897.8

17.0

2,036.4

-18.8

+4.2

99.9

27.9

-

-

-

-

-

-

-

-

-

99.7

61.6

Hungary (BUX)

+14.8

+27.6

+36.6

15,686.7

22,420.4

14.1

15,540.1

-12.9

+10.1

99.4

59.6

Kazakhstan (KASE)

+1.9

-20.2

-11.9

761.0

1,312.8

9.2

13,294.6

-21.9

-18.6

99.7

44.5

-

-

-

-

-

-

-

-

-

0

41.3

Stock market index

Georgia (-)

Kosovo (-) Kyrgyzstan (-)

-

-

-

-

-

-

-

-

-

99.2

-

Latvia (OMXR)

+2.7

+2.2

+7.0

408.0

457.8

10.3

949.9

-20.1

+2.5

99.9

73.9

Lithuania (OMXV)

+1.2

+10.7

+9.5

444.4

500.7

11.2

4,187.2

-10.0

+11.4

99.8

65.1

Macedonia, FYR (MBI10)

-3.3

+1.5

-7.1

1,586.1

1,877.0

-

236.3

-80.7

-78.7

97.5

40.1

-

-

-

-

-

-

-

-

-

99.1

38.4

Mongolia (MSETOP)

-2.5

-18.7

-13.8

12,713.0

17,196.3

-

-

-

-

98.3

-

Montenegro (MONEX20)

+1.9

+34.5

+13.2

9,665.6

12,610.1

-

-

-

-

98.4

61.1

Poland (WIG)

+3.8

+9.3

+10.0

49,593.7

56,518.0

14.9

162,356.9

-19.4

+0.8

99.7

73.1

Romania (BET)

+8.0

+16.7

+8.5

6,328.5

7,561.9

10.5

20,645.3

-10.6

+13.5

98.6

51.5

Russia (MICEX / RTS)

+4.0 / +17.9

+29.4 / -9.4

+17.2 / +36.3

1,280.1 / 629.2

1,838.2 / 1,421.1

6.5

466,701.5

-32.5

+12.4

99.7

76.1

Serbia (BELEXLINE)

+9.6

+23.4

+7.9

568.2

746.6

7.3

2,941.7

-8.1

+23.2

98.2

52.3

Slovak Republic (SAX)

+1.4

+15.8

+8.3

204.5

268.3

-

45,015.9

+1,0..

+1,253.3

99.6

55.1

Slovenia (SBITOP)

+2.0

+5.6

+5.0

728.6

839.4

11.7

6,551.5

-9.1

+16.5

99.7

86

-

-

-

-

-

-

-

-

-

99.7

22.4

+4.3

+18.2

+0.1

71,388.7

91,412.9

13.1

232,473.5

-1.3

+17.3

94.9

-

-

-

-

-

-

-

-

-

-

99.6

69.3

Ukraine (PFTS)

-15.0

-13.0

-7.7

352.5

483.3

3.9

1,842.7

-94.2

-58.7

99.7

79.7

Uzbekistan (-)

-

-

-

-

-

-

-

-

-

99.5

-

Moldova (-)

Tajikistan (-) Turkey (XU100) Turkmenistan (-)

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute for Statistics; InFinancials; EuroStat

*Official figure or independent estimate

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82

I Events

bne May 2015

2nd INTERNATIONAL CONFERENCE

ON E-MONEY, CARDS AND PAYMENTS 8-9 June 2015 Danubius Health Spa Resort Margitsziget, Budapest

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