bne magazine October 2013

Inside this issue: How the Moscow mayoral election was stolen Unpopular in Poland Murky takeovers of Moldovan banks October 2013 www.bne.eu

Tajikistan going Rogun

Chinese Go for Central Asia

bne October 2013

Contents

Editor-in-chief: Ben Aris (Moscow)

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Managing editor: Nicholas Watson (Prague)

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News editor: Tim Gosling (Prague)

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

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COVER STORY 6 The Insiders

CENTRAL EUROPE 26 New Czech parties to rock political boat

8 Chinese Go for Central Asia +7 7073011495

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12 Perspective

27 Consuming more in Central Europe

13 Chart of the month

29 Unpopular in Poland 31 A pension raid in Poland

EASTERN EUROPE

33 Hungary PM ends "colonisation"

14 Ukraine fights off Russian advances

34 Hungary banks face deadline

16 How the Moscow mayoral election was stolen

35 The Baltics' Great Wall of China

18 Doing the Hulu in Russia

37 Notorious – the rise and fall of Ask.fm

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

No liability can be attached to the publisher for these comments, nor for inaccuracies, errors or omissions. Investment decisions or related actions taken on the basis of views or opinions that appear herein are the responsibility of the reader and the publisher, contributors and related parties cannot be held liable for these actions. bne is the property of bne Media Ltd · Reg number: HE 185230 · Michalakopoulou 12, 4th floor, Suite 401, P.C 1075, Nicosia, Cyprus · Postal address: Schluterstrasse 19, Berlin 10625, Germany

21 Russia's new regulatory overlord 23 Back to the 90s as Russia freezes energy tariffs

40 Hungary heads further down renationalisation path 41 Areva continues its Czech nuclear fight

24 Belarus still has a gas with Russia

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Contents

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SOUTHEAST EUROPE 42

EURASIA

Murky interests wrest control of top Moldovan banks

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Tajikistan going Rogun

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A pratfall in Turkmenistan

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Moldova whines over Russian ban

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Armenia picks Russia over closer ties with EU

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Coming soon to Turkey: Kurdistan oil and gas

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Mongolia mounts Operation Rescue Oyu Tolgoi

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All that glitters is not gold in Romania

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Fencing off farmland in Georgia

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Green against black in Serbia

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Judicial progress in Georgia?

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Big tasks face Serbia's revamped govt

Kazakh ecommerce reaches turning point

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Coming to a mall near you in Serbia

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A new broom in Albania

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Albania makes a hash of it

Follow us on twitter.com/bizneweurope

OPINION 68

Ficoid and Zemanite

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UPCOMING EVENTS

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Not a Cold War, but more than a little chilly

George Friedman of Stratfor

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tratfor has been chronicling what we call the end of the Post-Cold War world, a world with three pillars: the United States, Europe and China. Two of these three have been shifting their behaviour over the past few years.

We've discussed the end of China's high-growth, low-wage expansion. We've also discussed the deep institutional crisis in Europe resulting from its economic problems. We have discussed some of China's potential successors. What needs to be discussed now is the system that will emerge from the Post-Cold War world, and to do that, we need to discuss shifts in Russia's behaviour.

Chaos in Russia Russia went through two phases in the Post-Cold War world.

The first was the chaos that inevitably followed the collapse of the Soviet Union. Chaos sometimes can be confused with liberalism and many think of Russia in the decade after the Soviet Union as being liberal. But Russia under Boris Yeltsin was less liberal than chaotic, with a privatisation programme that enriched those who rapidly organized to take advantage of the poorly defined process, a public life that had little shape or form and a West that was both pleased with the fall of Soviet power and deluded into thinking that Russia was reshaping itself into a Western constitutional democracy.

The second phase was a reaction to the first. The havoc of Yeltsin could not continue. To a great extent Russia was not working. The only structure that had survived the Soviet Union and that was still working was the security services – and even those were being seriously degraded by Yeltsin's efforts. The security services had both held the country together to the extent possible and had participated in the accumulation of wealth through the privatisation process.

In the course of that, they not only retained the power they had in the Soviet Union but also dramatically increased their power. At the same time, a class of oligarchs emerged and the two groups oscillated between competition and cooperation.

Russia could not continue as it was. It was sinking into extraordinary poverty, worse than the Soviet Union; there were regions that were seeking to break away from the

Russian Federation; and it had little to no international standing. Influence is not something given to a country. It has that influence because of its power, because the consequences of ignoring its wishes would be unacceptable. By 1999, Russia had reached the low point of its influence.

Russia's return It was logical that a man like Vladimir Putin would emerge from the chaos of the 1990s. Putin was deeply embedded in the KGB and the old security apparatus. During his time in St Petersburg, he was integrated with the emerging oligarchs as well as the new generation of economic reformists. Putin understood that in order to revive Russia, two things had to happen. First, the oligarchs had to be intimidated into aligning their activities with the Russian government. He also understood that he had to bring some order to the economy both for domestic and foreign policy reasons. Russia had massive energy reserves, but it was incapable of competing on the world markets in industry and services. Putin focused on the single advantage Russia had: energy and other primary commodities. To do this he had to take a degree of control of the economy – not enough to return Russia to a Soviet model, but enough to leave behind the liberal model Russia thought it had. Or put differently, to leave behind the chaos. His instrument was Gazprom, a governmentdominated company whose mission was to exploit Russian energy in order to stabilize the country and create a framework for development. At the same time, while reversing economic liberalism, Putin imposed controls on political liberalism, limiting political rights.

Energy production created an economic base that the government could use to end the erosion of economic life throughout the country. It also gave Russia a lever that assured it would not be ignored. Energy sales to Europe became an essential part of European economic life. Germany, for example, needed energy to maintain its economy. There was always a chance that Russia might cut off sales. On several occasions, the flow of energy was severed when disagreements arose between Moscow and the transit states, Belarus and Ukraine. As the Russians developed greater reserves it became easier for them to endure the cost of a month-long disruption than it was for Germany.

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Therefore, Germany and the rest of Europe ceased to be indifferent to what Russia wanted. They couldn't afford to neglect Russian interests. During the Cold War, Russia had been poor and powerful. After the Cold War, it had been poorer and powerless. Putin returned it to a place where it was somewhat better off and had international power. That he was indifferent to individual rights upset urban liberals in Russia.

Its effect outside of Moscow and St Petersburg is less clear, but his popularity continues to be greater outside major cities.

As Europe struggles with its internal problems and China deals with its economic problems, Russia has attained a position of significant regional influence –influence that Putin is systematically trying to increase. Putin is following a policy that we might call "commercial expansionism."

Russian tanks are not about to surge into the former Soviet satellites in Europe like they did in Georgia, but the weakness of Europe has forced these countries to rely less on the rest of Europe and to try to cope on their own. Unable to rely on the US, where the single issue of missile defence has created substantial unease, they remain distrustful of Russia in the extreme. However, they have few options, and the Russians are being meticulous in assuring that commercial relations are not seen as a means of political control.

This strategy creates a new dynamic in Russia's relationship with the US. During the Soviet era and under Putin, the Russian strategy toward the US has been to generate problems in diverse areas in order to force US actions that diffuse American power and lead Washington to overcommit.

Vietnam was an example of this. For Putin, the sphere for this action is the Middle East. The wars in Afghanistan and Iraq were gifts to the Russians. The Americans were tied down, creating a window of opportunity for the Russians to recover their balance, rebuild their system and, when the opportunity presented itself, expand their power.

The end of the wars in Afghanistan and Iraq are not in the Russian interest. Moscow benefits, with some costs, from the US preoccupation in the Islamic world. Therefore, the Russians have played a role in both Syria and Iran, essentially inviting the Americans to continue their policy in the Middle East while relieving pressure on the Russians. The US has responded with increased pressure on the Russians to halt support for Bashar al Assad and the Iranians. The Russians refused.

New Cold War When you step back, you see the US in the process of disengagement that normally follows American wars. This disengagement comes at the same time that Europe is undergoing an internal economic crisis that has created an institutional crisis. This has opened opportunities for the Russians to increase their influence in Europe at a time when the US is trying to find its own balance.

The Snowden affair should be seen in this light. There are many issues involved in the Snowden case, from US

constitutional matters to the obligations of those with clearances. The Snowden affair also has this context: An American with access to highly classified material has defected to Russia.

The Americans want him back. Ten or 15 years ago he might have been returned, but not now. If the Russians returned him, all other potential American defectors might decide not to trust Russia. If an equivalent Russian defected to the US, it is unlikely he would be returned to face trial. But the defection would be much more quiet, as the less the Russians knew the better. For reasons perhaps beyond their control, or perhaps not, this defection cannot be hidden.

But that serves two purposes. First, it creates a political crisis in the US and between its allies. Second, it aligns Russia with human rights groups (international and inside of Russia itself) that have been condemning Russia for violating human rights.

Russia has created a moral equivalency on human rights with the US, valuable in its political war with the US. The Snowden affair is on this level a minor matter. But there are no opportunities too minor to be exploited now.

There is no danger of a military confrontation now or perhaps ever. But the Russians are now using the European economic crisis and tensions between Europeans and Americans to project power – commercial, in this case – into Europe, to separate the Europeans from the Americans to the extent possible and to put the US on the defensive.

The US not yet defined its policy toward Russia. It continues to look at Russian behaviour in the context of isolated actions

"As Europe struggles with its internal problems and China deals with its economic problems, Russia has attained a position of significant regional influence" that do not form a coherent whole. Syria, Iran, Eastern Europe and Ecuador are viewed as Russian irritants, not a Russian strategy. But it is now a strategy – a strategy of finding the means to tie down and divert the US while Russia creates a new reality on its periphery and especially in Europe.

The US can afford to be confused. It is a huge power with ample time to react. Russia is ultimately a weak power.

Its advantage in energy depends on the price of it and the development of alternative sources. Russia's reassertion rests on weak foundations and I doubt they can sustain it. The Soviet Union was much stronger on the whole than Russia is today, and it could not sustain itself. Neither can Russia.

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Chinese Go for Central Asia Clare Nuttall in Astana

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resident Xi Jinping’s tour of Central Asia in early September was an economic coup for China, which scooped up energy deals across the resource-rich region. While China is still competing for political influence in Russia’s traditional stomping ground, as the world’s second largest economy its greater financial clout means it is winning the economic battle.

With Xi’s visit focusing on the region’s three main oil and gas producers – Kazakhstan, Uzbekistan and Turkmenistan – Beijing’s priority was clearly securing access to more oil and gas. The visit was highly successful in this respect. China National Petroleum Corp (CNPC) sealed the deal to buy an 8.33% stake in Kazakhstan’s offshore

Kashagan oilfield, the world’s largest discovery of the last three decades.

China has also agreed to finance the second phase the development of Turkmenistan’s Galkynysh gasfield, the world’s second largest. Agreements on expanding the Central Asia China gas pipeline will ensure a steady increase in the supply of gas from Turkmenistan and other Central Asian countries to energy-hungry China, but the expansion – including a new line of the pipeline taking an alternate route through Kyrgyzstan and Tajikistan – will lock all five Central Asian republics into China’s pipeline network whether as suppliers or consumers of gas.

While the emphasis was on energy, Xi also outlined his vision for deeper

economic cooperation, the Silk Road Economic Belt, and sought Central Asian support in the security sphere, demonstrating that Beijing’s agenda goes beyond access to raw materials.

Turkmen ties Xi kicked off the tour in Turkmenistan, China’s top natural gas supplier, on September 3, joining his Turkmen counterpart Gurbanguly Berdymukhamedov to open new infrastructure at the Galkynysh gasfield, which will allow Turkmenistan to start pumping gas from the field eastwards to China. That will help the Central Asian state boost exports to China in the coming years to 65bn cubic metres (cm) annually, according to officials in Ashgabat, having sent 20bn cm last year.

Cover Story I 9

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Xi and Berdymukahemdov agreed to start talks on funding for the development of the second phase of Galkynysh, for which CNPC will be the sole service contractor. This gives the Chinese stateowned company a level of access to Turkmenistan’s vast gas reserves that has until now eluded international energy majors, who have made little headway in the closed, authoritarian country.

during the visit on September 7. The $5bn deal was widely expected after Astana blocked the sale of the stake formerly owned by ConocoPhillips to India’s ONGC Videsh, confirming the strength of China’s position in Kazakhstan’s oil and gas sector.

China will also cover up to $3bn of Kazakh state oil and gas company KazMunaiGas’ share of the costs during the second phase development of the field.

To enable the increase in exports, Turkmenistan and China plan to go ahead with the expansion of the Central Asia-China (CAC) gas pipeline. Two new lines will be built: Line C, which will follow the already established route from Turkmenistan through Uzbekistan and Kazakhstan to China, while Line D will follow a new route via Uzbekistan, Kyrgyzstan and Tajikistan to the Chinese border.

China’s investment into Kashagan is likely to result in an increase in the share of oil from the field being sent eastwards to China, part of an existing trend towards a much closer relationship with Kazakhstan in the energy sphere.

In addition to giving China an alternative route should there be a technical or security problem on the main CAC pipeline route, building Line D through the two Central Asian countries that are not currently gas exporters, has the effect of “tying in both Tajikistan and Kyrgyzstan to the Chinese hegemony,” says Andrew Neff, senior energy analyst at IHS Global Insight.

Building through Tajikistan also gets the export infrastructure in place should the Bokhtar project that's being developed

by CNPC, Total and Tethys Petroleum be successful enough to turn Tajikistan into an energy exporter. “There’s definitely a tie-in,” Neff tells bne. “Now there’s the prospect of major gas production from Tajikistan, having an outlet to export this via the Central Asia China pipeline is a no brainer.”

Cash in on Kashagan Xi’s visit to neighbouring Kazakhstan came shortly before the long-awaited launch of production at the offshore Kashagan oilfield, which is set to cause a rapid upturn in Kazakhstan’s GDP growth and which in the longer-term the government hopes will establish the country as one of the world’s top oil exporters.

An agreement on CNPC’s acquisition of an 8.3% stake in Kashagan was signed

Astana was unhappy when the Kashagan consortium blocked an attempt by Sinopec and CNOOC to buy into the consortium when BG Group announced it was selling its stake back in 2003. Since then, new legislation giving the government ultimate control over transactions at fields deemed to be “strategic” was adopted,

seen from the government viewpoint as a reflection of the decision that China is where the current oil demand is, where future demand is, and where future oil from Kazakhstan should be directed.”

In total, around $30bn worth of deals were signed during Xi’s visit to Kazakhstan, including an agreement to build a refinery and petrochemical complex in Kazakhstan, and two credit lines worth $8bn for the Baiterek National Holding Company, which was set up in May to develop and diversify the Kazakhstani economy.

A further $15bn worth of deals were signed with Uzbekistan, including one on the construction of a $455m rail tunnel in the Uzbek Fergana Valley as part of the planned China-KyrgyzstanUzbekistan railway. Uzbekistan, which started exporting gas through the CAC in mid-2012 – to the detriment of domestic gas consumers – is planning to step up exports through the pipeline. CNPC also signed a

"China is where the current oil demand is, where future demand is, and where future oil from Kazakhstan should be directed” allowing Astana to bring CNPC into the consortium 10 years later. “There is a realisation from the Kazakhstani government that the true potential of the Kashagan field is in danger of not being realised under the existing consortium agreement,” says Neff, who points out that China has shown what it can achieve with the speedy construction of the CAC pipeline, as well as its support for the Beinau-BozoiShymkent pipeline, which will bring gas from the Kazakhstani oilfields to south Kazakhstan as well as linking gas producing regions to the CAC.

deal to join the Uzbek-Singaporean UzIndoramaGasChemical consortium, which is building a $2.5bn gas-chemical complex in the Kashkadarya region.

“I think there was a sense when ConocoPhillips decided to sell [its stake], that pre-empting the sale and selling to CNPC would have the benefit of bringing fresh blood into the consortium,” Neff adds. “The shift in the consortium is

Smooth as silk China is now the top trading partner of most of the Central Asian republics, and among the top three for every country in the region. Trade between Kazakhstan and China will exceed $30bn in 2013,

Kyrgyzstan will receive $3bn in loans for energy and infrastructure projects, including for the Kyrgyz section of the CAC pipeline. Though Tajikistan was not included in the tour, Xi met Tajik President Emomali Rakhmon during the September 13 Shanghai Cooperation Organisation (SCO) summit, agreeing to start building Line D of the CAC, which will pass through Tajikistan, as soon as possible.

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China’s ambassador to Kazakhstan, Le Yucheng, told Kazakhstani state media.

Xi’s Central Asian tour coincided with the third China-Eurasia Expo in Urumqi, the capital of the Xinjiang region, which highlighted the already booming trade between China and its western neighbours, as well as the potential for their use as a transit route for Chinese exports.

While in Astana on September 7, Xi outlined his vision for the future, the co-called Silk Road Economic Belt, in a speech at the Nazarbayev University.

The proposal envisages a free trade zone spanning China and Eurasia; a region that “boasts a 3-billion population and a market that is unparalleled both in scale and potential,” Xi said, according to Xinhua.

It is not clear how the belt would fit alongside the existing Russian-led Customs Union, which is also planning expansion within the Eurasian region.

However, Russia was not ignored during Xi’s Central Asian tour, with a flight to the G20 summit in St Petersburg sandwiched between his Central Asian visits, and the tour ended with the Shanghai Cooperation Organization

(SCO) summit in Bishkek, which includes both China and Russia.

The Chinese Silk Road Economic Belt concept was also proposed as the 2014 withdrawal of international troops from Afghanistan is expected to signal a drop in US interest in the Central Asian region. The Chinese proposal appears far more ambitious than the US’ own New Silk Road strategy, which envisages helping Afghanistan to remain stable by enmeshing it into the regional Central Asian economy.

As China’s geographic backyard, Central Asia is highly important to Chinese security. Across the region, concerns are growing about the impact of the withdrawal from Afghanistan, which borders China’s Xinjiang region as well as three of the five Central Asian republics.

Beijing is looking to neutralise the threats of insurgency from beyond China’s borders, and growing Uighur nationalism and unrest within Xinjiang. Building strong security relations with Central Asia is seen as a tool for achieving these goals. "Countries in the region not only face the opportunity to achieve common development by taking advantage of their economic complementarity, but

Kazakhstan – $30bn worth of deals

also face the common threat of external intervention and the three evil forces,” Chinese Foreign Minister Wang Yi said in a statement at the conclusion of the SCO summit.

Despite the economic benefits, the steadily growing trend of Chinese engagement in Central Asia has not yet gained full political acceptance at the grassroots level, where there is a growing tide of anti-Chinese sentiment. In an extreme example, work has been suspended twice at a mine operated by China’s Kaidi in south Kyrgyzstan after violent protests.

With chronic underemployment in Tajikistan, the use of Chinese construction workers for road building and other construction projects has also sparked resentment, while Kazakhstan has seen sporadic clashes between local and Chinese oilfield workers.

However, at a government level Central Asia has become increasingly reliant on Chinese support since the onset of the 2008 economic crisis, as other sources of finance dried up. China’s policy of non-interference in the internal affairs of the Central Asian republics – a point reiterated by Xi during his visit – is also a welcome contrast to western leaders

Kyrgyzstan – $3bn worth of deals

• CNPC to buy 8.33% Kashagan stake for $5bn. China will also finance up to $3bn of KazMunaiGas’ share of second phase development costs

• $1.4bn for Kyrgyz section of the Central Asia China pipeline

• Two lines of credit worth $8bn for Baiterek Holding Company, set up in May to diversify the economy

• $400m for construction of the new north-south highway

• China to build a refinery and petrochemical complex • Kazakhstan to gain access to China’s Lianyungang port

Turkmenistan – deal amount undisclosed • China to finance and develop second phase of Galkynysh gasfield • China to build and finance construction of Line D of Central Asia China gas pipeline from Turkmenistan via Uzbekistan, Kyrgyzstan and Tajikistan to China

• $400m for thermal power plant

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who have tried to balance their hunger for Central Asia’s natural resources with enough criticism for their lack of democracy and respect for human rights to appease audiences back home.

“The rapid development of economic cooperation and China’s de facto sponsorship of Central Asia’s weaker states (which have been unable to attract foreign investment, and have been surviving only with international assistance) is inevitably leading to a situation where the Central Asian states are, to varying degrees, falling into political dependence on China, which in some cases is even taking on a neocolonial character,” writes Aleksandra Jarosiewicz of the Centre for Eastern Studies (OSW).

Most importantly, although actors from many other parts of the world – from the US to India, Europe to the Middle East – have tried to woo Central Asia, none have made the impact that China did with its quick construction of the 1,833-kilometre CAC pipeline, which will soon be expanded to encompass the entire region. The project established China’s reputation for getting things done, quickly and efficiently, making China increasingly the go-to place for Central Asian governments.

Uzbekistan – $15bn worth of deals • China to finance construction of $455m Fergana Valley railway tunnel, part of the planned ChinaKyrgyzstan-Uzbekistan railway • CNPC to join UzIndoramaGasChemical consortium to build gas-chemicals complex • China to finance construction of Navoiazot chemical complex with $470m • $175m Chinese loan for modernisation of Angren power plants

Cover story

Russia risks being stood up at the altar by China

bne Russia is suddenly in danger of becoming dangerously isolated with few friends in the world.

In 2007, Vladimir Putin told the world’s diplomatic elite at the Munich Conference on Security Policy that the West was Russia’s “natural partner,” but Moscow would turn its back if it could not meet Russia half way. It didn’t. By 2012, the Russian president expressly abandoned any pretence of trying to be nice to the West and has reoriented its foreign policy toward the east. In an antagonistic keynote speech at the St Petersburg Economic Forum last year, he called on the US to step aside as global leader in favour of the G20.

Initially China welcomed Russia’s advances with open arms, as Beijing shares Putin’s concerns about America’s "uni-polar" view of the world.

When Putin last went to China, he took a delegation of some 800 people with him and came back with billions of dollars worth of deals. Following his inauguration earlier this year, new Chinese President Xi Jinping made Russia his first foreign visit and more deals were signed. Trade has soared to $88bn in 2012, making China Russia’s biggest trading partner.

A Sino-Russian partnership seems to be a match made in heaven. Kingsmill Bond, strategist at Sberbank has called it “the best synergy on the planet,” as Russia has the raw materials and China both the people and the money. The partnership was supposed to be consummated by a gas pipeline from Russia to supply energy to China’s power-hungry and underdeveloped northwest territories. The trouble is, the two new friends still can’t agree on a price for that gas.

Everything is agreed bar how much the gas will cost and the haggling has been going on for years. The Kremlin was hoping to settle the price question during the G20 meeting in St Petersburg on September 5.

A deal calling on Russia to deliver annually 38bn cubic metres (cm/y) of gas to China was signed at the summit, but on the all-important question of price, they only managed to agree that the price should not be linked to the US benchmark Henry Hub, which is trading near historic lows as new techniques have allowed producers in the US to tap shale gas, creating a surge in volumes and driving the price lower at the Louisiana-based hub.

What began as a breathless love affair now seems to be souring. If building gas pipelines is the geopolitical equivalent of marriage, then frustrated by Moscow's unwillingness to commit Beijing has started sleeping around.

Desperate for energy, Xi China been actively courting other energy supplies during Xi's whirlwind tour of Central Asia, littering the region with deals, treaties and loans.

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Towards a truer picture of debt bne

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he Jubilee Debt Campaign (JDC), an anti-debt NGO, on September 2 released a new "debt league" that it says reveals the true scale of the burden on countries around the world.

Instead of just looking at how much debt is owed by the government, JDC's survey – based on data from the World Bank, International Monetary Fund, Organisation for Economic Co-operation and Development, and central banks – shows for the first time both government debt and private debt, and how much a country owes as well as what it is owed.

In this way, say campaigners, the new figures emphasise the responsibility of creditors and the financial sector for creating debt crises. Countries such as Norway, Saudi Arabia and Germany are traditionally seen as "morally superior" to indebted countries for their credit surpluses, but they are just as responsible for debt crises in a world increasingly characterised by huge imbalances, says JDC. "Often when referring to a country’s debt, people only focus on how much debt is owed by a government. This includes debts which are owed to citizens of that country, often as part of their savings such as pensions; debt which doesn’t necessarily harm the country’s economy. But it ignores the debt owed by private companies, including banks, even though that was the main cause of the current financial crisis," says JDC economist Tim Jones.

"It is debts owed between countries which are at the root of current crises in Europe, as well as in countries such as Jamaica, Pakistan and El Salvador. But it takes two to tango; our figures also show the big creditor countries, including Germany, Saudi Arabia and Norway, whose surplus status is just as much a problem to the global economy. It’s the other side of the same coin," Jones says. "Of course no one set of figures can capture all the complexities around debt.

The quality of debt is a huge issue – whether debts are used productively and democratically, or are used to fund useless projects, and unrepresentative regimes. There can be no statistical way of measuring this. But these new figures give far more insight than the blinkered view which looks only at government debt, and takes no account of who it is owed to."

As a prescription, JDC argues that countries in a foreign debt crisis need their debts to be cancelled, but to prevent crises in the first place the world's leaders need to regain control of the financial system. "The UK debt crisis is a crisis of private debt, bank debt, and it hasn’t gone away. Austerity will do nothing to help this.

Instead we need to regulate lending between states, including by private companies and banks. In the 1950s and 1960s, when such regulations existed, debts were far lower, growth was higher and there were hardly any debt crises,” Jones concludes.

In the top 15 of largest net debtors, there are three countries from the Central and Eastern European/Commonwealth of Independent States region (CEE/CIS): Croatia (an overall international debt burden of 83% of GDP): Poland (66%) and Latvia (65%). The Seychelles is the most indebted country at 152% of GDP. The healthiest country in the region is Russia with an overall international debt burden of -7% of GDP. Croatia and Latvia are let down by their private foreign debt, at 77% of GDP and 102% respectively. Poland's debt is more evenly split, with government foreign debt at 26% of GDP and private foreign debt at 38% of GDP. Other countries in the "hot zone" include Kyrgyzstan with an overall international debt burden of 64% of GDP, Ukraine at 63%, Georgia at 58%, Estonia at 56%, Czech Republic at 53%, Hungary and Lithuania at 52%, and Turkey at 51%.

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CHART:

The Kashagan effect

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azakhstan's giant Kashagan oil field finally saw its first crude emerge in early September, after years of delays. This week's chart shows the stunning effect that the output from the Caspian offshore project should have on the country's overall oil production.

Thought to contain around 35bn barrels of oil, Kashagan was touted as one of the world's biggest finds when it was discovered in 2000. With the first oil now flowing - some eight years after the earliest predictions – the project is set to catapult Kazakhstan into the big leagues, and make it one of the biggest non-Opec producers in the world.

According to the International Energy Agency (IEA), Kazakhstan is expected to register the fourth largest growth

in oil production over the next 20 years, with the expansion of output only to shadow Iraq, Brazil and Canada. From just 500,000 barrels per day (b/d) in 1990, Kazakhstan will see annual production hit 3.7m b/d by the time full production at Kashagan, and another new field – Tengiz - is reached in 2035. Production was 1.64m b/d in 2011.

Unsurprisingly, the economic impact for the Central Asian country should be significant. Fitch Ratings said this month that its forecasts for Kazakhstan's real GDP growth are 5.3% for 2013 and 6.0% for 2014, up from 5.0% last year.

"Higher commodity exports support our expectation that Kazakhstan's economy will grow more quickly than the 'BBB' category median over the medium term," the rating agency said.

Kashagan Effect: Kazakhstan Oil Production Forecast

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2.5

2

1.5

1

0.5

0

1990 Source: IEA

2011

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2035

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Ukrainian Prime Minister Mykola Azarov / www.consilium.europa.eu

Ukraine fights off Russian advances Ben Aris in Moscow

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he drama in Ukraine is starting to look like a Hollywood B movie storyline.

Hero wearing tattered clothes, bloodied and battered, staggers towards the sanctuary of the waiting plane/car/ spaceship as the pack of ravenous dogs/ savages/aliens pursue him with the glitter of revenge in their eyes.

Except, in the real world, it is Ukraine’s economy that is battered and bloodied (and in recession). The staggering is due not to the lack of water, but to the lack money, as foreign reserves have sunk by more than $15bn since April to a dangerously low $21bn as of September.

And the pursuers? Well that is Russia, which is furious at Kyiv and looks ready to rip it to pieces. On September 17,

Ukraine finally rejected Moscow’s offer to join its Customs Union trade club and instead has turned to the EU. The sanctuary Ukraine is making for is to sign off on an Association Agreement and Deep Comprehensive Free Trade Agreement (DCFTA) at an EU summit in Vilnius at the end of November.

"I welcome the adoption of the Association Agreement by the government of Ukraine. This is a clear proof of the European choice," European Commissioner for Enlargement and European Neighborhood Policy Stefan Fuele tweeted on the news that Ukraine had formally accepted the offer to sign the EU deal.

Ukrainian Prime Minister Mykola Azarov said the agreements that should be signed at the November summit in Lithuania raise the prospect

of "a European quality of life" for the ex-Soviet republic.

If all goes well, an EU deal will clear the way for structural adjustment loans, easier access to one of Ukraine’s most important markets, increased foreign direct investment and, most importantly, it would smooth the way for restarting talks on a crucial $15bn stand-by agreement with the International Monetary Fund (IMF).

But the drama is high. Ukraine has not reached this sanctuary yet – and commentators are worried it might not make it.

Warning signs The red lights are flashing in Ukraine as its economy deteriorates rapidly.

The $21.6bn of foreign reserves are only enough to pay for two and half

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months of imports, below the level most economists believe is a minimum to ensure the stability of the national currency.

Added to that the Treasury has a float of only $300m in cash, enough to pay government expenses for a few weeks at most. The economy has been slowing, the budget deficit ballooning and the current account deficit widening. The government’s response has been to simply not pay salaries, with arrears passing the UAH1bn ($123m) mark as of September 9 and still rising. In short, a devaluation is looming that could quickly spin out of control.

Timothy Ash, head of strategy at Standard Bank, released an alarming note in the middle of September saying he had been hounded by the Ukrainian press, who seem to be part of an attempt by the government to prepare the ground for a sharp devaluation and possibly worse to follow. “I think the Rubicon has been crossed,” Ash said.

“The Ukrainian hryvna has always benefited from being a ‘boy that cried wolf’ from most… analysts, but the news flow/mood music is just getting really ugly.”

Ash was called by several state-owned media outlets and aggressively grilled on his views on the value of the national currency. “All the local press coverage is talking down the hryvna – the sense is that the administration is now giving up the ghost, and recognises that it can no longer support/defend the hryvna,” he said.

Ash speculates that Ukraine may sink into crisis before the end of November, however it is likely that the government will manage to muddle through somehow. On the plus side, Ukraine is on course to bring in a record harvest, which is a major export item and the Federal Reserve’s decision to delay ending quantitative easing on September 18 means Ukraine could even issue more Eurobonds, albeit at a high price.

Sticking points So everything will be okay when

Ukrainian President Viktor Yanukovych flies into Vilnius at the end of November and signs on the dotted, right?

Well, no. Although Ukraine has signed off on all the legal stuff necessary to make the agreements possible, there is the question of releasing former Ukrainian prime minister Yulia Tymoshenko, who is serving a sevenyear sentence for abuse of office.

However, the EU has taken the stance that she is a political prisoner and made her release a prerequisite for the DCFTA deal to go ahead.

After Russia badgered Armenia into agreeing to join the Customs Union in September and aggressively threatened tiny Moldova into doing the same (the brave little country has snubbed the Kremlin and promptly had its wine banned), the Tymoshenko issue seems to have been forgotten as tensions

But even signing off on the deal will not solve Ukraine’s biggest problems. What makes the country especially vulnerable to shocks is its $62.1bn of short-term debt. Coupled with a current account deficit of some $13bn-14bn that needs to be financed, Ukraine’s total external financing requirement this year will be some $75bn – more than three-times its entire forex reserves – from a total gross external debt of $136bn outstanding.

Kyiv’s new pals in Brussels will have to come up with hundreds of millions of dollars to tide the government over, so cutting a new deal with the IMF becomes imperative.

Of course, this all assumes that Russia as the jilted partner doesn’t retaliate.

The Kremlin has already threatened to raise duties on Ukrainian imports and the state-owned gas monopoly Gazprom is holding a $7bn gas bill over

"The agreements that should be signed at the November summit in Lithuania raise the prospect of a European quality of life"

escalate dramatically. But it is bound to reappear. "We must make every effort for Tymoshenko to be freed before the Vilnius summit," Iryna Gerashchenko, a deputy for the opposition party UDAR, told Interfax-Ukraine. "Even though the signing is important to the EU and Ukraine, the EU will never be able to close its eyes to the violation of fundamental values such as human rights, including the right of defense in a court and the right to justice."

Fuele fudged the issue in an interview on September 19, saying he was confident “a decision to a large extent will be reached in her interests.” Lithuanian Ambassador to Ukraine Petras Vaitiekunas went a step further, saying the EU isn’t making Tymoshenko’s release a necessary condition for signing the trade agreement.

Kyiv’s head for a shortfall in deliveries under Ukraine’s take-or-pay deal with the company.

The Russians are clearly gearing up for a fight. In the middle of September, Valdimir Putin brought back his former deputy administration chairman, Vladyslav Surkov, an eminence gris and top Kremlin spin doctor, as point man to manage Ukraine affairs. Russia's big guns are being trained on Kyiv.

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lines on a popular radio show. And that was his undoing. As most Muscovites assumed he was a shoo-in, they didn’t bother to turn up at the polling stations: the turnout was an extremely low 30%, which plays to Navalny’s advantage because his voters are more committed.

Had there been a higher turnout, then it is likely that Navalny would had scored closer to the 15-20% the polls were predicting. All said and done, Sobyanin is genuinely popular and was always going to win; the only question was, by how much?

How the Moscow mayoral election was stolen

Lessons learned Navalny’s strong showing indicates Russians are politically maturing as a people. In the less politically sensitive Yekaterinburg mayoral election on the same day, controversial anti-drug crusader and opposition candidate Yevgeny Roizman actually beat his ruling United Russia candidate Yakov Silin for mayor by 33.25% to 29.77%.

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veryone was a winner in the crucial September elections for Moscow mayor.

Sergei Sobyanin, the incumbent, who took 51.3% of the vote, retained his job – one of the most powerful in Russia. And his opponent, opposition blogger Alexi Navalny, who surprised observers by almost forcing a run-off with 27.1%, also won by shaking the political establishment to its core and finally making the opposition a credible political force.

The international press was full of gushing op-eds following the vote about the “birth of real politics” in Russia and how it is now only a matter of time until the true forces of democracy sweep away the plutocratic regime of Russian President Vladimir Putin, now in his 13th year in office.

But despite Navalny’s strong showing, there is a long way to go before Russia’s political scene becomes normal. Still, Navalny has changed the nature of the game. He ran what was arguably Russia's first western-style campaign – walking the streets, shaking hands

and kissing babies. Locked out from access to the largely state-controlled TV channels (and Putin has yet to say Navalny’s name in public), he resorted to swamping the internet

The lesson has not been lost on Putin, who ordered his governors to make more of an effort in the aftermath of the Moscow vote, telling them to make contact with their opponents and listen to their complaints. “I am urging you

"The fight for change has moved from the street to the ballot box" with campaign ads, which is a pretty effective way to reach gizmo-loving Muscovites.

Probably his biggest contribution was he had a platform. As it turned out, the mayor stole many of his best ideas, but that is par for the course even in the West. However, after it faced an embarrassing failure to win the first round cleanly, the Kremlin will have to in future put more thought into their platforms and actually campaign if they want to win votes.

Sobyanin did next to nothing to win hearts and minds, other than sing a few

to build relationships not only with your support groups, but with all your opponents as well, bearing in mind that they… sincerely wanted to get these tools of power to resolve the problems of our citizens,” Putin said at a meeting with the governors who won office in a series of about 7,000 elections of various types that were held across Russia’s 83 regions on the same day.

The irony of Russia's "managed democracy" is the democratic part means that Russians really do get to vote and their votes really do count.

However, in the managed part the Kremlin manipulates the vote by a few

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percentage points to engineer a radically different balance of power in the body politic.

Ballot stuffing is par for the course and it's widely accepted that the authorities added about 12% to the ruling United Russia's result in the 2011 parliamentary elections and about 5% to Putin's result in the presidential elections in May 2012.

In both cases, United Russia and Putin would have won anyway, but the Kremlin wanted to cross a political threshold to bolster their power. By taking over 50% of the vote, United Russia gets to control all the key Duma committees that set policy; by taking over 60% of the vote, Putin reassures his clients in the Kremlin that he has a firm grip on power, making himself unassailable in the process. Failing to cross either of these thresholds creates the necessity to compromise with opposition forces.

Suspicious minds In the mayoral election, bne examined the voting closely and came up with strong evidence that the Kremlin added a couple of percentage points to Sobyanin’s result to ensure a first-round victory: 119 districts in Moscow from a total of 129 actually voted for a second round, but Sobyanin’s extraordinarily strong showing in a mere eight districts was enough to push his tally over 50%.

In general, the central districts inside the Garden Ring and in the southeast clearly support Navalny: he actually beat Sobyanin in one district, the Gagarinsky district near the university, with 38.53% versus 37.30%.

However, in eight districts Sobyanin won over 60% of the vote. There is a spike in support amongst these districts, despite Sobyanin not visiting them, making little mention of them, offering no specific development plans for them or doing any real campaigning in any part of the city at all.

What is so suspicious is this voting pattern is a mirror image of votes cast for United Russia in 2011, which also

Eastern Europe

came very close to failing to win 50% of the vote. Again a handful of regions, mostly in the Caucasus, turned in close to 100% support for the party.

Like the Moscow mayoral election, the extraordinarily strong support for United Russia in only six regions was enough to ensure its majority.

While this analysis is not conclusive, it does raise serious questions, which Navalny’s team has also latched onto.

The Moscow courts received 448 claims from Navalny calling for an

"What is so suspicious is this voting pattern is a mirror image of votes cast for United Russia in 2011, which also came very close to failing to win 50% of the vote" investigation into voting irregularities.

He also asked for access to the CCTV videos from a selection of polling stations with dodgy results.

The courts promptly rejected the requests and Sobyanin was sworn into for a second four-year term on the same day.

The story won’t stop there, however.

The vote has legitimised Navalny. With centuries of autocracy behind them, the idea of someone simply proposing themselves for office is completely alien to most Russians; you have to be proposed by some sort of body or power. So Navalny’s votes translate into power and on September 18 he finally announced he would form the People’s Alliance, a new political party, which his supporters in the Fund for Struggle against Corruption – basically a civil society – have been trying to establish for a while.

If Navalny can build on his momentum – a big if, as he was convicted of corruption in August and is currently appealing a five-year prison sentence – then this is the real result of the election: the fight for change has moved from the street to the ballot box.

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Doing the Hulu in Russia

Egor Yakovlev, General director Tvigle Media / www.1tv.ru

Ben Aris in Moscow

"T

vigle.ru is the first online streaming portal for TV shows and movies in the universe,” Egor Iakovlev, the founder and CEO of Russia’s biggest video portal, says with his tongue almost entirely in his cheek.

(now Media3), the investment arm of the Ananiev brothers who also own PromSvyazBank. Currently the shareholding is about a quarter Iakovlev, a quarter Allianz, a third Media3 and the rest owned by the company’s management.

But he is right. After spending nearly a decade working with computers and networks, Iakovlev founded his company in 2007, a year before the better know US rival Hulu.com went into business.

And Tvigle has been doubling in size – both in terms of users and in terms of cash – over the last three years. “I think we are in the hockey stick stage of development now,” Iakovlev says, this time a bit more seriously.

New ways of viewing Russia has taken to the internet like a duck to water and passed Germany last year in terms of the number of people online: some 72m Russians – and rising – are connected to the internet, making Russia the largest online market in Europe.

Iakovlev comes from a classic stable of Russian internet pioneers. He ran the Russian magazine Computerra for many years before going on to join RuNet wunderkind Dmitri Alimov at AHulMedia, a pioneering TV production company owned by tycoon Lev Blavatnik, before leaving to found his own company.

Tvigle raised around $4m in its early stages from AllianzRosno Asset Management and then another $6.5m in 2011 from PromSvyazCapital

With widespread access to broadband,

wait for their shows to air; they want them on demand. And they want quality: 80% of the content on TV – the programmes they show in the small hours – has no demand at all online.”

Like most of the competition, Iakovlev went into the business assuming that he needed to gather together a large catalogue of movies and shows, and that most of the money would be made from the persistent viewing of the “tail end” of classic movies or programmes that never go out of style. But things worked out differently. “In Russia we have digital communism, as all the content is immediately available through many channels,” says Iakovlev. “So we had to

“The whole idea of scheduling a programme is dying” people have been changing the way they view their favourite shows. “The whole idea of scheduling a programme is dying,” says Iakovlev, whose offices are in a converted factory and his clothes the de rigeur casual for internet professionals. “People don’t want to

change and now we behave most like a medium-sized broadcaster. We have to figure out who are our audiences and deliver the content they want quickly.”

Today, Iakovlev says that Tvigle acts more like a medium-sized TV station

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than an online distributor. As such, the company has subdivided its audience into groups and in effect set up a series of channels to cater to each. The content is roughly divided into three main groups: movies, TV shows and documentary /cartoons /comedy.

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Paying pals in rubles

bne And unlike most of its competitors, the company is already profitable. The company’s revenues have risen from $20m in 2011 to $100m in 2013, and it's forecasting revenues of $270m by 2015.

The rampant piracy in Russia makes pay-per-view impossible. Iakovlev reckons that there are about 10bn streams a year in Russia of video content, but the legal streams, where the provider has a licensing deal with the owner, account for at best 10%.

As such, everyone has to make money from advertising.

Tvigle usually strikes a revenue-sharing deal with the owner of the copyright.

However, sometimes the company will buy unlimited rights or make up-front payments for licences to fill out its offering.

Tvigle has also adopted a diversified strategy to attracting viewers. Of course, punters who want to put their feet up and spend an evening in can simply go to the company’s website. But Tvigle has also signed syndication deals with 7,500 other sites that offer the service and it comes pre-installed in six brands of SmartTV that will be the next big thing in consumer electronics in Russia: consumers are skipping over the cable TV and set-top box stages that are typical in the West and going straight for the internet-enabled SmartTVs, which have seen sales soar in the last year. The syndications already account for half of Tvigle’s revenue stream.

“The traditional TV advertising market in Russia is already worth $7bn a year and if you look at their client list, it is already the same as ours,” says Iakovlev. The online advertising market is the fastest growing segment in Russian media, rising by 45% a year for the last three years. It was worth $1.8bn in 2012.

Russia boasts the biggest and fastest growing e-commerce market in Europe, but the international online payment companies shied away, terrified of the rampant corruption and credit card fraud - until now that is. It seems the appeal of fat profits have finally outweighed the fear of being conned, with PayPal announcing on September 17 the inclusion of the ruble among its settlement currencies. Its logo instantly appeared on a dozen of Russia’s most popular online stores.

Russians are increasingly enthusiastic users of the internet. Since the end of last year, Russia's online population is bigger than that of Germany and the UK combined, making it the largest ecommerce market in Europe by far.

With credit card ownership growing exponentially, Russians have become comfortable with buying goods online. Indeed, this spring the number of parcels arriving from abroad – everyone is well aware that prices in the West are a lot less than in Russia – was so great that Russian Post’s system collapsed under the weight of all the deliveries. At the same time, the number of online services and goods being offered by Russian companies is roughly doubling every year. Still, the lack of online banking has made paying for goods and services problematic.

PayPal has had its eye on the big local e-commerce players, 13 of which have already added the US online payment firm to their settlement alternatives and include: Ozon.ru, Lamoda.ru, Anywayanyday.com, Enter, Svyaznoi, tutu.ru among others.

PayPal has been operating in Russia since 2006, but only got its banking licence from the Central Bank of Russia in May. "It only took 90 days to receive the licence, and we are happy with our relationship with the central bank and other state organizations," says Vladimir Malugin, PayPal's regional director for Russia.

PayPal is fairly late into the Russian market. Revenues from online retail is expected to grow from $12bn in 2012 to $36bn in 2015, reaching 4.5% of all retail sales, JP Morgan forecast in a report earlier this year, and the market is clearly in its “hockey stick” phase of growth. US companies will be playing catch-up with the more established players like Yandex, Money (17%), Qiwi (14%) and WebMoney (13%), as well as upstarts like Chronopay.ru and others that are also growing fast. In addition, many of Russia’s leading banks like PromSvyazBank and Sberbank are rapidly moving online.

Currently PayPal has about 3m users in Russia, of whom 1m use it regularly. The company’s biggest advantage is that it can offer settlement in international stores, something most Russian services can't (although Chronopay is the exception thanks to a tie-up with VISA). However, most of the e-commerce market remains “virgin territory” and so is up for grabs to any players who come along.

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In the future this model will be extended to providing a “white label” platform to other companies that want to stream their content. Iakovlev has had conversations with most of the leading TV stations, many of which still prefer to stick to traditional broadcasting, but Tvigle is providing services to some 50 other broadcasters

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Britain’s highest rated shows that was broadcast, dubbed in Russian, simultaneously with the British version.

The value of the deal – which included other programmes like motor show "Top Gear", period drama "Upstairs Downstairs", the comedy "Mongrels" and crime drama "Luther" – was not disclosed but market sources believe

“In Russia we have digital communism" including: 2x2, MustTV, Dozhd TV and MTV Russia. “It’s the business of the future,” says Iakovlev.

King content The key to the business is getting good content to keep view numbers high.

Currently the company is attracting between 6m and 10m views a month from an estimated 42m video views a month in 2012 in Russia. Hollywood blockbuster movies are an obvious crowd pleaser, but it is TV shows that are the most attractive content for Tvigle. “Movies are a one-off event and the people that make them spend a lot of money, so expect a lot of money if you show them. But a viewer will come back every week to watch their favourite shows and the series can run over the whole year. This builds loyalty with the viewer that you can't get from a movie. And TV is a lot cheaper to produce, so the expectations of the owner are a lot lower,” says Iakovlev.

audience. “But that is something still to come,” says Iakovlev. “At the moment most of the advertisers are things like FMCGs [fast moving consumer goods] who simply want big audiences.”

Tvigle’s model has already made it the biggest online video provider in Russia with more than 6.5m views in July, according to Russian daily RBK. July being a slow month, Iakovlev believes this will rise to 12m-14m a month by the end of the year, building on its current 20% market share.

it was based on revenue share with a minimum guaranteed sum of $500,000.

This makes the deal the biggest licence agreement ever signed by a Russian online video service.

However, Iakovlev welcomes the competition, as everyone is still in “piegrowing” mode and the bigger fight is not to win viewers from competitors but from the pirates. “Competition is good, as it will grow the market,” says Iakovlev.

Audiences have been growing very fast, almost doubling each year since a brief hiatus during the 2008 crisis, with no sign of slowing down for the time being. “The number of viewers will double each year over the next three or four years,” predicts Iakovlev.

“After that growth will slow, but it will still grow at something like 50% a year.”

“There are currently 10bn streams in Russia, but the legal content is only 10%. We need to widen the market and not fight against each other, but against the pirates. That’s why I think the new law against piracy is a positive development,” he says, referring to a recent controversial law that critics have decried as opening the way to censorship.

The growth of online viewing is eating into traditional broadcasters' share of advertising spending. And as online viewing, unlike traditional broadcasting, can identify exactly how many people of what kind watch an advert, in theory the offering is much more attractive to advertisers because they can more aggressively target their

To coordinate their efforts against piracy and lobby the government, Russia's leading online media companies have set up an industry group, the Association of Internet Media, which came into being on September 18 and currently comprises 15 companies that together represent about 95% of the legal market, says Iakovlev.

In the West some six major studios dominate the media business with an 85% market share, says Iakovlev, handing them considerable market power. But in Russia the content production remains highly fragmented and the same six studios have only a 35% market share. One of the roles of Tvigle is to consolidate all this content into one simple place to access it all.

And Iakovlev is constantly looking for new partners at home and overseas.

Last year he signed a deal with the BBC to run “The Misfits”, one of

“Movies are a one-off event, but a viewer will come back every week to watch their favourite shows"

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in December 2011. That was followed by connecting the newly minted Moscow Exchange to the international capital market by signing up to the international settlement systems Clearstream and Euronext, which went live at the start of this year.

Russia's new regulatory overlord Ben Aris in Moscow

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ussia leapt 10 places in the latest "Economic Freedom of the World" report, released in September by Canada’s Fraser Institute, to 101st place largely thanks to its financial reforms.

The US fell 13 spots, largely because of its financial mess. The Kremlin is regularly lambasted for failing to make structural reforms, but the one thing it is good at – better than nearly any other emerging market, according to the World Bank – is sorting out its financial sector. Everyone in Russia is thinking about money these days.

Russia runs one of the most open and internationalised financial sectors of any of the major emerging markets.

Unlike many its capital account is completely open, which allows money to flow in and out of the country moreor-less without restrictions, and it even beats the US in the efficiency of its tax administration, according to the most recent "Doing Business" report from the World Bank.

The government put another piece in place on September 1 when it merged the securities market regulator, the Federal Securities Service, with the Central Bank of Russia to create a

so-called super-regulator. From now on, in effect the central bank will be responsible for any and all financial businesses – from pensions, through to stocks and on to setting interest rates and running monetary policy.

Step by step The creation of a mega-regulator has been discussed for more than a decade, but since April 2008, when the state launched its Moscow as an International Financial Capital programme, the

The next big event will come on January 1, 2014 when domestically traded equities are included in the international settlement system. In a preview of what that might mean: the government was expecting foreign investors to buy some $5bn of Russian domestic bonds once they could trade directly on the Russian market, but the actual volume this year has been closer to $20bn. Indeed, this reform has been so successful that the central bank is now worried about too much foreign capital flowing into the domestic market. In August, the CBR increased the risk assessment for foreign borrowing to “high risk”, which will make foreign borrowing more costly and force banks to keep larger prudential reserves as a way to slow the pace somewhat.

The regulatory reform has been well received by Russia’s professional investors, as it normalises the market structures and brings them in line with international norms. “The Central Bank of Russia's new role as a 'megaregulator' overseeing commercial banks and nonbank financial institutions is likely to standardize regulation and

“There is still a lot to do, but the mega-regulator is another sign Russia wants to be a full member of the world economy" previous turf wars that had hamstrung any changes have been swept away and one important reform after another fell into place – the 2008 global financial meltdown notwithstanding.

reporting among the various entities and could be positive for ratings in the Russian financial sector in the long run,” Standard & Poor's said in an assessment after the mega-regulator went live.

The first major change was a merger between Russia’s two leading exchanges, Micex and RTS, completed

In parallel with the new body, the CBR has accelerated Russia’s effort to comply with the so-called Basel III criteria –

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tough new prudential rules that will improve the stability of the banking sector further. Reserves that banks need to hold against the possibility of loans going bad (especially retail loans)

place and stricter related-party lending regulations have been introduced.

All these changes are very timely, as despite the relative health of the

"It was expecting foreign investors to buy some $5bn of Russian bonds once they could trade directly on the Russian market, but the actual volume has been closer to $20bn" have been dramatically increased, a raft of new rules to tighten control over Russian banks' sources of capital are in

banking sector, it remains under pressure from the soggy global growth externally and the lack of confidence

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

internally. The upshot is that banks are increasingly having to rely on the state’s copious reserves for cash. At the same time, their lending business is very lopsided: consumer loans have been growing by 40% a year for the last few years (although slowing now), however corporate lending is virtually stagnant.

Banks are thirsty for funds, but are unable to make profits from their traditional lending business. “There is still a lot to do, but the creation of the mega-regulator is another sign for foreign investors that Russia wants to be a full and modern member of the world financial and commercial economy," says Geoffrey Nicholson, a partner at PricewaterhouseCoopers.

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bne October 2013

Eastern Europe

Back to the 90s as Russia freezes energy tariffs

I 23

expected to run. The service sector will be the biggest beneficiary thanks to the lower costs. However, manufacturing will be less affected, as any gains won from lower prices will be offset by losses for utilities and the raw materials producers. But it will be worth it if freezing tariffs leads to a general revival in capital investment, which has fallen into torpor over the last year.

Ben Aris in Moscow

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n the face of persistently high inflation and capital outflows, the Russian government has decided to freeze energy tariffs, which will give the economy a short-term boost, but will also stymie the long-term development of the economy.

Times are tough in Russia after economic growth dropped to 1.2% in the second quarter, but inflation remains stubbornly above 6%. Forced to choose, the Central Bank of Russia (CBR) has opted to fight inflation ahead of boosting growth, an extremely emotive topic for Russians who lived through years of hyperinflation in the early 1990s.

For almost two decades, the state has held back increases in tariffs for power and gas in an effort to bring inflation down into single digits. And the effort has been successful: inflation fell to a record low of 5.5% in July 2010.

However, the slowdown in 2012 has been partly cause by the high cost of borrowing: the CBR has kept interest rates high as the cornerstone of its battle against inflation. This high cost of borrowing has caused investment to tank and that in turn is killing growth.

Inflation has fallen slowly from a high of over 7% earlier this year, but the current 6.4% is still too high for the government’s taste.

Desperate measures Freezing energy tariffs is one of the most effective tools in the state’s armoury for containing inflation. But it comes at a high cost: the decades of underinvestment, especially in the power sector, mean that Russia’s utilities, strapped of investment cash, are old and inefficient. The privatisation

of the sector at the end of the 1990s was a big step in the right direction, but the sector still needs tariffs to rise to international levels to raise more money for investment.

Yet on September 7, Russian Prime Minister Dmitry Medvedev asked key government entities (including the economy, finance, and transport ministries) to develop scenarios for Russia’s development over the medium term assuming that all regulated tariffs are kept stable. The tariff freeze has been proposed for gas, electricity and rail transportation. And, if implemented, will come into force in July 2014.

“This new proposal goes far beyond the economy ministry’s initiative to set the regulated tariff growth in line with last year’s consumer inflation for industrial customers and to set last year’s inflation plus few extra percentage points for households,” says Alexei Devyatov, an

But analysts are confident the move will deliver on its main goal. “We also see a very strong positive effect on inflation, which, under the assumption of zero tariff growth in 2014 and average 5% tariff growth in 2015-16, drops from 6.3% year-on-year in 2013 to only 3.4% year-on-year by the end of 2014, but then moderately rises to 4-5% in 201516,” says Devyatov.

The freeze may have the desired effect, but this is so-1990s as far as policymaking is concerned and smacks of desperation. Russia has been working hard to move into the 21st century and made several significant changes to the way it manages the economy, the introduction of the so-called fiscal rule probably being the most important (oil price assumptions in the budget are based on historical prices rather than future guesses).

Previously, the Ministry of Economic Development intended to increase

"The state has held back increases in tariffs for power and gas in an effort to bring inflation down into single digits" analyst with Uralsib. “The tariff freeze proposal shows that the government is concerned about the current state of the economy and is ready to use policy tools to boost fading economic growth, which is bad for key monopolies, but good for the economy.”

Uralsib estimates the tariff freeze will add 0.8-1% to growth over the year it is

tariffs by 5% a year, President Vladimir Putin called for keeping the hikes in line with inflation (6-7%), and the energy ministry and gas producers continued to lobby for 15% hikes to close the gap with the rest of the world. In this context a flat out freeze looks fairly drastic by comparison.

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projects and programmes which are on offer for discussion today are very interesting for us,” Lukashenko said.

Gazprom’s tower Gazprom is one of the biggest foreign investors in the Belarusian economy, and has started another project in Belarus that seems to be a question of prestige for the energy giant. The talk is about a new headquarters for the company’s local subsidiary Gazprom Transgaz Belarus (formerly Beltransgaz).

Photo: Alexey Miller and Alexander Lukashenko / www.gazprom.com

Belarus still has a gas with Russia Sergei Kuznetsov in Minsk

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ussia and Belarus may be at each other's throats over the collapse of their potash joint venture and the subsequent arrest of the chief executive of Russia's Uralkali during a visit to Minsk, but it was all smiles at a recent meeting between Gazprom and the Belarusian government.

Alexey Miller, Gazprom's CEO, assured President Alexander Lukashenko during a visit to Minsk on September 13 that his company would boost its investment in the modernisation of the gas transportation system, as well as in the expansion of gas storage facilities. The Russian state-controlled company acquired Belarus' gas pipeline network for $5bn in 2007-2011. “The volume of investments will rise by 20% in comparison with the previous year,” Miller said, as quoted by the presidential press service. He did not specify how much was invested in 2012, though in November Miller said Gazprom was ready to invest about $2.2bn in the near future in the

modernisation of the Belarusian gas pipeline network, and $1.1bn in the expansion of gas storage facilities.

Judging by Lukashenko's remarks, his administration is satisfied with the current cooperation with Gazprom.

A new 182-metre office building will be part of a multifunctional complex, which is planned to include sports and healthcare centres, as well as other public premises. Vladimir Semashko, first deputy prime minister of Belarus, told reporters on September 13 that Gazprom intends to invest $500m in the complex.

Lukashenko has granted Gazprom by special decree the right to build this compound. According to the document, which was signed in April, the Russian gas monopoly will pay $34.2m for pre-construction preparations, as well as finance the construction of a traffic junction nearby.

Gazprom’s complex will be built on the territory of one of Minsk's currently operative bus stations. The station will be demolished, a prospect which has

"I was surprised to discover that maybe for the first time in many years I have nothing to reproach Gazprom for"

“While preparing for the meeting, I was surprised to discover that maybe, for the first time in many years, which is strange, I have nothing to reproach Gazprom for. We have paid for everything we have bought from you.

You have paid for everything you have transported via Belarus... The new

sparked criticism in the local non-state media. But this criticism is low profile and seems to be on the wane.

Another project that Belarus is trying to involve Gazprom is the construction of a new complex for Grodno Azot, the stateowned producer of nitrogen fertilisers,

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to be located near the border with Poland and Lithuania.

An announcement was made in July

by Belneftekhim, the state oil and chemical concern which is an umbrella structure for Grodno Azot, that it had started negotiations on the issue with Gazprom’s investment subsidiary, Gazprom Investproject. According to Belneftekhim’s statement, the sides “reached an agreement to work out a scheme for the joint implementation of an investment project to build a nitrogen complex.” A working group of experts from Gazprom and Belneftekhim was created to carry out the potential agreement.

Why are the Belarusian authorities interested in Gazprom’s participation?

The reason is that the main raw material for Grodno Azot is gas, which could be supplied by Gazprom at a low price. Grodno Azot needs about 1.5bn cubic metres of gas annually.

According to the information package prepared by the Belarusian authorities for potential investors, the total amount of investment required for the project is estimated at $1.01bn. The location

Eastern Europe

of the complex close to the EU border should make it easier to export Grodno Azot products through Baltic seaports, in particular the Klaipeda port in Lithuania.

Konstantin Mayanov, chief executive of Grodno Azot, tells bne that consultations with Gazprom Investproject are underway, but declined to comment further. “You should ask Gazprom Investproject.

I can’t comment on the plans of our partners,” he said. However, the latter company’s press service did not response to an e-mailed request.

Previously, the Belarusian authorities attempted to negotiate the possible investment in a new Grodno Azot complex with another Russian company, nitrogen and phosphate fertiliser producer EuroChem, but without apparent success.

“Grodno Azot is financially in a much better position now than it was some time ago, which is certainly not helping to speed up the process,” Daniel Krutzinna, a partner with Civitta consulting company, tells bne.

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Russia starts food fights Ahead of the EU summit in Vilnius on November 28-29, which will have a heavy emphasis on eastern expansion, Russia has been throwing its weight around in an effort to make its Customs Union the trade bloc of "choice". Not confined to pressuring states like Ukraine and Moldova that are expected to ink free trade and association pacts at the EU summit, Moscow also appears to be putting pressure on countries that are encouraging those countries to look west.

On September 23, Russia's animal and plant regulatory body, Rosselkhoznadzor, announced it would set stricter control measures for vegetables and cereals imported from Poland, as well as those from the Netherlands and Serbia, due to what it alleges are repeated violations of quality requirements.

"We have great suspicions that there is a high extent of deliveries from Poland, which, to put it mildly, do not meet the established requirements," Russia's public health chief, Gennady Onishchenko (pictured), was reported as saying. "This means that semi-legal, and frequently criminal, schemes are in use, in which some goods are brought into Poland where they assume signs of having allegedly been manufactured in Poland and then spread in the territory of Russia through Belarus."

Such trade obstacles using health reasons are a favoured tactic of Russia lately. In August, Russia imposed restrictions on the imports of pigs from Belarus and chocolate from Ukraine; in September, Moldova had a ban put on its wines and spirits, with saying they contained impurities. Controls over the safety and quality of Lithuanian dairy products have also been imposed, leading to Lithuanian Prime Minister Algirdas Butkevicius claiming the situation is getting close to an "economic war" against his country.

The question is: who will be next to feel Russia's wrath?

"Why is Belarus interested in Gazprom’s participation? The reason is the main raw material for Grodno Azot is gas, which could be supplied by Gazprom at a low price"

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New Czech parties to rock political boat Tim Gosling in Prague

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isillusioned with the major political parties, Czech voters put two new entrants in parliament in 2010. More debutants are likely to enter the lower house following the election in October, which is likely to leave the next government even more unstable than is normal for the Czech Republic.

Czechs head to the polls on October 25 following a vote in August to dissolve parliament. That came after a corruption and spying scandal deposed the previous centre-right coalition of the Civic Democratic Party (ODS) and TOP 09 over the summer, and the subsequent appointment by President Milos Zeman of a puppet cabinet stuffed full of his cronies.

None of which helped promote the image of politicians to a population weary of corruption scandals and austerity, but only extended debate over the state of democracy in the country. A survey in August revealed that Czechs respect their elected representatives less than cleaners, while the World Economic Forum's Global Competitiveness Report 2013-2014 ranked the country 146th out of 148 nations surveyed in terms of public trust in politicians.

The left-leaning Social Democrats (CSSD) are a shoo-in to win the largest share of the 200-seats in parliament, but with polls showing their support around 30% they will likely need support – either in coalition or informally – to

govern. The list of major potential partners ranges from the Communist Party of Bohemia and Moravia (KSCM) to the staunchly conservative TOP 09.

However, a host of new parties are waiting in the wings, hopeful of having a final say in the cabinet. A poll in September suggested Ano 2011, set up by billionaire businessman Andrej Babis; Dawn of Direct Democracy (DoD); Party of Citizens' Rights – the Zemanites (SPOZ); and the Green Party (SZ) could all cross the 5% threshold to enter the house.

Rough and tumble Yet how these parties will fare in the rough and tumble of the Czech

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parliament is debatable. Analysts worry the arrival of such new parties will make any Czech government even more unstable and unpredictable than usual.

The Czech Republic has had seven prime ministers in the last ten years. "The more parties enter the chamber of deputies, the wilder the lower house of parliament will be, and the more difficult it will be to form a government coalition," Lenka Zlamalova, a political commentator, wrote in Lidove noviny.

Public Affairs (VV), which entered parliament in 2010 on a similar "protest" ticket against corruption, illustrates the issue. "It looks like a potential rerun of VV," says political analyst Jiri Pehe.

"Their election promise was to 'fight the dinosaurs'; they immediately joined them instead."

Public Affairs was catapulted into government when it joined the ODSTOP 09 coalition. However, it soon imploded under that weight, slicing the government's majority to the slimmest of margins as it split.

Vaclav Kopecky of think-tank CEC Government Relations also suggests that any new parties entering parliament will struggle to survive the power of the major parties and the cut and thrust of Czech politics. "VV overestimated their capacity," he says. "If any of the new parties enter parliament, they'll likely go the same way."

Consuming more in Central Europe

Tim Gosling in Prague Domestic demand in Central Europe finally showed signs of life in the second quarter following long-term decline, lasting years in some countries, according to data released on September 4. Coming on top of continued growth in manufacturing, the figures offer added optimism of momentum to the region's economic recovery.

Breakdowns of GDP and retail sales data for the April-June period showed consumers in Central Europe finally found the confidence to loosen the purse strings a little. That will be a relief for governments across the region, who have for the most part watched exports – overwhelmingly headed into the crisis-hit Eurozone – become the only meaningful driver of their economies in the last few years.

In Slovakia, at 1.5% year on year household consumption growth turned positive for the first time since 2009. In Hungary, the contribution of domestic demand to GDP growth finally turned positive, as both household consumption and investments managed to improve on a yearly basis.

Czech retail sales offered a pleasant surprise of 4% growth. Komercni Banka says the figures are another positive signal that household demand is slowly strengthening. "Apart from labour market stabilisation, declining inflation also helps," the bank notes. "The past several years demonstrated that the Czech conservative consumer is very sensitive to price development. Finally, the end of fiscal consolidation, which affected especially households' budgets, is positive for consumption, as well."

Should it cross the threshold, the president's SPOZ is the most likely to join a CSSD-led coalition, given their close left-leaning programmes. However, Zeman's naked fight to expand his power inside the larger party presents perhaps the largest risk to stability.

However, it's not all plain sailing. As Erste Bank notes, Czech retail sales rose in general, but it was not a broad-based rise. Car sales contributed a full 3 percentage points of the overall 4% growth, while the retail segment proper added no more than 1 percentage point. "Cars are thus the channel through which better confidence seeps into the real economy," Erste says. "Retail, as such, won't improve until the situation on the ground [does], and that won't happen before unemployment and wages improve."

At the same time, SPOZ's weakness is that it offers few new faces to weary voters. That's a trait it shares with the likes of LES, founded less than two months ahead of the election by Martin Bursik, former head of the Greens, who led that party into a coalition government with the ODS in 2007, with a similarly disastrous result to the VV debacle.

Dogged by erratic government policy, Hungary saw subdued investment activity by the private sector in the second quarter, but with elections due next year state spending boosted overall investment to annual growth of 4.9%. That suggests a continued struggle for economic growth. "The recovery seems fragile," fret Erste analysts. "Household consumption may be somewhat higher than predicted earlier, however recovery in the Euro area seems to be a slow process, and apart from car production, Hungarian industry has still not managed to considerably improve. We maintain our prediction for this year's annual GDP growth of a tiny 0.2%."

In addition, SPOZ's positioning on

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the left is in a part of the political spectrum dominated by the CSSD. It's no coincidence that practically all of the new parties contesting the election are on the right, where the collapse of support for the mainstream ODS has created a window of opportunity.

That opportunism, however, is likely to prove the Achilles' heel of the likes of DoD, which is running a somewhat disjointed populist campaign. "VV and the Greens have made voters cynical, despite the fact they’re looking for a new political home," Pehe says. "Some of these new parties could get in – but what then, without a solid political structure?"

Nouveau riche Ano 2011 is widely discussed as the most serious, and freshest, of the new projects.

Babis, who controls hundreds of Czech (and Central European) companies through his Agrofert Holding, has been careful to select figures as untainted by politics as possible, although there is certainly some form among his motley collection of celebrity journalists, lawyers and diplomats.

However, just like the other new parties, Ano 2011 – which Babis launched two years ago with the familiar pledge from new political projects to fight corruption - suffers from a distinct lack of wider policy and leadership. "No one knows how serious Babis really is on policy," Kopecky says, pointing out that the current programme is based on focus groups culled from the world of business. His stated aim to run the country like a company is also likely to prove an acquired taste.

The real key for Ano 2011 is Babis' money, estimated to total around $2bn

by Forbes. The mainstream parties have been blighted for years by reports of being financed and controlled by shadowy local figures, or perhaps even Moscow. The blocking of new legislation on political funding has done little to help the image of the politicians, but it limits the competition.

Cash is clearly the main challenge for most of the new parties. Tomio Okamura – leader of the somewhat

racist DoD despite him being ethnically Japanese – appears to have some serious powers of persuasion; he has apparently persuaded a (unnamed) bank to lend his party CZK10m (¤390,000) of the CZK15m costs of his campaign, on the back of the state subsidies available to those attracting over 3% of the vote.

"Some are gambling on this election, and the banks are lending, despite the flimsy premise," Pehe says, laughing with astonishment.

TOP of the pile Kopecky is less convinced that Babis' money will prove so important at the upcoming elections. "I don't think Ano 2011 will go crazy putting up billboards everywhere," he says. "The population has been through so many elections they've become resistant to campaigns."

On top of everything else, that might suggest any attempt to pump new blood into the Czech Republic's listing political scene is doomed. However, TOP 09's rise illustrates the two-party system is not so entrenched. The staunchly conservative TOP 09 may have just finished a stint in one of the most unpopular governments the country has ever seen, but it looks set to finish the October vote as the strongest party on the right.

The secret to that success is manifold, suggests Pehe. It includes the fact that the party was set up by experienced politicians who know how to navigate the system; is led by a charismatic, unique and trusted figure in former foreign minister and presidential candidate Karel Schwarzenberg; has kept its distance – visibly at least – from the unsavoury elements lurking behind the mainstream parties; and recognised that – contrary to the eurosceptic ODS – Czech voters on the right tend to be pro-EU. The main point, however, is that it has shown clear leadership, even whilst it has watched its approval ratings collapse. "They stick to their guns," says the analyst. "Perhaps the only party to do so, apart from the KCSM. That shows they are principled – even if you don't like the particular form that takes."

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sails right now and is doing what it does best: pursuing a populist and nationalist agenda,” says Nicholas Spiro of Spiro Sovereign Strategy. “While this may play well with PiS' loyal voters, it's very doubtful whether there's anything to be gained from taking a stridently anti-business stance.”

Kaczynski's audience were not the wellheeled business leaders and lobbyists strolling down Krynica's crowded main street. “The very cold reception to Kaczynski's appearance in the halls of Krynica show that gaining the support of entrepreneurs will be difficult,” says Wojciech Szacki with Polityka Insight, a policy analysis firm.

Unpopular in Poland Jan Cienski in Warsaw

D

onald Tusk's political problems are not over, despite some signs of an economic revival and recent attacks on business by his leading rival, Jaroslaw Kaczynski.

and proposed hiking taxes for the wealthiest. “Kaczynski to business: I didn't come to you, I came for you,” was one tweet making the rounds at Krynica.

A new opinion poll, released just after as many as 100,000 union-led protesters marched through the streets of Warsaw over the weekend, showed Kaczynski's right-wing Law and Justice party (PiS) with the support of 39% of those polled, while Tusk's Civic Platform lagged far behind at only 30%.

Kaczynski's attacks may have dismayed the business vote, which had become disenchanted with Tusk's caution over pushing through deeper economic

Some analysts had felt that Kaczynski's recent denunciation of business, made at the annual gathering of Polish business at the mountain resort town of Krynica, would scare the suits back into Tusk's camp. Kaczynski said most Polish companies were not innovative and were largely penetrated by communist-era apparatchiks. He also called for companies to raise salaries for their workers or else face “punitive” taxes. He denounced business for exploiting workers in the same way that lords oppressed their serfs, called for a transaction tax on equities sales

Kaczynski's real target was the thousands of angry demonstrators who spent several days in Warsaw in midSeptember protesting against Tusk and his government.

Tusk's troubles Led by Piotr Duda, the charismatic ex-commando who now heads the Solidarity labour union, a rump of the organisation that helped bring down communism in Poland more than two decades ago, demonstrators demanded a reversal of a recent increase in the retirement age to 67, higher salaries and more job protection. “My heart is glad,” Duda yelled to the throngs waving Polish flags and posters calling for Tusk's removal. “I'm a guy,

“While this may play well with PiS' loyal voters, it's very doubtful whether there's anything to be gained from taking a stridently anti-business stance” reforms and slashing at bureaucracy and red tape. But it seems to have done him no harm with the broader electorate, particularly people who have been hurt by the economy's unexpectedly sharp slowdown at the beginning of this year. “Mr Kaczynski's party has the political wind in its

but I want to cry with joy when I see that we've finally woken up as Polish workers.”

Tusk's troubles stem from a combination of a sour economic mood and with exhaustion with his government – after six years in power

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“I'm a guy, but I want to cry with joy when I see that we've finally woken up as Polish workers”

his administration is the longestserving in Poland's democratic history.

Poland's economy grew by only 0.5% in the first quarter of the year, accelerating to an only slightly less anaemic 0.8% in the second quarter.

Unemployment is slowly drifting lower, but is still high at 13%.

Meanwhile, internal strife in Tusk's Civic Platform party has led to several MPs quitting, reducing the

governing coalition to only 232 seats in the 460-member parliament. This creates a point of maximum danger for Tusk. Fortunately for him, there are unaffiliated MPs who are likely to support the government, making early elections unlikely.

The economy is also showing signs of gaining strength. Exports are up, as is industrial production and business sentiment, while still low, is also rising.

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

During his own appearance in Krynica, Tusk declared the crisis over and predicted that the economy would be growing by over 2% by the end of this year and by 3% by early 2014.

“I have bad news for the professional pessimists. There will be no recession and no stagnation in Poland,” Tusk said.

With parliamentary elections scheduled for 2015, Tusk does have some time to wait for the economy to start to gain speed in the hope that it turns around his party's lacklustre support numbers.

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restrained, given that the government had telegraphed its desire to dramatically overhaul the OFE system over recent weeks.

However, once the move was made markets plunged. The Warsaw Stock Exchange fell by 2.14% that day and by a further 4.16% on September 5, before clawing back almost 2% on September 6. Treasuries also reacted, with yields on 10-year Polish government bonds jumping to 4.75%, the highest in a year.

The longer-term impact, though, is still difficult to measure.

A pension raid in Poland Jan Cienski in Warsaw

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he Polish government's dramatic changes to the pension system caused the Warsaw Stock Exchange to tumble for two days as markets swung violently on the news, but the longer term consequences of the government's action are still very unclear.

In an announcement on September 4, Prime Minister Donald Tusk sharply curtailed the activities of the second pillar of the pension scheme – a system of privately run funds called OFE, which invested part of a worker's obligatory social security payments.

Tusk is forcing the 14 funds, which have about PLN280bn (€65bn) in assets, to hand over PLN120bn in holdings of state treasuries. The bonds will be shifted to the state-run ZUS pension system, dramatically improving Poland's fiscal condition – public debt will fall by about 8 percentage points from about 55% of GDP. The benefits for Tusk are obvious.

His government has been battered in opinion polls by the unexpectedly sharp slowdown in the economy and he

had little fiscal scope to unleash much spending in hopes of stimulating faster growth before parliamentary elections due in 2015. “Make no mistake about it, Poland's controversial pensions overhaul is a fiscally and politically motivated one whose designers are far less concerned with the likely fallout in the country's capital markets,” says Nicholas Spiro of Spiro Sovereign Strategy. “The overriding priority is growth, which is not surprising

Listing On the equities side, the OFE funds had been solid buyers of shares issued in IPOs and secondary listings, making the WSE one of Europe's top exchanges for new listings. OFE purchases were also a key ingredient in the government's privatisation strategy, which often involved selling minority stakes in key state-controlled companies like copper miner KGHM, PKO BP, the country's largest bank, and insurer PZU. Investors, particularly foreign ones, were reassured by regular infusions of OFE cash onto the market, which helped provide liquidity and added a “pension premium” on the value of Polish stocks.

OFE will now play a much smaller role on the market. The government is going to give OFE holders a three-month

"This is very negative for Polish equities, as it means pension funds are most likely to be net sellers of Polish equities in the future” given that Polish policymakers underestimated the severity of the country's economic downturn.”

While the political calculation is clear – the impact on both debt and equity markets is not. Many analysts thought that any market reaction would be

window to decide on whether to keep money with the funds or to shift their entire pensions back into the state system. Analysts think that anywhere from 50-80% will quit. Furthermore, as a person nears retirement, assets will be regularly shifted from the OFE to the ZUS system and final pensions will

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S dnem rozhdeniya Juozas!* Lithuanian truck driver Juozas celebrated his birthday on September 17 sitting in his cab at an internal Russian customs post near Moscow.

Come the day, he treated himself to a little meat to go with the bread and biscuits he had been surviving on for the previous week – a move prompted by his rapidly depleting cash.

Russia started subjecting Lithuanian vehicles to lengthy border checks in August; movement on the huge lines of trucks appeared to have halted altogether by mid-September. The Lithuanian hauliers' association said on September 19 that no truck loaded in Lithuania had cleared Russian customs for a week. Vilnius estimates its transport firms – a vital industry for the small Baltic country – are losing ¤2m per day. The European Commission called on Russia on September 17 to cease the action.

Brussels has also objected to the pressure Moscow is applying to other former Soviet states.

Trade wars against Ukraine and Moldova have been waged ahead of an EU summit in Vilnius in November, at which they are due to sign EU Association Agreements. Russia wants them to join its Customs Union instead. As current EU president, Lithuania will host the meetings in November.

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be paid out completely from ZUS. “We believe this is very negative for Polish equities as it means that pension funds are most likely to be net sellers of Polish equities in the future,” notes Wood & Company, the investment bank.

Finally, benchmarks are likely to be changed and the funds will be able to invest more of their diminished assets outside of Poland, further diluting their impact on the market.

The 14 OFE funds are also likely to be dramatically pared back due to the government's decree slashing their fees as well, because they will have a smaller pool of funds to manage. Polityka Insight, an analysis service, estimates that only three to five funds will be left in the game once the changes take hold.

There could also be an impact on the Polish debt market, the largest and most liquid in the region. “The OFEs are a large holder of Polish government bonds and barring them from investment and active trading in bonds could reduce the depth of the Polish bond market,” says Magdalena Polan of Goldman Sachs.

Although the government will need to borrow less because it will no longer have to prop up the OFE system, what borrowing it does do will be even more reliant on foreign investors.

In a research note, Moody's Investors Service, the ratings agency, worries that the move will hurt the credibility of the Polish government, but adds that the changes will not do much damage to Poland's creditworthiness. “The fiscal impact is likely to be positive as it implies a reduction of debt metrics, granting more fiscal space with respect to the country’s fiscal and debt rules,” said an analysis by Jamie Reusche of Moody's. “The potential increased revenues from workers that switch back to ZUS will also greatly aid the fiscal consolidation effort and allow the government more room for policy manoeuvre in order to support the nascent economic recovery.”

And a recovery is what Tusk is hoping for. A decent burst of growth would quickly end the fuss over changes to the OFE system and possibly revive the ailing fortunes of his Civic Platform party.

The action reinforces Russia's use of its big stick – energy. After studying the latest contract proposal from Gazprom, Lithuanian Prime Minister Algirdas Butkevicius claimed on September 19 that Moscow had launched "economic war".

The European Commission has threatened to take the trade issues to the WTO. That long process is unlikely to help Juozas or his company much, however. The driver said he may soon have to abandon his rig and find his way home.

*Russian for "Happy Birthday Juozas!"

“Make no mistake about it, Poland's controversial pensions overhaul is a fiscally and politically motivated one whose designers are far less concerned with the likely fallout on the country's capital markets”

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risks to customers in advance, [and] they made a deal that meant a huge profit only for them."

Repeating a chilling new demand that the banks should be ready to absorb the bulk of the losses in phasing out such forex loans, the PM added: "It is a moral obligation of the banks to modify the [loan/mortgage] contracts. We are calling on the banks to bear most of the losses stemming from the exchange rate changes themselves. If they do not comply voluntarily by November 1, the government will take steps [to do so]."

Hungary PM ends "colonisation" Tim Gosling in Prague

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ungarian Prime Minister Viktor Orban launched another broadside against foreign investors and media on September 9, warning that the era of "colonisation" is over. The heightened rhetoric ahead of the elections next year will only raise more worries amongst investors.

Orban and his ruling Fidesz party have been campaigning for some weeks now as they push to try to recapture the constitutional majority currently enjoyed at elections to be held in the spring at the latest. Opening the autumn session of parliament, the PM both boasted of his government's economic prowess, reiterated promises to cut energy bills, and continued the pressure on the banks to take more losses from their foreign-currency loans.

"Hungary is an independent, sovereign country," Orban proclaimed as he set out the agenda for the parliamentary session. "The era of colonisation is over.

Utility price cuts, the elimination of the foreign currency loan regime and rescuing families and their homes are national causes for us."

A popular target The resumed attack on the banks is the

most immediate issue affecting investor confidence. As bne has reported, Fidesz effectively launched its election campaign in a sudden move in July, as it reopened an issue it had previously said was not in its plans. However,

On top of the benefits at the ballot box however, Fidesz will also rid itself of what is one of the last remaining brakes on its erratic and unorthodox policymaking – the vulnerability of the population to currency market swings.

Turning his ire back onto those markets, Orban played up to his domestic audience once more as he rounded on foreign commentators. "London-based analysts are the modern day equivalents of Soviet scientists," the PM thundered.

"We are more cautious than them [and] expect 2% economic growth for next year." The fact that consensus in the

"Hungary is an independent, sovereign country – the era of colonisation is over" forcing the banks to shoulder more big losses from the hundreds of thousands of mortgage loans made in Swiss francs and euros should offer a clear populist boost at the polls.

Previously full of rhetoric concerning "negotiations" with the banks, the government upped the ante in early September. Following up ultimatums issued by officials, Orban told the lower house: "The banks abused their own position and [exploited] the people's naiveté. They were propagating [forexbased] loans while they were aware of the potential risks. They knew exactly what would happen if exchange rates went haywire, they [played down] the

latest Reuters poll was for a 1.5% growth in 2014 did not deter his claim.

Continuing his theme, Orban also told the parliament that his government has freed Hungary from the yoke of foreign interests by developing the economy. He praised the successful exit from the EU's excessive deficit procedure – Hungary's first budget gap below 3% since it joined the bloc, albeit mostly paid for by crisis taxes – as well as continued falls in inflation.

Helping that slowdown in price rises, as well as a similar vote-boosting move to the banking issue, Orban reiterated that further reductions of retail energy

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Hungary banks face deadline

Tim Gosling in Prague The head of Hungary's ruling Fidesz parliamentary faction threatened the banks on September 5 that they must come up with a satisfactory proposal to settle the foreign-currency debt issue by November 1, or the government will implement its own solution.

The banks must repair the mistakes of forex mortgages, Antal Rogan insisted, saying that they have a moral responsibility for the problem and should modify loan contracts in favour of borrowers. The deadline for the banks to come up with a satisfactory proposal is November 1, he warned.

Budapest recently rejected proposals by the country's banking association for a solution to the forex debt issue, with hundreds of thousands of borrowers having seen their monthly payments on debt in Swiss francs and euros skyrocket during the crisis. It is one of the last brakes on the government's erratic and unorthodox economic policymaking, as any moves that lower the value of the forint, like interest rate cuts, would immediately hurt households even more.

The government made a sudden announcement in the summer that it intends to wipe out forex debt one way or the other. In a bid to soothe market nerves, it quickly promised to negotiate a settlement with the country's battered lenders, but is clearly not ready to let them escape without significant losses. The banks shouldered huge costs in a threemonth scheme to allow early repayments from borrowers in late 2011.

"For one and a half months banks have the possibility to resolve this problem as they also have the moral obligation (to do so)," Rogan told a news conference, according to Reuters. "We expect banks to modify the contracts... if this does not happen then the state will step in, and will work out its own proposal which parliament will approve before the end of the year. And the direction of this is fairly obvious."

"We will set the goal of phasing out foreign currency mortgages... and practically implement a conversion of these (loans) into forints," he added.

That threat is at odds with words earlier from Minister of National Economy Mihaly Varga, who sought to calm nerves by insisting the government is still considering several options, including that put forward by the banks. However, his ministry said on September 4 the current offer from the banks is unacceptable.

Sandor Csanyi, head of Hungary's biggest lender OTP, claimed on September 3 that the country's banks stand to lose HUF950bn (¤3.14bn) from the issue, and that this would cause the economy to collapse.

Analysts point out Csanyi is in the midst of a political fight with Fidesz, and that the figure he gave would only materialize should the most extreme option being considered by the government be implemented.

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tariffs are on the way to follow the 10% cut in January. The quashing of energy bills – at the expense of mostly foreign investors – is a "symbolic step by which the country is ending defenselessness," he insisted.

He also boasted of the move in July to pay off the International Monetary Fund early and send it packing out of the country, reports Portfolio.hu. "We have freed the country from the grip of the International Monetary Fund.

Hungary has repaid the IMF loan to the last cent," he reminded Hungarians.

"Only those countries whose reserves are sufficient and whose government is stable can manage this. We have ended the constant pressure by which this organization would have forced austerity on us."

While it has been a common feature since he came to power in 2010, Orban has accelerated his efforts to tap into the populism seen rising across Europe during the crisis. He has in the past compared the EU to the Soviet Union and German Chancellor Angela Merkel's policymaking to Nazi tanks which invaded in 1944.

However, as the 2014 elections approach, investors will worry that words will turn to actions. The banks lost millions on an earlier scheme to alleviate pressure on forex debtors, and the CEO of the country's top lender OTP said recently that the sector could end HUF950bn out of pocket, which would "see the economy collapse".

In summing up, Orban told his audience: "The banks and corporates in monopolistic positions had better get used to this new situation. Now we are stronger and they have to adjust to Hungarians, not the other way around.

No one will get extra profit at the expense of the Hungarian people again in this country."

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are willing to pay a little extra for, even in a Latvian market which features 15 craft breweries against just a couple in Estonia.

"From our brewery to [the south Estonian city] Parnu is as far as it is to Riga, and from our brewery to ValkaValga is just 50 kilometres," he points out. That places Estonia well within the north Latvian brewery's potential catchment area.

The Baltics' Great Wall of China Mike Collier in Riga

T

he twin towns of Valka and Valga straddling the Latvian-Estonian border are often held up as prime examples of free movement within the EU. Citizens of both towns wander across the border to do their shopping and the local fire brigades even help each other out regardless of which country a blaze happens to appear in.

But according to Aigars Rungis, owner of Latvia's Valmiermuiza microbrewery, the border might be all but invisible, but a "Great Wall of China" still sits on top of it as far as small business is concerned.

"On the Latvian side our beer costs €1.50.

The beer crosses one metre to the Valga side and it costs €2.80 – it doubles in price. The reason is, in selling my beer to Latvian customers it's very simple – I have an invoice and once a month I pay alcohol tax to the tax authorities. When I sell in Estonia I have to involve an import company, an import warehouse, a distributor – and as a result it's too costly for a small business. For big business it's not so bad, as you can send big trucks from one border to another. But if I want to send just a few crates, it's too costly."

The coming of the euro to Latvia in 2014, which will follow Estonia's accession to the Eurozone in 2011, is supposed to herald a new era of easy price comparisons and consumer competition. But as Rungis' experience shows, talk of the Baltic states operating as a single market remains more theory than reality. "I have

However, the lack of coordination and cooperation between tax authorities and punitive legislation for producers of such abominable vices as beer, wine and spirits has meant a different approach was required to quench the thirsts of Estonian drinkers, whose market is dominated by three massproduction brewers that produce beers lacking the refinement of Valmiermuiza's craft ales. "Estonians are beer lovers like Latvians, and they like our beer. We started in the Estonian market a year ago where our beer is in [the high-class Scandinavian department store] Stockmann and a few restaurants and bars. We started to work with restaurants and bars in Estonia because they are a bit less sensitive to price. I could not sell my beer to an Estonian supermarket, for example, because it would be too expensive. And for an Estonian crossing the border to sell in Latvia I think it would be the same," Rungis says.

"The only problem is this Great Wall of China built by the tax authorities"

just been reading something with a businessman saying the Baltic states is his home market. I like the vision – the question is, do the governments have the same vision of the Baltics as a home market? Are we competing or cooperating?" questions Rungis, who founded Valmiermuiza in 2009 and has quickly established it as a genuine premium brand – a beer that people

"The only problem is this Great Wall of China built by the tax authorities," he complains. "I don't understand why today when the police are very strong, when there's a certain degree of trust between our governments and computerised records, you can catch terrorists but still you don't trust that if a crate of beer passes across the border, someone is avoiding tax."

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Home brew One possible solution would be for Rungis to found an Estonian-based brewery – something he is thinking about, not least because with Valmiermuiza already running at full capacity (just over 1m litres of beer in 2012) he is already unable to satisfy demand. Yet even if he did establish a brewery north of the border, more Chinese walls would emerge.

Latvia's state-owned Hipoteku bank, now a de facto development bank, would not be able to back him because it only supports projects on Latvian soil.

Labour laws would be another problem.

"Let's take Valka-Valga as a case study again. If a company on the Latvian side in Valka wants to hire someone from Valga for a week, it's just not worth it – the amount of paperwork if you want to do it legally is incredible. Of course, everyone does it illegally because that's the only way and as we all know alcohol is bad, so anything involving it needs even more paper. Why can't we simplify this cross-border bureaucracy? We already have examples – I can set up a company in Estonia in five minutes on the internet. In that respect, Estonia is far ahead."

Doing her best to break down such barriers is Riga-based Estonian Hele Lohmus, who despite her modest stature is an energetic dynamo of crossborder cooperation in her role heading up the Estonian-Latvian Joint Business Development Support for Increased Competitiveness (DELBI), which gives free help and advice to Estonians wanting to enter the Latvian market

and vice versa. "Post-crisis, interest is picking up," she tells bne, though historically Estonian entrepreneurs have been far more interested in heading south than Latvians heading north.

"Latvian companies will often say 'Oh, Estonia is so small, why should I go there?' It's true that around Riga you have 1m people in a small area. In Estonia you have 1m spread across the whole country, so you have some extra transport and logistics issues. But then they say they want to get into Germany or England, which I think is stupid because what you need to emerge onto another market is branding, a name. It's easier to start with a neighbour. It's not Taiwan where you have to ship things a few thousand kilometres and you don't know what's happening and are in a totally different environment."

And if Latvia has its urban population as a pull factor, Estonia can offer its strong ties to Scandinavian markets in return.

"We have a saying," Lohmus smiles, "every Estonian has a Finnish friend."

Yet even she admits that on crucial projects such as Rail Baltica – a planned high-speed rail link from Helsinki to Berlin via the Baltics and Poland – Baltic cooperation leaves plenty to be desired.

"Every country has its own interests and they don't see the possibility to cooperate and gain something. This is bad. Sometimes this vision of the future is very short-sighted on big projects.

They immediately want some profits and big benefits but this is something that should be for 50 years."

"On the Latvian side our beer costs ¤1.50. The beer crosses one metre to the Valga side and it costs ¤2.80 – it doubles in price"

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home largely empty handed apart from a series of unattributed quotes from a "former employee" of Ask.fm with a suspiciously good grasp of tabloid English.

The lack of hard evidence against founders Ilja and Mark Terebin left The Mail On Sunday taking the bizarre option of interviewing their parents in order to prove... well, it's difficult to say what.

Notorious – the rise and fall of Ask.fm Mike Collier in Riga

M

ost young internet start-ups would be glad to be in the spotlight of the international media, but in the case of Latvian website Ask.fm, it has been a mixed blessing.

The social networking site, set up in 2010 with backing from the Rubylight technology investment fund, which also set up Russia's Odnoklassniki. ru, has seen its number of registered users worldwide pass the 70m mark – 35-times larger than the entire population of the country in which it is based. But it has also been linked in the pages of UK and other media to the suicides of half a dozen teenagers who used the site.

Critics – which is to say the Daily Mail and similar bastions of hysterical selfrighteousness – claim the environment that Ask.fm creates, in which both registered and anonymous users can post answers to questions asked by others, leads to abuse and so-called "cyber-bullying". They point, with as much lurid detail as possible, to cases

such as British teenager Hannah Smith, 14, who took her own life in August after receiving abusive messages on the website. Most of those messages turned out to have been sent from her

UK Prime Minister David Cameron even waded into the debate, saying on state-sponsored BBC television (the BBC always makes a point of saying that about broadcasters in Russia and elsewhere which do not even impose a compulsory licence fee) that websites such as Ask.fm, "have got to step up to the plate and clean up their act and show some responsibility."

Rather than argue with the onslaught from the UK, the founders of Ask.fm have preferred to keep a low profile.

Requests for interviews have been politely declined, with all information from Ask.fm now passing through the hands of its London-based legal representatives Mishcon de Reya. On August 19, that information took the form of a statement by the Terebin

"There is a growing feeling in Latvia that being based in a small country about which most people know little, makes Ask.fm a convenient scapegoat" own computer, according to IP address records traced by Ask.fm.

Her sad death led to a feeding frenzy among a UK press unhumbled by the Leveson enquiry into its own sleazy practices. Keen to blame an Eastern European website for her death rather than consider family, school or other social problems she may have faced as a teenager growing up in modern Britain, hacks were despatched post-haste from Fleet Street to Riga, but returned

brothers promising to improve the website's security features. "In the light of recent events highlighting the impact online bullying and harassment can have on young people, we engaged professional advisors to conduct a full and independent audit of our site and its safety features... We can today announce our commitment to making changes to Ask.fm's existing policies in three core areas: reporting and moderation, registration and corporate visibility," said the statement.

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"We will hire more staff to act as moderators, including a Safety Officer to take overall responsibility for moderation," it added, promising to make these and other changes by January 2014.

Ask.fm also promised to make certain sections of the site unavailable to anonymous users to encourage registration, and said it would set up a separate website to provide information to parents.

The reversal in Ask.fm's fortunes has been swift. As recently as June, one of Ask.fm's other directors, Klavs Sinka, appeared on the local TV3 news

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And despite the huge media coverage in the UK, there has been much less in Latvia, not least because Latvians themselves are not keen users of the site. Fewer than 1% of Ask.fm's users are Latvian, compared with 8.7% from Italy, 7.6% from Brazil, 7.3% from the US, 4% from France and 2.9% from the UK, according to data from web statistics monitor Alexa.

Latvia's most popular social networking site by far is draugiem.lv, ("for friends"), making Latvia one of very few countries where a local website outstrips the popularity of global giants such as Facebook and Twitter. "Ask.fm was started in Latvia, it is international and

"Everything we say is being twisted by the media"

channel to reflect on the company's amazing rise to global prominence in under three years. "It's a typical success story, just five boys sitting in a flat eating dumplings and thinking and thinking until we came up with an idea we were happy with," Sinka said.

Looking younger than his 25 years, Sinka was already aware that in the fast-paced world of IT, runaway success can quickly change. "Things are very changeable, and there's never a final victory when we open the champagne and live the easy life," he said.

Those turned out to be prophetic words, as less than two months later he was telling the UK's ITN news: "Everything we say is being twisted by the media."

One of the few people who have actually spoken to the Ask.fm owners recently is Kristine Zilde, the journalist who carried out both the TV3 and ITN interviews. "I would say they are confused," Zilde tells bne. "They do all they can to improve the site, but the pressure and the negative image they are getting doesn't seem fair to them."

works in many languages. Draugiem.lv is a Latvian social network in Latvian," says Latvian IT journalist and industry expert Juris Kaza.

What effect the furore will have on Ask.fm's long-term future is unclear.

"It already has impacted: usage has dropped, some advertisers have pulled out. Whether this is fatal, given the measures they have announced, remains to be seen," Kaza says.

While the number of registered users continues to climb, actual use of the website has dropped in recent weeks.

According to Alexa data, Ask.fm was the 150th most popular website in the world over the last three months, though the number of page views it attracts has plummeted by 40% in the last month.

But there is a growing feeling in Latvia that being based in a small country about which most people know little makes Ask.fm a convenient scapegoat.

Social commentator Karlis Langins points out that the British media's picture of the site as a breeding ground for teenage suicides is riven with

hypocrisy. "I think it is just another case of parents blaming everything for their child's death and politicians reacting in a populistic manner. It is an easy way out because they have an easy target to point their finger at," Langins says.

"Ask.fm has 70m registered users, a little more than entire population of Britain, which is ranked number 37 in the world for suicides with 11.8 people committing suicide for every 100,000 citizens. If Ask.fm was a country where every registered user was a citizen, it would be in last place in the world with 0.01 suicides for every 100,000 citizens. Ask.fm would have to have 7,455 suicides per year just to match Britain. I would love to hear what David Cameron would have to say on this matter," says Langins.

The wider Latvian IT sector has also backed Ask.fm, saying that it proves Latvian companies can provide genuinely global companies. "The most important thing in this specific case is the fact that according to public information, Ask.fm is showing good will and investigates the problematic situation, which indicates that they are neither fraudsters, nor law breakers," said a joint statement to bne from the board of the Latvian IT Cluster, an umbrella organisation for young tech companies.

"We consider it as an opportunity to promote Latvia without any danger of building up a negative opinion of the country. There are many new and innovative companies emerging in Latvia, already known worldwide, and they should be discussed more," it added.

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Deutsches Eigenkapitalforum 11 – 13 November 2013 Frankfurt / Main Entrepreneurs meet investors … … at Europe’s largest and most important capital market event for corporate financing via the capital markets. Between 11 and 13 November 2013, this information and networking platform will provide an ideal meeting point for the entire community of entrepreneurs, investors and analysts, as well as Frankfurt’s financial sector. Take advantage of the multitude of opportunities to present yourself to an audience of professionals, address investors directly, improve your specialist knowledge and expand your network!

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bne October 2013

Hungary heads further down renationalisation path Tim Gosling in Prague

H

ungary is in takeover talks with as many as seven utilities, Prime Minister Viktor Orban said on September 20. With elections on the way in early 2014, the government is looking for a boost in the polls from lowering tariffs and inflation, while bashing foreign investors at the same time.

In a bid to reverse falling approval ratings and preserve the constitutional majority that has allowed it to make so many controversial moves since coming to power in 2010, Orban's Fidesz government has already bought a municipal water firm from France's GDF Suez and the Hungarian gas arm of German energy giant E.ON. It also recently opened talks with Mol on gas storage assets.

The PM, who once again accused utilities of abusing their monopoly positions to dictate prices in his regular Friday appearance on local radio, said

the government will continue to seek to take control in order to create a stateowned utility sector in the coming years.

The ultimate aim is to reduce tariffs.

To that end, the state is in talks to buy the Pecs water works, according to Portfolio.hu, as well as Fogaz.

German giant RWE currently holds a

On the back of that, more tariff cuts are on the way Orban promised. Having pledged last year to cut household tariffs by 30% before the elections – due to take place in the spring next year – the government cut prices by 10% in January. Another similar sized drop will be implemented on November 1. The government is currently working on a bill to make household energy supply a non-profit sector, and Orban told the radio station that he hopes to see it submitted to parliament and come into effect ahed of the vote. "There's much debate on whether this bill should be a two-thirds bill," the PM said, referring to the level of support in the lower house needed for a constitutional majority. "A simple majority law would suffice if we were sure the Socialists will not side with the multinationals against the people."

Helping the private sector At the same time, moves are also afoot to target suppliers to commercial customers, Orban revealed, complaining that Hungary needs to rein in energy costs for companies in order to grow the economy. "How could Europe become competitive with the US when energy prices are 30% higher," Orban asked rhetorically, according to the Wall Street Journal. "These energy firms tell me they don't make profit on household energy, only on corporate services. I don't care."

Presuming Fidesz will stay in office, he added: "After the elections, the next government will need to find means

"How could Europe become competitive with the US when energy prices are 30% higher"

minority stake in the gas supplier to the Hungarian capital. Speculation has also recently been buzzing around Tigaz, one of the country's largest gas distributors that is currently controlled

by Italy's Eni.

to lower tariffs to US levels in case of energy used by the economy."

That's clearly electioneering: the US is one of the world's largest energy producers and is in the midst of a shale

bne October 2013

gas boom that has lowered prices to historic lows; Hungary is heavily dependent on expensive Russian oil and gas imports.

However, it should be able to force a bargain in buying out the utilities.

While the opposition has recently demanded an inquiry into the price Budapest paid E.ON for its local gas arm, the government has the upper hand in the talks. Stiff crisis taxes on the sector, coupled with the tariff cuts, have impacted the valuations of utilities. Meanwhile, Hungary filed with the US Securities Exchange Commission in mid-September, opening the way for up to $5bn in new debt. Any new borrowing could be used to pay for the re-nationalisations.

The PM also said the government is looking at the coal industry and called for smaller coalmines to be reopened to provide fuel for the neediest. "Coal mining is still an important industry," he stated, while also warning that the cabinet is set to take an "unexpected" step.

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Areva continues its Czech nuclear fight

bne As Areva takes the fight over its expulsion from the Czech nuclear tender to the regional court in Brno, the head of the French nuclear group says it isn't seeking compensation from utility CEZ, but wants to be readmitted to the competition.

"We want to be invited into the procedure again, and to be treated fairly.

Secondly, we also have to defend the name of our company," Areva CEO Luc Oursel told Hospodarske noviny in an interview published on September 24.

Czech state-controlled utility CEZ disqualified Areva from the tender – estimated to be worth ¤8bn-12bn – to build two new reactors at the Temelin nuclear power plant in October 2012 claiming "serious shortcomings" in the preliminary bid. This left the Russian-Czech consortium of Atomstroyexport, Skoda JS and Gidropress to duke it out with the Japanese-US firm Westinghouse.

Since being ousted, Areva has launched numerous appeals. All have so far failed, with the latest coming on July 26 when the chairman of the Czech antimonopoly office (UOHS), Petr Rafaj, said Areva had not met the tendering conditions.

Oursel said on September 20 Areva filed a complaint with the Regional Court in Brno, where the Czech antimonopoly office is based. An application for a preliminary injunction to either suspend the tender or prevent CEZ from singing a contract with a winner has also been submitted. "We have serious misgivings and concerns over the way the antitrust authority dealt with our protest," Oursel told the paper. "Over the course of their review, the authority, and later its president, clearly ignored certain very important evidence. The antitrust authority did not act as the impartial body it is supposed to be when pursuing the relevant EU directives… We believe that the antitrust authority’s decision regarding our protest casts serious doubt upon the whole procurement procedure."

Asked whether Areva intends to continue its legal complaints all the way to Brussels, Oursel said the way its exclusion from the tender has been handled by UOHS couldn't have failed to attract the attention of the European Commission. "We know that the commission has been monitoring the whole case."

Even without Areva's legal challenges, the tender is in trouble. On July 23, CEZ was forced to admit that its goal to pick a winner and sign the contract by the end of 2013 is unlikely to be met because of the collapse of the centre-right government. The signing of a final contract may now be delayed until the autumn of 2014.

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Murky interests wrest control of top Moldovan banks Graham Stack in Kyiv

M

oldova may be making strides toward joining the EU and freeing itself from Russia's grip, but this poorest corner of the continent is still suffering from the worst kind of gangster capitalism as the recent illegal expropriation of two of its largest banks by murky interests shows.

A two-year operation to wrest control over top Moldovan banks was nearing its end in September, with the apparent overnight privatisation of the savings bank Banca de Economii Moldova, and a change in shareholders and managers at the country's largest bank, Moldovan Agroindbank. Former shareholders in both banks claim they fell victim to "raider attacks", ie. illegal expropriation. The identity of the new

owners is unknown, but are allegedly linked to oligarch Vlad Plahotniuc and his group.

As a result of a closed share issue, the state's stake in the savings bank Banca de Economii (BEM) has dropped

controlling stake in the bank that has a monopoly on paying out of pensions to Moldovan's villagers – the majority of the population – thanks to its extensive network inherited from Soviet times. BEM is also the bank where state organisations and state-owned

"Former shareholders in both banks claim they fell victim to raider attacks" from 56% to 33.3%, the head of the National Bank of Moldova, Dorin Dragutanu, confirmed on September 2. This means that the state has lost its

companies hold most of their funds. As with most Moldovan banks, there is no official information on who the new owners are.

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bne October 2013

Prompting the share issue, to which the state did not subscribe, was the need to recapitalise the bank that was close to failure, after being looted by its management since 2009. As bne reported in February, a secret report by the International Monetary Fund (IMF) on the bank leaked to media in January described how massive fraudulent lending at the bank had driven it to the brink of ruin. Former BEM head Grigore Gacichevici was arrested that month and charged with disbursing a fraudulent $2m loan.

Auditors Grant Thornton, in a leaked audit, analysed another case where loans totaling â‚Ź10m were paid to a group of Moldovan companies, secured by fake real estate, and then transferred to offshore accounts. It noted that, “there is a large probability of further such transactions.â€?

The IMF leaned toward winding up the bank, but the situation at BEM was eased by the sale of a swathe of nonperforming loans in May, and August's closed share issue may have been a secret part of the same agreement. With only existing shareholders allowed to participate, and the state abstaining, BEM's minority shareholders would now seem to control the bank.

The minorities gained a stake in the bank in 2011-2012 during the "raider attacks", where dubious court decisions transferred stakes in top banks from former shareholders to offshore shell companies. They would thus appear linked to oligarch Vladimir Plahotniuc, whom UK court documents have connected to the "raiding" of second largest bank Victoriabank. Other reports circulating in the media allege

Moldova whines over Russian ban

bne Russia stepped up pressure on Moldova to drop its moves towards closer relations with the EU as it announced it is to halt several batches of wine imports and threatened a blanket ban on the country's main hard currency earner. The move brought a sharp rebuke from Brussels.

Russia's Federal Service for Oversight of Consumer Rights Protection and Human Welfare announced on September 5 that the import of several batches of Moldovan wine has been stopped due to "harmful impurities".

Director Gennady Onishchenko told RIA Novosti that, "Moldova is close to facing another ban and we would repeat the draconian measures of 20052006. We have stopped a number of batches today."

Russia banned wine imports from Moldova in March 2006. In 2007, over 40 Moldovan wine producers passed sanitation and epidemiological checks and their supplies were resumed. The latest problem apparently stems from the fact that the wine is stored in plastic containers for long periods, he said. Chisinau has already promised to fulfil the requirements to avoid an embargo.

However, few are in any doubt that the real reason behind Russia's move is more to do with Moldova's push toward closer ties with the EU. Iurie Leanca, the prime minister of Moldova, wrote in a piece for the Financial Times in September that, "spurred on by our desire for closer integration with the EU, Moldova is beginning to emerge from decades of missed opportunities and relative decline."

Tensions are running high in Russia's "near abroad", the Commonwealth of Independent States (CIS), ahead of the next EU summit in Vilnius in November. Many of the countries in the region are due to sign off on EU Association Agreements, which would clear the way to seal free trade agreements with the bloc and kill off any chance of them joining the Russian-led Customs Union.

Russia has been throwing its weight about trying to force countries to sign up to its trade club. In September, Armenia caved in and said it would join.

However, Moldova is defying Moscow, and has so far ignored threats from Russian Deputy Prime Minister Dmitry Rogozin that trade bans could follow unless it halts its aspiration of further European integration.

That drew a sharp response from the Brussels. EU Enlargement Commissioner Stefan Fuele warned Russia that it is "unacceptable" to use threats against ex-Soviet states that are seeking closer ties with the EU, while the European Parliament approved a draft resolution that asks the European Commission and the EU Council to defend Ukraine and other post-Soviet members of the Eastern Partnership against Russian pressure.

The EU is also looking into the possibility of being able to further increase the wine quota for Moldovan exports.

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that former prime minister Vlad Filat, an oligarch in his own right, is a new shareholder, but analysts say this could be smears by his enemies.

The share issue in fact raised only MDL80m ($6.3m) for the bank, after an earlier deal saw the bank's nonperforming loans sold off. Government officials say the state will retain a blocking stake, but are also talking up the need for private ownership of the bank to save it from further looting.

And given the bank's continued capital inadequacy, further dilution of the state's stake in favour of the new owners may be just a matter of time.

Bad designs BEM is the last of the three main banks that have been the subject of "raider attacks" to surrender. In 2011, new shareholders controversially gained control of Moldova's second largest bank Victoriabank. And in July, Moldova's biggest and best bank, Moldovan Agroindbank, saw controversial new shareholders vote out management that had built the bank up since 1996, despite attempts by the European Bank for Reconstruction and Development (EBRD), the bank's main creditor, to fend off the attack.

“We have held talks both with the government and the regulator about a series of opaque deals resulting in shareholder change,” the EBRD's Olivier Decamp told Kommersant Moldova in early August.

Agroindbank's now ex-CEO, Natalia Vrabie, was less diplomatic: "The scale and odious nature of these fraudulent actions are sufficient to undermine the

bne October 2013

financial stability of the bank and of the country," she said earlier, warning that a change in the bank's shareholders without consent of creditors such as the EBRD could trigger a default on the bank's funding.

alone. As bne reported, according to a letter circulated by the National Bank of Belarus, a swathe of these funds flowed historically through the banking systems of the Baltics, Cyprus and Kyrgyzstan.

The deals referred to saw a total of 28% of the bank's shares transferred between February and May from existing shareholders to a gaggle of UK and Latvian shell companies. Each shell company acquired less than 5% of the bank's shares, thus remaining under the threshold for mandatory approval by the regulator. But, as demanded by the EBRD, the National Bank declared that it had identified one beneficiary behind the various shell companies, and suspended the companies' voting rights given their evasion of approval procedures.

But with the Cyprus banks paralysed by the financial crisis there, Kyrgystan's banking system in turmoil following the 2010 revolution, and two Lithuanian banks with core clientele from the former Soviet Union closed down 2012-2013, there is room for more mini-jurisdictions on the fringes of the former Soviet space to get in on “nonresident banking” alongside Latvia – and thus non-resident banking may be the market niche that Moldova's new banking masters are eyeing. Former Agroindbank CEO Vrabie warned that the change in shareholders would herald a “radical shift in politics and strategy” at the bank.

But on June 12, in a sign of the subjugation of the court system to oligarchic interests, a regional court overruled the regulator's decision. As a result, the new shareholdings voted at a meeting on June 28 to replace Vrabie with a new face, Serghei Cebotari.

Central bank chief Dragutanu said it could “not be excluded” that the new shareholder(s) already had a controlling stake in the bank.

What the future holds The question now is what the future holds for Moldova's banking system?

The answer may lie to the east, reckon bne sources.

Earlier in 2013, the former head of Russia's central bank, Sergei Ignatiev, said that around $50bn had been channelled out of the country illegally via rafts of shell companies in 2012

“We have held talks both with the government and the regulator about a series of opaque deals resulting in shareholder change”

There are signs that this already happening. According to investigations of the Russian tax rebate fraud that led to the death and imprisonment of Russian investigator Sergei Magnitsky, $53m of the dirty funds passed through Moldovan shell companies with accounts at Banca de Economii in 2008, and then onto Latvian banks, apparently without ringing any alarm bells.

A further indication may be that many shell companies used in the raider attacks were set up by company service providers associated with Latvian banks, as bne has described. Plahotniuc and other Moldovan oligarchs are believed to have close links to Latvian bankers, according to bne sources.

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supply of cheap gas, a lucrative role in transiting oil and gas, not to mention leverage over its own sizeable and fractious Kurdish minority.

Coming soon to Turkey: Kurdistan oil and gas David O’Byrne in Istanbul

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nkara's decision to award Turkish construction group Siyah Kalem a license to import gas from the Kurdish region of northern Iraq into Turkey further ramps up pressure on the Iraqi central government in Baghdad to give its semi-autonomous northern enclave more control over the export of its oil and gas.

Turkey has for the past year been allowing the Kurdistan Regional Government (KRG) to export increasing volumes of crude oil and condensates by truck through Turkey's Mediterranean ports in spite of objections from Baghdad. Ankara now appears increasingly likely to go the whole way and allow both crude and gas to be exported through it by pipeline. The question increasingly appears to be not "if" but "when" – albeit with the caveat of "what", as in what will be the reaction of Baghdad?

With its sizeable reserves of oil and gas, the semi-autonomous Kurdish region of northern Iraq has long presented a conundrum for Turkey. The region is home to camps of the Kurdistan Workers party (PKK), which has for

close on 30 years been conducting a violent insurgency in southeast Turkey.

So on the face of it, Ankara should be treating the KRG as an enemy. In fact the exact opposite has occurred, with the two sides enjoying particularly close relations and Kurdish ministers

With the region thought to hold as much as 45bn barrels of oil and 2.8 trillion cubic metres of gas, both sides have much to offer each other. The only problem preventing the immediate construction of pipelines is that the Iraqi central government in Baghdad remains the internationally recognised authority, even over the northern Kurdish province over which it exercises little control. As such, Baghdad refuses to recognise the contracts the KRG has signed with oil companies developing its oil and gas fields in the region, and also refuses to allow the KRG to export any of it without its say-so.

Limited exports began in 2011 under an agreement that saw two fields in the region truck crude across country to be fed into the existing Iraq-Turkey oil line, which terminates at Turkey's Mediterranean oil hub of Ceyhan and remains under Baghdad's control.

However, a proposal made to Baghdad last year by Turkey and the KRG for increased independent exports with revenue to be paid into an escrow

"On the face of it, Ankara should be treating the KRG as an enemy; in fact the exact opposite has occurred" treated as the equals of their Turkish counterparts despite their lower status as "regional ministers".

Mutual benefits As with all the best friendships, each has something the other wants. With little likelihood of improved relations with Baghdad and every sign that it will one day formally secede, the KRG sees Turkey as the best route for it to monetise its oil and gas reserves.

Ankara for its part sees a guaranteed

account – with 83% to be paid to Baghdad and 17% to Erbil – was rejected by Iraq. And with Baghdad refusing to pay the region its share of the revenue for the oil it was already exporting by October last year, the KRG had already started exporting condensate by truck to Turkey to be followed in January this year by crude, trucked to the Atas terminal at Mersin.

Exact export volumes are unclear, but Turkish tanker truck operator

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Powertrans, which has been trucking in and exporting the crude, rented storage capacity of up to 80,000 tonnes at Atas and is believed to be renting a further 40,000 tonnes from the DeltaRubisoperated Dortyol terminal, from which a first cargo was exported in midSeptember.

More may be about to follow with three pipelines under construction in the KRG-controlled region ostensibly

suggest all three may yet terminate at a new metering station being constructed by the KRG closer to the Turkish border, allowing a cross-border connection with the Turkish section of the IraqTurkey pipeline.

Turkish officials claim that they have no official knowledge of the new pipelines, but confirm that they are open to discussing possible options. Whether that will result in the long-anticipated

cross-border connection to the Turkish side of the existing pipeline remains to be seen. However, by awarding Siyah Kalem a licence to import gas, Ankara has for the first time signalled its

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

A visit by Turkish Prime Minister Tayyip Erdogan to Washington earlier this year had been expected to elicit approval for plans for Turkish upstream operator TPAO to partner ExxonMobil in developing gasfields in the KRG region, but to Ankara's chagrin the Obama administration declined to budge.

What remains to be seen is whether licensing Siyah Kalem is aimed at further pressuring Baghdad into agreeing a deal with the KRG to free up exports, or whether Ankara and the KRG seriously intend to go it alone.

"As with all the best friendships, each has something the other wants" to carry crude from oil fields under development by DNO, Genel and Gulf Keystone to the Baghdad-controlled Fishkabour measurement station on the Iraq-Turkey oil line. However, reports

intention to defy both Baghdad and the US.

In the current climate with the Syrian civil war showing every sign of escalating and ethnic divisions in Syria, Iraq and Turkey already inflamed, such a move would be risky. The question, therefore, is whether for Ankara and Erbil the benefits will outweigh the risks.

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Critics claim that the use of cyanide poses a huge risk to the environment, a danger they claim nobody has seriously assessed thus far, while charging politicians with hidden financial interests in the project. Reports say behind Gabriel Resources’ project in Rosia Montana stand international billionaires such as John Paulson, Beny Steinmetz and Thomas Kaplan. Similar environmental fears have prompted official protests from neighbouring Hungary.

All that glitters is not gold in Romania

As if that weren't a big enough headache for the government, the project’s developer, Gabriel Resources, vowed in a statement on September 9 to “commence litigation for multiple breaches of international investment treaties,” if the draft legislation were to be rejected before debate by the parliament’s two chambers.

Gabriel Resources' share price has taken a hammering following the twists and turns in Romania. On September 9, the shares plummeted to end the day down 54%.

Bogdan Preda in Bucharest

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controversial mining project backed by a Canadian company and a handful of billionaires to extract gold and silver from an old quarry in Romania’s Transylvania region is causing splits in Romanian society and within its governing coalition A parliamentary vote that was expected to give the 2016 start date for the 15-year-old project a further boost was postponed in September following protests by tens of thousands Romanians over plans to extract more than 300 tonnes of gold and 1,600 tonnes of silver and use cyanide to separate a gramme of gold from a ton of rock.

Thousands of mostly young people took to the streets of the Romanian capital Bucharest on September 8 to protest against the project. They were joined by another 6,000 protesters in the city of Cluj in the Transylvania region, plus thousands more in other major cities. Protesters refused on several occasions to speak to Romanian media representatives, claiming that too many newspapers and television outlets were flooded with paid-for advertising

by Gabriel Resources in favour of the

project. They carried banners reading, “The Romanian press is full of lies!”

Local authorities in Alba county, where the project is located, also staged their own show of force on a stadium near Rosia Montana, where they organized dances and open-air picnics in order to underscore the project’s importance

Man apart The affair is also causing splits within the ruling Social-Liberal Union.

Following a weekend of protests over the project, Crin Antonescu, head of the Senate and leader of the junior coalition partner the National Liberal Party, made a statement on September 9 in his own name declaring that: “The Rosia Montana mining project cannot

"We will go ahead with formal notification to commence litigation for multiple breaches of international investment treaties for up to $4bn” for the future of the community. 33 Romanian gold miners staged a fiveday protest underground against plans to halt development of the site that only ended on September 15 after the prime minister went into the pit to meet them. Thousands also gathered in Rosia Montana that same day to support the mine development and protest against widespread poverty in the area, arguing the plan would create jobs.

be sustained… It should either be withdrawn or be rejected.” He explained that the project could only be considered if additional studies show it poses absolutely no threat to the environment.

Antonescu’s statement took the government by surprise, coming as it did just as parliament was preparing to debate draft legislation for the project issued by the government on August 27.

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This would open the way for a revival of the project after years of litigation and arguments over the project’s permits, which the authorities have so far been reluctant to award.

The current government is led by Prime Minister Victor Ponta, head of the Social Democratic Party, which together with Antonescu’s National Liberal Party forms the Social-Liberal Union. The coalition has a 70% majority in the parliament.

Visibly riled by the comments made by Antonescu even before any vote could take place, Ponta stated that, "a decision on such a controversial project must be reached by the country’s supreme institution, the parliament, and that’s why I sent it to parliament to decide…

But taking into account the fact that a parliament’s majority is against it, the project shall be rejected.”

Ponta previously also indicated he would vote against the project, but explained that his government had opted to have parliament decide in order to avoid facing legal action by Gabriel Resources.

A day later, on September 10, a Senate commission rejected the gold mining project, raising even more question marks over its fate. The same day, Antonescu followed up on his previous statements by publicly asking Ponta in

the mining project – and attached a big number to it. “If the lower house [of parliament] does reject the project, we will go ahead with formal notification to commence litigation for multiple breaches of international investment treaties for up to $4bn,” Henry told the Globe & Mail in a phone interview. “Our case is very strong and we will make it very public that Romania’s effort to attract foreign investment will suffer greatly.”

What lies ahead Others are lining up against the project.

The minister for water, forests and fisheries, Lucia Varga, also spoke openly against the project, saying she would not award a permit to the project under the current circumstances, with no clear proof that procedures and standards planned to be used in the gold and silver mining in Rosia Montana are in line with those of the EU. In a similar statement, Romanian Academy President Ionel Haiduc said that such mining should only take place if all environmental hazards that could be caused by cyanide are totally excluded. Moreover, he claimed that the gold extraction royalties the Romanian state is entitled to in the project, currently set at 6% of the total amount of gold and silver that would be extracted, should be considerably higher. Haiduc

"Critics claim that the use of cyanide poses a huge risk to the environment" a live broadcast on Antena 3 channel: “We all and the public opinion should know about what kind of damages we’re talking about if this project won’t happen… Who and when has engaged the Romanian state to the extent that we don’t have the power to decide today in our country and over our resources under the threat of having to pay damages?”

On September 11, Gabriel Resources chief executive officer Jonathan Henry vowed that legal action would go ahead if the Romanian government does kill

said Romania should rather wait until it can secure a better deal or start the mining for precious metals in the region itself without the use of cyanide.

Various mining experts in Romania have suggested the project could still be possible if the gold- and silver-rich ore excavated from Rosia Montana is transported to another site or country for cyanide-treatment in order to avoid any environmental impacts. Others argue that would increase the costs to an extent it would make the project unviable.

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Green against black in Serbia Harriet Salem in Belgrade

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n Belgrade city centre, protestors stand behind a dramatic black banner depicting the outlines of two fallen bodies: "2,100 dead in Serbia. EBRD coal kills," reads the bold yellow and red text.

The protest is part of mounting pressure from environmentalists on the European Bank for Reconstruction and Development (EBRD) to cut lending to coal projects in Emerging Europe. Currently reviewing its energy strategy – scheduled for completion on September 30 – the development bank has held consultations with regional NGOs in Moscow, Istanbul and Belgrade.

Yet while the EBRD's recent decision to abandon plans to fund the completion of the controversial Kolubara B project – a 750-megawatt lignite-fuelled power plant – has been greeted with jubilation by green activists, critics say much more now needs to be done by the bank and the Serbian government to avoid an energy and economic crisis.

Speaking to bne on September 13, Axel Reiserers, spokesperson for the EBRD, confirmed that the bank had suspended its involvement in Kolubara B and cast doubt on any future involvement.

"Should it become active again, it will have to be assessed against the new energy strategy which has far more stringent rules and would make our possible participation in the current configuration very difficult," he said.

The confirmation follows a prolonged period of silence from all the parties involved. In 2011, the Serbian stateowned utility Elektroprivreda Srbije (EPS), which manages the Kolubara mining and power production complex located 60 kilometres south of Belgrade, and Italian energy company Edison signed a joint-venture agreement.

However, despite stating that the preliminary contract was a "foundation

for joint activities that practically begin immediately," little progress has been made since, with the project dogged by what Bankwatch.org – an NGO monitoring the activities of international financial institutions – calls "corruption allegations, pollution at local level, [and] irregularities in resettlement of local populations."

Over the past few years there have been numerous arrests connected with the Kolubara complex, with the latest coming on September 9, when police arrested several individuals, including the former director of the Kolubara

I 49

than a PR exercise in demonstrating that the bank's draft energy strategy, which has so far received a less than warm response from the anti-lignite lobby, does have real reach and impact. Although produced under the "Sustainable Energy Initiative", the draft document goes significantly less far than the stringent environmental conditions for borrowing recently introduced by the European Investment Bank and World Bank, both of which have signalled a virtual end to their coal lending.

Few alternatives Whatever the outcome, or reach, of the EBRD's final energy strategy, much of the damage in Serbia has already been done. Since the fall of dictator Slobodan Milosevic in 2000, the EBRD has lent hundreds of millions of euros to EPS for so-called "environmental improvement" projects in the Kolubara mining basin – including a €50m loan in 2003 for a mining pit expansion, and an €80m loan

"That such projects can be classified as beneficial to the environment is ridiculous" Mining Basin Nebojsa Ceran and former financial director Ljubisa Nekic, on suspicion of fraud in land expropriation proceedings around the Kolubara mine.

Activists in Serbia hailed the EBRD's exit from the project, with Zvezdan Kalmar, project manager at the Subotica-based Centre for Ecology and Sustainable Development (CEKOR), calling it "one of the first serious NGO achievements in Serbia related to active citizens' advocacy against any sort of infrastructural project in energy."

Alongside Bankwatch, CEKOR has campaigned for over a decade to push green energy onto the agenda in Serbia, where burning fossil fuels accounts for 64% of domestic energy production and around 85% of total consumption.

However, given the timing, it's difficult not to think that the EBRD's retreat from the Kolubara B project may be little more

in 2011 for a coal excavator, spreader and conveyor system.

"These loans, which in the end have to be paid back, are effectively locking the country into a future of lignite dependency… and are undermining Serbia's target as a member of the European Energy Community to increase renewable energy to 27% by 2017," Kalmar tells bne.

That such projects can be classified as beneficial to the environment is "ridiculous," he adds. "Reductions in toxic emissions from these supposed efficiency projects are very small compared to [the] overall output."

Environmental concerns are not the only problem faced by policymakers. Serbia's energy sector is also teetering on the brink of a financial crisis. Earlier this year, state-owned EPS, Serbia's sole electricity provider, appealed to the government

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Big tasks face Serbia's revamped govt

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for a €300m loan to avoid bankruptcy.

"Serbia's energy policy is unsustainable, economically and environmentally," independent energy expert Aleksandar Macura tells bne. "The situation is now a fire in the apartment."

Nicholas Watson in Prague Serbia's reshuffled government met for the first time on September 3 as it faces the twin tasks of securing the economic recovery and the Balkan country's accession to the EU. Serbia's parliament late on September 2 approved the new cabinet of Prime Minister Ivica Dacic in a 134-65 vote, following three days of heated debate.

The new cabinet emerged from a long drawn-out reshuffle of the year-old, three-party coalition, which ultimately saw Dacic oust the then-finance minister Mladjan Dinkic and his small, fiscally conservative URS party. This angered Aleksandar Vucic, deputy PM and the powerful head of the largest party in the coalition, the Serbian Progressive Party, though not enough to cause the coalition to collapse and force early elections.

Dacic, who heads the Serbian Socialist Party, argued that Dinkic's fiscal hawkishness was holding back the recovery of the country's struggling economy, which is suffering from rising twin deficits of the budget and public debt, as well as high inflation and unemployment. "Our primary goal is to stop the economic downturn and create new jobs," Dacic said of the new cabinet.

The reshuffled government has 11 new ministers, as well as a couple of outside advisers drafted in by Vucic. The one that raised the most eyebrows was the scandal-tainted former chief of the International Monetary Fund, Dominique Strauss-Kahn, who is being called on to help guide the government on the best way to restructure the country's large foreign debt.

The key cabinet appointee is the US-educated Lazar Krstic as the new finance minister. This Yale-educated, 29-year-old was until his shock appointment by Vucic employed by the global management consultancy McKinsey & Co – a source of several cabinet appointments by this government.

Many worry about his lack of experience swimming in the shark-infested waters of Serbian politics – something his predecessor Dinkic was immersed in having served in several governments in the years since the autocrat Slobodan Milosevic was ousted in 2000. "I wonder how good Krstic will be at navigating the waters of Serbian politics - he spent the better part of the past decade outside the country. His networks and insider knowledge of party politics are likely to be less than those of his in-country based peers," says Otilia Dhand, vice president of Teneo Intelligence. "It is a very intriguing nomination indeed, and I am looking forward to following his fortunes."

Krstic certainly has his work cut out for him. Dacic might've been hoping that getting rid of Dinkic would rid the government of its bent toward trying to streamline the public sector, but the opposite may occur. In fact, no government has yet found the courage to make inroads into cutting spending to the country's pensioners and state employees, which make up about one-third of Serbia's electorate. But while Krstic has yet to outline his plans, he has already talked of "belt-tightening" and bringing the budget deficit down from last year's 5.7% to below 4.0% next year. Cutting the budget deficit is key to renegotiating a standby loan deal with the International Monetary Fund (IMF), Krstic's other big job.

EPS' burgeoning debts are at least partly attributable to the state's leverage over electricity prices, which are kept artificially low as a vote-winning tool.

However, while subsidised electricity prices continue, government subsidies are drying up. EPS has the "indirect moral support" of the state, was the tepid response of then-finance minister Mladan Dinkic, to the company's February bailout request. "Everything else is in their hands," he said, neatly passing the buck.

The crisis is not limited to the upper echelons. Despite electricity prices being kept below market value, energy poverty remains a real issue in Serbia where the average wage is around €400 per month.

"We have a situation where the service is not affordable from a living-standard perspective, but the price does not cover the real cost either," Macura says. "This is partly to do with wasteful patterns of consumption, much electricity in Serbia is consumed by private households not for the creation of GDP, but it is also because of inefficient and out-dated technologies of production and distribution. There is a lot of waste in the system."

Unsurprisingly, the Kolubara mining basin – which generates around half of Serbia's electricity, or "lights one in every two light bulbs in Belgrade" as politicians often like to remind the public – has become a highly politicised topic, with the government keen to attract third-party investment to modernise the plant's technology, some of which dates from the 1970s.

The Kolubara B project – which was designed to replace four blocks at the out-dated Kolubara A plant, as well as increase total power generation capacities – remains a "priority project" for the government, a spokesperson from the Ministry of Energy, Development and Environmental Protection (MEDP) tells bne. "To our knowledge, activities in the project are [still] underway."

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courts, that can take years to process cases, are acting as a deterrent in an environment where otherwise low tax rates should attract foreign investors.”

H&M, which invested directly in Serbia rather than through franchise partners, encountered similar bureaucratic stumbling blocks to IKEA. “H&M did not come to Serbia earlier, because we were unable to find appropriate space,” the company’s director, Karl-Johan Persson, told Serbian online business portal Ekapija in August.

Coming to a mall near you in Serbia Harriet Salem in Belgrade

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n August 29, a crowd of over 2,500 people gathered at Belgrade's Delta Shopping Mall to witness the opening of Serbia’s first H&M – a Swedish company known for selling high fashion at affordable prices. Although the store’s doors did not open until 11am, eager shoppers began queuing outside as early as 5am. The first customers through the doors were treated to a gift voucher, worth around €13, as well as front-ofhouse seats for a procession of speeches, red ribbon cutting and synchronised dancing to garish pop tunes.

While the hysteria surrounding the opening of a store, considered unremarkable across most of Western Europe, may at first seem an overreaction, the mass excitement becomes understandable in the context of the lack of other options on the Serbian high street. “Prices here are high compared to the average income of the population, there is a lack of affordable basic goods,” explains Andrew Roberts, managing director of Eastern Europe Economics, a regional financial consultancy. “This is because competition is low and margins are high”.

Similar scenes can also be expected if home furnishings store IKEA opens a

long-anticipated branch in Belgrade next spring. Negotiations to develop five IKEA stores across Serbia – a €250m investment by the Swedish firm – began in 2008, but have stalled repeatedly due an inability to reach agreement with authorities over land prices and locations. Now, five years on, the company’s director Mikael Ohlsson says that if necessary administrative procedures can be completed by the

These difficulties are part of a wider problem in Serbia that has hampered the country's efforts to attract serious foreign direct investment (FDI) over the past decade. This in turn has contributed to the stagnation of Serbia’s economy, which has seen the public debt and budget deficit climb to worrying levels, while the unemployment rate stands at about 25%.

Last year, according to statistics from the Serbia Investment and Export Promotion Agency (SIEPA), the country attracted just under €2bn in FDI, less that half that of the peak in 2009.

Statistics from the World Bank and International Finance Corporation on the business environment in Serbia also paint a grim picture;

“Prices here are high compared to the average income of the population, there is a lack of affordable basic goods” end of summer, IKEA hopes to finally open its doors to Serbian shoppers in April 2014.

That's a big “if”, though. “A number of large chains, have for a few years now, been talking about coming here, but they always come up against problems getting the required land permits,” Roberts tells bne. “In Serbia, complex bureaucratic processes and inefficient

Serbia is one of the region’s poorest performers, ranking 19th out of 24 on the "Doing Business" index. Scores on “enforcing contracts” and “dealing with construction permits” are particularly dismal with the country rated at 20th and 21st, respectively.

However, Serbia’s coalition government, which recently appointed a new cabinet with many fresh faces, says it is prepared

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to take tough action to revive the country’s beleaguered economy – and increasing the country's appeal to foreign investors looks to be high up the agenda.

“We're very keen to get more know-how from western society and attract more investors – that's the main aim of this government,” Aleksandar Vucic, the deputy prime minister and leader of the coalition’s largest party, told the BBC.

bne October 2013

investors and so we are attempting to fix the problems that were pointed at,” he tells bne.

Certainly, the appointment of Krstic Lazar, a Harvard-educated technocrat, to the position of finance minister, alongside a renewed commitment to renegotiate the terms of a frozen International Monetary Fund loan, and

“There has been no shortage of plans in Serbia, the previous government had them to. The problem is they are never implemented” According to a SIEPA advisor, moves are already underway to create a more hospitable environment for potential investors. “We are looking at major changes in labour law in the near future, along with the one concerning planning and construction law – this was suggested to our government by foreign

the country’s rapid progression towards the EU (official accession talks are expected to start in January 2014) have convinced some that the government means business.

“Time to give it a second look” is the title of the Royal Bank of Scotland’s recent

report on Serbia’s economy. Cautiously optimistic, the report highlights the lack of market recognition for the recent positive progress made by the Serbian authorities – most notably the sale of 49% of JAT Airways to Eithad and rumoured upcoming privatisation sale of Telekom Serbia – concluding: “it is time for the potential upside to be acknowledged”. Although far from a seal of approval, the report is a U-turn on the bank’s position in May, and an indication it feels the government is at least starting to make moves in the right direction.

But while the tough talk is impressing some, others worry that making good on the proposed economic and legal reforms will be even more challenging than assembling IKEA furniture.

“Everybody knows what needs to happen and everyone has known for a long time.” Roberts tells bne. “There has been no shortage of plans in Serbia, the previous government had them too.

The problem is they are never implemented.”

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s a new Albanian government takes power promising to clamp down on corruption and European Commission President Jose Manuel Barroso raises the possibility the country could be granted EU candidate status later this autumn, the future for this impoverished part of Europe looks brighter than it has done for years. Yet as recent events over the ownership of the country's sole refiner show, there's still a long way to go.

A new broom in Albania

On September 10, Albania's president officially appointed Edi Rama as the country's new prime minister, and the following day his Socialist Party-led government, which won 83 of parliament's 140 seats in the June election, presented a programme for its 2013-2017 term of office that is designed to further the country's progress in joining the EU.

Nicholas Watson in Prague

Among the top priorities are reforming the judicial system and establishing a National Bureau of Investigation to fight against organised crime, corrup-

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tion and trafficking. The government's anti-corruption policy will focus on prevention, increasing transparency in state institutions and punishing corrupt individuals, it said. There are certainly enough to choose from; after eight years under the thumb of former prime minister Sali Berisha, Albania now finds itself in Transparency International's "Corruption Perceptions Index" down in 133rd place out of 174 countries, the economy dominated by oligarchic and criminal interests.

Case in point is the former state-owned refiner ARMO, which in August suddenly switched hands in a deal blessed by the outgoing government. According to documents filed with Albania's National Center of Registration (QKR) on August 8, controversial businessman and Berisha crony Rezart Taci appears to have sold his shareholding in ARMO to a mysterious company called Heaney Assets Corporation, which is connected to Azerbaijani interests. Heaney Assets, whose ultimate owners bne has been unable to determine, paid €35m for Taci’s stake in AMRA Oil, which in turn controlled 85% of ARMO’s stock. The rest of the refiner's shares remain in the hands of the Albanian government. The QKR documents also show that Heaney Assets paid almost €15m for minority stakes in several other companies controlled by Taci, including Europetrol, Taci Oil and Kuid.

According to reports and comments from officials, the financial state that Taci left ARMO in explains why the purchase price was so low; Taci bought the refiner in 2009 in a dodgy privatisation for €128.7m. According to various sources, ARMO owes Albania’s state oil producer Albpetrol about €25m, and there were other debts taking the total up to as much as €120m. Taci is believed to have also had an unpaid loan of €75m from the Bank of Azerbaijan. The Azeri bank sued him for the money in August 2012, but withdrew the lawsuit after a few days, according to reports and sources.

According to an August 25 interview with Eno Bozdo, at the time the deputy minister of economy, trade and energy, in the Albanian economic weekly

Southeast Europe

Albania makes a hash of it

Nicholas Watson in Prague News on August 23 that Albanian police had seized over a tonne of cannabis bound for Italy has put the spotlight on this EU-aspirant country's growing importance as a source of the continent's marijuana.

Albanian police spokesperson Laura Totraku was reported by BalkanInsight as saying that a routine patrol carried out by border police in Vlora together with Italian officials on the Karaburun peninsula came across the cannabis stuffed in 38 duffle bags, waiting to be smuggled across the border.

Albania is now widely considered the leading supplier of cannabis in Europe and a major transit zone for other drugs like heroin and cocaine. According to a US State Department Narcotics Control Report, last year police seized over 21 tonnes of cannabis destined for European markets, notably Greece and Italy, nearly double that in 2011. Heroin and cocaine discoveries also more than doubled over the same period, to 87.7 kilograms and 4.6 kg respectively.

The Italian financial police reckons Albania's marijuana production earns more than ¤4.5bn a year (a figure the Albanians dispute). The country's official total exports in 2012 amounted to ¤1.7bn.

The US State Department puts the staggering growth in marijuana seizures in Albania over the past year to a rise in enforcement activity attributable to better police training and techniques, as well as increased marijuana production. Most of that is centred on the mountainous area around the town of Lazarat in southern Albania, located near the border with Greece.

According to an article published in Global Post, intelligence reports suggest the town cultivated more than 60 acres of land this year, an estimated 300,000 plants that could yield as much 500 tonnes of marijuana. Cannabis is usually planted in May and harvested in September.

With up to 90% of Lazarat's residents — 7,000 in all — believed to be involved in the drug business, it's no surprise that they are keen to see it continue unabated. The same Global Post article reports a failed attempt last summer by a special forces team to enter Lazarat, which resulted in a firefight that one unnamed local police commissioner described as "very much like a real war."

"We were drawing indiscriminate fire from 20 positions, including heavy machine guns and anti-tank missiles," the commissioner was quoted as saying. "I saw a 70-year-old grandmother shooting at us with a heavy machine gun. I thought I was going to die."

Unsurprisingly, the country's law enforcement agencies haven't been back. The country's shaky justice system also means that despite increased seizures, "cumbersome bureaucracy and weak judicial and law enforcement institutions resulted in few convictions," says the US State Department.

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Monitor, the new owners of ARMO have pledged to honour all the firm's debt obligations. Bozdo also claimed in the interview that the Ministry for the Economy, Trade and Energy was "kept in the loop" regarding the talks between Taci and Heaney Assets, and signed off

bne October 2013

For Gary Kokalari, founder of Albanians for a Democratic Albania, which is involved in fighting corrupt practices in Albania, this was merely one of several reasons why the privatization of ARMO was illegal. "First, ARMO was supposed to be a strategic privatization of a state-

"We signed off on the deal due to the financial predicament in which ARMO recently found itself" on the deal due to "the financial predicament in which ARMO recently found itself."

Old tricks The financial state of ARMO and the murky way it was offloaded is not a total surprise, say observers.

First, it has been clear for some time that Taci was in financial difficulties. In February, the previous Albanian government was humiliatingly forced to cancel the winning bid from a consortium headed by Taci in the tender for state oil and gas firm Albpetrol after it failed for two months to come up with a down payment. It later turned out, as bne has reported, that the 10% bank guarantee put up by Taci's Vetro Energy to back its â‚Ź850m bid for Albpetrol was a fantasy, meaning the government couldn't claim it as recompense.

Even before that the nature of Taci's victory in the October 2012 tender for Albpetrol was being called into question.

The initial announcement on October 3

by Prime Minister Berisha that Albpetrol was to be sold to a "US-run consortium" had everyone applauding, hoping for a new era of transparency and investment for the country's most valuable strategic asset. It was only days later that it shockingly emerged that the winning consortium Vetro Energy was actually 51% owned by Taci. You couldn't blame Taci for using this trick, as it worked so well three years previously with the tender for ARMO. Then, Taci used a previously unknown Swiss company to close the deal, and shortly afterwards he re-registered ARMO under the Taci Group.

owned asset, and there is no legitimate government in the world that would have allowed a last-minute switch to occur as was the case with the insertion of Taci into the ARMO deal at the 11th hour," he says. "Not to mention my belief that Taci was not a financially qualified bidder, as is now well known and I also believe [tender advisor, US law firm] Patton Boggs should have discovered this from the start.

Furthermore, to my knowledge Taci never lived up to the terms of the deal, and the terms included the requirement that he invest several hundred million dollars for completion of the acquisition and for capital expenditures to modernize the facili-

figure out that Taci rushed to sell ARMO while Berisha was still in power because they were both desperate to protect their interests," says Kokalari. "In my opinion, there were suspicious circumstances surrounding the privatization of ARMO and the subsequent sale by Taci, and the new Albanian government should immediately investigate the transactions to determine if fraud was committed. If so, the government should seize the assets and start over again."

The question, though, is whether this new government has the appetite to investigate past shady deals or will prefer to let sleeping dogs lie. After all, Rama has a very full in-tray, with the crumbling and unreconstructed economy at the top of the list. "The economic challenges Albania faces are familiar, and enormous," says Gerald Knaus of the European Stability Initiative. "There is the prospect of short-term crises. There is concern about an energy supply crisis later in the year. Some worry about discovering the true state of public indebtedness following an audit (including all unpaid bills by Albanian public institutions which will come due). The motor of previous growth, the construction sector,

"In my opinion, there were suspicious circumstances surrounding the privatization of ARMO and the subsequent sale by Taci" ties. We now know he never had the funds, instead from day one he started milking the company like a fat cow and drove the business steadily into the ground."

has come to a halt. At this moment there is almost no credit being given to Albanian companies by banks, a disaster if the goal is structural change."

The timing of the ARMO sale to Heaney Assets is also interesting, rushed through as it was in the window between Berisha conceding the election on June 26 and the new administration taking control in September. There's no equivalent in Albanian to the Russian word krisha, which literally means "roof" and refers to protection that a business enjoys from important people higher up, but the sentiment still applies in this fairly lawless country. "It doesn't take a genius to

All that suggests chasing dodgy businessmen down meandering legal avenues for past misdeeds may not be that high on the agenda. Much will depend on the EU, which has already rejected twice Albania's membership applications but looks minded to confer candidate status by the end of this year. bne's previous discussions with Brussels about shenanigans in Albania suggests that they too have their eye set on the future rather than the past.

Southeast Europe I 55 The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS

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Tajikistan going Rogun Clare Nuttall in Astana

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ajikistan says it will wait for the results of an independent study before starting to build the world’s tallest dam. Even so, it is likely to press on with construction whatever the result of the study, inflaming tensions in an already jittery region where water is an increasingly precious resource and earthquakes a constant worry.

Relations might be tested sooner. Part of Tajikistan’s controversial Rogun hydroelectric power plant could be put into operation in the very near future before the dam is built. In August, Tajik state television showed engineers at Rogun saying that the first two units of the hydro plant could be put into operation using low-pressure water, and work to block the Vakhsh river, a tributary of the Amu Darya, has already started, according to local press reports.

For the dam, Dushanbe has agreed to wait for an expert assessment of Rogun’s social and environmental

impact commissioned by the World Bank, in the hope of securing finance from international financial institutions. However, Uzbekistan, the fiercest opponent of the project, claims that construction is already underway.

experiences acute power shortages during six months of the year?” he asked rhetorically, Asia Plus reported.

Tajikistan’s largest enterprise, the Tajikistan Aluminium Company (Talco), also relies heavily on cheap power.

Tajikistan's autocratic leader, President Emomali Rakhmon, appears determined to go ahead with the dam, appealing to Tajik nationalism as he tries to raise funds from the

Not very neighbourly The plans have caused a serious rift between Tajikistan and Uzbekistan, which lies downstream on Central Asia’s two great rivers, the Amu

“Who wants to invest in a country that experiences acute power shortages during six months of the year?” impoverished population. In an address to the parliament on April 26, Rakhmon pointed out that power shortages are scaring investors away.

“Who wants to invest in a country that

Darya and Syr Darya. This threatens to disturb the fragile balance of water management that has existed between the five Central Asian republics since the breakup of the

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Soviet Union. Uzbekistan also claims such construction is foolhardy in an earthquake-prone area.

Uzbekistan periodically uses the threat of cutting off gas supplies to its upstream neighbours to deter them from letting too much water through their dams in winter, which causes flooding and reduces the amount of water available for irrigation.

The failure to renew the gas export agreement between Uzbekistan and Tajikistan this year has been a further incentive to Tajikistan to pursue hydropower investments. Dushanbe has also accused Uzbekistan of holding up rail freight at the border in an attempt to force the Tajik government to abandon its construction plans.

In early 2012, the Tajik embassy in Moscow warned these tactics had pushed Tajikistan to the brink of a “humanitarian crisis”.

Uzbek officials have gone so far as to warn that Rogun could cause war to erupt. In more conciliatory moments, they have appealed to Dushanbe to build smaller dams instead, though such appeals have fallen on deaf ears, perhaps because Rakhmon regards the giant dam as a monument to his rule as much as something that will benefit the population. “The question of Rogun is too often politicised. The impact depends on the scale of the dam. The smallest size being considered would have no effect on Uzbekistan, the medium has very little effect, and there might be some effect from the largest size,” says Kai Wegerich of the International Water Management Institute. “Uzbekistan’s fear is that Tajikistan will release water only in the winter, but this is not correct, because Tajikistan is more diversified in terms of industry, and wants to benefit from selling electricity to Pakistan in summer.”

Water is a huge issue in Central Asia, where five states, all with fast-growing populations, depend on shared resources. In the 1960s, a fatal decision by the Soviet government to prioritise cotton production over the Aral Sea fishing industry resulted in the massive diversion of the Amu Darya and Syr Darya, causing the Aral Sea – a lake

A pratfall in Turkmenistan

bne After an embarrassing fall from his horse in front of an audience of thousands, Turkmenistan’s eccentric president, Gurbanguly Berdymukhamedov, has taken up cycle racing instead and ordered his country’s 5m citizens to get on their bikes for weekly mass cycling events.

Undeterred by the fact that few Turkmens own bicycles or summer temperatures that regularly top 40°Celsius in the desert country, Berdymukhamedov’s officials organised weekly events through August, culminating in a presidential order that all Turkmens turn out on their bikes on September 1.

According to opposition website Chronicles of Turkmenistan, this triggered a spike in the price of bicycles, with citizens of the authoritarian republic scrambling to comply with the order. While government workers were issued with imported bicycles worth around $200 - close to the average monthly salary - in the final days of August, Chinese imports were changing hands for up to $500.

Well known as a horse-racing enthusiast, Berdymukhamedov is now keen to show off his prowess in the bicycle saddle. On April 28, Berdymukhamedov fell off his horse seconds after winning a national race to take $11m in prize money. His horse Berkarar (The Mighty) stumbled after passing the finish line sending the president flying over its head.

Eyewitness reports say that Berdymukhamedov remained lying on the race track for several seconds before being taken away by ambulance. However, he reappeared, apparently unharmed, around 40 minutes later. A video of the incident was smuggled out of the stadium and broadcast by Eurasianet, despite efforts by security to prevent footage from being carried out of the stadium.

Now, Turkmen television broadcasts frequent footage of the president winning cycling races instead. He has also approved a four-year government programme to encourage cycling. "This campaign will help to boost health, ensure environmental security and promote cycling," Berdymukhamedov said, according to the BBC. The plans are reminiscent of the "Health Walks" organised by Berdymukhamedov’s predecessor, the late Saparmurad Niyazov, on a specially built 8-kilometre-long concrete staircase built into mountains near Ashagabat. On one occasion, Niyazov ordered government officials to make the walk - joining them at the summit by helicopter.

Berdymukhamedov has gradually got rid of the remnants of Niyazov’s personality cult, including removing the gold-plated rotating statue of Niyazov that topped the Arch of Neutrality in central Ashgabat on the outskirts of the city. He has also initiated economic reforms, and allowed the creation of a second political party. Even so, the president’s whims are still law in this isolated and authoritarian country.

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lying between Kazakhstan in the north and Uzbekistan in the south – to lose around 60% of its volume between 1963 and 1987. Salt and sand storms have destroyed surrounding agricultural land, and had devastating consequences for the local population’s health.

Not deterred by causing the world’s greatest manmade disaster, Soviet planners continued to mull plans to divert the Ob and other Siberian rivers from the Arctic Ocean to the Central Asian cotton fields. The idea was dropped when the Soviet Union started to disintegrate, but even recently top officials including Kazakhstan’s

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Despite the angry rhetoric, the high level of Russian engagement – including military bases in Kyrgyzstan and Tajikistan – makes armed conflict between the states unlikely. Following Putin’s visits to the region in 2012, Moscow has ensured its long-term military presence in both countries.

Russia has also latched onto the water issue, providing funds for the proMoscow government of Almazbek Atambaev in Kyrgyzstan to build the Upper Naryn Cascade and Kambarata-1 hydropower plants. Russia also plans to provide $500m for the CASA1000 project to build an electricity

“Central Asia’s water resources are very heavily used, even over-used"

President Nursultan Nazarbayev and Uzbekistan’s Islam Karimov have refloated the idea.

Dam the status quo Since the breakup of the Soviet Union, the five Central Asian states have used a complex web of agreements, and regular ministerial-level meetings, to share the region’s limited water resources. Each state has a quota for water use, similar to those allocated during the Soviet era. “Central Asia’s water resources are very heavily used, even over-used. Water sharing works in years with normal or above normal flow, but things get tense in low flow years. Everybody has to cut back when there isn’t enough water,” says Philip Micklin, author of "Desiccation of the Aral Sea: A water management disaster in the USSR". There is also conflict within states, when powerful regional leaders take more than their share.

However, the massive scale of the Rogun dam threatens to disturb the status quo in a way that the ongoing bickering over water sharing and Kyrgyzstan’s more modest construction plans have not.

transmission line from Central Asia to Afghanistan and Pakistan.

However, Moscow has stopped short of financing Rogun, a decision likely based on the incendiary effect this would have on relations with Uzbekistan. Instead, shortly after his 2012 visits to Central Asia, Putin invited Kazakhstan and Uzbekistan to join the Kyrgyz hydropower projects in an attempt to resolve water use disputes.

The other superpower vying for influence in Central Asia, China, has already helped rebuild Tajikistan’s dilapidated roads, but again no concrete offers to support Rogun appear forthcoming. Despite its own controversial domestic projects such as the Three Gorges Dam, which displaced 1.2m people, Beijing seems reluctant to take a similar step in Central Asia.

While state-owned SinoHydro is active in Tajikistan, the company backed off from a project to build a dam on the Zerafshan river after opposition from Tashkent. With both Uzbekistan and Turkmenistan now supplying gas through the Central Asia-China pipeline, support for Rogun is looking less likely.

Even without deliberate provocations, there are other factors contributing to increased pressure on the Central Asian region’s limited water resources, and threatening to raise tensions.

All five republics have expanding populations, as does Afghanistan, the fourth state in the Amu Darya river basin. Soviet concerns that Kabul could also demand its share of the river’s waters were never realised due to the outbreak of war, but if north Afghanistan remains stable, there could be more competition within the Amu Darya basin. To the east, China’s fast-developing Xinjiang region is also increasing water use.

The consequences of climate change are already being felt in Central Asia, where temperatures are steadily rising and weather patterns becoming less predictable. The glaciers that feed the Amu Darya and Syr Darya rivers are shrinking by a rate of between 0.2% and 1% a year, which in the long-term will result in a significantly lower flow of water to be shared among the five states.

Despite being aware of the climate change threat, the region’s governments have not yet banded together to tackle the issue. “The countries are still trying to be independent, and because of this mindset, it is difficult to face the question and say that in the end they need each other. Only after they satisfy their mission to be independent, can they decide to integrate again,” Wegerich says.

For the time being at least, Central Asia’s water problems show no signs of improving, with the need for the regions’ governments to find a practical solution to sharing limited resources often overshadowed by both economic need and nationalistic posturing. Rogun and other new projects are putting more pressure on an already difficult situation.

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tactics mirror those used to pull other former Soviet states, such as Ukraine, back from flirtations with Brussels.

In July, Armenia's Public Services Regulatory Commission announced an 18% price increase for gas consumers, following a price hike by Russian export monopolist Gazprom. The previous month, Russia completed an arms delivery worth around $1bn to Azerbaijan, potentially escalating the long-standing conflict over the breakaway Nagorno-Karabakh Republic.

Armenia picks Russia over closer ties with EU Clare Nuttall in Astana

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rmenia has firmly stepped back into Moscow's zone of influence with an announcement that it is set to join the Customs Union. The news overturns speculation that Yerevan was planning to reject entry to the Russianled bloc in favour of closer ties with the EU. A joint statement, issued on September 3 by the Russian and Armenian presidential administrations, says Armenia is now ready to join the Customs Union, which currently sees Russia share a free trade zone with Belarus and Kazakhstan. The announcement came in the wake of talks between Armenian President Serzh Sargsyan and his Russian counterpart Vladimir Putin.

“Serzh Sargsyan announced Armenia’s decision to join the Customs Union, to take the necessary practical steps required to achieve this and to subsequently participate in the formation of the Eurasian Economic Union," says the statement published on the Kremlin website.

Amid arguments over energy with Moscow, Armenia had appeared

this year to be moving out of the Russian sphere of influence. The government had been pursuing an EU Association Agreement, which includes the development of political, trade, social, cultural and security links with the European bloc. The EU started negotiations on an Association Agreement with Armenia in July 2010

At the same time, despite the recent tension Russia remains Armenia's most important partner in the economic sphere.

Bilateral trade between the pair grew by over 22% to reach $1.2bn in 2012.

Helping to ease Yerevan's route back into the fold, Putin told journalists as the announcement was made that Russian Railways could invest around RUB15bn ($450m) to help develop Armenia's railway system. Russian state-owned oil giant Rosneft also appears to have revived its interest in Armenia's debt-ridden Nairit chemicals plant, which has lain virtually idle for several years.

However, the news has proved unpopular among Armenians who, already hit by the gas price

"Armenia negotiated 4 years to get Association Agreement with EU. Now President prefers Kremlin to Brussels" and on a Deep and Comprehensive Free Trade Agreement (DCFTA) in May 2012. Both agreements were due to be signed at the upcoming EU summit in Vilnius in November.

Leverage Yet the Customs Union announcement follows a ratcheting up of pressure by Russia to force Armenia – usually one of its closest allies – back into line. The

increases, had been hoping for a move towards Europe. Around 300 people demonstrated outside the presidential residence on September 4 against the decision to take the country into the Customs Union. A substantial security force including riot police turned out to break up the demonstration, and at least nine were arrested. "The protesters, mainly youth, were met by significantly larger numbers of

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police, including riot police, and were subjected to excessive force," writes Richard Giragosian, director of the Regional Studies Center in Yerevan. "This may actually spur more demonstrations in itself."

Quite what the decision to join the Customs Union will mean for Yerevan's

alternative to the EU for the postSoviet region.

While Armenian government officials were still expressing hope that this hasn't scuppered the prospect of closer ties with Europe, EU officials have previously stated that a DCFTA would not be compatible with membership

“In light of Armenia's declared choice to join the Customs Union, it is difficult to imagine the initialling of the Association Agreement at the summit" ambitions for greater integration with the EU is still unclear. The planned Eurasian Economic Union – due to be launched in 2015 – is designed as an

of the Customs Union. “In light of Armenia's declared choice to join the Customs Union, it is… difficult to imagine the initialling at Vilnius

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summit in November of the Association Agreement with Armenia as it had been negotiated,” EU Commissioner for Enlargement and European Neighbourhood Policy, Stefan Fuele, said in a statement published on the European Commission’s website on September 6, following a meeting with Armenian Foreign Minister Edward Nalbandian in Brussels.

“Based on the information we presently have, the compatibility of obligations to the Customs Union with those under an Association Agreement/DCFTA with the EU looks problematic,” Fuele added.

Meanwhile, Swedish Foreign Minister Carl Bildt made a franker expression of European frustration on his Twitter feed, tweeting that: "Armenia negotiated 4 years to get Association Agreement with EU. Now President prefers Kremlin to Brussels."

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Mongolia mounts Operation Rescue Oyu Tolgoi Terrence Edwards in Ulaanbaatar

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ongolia called a special twoweek-long session of parliament to begin September 16 as it scrambled to rescue its flagship coppergold mining project.

Oyu Tolgoi has been a magnet for investment, and the circumstances surrounding it are how most investors gauge the investment climate in Mongolia. So it came as a shock when Mongolia's private partner in the project, diversified miner Rio Tinto, announced in August it would lay off 1,700 workers because the development of an underground mine would have to be suspended. The reason for the suspension was that the company had received word from the government it needed permission from Mongolian parliament to raise the financing for it.

The government controls 34% of the project while Rio controls the remaining 66% through majority-owned Turquoise Hill Resources, though the partnership has been a volatile one. The tunnel mining is poised to propel the copper mine from being the fifth largest in the world to the third largest. Rio was pushing to get a $4bn financing package

in place to fund development, but the government baulked, saying that reported costs of $6.5bn for phase one of the mine were already exorbitant.

Rio has said that it will suspend operations until it receives parliamentary approval for the financing package. Meanwhile, the government is waiting to hear from Rio on some oustanding questions. "We are still expecting two replies that are supposed to be made from Oyu Tolgoi," Economic Development Vice Minister Ochirbat

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From bad to worse Mongolia was already seeing flagging foreign investment due to the 2012 "Strategic Entities Foreign Investment Law" (SEFIL), which raised obstacles for investors to clear before they could acquire assets in mining and other "strategic" sectors named in the legislation. According to government data posted on state-run website Montsame, in the first half of 2013 Mongolia saw foreign investment fall 43% from the same period last year, with the mining industry taking a hit of some 32%. Another industry hit hard was tourism, down 98.5%, where spending is largely related to mining because of foreign workers and investors visiting the country, and the chartering of planes to visit mine sites.

Mongolia is also hurting from a decline in coal sales, caused by weak global economic conditions and slowing growth in the country that consumes over 90% of Mongolia's mining products, China. This shortfall in coal sales is leading to an ever-widening deficit in the state budget. According to a budget update from the Ministry of Finance in September, the deficit stands at MNT222bn ($129.3m), with about MNT830bn of budget spending still needing to be made.

But if Mongolia was betting it had Rio up against a wall, the miner's response has had the government scrambling to fix the economic fallout.

Since the August 14 announcement of redundancies at Oyu Tolgoi – mostly

"We are still expecting two replies that are supposed to be made from Oyu Tolgoi" Chuluunbat told bne on the sidelines of the "Discover Mongolia" Forum in September. "There is the report about the investment that is being made; the second is about the feasibility study for the underground mining. It [the feasibility study] should have been submitted to the government."

contractors specifically assigned to the construction of the underground tunnel – the currency has taken a nosedive, plummeting 9.5%. The tugrik is now 23% lower than it was a year ago. That has been particularly painful given Mongolia's reliance on imports for much of its groceries and retail goods. The

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government also has to service dollardenominated bonds; it raised $1.5bn in a sale of bonds last year.

The government has so far played it cool in public, with the prime minister and other officials repeatedly stating the economy is not in such terrible shape as reported. "The country is not facing any difficulties," Dondogdorjyn Erdenebat, secretary general of the coalitionleading Democratic party, told a press conference in August. "We can survive without Oyu Tolgoi for a while. We have survived this long with our livestock."

In August, data showed that Mongolia’s second-quarter economic growth accelerated from the first three months of this year as the government boosted spending on infrastructure. GDP grew 14.3% in the April-June period, compared with 7.2% in the previous quarter. That brought growth in the first half of the year to 11.3% on year, compared with an annual pace of 12.4% in 2012.

The government is also quick to point out that annual inflation had fallen to 8.3% in August compared with 15.6% a year ago. That may be, but year-on-year inflation has since climbed to 9.4% and analysts are predicting more trouble further down the line. "We believe that there are more negative implications for the Mongolian public to follow before this economic 'crisis' is over," Ulaanbaatarbased Mongolian Investment Banking Group wrote in a research note. "In addition to the impact on the Mongolian people, companies will also continue to face hardship. We know of many corporations both in mining and other sectors that have been forced to downsize due to a decrease in business activity.

To this end, we believe that the widely publicized 1,700 jobs that were cut at [Oyu Tolgoi's] underground development could be the tip of the iceberg."

Called back Despite the reassuring public face, the government is in overdrive, calling in members of its parliament early from recess for what they're calling an "extraordinary" session of parliament scheduled for September 16-19.

Up for discussion at the session are five different pieces of legislation, including an investment law that would replace the original law from 1993 and scrap the 2012 SEFIL that has done so much to scare off investment. MIBG argues the new legislation would "create a significantly positive legal environment for existing and prospective foreign investors".

The bank also notes the potential benefit from a law intended to create greater transparency in the gold mining industry and boost government revenues from it. "There are lots of changes in the gold sector for the positive," says Ankhbayar Bilguun, chief executive of MIBG. "It is a strong signal that Mongolia is taking action towards a hard currency‌ In the next five to six months, we're looking at a significantly revamped legal landscape."

Oyu Tolgoi will be the main topic for discussion, though, and the official in charge of the government stake in the project, Davaadorj Ganbold, and the mining minister are planning to fly to London to discuss the points of contention with Rio management.

"Those who are hoping for a quick resolution to the issues surrounding phase 2 [of Oyu Tolgoi] should temper their enthusiasm," reckons Nick Cousyn, chief operating officer of Ulaanbaatarbased broker BDSec, who alerts investors to comments made by Ganbold that the dispute could not be resolved solely by the shareholders, but by government too, probably extending the delay.

"Those who are hoping for a quick resolution to the issues should temper their enthusiasm"

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time to analyse the extent of foreign investment in Georgian agriculture land and to develop a land cadastral system.

The timing of the changes and the lack of consultation with the business community before the amendment was passed have raised concerns, however.

Fencing off farmland in Georgia Molly Corso in Tbilisi

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new amendment prohibiting foreigners from owning agricultural land in Georgia is sending shock waves through the foreign business community. While the Georgian Ministry of Agriculture has denied the measure will adversely affect investors, lawyers and legal watchdogs warn the change will harm investment in the country.

Passed by the Georgian Dreamcontrolled parliament in June, the amendments seek to circumvent a 2012 Constitutional Court decision that opened up land to foreigners by banning them from ownership until 2014.

Previous to the ruling, foreigners could only own land in Georgia if they were part of a Georgian-related business.

While members of parliament have argued the measure is a temporary change designed to give the government the chance to determine how much agriculture land is now in foreign hands – and what investors are doing with it – critics believe it could torpedo development in sectors spanning from farming to energy.

The change, which prohibits foreigners from owning, inheriting or buying agricultural land in Georgia, has widely been seen as an uneven-handed attempt to quell rural concerns over

Mathias Huter, an analyst for Transparency International Georgia, notes that the nature of the amendment – which was passed quickly, against a background of media reports about tensions between Indian farmers and local communities in rural farming villages – raises questions about the parliament’s intent. “One problem that I see is that this law was passed very quickly, without really wider consultations and one could claim that it might be an initiative that is connected with the presidential elections – that the presence of foreign investors, especially maybe those with non-white skin in some of the villages,” he says.

Pavle Mgeladze, a spokesperson for the Ministry of Agriculture, stresses to bne that the change is merely a temporary measure to give the government time to design a policy that protects the rights of foreigners and the local community.

He notes that land ownership is a very “sensitive” issue in Georgia and that

“It is much bigger than just agricultural land, the implications are much bigger” the number of Indian immigrants purchasing Georgian farmland.

A wave of foreign farmers from India and other countries have purchased agricultural land in Georgia over the past year, building on the former government’s experiment to settle Boer farmers from South Africa to Georgia to invest in the land and improve local crop management.

Lawmakers have denied there is any xenophobic element to the changes, stressing that the amendment is intended to give the government

many farmers – even if they are not currently cultivating the land – do not want to see it cultivated by foreigners.

Mgeladze says the government is considering allowing foreigners to take out long-term leases on land instead of allowing direct purchases. The problem today, he notes, is that the government does not know how many hectares have been sold to foreigners over the past few years.

Leased Huter and Transparency International Georgia have formally asked the

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Illegal parking More public anger concerning transport in the Armenian capital as allegations surface that parking in the city and its revenues have been handed over to a unknown company owned by a close associate of Armenian President Serzh Sargsyan.

Still recovering from the fallout of a recent bus boycott over fares, Yerevan’s city government has managed to crash into another scandal as the privatisation of parking spaces in the capital – the solution to the growing problem of a lack of formal parking – had been awarded to an unknown company called Parking City Service.

According to Eurasianet.org, Armenia’s company registry shows that Parking City Service, founded soon after the mayor’s announcement to privatise parking, is owned by Tigran Michael Harutiunian, who is registered at the same Yerevan address as businessman Michael Harutiunian, a close ally and childhood friend of President Serzh Sargsyan. "The two Harutiunians appear to be one and the same," says Eurasianet.org.

“The truth is they would not let ordinary people interfere in this business. They would not let mere mortals into this field,” independent political analyst Yerevand Bozoia told Eurasianet.org.

“This sphere was supposed to be regulated by the Mayor’s Office, but, instead, it belongs to a private company, which earns billions [of drams] out of nowhere.”

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Constitutional Court to overturn the new amendment as a violation of the court’s previous decision, but it could take several years for the judges to issue a decision.

In the meantime, however, some investors are concerned the amendment will adversely impact a struggling part of the economy. Agriculture, once an engine for the Georgian economy, has dropped below 10% of the country’s GDP even though 46.8% of the population still live in rural communities.

Ketti Kvartskhava, a partner at BLC Law Office in Tbilisi, stresses that the amendments could have wide, unforeseen implications for investors.

She says that even though the amendments are not retroactive – foreign investors who currently own agricultural land will not lose it under these changes – it means they cannot expand their holdings, sell their land, or even pass it on as inheritance. The changes also complicate changing land status, so when investors need land for energy projects or any other type of development, they cannot purchase agricultural land unless the owner agrees to change its status prior to the sale. “It is much bigger [than just agricultural land], the implication is much bigger,” she says.

However, Mgeladze points out that there is no indication the change has impacted

investment in agriculture since it was put into force on July 19.

He adds that the government does not want foreign investors to be put off by this temporary change because “they are important" to the economy. “If an investor is really interested to come to Georgia, he or she can come to us and we will find a way to [work with them],” he says.

Some investors, like the Norwegian Clean Energy Group, have already taken the government up on that offer. Tornike Rijvadze, the company’s legal counsel in Georgia, tells bne the company received assurances the government would work with it to obtain land. “[The] amendments theoretically may delay the process of land acquisition but overall it doesn't prejudice our legitimate expectations,” he sats. “Therefore, the confidence is remarkable and we are committed to achieve our project development goals though one of the biggest FDI in the renewable energy projects in Georgia.”

Kvartskhava warns, however, that investors looking in from abroad may receive a different message. “Parliament has to clearly analyse what is the purpose of the law. If the purpose of the law is to, not to allow foreign investment in agriculture, this is the right way to do it. That is what they are accomplishing with this law,” she says.

“If an investor is really interested to come to Georgia, he or she can come to us and we will find a way to work with them”

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Tchiaberashvili, and pro-Saakashvili television director Nika Gvaramia. In addition, Tbilisi Mayor Gigi Ugulava has been charged (but not arrested) with money laundering and embezzlement while in office.

The cases caused alarm: western diplomats and even lawmakers in the US and EU have warned Ivanishvili about the nature of the arrests and the punitive undertones that colour the allegations against the men.

Judicial progress in Georgia?

There have also been countless missteps in how the police have handled the arrests, illustrated by the decision to arrest high-ranking Tbilisi officials on June 27 during Nato Secretary General Anders Fogh Rasmussen’s visit, even after the Nato chief underlined his own concerns about how the government was handling cases against former officials.

Molly Corso in Tbilisi

O

ver the past year, Georgian politics has been punctuated by a series of high-profile arrests.

For critics of the new government, the drumbeat of prosecutions and protests have underscored fears that the Georgian Dream coalition is more concerned about retribution than justice.

But on the other side there is growing belief that while the arrests have added to the political gridlock between President Mikheil Saakashvili and the new government, the changes being made to the judicial system could be one of the administration’s most successful reforms.

The Georgian judiciary has long been a swamp of political intrigue, corruption and conflicts of interest.

While President Saakashvili, a former minister of justice, campaigned on reforming the court system, the period from 2003 to 2012 when he and his United National Movement (UNM) government were in power together saw a super-charged prosecution and emasculated judges who routinely ruled in favour of the government.

The high percentage of guilty verdicts,

coupled with the country’s rate of incarceration, created a system where, once accused of a crime, defendants assumed it was better to strike a deal than end up in court.

Georgian's history of having the court system used as an extension of the government's own power added to fears that the new one led by the Georgian

However, a recent report by Transparency International Georgia suggests that once the cases get to court, politics appear to take a backstage to judicial process.

Due process From February until July, the Transparency International team observed court cases against Akhalaia, Merabishvili, Ugulava and many other

"Both the defense and the prosecution enjoyed equal opportunities to present their positions” Dream coalition, which defeated UNM in the 2012 parliamentary election, would wield the judicial process as a weapon against its political adversaries.

Indeed, almost as soon as they took power, Prime Minister Bidzina Ivanishvili and his Georgian Dream coalition started arresting Saakashvili’s closet allies, including former prime minister Vano Merabishvili, former defence minister and police czar Bacho Akhalaia, Kakheti Governor Zurab

former high-ranking officials – including Irakli Okruashvili, the former defense minister- turned-Saakashvili foe.

While the verdicts and sentences delivered against the men will be the final test of the courts’ independence and competence, a smattering of reports concerning the way the cases have been heard appears to support claims the new government might have achieved a rare judicial success in its handling of the cases.

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The Transparency International report found that, unlike when judges ruled on cases in the past, over the past six months “equality was

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Akhalaia and his defence team managed to beat some charges of abuse and torture in an unexpected court verdict on August 1 – a very public

"Once accused of a crime, defendants assumed it was better to strike a deal than end up in court" observed” between the defence and the prosecution. “Both the defense and the prosecution enjoyed equal opportunities to present their positions, and they could freely exercise the rights safeguarded by procedural legislation,” an English-language summary of the report notes.

defeat for the new administration that could, however, turn out to be a victory of sorts by creating a precedent for a more independent judiciary.

The judiciary, for better or worse, seems eager to prove its new power. On September 10, former foreign minister

Salome Zourabishvili lost her final appeal to overturn a decision barring her from running in the presidential election in October despite receiving public approval from Ivanishvili.

The case has special resonance since Ivanishvili is not even a Georgian citizen, as his citizenship was revoked by the former government through the courts prior to the 2012 parliamentary elections.

Zourabishvili, who has dual-nationality, tried unsuccessfully to argue against a law that bars dual-nationality citizens from becoming president based on the fact it does not prohibit them from running for office. She was supported by three election watchdogs, which agreed the law does not prohibit her from campaigning.

Kazakh ecommerce reaches turning point INTERVIEW:

Clare Nuttall in Astana

I

ncreasingly widespread broadband and mobile internet access have resulted in a critical mass of users in Kazakhstan, making it possible for entrepreneurs to launch profitable online businesses.

After several years building up Kazakhstan’s first online financial services aggregator, prodengi.kz, the company’s founder and CEO Alexei Sidorov is now expecting to double the size of his business by the end of 2013, launching several new ventures.

Sidorov and his wife Elmira Kadyrbayeva launched the prodengi site in late 2008, at a time when internet use in Kazakhstan was still relatively low. As a

result, the country’s online sector lagged behind developed economies, but in the five years since then both internet and banking services penetration have steadily grown.

After several years in the banking sector, Sidorov was looking for opportunities to launch his own business, but didn’t want to go down the typical route for Kazakhstani entrepreneurs of trading or importexport. “Starting an online business meant that I would not face the choice of either building a distribution network or being limited to one or two locations,” he says. “I also knew that Kazakhstan would definitely follow the path of other emerging markets where

internet penetration grows and people use the internet more and more.”

When the website, which allows users to compare banking and financial services products, launched, the business model had already been proven in other economies by companies such as the UK’s MoneySupermarket.com. Take-up has increased steadily, with prodengi now receiving between 8,000 and 10,000 unique visitors a day – due to a combination of both higher internet penetration and brand awareness.

“Comparing information about financial products is a common issue. Many people in this country have pretty poor financial literacy and always have

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problems finding information about banking products and comparing between banks,” says Sidorov. “What we need is for people to understand the basics of how to use the internet, have a fairly stable and preferably high bandwidth internet connection. Every year, penetration increases. Today, it is almost 50%, which represents a critical mass - enough people are using the internet for online businesses to be viable.”

In search of a business model Monetising the site was also an issue. prodengi initially focused on selling advertising, but swiftly ran up against managers at financial services companies who took a quantity-overquality approach, preferring blanket coverage and being unwilling to pay more for targeted advertising. prodengi later started offering online lead-generation services, where the banks paid only after people or companies completed their online forms. “Over the last two years we have made lead generation our primary source of revenues, and make more money from this than from advertising,” Sidorov says.

Competition remains relatively low; although a handful of local companies have launched in Kazakhstan, none of

Eurasia

them have the same brand recognition as prodengi. Russia’s Yandex Uslugi has entered the Kazakh market, but given Kazakhstan’s relatively small population, it has so far been overlooked by other major international players.

Sidorov is now looking at other areas to expand into, including moving away from just financial services to other comparison services such as coupons, which have recently become popular in Kazakhstan. “We have a long-term plan to convert the prodengi brand to something more, so people associate us with other ways of saving time and money,” he says.

In addition to building up prodengi, Sidorov is planning to launch two new internet startups in the near future, and has used his experience with financial services companies to launch Clickabilia, an online marketing consultancy. His workforce is set to double in size from the 12 people currently working for prodengi and Clickabilia, to between 20 and 25 across several ventures by the end of 2013. “Online businesses are growing very fast and I think now is the right time to build startups and develop new products,” he says. “I want to ride this wave of growth, not rest on my laurels, with just one or two companies.”

"Enough people are using the internet for online businesses to be viable"

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Opinion

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Ficoid and Zemanite

James de Candole of Candole Partners

A

ssume that President Zeman becomes the Czech prime minister in all but name after the October 25-26 parliamentary elections, with the CSSD, under an emasculated leadership, forming the next government in coalition with the Zemanites, and the Communists in the background. And assume that Slovak Prime Minister Robert Fico, whose governing SMER holds an absolute majority in that country's parliament, becomes the Slovak president in six months time.

These assumptions are reasonable ones to make today.

The politics of both countries are shifting away from an adversarial parliamentary system in which parties compete for power – however inconsequential that competition is in practice – to a system in which a single politician has become the most important arbiter.

The cause of this shift is the failure of the political parties to convince people that the differences between them are meaningful – that the competition is real. This has led voters to place their hopes for better government in the hands of someone that stands above the parties, or in the case of Slovakia, overwhelmingly in the hands of one party leader.

And can you blame them, however misplaced their hopes turn out to be?

The politics of both the Czech Republic and Slovakia have become precariously unbalanced. In the Czech case, whereas until now we have had too much equilibrium, epitomised by the long and profitable relationship between Vaclav Klaus and Zeman, soon we shall have too little. Zeman is exacerbating this understandable shift away from parties, whose ideological interests were long ago sacrificed on the altar of their uncontrollable greed.

In Slovakia, the absolute parliamentary majority held by SMER has allowed it to ignore altogether the five other parties represented in parliament. In the Czech Republic,

CSSD, KSCM and SPOZ together will likely win a comfortable parliamentary majority next month. And facing them will be at least another four parliamentary parties (TOP 09, ODS, ANO and KDU-CSL).

The dominance of Milos Zeman is resented by a large minority, concentrated in Prague. Likewise, the dominance of Robert Fico and SMER is resented by a relatively small minority, concentrated in Bratislava. Just how small a

"Both Czechs and Slovaks are facing the prospect of a presidential republic" minority will become clear next spring, when Fico is likely to run for, and to win the presidency, even if Iveta Radicova, the only person with any chance of reducing the size of Fico’s majority, decides to run against him, which is not at all clear.

Presidential republics Today, both Czechs and Slovaks are facing the prospect of a presidential republic in which the directly elected head of state effectively controls the government, which in turns dominates a fragmented opposition in parliament.

There are factions fighting for influence around both leaders of course. The closer Fico comes to announcing his presidential candidacy, the greater are the tensions within SMER, between the interior minister, Robert Kalinak, and the speaker of the parliament, Pavol Paska, both of whom want to succeed Fico as party chairman and prime minister in the event that he becomes president. Kalinak is best known for

Opinion

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his splendid mane; Paska for his arrogance. It was Paska who said he had not noticed anything significant happening on November 17, 1989, as he was too busy laying new tiles in his bathroom.

There are even rumblings of dissatisfaction in the Zeman camp. The unwillingness of Miroslav Slouf to be written out of the party history by Zeman’s new favourites suggests that not all Inner Party members are entirely happy with the growing influence of SPOZ vice chairman and businessman, Martin Nejedly.

But the significance of this infighting among their underlings should not be exaggerated. It is certainly no substitute for parliamentary democracy. None of these minions would dare commit the crime of even thinking that he could unseat the leader.

By November 17, 2014, 25 years after Pavol Paska was happy laying his bathroom tiles (he has built a lovely new house in the meantime) and ranking KSC member Miroslav Slouf was in a cold sweat, the politics of former Czechoslovakia will be dominated by two men, and both will be president.

If you want a vision of the near future, to misquote George Orwell, imagine President Milos Zeman planting kisses on the cheeks of President Robert Fico –for ten years.

"The politics of both the Czech Republic and Slovakia have become precariously unbalanced"

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Eurofinance’s 22nd conference on

The Third Annual TEAS Business Forum London Enhancing Azerbaijan’s Competitiveness and Business Climate

Designed to act as a platform to develop business networks and to highlight the wealth of business and investment opportunities that exist in Azerbaijan, the conference will focus on topics including: Agribusiness – Large-scale infrastructure projects – Energy issues in the region – ICT Industry Senior figures from the public and private sectors will participate.

– H.E. Fakhraddin Gurbanov – Ambassador of Azerbaijan to the UK – Shahmar Movsumov – Executive Director, State Oil Fund of Azerbaijan – Javanshir Feyziyev – MP, Member of the Committee on Foreign and Interparliamentary relations – Ilham Aliyev – Deputy Executive Director, The Azerbaijan Investment Company (AIC) – Tahir Gozal – Vice-president, Azersun Holding (TBC) – Rufiz Chiragzade – Senior Operations Officer, The World Bank – Shailaja Fennell – Lecturer, University of Cambridge – Mehmet Öğütçü – Chairman, Global Resources Corporation – Rufat Afendiyev – Director UK SOCAR – Al Cook – Vice President, Shah Deniz Development, BP

international cash and treasury Management 16 – 18 october 2013, cciB, Barcelona

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