bne newspaper april 25

Content: 2 Top Stories 6 The Regions This Week 11 Eastern Europe 12 Eurasia 15 Central Europe 21 Southeast Europe 24 Opinion

bne:Newspaper Follow us on twitter.com/bizneweurope April 25, 2014

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Anti-terror operation in Ukraine sees tension spike Harriet Salem in Sloviansk and Donetsk Kyiv lunched a renewed anti-terrorism operation in a bid to oust pro-Russian separatists on April 24. The move predictably raised tension, as Moscow swiftly warned of "consequences" and launched new military exercises on the border.

Russian President Vladmir Putin warned: “If the regime in Kiev has really begun to use the army against the country’s population then it is,

without any doubt, a very serious crime against their people." Moscow has regularly said it will be forced to intervene if Kyiv uses force against the separatists.

Russian forces promptly launched a new wave of military exercises in its southwest border regions.

See page 2

EU struggles for unity as it pushes against Russia's South Stream bne As the EU looks to step up resistance to Russian plans to build a massive new gas pipeline plugging it into Southern Europe, Bulgaria is leading opposition among member states set to host the route.

In a vote on April 17, a majority of MEPs voted in favour of ending the South Stream project, as well as backing EU economic sanctions against

Russia over its role in the crisis in Ukraine.

MEPs "called for EU measures against Russian firms and their subsidiaries, especially in the energy sector, and Russia's EU assets, against a background of violence designed to destabilise the east and south of Ukraine," says a European parliament statement. "Parliament is gravely See page 4

Top Stories April 25, 2014

Ukraine tension [cont.]

Nato claims more than 40,000 Russian troops have been massed on Ukraine’s eastern border for the past six weeks.

Washington was quick to offer support to the interim Ukrainian government. In a televised address, US Secretary of State John Kerry accused Russia of "distraction, deception and destabilisation", insisting there is clear evidence the armed separatists that seized buildings and towns in the east of Ukraine over the past few weeks are armed, trained and financed by Moscow.

Alongside repeated threats of more sanctions from the White House, Kerry urged Moscow to take action to calm the situation. "Not a single Russian official has publicly gone on television in Ukraine and called on the separatists to support the Geneva agreement," he said. In contrast, the US official praised Kyiv, which he said had honoured the agreement struck between Ukraine, Russia, the EU and US on April 17 that planned a way out of the crisis.

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have only listed one seriously injured and one dead. Another man is reportedly in hospital with serious injuries but "will live".

The attack has fuelled anger amongst the separatists who claim Kyiv's government is "fascist". Standing on the smouldering barricades, pistol-packing 35-year-old militia commander, Yevgeniy, vowed to avenge the assault. “We will line the road with their dead bodies,” the camouflage clad fighter told bne.

In a bid to keep the local population calm, Ukrainain helicopters scattered thousands of “survival guides” over Sloviansk and nearby Kramatorsk warning citizens that “Russian terrorists” were operating in the area, and providing instructions on how to save lives. Both the government in Kyiv and the rebels' leaders ordered schools and all but non-essential businesses to close.

CHANGES ARE GOOD

Second wave With the east descending into violence and thuggery – the separatists are reported to have committed kidnap and torture - Kyiv said it was forced to launch a second counter-terror assault on April 24. A previous attempt to oust the rebels was halted on April 16, when the resource-starved Ukrainian army was repelled.

On the morning of April 24, the Ukrainian military established a checkpoint on the outskirts of Sloviansk – a focal point in the stand off - and pushed a convoy of at least 10 APCs towards a barricade on the northwest of the city. But following a brief exchange of fire, the assault was quickly repelled when the pro-Russia militia set fire to a tyre barricade under attack.

Kyiv’s interior ministry claimed up to five separatists were killed in the attack, but the rebels

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Top Stories April 25, 2014

Lack of support Ukraine’s east has been rocked by unrest since the new administration took power in February following the flight of pro-Russian president Viktor Yanukovych. After the annexation in March of the Crimean peninsula by Russia, Moscow-aligned separatists seized control of state administration and security services in at least 10 towns and cities in the southeast. Both Sloviansk and Kramatorsk are entirely under the control of armed gunmen.

Surveys of public opinion from Ukraine’s southeast suggest the militia’s guerrilla tactics do not enjoy strong support. A recent poll by Kyiv Institute for Social Research found less than 30% of the local population support the occupation

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of state buildings by armed men. However, in Sloviansk and Kramatorsk, the rebel’s heartland, suspicion of the West and Kyiv is strong.

The new government in Kyiv and its western allies have accused Moscow of fomenting the unrest in a bid to justify Russian military intervention in Ukraine. In a response to the renewed counterterror operation, By the time sun set on Sloviansk on April 24, the Ukrainian forces were hunkered down behind their newly established checkpoint in Hlyboka Makatykha, 15km from the separatist barricade. Some media were reporting official sources as saying the operation had been halted due to growing concerns that a Russia invasion was imminent.

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Top Stories April 25, 2014

EU struggles for unity as it pushes against Russia's South Stream concerned about the fast-deteriorating situation and bloodshed in the east and south of Ukraine."

MEPs voted separately on a text on the South Stream project, which is planned to bypass Ukraine's pipeline network to carry 63bn cubic metres of gas per year under the Black Sea and through Central and Southeast Europe.

The approved text includes a statement that the parliament "takes the view that the South Stream pipeline should not be built, and that other sources of supply should be made available."

Brussels has long been at odds with Moscow over its plan for a twin for the Nord Stream route that began delivering gas to Germany in 2012, as it pushes to diversify its gas supply, mainly by tapping producers in the Caucuses.

The Ukraine crisis has only concentrated minds.

A spokesperson for EU Energy Commissioner Gunther Oettinger told Russian newswire ItarTass on April 19 that South Stream is "not a priority" for the EU. Family fight However, several EU member states have signed up to host the pipeline. The European parliament vote, which is non-binding, caused dismay in Sofia. Bulgarian Energy Minister Dragomir Stoynev said that the project should not be blocked for political reasons, and called on MEPs to consider the impact it could have on member states. "We will fight for the implementation of South Stream," Stoynev said.

Russia has suggested its standoff with Kyiv could see the gas taps turned off. That threatens to cut off the likes of Bulgaria - which imports almost all of the gas it consumes from Gazprom, with supplies routed via Ukraine - for a third time in

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eight years.

That patchy track record sees the 2,380km South Stream pipeline deemed of strategic importance to Bulgaria. The country does not yet have alternative connections to other countries in the region, although it may receive gas from Azerbaijan's Shah Deniz field via Greece after new pipelines come online in 2019.

"South Stream is a long-term infrastructure project of strategic importance. Now they want to stop South Stream. How are we to develop? This crisis at the moment shows that we do not have security of natural gas supplies for Bulgaria," Stoynev said, according to Reuters. "Bulgaria is part of the European family, meaning that we must comply with European policies. But solidarity is one of the key principles on which the European Union was set up. The European Commission should take into account of the negative effects for each member state of its future actions."

Stoynev added that Sofia would observe Brussels' decision, but "we will fight for a financial mechanism for the countries that will suffer losses from these decisions."

Leverage Brussels has been knocking heads with Moscow over both Nord and South Stream for some years, but clearly sees the project as a point of leverage as it seeks to react to Russia's annexation of Crimea in March. The EU insists Gazprom must respect its regulations, which demand access to the route for third party suppliers, and said late last year that it would force participating members to redraw contracts with the company.

The demand provokes anger and resistance in Russia. Energy Minister Alexander Novak insisted on April 18 that despite the European parliament's vote in favour of dropping South Stream, the project would still go ahead since it is already the subject of international agreements. "Russia continues realising the project in compliance with the intergovernmental agreements. The work

Top Stories April 25, 2014

cannot be suspended," he claimed.

The reaction of Bulgaria only emphasizes the leverage Russia enjoys in the eastern end of the EU thanks to its dominance of energy supplies.

That complicates Brussels' efforts to put together a united front.

Poland, for instance, is pushing for strong action.

Prime Minister Donald Tusk called on April 21 for the EU to form an energy union to create a single entity that would buy Russian gas, preventing Moscow from picking off individual member states. By way of contrast, Slovakia continues to drag its feet on piping gas from the

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bloc to Ukraine in a bid to help it weather Russian pressure, saying it needs guarantees that its own supplies will not suffer.

"It cannot be ruled out that the threat of another gas crisis in relations between Russia, Ukraine and the EU will be used by Moscow as a pretext for a more assertive expression of its postulates (which it has put to Brussels over the last few months) to revise energy cooperation between the EU and Russia, the main component of which is an exemption from the application of EU regulations to cross-border projects (mainly South Stream and Nord Stream)," suggests Szymon Kardas at The Centre for Eastern Studies.

The Regions This Week April 25, 2014

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Eurasia Turkmenistan continues dismantling expresident Saparmurat Niyazov's personality cult of "Turkmenbashi," replacing it with that of his replacement, President Gurbanguly Berdymukhamedov, who assumed the title of Arkadag ("Protector"). Several monuments to Niyazov, who died in 2006, and his family have been removed recently.

Sales of new cars have grown in Kazakhstan despite the February devaluation that saw the value of the tenge fall by a fifth against the dollar.

The Association of Kazakh Auto Business said sales of new cars – mostly imported - from official dealerships increased by 25% year-onyear to 34,474 in January-March 2014.

The agriculture ministry says membership of the Russia-led Customs Union has benefitted Kazakhstan's agricultural sector by opening up new export markets. According to figures from the ministry, Kazakhstan has exported agricultural goods worth about $1bn to the Customs Union in the last three years.

Turkmenistan's president has instructed the central bank to impose currency controls.

Gurbanguly Berdymukhamedov ordered oversight of the receipt of foreign currency by ministries and government agencies, as well as tightening banking supervision. Turkmenistan attaches great importance to maintaining a stable exchange rate, Berdymukhamedov said on April 24.

The population in Kazakhstan's northern regions is set to shrink, according to Labour and Social Protection Minister Tamara Duisenova.

By 2050, the population in the northern regions is expected to dwindle by 0.9m people, while the population of the southern regions will be almost four times larger than that in the north.

Quartz deposits have been discovered in Turkmenistan's north-west, the Oil and Gas

Industry and Mineral Resources Ministry said on April 24. A ministry statement said that the deposits, which are used in glass and silica brick production, are “truly inexhaustible”.

Trade turnover between Azerbaijan and the Netherlands amounted to $320m in 2013. Dutch companies, which invested around $180m in Azerbaijan last year, are mainly targeting the non-oil and non-financial fields.

North Caspian Operating Company, the embattled operator of Kazakhstan’s Kashagan has seen a change in leadership. The replacements of the chairman and managing director of the company, which saw production halted at the giant field shortly after its launch in 2013, came as it said production is now not expected to resume until late 2015.

A Kyrgyz official dismissed complaints about difficulties in trading with Customs Union countries as groundless. Economy Minister Temir Sariyev told journalists there is “no evidence” to back up the claims from local entrepreneurs.

Social networking sites contribute to the spread of false information, the Kazakh president's daughter claimed. MP Dariga Nazarbayeva told a media forum in Astana: "Events in the Ukraine have generated misinformation, the lion's share of which has been spread through social networks and blogs."

The Kazakh government has approved quotas for foreign labour for a number of priority infrastructure projects in 2014. These projects include the construction of an additional line on the Kazakhstan - China gas pipeline, the construction of the linear part of the Beyneu Bozoy - Shymkent pipeline, and the construction of the second and third stages of the Zhanazhol gas plant.

The Regions This Week April 25, 2014

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Central Europe Czech research centres are multiplying too fast, local media reports. Some 40 centres are being built with EU support, but it's clear that some are doomed, claimed Lidove noviny.

Hungarian PM Orban opened a new football stadium in his home village. The bill for the 3,500-seat Pancho Arena, next to the PM's home in Felcsut - a village of 1,750 - was footed by the state and companies with ties to Orban's Fidesz party.

spend more to "make Slovakia a country in which young people will want to stay".

France and Poland formally put forward a proposal for a European energy union on April 24, as part of efforts to counter the effects of heavy dependence on Russian gas by some states.

The proposal to head towards "the European energy community" will be discussed at a European summit on energy policy in June.

The Czech Republic and Poland quit their bids co-host Euro 2020. The applications to host games during the championship were withdrawn as the respective football associations failed to secure local government guarantees to UEFA.

Russia warned that Ukraine is eyeing a fuel pipeline to Hungary on April 24. Oil pipeline monopoly Transneft said Ukraine's courts are considering a claim to transfer control over the pipeline, which shipped some 1.7m of oil products last year, to the state.

Hungary's central bank is suing a member of its own supervisory board for slander. The MNB says Peter Rona told media that it had purchased art without legal authorization and voiced agreement with a recent press article entitled "MNB gifting money to cronies without restraint".

The Slovak government has approved a bill strictly regulating the sale of agricultural land to foreigners. The bill states that any purchaser must have been legally resident in the country for at least a decade. At the same time, plots over 20 acres must be offered to local buyers first.

The Customs Union may restrict the import of Polish apples, an official from Russia's state veterinary and phytosanitary service (VPSS) said on April 24, citing concern over the quality of food safety checks. Poland is the world's biggest exporter of apples and Russia and Belarus are its top two customers.

Hungary's central bank is pushing banks to buy more local-currency government debt in an attempt to reduce the country's high reliance on foreign financing. The MNB said that from August, two-week bills - its main tool for managing market liquidity - will be replaced with two-week deposits.

Hungarian state companies offer poor transparency, a survey of websites by the local office of Transparency International reported on April 24. The average score on a scale devised by the watchdog to measure public-sector enterprises' fulfillment of the legal obligation to make company data public was 46 out of 100.

With the recent introduction of a new legal instrument called a trust fund, the Czech Republic has become one of the few countries in Europe that can offer a vehicle that satisfies Islamic finance.

A memorandum on shipping some gas volumes to Ukraine from Slovakia could be signed on April 28, Slovak Economy Minister Tomas More than 70% of young Slovaks want to live Malatinsky said on April 24. However, following a abroad, a recnt survey found. The Strategy for meeting with Kyiv and Brussels, Bratislava reiterated Young People for 2014-20, which was approved by that larger reverse flows would require talks with the the cabinet on April 23, calls on the government to Russian side.

The Regions This Week April 25, 2014

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Southeast Europe Romania is trying to revitalise the privatisation process by launching a new department to handle state asset sales. Attempts to sell off several major companies flopped in 2013. Bucharest says it is determined to offload stakes in several of the country's largest companies, including utility Electrica and Posta Romana, this year.

The Bulgarian government will do everything possible to ensure the South Stream project goes ahead despite worsening relations between the EU and Russia, Foreign Minister Kristian Vigenin has said. Bulgaria imports around 100% of its natural gas from Russia’s Gazprom.

Montenegro's constitutional court ruled against a new mining law. A key clause in the law stated that the Montenegrin parliament has the right to make a final decision on the sale of Kombinat Aluminijuma Podgorica (KAP), which was declared bankrupt in 2013 and over which Podgorica is fighting with Russian oligarch Oleg Deripaska.

Kosovo’s parliament voted to set up a special war crimes court to handle alleged crimes committed by ethnic Albanian guerrillas during the country’s 1998-99 war against Serbia. MPs backed the plans at a sitting on April 23.

The EU has promised support for Moldova after the country signs its EU association agreement this year. French Foreign Minister Laurent Fabius said that Brussels would extend technical and financial support to Moldova, after Chisinau defied Moscow by going ahead with the deal.

US fund Anholt Investment has acquired around 6,000 hectares of arable land in northern Romania. Since Bucharest passed legislation allowing foreign ownership, around one third of the country’s farmland is now held from overseas.

Serbia’s gas pipeline operator may be in breach of EU rules, a European energy regulator has

warned. The European Energy Secretariat said it was considering whether Serbian pipelines were in compliance with unbundling requirements.

Turkey’s capital markets regulator has blocked a 1bn lira bond issue by Bank Asya, which is linked to Islamic scholar Fethullah Gulen’s opposition movement. The sukuk (Islamic bond) issue had previously been approved by the regulator but was halted due to “financial problems” at the bank.

Azerbaijan’s state oil company Socar is expected to sign a $3.5bn loan agreement for the construction of an oil refinery in Turkey in the near future. The head of the company’s Turkish unit, Kenan Yavuz, said in an interview with Bloomberg that the deal is due to be signed in May. A Chinese consortium is the only remaining bidder to build a new Bosnian power plant.

Bosnian energy company EPBiH said on April 22 that Hitachi has withdrawn from the race for the $1.16bn 450MW project, citing the political situation in Bosnia. That leaves an offer from China Gezhouba Group and Guandong Electric Power Design on the table.

Bulgaria’s construction sector returned to growth in 2013, after five years of contraction, according to the National Registry of New Buildings and Reconstructions. The most activity was recorded in Sofia and Burgas.

The Netherlands-based Damen Shipyards Group has put in a bid to buy Montenegro’s Bijela shipyard. The Dutch company is the only bidder for the asset, and Montenegro’s privatisation authority is currently considering whether its offer meets requirements.

Croatian food and retail company Agrokor has secured a ¤50m loan agreement from BNP Paribas Fortis. The Croatian company is close to finalising a deal to acquire Slovenia-based supermarket chain Mercator.

The Regions This Week April 25, 2014

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Eastern Europe The war of words over Ukraine's gas bill continues to escalate. Previously Russia claimed Kyiv owes Gazprom $2.2bn, but this week PM Dmitry Medvedev upped the bill to include last year's controversial take-or-pay clause. That has him insisting Ukraine's national gas company Naftogaz owes Gazprom $11.4bn – almost as much as the country's entire hard currency reserves

The founder of Russia’s largest social networking website fled on April 22. Pavel Durov left Russia a day after he claimed he was forced out of his post as CEO at VKontakte for refusing to share users’ personal data with Russian law enforcement agencies. The site is now controlled

by Kremlin-insiders - Rosneft CEO Igor Sechin and billionaire shareholder Alisher Usmanov.

Russia will launch a state-run internet search engine titled "Sputnik" this spring to challenge market leader Yandex and second placed Google. The ISE will be built by state controlled Rostelecom and be the default search engine used by state companies and government agencies.

Putin called for increasing Russia's military infrastructure in the Arctic this week, with a unified system of naval bases for ships and nextgeneration submarines to meet the challenges of a "dynamically changing" world that "is fraught with new risks and challenges to Russia's national interests, including in the Arctic."

Oligarch Petro Poroshenko could win the upcoming Ukrainian presidential elections in the first round, according to a new poll.

According to the survey by Socis, the chocolate magnate currently has 33% approval overall, while 48.4% of those determined to vote on May 25 would choose Poroshenko as president, close to the 50% threshold for a first round victory.

Russian Foreign Minister Sergei Lavrov took his first "selfie" this week. Smiling from ear to ear during an interview with the Kremlin-backed RT - in which he threatened Russia will act if Kyiv uses force to oust pro-Russian gunmen from eastern cities - the reporter showed him how take the smartphone self-portrait.

A poll found 51% of Russian's view Lenin positively. The percentage that see the leader of the Bolshevik Revolution "entirely positively" or "mostly positive" has grown dramatically from the 29% in 2006, the Levada Center found.

Russian films took in nearly RUB8bn at the domestic box office in 2013, as the number of movie-goers reached 35m people A total of 423 films premiered last year, of which 60 were Russian productions. Last year the Kremlin started actively supporting the domestic film industry.

US Army paratroopers arrived in Poland and the Baltics for military exercises this week. Pentagon press secretary Rear Admiral John Kirby said on April 22 that the exercises will last about a month, and initially involve about 600 troops. Russia also has some 40,000 troops on exercise next to Ukraine's border, according to Nato.

Russia will complain to the WTO if the west imposes sanctions on it, Prime Minister Dmitry Medvedev said on April 22. "We can show our teeth and we will turn to the courts, including to the Dispute Settlement Body within the WTO,” he said.

The Odessa refinery was seized from Russia's VTB Bank by a Kyiv court this week. The asset was gained by the state-controlled bank after Ukrainian billionaire Serhiy Kurchenko’s VETEK group of companies defaulted on a loan.

US Vice President Joe Biden offered Ukraine up to $50bn as a support package during a visit to Kyiv this week, according to reports. He told Ukrainian lawmakers Washington is ready to provide economic aid, but cautioned them to fight the endemic “cancer of corruption”.

bne Chart April 25, 2014

Much has been made in the recent years of crisis in Europe of the failure of EU membership to live up to the promises made to the populations in new member states. In the midst of economic hardship, populist politics has come to the fore by latching on to euroscepticism in countries such as Hungary and the Czech Republic.

However, with the ten-year anniversary of the accession of ten new members to the bloc coming up in May, data compiled by Erste Bank suggests that many of the CEE states that hitched their wagon to Brussels in 2004 have done better than they may have done going it alone.

In terms of pure economics, the analysts estimate that EU membership boosted annual average growth in the Visegrad Four countries (Czech Republic, Hungary, Poland and Slovakia) by around 1 percentage point. That's despite a significant drag from Hungary due to "policy mistakes" over the years.

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That leg up has helped them see strong income convergence over the past decade. GDP per capita in purchasing power standards has increased from 49% of that of the EU15 in 2003 to 65% in 2013.

Thus, the income gap between Visegrad and the old EU members has narrowed by one third.

Yet headline economic indicators are only part of the larger story. Three of the four Visegrad countries have jumped in the quality of life ranking, which measures elements such as life expectancy, income equality, crime and education. Slovakia, Poland and the Czech Republic are among the top five countries with the largest improvement in the index over the last decade, and the latter has even surpassed Italy and the UK. By way of contrast, and suggesting national policy is anything but dictated from Brussels, Hungarians have seen their quality of life decline the second most in the bloc, coming in just above Greece.

EU membership boosts quality of life in Visegrad

Eastern Europe April 25, 2014

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Russian stock market's 1000 is the new 500

bne Russia's stock market is down by almost 18% since the start of the year as the crisis in Ukraine has developed, hitting a low of 1098.55 on March 21 following the referendum in Crimea that opted for annexation by Russia.

The stock market plunge is reminiscent to the last huge selloff in the autumn of 2008 following the collapse of Lehman Brothers in the US. That saw the RTS fall from its all-time high of 2,487 set on May 18, 2008 to a low of 492 on January 23, 2010.

That selloff was driven as much by fear as anything fundamentally wrong with Russia's companies. And Sberbank's chief strategist, Kingsmill Bond, argues that the same thing is happening today.

"1,000 is the new 500," Bond said in a note in the middle of April. "Thanks to five years of decent return on equity and a higher oil price, the book value of the market has nearly doubled since 2008. This implies that, at this oil price, we are close to the valuation trough reached in 2009."

Everyone that follows Russian equities agrees that its stock market is ridiculously cheap, even by Russia's traditionally low standards. However, with Russian troops on maneuvers on Ukraine's border, the fear factor is back. In 2009 the fear was of an imminent global economic collapse (averted by the liberal use of quantitative easing); this time around it is fear of war (that hopefully will be averted by the Geneva accord signed April 17).

Russia-based analysts believe the market is oversold again. In 2010 as fears of the global meltdown receded, the RTS recovered to 1,500, marking Russia yet again one of the world's best performing markets. If war is avoided and a political compromise between primarily the US and Russia is secured, then the market could again rebound in a similar way. "Stocks trading at a P/E of less than 5 include Gazprom, Lukoil, Gazprom Neft, Aeroflot, LSR Group and state banks," says Bond. "And we expect an annual dividend yield of over 7% for the next couple of years from a wide range of stocks, including KazMunaiGas EP, Bashneft, Kcell and MegaFon." Russian dividend yields remain among the most attractive in emerging markets.

Still, it will be a while before Russian shares get anywhere hear their May 2008 peak again. The most painful damage done by the Ukraine crisis is the destruction of a fragile trust built up over the last two decades: while the two sides have never really seen eye to eye, no one believed the Kremlin would go as far as putting troops into play again now the Cold War is supposed to be over.

Bond believes that if peace can be brokered (presumably by German Chancellor Angela Merkel), "We believe that the RTS Index would even then struggle to exceed the pre-crisis level of 1,300, as there are long-term negative consequences for the economy and the market from recent developments."

Eurasia April 25, 2014

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Caspian states claim breakthrough on legal status close

bne Foreign ministers from the five Caspian littoral states achieved "significant progress" towards an agreement on dividing up the sea at a meeting in Moscow on April 22. There are now hopes that a deal could be struck later this year - paving the way for construction of a sub-sea pipeline to carry gas from Turkmenistan to Azerbaijan.

"We have reviewed the course of the work of the convention on the legal status of the Caspian Sea, and we have noted significant progress including the progress reached during our talks today," Russian Foreign Minister Sergey Lavrov was quoted as saying after the talks by RIA Novosti.

"We paid special attention to the fulfilment of those tasks that were adopted at the summit in Baku in the fall of 2010 and first of all, the issues of differentiation of marine territories, and we have a significant rapprochement on this matter," he added.

The rights of use of sea has been a bone of contention amongst the five littoral states - Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan - since the breakup of the Soviet Union in 1991. Its strategic position in the midst of an energy rich region makes it a lynchpin in the gas trade with Europe.

The EU has been promoting plans for a transCaspian gas pipeline from Turkmenistan to

Azerbaijan, where it would connect to planned pipelines to Europe via Turkey, in a bid to reduce European dependence on Russian gas. Moscow is opposed to the plan, citing the unresolved legal status of the sea.

The lack agreement has prevented projects to ship hydrocarbons from Central Asia to the west, allowing Russia to maintain control of gas headed to Europe. It has also eased China's push to dominate the region's markets.

However, there are now hopes of a breakthrough at an upcoming summit in September, when heads of state from all five countries are due to meet in the Russian city of Astrakhan. A treaty on the legal status of the sea and the delineation of maritime borders in the southern Caspian would also help Baku and Ashgabat solve the problem of the disputed Kyapaz (Serdar) oil field.

Turkmenistan and Azerbaijan have renewed talks on the trans-Caspian gas pipeline in recent weeks as plans for Western sanctions against Russia over the Ukrainian crisis are putting Russian gas supplies to the EU at risk.

Turkmenistan, which sits on the world's fourth largest gas reserves, has shown interest in diversifying export routes: it is already pumping gas to China via Uzbekistan and Kazakhstan and is in talks with Pakistan and India on building the TAPI pipeline via Afghanistan.

Eurasia April 25, 2014

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India flounders in Central Asia bne India's friendly diplomatic relations with Central Asia have not paid off in practical terms, with trade and investment still at low levels. Now that China and other rivals are firmly entrenched in the region, it may be too late for New Delhi to recover lost ground.

to Central Asia via Kashmir and Tibet has been blocked for more than half a century. Despite the signing of a ceasefire agreement in 2003, Kashmir is divided by the Line of Contact between Indian and Pakistani forces, with the northern part of the territory under Pakistani control.

India's lack of clout in the resource-rich region was starkly illustrated in 2013, when the Kazakh government blocked an attempt by OVL, the overseas arm of Indian state oil company ONGC, to buy into the Kashagan oilfield. Instead, the 8.4% stake in the giant offshore field that used to belong to ConocoPhillips was sold to China's CNPC.

"The main obstacle to developing relations with the region is the lack of land connectivity, which hampers both trade and access to energy resources," says Neelam Deo, director of the think-tank Gateway House. "India has banked too much on historical linkages and needs to be much more proactive in responding to outreach from these governments and in coming up with its own projects and plans."

Given its growing need for energy, India has not given up on the region. India is expected to become "increasingly import-dependent", according to the BP Energy Outlook 2030, published in 2013. Along with China and the Middle East, India is expected to account for nearly all of the global increase in oil demand in the next two and half decades.

To create an alternative to air transport, India is developing the Chabahar port in Iran, which would open up a land-and-sea route to Afghanistan then on to Central Asia.

China, on the other hand, borders three of the Central Asian republics, and Beijing has taken full advantage of its geographic proximity, supporting the entry of CNPC and other major However, India has so far failed to make much headway in accessing oil and other raw materials companies to Central Asian markets, issuing soft loans to Central Asian governments and flooding from Central Asia. The primary reason is the market with its manufactured goods. Most geopolitical. Less than 500 kilometres separate the Indian sector of Kashmir in the far north of the importantly, Beijing has rapidly invested tens of billions of dollars into pipeline infrastructure country from south Tajikistan, but the direct land route is blocked by two of the world's most volatile to carry Central Asian oil and gas to China; an and unstable territories. Establishing a direct land expanded Central Asia-China gas pipeline network spanning all five of the Central Asian republics is connection would hinge on peace taking hold in due to be completed within a few years. both Afghanistan and Kashmir, an unlikely event anytime soon.

Silk ties The future of Afghanistan following the withdrawal India, like China, has built upon its historic connection with the region dating back to before of international troops in 2014 is unclear, with the Silk Road era. However, this has not been the governments in both India and the Central accompanied by any great headway economically.

Asian republics fearing a return to violence and Indian investment into Central Asia has been instability. Meanwhile, India's traditional route

Eurasia April 25, 2014

modest, although there have been a smattering of deals including in the oil and gas sector: OVL acquired a 25% stake in Kazakhstan's Satpaev field in 2011, and struck a $1bn agreement to buy into Azerbaijan's Azeri-Chirag-Guneishi oilfields and the Baku-Tbilisi-Ceyhan pipeline the following year. The Indian company has also agreed to work with Uzbekistan's Uzbekneftegaz on upstream projects.

As India seeks to develop its nuclear power sector, India's Nuclear Power Corporation has secured access to uranium from both Kazakhstan and Uzbekistan. A handful of deals have been signed in other sectors such as Punjab National Bank's acquisition of Kazakhstan's Dana Bank and the reconstruction of Tajikistan's Varzob hydropower plant by India's BHEL. India is also pushing for the construction of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, which would allow both India and Pakistan to import gas from Turkmenistan.

Agreements on pricing have already been signed and Turkmenistan is pushing for a 2015 start date, though with the project hinging on a stable Afghanistan it is still not clear when - or if construction of the 1,680km pipeline will begin.

Despite these projects, overall the level of trade is "abysmal" given the friendly relations between India and the Central Asian governments, which have not translated into "pragmatic and practical progress", Professor Mushtaq Kaw, of the Centre of Central Asian Studies at Kashmir Univeristy, tells bne.

Missed opportunities While the lack of a land connection is the primary factor, New Delhi has also been less active than its competitors in the region especially during the years immediately after the breakup of the Soviet Union. India was in a relatively strong position at this time, thanks to the strong strategic partnership between India and the Soviet Union since the 1950s, and was quick to recognise the newly independent states.

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However, in the new "Great Game" that followed independence of these various states, other players such as China, Turkey and the US gained ground. Kaw points out that as a relative latecomer to the region, India allowed major companies, especially those from China, to reach out first. "By the time India had woken from its sleep, others were already there," he says.

Growing awareness of the importance of Central Asia to India is reflected in the adoption of the new Connect Central Asia strategy, intended to boost cooperation in both the economic and the security spheres, in 2012.

Deo argues the Indian government still needs to rethink its strategy towards the region. "India cannot compete with Russia and China because it has no land connectivity. However, India can add substance to the existing relationship by building on the cultural links and the goodwill it enjoys in the Central Asian republics. The nature of this relationship has to be different from what China enjoys due to geographical proximity and Russia has due to political linkages," Deo tells bne. "India's prospects in the region could be considerably improved if it worked together with Russia, which is not a competitor for access to energy resources in the region." India and Russia already plan to set up a free trade agreement between India and the Customs Union of Russia, Belarus and Kazakhstan.

Ironically, Central Asia and India may gravitate closer together at least diplomatically, as they face the common threat of a potential increase in regional instability after 2014. Countries to the north and south of Afghanistan fear a rise in militancy and a possible return of the Taliban after the withdrawal of international forces this year. India has already indicated closer security links with Central Asia, including through growing interest in entry to the Shanghai Cooperation Organisation which currently comprises Russia, China and the Central Asian republics.

Central Europe April 25, 2014

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Czech finance minister blasts plan to hand oil pipelines to Poles

Tim Gosling in Prague The powerful Czech finance minister insisted on April 24 that the country should not give control of its oil and fuel pipelines to a foreign company, potentially blocking a deal to hand the assets to Polish state-controlled refiner PKN Orlen.

Earlier this month, Prague confirmed that it is in talks with the company over a possible merger of the two companies - Mero and Cepro - with Ceska Rafinerska. The operator of the country's two refineries, which is 67.6% owned by Unipetrol - in turn controlled by PKN Orlen - would maintain control. The assets on both sides have long been at the centre of a background tussle.

However, Unipetrol appears to have taken the upper hand. It is reported to have made muchneeded investment into the Czech refineries dependent on a deal. The European refining segment is under huge pressure right now, and one of the key issues for the weak profitability of Ceska Rafinerska is the high fees charged by Cepro and Mero. Analysts at Erste Bank talk of "compelling pressure" to decrease capacity under current conditions.

Meanwhile, the company is reportedly ready to tighten its control of the refiner, which previous Czech governments had hoped to return to state ownership. Unipetrol bought Shell out of its 16.3% stake in January and is now reported to be in talks with Italian giant Eni on the remaining 32.4%. On April 24, Unipetrol reported that the increase of its shareholding in Ceska Rafinerska had pushed it to

its first quarterly profit since 2012.

The Polish-controlled company's tightening grip on Ceska Rafinerska appears to leave the Czech government with a choice: risk watching the country's refining assets reduced or risk handing control of its strategic oil pipeline operator to a Polish state-controlled company.

It was just over a year ago that Prague was forced to buy a share in the Transalpine pipeline (TAL), which carries crude from the Adriatic, as the country faced a virtual cut off from Russian oil supplies, with one of the two refineries forced to shut down for around a month. Central Europe's relations with Moscow have hardly improved in the meantime.

Czech Prime Minister Bohuslav Sobotka last week expressed his opposition to any deal on privatising Mero and Cepro. Finance Minister Andrej Babis suggested around the same time that fuel distribution, fuel storage, and petrol station network owner Cepro should definitely not be sold due to strategic reasons, but that oil pipeline operator Mero is up for debate.

However, the billionaire finance minister who has watched his power steadily grow since his new political platform Ano 2011 took power as part of a coalition with Sobotka's Social Democrats in January appears now to have remembered his bad tempered fight with PKN Orlen for control of Unipetrol around a decade ago.

Central Europe April 25, 2014

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"I believe that Cepro and Mero are strategic assets of the Czech state and certainly we will not want to privatise them or put them into some joint company.

That is my position," Babis told Reuters on April 24.

Cepro. There are commercial options, for example we have to consider also that Mero would buy the Kralupy refinery, as an asset, not as a company," he told the newswire.

The finance minister then sought to revive suggestions that Prague could turn the proposal on its head. Insisting he'll seek an agreement with PKN that would secure the long-term operation of the Czech refineries at Kralupy and Litvinov, as well as end disagreements between Mero and Unipetrol on fees for oil deliveries, Babis said one option is for Mero to take over the Kralupy refinery.

"As the refining marketplace in Europe is showing low profitability, there is a compelling pressure also to decrease Ceska Rafinerska capacity," Erste wrote in mid-April. "We expect several solutions: either PKN Orlen (via Unipetrol) buys out Cepro and Mero or PKN Orlen divests its refineries to the Czech state and agrees on the long-term supply to the petrochemical lines and retail. We like any of these changes as the current setup is not ideal and Ceska Rafinerska burns cash for the group in its current state."

"There are other possibilities how to resolve cooperation between Unipetrol and Mero and

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Prague's nuclear Hunger Wall

Nicholas Watson in Prague According to myth, the purpose of Prague's Hunger Wall built in the 14th century was not strategic but to employ and thus feed the poor.

On April 10, its modern-day equivalent, the ¤8bn-10bn expansion of the Temelin nuclear power plant, was finally demolished when the state utility CEZ announced the tender had been cancelled.

In the five years since CEZ announced what it claimed would be the Czech Republic's "most transparent" tender ever, the process had degenerated into such a fiasco that its cancellation was the worst-kept secret in Prague for over a year and appeared to have been only kept going in order to provide work for various officials and consultants.

"CEZ should have made the decision to cancel the project a long time ago – it would have saved tens of millions of euros of shareholders' money, as well as time and energy the bidders had to put in," says Jan Ondrich of Candole Partners, a Prague-based advisory firm that has been a long, trenchant critic of the project.

In its April 10 statement explaining the decision to cancel the tender, CEZ blamed the "turbulent" evolvement of the electricity sector in Europe since 2009. "While originally the project was fully economically feasible given the market price of electricity and other factors, today all investments into power plants, which revenues depend on sales of electricity in the free market, are threatened," it explained in tortured English.

However, the project's legions of critics have argued that it never made much sense, even before the incompetent politicians and officials managed to hole it completely.

Lack of support A report dating from as long ago as the beginning of 2012 by Candole Partners (which counts amongst its clients competitors of CEZ), estimated that the CZK200bn project to build two new reactors at the Temelin nuclear power plant had only a 46% chance of breaking even over its 40-year lifetime. That meant there was only a 54% chance the project won't be profitable. "If we were potential investors in the project, we would probably decline. Investors typically want a 95% ratio to be sure that they won't lose money," Candole's Ondrich said at the time. "This is like taking ¤8bn and betting on the flip of a coin whether it's heads or tails."

Clearly investors agreed because CEZ fruitlessly casted about for state support for years, before all hope was lost when the recently formed coalition of Prime Minister Bohuslav Sobotka sternly ruled it out on April 9. "We have clearly declared that we currently refuse any type of state guarantee. Nobody should be surprised at this considering the experience we have had with support to renewable sources, above all to solar power plants," Sobotka told reporters.

"Moreover, the development on energy markets is unpredictable to a maximum extent, and the government can hardly pledge to guarantee electricity prices."

Central Europe April 25, 2014

Indeed, wholesale power prices in next-door Germany have plunged 34% since 2010 from over-capacity and falling fuel costs. On March 25, data compiled by Bloomberg showed Czech power for 2015 had dropped to its lowest level since the contract’s start in June 2012. And analysts say there is little prospect of prices rising soon given the huge expansion of wind and solar in Germany, as well as low hard coal and carbon prices, which make coal a more attractive fuel for power generators.

Given the deteriorating economics of the project, its supporters began to lean on arguments about energy security, but these too were undermined by murky decisions taken by officials in government and management.

Ejected The worst was the shocking move by CEZ in 2012 to eject France's Areva from the tender, which left only the US-based Westinghouse Electric and a consortium led by Russian state nuclear holding Rosatom in the race. CEZ airily said Areva had "failed to meet statutory requirements" and "not fulfilled some other crucial criteria defined in the tender", though subsequent leaks of documents called this into question.

According to bne sources, the decision to eject Areva was on the instructions of the office of the previous president Vaclav Klaus, a notorious interferer with a penchant for taking high-handed decisions, even in cases where he had no right to do so.

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Areva was furious and set about contesting the decision through the courts, which had the effect of stalling the tender and making any decision to choose a winner nigh-on impossible. On April 17, Areva announced it was suspending its legal action in light of the tender being cancelled.

With Russia's subsequent annexation of the Ukrainian peninsula of Crimea and its continued backing of militant groups in eastern Ukraine, the decision to eject Areva also meant that Westinghouse by default became the only possible winner of the tender. "Personally, I cannot imagine that Russians will continue to take part in the tender to expand Temelin because a country that uses military aggression in foreign policy is a security risk for the Czech Republic as well," Jiri Dienstbier, minister for human rights, said on March 3 – a view shared by several of his colleagues.

Temelin redux Westinghouse and Rosatom expressed dismay at the tender's cancellation, though it was widely greeted with relief by investors in CEZ. But for the nuclear industry and the myriad other parties – both official and unofficial – that benefit financially from such projects, CEZ's chief executive Daniel Benes offered a sliver of hope that they would not go hungry for long.

"It does not mean that we have stopped nuclear power plant construction in the Czech Republic," he said in a statement. "[The] risk that within 20 years we will not be able to cover [electricity] consumption of our country is still acute."

Central Europe April 25, 2014

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Architect of global VAT scam claims Slovak politicians, police abetted fraud

Tom Nicholson in Bratislava A key Slovak witness in a multi-million-euro international VAT fraud case has told police that top members of the Slovak ruling Smer party, the Tax Office, police and the secret service knew of the scandal and profited from it financially, bne can reveal. The revelation is sure to cause further consternation in the EU, which in its latest AntiCorruption Report released in February found Slovakia to be generally perceived as the most corrupt country in the EU. According to sworn testimony that remains part of a confidential police investigation but obtained by bne, Milan Chovanec, 36, a lawyer from the eastern Slovakia city of Presov, has implicated MP Stanislav Kubanek, Deputy Interior Minister Jozef Bucek and the former head of the elite anti-organized crime unit, Michal Kopcik, in a cross-border fraud spanning five years from 2006 to 2011. The officials have denied his claims.

and involved over 100 Slovak, Czech, Polish, Latvian, Hungarian, US and Irish companies.

These companies, investigators claim, dealt in gold bars, bricks, oak flooring, platinum, oil and other goods in a classic "carousel" scheme.

Such VAT scams typically involve the re-export of goods across international borders. As the goods cross each frontier, the exporter can demand the return of VAT paid. In fraudulent "carousel" transactions, either no goods are actually shipped, or the consignments are traded among shell companies until they wind up back with the original exporter, completing their "carousel ride".

Since coming to power in 2012, the Smer party-led government of Prime Minister Robert Fico has targeted VAT crime for special police attention, claiming that widespread fraud is costing austerity-straitened state coffers hundreds of millions of euros annually. A new electronic VAT audit system, introduced earlier this year, revealed the size of the problem: of over 14m VAT transactions reported in January, 1.7m were identified as “risky” by the Tax Office. Officials identified 108 previously unknown “carousel” schemes involving over 800 companies.

Chovanec made the allegations over the course of dozens of police interviews in January and February 2014, transcripts of which have been seen by bne. Police regard the Presov lawyer as one of the main architects of the fraud, and took him into pre-trial custody in November 2011. To date, 45 people have been charged in the case with tax and racketeering offences, with another 40 regarded as suspects. Damages are pegged at ¤20m, but according to unofficial estimates could “For the first time, we have an accurate picture exceed ¤50m. of VAT anomalies and of networks where the entire VAT sum disappears,” said Tax Office head Frantisek Imrecze April 15. “Our response to this Carousels information will be swift.”

According to the police indictment in the case, filed in 2012, the tax fraud revolved around the Slovak company Tatra Trade Corporation (TTC) However, senior police and prosecution sources

Central Europe April 25, 2014

tell bne that aggressive investigations, like that of Chovanec’s TTC, could unearth more embarrassing links between suspected VAT scammers and highly-placed Fico administration officials in the months to come.

Police protection According to information from sources connected to the TTC investigation, Chovanec decided to talk after two years in custody in the hope of being released to provide financially for his young child and common-law wife, Katerina Simcikova of Prague, who has also been charged in the case. According to transcripts of Chovanec’ testimony, he told police that he hoped that if his evidence proves authentic, he will receive a reduced sentence. He remains behind bars. bne attempted to contact Simcikova, but her number has been disconnected.

In his testimony, Chovanec alleges that his TTC company came early to the attention of the police, but that far from prosecuting him and his associates, Michal Kopcik as head of the UBOK elite racketeering unit during the first Fico government of 2006-2010 agreed to protect the gang in exchange for a share of the proceeds. "In return for providing me with 'police supervision', he [Kopcik] received quarterly payments of at least ¤10,000 each," Chovanec told police. "Our cooperation began in 2007, mainly with regard

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to TTC's dealings in gold bars. Kopcik helped to thwart the work of the police anti-fraud unit."

Kopcik rejected Chovanec's claims. "These accusations are pure lies. I intend to file a libel complaint," he said in a statement when approached for comment by bne.

Chovanec told police in jailhouse interviews that his activities also attracted the attention of ostensible "fixers", such as a man he described to police as "Miroslav", and who promised to help him have accomplices selected as heads of local tax offices to facilitate further tax crimes. "Miroslav had contacts to people who worked in Banska Bystrica (the seat of the national Tax Office) and who comprised a group of top Tax Office bureaucrats, police and secret service officers, people who could influence decisions taken by these institutions," Chovanec claimed in his testimony.

"The Banska Bystrica group had detailed information on TTC and its business activities and partners, meaning that at any point they could have launched Tax Office audits and police arrests against me and my business partners.

They also had detailed information about my personal life and the lives of my associates."

Chovanec claims to have paid hundreds of thousands of euros in bribes and extortion money to Miroslav and his group.

Southeast Europe April 25, 2014

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Internal power struggle threatens Slovenia's newfound stability

Guy Norton in Zagreb Arguably the last thing that Slovenia needs right now is another bout of political uncertainty.

But that's just what threatens to happen if the country's prime minister, Alenka BratuĹĄek, loses a crucial vote at the congress of her Positive Slovenia party on April 25.

In a graphic illustration of the unfortunate tendency of Slovenian politicians to put personal pride and ambition ahead of national interest, Bratusek is being challenged for the presidency

by Positive Slovenia founder Zoran Jankovic, who claims that the party he created in October 2011 has lost its way under Bratusek and that it has failed to do enough to kick start the moribund Slovenian economy.

Jankovic, mockingly referred to as Jay-Z by his political opponents, is currently serving his second term as mayor of the Slovenian capital Ljubljana and is looking to regain the leadership of Positive Slovenia despite his political credibility being increasingly called into question as a result of a number of corruption and abuse-of-office allegations levelled against him.

For her part, Bratusek has threatened to resign the premiership if she fails to secure the backing of the Positive Slovenia party faithful on April 25.

The intra-party election at the congress is the culmination of hitherto low-level tensions between pro-Jankovic and pro-Bratusek factions within Positive Slovenia, which have been simmering ever since Jankovic called for an election congress to elect a permanent president last October – a

move that was postponed until now by the party's leadership in an attempt to avoid political instability.

Outcome uncertain In the run-up to the vote the outcome remains highly uncertain. Jankovic, who led it to victory in the December 2011 parliamentary elections, reportedly still enjoys widespread support in the party, being viewed as a father figure who rapidly established Positive Slovenia as a political force to be reckoned with in 2011. That's something that even Bratusek acknowledges, with the prime minister telling Slovenian daily Vecer: "The fact is that with him and because of him we won the elections at the end of 2011."

However, Jankovic's sometimes overbearing manner and rumours of financial shenanigans have often made him persona non grata with potential allies. Thus, although Positive Slovenia emerged as the largest party in the 2011 general election with 28.8% of the vote, Jankovic failed to garner enough cross-party support to assemble a coalition administration.

Subsequently, Janez Jansa, leader of the Slovenian Democratic Party (SDS), was able to cobble together a right-wing alliance that relegated Jankovic to the role of the leading opposition figure in Slovenia.

Both Jankovic and Jansa were subjects of damning findings in a report compiled by Slovenia's Corruption Prevention Commission in January 2013, which found that both men had

Southeast Europe April 25, 2014

failed to properly account for the source of some of their financial assets.

While the findings of the country's anti-graft watchdog led to the collapse of Jansa's SDS-led centre-right administration, Jankovic's political fortunes also took a turn for the worse when potential political partners of Positive Slovenia insisted on his withdrawal from the helm of the party as a pre-condition for holding talks on forming a centre-left administration.

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broadcaster Pop TV, only 21% of 700 respondents rated Bratusek's government a success. That's the worst result in the whole of her 13-month rule, although it's still considerably better than the 13.6% mark registered by the preceding Jansa-led coalition when it fell last February.

On balance, therefore, the Slovenian political blog Sleeping with Pengovsky argues: "On the whole, in April 2014 PM Bratusek is much more in charge than she was in July 2013 [when speculation about a potential political challenge from Jankovic first This allowed Jankovic's one-time political protégée surfaced]". When asked at the weekend whether she thought she would defeat Jankovic's political Alenka Bratusek to assume both the leadership of Positive Slovenia on a pro tempore basis in January challenge she told Vecer: "I believe, I will." last year, as well as take charge of a centre-left Nonetheless, Bratusek's position within her own coalition government which was formed in March party was recently weakened when a handful of 2013. In both instances the relative political novice Positive Slovenia MPs voted against the party line Bratusek was spared the challenge of facing in support of an opposition motion – ultimately elections for the position of Positive Slovenia unsuccessful– to dismiss Interior Minister Gregor president as well as prime minister of Slovenia, Virant, leader of the coalition party Civic List, over becoming the first woman to hold the post. an expenses scandal. As Virant has long been an outspoken critic of Jankovic, the mini-rebellion Holding it together within the Positive Slovenia ranks was widely So far the 44-year-old, an economist by training, regarded as having being engineered by Jankovic. has managed to hold together an at times fractious coalition administration, which as well as Positive Slovenia comprises the Social Democrats, For his part, Jankovic has maintained that his victory in the April 25 vote should not preclude the Democratic Party of Pensioners (Desus) and Bratusek from continuing to lead the government the Civic List (DL) party. Indeed, she has thus far for the remainder of its term until 2015. However, defied the SDS' infamous prediction on Twitter Bratusek has rejected that interpretation of events that the lifespan of her government would be as and said she would refuse to serve as premier of a short as the hemlines of her skirts – a reference party headed by someone facing various corruption to Bratusek's preference for above-the-knee charges. Bratusek's three coalition partners have skirts, which in the stuffy world of Slovenian expressed similar reservations. "I expect Bratusek politics ranks as a racy choice. will resign immediately if Jankovic is elected," What's more, Bratusek has successfully steered a Meta Roglic, a political analyst at daily Dnevnik told Reuters, adding: "As it is very unlikely that another much-needed banking sector rehabilitation plan coalition could be formed within the present through parliament that also received the allimportant approval of the European Commission, parliament, we can expect an early election in late September or October." which has forecast that Slovenia might actually emerge from recession this year, after the Consequently, a Jankovic victory would most likely country's economy shrank by 1.3% in 2013. mean the third government collapse in four years and yet another early election, the second one in a However, in the latest monthly public opinion row following the 2011 vote. poll conducted by Slovenian daily Dnevnik and

Southeast Europe April 25, 2014

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Serbia's PM-elect promises cabinet "surprises"

bne Serbian President Tomislav Nikolic officially handed Progressive Party leader Aleksandar Vucic a mandate to form a new government on April 22.

Vucic promised "surprises" as he puts together a cabinet to push through his promises of reform.

just 44 seats. SNS now plans to invite SPS and the Alliance of Vojvodina Hungarians - which represents Serbia's Hungarian minority in the north - to join the new government.

The cabinet is also expected to include nonpartisan figures. However, there are not yet Although the Progressives (SNS) have enough any clear indications as to who will hold the key seats in the new parliament to rule alone, Vucic positions in the new government. Vucic, who has announced plans to form a cross party began his career as an ultra-nationalist hawk but coalition in order to ease the passage of tough has since reinvented himself as a pro-European new austerity and reform measures promised anti-corruption campaigner, told journalists that during the election campaign. The new cabinet which is expected to include opposition leader and there would be "big surprises" in its composition. outgoing Prime Minister Ivica Dacic - is due to be Speaking to journalists in Novi Sad, Dacic claimed announced on April 27. the cabinet list has not yet been drawn up, and that talks are set to continue over the coming Speaking at a press conference after meeting days. "As soon as the future prime minister is with Vucic, Nikolic said the appointment marked ready to make the information public, he will do the "beginning of huge responsibility and work so," the departing PM said. under constant public scrutiny". Stressing that he "sincerely" congratulates Vucic on the election The centre-right SNS had been in government in victory, the president warned that it is now the hard work starts. "Honestly speaking, I would not partnership with SPS since 2012. However, facing want to be in his shoes, as Serbia is facing serious opposition from the Socialists to his attempts to bring in austerity measures and reform the challenges," he said, according to B92. economy, Vucic moved to take advantage of high poll results to force a snap election in March. "[H]ardly anyone received such a mandate under more difficult circumstances, especially after the bad decisions made in 2007 and 2009, because of The major mid-term target is to secure a new which the state has a high deficit and the economy deal with the International Monetary Fund (IMF), which has called for an overhaul of the is not functioning," Vucic told the press. public sector and pension system, in order to reduce the budget deficit and state debt. Vucic's The Progressive Party achieved a landslide in government is also expected to embark upon a the the March 16 elections, taking 158 of the 250 new wave of privatisation following IMF calls for seats in parliament. Dacic's Socialist Party of Serbia (SPS) led the last administration as senior loss-making state firms to be sold off or shut down. partner in a coalition with SNS, is left holding

Opinion April 25, 2014

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Turkey attempts to secure Russian energy

Stratfor The threat of a Russian natural gas cut-off to Ukraine has lit a fire under Turkey, one of Moscow's biggest energy clients. Roughly 60% of Turkey's natural gas supply comes from Russia through two primary routes, and 12.5% of that supply could be at risk if Russia punishes Ukraine and its downstream customers. Rather than pushing Turkey into a desperate and urgent search for alternatives to Russian energy, the events in Ukraine are forcing Turkey to consider ways to solidify its energy relationship with Russia.

uncomfortable with having to depend so heavily on Russia for its energy supply in such a volatile region. Turkey remembers well the energy disruptions that resulted from Russia's invasion of Georgia in 2008, when Azerbaijan lost its transit route through the Caucasus to reach Turkey.

Turkey was also affected by Russia's natural gas cut-offs to Ukraine in 2006 and 2009.

With Turkey now facing yet another potential energy disruption over a conflict between Russia and its neighbours, one might assume that energy-hungry Turkey would start pursuing alternative energy Turkey was among the 18 countries that options to secure its energy supply. But for now, Russian President Vladimir Putin addressed Turkey seems to have come to terms with the April 10 in a now infamous letter to Europe. In enormous challenges attached to its diversification that correspondence, Putin laid out a lengthy options. Rather than identify Russia as the and sober explanation of the $2.2bn in debt problem, Ankara is depicting the Europeans as the Ukraine owes Russia and highlighted the main consequence of Ukraine's refusal to pay Russia for big thorn in its energy security plans while taking its natural gas supply: Russian state firm Gazprom the opportunity to cosy up to Russia. would have to resort to the "extreme measure" of Turkey has thus come out with two proposals, reducing natural gas flows to Ukraine. As Putin both of which entail avoiding the Europeans and explained, such a move would then raise the risk dealing with Russia directly. that Ukraine would siphon off the natural gas for itself and thus deprive customers further Two streams downstream, including Turkey.

The first proposal is for Russia to increase energy shipments through the Blue Stream gas pipeline, Turkey's core economic hub in the Marmara which runs directly to Turkey. Russia could region receives roughly 12.5% of its natural gas increase shipments from 13.6bn cubic metres from a pipeline that runs from Russia through (cm) to the pipeline's maximum capacity of 16bn Ukraine and the Balkans to reach Turkey. The cm. In addition, Russia and Turkey could choose rest of Russia's natural gas supply to Turkey to dust off plans to build a line paralleling Blue travels through the Blue Stream pipeline, which Stream. runs under the Black Sea. Turkey has long been

Opinion April 25, 2014

The second Turkish proposal is for Russia to re-route the 2,400-kilometre South Stream pipeline so that it makes landfall on Turkish soil in the Thrace region instead of on Bulgarian soil. South Stream would allow Russia to transport up to 63bn cm of gas to Europe without having to traverse Ukraine. The planned route would start in Russia (where construction has already begun), run through Turkish waters in the Black Sea, make a land connection in Bulgaria and then split northward to supply Central Europe and southward toward the Mediterranean through Greece and Italy. This is first and foremost a Russian-European pipeline designed to circumvent Ukraine. This is not a pipeline designed to feed Turkey. From Russia's perspective, Turkey's energy needs can be taken care of through Blue Stream and any subsequent expansions to that line.

But Turkey is now trying to alter the logic of South Steam altogether, first by attempting to convince Russia that the Europeans are only going to create problems over South Stream with the Ukraine conflict in play. Instead of facing more delays from EU bureaucrats on this project, Turkey is proposing that Russia direct ample amounts of gas to Turkey, which will gladly consume it while Russia and the Europeans hash out their differences. Once the European-Russian conflict blows over, interconnectors from Turkey could then be built to extend into Europe. That way, the Turkish logic goes, Turkey secures more Russian gas without having to worry about European disputes while positioning itself as a powerful transit state.

Such a proposal would not sit well with the Europeans waiting to receive this gas. The South Stream consortium has already said it would not tolerate higher costs and further delays entailed in a re-routing. Bulgaria has already begun creating legal loopholes to try to bypass potential interference from Brussels and ensure that the project continues as planned. Russia will also

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likely prioritize keeping the current route through Bulgaria to maintain its leverage with Europe and isolate Ukraine's dependence on Moscow.

At the same time, Russia will be very interested in securing more market share for its energy in Turkey through an expansion of Blue Stream.

Alexander Medvedev, the deputy head of Gazprom, will be in Ankara on April 21 to discuss these plans.

Turkey's non-Russian energy options will meanwhile remain weighed down by a number of political, logistical and financial challenges. So far, Ankara seems unwilling to incur the costs of unilaterally importing a few hundred thousand barrels per day of Kurdish oil from Iraq against the wishes of Baghdad, Tehran and Washington.

Israel's attempts to link Turkey into its eastern Mediterranean energy network still depend on Turkey and Cyprus reaching a peace deal. An increase in Iranian energy flows through Turkey is still years out as Tehran tries to rehabilitate itself.

Azerbaijan already is planning for 6bn cm of gas from its Shah Deniz II offshore fields to reach Turkey within the next three to four years (and has 10bn cm contracted for Europe). But any significant increase in energy flows through the Caucasus route would depend largely on Azerbaijan being able to unlock the politically and technically contentious Trans-Caspian route to channel supplies from Turkmenistan, Uzbekistan, Kazakhstan and potentially Iran against Russia's will. Other domestic considerations, such as attracting investment to boost coal production and build more expensive liquefied natural gas import terminals and re-gasification facilities, will also come into play. But they depend on investors being comfortable enough with Turkey's political mood swings to put money into large projects with long payback periods.

Russia remains Turkey's primary energy patron.

And it appears for now that both Ankara and Moscow will work to keep that relationship intact.

Weekly Lists April 25, 2014

bne:Investor First stage of Ukrainian GTS modernization to cost $3-4 bln - energy minister

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businessneweurope I Page 26

The first stage of the modernization of the Ukrainian gas transport system (GTS) will cost $3-4 billion, Ukrainian Energy and Coal Industry Minister Yuriy Prodan has said.

Interfax

"About $3-4 billion will be required for the first stage of the modernization," he told reporters in Kyiv on April 23. He recalled that Ukraine had sent a proposal for the joint operation and modernization of its gas transport system to companies in the European Union and the United States.

Kazakhstan looks to boost grain exports to China and Iran

Kazakhstan aims at raising exports to both the Chinese and Iranian grain markets, a senior official said on April 23, adding that infrastructure to support the bid is now underway to support a strategy that looks to reduce dependence on Russian and Ukrainian ports.

bne The two countries are already among the largest importers of Kazakh grain, Nurbek Dairbekov, head of Kazakhstan's stateowned grain trader Food Contract Corporation, told journalists. With Iran set to see imports of Kazakh grain rise from 345,600 tonnes to 1.2m, the Persian country will account for 14% of total exports during the 2013-14 marketing year. Supplies to China are expected to more than double to 370,000 tonnes.

The targets are dependent on infrastructure projects, both within Kazakhstan and in the region. The jump in exports to Iran is thanks to the launch of a rail link between Iran and Kazakhstan via Turkmenistan would help Kazakh grain exports to Iran. Astana now plans to build a grain terminal on the border between Turkmenistan and Iran, he added.

The state grain trader also plans to build grain terminals on the border with China to increase supplies to the Asia-Pacific region.

Astana hopes to use China as a route to supply customers in Southeast Asia.

Gazprom eyes rise in European gas demand Ria Novosti

Russian energy giant Gazprom expects to boost its gas exports to Europe, where demand for gas imports is expected to rise longterm as regional extraction drops, the company said Tuesday.

At a meeting on Tuesday, Gazprom's board of directors discussed prospects for the international gas market, geopolitical issues and ways to increase energy independence.

Gazprom believes there will be an increased demand for Russian natural gas in Europe due to an expected broader use of natural gas fuels in the future for vehicles and maritime transport.

Weekly Lists April 25, 2014

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure.

For more information, please visit the website at www.bne.eu.

businessneweurope I Page 27

bne:Deal

Hungary's partially state-owned MOL is set to acquire 124 petrol stations in the Czech Republic from Italy's Eni, local media reported on April 23, quoting unnamed sources.

Hungary's MOL reportedly acquires Czech petrol station network from ENI

MOL will hand over the non-operating Italian Mantova refinery in Italy, as well as a handful of petrol stations in the country, in return for the network of Agip-branded Czech outlets, Hospodarske Noviny reported. Eni and MOL declined to comment.

bne

MOL will operate 273 petrol stations in the Czech Republic after the deal, making it number two on the market. The Benzina chain controlled by Poland's PKN Orlen, currently operates 340 locations.

ENI is also in talks to leave its stake in the Czech Republic's sole refiner, Ceska Rafinerska, which the Italians could sell to PKN Orlen.

Analysts at Erste suggest the deal would prove positive for MOL, which closed the Mantova refinery and transformed it into a product deposit in 2013. "Therefore, a 'non-working' asset would be transformed into a working one."

Gazprom seals deal to buy share in Hungarian oil field

Russia's Gazprom Neft has approved the acquisition of a 50% stake in RAG Kiha, registered in Hungary for oil and natural gas production. The RAG Kiha shares will be bought by Nafta Industrija Srbije (NIA), a Gazprom unit in Serbia.

Portfolio.hu NIS reached an agreement with RAG Hungary to December 2011 to jointly explore and develop the Kiskunhalas field in southern Hungary. A year later, another deal was made, allowing NIS to buy out 50% of RAG Kiha and thus acquire 50% of the latter's license for the "Kelebia block".

Rosneft may cancel acquisition of Kyrgyz airport holding Alfa Bank

Vedomosti reports that Rosneft may cancel plans to acquire 51% of Manas International Airport, which comprises 10 airports in Kyrgyzstan, including its two largest in Bishkek and Osh. The decision came after protests in Kyrgyzstan against selling the stake to a Russian company.

We reiterate that in February Rosneft considered spending of $1bn, including on this stake purchase as well as on investments in some joint projects. It was not fully clear how Rosneft planned to capitalize on the deal to own part of an airport that has very little to do with its core business. It would be better if Rosneft focused only on the refueling areas of these airports.

Weekly Lists April 25, 2014

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure.

For more information, please visit the website at www.bne.eu.

businessneweurope I Page 28

bne:Banker

The Budapest City Court is requesting Hungary's Constitutional Court to annul the Savings Bank Integration Act, which it believes is unconstitutional.

Budapest court asks for savings bank integration to be annulled

The appeal to the Constitutional Court was announced in courtroom today by the judge hearing a lawsuit brought by the National Savings Cooperative Association and an individual plaintiff against the State of Hungary and co-defendants. The plaintiffs filed for compensation for damage caused by legislation.

Portfolio.hu In the court's legal opinion, the Savings Bank Integration Act constitutes several counts of violating shareholder rights, is incompatible with the principle of fair competition, has interfered with the ownership structure of TakarĂŠkbank, and therefore an annulment is necessary in a manner that makes it possible to restore the original conditions.

Russia's VTB mulls shrinking New York office

VTB Capital, Russia's largest investment bank, is considering cutting most of its New York staff if the U.S. imposes further sanctions over the conflict in Ukraine, two people with knowledge of the plan said.

Bloomberg The bank is reviewing whether to wind down its trading operations in New York, where it has about 40 employees, and leave just a representative office, the people said, asking not to be identified because a final decision hasn't been made. The state-run company has already cut 100 overseas jobs this year, mainly in London and New York, one of the people said.

Hungary rules out eviction ahead of forex loans resolution bne

The Hungarian cabinet on April 23 announced it will prohibit any kind of eviction until a final resolution is agreed on the country's problematic forex loans. A new relief scheme for borrowers has been on the drawing board for months, but is not expected until the autumn, after the judgment of Hungary's top court.

Analysts at Erste see the move as negative for the country's battered banks, which have already seen non-performing loans elevated by the government's promise that it will force the banks to offer them respite on payments, if not entire contracts. The removal of the option to evict is only likely to further antagnise that trend, and thus raise the NPL ratio across Hungary.

Weekly Lists April 25, 2014

bne:Credit Russian finance ministry guides for recession in 2Q14 Alfa Bank

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For more information, please visit the website at www.bne.eu.

businessneweurope I Page 29

Ahead of the government's discussion on the macro forecast, which is expected to take place in the coming weeks, the Finance Ministry presented its cautious view on the near-term economic trends.

The ministry said that after adjusting for seasonality, Russia's GDP dropped 0.5% q/q in 1Q14 and will keep contracting in 2Q14, which would be a recession by definition.

That said, a couple of considerations prevent us from taking the news too negatively: First, seasonally adjusted q/q estimates are not closely followed by the market in Russia, while more relevant y/y growth is still possible in the coming quarters. There is still a chance that Russia's GDP will show some modest growth for full-year 2014.

Secondly, the Finance Ministry's negative guidance on economic growth reflects its concerns on poor revenue collection and thus seems to be a justification of its opposition to budget rule easing, which the government is also discussing.

EU deficits drop, debt increases, in 2013 Eurostat

In 2013, the government deficit of both the euro area (EA18) and the EU28 decreased in absolute terms compared with 2012, while the government debt rose in both zones.

In the euro area the government deficit to GDP ratio decreased from 3.7% in 2012 to 3.0% in 2013, and in the EU28 from 3.9% to 3.3%. In the euro area the government debt to GDP ratio increased from 90.7% at the end of 2012 to 92.6% at the end of 2013, and in the EU283 from 85.2% to 87.1%.

Germany was close to balance, and the lowest government deficits were recorded in Estonia (-0.2%), Denmark (-0.8%), Latvia (-1.0%) and Sweden (-1.1%). Ten Member States had deficits higher than 3% of GDP: Slovenia (-14.7%), Greece (-12.7%), Ireland (-7.2%), Spain (-7.1%), the UK (-5.8%), Cyprus (-5.4%), Croatia and Portugal (both -4.9%), France and Poland (both -4.3%).

Lithuania's 2015 euro bid on track as EU budget criteria met

Lithuania pushed ahead with plans to adopt the euro next year as the European Union statistics office confirmed that the Baltic nation's debt and deficit levels are in line with the bloc's targets.

Bloomberg

The Lithuanian government brought its deficit below the euroadoption limit -- 3 percent of gross domestic product -- to 2.2 percent last year from 3.2 percent in 2012, Eurostat in Luxembourg said today in a statement. State debt fell to 39.4 percent of GDP from 40.5 percent. Euro aspirants' debt must be less than 60 percent of GDP.

Weekly Lists April 25, 2014

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure.

For more information, please visit the website at www.bne.eu.

businessneweurope I Page 30

bne:Stocks

A Ukrainian court has seized an oil refinery in Odessa, the country's third largest, the Ukrainian Interior Ministry said on Tuesday.

Ukraine court seizes Odessa refinery

It cited an investigation into fuel duty fraud but gave few details.

The plant has also been at risk of being drawn into the bitter confrontation between Ukraine and Russia.

Reuters

Ownership of the refinery is in question after a report it had been acquired by a Russian bank and the Ukrainian government which took power following the overthrow of the Kremlin-backed president in February has said it wants control of the refinery.

Slovakia to fast-track change on privatisation act to push Slovak Telekom listing

The Economy Ministry is proposing to change the privatisation act in order to enable Slovak state to sell its shares of Slovak Telekom on the stock exchange.

Slovak Spectator

Carlos Tessara further reduces stake in Poland's Alior Bank bne

The majority owner of Slovak Telekom shares, the Deutsche Telekom company, was promised that the sale via the exchange will start before this summer, the Sme daily wrote in its April 22 issue.

A memorandum on cooperation stipulates that Slovakia shall start looking for an investment bank as advisor on the transaction as soon as this month.

Controlling shareholder the Carlos Tessara Group sold a 4.7% stake in Poland's Alior Bank in an accelerated book build on April 23, raising PLN260.7m. The block trade, led by UBS, priced the 3.3m shares at PLN79 each, a 6.9% discount to the closing price of PLN84.87 on the day of the sale, and only just above the bottom end of the initial pricing of PLN78.93-82.32.

The Italian investment vehicle of Franco-Polish billionaire Romain Zalewski has now reduced its stake to 26.2%, and has until the end of 2014 to exit the bank after Poland's stern financial market regulator KNF agreed in January to prolong a deadline by 12 months due to market conditions. Carlo Tassara pledged ahead of the December 2012 IPO of Alior in Warsaw that it would sell its entire 34% stake to a strategic investor by the end of 2013.

The group now faces a 90-day lock-up on its remaining shares.

Analysts suggest the latest SPO will only make disposal of the remaining stake more difficult.