bne:Newspaper - October 17, 2014 by Ben Aris

Content: 2 Top Stories 6 The Regions This Week 11 Eastern Europe 13 Eurasia 15 Central Europe 19 Southeast Europe 23 Opinion 26 Lists

bne:Newspaper Follow us on twitter.com/bizneweurope October 17, 2014

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Russian central bank plays it cool as ruble falls to historic low bne The ruble dropped to another historic low this week - as the price of oil plunged to its lowest mark since 2010 - passing the RUB41 per dollar mark on October 15. However, analysts said Russia's central bank is not panicking because ruble weakness is bolstering manufacturing growth and budget revenues. Russia's central bank has already spent $54.9bn out of its foreign currency reserves since the start of 2014, bringing its reserves to a four-year low

$454.7bn, but only around $220bn of that is in hard currency cash. "Analysts are debating whether the central bank should intervene more than its current policy allows or perhaps stop intervening, amid claims that it is wasting its foreign currency reserves," Sberbank CIB analysts wrote, as quoted by the Moscow Times. "If intervention continues at the See page 2

American banks put Central Europe subsidiaries up for sale bne GE and Citigroup of the US have put some of their Central European operations up for sale, in a sign of their reduced focus on the region. Citigroup will quit 11 small markets for retail banking, the US banking giant announced on October 14, including Hungary and the Czech Republic. The sizeable retail operation in the

former - which has little exposure to forex debt is likely in particular to whip up interest. Citigroup called the move "strategic action … to accelerate the transformation of Global Consumer Banking (GCB) by focusing on those markets where it has the greatest scale and growth See page 4

Top Stories October 17, 2014

Russian central bank plays it cool as ruble falls to historic low current pace until year-end, Russia's foreign exchange reserves could fall by around another $40bn," they added. Three months of import coverage for Russia considered the safe level of central bank reserves to defend against a currency crisis - comes to $75bn, according to International Monetary Fund figures - meaning that Russia can currently finance nine months import coverage from cash reserves, and if converting bullion reserves to hard currency, one and a half years, “which is still likely ample for the central bank to manage the rouble as it sees fit, barring a major crisis of confidence,” according to Standard Bank's Tim Ash. In 2015, the central bank is set to move to a free floating ruble, which - if it goes ahead – will end the bleeding of reserves, but at the risk of the fall of the ruble panicking the population "The CBR is not panicking either in terms of the scale of its intervention - verbal or direct - or rate hikes," said Ash in a research note. "They appear comfortable with ruble weakness - seeing this as an escape valve for market concerns and also a likely kicker for growth," Ash explained, adding that Russia had been suffering from a phenomenon known as 'Dutch disease' - meaning large hard currency revenues from oil and gas exports cause excessive appreciation of the domestic currency, making local manufacturing uncompetitive. "They appear comfortable both with the extent and pace of ruble weakening at present," Ash underlined. Russia's top economic thinkers are against defending the currency. "Holding the ruble at one level or another carries with it serious risks for

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the economy," said German Gref, head of Russia's largest bank, state-owned Sberbank, as quoted by RIA Novosti. Backers of a weak ruble as part of the Kremlin's much touted import substitution growth policy will be bolstered by September's manufacturing results showing a 2.8% on the year in industrial production, following zero growth in August, although some of this growth is the result of September 2014 having one extra working day than September 2013. "We believe that import substitution thanks to the weak ruble will moderately support Russia's manufacturing," wrote UralSib analysts, listing food, machinery, chemicals, plastics, textiles, and wood processing as likely beneficiaries. A weaker ruble also takes pressure off the budget coming from slower than forecasted growth, say analysts, since around half of Russia's budget

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Top Stories October 17, 2014

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revenues come from hard currency export revenues from oil and gas exporters.

Analysts said the finance ministry could auction as much as $5.7bn.

Chris Weafer of Macro-Advisory, argues that the falling oil price and rouble remain eminently manageable for Russia. Even with oil at $80 and the ruble-dollar exchange rate at RUB41.50 he predicts that the federal budget would likely run a deficit of approximately 2.5% of GDP. “Hardly the sort of scenario which would crash the economy or kill public support for the president,” he wrote in a column for bne.

"A fairly large amount of hard currency has accumulated on the treasury accounts and together with the central bank we can bring this on to the market to supply more liquidity," Siluanov said, as quoted by Interfax.

With the Central Bank playing it cool, it was left to the finance ministry to provide some support. Finance Minister Anton Siluanov announced his ministry would hold foreign exchange deposit auctions in the coming weeks, to ensure demand for foreign currency on the part of banks was met.

An expected interest rate rise from the central bank in October will, however, further contribute to economic slowdown, warn experts. Russian inflation is expected to rise on the back of devaluation, prompting the central bank to hike rates.

While bad for investors, how the fall in the ruble plays out for the manufacturing sector is a moot point. According to HSBC economist Alexander Morozov, "the overall situation in manufacturing However, the positive effect on the budget of ruble looks rather stable”. Some import substitution effect is expected to support domestic producers, devaluation will be mitigated if an ongoing drop in the price of oil continues. The price for a barrel although car manufacturers have experienced a fall in demand of around 20% since the start of the of Brent crude oil fell to a fresh four-year low year as consumers postpone big ticket purchases of $83.9 per barrel on October 15, following the because of uncertainty. Budget retailers who stock biggest one-day fall in the price of oil since 2011. more Russian produce have on the other hand The price of oil has dropped by more than 20% had a 20% spike in sales. since peaking in mid-June.

Top Stories October 17, 2014

American banks put Central Europe subsidiaries up for sale potential". The disposals are expected to be completed by the end of 2015. In Central Europe, it is notable that Citi won't be giving up its foothold in the Polish market, despite its local unit Bank Handlowy lying outside the top three in terms of market share. In Hungary, because of the rough treatment handed out to the banks from the government since Prime Minister Viktor Orban took office in 2010, bank valuations have plunged. Battered by high sectoral taxes and the forex relief scheme, some banks have looked at leaving but found interest only from the state, or close friends of the government. Despite closing three of its branches to leave it with just 10 last month, Citibank Magyarorszag is one of the better performing banks in Hungary, according to Protfolio.hu. In particular, its low loan exposure looks attractive right now given the uncertainty on the market, while deposits are also healthy. One of the largest players in Hungarian private banking - Citi managed the sixth largest asset portfolio and had the second-largest number of accounts, according to a recent survey - Citi should have little trouble offloading the unit, suggested Portfolio's analysts. Most of the universal banks in Hungary would be interested, they suggest. They add that market sources claim several potential buyers are already queuing up. In the Czech Republic, divestment will likely prove more straightforward. Citibank has just 10,000

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clients, focussed on premium personal banking services, with credit cards another major plank of the business. Ceske Sporitelna, Komercni Banka and Sberbank are all open to look at any potential acquisition in the Czech Republic, spokespeople told Aktualne. cz. A day after Citigroup’s announcement, BPH announced in a filing on October 15 that GE is considering selling its 89% stake in the bank, and has informed KNF of the plan. It added that GE has hired advisors for the sale of the Warsawlisted lender. Bloomberg suggests the holding is valued at about PLN2.8bn. GE is trimming financial arm GE Capital, and sold its Nordic business in June. “BPH is a well-run bank with a stable balance sheet and strong capital position,” spokeswoman Susan Bishop, told Bloomberg via e-mail. “The bank would be better positioned to realise its full potential if it was aligned with a company that had a strong commitment to its business plan and growth strategy.” However, Polish regulators have reacted furiously to GE’s announcement, insisting that the US conglomerate has yet to fulfill its obligations as a strategic investor. Poland's banking regulator patrols the sector with something of an iron fist. It has regularly clashed with foreign giants on the market, especially through the global financial crisis, as it has issued tough conditions on M&A and clamped down on dividends heading out of the country to parent groups. It has also made certain to attach strong conditions to any major acquisitions, and in a statement suggested GE has failed to live up to those placed on its 2008 purchase from Pekao of BPH, which PAP reports is the country's 14th largest bank by assets.

Top Stories October 17, 2014

"KNF attaches great importance to the fulfilment of commitments by majority shareholders of banks, especially those commitments that have not been fulfilled," the regulator said in a statement. "Any potential unilateral actions of a shareholder, without seeking KNF's consent, could form a basis of supervisory action against the investor not fulfilling the commitments."

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country's biggest banks have regularly said they are keen to take part in a coming wave of sales.Â

However, that will not necessarily put off the country's largest foreign-owned banks from seeking a leg up in their race to catch top banking dog PKO, according to local press reports. The list of potential bidders reportedly includes Spanish giant Banco Santander, which created Many have credited KNF's stern approach with the country's third largest lender last year when it completed a merger of Kredyt Bank into BZWBK, keeping the Polish sector stable. But others complain it is holding back development. In as well as BNP Paribas, Credit Agricole, Societe particular, it has insisted that it would oppose Generale and Deutsche Bank. Analysts at Erste further consolidation of the sector, even whilst the suggest BZWBK is the likely front runner.Â

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The Regions This Week October 17, 2014

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Eurasia Armenia will become a member of the Russialed Eurasian Economic Union (EEU) in 2015. An agreement on Armenia's membership of the free-trade bloc was signed at a summit of the heads of the member states in Minsk on October 10. The Russian, Kazakh and Belarusian leaders signed a treaty on the establishment of the EEU in Astana in late May. As a member of the EEU Armenia will receive 1.13% of customs duties on goods imported to the member states. The share of Belarus will fall to 4.65% from 4.7%, the share of Kazakhstan will drop to 7.25% from 7.3%, while Russia's share will be reduced to 86.97% from 88%. Kazakhstan, Russia and Belarus currently collect import duties in a centralised manner and then divide them according to the countries' respective shares. The Minsk summit endorsed a package of measures for Kyrgyzstan to bring its legislation to in line with the requirements of the EEU. Kyrgyzstan is now expected to sign a membership agreement in 2015. Kazakhstan's economy increased by 4% in the first nine months of 2014. This is below a government target of 5-6% for the whole 2014. The government says it may revise economic growth forecasts for this year. An Ontario court has frozen Kyrgyzstan's share in the Kumtor gold mine, after the government failed to pay $118m in damages to Stans Energy. A Moscow arbitration court ordered the government to compensate for seizing the firm's licence to develop a rare earths deposit. The Kyrgyz government owns a third in Kumtor and has been trying to increase its share to 50%. Kumtor accounts for 50% of the country's industrial output and 10% of GDP.

Azerbaijan intends to screen foreigners temporarily residing in the country for HIV. Parliament is also debating amendments to cancel multi-entry visas issued for one year. Kazakhstan will increase a minimum retail price of a pack of cigarettes in 2015.The price will go up to $1.1 for a pack of 20 cigarettes. The government set a minimum retail price of cigarettes at $0.8 in 2014, up from $0.7 in 2013. Kazakh anti-smoking campaigners say the price is very low and call for tobacco taxes to go up by 200% a year to bring the price to $4 per pack. Azerbaijan, Georgia and Turkey are about to complete the construction of the Baku-TbilisiKars railway line (BTK). The trial of the line is scheduled for the end of 2014. Kazakhstan and Afghanistan show interest in transporting their goods along the new line. Kazakhstan, Turkmenistan and Iran will launch a railway line linking the three countries in November which could further be joined with the BTK. GM Uzbekistan, an Uzbek-US joint venture, decreased sales of cars in Russia by 27% yearon-year to 31,653 units in January-September 2014. Its sales fell by 64% year-on-year to 2,350 cars in September 2014. The share of GM Uzbekistan in Russian market stood at 1.8% in January-September 2014 against 2.1% in the same period of 2013. Georgia has protested Russia's proposals to sign a treaty on allied relations and integration with the breakaway region of Abkhazia. President Giorgi Margvelashvili believes this treaty will deteriorate the military-political situation and will pose a security threat to the entire region. This treaty is yet another step against Georgias sovereignty and territorial integrity, President Margvelashvili said.

The Regions This Week October 17, 2014

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Central Europe US-Japanese company Westinghouse has offered to fund the expansion of Temelin. Suitors continue to line up ahead of the expected re-launch of the ¤10bn tender. When it was cancelled in April, Westinghouse was in a run off with Russia's Rosatom, which had earlier offered financing. Deutsche Telekom has been fined ¤70m for breaking competition law in Slovakia. The German telecom was found guilty of exploiting its dominant market position via Slovak Telecom. Bratislava is currently trying to sell its minority stake in ST.

hacks said they fear for their editorial freedom under the financial group, which has fought the paper over accusations of corruption and undue influence on the government. Estonia and Latvia, alongside Finland and SEE countries are the most vulnerable to a cut in Russian gas supplies to the EU, Brussels said in a report on gas stress tests. However, energy commissioner Gunther Oettinger admitted such a scenario is unlikely, with the main risk being a reduction in supplies via Ukraine, which would relieve the pressure in the north.

Hungary's MOL may return to bid for oil & gas Laimdota Straujuma will continue as Latvian assets from DEA, local press reports. Russian PM despite her poor performance during the oligarch Mikhail Fridman had agreed to pay recent election campaign. The three-party RWE ¤5.1bn for the upstream assets in Norway, coalition involving her liberal-conservative Unity Egypt and the UK, but London has blocked the party won the vote with 58%, and President deal. Andris Berzins said this week he would give her the task of forming the new government. CEZ and Tirana confirmed the settlement deal over Albanian distribution assets, this Sanctions have trimmed around 20% from week. Tirana will pay the Czech utility around Slovak food exports to Russia. The Ministry ¤100m – the same as it cost CEZ originally – to of Agriculture reported the food embargo put to bed a bitter fight between the pair. The introduced by Moscow in July has cost the deal is part of an ignominious end to the Czech industry ¤6.2m thus far. However, it added that company's former vision of building a CEE it is braced for spare supply arriving on its giant. market from other EU states. Hungary's Wizz Air is in talks with a state RBI is doing well everywhere but Hungary and fund to power expansion in Russia. Jozsef Ukraine, the Austrian bank's finance head said. Varadi, CEO of the low-cost airline, offered no CEE's number two lender said last month it details on the talks with the Russian Direct could lose as much as ¤500m this year because Investment Fund, which was set up by the state of problems in two specific markets. to encourage investment. Eurozone inflation dropped to its lowest in five years in September, as it fell to just 0.3%. Hungary and Poland were amongst the biggest contributors to the stall in prices, with both stuck in deflation yet again. Journalists at Slovak newspaper SME quit in protest against its proposed sale to Penta. The

Almost 70% of Czech firms agree with sanctions against Russia, according to a poll by bank CSOB, which surveyed 500 companies in September. The same ratio said the sanctions have not caused drastic losses.

The Regions This Week October 17, 2014

Southeast Europe Boiko Borisovâ&#x20AC;&#x2122;s GERB party, which took the largest share of the vote in Bulgariaâ&#x20AC;&#x2122;s October 5 elections, has struck a coalition deal with the nationalist Patriotic Front. However, GERB still needs to bring at least one other party on board to form a majority in the new parliament. Russian President Vladimir Putin arrived in Serbia on October 16 for a brief visit dominated by discussions over the South Stream pipeline and Russian-Serbian economic ties. Putin also attended a military parade and remembrance ceremony, marking the 70th anniversary of the liberation of Belgrade.

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Smaller renewable energy companies in Romania are expected to start filing for bankruptcy after the government slashes incentives for renewable electricity generators earlier this year. The changes to the green certificates scheme have also dented investor confidence in Romania. Romanian President Traian Basescu has accused Prime Minister Victor Ponta of being a former undercover intelligence officer. Ponta, who is likely to become Romaniaâ&#x20AC;&#x2122;s next president in the November 2014 election, said the accusation was "all lies".

The Romanian economy is expected to grow by around 1.5% this year, down from 2.6% in At least 19 UK-registered companies are under 2013, a senior central bank official said October suspicion of involvement in the laundering of 14. Lucian Croitoru, counselor to the governor of around $20bn in Russian funds via banks in the National Bank of Romania (NBR), attributed Moldova and Latvia. An investigation by The Independent newspaper and the Organised Crime the slowdown in growth after Romania's 3.6% and Corruption Reporting Project (OCCRP) reveals expansion in 2013 to significant problems in the eurozone, where the country's main trading that UK companies owned by murky offshore entities played an important role in the laundering partners are located. scheme which spans numerous jurisdictions. Macedonia moved a step closer to delaying planned electricity sector liberalisation on Albania and Serbia will both be punished by Uefa after fighting broke out between players and October 13, when legislation was approved by fans at a Euro 2016 qualifying match in Belgrade. the parliament's energy committee, despite opposition from the EU Energy Community. At a A drone dragging a flag with Albanian slogans flew into the stadium during the match, provoking session on October 13, the parliament committee on energy backed government plans to amend the fight. the law on energy, and delay liberalisation of the electricity market until July 1, 2020. European Commission President-elect JeanClaude Juncker has approved the nomination of The Croatian government will launch a new Slovenian Deputy Prime Minister Violeta Bulc attempt to find a strategic investor for national as an EC member. A previous nominee, former flag carrier Croatia Airlines in November. Zagreb Prime Minister Alenka Bratusek, was rejected. wants to sell of 49% of the airline, which is Azerbaijan's state oil company Socar is looking at struggling to maintain market share despite an ways to increase its investments into Romania, ongoing restructuring programme. where it already operates a network of 30 petrol stations. Hamza Karimov, CEO of Socar Romania, indicated on October 14 that the company is looking at potential upstream investments.

The Regions This Week October 17, 2014

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Eastern Europe Russia is on course to freely float the ruble from next year, the central bank's governor said. The ruble has been falling constantly in recent weeks, making all-time low records at each step. The currently was trading at RUB41/$1 at the time of writing and is down almost 20% YTD, driven down by falling oil prices and stagnant economic growth. The ruble also hit a new all-time low against the euro of over RUB51.20 per euro on Monday. Wrangling over Ukraine's gas bill continues. Russia offered easier repayment terms this week, asking for an upfront payment of $1.4bn instead of $2bn on a total $5.4bn bill. Ukraine rejected the deal as it would have included the tacit acceptance of the $394 per thousand cubic meters Russia is asking, but includes a $100 "discount" to the price agreed in the 2009 deal. Ukraine is holding out for $269 and formally applied to the Stockholm Arbitration court to resolve the matter, but has already earmarked $3bn for gas payments. Chinese and Russia agreed on a project to build the first stage in a high-speed Moscow-Beijing railway, which will run from Moscow to the regional capital of Kazan.

Ukrainian Finance Minister Oleksandr Shlapak said that the cost of rebuilding the war-torn regions of eastern Ukraine will come to $2bn. Tim Ash at Standard bank estimates the war has cost Ukraine a total of $42bn and Russia over $100bn (if lost revenues are included to actual costs). President Poroshenko's For Petro Poroshenko Bloc is riding high in the polls with 33.5% and is on course to win the largest share in October's parliamentary elections. Oleh Liashko's Radical Party, PM Arseniy Yatsenyuk's People's Front, former Regions party member Serhiy Tyhipko and Yulia Tymoshenko's Batkivchyna are all also over the 5% threshold needed to entre parliament in the polls. The Russian consumer rights protection service banned imports of all cheese products from Ukraine. It based its decision on four pieces of cheese products that did not correspond to Russian standards or labelling rules. Much of the cheese comes from the Ukrainian plants of Milkland, one of the biggest exporters of cheese to Russia.

About 500 rightwing protesters clashed with police outside Ukraine's Rada demanding a law recognise controversial World War II-era guerrilla resistance groups -- the Organization of Ukrainian Russia's Avtovaz, maker of the Kalina (the Nationalists (OUN) and Ukrainian Insurgent successor to the iconic Lada) has been forced to alter its design to prevent cats from crawling into Army (UPA) -- as national heroes, though they collaborated with the Nazis. Government figures the engine compartment to keep warm in the winter, leading to some nasty surprises for owners. claimed the action was organised by the Russia intelligence services. The Moscow Commercial Court has fined a McDonald’s The average Muscovite earned about RUB50,000 restaurant for selling unmarked toys. The restaurant ($1,200) a month this year, as wages in all sectors in Moscow must pay RUB100,000 ($2,500), because the toys didn’t have a date of manufacture stamp, increase but fall behind the double-digit pay rises of recent years. Wage growth in all sectors of the which is an administrative offence. city's economy will exceed inflation, likely to strike Ukraine’s parliament submitted a bill suspending 7.5 to 8% for the year. the CIS treaty (Commonwealth of Independent Russian spending on luxury goods tumbled 7% States). The bill was initiated by the right wing at constant exchange rates this year and are Svoboda party. Ukraine would follow Georgia if it down 18% at current exchange rates on the back exits the CIS. Georgia withdrew after a short war of the falling ruble. with Russia in 2008.

bne Chart October 17, 2014

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Ukraine, Belarus and Kazakhstan on Diverging Paths took the bold step of a voluntary devaluation early this year which has softened the blow somewhat, but going into the winter season, industrial recovery never really got going and has tuned negative in the last few months. The failure to Because of the de facto war in the east and the state's dire financial health, Ukraine's economy is restart production at the giant Kashagan oil field in free fall. The IMF assumptions for recovery this has hurt. year assumed a contraction of 3% but this has The surprise winner is Belarus which saw proven to be "wildly optimistic" in the worlds of Tim Ash, head of research at Standard Bank. The its industry picking up nicely in the last few months. As a member of Russia's Customs country's economy is on course to shrink by just Union it has been able to step into the breech under 10% by the year end. following Russia's ban on the import of European agricultural goods and a $1.5bn from Russia has Kazakhstan has also been hard hit by the spill also given the economy a shot in the arm. over effects. The National Bank of Kazakhstan The economic malaise that is sweeping Europe is affecting Ukraine, Belarus and Kazakhstan in very different ways.

Eastern Europe October 17, 2014

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Russia signs raft of deals with China Graham Stack in Berlin The Kremlin is eyeing Chinese loans as a means for Russia to attract funding, after Western sanctions largely cut off access to international capital markets. “This is a very real source of financing for our operations. It may be implemented in various forms: loans in yuan are absolutely possible, [and so are] connected lending, project financing, participation in major projects,” Russia's economy minister Aleksei Ulyukaev said on October 13, as quoted by RIA Novosti. “This is not a complete but a partial substitution," Ulyukaev Following the meeting, Medvedev said he envisaged said. Russia-China trade soon doubling to $200bn. Moscow and Beijing also moved forward with some “Relations are really on the rise,” Medvedev said high profile energy and infrastructure projects, following the meeting, as quoted by Interfax. “I think that level [of trade] is absolutely reachable.” signing an intergovernmental agreement on natural gas supplies, which now allows a landmark 30-year gas deal agreed in May, worth around To financially underpin such a trade surge and move towards stronger use of domestic currencies $400bn, to enter into effect. in trade instead of the dollar, Russia and China Russia's deputy energy minister Anatoly Yanovsky agreed to a three-year yuan-rubel swap worth was quoted by media as saying that China had 150bn yuan (roughly $24.5bn), and Beijing state offered Gazprom a role in construction of gas banks agreed to provide credit lines to Russian pipelines to carry Russian gas on Chinese territory. banks and companies to fund technology imports In addition, Yanovsky said, consultations were from China. proceeding on gas supplies to China via the 'western' route through Russia's Altai region, with Kremlin-owned VTB and Vneshekonombank received yuan credit lines worth around $2bn each volume of supplies initially set at 30bn cubic meters per year, and the possibility of expansion to 100 to fund imports from China. Leading Russian cubic meters, according to newswires. mobile communications firm MegaFon secured a $500m loan from China Development Bank for Russia's oil giant Rosneft and China's CNPC also equipment from Chinese technology producer signed an agreement for construction of a liquefied Huawei Technologies, its main supplier. Russia's natural gas plant on the island of Sakhalin, in the largest bank, state-owned Sberbank, and Huawei Russian Far East. also signed a technology agreement intended to replace reliance on Western technologies. Another memorandum opened the doors to Chinese participation in a planned $25bn high“Until recently, Sberbank used high-tech speed rail link between Moscow and Kazan, equipment mostly from American and European companies,” said German Gref, Sberbank CEO. “We with the overarching aim of creating a Eurasian are continuing and developing our cooperation with high-speed transport corridor between Moscow them, while at the same time turning our attention and Beijing. Chinese representatives said that Chinese companies could invest about $10bn. to alternative producers and providers.” Russia and China signed a raft of 40 agreements encompassing trade, energy, finance and technology, following a meeting between Russian prime minister Dmitry Medvedev and his Chinese counterpart, Li Keqiang, on October 14 in Moscow. The agreements demonstrate how Russia is looking for other options, after sanctions imposed on Russia in response to Moscow's aggression in Ukraine restricted access to Western finance and technology.

Eastern Europe October 17, 2014

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Poroshenko fires commanders of Ukrainian military campaign bne Ukrainian President Petro Poroshenko has fired key commanders of Kyiv's failed so-called "anti-terrorist operation" against Russian-backed rebels in the Donbass region of East Ukraine, including defence minister Valery Heletei. "It's time to replace the Defence Ministry's chief," Poroshenko was quoted as saying on October 12.

Poroshenko's press service said that the firing of the defence minister and head of the border guards, together with the formation of an intelligence committee chaired by former head of Ukraine's security service Ihor Smeshko, will "significantly strengthen Ukraine's law enforcement agencies and enhance its defence capability," according to Interfax.

Heletei had become the target of massive public criticism over the failure to stem corruption in the military, to boost domestic defence equipment production, or to account for strategic military losses. "The president has accepted the defence minister's letter of resignation and will on Monday present a defence minister nominee for approval by parliament," the presidential press service announced on October 12.

"Heletei’s appointment will be viewed as one of Poroshenko’s biggest mistakes in his first 100 days in office. Rather than appointing someone with a career in the military, Poroshenko tapped someone from his entourage who had minimal military experience. Poroshenko needs to forego his entourage for recruiting his governing team and start selecting officials who have the skills, experience and character to govern, particularly in the sensitive military matters," wrote Concorde Capital's Zenon Zawada.

Heletei's firing was regarded as inevitable after he consistently defended subordinates subsequently fired by Poroshenko, and because of the overall failure of the Ukrainian campaign in the east and the significant casualties.

Also this week, soldiers from Ukraine's National Guard marched on the presidential administration in Kyiv demanding demobilisation, in the first sign of open unrest in Ukraine's armed forces since the failure of the so-called "anti-terrorist operation" in the Donbass region of East Ukraine.

On October 9 journalists reported that an order had been signed to fire General Vyacheslav Nazarkin, head of Ukraine's special operations centre and deputy head Around 350 soldiers serving in Ukraine's National of the staff of the so-called "anti-terrorist operation”. Guard - which comprises of a mixture of professional and conscripted internal troops and which played Poroshenko fired on October 3 the long-serving head of Ukraine's state border guard service Mykola a key role in Kyiv's unsuccessful battle against Russian-backed rebels in East Ukraine - broke Litvin, brother of pro-Russian former parliamentary out from their base near Kyiv without weapons, speaker Volodymyr Litvin. The failure of Ukraine's border guard to secure Ukraine's borders is regarded and marched into the capital to the presidential administration, chanting slogans against president as a crucial factor in the success of the RussianPetro Poroshenko, according to the zn.ua website. backed Donbass insurgency. A third Litvin brother commanded a division of the regular Ukrainian army The soldiers demanded payment and clothing and equipment for the winter, and that they be treated active in the "anti-terrorist operation" against the rebels, and is alleged by volunteer battalions fighting "like people, not like cattle”, and resisted attempts alongside the regulars to have fled the field of battle, by officers to persuade them to return to barracks, according to zn.ua leaving them in the lurch.

Eurasia October 17, 2014

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Falling ruble and oil price reignite rumours of devaluation of Kazakh currency bne The stumbling ruble and oil price have reignited rumours about a "second wave" of devaluation for the tenge in Kazakhstan. Rumours about another devaluation have been circulating in the country's financial capital, Almaty, since the central bank was forced to cut the value of the Kazakh currency by 19% in February.

trend continue, "the National Bank may rule out the ruble as a factor and signal to the market that it doesn't oppose shifting [the exchange rate of] the ruble from a historically-established corridor of KZT4.5-5.5 to KZT3.5-4.5 to the ruble", Khudaybergenov wrote. "In other words, the next critical level is RUB52 to the dollar."

The Russian ruble has renewed historical lows three times in the past three days, touching record lows of RUB41 against the dollar and RUB52 against the euro on October 15. The value of the ruble has slumped by about 10% since the beginning of September and nearly 20% since the beginning of the year, sparked by Western sanctions against Moscow over its annexation of Crimea and continued support for separatist rebels in eastern Ukraine. The ruble has also been hit by oil prices, which fell to $86 on October 14, down by nearly a quarter since June 2014, making it difficult for the Russian government to balance its books. The 2014 Russian budget is based on an annual average weighted oil price of $93 per barrel.

In early September, Kairat Kelimbetov, chairman of the National Bank of Kazakhstan, the central bank, said that the tenge "will be fine at the ruble's rate of 40-42" to the dollar. Khudaybergenov admitted that the continuing fall in global oil prices might take a toll on the value of the tenge but the governmentâ&#x20AC;&#x2122;s worstcase scenario for public finance was Â an oil price of $80 per barrel. He suggested that the Kazakh economy would feel strained at an oil price of $60 per barrel, posting 0% growth. Even in this case the tenge would be devalued next year because higher oil prices earlier this year will compensate for the lower prices now, Khubaybergenov explained.

Olzhas Khudaybergenov, an adviser to the head of the Kazakh central bank, denied on his Facebook page on October 16 that rumours of the tenge's devaluation had been based on economic fundamentals but explained them as coming from a general "atmosphere of mistrust in government and scepticism" in Kazakhstan. The adviser argued that the rate of inflation in Russia is outpacing the rate of the ruble's devaluation, which means there will be "no cheapening of Russian goods and, as a result, an increase in imports" to Kazakhstan. Kazakh imports of Russian goods fell by 22.3% in the first eight months of 2014, and should this

"On the other hand, it's absolutely unfavourable for authorities to repeat devaluation this year because this situation raises a question about the stability of the entire financial system," he said. "Not only will this set a precedent but will also create a risk of social protests." In response to a 10% devaluation of the Russian ruble in late 2013 and early 2014, the National Bank devalued the national currency from KZT155 to KZT185 to the dollar in February. Combined with opposition to Kazakhstan's deeper integration with Russia within the Customs Union in some quarters of Kazakh society, the February devaluation sparked public protests in Almaty.

Eurasia October 17, 2014

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British firm to carry out feasibility study for Turkmenistan-India gas pipeline bne Berdimukhammedov to speed up efforts to find new buyers. Since then, China quickly replaced Russia as the largest importer of Turkmen gas through a 1,833km pipeline expected to reach full capacity (55bn cm per annum) in 2015. The TAPI project - which has been on the table of Turkmen authorities since the early 1990s, when oilmen from the US and Argentina tried to secure the support of the emerging Taliban movement in Afghanistan - would provide Turkmenistan with access to the huge south-eastern Asian markets. The Asian Development Bank (ADB) However, as soon as the Taliban seized power, it awarded Penspen the contract and it in turn has became clear that no financial institution would take brought in Netherlands-based engineering firm Royal Haskoning to undertake the environmental and the risk of financing a multi-billion pipeline running through Afghanistan. social safeguards components of the study. A British engineering firm will carry out a technical feasibility study for the proposed 1,820km, 56-inch diameter TAPI pipeline running from Turkmenistan's giant Galkynysh gas field, the world's second largest, all the way to India through Afghanistan and Pakistan. “[TAPI] “will enable Turkmenistan to monetise a part of its vast natural gas reserves, by opening a southerly route to the energy-hungry markets of South Asia,” Peter O’ Sullivan, CEO of Penspen, said in a statement.

Turkmenistan boasts proved natural gas reserves of 17.5 trillion cubic meters, the fourth largest in the world, according to figures from BP's 2014 Statistical Review. Galkynysh alone stores at least 13.1 trillion trillion cm of natural gas, British auditor Gaffney, Cline & Associates estimates.

After the global financial crisis, Berdimukhammedov revived TAPI and held roadshows to look for prospective consortium leads and financiers in London, New York and Singapore in 2012.

Penspen now expects to have the technical feasibility study ready in six months, following which the Since its discovery in 2006, the Turkmen government company will provide on-going support to ADB during has strived to open new export routes for Galkynysh's the investor selection process, it said in a statement. future production to minimise the country's Yet securing the money needed for the project will dependence on pipelines to Russia and thus break remain difficult. Both ExxonMobil and Chevron pulled loose from Moscow's stanglehold. Traditionally, out of the race to lead the consortium that would Turkmen gas has flown almost exclusively towards raise the necessary financing for the project - total Russia, which buys it at discounted price and costs are expected to reach US$7.6bn - because resells it to European customers. But the Kremlin of Ashagabat’s refusal to grant the two companies abruptly cut Turkmen gas imports in 2009 because an equity stake in the pipeline. Total of France and of weakening demand in Europe, jeopardising Malaysiais Petronas are now rumoured to be in the the country's public finances, heavily reliant on running for the post. gas sales, and prompting president Gurbanguly

Eurasia Europe Central October 17, 2014

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Governing parties shore up support in Czech and Hungarian elections

bne Governing parties in the Czech Republic and Hungary shored up their positions in Senate and local elections on October 18-19, although turnouts continued to fall. Czechs appear to have handed the governing coalition another majority in the Senate. The Social Democrats (CSSD), the centrist Ano party and the Christian Democrats (KDU-CSL) are set to win in 15 out of the 27 constituencies contested, which will mean the coalition retains control of the 81-seat upper house. No candidates managed to win in the first round, so they will now contest a run-off in a weekend of October 25. The CSSD advanced to the second round in 19 constituencies. It needs to win all but one of those to retain a party majority in the Senate, but is favourite for just 10. Ano will contest nine wards, as will KDU-CSL. That suggests the recovery in the economy this year has boosted support for the trio. It also suggests mainstream parties have managed to peg back the growing discontent against the political establishment that has dominated recently. That reflects polls over the last few weeks showing a return of trust amongst voters. At the same time, voter turnout was just 38.61%, even though turnout in the concurrent local elections was 44.46%. That is important for the balance of the governing coalition. The growing support for Ano since last

October's general election has strengthened the hand of billionaire and Finance Minister Andrej Babis, who set up the centrist party as an alternative, much like the protest parties currently popping up across Europe. Babis has been extending his personal power base through the year, and appears to be cooperating with the old political establishment - such as President Milos Zeman - in a fight against the current leadership of the CSSD. Another weak showing by the CSSD threatened to upset the coalition. "Contrary to expectations by some, this weekend's vote didn't turn out to be a referendum to prove that voters are unhappy with the work of our coalition," Prime Minister and CSSD head Bohuslav Sobotka told a news conference, according to the Wall Street Journal. While Ano did not manage to impose itself in the Senate vote, its continued claim to be a party of reform meant it did well in the local election. The party won in half the country's 26 major cities, including Prague - where the campaign was led by a former head of Transparency International - to cement its status as a major political force, just a year after storming onto the scene at the last general election. In contrast to the Senate election, at the local level voters showed they are still wary of the notoriously corrupt Czech political elite. Independent

Eurasia Europe Central October 17, 2014

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candidates gained over 40,000 posts on municipal councils - 3,000 more than in the previous elections. A record 165 parties and movements stood, fielding more than 230,000 candidates for 60,000 seats in local councils. Meanwhile, in Hungary, the ruling Fidesz consolidated its power, as widely expected. The party won in 22 out of Hungary’s 23 major cities, as the leftwing opposition continues to struggle to put together any meaningful challenge following changes in electoral rules and Fidesz’s continued dominance of the media.

than a two-thirds,” Prime Minister Viktor Orban said, according to MTI, after preliminary results were released on the evening of October 12. The far-right Jobbik followed up its strong showing in April's general election to establish itself as the main point of opposition. It came second in 17 out of 19 counties and won in nine towns, up from three in 2010. Leader Gabor Vona said Jobbik will start preparing for government. While any role in government currently looks unlikely, Jobbik's role as the top challenger will help to push Fidesz further in a nationalist direction.

“With our success in the local elections, we have our third win,” while in Budapest “we have more

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Central Europe October 17, 2014

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Polish patience with Ukraine begins to fray

Jan Cienski in Warsaw Poland has been Ukraine's most voluble supporter in the EU and a strong backer of sanctions against Russia, despite the consequences for the Polish economy – but Warsaw's patience with Kyiv is beginning to fray. There is a growing sense that Poland is being taken for granted, that Ukraine is putting its own domestic political and economic interests ahead of cultivating a close relationship with its western ally. The latest irritant is Ukraine's refusal to buy Polish coal. This is a hugely sensitive issue in Poland, where the coal sector is haemorrhaging red ink as local mines find it difficult to compete against cheaper imports, especially coal from Russia. So, when Poland offered to sell coal to Ukraine, the feeling was that the Ukrainians would jump at the offer of diversifying some of their energy needs away from Russia. Ukraine's coal output plummeted by 96% in September compared with the same period last year, notes Tim Ash of Standard Bank. That is a consequence of war in eastern Ukraine, where most of the country's coal industry is located, which has led to mines being flooded and transport infrastructure being devastated by fighting. But Ukraine decided to keep buying Russian coal instead. “We hear that that there is only interest in Polish coal from the Ukrainian side on the

condition that it is free,” Janusz Piechocinski, the economy minister, said in a radio interview on October 15. “I am disgusted by that.” Poland has an agreement to sell Ukraine 100,000 tonnes of coal, but Ukraine appears to be negotiating subsequent deliveries from Russia and South Africa. Normally a coal exporter, Ukraine is likely to need to import 3m-4m tonnes of coal in the next months to keep its thermal generating plants online. Poland is also furious that Ukraine has for months blocked the import of some Polish meat for health reasons. “If there is a continuing problem with 2,000 tonnes of meat on the bone, please don't be surprised if there is a rise in unfriendly opinions about Ukraine,” said Piechocinski. The complex internal dynamics of Ukrainian politics are also annoying Poles. Earlier this week, thousands of Ukrainian nationalists demonstrated in Kyiv, calling for the recognition of the wartime Ukrainian Partisan Army. UPA, which has strong roots in the west of the country, had a complicated war, wavering between support and opposition to the invading Germans while fighting the Soviets. Members of the guerilla force also helped massacre local Jews, and the UPA ethnically cleansed western Ukraine (which before the war had been eastern Poland) by killing about 100,000 Poles.

Central Europe October 17, 2014

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In her maiden address to parliament at the beginning of the month, Ewa Kopacz, the new prime minister, stressed that Poland would no longer be out in front of other EU countries when it comes to policy on Ukraine. “It is impermissible for Poland to be isolated as a result of setting itself unrealistic goals,” she said.

Leszek Miller, a former Polish prime minister and head of the ex-communist Democratic Left Alliance opposition party, tweeted on October 14, “March of UPA supporters in [Kyiv]. `We are proud.' Of what? Of massacring Poles in Volhynia [a region in western Ukraine]?” The friction is likely to strengthen Poland's new foreign policy direction, which is much more cautious about taking a leading role over Ukraine.

Kyiv's policies on coal, meat and history are unlikely to prompt her to change that view.

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Southeast Europe October 17, 2014

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Turkey launches air attack on PKK

bne The Turkish army launched an air attack on the outlawed Kurdistan Workers Party (PKK) on October 14, in the first operation on this scale since 2012. The government has already cut its GDP growth forecast for 2014 citing the conflicts in neighbouring countries, and reigniting the conflict with Turkey’s Kurdish minority could put further pressure on the economy. Turkish fighter jets attacked positions held by the PKK in the Daglica district close to the Turkish border with Iraq. Hurriyet Daily News reported that the Turkish General Staff ordered the bombings in response to a series of armed attacks by the PKK in early October. Turkish Prime Minister Ahmet Davutoglu said on October 14 that the military had acted following “very serious harassing fire” around the Daglica military outpost. “Naturally it is impossible for us to tolerate this. Hence the Turkish armed forces took the necessary measures," Davutoglu told a press conference, Reuters reported. A year and a half on from the March 2013 ceasefire, relations between the government and Turkey’s Kurdish minority - estimated at estimated 11m-14m people - are under heavy strain because of Ankara’s reluctance to step in to support fellow Kurds in neighbouring Syria. Kurds within Turkey are angry that the government has stood by while Kurds in Syria face a massacre by Islamic State (IS) forces in the town of Kobane close to the Turkish border.

Many Kurds have tried to cross the border to fight in the Syrian conflict, but have been turned back by the Turkish military. An estimated 37 people were killed in early October when riots broke out across majority Kurdish regions of south-east Turkey. As well as clashes between rioters and police, fighting also broke out between Kurdish protesters and members of radical Islamic group Hizbullah in the town of Diyarbakir, where eight people were killed on October 7. Ankara is now facing the dilemma of whether to support Kurds in northern Syria against IS, in case this strengthens Kurdish forces, enabling them to renew their fight for an independent Kurdish state in southern Turkey. However, a failure to act has already angered Turkey’s ethnic Kurds and risks restarting the conflict between Turkey and the PKK, which resulted in around 40,000 deaths. The PKK said in an October 14 statement that the air operation against its bases violated the 2013 ceasefire, and their jailed leader Abdullah Ocalan has threatened to break off peace talks. Ankara is still considering its next move after the Turkish parliament voted to allow intervention in the conflicts in Iraq and Syria on October 2. Officials from Turkey and the US are in talks on Turkey’s role in the fight against IS. Washington is hoping at least to secure access to Turkish military bases and airspace. However, Davutoglu has said that the priority for Turkey

Southeast Europe October 17, 2014

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by the conflict in Ukraine and the resultant is to establish a buffer zone within Syria, and Ankara also wants regime change in Syria to be a slowdown in the Russian economy. condition of its involvement. "The growth target is a little lower than what we set at the beginning of this year," Babacan told The conflicts in neighbouring countries have a press conference, according to AFP. "This is already taken their toll on the Turkish economy. because exports with Russia, Ukraine and Iraq On October 8, the government lowered its 2014 have decreased due to geo-political tensions ... growth forecast from 4% to 3.3%, with Deputy Prime Minister Ali Babacan citing the situation in Unfortunately, the situation in Iraq and Syria is Syria and Iraq in addition to growing uncertainty not improving.” in the global economy. A resurgence of the conflict with the Kurdish minority could further hurt Turkey’s growth Before the conflict erupted in Iraq, the country was Turkey’s second largest export market after prospects, since the country’s strong economic growth within the last decade is partly attributed Germany, and an important route for exports to to domestic stability. third countries. Turkey has also been affected

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Southeast Europe October 17, 2014

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Nationalists take the lead in Bosnia's elections

bne Preliminary results in Bosnia’s October 12 elections show that nationalist candidates are ahead in the race for the country’s rotating presidency, which is rotated between presidents representing the country’s Muslim, Croat and Serb populations. Meanwhile, a fragmented parliament is expected, meaning weeks of negotiations before a new coalition is formed.

don’t mean much - the party with the most votes will not necessarily be in government because at least five or six parties are needed to form a government at the state level,” Ivana Maric of Sarajevo-based think tank Populari tells bne. Early elections were called in February after protests over corruption and unemployment erupted into the worst outbreak of violence since the end of the war in 1995.

Bosnian Muslims have backed Bakir Izetbegovic, the Party of Democratic Action (SDA) candidate for the presidency, with 33% of votes cast, putting him seven The latest round of elections has brought the points ahead of runner up Radoncic Fahrudin. complex power-sharing structure of the Bosnian government under scrutiny. The system of two Dragan Covic has a decisive lead among Croatian autonomous republics, intended to ensure peace within Bosnia, has the downside of voters, taking 51.52% of votes, according to creating conditions for political deadlock that preliminary results, while Zeljka Cvijanovic and has prevented reforms from being introduced, Mladen Ivanic are neck and neck for the Serbian as well as creating opportunities for corruption. presidency. Nearly 20 years on from the signing of the The vote for the presidency of the Serb-dominated Dayton Agreement that established the system, frustration has come to a head this year. Republika Srpska, the ethnic Serb half of Bosnia and Herzegovina, is also too close to call. The Faced with an electorate tired of politicking, vice president of incumbent Milorad Dodik’s and unable to impress voters with concrete Independent Social Democratic Party of the achievements in tackling unemployment or raising Republika Srpska (SNSD) claimed on October living standards, politicians of various stances 13 that with 53% of votes counted, Dodik had a have used calls for secession as a rallying cry. narrow lead over his rival Ognjen Tadic. However, This has been most extreme in the Republika according to Serbian daily Blic, an earlier count Srpska where Dodik is fighting to hold onto the put Tadic narrowly ahead. presidency, though some Croat leaders have also Bosnia also held early parliamentary elections on called for their own entity within Bosnia. October 12. However, since as expected no party However, economic issues remain the most took a majority, the result merely opens the way pressing tasks for Bosnia’s new leaders. for negotiations to form a new coalition. “Votes

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According to Maric, while national issues are still development, improving the business climate, important, the population is “moving forward from energy sector reform and privatisation of state national topics to real topics - unemployment, owned enterprises. corruption and living standards”. “Since then, there hasn’t been much progress, At the beginning of this year, Bosnia was on especially in recent months due to the track for annual GDP growth of around 2%, but combination of the pre-election period and the forecasts have now been slashed to close to zero, aftermath of the floods,” said the EBRD’s lead because of a combination of flooding and slow economist for Southeast Europe, Peter Sanfey. recoveries in Croatia and Bosnia’s other trading While things are “not at a complete standstill” – partners within the EU. there has been some progress for example on business registration and within the framework of Bosnia’s IMF programme – “we would hope Investment decisions have also been put on after there is a new government there would be hold during the last eight months of political progress,” Sanfey said. uncertainty. “Bosnia has a history of coping with an unstable political environment, but it is difficult to predict the outcome of the elections, and Bosnia’s journey towards EU entry is also investors want stability,” Erste Bank analyst Alen faltering. The latest EU enlargement report Kovac told bne. published on October 8 criticised the country’s “very limited” progress and declared there was an urgent need for socio-economic reform. “Bosnia Nor has there been much progress on reforms and Herzegovina has not overcome the standstill to the business environment, while privatisations in the European integration process while most of major companies including BH Telecom have other countries in the region are moving ahead stalled. Just under a year ago, the European decisively. This regrettable situation is caused Bank for Reconstruction and Development’s mostly by a lack of collective political will on the (EBRD) “2013 Transition Report” identified areas where work was needed, including infrastructure side of the leadership,” the report said.

Opinion October 17, 2014

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Back-of-envelope estimate of cost to Russia of Ukraine crisis is $100bn in 2014 COMMENT:

Timothy Ash of Standard Bank SRussia’s foreign minister, Sergey Lavrov, this week estimated that the crisis in Ukraine would likely cost the German economy €40bn this year, and a further €50bn in 2015 – presumably through lost exports, and a broader disruption to the German economy and weaker resulting real GDP growth. It is unclear how Lavrov derived his figures, but these are not insignificant numbers being bandied about, ie. around 0.7% of GDP on an annual basis. With this in mind, it is worthwhile perhaps to try and estimate the losses of the crisis to both Ukraine and Russia. In Ukraine’s case, it is perhaps important to distinguish between losses resulting from the conflict and those relating to the underlying economic crisis that is resulting from the unsustainable policies run by the former Yanukovych regime – twin deficits were always going to end in a major macroeconomic adjustment, with a large exchange rate adjustment required and likely a corresponding recession as domestic demand “shrunk to fit.” In a scenario where no conflict occurred, real GDP might have contracted by 2-3% year on year, and the exchange rate likely dropping from UAH8.2:USD1 to more like UAH9.5:USD1+. This would likely have cut dollar GDP from $178bn in 2013 to more like $157bn in 2014. It might reasonably be argued that the recession/ devaluation might have been moderated by access to Russia’s $15bn bailout bond facility,

and the provision of cheap Russian gas/energy – albeit as has proven the case in neighbouring Belarus, such Russian support tends to stall much needed longer term reform, and ensures that economic losses are sustained over a longer period of time. As is, as a result of the onset of conflict, we estimate a real GDP contraction this year of 9-10%, we assume nominal hryvnia GDP flatlining due to an acceleration in the GDP deflator from exchange rate pass through to inflation, and with the exchange rate depreciating to average around UAH11.5:USD1 for the year, which takes dollar GDP down to around $127bn, implying a loss of $30bn on the no-conflict scenario as noted above or the equivalent to around 17% of GDP for 2013. We would note that this is likely the result of the loss of Crimea, parts of the eastern Donbass region, the actual conflict, plus also disruption to trade and energy ties to Russia. We would also note that the hryvnia has been relatively unmoved by the recent broader dollar rally, as the National Band of Ukraine (NBU) imposes administrative tools to try and hold the hryvnia around current levels of UAH12.9:USD1 – arguably the currency should be much weaker if left to its own devises, and indeed the black market rate for the currency is currently nearer to UAH15:USD1, which would imply even large dollar GDP losses as above. The above represents a flow loss of GDP, but

Opinion October 17, 2014

there is also a loss of assets (stock GDP in effect) – in terms of destruction to the stock of wealth/assets, including infrastructure. Therein official sources are suggesting that the costs of repairing roads, bridges, housing and infrastructure might total as much as $2bn. In addition, the crisis has resulted in a deterioration of the public finances, a wider budget deficit (now over 10% of GDP) and increased borrowing costs. The original International Monetary Fund (IMF) programme agreed in March assumed the stock of public sector debts of $73bn as of the end of 2013, rising to $82bn by the end of 2014. This was revised up again during the first review under the Stand-By Arrangement (SBA) in July, and after the first onset of hostilities to $92bn, which might still prove to be an under-estimate. However, this suggests an additional $10bn in increased public sector borrowings as a result of the conflict – it might be argued that the IMF also simply underestimated the economic adjustments required as a result of the policy failures of the Yanukovych regime. All told the above might suggest an “all-in” cost to Ukraine of the current conflict of around $42bn, including a $30bn loss in dollar GDP as a result of the conflict, $2bn infrastructure losses, and perhaps an additional $10bn in terms of increased public sector indebtedness. Clearly for a poor country, these losses are huge and impose a systemic burden, with the hope being that Western financial support can partly fill this gap. 100bn dollar question Applying some similar analysis to Russia, I estimate that real GDP losses are in the 0.50.75% range – pre-Ukraine crisis, the market consensus was for real GDP growth of around 0.75%-1% for 2014 for Russia. At present, the consensus is for real GDP growth of zero to 0.23% for 2014.

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Sanctions and concern generally has also weighed on the ruble – albeit lower oil prices and a general trend to a weaker rouble on longstanding concerns over Russia’s real GDP trajectory are also weighing there. We assume an average ruble rate for 2014 of RUB37:USD1, from RUB31.8:USD1 in 2013. We assume around one-third of the exchange rate weakening from 2013 to 2014 is Ukraine-conflict related, ie. we assume that the ruble would have weakened anyway to an average rate of around RUB35.26:USD1 due to weak underlying growth, dollar strength and lower oil prices. We hike the GDP deflator for Russia for 2014 by 2 percentage points to account for the impact of the food import ban and some exchange rate pass to inflation. We assume 0.25% real GDP growth in 2014, as opposed to 0.75% in no conflict scenario. Overall, our results suggest that without the conflict Russia’s dollar GDP in 2014 would have dropped from $2,099 billion in 2013, to $2,022 billion. However, assuming a larger nominal exchange rate correction and weaker real GDP growth this takes dollar GDP down to $1,953bn, implying a loss of around $69bn, or just under 3.3% of GDP again. Note that the IMF using similar GDP/deflator assumption forecast dollar GDP for Russia dropping to $2,057bn in 2014, albeit they arguably use an optimistic exchange rate assumption now of RUB35.3:USD1 – already exceeded this year. In Russia’s case it might also be appropriate to add in losses in foreign exchange reserves defending the ruble. Thus far in 2014, forex reserves have dropped $56.9bn, and on the current rate of depletion total reserve loss for the year might total $65bn. This compares with reserve loss of $25.8bn for the full year in 2013. Again it is reasonable to take out intervention that might have been driven by underlying ruble weakness related to oil prices and weak growth drivers. However, it does not appear unreasonable to assume that one half of reserve

Opinion October 17, 2014

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loss – maybe $30bn or so – might be specifically related to attempts to counter capital flight tied to the crisis in Ukraine and the imposition of Western sanctions on Russia, which has hurt overall sentiment.

disbursement from the Russian budget – given the economies of these two regions have all but collapsed, and Russia will now be responsible for provision of social support for their populations, supply of energy and rebuilding costs.

All told, the above suggests an overall loss to Russia of perhaps as much as $100bn, or just under 5% of GDP, which is very large. This makes no assumptions in terms of military losses incurred, and higher fiscal costs associated with required investments/fiscal drag from Crimea, which could also reach into the tens of billions of dollar – particularly in terms of the construction of a new bridge to connect Russia with Crimea (preliminary estimates put the cost at RUB300bn, or $8bn).

Note that in terms of the dollar GDP losses as noted above, these are the losses only incurred for 2014, but the crisis in Ukraine and sanctions are likely to impose a longer term drag on both economies – ie. recurring and cumulatively growing losses. These may well be diminishing but none the less very significant.

Also, there appears to be ongoing costs for Russia’s support for separatists in the Donbass – currently 2.5% of Ukrainian territory occupied by pro-Russian forces. Arguably, many of these costs have yet to be assumed. As a very rough estimate, supporting Crimea and regions of Donbass controlled by separatists could easily drain $5bn (0.3% of Russian GDP) annual

Now clearly on the above we could have a discussion as to whether it is useful to include real depreciation/appreciation in measuring losses, and whether dollar GDP is the best means to do this, rather than simply real GDP losses. That said, countries often use dollar GDP, and dollar per-capita GDP, when it is rising as a measure of wealth/well-being, and indeed dollar GDP is used as a key measure of key ratios, such as current account/GDP, gross external debt/ GDP, etc and on a relative basis. It is important therefore to the overall story.

Weekly Lists October 17, 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.

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bne:Investor Russia considering natural gas pipeline to Japan

Russia is proposing to build a natural gas pipeline to Japan's northern island of Hokkaido from Russia's island of Sakhalin, Japan's Nikkei paper reported on October 14.

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Citing unnamed diplomatic sources, Nikkei said that Russia presented the plan in September. â&#x20AC;&#x153;Construction of a pipeline will depend on the Ukrainian situation and talks over the Northern Territories [Russia's Kuril Islands claimed by Japan],â&#x20AC;? the source said.

Rio Tinto cuts production estimates at Mongolia's flagship mine Oyu Tolgoi

Mongolia's troubled copper-gold mine Oyu Tolgoi has suffered another setback, as operator Turquoise Hill Resources cut production estimates for 2014.

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Oyu Tolgoi is by far the largest ongoing development in Mongolia and it is generally perceived as a barometer for Mongolia's business climate. Turquoise Hill owns 66% of Oyu Tolgoi, the remainder being in the hands of Mongolia's government. The company invested as much as $6.2bn to kick off the mine's open pit in July 2013, but the development of a $4.9bn underground expansion have been help up for more than 18 months as company and government have yet to strike an agreement over a number of pending issues such as cost overruns and a tax dispute.

Westinghouse offers co-funding on Czech nuclear plant expansion

Westinghouse offered the Czech Republic to partially co- finance expansion of nuclear plants, according to Czech unit head Pavel Janik. Westinghouse approached the Czech Finance Ministry and Ministry of Industry and Trade.

bne Westinghouse was one of two participants in the cancelled tender to expand the Temelin NPP. The extension of Temelin will be needed later than originally expected, thanks to slower demand growth and refurbishments of lignite plants. However, the recently approved state support for the Hinkley Point C NPP raises hopes for contractors that the project may be restarted.

Weekly Lists October 17, 2014

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bne:Deal Putin allies reportedly to buy Russian daily Vedomosti

Russia's leading quality independent newspaper Vedomosti is set to be sold to businessmen close to Russian President Vladimir Putin, according to newswires, in a move that will further narrow the space for critical opinion in Russia's media.

bne According to Bloomberg, businessmen close to the president are preparing to buy the respected paper that was founded in 1999, only months before Putin shot to power on the back of a war against militants in Chechnya. At its launch, the paper advertised with the slogan, "Any oligarch can buy us. At kiosks," referring to the purchase months before of rival Kommersant by the late oligarch Boris Berezovsky. The paper was co-founded by the Wall Street Journal and Financial Times, each of which hold 33% stakes in the paper. Finnish media outfit Sanoma owns the remainder. While Vedomosti has a print run of only 75,000, its high standard of reporting has lent it wide influence.

Russian corporates in slew of EM deals

Russian corporate giants are looking to close big deals with players from other emerging markets - Argentina, India and China - as Russia's breakdown in relations with the West makes business outside of Europe and US more attractive.

bne Argentina's national energy company YPF and Gazprom are negotiating over a memorandum of understanding to produce natural gas in Argentina, with its value put at least $1bn, said the South American country's Industry Minister Debora Giorgi October 9, Bloomberg reported. YPF, controversially renationalized in 2012, is now looking to develop a the D129 shale deposit in Chubut province, and Vaca Muerta, a shale formation in the Neuquen basin believed to contain at least 23bn barrels of oil.

Weekly Lists October 17, 2014

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bne:Banker UK firms, Latvian and Moldovan banks linked to Russian moneylaundering bne

At least 19 UK-registered companies are suspected of involvement in the laundering of around $20bn in dirty Russian money via banks in Moldova and Latvia, according to an investigation by The Independent newspaper and the Organised Crime and Corruption Reporting Project (OCCRP). One of those Latvian banks implicated by the OCCRP, Trasta Komercbanka, is co-owned by Ukrainian banker Ivan Fursin, who also happens to be chairman of Ukraine's parliamentary anti-money laundering committee. The money-laundering scandal broke earlier this year, following investigations into bank transfers in Cyprus, after Cypriot banks were hit by the global financial crisis. As bne reported in August, the OCCRP revealed that around $20bn worth of Russian money of dubious origin had been laundered between 2010 and 2014. â&#x20AC;&#x153;Organized criminals and corrupt politicians in Russia moved $20bn in dirty funds through this laundromat's complex cleanse-and-spin cycle made up of dozens of offshore companies, banks, fake loans, and proxy agents," the OCCRP said in the report. "The process was then certified as clean by judges in the tiny Republic of Moldova. The newly cleaned funds were then spread across Europe."

Citigroup heads for the retail exit in Hungary and Czech Republic bne

Citigroup will quit 11 small markets for retail banking, the US banking giant announced on October 14, including Hungary and the Czech Republic. The sizeable retail operation in the former - which has little exposure to forex debt - is likely in particular to whip up interest. Citigroup called the move "strategic action ... to accelerate the transformation of Global Consumer Banking (GCB) by focusing on those markets where it has the greatest scale and growth potential". Aside from Japan, the territories the US bank will exit are for the most part small emerging markets. Alongside the Czech Republic and Hungary, it will divest consumer franchises in Costa Rica, Egypt, El Salvador, Guam, Guatemala, Nicaragua, Panama and Peru, as well as the consumer finance business in Korea.

Weekly Lists October 17, 2014

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bne:Credit Polish central bankers sow confusion bne

Less than a week after finally agreeing to cut interest rates, Poland's central bankers are back to bickering and sowing confusion over further steps to support the stuttering economy. With the recovery going strongly early this year, the National Bank of Poland's traditionally turbulent Monetary Policy Council (MPC) briefly reached unanimity, opening the way for Governor Marek Belka to announce it would offer forward guidance. With the economy now stumbling, such consensus has gone out of the window. Conflicting signals mounted on October 13 following the previous week's surprise of a 50-basis-point cut to push the key interest rate down to 2%. Following the October 8 cut, Belka suggested more easing could be on the way due to the effects of economic weakness in the Eurozone and the Ukraine crisis on GDP growth and inflation. He reiterated that view in an interview published by Gazeta Wyborcza on October 13, but warned investors not to assume the move would mark the start of an aggressive easing cycle.

Ukraine, Belarus and Kazakhstan on Diverging Paths Sberbank CIB

– Belarus is seemingly one of the few clear beneficiaries of the Ukrainian crisis, as it has been able to increase production and exports to Russia almost overnight due to its geographical proximity and free trade arrangements via the Customs Union. The growth in exports supports industrial output and GDP dynamics. – Kazakhstan remains the least affected by the conflict in Ukraine, while the general macroeconomic trends that emerged after the depreciation of the tenge early in the year are relatively unchanged. Industrial growth has fluctuated at around 0% y-o-y, while GDP growth has decelerated and inflation remained relatively high. – Ukraine industrial output contracted 21.4% y-o-y in August, which brought the 8m14 tally to negative 7.8% y-o-y versus the more moderate negative 5.8% in 7m14. It looks increasingly likely that 3Q14 GDP growth will be more negative on a y-o-y basis than it was in 2Q14 (negative 4.6%), although it remains unclear how severe the drop will be, as September industrial output may contract further, and the construction dynamic remains unknown due to competing downward pressure from the continuing macro deterioration and upward pressure from the need to rebuild infrastructure damaged by the war.

Weekly Lists October 17, 2014

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bne:Stocks Russian internet giants Yandex and Mail.ru fall below IPO price

The shares of Russia's two largest internet stocks have again fallen beyond their IPO prices, indicating that Russia's slowing economy and disturbing political trends are impacting even on its most dynamic sector.

bne The share price of Russia's largest internet company, search engine Yandex, on the Nasdaq has fallen to $24.48 on October 17, below the price of its landmark IPO in May 2011, the first such IPO of a Russian internet company, when the company's shares were floated at a price of $25 per share. The global depositary receipts (GDR) of Mail.ru, Russia's largest social network company, listed on the London stock exchange were trading at GBP24.12 on October 17, less than their IPO price in November 2010 when they were placed at GBP27.70. Russia's internet stocks have plummeted faster than the market, as investors fled the hopeful part of the Russian economy faster than they drop its core oil and gas stocks, as anti-Westernism and authoritarianism in Russia grow.

AFK Sistema plans to sell minority stake in Detsky Mir said put on hold UralSib

The Russia-China Investment Fund (RCIF) has put the deal to acquire a minority stake in AFK Sistema’s toy retail unit, Detsky Mir, on hold, Kommersant reported today. According to the newspaper’s sources, the sale has not been ruled out completely, but little progress has been made. Neither Sistema nor RCIF have commented on the story. AFK Sistema announced in early September that it had agreed in principle to sell a minority stake in its subsidiary Detsky Mir to the Russia-China Investment Fund (owned jointly by the Russian Direct Investment Fund and the China Investment Corporation). Although details of the potential deal were not disclosed, Sistema CEO Mikhail Shamolin indicated earlier this year that the company was considering selling up to 10% of Detsky Mir through a private placement, with the children’s retailer potentially being valued at around $1 bln. Thus, the size of the deal with RCIF could have been about $100 mln.