Suna Erdem on whether Turkey’s politicians can prevent a ...d2pkwuv6g453nl.cloudfront.net/dispatch-pdf/bne_magazine_november_2015.…Suna Erdem on whether Turkey’s politicians

Inside this issue:

Out of Africa for Russian banking exile Jennings

Mattoni puts the fizz into Central European waters

Slovakia’s Fico told to take his trousers down

Special Report: CEE/CIS Bank Survey 2015p. 28

Ben Aris looks at Moscow Exchange’s revival p. 12

Georgian PM Garibashvili talks China, Russia and tradep. 60

November 2015 www.bne.eu

GBP 4.50/USD 6.75/EUR 5.90

ISSN

205

9-27

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Turkey into the abyss?Suna Erdem on whether Turkey’s politicians can prevent a catastrophe from unfolding

Contents I 3bne November 2015

Senior editorial boardBen Aris (Moscow) +7 9162903400editor-in-chief [email protected]

James R Hammond (Boston) +1 6178525441publisher [email protected]

Nicholas Watson (Prague) +42 0731582719managing editor [email protected]

Robert Anderson (Prague) +42 0603517867news editor [email protected]

Liam Halligan (London) +44 7801799279editor-at-large [email protected]

Central AsiaNaubet Bisenov (Almaty) +7 7015933810bureau chief [email protected]

Eastern EuropeNicholas Allen (Berlin) +49 15730395872 bureau chief [email protected]

Central EuropeTim Gosling (Prague) +42 0720180811bureau chief [email protected]

Southeast EuropeClare Nuttall (Bucharest) +7 7073011495bureau chief [email protected]

Advertising & subscriptionElena Arbuzova (Moscow) +7 9160015510 business development [email protected]

Michael Dragoyevich (London) +44 7715412938commercial director [email protected]

DesignOlga Gusarova (London) +44 7738783240art director [email protected]

Cover illustration: Illarion Gordon

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THE MONTH THAT WAS

COMPANIES & MARKETS

Out of Africa for Russia banking exile Jennings

Russia’s central bank limits foreign shareholder voting

Moscow Exchange on a roll


Business leader-turned-technocrat ready to mine Mongolia's “treasures”

Multinationals pessimistic on Russian market

Ukraine cities compete to attract IT companies

Once I lived the life of a mil-lionaire…

Fondul Proprietatea drives Romania’s privatisation agenda

Signs of a resurrection in Russia’s moribund capital markets

Eurasia currencies continue to face devaluation pres-sures

Corporate Statement: PASHA Bank

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SPECIAL REPORT –CEE/CIS Bank Survey 2015

COVER FEATURE

Turkey into the abyss?

CENTRAL EUROPE

Melnikoff's ‘Metamorphosis’

Fico told to take his trousers down

J&T gets Chinese oodles of cash

SOUTHEAST EUROPE

Stavreski says investors keeping faith with Macedonia

Roldovan graft

Turkey’s medical tourism industry looks a little pale

EASTERN EUROPE

Ukraine’s ‘shadow government’ investigated for money laundering

Lukashenko is Belarus’ president but nobody’s friend

More bumps in Russia’s pension reform road

'Farmer John' brings cheddar to cheese-starved Muscovites

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bne IntelliNews is the property of New Sparta Media.New Sparta Media | 27a Floral Street, 3rd Floor, London, WC2E 9EZ, UK

4 I Contents bne November 2015

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60 74EURASIA

Georgian PM eyes free trade deal with China within a year

A purge in Baku

Fugitive Kazakh banker one step closer to home

OPINION

The limits of the Russian ‘patriotic mobilization’

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Revving Georgia’s economic engine

Are emerging markets set to rally?

Rhetorical wizard Draghi conjures up a QE battle

ARTS, CULTURE & PEOPLE

The camera loves Tbilisi – and vice versa

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OBITUARY: Arpad Goncz – Hungary's first elected president

NEW EUROPE IN NUMBERS

Charts of the month

Macroeconomic indicators

Financial indicators

UPCOMING EVENTS

COMPANIES MENTIONEDVolkswagen (8)Severni Energeticka (8)VTB Bank (8, 14)Telekom Srbija (8)Transgaz (8)OSHEE (8)Neftisa (8)Lenta (8)Lokum Deweloper (9)Sberbank (9, 35)VTB (9)Gazprombank (9, 53)Vnesheconombank (9)Rosselkhozbank (9)Renaissance Capital (10)Renaissance Credit (10)Bank of New York Mellon (11)Norilsk Nickel (7, 11, 24)Prosperity Capital (11)TGK-2 (11)Goldman Sachs (13, 58, 59, 79)Karlovske Mineralni Voda (15)Kofola (16)Kekkuti Asvanyviz (16)Coca-Cola (16) Pepsi (16)Nestle (16)Szentkiralyi Asvanyviz (16)Waldquelle (16)Turquoise Hill (17)Newcom Group (17)Clean Energy Asia (17)Erdenes Mongol (17)Rio Tinto (8, 17)Shenhua Energy (17)Sumitomo Corp (17)Mongolian Mining Corp (17)Saki Partners (18)Nairit (18)Snapchat (19)

Looksery (19)Luxoft (19)NIX Solutions (19)908 (19)Fondul Proprietatea (22)Electrica (22)Romgaz (22)Hidroelectrica (22)CE Oltenia (22)Salrom (22)Franklin Templeton (22, 24)Bucharest Airports (23)Constanta Port (23)Posta Romana (23)Gazprom (7, 24, 61)Rosneft (24, 25)UniCredit Bank (24)Aberdeen Asset Management (24) Ashmore Group (24)Uralkali (25)Eurochem (25)Metalloinvest (25)Gazprom Marketing & Trading (25)SUEK (25)Novolipetsk Steel (25)PASHA Bank (27)Promsvyazbank (31)Financial Company Otkrytie (31)Raiffeisen Bank (31, 35)ING Bank (31)Citibank (31, 33, 35)Ural Bank for R&D (31)Deutsche Bank (31, 33)Sovcombank (31)HSBC (31)Financial Settlement Centre (31)Rapida (31)StarBank (31)Belagroprombank (31)ASB Belarusbank (31)Priorbank (31)

Bank Petrocommerz Ukraine (31)Motor Bank (31)Bank Veles (31)mBank (32)ING Bank Śląski (32)Bank Millennium (32)Commerzbank (32)Alior Bank (32)Bank BPH (32)GE Capital (32)Idea Bank (32)Bank Pocztowy (32)Poczta Polska (32)PKO BP (32)OTP Mortgage Bank (32)K&H Bank (32)Kereskedelmi es Hitelbank (32)Ceskoslovenska Obhodni Banka (32)Ceska Sporitelna (32)Komercni Banka (32)Tatra banka (32)Slovenská sporiteľňa (32)ČSOB (32)Raiffeisen Bank International (32, 34)Swedbank (32)Versobank (32)LHV Pank (32)ABLV Bank (33)Rietumu Banka (33)Norvik Banka (33)Siauliu Bankas (33)Citadele bankas (33)Invalda LT (33)Ziraat Bankasic (33)BNP Paribas (33)Türkiye Halk Bankası (33)Turk Ekonomi Bankasi (33)Turkiye Sınai Kalkinma Bankasi (33)Sekerbank (33)İller Bankası (33)

Aktif Yatırım Bankası (33)Nurol Yatırım Bankası (33)JPMorgan Chase Bank (33)Banca Comerciala Româna (34)Banca Transilvania (34)Banca Comerciala Romana (34)Volksbank Romania (34)Banka Kombëtare Tregtare (34)DSK Bank (34)Sibank EAD (34)TEB Bank (34)ProCredit Bank (34)Privredna Banka Zagreb (34)Zagrebacka Banka (34)Erste & Steiermärkische Bank (34)Intesa Sanpaolo Group (34)Eurostandard Banka (34)Ohridska Banka (34)Mobiasbanca (34)Moldindconbank (34)Agroindbank (34)Hipotekarna banka AD Podgorica (34)Banca Intesa (34)Halyk Bank (35)Tsesnabank (35)Delta Bank (35)Kaspi Bank (35)Home Credit Bank (35)Armbusinessbank (35)Araratbank (35)Inecobank (35)International Bank (35)AccessBank (35)Kapital Bank (35)Xalq Bank (35)TBC Bank (35)Bank of Georgia (35)Optima Bank (35)Rosinbank (35)JSC CB Tolubay Bank (35)Ipoteka Bank (35)

Asaka Bank (35)Qishloq Qurilish Bank (35)Khan Bank LLC (35)Trade and Development Bank of Mongolia (35)Golomt Bank of Mongolia (35)First MicroFinance Bank (35)CJSC Accessbank Tajikistan (35)Orienbank (35)J&T Financial Group (44)CEFC China Energy Company (44)Pivovary Lobkowicz Group (44)Travel Service Airlines (44)Enel (44)Slovenske Elektrarne (44)E.ON (44)Unipetrol (44)Adris Grupa (44)British American Tobacco (44)Dräxlmeier (49)Johnson Controls (49)Johnson Matthey (49)Lear Corporation (49)Khazanah Nasional (49)Emirati Abraaj Group (49)Acibadem Healthcare Group (50)Turkish Airlines (51)Skoda JS (53)Ukrprominvest (53, 54)Bogdan Motors (53, 54)JB Park GmbH (54)Intraco Management Limited (54)Business Airlines (54)Mosston Engineering (55)Azbuka Vkusa (59)Stockman (59)Crocus Group (59)Azerigasbank (64)BTA Bank (64)

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bne November 20156 I The Month That Was

Central Europe Despite Andrzej Duda's party promising increased spending in the election cam-paign, austerity is alive and well in the Polish presidential palace. The Belgian press reported sniffily that Duda served a €12 bottle of wine to King Philippe during a state visit.

Latvia plans to build a fence on its border with Russia, in order, it claims, to restrict illegal border crossings. The 90km fence is part of an upgrade project for secu-rity along the 270km border. The interior ministry insists the project is not connected to tensions with Moscow or the potential for Kremlin aggression in the Baltic region.

The Czech corruption case centred on Olumouc is expanding rapidly. Regional governor Jiri Rozboril and two senior police officials have been charged, as it emerges police have been probing a powerful criminal ring cen-tered in the region for months. Earlier reports detailing the arrest of former interior minister Ivan Langer suggested the case was focused on a solar plant.

Southeast Europe Croatia allowed the use of marijuana for medical purposes as of October 15. The drug can now be prescribed to patients suffering from cancer, epilepsy, AIDS and related conditions, following a recommendation from an expert com-mission. Meanwhile, Albanian police seized 3.2 tonnes of cannabis near the city of Gjirokastra as part of a major anti-drugs operation.

A close associate of Moldova’s former prime minister, Vlad Filat, has testi-fied that Filat is the indirect owner of Caravita and Business Estate – two key companies involved in the country's $1bn bank fraud. Prosecutors could ask up to 10 years in prison for Filat based on current evidence.

Macedonia’s four major political parties failed to agree on further steps in the implementation of the July agreement that resolved the country’s political crisis. Johannes Hahn, EU commissioner in charge of EU expansion, said he was disap pointed with the lack of progress.

Eastern Europe An investigation into the shooting and death of over 100 people on Kyiv’s Maidan square during the 2013-14 protests are going badly after a Berkut special forces commander accused Ukraine’s interior ministry of shielding Berkut officers rather than investigating and prosecuting them.

The US Senate approved an increase in military assistance to Ukraine worth $300mn, which will be provided in 2016, The money is part of the draft National Defense Authorization Act for the 2016 Fiscal Year.

The price of Russian fruit soared on average by 30-50% in the last year because of devaluation and food sanctions. Orange prices rose fastest, up 57.4% in September versus a year earlier.

Russian air strikes in Syria are costing Moscow up to $4mn per day, data collated for The Moscow Times by a defence think-tank showed. Russia has already spent some $80mn-$115mn since strikes began on September 30.

Eurasia The Kazakh parliament approved a law allowing foreigners to be hired into the state apparatus, which will come into force on January 1, 2016. Foreigners will not be civil servants, but will work on a contractual basis. Prior to their appointment, they will be scrutinised by the Kazakh national security services. The move shows that Kazakhstan has failed to foster qualified managers from among the local population.

South Ossetian leader Leonid Tibilov said his Georgian breakaway region will hold a referendum to join the Russian Federation, after a meeting with Vladislav Surkov, the Russian presidential aide on relations with South Ossetia and another Georgian breakaway region Abkhazia. South Ossetia declared its independence in September 1990, but is internationally recognised as being part of Georgia. The administration of former Georgian president Mikhail Saakashvili tried to resolve the conflict with South Ossetia, but only managed to escalate tensions, leading to the 2008 war between Russia and Georgia.

Politics

bne November 2015 The Month That Was I 7

Central Europe Economic expectations in Central and Eastern Europe continued to decline in October, according to the latest ZEW survey. The overall Economic Senti-ment Indicator for the region dropped 7.7 points to -0.1. That followed an 11.4-point drop in September. The CEE region observed in the survey consists of Bulgaria, Croatia, the Czech Repub-lic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia and Turkey.

Polish unemployment dropped to single digits in September when the rate fell to 9.7%. The government has been predicting the jobless total would drop below the threshold for some months. The reading is another in a long series that kicked off last year showing consistently falling unemployment and a tightening labour market. Joblessness has blighted the economy, despite its relatively rapid growth compared with others in Europe.

The Czech Republic’s debt/GDP ratio fell to 41.7% in the second quarter from 42.4% in the previous three months. The debt burden remains well below the EU average of 87.8%, and places the Czech Republic ahead of its Visegrad peers as the least indebted country among the four. Poland ranks second, with a debt/GDP ratio of 51%, followed by Slovakia at 54.5% and Hungary at 79.6%.

Southeast Europe Foreign direct investment in Albania fell to €869mn in 2014, down from €945mn a year ear lier. Since 2013, FDI has been the main financing source of the exter nal sector deficit in Albania.

Romania's adopted and intended poli-cies will push the country's fiscal deficit close to 3% of GDP in 2016 and above that threshold in 2017, unless offsetting measures are identified or capital spend-ing is again not fully carried out, the IMF

warned in the statement issued at the end of a staff visit to Romania.

Bulgaria's government presented a draft law on additional taxation of foods with a high content of salt, sugar, caffeine and hydrogenated veg-etable oils, as well as carbonated drinks. The new indirect tax will have a rate of between 3% and 78% of the final price and will be paid by the manufacturers and importers of the respective products.

The collapse of Corpbank last year and the subse quent payout of insured deposits by the Bulgarian Deposit Insurance Fund has resulted in an increase in the country’s 2014 budget shortfall from an estimated 2.8% to 5.8% of GDP, creating the fourth largest budget gap in the EU.

Eastern Europe UBS' working-time Big Mac index – developed because it regards the nominal price of a burger used by The Economist as misleading due to it being disproportionately cheaper or costlier in other countries, while its working time-based method factors in the circumstanc-es of the average worker – shows that people in Kyiv have the rawest deal, hav-ing to work for nearly an hour to afford a Big Mac. This is nearly triple the time it would take a Muscovite to earn one, while those living in Western Europe would earn roughly enough money to buy four burgers in the same time.

Russia is lining up a $3bn monster Eurobond deal for early next year by telling investors the economy is emerging from its biggest shock since the USSR

was whip-sawed by the 1985 collapse in oil prices. A decision to go to the market hasn’t officially been taken yet, but investment bankers are being sounded out now, especially following the recent completion of the first corporate deals in 11 months by blue-chip issuers Gazprom and Norilsk Nickel.

Ukraine's economic collapse is bottom-ing out, but the conflict-torn country is still far from moving on to rebound growth, say analysts. The Ukrainian Ministry of Economic Development and Trade announced earlier the country's real GDP dropped by 16.3% in January-June. Industrial output fell 5.1% y/y but increased 5.9% m/m in September.

Eurasia Uzbekistan's GDP grew by 8% in the first nine months of 2015, according to government figures. The Uzbek govern-ment doesn't publish absolute figures illustrating the methodology of how it compiles growth figures. This gives rise to doubts about the real state of the country's economy.

Annual economic growth in Tajikistan stood at 6.4% in the period between January and September, compared with 6.9% in the same period last year.

Georgian exports dropped 24% y/y to $1.6bn in January-September. Depressed demand for its goods in main trade part-ners – Russia, Turkey, and Azerbaijan, has led to a 24% y/y drop in Georgia's exports, which is grappling with slower growth, cur-rency depreciation as a result.

Economics

bne November 20158 I The Month That Was

Central Europe Central Europe is watching nervously VW's market share in the EU slip. New car registrations in the EU continued to grow strongly in September, but the scandal-hit German automaker – which is a major investor in the Czech Republic, Slovakia and Hungary – saw its market share decline to 23.3% from 26.5% in August.

Czech mining limits will be partially lifted, the government has decided. The controversial move will see CEZ allowed to resume digging lignite at Bilina, but Severni Energeticka will remain con-strained at CSA.

Poland will raise PLN9.2bn (€2.17bn) from its auction of LTE frequencies. However, there are fears the high pric-ing could boomerang on the country by holding back infrastructure development. Winning bidders suggested they will need to team up to build the network, and that they could launch legal action over an auction process that "raised doubts".

Southeast Europe American investment fund Apollo has offered €1.2bn for a 58.11% stake in Telekom Srbija. Serbia’s government is looking to earn €1.5bn from the sale.

Russian VTB Bank is ready to expand into the Bosnian Serb Republic, according to the entity’s president, Milorad Dodik. VTB Bank has previously supported the entity, providing loans to help patch the budget gap.

Romania’s Transgaz has applied for a €224mn EU grant for the first stage of the Bulgaria-Romania-Hungary-Austria (BRUA) project. The cost of the project, one of several new regional pipelines in Central and Southeast Europe, is esti-mated at €560mn.

For the first time in five years, Albanian power distribution company OSHEE will not seek a price increase from energy regulator ERE in 2016. The utility has recently increased revenues and seen a sharp decline of power losses after the government launched a campaign to combat electricity theft last year.

Eastern Europe Tycoon owner and chairman of Rus-sian oil refining company Russneft Mikhail Gutseriev may IPO his Neftisa oil company after a mooted merger. Earlier in October, Gutseriev said the merger would only be possible if the oil price exceeds $50/barrel, while the IPO would also be conditional on high oil prices.

The leading Russian retailer Lenta is preparing a $250mn secondary share offering, which could possibly be expanded to $300mn. Lenta is going to issue $150mn worth of GDRs, while its shareholder the EBRD will sell its stake worth $100mn to $150mn. The funds raised from the SPO will be used to expand its retail network development programme, Lenta said.

Russian media representatives have slammed a draft bill that would force

media to declare foreign funding except from advertising and share capital to state regulators or face possible clo-sure. If passed into law in its current form, the bill would be another blow to media freedom in Russia, say critics. This requirement could be used to close media outlets, head of the legal depart-ment of the business daily Vedomosti, Vladimir Rumyantsev, told the Duma's information policy committee.

Russia ranks just 60th out of 64 countries as the most attractive des-tination for expats in terms of living standards and overall satisfaction, a sur-vey released by online expat community InterNations says. Russia fell one place behind Kazakhstan, but is one place ahead of the alcohol-free Saudi Arabia. Top of the list were Ecuador, Mexico and Malta.

Eurasia The financial closing of the multi-billion underground expansion of Mongolia’s flagship copper and gold mine Oyu Tolgoi is expected by year-end, according to a statement by Rio Tinto, which controls 66% of the mine, the remainder being in the hands of the government. The company is in the process of raising as much as $6bn in external funding for the project development. After being stalled for almost two years, the project, the largest development in the country and widely considered a barometer of its investment climate, is finally moving forward after the government and Rio Tinto struck an agreement in mid-May.

Business

bne November 2015 The Month That Was I 9

Central Europe Slovakia has joined the negative yield club. Bratislava sold €112mn of a 1.5% coupon bond that matures in 2018 at an average yield of -0.0449%.

Fitch affirmed the Czech Republic’s long-term foreign and local currency Issuer Default Ratings (IDRs) at marks for 'A+' and 'AA-, respectively, with a stable outlook. The country’s ratings are underpinned by strong fiscal finances and external balance sheet, Fitch said, though the country has weak structural indicators relative to the ‘A’ median such as lower levels of per-capita income and more volatile GDP growth.

The postponing of the float of Polish real estate company Lokum Dewelop-er is just the latest in a series of IPOs planned on the Warsaw Stock Exchange to be scrapped, as offers succumb to "market conditions".

Southeast Europe A Tirana court acquitted former Alba-nian central bank governor Ardian Fullani of charges of abuse of office in connection to a multi-million euro theft from bank reserves and the bank’s acqui-sition of the Hotel Dajti. The theft scandal severely tarnished the reputation of the central bank, and its new governor Gent Sejko has pledged to carry out reforms.

Romania issued €2bn of euro-denom-inated Eurobonds with maturities of 10 and 20 years. The 20-year issue was the first with such a long maturity for the country. The demand, particularly

for the 10-year maturity, was strong, and combined orders for the two maturities exceeded €5.5bn, local news reported. Citigroup, HSBC, Raiffeisen Bank International and UniCredit were the managers of the deal.

The Bulgarian National Bank adopted a plan to reform banking supervision. The plan should help restore confidence in the regulatory body, which remains poor after the country suffered a bank-ing crisis when Corpbank, then the country’s fourth largest lender, suffered a bank run that deprived it of liquidity, leading to it having to be taken over.

Eastern Europe The EU has prohibited financial institutions from publishing analytical research of sanctioned Russian banks. The step was taken as such publications could help investors make decisions on investing in sanctioned assets, the Euro-pean Commission commented. Russian banks that are directly sanctioned by the EU include the state-controlled Sber-bank, VTB, Gazprombank, development bank Vnesheconombank, and Rosselk-hozbank (RusAgro).

The foreign currency and gold reserves of the Central Bank of Russia gained $3.5bn to reach $377.3bn as of the week ending October 16. As Russia was affected by falling oil prices and Western sanctions over Ukraine, its reserves dropped precipitously, but have been ris-ing steadily since the end of July, gaining about $20bn and reaching the highest point since January 2015.

Sberbank CEO German Gref has recounted to investors in London the extraordinary events of December when panic and chaos in Russia led to a bank run and an outflow of RUB1.3 trillion ($16bn) in one week, exacerbated by rogue emails warning clients of imminent disaster. "All we could do was hope and pray," Gref, a former economy minister under President Vladimir Putin, told delegates at the Sberbank investor day at the St Pancras hotel in central London. "There was total panic and chaos on the market. The participants thought the Central Bank had lost control."

Eurasia Caucasus and Central Asian countries need to tighten their monetary policy to anchor inflation expectations, but excess tightening may weaken financial intermediation and hinder economy activity, the IMF warned in its Regional Economic Outlook, presented in Almaty on October 23.

Mongolia’s bad loans (NPLs) amounted to MNT836.8bn (€368.5mn) at the end of September, up by 41.7% y/y. NPLs are rising in the banking sector as the Mongolian economy falters, following a credit boom a few years ago that was stimulated by easy central-bank policy. S&P warned in April it could cut Mongolia’s 'B+' rating, citing the country’s mounting fiscal and current-account problems, which are putting pressure on the financial system.

Finance

bne November 201510 I Companies & Markets

and the consumer lender Renaissance Credit to Prokhorov, while retaining ownership of the group's African assets.

Fast-forward three years and Jennings, an evangelist for African investment, is in hot water in Kenya, where his difficulties make his problems in Russia pale into comparison.

Ta-ta to TatuPlans by Jennings to build a new city costing $5bn and stretching to 2,500-acres on an old coffee plantation outside Kenya’s capital of Nairobi have been held up for years amid increasingly incendiary relations between him and his local partners. Tatu City is a 2,500-acre, mixed-use and mixed-income development, with plans for residential, commercial, industrial, tourism, social and recreation amenities for more than 70,000 residents and 30,000 day visitors.

Jennings' partners, who are now his enemies, are Kenya's richest man Vimal Shah and Nahashon Nyagah, a former governor of Kenya's central bank. At a public event in Nairobi in September, Jennings made a wide-ranging attack on Shah and Nyagah.

Out of Africa for Russia banking exile Jennings

Renaissance Capital founder Stephen Jennings may be enjoying better weather since fleeing Russia for Africa three years ago, but his problems

seem to be mounting.

New Zealand-born Jennings was ousted in November 2012 from the Moscow-based investment bank he founded 20 years earlier after his billionaire partner Mikhail Prokhorov rebuffed his requests for more cash for the cash-strapped lender. Legend has it that Jennings lost the keys to the business after a showdown meeting with Prokhorov and Suleiman Kerimov, another tycoon who had substantial funds on account at Renaissance. Jennings requested more funds to cover the firm's losses and the tycoons turned on him, demanding he hand over his 50% stake.

Renaissance sources say Jennings, then 52, faked a heart attack to escape. An ambulance arrived and the driver was paid handsomely to divert him to Sheremetyevo airport so he could escape to London. He hasn't been back to Russia since, and neither the Russian side nor Jennings has ever spoken about what actually happened. Jennings eventually signed the papers that surrendered control of the investment bank

Jason Corcoran in Moscow

Stephen Jennings, CEO, Renaissance Capital (AP Photo/Sunday Alamba)

bne November 2015 Companies & Markets I 11

According to Jennings, Nyagah orchestrated the illegal transfer of a large tract of land worth $100mn, owned by the Tatu City investors, to members of his family. Police are now investigating the matter. Jennings described in painstaking detail the "theft, fraud and extortion" by Nyagah and his associates and how his partner Shah had "provided him with the cloak of legitimacy to commit what is probably the largest corporate theft in Kenyan history". He said Shah masquerades as a major shareholder when in fact he has only invested $289,000 in the project with a shareholding equivalent to less than 0.3% of the total investment.

Jennings recounted how he and some of his colleagues in January were summoned to the immigration department and interrogated for half a day about work permits. "In 25 years working in about 35 emerging markets, this was my first experience of such cheap harassment. There is no official file because this is a crude and corrupt shakedown." Investigations by Jennings have led him to believe Nyagah and his brother were behind the interrogation. Neither Shah nor Nyagah responded to requests for comment.

Jennings said the organiser of the event TatuTrueTalk where he spoke publicly about corruption by Shah and Nyagah had been"threatened with thugs who would beat him up" unless he pulled out. One of his lawyers also received "a chilling, written letter of retribution".

In his first interview with Western media since 2009, Jennings told the New Zealand Herald on October 8 that being so vocal about public policy and corruption issues was not his normal modus operandi. "We normally prefer to work behind the scenes. But normally we would get more support from government and more traction within the system," said Jennings, who says he now spends 70% of his time in Africa. "It's when we weren't getting that traction and we weren't getting that kind of support that we went more public with these issues."

Asked whether he faces any personal danger, he replied: "We made the decision – and I think it was the right decision – that it would have been more dangerous not to speak out."

Jennings said he is commissioning "a senior investigative journalist'' to write a book on the Tatu City saga. Another good read would be a tome on the life and times of the Kiwi oligarch in Russia.

“Shah has provided Nyagah with the cloak of legitimacy to commit what is probably the largest corporate theft in Kenyan history"

Russia’s central bank limits foreign shareholder voting


New regulations recently introduced by the Central Bank of Russia (CBR) are making it more difficult for foreign shareholders to vote at shareholder meetings, dealing a fresh blow to corporate governance standards that tend to suffer during recessions in Russia.

The disclosure requirements, which partially came into force in July, oblige foreign shareholders of Russian companies to emerge from the shadows and to provide more information about their identities. But many shareholders are refusing to fulfil the new legal provisions requiring fuller disclosure. Voting proxy companies can't vote on their behalf and are being locked out of crucial corporate decisions, and run the risk of not receiving dividends for their clients.

As a result of the new requirements, participation in voting at annual general meetings has fallen by up to 30%, according to Bank of New York Mellon, a leading custodian bank which acts on behalf of stockholders. Representatives from Norilsk Nickel told delegates at a Moscow investor conference in early September that they had difficulty in reaching a quorum because of the new law.

The authorities want to force investors to make direct purchases of shares and to abandon the depositary receipt route. They are trying to expose opaque "grey schemes" that allow the real owners of shares to remain in the shadows. But custodians and registrars argue the CBR is throwing the baby out with bathwater, as the procedure is killing off voting by minorities at a time when Russian companies are trying to wriggle out of their obligations. Logistically, keeping track of the owner of securities can be difficult when they change so quickly.

The last economic crisis in 2008 led to many corporate governance flare-ups in Russia when oligarch owners ran roughshod over corporate governance rules. Prosperity Capital, one of Russia’s largest foreign portfolio investors, suffered the most because of cancelled buybacks by oligarch Mikhail Prokhorov and Leonid Lebedev's utility TGK-2.


This pro-shareholder attitude is partly a function of the change in ownership structure of Russia’s exchanges. Previously, the RTS, which celebrated its 20th birthday in September, was largely owned by market participants, whereas MICEX was largely owned by the Central Bank of Russia (CBR). But follow-ing the merger at the end of 2011, the exchange boasts a broad ownership and one of the highest free floats on the market.

And in the latest development, Russia’s capital market was hooked into the global financial system when Moex was quietly added to the Clearstream and Euroclear international settlement and clearing systems between 2013 and the

middle of 2014. Now investors can buy Russian stocks and bonds directly from the comfort of their own trading desks in London and New York. This investor-friendly approach has made the exchange a regular outperformer in the Russian equity universe.

New roleIt’s too early to say that reform of Russia's capital market is complete, but with Moex the country now boasts easily the most sophisticated one in the former Soviet bloc. Moex ranks among the world's top 25 exchanges by total volume of equities traded, and also among the 10 largest exchange platforms by bonds and derivatives trading. As of May 1, the securities of 728 issuers were trading on the platform.That depth is crucial after US and EU sanctions cut Russian corporates off from the international capital markets, leaving Moex as the only game in town – bar some state-to-state funding by China and the sovereign wealth funds of the Middle East.

INTERVIEW:

Moscow Exchange on a roll

After lying fallow for the last couple of years, the green shoots of recovery are appearing in Russia's capital markets. Reforms that have connected the Moscow

Exchange to international capital markets and the growth of private pension funds could transform the landscape in the years to come, but this will be an evolution, not a revolution, Evgeny Fetisov, Moscow Exchange’s (Moex) chief financial officer and member of the executive board, tells bne IntelliNews in an exclusive interview.

Moscow Exchange has been putting its money where its mouth is: the leading Russian exchange now has the highest dividend yield of any exchange in the world after it increased the share of profits returned to shareholders in September, paying out 55% of its net annual income to its shareholders, up from the previous payouts of 30% in 2012, 40% in 2013 and 50% last year. “We take what we need to continuing building up the exchange’s infrastructure, but we believe strongly that what is left over after this should be returned to our shareholders,” Fetisov says.

Moex has come to epitomise the best practices of the best stocks that are listed on its boards since Russia’s leading exchanges – the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (Micex) – were merged in 2011 to create Moex. As a result, the exchange has been one of Russia’s best performing stocks despite Russian equities in general being walloped by the recession and the brouhaha that surrounds the Kremlin’s increasingly aggressive tactics in first Ukraine and now Syria. Moex shares were up this year by 32% as of September 29, against the rises of just 2% for the dollar-denominated RTS index and 13% for the ruble-denominated Micex index.

Part of Moex's strength is that in addition to being the platform for trading stocks and bonds, it also includes a central depository. This business earns regular fees from holding these assets on behalf of investors as a global custodian, and this income keeps coming irrespective of the swings on the market. It also offers commodity trading, currency conversion, derivatives and other related financial services – in short, a diversified range of income streams.

Ben Aris in Moscow

“The pension assets under management is not huge by global standards, but this source of funds is starting to be important”


Foreign investors have always played a big role in the Russian stock market, and still own roughly half of the market's free float, in the hope of cashing in on the transformation of the country to a market economy. But capital markets play a more important role for governments as an essential source of capital. A significant new pool of money is being created for investment into equities via the ongoing pension reforms in Russia that will be channelled through the exchange – and Russian companies are already complaining that development is stymied due to the lack of long-term cheap funding.

Pension money will be the next big step-up for Moex, but reform of Russia’s pension system is not going smoothly. There have been at least two attempts to make sweeping reforms and neither produced much. The cash-strapped government also raided the state pension fund last year by freezing some of the payments, but those funds were unfrozen this year in May and, according to Fetisov, an additional RUB600bn (€8bn) from the funds is available to be invested in Russian assets.

However the government is still stuck for cash and in September talk began again about reintroducing the freeze. The upshot of all the confusion is that the total value of pension assets under management in Russia has risen from about 3% to 5.6% in the last decade as of the end of 2014, according to Goldman Sachs – a fraction of where it needs to be if Russia is going to be able to take care of its pensioners.

Nevertheless, over the longer term Russia’s growing pension resources represent a significant amount of capital that will end up in the equity market and the amount of pension money going into the market is already significant.

The state has introduced new investment-style accounts where anyone investing up to RUB400,000 is eligible to get that 13% income tax refunded if the investment is held for at least one year and is eligible for capital gains tax relief if they hold the investment for more than three years. These products are proving to be highly popular with the population, which is finally starting to think about old age. “The pension assets under management is not huge by global standards, but this source of funds is starting to be important,” says Fetisov, who cites a recent Goldman Sachs report that estimates pension funds under management will reach a total of $200bn by 2020 in a $1tn economy.

Creating an equity cultureThe pension story underscores the challenges that Fetisov and his colleagues are facing: financial literacy in Russia is very low and part of his job is to create the “equity culture” that imbues the more developed markets; only about 3% of the Russian population have any money invested in equities. The problem has been a series of unlucky coincidences. President Boris Yeltsin introduced the legal framework for mutual funds in 1995 and the first appeared in 1996 – about 18 months before the markets collapsed in the 1998 financial crisis.

More recently a similar thing happened when the government

Emerging Markets Direct – your data source for the developing worldCEE Banking Sector Report – 2015j.mp/ceereport

The CEE banking sector is still suffering from an outflow of liquidity towards parent banks. This, combined with weak credit demand (amid a soft economic recovery) and reduced risk appetite by banks, has led to subdued lending activity.

• Most CEE countries’ banking sectors were profitable last year, with Poland hitting an all-time high. The exceptions are Hungary, where banks reported a record high loss in 2014 due to regulatory-ordered one-off foreign currency loan settlements, Romania, where the industry started to recover after a massive cleaning of the loan portfolio, and war-torn Ukraine;

• Interest margins across the region, although tightened, are still much higher than in Western Europe. Growth potential is also much stronger amid low levels of indebtedness compared to the more developed economies;

• M&A activity is focused mostly in Poland (where the regulator opposes further consolidation in the sector), Hungary (where the state is the major buyer of bank assets,) Romania, the Czech Republic and Slovakia;

• With a few exceptions, the non-performing loan (NPL) ratio remains uncomfortably high across the region, hurting profitability and credit growth.

j.mp/emdstore


year ago, which includes aspects like new listing rules, which will take effect at the beginning of 2016. There are also new rules to force independent directors onto company boards to oversee operations. Taken together, the new rules are another step forward in improving Russia’s corporate governance.

The financial sanctions are also holding back another reform that joining the international settlement system made possible. Now that international traders can buy locally listed stocks on their own systems, the need for depository receipts (DR) – an international proxy for locally listed shares and long a hallmark of emerging market stocks – have become superfluous.

As the price of the DRs is usually slightly different from local prices, investors were steadily buying DRs and converting them to their local equivalents and making money on the arbitrage. However, the sanctions include a clause that prohibits the issue of “new” shares in international markets. Ironically, the US Securities and Exchange Commission has ruled that converting DRs to local shares does not involve the issue of “new” shares, as the local shares already existed, whereas the EU ruled that the conversion does produce “new” securities and so has banned the practice.

If the EU does drop its financial sanctions in December, which is a distinct possibility, then this business will restart and should boost Russian share prices, as DRs are a lot more expensive to hold than locally listed shares. ”DRs cost an average of 8% to 14% of dividend payments. It gets very expensive to trade DRs if you can do the same with local shares,” says Fetisov. “Investors are still using DRs as a legacy of the transformation from an emerging market to a increasingly developed one.”

The end of DRs would be welcomed by Russian companies, as they raise the cost of an IPO significantly. The company has to satisfy two different sets of regulators and analysts simultaneously on two separate exchanges with two sets of fees, ultimately reducing the size of the free-float to each class of investment.

tried to rope the population into the “people’s IPO” listing of VTB Bank in May 2007. Russian punters put more than $1bn into the issue – only to suffer massive losses about 18 months later during the 2008 financial crash.

Russians are now, unsurprisingly, wary of securities and mutual funds. Still, the most sophisticated can see there is money to be made once the bear market ends, and Fetisov says Moex has more than 1.1mn retail accounts, of which about 70,000 are actively trading. The amount of money invested in the stock market by day traders has become large enough to have a real impact on the index.

The bigger problem is that like the day traders, what passes for institutional investors in Russia are also only speculating on short-term gains. The lack of pension or insurance funds means there are few long-term investors in the market. Even the foreign investors, which used to own about half of all equities listed, tend to be hedge funds, which have at best a six-month time horizon. This short termism makes the market shallow and volatile. “We want to see a more buy-and-hold culture, as that would give additional depth to the market. We also need to develop the domestic investor base – both institutional and retail investors. The introduction of individual investment accounts this year will help as they are geared to one- to three-year investments. Over 50,000 accounts have been opened in the first nine months of this year, which together are worth over RUB6bn,” says Fetisov.

A shortcut to improving the investor profile would be for someone to set up some domestic Exchange Traded Funds (ETF), says Fetisov. There are several foreign Russian-focused ETFs. ”Why do we not have any ETFs here in Russia? The market is certainly big enough, and they are a simple and less risky way for people to invest in Russian equities. However, so far there’s been no interest in establishing domestic funds,” says Fetisov.

Low valuationsThe pile of problems – economic and political – that Russia is currently enduring has driven share prices down to rock bottom levels. But Fetisov argues on a fundamental basis that can’t last forever, although he won’t speculate on when any recovery could begin.

Russia has always had an emerging market discount applied on its equities and on top of that a specific “Russia-risk” discount. On a valuation basis Russian stocks should be attractive, but a deep recession and lots of war-talk makes betting on Russian equities very risky right now. But Fetisov queries whether this is still appropriate to today's market. ”Russia has something like a 50% discount to other emerging markets, however we have corporate governance here, transparent accounts, and the well-functioning financial infrastructure. The size of this discount is not justified – a large part of it is due to sentiment,” he says, adding that “another part of it is due to the missing domestic investor base.”Russia introduced a new corporate governance code over a

Dispersed ownership with no controlling shareholder...as of March 16,2015

Free float50,8%

CBR 11,7%

Sberbank 10%

VEB 8,4%

EBRD 6,1%

CIC 5,6%

RDIF 5,3%MICEX-Finance 2,1%


Just like the huge client list from the early days, KMV had to deal with thousands of shareholders thanks to the messy privatisation process in the country. The Italian owner had to hire a gigantic hall in Karlovy Vary's famous Pupp Hotel to host annual general meetings. It took until 2005 for the family to take full ownership, achieved thanks to a temporary window simplifying squeeze-outs. KMV is now fully owned by Alessandro via a Netherlands-based holding, his father having retired in 2013.

Returning thirstAlessandro Pasquale is busy building on his inheritance, expanding the company's portfolio of mineral water brands and soft drinks, and growing into new markets via acquisitions. KMV remains the market leader at home, with a share of 47% last year, according to a report on the segment from Euromonitor International.

Pasquale claims KMV's lead has consistently increased in recent years, despite the economic crisis suggesting cheaper bottled water might erode its advantage. Neither has a conservation

controversy surrounding the now-abandoned spa built by Heinrich Mattoni around the spring appeared to have hit sales.

First-half results reflect the economic recovery in the region as consumer confidence returns. KMV saw record sales growth of 31% on year in the six months to June, with revenue reaching over CZK3.5bn (€130mn). And this growth should accelerate through the rest of the year, Pasquale hopes, thanks to a searing hot summer in Central Europe and the recent acquisitions in Hungary. KMV expects to sell 1bn litres of water and soft drinks in 2015, and boost turnover to CZK6.3bn.”The crisis is behind us now,” the Italian insists.

For a brand to cross the divide to become generic is a sign of a rare level of success – and Sellotape, Hoover and Aspirin have all made the grade. In the Czech Republic,

you're as likely to hear an order for a “Mantonka” as a mineral water.

To get to that point, Antonio Pasquale had to deal with hundreds of shops, bars and restaurants as he resurrected Mattoni – the mineral water brand from Karlovy Vary – just after communism fell. “There were no distributors in 1991 when my father came here from Italy,” explains Alessandro Pasquale, the current CEO of Karlovske Mineralni Voda (KMV) and son of Antonio. “There were no products to distribute.”KMV has introduced a large range of other bottled waters and soft drinks in the intervening quarter of a century. However, it's still the mineral water brand from the spa town in the west of the country – a cherished client of Czech TV stations and avid supporter of public events, whose giant eagle-shaped billboards guard Prague along the main roads coming from all directions – that has seen KMV retain top spot in the Czech bottled water market throughout the years.

However, the company is keen to take more crowns. It now leads the wider Czech soft drinks segment, and claims recent acquisitions in Hungary have made it “the largest producer of bottled mineral and spring waters in Central Europe”. KMV also has a plant in Austria, where it ranks second in the water market. It enjoys a similar position in Slovakia, and today exports to Poland, Germany, the US and UAE.

Pasquale Snr was hardly alone when he arrived in the Czech Republic in 1991; Italian investors were amongst the first to arrive when the Iron Curtain fell. However, the crowd landed in Prague and concentrated on snapping up real estate.

Having already run a successful water producer at home in “the most developed water market in Europe”, Pasquale says his father saw it as a natural expansion to head to Karlovy Vary, where Heinrich Mattoni first tapped the spring in 1873. Pasquale Snr was such an early mover that he initially had to run the company as a joint venture with the state and wait for privatisation law to catch up.


Tim Gosling in Prague

“In the Czech Republic, you're as likely to hear an order for a ‘Mantonka’ as a mineral water"


“Confidence is returning, but not as before. It was unhealthy in the boom years, with many people taking on huge debt, and I don't think we'll see that again.”

On top of the return of consumer spending, some suggest the Czech bottled water segment will get an addition boost from recent legislation demanding that at least one drink in bars and restaurants should be cheaper than beer. Full of disdain, Pasquale shrugs as he says the legislation may or may not help KMV's sales, calling it an empty political gesture. “They claim it's part of an effort to reduce teenage drinking,” he scoffs. “People know whether they want a beer or a water when they walk into a pub. A few crowns won't make any difference. They should look at the underlying causes for teenage drinking.”

The awkwardness of the legislation also appears to stem from an effort to avoid the third rail of Czech politics. “Beer in the Czech Republic is like the baguette in France,” Pasquale laughs. “You can't touch it.”

However, he suggests, the ongoing emphasis on a healthy lifestyle is helping consumers switch to water. Indeed, Euromonitor International points out that “Czech consumers purchased more functional bottled water and natural mineral bottled water in 2014 with the developing health and wellness trend in the country”.

In the DNAIn seizing that opportunity, Pasquale appears confident that his “relatively small company” can continue to see off competition from multinationals such as Coca-Cola, Pepsi and Nestle. He also claims rising competition from local firms in the region is a good sign.

Kofola – producer of the eponymous communist-era Czech cola substitute – is particularly keen. Having bought Slovenian mineral water producer Radenska earlier this year, the Warsaw-listed company says it is looking for acquisitions in the Czech and Slovak markets, as well as others. “I like the local competition,” Pasquale asserts. “The only expansion Kofola is carrying out is in the water segment. It tells you something about the future of the market. Water is the perfect answer to building health concerns.”

Meanwhile, respect for local flavours is key to fighting the multinationals' advantages of scale and product portfolio, he contends. “They try to convince the consumer to take a standardized product,” he says. “We go from the opposite end to respect local tradition. We don't offer orange-based beverages in the Czech Republic, but forest fruit flavours.”

“I'm Italian,” Pasquale adds with passion. “It's in my DNA to preserve local flavours!”

Liquid marketsThe small size of the Central European markets is another bonus, the CEO suggests. “We're small, fast and flexible,” he points out, noting that KMV has also consistently pumped earnings back into technology in order to raise productivity. The Mattoni plant in Karlovy Vary has seen output rise by a factor of 20 since 1991 while retaining around 200 staff throughout. “We're not a super modern family,” he laughs, “but the factories are all completely new.”

He points to KMV's new Hungarian bottled water producer Kekkuti Asvanyviz – producer of the Theodora brand – which was bought in March from Nestle, as an illustration. “We've held the company for eight months,” he says, “and in the first half of the year it reported a profit for the first time in nine years.”

A month later, KMV bought soft drinks producer Szentkiralyi Asvanyviz, a move that saw KMV take top spot in Hungary for mineral water, Pasquale claims. He wants to double the size of the business in the country over the next five years.

The acquisitions – which followed the 2008 purchase of Austria's Waldquelle – will likely take some time for KMV to digest, therefore. They also complete Pasqaule's “primary target” to take a leading share in four “similar” markets. For the future, Pasquale would likely seek a larger pool – suggesting Germany, Poland or even Italy – although he bemoans a lack of good targets across the region.

However, he insists KMV stands ready for any opportunities. The company's retained earnings are “huge” he says, citing a conservative approach to spending by both KMV and the family behind it. On top of that liquidity, private equity has long been keen to hook up with KMV, and Pasquale says he would be happy to look at any deal should it be needed.

Meanwhile, KMV is in the midst of trying to offload a small plant in Ukraine. “It has never really worked,” says Pasquale, with the crisis only sealing the factory's fate. “The economy is not developing, and you have a frozen conflict. Investment is about expectations,” he adds ruefully.

“We're not a super modern family, but the factories are all completely new”


up to a third of Mongolia's annual GDP. "We own 34% [and] 66% shareholder Turquoise Hill has a $7bn market capitalization. That's just one asset.”

Missed potentialKnown by many business leaders in Ulaanbaatar as Byamba, the Western-educated businessman cut his teeth as the head of Newcom Group, one of Mongolia's largest conglomerates. It was there that he led the development of the country's first wind farm. With one more and a solar farm also in the works, the Newcom subsidiary Clean Energy Asia has the ambitious hope to someday export green energy throughout northern Asia.

But it's Byambasaikhan's tenure at Erdenes Mongol that will likely prove the most challenging of his career. Case in point: Mongolia has squandered its enormous Tavan Tolgoi coking coal deposit since commercial production was launched four years ago. That includes numerous stops in production, corruption scandals and a decision to give away most of its working capital for a short-lived social programme that handed out about $15 a month to each Mongolian.

Byambasaikhan's first victory was mending relations with global miner Rio Tinto for the relaunch of a $6bn underground expansion at the Oyu Tolgoi copper mine. The project was stuck in limbo for about three years because of disagreements between Rio Tinto and the government. Now Byambasaikhan is leading negotiations for a strategic partnership for the Tavan Tolgoi coal mine after a deal from earlier this year to hand over management to China's Shenhua Energy, Japan's Sumitomo Corp and the locally-run Mongolian Mining Corp fell apart because of objections by some lawmakers. “The dialogue should be corporate-to-corporate relationship; not sovereign-to-corporate,” says Byambasaikhan about negotiations for Tavan Tolgoi. “That's how we succeeded in unlocking the underground project at Oyu Tolgoi.”

Treasure collectorSuccess at Tavan Tolgoi as well as an investment agreement

Business leader- turned-technocrat ready to mine Mongolia's “treasures”

One of Mongolia's premier dealmakers has taken on the supreme task of putting the country's mining and infrastructure projects back on track after years of

delays – and he's doing so ahead of elections that could bring about yet another complete change in government and its institutions.

Mongolia was a magnet for investment until 2013, when foreign investors grew wary over problems that were plaguing the key mining sector. Poor management of state-owned mines, disputes with private partners and years of dragging development on infrastructure that would remove bottlenecks on mining exports all took their toll. The slowdown in China, which consumes most of the gold, copper and coal produced here, hurt the economy further. The Asian Development Bank is projecting just 2.3% growth for 2015, compared with 17.5% hit during the peak of the mining boom in 2011.

These are the challenges that Bayanjargal Byambasaikhan will face as he seeks to transform the country's most valuable portfolio of assets into a flourishing investment vehicle. State-owned mining license holder Erdenes Mongol is where the country keeps its stakeholdings in the country's five most-valuable deposits for gold, copper, coal and other minerals that litter this resource-rich country.

Erdenes translates from Mongolian into "treasure", but much of that remains buried deep underground because of poor management by successive governments. “We're introducing new standards of business to the companies that run the mines, starting with the financial and technical standards,” Byambasaikhan tells bne IntelliNews in an interview.

Currently, it's difficult to put a dollar estimate on the value of Erdenes Mongol's portfolio. But audits are currently underway, and the partial privatisations of the mines should help put accurate values on them. “Look at Oyu Tolgoi,” says Byambasaikhan, referring to the country's giant copper-gold mine that at full production could generate

Terrence Edwards in Ulaanbaatar


for a crucial railway line that would allow more coal to be sent to China would score a hat-trick for Byambasaikhan. That might give him the political clout needed to see through his grand design of transforming the holding company into a government-owned investment fund.

His inspiration is the Singaporean sovereign wealth fund Temasek, which currently manages a net portfolio of $266bn. Byambasaikhan puts its success down to the quality of its assets, its talented personnel and ability to operate independently.

Nigel Finch, managing director of the Sydney-based financial advisory firm Saki Partners, says “there are no cons” to the Temasek model. “The main priority is to develop a dual mandate strategy; to ensure the fund achieves the targeted economic returns while simultaneously delivering social impact in Mongolia,” says Finch, who is a honorary consulate in Sydney for the Mongolian Embassy and has hosted Mongolian delegations seeking economic cooperation with Australia.

Byambasaikhan sees 10-fold economic growth for Mongolia over the next 20 years, with Erdenes Mongol's portfolio expanding alongside that growth. But despite all his optimism, the upcoming parliamentary elections could put a hole in his grand plans. With Mongolians set to go to the polls in July 2016, a change of government could see Byambasaikhan turfed out of his job.

When the 2012 election saw the Democrats take power away from the Mongolian People's Party, it set off a sea-change in government. New appointments were made at every level of government agency, and the entire ministry structure was reformed.

In the run-up to these elections, politicians could also be tempted to criticise the government and people like Byambasaikhan for handing over too much control of valuable resources and infrastructure to foreign investors – which always goes down well with a population suspicious of larger neighbours looking to control its economy. Oyu Tolgoi, Tavan Tolgoi and the railway all hinge on partnerships with foreign investors to lead and finance development.

Regardless, Byambasaikhan insists he can do his job just fine under any government. If he succeeds, maybe they will let him try. “Government is really convinced that state-owned enterprises can run better, but the way to do it is to remove political influences,” says Byambasaikhan, who asks for nothing more than the ability to run his fund as freely as any other company that operates in the country.

“Put me on the same ring as everyone else,” he says. “I don't need any privileges or restrictions.”

Multinationals pessimistic on Russian market

bne IntelliNews

Large investors are pessimistic about the outlook for the Russian market and some are reducing their exposure, according to an October report published by the London-based advisory firm Global Counsel.

Although some groups are keeping their options open, and some even seizing counter-cyclical opportunities, unless the business environment improves more groups will step back from the Russian market, Global Counsel said.

The report asked 46 of the biggest international investors on how they perceive the turbulent 18 months since the beginning of 2014, during which sanctions have been imposed, oil prices fallen, and Russian domestic and foreign policy has been volatile.

Six times as many correspondents view the Russian market negatively than those viewing it positively, making a “bleak assessment”, driven by both structural and cyclical factors. Nevertheless, there are twice as many companies committed to expanding their presence in the Russian market as those planning to reduce it. Still, the largest group of respondents are either standing pat or not reporting any changes.

Across sectors, healthcare had the most optimistic assessments of the market, while the financial and the energy sectors the most pessimistic. While comments on Russian policy were hard to obtain, Global Counsel notes that those collected concerned mostly the food embargo and the policies affecting the financial sector.

At the same time, a number of large players are “dou-bling down” and expanding their operations despite the pessimistic outlook, but the authors of the report are not sure whether such strategies will be sustained, given the uncertainty stemming from the external environment and internal policy.

“The next 18 months are likely to be critical in determining whether more international investors double down or pull back from the Russian market,” commented Gregor Irwing, chief economist of Global Counsel.

If the external environment does not improve, then the number of foreign firms reducing their exposure to Russia is likely to increase, he added.


Then a large Dnipropetrovsk web development company 908 announced it was entirely relocating its staff to Poland due to pressure from the security forces. “In Ukraine the police can enter any company, confiscate the means of production and keep hold of them,” the co-owner of 908, Andriy Khorsev, wrote on Facebook, after law enforcement confiscated servers in connection with child porn allegations. “This is done with one goal – to put pressure on the company and force it to undertake certain actions… Such moves will kill a sector that not long ago was a beacon of hope,” he lamented.

The raids and corrupt activities by law enforcement agencies add to an already unfriendly environment for those working in IT in Ukraine. Fighting in East Ukraine – both the actual conflict zone in the Donbas region, but also the accompanying threat of being called up to the army – weighs on the minds of the young men who make up the bulk of coders. Together with a general decline in living standards set against the rewards for coding talent in the West, Ukraine's IT brain drain is accelerating. The industry association IT Ukraine puts the total number of programmers who left Ukraine in 2014 at 2,500, but the loss of whole companies is a new phenomenon that threatens to reduce the growth rate of Ukraine's IT sector from 25-30% in 2013 to 2-3%.

Raids on IT companies may not always be a sign of corruption, the interior ministry points out in its defence, since the sector suffers unhealthy links to cybercrime, as bne IntelliNews has detailed. In August, the US Securities Exchange Commission accused Ukrainian hackers of teaming up with local invest-ment banks to commit fraud in the US worth over $100mn. US regulators have also frequently accused Ukraine's IT sector of infringement of intellectual property rights.

Ukraine cities compete to attract IT companies

First the good news: in September global photo sharing app Snapchat bought Odesa-based start-up Looksery for $150mn – the biggest ever buyout of a Ukrainian-based

IT firm, less than a year after its launch. Looksery technology allows real-time modification of video images to brush up your looks when chatting, or can transform you into a cast member of “The Walking Dead”. Looksery's programming team was based in Odesa after being selected in national programming competitions, while the company was registered in San Francisco.

Now the bad news: Ukraine's IT sector, one of the strongest parts of the economy because of a plethora of talented coders, is reeling after a series of raids by the security services, which has caused some local developers to shut up shop and relocate to more benign environments such as Poland. "The large number of searches at IT companies is a cause for concern – in September alone there have been over five. This will hardly improve the investment climate,” the Lithuanian-born economy minister, Aivaras Abromavicius, tweeted on September 23. Estimates put the total number of 'raids' of IT firms by the security services so far in 2015 at over 50.

Outsourcing in 2013 brought in close to $2bn in revenue, for the first time exceeding revenues from arms sales, Ukraine's other technology export, with a growth rate predicted at 25% pa. But in 2014 the crisis with Russia caused the estimated figure to fall back sharply, as swathes of the country were hit by physical disruption.

Now increasing pressure from Ukraine's unreformed law enforcement is adding salt to the wounds.

In early September, the Security Service of Ukraine, known by its acronym SBU, raided the Dnipropetrovsk office of New York-listed international outsourcing company Luxoft, reportedly after threats of a terrorist attack had been sent from its IP addresses in June. One week later, the SBU raided the Kharkiv offices of IT firm NIX Solutions, reportedly looking for documents relating to a bank.

Graham Stack in Kyiv

“Such raids by the police will kill a sector that not long ago was a beacon of hope”


Ukraine's government for its part suspects that the outsourcing industry exploits its offshore nature to evade taxes, and also that many local programmers formally registered as individual entrepreneurs are in fact full-time employees of IT developers.

Rolling out the welcome matWith decentralisation a la mode in Ukraine, competition among cities and regions to provide the best conditions for IT could now offer the best solution for the sector's problems. “Regarding the numerous recent 'mask shows' [raids by masked police] against IT companies in Ukrainian cities, I invite all developers who find their local situation scary and uncomfortable: Come to Lviv,” wrote the mayor of

Lviv, Andriy Sadoviy, who is also head of the Samopomich political party. Sadoviy is offering help in relocation, support from Lviv town council's IT Cluster and Business Services section, “and protection from unhealthy attention from 'people wearing epaulettes'.”

Ironically, September's landmark Looksery deal, while showcasing Ukraine's coding talent, also accelerated the IT brain drain, as the company closed its Odesa office to relocate staff to Silicon Valley.

But Odesa's reform-minded regional administration under former Georgian president Mikheil Saakashvili is now aiming to reverse the tide and like Lviv provide a friendly incubator environment for IT companies. Furthermore, an adviser to Saakashvili, former Microsoft lawyer Sasha Borovik, is now running for mayor of the city of Odesa and has made IT a major plank in his campaign. "I hope that in the future when coders will talk about work in Ukraine, they will first and foremost think of Odesa… We just have to free ourselves from bureaucracy and corruption and explain that coders are wel-come here and we will assist them," he tells bne IntelliNews.

“We just have to free ourselves from bureaucracy and corruption and explain that coders are welcome here and we will assist them"

Even more depressing: while EM equities, supposedly a play on growth and convergence, declined for four years in a row, developed equities soared by 40% (S&P 500) and 20% (Euro Stoxx 600, in euro), respectively, over the same period. $1mn invested in May 2011 across developed markets equities would have grown to about $1.13mn (not counting divi-dends) by October.

In the second half of August, the MSCI Emerging Markets Index hit bottom – for the time being. Since then, it gained in dollar terms 11.5% to October 16. Not spectacular, but

No, the title of this column is not the first line of the autobiography of an erstwhile emerging markets investor – although it could be. Somebody who

invested $1mn in emerging markets equities in May 2011 would have only owned, roughly, $640,000 by the end of September (based on the MSCI Emerging Markets Index). Certainly nothing to cheer about. In fact, the column’s title comes from the blues standard “Nobody loves you, when you are down and out” – popularized by the great Bessie Smith in the 1920s – which perfectly summarizes the sentiment towards emerging markets in recent months, if not years.

COMMENT:

Once I lived the life of a millionaire…

Peter Szopo of Erste Asset Management


recently. First, the possibility of another round of quantitative easing in 2016 in Europe and the US in response to sluggish European growth and recession risks in the US. However, it is not clear how this would help EM equities, because the growth shock preceding further monetary easing would likely dominate the liquidity impact. Second, and more beneficial for EM assets in the near term, would be further stimulus measures, particularly of the fiscal kind, in China. They would not only support demand for commodities, but also alleviate general China-related fears that, according to recent surveys, are the main risk factor weighing on investor sentiment.

Overall, however, it still is unlikely that the current uptick in EM assets will turn into anything closely resembling the EM bull market of the early noughties or the massive rebound from 2009 to 2011. It may last another two weeks or two months – nobody can tell – but “a return to robust and synchronized global expansion remains elusive”, as the IMF pointed out in its recent World Economic Outlook (Page xiii), and commodity markets will remain weak. Two of the key ingredients for a revival of the EM investment case, therefore, will be missing for the time being. EM investors, it seems, need to wait some more time before they can return to live a millionaire’s life.

significant enough to re-examine the investment case for EM equities, particularly because the rebound was accompanied by an improvement in a number of other indicators usually associated with a “risk-on” scenario, in which investor

appetite for risk assets grows. The dollar weakened, oil and copper bounced, and the S&P 500 as well as Euro Stoxx 50 volatility indicators dropped sharply.

Swings in investor sentiment are often hard to understand at the time they take place. One factor triggering the change could have been China’s devaluation in mid-August. Initially it was seen as a confirmation of China’s growth problems and, therefore, accelerated the drop in risky assets, including EM equities. However, soon afterwards investors realised that previous concerns were likely overdone, and they also started interpreting the currency move as a sign that Chinese authorities would not accept a massive slowdown in economic growth without attempts of counteracting.

My expectation (expressed in this bne IntelliNews column) of a better second half-year for Central European equity markets (Poland, Czech Republic, Hungary) has not materialized, so far, in light of the generally poor third quarter for equities. However, within the EM universe, Central European markets proved to be more resilient to global turbulences than their peers (see chart), in line with the thinking in the previous column. The recent rebound was also supported by the fact that in August the slide in earnings estimates for the EM corporate sector slowed and finally turned upwards. 2015 earnings will still decline (the third year in a row), but based on consensus estimates growth in 2016 could reach 12%. Together with a current valuation discount of 28% to developed markets against a long-term average of 21%, the earnings momentum will likely remain supportive. Likewise, the reluctance of the US central bank to start raising interest rates in September was perceived by many investors as supportive for EM assets. However, as far as equities are concerned, it is not clear whether the relief about the Federal Reserve’s inaction was appropriate. As low interest rates are the consequence of feeble US or even global growth, EM equity investors should in fact be concerned about the lack of upward pressure on interest rates.

Chinese stimulus could provide near-term supportTwo more factors creating upside risk were brought up

“Two of the key ingredients for a revival of the EM investment case will be missing for the time being”

“It still is unlikely that the current uptick in EM assets will turn into anything closely resembling the EM bull market of the early noughties”

EM equities vs. Yuan

Source: Bloomberg; Erste Asset Management

6.4100.0

92.0

84.0

76.0J-15

EM Central Europe Yuan/USD

A-15 S-15 O-15

6.4

6.3

6.2


Romania’s government is under pressure from the property restitution fund Fondul Proprietatea to accelerate the country’s sluggish privatisation process

and move forward with IPOs and strategic sales of state-owned enterprises.

Fondul Proprietatea (FP), “property fund” in Romanian, is a closed-end fund set up to reimburse Romanians whose property was confiscated in the Communist era. Managed by US-based Franklin Templeton, it currently has €3bn under management. FP is listed on the Bucharest Stock Exchange and in April carried out a successful secondary listing in London. This resulted in a broadening of the fund’s investor base with a number of new international investors – both large and small – becoming shareholders.

The size of FP’s portfolio has fallen sharply from almost 90 companies to 49, following a series of sales and IPOs. These included several high-profile IPOs of major energy companies in 2013 and 2014, with both electricity distribution company Electrica and gas company Romgaz holding dual IPOs in Bucharest and London.

Privatisation by IPO has proved popular in Romania, primarily because it is a relatively transparent process. “A lot of questions have been asked about past transactions, and in the current political climate it’s very challenging to get the government to make decisions to sell stakes to investors,” the fund’s manager, Greg Konieczny, tells bne IntelliNews in an interview. “So we encourage the government first to list part of its holding, and then take a decision on whether to further reduce its holding.”

Two more companies, Hidroelectrica and CE Oltenia, have already been approved for IPO by the government, but there have been lengthy delays and the timing of the deals are still unclear. And the experience of the two energy companies illus-trates the challenges faced with privatisation in Romania, which has lagged behind its peers elsewhere in Emerging Europe.

Tales of corruption and bankruptcyThe IPO of Romania’s largest electricity producer

Hidroelectrica has been delayed because of the insolvency procedures at the company, but there are hopes these will be wrapped up by the first quarter of 2016. The best-case scenario would be an IPO before the summer, or failing that in the second half of the year, according to Konieczny. Morgan Stanley has already been selected as investment banker for the process and preparatory work is proceeding, but a lot depends on when the insolvency issue ends.

Hidroelectrica posted record profits in the first quarter of 2015, after carrying out a far-reaching restructuring programme. The most important step was cancelling contracts signed under

previous managers, under which it sold electricity at a loss to murky private traders, dubbed “smart guys” by the company. Progress was finally made in early 2015, when Hidroelectrica won several court cases against the traders.

Meanwhile, the IPO of CE Oltenia, the operator of several coal fired power plants, has been postponed indefinitely, although Romanian Energy Minister Andrei Gerea indicated on September 25 that a listing might be considered in spring 2016.

Unfortunately, former CE Oltenia managers were at the centre of a corruption case also involving Prime Minister Victor Ponta. Ponta is accused of forging documents to cover payments made to him in 2007 and 2008 when he was working as a lawyer, Romania’s anti-corruption prosecutors said on September 17.

More IPOs could be in the pipeline. The listing of salt monopoly Salrom might be approved soon despite a comment

Clare Nuttall in Bucharest

Fondul Proprietatea drives Romania’s privatisation agenda

bne:Funds

“One of the reasons Fondul is attractive for investors – both local and international – is that it’s a proxy for Romania”


from Minister of Economy Mihai Tudose on September 10 that the IPO was “not an option” given the company’s strategic importance.

Konieczny tells bne IntelliNews that Tudose’s comment had been “unwise”. It also contradicts an earlier government statement indicating that Bucharest is willing for the IPO to go ahead. Having shared more information on the IPO process and costs with the minister, FP expects a shareholder meeting to take place within the next 30 days, at which time the IPO could be approved. This would pave the way for an IPO before summer 2016, subject to market conditions.

A Romanian government committee is now drawing up a list of the next companies due for listing, which is likely to include Bucharest Airports, Constanta Port and Posta Romana, after the attempted sale of the company to Belgium’s bpost fell through in September.

FP is keen to push ahead despite the uncertain investment climate. “To prepare a company for IPO takes between six and 18 months. It’s very difficult to know what the market will look like in a year’s time,” says Konieczny.

Nor does he expect Romania’s upcoming elections – the country will hold both parliamentary and local elections in 2016 – to affect plans to sell stakes in state-owned or partially state-owned companies, or to affect the appetite for investment into Romania. “Of course, locally there will be a lot of noise around the election campaign. However, most investors realise that for all the main parties the goal is to further integrate with Europe. There are no strong political voices against the EU as in Greece or Hungary. We don’t expect any major shift in policy,” he says. As FP exits some of its portfolio companies, the fund has the ability to make new investments. However, Konieczny says that under current market conditions, buying new companies would not benefit the fund. “We would consider buying new companies if the return from them is greater than the returns we can generate for shareholders from buying back our own shares,” he explains. As of end-August, FP was trading at a discount to net asset value (NAV) of around 30%. “If we buy back our own shares, we get a return of close to 50%. It would be very hard to beat that by investing into new companies.”

FP is expected to continue to get smaller, as the current €3bn is far too large for the local market. However, there are no plans to wind up the fund, which does not have a fixed expiry date.

In addition to supporting the privatisation process, FP has also helped to make Romania more accessible to investors by offering exposure to the Romanian market. As Konieczny points out, “One of the reasons Fondul is attractive for investors – both local and international – is that it’s a proxy for Romania.”

Emerging Markets Direct – your data source for the developing worldPolish Metallurgy Report – 2015j.mp/polishmetalreport

Get an overall picture of the current trends and the outlook for Poland’s metallurgical sector, which represents a significant part of the country’s indus-trial base. It is dominated by the steel industry, which accounts for more than 90% of the country’s total metallurgical output. Copper production makes about 7% of the total, while other metals, like lead and zinc, make the balance.

• Poland’s steel production sector is mostly driven by the main domestic consumers - the construction sector, the auto manufacturing industry, the producers of machinery and other metal products and household appliances makers;

• Poland is the biggest steel producer in the CEE region and the sixth biggest in the EU, accounting for about 5% of the bloc’s total crude steel output;

• After two years of contraction, Poland’s crude steel output grew 8.4% y/y in 2014 and is set to keep on rising in the medium term, driven by robust perspectives for the key domestic consumers – the automotive and construction sectors;

• After two years of contraction, Poland’s apparent crude steel consumption soared 18% y/y to an all-time high of 12.19mn tonnes in 2014, as performance improved at both the automotive and construction sectors while consumption is also set to grow further in the coming years, reaching new record-high levels;

• Poland’s copper sector is dominated by 32% state-owned KGHM, which is the sole domestic copper mining company and one of the leading copper producers in Europe.

j.mp/emdstore


JPMorgan, and UniCredit Bank and roadshowed by Gazprom from October 5, the issue enjoyed double the proposed supply, enabling a two-fold yield guidance cut from 5-5.125% to 4.75-4.875%, to the final placement yield of 4.625%.

Norilsk's placement could "open the door for issuance from other Russian corporates," according to Sberbank CIB. "The placement shows that international capital markets are not closed off for Russian corporate issuers, which is positive for the short-term outlook for Russia's current account."

This year alone, there was $16bn worth of euro and dollar Russian paper with a maturity date scheduled. Almost $4.5bn of that belongs Gazprom, while Rosneft, another state behemoth, must service or refinance $26bn in debt from the second half of this year till the end of 2016.

"An outright lifting of the sanctions can’t be dialled back quickly," Tom Adshead, chief operating officer at Macro Advi-sory in Moscow, tells bne IntelliNews. "What we could see is a marginal softening as Ukraine gears up to take control back of its borders. That would manifest itself in the banking sector first with a nod from the very top to compliance departments to start softening their internal guidance on how sanctions are interpreted."

The banker who came in from the coldSome investors, however, remain to be convinced that Russia risk is back on the table after the Paris talks over the future of Ukraine. Paul McNamara, who manages $4.5bn in emerging market assets at the investment firm GAM in London, points to

the Norilsk deal being made up of mostly European banks. "If Paris is a game-changer, then I am the Pope,” McNamara tells bne Intellinews.

Financial sanctions preventing some Russian entities from raising money in international capital markets have been far more effective than sectoral sanctions, asset freezes and visa restrictions. Even Russian companies not sanctioned are suf-

“Norilsk's placement could open the door for issuance from other Russian corporates"

"If Paris is a game-changer, then I am the Pope”

Russian corporates, locked out of international capital markets for the past 11 months due to the Kremlin’s involvement in the Ukraine conflict, can see light at the

end of the tunnel.

A new agreement brokered in Paris on October 2 to hold elections in East Ukraine, along with a ceasefire and a continuing withdrawal of weapons from the front lines, boosted hopes that Russian companies will be allowed out of the funding purgatory imposed for President Vladimir Putin's annexation of Crimea and aggression in eastern Ukraine.

This optimism has made Russia’s bond market the best performer among the major emerging markets so far this year, returning 17% year to date, according to Bloomberg. Franklin Templeton excluded Russia from its portfolio in the summer and missed out on the rally, but money managers at Aberdeen Asset Management and Ashmore Group both say there is still more upside in Russia’s bonds.

Russian issuers have seized the opportunity. Norilsk Nickel, the world's biggest producer of Nickel, on October 7 sold $1bn in the first benchmark-sized Eurobond in a successful tilt to test the improved political temperature over Ukraine. Norilsk sold double what it was planning to and managed to secure a seven-year note yielding 6.625%, down from initial guidance of about 7%. That is the biggest deal from a Russian corporate since Gazprom sold a $700mn one-year bond last November. It was also the first money borrowed in US dollars since January, according to data provider Dealogic. Russian companies also haven’t issued new debt in euro, sterling or yen bond markets over this period, Dealogic said. Barclays, Citigroup, ING Group, Societe Generale CIB and UniCredit were the lead managers on the deal.

Hot on the heels of Norilsk Nickel's $1bn bond placement, Russia's state gas company Gazprom placed three-year Euro-bonds also worth €1bn on October 8. Organised by Banca IMI,


Signs of a resurrection in Russia’s moribund capital markets

bne:Deal


fering from contagion, as banks are unwilling to lend to any Russian company for fear of incurring the wrath of a US or UK regulator.

The inability of large companies like Rosneft to refinance their debts on the international market fuelled the collapse of the ruble and triggered a run on the banks in December. The oil giant sold a monster RUB625bn bond, which intensified pressure on the currency, as the market assumed it was to be used to buy dollars.

With equity and debt markets largely shut, the only limited activity in the past year has been through the syndicated loan market. Even there, only $3.2bn worth of deals have been made so far in a market that historically was worth about $50bn a year.

Uralkali, Eurochem, Metalloinvest, and Gazprom Marketing and Trading are some of the small band of companies that have managed to secure deals. Other names in the market now trying to close deals are coal miner SUEK and steelmaker Novolipetsk Steel, which is struggling to close a deal worth $400mn following protracted haggling over pricing and "sanctions documentation", according to a senior banker working on the deal.

Sanctions, the crash in commodity prices and the first

recession since 2009 has decimated Moscow's investment banking community, with many losing their jobs and the lucky few being relocated to London to work on other markets. Fees from mergers, bonds and equity deals for European banks dropped 61% to $42mn in the year to October 5, according to

data provided to bne Intellinews by Freeman & Co in New York. Fees earned by US banks plunged 90% to a paltry $9mn over the same period.

A reopening of Western debt markets could feed into the equity market and open the door to more deals. It could also lead to the lifting of informal bans on lending and new investments to Russian companies by international financial institutions such as the European Bank of Reconstruction and Development and the World Bank’s IFC private equity arm, according to Adshead. "Sanctions won't be lifted because they are formally linked to Crimea, but we could see a loosening of the interpretation and that's all we need to get the show back on the road," says Adshead, himself a former EBRD banker.

"An outright lifting of the sanctions can’t be dialled back quickly"


Despite significant devaluations already in 2015, Central Asian and Caucasus currencies are continuing to face depreciation pressures because of sluggish economic

growth and worsening foreign trade, the IMF predicts in its autumn World Economic Outlook, which was presented during the IMF/WB Annual Meetings in Lima, Peru, on October 6.

The IMF said in the outlook that weakening commodity prices had triggered “sizeable” currency depreciations since last spring, especially in August. Regional currencies have fallen by 40-50% in value this year, most notably the Azerbaijani manat by nearly 35% and the Kazakh tenge by over 45%.

“Countries with weakening growth prospects and worsening terms of trade are facing [further] currency depreciation pressures,” the outlook suggests. However, “exchange-rate depreciation has generally been a useful buffer for countries experiencing growth slowdowns – and has already been substantial – but could cause adverse balance-sheet effects where there is foreign-currency borrowing,” Maurice Obstfeld, IMF chief economist, warned as he presented the report at a news conference in Lima.

Kazakhstan issued 10-year Eurobonds worth $1.5bn and 30-year bonds worth $1bn last October, while Azerbaijan sold its first international bond sale of $1.25bn in March 2014.

The IMF warns that policymakers “need to consider the impact of the exchange rate on their financial sector and take measures to ensure its health, especially given the sector’s substantial foreign currency lending to unhedged borrowers and short open foreign exchange positions”.

The outlook predicts net energy exporters – Azerbaijan,

Kazakhstan, Turkmenistan and Uzbekistan – will post a combined current account deficit of 2.7% of GDP in 2015 and 3.2% in 2016 against a surplus of 3.3%. While Azerbaijan and Uzbekistan will maintain their balance sheets in the black, Kazakhstan’s current account will post deficits of 3% of GDP in 2015 and 4.1% in 2016 against a surplus of 2.1% in 2014.

Economic growth in the Caucasus and Central Asia will be held back by lower commodity prices and spill-over effects from Russia (through trade, foreign direct investment, and especially remittances), which will interact with existing structural vulnerabilities.

The IMF predicts Kazakhstan’s real GDP growth will slow very sharply to 1.5% this year (from 4.3% in 2014) before recovering somewhat to 2.4% in 2016. Other countries will also experience much slower growth this year, before accelerating in 2016. Uzbekistan will grow by 6.8% this year and 7.0% in 2016; Turkmenistan by 8.5% and 8.9%; Tajikistan by 3.0% and 3.4%; and Kyrgyzstan by 2.0% and 3.6%.

In the Caucasus, it predicts Armenia will grow 2.5% and 2.2% this year and next respectively, and for Georgia 2.0% and 3.0%. Azerbaijan is the region’s only economy that will grow faster this year compared to last. The IMF predicts it will grow by 4.0% in 2015 (after 2.8% in 2014), falling to 2.5% in 2016.

Naubet Bisenov in Lima

Eurasia currencies continue to face devaluation pressures

bne:FX

"Exchange-rate depreciation has generally been a useful buffer for countries experiencing growth slowdowns"

bne November 2015 Corporate Statement I 27

To the regions and beyondIn an effort to promote regional development in Azerbaijan, PASHA Bank has opened offices in the towns of Ganja and Zagatala, as well as a business centre in Zagatala focused on supporting entrepreneurs working in agriculture. Looking ahead, PASHA Bank is eyeing a further expansion of its regional network to Sumgayit and Guba. “We see a big potential for development in the regions of the country, the demand for expertise and business consultations we provide,” Kazimov explains.

In order to support the development of agribusinesses in Azerbaijan and Georgia, PASHA Bank has partnered up with non-banking credit organisations like FINCA, whose inaugural bond issue on the Baku Stock Exchange and Georgian Stock Exchange it underwrote. PASHA Bank also organises events aimed at bringing financiers together with agribusiness entrepreneurs to the same table; its February workshop on the development of microfinance in agriculture is a case in point.

In 2013 and 2014, PASHA Bank opened subsidiaries in Turkey and Georgia respectively, a choice of locations that was no accident according to Kazimov. “These countries are among the major trading partners of Azerbaijan. By establishing a banking network within the economic triangle Azerbaijan-Turkey-Georgia, we aspire to contribute to much higher trade flows between the countries as well. We are more than confident in the successful future of the region, ready to become one of the engines of its economic development, and plan to lend support both to the Azerbaijani entrepreneurs in these countries and local business,” Kazimov states.

Looking ahead, Kazimov believes that PASHA Bank's ability to guide its clients will set it apart from competition. “Considering the rising macroeconomic challenges in the region, the financing provided by credit organisations becomes a minor product, while proper business consulting takes centre stage. Entrepreneurs need competent and weighty advice on how to improve business models, manage cash flows and other topics, and PASHA Bank is making efforts to ensure that the funds allocated to businesses contribute to their development,” Kazimov concludes.

As of this summer, PASHA Bank has a new CEO in the person of the young, but accomplished financier Taleh Kazimov, who sat down with bne IntelliNews to discuss

how he will inject dynamism into the bank's development by offering holistic solutions to clients that encompass financing to consulting.

Having been with PASHA Bank since its inception in 2007, Kazimov is in no rush to make drastic changes to its strategy, preferring instead to keep a close eye on the market and adapt to changes as they come along. “In case of necessity, we can reconsider our growth programme in order to adapt to new market trends”, he says, adding that, “we see no need for changes in the strategic vision for now.”

That strategic vision, which has informed PASHA Bank's growth in recent years, has been to contribute to the development of the non-oil economy in Azerbaijan, to support the growth of small and medium-sized enterprises (SMEs), regional development and creating financial links between Azerbaijan and its closest commercial partners Georgia and Turkey – directions that largely echo Baku's growth strategy as well.

One of the directions that PASHA Bank will pursue more proactively with Kazimov at its helm is the SME segment. At the moment, SMEs only account for 10% of Azerbaijan's GDP, which is low by Central Asian standards, where the average contribution of SMEs to the economy is closer to 30-40%. But PASHA Bank wants to change that. “SMEs have always been a priority for us. In late 2013, the bank opened the first out of four currently operating service centres dedicated exclusively to SMEs. Just like with our corporate clients, we offer our SME clients tailor-made services; we have no interest in growing this type of lending aggressively, though, through minimum analysis and maximum security. Unlike other banks, we provide both financial and consulting services to our clients,” he explains.

SME business owners need professional advice to channel their companies' growth in the right direction, and PASHA Bank offers such services for free. “Any bank is capable of providing a loan, but not every bank is capable of ensuring that clients will fully benefit from these funds,” Kazimov adds.

PASHA Bank finds consulting as important as financing in volatile times

bne November 201528 I Special report

Special Report: CEE/CIS Bank Survey 2015

bne November 2015 Special report I 29

The Ukrainian banking sector is probably the worst off following the collapse of the economy, which is expected to shrink by 11% this year. A massive devaluation of the hryvnia, which has lost more than half its value, has nearly bankrupted the whole sector.

Russia and Belarus are not doing much better. Russia’s banks are now in an unof-ficial slow-motion crisis as the Central Bank of Russia (CBR) has been closing banks at the rate of several a week in recent months – to the point where the funds of Russia’s Deposit Insurance Agen-cy (DIA) have almost been exhausted and it has had to ask the CBR for more cash.

The Russian list is remarkable for the total lack of state-owned banks near the top of the league. The two biggest banks in the country, which enjoy significant competitive advantages thanks to their state ownership, did very badly on an ROE basis: VTB Bank earned a mere 5.51% ROE (308th place) whereas its

It has been a tough year for banks across the bne IntelliNews region. Economic stagnation, civil unrest

and even wars and terror attacks have weighed on banks’ profits and muted growth.

bne IntelliNews has been ranking banks every year for more than half a decade, but this year we have introduced a new methodology. In the past we ranked banks in terms of asset size as the entire region boomed on the back of the transition process. But now as the region moves into a more difficult low-growth phase, we decided to switch the focus to looking at profitability as the most relevant metric in this environment.

We chose to rank banks on the basis of return on equity (ROE) as the crucial variable and subdivided the bigger banking sectors into groups by asset size to be able to compare apples with apples. However, we have also taken into account asset growth and profitability

as a way of excluding the chaff of the more obvious scams and glorified treasury operations that some banks are – especially east of the European Union (EU) member states.

The list was compiled with help from our partners Standard & Poor’s and Fitch Ratings, which provided some of the numbers, in addition to bne IntelliNews’ own research. The final ranking is not a definitive list, but it is comprehensive and covers all the 30-plus countries in our patch.

The picture across the region is very mixed and the situation is highly dependent on the local story. Taken as a whole, ROE has fallen across the entire region to 3.0-3.5% in the first half of this year compared with 6% growth in 2014, according to data from Raiffeisen Bank International (RBI). Risks remain high and the worst problems are in Eastern Europe, which is dragging down the rest of the region.

Uphill battle to raise banking profitabilityBen Aris in Moscow


sister Sberbank did slightly better with 6.80% (260th place).

Things are going better inside the EU accession countries in Central Europe where the economies are less volatile and financial sector regulation is stronger.

Banks have “more or less sustainable single-digit loan growth, solid profitabil-ity on aggregate and on-going soundness of the core funding base”, RBI analysts Gunter Deuber and Elena Romanova wrote in the bank’s annual banking report. However, the analysts warned that there might be some “underwater stones” in the second half of the year related to Poland’s changing regulations on foreign currency loans.

In Central Europe RBI predicts loan growth will come in at 4-6% year on year (y/y) this year, with the outlook for Czech Republic, Slovakia and Poland in particular all looking positive, as most of the bank sectors in the region will return to profit in the second half of this year.

In Poland, lenders are facing a large bill on mortgage loans denominated in Swiss francs. Since the Swiss currency spiked in January, the political pressure has been on. The current government has put together legislation to offer borrowers a conversion scheme that would cost the banks around PLN10bn (€2.35bn). However, with the populist Law & Justice (PiS) likely to win the October 25 elec-tion, the bill could shoot up to anywhere between PLN30bn-60bn, depending on how hard any new proposals prove post-election. On top of that, PiS has suggested it will levy some form of tax on the sector that could cost lenders PLN1.7bn-5.0bn.

In Hungary, meanwhile, banks could benefit from a cut in Europe's highest bank tax in 2016, with further reduc-tions promised in the coming years. However, they remain wary of poli-cymaking after several years of pain, including a big hit on forex mortgages in late 2014. In the face of that, the central bank is preparing measures to push them to raise lending if they want to benefit from the lowered tax.

Banks are also muddling through in Southeast Europe with “their perfor-mance and developments hampered by both macro-related and structural issues,” RBI said.

New loan volumes were sinking slowly in Southeast Europe in the first half of this year in real terms, especially in Croatia and Bulgaria. The only exception is Romania, which has clearly turned the corner and is recovering on the back of solid lending activity, but most of the countries in the region have to bear the millstone of non-performing loans (NPL).

And times are tough in Central Asia. Kazakhstan is the only country with a fully developed banking sector and banks there have been hit by the deci-sion of the government to free the tenge, leading to a 25% devaluation of the national currency.

“We would expect keeping overall profit-ability in CEE in 2015 at the 2014 level to be an uphill battle,” RBI concluded.


Russia Group A

Bank ROE

Promsvyazbank 14.22

FC Otkrytie 9.17

Raiffeisen Bank 7.47

Russia Group B

Bank ROE

ING Bank 38.08

Citibank 26.88

Ural Bank for R&D 8.97

Russia Group D

Bank ROE

Financial Settlement Centre 269.84

Rapida 204.65

StarBank 178.39

Ukraine

Bank ROE

Bank Petrocommerz Ukraine 124.13

Motor Bank 52.37

Bank Veles 51.40

Belarus

Bank ROE

Belagroprombank 5.38

ASB Belarusbank 5.08

Russia Group C

Bank ROE

Deutsche Bank 40.65

Sovcombank 32.34

HSBC 32.15

Eastern Europe

Promsvyazbank won in the Russian A category of biggest banks with an ROE of 14.22%. Russia’s leading commercial lender, the bank is part of a larger group owned by the conservative Russian Orthodox brothers Dmitry and Aleksey Ananyev, who both sport enormous beards and made their first money by laying fibre optic cables and computers before building a banking empire. The bank has always focused on quality mid-sized to large industrial enterprises in the private sector and seeks out quality customers with which it works closely, rather than chasing the easy-government money.

Runners up are Financial Company Otkrytie (9.17%), a fast growing mid-sized investment bank that specialises in pension fund management among other things, and the Austrian Raiffeisen Bank, which has been in Russia since the 1990s and was a pioneer of retail and corporate services in the country.

The B group was won by Holland’s ING Bank, which is Russia’s largest custodian bank with a ROE of 38.08%.

The winners in Group D highlight the problems of dealing with Eastern Europe’s banking sector. The winner is Financial Settlement Centre with a massive ROE of 269.84%, which would have made it the most profitable bank in the country – indeed the whole region – except the CBR pulled its banking license on August 3 when it was found to “not comply with anti-money laun-dering laws of proceeds from crime and terrorism”.

The Ukrainian results are a bit meaningless this year, as the whole banking sector is in crisis and the numbers they are reporting to the National Bank of Ukraine (NBU) are regarded as having little bearing on reality.

The winner of best bank in Belarus was Belagroprombank, the state-owned titan that funds the agricultural sector, with an ROE of 5.38%. Just behind is Belarusbank (5.08%), the biggest bank in the country. An honourable mention goes to Priorbank, a Group C bank set up in cooperation with the European Bank for Reconstruction and Development (EBRD), which had an impressive return of 35.46%, the highest in its class, despite the economic problems in the country.

Deutsche Bank wins in the C group with an ROE of 40.65%, but the German bank recently decided to close all its investment bank operations and scale back to only maintain its corporate banking services after its office was dogged by money-laundering allegations. However, that didn’t stop it earning the highest ROE in our Russian rankings so far this year.

And the winners are…


Poland Group A

Bank ROE

mBank SA 13.28

ING Bank Śląski SA 12.10

Bank Millennium SA 11.12

Poland Group B:

Bank ROE

Alior Bank SA 5.47

Bank BPH SA 1.45

Hungary

Bank ROE

OTP Mortgage Bank 16.93

K&H Bank Zrt 9.85

Kereskedelmi es Hitelbank Zrt (K&H Bank Zrt)

6.24

Slovakia

Bank ROE

Tatra banka 15.46

Slovenská sporiteľňa, a.s. 14.40

ČSOB, a.s. 9.91

Estonia

Bank ROE

Swedbank 49.62

Versobank 30.10

LHV Pank 20.84

Czech Republic

Bank ROE

Československá obchodní banka, a. s. 5.38

Česká spořitelna, a. s. 5.08

Poland Group C/D

Bank ROE

Idea Bank SA 14.00

Bank Pocztowy SA 10.08

Pekao Bank Hipoteczny SA 2.15

Central Europe

Two out of the three top banks in Poland’s Group A – mBank and Bank Millennium – are amongst the lenders with the biggest forex loans portfolios, and therefore stand to take a big hit should a costly "solution" be forced on the banks. Germany's Commerzbank, which owns mbank, has threatened possible legal action. However, banks with forex loans stand to make lower profits whether or not legislation arrives. The regulator KNF is already pushing exposed lenders to beef up capital buffers, hitting both financial results and dividends. The uncertainty only adds to a year already set to prove mediocre for bank earnings, because of record low interest rates and fierce competition between lenders to get Poland’s consumers to spend more. ING Bank Śląski, owned by the Dutch group, looks to be in a more comfortable place. It has few specific risks weighing on its balance sheet.

Top performers Alior Bank and Bank BPH are centre stage in ongoing speculation on a coming consolidation wave in Polish banking. Poland’s state-controlled insurer PZU took control of Alior in May, and was reportedly close to a deal to buy BPH from GE Capital until talks broke down in October. The uncertainty over the sector impeded the pair from agreeing on a price. Meanwhile, KNF remains opposed to any major acquisitions by existing large players, especially the foreign groups that mostly dominate.

The winner in Hungary is OTP Mortgage Bank with an ROE of 16.93%. The mortgage lender is owned by the country’s largest bank by assets, OTP. Runner up is K&H Bank, a unit of Belgium's KBC. All banks in Hungary are hoping to recover from tough treatment by the Fidesz government over the past five years, which has driven many into large losses.

Tatra banka was established in 1991 as the first private bank in Slovakia. It is owned by Raiffeisen Bank International. Like the Czech market next door, Slovakia is seen as a stable market, but offering limited opportunity to boost returns swiftly.

The winner in Estonia is Swedbank, with an ROE of 49.62%, a result that leaves most European banks far behind. In September, the Swedish lender acquired the retail banking businesses of Danske Bank in Lithuania and Latvia, growing its consumer base and loan portfolio to strengthen its position in the Baltic region.

Ceskoslovenska Obhodni Banka (CSOB) is the winner in the Czech Republic with an ROE of 17.27%. The third biggest bank by assets is owned by Belgium’s financial group KBC. Alongside runners up Ceska Sporitelna and Komercni Banka, it was one of the three major banks in the country before the fall of communism. All are owned by major Eurozone banking groups and operate in what is often described as the perfect banking market: stable, but a bit boring.

Idea Bank and Bank Pocztowy are both looking to raise funds to power rapid expansion. The innovative Idea issued PLN200mn worth of bonds in late September, with plans to execute another PLN300mn soon. The bond issue follows the bank’s troubled IPO in April, when it only achieved an IPO price of PLN24 per share, having hoped for PLN32.

Bank Pocztowy’s shareholders - state-owned postal operator Poczta Polska and state-controlled bank PKO BP – boosted the bank’s capital by PLN60mn in September, and plan to get an IPO off as soon as market conditions allow.


Turkey Group A

Bank ROE

Türkiye Cumhuriyeti Ziraat Bankası A.S.

16.66

Türkiye Halk Bankası A.S. 14.22

Türk Ekonomi Bankası A.S. 13.91

Turkey Group C

Bank ROE

Citibank A.S. 18.43

Aktif Yatırım Bankası A.S. 13.39

Lithuania

Bank ROE

AB Šiaulių bankas 22.41

AB Citadele bankas. 11.52

AB bankas „FINASTA“. 10.33

Latvian

Bank ROE

ABLV Bank. 35.95

Rietumu Banka 21.73

Norvik Banka. 11.53

Turkey

Turkish state-owned lenders dominated our list this year, led by state-owned Ziraat Bankasi, Turkey’s largest lender by asset size. French BNP Paribas’ Turkish unit Turk Ekonomi Bankasi (TEB) was the only private lender in the first group.

The Turkish banking sector is highly dependent on external funds because of low saving rates in the country. Turkish lenders have not faced visible problems in foreign borrowing yet, although the US Federal Reserve’s expected rate hike could curb capital flows to emerging markets, with Turkey seen as amongst the most vulnerable to that.

Citi started doing business in Turkey in 1975 with corporate banking services and began to operate as a branch in 1981. In 2007, Citi acquired Opus Menkul Değerler A.Ş. and has started to provide security services in Turkey as Citi Menkul Değerler A.Ş.

Siauliu Bankas is the least profitable of the Baltic winners, but its ROE still stands at over 22%. The EBRD is the bank’s biggest shareholder with a stake of over 18%. Siauliu took over investment bank Finasta and Finasta brokerage services earlier in 2014 from investment group Invalda LT.

Turkey Group B

Bank ROE

Türkiye Sınai Kalkınma Bankası A.S. 18.31

Şekerbank T.A.S. 5.17

İller Bankası A.S. 5.13

State-owned lenders Turkiye Sınai Kalkinma Bankasi (TSKB) and Iller Bankasi were among the top three lenders in the second group. Sekerbank was the only private lender in the leaders of the second group.

Turkey Group D

Bank ROE

Deutsche Bank A.S. 17.50

Nurol Yatırım Bankası A.S. 12.59

JPMorgan Chase Bank N.A. 10.25

Deutsche Bank Turkey is a provider of corporate banking services, while Nurol Yatirim Bankasi is an investment bank and JP Morgan Chase Bank is a provider of financial services to corporates.

ABLV Bank, with an ROE of nearly 36%, is significantly more profitable than the majority of its European peers. ABLV is Latvia’s biggest locally-owned bank; Oleg Fils and Ernests Bernis – who control the lender – regularly top the charts of richest Latvians. Its expansion outside its home country has concentrated on the former Soviet Union, helping to concrete Latvia's reputation as an EU base for capital from that region.


Romania

Bank ROE

Banca Comerciala Româna 23.30

Banca Transilvania 10.38

BRD – Groupe Société Générale 9.66

Albania

Bank ROE

Banka Kombëtare Tregtare 19.78

Raiffeisen Bank Albania 15.73

Intesa Sanpaolo Bank Albania 14.96

Kosovo

Bank ROE

TEB Bank 35.59

ProCredit Bank, Kosovë 32.67

Raiffeisen Bank Kosovo J.S.C. 28.63

Macedonia

Bank ROE

Eurostandard Banka a.d. Skopje 60.00

Ohridska Banka a.d. Ohrid 22.08

Croatia

Bank ROE

Privredna Banka Zagreb d.d. 10.59

Zagrebacka Banka d.d. 6.57

Erste & Steiermärkische Bank D.d. 2.38

Bulgaria

Bank ROE

DSK Bank 21.71

Sibank EAD 14.36

Unicredit BulBank AD 13.56

Bosnia

Bank ROE

Raiffeisen Bank d.d. BiH 19.76

UniCredit Bank d.d. Mostar 12.52

Montenegro

Bank ROE

Societe Generale banka Montenegro AD 18.08

ERSTE Bank AD Podgorica 13.94

Hipotekarna banka AD Podgorica 10.65

Serbia

Bank ROE

Banca Intesa a.d. Beograd 195.45

Unicredit Bank Srbija a.d. Beograd 16.14

Raiffeisen banka a.d. Beograd 11.33

Moldova

Bank ROE

BC „MOBIASBANCA - Groupe Societe Generale” S.A.

27.12

BC „Moldindconbank” S.A. 25.93

BC „Moldova - Agroindbank” S.a. 21.38

Southeast Europe

Erste group’s Romanian branch Banca Comerciala Romana (BCR) returned to profit in H1 this year after massive losses in 2014. But its non-performing loan (NPL) problem is still not fully settled and the group has just abandoned plans to sell a €2.7bn bad loan bundle, disappointed by the price offered. Banca Transilvania, in second place, recently acquired Volksbank Romania. This allowed locally owned Banca Transilvania to overtake Societe Generale’s BCR to become the second largest bank in Romania. However, while the deal boosted Banca Transilvania’s market share the bank also had to resolve NPL problems at Volksbank, including with CHF debtors.

DSK Bank, a state savings institution in the communist era, is Bulgaria’s second largest bank by assets, now owned by Hungary’s OTP Bank. A February 2015 survey by Client X found it was the most trusted bank in Bulgaria. DSK was also the developer of the mobile savings gaming application DSK Gameo in 2003.

Winner Privredna Banka Zagreb is a member of Intesa Sanpaolo Group. The EBRD, a shareholder since 2002, sold its 20.9% stake to Intesa Sanpaolo in June, citing the bank’s successful development within the Italian group. Runner-up Zagrebacka Banka, part of UniCredit Group, was Croatia’s largest bank by assets at the end of June, with Privredna in second place and Erste & Steiermarkische Bank third.

Banka Kombetare Tregtare (BKT), now part of Turkey's Calik Holding, is the biggest and oldest commercial bank in Albania.

Banka Intesa is the largest Serbian bank with total assets of over €4bn and a 16.2% market share. Originally Serbia’s first private bank, Delta banka, it is now part of Intesa Sanpaolo. Despite cost-cutting efforts, it still has one of the country’s largest branch networks and an emphasis on customer service in a market where staff are traditionally rude and unhelpful. Runner-up UniCredit Bank Srbija is the country’s third largest bank with a focus on small and medium-sized enterprises.

Moldova’s banking sector is in turmoil as investigations into a $1bn bank fraud drag on, most recently resulting in the arrest of former PM Vlad Filat on October 15. The central bank’s decision to liquidate the three banks involved in the scandal does, however, create opportunities for other banks to expand. Mobiasbanca in particular could benefit from its status as part of international banking group Societe Generale.


Kazakhstan Group A

Bank ROE

Halyk Bank 23.86

Tsesnabank 14.27

Sberbank 2.37

Kazakhstan Group C

Bank ROE

Home Credit Bank 23.37

RBS (Kazakhstan) 22.58

Altyn Bank 18.96

Armenia

Bank ROE

ARARATBANK 23.41

INECOBANK 19.59

Armbusiness 18.30

Georgia

Bank ROE

JSC TBC bank 13.01

JSC Bank of Georgia 10.60

Azerbaijan

Bank ROE

AccessBank 33.13

Kapital Bank 28.20

Xalq Bank 6.07

Kyrgyzstan

Bank ROE

Optima Bank 25.09

Rosinbank 18.39

JSC CB Tolubay Bank 17.50

Uzbekistan

Bank ROE

Ipoteka Bank 27.50

Asaka Bank 15.09

Qishloq Qurilish Bank 13.46

Mongolia

Bank ROE

Khan Bank LLC 24.81

Trade and Development Bank of Mongolia LLC

20.22

Golomt Bank of Mongolia 10.28

Tajikistan

Bank ROE

First MicroFinance Bank (The) 20.83

CJSC Accessbank Tajikistan 12.62

Orienbank 6.61

Kazakhstan Group B

Bank ROE

Citi Bank Kazakhstan 39.74

Delta Bank 22.37

Kaspi Bank 19.34

Eurasia

Halyk Bank, also known as Halyk Savings Bank of Kazakhstan, is the country’s second largest bank in terms of assets and first in terms of equity capital and profit. Halyk was one of the few Kazakh banks not involved in reckless lending to high-risk projects and in aggressive borrowing in the global capital markets during the credit boom preceding the 2008 financial crisis, which hit the Kazakh banking sector badly. Historically, the bank has always adhered to the highest corporate governance standards which have allowed it to make the right strategic decisions. Halyk is the only Kazakh company to make Forbes magazine’s Global 2000 list of the world’s biggest, most powerful companies in 2015.

Armenia's underdeveloped banking sector, the assets of which stand at a meagre €6bn, has had its margins affected by a weak operating environ-ment, characterised by devaluation, economic slowdown and higher rates. Overall sector ROE in the first quarter was a modest 0.7%, which may explain why, of the banks we selected, only Armbusinessbank, ROE of 18.30%, is among the country's top five largest banks. The ranking is completed by the smaller Inecobank (9th largest bank, ROE 18.30%) and Araratbank (ROE 23.41%).

Georgia's banking sector has been no stranger to controversy, or operating environment and currency devalua-tion shocks this year, but the country continues to have the most competitive banks in the Caucasus. The two winning institutions, TBC Bank and Bank of Georgia, are also the two largest lend-ers in the country, and are both listed on the London Stock Exchange. Bank of Georgia caters largely to corporate clients, while TBC Bank focuses on the retail and SME segments.

Azerbaijani banks have withstood the shock of the decline in oil prices and a 33% devaluation of the national currency thanks to their high liquidity, although the sector's high level of dollarisation may turn into a credit risk. A noteworthy exception may be International Bank, the country's largest bank, which may be privatised after reports of poor manage-ment led to an investigation that resulted in a wave of arrests of executives from different companies this May.

After restructuring over 100,000 foreign-currency denominated loans this year, Azerbaijan’s banks have managed to post a 6.5% NPL rate, which may not reflect the true quality of their loan portfolio.

AccessBank is an SME and micro-lender owned by international financial institutions; Kapital Bank is owned by one of the largest holdings in the coun-try, which can count on close ties to Baku and generous financial backing.

36 I Cover story bne November 2015

Turkey into the abyss?Suna Erdem in London

bne November 2015 Cover Story I 37

key is certainly not a ‘failed state’, nor is it yet the Sick Man of Europe, but the trajectory is negative,” says Wolfango Piccoli, of the political risk consultancy Teneo Intelligence. “In the best case scenario there will be a coalition. But even if we assume for a second that the parties are able to talk, we could still end up at the end of January with no government in a country that has been in a constant electoral cycle. Nothing has really happened in terms of reforms since 2009.”

Grand plansThe coalition most favoured by inves-tors and the international community is a union of AK and the main opposi-tion Republican People’s Party (CHP). “All the signs are that this time around a coalition deal will be stuck and the most likely one will be with the CHP. If that happens Turkey would be a differ-ent place,” says a Western diplomat in Turkey. He says he finds the apocalyptic scenarios for Turkey “ludicrously over-

stated”, while the CHP appears deter-mined to restore some of the freedoms that have been restricted over the past two or three years. “My sense is that the realists in all parties are trying to reas-sert themselves.”

This grouping would have a big major-ity and a broad base, but opposition sources point out that previous coali-tion talks fell apart when AK allegedly refused to offer CHP the long-term deal they were looking for. They are unlikely to accept anything less now, but will AK offer it?

Optimists refer to former minister Ali Babacan’s earlier comments that the two parties had been close on the economy in previous talks. The mere fact that the well-respected Babacan, who had wanted to quit politics, is running again is also seen as reassuring.

“If the government doesn’t change its polarizing, discriminatory language, this country would become unliveable and ungovernable”

A strong economic policy would be key to the success of any coalition government – it needs to deal with a stubborn current account deficit, a slowdown in growth, the rocketing value of the dollar, poor consumer confidence and a central bank that is fast losing credibility under attack from Erdogan. A survey by MetroPoll, conducted just before the bombings, found 63.9% of voters believed that the economy was mismanaged (compared with 52.9% a year earlier).

But party manifestos offer little hope. Many promises are mere fantasies – at least they don’t pledge to abolish football’s offside rule, as one Turkish politician once did, but they all want to significantly raise the minimum wage. “It’s ridiculous,” says Piccoli. “Almost 80% of workers are on the minimum wage – it’s unaffordable.”

And even those close to Babacan are not confident that he will wield influence as

foreign investors hope. Prime Minister Ahmet Davutoglu strong-armed him into running again, and the pair may feel that after the elections the beleaguered Davutoglu will carry more weight – but he has so far failed spectacularly to stand up to Erdogan and is unlikely to do so in the future.

Need for peaceEven if a coalition is formed, many are questioning how long it could last. With Erdogan sniping from the wings and the CHP nursing a record of internal squabbles, a year would be good going.

And they also question how such a government could tackle the biggest issue in its inbox – ending the fighting between the military and the Kurdistan Workers Party (PKK), which is tearing the country apart, and resurrecting the now moribund peace process that

The abyss is a dark, miserable place and Turkey is on the verge of plunging into it with both

feet. Even before two suicide bombs hit Ankara just three weeks shy of the general election, political instability, an economic downturn, violence along Turkey’s southern border and renewed civil strife at home had been raising alarm bells.

Since at least 99 leftists and Kurds were killed at a peace rally in what has been described as Turkey’s 9/11, Turkey has been talked about as a “failed state” and compared to Pakistan. President Recep Tayyip Erdogan’s increasingly frenzied behaviour as he seeks to cement his rule by changing the entire state structure to favour his own presidential ambi-tions, has been likened to the impetu-ous folly of King Lear. Once the star of a troubled region, Turkey is now anything but. “We’ve been saying for years that if [the government] doesn’t change its polarising, discriminatory language, this country would become unliveable and ungovernable,” warns Mehmet Y. Yilmaz, a leading columnist.

November 1 sees a rerun of an election called, effectively, because Erdogan didn’t like the results of the last one in June. Then, his Justice and Development Party (AK) lost its majority for the first time since 2002 and was forced into coalition negotiations. Turkey’s inef-fectual opposition was complicit in the failure of those talks, but it’s an open secret that the supposedly impartial president wanted a stalemate that would necessitate new polls.

It is seen as proof of Erdogan’s delu-sional state that opinion polls have been predicting almost exactly the same results as last time, and not anything like the sudden swing back to AK from people seeking a return to stability. The People’s Democracy Party (HDP), the Kurdish party which took 80 seats to deny AK its majority, is expected to get into parliament again. After four elections in two years, Turkey is crying out for some sanity at the helm, and observers believe Erdogan will have to allow his party to share power. “Tur-

Turkey into the abyss?

38 I Cover story bne November 2015

Erdogan so brutally abandoned, losing him whole swathes of liberal and Kurdish support.

The CHP might see some point in trying to tackle it; an AK-HDP coalition – unlikely due to mutual hostility – would have to. There is also another possible alliance – between AK and the combative, hard-line Nationalist Action Party (MHP), whose members become

apoplectic at the mere mention of the peace process. “God help the Kurds if they get in!” says a source close to what remains of AK’s liberal wing. “There will be a bloodbath.”

Kurdish academic Mesut Yegen warns, “If that happens, then any return to the peace process will be kicked into the grass and the possibility of civilian clashes will be constantly hanging over us.” But while the peace process has been pronounced dead, Yegen says eventually Turkey and the PKK will have to get back to the table. He predicts that imprisoned PKK leader Abdullah Ocalan will help find a face-saving way back.

As Hasan Turunc, a visiting fellow at Oxford University, points out: “There are many destabilising factors, but structur-ally too much has changed for Turkey to return to the bad old days. From a low-income country, Turkey has become a middle-income country – that’s quite an achievement. The central bank has become independent, many reforms have been implemented – it can’t go back now.”

Foreign investment may be on hold, but there is little sign of an exodus yet. Turunc adds that much is still happening away from the headlines. Next year will see Turkey and the EU upgrade their Customs Union – a 20-year-old deal possibly more useful to businesses than still elusive full membership to the bloc. And the recent election of new, open-minded leaders in Turkish and

Greek Cyprus boosts hope of an end to the island’s 40-year division, which pits Turkey against the rest of the world.

A new Turkish government could also, surprisingly, find the country’s international standing benefiting from the one thing that had sunk its ambitious foreign policy – the Syria crisis. Europe is so desperate for Turkey’s help in stemming the flow of refugees across its

borders that German Chancellor Angela Merkel ignored criticism to visit Istanbul and offered to push forward Turkey’s dormant accession talks and speed up visa-free travel to the EU for Turks in return.

Anti-government Turks cringed at the sight of Erdogan and Merkel side by side on what can only be described as gold-encrusted thrones, but the visit also highlighted one of the few issues where Erdogan’s Turkey attracts praise – hous-ing around 2mn refugees at a time when Europe’s richer countries argue over how to accommodate tens of thousands.

And while Russia’s involvement in Syria has dangerously ratcheted up tensions between the two countries, it has forced Turkey’s foreign policy more into line with the West on issues such as Ukraine and Nato. “I think Turkey’s foreign policy is already becoming sanguine,” says a diplomat based in Ankara. “There has been less virulence against Israel, less against Egypt. They’re now taking a harder line on Russia than they’ve ever done in public. I think pragmatism is returning even in the highest office.”

‘Sultan in the Palace’Dubbed the “Sultan in the Palace” for his imperial-style ambitions and his expensive new presidential home, and surrounded by young, excitable sycophants dispensing bad advice, the man in the highest office, President Erdogan, is seen as the single biggest problem Turkey faces.

Whatever happens in the election and its aftermath, this could be the start of a long and painful transition process away from the long, increasingly autocratic Erdogan period. “Nothing will be sustainable in the near future. Will Erdogan actually serve out this term?” asks one disaffected former AK politician. “Voices against him are growing. His recent behaviour is alienating the remaining sensible people in the party. He was completely disgraced by corruption allegations [in December 2013]. He’s cornered. I don’t think that there’s anything that he can do to improve his prospects.”

A leaked internal AK document shows senior party members know full well why they are losing public support, notably the Kurdish issue, the economy – and Erdogan.

A major flaw in the transition theory is that there is no credible alternative to Erdogan, who has for most of his years at the top been an effective leader. The only commanding figure inside or outside AK is the former president, Abdullah Gul, who could return to politics more than a year after he was publicly snubbed by the party that he co-founded, but there are question marks about his power base.

All talk of a steady transition presupposes that Erdogan will sit tight while the country moves on. But could Erdogan do something desperate to hang on, such as trying to force the banning of HDP? And who is to say that the man who obsessively follows opinion polls won’t suddenly call yet another election as soon as he sees AK’s ratings go up?

“The worst case scenario? A third election in the context of a continued decline for the AK party and with Erdogan more and more out of control… The economy would take a complete hit,” says Piccoli. “I don’t think this is likely, but in the end this will be a decision taken by an individual. And we really can’t get into his mind.”

“I think pragmatism is returning even in the highest office”

Inside this issue:

Russia feels let down by Europe

China's EU bridgehead crumbles

Turkey's power to the people

A long hot summer in Kyrgyzstan

Special Report: Ukraine on trial

July 2011www.businessneweurope.eu

BEYOND THE BURGERWhy are prices so high in emerging markets?

May 2014www.bne.eu

Inside this issue:

Chaos deepens in Ukraine

Prague's nuclear Hunger Wall

Slovak corruption goes round and around

Macedonia’s ruling party wins big

India flounders in Central Asia

GREATGAME II

A hot peace rather than new Cold War looms

bne November 2015 Cover story I 39

Inside this issue:

Russia feels let down by Europe

China's EU bridgehead crumbles

Turkey's power to the people

A long hot summer in Kyrgyzstan

Special Report: Ukraine on trial

July 2011www.businessneweurope.eu

BEYOND THE BURGERWhy are prices so high in emerging markets?

May 2014www.bne.eu

Inside this issue:

Chaos deepens in Ukraine

Prague's nuclear Hunger Wall

Slovak corruption goes round and around

Macedonia’s ruling party wins big

India flounders in Central Asia

GREATGAME II

A hot peace rather than new Cold War looms

Inside this issue:

Made (badly) in Russia

Highway robbery in Czech Republic

The lonely life of Turkish Cypriots

Mongolia's crucial month

Special Report: Private equity in CEE/CIS

June 2012www.businessneweurope.eu

POLITICAL FOOTBALL

Inside this issue:

Speeding after Russia's online consumer

How to spend it in Poland

Turkey's ruling control freaks

Gulnara Karimova falls out of fashion

Special Report: A Turkish star in the dark night sky

October 2011www.businessneweurope.eu

War GamesDefence firms battle for lucrative tenders in CEE

May 2013www.bne.eu

Inside this issue:

Russia's repo men

Putting some Polish on the portfolio

Stalemate in Sofia?

A Kazakh cattle prod

Special Report:Turkey's time

...OR ALREADY IN THE WEST AND LOOKING EAST?

IS TURKEY TO THE EAST LOOKING WEST...

June 2014www.bne.eu

Inside this issue:

Spectre of Yanukovych haunts Ukraine

Will EU stand for Energy Union?

The Balkans' bear problem

Almaty in Wongaland

RISE OF THE PSEUDO-STATES

October 2012www.businessneweurope.eu

Inside this issue:

Rogers jumps on bearwagon

Latvia's fanfare for the common currency

Serbia's looming winter of discontent

Saakashvili becomes prisoner of scandal

Special Report: Azerbaijan

A PARLIAMENTARY KLEPTOCRACY

Ukraine elections to decide who stays free

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bne November 201540 I Central Europe bne November 2015

What is not in question is that Mr MFF is a photographer. According to himself, he is a world-famous photographer; according to others, a photographer of somewhat lower rank. He runs a variety of colourful websites showcasing his abilities and others outlining a strongly anti-Russian slant. For once, the world 'Russophobe' seems justified (despite the fact that he is Russian-born himself and now a US citizen), as he also has pet theories about the physiological degen-eracy of the entire Russian nation.

In an article on one of his websites (which later repeated the allegation that your correspondent is a master spy), he advocates the deportation of 300,000 Russians from the Baltic states in cattle trucks and various other extreme views. Police are investigating.

Melnikoff is the creator of an exhibi-tion titled 'The People of Maidan' that opened in early October in central Riga,

ming it as a hack writer in the Baltic states for the last decade and is a dangerous spy about whom something should be done.

Putting aside for a moment the probability that if Russia's security services can carry out assassinations with rare radioactive isotopes they are probably capable of coming up with names for their agents that aren't quite so similar to their real names, plus the fact that Kolyerov is actually banned from visiting the Baltic states, attention turns to why this backhanded compliment was paid.

Entirely coincidentally, two days previously I wrote an article for Latvia's public broadcaster, LSM, about another man with identity issues. His name is variously given as Sergey Melnikoff, Sergei Melnikov and his preferred moniker, 'MFF' (presumably pronounced “Mfffff”).

Melnikoff's ‘Metamorphosis’Mike Collier in Riga

Franz Kafka's most famous short story, "Metamorphosis", begins with the main character, Gregor

Samsa, waking up one morning to discover he has been inexplicably transformed into a giant beetle. It causes a good deal of nuisance, but makes surprisingly little difference to his basic standing in society.

That's rather how your correspondent felt on October 10 when he awoke to discover that – according to one wacky Ukrainian website – he had been trans-formed overnight into Modest Kolyerov, former Regnum news agency boss and master of the dark arts of Putinist information warfare. Admittedly, there is a passing resemblance – we are both bald with beards – though I like to flatter myself I am not quite such a dead ringer for Trotsky as my doppelganger.

According to this eccentric piece of news, Kolyerov has in fact been slum-

bne November 2015bne November 2015 Central Europe I 41

which purports to show his photographs of the Ukrainian uprising centred on Kyiv’s main square that ousted the corrupt former president Viktor Yanukovych in 2014, along with lots of biographical information about MFF and his tenuous connections to the rich and famous.

Within minutes of the first couple of boards being erected outside the main Latvian government building, the Cabinet of Ministers, they were attacked by two young men apparently incensed by what they took to be a Pravy Sektor flag flying proudly in the breeze. They also took the surprising measure of filming themselves carrying out the attack and immediately uploading it to social media.

Following a police appeal for witnesses, two men were arrested on suspicion of vandalism, though they have yet to be tried. A few days later, the exhibition was attacked again at 2:00am. The extent of the damage is unclear. In some reports, MFF says it was completely destroyed, in others that he has a reserve exhibition ready to be erected at a moment's notice. Curiously, the security that the organizers of the exhibition had promised to provide to both police and Riga City Council failed to materialize for two nights in a row. Because of that, the council revoked the licence for the exhibition – sparking accusations that Riga Mayor Nils Usakovs was censoring 'The People of Maidan' – and it is now seeking a new home while Melnikoff demands compensation of €150,000 to avoid litigation. That is colloquially known as a shakedown.

But in among the furore about vandal-ism, the main findings of the LSM inves-tigation appear to have been overlooked, and it is these that appear to have irked MFF and his allies.

Soul miningChiefly these relate to an organization called the Soul of Ukraine Foundation, a US-registered entity founded by MFF and chaired by his daughter. Its mission is to spread the word about Maidan far and wide by means of MFF's own exhibition, while collecting charitable donations that can be spent on such items as three

"The attempt to undermine your correspondent is one last desperate attempt by MFF and friends to keep their unravelling circus on the road"

The attempt to undermine the credibility of your correspondent is perhaps one last desperate attempt by MFF and friends to keep their unravelling circus on the road. Once you start digging into the weird and colourful world of MFF all sorts of bizarre facts emerge.

It may also be worth noting that despite his anti-Putin views, in his own promo video, Melnikoff shows himself hanging out with the Russian president in what may be a sun-drenched mountain top or possibly just a crude photo montage.

What's really surprising is that no one at the Latvian Foreign Ministry thought it was worth checking out the bona fides of MFF – the world famous photogra-pher no one has ever heard of.

However, in amongst all the dirt, one piece of information did emerge to lend weight to MFF's claims for photographic credibility. In 2009 he did indeed win an award at a festival in northern Spain for a picture of a mountain. The regional newspaper, La Nueva Espana, ran a gushing story that reads suspiciously like a press release about how the “famous millionaire American adventurer” would soon land to collect it “in his private jet”.

A few days later it ran another, rather more downbeat story, about how Melnikoff had failed to show up to collect his award. However, that didn't stop MFF faking the front cover of La Nueva Espana at the end of his promo video to make it appear that he was given the front page splash – dressed as a cosmonaut!

You couldn't make it up. Or maybe you could.

cars, a truck and €50,000 for the Foun-dation's board members.

The Soul of Ukraine Foundation is represented in the Baltic states by one Sergey Alekseev, who also heads a “patriotic” Latvian business entity called the Latvian Renaissance Foundation (LRA). It is the LRA that is the actual organizer of MFF's exhibition and that in turn is linked to the 'MayDay news agency' run by Russian Mikhail Alekseev, which seems to exist not so much to disseminate news but to channel Russian money through none other than the LRA as part of a tax-reduction scheme.

As the LSM investigation shows, the links between MFF and the two Alekseevs are strong – a fact made evident on October 15 when Collier/Kolyerov received a phone call from Mikhail and then an email signed by Sergey within minutes, asking him to confirm he was a Russian spy as reported on MFF's noxious news site. Tellingly, Sergey signed himself 'editor in chief'.

One final fact uncovered by the LSM investigation is perhaps the most important of all. The pictures MFF claims he took standing on the barricades “from day one” of

the Maidan protests in Kyiv are not all his. Distinguished Ukrainian photojournalist and Pulitzer Prize finalist Efrem Lukatsky confirmed on October 14 that a spectacular shot of riot police in flames – used by MFF to sell his forthcoming book of Maidan pics at $1,000 a pop – is in fact his. Other images emblazoned with Melnikoff's name have been identified as the work of Evgeny Feldman of AP and even as coming from online photo library Shutterstock.

42 I Central Europe bne November 2015

Fico has founded an increasingly close alliance. Both continue to rail against the EU’s policy of mandatory quotas for refugees. Slovakia has said it will refuse to accept its quota, and will challenge the legality of the EU decision in the Europe-an Court of Justice. Bratislava insists the vote on the issue should have been passed unanimously, rather than by majority.

Slovakia says instead that it will accept just 100 “Christian” refugees; the country does not have a tradition of accepting refugees from Islamic countries, it says, and does not even have any mosques. The refugees would not stay in the country anyway, Slovak officials have also argued, but would head to Germany. “I can hardly imagine Muslims integrating in Slovakia, without the members of their family, out of their environment. They would not have the opportunity to practice their

Fico told to take his trousers downRobert Anderson in Prague

The Party of European Socialists and Democrats (PES), the umbrella group for Europe’s

centre-left parties, has put Slovak Prime Minister Robert Fico’s Smer party on notice for violating the group’s values.

At a meeting of the PES presidency on October 9, the group stopped short of suspending Smer, despite Fico’s recent negative comments about refugees and his refusal to accept more than 100 into Slovakia. Alison Abrahams, PES spokeswoman, told bne IntelliNews that the group would continue to keep Smer under observation. “The situation will be monitored – there will not be an end date on such a monitoring,” she wrote via email.

The reprimand suggests Smer still does not grasp how to behave either as a progressive or a pro-European party. That weakness could prove embarrass-ing when Slovakia takes over the EU’s rotating presidency next summer.

Slovakia is now in the EU’s naughty corner along with Viktor Orban, Hun-gary’s rightwing premier, with whom

religion. So let's not close our eyes to reality,” Fico said at a press conference on September 9. “We cannot tolerate an influx of 300,000 to 400,000 Muslim immigrants who would start building mosques all over the place,” he added.

In an interview with RTVS radio, Fico said Slovakia was “incapable of inte-grating the Roma. But still we pretend that we are able to integrate someone from Eritrea or someone from a com-pletely different religion with different traditions". He has previously said that Slovakia was “built for Slovaks, not minorities”.

IsolatedFico's government’s hardline stance is popular at home and appears to have bolstered Smer’s support in the run-up to general elections next March. But Fico has been strongly criticised by Andrej Kiska, the country’s independent president, who said in a speech to parlia-ment on October 7 that Slovakia had left a “bad impression” and was now in an “isolated position”. Kiska added that Slovakia could easily accept hundreds or even a thousand refugees.

“When Slovakia voluntarily announced in July it would accept 100 people out of the total of 40,000, we lost sympa-thies in most of Europe, and we lost the understanding and comprehension they might have for our reasonable argu-ments," the president said. "Slovakia has become a target of jokes and ridicule in European and global media.”

As is not uncommon, Fico has got himself into deep water for playing to his domestic audience with comments that he now has to try to explain to his international partners.

Several European Social Democrats have called for Smer to be expelled from PES, including Italian MEP Gianni Pittella,

"We cannot tolerate an influx of 300,000 to 400,000 Muslim immigrants who would start building mosques all over the place"

Photo: Paul Prescott

Central Europe I 43bne November 2015

head of the Socialist and Democrat Group in the European Parliament, who said Fico “has embarrassed the whole progressive family”. “The persistent unwillingness to take responsibility and show solidarity in the framework of the refugee crisis contrasts with our values and political convictions,” Pittella said on September 23. “You cannot merely

call yourself a progressive; you must also show it in your words and actions.”

Fico was called to Strasbourg on October 5 to explain his comments to Pittella and PES President Sergei Stanishe. In a follow-up letter sent on October 8, the Slovak PM denied having talked in the media about refugees or minorities in a discriminatory manner. He also high-lighted a Slovak agreement with Austria under which migrants are temporarily housed on the Slovak side of the border. And he insisted that his government is “prepared to participate in all meaning-ful initiatives which may bring solutions to this migration crisis”.

FormSmer has form with the PES. Shortly after joining, it was suspended in October 2006 when Fico formed his first government in coalition with the overtly racist Slovak National Party (SNS). Jan Slota, the then-SNS leader, was notori-ous for once saying that the best way to handle Roma was with a “long whip in a small yard”. Smer’s suspension was only lifted in February 2008.

In reality Smer’s socialism has always been more of a marketing brand than a matter of conviction. Initially, Fico’s new party did not even pretend to be left wing, competing for voters with former premier Vladimir Meciar’s HZDS using similar populist and nationalist tactics. Like the HZDS, Smer was also ambivalent about EU membership. Fico campaigned in 2002 with the slogan “To the European Union! But not with bare

bums”, arguing that Slovakia should not enter the bloc as a beggar.

Fico, himself a former Communist Party member, moved Smer into the vacant space on the left only once he had taken over the HZDS’ largely elderly, rural and less-educated electoral base. After merg-ing with the moribund Slovak Social

Democrats, he was finally accepted into PES, although Smer has never shared the group’s views on minority rights nor shown any sympathy for the problems of Slovakia’s impoverished Roma minority.

Smer also moved to become more pro-EU when the country’s centre-right parties, which had taken the country into the bloc, themselves became more Eurosceptic. Fico was able to wrap himself in the EU flag when the last centre-right government collapsed in October 2011 over whether to support the European Financial Stability Facility, the Eurozone rescue fund. He won credit for ensuring the measure passed, though he insisted on fresh elections before agreeing to do so.

Unlike Hungary's Orban – who enjoys provoking the EU and has had an easy ride from the centre-right European People’s Party – the reprimand is likely to embarrass the Slovak premier. Even more so because he hopes to be still lead-ing the government when it takes over the EU’s rotating presidency next July for the first time.

Moreover, if Slovakia follows through with its threat to mount a legal chal-lenge to the EU quota decision, PES may eventually feel compelled to suspend the party – a decision that requires a super-qualified majority of votes from its membership. Becoming EU president after a public caning, and then being excluded from taking part in key party discussions, would really leave Slovakia with a bare bum.

"You cannot merely call yourself a progressive; you must also show it in your words and actions"

High stakes in Czech politics

The Czechs have a keen sense of irony (remember David Cerny’s 2009 art installation in the European Council building that lampooned national stereotypes?), so one politician’s bet with another over a betting law taps into that rich vein.

Andrej Babis, the country’s second richest man who also happens to be the finance minister (or should that be the other way round?), and his predecessor Miroslav Kalousek are often at loggerheads since the latter’s TOP09 party was turfed out of power and Babis’ ANO came second in the 2013 elections that brought it into government in a coalition with the Social Democrats.

By all accounts they dislike each other intensely, and this rivalry has now become pecuniary. In a parliamentary committee debate over the 2016 budget on October 24, Kalousek bet CZK10mn (€370mn) that Babis' allegation that he had been investigated by police over his 2008 decision to allow betting on the internet was not true. Babis accepted that bet.

Both men can certainly afford such a wager. Babis’ conglomerate Agrofert makes him worth around $2.5bn, according to Forbes magazine, while Kalousek was deputy defence minister when controversial laws were ushered in that led to notoriously corrupt procurement deals that has led to numerous scandals.

44 I Central Europe bne November 2015

where we want to grow, both organically and through acquisitions,” J&T co-founder Patrik Tkac said.

In parallel with its investment in J&T – and no doubt with the Slovak group’s assistance – CEFC snapped up a bewildering array of Czech assets in September, including football team Slavia Praha, brewery Pivovary Lobkowicz Group, Travel Service Airlines, media groups and property. It has also acquired a historic building on Prague’s main shopping street to serve as its European headquarters.

J&T has also been busy this year, loading up with out-of-favour coal-fired power assets that indebted European utilities want to shed. On October 22, it was reported that Italy’s Enel had reached a general agreement to sell part of its 66% stake in Slovakia's main electricity producer Slovenske Elektrarne to EPH, a Czech energy holding in which J&T holds a sizeable stake, possibly even a majority one. And earlier in October, EPH said it has joined with PPF, the investment group of Petr Kellner, Central Europe’s richest man, in the tender for Vattenfall’s coal assets in Germany. EPH has already bought E.ON’s coal assets in Italy.

J&T gets Chinese oodles of cashRobert Anderson in Prague

Voracious Slovak corporate raiders J&T Financial Group have deepened their links with

their mysterious Chinese investor, as they prepare for yet more audacious acquisitions such as part of Slovakia's main electricity producer.

CEFC China Energy Company, a shadowy Chinese investment group focused on energy, has now doubled its stake in J&T to 9.9%, reportedly paying CZK1.94bn (€72mn). CEFC entered J&T in May, buying 5% for a reported €79mn. The Chinese group has said it plans to boost its holding to 30% eventually.

The link between J&T and CEFC appears to have been forged during an official visit by Czech President Milos Zeman to China in October last year. Zeman was accom-panied by J&T executives, and during the trip a strategic co-operation agreement between J&T and CEFC was signed. The announcement of the increase in the CEFC stake in J&T coincided with another trip to China by Zeman.

“In CEFC we have found a partner with the same vision as us as regards development possibilities in our region,

EPH has also talked about adding new capacity to its assets in the UK, and its Eustream subsidiary announced ambi-tious gas pipeline investment plans in Central Europe.

Risky businessEPH’s acquisition of coal-fired energy assets in the UK, Italy and Germany is a bold bet on either energy prices rising, or govern-ments making capacity market payments to keep such plants running as potential reserve load operators to even out the vola-tility of power from renewables. “The acqui-sition of coal-fired assets is a bet against EU climate policy,” says Jan Ondrich, a Prague-based energy economist.

But few analysts predict a significant correction in energy prices in the short term, and any capacity market payment would be dependent on political decisions in Germany and Italy, countries where EPH has virtually no ability to influence policymakers, unlike in the Czech Republic and Slovakia, where it is reportedly close to Zeman and Slovak premier Robert Fico.

Outside electricity, EPH is also reported to be joining with Kellner for a possible bid for PKN’s stake in Czech petro-chemicals group Unipetrol. J&T also is poised to spend big, by making a hostile takeover bid for Croatian conglomerate Adris Grupa, according to local media reports. Adris Grupa has become even more attractive after it managed to sell its tobacco unit TDR to British American Tobacco (BAT) earlier this year.

J&T and EPH’s acquisition sprees have raised much speculation over the source of their apparently bottomless pockets. J&T had to be bailed out by Kellner during the 2008-2009 global crisis because it had over-extended itself, and the financier was only finally bought out from EPH at great expense last year.

Czech media speculate EPH has debts of more than CZK5bn secured on its assets, notably its stake in Slovak gas pipeline company SPP. And there has been constant speculation CEFC is helping to fund the acquisition drive. This is heightened by the mystery over the identity of its Chinese sugar daddy.

Central Europe I 45bne November 2015


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46 I Southeast Europe bne November 2015

INTERVIEW: Stavreski says foreign investors keeping faith with MacedoniaAndrew MacDowall in Skopje

Macedonia’s finance minister admits in an interview with bne IntelliNews that serious

allegations of abuse of power against his government have had an impact on prospective foreign investors, but insists the investors, whom he did not specify, would continue with their plans now the crisis looks to be at an end.

Zoran Stavreski refuses to be drawn on the specific allegations, which include vote rigging, the undermining of judicial independence and covering up murder evidence. The controversy led to street protests, and an EU-brokered deal between the government and opposition that will bring early elec-tions in April next year, with a caretaker government to be installed in January to oversee the poll. “What is good is that no new investors have cancelled plans for investing in Macedonia,” claims Stavreski. “However, we need to be frank and admit that because of the

political crisis, some have temporarily decided to wait for some time.”

The allegations come from apparently wiretapped recordings released by the opposition – which the government accuses of organising a “coup” through illegally-acquired materials – and implicate Prime Minister Nikola Gruevski and other senior officials.

In one of the recordings, a voice that is apparently Stavreski’s seems to say that Gruevski had “lost sense of reality”, and slams the government’s economic policy as mad. “We are constantly adding new [budget]

expenditures. Even the United States could not withstand this... pedestrian tracks, aqua parks, this and that... this is insane!” the voice says, according to a report by Balkan Insight. “We are lunatics! We are spending on chocolate when we don't have bread.”

Stavreski has not denied the recordings are of his voice, but says that they have

been “spiced up” a little. “When it comes to the image of the government, allega-tions are allegations and there are allega-tions everywhere in the world in terms of what has been done and what has not been done. Our position is that institu-

"We need to be frank and admit that because of the political crisis, some investors have temporarily decided to wait for some time"

bne November 2015 Southeast Europe I 47

tions should do their job and investigate all their cases, and wherever there is indi-vidual responsibility – if there is any – the institutions should behave like in every EU country,” he says.

A special prosecutor has been appointed to investigate the claims, who has said that the first charges could be put in place before the April election. However, the opposition is already questioning the independence of the process.

Avoiding direct denial, and emphasising the importance of the investigation, is very much the government line, though many officials add criticism of the oppo-sition’s use of allegedly illegally-acquired recordings.

It was clearly not a topic on which Stavreski – who at one stage in the interview took a telephone call from the prime minister – wished to dwell. The Macedonian government is at pains to stress its economic credentials at a time when its democratic and European ones are being questioned.

It’s the economy, stupidMacedonia rode out the global economic crisis and the Eurozone’s near-meltdown through the efficacious use of fiscal stimulus, but Stavreski says the govern-ment will keep an eye on public finances to ensure that its currency peg does not come under pressure.

Stavreski draws an unveiled comparison between the recent experiences of Macedonia on one hand, and “peripheral countries in Europe and some neighbours”. Many of the latter were of course forced into pro-cyclical fiscal tightening when the crash came, exacerbating the downturn after years of mirror-image pro-cyclical stances of loose policy fuelling booms. Greece is both a neighbour and a peripheral Eurozone country, and continues to block Macedonia’s EU and Nato accession processes over tedious historical arguments about its name.

Stavreski argues that Macedonia’s relative pre-crisis frugality allowed it to loosen policy when it was most needed. “I’d say our fiscal policy was reasonable,

bne IntelliNews

Romania and its Moldovan neighbour’s reputations for corruption were highlighted again in October in a slew of unwelcome headlines. A leaked report from the Romanian Intelligence Service (SRI) claims that top civil servants belong to – and in some cases lead – criminal groups.

The report on the security climate in 2014 notes that organised criminal groups have “succeeded in penetrating public bodies at high levels”. Corruption has affected almost all strategic sectors in Romania, but has had a particularly strong impact on the public administration. Civil servants including high-level officials have been identified as members or even coordinators of some organised crime networks, while the decision-making process is subordinated to private interests, impairing the government’s capacity to deliver public services. The report claims that abusive and illegal activities by decision-makers at local level have been magnified by their links with members of criminal groups.

It is unclear from the report whether the intensity of corruption is gaining ground or diminishing. Most of the other security risks – including under-financing of the public sector, lack of human resources, weak EU funds absorption – are mentioned as ongoing issues, presumably at constant levels.

A clear illustration of this was the admission a few days later on October 12 by Romania’s former communications minister Gabriel Sandu in court that he had received a €4mn bribe in the so-called Microsoft case. Eight other former ministers are under investigation in the case, but Sandu is the only one to be indicted so far. The National Anticorruption Directorate (DNA) started investigations into the sales of educational software licences for Romanian schools in September 2014. The nine former ministers are suspected of receiving bribes in exchange for signing and later extending contracts to license Microsoft software at above-market prices. Next door in Romania’s poorer neighbour, Moldova, the news is even worse.

Vlad Filat, a leading member of Moldova’s fragile ruling coalition, was arrested and charged with involvement in a massive $1bn fraud on October 15 after MPs voted to lift his parliamentary immunity.

The arrest of Filat, a former prime minister and head of the senior ruling Liberal Democratic Party (PLDM), threw the fragile pro-EU coalition into disarray after 79 of Moldova’s 101 MPs voted in favour of lifting Filat’s immunity, including those from the PLDM’s coalition partners. The vote was held at the request of head prosecutor Corneliu Gurin. After the vote, officers of the National Anticorruption Centre (CNA) detained Filat for 72 hours and will ask a court to place him under police custody.

While the PLDM claims Filat's arrest is a plot, prosecutors say they have evidence linking the politician to the massive banking fraud in which $1bn – around 10% of the country’s GDP – was siphoned off from three Moldovan banks.

Roldovan graft


bizarre and unattractive vanity project that has funnelled money to preferred contractors.

Stavreski defended state employment levels, but he made clear that the budget must not be allowed to get out of control – with a side observation that fast-and-loose fiscal policy will endanger Macedonia’s currency stability, and thus risk overturning the economy entirely. Macedonia maintains a currency peg, fixing the denar against the euro. “Debt is kept at a level which is not particularly going to risk our debt sustainability,” he says. “For a country like Macedonia, a small country with small forex reserves and a fixed exchange rate regime, there’s a need to keep the budget deficit under control or you’ll put pressure on foreign exchange, and we don’t want that situation.”

Returning to the issue later in the interview, Stavreski described manag-ing public finances as “an art more

before the crisis, after the crisis, and during the crisis, in the following way. Before the crisis, when Macedonia had growth rates of between 5% and 6%, we had surplus revenues, and reduced public debt from 33% to 23% of GDP. When the crisis happened, we had a very favourable starting position, and during the crisis… we increased capital expenditures, infrastructure spending. That helped a lot both in the short run by increasing our GDP and creating jobs and activity for the construction sector and other connected sectors, and in the long run these infrastructure investments are important for improving the competitiveness of our economy.”

The sustainability of this fiscal stimulus, however, is starting to be questioned. Macedonia’s economy is expected to grow by 3.0% this year and 3.5% next, according to a July report by Erste Group. But after Stavreski’s bne IntelliNews interview, he announced a draft budget for 2016 that pencilled in

the country’s biggest-ever outlay. The draft foresees spending of €3.18bn, 6% up on 2015. The budget is based on an optimistic GDP growth forecast of 4%.

Before the budget, Erste had forecast a deficit of 3.6% this year and 3.4% next, with debt rising to 41.5% of GDP in 2016. It said that public debt would move towards 50%, with “strong upward pressures” from road construc-tion and the state-owned electricity company.

Opponents say that debt may well be higher than reported, and that the gov-ernment administration has swelled, as the ruling VMRO-DPMNE party looks to bolster its support ahead of the election by spreading patronage via sinecures. Meanwhile, some of the vaunted infra-structure spending has been channelled to the Skopje 2014 project, a makeover of the capital’s centre intended to boost national pride and the city’s appeal as a place to live and visit. Others see it as a

Emerging Markets Direct – your data source for the developing worldCroatia Country Report – August 2015j.mp/croatia-august

Croatia’s economy expanded by 1.2% y/y in the second quarter of the year, beating all expectations, supported both by domestic and foreign demand. The government announced plans to convert loans denominated in Swiss francs into euros, but a number of foreign banks reacted saying the measure would breach EU legislation.

• Croatia's consumer prices fell 0.4% y/y in July, after staying flat the previous month, while the working-day adjusted industrial output rose 3.9%, speeding from 1.6% in June;

• The unemployment rate fell to 15.9% in July from 16.1% in June, the fifth consecutive month of decrease.

Bosnia and Herzegovina Country Report – August 2015j.mp/bosnia-august

The Bosnian government plans to invest €960mn in public projects in 2016-2018, according to an adopted programme for public investments in the next three years. Meanwhile estimated losses in agricultural production, caused by the drought this summer, are over €102.3 million.

• CPI deflation slightly deepened to 1.1% y/y in July from 0.5% y/y in June;

• The working-day adjusted industrial production rose by 2.3% y/y in July, cooling from a 3.5% y/y growth in June, due to slower rise of mining and manufacturing sectors.

j.mp/emdstore


than a science”, while asserting that the country has a fiscal plan starting in 2017 (conveniently after the election) to rein in the deficit. “We will have a gradual reduction in the next several years, to enable us to keep our debt at a sustainable level, while gradually reducing public support for growth. In the meantime we expect that the pri-vate sector will take over and increase its investments. We have to be more careful, as we are a small country with small GDP. For us it was important to adopt a strategy on public debt and fiscal consolidation which would keep Macedonia’s debt stable, or at a sustain-able level.”

Opening up through infrastructureHowever, Macedonia's government insists that investments are necessary to underpin long-term growth. When Macedonian officials are asked to name a weakness that their country has, they invariably mention its landlocked posi-tion. Infrastructure such as a restored

railway link to Bulgaria, and highway development along European transport corridors VIII and X are intended to miti-gate this to the greatest extent possible.

The government is also seeking inves-tors to build a large new hydroelectric plant, an investment of several hundred million euros, as well as energy distribu-tion networks in Skopje and other parts of the country. “There are various other investments in the areas of education, the health sector, environment, and many others,” Stavreski tells bne Intel-liNews. “Competitiveness means not only taxes but labour costs, logistics and infrastructure. We invested in all these areas and it helped a lot in attracting investors. It’s a difficult game, as we were unknown as a country.”

He points out that most countries in the region have low taxes (Bulgaria has the EU’s joint-lowest flat income and corporate tax rate at 10%), while administrative reform to make the sys-

tem more investor-friendly has also been important.

After years of glossy advertisements in international business magazines, Stavreski trumpets the country’s high ranking in the World Bank’s “Doing Business” survey. It ranked 30th in 2015, the highest in Southeast Europe (including Greece and Turkey), and was sandwiched right between Japan and France. The country has major investors including Dräxlmeier, Johnson Controls, and Johnson Matthey. And in May, despite the ongoing political stramash, Lear Corporation announced plans to open an automotive seat cover plant in Gostivar, in northwest Macedonia.

Many of these investments are in industrial free zones, so the value that they feed back to Stavreski’s coffers has been questioned. But in a country where unemployment tops 25%, keeping the investment coming in remains a priority.

Pristine facilities, high-tech equipment, renowned experts, luxurious spas, friendly

and clean-cut nurses and doctors, services reminiscent of five-star hotels, all-inclusive packages in exotic

destinations: medical tourism is big business these days.

And now Turkey is becoming a big player in this $50bn a year business, rising in the ranks of the top-ten medical

destinations in the world after attracting over 400,000 medical travellers last year. The sector has certainly been on the radar of domestic and international investors, having drawn in big names like Khazanah Nasional, Malaysia's sovereign wealth fund, and the Emirati Abraaj Group in recent years.

Perhaps nothing symbolises Turkey's emergence in the market of glitzy healthcare facilities than the Bilkent Integrated Healthcare Campus – a $1.3bn project that is being constructed by an Azerbaijani company with German money, which will cover 1.2mn square metres outside Ankara, employ 8,000 staff, and treat 35,000 patients a day once completed in 2018. Touted as "Turkey's largest ever project under the republic", the complex will also include a hotel resort and a conference area, as hospitals do.

But behind all the money that is pouring in and the picture-perfect image that Turkey’s medical travel industry puts out, there are doubts about some of the statistics, parts of

Turkey’s medical tourism industry looks a little paleCarmen Valache in Istanbul


the sector are hurting, and the current violence and instability in the country will do nothing to help business.

Travel for healthMedical tourism is certainly a budding, lucrative, and very location-sensitive business. Its size is estimated at $38.5bn-55bn by Patients Beyond Borders, with 11mn cross-border patients travelling every year for medical procedures, spending between $3,500 and $5,000 per visit. Americans and Western Europeans account for the lion's share of medical tourists, with an estimated 1.2mn Americans crossing the border with Mexico every year.

However, even in the most popular healthcare travel destinations, like Thailand and Singapore, which report over 1mn medical tourists a year, foreigners account for less than 10% of total patients; of those, over 90% come from neighbouring countries. So while the trend is growing, its proportion in the overall healthcare business remains relatively low, and the mobility of patients limited.

Europe's ageing population and congested public healthcare systems have prompted many Western Europeans to seek cheaper private care nearby, which has led to the rise of Emerging Europe, Turkey and Israel in the medical travel industry. Since the Arab Spring started in 2011, the number of Middle Eastern patients has also increased tremendously, and unsurprisingly they favour Turkey over Israel.

Russians, Central Asians, particularly Turkic peoples like Azerbaijanis and Turkmens, and patients from Southeast and Eastern Europe account for the rest of the foreign patients arriving in Turkey. While the country's prices are not nearly as low as India or Thailand's, they are a good 50% lower for certain procedures, like heart bypasses, compared to prices in Germany. Its proximity to the above-mentioned source markets also makes Turkey a destination of choice for medical tourism.

Reliable statistics are notoriously difficult to obtain in this business. In an effort to boost their standing in the industry, many countries will count every single foreigner that sets foot in their hospitals, including foreign residents who want flu vaccines or pissed-up tourists. Meanwhile, institutions like the US-based Joint Commission International (JCI), a globally-recognised accreditation body, have profited from the growth in medical tourism: over 600 medical facilities in developing countries have sought their accreditation to date, and their number is rising at 15% to 20% a year. JCI is the healthcare version of Moody's rating agency; if you do not have their accreditation, fearful patients tend to avoid you.

In rude healthIn comes Turkey, a popular beach and cultural tourism destination on the edge of Europe that receives upwards of 40mn tourists every year. A relatively liberal Muslim-majority country, with a wealth of culture and history, it

appeals to both Europeans and Middle Easterners. A service-oriented and fast developing high-tech economy, Turkey is famous for its hospitality, for its skilled workforce – and increasingly its affordable medical costs.

According to the Turkish Statistical Institute, the country has seen a surge in medical tourists from 109,000 in 2010 to over 400,000 in 2014, making the coun-try the sixth most popular destination for medical procedures in the world. But Ankara doesn’t plan to stop here: it aims to become one of the top five medical destinations in the world, and to attract 700,000 medical tourists with a turnover of $8bn by 2017, and for 2mn tourists and $20bn in turnover by 2023. The country's goals are feasible, seeing how foreign patients spend a significant $2,000 to $4,000 per procedure, and between $9,000 and $12,000 for the entire visit.

But for all of Turkey's keenness on medical travel, the number of foreigners in its hospitals remains tiny compared to the approximately 18mn Turks who use public and private hospitals every year. Besides, the statistics the government puts out could be exaggerated. The largest operational private hospital group in Turkey at the moment, Acibadem Healthcare Group, reports that it accounted for 20% of the $750mn medical tourism turnover in the country last year, but only treated about 42,000 medical tourists during that time, which it claims represents 15% of the total medical tourists visiting Turkey. That would put the number of Turkey's


Emerging Markets Direct – your data source for the developing worldRomania Country Report – August 2015j.mp/romania-august

GDP increased by 3.2% y/y in Q2, decelerating from 4.3% y/y in Q1, the country’s statistics office INS reported in its flash estimate on August 14. Seasonally adjusted GDP inched up by a mere 0.1% q/q in Q2, after the 1.4% q/q advance in Q1. It slightly exceeded the pre-crisis peak level.

• Ruling coalition, opposition agrees over Fiscal Code including 4pp cut in VAT rate to 20%;

• Central bank argues for stimulating supply, not demand;

• Market regulator decides on bankruptcy for Astra insurer;

• PM Ponta has no plans to resign before December. 2016 elections.

Montenegro Country Report – August 2015j.mp/montenegro-august

The European Union has decided to grant Montenegro €45mn for infrastructure projects. On the other hand, the agriculture ministry has estimated that Montenegro will need billions of euros to protect the current quality of water and to implement all directives of the EU.Bosnia and Montenegro signed a border demarcation agreement. The two countries are the first ex-Yugoslav republics to sign an agreement defining their borders.Montenegro's police arrested several high-ranking municipal officials in the resort town of Budva, including the mayor, on suspicion of abuse of power and damaging the budget in the range of millions of euros.• The budget deficit increased by 52.3% y/y to

€115.5mn in the first seven months of 2015.

j.mp/emdstore

medical tourists at around 280,000, under the government's estimates.

Acibadem Healthcare, which operates 17 hospitals in Turkey and one in Macedo-nia, treated over 3.5mn patients in 2014. "We attend patients from 42 different countries… and Western European coun-tries only account for 1,500 to 2,000 of our 42,000 medical tourist patients,” says Gokhan Izlisu, Acibadem's international relations supervisor.

The rest of the patients come from the Balkans, the Middle East, and Russia/ Commonwealth of Independent States (CIS), which perhaps explain why neurosurgery, orthopedics, oncology and organ transplants are the most popular procedures among its patients, and not plastic surgery. "Plastic surgery and dentistry are the most popular with Western Europeans," Izlisu says.

Meanwhile, Middle Easterners are more concerned with their hair. "Most Arabs that approach us do so

for hair implants," Dr Dilek Uzer from intermediary medical tour operator Turkey Health Tour, tells bne Intellinews.

Not all well with wellnessOne part of the medical travelling business that Turkey is famous for, wellness tourism, is not doing so well, according to Carmen Siebel, a spa consultant with 25 years of experience advising hotel spas in Istanbul and in Turkey's beach resorts. “A decade ago, the focus was on high quality and inclusive packages, which is how Turkey attracted high-quality wellness clientele from Western Europe," she tells bne Intellinews.

But lately, she explains, hotels have moved to outsource their spas to outside companies, which have been forced to lower prices, and therefore the quality and diversity of treatments. “Thalasso-therapy and expensive procedures like Botox injections used to be an important revenue source for us, but not anymore. Nowadays, we are operating with low-quality products and performing basic

procedures like massages and facials," Siebel complains, adding that nepotism is a big problem in the spa business in Turkey. “Many of these hotels are family-owned, and they appoint inexperienced offspring in management positions, which is bad for business.”

But with the help of Turkish Airlines, the airline that claims to operate flights to the largest number of destinations in the world, medical tourism is bound to flourish. In October, Turkish Airlines announced it would offer 50% discounts to medical tourists who seek treatment in Turkey and can provide proof from the medical facility where they were treated.

For all Turkey's shortcomings – and the recent upsurge in violence as the poltical situation worsens is one more – its many benefits such as a location close to Europe and the Middle East, and an educated and skilled workforce will continue to support the growth of its medical healthcare.

bne November 201552 I Eastern Europe

and this system is in a crisis,” he told his audience, who had flocked to Ukraine expecting to hear cheerleaders for the country’s heroic reform efforts.

Star investigative journalist-turned-MP Serhiy Leshchenko then did some digging, and came up with three key figures exercising shadowy power that goes far beyond their official remit: Boris Lozhkin, Poroshenko’s chief of staff, Mykola Martynenko, deputy head of the parliamentary group of the Peope’s Front party, and Ihor Kononenko, deputy head of the Bloc Petro Poroshenko parliamentary group.

“I have heard these names dozens of times and after becoming an MP I have found much to confirm their

massive influence,” he wrote in a groundbreaking cover article in leading journal Novoe Vremya on September 18.

Money-laundering suspicionsAccording to Leshchenko, at least two of the three are facing money-laundering investigations in the West. And all three have surprisingly close ties to Russia, given the current crisis between the two neighbours.

Leshchenko argues that Poroshenko’s chief of staff, Boris Lozhkin, is at the core of the ‘shadow government’. Lozhkin is Poroshenko’s top power broker and spin doctor – and ironically the idea to invite top international reformers such as Saakashvili to work in Ukraine was his brainchild.

Ukraine’s ‘shadow government’ investigated for money launderingGraham Stack in Kyiv

Two core members of what has become known as Ukraine’s ‘shad-ow government’ are reportedly

under investigation in Europe for money laundering, while the VIP aviation busi-ness of a key confidante of President Petro Poroshenko could also make him a target of international law enforcement agencies.

“We essentially have a shadow government – a parallel government,” Mikheil Saakashvili, former president of Georgia turned governor of Ukraine’s Odesa region, told a shocked crowd of international business people and politicians at the Yalta European Strategy conference in Kyiv on September 14. “In reality, the country is run by some parallel shadow system

bne November 2015 Eastern Europe I 53

But Lozhkin’s past as a pro-Russian print media tycoon may now be catching up with him, if Leschenko’s information proves valid. Lozhkin made his fortune as owner of the Ukrainian franchises for Russia’s leading tabloid titles, such as Konsolmskaya Pravda – Ukraine’s best-selling paper with a print run of 230,000. In 2013, only weeks before pro-EU demonstrations kicked off in Kyiv against the regime of then-president Viktor Yanukoyvch, Lozhkin sold his entire holdings to a corrupt Yanukovych crony, the notorious ‘Wizard of Gas’ Serhiy Kurchenko.

Lozhkin cashed in at least €160mn for his media holding – the size of a loan Kurchenko got from a state bank to fund the overpriced acquisition. The collateral for the loan is now worth a fraction of the loan value. Meanwhile Lozhkin was decorated in 2013 by Russia’s State Federation Council for his outstanding contribution to Russia-Ukraine business relations.

Now, as Austria launches a sweeping asset retrieval effort on behalf of Ukraine, including recovery of money allegedly stolen by Kurchenko, Lozhkin may get caught in the net. Leshchenko argues that Lozhkin is now under investigation in Austria for money laundering after accepting Kurchenko’s tainted funds. Austrian News Agency (ANA) reported Lozhkin’s involvement on September 24, citing a spokesman for the country’s anti-corruption prosecution office. “Neither Ukraine nor Austrian law enforcement agencies have asked me for information on investigations regarding myself,” Lozhkin told ANA in reply.

“In public, Boris Lozhkin stays mum over the criminal investigation in Austria, “Leshchenko tells bne IntelliNews.” But offstage there is a hive of activity: Lozhkin’s lawyer dealing with the sale to Kurchenko of UMH [Lozhkin’s media holding] and the deputy head of the presidential administration are now both in Vienna. They are trying to put out the fire while it is still on the roof, before the whole house catches fire.”

Leshchenko says Lozhkin has confirmed the money-laundering investigation to him in a private conversation. The presidential secretariat did not reply to a bne IntelliNews request for clarification.

Atomic decayLozhkin is not the only core member of Ukraine’s ‘shadow government’ report-edly facing a money-laundering inves-tigation in Europe, says Leshchenko. Swiss authorities are investigating Prime Minister Arseny Yatsenyuk’s chief fixer, Mykola Martnynenko, deputy head of the parliamentary group of Yatsenyuk’s People’s Front party, on suspicion of tak-ing a $30mn bribe from a Russian state-owned company, according to multiple reports.

Martynenko started out as a businessman supplying Ukraine’s colossal, crumbling and corrupt nuclear power sector in the 1990s, before moving into politics. He has headed the parliamentary energy and nuclear power committee for over 10 years, irrespective of frequently changing prime ministers and presidents. He is regarded as the unofficial ‘watcher’ over the sector that supplies Ukraine with over half of its electric power, as well as a fundraiser and sponsor of the PM’s People’s Front.

According to political scientist André Haertel, associate professor at the Kyiv-Mohyla Academy, Martynenko is, with the protection of president and prime minister, expanding his personal

influence over the broad network of state energy companies. “While Martynenko in Switzerland is already under investigation for taking millions [of francs] worth of bribes, he is also suspected of deploying corrupt schemes to relieve state companies of millions of dollars,” says Haertel.

"We essentially have a shadow government –a parallel government"

Swiss journalists report that authorities suspect Skoda JS, a Czech nuclear engineering company owned indirectly by Kremlin-run Gazprombank, of having paid as much as $30mn in bribes to Martynenko’s Swiss bank account in 2013, to win a contract for the upkeep of Ukrainian nuclear reactors.

Swiss prosecutors have confirmed that they opened a bribery case against Martynenko in 2013. Martynenko acknowledges as much, but says the case is fabricated by “lies concocted in the imagination of oligarchs”, in a message posted on Facebook.

Army buddy shoots up the ranksIhor Kononenko, deputy head and unofficial chief whip for the president’s Petro Poroshenko Bloc, is another key member of the ‘shadow government’, according to Leshchenko’s analysis, and the closest to Poroshenko himself.

Kononenko has known the president since the two performed army service together in the 1980s. Kononenko then partnered Poroshenko and Oleh Gladkovsky, now first deputy secretary of the National Security and Defence Council, in setting up the industrial holding Ukrprominvest (UPI), which included the once mighty automotive concern Bogdan Motors among its divisions.

In August 2014, Kononenko took on a new role: as the unofficial organisational force behind the creation of Poroshenko’s eponymous

party, only two months before parliamentary elections in October 2014. With Kononenko at the helm, the party has grown rapidly into a well-funded political machine, which took just under a third of the seats in parliament in the elections, and which has largely maintained its standing in

54 I Eastern Europe bne November 2015

the polls, despite harsh government austerity measures.

In a recent interview with bne Intel-liNews, Lviv Mayor Andriy Sadovyi accused both Bloc Petro Poroshenko and the People’s Front of selling seats in par-liament. The pro-reform president of the European Business Association, Tomas Fiala, had previously named the sum of

$3mn-5mn per seat taken by the parties. “We have a lot of questions for Tomas Fiala to answer,” Kononenko countered on Facebook on September 23.

While other members of the alleged shadow cabinet such as Martynenko and Lozhkin were already well-known figures in politics, media and business, Kononenko was a dark horse at the outset just over one year ago. But since then, he has shown significant pulling power over the purse strings and media across the whole spectrum of the Ukrainian establishment.

Secret flights, frequent fliersOne clue as to the origins of Kononenko’s sway over the rich and powerful could come from his secret business as provider of VIP business jet services to Ukraine’s gilded elite, according to documents seen by bne IntelliNews.

Kononenko’s UPI industrial holding secretly runs Ukraine’s leading executive jet business for VIPs, flying top dogs around Ukraine, Europe and the world, according to the documents. Besides Poroshenko himself, the VIP jet business has catered to a swathe of Ukraine’s top businessmen and politicians, including many high-ranking officials in the ousted administration of former president Yanukovych.

At least one of the Cessna aircraft provided to clients was owned directly by UPI together with Raiffeisen Leasing, according to the documents, and registered in Austria as OE-GBY.

The lessee was a local Viennese firm, JB Park GmbH, run by Dmytro Lytvynets, who is also director of Bogdan GmbH, an Austrian affiliate of Bogdan

Corporation, the automotive subsidiary of Ukrprominvest.

The documents name as contact person for JB Park a certain Daria Tsaregorodtseva, whose email address uses the historic Ukrprominvest domain, upi.com.ua. Tsaregorodtseva is also listed as representative for a British Virgin Islands shell company, Intraco Management Limited, through which many business expenses for the secret VIP airline get paid. In Ukraine Tsaregorodtseva is listed as owner and director of Business Airlines, which receives payments for the VIP flights, according to the documents; Business Airlines also used to be shareholder in an UPI subsidiary in Kyiv, Bogdan Electrotrans, according to Ukraine’s company register. Intraco itself owns real estate in Kyiv linked to Bogdan Motors, underlining that the

elite aviation business is a division of Kononenko, Poroshenko and Gladkovsky’s UPI.

Tellingly, some Intraco payment documents name Dariya Kononenko, the daughter of Ihor Kononenko, as originator of payments, identified by her UPI email, indicating that the Kononenko family were directly involved in running the business jet operation.

According to the documents, UPI-linked structures may own or have long-term lease arrangements for as many as 10 planes, operated mainly by Austrian and Ukrainian firms. Despite the size of the business, it has no official website or brand name, suggesting clients were acquired through personal contacts and word of mouth.

The VIP jet service flies oligarchs and top officials around Ukraine, Europe, and the world, with flights as far as India and the Seychelles, according to the documents seen by bne IntelliNews. A round trip within Ukraine costs upwards of $7,000, while it costs $150,000 for the round trip to the Seychelles.

Frequent fliers on board the UPI executive jets include top Ukrainian executives such as Igor Litovchenko, head of Ukraine’s leading mobile phone provider Kyivstar; Leonid Chernovetsky, the eccentric former mayor of Kyiv, together with his wife and five children; banker Vasily Khmelnitsky; land baron Yury Kosyuk; automobile magnate Tariel Vasadze; and tycoon brothers Hrihory and Ihor Surkis and Oleksandr and Serhiy Buryak; as well as metals and mining magnate Vadim Novitsky.

The impressive list of Ukraine’s rich shows just how much the jet service has networked the Kononenko family with Ukraine’s oligarchs.

Foreign VIPs have also used the bespoke aviation: Flamboyant Russian pop star Philip Kirkorov is a frequent client, as is controversial Armenian arms broker Davit Galstyan, whom the

"The impressive list of Ukraine’s rich shows how the jet service networked the Kononenko family with Ukraine’s oligarchs"

Eastern Europe I 55bne November 2015

UN alleges supplied arms via Ukraine from the Balkans to Libyan rebels in 2011. Payment documents show that Galstyan’s arms company Mosston Engineering paid €270,000 to Intraco as late as June 2015.

Asked to comment, Kononenko told bne IntelliNews by email: “I am not a beneficial owner or director of the companies mentioned in your query. [The] origin of documents... is not known for me. In my opinion they [sic] are signs of tampering.”

Cash-rich croniesRemarkably, despite the huge cost of the VIP service, many clients, and all government officials flying on the jets, paid in cash for their flights – sometimes handing over the money once on board the plane, according to the document.

Illustrating the scope of Kononenko’s political connections, UPI’s jet service did extensive business with luxury-loving officials in the pro-Russian Yanukovych administration, who all paid in cash for their flights. Many of these clients are now under international sanctions and targeted by asset retrieval measures.

The records detail flights for Andriy Kluev and Nestor Shufrich, the hardliner head and deputy head, respectively, of Ukraine’s national security and defence council under Yanukovych, who together paid a total of $115,000 in cash in 2011-2013. ‘Mr Azarov’ – either former prime minister Mykola Azarov or his son; ‘Mr Katsyba’, one of the Katsuba family formerly powerful in the gas sector; Serhiy Arbuzov, former head of National Bank of Ukraine and former first deputy prime minister; and former energy minister Eduard Stavitsky all flew with the Kononenko-linked VIP jet service, handing over in cash a total of nearly $200,000 for their flights.

All of these clients except the Katsubas fled Ukraine after the fall of Yanukovych. The documents do not show if the Yankovych cronies

left Ukraine on board the UPI-linked planes, but there are some open source clues: One Gulfstream private jet recorded at the time as having flown from Kyiv to Vienna but then denied landing appears to have been UR-PRM, one of the planes used for UPI operations, according to the documents.

A list of private jet charters in Ukraine was posted to Twitter on February 20, 2014 – the day many Yanukovych cronies tried to flee the country after the massacre of anti-Yanukovych protestors on Maidan, according to Radio Liberty. The list does not specify the exact airplanes used.

Spy in the skyOne notable high-ranking frequent flyer had already left Ukraine on a UPI plane: controversial former Ukrainian defence minister and defence industry boss Dymytro Salamatin. Salamatin, who apparently retained Russian citizenship while serving as Ukrainian defence minister, is widely suspected of having spied for the Kremlin during his tenure in office between 2010 and 2012, laying the groundwork for Russia’s subsequent seizure of Crimea and incursion into eastern Ukraine in 2014.

Salamatin served alongside Poroshenko in Ukraine’s government in 2012, during which time Salamatin enjoyed VIP flights to Moscow, as well as to Qatar, Delhi and India, paying a total of $149,000 in cash for the flights. It was also in 2012 that Salamatin’s ministry awarded Poroshenko’s shipyard Leninska Kuznya a contract for the construction of the first two gunboats of a series of nine for Ukraine’s navy, as bne IntelliNews earlier reported.

After parliamentary elections in late November 2012, both men left the cabinet, ending their collegial relations. Thereafter their fates diverged sharply: Poroshenko started preparations for a bid for the presidency – which turned out successful in May 2014 under the most unexpected of circumstances.

In contrast, following his dismissal from the cabinet, Salamatin immediately moved back to Russia, where he remains. His final UPI-organised Moscow-Domodedov trip on December 29, 2012, cost UAH124,700 – around $15,000 at the time – which Salamatin as usual paid in cash, according to the documents. He could not be reached for comment.

At least one former high-ranking Ukrainian official now believes that Kononenko’s links to the secret cash-rich VIP jet business leave him vulnerable to international investigation for money laundering – putting him in the same boat as Lozhkin and Martynenko.

“The mentioned company [Intraco Management] is part of Ukrprominvest Group, Kyiv Ukraine. Several financial operations are held monthly amounting from €100,000 to €300,000... The documents attached indicate money laundering,” the former head of Ukraine’s security service Valentyn Nalivaichenko informed the Financial Activity Task Force in a letter in August. Nalivaichenko claims Poroshenko dismissed him in July after he started investigating the company and other offshore entities connected to the presidential party.

"I have heard these names dozens of times and after becoming an MP I have found much to confirm their massive influence"


As expected, Belarus’ longstanding autocrat Alexander Lukashenko won another five-year term in a

landslide presidential election on October 11. And as expected, the EU agreed days later to suspend the current sanctions against Belarus for the next four months in recognition that the election, while not strictly free or fair, was an improvement on the last rigged one in 2011, which ended in riots and repression.

However, a likely outcome of any EU rap-prochement with Minsk is that Lukashen-ko will be well placed to convince Russia that the West wants to pull the former Soviet republic out of the Kremlin’s orbit, and that his oft-proclaimed loyalty to Russia should therefore be contingent on more Russian cash to support the strug-gling Belarusian economy.

Currently, the Belarusian government is negotiating support packages simultane-ously with the International Monetary Fund (IMF) and another potential donor, the Russia-led Eurasian Fund for Stabili-sation and Development (EFSD). Minsk

is trying to secure a new loan of around $3.0bn-3.5bn from one of these institu-tions. But it still has to do much more before it anchors its case with the West and reaps a funding windfall. "The IMF is not ready to give billions for 'political

prisoners' but only for reforms – look at Ukraine," says Balazs Jarabik, visiting scholar at the Carnegie Endowment for International Peace, referring to the six jailed opposition activists pardoned by Lukshenko in the run-up to the election. "So the rapprochement with the West – as always was the case – is to make sure that Russia maintains its subsidies [to Belarus]. These have, of course, been decreasing since 2006, but they are still a key external factor that keeps the economy afloat."

Jarabik adds that the Kremlin "strongly dislikes" Lukashenko, but knows that it has no other option in Belarus. "This is similar, actually, to the West’s realisation. The Western and Russian views coincide here."

What Russian air base?Case in point is Lukashenko’s recent slipperiness over a planned Russian air base in the Belarusian city of Baranovichi, 145km from Minsk.

In September, after a meeting between Lukashenko and his Russian counterpart Vladimir Putin, Moscow announced plans to establish an air base in Baranovichi, which many experts consider to be the Kremlin's response to Nato's expansion towards its borders. A new air base would be a demonstration of Russia’s determination to defend its geopolitical interests in the territories of post-Soviet countries in the aftermath of the Ukraine crisis that involved the annexation of Crimea and the stoking of a rebellion in the east of the country.

However, on October 6 Lukashenko unex-pectedly announced that there had been no discussions concerning the establish-ment of any base. "I am the man in charge of making such decisions and I know nothing about such plans,” he said. “We don't need a base these days. We don't need military air forces either. We need

certain weapons. This is what I've been saying to Putin and earlier to [Russian Prime Minister Dmitry] Medvedev.”

Many Belarusian experts believe this unexpected rebuff to be a manoeuvre aimed at bargaining for more from the Kremlin in return for Minsk's consent to deploy Russian military potential on its territory. And the Kremlin appears to be willing to play ball on this one. "Putin will include the establishment of the air base as a key condition for a new

"The IMF is not ready to give billions for 'political prisoners' but only for reforms – look at Ukraine"

Lukashenko is Belarus’ president but nobody’s friendSergei Kuznetsov in Minsk

Photo: Shutterstock



From our desk to yoursGet the emerging markets newswire that financial professionals trust.


loan from the EFSD," Alexander Mukha, a Minsk-based independent financial analyst, tells bne IntelliNews.

But Mukha adds that the issue of the air base in Belarus has become "less significant" for Moscow, at least for the time being, because of the launching of Russian air strikes in Syria. The expert believes that until recently Putin considered the deployment

of the air base in Belarus as mainly a PR move aimed at demonstrating Russia’s commitment to defending its interests in the post-Soviet space. However, the Kremlin has now shown its determination to defend its interests globally through the operation in Syria and its support of Bashar al-Assad.

Meanwhile, Jarabik believes that Minsk will resist "as much as it can" and will

focus on diffusing the Ukraine conflict whilst working to reduce tensions between the West and Russia. "This is indeed a life-or-death issue for Minsk," Jarabik says, noting that there is little room for an independent Belarus in the so-called 'Russian World', which, according to Moscow's conception, includes the post-Soviet countries that have a significant Russian-speaking populations.

Short of the money needed to close an estimated 2.8% budget deficit predicted by the end of this

year, the Russia's government decided to raid the pension system again on October 7 and froze contributions to the state pension fund for a second time, according to the chairman of Russia's Pension Fund Board, Anton Drozdov.

The state froze contributions last year, but reinstated them again in May, as the economy appeared to be stabilising. However, a renewed bout of ruble and oil price instability over the summer has wrecked Russia's chances of a return to normalcy, leaving the state reaching for emergency measures yet again.

The decision comes at a high cost. With the demographic dip caused by the economic chaos in the 1990s about to hit the working population, the state pension fund is already underfunded; whereas the social contributions (a 6% tax on income) from two workers used to fund the pension of one retired worker, that ratio is rapidly moving towards one worker per pensioner.

On top of that, the pension funds are a solution to the problem of funding that has come with Russia's current pariah

status in the world. The financial sanc-tions imposed by the US and EU have cut the country off from the long-term cheap financing it so badly needs to re-start the virtuous circle of investment-profit-growth. With the consumption-led growth model clearly exhausted, the new model is based on low inflation, low interest rates and domestic investment, of which the pension funds are supposed to be a big source of long-term domestic capital.

And pension reforms had been starting to move, albeit at a gradual pace. Russian pension fund assets could triple and be worth almost a fifth as much as the entire economy by 2020 if the government continues its reforms as planned, a recent report by Goldman Sachs posited. "Hav-ing cleaned up the pension system in 2013-14, the Russian government now seems ready to allow resumption of contributions to private pension funds. The impact will be large: we forecast Russian pension fund assets will increase to [approximately] $200bn by 2020 from $64bn today. The creation of this sticky, long-term domestic investor base is likely to produce significant benefits for Russian capital markets, particularly for stocks," concluded Goldman Sachs analyst Dmitry Trembovolsky and his colleagues in a report titled "The rise of Russian pension funds", released at the end of August.

More bumps in Russia’s pension reform road Ben Aris in Moscow

The Central Bank of Russia (CBR) is still working on fine-tuning the system and could announce a major overhaul within a month, Sergey Shvetsov, first deputy central bank governor, told reporters in New York on October 7.

While the shape of the new system remains unclear, it looks like Russia will plump for some version of the "three pillars" that was pioneered by Chile and taken up with enthusiasm by the Baltic states in the noughties: the state pension fund will remain the backbone providing cover for everyone, but workers can then chose to have part of their social contributions managed privately and can also take additional privately funded pension cover. Just how these parts are weighted and what financial investments are put in place to encourage their growth is the meat of the current debate. "The new system can't be entirely voluntary," Shvetsov said. "In any case, there'll be some kind of encouragement for either people or companies to set money aside for non-state pension funds. We're trying to formulate an alternative that would be less costly for the budget, but not less effective in terms of the size of the funds attracted from the population."

Stop-start reformThe modernisation of Russia's pensions began in 2002, when the government required 6% of every employee's salary to be contributed to state or private pension funds. Over the last decade Russia has seen its pension assets under management (AUM) go from 3.0% to 5.6% of GDP today.


However, the government is now assuming that the Western financial sanctions are a permanent feature, so it is being forced to build up domestic capital resources. And that is without the problem of funding generous pension payments in the coming years to relative young OAPs (women retire at 55 and men at 60 in Russia). The upshot is that funding pensions is already eating into the federal budget.

According to official statistics, the private pension funds client base has grown to 28mn people compared with 52mn in state pension funds, while the asset split is $33bn in private funds and $31bn in state, according to Goldman Sachs. In short, private pension funds are slowly eating into the share of the State Pension Fund.

Like everywhere else, the key to pension reform is putting in rules that prevent funds from taking excessive risks and collapsing, leaving the state with a costly bailout.

The current pension reform proposals include: a change in the legal status of pension funds to for-profit; the establishment of a special insurance fund to guarantee savings in the case of bankruptcy; and merging the previous regulator (Federal Service for Financial Markets) with the Central Bank of Russia (CBR), and shifting oversight to it.

The cash-strapped Russian government raided the fund and froze transfers to private pension funds in 2013-14, but pension contributions were unfrozen this year in May, with the government handing back RUB530bn ($8.4bn) of employer contributions it kept in 2013 to private pension fund managers.

Still, the government says it plans to unfreeze pension contributions as soon as possible. And if the government sticks to its plan, then Goldman Sachs forecasts Russian pension fund assets will increase by about $120bn by 2020 to reach a total of $200bn, on a combination of inflows and investment returns.

'Farmer John' brings cheddar to cheese-starved Muscovites


A British farmer who bent Vladimir Putin's ear over milk prices is hitting back at Russia's recession with a cheese offensive, ramping up his output of cheddar, edam and stilton for Muscovites who crave quality brands amid the ban on Western food.

John Kopiski, whose Bogdarnya dairy farm is located 200km east of Moscow in the Vladimir region, already supplies large supermarkets including Azbuka Vkusa, Stockman and the Crocus Group with 150kg of cheese per day, and plans to double production to 300kg as demand for his artisan cheese takes off.

Having fought off bankruptcy for years, the current sanctions against Russia have not been the worst news for Kopiski. Russian producers have been frantically making cheese since Moscow imposed the Western food embargo in August 2014 – but no one is doing it very well.

Generally, domestic Russian produce is being rediscovered amid a gradual renaissance in the agriculture base: top steak restaurants in Moscow stock angus beef from Voronezh and scientists in Siberia are developing their own mozzarella, mascarpone, and roquefort.

Kopiski is also right on cue with such offerings such as his Farmer John cheddar, which may not have the mature kick preferred in Britain, but is nutty with a soft creamy texture and runs rings around local types. "Sanctions have helped us a bit," Kopiski tells bne IntelliNews. "But if there's a foreign cheese at RUB1,200 and a Russian cheese at RUB1,000, many people will still buy the foreign cheese because there's still a distrust of Russian products. Fortunately, I have gotten exposure which tends to build a market following."

Kopiski, a Russian citizen since 1997, achieved minor fame in April when he was one of the first people to quiz Putin during the president's annual phone-in. Introduced by the anchor as "simple Russian guy John", Kopiski complained to Putin live on national TV that farmers like him were starved of credit because of crippling interest rates and because banks wouldn’t provide loans with a long maturity to allow farmers to develop. His questions were fielded deftly by the Kremlin boss, who took a visible shine to the straight-talking, heavily-accented farmer.

60 I Eurasia bne November 2015

we are the country that connects east and west as well as north and south. And Georgia is the natural gateway to Europe from Asia. This is the reality,” the 33-year-old PM tells bne IntelliNews on the sidelines of the Silk Road Forum held in Tbilisi on October 15-16, which was co-organised with the Chinese government and attracted over 1,000 delegates from 32 countries to discuss how to revive the ancient trade corridor.

Seven years after the war with Russia over the breakaway region of South Ossetia that scared off investors and allies, Georgia has proved to be “a reliable and stable country for the transit of energy, trade and goods that flow into this corridor,” he stresses.

The tarmac on the new Silk Road will certainly be energy, but the project will encompass “everything, any goods” and China is the trump card. The feasibility study on the free trade agreement (FTA) is over and an analysis showed that the deal would boost Georgia’s annual exports to China by 95% and China’s by 1.7%. “When I was in China [in September] I got confirmation to start actual work [on the terms of the deal], which will begin on November 5,” says Garibashvili. “I am sure it will not take too much time, and maybe it will be completed within a year.”

An FTA with China would be the latest of a string of such deals that the small Caucasus nation of 4.4mn has signed

INTERVIEW: Georgian PM eyes free trade deal with China within a yearMonica Ellena in Tbilisi

Georgia hopes to complete its free trade deal with China within a year, while it continues to pursue

a "pragmatic" approach to improving its fraught relations with Russia as potential obstacles such as its desire to join Nato loom, Prime Minister Irakli Garibashvili tells bne IntelliNews in an excusive interview.

After years of terrible relations with its former Soviet master that have involved numerous trade wars and an actual bloody war in 2008, Georgia is opening as many doors as possible to diversify and strengthen its economy, betting on both east and west.

“Georgia has a very strategic location,

Photo: http://gov.ge

bne November 2015 Eurasia I 61

over recent years. In June 2014 it signed a free trade and association deal with the EU, enjoys similar deals with many CIS countries and neighbouring Turkey, and in September began negotiations over a deal with the European Free Trade Association. “This makes us unique,” the PM claims.

Russian rouletteOpen trade with diverse countries is essential for Tbilisi, as Russia casts a long shadow. Russia has traditionally been the main destination for Georgia's exports (as well as the source of remittances), so when Moscow banned Georgian products in 2006 the country lost overnight about 80% of its export market for key products like wine.

Since you can’t choose your neighbours, normalising relations with Moscow has been a key goal of the Georgian Dream coalition since it won the general election in 2013. The prime minister believes that what differentiates the new government’s approach to that of the previous administration led by former president Mikheil Saakashvili is its more practical attitude. “We have proved in the last three years [that] we are a responsible player in the region… We are pragmatic people, we want to and we will avoid any conflict, because we truly believe in solving problems through peaceful means, not by escalating them.”

The coalition is on the same page as Tedo Japaridze, chairman of the Georgian parliament’s foreign relations committee, who addressed the recent Bucharest Forum by saying that, “we want to live with Russia, we don’t want to live in Russia.”

Georgia considers Russia to be an occupying force, as Russian troops are stationed in the breakaway regions of Abkhazia and South Ossetia, which account for about 20% of the country’s territory. “Russia still continues its occupation policy. Of course, we strongly condemn the creeping annexation – this is what we consider it – of our territories of Abkhazia and [South] Ossetia. [The Russians] disregard international law,

On September 25, Georgian Minister of Energy and Deputy Prime Minister Kakha Kaladze met with the Russian gas export monopoly’s chief executive, Alexei Miller, in Brussels, and stated that “any developed country thinks of diversifying its energy supplies,” and Tbilisi would consider additional supply from Gazprom if the proposal is commercially viable. This provoked howls of protest in the media, suspicious of a Russian company that is used by the Kremlin as a geopolitical tool and is currently being investigated by the EU for anti-competitive practices. “The main provider of gas is and will be Azerbaijan, our main strategic partner,” insists Garibashvili, who recently paid an unexpected visit to Azerbaijan. “We have great relations, why would we replace Azerbaijan gas with Gazprom gas? This is not our intention – our policy is crystal clear.”

“Gazprom supplies gas to Armenia via Georgia, which proves Georgia also con-nects north and south [as well as east and west], and it has been like this for many, many years, even under the previ-ous administration,” he states, adding that the meeting focused on the poten-tial increase of gas volumes for Armenia.

"They had to negotiate with the Geor-gian side regarding this issue because we keep a certain amount of gas from this pipeline,” he explains. Gazprom provides Georgia with about 200mn cubic metres of gas per year (cm/y) as a transit fee, out of the total 2.2bn cm/y the country consumes.

Trouble at homeThis year’s economic slowdown in the region has taken its toll on Georgia. The 35% devaluation of the Georgian lari versus the US dollar since last November has severely hit people’s pockets and Russia’s recession harmed Georgia through falling exports and remittances. In 2014, Georgia’s economy expanded by 4.7%; this year the government predicts

it is obvious. Nevertheless, we made it very clear that there is the need for responsible and pragmatic dialogue with Russia,” Garibashvili says.

Even so, the PM is adamant that Geor-gia’s Euro-Atlantic aspirations are set in stone. “[This is] the choice of our peo-ple, we’ve followed this policy and we’re going to continue. I believe that Russia should also be interested in a stable neighbour country,” he says. “Our Nato aspiration is not against anyone, it is not against Russia, it is for a better protected future for our next generation.”

Such an ambition does not go down well in the Kremlin, which regards any moves by Georgia to deepen relations with the Western military alliance as a provocation. At the last Nato meeting in September 2014, Georgia did not get the desired Membership Action Plan (MAP), the last step before full membership, but instead received a substantial aid package, including the establishment of a Nato training centre that opened in August.

Complicating matters is public opinion. A non-binding referendum in early 2008 on EU and Nato membership received

overwhelming public support. Fast-forward seven years and the support has turned lukewarm. A survey by the National Democratic Institute (NDI) released on October 17 showed that 61% of Georgians still support the Euro-Atlantic path, marking a 17-percentage-point drop from a year ago. The government questioned the results, which also showed a steady fall in popular support for the ruling coalition.

Meanwhile, Garibashvili stamped on speculation in the media that his government is negotiating with the Russian state gas company Gazprom to play a bigger role in its gas market, instead reinforcing the “key” energy relations with neighbouring Azerbaijan.

"Maybe the free trade talks with China will be completed within a year"


growth of 2.5-2.8% and 3.0% for 2016. “We managed this crisis situation strongly and efficiently,” the PM maintains. “There is a slowdown everywhere, oil prices dropped, devaluation in many countries – this has a negative impact on Georgia, as there is a spill-over effect.”

The government is looking to bolster growth through plans to attract more foreign direct investment (FDI) and boost the economy via more local production;

about 230 new factories were set up with the help of government programmes in the last two years, the PM says. “Inflation is [also] not high, which is why we are confident. The people with loans in US dollars and salaries in lari are not in an ideal situation – they have had to extend their loan period with the banks, which are finding new terms for them.”

But the economy is not the only challenge at home. Politically, the government has faced criticism over its meddling with the central bank’s independence, alleged attempts to limit the freedom of the press, and allegations that the former PM and Georgia’s wealthiest man, Bidzina Ivanishvili, is still pulling the strings of government behind the scenes.

The Constitutional Court has suspended as an interim measure a controversial bill passed in September that stripped

the central bank of its supervisory role and transferred it to a newly estab-lished Financial Supervisory Agency (FSA) under parliamentary control, raising investor concerns about the independence of financial regulation at a critical time for the economy. “I can’t judge the Constitutional Court, and of course everyone has to obey its final deci-sion… We continue to work and coordi-nate closely with the National Bank. I will coordinate to make sure there is a good

communication between the government, the Ministry of Finance and Economy, and the National Bank of Georgia. There is no reason for dramatic scenarios,” he says.

Garibashvili rejects the accusation that his government is trying to influence the media, specifically actions taken against Georgia’s most popular TV station Rustavi 2, which is close to the opposition United National Movement of Saakashvili. Rustavi 2 is currently embroiled in a property dispute that has led to the freezing of its financial assets, thus threatening its capacity to broadcast. The management of the station has accused the government of blocking a funding deal necessary to continue its operations. Human rights groups as well as President Ghioghi Marghvelashvili have expressed concerns, while the US embassy called any actions that give the appearance of restricting media freedom as “disturbing”.

"Ivanishvili doesn’t make decisions"

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ANNUALINTERNATIONALCONFERENCE

12 November, 2015Moscow, Ararat Park HyattNeglinnaya st., 4

A one day conference presented by the IBA Corporate and Mergers and Acquisitions (M&A) Law Committee, supported by the IBA European Regional Forum and Russian Arbitration Association.Now in its seventh year, this leading conference will once again bring together practitioners from around the globe to discuss the latest emerging developments and hot topics in Russian and CIS M&A law, as well as hosting input and commentary from some of the world's leading experts in the �eld.Topics include:

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of Russian and foreign court in applying Russian law provisions regarding liability of shareholders and directors for the debts of the company; practical problems arising in insuring these risks, developing of the code practice related to shareholders disputes and similar things.

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I N T E R N A T I O N A L B A R A S S O C I A T I O N C O N F E R E N C E S

Garibashvili rejects the accusations, arguing that Rustavi 2 is not the only opposition channel. “Which of the other channels are pro-government? None of them. All of them are very critical of government and in the last three years our government has proved that we want to make media strong and independent,” he says, adding that Rustavi 2 is “a court case, it is not a government affair”.

The president’s position on Rustavi 2 as well as his veto of the bill on the new FSA highlights the friction between the two highest government officials, which has often been played out through the media. The government has accused the president, who ran on the Georgian Dream ticket, of a lack of “gratitude”, while the president has made thinly veiled criticisms of Ivanishvili for his Machiavellianism. The PM stresses that he personally has no issues with President Marghvelashvili. "When it is necessary, I call him and talk. Every time the initiator was me. But the president has his own agenda and vision – I don’t want to judge him.”

As for the accusations against Ivanishvili, Garibashvili is clear. “This government was formed by my predecessor [Ivanishvili], with whom I have worked for ten years and with whom I am very close,” he explains. “From the very beginning, I said sometimes I may ask advice or he may give advice, but this is for our country. I didn’t hide it... [and] he doesn’t make decisions.”


A purge in Baku

bne IntelliNews

A purge at Azerbaijan's intelligence ministry has sent the Baku rumour mill into overdrive,

raising questions about security in the country and the president’s plans for the various power factions that exist.

The mystery began on October 17, when President Ilham Aliyev out of the blue dismissed the country's security minister and close former ally, Eldar Mahmudov, straight after returning from a summit in Kazakhstan, where Commonwealth of Independent States (CIS) heads of state had gathered to discuss, among other things, the threat of Islamic terrorism. He did so through a brief announcement posted on the website of the Azerbaijani presidency, which offered no explanation for the dismissal.

The following day there was an emer-gency meeting of the country's Security Council, according to haqqin.az. Then Turan news agency reported "unusual" activity at the Ministry of National Security (MNS) headquarters; a usually shut main gate was wide open, cars were going in and out, and people with briefcases and folders were reportedly seen leaving the building. "It looked like a seizure of documents was taking place inside," the news site reported.

On October 20, seven high-ranking MNS officials were arrested, four of them working at the ministry's monitoring centre, which oversees the listening of private telephone conversations, among other things. The charges brought against them were extortion of private business people and embezzlement. On the same day, President Aliyev also appointed a new deputy security minister, Deputy Justice Minister Madat Guliyev. On October 22, three more employees of the monitoring centre were placed under arrest with similar charges. And nine more MNS staffers from different departments, four of whom were generals, were dismissed on October 23.

Trying to make sense out of the events requires a great deal of supposition, for not only does the authoritarian govern-ment rarely account to the public for its political acts, but it has stifled dissent to such a degree that independent observers daren’t express an opinion for fear of per-secution. However, one thing is certain: Aliyev has become disenchanted with the performance of his security staff and is purging the ministry of Mahmudov's most trusted employees and allies.

Furthermore, by attacking a power-ful and connected minister like Mahmu-dov, Aliyev is reasserting his control over the country before Azerbaijan is scheduled to hold parliamentary elec-tions on November 1. Mahmudov's influence in Baku, Moscow, Ankara and Jerusalem had gradually increased over

the last decade, and with it his personal fortune and that of his family. His clan, however, was not as powerful as the more notorious Pashayevs, Mammadovs or Heydarovs, making it an easier target. "Therefore, while he was definitely influential, he could be disposed of, and that is exactly what Aliyev did," Vadim Mukhanov, senior fellow at the Centre for the Caucasus and Regional Security at the Moscow State Institute of Inter-national Relations, tells bne IntelliNews. "Aliyev might want to dispose of some of the other ministers that have become larger than life, but he cannot do that at the moment because they have a lot of support from their clans."

The timing, coming less than two weeks before the parliamentary elections, could also mean that Aliyev is trying

to appease the electorate by bringing to heel a ministry that has become synonymous with human rights abuses and corruption. Reports of small businesses being unlawfully raided by the MNS and fearful owners forced to pay hefty bribes to avoid being thrown in jail under fabricated accusations or, worse, having their safety or that of their families threatened by the state's spies, are legion.

Man for all seasonsMahmudov appeared a stereotypical figure on Azerbaijan's political scene: a career security bureaucrat, he had worked with the Ministry of Internal Affairs between 1980 and 2004, when he was appointed minister of security. He represented the country frequently at international security conferences and seminars, and continued to do so until as recently as October 9.

But behind a rather uninteresting appearance, Mahmudov had numerous private business interests. "Mahmudov was more a businessman than a head of special services," a haqqin.az editorial

claimed after the minister's dismissal. A well-connected individual, he was related to the former chairman of International Bank of Azerbaijan, Jahangir Hajiyev, who has reportedly been jailed.

According to a Facebook post by Arif Mammadov, former ambassador to the Organisation of Islamic Cooperation at the EU, Mahmudov took out a large loan from IBA that he was unable to repay. "This is not the first time Mahmudov has fallen out of favour with the president," Mammadov's post reads. "Once, he blackmailed a business for a large sum of money and did not pay it back, and he came close to being fired when Aliyev found out. He got out of that by paying the money back with interest. Now, he took out large amounts of money from IBA, which went to third coun-

"While he was definitely influential, he could be disposed of, and that is exactly what Aliyev did"


tries through the bank of the minister’s cousin, Chingiz Asadullayev, the owner of Azerigasbank. Mahmudov also estab-lished powerful personal ties with Israeli intelligence, something that could only concern Russia. Moscow may have dug out some serious discrediting evidence about the minister, and informed the president about it during his latest trip [to the CIS summit]. The minister also defended other well-known ministers from the presidential administration.”

Another who spoke about the case, for-mer MNS employee Arastun Orujlu, also pointed to Mahmudov's financial prob-lems as the cause of his dismissal. "He invested billions of the top leadership's money in Russia through his employees, but those billions were lost because of the sanctions against Moscow. In addi-tion, Mahmudov reached out to [Turkish President Recep Tayyip] Erdogan's close circles with the help of his business part-ner, a well-known billionaire in Turkey. He tried to get the Turkish president's support to be appointed prime minister. Ilham Aliyev did not like this; however, no one touched Mahmudov because of Russia's support.”

“This time, it was Moscow that surrendered him," he concluded in an interview with haqqin.az.

As Mahmudov spent more time handling cash than information, his work suffered. Several arrests of Azerbaijani terrorists who fought with Islamic State had to be performed by Azerbaijan's international counter-terrorism partners, according to haqqin.az, which constituted a big failure on MNS' part to protect national security. That is despite it being well known in Baku that the nearby industrial town of Sumgait has become a recruiting ground for terrorist groups.

Regardless of the reasons behind Mahmudov's dismissal, it is a positive development, one expert, who declined to be named, tells bne IntelliNews. "During his 10-year tenure at the MNS, the ministry became a tool for repression, and for spreading fear in society. His dismissal may mean that the ministry might be reformed in the future," he says, hopefully.

Fugitive Kazakh banker one step closer to home

bne IntelliNews

A former Kazakh banker accused of stealing up to $6bn from BTA Bank is one step closer to finding himself in a country that might then hand him over to his native Kazakhstan, after the French government signed a decree sealing his extradition to Russia.

Ablyazov’s lawyer Peter Sahlas said on October 12 that his client was informed of the decision the previous week. French Prime Minister Manuel Valls apparently signed the extradition order on September 17, it was reported.

BTA “applauds the Prime Minister’s decision as a crucial step towards forcing Mr Ablyazov to face justice for the billions of dollars that he stole from the Bank”, the Kazakh bank, which Ablyazov once ran during the pre-crisis boom years as chairman and controlled through an undeclared stake, said in a statement emailed to EurasiaNet.org.

Ablyazov will now appeal to the Conseil d'État, France’s supreme administrative court. Should the Conseil d'État uphold the extradition decree, he will be deported by the end of the year. Observers say it would be highly unusual for the Conseil d'État to rescind the decree.

Amid the salacious details of luxury villas he used as hideouts in Europe while on the run, his family and defence team have attempted to paint Ablyazov as a victim of a political witch-hunt by Kazakhstan’s authoritarian President Nursultan Nazarbayev.

Once a minister in Nazarbayev’s administration, Ablyazov first fell from grace when in 2001 he co-founded the Democratic Choice of Kazakhstan (DCK), an opposition movement. After serving a jail sentence for abuse of power, he became chairman of BTA Bank, then one of Kazakhstan’s largest financial institutions, in 2005, while allegedly continuing to finance opposition movements. He stayed in the post until 2009, when the Kazakh authorities issued an arrest warrant accusing him of embezzling as much as $6bn. He has always rejected those claims, accusing Nazarbayev and his inner circle of plotting to gain control of BTA Bank.

As his bank collapsed and had to be taken over by the state in February 2009, Ablyazov fled to the UK where he was granted political asylum. However, BTA Bank started legal proceedings in the UK High Court as soon as he stepped onto British soil. He was eventually found guilty of contempt of court in trying to hide more than £34mn of assets from creditors and sentenced to 22 months in jail in February 2012.

By that time Ablyazov had already fled the country, though. He then hit the headlines in May 2013 when the Italian police raided a villa in Rome where he was supposedly staying with his family. However, when they arrived the police found only his Kazakh wife and six-year-old daughter. They were hastily deported to Kazakhstan. Ablyazov was eventually arrested in Cannes, France, in August 2013.



From our desk to yoursGet any questions you have about the news answered by our analysts.

bne November 201566 Opinion

action, and while a combination of wall-to-wall media coverage and the inevitable initial appeal of what seems a “nice, victorious little war” explains this apparent flip-flop, the underlying concerns are unlikely to go away. It is noteworthy how often the spectre of the Soviet war in Afghanistan – a “six month” and “limited” deployment that ended up lasting ten years and costing more than 15,000 Soviet lives – crops up even in the more supportive media.

Moderately quiet on the eastern frontBesides which, Russians are no more simplistic in their perspectives on the world than anyone else. They can be excited by the thought that their country is again shaping global events; some of them at least can enjoy the videogame pyrotechnics as jihadists and rebels are hammered by the might of the Russian military. But that does not mean they cannot keep that in context, that they want to see their boys coming home as “cargo 200” casualties. It also does not mean that they need to hold these feelings especially deeply, or indeed that they are not also savvy enough to know what responses are expected of them when surveyed.

For that matter, just how mobilized do Russians feel? Life has become harder – salaries have dropped in real terms for the last ten months – but most have adapted. Finland, for example, is suffering because the Russians who tended to come to shop now spend only two-thirds of what they did before the current crisis. But this is only in part because they are buying less overall, and in part reflects a shift to cheaper online suppliers instead of coming to Finland to buy in a bricks-and-mortar shop.

Meanwhile, Russians continue to live their lives largely in blissful ignorance that they are supposedly locked in economic and geopolitical conflict with the West. Airliners,

Has Putin’s Russia become a mobilization regime? A common assumption is that the Kremlin is becoming or has become dependent on a heady mix

of paranoia, militarism and public spectacle, and war is a great way of supplying it. There is some truth in this, and certainly the Kremlin is pushing a nationalist line for all it is worth. However, we should not assume the Russians are wholly taken in by it, let alone that this means Putin needs to manufacture crisis after crisis to keep his action show topping the ratings.

The war will be televisedOf course, Moscow is making much of its latest adventure. However, the black and white cockpit camera footage of bombs hitting targets, the to-camera pieces shouted over the scream of jet engines, the shots of cruise missiles streaking from warship launchers, are all long-established staples of techno-war. They could as easily be drone footage from US operations in Afghanistan, or reportage from Balad Air Base in Iraq as American F-16s headed off for another mission. What modern war is not turned into a blockbuster, especially in the early days, before friction, fate, and the ingenuity of the perfidious enemy bring to an end illusions that it can be managed and choreographed?

Meanwhile, the cast of nationalist ideologues and propagandists continue to ply their trade, smoothly pivoting from Ukraine to the Middle East. Veteran writer Alexander Prokhanov – who first hit the big time in the 1980s with hearty accounts of Soviet heroism in Afghanistan – is now telling young Russians to stop watching TV game shows and undertake their own “personal mobilization” for a clash of civilizations. And when not noting the “ideal” conditions for bombing in its weather forecasts, television news is delivering a stream of accounts of successful missions and grateful Syrians.

However, there is a world beyond Perviy Kanal news and Rossiya 24, and one has to ask just to what extent ordinary Russians really feel mobilized or respond to such PR blitzes. According to a recent Levada Center poll, 72% of Russians are supportive of the air campaign against Islamic State, but that does not equate to any blanket approval of a wider military operation.

An earlier survey had found 69% opposing direct military

STOLYPIN:

The limits of the Russian ‘patriotic mobilization’Mark Galeotti of New York University

"One has to ask just to what extent ordinary Russians really feel mobilized or respond to Kremlin PR blitzes"

bne November 2015 Opinion 67

the Syrian adventure as having three crucial virtues: as highly successful (hundreds of Islamic State “mercenaries” are fleeing the war zone, according to the official accounts); wholly safe for Russians; and well received everywhere but in the White House.

This will not last. If Moscow wants to change the ground truths of this war, it will take a lot more than 30 aircraft and some cruise missile strikes: brigades of combat troops, not a few “volunteers” and technical advisers will be required. In due course, there will be casualties, whether to accident or enemy action, and the risk of an upsurge in terrorism at home cannot be discounted considering that many North Caucasus cells have pledged their loyalty to Islamic State. And the operation is unlikely to win any long-term plaudits other than from Tehran and Baghdad, and is already complicating relations with Ankara, a potential regional ally.

So the shine will soon dull and if anything the Kremlin – as with Ukraine – may well find itself the hostage of its triumpha-list propaganda. However, that does not mean that it will have to pick some new war with which to replace it. Given that the present patriotic mobilization is actually rather less powerful and pervasive than might seem at first glance, with Russians not quite so quick to be taken in, it also means, mercifully, that its failure is going to be less critical for the regime, and Putin is unlikely to feel an imminent need to pick another fight.

Mark Galeotti is Professor of Global Affairs at the SPS Center for Global Affairs, New York University and Director of its Initiative for the Study of Emerging Threats. He writes the blog In Moscow’s Shadows (http://inmoscowsshadows.wordpress.com/) and tweets as @MarkGaleotti.

trains and buses still shuttle back and forth across the notional front line, and while the numbers travelling abroad look set to fall by 40% this year, surveys show this is a product of the ruble’s decline, not any disinclination to visit the outside world. On a personal level, Russians seem to respond more with sorrow than anger when discussing the crisis with Westerners.

More generally, much of the outside world’s coverage of Russian hyper-patriotism comes from Moscow, a city admittedly festooned in St George’s ribbons and wallpapered in nationalist billboards. But how universal is this? A trip to St Petersburg this summer, for example, revealed a city far less burdened by all the paraphernalia of mobilization. How far is it really the case that Moscow is the face of a Potemkin patriotism as much as anything else driven by an apparent eager to present its lords and masters – how many of the movers and shakers of today’s Russia venture far outside the A107 ring road? – with what they want to see?

Neither master nor captive, but bit of bothPatriotic mobilization is used in a bid to distract Russians from their current troubles and delegitimize any efforts to pin blame on the Kremlin. In some cases, actively dissenting voices are persecuted as backsliders, even traitors, but this is the rarity, not the norm. Instead, it is rather that quieter voices of uncertainty and misgiving are drowned out by the official clamour.

For now, at least. Being 72% comfortable with the current arm’s-length operation is one thing, especially when Putin reassures his people that the government has been able to fund it out of the military’s existing budgets. However, this is based on consumption of an official narrative that presents


it underscores that for all of the positive news to come out of Georgia, there is something about the country’s economic formula that is not quite right. Georgia’s two-sided economic story begs many questions, but perhaps foremost is this: what is the country’s economic driver?

Blue-collar bluesUnder the previous United National Movement (UNM) government, which ran Georgia between the landmark 2004

Rose Revolution and the hotly contested 2012 parliamentary elections, state economic policy was narrowly focused on attracting foreign direct investment (FDI) and establishing a white collar, services-oriented economy. Economic development strategies mirrored this approach; tourism was emphasized, and large-scale urban makeovers became a dominant element in revitalization programming.

This moved the needle on economic growth. Between 2004 and 2012, the Georgian economy averaged 6.2% in growth – a strong rate on its own, but particularly so given large dips coinciding with twin shocks of the global economic crisis and the August 2008 Russian invasion.

Michael Cecire of the Foreign Policy Research Institute

Economic development and growth in Georgia have traditionally meant different things for different people. Georgia recorded periods of strong economic

growth between 2004 and the present, and the country’s physical transformation over that same period has been striking – urban revitalization in various cities and towns, increasingly modern infrastructure, and increasing emphases on convenience. Yet despite these undeniable gains, the population benefited unevenly and unemployment has remained stubbornly high.

More contemporaneously, there are two ways to look at Georgia’s past year of mediocre economic growth. One is to focus on the bad, of which there is plenty. September data from the National Statistics Office of Georgia shows the economy sauntering at a leisurely 2.8% growth average for the first eight months of 2015. Foreign trade is down some 13% from 2014. And the Georgian currency, the lari, has depreciated almost 40% in the past year.

At the same time, there is some silver lining. Considering the constant pummelling from exogenous shocks, that Georgia is growing as strongly as it is might be considered a point in its favour. That 2.8% number is nothing to write home about, but it beats dour 2015 growth estimates from the European Bank of Reconstruction and Development (EBRD) by a good half-point. And to the relief of many, Fitch, the ratings agency, has affirmed Georgia’s outlook as stable and kept its bond rating at an investment grade ‘BB-’ .

This duality in Georgian economic performance has provided great fodder for both opponents and defenders of whichever government has been in power. Still, it also illustrates a rather scrambled and more difficult path to economic prosperity in Georgia than is often assumed. And

COLCHIS:

Revving Georgia’s economic engine

"For all of the positive news to come out of Georgia, there is something about the country’s economic formula that is not quite right"


widely believed to be several times higher than the official rate. But the official rate is still useful as a proxy indicator of labor fluctuations.

In contrast to the UNM, upon coming to power, Georgian Dream seemed to have little concern (at least relative to the UNM) for the quarterly drip-drop of GDP. Much of 2013 saw slow or stagnant economic growth as Georgian Dream paused or canceled a slew of UNM building projects, including ambitious plans for a greenfield megacity on the Black Sea coast. Meanwhile, the new Georgian Dream government unveiled a broad social welfare programme that included universal healthcare, raising pensions and eliminating tuition fees in many state university programmes.

Georgian Dream also made agriculture a centerpiece of its economic development programme. The state began offering generous subsidies for key crop yields, and trade with Russia was reopened in a bid to revive agricultural exports. Russia quickly again became Georgia’s top wine export market, and became Georgia’s third largest trade partner overall by 2014. And concomitantly, if we accept official unemployment as a proxy for actual unemployment,the unemployment rate in Georgia in 2014 fell to its lowest level since 2007.

Less tangibly, the now-ruling Georgian Dream coalition inherited in 2012 a very different country than the one the UNM had won in 2004. By 2012, Georgia had generally functioning transportation infrastructure, an increasingly established middle class, and a largely competent, if politically polarized, state bureaucracy and civil society sector.

But for all of the UNM’s triumphs, its obsession with creating a white-collar economy did more to establish what were only the accoutrements of a post-industrial economy superimposed over what remained, at its core, a still largely agrarian country. To wit: while only accounting for 9% of GDP, Georgia’s agricultural sector was responsible for some 56% of the labour force in 2014. By focusing on GDP growth and capital inflows, but largely ignoring labor, the UNM developed an economic growth model that willfully discounted the role of agriculture. It is telling that the most attention that Georgian agriculture gained under the UNM’s tenure was the ill-fated plan to attract South African Boers to work prime Georgian farmland at fire sale prices.

By 2012, despite years of solid economic growth, the official unemployment rate had actually risen to 15%. Because of the way unemployment is tabulated, the actual rate of unemployment – or at least severe underemployment – is

Emerging Markets Direct – your data source for the developing worldIndia Coal Industry Report – 2015j.mp/indiacoalreport

After a tough year in FY14, domestic coal produc-tion saw significant growth in FY15. The growth was primarily due to the higher capacity utilization recorded by Coal India Ltd. Despite higher production, increase in coal demand led to a 33% y/y rise in coal imports. However, the profit margins of coal players took a hit due to a decline in coal prices and simultaneous rise in operational costs. Reforms in the coal sector and faster clearances have the potential to increase the annual production of coal in India.

• After a strong performance in coal production during 2008-10, the sector took a beating in subsequent years, partly due to the repercussion of coal block allocation scam. However, it recorded a significant recovery in FY15, growing by 8.4% y/y.

India Textile & Garment Industry Report – 2015j.mp/indiatextilereport

It was a good year for the domestic textile sector, backed by stable growth in exports. Depreciation of the Indian rupee helped in making local textile exports more competitive amidst competition from emerging markets like Bangladesh and Vietnam. The two largest export segments, namely ready-made garments and cotton textiles, each saw a double-digit growth in USD terms during the year.

• In FY15, the sector export earnings grew by 16% y/y in USD terms, recording a second year of strong recovery after the decline in FY13;

• As of FY14, ready-made garments were the largest segment in terms of export contribution, accounting for 46% of the total export earnings.

j.mp/emdstore


Comparative advantagesOf course, disclaimers about correlation and causation are in order here. It is not incontrovertibly apparent that humming Georgian growth between 2004 and 2012 was not just a product of macroeconomic beta-convergence after the chaotic doldrums of the 1990s. And boosts to the Georgian labour market in 2014 rely on one’s acceptance of state data as an effective proxy, despite being broadly regarded as problematic. Nonetheless, those correlations are striking.

At first glance, the dividends gleaned from Georgian Dream’s agriculture-first approach seem like an adequate secret sauce for further gains against unemployment. But Georgia’s big export market, Russia, is in the midst of a severe economic reckoning from the effects of rock-bottom energy prices and international sanctions – not to mention

the drain from the Ukraine and Syria conflicts and the cost of propping up an increasingly numerous constellation of separatist dependents along its periphery. Unsurprisingly, trade with Russia has gone down as a result.

Yet other promising markets have stepped into the breach. Most notable is China, which has been content to play on the margins for years until more recently, and has presented itself as an increasingly major league player in the economic realm. China has jumped into being Georgia’s fourth largest trade partner (or third, depending on the numbers you’re reading) and a leading source of FDI.

China’s sudden interest stems from Georgia’s position as a key connector state in Beijing’s New Silk Road (NSR) initiative. NSR is envisioned as a trans-Eurasian trade corridor that would offer China a direct, overland route to Europe, and vice versa. Tens of billions of dollars have been set aside to make NSR a reality, and Georgia, sitting at an important juncture squarely along its path, has attracted Chinese attention. Already, China and Georgia are negotiating a free trade area. And in a clear statement of intent, Georgia just played host to the inaugural Silk Road Forum, co-sponsored by China and the Asian Development Bank.

The budding China relationship also holds promise in other ways. As its relations with Beijing develop, Georgian

wine has become an increasingly popular and prominent offering in China and the Far East. Though Russian demand has dipped, exports to China have grown some 90% in 2015, and China is already the fourth largest Georgian wine importer. And if trends hold, China could move quickly up that list in the years to come.

The amazing growth of Georgian wine in the Chinese market potentially hints at a far broader opportunity for Georgia. China’s appetite for Georgian wine is significant not only in its trade volume or potential, but also because it may help clarify a stubborn problem in Georgian economic policy. For years, the Georgian government and its consultants have sought to identify a clear economic growth engine – an internationally competitive comparative advantage – to help carry the country to prosperity. Given the country’s heritage and labour composition, Georgian agriculture is often seen as a sector ripe for growth. Yet its potential as an agricultural producer has typically been seen as limited, given its restricting geography, the continued domination of smallholder cultivation, and the attendant costs of production, processing and export.

Wine is a good example. Georgia will never be able to match the major producing nations at price point or volume, which would seem to consign it the margins of the industry. Yet in China, Georgian wine has found success not as an inexpensive competitor to the flagship brands in Europe and the Americas, but as a niche good in its own right. And, like in China, Georgia can sell its wine to other emerging economies – in Asia and elsewhere – with large, underserved luxury good markets. In this formulation, other Georgian offerings make similar sense – mineral water, spirits, and even some varieties of prepared food products.

There is no silver bullet for building and sustaining Georgian economic development and growth. Tapping emerging luxury markets would only be one piece of the puzzle, and trade with Europe, Turkey and even Russia will continue to play a major role in the economy. Attracting FDI and, yes, developing a white-collar sector will also have a role to play in the new Georgian economy. But the possibility of purveying agricultural products to the enticing Chinese market, and in other emerging economies, may offer Georgia the most straightforward path to both addressing its long-running unemployment woes, while developing a basis for strong, export-driven growth.

Michael Cecire is an associate scholar at the Foreign Policy Research Institute's Project on Democratic Transitions and Black Sea regional analyst. Follow him on @mhikaric

"The amazing growth of Georgian wine in the Chinese market potentially hints at a far broader opportunity for Georgia"


longer any common and linked vulnerability to being cut off from capital, as there was pre-1998, sufficient to cause widespread financial contagion.

In other words, the prospect of mass sovereign defaults is gone. That’s because, unlike in the 1990s, individual countries are more capable of withstanding shocks. Their investor-base is dominated by local institutions, while external investors are generally long-only and unleveraged institutional money. Of course, EM fundamentals have been strong for a while. This has not changed recently, but is the backdrop for the other reasons why we could soon see an EM debt and equity rally.

Reason 2: US/EM terms of tradeDollar strength is damaging the US balance of payments sufficiently for it to now be regularly mentioned by the International Monetary (IMF) and others as a reason the US should not raise interest rates. Less well advertised is that it has created new vibrancy for emerging market exporters. I expect we will start to see more positive surprises in EM growth forecasts as a result.

Reason 3: September Fed decisionThe September US Federal Reserve interest rate decision – which was to do nothing after a big build-up of expectations, again, that rates were about to go up – is proving to be a critical turning point in market expectations. The purpose of the big build-up was to signal that finally, after seven years, the US economy was robust enough to tolerate higher interest rates. That the Fed then blinked uncovers the lie about the state of the US economy. For America’s recovery is modest, fragile and largely jobless. Corporate indebtedness in the US is also now becoming problematic – much more so than in emerging markets.

This message is creeping bit-by-bit into the consciousness of market participants as the most credible explanation of events. It takes time for people, faced with confusing data incompatible with their world view, to change that world view. Yet it is difficult to make sense of the Fed’s September decision

Dr Jerome Booth of New Sparta

One can never tell exactly when markets are about to turn, but the signs are there. I expect, on balance, that the next move by America’s Federal Reserve is likely

to be yet more “virtual money-printing” – which will become known as QE4. I also think the dollar’s long surge is nearing an end and emerging market debt and equity could soon rally too.

I set out my reasons below:

Reason 1: Fundamentals in EM are strongEmerging markets (EM) have no quantitative easing; are still growing much faster than developed countries; have avoided inflation resulting from US and EU monetary emissions; have avoided any significant sovereign defaults, retain significant insurance against future shocks in the forms of vast foreign exchange reserves; and have more effective policy tools to deal with potential external shocks than the developed world.

The rise in EM corporate indebtedness is modest and manageable, despite numerous Western commentaries to the contrary, and mostly helping companies grow faster whilst reducing dependence on banks – which is good.

The emerging world remains highly diverse and within the seventy or so countries that most people invest in there is huge heterogeneity. More EM economies are benefitting from lower commodity prices than are suffering.

There are always a few countries with self-inflicted economic problems like Brazil, and a few with more chronic problems like Venezuela, but most are managed competently, even if structural reform is significantly sub-optimal. There is no

UPSIDE DOWN WORLD: Are emerging markets set to rally?

"The prospect of mass sovereign defaults is gone"


more likely than not that Merkel will either close the borders or lose power. This month’s Polish election, and the rising probability of Brexit, point to huge short- and medium-term uncertainty. All this is sufficient to spook markets into needing more QE.

Reason 5: Growing awareness that EM is the solutionEmerging markets are a huge source of global aggregate demand – the thing sorely lacking in the US and Western Europe. Investing in EM infrastructure can soak up trillions of dollars in a non-inflationary way, significantly boosting productivity and growth. China has shown the way in building infrastructure and now wants to help other emerging markets to do the same. We should welcome this, and the new international financial architecture they are building to achieve it. As more people understand this, they are likely to shift their investments.

New Sparta is the private office of Dr Jerome Booth – economist, entrepreneur, investor, commentator and leading expert on emerging markets. New Sparta is majority owner of bne IntelliNews. Follow him on @Jerome_Booth

and also believe all is fine with the US economy. Unexplained market volatility and gapping liquidity are signs that dominant world views are, indeed, quietly being discarded.

Reason 4: EU turmoil around the cornerPolitics always trumps economics. Things may be bad in Europe, but are not yet bad enough to lead to political change and vigorous reform. The continuing farce over Greece demonstrates this. The electorates of Northern Europe looked as if nothing was going to shake them out of complacency.

This may be changing, however, because the politics is changing. Le Pen does now have a chance of winning in France in a run-off against Hollande. The problems in Greece are being eclipsed in German politics by immigration, with it now

"Emerging markets are a huge source of global aggregatedemand"


The ECB supremo has now taken on the air of a rhetorical magician. Back in mid-2012, when the single currency was imploding, the smooth-talking Italian pledged to do “whatever it takes” to save the euro. Previously febrile bond markets calmed in response, and Eurozone officials and politicians claimed the crisis was “solved”. So effective has Draghi been, his supporters point out, that he hasn’t even needed to implement the so-called Outright Market Transactions programme, a more sustained form of central bank sovereign bond-buying. Just the prospect that he might has held bond markets in check across the Eurozone’s fragile “periphery”. Amidst the QE sugar-rush, though, think twice before swallow-ing Draghi’s money-printing kool aid. “Deflation” is often cited as the main motivation for QE – in the US, UK and Eurozone – but this is actually nonsense. Yes, Eurozone inflation was negative in September, at minus 0.1%, down from 0.1% the month before – and that’s below the 2% target. But take out the 50% oil price drop and much lower food prices too, both of which will soon fall out of the numbers, and Eurozone infla-tion was easily positive last month, at around 1%.

The real reasons for QE are rather different. Western politicians are certainly determined to keep the asset price rally going, pushing further into the future the inevitable market turmoil when the money-printing (and the prospect of future money-printing) finally ends. Central bankers seem happy to oblige, even though such blatant bubble-blowing, history suggests, is unlikely to end well. In addition, the big QE banks in London, Washington and Frankfurt, along with Tokyo and Beijing, are engaged in an ongoing currency war – all of them trying to secure a more competitive exchange rate to boost their exports. Western nations have the further incentive of QE-ing their way to weaker currencies to reduce the burden of the “hard currency” debts they owe to the rest of the world.

Draghi’s next move probably now depends on the Federal Reserve. If the US central bank does finally raise rates, the euro would fall against the dollar. That, in theory, makes additional euro-QE less likely. Whatever happens, exchange rate movements across ‘New Europe’ will have little to do with actual trade flows over the coming months, amidst a QE battle between the world’s most powerful central banks.

Mario Draghi is being hailed, once again, as a rhetorical wizard. The president of the European Central Bank has done it again.

After the October meeting of the ECB’s Governing Council, Draghi dropped hints the Frankfurt-based bank would soon be unleashing yet more quantitative easing across the Eurozone, further lowering interest rates. No matter that the ECB has been churning out €60bn of virtu-ally printed money a month since March and is committed to do so until September 2016. That’s a Euro-QE programme of €1,100bn – an astonishing 8% of the Eurozone’s annual GDP. No matter, also, that the ECB’s benchmark interest rate is 0.05%, with the central bank deposit rate at minus 0.2% – both record lows – or that Draghi has previously said such rates were at “their lower bound”. The ECB is now “vigilant” – a trigger word previously pointing to imminent policy action. On cue, stocks and bonds rocketed in expectation that, at its next meeting in December, the ECB will unleash an additional stimulus. The Europe-wide Stoxx 600 share index closed 2% up, with Italian and Spanish benchmark 10-year yields dropping to their lowest levels since April. Across much of “New Europe”, too, share prices rose. With the European Bank for Reconstruction and Development predicting little overall regional growth this year, and a lacklustre 1.4% expansion in 2016, Western Europe’s performance is vital. It’s difficult to envisage a meaningful upswing in Central, Eastern and Southeast Europe, in fact, unless the Eurozone is buoyant. “The outlook for our region is improving on the back of Eurozone monetary easing – there is definitely scope for optimism,” the EBRD said, when releasing its last round of economic forecasts in May. “But the on-going Russian recession is cause for concern”. When Eurozone QE began earlier this year, EBRD economists moved quickly to upgrade their growth forecasts for Poland, Slovenia, Hungary and the Slovak Republic, a move the institution said, “mainly reflected the Eurozone monetary stimulus”. We could soon see a similar uprating of regional growth projections – by the EBRD, other multi-laterals and a range of commercial institutions – if Draghi delivers on his pledge.

Liam Halligan in London

INVISIBLE HAND:

Rhetorical wizard Draghi conjures up a QE battle

bne November 201574 I & PEOPLECULTUREARTS

It’s the philosophy of #Dysturb, the France-based collective of freelance photographers, which by pasting large format photographs on city walls, cuts out from traditional publishing avenues to offer a new visibility to photojournalism.

Whose eye behind the lens?Educated in France, the world’s photographic Mecca, Nijaradze is a descendant of Imeretian aristocracy and a modern-day patron who staunchly supports an emerging generation of skillful professionals from the Caucasus. Many are women – like Georgia’s Mariam Amurvelashvili, Anka Gujabidze or Armenia’s Inna Mkhytaryan and Piruza Khalapyan – and “women are changing photography”.

“Their active involvement in photography is a new phenomenon – 20 years ago we would have not had such a quantity and quality of work produced by women,” Nijaradze

ART REVIEW:The camera loves Tbilisi – and vice versaMonica Ellena in Tbilisi

Stills of a moving world on gigantic screens: Crimea’s steep cliffs standing over warm-hued hot bath domes, Greenland’s icy world casting a frosty light in a tucked

away Italian courtyard, the shrinking Aral Sea’s tragedy at odds with the greenery of a buoyant and buzzing square.

Tbilisi – “the city that loves you”, as its tourism slogan goes – certainly loves photography too. And once a year between September and October the Tbilisi Photo Festival (TPF) turns the old town’s architectural bonanza into a spectacular photographic nocturnal walk as the “Night of Photography” – a Caucasian rendition of Arles’ “Nuit de la Photographie” – projects the work of some of the world’s best photographers onto giant screens.

“The idea to bring high-quality, classy, photography to Tbilisi developed in 2010 with Lionel Charrier of the French photo agency MYOP and former photo editor at Magnum,” TPF’s heart and soul, Nestan Nijaradze, explains to bne IntelliNews. “The festival wants to offer the city as a platform for an open and broad dialogue about identity and photography.”

Mathieu Dupond’s human-scale photo of the devastated Syrian city of Deir Ezzor on Abo Tbileli Street or James Keogh’s Donestk in Gudiashvili Square aims exactly at that: narrowing the distance between photojournalism and people.

“The festival wants to offer the city as a platform for an open and broad dialogue about identity and photography”

bne November 2015 I 75& PEOPLECULTUREARTS

maintains. “They look at increasingly pressing social issues like discrimination or migration with a different eye and a finer sensibility, they tend to commit more to longer, documentary projects.”

Justyna Mielnikiewicz agrees. The multi-award-winning Polish photographer adopted Tbilisi as her home in 2002 to focus on long-term projects from the Caucaus and, more recently, Ukraine. “More women in photography reflect a dramatically different media landscape,” she says. “Surveys show that half of professional photojournalists today are freelancers and the vast majority are women. We can multi-task and essentially adapt more easily to a market that is constantly changing.”

This change is also bringing female photojournalists together. Nazik Armenakyan, Anahit Hayrapetyan and Anush Babajanyan came together and founded the Yerevan-based 4 Plus – a unique documentary photography centre with the aim of empowering women through photography.

Developing national talents and giving them a visible platform is also what inspired Kolga Photo, the photography contest that, along with TPF, has turned Tbilisi into a photo-city.

The dynamics are different and the two events complement each other. Kolga started in 2002 as a photo competition for university students, recalls Beso Khaindrava, Kolga’s founder. “Initially what we had in mind was a contest for amateur photographers and it was a small scale competition. After four years we dropped the amateur restriction and all photographers could participate, including professionals.”

Since then, the Kolga Award has grown into a whole week of photo events and it also features a specific prize – the Alexander Roinashvili Award, after the first Georgian photographer – for Georgian professionals who have contributed to the development of Georgian photography. The 2015 award was awarded to AP photojournalist Shakh Aivazov in May.

Walking Robert Capa’s walkTbilisi is the heart of the Caucasus’ photojournalism world. Blame it also on geography: neither Asian nor fully European, a key stop along the Old Silk Road, Tbilisi is where east and west meet, where civil wars and democratic revolutions unfold, and where a mystic Christian tradition is still intertwined with blunt Soviet pragmatism.

Georgia’s appeal is decades-old. In 1948, Endree Friedman, aka Robert Capa, and John Steinbeck said that Tbilisi was the only place [in the USSR] where they had a delicious dinner. Not that the combat photographer and the writer toured the then-Land of the Soviet to sneer with gratification over the country’s legendary food and supra, the feast. Rather, Capa portrayed the physical fatigue that each banquet inflicts on the non-trained body.

The pair’s account of their 40-day trip across Soviet land, “The Russian Journal”, is filled with snapshots where politics is mostly kept out of the frame and individuals dominate the picture – the tamada, the banquets’ toastmaster, or the students performing their morning exercises in a classroom dominated by signs declaring “Cheers to the great Stalin!” are fully-rounded human beings living in a region pulsing with life, struggle, and grace.

For Nijaradze, this passion for and from the 35mm should not come as a surprise, because “Georgia has a history of a vibrant art scene, built on a rich cultural past and strong intellectual elite, which the USSR did not managed to tame.” Somehow history provided an additional platform for photojournalism.

Nor is the French connection, strong in TPF, unexpected. The two countries have a long history of friendship. Georgian aristocrats were familiar figures in Paris’ intellectual circles and looked to France for diplomatic support during political hardships – in 1810 King of Imereti Salomon II wrote to Napoleon seeking assistance against the Russian Tsar who “had unjustly and illegally stripped him of his realm”.

History repeats itself: “At the top of my voice”, an account by Magnum photographer Alex Majoli of the war between Georgia and Russia over the breakaway region of South Ossetia is one of the highlights of TPF.

As Kolga and TPF have laid the foundations for Georgia as an international photography centre, Kolga's Khaindrava thinks there is room for further improvement, but “economic growth is key, as it will support those working in and for photography to invest further”.

“Georgia has a history of a vibrant art scene, built on a rich cultural past and strong intellectual elite, which the USSR did not managed to tame”

bne November 201576 I & PEOPLECULTUREARTS

conservative Hungarian Democratic Forum in the 1990 democratic elections that ended four decades of communist rule. However, Goncz was elected president by parliament in a compromise between the rival parties. In 1995 he was re-elected for a second five-year term.

While in office, Goncz was the country’s most popular politi-cian. He was credited for using the limited powers of the presi-dency to enforce Hungary's fledgling democratic constitution. One of the most prominent cases in which he clashed with the

conservative government was his refusal to dismiss the heads of the state radio and television. That earned him the praise of press-freedom advocates, but drew criticism from rightwing nationalists who accused him of overstepping his power.

Ferenc Madl, a conservative, replaced him as president in 2000. In his farewell speech, Goncz asked Madl to be aware of the social divisions created after Hungary began to build its democratic systems. “No one should be measured by any scale other than that of humanity,” Goncz said.

In the following years, Goncz largely disappeared from the limelight, devoting himself mainly to charitable causes.

bne IntelliNews

Arpad Goncz, Hungary’s first democratically indirectly elected president after the fall of communism, died on October 6 at the age of 93.

Goncz's fatherly manner appealed to many Hungarians, winning him the nickname “Uncle Arpi”. He died surrounded by members of his family, the MTI new agency noted, citing the head of the former head of state's secretariat. Announcing Goncz's death to lawmakers, Deputy Speaker Istvan Hiller called him “a legend already during his lifetime”. Lawmakers stood for a minute’s silence in honour of his memory.

Born in 1922 in Budapest, Goncz graduated from the Pazmany Peter University of Arts and Sciences in 1944. Charged with treason and sentenced to life in prison for his involvement in Hungary's 1956 uprising, Goncz was released in 1963 under a general amnesty aimed at easing tensions with the West.

While in prison he learned English, which helped him make a living in the years that followed. He became known for translating parts of JRR Tolkien's “The Lord of the Rings”, while also working as a welder and an agronomist.

His ascent to politics started in the second half of the 1980s. He was a founding member of one of the main opposition groups that arose before the collapse of communism – the Alliance of Free Democrats. In 1989, he became president of the Hungarian League for Human Rights.

The Alliance of Free Democrats finished second to the

OBITUARY: Arpad Goncz – Hungary's first democratically elected president

Photo: posztos

"He was a legend already during his lifetime"

bne November 2015 I 77& PEOPLECULTUREARTS

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Government organizations • Analyze market position and relative performance in

trade community and world• Trade shares by commodity and region• Market size relative to competitors• Market Growth potential by sector• Develop incentive programs and measure

performance against objectives, cross-country norms

Photo: posztos

78 I New Europe in Numbers bne November 2015

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CRIMEA RIVER: HARD GRAFT FOR A BURGER IN KIEVLHS and bars = mins worked for Big Mac. RHS and dots = Big Mac Index ($)

Sources: The Economist; UBS Price

& Earnings 2015

0 10 20 30 40 50 60

RussiaArgentina

NigeriaBrazil

ThailandIndonesia

PolandPeru

ChinaTurkey

BORROWINGS OF COMMODITY PRODUCERSPercentage of total corporate debt

Metals and mining

Energy

Source: IMF

Nov 11 Jul 12 Mar 13 Nov 13 Jul 14 Mar 15 Nov 15

60.0

70.0

80.0

90.0

PUTIN POPULARITY HITS ALL-TIME HIGH FOLLOWINGSYRIA INTERVENTIONRating, percentage

Source: VTsIOM

89.9%

0 20 40 60

Yes, I know

I vaguely know

I do not know

No answer

20%

55%

23%

2%

ONLY 1 IN 5 UKRAINIANS KNOW HOW TO VOTE IN FORTHCOMING ELECTIONPercentage of respondents

Source: Democratic Initiatives Foundation

Swiss bank UBS has further developed The Economist’s famous Big Mac Index by measuring the minutes it would take to earn enough money to purchase a Big Mac in various cities – the argument being that the nominal price of a burger used by The Economist may be misleading due to it being disproportionately cheaper or costlier in other countries, whereas UBS’s time-based method factors in the circumstances of the average worker.

As the chart shows, burger-lovers in Kyiv have a raw deal, having to work for nearly an hour to afford a Big Mac – nearly triple the time it would take a Muscovite to earn one. Those living in Western Europe would earn roughly enough money to buy four burgers in the same time.

Sources: The Economist ; UBS Price & Earnings 2015

President Vladimir Putin’s popularity hit an all-time high in early October, when the Russian leader’s approval rating hit 89.9% in polling firm VTsIOM’s monthly survey.

Putin’s recent decision to send Russian troops to conflict-ridden Syria and Iraq is a likely factor behind the recent surge in support for the president. The previous highest rating was 89.1% in July this year.

However, Moscow-based polling firm Levada measured Putin’s latest approval at 84%, 5% lower than its record high of 89% in June this year.

Source: VTsIOM

The recent drop in the price of commodities and China’s concurrent growth slowdown has seen vast sell-offs of emerging markets (EM) debt by foreign creditors over the last few months, leaving many EM corporates in a potentially precarious position.

As the chart shows, Russia’s exposure to not only commodities but also energy prices eclipses that of the next nearest country, Argentina. However, that the Kremlin owns so much of the producing sectors means that Russian corporates are not as at risk as other EM country’s producers. Nearly a third of all Polish corporate debt is issued by companies whose livelihoods could hinge on an upswing in prices.

Source: IMF

Only 20% of Ukrainians said they know how to vote in forthcoming elections, according to a recent poll conducted by the Democratic Initiatives Foundation.

In the same survey, only 9.6% of respondents said that the election will be conducted honestly and without any fraudulent activity. 55.4% said that the local elections will not change anything for them, regardless of the result.

Source: Democratic Initiatives Foundation

Crimea river: hard graft for a burger in KyivLHS and bars = mins worked for Big Mac. RHS and dots = Big Mac Index ($)

Putin popularity hits all-time high following Syria interventionRating, percentage

Only 1 in 5 Ukrainians know how to vote in forthcoming electionPercentage of respondents

Borrowings of commodity producersPercentage of total corporate debt

Kyi

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bne November 2015 New Europe in Numbers I 79

United States84.6%

United Kingdom96.0%

EU27.6%

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9K

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41,6

27

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2,89

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7

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197

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189

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TOTAL PENSION ASSETSPercentage of GDP

PENSION ASSETS PER CAPITAUS Dollars

[Data only cover OECD classification autonomous pension funds. All types of plans are included (occupational and

personal, mandatory and voluntary) covering both public and private sector workers.]

Uni

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Pol

and

Rus

sia

CEE

/CIS

Turk

ey

Fran

ce

-100.0

-60.0

-20.0

20.0

60.0

-50.

2%

19.8

%

12.8

%

12.2

%

38.2

%

10.8

%

14.3

%

5.7%

0.8%

3.4%

CHANGE IN ASSETS SINCE DEC 2013Percentage, local currency

Sources: OECD, Pension Funds in Figures; bneIntelliNews research

Germany

6.6%CEE/CIS6.7%

Poland8.7%

Russia5.6%

RUSSIAN PENSION REFORM COULD BREATHE NEW LIFE INTO EQUITIES MARKET

Russia’s gradual process of pension reform could see pension funds accounting for 55% ($60bn) of total free float on the domestic equity market by 2020, according to a recent report by Goldman Sachs.

The increase in assets under management (AUM) could also mark the end of the finance drought Russia has suffered since EU- and US-led sanctions froze the country out of international capital markets.

As the chart shows, Russia’s pension AUM as a percentage of its

GDP is low in comparison to some Western counterparts. The Goldman Sachs report has suggested that this AUM-to-GDP figure could rise from its current 5.6% to almost 20% by 2020.

Sources: OECD, Pension Funds in Figures ; bne IntelliNews research[Data only cover OECD classification autonomous pension funds. All types of plans are included (occupational and personal, mandatory and voluntary) covering both public and private sector workers.]

Russian pension reform could breathe new life into stock market

Kent Gida Maddeleri Sanayii ve Ticaret AS Turkey Packaged Foods and Meats

Joint Stock Company Ventspils nafta Latvia Oil and Gas Storage and Transportation

Alcatel Lucent Teletas Telekomunikasyon A.S. Turkey Communications Equipment

BIOTON S.A. Poland Biotechnology

Verusa Holding A.S. Turkey Asset Management and Custody Banks

Cloud Technologies Spólka Akcyjna Poland Internet Software and Services

Vivid Games Spólka Akcyjna Poland Home Entertainment Software

Kiler Alisveris Hizmetleri Gida Sanayi ve Ticaret Anonim Sirketi Turkey Food Retail

BEST S.A. Poland Diversified Support Services

Bytom Spolka Akcyjna Poland Apparel, Accessories and Luxury Goods

Tukas Gida Sanayi ve Ticaret A.S. Turkey Packaged Foods and Meats

Indykpol Spolka Akcyjna Poland Packaged Foods and Meats

Votum Spolka Akcyjna Poland Insurance Brokers

Selvita S.A. Poland Life Sciences Tools and Services

Finansbank AS Turkey Diversified Banks

Kernel Holding S.A. Ukraine Agricultural Products

Turker Proje Gayrimenkul ve Yatirim Gelistirme A.S. Turkey Real Estate Development

TAT Gida Sanayi A.S. Turkey Packaged Foods and Meats

Tesco Kipa Kitle Pazarlama Ticaret ve Gida Sanayi A.S. Turkey Hypermarkets and Super Centers

Klimasan Klima Sanayi ve Ticaret Anonim Sirketi Turkey Industrial Machinery

2,1239.2349.8

52552.0326.2

1097.6233.3

2428.5165.2

268-0.6162.6

1041.1158.2

5127.8148.4

23735.5148.1

96-9.7144.1

57-4.9140.6

219-4.5138.8

788.3135.1

521.1133.3

733.4133.0

6,747113.6123.9

1,05818.5122.8

1068.3117.6

3030.3117.4

1,1509.6114.5

5814.7107.8

TOP 25 PERFORMING CEE/CIS EQUITIES, OCTOBER 2015Excluding Russia. Market cap $50m or more. End of day data, October 22, 2015.

Company name Sector

Price change (%)1-year 30-day

Mkt cap.($mn)

80 I New Europe in Numbers bne November 2015

Country 2014 total AnnualQuarter,

latestForecast,

2015GDP per

capita ($)Agri. Indus. Serv. % GDP % GDP Latest, YoY % YoY

Albania 13,370 2.1 +2.5 +3.4 4,549 22 15 63 -5.1 -12.1 +2.2 Sep 17.3 2Q15 +16.8 2Q15

Armenia 9,529 5.9 +5.1 +3.3 3,551 22 31 47 -1.8 -7.9 +3.3 Sep 18.2 2Q15 +5.6 Sep

Azerbaijan 75,188 1.4+3.7

(YTD)+3.4 8,060 6 62 32 -0.5 16.0 +3.7 Sep 5.0 2013 -0.7 2014

Belarus 75,925 4.1 +4.4 +3.4 7,685 9 42 49 1.0 -6.7 +11.9 Sep 0.5 2014 -7.1 Sep

Bosnia & Herz. 19,191 1.1 +4.4 +3.4 4,735 8.1 26.4 65.5 -2.1 -7.7 -1.5 Sep 43.2 Aug +4.6 Aug

Bulgaria 55,733 2.3 +2.2 +0.8 7,418 6.7 30.3 63 -3.7 0.0 +0.1 Sep 9.2 Sep +4.3 Aug

Croatia 57,639 -0.4 +1.2 +0.5 13,415 5 26 69 -5.7 0.7 -0.8 Sep 16.2 Sep +2.8 Aug

CzechRepublic

186,877 4.4 +4.6 +2.5 19,295 2 38 60 -2.0 0.6 0.4 Sep 6.0 Sep +6.3 Aug

Estonia 25,916 4.1 +2.0 +2.3 18,988 4 29 67 0.6 -0.1 -0.7 Sep 6.5 2Q15 -2.7 Aug

Georgia 16,898 4.7 +2.5 +3.2 3,785 9 24 67 -3.2 -9.7 +5.2 Sep 12.4 2014 +2.9 1Q15

Hungary 137,104 2.8 +2.7 +2.4 13,182 34 28 68.7 -2.6 4.1 +0.4 Sep 6.7 Aug +6.2 Aug

Kazakhstan 234,065 4.3 +1.7 +5.0 13,438 5 38 57 -1.2 2.2 +4.4 Sep 4.9 Aug -4.2 Sep

Kosovo 7,308 5 +0.2 +3.8 4,022 12.9 22.6 64.5 -3.5 -6.8 -1.2 Sep 35.3 2014 n/a

Kyrgyzstan 7,515 4 +7.3 +4.5 1,279 20.8 34.4 44.8 -0.5 -24.7 +5.8 Aug 2.3 Jul +11.4 Aug

Latvia 31,920 3.6 +2.7 +2.9 15,973 4.9 25.7 69.4 -1.4 -3.1 -0.5 Sep 9.8 2Q15 +6.4 Aug

Lithuania 43,911 3.8 +1.4 +3.0 16,206 3.7 28.3 68 -0.7 0.1 -1.0 Sep 9.6 Aug +0.2 Sep

Macedonia,FYR

11,327 5.2 +2.6 +3.4 5,066 10 26 63 -4.2 -1.4 -0.2 Sep 26.9 2Q15 +12.7 Aug

Moldova 8,337 4.6 +0.7 +3.4 2,284 15 17 69 -1.8 -8.0 +12.6 Sep 4.1 2Q15 -6.1 Aug

Mongolia 12,419 7.8+3.0

(1H15)+7.5 4,069 16 33 50 -2.0 -25.4 +4.9 Sep 7.8 2Q15 +16.1 2014

Montenegro 4,547 2.7 +3.4 +3.0 7,334 10 20 70 -3.9 -14.6 -1.7 Sep 14.6 Sep -5.1 Sep

Poland 543,255 3.3 +3.3 +3.2 13,888 4 33.3 62.7 -3.2 -1.4 -0.8 Sep 9.7 Sep +4.1 Sep

Romania 199,903 4.3 +3.4 +2.7 9,794 6 43 50 -2.0 -0.5 -1.7 Sep 6.8 Aug +3.6 Aug

Russia 1,261,604 0.6 -4.3 -3.8 6,843 4 36 60 -0.5 3.1 +15.7 Sep 5.3 Sep -3.7 Sep

Serbia 43,866 -3.6 +1.0 0.0 5,890 7.9 31.8 60.3 -4.6 -6.0 +1.4 Sep 17.9 2Q15 +12.9 Aug

SlovakRepublic

99,795 2.2 +3.2 +2.5 18,090 3.1 30.8 47 -2.9 0.1 -0.5 Sep 11.4 Sep -0.5 Aug

Slovenia 48,051 2.6 +2.6 +1.8 23,262 2.8 28.9 68.3 -4.9 5.8 -0.6 Sep 11.8 Aug +5.2 Aug

Tajikistan 9,019 6.7 +6.4 +5.8 1,105 27 22 51 0.3 -7.9 +5.1 Sep 2.5 Jul +13.3 Aug

Turkey 843,173 2.8 +3.8 +3.3 10,852 9 27 64 -1.3 -5.7 +8.0 Sep 9.8 Jul +7.2 Aug

Turkmenistan 46,371 10.8 n/a +11.5 7,875 7.2 24.4 68.4 0.8 -4.4 +4.4 2014 10.6 2013 n/a

Ukraine 162,881 -8.2 -14.6 -2.3 3,792 10 27 63 -4.6 -3.5 +51.9 Sep 9.6 2Q15 -5.1 Sep

Uzbekistan 60,828 7.6+8.0

(YTD)+7.1 1,995 19.1 32.2 48.7 0.2 1.2 +2.6 1Q14 10.7 2013 +8.1 1H15

MACROECONOMIC INDICATORS

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bankof the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institutefor Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Develop-ment Bank; National Statistical Committee of the Republic of Belarus; Haver Analytics

*All data are latest available official fig-ures or independent estimates

SPACE FOR AD/HOUSE AD SHOWING OTHE..

GDP, $mn GDP composition (%)Budgetdeficit

Currentaccount

Inflation(CPI) Unemployment Ind. prod.GDP growth, local currency

bne November 2015 New Europe in Numbers I 81

Stock market index Month 12-month Ytd52-wk

low 52-wk high P/E Latest $mnYoY% $

YoY % localcurr. % adults % pop.

Albania (-) - - - - - - - - - 96.8 58.5

Armenia (-) - - - - - - - - - 99.6 46.1

Azerbaijan (-) - - - - - - - - - 99.8 20.4

Belarus (-) - - - - - - - - - 99.6 66.4

Bos/Herzegovina (SASE) +1.4 -2.1 -4.5 668.3 731.8 - - - - 98.2 23.2

Bulgaria (SOFIX) +0.3 -12.7 -14.1 438.3 547.0 10.0 3,697.9 -38.0 -29.6 98.4 92.8

Croatia (CROBEX) +1.6 -6.8 -1.2 1,672.3 1,846.0 11.6 19,285.6 -12.0 -0.5 99.1 63.0

Czech Republic (PX) +3.7 +3.8 +2.5 933.3 1,058.4 13.3 25,177.7 -23.5 -14.1 99 78.0

Estonia (OMXT) -0.2 +17.6 +14.0 732.6 914.2 11.7 2,018.5 -6.7 +6.0 99.9 33.0

Georgia (-) - - - - - - - - - 99.7 61.6

Hungary (BUX) +6.2 +27.8 +33.3 15,686.7 22,850.5 11.6 15,447.7 -4.4 +9.9 99.4 56.6

Kazakhstan (KASE) +5.7 -13.6 -5.3 761.0 1,064.0 - 11,975.9 -41.3 -36.1 99.7 55.2

Kosovo (-) - - - - - - - - - 91.9 47.6

Kyrgyzstan (-) - - - - - - - - - 99.2 -

Latvia (OMXR) +1.2 +40.2 +42.5 405.8 600.7 7.1 976.8 -13.8 -2.5 99.9 69.9

Lithuania (OMXV) -0.2 +7.5 +6.3 444.4 505.7 11.7 4,115.0 -10.0 -4.4 99.8 66.3

Macedonia, FYR (MBI10) -0.1 -7.7 -8.4 1,616.8 1,877.0 - 233.3 -12.0 +0.3 97.5 41.2

Moldova (-) - - - - - - - - - 99.1 38.4

Mongolia (MSETOP) -0.6 -14.4 -10.6 12,477.3 15,862.4 - - - - 98.3 55.5

Montenegro (MONEX20) - - - - - - - - - 98.4 62.2

Poland (WIG) +2.9 -4.1 -0.4 48,916.6 57,379.5 15.1 143,437.3 -26.2 -14.8 99.7 71.5

Romania (BET) +0.1 +1.1 +2.2 6,503.1 7,638.9 14.3 20,066.2 -22.6 -11.7 98.6 51.5

Russia (MICEX / RTS)+6.4 /+13.5

+25.0 /-15.8

+20.2 /+14.7

1,380.4 /629.2

1,838.2 /1,098.7

13.8 596,348.3 -19.7 +15.5 99.7 76.1

Serbia (BELEXLINE) -0.6 -11.0 -6.5 614.8 746.6 10.8 2,990.6 -19.5 -7.0 98.2 56.3

Slovak Republic (SAX) +4.5 +31.8 +27.6 214.6 291.8 - 52,918.7 +25.3 +40.8 99.6 53.6

Slovenia (SBITOP) +3.7 -13.7 -11.4 646.7 836.3 11.9 5,828.8 -27.6 -17.8 99.7 84.4

Tajikistan (-) - - - - - - - - - 99.7 24.4

Turkey (XU100) +9.3 +0.9 -6.2 71,299.4 91,412.9 14.0 207,204.9 -15.2 +13.1 94.9 7.98

Turkmenistan (-) - - - - - - - - - 99.6 79.3

Ukraine (PFTS) -13.6 -38.8 -32.1 267.3 488.2 2.5 6,553.0 -72.9 -67.1 99.7 78.9

Uzbekistan (-) - - - - - - - - - 99.5 8.87

FINANCIAL INDICATORS

Sources: Bloomberg; Capital IQ; InFinancials *Official figure or independent estimate

SOCIAL

AD SPACE TO BE CROPPED OUT ADSPACE TO BE CROPPED OUT

Stock market Total market cap., all publicly trad-ed equities

Literacy Tertiary edu.

82 I Events bne November 2015

Upcoming events 2015

10th Annual Liquidity Management (18 - 20 November)Vienna, Austriahttp://finance.flemingeurope.com

3rd Annual Back Office Operations Forum (19 - 20 November)Vienna, Austria , Renaissance Wien Hotelwww.globalleadingconferences.com

3rd Annual Retail Banking Forum (26 - 27 November)Vienna, Austria , Renaissance Wien Hotelwww.globalleadingconferences.com

Ukrainian Investment Summit (7 – 8 December)London, United KingdomAdam Smith Conferenceswww.adamsmithconferences.com

Don’t miss out, book your place at mergermarketgroup.com/event/turkey2015

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Network with over 260 senior M&A professionals, investors and advisors, and hear from more than 30 expert speakers as they provide insight in to the future investment opportunities expected to be seen in Turkey over the next year.

Contact us: + 44 (0)20 3741 1069 [email protected]

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