Russian Tourism Market Recovers Fast to Pre-Crisis Volumes

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Russian tourism market recovers fast to pre-crisis volumes

Revived steel industry washes away Zenica’s blues

December 2017 Turkish lira remains under strain as Pence-Yildirim tête-à-tête produces little

Kazakhstan’s new military doctrine shifts logic of country’s security agenda

THE PIK OF RUSSIAN REAL ESTATE

Are investors about Russia's bank clean-up ‘Paradise Papers’ team to take flight from got hijacked and landed exposes Kazakhstan’s Romania? a senator in jail ‘Secret Billionaires’ p. 34 p. 42 p. 46 ISSN 2059-2736 ISSN

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Senior editorial board Ben Aris (Berlin) +49 17664016602 editor-in-chief & publisher [email protected] 20 Will Conroy deputy managing editor [email protected]

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

Clare Nuttall (Bucharest) +40 757369985 news editor [email protected]

Nicholas Watson (Prague) +42 0731582719 contributing editor [email protected] 10 12 Advertising & subscription Elena Arbuzova (Moscow) +7 9160015510 business development [email protected]

Design Olga Gusarova (London) +44 7738783240 6 THE MONTH THAT WAS 16 Sberbank drops its lowest art director [email protected] mortgage rate by 0.3% to 8.6%- 9.7% per annum COMPANIES & MARKETS Please direct comments, letters, press releases and other editorial enquires to [email protected] 17 Turkish conglomerate Sabanci 10 Russian tourism market plans IPO for energy unit Enerjisa recovers fast to pre-crisis All rights reserved. No part of this publication volumes 18 Kazakhstan signs MoU with may be reproduced, stored in or introduced to any retrival system, or transmitted, in any form, or by Swiss company 5EL SA on any means electronic, mechanical, photocopying, 11 Damen takes over Daewoo blockchain innovations hub recording or other means of transmission, without shipyard in Romania development express written permission of the publisher. The opinions or recommendations are not necessarily those of the publisher or contributing authors, 12 Revived steel industry 19 Turkish Burger King operator including the submissions to bne by third parties. washes away Zenica’s blues TFI files for New York IPO No liability can be attached to the publisher for these comments, nor for inaccuracies, errors or omissions. Investment decisions or related 13 Russian internet advertising 20 Sberbank cements most actions taken on the basis of views or opinions beats TV first time in 20 expensive Russian company lead that appear herein are the responsibility of the years reader and the publisher, contributors and related parties cannot be held liable for these actions. 21 Money lending startup 14 Turkish lira remains under CarMoney secures $10mn strain as Pence-Yildirim from local investors bne Intellinews is published by tête-à-tête produces little Emerging Markets Direct Media Holdings LLC 21 Russian supermarket chain Lenta Print issue: 15 Turkish central bank “sits bought 22 supermarkets in Siberia £4.50 /$6.75 /€5.90 . €499 / year on hands” as inflation hits 9-year high 22 Markets digest second Czech rates hike along with less hawkish than foretold forecast

COVER FEATURE

24 The PIK of Russian real estate Follow us on twitter.com/bneintellinews

bne.eu/subscribe bne December 2017 Contents I 5 19

24 28 38 CENTRAL EUROPE EURASIA

28 Copious mud flies as starting 44 Kazakhstan’s new military pistol is fired on Czech doctrine shifts logic of presidential race country’s security agenda

29 Commercial interest in Baltic 46 ‘Paradise Papers’ team Pipe affirmed exposes Kazakhstan’s ‘Secret Billionaires’ 30 Higher exports and investment push first-half growth in all 48 Uzbekistan makes top EBRD countries bar two 10 in World Bank’s Doing Business global improvers

SOUTHEAST EUROPE OPINION 34 Are investors about to take flight from Romania? 50 Uzbekistan: Iran’s unlikely bastion of influence in 37 Russia wants EU guarantees Central Asia? to continue with Turkish Stream development 53 Six reasons why Russia does not want a higher oil price 38 Turkey says purchase of 46 Russian S-400 missile 54 The importance of Russia’s system completed unimportant prime minister 53

EASTERN EUROPE 56 NEW EUROPE IN NUMBERS

40 Iran, Russia display strategic unity and envision huge oil deal as Putin visits Tehran

42 Russia's bank clean-up got hijacked and landed a senator in jail 6 I The Month That Was bne December 2017

Politics

Eastern Europe the legal status of aliens – will allow the promised 25% pay hike will be cancelled Baltic state to impose sanctions on indi- out by the policy. Russian celebrity TV personality, viduals suspected of violating human journalist and socialite Xenia Sob- rights or committing corruption. Croatian police launched criminal chak announced she is going to run investigations into 15 people con- for president in Russia's 2018 election. The European Parliament adopted nected to troubled food and retail Sobchak will represent the "Against All" a resolution calling on the EU Coun- giant Agrokor. Several former Agrokor vote option, but is widely seen as a Krem- cil to launch the so-called “nuclear executives were detained but the group’s lin stooge. Genuine Russian opposition option” against Poland to punish founder Ivica Todoric, who is wanted leader Alexey Navalny was banned Warsaw for its alleged abuse of the in connection with the case, has left from running in the presidential elec- rule of law. The triggering of Article the country along with his son Ante, tion not only in 2018, but also in 2024. 7 of the Treaty on the European a prominent Agrokor board member. Union could in theory lead to suspen- Ukraine’s anti-corruption agencies sion of Poland’s voting rights in the bloc. A new task force within the Alba- have gone to war with each other. The nian state police has been set up leading agency the National Anti-Cor- and tasked with fighting organized ruption Bureau of Ukraine (NABU) has crime in cooperation with agents from opened a criminal probe into suspected America’s FBI and Italy. The new force extortion by members of a sister anti- will be operational as of November 6, corruption body The National Agency on media in Tirana reported. The fight Corruption Prevention (NAZK) that is against criminal and drug trafficking charge of the government e-declarations has risen high in the list of priorities for of income by civil servants. NABU has the Socialist-led government of Prime also opened an investigation into pos- Minister Edi Rama. sible embezzlement by the Infrastruc- Former Estonian Prime Minister ture Minister Volodymyr Omelyan. Taavi Roivas stepped down as deputy speaker of the parliament follow- Eurasia Fresh Russian connections in the ing press accounts of alleged sexual administration of the US President harassment during a trade mission to Saudi Arabia accused Iran of being Donald Trump were revealed in the Malaysia. The charges mark a new low behind an attempted Houthi rebel Paradise Papers. US Secretary of for Roivas whose Reform Party’s coali- missile attack from Yemen on Riyadh's Commerce Wilbur Ross has was found tion government collapsed in late 2016 international airport that could consti- to have a stake in shipping company and paved the way for the outcast Centre tute “an act of war”. The missile was shot Navigator through a chain of offshore Party to take power in the Baltic state. down but the explosion was heard in the investments, that is co-owned by Putin’s Saudi capital. son-in-law and his petrochemical company Sibur. Southeast Europe The leaking of the Paradise Papers revealed inner workings of Meridian The latest round of US sanctions The ruling Social Democratic Union of Capital, a major Kazakh investment against Russia will not apply retroac- Macedonia (SDSM) scored a landslide and holding company. Meridian has tively to Russian energy export pipe- victory in the first local elections drawn on Kazkommertsbank deposits line projects initiated before August 2 since it came to power. Previously, to fund project after project around the 2017, according to a guidance from the most local governments were under world until it went bust. US Department of State. The decision the control of the rival VMRO-DPMNE, will be greeted with relief by the Kremlin which went into opposition in May after Azerbaijani President Ilham Aliyev and Gazprom which is building a gas a decade in power. on approved civil code amendments pipe to Europe. that will effectively decimate the legal More than 5,000 employees of the profession. The amendments give the Romanian public healthcare sector bar ultimate control of the legal profes- Central Europe protested on October 19 against the sion and only a tenth of lawyers active government’s plans to transfer social in Azerbaijan are members. The Lithuanian parliament passed a security contributions from employers to version of the Magnitsky Act. The leg- employees. Labour Minister Lia Olguta islation – technically a part of the law on Vasilescu has admitted that most of a www.bne.eu bne December 2017 The Month That Was I 7

Economics

Eastern Europe tion fuelled by a strong labour market Economic Forecast. The economy should and government child payment scheme, grow by 3.9% this year and by 3.8% in Investment flows among Eurasian the World Bank said. The forecast is an 2018. The EBRD also raised its fore- Economic Union member countries upward revision by 0.7pp compared to cast for Bulgaria’s real GDP growth to leapt by 15.9% in 2016 after three con- the World Bank’s previous prediction 3.5% in 2017. secutive years of decline. The year saw from May. total mutual FDI stock within the bloc The European Commission (EC) raised reach $26.8bn, says a new report from Hungarian gross wages grew at the its GDP forecast for Albania for 2017 by the Eurasian Development Bank. fastest pace in more than a decade 0.3% to 4%, due to the expected boost in August, rising 13.2% to stand at of foreign direct investment (FDI), Russia’s industrial output stalled in HUF292,400 (€949). The shortage of the EC said in its Autumn European October failing to show growth for the labour has been exerting an upward Economic Forecast. first time since March and posting 0% pressure on wages, which remain below year-on-year growth and slipping by the CEE average. 0.1% in month-on-month seasonally Eurasia adjusted terms, the Rosstat agency said. Czech consumer price inflation hit a five-year high in October rising by Kazakhstan’s bilateral trade with Russia’s GDP growth disappointed by 0.5% on a m/m basis bringing the rate to EEU members (Russia, Belarus, decelerating in Q3 to 1.8% y/y from 2.9%. The year-on-year inflation rate is Kyrgyzstan and Armenia) grew by 2.5% y/y in the second quarter, accord- now the highest since October 2012. 30% y/y to $12.37bn in the first nine ing to Rosstat. The released estimate months of this year. Exports rose 33.9% is considerably lower that the flash Estonia is to replace Latvia as the fast- y/y to $3.72bn, while imports expand- estimates made by the economy ministry est growing economy in the Baltics, ed 28.4% y/y to $8.66bn. earlier of 2.2% y/y. this year according to the European Commission’s prediction in its Autumn Georgia's consumer price inflation Russia's Consumer Price Index (CPI) Economic 2017 Forecast. It predicts edged up to 6.4% y/y and 0.8% m/m in October fell again to an extraor- Estonia’s economy is likely to register in October exceeding the state target of dinary low of 2.7% year-on-year 4.2% this year and Latvia’s 3.8%. 4% and reflecting exchange rate insta- down from the already low 3% seen in bility. The Georgian lari had been appre- September. Inflation has strongly over- ciating since January but since Sep- shot the Central Bank of Russia (CBR) Southeast Europe tember it has returned to depreciation. target of 4% set for 2017. All the Western Balkan countries, Ukraine's foreign exchange reserves except Bosnia, restored employment increased by $98mn, or 0.5% month- to its level before the crisis in 2008 on-month to $18.736bn in Septem- with around 230,000 jobs being created ber, or 3.7 months of import cover, in 2017, the World Bank said. The region according to National Bank of Ukraine. has relatively high unemployment levels The result was due to the placement of with youth unemployment being par- local Eurobonds ($170.3mn) and swap ticularly high. operations (worth $100mn). Romania’s currency fell to its weak- Mongolia’s trade surplus expanded Ukraine's parliament, the Verkhovna est level against the euro since 2012. 64.2% y/y to $1.5bn in the first nine Rada, greenlighted the nation's state The leu dropped to nearly RON4.65 to months amid increased demand for budget for 2018 in the in first read- the euro on November 13, and funda- commodities in China, its main trade ing. The budget deficit target for 2018 mentals show that unless a strong inflow partner. Exports surged by 37.5% y/y to is 2.4% of GDP, real GDP growth is of transfers from the European Union $4.6bn mainly thanks to higher Chinese 3% year-on-year and inflation it 7%. budget occurs in the coming quarters, orders for Mongolian coal shipments. the local currency will weaken further. Kazakhstan’s economy grew by 4.3% Central Europe Growth projections for Bulgaria were y/y in the first nine months. Growth improved significantly by the Europe- measured 4.2% in the first half. GDP Poland’s economy will expand 4% in an Commission (EC) in 2017 and 2018 expansion in 2016 was just 1%. 2017 on the back of robust consump- in the autumn edition of the European www.bne.eu 8 I The Month That Was bne December 2017

Business

Eastern Europe to local media. Talks are informal at the moment as Time Warner has not Total spending on Internet advertising yet announced its plans to sell the TV in Russia was more than spending on station but it is reportedly expecting TV advertising for the first time ever €2bn for the acquisition. in January-September 2017. The total online spend amounted to RUB115- UK employee benefits company 116bn ($2bn), up by 23% year-on-year, Edenred bought Slovakia’s third- according to a survey by the Association largest provider of meal vouchers, of Communication Agencies of Russia Vasa Slovensko, becoming the market (ACAR). leader in the country. Edenred has been operating in Slovakia since 1994. Sales of new passenger cars and LCVs in Russia increased by 17.3% y/y in October, the Association of European Southeast Europe Business, which follows the market, said in a press release on November The largest wind farm project in 9. In total, 148,597 units were sold in the Western Balkans will receive a October, and 1,277,938 in the January- €215mn loans from the EBRD and IFC. October period. The Cibuk wind farm in Serbia will help the country meet its commitment to pro- The number of Russians holidaying duce 27% of domestic power needs from abroad has recovered and has almost renewable energy sources by 2020. passed its pre-crisis peak. In January- June 17.1mn Russian tourists went Romania’s largest private healthcare abroad, up by 30% year-on-year, accord- provider MedLife agreed to buy its ing to Rosstat. Russian outbound tourist competitor Polisano medical services. trips peaked at 42.9mn in 2014, before The acquisition will help Medlife, which dropping by 19% and 9% y/y in 2015 carried out an IPO last year, to further and 2016 due to ruble devaluation. strengthen its position on the Romanian private medical services market.

Central Europe Eurasia Audi is to start serial production of electric motors at its Hungarian plant Kazakhstan’s KazMunayGas sold the next year, which will become a manu- small Euro-Asia Air airline as part of facturing hub for the Volkswagen group. the country's ongoing privatisation The entire drivetrain of Audi's first programme. The government plans to purely electric-powered SUV model will privatise stakes of at least 25% in 45 come from the factory in Gyor starting large state companies including Air in 2018. Astana and Kazatomprom.

Hungary-based no-frills airline Wizz Kazakhstan launched gas exports to Air has set up subsidiary in the UK and China with the transiting of gas from is considering acquiring an air operators its Beineu-Bozoy-Shymkent pipeline certificate (AOC) due to the negative to the Central Asia-China gas pipeline. impact of Brexit. Central Europe’s State-owned KazTransGas has agreed to largest discount airline will add 100 supply 5bn cubic metres (cm) of gas to jobs at its new UK subsidiary at Luton. China’s PetroChina for about $1bn.

Czech Republic-based broadcaster CME could be bought by a group of Slovak and Czech oligarchs, according www.bne.eu bne December 2017 The Month That Was I 9

Finance

Eastern Europe flagship but troubled “Garden Ring” Romania’s Banca Transilvania (BT) bank Promsvyazbank (PSB). submitted permissions to buy up to Russian state-owned gas monopolist 100% in Victoriabank. It also asked Gazprom floated a €750mn Eurobond Sberbank has sold its Ukrainian for permission to buy a 39.2% stake with a coupon rate of 2.25% per operation, the Lviv-headquartered from Cyprus-based Insidown, officially annum – the lowest coupon rate for middle-sized VS Bank, to local banker controlled by Russian investor Sergey Russian issuers in any currency in the and politician Sergiy Tigipko. Lobanov but reportedly under the last seven years. control of Vlad Plahotniuc.

Russia's largest lender state-con- Central Europe The net profit of Romanian blue chip trolled Sberbank broke its ordinary BRD-Groupe Societe Generale, the share price record of RUB200 on Estonia is considering an IPO of the third largest bank in the country, November 7 on Moscow Exchange, Port of Tallinn, the country’s largest jumped 76% in the first nine months cementing its status as the country's port authority. The IPO is expected of the year to RON1.06bn (€218.2), most valuable stock in terms of capi- to take place in the first half of 2018 the bank said. The result was due talisation of RUB4.5 trillion ($76bn). with about a third of the port’s shares to dynamic commercial activity and planned for public trade, while the state improved risk profile. will retain the controlling stake in the strategic infrastructure company. Fast food Sphera Franchise Group has closed an IPO of a 25% stake in Latvia is one of the countries to be put the company, raising RON285mn on the EU’s blacklist of tax havens in a (€62mn). The group owns the bid to crack down on tax dodging that was franchises for Romania and Moldova highlighted by the Paradise Papers. Around of KFC, Pizza Hut, Pizza Hut Delivery 50 countries may be put on the list. and Taco Bell.

Sberbank beat market estimates with its largest-ever quarterly net profit of Southeast Europe Eurasia RUB224.1bn ($3.7bn), as the state- owned giant saw individual loan growth Albania’s first private stock exchange The Mongolia Stock Exchange (MSE) outpace corporate lending. Profits were will start working by year-end Top 20 Index is the world’s best up 20.7% on 2016 and 63.6% on 2015. after getting the green light from the performer, up 74% YTD. The growth country’s central bank. Albania and has been driven by commodities The share of Russian treasury bonds Kosovo are the only countries in the and especially coal company exports held by foreign investors reached region that do not have stock exchanges. to China. an all-time high at the beginning of October according to the central bank. The shares in the Bulgarian subsidiary Tajikistan plans to borrow $850mn Foreigners’ share in ruble-denominated of Czech energy giant, CEZ Distribu- in 2018-2020 for energy independence OFZ was 33.2% as of October 1 and tion Bulgaria, jumped on news of a and ensuring food security. Central 36.6% in Russian Eurobonds, worth possible sale of the asset. CEZ Distri- Asia's poorest nation in September $14.562bn. bution Bulgaria shares traded 12.72% raised $500mn from its inaugural higher at BGL283.49 ($168.1, €144.9), international bond this year priced Troubled development bank while CEZ Electro Bulgaria shares traded at 7.125% for a 10-year term. Vnesheconombank (VEB) will have 5.69% higher at BGL26,000.0, according its state guarantees prolonged by 45 to data on the local exchanges. Turkmenistan cut the daily limit years, deputy Finance Minister Sergei on ATM cash withdrawals made by Storchak said. The state budget extended The European Investment Bank Turkmen abroad to a maximum of $50 RUB550bnbn ($9.3bn) worth of credit (EIB) and the Croatian Bank for or its equivalent. In March, the limit was guarantees to VEB as of end of 2016. Reconstruction and Development cut to $250 from $1,000, and in October (HBOR) have signed off on a €250mn it was slashed to $100. Turkmenistan is Russian bankers Alexei and Dmitri credit line, the first tranche of a in the midst of an economic crisis caused Ananyev have abandoned merger €800mn facility to support small and by low gas prices and collapsed gas plans and could sell Vozrozhdenie medium-sized enterprises. export deals. which they own together with their www.bne.eu 10 I Companies & Markets bne December 2017

Russian tourism market recovers fast to pre-crisis volumes bne IntelliNews

he number of Russians holidaying abroad has people. Vedomosti says that fewer than 28% of Russians recovered and has almost passed its pre-crisis peak. have a passport valid for travelling abroad, leaving a big T In January-June 17.1mn Russian tourists went abroad, pool of Russians forced to take a holiday at home. up by 30% year-on-year, Rosstat reported on November 8. In October Vedomosti reported that the bankruptcy of Russian Russian outbound tourist trips peaked at 42.9mn in 2014, charter air carrier VIM Avia means the cost of tours to Russia’s before dropping by 19% and 9% y/y in 2015 and 2016 due most popular destinations could rise by 10-20% in the next to ruble devaluation, geopolitical turmoil, and the closure of summer season. the main destinations of Egypt and Turkey. VIM Avia held 15% of the charter airline markets, which is Turkey is regaining its status of Russia’s most popular the preferred way to get to holiday destinations, with 1.8mn destination with 4.1mn tourists having already visited it this passengers carried in January-August 2017, up by 31% year- year, or almost 25% of total flow, according to another report on-year. Pulling such a large player out of the market will by Interfax. push both the charter and the regular flights' prices up, market experts surveyed by the daily agreed. The largest tour operators surveyed by Vedomosti said that Turkey accounted for two thirds of all Russian tour sales this year. Following Turkey are Greece, Cyprus, Bulgaria, and Spain, as well as Montenegro and Croatia. The domestic tourism that was picking up in the post-2014 “Turkey accounted for two thirds crisis years grew at a slower 10% in 2017 so far, but the number of internal tourists is much higher at about 50mn of all Russian tour sales this year” www.bne.eu bne December 2017 Companies & Markets I 11 Damen takes over Daewoo shipyard in Romania

Iulian Ernst in Bucharest

amen Shipyards Group has entered into a share pur- creditors to implement a rescue programme that involves chase agreement with Daewoo Shipbuilding & Marine converting debt of over $3.3bn into shares and providing new DEngineering (DSME) to acquire its majority share in funds worth $2.6bn. In addition to the shipyard in Romania, Daewoo Mangalia Heavy Industries (DMHI) located in Manga- Daewoo wants to sell 14 other subsidiaries, including DSME lia, Romania, Damen announced on November 10. Construction, DeWind, DSME Oman, DSME Shandong, Shinhan Heavy Industries and Samwoo Heavy Industries. Damen already owns a shipyard in Romania, in Galati on the banks of the river Danube, which is currently the group’s larg- Damen Shipyards Group operates 33 shipbuilding and repair yards and has 9,000 employees around the globe. To date, Damen has delivered more than 6,000 vessels in more than “The terms have not been disclosed, 100 countries and supplies around 180 ships to customers around the world annually. but the price was hinted in the Damen Shipyards Group owns one of the most active yards in range of $40mn-$70mn” Galati, Romania, where it builds several types of ships, including military vessels. Multi-role corvettes were due to have

est shipyard. As such, the latest move represents a strategic complement to Damen’s current shipyard portfolio. “In April, the South Korean group The Mangalia shipyard is located on the Black Sea coast. The yard is spread over an area of 980,000m2, has three dry- received a green light from docks with a total length of 982 metres and 1.6 kilometres creditors to implement a rescue of berthing space. The docks, with a width of between 48 and 60 metres, will provide Damen with capacity to cater programme” for the largest ships.

The deal was announced this summer, and the Romanian been built for the Romanian navy at the Damen yard in Galati competition authorities have already approved the envisaged following a government decision under former prime minister transaction. The terms have not been disclosed, but the price Dacian Ciolos, but this was eventually cancelled in March and was hinted in the range of $40mn-$70mn. new negotiations with possible suppliers were announced.

"If the deal goes according to the plan, Daewoo will secure from the deal KRW50-80bn ($43.5-69.6mn),” an official from the Korean company told profit.ro in the summer.

Daewoo Shipbuilding began talks about the sale of the Mangalia Shipyard last year as part of efforts to restructure its international operations. The South Korean company has faced huge financial problems for years amid a downturn in the global shipbuilding industry.

Daewoo has controlled 51% of the Mangalia shipyard since 1997 when it took over the stake under a privatisation deal, with the remaining 49% remaining in the government’s hands. Since 1997, 127 oil tankers and container ships have been built and 300 other vessels repaired.

In April, the South Korean group received a green light from www.bne.eu 12 I Companies & Markets bne December 2017 Revived steel industry washes away Zenica’s blues

Ivana Jovanovic in Zenica

nyone arriving in Zenica, central Bosnia & Zenica workers each year, of, which Nair calculates €15mn is Herzegovina, prior to 2004 would have found the spent on consumption in the local economy – “this money is Apost-war town just as it was described in “Zenica going to the farmers markets, coffee shops, everywhere…” blues”, a song by the famous ex-Yugoslavian band Zabranjeno pusenje (No smoking). Life in Zenica, the site of the broken ArcelorMittal has been among the top Bosnian exporters for country’s largest prison, was so grim the lyrics claimed years, topping the list in 2013, 2014 and 2015 before dropping “whoever survives 12 years in Zenica prison, is a real hajji”. to second place in 2016 due to worsening conditions on the

Most people arriving in Zenica today still sing a bit of Zenica blues, but the town is no longer grey even on a foggy early “I can see with my own eyes how November evening. Today, Zenica defies stereotypes about post-war Bosnia, as it is a modern, growing town thanks to the the town has grown together with rehabilitation of one of Southeast Europe’s largest steel mills. the plant” The change started in 2004 when international steelmaker ArcelorMittal stepped in to reopen Zelezara Zenica, which had been heavily affected by the Bosnian war. After a 17-year global steel market. The company imports coal from Australia halt in operations, steel production at the Zenica complex was and the US, while it exports long steel products to all the ex- restarted in 2008 – the result of four years of work by local Yugoslavian countries as well as to Austria, Bulgaria, Hungary, engineers and ArcelorMittal experts from around the world. Italy and Romania. According to Nair, the contribution of the company (in terms of exports minus imports) to the country’s The magnitude of the task was reflected in the name of the GDP is over 2.5%. project to bring the steelworks back to life; it was dubbed ‘Phoenix’ after the great bird that rose from the ashes. Inte- Steely DNA grated production using iron ore from the nearby Prijedor The story of steelmaking in Zenica is one of resilience, mine began on schedule in July 2008, after an investment of innovation, engineering skill, hard work and determination, over €90mn. ArcelorMittal’s total investments in Zenica so far Nair tells bne IntelliNews. “These things are in the DNA of are over €160mn. the people,” he says, adding that this was a key factor in the decision to invest in Zenica. Nine years later in November 2017, ArcelorMittal and Zenica jointly celebrated the 125th anniversary of steelmaking in the There had to be some motivating factor to convince ArcelorMittal town, marking the occasion with an event on November 2. to invest in the face of claims by many experts that restarting the steel mill after so many years of inactivity would be impossible. In an exclusive interview with bne IntelliNews during the event, ArcelorMittal Zenica CEO Biju Nair stresses the Talking to bne IntelliNews in a mixture of Bosnian and English, contribution the revived plant has made to the local and Nair underlines that what tipped the balance was that when the national economy. “I can see with my own eyes how the due diligence was carried out, it became clear that people wanted town has grown together with the plant,” he says. to see their plant operating and were ready to start working.

Recent figures show that over 2,200 people are directly “Whether it’s in Eastern Europe or Russia or Kazakhstan or employed at the steel mill and another 10,000 jobs in the other regions, our company always looks for opportunities local supply chain depend on ArcelorMittal. Nair refers to to invest where there is a history in steelmaking,” says research by the World Steel Organisation, which shows that for Nair. “History means that there are people who know how to every job generated by a steel company 16 jobs are indirectly make steel. What matters most in any industry is people and created. ArcelorMittal pays €30mn in gross salaries to its knowledge and skills. If you go into a greenfield project, the www.bne.eu bne December 2017 Companies & Markets I 13

most difficult thing is to show people how to make steel and how to understand the technology. Zenica already had this.” Russian internet advertising

ArcelorMittal is the world's leading steel and mining company, beats TV for first time in with a presence in 60 countries and an industrial footprint in 20 years 19 countries. These include countries like Mexico, Kazakhstan and Ukraine, all of which have a tradition of steelmaking. bne intellinews ArcelorMittal’s website stresses Zenica’s history in the industry; people have been producing metals for a millennium Total spending on Internet advertising in Russia was thanks to the area’s natural resources, large coal deposits, more than spending on TV advertising for the first time and the communication lines along the Bosna river valley. ever in January-September 2017. The steelworks itself dates back to when a group of Austrian industrialists set up Iron and Steel Works Zenica in 1892 – The total online spend amounted to RUB115-116bn part of the first major wave of industrialisation in Europe, ($2bn), up by 23% year-on-year, according to the survey that extended as far as Bosnia. by the Association of Communication Agencies of Russia (ACAR) cited by the Vedomosti daily on November 9. When discussing the decision to invest in Bosnia, Nair also talks of the sympathy felt by people around the world For the first time in 20 years internet advertising has towards Bosnia because of what the country endured during caught up with spending on TV ads that stood at RUB116- the wars of the 1990s. “I was not here in 2004, but definitely 117bn in the reporting period and grew at a slower pace I can feel that some emotions must have also played cards. of 13%. When you make an investment in a country like Bosnia, which needs investment and growth, in one way you are supporting Total advertising market in January-September increased that country and in another way you want to benefit from the by 14% y/y to RUB285bn. In the third quarter, the market country’s need for investment, which means you will have the grew by 16% y/y. support of the government and the people,” he says. In the third quarter alone advertisers had spend “So, I would say: knowledge and skills of the people and RUB41bn on internet, beating RUB36.5bn on TV opportunity,” Nair sums up the decision to invest. promotion.

Market challenges and advantages In the meantime, this year the media communication In addition, despite the severing of many supply chains after market in Russia could peak at an all-time-high war broke out in ex-Yugoslavia and the country fractured, of RUB400bn, the head of ACAR Alexei Kovylov markets for Zenica’s products remained and have a strong told Vedomosti. The 14% market growth is the fastest reputation. ArcelorMittal Zenica (Zelezara Zenica before the since 2011. takeover) has for years been the key supplier of long steel products to ex-Yugoslavia. Almost all these countries can be reached by truck, and the company can thus deliver to the door for its customers.

“So, you had a market and customers believing in the products of Zenica. Today, with ArcelorMittal, we have great value from that. You can read between the lines when I say that we always try to connect between the traditions and new knowledge. That’s how we came here,” Nair adds.

Not that is has all been easy. Nair sees political instability as the main challenge for developing business and investment in infrastructure in Bosnia and the wider region.

In addition, concerns have been raised by journalists and environmental groups about air pollution in Zenica. Nair says the company is now addressing environmental issues. “We have invested in an old factory and it brings environmental challenges. We have invested nearly €50mn in an environmental clean up so far but we have to do more, and the next two or three years are very critical to us to complete our obligations www.bne.eu 14 I Companies & Markets bne December 2017 related to the environment,” he tells bne IntelliNews. “We are struggling to find solutions for Prijedor because Prijedor and Zenica are married, not by ArcelorMittal but by ArcelorMittal is also struggling to boost its stake in the nearby history,” says Nair. “Now, we need to develop new mines there Prijedor mine, which has been the main supplier to the steel so ArcelorMittal is looking forward to a very good engagement mill in Zenica for decades. Alongside the acquisition of Zenica with the government of Republika Srpksa to find a solution in 2004, ArcelorMittal bought 51% of the company then to develop it and go further.” He stresses the benefit of having named Iron ore mines Ljubija. This company today operates an iron ore mine virtually on the steel plant’s doorstep: “if under the name ArcelorMittal Prijedor, and exports iron to Prijedor mine produces iron and it is used in Zenica, it gets other ArcelorMittal companies. value but if you transfer it more than 500km, it loses value. We need to continue this marriage.” The international steelmaker now wants to increase its stake in the Prijedor mine, where the remaining 49% is owned by Despite the challenges, however, ArcelorMittal is committed the government of Republika Srpska, even though Zenica is to staying in Bosnia and in the region, with Nair being very located in the Bosnian Federation, the country’s larger entity. passionate about his work there. Having already spent 14 Taking greater control of the company would ensure a source years and millions of euros, ArcelorMittal wants to see its of iron ore for Zenica’s unit. business grow along with the town of Zenica.

However, the Republika Srpska government’s attempt to sell “We stay here, we invest here… Our goal is to stay within over 60% of its 49% stake in Prijedor this spring failed due the ex-Yugoslavia and from [Bosnia] go to Serbia, Slovenia, insufficient political consent and has now been put on hold. Croatia…” he concludes. It’s not clear what the entity’s government plans to do now.

Turkish lira remains under strain as Pence-Yildirim tête-à-tête produces little

Will Conroy in Prague

he Turkish lira (TRY) remained under pressure on 9 though efforts were made by officials from both sides November 10 as the much hyped Washington, DC afterwards to put as positive a spin on relations as possible. Tmeeting between Turkish Prime Minister Binali Yildirim and US Vice President Mike Pence did not The hoped for full restoration of visa processing – first the US, immediately produce much by way of resolving tensions then Turkey in retaliation, suspended such visa services for the over an outbreak of issues straining bilateral relations. other side’s nationals after the early October arrest of a worker of the American embassy in Ankara over his alleged links to Since 11 October, the TRY has slid from 3.63/USD to 3.87/USD, US-based self-exiled cleric Fethullah Gulen, blamed for the with analysts considering that the psychologically important failed coup of last year, and on charges of espionage – did not 4.00/USD mark might not be far away if Turkey’s inflationary materialise from the clear the air session. and other various economic problems continue to mount up and the relationship with the US either goes unrepaired or deterio- There was also no sign of the US agreeing to consider extradit- rates. Ahead of the Yildirim-Pence tête-à-tête, foreign buying ing Pennsylvania-resident Gulen nor of Turkey agreeing to free of Turkish local-currency government bonds had slowed to a American evangelical pastor Andrew C. Brunson, arrested as trickle, a big concern for Ankara given that the Turks are depen- part of ongoing mass purges of suspected Gulenists that have dent on portfolio inflows to help finance a current account taken place under the country’s 17-month long state of emer- deficit which the International Monetary Fund forecasts will gency introduced following the botched putsch. Neither was expand to 4.6% of GDP this year, from 3.8% last year. there any indication of Nato member Turkey signing up to buy the US Patriot missile defence system in place of a deal for Rus- Pence and Yildirim did not even hold a press conference after sia’s S-400 hardware which may be moving towards comple- emerging from their relatively short meeting on November tion, though some sceptical experts doubt it will go through. www.bne.eu bne December 2017 Companies & Markets I 15

It was also notable that Pence and Yildirim had nothing to announce as regards a potentially game-changing issue, Turkish central bank “sits namely the US prosecution being brought against Turkish- Iranian gold trader Reza Zarrab, accused of helping Iran evade on hands” as inflation hits sanctions by arranging money laundering. News agencies 9-year high have reported that prosecutors say Zarrab invoked the name of Turkey’s president, Recep Tayyip Erdogan, when questioned about a scheme that allegedly received support from Turkey’s government, and Zarrab is said by some analysts to have been close to the Erdogan family. bne intellinews

Assessing what’s known about the outcome of the Pence-Yildir- Analysts were scathing of Turkish central bank inaction im meeting so far, Timothy Ash, senior sovereign strategist at on November 3 as the latest inflation figures showed BlueBay Asset Management, observed in a note to investors: consumer prices had accelerated to a nine-year high. “My read is that both sides still understand that the US-Turkey Annual inflation moved up from 11.2% in September relationship is really important, it is strategic, and that they to 11.9% in October, the steepest level recorded since both do want to try and normalise and to improve the relation- October 2008, data from national statistics office ship, even though is still very, very difficult… It does makes TUIK showed. me think that this is like a married couple that are having a torrid time in the relationship, with fault on both sides, and Timothy Ash, the senior sovereign strategist at BlueBay the marriage is near break-up.” Asset Management, responded in a note to investors: “Meanwhile, the [Central Bank of the Republic of Turkey] He added: “It has begun so badly that both sides have even CBRT just sits on its hands. No new tightening. Credibility begun dating other admirers (Turkey – Russia, and the US – on the inflation front shot through.” While facing orthodox the Kurds [whom to Turkey’s anger they armed in the fight pressure from economists for monetary tightening, against Islamic State in Syria], et al). But in the interest of the the CBRT is at the same time still under sustained extended family (the Western alliance) the in-laws (Pence and unorthodox pressure from Turkish President Recep Yildirim) have decided to meet to see if there is still hope, and Tayyip Erdogan and ministers for loosening.

In one of the latest examples of such a stance from the “Turks are dependent on portfolio government, Turkish PM Binali Yildirim on October 17 said the government was working to lower interest rates inflows to help finance a current to acceptable levels. This caused Ash to issue a wry rebuke, saying: “He is totally correct [about rates being account deficit” disproportionate]. Given overheating traits as reflected in high and rising inflation and the widening current account deficit, rates need to be higher!” Four days previously, lay all the dirty washing from both sides on the table in the Erdogan, reiterating his rather unconventional view that hope of trying to bring resolution. Let’s see if there is enough the main cause of inflation is high interest rates, said he of a spark in the relationship to keep it together.” planned to hold talks with both public and private lenders on how to lower interest rates. In his statement after the meeting, Pence relayed his “deep concern over the arrests of American citizens, Mission Turkey Ash said the CBRT’s inaction suggests it is “in something local staff, journalists, and members of civil society under the of a political strait-jacket at this stage, with Erdogan state of emergency [in Turkey] and urged transparency and significantly shaping monetary policy”. The strategist due process in the resolution of their cases”. advised: “CBRT strategy seems pretty clear – to hold the line on rates, not further tightening, and try and ride out These matters are also being pursued by Germany in its ongo- near term rising inflation. They hope to hold out until ing disputes with Turkey over many of Ankara’s actions under base period effects bring some relief. The CBRT has emergency laws that allow Erdogan to rule by decree. been arguing that this should be in December, but I think this is becoming even less likely now, given exchange In late October, MEPs proposed cutting Ankara’s EU pre-acces- rate pass-through, wage price pressure, energy price sion funds and reports outlined how Berlin was apparently pressure, and the impact of tax hikes. Likely the drop-off working actively to cut financing for Turkey from Germany’s in inflation will only come now in Q1 2018, if then. The state-owned KfW development bank, the European Investment CBRT is winging all this – living on something of Bank (EIB) and the European Bank for Reconstruction and a prayer. Development (EBRD).

www.bne.eu 16 I Companies & Markets bne December 2017 Sberbank drops its lowest mortgage rate by 0.3% to 8.6%-9.7% per annum

bne IntelliNews

berbank has dropped its lowest mortgage rate by However, restrictions apply to Sberbank’s new low rates 0.3% to 8.6%-9.7% per annum as falling Central and they are only available for apartments selected on the SBank of Russia (CBR) rates make borrowing in "DomKlik" portal that is run by Sberbank. The promotion Russia increasingly affordable. applies to apartments marked with the "Online Approval" icon, which are properties the bank has inspected itself. This rate is well below the 12% rate above which the government was offering subsidies to encourage Russians Even without the promotions, discount mortgage rates are to buy their homes and also to bolster the flagging banking running at an average of 9.4%, which is still well down from sector last year. Mortgage lending has become one of the last year. Sberbank is the largest player in the mortgage most profitable businesses for banks. market with more than a 50% market share.

The CBR cut its overnight monetary policy rate to 8.25% last month in the latest in a run of cuts and as inflation dropped to “Mortgage lending has become one a new historic low of only 2.7% at the start of November – well of the most profitable businesses below the 4% target rate for this year – the regulator may cut rates again at its November meeting. for banks.”

Keep up to date with events in Content: 2 Top Stories emerging Europe with the bne bne:Newspaper 5 The Regions This Week 9 Chart WEEKLY 10 Central Europe 13 Southeast Europe IntelliNews weekly newspaper, 16 Eastern Europe 19 Eurasia Follow us on twitter.com/bneintellinews 21 Opinion 23 Lists24 Lists a collection of our best stories June 16, 2017 www.intellinews.com NEWSPAPER on the region, commentary and Spotlight trained on Russia for features, as well as highlighted World Cup dress corporate and economic news. rehearsal

Jason Corcoran in Moscow Launch of the countdown from 1000 days until the 2018 World Cup begins in Russia.

The spotlight is on Russia as the country prepares $1.5bn stadium in St Petersburg as it banks to host its dress rehearsal ahead of next year’s foot- on FIFA’s Confederations Cup to showcase its ball World Cup amid growing concerning about the ability to host a successful World Cup in 2018. Sign up to receive a free copy readiness of the venues and safety of fans. The eight-nation tournament kicks off at the scandal-plagued St Petersburg stadium on June The Kremlin has boosted security measures of bne's weekly newspaper by and rushed to complete a controversial See page 2

filling out the form online. The strange death of Social Democratic Czechia

Or go to bne.eu/welcome to see Robert Anderson in Prague Bohuslav Sobotka resigned as Social Democrat leader but stayed on as Czech premier.

Czech Prime Minister Bohuslav Sobotka’s res- to a low of 10%, according to one recent poll. samples of this and other products. ignation as Social Democrat leader on June 14 reflects the precipitous decline in CSSD support It now looks all but certain now that the CSSD will in opinion polls this year. be out of power – or at least a leading position – after the next election in October. The expected The party’s vote has sunk from regularly more than 30% in the noughties, to 20% at the 2013 election, See page 3

www.bne.eu bne December 2017 Companies & Markets I 17 Turkish conglomerate Sabanci plans IPO for energy unit Enerjisa

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abanci Holding, one of Turkey’s largest conglomerates, October that Turkven was planning an IPO in 2018 to offer said on November 15 that it plans an Istanbul stock a stake of around 50% in its hospital chain unit Medical Sexchange initial public offering (IPO) for up to 20% Park Group. of its energy unit Enerjisa in February. The listing of Medical Park could be worth around $1bn, Enerjisa will sell 18%, or 212.6mn shares, with an option Tari said. to sell another 2%, or 23.6mn shares, Sabanci announced in a filing with the stock exchange. This week, TFI TAB Gida, the exclusive franchisee for Burger King in Turkey and China, filed with the SEC to raise up to Enerjisa is a 50:50 joint venture between Sabanci and $400mn in an IPO in New York. Germany's E.ON. In March this year, the two companies struck a deal to restructure Enerjisa and its subsidiaries.

The company distributes power to some 20mn customers “Enerjisa’s revenues were up fifth in Turkey. in the first nine months of 2017 Revenues of the electricity distributor increased to to TRY8.59bn (€1.9bn)” TRY8.59bn (€1.9bn) in the first nine months of 2017 from TRY6.9bn a year earlier. The company’s net income was TRY454mn across January-September versus TRY422mn in the same period of 2016. Clothing retailer De Facto hired Citigroup Inc. and HSBC Holdings Plc in advance of a planned IPO next year, people Shares in Sabanci Holding rose more than 3% on November familiar with the matter told Bloomberg in October. 15 following the IPO announcement. In September, Baskent Dogalgaz Dagitim, a company that Borsa Istanbul’s chairman Himmet Karadag said on distributes natural gas in Ankara, applied to the Capital November 14 that preparations were under way for Markets Board to list a stake of up to 28.75% on the around 12-13 large-scale IPOs on the Istanbul stock Borsa Istanbul. exchange next year. Sok, one of Turkey’s largest hard-discount chains, plans an Seymur Tari, CEO of private equity firm Turkven, which IPO in 2018, sources familiar with the matter told Reuters listed jeans fashion retailer Mavi in June, told Reuters in in August.

“Preparations were under way for around 12-13 large-scale IPOs on the Istanbul stock exchange next year” www.bne.eu 18 I Companies & Markets bne December 2017 Kazakhstan signs MoU with Swiss company 5EL SA on blockchain innovations hub development

bne IntelliNews

he Astana International Financial Center (AIFC) and In October, AIFC and Malta-based investment company the Swiss company 5EL SA signed a memorandum EXANTE signed a memorandum of cooperation on Tof understanding on October 31, agreeing to develop developing Kazakhstan’s cryptocurrency markets as well a blockchain innovations hub in Kazakhstan. as “positioning the AIFC as an international financial technology center”. According to the agreement, EXANTE Kazakhstan is one of several countries in the former Soviet will launch the Stasis platform, a financial and technological space keen to develop its fintech sector and benefit from infrastructure for launching digital assets, which allows cryptocurrency technologies. The country started working on fiat currencies to be tokenised into their digital versions via a regulatory apparatus for cryptocurrency controls in August, blockchain. EXANTE also agreed to cooperate with the AIFC while both Russia and Ukraine have also thrown themselves on cryptocurrency market regulations and to support the into the blockchain craze as their authorities look at ways of evolution of the Kazakh capital Astana’s “fintech-ecosystem”. regulating cryptocurrency use.

5EL SA will help AIFC design and develop the blockchain “Kazakhstan will develop the innovation initiative code named “Bright Chain”. Bright Chain will aim to “attract and support technology developers blockchain innovation initiative and companies seeking to develop and operate commercial code named “Bright Chain” applications of blockchain technology in the areas of finance, trade and logistics”, the statement said. The AIFC announced in September its intention to develop “Astana International Financial Center aims to become the a 'crypto-valley' in Astana’s planned central business district, vital growth engine for the anticipated surge in trade & finance which will be located, along with the AIFC, in the segment flows within One Belt, One Road Initiative, and launching of the city where Astana hosted the EXPO-2017 green Bright Chain helps us to establish a long term competitive energy event. advantage as the hub for cost efficient and safe global trade,” Nurlan Kussainov, the CEO of the Astana International Its task will be to encourage investments by creating an Financial Center Authority, said. attractive environment for investing in financial services and developing the local securities market. 5EL SA will set up a subsidiary of its 5EL Blockchain Lab unit in Astana “to help the AIFC operate the most productive The centre, in collaboration with Deloitte, Waves, Ukrainian ecosystem for innovation and commercial applications of law firm Justcutum and Kesarev Consulting, hopes to create a distributed ledger technologies to drive the growth and "highly progressive regulatory framework" for blockchain and international competitiveness of both the AIFC and its cryptocurrency companies, Bitcoin.com reported in July. resident operators,” the company added.

www.bne.eu bne December 2017 Companies & Markets I 19 Turkish Burger King operator TFI files for New York IPO

bne IntelliNews

FI TAB Food Investments (TFI TAB Gida), the exclusive In July 2012, TFI entered the Chinese market by becoming franchisee for Burger King in Turkey and China, has the exclusive master franchisee for Burger King. As of end- Tfiled with the SEC to raise up to $400mn in an initial September, it operates 766 Burger King restaurants. public offering (IPO) in New York. It operated a total of 1,822 restaurants at the end of September, Proceeds from the offering will be used to repay $75mn the up from 1,529 a year earlier. company borrowed from Turkish lender Yapi Kredi back in 2013, TFI said in a November 14 statement. Its revenues increased to TRY2.86bn last year from TRY2.29bn a year earlier. The company’s nine-month revenue rose by 42% The company has applied to list its American depositary to TRY2.9bn this year. shares (ADSs) on the Nasdaq Global Select Market but has not yet decided how many it will offer.

Morgan Stanley, Credit Suisse and Goldman Sachs are acting “TFI is one of the world's largest as bookrunners and representatives for the proposed offering. global restaurant operators by the

TFI, one of the world's largest global restaurant operators by number of restaurants” the number of restaurants, operates a broad range of quick service restaurants, or QSRs, mainly in Turkey and China. On a related note, Borsa Istanbul’s chairman Himmet Karadag As of September 30, it operated or sub-franchised 625 Burger said on November 14 that preparations were under way for King restaurants in Turkey. It is also the exclusive master around 12-13 large-scale IPOs on the Istanbul stock exchange franchisee of Popeyes, Arby's and Sbarro in Turkey. next year. He did not provide other details on planned IPOs.

www.bne.eu 20 I Companies & Markets bne DecemberNovember 2017

bne:Funds Sberbank cements most expensive Russian company lead

IntelliNews Pro

ussian equities are slowly coming back into vogue and consistently beating the market and marked as a Buy across if an investor is going to buy anything, they will buy the board by investment banks and brokerages. RSberbank before anything else. Sberbank has ousted the Russian supermarket chain Magnit The Russian equity market had a stellar year in 2016 returning as the “tourist stock” and investors’ darling amongst the equity over 50% to portfolio investors, but this year the performance firmament. The reason is as well over half the population has been lackadaisical and the two main indices remain down has an account with Sberbank it is a great proxy for the on the start of the year by a few per cent. whole economy, but enjoys explicit state guarantees and monopolistic power that underwrites its performance. In the The same is not true for Russia’s most attractive stocks, many last two crisis years Sberbank was responsible for the entire of which have seen prices soar. Russia's largest lender, state- sector’s profits with all the other banks only breaking even controlled Sberbank, leads the way and broke its ordinary on aggregate. share all-time price record of RUB200 on November 7 on the Moscow Exchange, cementing its status as the country's most The consensus forecast of analysts surveyed by Bloomberg valuable blue chip in terms of capitalisation. in November suggests a target price of RUB240 per ordinary share, an upside of 20% from current price at the middle of The market capitalisation of Sberbank reached RUB4.5 trillion the month. ($76bn), approximately doubling year-on-year and well ahead of state-controlled oil major Rosneft with RUB3.5 trillion and In October Sberbank unveiled a new ambitious 5-year gas giant Gazprom with RUB3.1 trillion. strategy, aiming to make RUB1 trillion in profit in medium- term, as much as the whole Russian banking sector is Analysts surveyed by Vedomosti on November 7 noted that expected to make in 2017. That is five times what the Sberbank has become an absolute favourite among investors, entire sector made in 2016.

SBER:LI London Intl I Sberbank of Russia PJSC

ww.bloomberg.com www.bne.eu bne DecemberNovember 2017 Companies & Markets I 21

bne:FinTech Money lending startup CarMoney secures $10mn from local investors

bne IntelliNews

arMoney, a Russian startup, which allows you to borrow As of November 1, CarMoney’s loan portfolio amounts to money against your car, attracted a $10mn bridge round nearly 1.3bn rubles (approximately $22mn at the current Cfrom Russian business angels, East-West Digital News exchange rate), with the market value of securities reaching reported on November 15. over RUB3.5bn (some $59mn).

The investors (the names of whom remain undisclosed) The startup claims to have over 6,000 active users of its acquired a minority stake in the company. services in 59 Russian cities.

The fresh capital will be used to develop in-house IT solutions, The company expects to raise the next round of funding improve CarMoney’s scoring system, automate the decision- in 2018. making system, and for marketing purposes.

bne:Deal Russian supermarket chain Lenta bought 22 supermarkets in Siberia

IntelliNews Pro

ussian supermarket chain Lenta, one of the largest The average selling space per store of Lenta’s acquisitions is around retail chains in the country, signed an agreement with 800 square metres, giving total selling space of approximately Rthe Holiday Group to purchase 22 supermarkets in the 18,000 square metres. The stores are compatible with Lenta’s Siberia region on November 7. supermarket format in terms of size and layout, and the locations are complementary to Lenta’s existing stores in the regions. The 22 supermarkets currently operate under the “Holiday Classic”, “Kora” and “Holdy” brands. Of the stores, 11 are Lenta’s Chief Executive Officer, Jan Dunning said: “Lenta is located in Novosibirsk region, 7 in Kemerovo and 4 in Barnaul. pleased to announce an agreement to acquire 22 supermarkets in Siberia from the Holiday Group. This transaction will A battle for supermarket supremacy has broken out as both significantly strengthen our network in Siberia, giving many Lenta and the X5 Group, currently the largest chain in terms of more customers the opportunity to shop at a Lenta store close revenue, are assaulting previous market leader Magnit, which to their homes. The stores all have good urban locations and has seen its growth stall in the last two years. are complementary to Lenta’s existing network.” www.bne.eu 22 I Companies & Markets bne DecemberNovember 2017

Siberia is an important region for Lenta, the company said in to welcoming former Holiday store employees into the Lenta a statement. Lenta opened its first hypermarket in Novosibirsk family. The stores will be refurbished and rebranded over the in 2006 and its first supermarket in the city earlier this year. next few months,” Dunning added. It currently operate 36 hypermarkets and 4 supermarkets across Siberia, served by a distribution centre in Novosibirsk, “Third quarter operating numbers highlight that X5 and according to the company’s press release. Lenta are grabbing market share at the expense of Magnit. We expect the store redesign program to pressure Magnit’s “While Lenta remains primarily focused on organic expansion, sales for at least 2-3 more quarters and believe that both we are happy to supplement this by acquiring high quality X5 and Lenta are well-positioned to attract customer traffic existing stores when suitable opportunities arise. We have a inflows," Alfa Bank said in a note. strong track record of successful integration and look forward

bne:FX Markets digest second Czech rate hike along with less hawkish than foretold forecast

bne IntelliNews

he Czech crown has been flying ever since the Czech “The prevailing view, and there was a unanimous vote in this National Bank (CNB) became the first central bank respect, is that there is no reason for dramatic steps, and that Tin the EU to hike rates this August and promises more we have enough time and room to raise rates in future meet- hikes or currency appreciation. ings,” CNB governor Jiri Rusnok told a news briefing after the rates decision meeting. Markets are still absorbing the Czech central bank interest rates forecast released in November that is not as hawkish Some board members had indicated before the meeting that as anticipated. The central bank hiked rates for a second there would be more urgency shown towards tightening time on October 2 by 25 basis points to 0.50% in response to inflationary pressures being generated by Europe's fastest growing economy. “No other central bank in the EU No other central bank in the EU has gone ahead with two rate has gone ahead with two rate hikes hikes within this year. A third Czech increase may still be on the table for 2017, but the CNB has made it clear that it is in no within this year” hurry to further bump up borrowing costs.

“The rate forecast is not as hawkish as the market expected,” monetary policy. Rusnok said a sharper hike was debated but ING economist Jakub Seidler told Reuters, adding that it eventually the board opted 7-0 for a standard step, with the showed only one rate increase next year. “The economy is potential for another hike, perhaps in December. doing well so definitely it is reasonable to expect more than one hike in 2018.” The European Central Bank's decision in November to www.bne.eu bne DecemberNovember 2017 Companies & Markets I 23

extend asset purchases, but at half the volume from January starting to feel the heat. Inflation rose by 0.2% to 2.7% y/y in until at least September next year will add cautiousness to September, although some analysts say it may have peaked at Czech policy tightening by mid-2018, according to Rusnok's this level for this year. A Reuters poll anticipates another CNB comments. The ECB’s approach may preserve demand for the rate hike in the first quarter of 2018 after a pause in December.

The koruna gained by 5.6% to the euro since the central “Foreign buyers have continued bank dropped its cap on the exchange rate in April. Just after the rates decision, it reached its highest level since to pile into Czech domestic the intervention was brought in in late 2013, edging up to government bonds” CZK25.530/euro. Foreign buyers have continued to pile into Czech domestic government bonds – according to the finance ministry’s latest higher-yielding koruna for longer and consequently reduce data issued on October 31, non-Czech holdings of these bonds the demand for rate hikes. moved up to a new high of 51.35% in September, almost double the 28.36% share seen a year ago and a substantial With Czech economic output growing by 4.7% y/y in the advance on August’s 46.12%. A surge of foreign investors second quarter, wage settlements, amid the EU's lowest level into the bonds was also recorded prior to the central bank’s of unemployment, are on the rise and the inflation rate is removal of the koruna cap in April.

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www.bne.eu 24 I Cover story bne December 2017

CEO Sergey Gordeev I Photos © PIK Group The PIK of Russian real estate

Ben Aris in Moscow

he Russian economy is becoming The acquisition of rival Morton for estate in January-June, a 90.4% increase normal. Inflation has fallen from RUB11.7bn ($189mn) in 2016 left PIK y/y. Still, the company posted a net loss Tthe double digits typical of an as by far the largest and fastest growing of RUB2.5bn, compared with a net profit emerging market and is currently 2.7%, Russian real estate company. In late of RUB1.7bn in January-June of 2016, a normal country level. Unemploy- 2016, it had a portfolio of 12.5mn but that is a function of the fact that a ment is also at record lows of 5%, and square metres (sq m) of property. In the project can take two years to complete, incomes, while still well below potential, are on a par with many poorer European Union (EU) countries: per capita income is currently $22,540 per year. “PIK group emerged last year as the real estate sector’s standout company” The one exception is interest rates, which are still a high 8.25%, despite a string of cuts this year by the Central Bank of Russia (CBR). However, even same year, its revenue was RUB60bn CEO Sergey Gordeev told bne IntelliNews this will fall to 4-5%, perhaps as soon ($0.9bn). This year, the developer in an exclusive interview, and doesn't as next year, almost a normal country’s expects total cash collections of between reflect the state of the company since cost of capital. RUB190bn and RUB200bn. it took over Morton.

All this combines to give a rosy outlook In the first half of this year PIK’s “[The loss] is because of the way real for Russian real estate. revenues more than doubled, up 119% estate business is. These results reflect to RUB41.5bn (€716mn), while its the state of the company two years ago as PIK group emerged last year as the closest competitor, LSR, saw a 30% we book the revenues when we deliver to real estate sector’s standout company. decline. PIK sold 771,000 sq m of real the customer not when we get the money www.bne.eu bne December 2017 Cover Story I 25

from them,” Gordeev told bne in an new business centre has been opened in as real incomes have started to rise interview in PIK’s headquarters in central Moscow this year. A flurry of old retail again, albeit modestly, and the economy Moscow. “So we will see the profits from projects were completed in 2015-2016, is a lot healthier this year than it has the current activity in 2018 and 2019.” but since the “silent crisis” that hit two been for most of the last two. Part of years ago, no significant new projects the fall in the index must be due to the The company’s financial results in this dif- have been completed. stagnation of real disposable incomes, ficult market were given rousing support but part of it is also due to the increasing by international ratings agency Standard “The retail business is changing fast and completion of online stores. & Poor’s (S&P) at the start of November, the old style of malls are not as relevant which praised the company’s “sound as they were. There is a lot more space The growth of Russia's e-commerce is performance” at time when many of PIK’s than there was 10 years ago. There is an easily outpacing the development of competitors are seeing sales fall, while oversupply,” says Gordeev. “We don't see traditional retail outlets: the online PIK is enjoying “strong pre-sales and any change in office in the near future market grew by 22% year-on-year cash collection growth driven by robust either, as this business is being disrupted to RUB498bn ($8.6bn) in January- demand for its apartments”. by the co-working spaces. This way June 2017 and Russia’s e-commerce office space is being changed.” is predicted to account for 10% of the “The stable outlook reflects our global total by 2025, according to view that PIK's liquidity position is Gordeev used to have an office Russia’s Ministry of Industry and Trade. supported by large cash balances and development company called Horus Clearly Russia’s booming e-commerce is our expectation of sound operating cash Capital that developed office space already affecting the real estate sector. flow,” the agency concluded. but he sold it in 2010 because of the changing trends in the industry. “In malls you can clearly see the chang- Sector trends ing traffic as a new generation come to The real estate sector boomed in the The disruption in retail is also starting to the fore – the millennials,” says Gordeev. noughties and profits could be made be visible: the latest Watcom shopping “They don't like using cars and prefer the from buying a building on Monday and index, which tracks footfalls in Moscow’s metro or buses. They want to be inde- flipping it on Friday. But the real estate leading malls in real time, is having pendent from cars. That means retail has business has had a hard time in the years its worst year since the index was to mingle with the metro stations. There since the global financial crisis. Only one established in 2014, which is surprising has to be more entertainment and fewer www.bne.eu 26 I Cover story bne December 2017 shops as traditional retail is being dis- of new deals up 54% in the first half of The takeover of Morton transformed PIK rupted by e-commerce. The food retail this year to 362,000 sq m of acquired into a market leader almost overnight. outlets – the big supermarkets – these space on the back of soaring demand There were significant cost savings as will remain but the fashion stores will from e-commerce companies. A large all Morton’s properties and land bank be diminished.” chunk of the demand came just from of 4.6mn sq m worth RUB53.6bn was the major online retailers Utkonos taken under the control of the PIK Russian food retailers are better posi- (groceries) and Wildberries (clothes management; more than 6,000 staff tioned than some Western European & shoes), two of Russia’s largest were let go as a result. retailers for the changes resulting from e-commerce companies. “There was a huge administrative cost saving and at the same time the cost of loans fell significantly,” says Gordeev. “Profits could be made from buying a building “We sold the non-standard properties and concentrated on controlling costs on Monday and flipping it on Friday” and boosting the returns.”

However, one of the more valuable disruptive e-commerce challenges and Residential assets that PIK picked up from the acqui- its attempt to adjust to consumers' But none of this has stopped residential sition was a state-of-the-art plant built increasing preference for shopping at projects from going forward. Prices on by Morton that makes prefabricated con- smaller convenience stores rather than the primary residential market have struction panels for high-rise buildings. at hypermarkets, Fitch Ratings said on been flat or even fallen a little, but Gordeev has a bee in his bonnet about November 23. a government sponsored mortgage- technological advances in the construc- subsidy programme for loans with tion business and carried on investing in The retail segment amongst Russia’s top interest rates over 12% has been the panel plant. 50 companies by revenue accounted for supporting sales in this subsector. RUB606bn ($10bn), or more than half “With this tech we can reduce the time of the aggregate revenues of Russia’s top Demand for residential property remains to put a 25-storey building up down to 50 companies, soaring from 18% of the huge and not just in Moscow where the two months. Morton didn't make full use total in the preceding year, but still lag- demand is so great you could build a of this capacity and it is an important ging behind the RUB1.38 trillion grossed second Moscow alongside the existing driver of cost reductions,” says Gordeev. by the fastest growing retailers in pre- one. As mortgage rates have now fallen “We have created a lot of different plants crisis 2014. Fitch said it sees consumer below 12% the government has ended and we should be able to create all the interest in hypermarkets continuing to the subsidy programme, and rates elements for an apartment by the end of decline globally as shoppers put more of continue to fall: in November Russia’s this year. We have a small plant where a priority on speed and convenience. leading bank Sberbank cut its rates to all the elements of the bathroom are their lowest ever level of 8.6%-9.7% and made and can be delivered to the site. As Russian hypermarkets tend to be the central bank is expected to cut rates It is already producing 5,000 units, smaller and closer to their customers than their Western counterparts, the trend will go slower in Russia, but Fitch expects the size of the average Russian “Demand for residential property remains huge” hypermarket to fall by around 300 sq m to 4,200 sq m over the medium term, the ratings agency said in its report. to 4-5% in the next year or so. Mortgage which will grow to 15,000. It is modular, And the same sort of disruption is just sales already account for 57% of PIK’s robotic and cheap. We are also thinking getting underway in the office business. sales, up from 7% in 2010. about exporting these elements, but that A number of co-work space hub com- is in the future.” panies have sprung up in the last year “The CBR could go faster, but I don't think and already have a dozen locations in it will. It is being very cautious, as it fears It’s all about the money Moscow where established companies the return of inflation. However, if rates Along with the changes in the business are moving in, due to their cheapness were to fall to 4-5% we would probably have been changes in the ownership and convenience. see acceleration in mortgage sales. But of PIK. In August Gordeev bought out rates falling to 4% could happen in the two significant minority investors – The one bit of the real estate business next two to three years,” says Gordeev, legendary Russian financier Alexander that is benefiting from these disruptions who adds he is relying more on cost cut- Mamut and the owner of failed bank is warehousing, which saw the volume ting than rate cuts to make his profits. Binbank (aka B&N Bank) Mikhail www.bne.eu bne December 2017 Cover story I 27

Shishkhanov – to bring his stake up S&P is a little more cautious on the debt The attitude of Russian business owners to just over 50%. Since then he has pay down, forecasting a deleveraging to to their shareholders has changed increased it further to 74.6% by the about 2x Ebidta in 2018 and 1x in 2019, dramatically in the last decade. In the middle of October. from 4x in 2017, “on the back of continued Yeltsin era the key was to “privatise the growth in buildings completion, recog- cash-flows” as oligarch Boris Berezovsky At the same time the company has nised revenues, and better profitability,” once described it. Today owners see their delisted its GDRs from the London Stock the agency said in its November note. equity as a valuable source of capital and Exchange and all trading is now only are investing into their value by paying available on Moscow Exchange (MOEX). Gordeev has also committed himself to out dividends amongst other things: As part of this deal Russian state-owned paying a generous 30% of operating cash Russian companies now pay the highest bank VTB bought a 7.57% stake, leaving flow as dividends semi-annually starting dividends in the emerging markets another 25.41% as the free float. with the 2017 financial year. The compa- universe, about 5% of net profits, or ny last paid dividends in 2014 and they double the MSCI EM average. “Mamut and Shishkhanov were inde- “were not very much”, says Gordeev, but pendent investors. Today Mamut’s main that should change next year. “Russian shares are cheap thanks investment is in [Russian online com- to sanctions. So companies want to pany] Rambler and Shishkhanov was “If we stick to our business plan and increase the value of their shares and invested as a private individual. There there is free cash flow left, then we will hence they have a generous dividend was no connection between us and share it with shareholders. There are policy. Good corporate governance Binbank,” Gordeev said, who argues that only two good things to spend money on: policy is part of the same thing,” says the strength of a real estate company, shareholders and land,” says Gordeev. Gordeev. like a tech company, is in the quality of its management. Leading residential real estate developer by construction volumes

The decision to delist from London is PIK Group 3,960 part of a growing trend. In the boom years the LSE representatives were con- LSR Group 3,442 stantly in Moscow hoping to lure leading Setl Group 2,798 blue chips to IPO on its exchange. USI 1,434

But Gordeev voices a recurring com- CDS Group 1,257 plaint. “We delisted from London as we didn't see any action in our stock there by Leader Group 986 investors on the exchange,” says Gordeev. Samolet development 899

Now MOEX is connected to the FSK Lider 851 international clearing system Euroclear Etalon Group 842 it makes no difference if the stock is listed in Moscow or London and so SU-155 Group 805 Current construction volume, th sqm Russian companies are increasingly Source: National Association of Property Developers data as of 1 August 2017 moving their shares home.

On top of this PIK is planning to come Share of mortgage sales back to the market when the current transformation stemming from its 60% 57% merger with Morton is complete. 55% 50% 50% “We are targeting making an SPO in the 39% 39% 40% 36% future but we want to start from a white page,” says Gordeev. 30% 29% 24% The company is also reworking its 20% financials. The company reported that 10% net debt increased slightly in the first 7% half of this year to RUB43.6bn from 0% RUB40.7bn as of late 2016, but Gordeev 2010 2011 2012 2013 2014 2015 2016 1Q2017 2Q2017 says the company could try to reduce the debt to zero by early next year. Source: PIK Group www.bne.eu 28 I Central Europe bne December 2017

Populist President Zeman has polarised Czech society. In November 2014 in Prague, in a demonstration named "I Want to Talk to You, Mr. President", Czechs showed red cards to Zeman in a protest at his pro-Russia stance and vulgar language. www.wikiwand.com Copious mud flies as starting pistol is fired on Czech presidential race

Will Conroy in Prague

ndrej Babis – the billionaire ‘anti- understand the logic of Andrej Babis. Topolanek, nevertheless, told journalists politician’ set to become Czech Topolanek by preventing his ministers at a press conference that he respects Aprime minister following the from 'taking from Andrej' provoked a 73-year-old Zeman, a former Social Dem- late October general election landslide feeling in him that others offered more." ocrat (CSSD) leader (1993-2001) and achieved by his anti-establishment prime minister (1998-2002) for his previ- Ano movement – on November 7 made ‘Beware the Babis-Zeman power pact’ ous political achievements. He added a lively intervention, stating that the ODS, which came second in the elec- that Topolanek would like to see Zeman candidacy of former centre-right Civic tion, though a distant second, has been go down in history as the PM who led the Democratic Party (ODS) PM Mirek Topo- warning that should Kremlin-friendly country into Nato, not as the president lanek, announced at the last minute, and brazen-faced President Milos who raped the constitutional order and was a “mockery”. Topolanek had been Zeman be re-elected he will essentially “kowtowed to undemocratic big powers”. the “most corrupt head of government take over foreign policy by forming a in the Czech Republic's history,” he said. power pact with fellow populist Babis, ODS has endorsed Topolanek as a despite the constitutional arrange- non-partisan candidate for president, Babis, himself facing a fraud ment that the Czech president serves having decided, like the other par- investigation, said he saw Topolanek a largely ceremonial purpose. ties in parliament, not to nominate as the joint candidate of “symbol its own contender. Party leader Petr of corruption” Miroslav Kalousek Flinging his own barbs, the outspoken Fiala said that his party’s main goal is – a former finance minister during Topolanek told the Pravo daily that the to prevent Zeman’s re-election. ODS, Topolanek’s 2006-2009 administration last straw for him when deciding wheth- an Atlanticist party, views Topola- but now merely a leading light in the er to run was a horrible post-election nek as someone who can take on the liberal-conservative TOP 09 party, press conference given by Zeman and Zeman-Babis power pact, Fiala said. the parliamentary representation of Babis which, if it had been a scene out of which was almost wiped out in the a Monty Python movie, he would have However, Vaclav Klaus Jr., a highly election – and ODS. Kalousek quickly laughed about. It was, however, rather popular upcoming ODS politician and responded with a tweet saying: "I a sad Czech politics reality show, he said. son of the former president and ODS www.bne.eu bne December 2017 Central Europe I 29

founder Vaclav Klaus, who some view as capable of eventually challenging Fiala Commercial interest in Baltic Pipe affirmed for the ODS chairmanship, came out against Topolanek. Klaus Jr. remarked that he does not belong to the “political- Wojciech Kosc in Warsaw business group Kalousek & Co.” and will therefore not vote for Topolanek. Gas shippers have confirmed interest in the planned Baltic Pipe to link Norway with Poland via Denmark by submitting binding bids for 15-year After his government came to an end capacity transmission contracts using the pipeline, Polish and Danish gas having failed a vote of confidence, grid operators Gaz-System and Energinet said on October 31. Topolanek left politics to go into business. He has been a member of The commitments mark the successful end of the second phase of the the board of Eustream, Slovakia's gas so-called open season, in which Gaz-System and Energinet gauged interest transport utility monopoly, and head of from companies in the pipeline. The Baltic Pipe is supposed to reduce the supervisory board of the Elektrarny Poland’s dependence on gas imports from Russia. The final investment Opatovice energy company, a part of decision on building the pipeline, preliminarily scheduled for 2018, appears the giant EPH energy holding. It has likelier than ever to be in favour of going ahead with the project. wished him luck, but has stopped short of contributing to his campaign funds. The Baltic Pipe is expected to become operational in 2022, the year Poland’s long-term Russian gas contract ends. The contract is likely not to be renewed, Fighting associations with corruption Warsaw has claimed repeatedly. Fighting back against associations with corruption, Topolanek reportedly The total capacity set out in the bids has not been disclosed. In mid-June, the vowed that as president he would not TSOs said that forward demand for using Baltic Pipe must total at least 7.5bn grant a pardon to his friend and former cubic metres (cm) per year in order for construction to kick off. close aide, lobbyist Marek Dalik, who has this week started serving a five- Poland’s state controlled oil and gas company PGNiG – on the interest of year jail sentence for soliciting a bribe which the success of the project hinges – said, however, that its bid amounted in connection with a military contract to PLN8.1bn (€1.9bn). That will likely translate into allocation of the most for armoured personnel carriers. capacity to the Polish company. PGNiG said earlier it would like to book nearly the entire capacity of the Baltic Pipe. Following economic tests, capacity As president, Zeman has proved a contracts are expected to be signed by the end of January 2018. pro-Russian, pro-Beijing, anti-elite candidate who has polarised Czech Poland’s alternatives to Russian gas increased last year as the country politics. He has lambasted the EU launched its first LNG terminal that can handle 5bn cm of gas annually. Once for opening the way to Muslim mass the Baltic Pipe is operational, Poland will be able to ship the majority of the immigration, which he has denounced 16bn cm of gas it consumes annually from outside of Russia. Warsaw consid- as an "organised invasion" of Europe. ers Russia a hostile country. Warsaw also says it is mulling a project to install a floating terminal in Gdansk Bay. Zeman has also called for a referendum on a Czexit from the EU. Only the citizens In August, Poland contracted Ramboll Danmark to carry out the analytical, should decide on this matter, he says, research and design work necessary to obtain required permits for the although he claims that his own posi- construction of the Baltic Pipe. tion is that the country should remain in the bloc. Zeman has also frequently castigated urban elites that he describes Denmark Sweden as the "Prague coffeehouse society" which is far removed from real-life problems. Baltic Pipe Politicians vs non-politicians and a vote East, or a vote West Before the entrance of Topolanek into the race for the Castle, the only candidate who looked capable of giving Zeman a run for his money was Jiri Drahos, a chemist who served as president of the Czech Academy of Sci- Germany Poland ences from 2009 to earlier this year. www.bne.eu 30 I Central Europe bne December 2017

Responding to the new shape of the The president was buoyed on November walking. He has lately denied that he battle for the presidency, Drahos told 7 by an announcement from Tomio suffers from gout, while saying that Czech media that Topolanek represents Okamura, leader of the far-right after many years he is now free of the same things as Zeman, namely Freedom and Direct Democracy (SPD) diabetes. Czech media have reported boorishness, vulgarity and a lack of party which came third in the general him as suffering from a diabetic respect for opponents’ views. Referring election with 11% of the vote, that complication, polyneuropathy. to Zeman and Topolanek as the two he has decided that he will not run in “matadors” of Czech politics, Drahos the election. Pravo reported Okamura One test of his stamina will occur said voters would witness a contest of as, after visiting Zeman at Lany between November 21-24 when Zeman politicians versus non-politicians like Castle, saying that the SPD has four will lead the largest ever Czech corpo- himself and Michal Horacek, the pop criteria for supporting a presidential rate delegation of over 120 companies music lyricist and millionaire former candidate. These were given as support to Russia. "The interest in the Russian co-owner of betting company Fortuna. for direct democracy, opposition to mission is huge and the number of Like Horacek, Drahos is very supportive Islam in the Czech Republic, a refusal the firms applying for participation of the Czech Republic’s EU and Nato to accept migrants coming into the can be still expected to slightly rise. memberships and the country’s con- country as part of the migrant wave, We have registered 124 participants tinued orientation towards the West. and support for Czech interests as for now," Czech Confederation of against those of Brussels. The SPD Industry spokeswoman Eva Velickova Zeman, whom the most recent polls is also pushing for a referendum on told CTK. During the trip, Zeman is predicted would land around a third a Czexit and Babis, as PM, may be due to have a tête-à-tête with Russian of the vote in the first round (unless a minded to pass a referendum law that President Vladimir Putin in Sochi. candidate scores an absolute majority of would pave the way to such a vote. votes there will be a second round run- A total of 19 candidates registered for off between the contenders that come Question mark over Zeman’s the presidential race before the dead- first and second). Zeman remains the physical fitness for office line expired at 16:00 on November 7, clear favourite with the bookmakers to Zeman has been battling suggestions although it is thought that less than win re-election, although one poll back that his health might preclude him half have met all the formal conditions. in September, conducted by Median, from going on as president. His public The election’s first round will be held found Drahos would beat Zeman with appearances have recently been limited on January 12-13. A second round, if 55.5% of the vote in a second round. because of the difficulties he has with necessary, will follow two weeks later.

Higher exports and a growing concern in some locations. Average growth across the EBRD region will be 3.3% this year, the develop- investment push first- ment bank forecast. That equates to a rise of 0.9 percentage points over the previous estimate from the half growth in all EBRD bank that was issued in May at the time of the bank’s annual meeting. countries bar two Growth in 2016 only reached 1.9%. The EBRD tracks the economies of 37 emerging countries, where it finances bne IntelliNews projects and supports reforms that promote sustainable and environmen- igher exports and rising levels Countries across the entire EBRD region, tally-friendly market economies. of investment on the back of with two exceptions, are enjoying Himproving commodity prices broad-based growth and rising income Emerging Europe is booming as have prompted the European Bank for levels. Several countries where the the bne IntelliNews magazine reported Reconstruction and Development (EBRD) development bank is active are also in this month’s cover story. “The to significantly increase its forecasts for experiencing record low unemploy- pace of growth has picked up in 27 economic growth in Emerging Europe. ment. The negatives in the picture are of the EBRD’s economies this year, The bank made its case for the revised minimal and are mainly caused by the first time that such a broad forecasting in its latest Regional Economic economies running up against structural upturn has been seen since 2010,” Prospects report released on November 6 . constraints. Rising inflation is, however, the bank said in a press release. www.bne.eu bne December 2017 Central Europe I 31

The growth is mixed with Central Europe being the star performer – Czechia and Romania are the outstand- ing examples, but even the laggard Eastern Europe is seeing many countries like Russia and Belarus put in better than expected results. All economies in the EBRD space, except Azerbai- jan and FYR Macedonia, saw positive growth in the first half of the year.

Several countries, notably Roma- nia and Turkey, are enjoying growth rates comparable to the pre-financial crisis levels of the mid-2000s. political tensions, persistent security In about two-thirds of the countries The EBRD’s chief economist, Sergei threats, the growing appeal of populist where the EBRD is present, the ratios of Guriev, said: “The broad-based anti-globalisation policies in advanced non-performing loans (NPLs) peaked in recovery is a very welcome develoment. economies and a high degree of concen- the double digits after the 2008-09 global It also creates a window of opportunity tration in the sources of global growth. financial crisis. In half of the economies, to carry out reforms that will ensure the NPL ratios peaked at levels close to the sustainability of the stronger Inflation is largely on track to meet cen- or above 20%. In most countries, NPL growth rates over the longer term.” tral bank targets and in Russia’s case has ratios continued rising for several years already long passed the 4% the Central after the crisis before peaking and start- Unfortunately, it is usually exactly the Bank of Russia (CBR) was aiming for; ing to decline. A few exceptions include time when it becomes easier to make in November inflation fell to a record the Baltic States where NPLs peaked reforms that governments feel the 2.7%. However, inflation is a problem early and by now have declined to levels least need to make them. While the elsewhere. In the Balkans, Azerbaijan, around or below 5%. In contrast, in economics of most of the CEE countries Egypt, Turkey and Ukraine inflation rates several economies in Eastern Europe and have improved, the politics in many of are in the double digits, reflecting earlier the Caucasus and Central Asia, NPL ratios the same countries have gotten worse. depreciations of the respective curren- are yet to start declining. The declines in Romania, Czechia, Ukraine and Russia cies. Similarly, inflation is expected to rise NPL ratios from their peaks have on aver- are all cooling on the idea of putting in Uzbekistan (a reforming country the age been modest and NPL levels remain deep structural reforms in place and EBRD is returning to after a long absence) elevated across much of the EBRD map. the rise of nationalist politics in regions where the Central Bank raised its policy like Southeast Europe is distracting rate by five percentage points following Growth is expected to moderate politicians, who have in many cases an exchange rate liberalisation. somewhat in 2018, to 3%, in line with preferred to push illiberal agendas. Poland, Belarus, Hungary and more Export and GDP growth H1 2017, %year-on-year recently Romania and Czechia have all seen large anti-establishment parties or radicals returned in elections in the past few months. Czechia is the latest example, with the ascendance of the Ano movement which won with a landslide in the general election.

Growth across the region is expected to continue into 2018, but at a slightly more moderate pace of 3.0%, the EBRD said. Despite the recent acceleration in economic output, the EBRD expects average growth in to remain slightly below that of other comparable emerging markets. The bank also offered a cautionary note in saying that despite the good news, the ongoing growth story remains subject to many risks, including geo- Source: CEIC, national authorities. Exports in nominal euro terms. www.bne.eu 32 I Central Europe bne December 2017

Non-performing loans, % of total a forecast that is below those of some of the other International Financial Institu- tions (IFIs) and local investment banks.

“The increase in the oil price – compared with 2016 – has been a positive factor for Russia, and also for other commodity exporters and countries in Central Asia and Eastern Europe and the Caucasus that rely on Russia for remittance flows or as a destination for their exports,” the EBRD said. The gap in growth rates between the east and west of the EBRD region was now expected to narrow further, it added.

Central Europe After a slowdown in 2016 linked to lower investment levels, growth in Source: CEIC, national authorities. World Bank, Moody's Central Europe and the Baltic states is expected to accelerate to close to 4% views of the medium-term growth years earlier. In local currency terms, in 2017, before moderating to around potential of the region’s economies remittances are only 9 percentage points 3.5% in 2018, the EBRD report found. and reflecting a number of country- below their peak levels of 2013 reflect- specific factors. Still, even this forecast ing cumulative depreciations in recipient Growth in Central Europe has been so represents an upward revision of 0.2 countries in recent years. fast that several countries are starting percentage points on the May fore- to run up against structural constraints, cast. Notwithstanding this accelera- Russia is the largest of the EBRD with rising wage costs and tightening tion, the average growth in the region countries and its gathering economic labour markets being the most significant is expected to remain slightly below recovery, though restrained, has had amongst them. Wages have grown at that of emerging markets elsewhere a spillover effect on its neighbours, such a quick rate that some international with comparable per capita incomes. most noticeably in Belarus. investors are beginning to talk about going home as the competitive advan- Eastern Europe “Russia has now pulled out of reces- tages these countries used to offer are While the economies of Central sion after a cumulative contraction of being eaten away and unions are becom- Europe are reaping the benefits of over 3% over the last two years. Russia is ing more demanding when it comes to two decades of reforms and institu- expected to see GDP growth of 1.8 and workers' rights and privileges. At the tion building to reach a critical mass, 1.7% in 2017 and 2018, respectively,” same time the appeal of the lower cost those of Eastern Europe are doing less the development bank predicted, giving Southern European countries is increas- well, stymied as they are by the need to make deep structural reforms. Remittances from Russia to EEC/CA, inflation-adj.

Russia remains an “investment node” for most of the region and especially for the countries to the south and east of it. Russia’s fate has a direct impact on remittances sent home by migrant workers and hence the economies of some of the smaller and poorer countries.

Remittances from Russia to Central Asia, Moldova and the Caucasus stabilised in US dollar terms towards end-2016 as the Russian economy returned to growth and the ruble appreciated in line with oil prices. Remittances rebounded by 21% y/y in the first half of 2017 but remained around 50% of the value recorded four www.bne.eu bne December 2017 Central Europe I 33

ing, but the low levels of productivity Real GDP Growth (In %; EBRD forecasts as of 7 Nov 2017) and poor infrastructure mean investors are not ready to make the switch as yet. Change in Change in Current Current forecast forecast Actual Actual forecast forecast since May since May In Poland, where growth is seen ris- 2017 2017 ing to 4.1% this year, the pace will 2015 2016 2017 2018 2017 2018 slow to 3.4% as the one-off impact EBRD Region 1.3 1.9 3.3 3 0.9 0.2 of increased social payments fades. Central Europe & 3.5 2.8 3.9 3.4 0.8 0.3 The near-term economic outlook has the Baltic states Croatia 2.3 3 2.9 2.6 0 0 improved in Hungary on the back of Estonia 1.7 2.1 3.7 3.4 1.3 0.7 cuts in the rates of corporate income Hungary 3.4 2.2 3.8 3.4 0.8 0.4 tax and social security contributions as Latvia 2.8 2.1 4.7 4.1 1.6 0.9 well as increased minimum wages. And Lithuania 2 2.3 3.6 3.5 0.7 0.5 labour shortages and the rising cost of Poland 3.8 2.9 4.1 3.4 0.9 0.2 labour in Czechia and Slovakia will also Slovak Republic 3.9 3.3 3.3 3.5 0.1 0 undermine growth in these countries Slovenia 2.3 3.1 4 2.9 1.5 0.7 in the medium term. All these nations South-eastern 2.4 2.9 3.6 3.3 0.5 0.3 are reaching a tipping point where Europe they will have to reinvest themselves, Albania 2.2 3.4 3.7 3.7 0.2 0 Bosnia & 3.1 3.2 2.5 3 0 0 ditching the low-cost, export-orientated Herzegovina models they have followed so far. Bulgaria 3.6 3.9 3.5 3.2 0.3 0.2 Cyprus 2 3 3.5 2.5 1 0.3 Southeastern Europe FYR Macedonia 3.8 2.4 1.5 2.5 -0.9 -0.5 In southeastern Europe, average Greece -0.3 -0.2 2 2.2 0 0 growth is also expected to accelerate, Kosovo 4 3.4 3.7 3.5 0.2 0 reaching 3.6% in 2017 before mod- Montenegro 3.4 2.9 3.7 3.3 0.7 0 erating to 3.3% in 2018. The Greek Romania 4 4.6 5.3 4.2 1.3 0.7 economy has returned to growth in Serbia 0.8 2.8 1.8 2.9 -1.1 -0.1 Eastern Europe -4.8 0.1 1.6 2.7 0.5 0.2 the first half of the year amid progress & the Caucasus in reforms and rising confidence. Armenia 3.2 0.2 3.5 3.5 1 0.5 Azerbaijan 1.1 -3.1 -0.5 2 0 0 Growth in Eastern Europe and the Cau- Belarus -3.8 -2.6 1.5 2 2 1 casus as a whole is expected to pick up Georgia 2.9 2.7 4.5 4.5 0.6 0.3 from near-zero to close to 1.5% in 2017 as Moldova -0.4 4.3 3 3.5 0 0 headwinds from low commodity prices Ukraine -9.8 2.3 2 3 0 0 and the earlier recession in Russia subside, Turkey 6.1 3.2 5.1 3.5 2.5 0.5 although Azerbaijan’s economy is project- Russia -2.8 -0.2 1.8 1.7 0.6 0.3 ed to remain in recession. A gradual recov- Central Asia 3.7 3.6 4.5 4.4 0.7 -0.1 Kazakhstan 1.2 1.1 3.8 3.5 1.4 0 ery in the region is set to continue in 2018. Kyrgyz Republic 3.9 3.8 4.4 4.2 0.5 0.1 Mongolia 2.4 1 2.6 3 1.2 0.2 Growth in Turkey is projected to acceler- Tajikistan 6 6.9 6.5 5 2.7 1 ate to 5.1% in 2017 on the back of gov- Turkmenistan 6.5 6.2 5.7 5.1 0 -0.9 ernment stimuli before slowing to 3.5% Uzbekistan 8 7.8 5.4 6.2 -0.8 -0.3 in 2018 as the fiscal impact wears off. Southern & 3.9 3.3 3.8 4 0.1 -0.1 Eastern Mediterranean Economies in the southern and east- Egypt 4.4 4.3 4.1 4.5 0.3 0 ern Mediterranean (SEMED) region Jordan 2.4 2 2.3 2.5 0 0 are expected to show growth of 3.8% Lebanon 0.8 1 2.3 2.5 in 2017 and 4% in 2018, supported by Morocco 4.6 1.2 4.2 3.5 0 -0.3 reform implementation and a continued Tunisia 1.1 1 2.2 2.7 0 0 recovery in the tourism sector, as well as Average "East": -2.1 0.4 2.2 2.3 0.6 0.2 EEC, CA, Russia export rebounds in Egypt and Jordan. Average "West": 4.2 3.1 4.2 3.6 1.1 0.2 CEB, SEE, SE- MED, Turkey Morocco is the only country in the SEMED region that is expected to see a slowdown in growth during 2018, as the base effect

from the agricultural rebound in 2017 1 All averages use weights corresponding to countries' nominal GDP values in US dollars at PPP. (after a very poor 2016) is removed. 2 EBRD figures and forecast for Egypt's real GDP reflect the fiscal year, which runs from July to June. www.bne.eu 34 I Southeast Europe bne December 2017

Are investors about to take flight from Romania?

Clare Nuttall in Bucharest

s the EU’s fastest growing econo- ending”, and cautioned that Bucharest just 25% who said this in 2015. my, Romania should be seeing a risks losing investors if it continues Awave of new investment. Instead, on the current course. Their views reflect a turbulent year in foreign investors say they are putting Romanian politics. The country is cur- new projects on hold due to the lack of This had already been highlighted in rently on its third prime minister this policy predictability. a recent survey by the Foreign Inves- year, with each change of government tors Council (FIC), which showed that heralding an intense period of uncer- The latest to add his voice to the grow- confidence of foreign investors in the tainty. This was especially the case when ing tide of criticism was President Klaus Romanian business environment Mihai Tudose came to power in June, Iohannis, who urged the government to had slumped. Of the FIC members making a series of policy announcements drop its plans for fiscal reform and an surveyed, 75% said that the business that were just as quickly changed or overhaul of the judiciary in a strongly environment in Romania has worsened abandoned. Beyond that, the uneasy rela- worded speech on November 2. The recently and that current developments tionship between the leader of the ruling president, who has previously clashed have lowered their trust, and up to Social Democratic Party (PSD) Liviu with the centre-left government, 90% of respondents said the constantly Dragnea on the one hand and Tudose and warned officials not to “throw Romania changing legislation is affecting their his predecessor Sorin Grindeanu on the into an economic adventure with a sad business planning compared with other has led to further confusion. www.bne.eu bne December 2017 Southeast Europe I 35

These are not the only problems. “Con- regard to their implementation The government sought to respond to tinued lack of infrastructure, increased procedure,” AmCham said. the criticism from the business commu- shortage of adequate workforce, nity. Speaking on behalf of the govern- regulatory and fiscal uncertainty and For employees, the changes are also ment, prime ministerial adviser Ramona a sentiment that the business environ- a source of concern, as they fear a fall Ivana Lohan stressed that while Roma- ment is deteriorating will lead to less in take-home pay as social security nia has achieved strong growth, “we investments, local or foreign, and this contributions are shifted from the don’t want to fall into the pro-cyclical in turn will lower growth and take the employer to the employee. Romanian trap” and that with Romania behind its economy below its potential,” claimed trade union confederation CNSLR true potential, “accelerating investments the FIC study published in October. Fratia announced on November 2 it is our highest priority.” She also talked has decided to start procedures to of the need for more investment in Representatives of other international launch a general strike after failing to infrastructure, and to take urgent action investors’ organisations such as Amcham persuade the government to drop the to tackle the brain drain. Romania and the Romanian-German plans. At the same time controversial Chamber of Commerce and Industry judicial reforms that, if adopted, will Referring to the recent policy changes, Lohan admitted that, “we know the measures had a negative reaction from “Foreign investors say they are putting new business, but we hope that with discussion [we] can overcome these so you projects on hold due to the lack of policy can do business in a friendly and honest predictability” environment.” Her speech met with a mixture of relief and scepticism from business leaders. (AHK) also deplored the situation in the increase political control over the “That was one of the best government country at the Business Review For- judiciary and make it easier for corrupt speeches I have heard,” commented Anas- eign Investors’ Summit in Bucharest on officials to avoid prosecution are likely tasiu, saying the list of all the problems October 31-November 2, with a special to lead to more protests following the businesses are facing “means they got emphasis on policy predictability. mass demonstrations earlier this year. it”. However, he questioned whether this understanding will translate to support for AHK president Dragos Anastasiu told the “Hard to invest” business in practice: “We all know what conference that “on paper we are doing The fear is that all these problems we have to do but our views on the way to well, but at the same time a survey of could lead investors to exit or at best get there are completely different … we our members shows that feeling for busi- postpone committing more funds feel there is no trust in us.” ness in Romania is going down.” to Romania. AHK’s research shows that, “almost all new projects and The other major issue that is just coming Dutch ambassador to Bucharest expansions by German investors are to the fore is the workforce. For a number Stella Ronner-Grubacic, whose country on hold because of two problems: of years it has been precisely the availabil- accounts for the largest share of invest- predictability and workforce. When ity of educated, skilled workers coupled ment into Romania, had a similar story you put those two problems together with low costs that has drawn investors to tell, saying that, “in many conversa- you see it’s hard to invest in such an in sectors from automotive components tions with Dutch businesses we hear environment,” Anastasiu stressed. manufacturing to IT to set up shop in concerns about changes to legislation, Romania. Now, however, wages are rising the business climate, lack of investment Jorg Menzer, partner and head of law and Romania is following the countries in infrastructure and education.” firm Noerr’s CEE offices put it even of the CEE region that have already seen

Meanwhile, a new report from AmCham Romania expresses con- “IT and outsourcing firms in particular have cern over the impact of the recently announced fiscal policy measures, both been forced to hike wages” in terms of increased costs for taxpay- ers and budgetary sustainability.“[T] his package of measures is proposed more bluntly, saying that “time is of the a dramatic fall in unemployment and shortly after many fiscal changes were essence” if Romania is to capitalise on its related squeeze of their labour markets. introduced, also adopted hastily, thus current strong growth to secure invest- creating instability and confusion in the ment for the longer term. “If investors IT and outsourcing firms in particular business environment with regard to the don’t get what they want immediately have been forced to hike wages and impact of such measures as well as with they will go elsewhere,” he said. become creative in offering additional www.bne.eu 36 I Southeast Europe bne December 2017

benefits from in office gyms and saunas in the fight against corruption, the to subsidised housing for their workers emergence of high value added sectors, COUNTRY in order to attract and keep good people. and Romania’s demonstrated resilience As it becomes harder to find workers to recent external shocks such as the REPORTS in Bucharest and Romania’s second Greek debt crisis and the war in city Cluj, tech firms are looking further neighbouring Ukraine. afield to second-tier university towns like Iasi, Brasov and Craiova. Add this to the frequently touted benefits of Southeast Europe’s largest Bridging the innovation gap market – at over 17mn, Romania’s Ronner-Grubacic referred to the population is more than twice as large importance of innovation for economic as those of the region’s next largest Check out IntelliNews development and stressed that “the countries Bulgaria and Serbia – and Pro’s Country Reports covering knowledge and tech gap in some sectors natural resources from oil and gas to the 30 countries in Central & of the Romanian economy needs to be abundant farmland, and in many ways Eastern Europe/Commonwealth bridged, the problem with skilled labour there is a compelling investment case of Independent States. needs to be fixed. If not, investors will if the issues of policy predictability and move elsewhere.” labour availability can be overcome. A monthly round up of the most important economic, “If Romania is going to become an Romania also shines in comparison to its finance, business and political innovation driven economy, the only northern neighbours when it comes to events, the reports are aimed constraint it has is human capital,” its relationship with the EU. Unlike most at busy professional investors added Dragos Pislaru, Romania’s former of the Visegrad Four countries whose and companies that need to labour minister, now a partner at think governments are increasingly in conflict keep on top of the story. tank Civitta Romania. Pislaru singled with Brussels, Romania is firmly com- out issues such as Romania being the mitted to deeper EU integration, which To subscribe to the reports last in Europe in terms of lifelong learn- Bucharest hopes will culminate in entry delivered by email get in touch ing, with just 3.3% of the workforce to the eurozone. with our sales staff for a trial. currently receiving training as one of the limiting factors. “We are in a region that is not among the T. +44 203 633 2008 best in Europe,” Oana Popescu, director Romania still has a raft of positive of the GlobalFocus Center think tank, E. [email protected] attributes, including the country’s put it, citing the way CEE member states strong economic growth rate. The have started to distance themselves from Or go to bne.eu/welcome to see government’s forecasting body, the Brussels and pursue their own interests. samples of this and other products.

“Romania’s population is more than twice as large as those of the region’s next largest countries”

CNP, has just lifted its forecast for this “Romania by comparison seems like year to 6.1%. Admittedly, this is mainly the angel in this region, an advantage consumption driven growth on the back we haven’t had before. Germany and of fiscal easing and wage increases, as other member states have not previously pointed out by the European Commis- shown a lot of interest [in Romania] sion in its Spring Forecast earlier this but they are interested now.” year, while “investment, by contrast, contracted as public investment fell”. Still, for Romania to attract increased investment, Bucharest must make a Other positives noted by the head of the concerted effort to bring about political European Bank for Reconstruction and stability and policy predictability to Development (EBRD) office in Romania, prevent international investors taking Matteo Patrone, include the progress their money elsewhere. www.bne.eu bne December 2017 Southeast Europe I 37 Russia wants EU guarantees to continue with Turkish Stream development

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ussia will start construction of "Given the negative experience of the in detail that attempts to isolate Russia, the second line of the Turkish South Stream, we will be ready to do to punish it for an independent foreign RStream gas pipeline only if the that work [to develop the second line policy, to make it change have failed”. European Union provides legal guaran- of the pipeline] only after receiving tees, Foreign Minister Sergei Lavrov told firm legal guarantees from Brussels," The total cost of the project is estimated members of the business community. the minister told the Association of at €6bn. Gazprom has already signed European Businesses in the Russian roadmap agreements for pipeline Turkish Stream replaces South Stream, Federation on October 31, according development with Bulgaria, Serbia a pipeline that was due to run to Central to a foreign ministry statement. and Hungary. Europe via the Black Sea and Bulgaria but was scrapped in December 2014 Lavrov said that the growing needs of In early September, Gazprom said that under EU pressure because of Russia's countries in Southern and Southeast work on the Turkish Stream is moving annexation of Crimea that March. Europe could justify the extension of the ahead steadily and deals with contractor second branch of Turkish Stream to the EU. Petrofac for the construction of on-ground Turkish Stream is expected to be “We see considerable interest in this from gas pipelines and a gas terminal near constructed under the Black Sea, a number of EU governments … I still Kiyikoy in Turkey were signed. bypassing Ukraine, with one line hope that common sense should prevail, aimed at supplying Russian gas to because in the energy sector we are natural, The company also said that it will allo- Turkey and the second line planned interdependent partners,” he commented. cate RUB50bn (€860mn) for the Turkish for the transit of gas from Russia to the Stream pipeline project in 2017, raising EU. The route of the second line has Lavrov took a further pop at EU policy, its original funding from RUB42bn. not yet been finalised. saying it was “hardly necessary to say

RUSSIA

Anapa

Black Sea

BULGARIA

Kiyikoy Luleburgaz

TURKEY

www.bne.eu 38 I Southeast Europe bne December 2017

is shifting his country’s orientation further and further away from its previously clear aspiration to join the European Union and is frequently under fire from Germany and Brussels for his approach to human rights during the 17-month-long state of emergency that has lasted in Turkey since the attempted coup in July 2016.

Erdogan announced in September that Ankara has signed an agreement to purchase the military hardware from Russia and had already made a down payment. In October, he added that Turkey was also interested in acquiring Russia's S-500 surface-to-air missile system. Turkey claims it has been unable to strike deals to acquire equivalent The S-400 has been in service with the Russian armed forces since 2007. Western anti-aircraft systems on reasonable terms.

Turkey says purchase of On a related note, Erdogan is expected to meet with Russian counterpart Vladimir Putin on November 13 in the Russian S-400 missile Black Sea resort city of Sochi in Russia for what will be their fifth meeting this year, Hurriyet Daily News reported on system completed November 12.

Turkey’s purchase of the S-400 is among bne IntelliNews the issues topping the agenda of talks in Sochi, according to the newspaper. ato member country Turkey In late October, General Petr Pavel, chair- has completed the purchase man of the Nato Military Committee, “In addition to the S-400, Turkey also made Nof Russia's S-400 surface-to- warned Turkey it would face “necessary preliminary agreements with the Eurosam air missile defence system despite consequences” if it went ahead and [manufacturer] countries to develop, scepticism that it would do so. It remains to be seen if the transaction, announced by Turkish Defence Minister Nurettin Canikli on November 11, will infringe “Turkey it would face “necessary consequences” sanctions applied to Russia by the US. if it went ahead and bought the Russian anti-

The announcement that the contro- aircraft technology” versial acquisition had gone through was made two days after a clear the air meeting in Washington, DC between bought the Russian anti-aircraft tech- produce and use the air defence system in Turkish PM Binali Yildirim and US Vice nology. “The principal of sovereignty order to improve its long-term domestic President Mike Pence failed to imme- obviously exists in the acquisition of national capacity," Canikli also said. diately produce any real progress in defence equipment, but the same way resolving a range of issues that have led that nations are sovereign in making their Last week, Turkey, France and Italy to a diplomatic falling out between the decision, they are also sovereign in facing signed a letter of intent to develop Americans and Turks. It is not known the consequences of that decision,” he an anti-ballistic missile system. if the S-400 purchase was discussed. reportedly said, noting that the S-400 There was some speculation that the can not be integrated with Nato systems. Under the pact, Turkey’s defence industry US would make a last-minute bid to and the Franco-Italian consortium will persuade Ankara to buy an American News of the acquisition will further work together to determine needs and pri- missile defence system rather than the concern Western politicians, who fear orities for the potential joint production of Russian one. Turkish President Recep Tayyip Erdogan a SAMP-T system, according to Anadolu. www.bne.eu bne December 2017 Southeast Europe I 39

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kremlin.ru Iran, Russia display strategic unity and envision huge oil deal as Putin visits Tehran

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ussian President Vladimir Putin Azerbaijani President llham Aliyev who to the JCPOA, to ensure Washington's affirmed his strong support for also journeyed to Tehran for the talks. continued participation in it, would not Rthe multilateral nuclear deal with be accepted. He affirmed to Khamenei Iran during his one-day trip to Tehran Countering Trump's attack on the JCPOA that Moscow opposes "any unilateral on November 1, where trilateral talks Apart from the US, the European Union change" to the accord, the supreme between Iran, Russia and Azerbaijan as a whole and all the other signatories leader's office said in a statement. were held. While making it clear that Russia has “Putin also praised the cooperation between no sympathy for US President Donald Trump's bellicose attack on Iran and the Moscow and the Iranians in resolving the nuclear accord, Putin also praised the cooperation between Moscow and the Syrian conflict” Iranians in resolving the Syrian conflict.

However, the talks between the three to the nuclear deal, formally known as "We oppose linking Iran's nuclear nations that border the Caspian Sea the Joint Comprehensive Plan of Action programme with other issues, including were largely held to improve energy (JCPOA) – namely Russia , the UK, defence issues," Putin added. cooperation, transport and trade. China, France, and Germany – are content with the agreement and accept that Upbeat Khamenei hails Syria Putin met with both Iranian President Iran is in compliance with it. Putin made collaboration, talks of isolating the US Hassan Rouhani and Iran's Supreme it plain in the Iranian capital that any Khamenei was visibly upbeat on camera Leader Ayatollah Ali Khamenei, as well as move by the US to try and force changes about the growing rapport between www.bne.eu bne December 2017 Eastern Europe I 41

Tehran and Moscow. He praised the shown in regard to a range of issues a 1,200 km gas pipeline running from Russian leader, saying that the two would lead to the two countries doing Iran to India, RIA reported. countries’ cooperation on Syrian issues away with US dollar transactions during the seven-year-old civil war in trade. Transport infrastructure milestones proved that the Iranians and Russians At the trilateral talks, Presidents Rou- could achieve “common goals during That will be of particular relevance hani, Putin and Aliyev signed the Tehran challenging situations”. According to to Russian oil producer Rosneft and Declaration, declaring their intent to his office, he also remarked: “I looked National Iranian Oil Company (NIOC). develop three-way cooperation in fields [Putin] in the eye. I was able to get The two companies said on November including the long-awaited Interna- a sense of his soul; a man deeply 1 that they had agreed an outline deal tional North-South Transport Corridor committed to his country.” to jointly work on several “strategic” (INSTC) which is to connect Moscow contracts in Iran, which together would to the Persian Gulf. The US, said Khamenei, wants to main- be worth up to $30bn. tain influence in every part of the world The plan is to make the INSTC a and to attain that goal “it will target Rosneft chief Igor Sechin said the 7,200-kilometre multimodal transport every weak country [one-by-one]”. preliminary deal, which would provide network. Using major junctions includ-

In a reference to Trump's vitriolic speech against Iran at the UN General “Russia’s Gazprom intends to produce natural Assembly in New York, Putin commented: “I could never imagine that the US gas in Iran” would act this way.” He added that he was impressed by Khamenei's support for the Syrian government of Bashar some barter agreements to assist hard ing Iran's sole oceanic port of Chabahar, al-Assad, whom Moscow is also backing currency-strapped Iran, provided the Tehran, Bandar Abbas, Bandar Anzali, despite the opposition of the West to his potential for a binding agreement to be Baku, Astrakhan and Moscow, it is to continued rule. signed within a year. Output from the utilize sea, rail and road transit routes to joint project would eventually reach connect Iran, Afghanistan, Central Asia, Khamenei outlined during his meeting 55mn tonnes/yr (1.1 million barrels the South Caucasus, Russia and the with Putin how he believes Tehran and per day), he added. Indian sub-continent. Moscow need to step up cooperation to isolate the US and restore peace in “We are talking about several oil and As part of a test run for the wider net- the Middle East, Iranian state media gas fields, which we will develop with work, India in recent days dispatched its reported. our partners,” Sechin told reporters, first Afghanistan-bound shipment via also noting that Iran has been invited Chabahar. The Indian embassy in Tehran State television quoted the supreme by Rosneft to develop offshore and said the shipment, comprised of wheat leader as saying: "A full resolution of other projects in Russia. cargoes, arrived at the port, being jointly Syria's crisis needs strong cooperation developed by India and Iran, at midday between Iran and Russia... Our coop- Rosneft has already struck a number on October 31. eration can isolate America ... of deals in Iraqi Kurdistan, including This cooperation will restore stability the purchase of a majority stake in the Azerbaijani President Ilham Aliyev in the region." region's key oil pipeline that runs to noted that the creation of a new railway Turkey, and analysts will see the deals between the three countries was coming Putin’s visit came a day after representa- as part of a strategy by Moscow to bol- along very quickly. The route, he said, tives from Russia, Iran, and Turkey dis- ster its political and economic influence was nearly fully operational. "Talks have cussed the Syrian conflict at peace talks in the Middle East. Such influence was been good between us, relations are at in Astana, Kazakhstan. They pledged to greatly weakened by the 1991 collapse a new high level," Islamic Republic News bring Assad's regime and its opponents of the Soviet Union. Agency reported him as saying after the together for a "congress" to jump-start meeting with his two counterparts. peace efforts later this month. However, The announcement of the Rosneft and there are serious doubts over whether NIOC deal was preceded by Russian Aliyev also remarked: "I am back with a proper representation of the Syrian Energy Minister Alexander Novak my brother... we have been intertwined opposition will turn up. detailing how Russia and Iran will by for several centuries." A very substantial the end of this year draw up a legal Azeri population lives in Iran. Rosneft, NIOC working on $30bn framework for a project aimed at of 'strategic' oil and gas contracts delivering Iranian natural gas to India. Rouhani said the next trilateral meeting Khamenei anticipated that the bilateral He said Russia’s Gazprom intends to between Iran, Russia and Azerbaijan cooperation between Russia and Iran produce natural gas in Iran and construct would be held in Moscow in 2018. www.bne.eu 42 I Eastern Europe bne December 2017

Bank to a consortium of 11 investors, who gave a guarantee, as part of the agreement seen by bne IntelliNews, to recapitalise the bank and keep it going until at least 2020. However, within two months the bank’s license was revoked and on February 28, 2014 Fetisov was arrested, accused of stealing RUB6.5bn worth of depositors' money.

He spent the next one and half years protesting his innocence before he was finally released after he took the unprecedented step of buying out all creditor claims at the start of 2015. The Russia's bank clean-up got hijacked and landed senator Gleb Fetisov in jail. courts released him several months later when he promised not to go into Russia's bank clean-up politics after all. The dispute centres on the guarantee to recapitalise the bank given by the got hijacked and landed consortium of investors led by Vladi- mir Malin, a former senior Kremlin official. Instead of injecting money, the a senator in jail new owners of My Bank bought shares in Spyker Cars, owned by notorious banker Vladimir Antonov, “at unfavour- Ben Aris in Moscow able terms to the bank,” according to a London International Arbitration Court he clean-up of Russia’s banking first time an owner has ever paid back (LICA) ruling handed down this May. sector is proving dangerous for everything owed by a failed bank. He With no cash injection the bank almost Tsome owners. But it is not the bank was then released but remains under immediately folded. owners that have stolen billions of dol- investigation and house arrest, unable lars from their own deposit vaults that to leave Moscow. Antonov is currently on the run from get locked up, but victims of sharp opera- EU officials that want to extradite him tors that use the clean up to make a fast However, in May this year the London from Russia to Lithuania where he faces buck and let the state pick up the bill. Arbitration Court exonerated Fetisov, bank fraud charges. The former owner and bne IntelliNews can exclusively of Portsmouth football club and Russia- Gleb Fetisov is one of Russia’s brightest reveal that Russia’s Ombudsman for based Converse Bank, he fled the UK in lights. He is a senator who wanted Business and anti-corruption Tsar, Boris July 2015 after a court ruled to send him to set up his own political party that Titov, has just issued an order to stop to Lithuania where he used to own Sno- would strive for a better standard of the Russian criminal investigation. ras Bank, before it collapsed with a hole living. He is a respected academic in its balance sheet of several hundred who has published dozens of peer- Deal gone wrong million dollars. reviewed papers on economics. Fetisov was a senator in the Federation And he is a billionaire businessman, Council, Russia’s upper house of parlia- Fetisov’s lawyers claim that Malin a partner of oligarch Mikhail Fridman ment, for nine years but following the was actually acting in the interests of and a shareholder in Alfa Group’s 2008 crisis he quit to concentrate on Antonov and his involvement should telecoms powerhouse Altimo. business. “Crises are good for business have immediately raised a red flag. The as they present huge opportunities,” he whole deal was designed to squeeze out But an attempt to sell his My Bank in said at the time. what was left of My Bank by buying the 2013 went horribly wrong. The bank car shares and then throwing the husk was supposed to be recapitalised as part Post-crisis, he decided to return to poli- away, leaving Russia’s Deposit Insurance of the deal, but when it immediately tics, and at the end of 2013 he started Agency (DIA) to pick up the tab. The went bust Fetisov got the blame and to rapidly sell off all his holdings to give speed of My Bank’s closure suggests that spent a year and half in jail before pay- himself a clear slate and remove any had been the plan all along. The new ing out $200mn to cover debts to deposi- conflicts of interest. On November 21, investors were all experienced busi- tors and creditors to clear his name – the 2013 he sold his controlling stake in My nessmen, including some high-ranking www.bne.eu bne December 2017 Eastern Europe I 43

officials from the Russian government. development of Russia, the development pany that Fetisov did not control, and They had the means to recapitalise the of a quality lifestyle for all Russians, then selling them to himself. Malin and bank if they chose to. Malin, who led the non-violence, social justice and his fellow shareholders claim that they group, is the former head of the Russian environmental protection lost RUB2bn as a result of these deals. Federal Property Fund that controls all state property. However, instead of My Bank was one of the first assets to go Fetisov was held in prison until August blaming these investors for reneging on and the deal in November 2013 came at a 2015 when a Moscow City Court the recapitalisation deal, the authorities nervous time for the market. It was closed released him after in January the same accused Fetisov of stripping the bank of the day after the CBR pulled the license year Fetisov paid the bank’s debts its assets and running it into the ground. of Master Bank, a similarly sized commer- “to clear my reputation”. But he has cial bank with Russian President Vladimir remained under investigation and house Telecoms to politics Putin’s cousin on its board of directors. arrest in Moscow ever since. Fetisov has a distinguished business Master Bank’s closure was a shock to career. He got his start in 1995 as an the market and My Bank was forced to London exonerates economist for the Alfa Group, one of Rus- temporarily limit withdrawals from its In May this year the dispute was finally sia’s biggest and most successful oligarch accounts to RUB20,000 a day to prevent a taken to the LCIA in London where groups. During the noughties he rose run. The CBR was concerned and told My the dispute should have been heard rapidly through the hierarchy, playing Bank it needed to inject some capital if it according to the agreement. The LCIA an instrumental role in the takeover of was going to remain open. ruled that Malin and his co-investors had a Siberian aluminium salt plant and run- caused the collapse of the bank and that ning an aluminium smelter for the group. When the CBR shuttered My Bank Fetisov played no role in the deal to buy Ultimately Fetisov became a significant the following February, the Russian the Spyker Cars shares. minority shareholder in Alfa’s telecom authorities got involved. The Investi- holding Altimo that owns Russian big- gative Committee (SCR) headed by The LCIA ruled that "the defendant three mobile phone company VimpelCom Putin’s attack-dog Alexander Bastrykin Malin violated clause 5.4 of the agree- amongst other things. By 2015 Fetisov’s detained Fetisov on February 28, 2014, ment [that covered the promise not to net worth was estimated by Forbes at charging him with large scale fraud and close the bank until 2020]” and award- ed Fetisov compensation of $29.9mn, including losses suffered by Fetisov of RUB677.4mn and $12.2mn, as well as “Master Bank’s closure was a shock to the interest, legal and arbitration expenses. market and My Bank was forced to temporarily "Fetisov did not take any actions that limit withdrawals” would lead to the insolvency of My Bank or to revoke its license, and, therefore, did not contribute to the collapse of the $1.9bn. In parallel, in 2000 he joined the stealing RUB6.5bn of deposits, despite bank and did not affect it," the LCIA said My Bank group, which is not part of Alfa. the fact Fetisov left the management of in its summing up statement seen by the bank in August 2012, according to bne IntelliNews. As the peak of the 2008 crisis passed his lawyers, and has played no opera- and Russia’s economy stabilised, Fetisov tional role since then. Now in the last instalment of the story, decided to return to politics, which is Titov has got into the game and, as bne when he started selling off his assets. Moreover, the London court pointed out IntelliNews can exclusively reveal, in “Business ties are a liability in Russia,” that the deal to buy Spyker Cars shares November he issued an order to the he said at the time. He even sold his stake happened after Fetisov had sold My SCR to halt the Russian investigations in Altimo: reportedly Fridman bought it Bank and he did not financially benefit into Fetisov. back for a 30% discount that cost Fetisov from the transaction. Antonov was also hundreds of millions of rubles. found to have forced his Lithuanian After Fetisov paid off My Bank’s credi- bank Snoras to buy Spyker Cars shares, tors the bank was wound up. There is Fetisov planned to invest more than which was one of the ways that he now no bank, and no victims, and yet the RUB700mn ($24mn at prevailing extracted money from his banks. Rus- Russian investigators kept the case open. exchange rates) over three years sian investigators have not interviewed As part of the state’s battle with corrup- to found a new opposition party, Antonov as part of the case despite his tion, Titov was given special powers by the Alliance of Greens and Social obvious central role. Putin to stop any criminal investigation Democrats, and get candidates elected if he has solid grounds to believe the to the Duma – a move that would not The SCR went on to accuse Fetisov of charges against a businessperson are have endeared him to the Kremlin. The stripping out My Bank’s good assets, col- unwarranted or being used as a pretext party’s platform was for the sustainable lecting them in Altimo, a Fridman com- for extortion by state officials. www.bne.eu 44 I Eurasia bne December 2017

Kazakhstan’s new military doctrine shifts logic of country’s security agenda

Kanat Shaku in Almaty

new military doctrine quietly new document is similar to Belarus’s ‘militarization of the region’ – that could passed in Kazakhstan on Septem- modified military doctrine from 2016. easily be attributed more to Moscow.” Aber 29 has received almost no public attention. Neither Kazakh Presi- “Even though the Kazakhstani The doctrine also introduces a concept dent Nursultan Nazarbayev, who signed document does not precisely identify of “hybrid warfare”, which appears to the decree, nor the Central Asian coun- any major conflicts that could pose a echo tactics used in Eastern Ukraine, try’s defence ministry has commented threat, it significantly shifts the rhetoric listing “ways of achieving military- on it. Last week, the Eurasia Daily and logic of the country’s security political and military-strategic objectives Monitor – a publication of the conservative Washington, DC-based Jamestown Foundation – featured an article delving into the details of the doctrine by Anna “Kazakhstan’s “key priorities in military security”, Gussarova, the director for the Central strays away from the focus on terrorism and Asia department at the Institute for Strategic Studies in London. extremism”

The document, outlining Kazakhstan’s “key priorities in military security”, agenda. The overall tone of Astana’s of an integrated military force (including strays away from the focus on terrorism new military doctrine has a geopolitical special operations forces, private and extremism emphasised in the background,” Gussarova writes. “The military security companies on the ex-Soviet nation’s previous military text is full of Cold War-style jargon – territory of the opposing side), via non- doctrine, adopted in 2011, according namely ‘confrontation between global military means, as well as by using the to the article. Instead, it stresses the and regional powers for spheres of potential of other states, terrorist and importance of border security and the influence,’ ‘the arms race,’ ‘increased extremist organisations, and separatist mitigation of potential armed conflicts. tensions,’ ‘a certain country’s desire to movements to destabilize the situation Gussarova also pointed out that the change the existing world order,’ and in the territory of the opposing state”. www.bne.eu bne December 2017 Eurasia I 45

The document never explicitly refers as empty words, but were also met Developing the military-industrial to Russia as a source of threats and with remarks of disapproval from complex maintains Kazakhstan will enhance Moscow. Since the Cyrillic alphabet The development of the country’s cooperation with the Russia-led is also used in Russia, the latest military-industrial complex is listed Collective Security Treaty Organisation plans for a switchover have been as one of the priorities of the new (CSTO) and the Shanghai Cooperation interpreted as a geopolitical move doctrine. Indeed, the oil-rich country Organisation, of which Russia is a that emphasises Kazakh culture and would benefit from jump-starting its member, among other international Kazakhstan’s drifting away from Russia. nascent defence industry not only to organisations. Still, the intentional Nazarbayev certainly seems serious improve its security but also to diversify obscurity of “global powers” that could about the alphabet switch this time its hydrocarbon-driven economy, threaten Kazakhstan specifically on its borders, suggests an attempt by Kazakhstan to potentially stay on the “An invisible wedge has been growing between lookout for threats originating from only two neighbours – Russia or China; Russia and its Central Asian neighbour” and China has not been particularly menacing towards Kazakhstan as of late, certainly not with Kazakhstan fully around. A new Latin alphabet of 26 which was greatly undermined by the engaged in China’s massive One Belt letters has already been developed. world oil price slump. Some projects One Road initiative to create modern And Kazakh officials have not stopped to upgrade the country’s armaments Silk Road-type trade corridors boasting short of associating their plans with and defence capabilities are already modern infrastructure. “strengthening” Kazakhstan's statehood in full swing. and sovereignty. Invisible wedge grows after Crimea Kazakhstan’s navy chiefs in February An invisible wedge has been growing Earlier this year, Nazarbayev’s remarks 2016 discussed possibilities for between Russia and its Central Asian about the new alphabet prompted Rus- upgrading ships with anti-ship missile neighbour since Russia seized the sian news headlines such as “Kazakh- systems with representatives of Zenith Crimean peninsula from Ukraine in 2014 stan’s transition to Latin alphabet is a Uralsk Shipyard and French military in response to the Euromaidan protests signal for Moscow” and “By transitioning company MBDA. The defence ministry, and subsequent revolution that drove to a Latin alphabet Kazakhstan and Kyr- meanwhile, said at the beginning of out a Moscow-friendly president. Any gyzstan would enter China’s zone”. March that it was considering new naval statements made by Russian officials mines to protect its Caspian Sea shore. that appear to place in question the Yuri Solozobov, a political analyst at Kazakhstan’s naval defences along the statehood Kazakhstan gained after it Russia’s National Strategy Institute, has Caspian coast are reportedly sparser was granted independence from the suggested in interviews with Russian than those of Russia, Iran, Azerbaijan USSR tend to prompt collective gasps. media that the decision should alert and Turkmenistan. The fact that Kazakhstan has a sizeable Moscow since “the commonality of ethnic-Russian minority and a near the cultural space was one of three Kazakhstan launched construction of 7,000-kilometer border with Russia does [pillars], along with energy [and] its first ammunition plant in March nothing to ease apprehension. defence, which linked, by invisible ties, 2016, located in the Sary-Arka special all the CIS countries”. He ambiguously economic zone in Karaganda. The new “The people of Kazakhstan do not want added that the transition is “not a facility will produce 30mn ammunition a Ukrainian scenario in the country,” reason for [Russia to] panic, but for rounds per year starting from December Nazarbayev said early in 2016, promising reflection and decision-making”. 2017, according to defence officials. to punish anyone who might try to enact It will primarily focus on meeting the a Euromaidan-type event in his country. Despite hints of preventing a “Ukraine Kazakh army’s needs, namely with 2.0” in the 2017 military doctrine, 5.45x39 mm, 7.62x54 mm, 9x18 Another sign of Kazakhstan distancing Kazakhstan is certainly quite lax about mm and 9x19 mm rounds. Canadian itself from Russia originates from Naz- maintaining at least one of the three company Waterbury Farrel will provide arbayev’s decision to introduce a Latin aforementioned pillars – defence. equipment for the production line. alphabet for the Kazakh language and The Central Asian nation may have The project’s estimated worth stands phase out the Cyrillic alphabet by 2025. lately signed agreements with Russian at KZT24.8bn (€63.9mn at the current companies on establishing joint weap- exchange rate) according to reports Nazarbayev on October 26 ordered ons systems production enterprises from 2015 and 2016. The plant will be his office to start preparations for the during an international arms exhibi- run by the defence ministry jointly with transition. His previous comments on tion, KADEX-2016. But Kazakh firms state-owned company Kaztekhnologii a possible shift to the Latin alphabet in also signed similar agreements with and a local subcontractor in steel 2006 and 2012 were largely regarded China, Germany, Ukraine and Belarus. manufacturing in Karaganda Region. www.bne.eu 46 I Eurasia bne December 2017

The country’s armed forces still use In October 2016, Kazakhstan estab- State Material Reserves of the Ministry ammunition reserves created before lished a defence and aerospace industry of Defence and the Aerospace Industry. the collapse of the Soviet Union in ministry. The ministry’s responsibili- 1991. With the reserves becoming ties include state policy in the defence, That said, the country’s security is exhausted, Kazakhstan decided to aerospace and electronics industries, widely seen as mostly hingeing on a build an ammunition plant instead as well as cybersecurity and execu- single big factor – the ongoing rule of its of importing ammunition from tion of defence contracts, among other 77-year-old leader Nazarbayev and the Russia in a sign of minimising its functions. Under the ministry, the need for him to guarantee the preserva- dependence on its intimidating government will be forming a number tion of that security after his departure neighbour. It was announced that of committees, including an Education by setting in motion the presently uncer- exports of Kazakh ammunition Information Security Committee, Aero- tain plans for transferring power to his would even be possible. space Committee and the Committee for eventual successor.

The leak reveals that Meridian used a large portion of the Kazkommertsbank’s deposits to fund project after project. This enabled them to grow quickly, and at little risk to themselves. According to an email from a central bank official, whenever a project failed, the bank owners and executives – who were also Meridian’s owners – would dump the losses onto the bank’s balance sheets.

Ownership and structure The leaks also reveal that “in November 2002, a clerk at Appleby’s Bermuda Meridian sold St. Petersburg Galeria Mall to Morgan Stanley for $1.1bn, a transaction which at the time office entered 10 names into an internal was recorded as the largest ever Russian real estate deal. database. A Kazakhstani technocrat and nine bankers joined thousands of other ‘Paradise Papers’ team businessmen, oligarchs, politicians, celebrities, and royals who wanted to benefit from the anonymity (and exposes Kazakhstan’s tax benefits) that offshore company ownership provides.”

‘Secret Billionaires’ Based on 2006 information, some of the initial co-founders of Meridian information are technocrat and head bne IntelliNews of the KazMunaiGas oil and gas company Sauat Mynbayev and his six he ‘Paradise Papers’ leak of 6.8mn In particular, the data, presented in co-owners Askar Alshinbayev, Yevgeniy confidential records related the “Kazakhstan’s Secret Billionaires” Feld, Nurzhan Subkhanberdin, Nina Tto offshore investment from report exposes one of the primary Zhussupova, Azat Abishev and Ian Appleby, a Bermuda legal services firm, causes behind the Kazakh government’s Connor. and leaked Kazakh banking data have banking sector bailouts this year, revealed some of the inner workings including the approximately €6bn While Meridian’s profits end up in of Meridian Capital, a major Kazakh bailout green-lighted for the country’s Bermuda, the leaks reveal it’s not where investment and holding company with largest lender Kazkommertsbank, which the group runs its operations. Meridian interests in oil and gas, banks, real was recently bought by the country’s Capital CIS Fund and Meridian Capital estate, mining, aviation, transportation, second biggest lender, Halyk Bank. The International Fund, which make up the and other areas, the Organised Crime Kazakh banking sector’s bad loans may, next layer of the group’s pyramid, are and Corruption Reporting Project it is feared, be compounding into an registered in another offshore zone, the (OCCRP) revealed on November 5. unexploded time bomb. Cayman Islands. www.bne.eu bne December 2017 Eurasia I 47

The funds “in some cases” form the top layers of ownership,” the report notes. piecing through Meridian’s web of of a chain of holding companies that offshores to find the main areas lead to the actual businesses. One such Finally, there are cases where Meridian’s from which it makes its billions.” example includes Meridian Petroleum, businesses are run by “nominee owners a “domestic oil and gas consultancy or by completely parallel structures “Today, it controls over a dozen oil in Kazakhstan, [which is] owned by which lead to separate, seemingly and mining fields around the world – a Dutch company that is owned by unrelated, offshore holdings”. from Alaska to Africa to Australia,” a Cyprus company which, in turn, is the report added. owned by one of the Cayman funds,” The group’s operations OCCRP relates. “Meridian’s modus operandi is more Meridian also controls a major Kazakh- about acquiring existing businesses stani rail transportation company that On the other hand, there are cases, than building them from scratch,” leases wagons and provides mainte- when the name “Meridian” does OCCRP reported. “Over the years, the nance services to Kazakh state-run not show up “anywhere in the pub- company has operated and often sold oil and gas companies. licly available chain of ownership of a for profit everything from oil and gas “The group also made hundreds of millions in real estate, largely in Russia “Meridian used a large portion of the and Kazakhstan. When it sold the St. Petersburg Galeria Mall to Morgan Kazkommertsbank’s deposits to fund Stanley for $1.1 billion, this was, at the project after project” time, the largest Russian real estate deal ever,” the report said. “Last year’s Panama Papers leak shows that it also given business”, where only its role as companies to glitzy malls to second-tier acquired half of another Kazakhstani “beneficial owner” can only be found airports to vast transportation compa- real estate empire, Capital Partners, in obscure reports. “For example, nies. The company’s shareholders have which built and sold projects like TengizTransGaz, a major Kazakhstani built a business empire, the full extent Moscow’s Metropolis mall – one of the transportation service provider, has no of which has been unexplored until largest in the country – and the Ritz mention of ‘Meridian’ in any of its four today. OCCRP reporters spent months Carlton hotels in Moscow and Almaty.”

The Global Business School

www.bne.eu 48 I Eurasia bne December 2017 Uzbekistan makes top 10 in World Bank’s Doing Business global improvers

bne IntelliNews

zbekistan was among the The country also streamlined the Mongolia came 62nd, improving top 10 global improvers in process for obtaining approvals of land slightly by two places from last year; Uthe World Bank's Ease of plot allocations from various agen- Kyrgyzstan slightly worsened to 77th Doing Business report that assesses cies. In addition, it passed legislation against last year’s 75th; while Tajikistan the environment for doing business that increased corporate transparency ranked 123rd, improving from 128th. across 190 economies worldwide. requirements, giving more agenda-set- Climbing 13 positions to rank 74th, ting power to shareholders and disclos- One of the world’s most isolated Uzbekistan also performed better than ing “board member activities in other countries, Turkmenistan, was not some other Central Asian countries, companies, executive compensation included in the report. the report released on October 30 and audit reports”. showed. Mongolia’s improvement was due to Uzbekistan was also among the the introduction of the Law on Movable The report noted a total of five business countries that introduced or enhanced and Intangible Property Pledges, which reforms implemented in Uzbekistan, systems for filing and paying taxes “regulates the assignment of receivables, financial leases and retention-of-title sales, requiring their registration with “Mirziyoyev’s most promising reforms in 2017 the collateral registry”. was the removal of strict currency controls” Tajikistan’s five-rank rise was driven by it “raising the revenue threshold for mandatory value-added tax registration”, which made starting most on the back of efforts by reformist online. Moreover, it rolled out a new a business easier in the country. The President Shavkat Mirziyoyev to open platform for business registration. small Central Asian nation also made up the country for investors. Mirziyoyev property registration easier and less came to power in September, following Uzbekistan’s ranking in this year’s costly by eliminating the need to the death of autocrat Islam Karimov, report surpassed those of its register sale-purchase agreements who prioritised trade protectionism neighbours, with the exception of at municipal offices. over foreign investments. Mirziyoyev’s Kazakhstan, which ranked 36th in most promising reform in 2017 was the report, falling one position below Uzbekistan’s currency liberalisation the removal of strict currency controls, last year’s 35th rank. Among the brought in by Mirziyoyev should draw which long fed a black market for the other ranked Central Asian countries, in more foreign investors as it makes it Uzbek som and double digit inflation.

Uzbekistan’s reforms include the streamlining of the process for obtaining “The European Bank for Reconstruction and an electricity connection “by introducing a 'turnkey' service at the utility that fulfils Development (EBRD) has for the first time all connection-related services, including since 2007 approved financing for projects the design and construction completion of the external connection”. in Uzbekistan” www.bne.eu bne December 2017 Eurasia I 49

possible to repatriate profits in hard currency.

Overall, the reform drive pursued by the president – which has also included the release of dissidents and human rights activists – is starting to clock up a good number of successes. For instance, the World Bank has entered discussions with Tashkent on possible backing it may be able to give to opening up the country economically – possibly including a $1bn loan according to some reports – while the European Bank for Reconstruction and Development (EBRD) has for the first time since 2007 approved financing for projects in Uzbekistan.

Also, following what was the first official trip to Ankara by an Uzbek president since 1999, Mirziyoyev is hopeful that many Turkish businesses forced out of Uzbekistan by his predecessor will make a return.

Uzbek GDP grew by 5.3% in the first nine months of 2017, down from the 7.8% reported for the same period of 2016, marking the first time Uzbek authorities have reported a growth figure below 7% within the last decade, having generally reported Find more Eurasia content at www.bne.eu/eurasia growth within the range of 7%-9%. The latest GDP data can be seen as a positive step towards transparency Selected headlines from past month: of macroeconomic reporting by · US charges five for bribing officials to win Central Asia contracts for Rolls-Royce Uzbek authorities. · Death toll from Iran-Iraq border quake approaches 400 · US lawmakers signalling Americans to stick with Iran nuclear deal, says EU foreign policy chief

www.bne.eu 50 Opinion bne December 2017

International interest in Uzbekistan has been revived by the rise to power of the apparently reform-minded President Shavkat Mirziyoyev. Uzbekistan: Iran’s unlikely bastion of influence in Central Asia?

Kanat Shaku in Almaty

n times of yore, Iran and Uzbekistan were both part of the of Independent States (CIS) and, a just little further afield, Persian Empire. Yet the two nations have grown distant in with Iran. Ithe one hundred years since the Uzbeks were enveloped into the Soviet Union. Uzbek Foreign Minister Abdulaziz Kamilov made that much clear when he led a delegation to Iran in October. A business Following the collapse of the Communist one-party bloc in forum held as part of the visit on October 18 saw entrepre- 1991, the subsequent hard authoritarian rule of isolationist neurs of both countries sign agreements worth $25.5mn, post-Soviet autocrat Islam Karimov, who ruled as president mostly in relation to agricultural and textile products. The two for 25 years until his death in September 2016, did little to sides also signed “mutually beneficial bilateral documents” improve things. While Uzbekistan shut itself off from the out- worth $7.5mn, according to Trend news agency. side world thanks to Karimov’s paranoia, Iran was closed off from international trade and investment due to the crippling Among other specific topics, Iran and Uzbekistan mulled improv- Western nuclear sanctions. But gone is Karimov and gone are ing their banking and visa issuance regimes to boost trade. the Iranian sanctions, and both Iran and Uzbekistan have been opening up, including to each other. Uzbekistan the hungrier When it comes to mutual trade, Uzbekistan is the party with Uzbekistan’s fortunes may have been revived by the rise to the greater hunger. The delegation's visit concluded with power of Karimov's successor, the apparently reform-minded Tashkent and Tehran discussing the possibility of Uzbekistan President Shavkat Mirziyoyev. Karimov took a highly cautious buying Iranian crude oil – a resource much sought after by approach to his neighbours, but Mirziyoyev is looking to the Uzbeks who under Karimov suffered lengthy oil and petrol bolster regional cooperation. Doubly landlocked Uzbekistan, shortages. Central Asia's most populous nation, with upwards of 33mn inhabitants, is under its new broom aiming to foster trade with Iranian oil would be a welcome addition to the Russian, Kazakh the next-door neighbours that are part of the Commonwealth and Turkmen supplies Uzbekistan secured earlier in the year, www.bne.eu bne December 2017 Opinion 51

although, in the case of the former two, Uzbekistan must first Islamist groups, including the Islamic Movement of Uzbeki- rehabilitate a pipeline before it can bring in any oil flows. stan (IMU), which only has connections to extremist cells in Afghanistan. Even after Karimov’s death, Uzbekistan was seen Iran’s Petroleum Minister Bijan Namdar Zangeneh said as a less likely Central Asia ally for Tehran compared to, for “high-ranking” Tashkent oil officials will come to Tehran in instance, Tajikistan, a country that shares a common cultural the near future to develop the oil deal-making. "Exports to and linguistic heritage with the Islamic Republic. [Uzbekistan] need to be conducted overland and probably by rail," he added. However, the importance to Tehran of strengthening Uzbek- Iranian ties to maintain influence in Central Asia has grown Sure enough, shortly after the Uzbek delegation’s visit to Iran, throughout this year, given that Iran’s relations with Tajikistan Afghanistan’s railway administration announced that Uzbeki- and Turkmenistan have deteriorated. stan was interested in helping Afghanistan build a railway line between the two countries in order to gain “a direct route” Tajikistan’s common Persian history with Iran has proved to Iran. Uzbekistan is already connected to Mazar-i-Sharif in insufficient to keep Dushanbe from complaining about Teh- Afghanistan – the idea is for a new line from Mazar-i-Sharif to Herat that would extend the railway route to the Iranian border. “It marked the first time that the

The Afghan railway administration noted the new northwest Tajiks had publicly blamed Iran for link would in fact help increase trade between Iran, meddling in their war” Uzbekistan, Tajikistan, Kyrgyzstan and China. That would also be in line with China’s massive One Belt, One Road trade infrastructure initiative, which seeks to turn Central Asia ran's alleged intrusions in Tajik politics throughout recent into a transit zone for Chinese goods exports. An existing decades. Such accusations reached new heights in August segment of a China-Iran railway passing through Uzbekistan when Dushanbe condemned Iran for alleged (but unproven) could also potentially serve to enhance trade between involvement in Tajikistan’s 1992-97 civil war. It marked the Uzbekistan and Iran. first time that the Tajiks had publicly blamed Iran for meddling in their war. Apart from being keen on importing Iranian oil, Uzbekistan is also pursuing possible access via Iran to the Persian Gulf. According to allegations aired by Tajik state television in a During an Organisation of Islamic Cooperation (OIC) sum- documentary, Iran supposedly sent assassins and saboteurs mit in Astana in September, Iranian President Hassan Rou- into the former Soviet nation to support an Islamist-led rebel hani hinted that Iran could become the “shortest route” for force. Three Tajiks shown in the documentary confessed to the Uzbekistan’s business people to access the Persian Gulf and killing of politicians and other prominent Tajik figures as well as attacks on a Tajikistan-based Russian military base. The trio, the documentary claimed, received financial support and “When it comes to mutual trade, training from Iran.

Uzbekistan is the party with the The documentary also claimed that the Tajiks were support- greater hunger” ers of Abdukhalim Nazarzoda, an ex-deputy defence minister and rebel general, who was allegedly planning a coup and was killed in 2015 by Tajik authorities in a shootout. By linking the international waters. The Iranian president’s remarks followed trio to Nazarzoda, Tajik authorities were implying that Iran Uzbekistan’s lifting of strict currency controls on September 5, has links to the banned Islamic Renaissance Party (IRP), which which have long hurt the Central Asian country’s prospects for was labelled as a terrorist organisation and even “recognised” drawing in FDI. by the China-led Shanghai Cooperation Organisation (SCO) as an extremist group. While Nazarzoda had not explicitly The visit to Iran paid by the Uzbek delegation represents more been a supporter of the IRP, the authorities claim he operated than just economic benefits for Uzbekistan, however, as there on behalf of the banned party, when he attempted a coup. is a political dimension to the thawing relations between the countries. The Tajik authorities have been cracking down on IRP members since the party was banned in 2015. Prior to the ban, the Iran’s troubles and ambitions in Central Asia IRP was the only registered political party of Islamic affiliation After Uzbekistan gained its independence in late 1991, in the whole of Central Asia. It also served as the only formi- Karimov’s government, fearing Islamist terrorist groups, saw dable political opposition to the Tajik regime led by Emomali Iran as an Islamic-fundamentalist threat, despite Iran’s mostly Rahmon since 1992. The party failed to enter parliament in Shi’a population having little in common with Sunni-related the February 2015 election, which international observers www.bne.eu 52 Opinion bne December 2017

considered neither fair nor free. Its leader, Muhidding Kabiri, between Tehran and Ashgabat, which flared up early in 2017 announced in June 2015 that he had gone into self-imposed over Turkmen natural gas exports. exile amid repeated threats and fear for his life. The unresolved dispute between Turkmengaz and Iran traces Some suggest Dushanbe’s move to accuse Iran appeared back to January 1 when Turkmen authorities terminated to be part of an ongoing reaction to Iran having invited pipeline gas exports to Northern Iranian provinces lacking the exiled Kabiri to a Tehran conference in December the infrastructure to access Iran's plentiful gas, insisting the 2015. Tajikistan’s initial reaction to the event comprised Iranians owed the company historical debts of more than of customs service restrictions on groceries imports from $1.8bn in dues. Iran and a shutdown of a popular Khujand city-based Iranian culture centre. The Turkmen foreign ministry said Iran's debts stemmed from a failure of the National Iranian Gas Company (NIGC) to abide Others believe the Tajik authorities are driven by the push by by the "take or pay" provision of the gas supply contract. NIGC Iran's regional arch-rival Saudi Arabia to boost cooperation responded that “Turkmengaz has committed numerous viola- with Dushanbe. Riyadh's ambassador to Tajikistan, Abdulaziz tions of the terms of the contract, including in the quality and bin Mohammed Al-Badi, bragged in an interview in Septem- quantity of deliveries, which are subject to penalties provided ber of successfully pursuing diplomatic overtures that led in the contract”. to the “expulsion of Iran and its agents from the country,” Eurasianet reported. Analysts were left puzzled by the decision to stop gas exports to Iran as it left Turkmenistan with China as its only gas “This is a great victory for the Kingdom of Saudi Arabia and export customer. Iran has throughout this year stressed that its wise leadership,” he added, as he described the “intensi- it is prepared to deal with Turkmenistan before international fication” of ties with Tajikistan. Al-Badi said the Saudi-led arbitrators. Ashgabat has responded with similar threats, but Islamic Development Bank was providing interest-free loans has also claimed that it plans to maintain supplies to Iran at 7bcm in 2017, unchanged from 2016. This did not stop Iran from rejecting Turkmenistan’s proposed gas-swap deal to get Turkmen gas to Turkey and Iraq, although it has relented “Uzbekistan may be in a position to enough to allow gas swap arrangements involving supplies serve as the voice of reason in the for Azerbaijan and Armenia.

Iranians' rows across the region” As Turkmenistan finds itself in a desperate bind largely of its own making, while Iran may be facing a risk of losing influence in Central Asia to its Middle Eastern rivals, Uzbekistan for the construction of mosques and educational institu- may be in a position to serve as the voice of reason in the tions across the Central Asian country. Six religious schools Iranians' rows across the region. and two universities were planned for launch in the upcoming two years, he noted. In May, Saudi Arabia provided a Barriers to cooperation? $200mn grant to Tajikistan for the construction of parlia- No trust issues were brought up during the Uzbek delegation's mentary and government buildings in Dushanbe – one of visit to Iran, even if Uzbekistan could easily find grounds for Tajik President Rahmon’s vanity projects. staying guarded. Though it was at the time closer to Tajikistan, in 2010 Iran interfered on behalf of the Tajiks during a Tajik- It is under these conditions that a partnership with Uzbekistan Uzbek railroad dispute by warning it would halt all Uzbek could be valuable for Iran, since the new Uzbek president has freight that passed through Iran. been mending his country’s ties with Central Asian neighbours - most notably ending the Tajik-Uzbek dispute over the A May article in The Diplomat cited a US ambassador to Tajiki- construction of the Rogun dam. Uzbekistan is both arguably stan indicating a likelihood of Iran wanting to build a “Persian more influential in the region due to its relatively big popula- axis” along with Afghanistan and Tajikistan. If true, Iran’s tion – Tajikistan’s population stands at a mere 8.7mn – and has choice would imply a preference for more distant relations the capacity to become the beacon of Central Asian synergy, as with countries like Uzbekistan, where, since the country’s seen in Mirziyoyev’s repeated efforts to alleviate old rivalries independence, the Tajik minority’s identity has been and revive regional economic kinships. publicly suppressed.

The Turkmen historical gas debts row But alignments in Central Asian politics appear to have Uzbekistan’s flourishing collaboration with Iran’s neighbour changed unrecognisably within the past year and reformist Turkmenistan, which includes joint ventures, could also prove Mirziyoyev may end up becoming the missing piece of the useful to the Iranians. It could eventually help fix tensions Iran-Central Asia jigsaw of alliances.

www.bne.eu bne December 2017 Opinion 53

MACRO ADVISER: Six reasons why Russia does not want a higher oil price

Chris Weafer of Macro-Advisory

ussia is the world’s biggest oil exporter (with crude and production due to the flooding and storms in states such oil products combined) and it is earning approximately as Texas. That lost production is now coming back and the R$5bn more per month with the price of oil in the mid growth rate could be much higher if more projects are made $60s than it would with a price in the mid $40s, the level at commercially viable with oil trading in the $60s or higher. which the federal budget is based. The International Energy Agency reported that total US oil So why does it appear the Russian government is not comfortable output fell to an average of 12.9mn barrels per day in Q3 this with the current oil price, which surged from just over $50 per year. It expects production to average 14.1mn b/d in Q2 next barrel in early October to just under $64 on the back of rising year, or an increase of 1.2mn b/d. It has already said that, tensions in the Middle East? And why it may not agree to with $65 oil, it will raise its forecast for later in 2018 and 2019 an extension of the production deal with Opec, in an effort much higher. to bring the price back below $60? Moscow has had to deal with the economic and social At first glance that certainly seems like a crazy position to consequences of two recent oil price collapses, in 2008-09 and take. But, when viewed in the context of the global oil and from 2014. The former was relatively short-lived while the renewable energy market trends and, especially, against the latter was blended with the sanctions and blamed on Western backdrop of Russia’s changing fiscal and industrial priorities, economic warfare. The damage from a third collapse would it makes perfect sense. likely greatly outweigh the financial gains to be made from higher oil in the meantime. Moving beyond oil vulnerability. Russia’s oil minister, Alexander Novak, indicated in early October that he favoured 2. Higher oil boosts alternative energy investment. Looking extending the Opec-Russia production deal into late 2018 beyond the medium term, the higher oil price also boosts (from the expiry in March) because it was slowly restoring funding for alternative energy projects, such as renewables, supply-demand equilibrium and needed some more time to and in the development of more efficient and cheaper electric be effective. But that was when the price of Brent was drifting engines and batteries. That was very clear in 2010-2013. in the $50-55 range, which suits Russia’s best interests. If oil There has been a slowing of the investment momentum since were to fall back to the mid $50s when the current deal ends, the price of oil fell steeply in late 2014 and in 2015. A more then Moscow would likely support an extension. But, if oil stable price in the mid $50s would preserve the hydrocarbon- stays in the $60-65 range, or higher, then Russian support for renewables ratio for much longer than would be the case with a deal extension is very unlikely. a much higher oil price.

The reasons for that counter-intuitive position are that it: 3. Russia is more focused on economic diversification. Russia saw that the oil-driven growth model, which created the boom 1. Creates a risk of another collapse in 2018. The higher the that drove the value of Russian GDP from $199bn in 1999 price of oil rises then the greater the risk of more investment to almost $2.25 trillion in 2013, had already become much into, e.g. US shale and Canadian Sands projects, which, as was less effective after 2013. The Russian economy had started to seen in 2014, risks a big increase in global supply. outgrow oil. In 2013, Russia’s GDP grew by only 1.3% or one- third that of two years earlier. That was despite the price of oil One of the reasons why the oil price has been well supported remaining close to $110 per barrel all year. Russia now needs in the mid-$50s in Q3 is because of the disruption to US to focus more on diversification and boosting economic and www.bne.eu 54 Opinion bne December 2017

industrial efficiency. The “laziness” and “complacency” which the fiscal rule mechanism less effective. comes with higher oil revenues could damage that programme and slow the currently positive momentum. 5. Could increase pressure for more spending. Currently there is a debate over what should be the next government’s 4. May make it harder to prevent ruble appreciation. The fiscal budget policy. The debate is essentially between the fiscal rule is working as rising oil prices is not pulling the ruble higher. conservative and spending reform agenda, sponsored Historically there was a close correlation between the ruble by former Finance Minister Alexei Kudrin, and the more and oil but that is now broken. In the past a rise in the oil price expansionist plan, sponsored by the Stolypin Club and boosted the ruble exchange rate, but the following graph shows supported by the big state sector companies. Higher oil that in the last three months Brent went from $56.5 to $64 revenues would make a compromise more likely and further while the ruble-dollar rate went from 57.5 to more than 60. reduce the momentum towards budget reform.

The Kremlin administration and government officials have 6. Russia has made the move from oil dependency. In general, been consistent in their message that a weaker ruble is much partly because of the evidence which started to emerge in better for the economy than a higher ruble. The weaker ruble 2013, i.e. that oil was no longer a powerful growth driver, and boosts competitiveness and helps both export-orientated partly because of the actions forced on Russia by the 2014 industries and reduces import demand. sanctions, Russia has now started to more seriously move on from the previous hydrocarbon dependency. This year less The fiscal rule mechanism means that the finance ministry than 40% of budget revenue will come from oil and gas taxes, is converting more rubles into foreign currencies the higher compared to 51% in 2014. The budget, based on the fiscal oil taxes go, thus increasing downward pressure on the plan, is on course to balance at an oil price of approximately ruble. So far that is working. The price of oil has appreciated $44 in 2021. It needed $115 in 2013. almost 15% since the start of October while the ruble has lost 3% against the dollar. Pre the fiscal rule such a move in the All of this compares a lot more favourably with the typical oil price would have driven the ruble-dollar rate to 49. The Opec-country model and are powerful reasons why Moscow fear is that oil in the mid $60s, or higher, would create more is today more comfortable with a sustainable price in the $50s speculative interest in ruble assets and, possibly, would make than closer to the mid-$60s.

STOLYPIN: The importance of Russia’s unimportant prime minister

Mark Galeotti of the Institute of International Russian prime minister Dmitri Medvedev. Relations Prague Photo: Semen Lixodeev / Shutterstock.com

lections in 2018 are very unlikely to mean a new al factotum, even to the point of keeping Putin’s throne warm president for Russia, but they could see a new prime as president-in-name-only in 2008-12, but he has also become Eminister appointed. It is tempting to see this as of little something of a liability. In part this is simply because his role real significance, like a choice of head butler to administer means that every setback and scandal comes to his door. But it the president’s affairs. However, while the role is essentially also reflects his own relative weakness as a manager, as well to be presidential henchman and scapegoat, it is a role as the savaging this ostensible “Mr Clean” received in a now- with meaning, and Vladimir Putin’s choice will be both notorious online video by anti-corruption campaigner Alexei consequential and also a potential indicator of the direction Navalny, highlighting his alleged property deals and mansions. he plans to take in his fourth presidential term. That said, it may be too soon necessarily to write off “Dimon”. There is a general assumption that the current prime minister Choosing a new prime minister is, of course, potentially a very Dmitri Medvedev will be replaced next year. He has been a loy- useful move for Putin. A new face can give the impression of www.bne.eu bne December 2017 Opinion 55

a new direction, even while Putin appears increasingly detached This risks having a destabilising effect on the regime, and from, and even bored by, the business of government. It also may be a step Putin is unwilling to take, unless he really is allows him to reward an ally or client, and maybe even auditioning for an understudy. groom a successor. This would especially be true were Putin to tap his defence However, this is also a problem. Although no one seriously minister, Sergei Shoigu. He has a reputation as a formidable doubts that he will be standing in 2018 (expect an announce- organiser and motivator, not least given how he turned the ment during or around his regular marathon press conference Ministry of Emergency Situations from being one of the most on 14 December) and – spoiler alert – that he will win, people are corrupt and dysfunctional state structures into a strikingly already looking to life after Putin. For a leader whose legitimacy effective one, as well as turning around the demoralised mili- in part rests on the myth that he is the “indispensable man,” this tary. However, his reputation – he is consistently second only is inevitably problematic. Anyone elevated to the premiership will to Putin in public polls – and his unusually broad appeal means inevitably become the focus of speculation about their presiden- that he might make too strong a prime minister for Putin’s tial ambitions and prospects. Furthermore, this will likely trigger comfort. Even if he has no higher ambitions, it would be hard if not outright struggles, as least quiet jostling over access to for Shoigu not to be touted as the next president, and for peo- power, opportunities for enrichment, and chances to settle scores. ple to start drawing comparisons with the present incumbent.

Medvedev has, after all, several understated virtues. He is One refinement would be to go for a figure such as Valentina unlikely to be considered presidential material, except as a Matvienko, speaker of the Senate, a former ambassador and front man for an oligarchic coalition. He is not dangerous, has governor of Putin’s home town of St Petersburg. She would fit no mortal enemies within the upper elite, nor yet particular the role of the manager-in-chief, with experience both within cronies. He is the safest of pairs of hands. Putin apparently promised him a full term as prime minister as honourable sinecure for quietly handing back the presidency, but if he “People are already looking to life opts to extend it, he will essentially be prioritising a quiet life, preferring to run the risk of looking tired and staid, than of after Putin” opening up the questions of succession and change.

Alternatively, he may decide that the country’s serious the legislature and in regional administration, but being both economic challenges need a prime minister who can 68 years old and also a woman – polls this year showed only a concentrate on them. The days when economist Alexei Kudrin third of Russians approved of the idea of a female president – was a plausible choice for prime minister are probably gone; she is less likely to be taken as a successor-in-waiting. he would demand too much authority and pose too much of a threat to established interests such as the defence industries. Finally, it might be a surprise candidate from the relatively However, both Minister of Economic Development Maxim unknown ranks of the governors and bureaucrats currently Oreshkin and Central Bank chair Elvira Nabiullina have been being tested for higher office, in which case it would be legiti- posited as potential “prime economists,” competent enough mate to think of them potentially even being road-tested for the to make a difference, yet not so confrontational as to trigger highest job of all. However, it is unlikely that we will see that a war within the government on their first day. quite yet. If anything, it may be a reason to keep Medvedev in place for a year or two longer, while the latest crop of governors Such a choice would indicate that Putin – whose level of knowl- and the like show what they are made of. In this case, the focus edge of the real problems facing Russia is unclear, cocooned as will be on person, not policy, as most likely Putin seeks to move he is by his aides and cronies – appreciates the primacy of the to some honourable “father of the nation” role from which he economic challenge, and is willing to see at least partial reform. can protect his and his friends’ interests while unburdening Economic liberalisation to fund and maintain political control himself of the responsibilities of the presidency. is a familiar (and often unmanageable) gambit in such circum- stances, and would likely entail greater emphasis on the rule Either way, and there are many other potential candidates, of law, as well as a gradual reduction in security spending, and these kinds of choices illustrate that whatever the weaknesses also, ideally, and improvement in relations with the West. of the prime ministerial position, Putin’s choice as to who holds it will say much about his priorities and concerns A third option would be an essentially administrative premier, heading into his next term. a tough manager whose job was not to implement new policies so much as to try and make the old ones work better. A figure such a Moscow Mayor Sergei Sobyanin, for example, would Mark Galeotti is a senior researcher at the Institute of be entirely credible, but while in policy terms this would International Relations Prague and the director of Mayak indicate continuity, such a figure – unlike the liberal “prime Intelligence. He blogs at In Moscow’s Shadows and tweets as economists” – would also be considered a potential successor. @MarkGaleotti. www.bne.eu 56 I New Europe in Numbers bne December 2017

Baltics GDP Estonia to replace Latvia as growth leader in the Baltics this year

Estonia will be the fastest growing economy in the Baltics this year, the European Commission predicted in its autumn economic forecast released on November 9.

The outlook forecasts that Estonia will overtake Latvia as the regional growth leader in comparison to the previous outlook published in May. The Estonian economy is now predicted to grow 4.4% in 2017, a 2.1pp revision in comparison to the previous forecast.

Latvia is likely to register growth of 4.2% this year – also a steep upwards, 1pp more than the May forecast. The outlook for Lithuania was also considerably revised upwards as the Commission added 0.9pp to its forecast growth of 3.8% in 2017.

Russia monetary policy rate vs inflation Russia's inflation hits new historic low at 2.7% in October

Russia's Consumer Price Index (CPI) in October fell again to an extraordinary low of 2.7% year-on-year down from the already low 3% seen in September, Rosstat statistics agency said on November 7.

Inflation has strongly overshooting the Central Bank of Russia (CBR) target of 4% set for 2017, diving from double-digit price growth in less than two years.

However, the CBR has pointed to stubborn inflationary expectations and other medium-terms inflationary risks so will probably stick to the moderately tight monetary policy despite the pressure from the government to support growth with lower interest.

Russian car sales Car sales in Russia up 17.3 % in October

Sales of new passenger cars and LCVs in Russia increased by 17.3% y/y in October, the Association of European Business, which follows the market, said in a press release on November 9.

In total, 148,597 units were sold in October, and 1,277,938 in the January- October period.

Domestic names continue to lead the sales, contrary to the situation during the boom years. The iconic Lada, manufactured by the country's largest carmaker Avtovaz, controlled by Renault, was the biggest winner, with a 23% increase in sales y/y in October and 17% in the January-October period.

Czech unemployment Czechia's unemployment rate hits new all-time low of 3.6% in October

The Czech unemployment rate hit a new all-time low of 3.6% in October, the Czech National Bank (CNB) reported on November 8.

The number of job vacancies has been approaching the number of unemployed and is expected to reach parity soon.

The decrease of long-term unemployment (24+ months) and unemployment with length of 6-9 months had the largest contribution to the reduction of total unemployment. Also, the ratio of the total number of unemployed to the number of unfilled vacancies fell to 1.3, the lowest since the new methodology was introduced in 1995. www.bne.eu bne December 2017 New Europe in Numbers I 57

Russia's highest Russian 12 month dividend expectations >5%

dividend paying Stock Price, RUB/s 12MF DY stocks for the next Enel Russia 1.3 11.2% 12 months Severstal 911 10.9%

Rostelecom pref. 53 9.7% bne IntelliNews Norilsk Nickel (DR) 1,126 9.6% Russia’s summer dividend payout season is over so it's time for investors NLMK 134 9.5% to look forward to the next one. High yielding dividend stocks have been consistent index-outperformers AFK Sistema* 13.1 9.1%* nearly every year since 2014 and so the list of generous companies is the first MTS 288 9.0% list investors look at when making equity investments in the Russian Federal Grid Co. 0.16 8.7% stock market. Aeroflot 165 <8.0% Russia’s stock market had a stellar year in 2016, returning over 50% to portfolio Tatneft pref. 319 7.7% investors, but market has done less well this year selling off by about 15% in the first quarter before making back Rostelecom 68 7.6% some of its losses. The ruble-denominated Moscow Interbank Currency Ex- RusHydro 0.81 7.4% change (MICEX) is down YTD by 7% as of mid-November, while its sister index, Unipro 2.57 7.4% the dollar-denominated Russia Trading System (RTS), is down by 3% since the Gazprom 127 6.9% start of the year. Megafon 589 6.9% Despite the lackadaisical performance of the indices Russia still returns some of the highest dividends in the world. LUKOIL 3,145 6.7% The MSCI Russia index was trading with an average dividend yield of 5% as Globaltrans 547 6.7% of the start of November – more than double the mere 2.3% for the broader MMK 44 6.6% MSCI EM index. Moscow Exchange 118 6.5% Steel stocks are being particularly generous at the moment as they return LSR Group 817 6.1% windfall profits from high commodity prices to shareholders. Looking through the list of companies expected to pay Etalon Group 235 5.7% more than 5% dividend yields over the next 12 months and another category Rusagro 694 5.6% that jumps out are utilities. Enel Rus- sia is expected to pay Russia’s highest Tatneft 444 5.5% dividends over the next 12 months and other names are also being generous Alrosa 78 5.2% as their capex programmes end and

they sending more of their profits to * High uncertainty. Source: Bloomberg, BCS shareholders. www.bne.eu 58 I Events bne December 2017

XV Russian Bond Congress The largest December 7-8, 2017 conference Saint-Petersburg for capital market

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