Turkey Into the Abyss? Suna Erdem on Whether Turkey’S Politicians Can Prevent a Catastrophe from Unfolding

Inside this issue:

Out of Africa for Russian banking exile Jennings

Mattoni puts the fizz into Central European waters

Slovakia’s Fico told to take November 2015 www.bne.eu his trousers down GBP 4.50/USD 6.75/EUR 5.90

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

Special Report: Ben Aris looks at Georgian PM CEE/CIS Bank Moscow Exchange’s Garibashvili Survey 2015 revival p. 12 talks China, p. 28 Russia and trade p. 60 ISSN 2059-2736 ISSN bne November 2015 Contents I 3

Senior editorial board Ben Aris (Moscow) +7 9162903400 editor-in-chief [email protected] 20 10 James R Hammond (Boston) +1 6178525441 publisher [email protected]

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

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

Liam Halligan (London) +44 7801799279 editor-at-large [email protected] Central Asia 15 Naubet Bisenov (Almaty) +7 7015933810 bureau chief [email protected]

Eastern Europe 6 THE MONTH THAT WAS 28 SPECIAL REPORT – Nicholas Allen (Berlin) +49 15730395872 CEE/CIS Bank Survey 2015 bureau chief [email protected]

Central Europe COMPANIES & MARKETS Tim Gosling (Prague) +42 0720180811 36 COVER FEATURE bureau chief [email protected] 10 Out of Africa for Russia Southeast Europe banking exile Jennings Turkey into the abyss? Clare Nuttall (Bucharest) +7 7073011495 bureau chief [email protected] 11 Russia’s central bank limits foreign shareholder voting Advertising & subscription CENTRAL EUROPE Elena Arbuzova (Moscow) +7 9160015510 business development [email protected] 12 Moscow Exchange on a roll 40 Melnikoff's ‘Metamorphosis’

Michael Dragoyevich (London) +44 7715412938 commercial director [email protected] 15 Mattoni puts the fizz into 42 Fico told to take his trousers down Central European waters Design 44 J&T gets Chinese oodles Olga Gusarova (London) +44 7738783240 17 Business leader-turned- of cash art director [email protected] technocrat ready to mine Cover illustration: Illarion Gordon Mongolia's “treasures” SOUTHEAST EUROPE Please direct comments, letters, press releases and other editorial enquires to [email protected] 18 Multinationals pessimistic on Russian market 46 Stavreski says investors keeping All rights reserved. No part of this publication faith with Macedonia may be reproduced, stored in or introduced to any 19 Ukraine cities compete to retrival system, or transmitted, in any form, or by any means electronic, mechanical, photocopying, attract IT companies 47 Roldovan graft recording or other means of transmission, without express written permission of the publisher. The 20 Once I lived the life of a mil- 49 Turkey’s medical tourism industry opinions or recommendations are not necessarily those of the publisher or contributing authors, lionaire… looks a little pale including the submissions to bne by third parties. No liability can be attached to the publisher for 22 Fondul Proprietatea drives these comments, nor for inaccuracies, errors or Romania’s privatisation EASTERN EUROPE omissions. Investment decisions or related actions taken on the basis of views or opinions that appear agenda herein are the responsibility of the reader and the 52 Ukraine’s ‘shadow government’ publisher, contributors and related parties cannot 24 Signs of a resurrection in investigated for money laundering be held liable for these actions. Russia’s moribund capital markets 56 Lukashenko is Belarus’ president but nobody’s friend 26 Eurasia currencies continue to face devaluation pres- 58 More bumps in Russia’s bne IntelliNews is the property sures pension reform road of New Sparta Media. New Sparta Media | 27a Floral Street, 3rd Floor, London, WC2E 9EZ, UK 27 Corporate Statement: 59 'Farmer John' brings cheddar to PASHA Bank cheese-starved Muscovites Print issue: €499 / year. 4 I Contents bne November 2015 66

60 74

EURASIA 68 Revving Georgia’s economic 76 OBITUARY: Arpad Goncz engine – Hungary's first elected 60 Georgian PM eyes free trade president deal with China within a year 71 Are emerging markets set to rally? 63 A purge in Baku NEW EUROPE IN NUMBERS 73 Rhetorical wizard Draghi 64 Fugitive Kazakh banker one conjures up a QE battle 78 Charts of the month step closer to home 80 Macroeconomic indicators ARTS, CULTURE & PEOPLE OPINION 81 Financial indicators 74 The camera loves Tbilisi – 66 The limits of the Russian and vice versa ‘patriotic mobilization’ 82 UPCOMING EVENTS

COMPANIES MENTIONED Looksery (19) Bank Petrocommerz Ukraine (31) Aktif Yatırım Bankası (33) Asaka Bank (35) Volkswagen (8) Luxoft (19) Motor Bank (31) Nurol Yatırım Bankası (33) Qishloq Qurilish Bank (35) Severni Energeticka (8) NIX Solutions (19) Bank Veles (31) JPMorgan Chase Bank (33) Khan Bank LLC (35) VTB Bank (8, 14) 908 (19) mBank (32) Banca Comerciala Româna (34) Trade and Development Bank of Telekom Srbija (8) Fondul Proprietatea (22) ING Bank Śląski (32) Banca Transilvania (34) Mongolia (35) Transgaz (8) Electrica (22) Bank Millennium (32) Banca Comerciala Romana (34) Golomt Bank of Mongolia (35) OSHEE (8) Romgaz (22) Commerzbank (32) Volksbank Romania (34) First MicroFinance Bank (35) Neftisa (8) Hidroelectrica (22) Alior Bank (32) Banka Kombëtare Tregtare (34) CJSC Accessbank Tajikistan (35) Lenta (8) CE Oltenia (22) Bank BPH (32) DSK Bank (34) Orienbank (35) Lokum Deweloper (9) Salrom (22) GE Capital (32) Sibank EAD (34) J&T Financial Group (44) Sberbank (9, 35) Franklin Templeton (22, 24) Idea Bank (32) TEB Bank (34) CEFC China Energy Company (44) VTB (9) Bucharest Airports (23) Bank Pocztowy (32) ProCredit Bank (34) Pivovary Lobkowicz Group (44) Gazprombank (9, 53) Constanta Port (23) Poczta Polska (32) Privredna Banka Zagreb (34) Travel Service Airlines (44) Vnesheconombank (9) Posta Romana (23) PKO BP (32) Zagrebacka Banka (34) Enel (44) Rosselkhozbank (9) Gazprom (7, 24, 61) OTP Mortgage Bank (32) Erste & Steiermärkische Bank (34) Slovenske Elektrarne (44) Renaissance Capital (10) Rosneft (24, 25) K&H Bank (32) Intesa Sanpaolo Group (34) E.ON (44) Renaissance Credit (10) UniCredit Bank (24) Kereskedelmi es Hitelbank (32) Eurostandard Banka (34) Unipetrol (44) Bank of New York Mellon (11) Aberdeen Asset Management (24) Ceskoslovenska Obhodni Banka (32) Ohridska Banka (34) Adris Grupa (44) Norilsk Nickel (7, 11, 24) Ashmore Group (24) Ceska Sporitelna (32) Mobiasbanca (34) British American Tobacco (44) Prosperity Capital (11) Uralkali (25) Komercni Banka (32) Moldindconbank (34) Dräxlmeier (49) TGK-2 (11) Eurochem (25) Tatra banka (32) Agroindbank (34) Johnson Controls (49) Goldman Sachs (13, 58, 59, 79) Metalloinvest (25) Slovenská sporiteľňa (32) Hipotekarna banka AD Podgorica (34) Johnson Matthey (49) Karlovske Mineralni Voda (15) Gazprom Marketing & Trading (25) ČSOB (32) Banca Intesa (34) Lear Corporation (49) Kofola (16) SUEK (25) Raiffeisen Bank International Halyk Bank (35) Khazanah Nasional (49) Kekkuti Asvanyviz (16) Novolipetsk Steel (25) (32, 34) Tsesnabank (35) Emirati Abraaj Group (49) Coca-Cola (16) PASHA Bank (27) Swedbank (32) Delta Bank (35) Acibadem Healthcare Group (50) Pepsi (16) Promsvyazbank (31) Versobank (32) Kaspi Bank (35) Turkish Airlines (51) Nestle (16) Financial Company Otkrytie (31) LHV Pank (32) Home Credit Bank (35) Skoda JS (53) Szentkiralyi Asvanyviz (16) Raiffeisen Bank (31, 35) ABLV Bank (33) Armbusinessbank (35) Ukrprominvest (53, 54) Waldquelle (16) ING Bank (31) Rietumu Banka (33) Araratbank (35) Bogdan Motors (53, 54) Turquoise Hill (17) Citibank (31, 33, 35) Norvik Banka (33) Inecobank (35) JB Park GmbH (54) Newcom Group (17) Ural Bank for R&D (31) Siauliu Bankas (33) International Bank (35) Intraco Management Limited (54) Clean Energy Asia (17) Deutsche Bank (31, 33) Citadele bankas (33) AccessBank (35) Business Airlines (54) Erdenes Mongol (17) Sovcombank (31) Invalda LT (33) Kapital Bank (35) Mosston Engineering (55) Rio Tinto (8, 17) HSBC (31) Ziraat Bankasic (33) Xalq Bank (35) Azbuka Vkusa (59) Shenhua Energy (17) Financial Settlement Centre (31) BNP Paribas (33) TBC Bank (35) Stockman (59) Sumitomo Corp (17) Rapida (31) Türkiye Halk Bankası (33) Bank of Georgia (35) Crocus Group (59) Mongolian Mining Corp (17) StarBank (31) Turk Ekonomi Bankasi (33) Optima Bank (35) Azerigasbank (64) Saki Partners (18) Belagroprombank (31) Turkiye Sınai Kalkinma Bankasi (33) Rosinbank (35) BTA Bank (64) Nairit (18) ASB Belarusbank (31) Sekerbank (33) JSC CB Tolubay Bank (35) Snapchat (19) Priorbank (31) İller Bankası (33) Ipoteka Bank (35) From our desk to yours Get the original CEE, Central Asia, MEA and South Asia business newswire.

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Politics

Central Europe A close associate of Moldova’s former Russian air strikes in Syria are prime minister, Vlad Filat, has testi- costing Moscow up to $4mn per day, Despite Andrzej Duda's party promising fied that Filat is the indirect owner of data collated for The Moscow Times by increased spending in the election cam- Caravita and Business Estate – two key a defence think-tank showed. Russia paign, austerity is alive and well in the companies involved in the country's has already spent some $80mn-$115mn Polish presidential palace. The Belgian $1bn bank fraud. Prosecutors could since strikes began on September 30. press reported sniffily that Duda served ask up to 10 years in prison for Filat a €12 bottle of wine to King Philippe based on current evidence. during a state visit. Eurasia Macedonia’s four major political Latvia plans to build a fence on its parties failed to agree on further The Kazakh parliament approved a border with Russia, in order, it claims, to steps in the implementation of the law allowing foreigners to be hired restrict illegal border crossings. The 90km July agreement that resolved the into the state apparatus, which will fence is part of an upgrade project for secu- country’s political crisis. Johannes come into force on January 1, 2016. rity along the 270km border. The interior Hahn, EU commissioner in charge of EU Foreigners will not be civil servants, ministry insists the project is not connected expansion, said he was disappointed but will work on a contractual basis. to tensions with Moscow or the potential with the lack of progress. Prior to their appointment, they will for Kremlin aggression in the Baltic region. be scrutinised by the Kazakh national security services. The move shows that Eastern Europe Kazakhstan has failed to foster qualified managers from among the local An investigation into the shooting and population. death of over 100 people on Kyiv’s Maidan square during the 2013-14 protests are going badly after a Berkut special forces commander accused Ukraine’s interior ministry of shielding Berkut officers rather than investigating and prosecuting them. The Czech corruption case centred on Olumouc is expanding rapidly. The US Senate approved an increase Regional governor Jiri Rozboril and in military assistance to Ukraine two senior police officials have been worth $300mn, which will be provided charged, as it emerges police have been in 2016, The money is part of the draft South Ossetian leader Leonid Tibilov probing a powerful criminal ring cen- National Defense Authorization Act for said his Georgian breakaway region tered in the region for months. Earlier the 2016 Fiscal Year. will hold a referendum to join the reports detailing the arrest of former Russian Federation, after a meeting interior minister Ivan Langer suggested The price of Russian fruit soared with Vladislav Surkov, the Russian the case was focused on a solar plant. on average by 30-50% in the last presidential aide on relations with year because of devaluation and food South Ossetia and another Georgian sanctions. Orange prices rose fastest, breakaway region Abkhazia. South Southeast Europe up 57.4% in September versus a year Ossetia declared its independence in earlier. September 1990, but is internationally Croatia allowed the use of marijuana recognised as being part of Georgia. for medical purposes as of October The administration of former Georgian 15. The drug can now be prescribed to president Mikhail Saakashvili tried to patients suffering from cancer, epilepsy, resolve the conflict with South Ossetia, AIDS and related conditions, following but only managed to escalate tensions, a recommendation from an expert com- leading to the 2008 war between Russia mission. Meanwhile, Albanian police and Georgia. seized 3.2 tonnes of cannabis near the city of Gjirokastra as part of a major anti- drugs operation. bne November 2015 The Month That Was I 7

Economics

Central Europe warned in the statement issued at the end was whip-sawed by the 1985 collapse in of a staff visit to Romania. oil prices. A decision to go to the market Economic expectations in Central and hasn’t officially been taken yet, but Eastern Europe continued to decline Bulgaria's government presented a investment bankers are being sounded in October, according to the latest ZEW draft law on additional taxation of out now, especially following the recent survey. The overall Economic Senti- foods with a high content of salt, completion of the first corporate deals in ment Indicator for the region dropped sugar, caffeine and hydrogenated veg- 11 months by blue-chip issuers Gazprom 7.7 points to -0.1. That followed an etable oils, as well as carbonated drinks. and Norilsk Nickel. 11.4-point drop in September. The CEE The new indirect tax will have a rate of region observed in the survey consists between 3% and 78% of the final price Ukraine's economic collapse is bottom- of Bulgaria, Croatia, the Czech Repub- and will be paid by the manufacturers ing out, but the conflict-torn country lic, Hungary, Poland, Romania, Serbia, and importers of the respective products. is still far from moving on to rebound Slovakia, Slovenia and Turkey. growth, say analysts. The Ukrainian The collapse of Corpbank last year and Ministry of Economic Development and Polish unemployment dropped to the subsequent payout of insured deposits Trade announced earlier the country's single digits in September when the by the Bulgarian Deposit Insurance Fund real GDP dropped by 16.3% in January- rate fell to 9.7%. The government has has resulted in an increase in the country’s June. Industrial output fell 5.1% y/y but been predicting the jobless total would 2014 budget shortfall from an estimated increased 5.9% m/m in September. drop below the threshold for some 2.8% to 5.8% of GDP, creating the fourth months. The reading is another in a long largest budget gap in the EU. series that kicked off last year showing consistently falling unemployment and a tightening labour market. Joblessness Eastern Europe has blighted the economy, despite its relatively rapid growth compared with UBS' working-time Big Mac index others in Europe. – developed because it regards the nominal price of a burger used by The The Czech Republic’s debt/GDP ratio Economist as misleading due to it being fell to 41.7% in the second quarter from disproportionately cheaper or costlier in 42.4% in the previous three months. other countries, while its working time- The debt burden remains well below based method factors in the circumstanc- Eurasia the EU average of 87.8%, and places the es of the average worker – shows that Czech Republic ahead of its Visegrad people in Kyiv have the rawest deal, hav- Uzbekistan's GDP grew by 8% in the peers as the least indebted country ing to work for nearly an hour to afford first nine months of 2015, according to among the four. Poland ranks second, a Big Mac. This is nearly triple the time government figures. The Uzbek govern- with a debt/GDP ratio of 51%, followed it would take a Muscovite to earn one, ment doesn't publish absolute figures by Slovakia at 54.5% and Hungary at while those living in Western Europe illustrating the methodology of how 79.6%. would earn roughly enough money to it compiles growth figures. This gives buy four burgers in the same time. rise to doubts about the real state of the country's economy. Southeast Europe Annual economic growth in Tajikistan Foreign direct investment in Albania stood at 6.4% in the period between fell to €869mn in 2014, down from January and September, compared with €945mn a year earlier. Since 2013, FDI 6.9% in the same period last year. has been the main financing source of the external sector deficit in Albania. Georgian exports dropped 24% y/y to $1.6bn in January-September. Depressed Romania's adopted and intended poli- demand for its goods in main trade part- cies will push the country's fiscal deficit ners – Russia, Turkey, and Azerbaijan, has close to 3% of GDP in 2016 and above Russia is lining up a $3bn monster led to a 24% y/y drop in Georgia's exports, that threshold in 2017, unless offsetting Eurobond deal for early next year by which is grappling with slower growth, cur- measures are identified or capital spend- telling investors the economy is emerging rency depreciation as a result. ing is again not fully carried out, the IMF from its biggest shock since the USSR 8 I The Month That Was bne November 2015

Business

Central Europe Romania’s Transgaz has applied for a media to declare foreign funding except €224mn EU grant for the first stage of from advertising and share capital to Central Europe is watching nervously the Bulgaria-Romania-Hungary-Austria state regulators or face possible clo- VW's market share in the EU slip. New (BRUA) project. The cost of the project, sure. If passed into law in its current car registrations in the EU continued one of several new regional pipelines in form, the bill would be another blow to grow strongly in September, but Central and Southeast Europe, is esti- to media freedom in Russia, say critics. the scandal-hit German automaker – mated at €560mn. This requirement could be used to close which is a major investor in the Czech media outlets, head of the legal depart- Republic, Slovakia and Hungary – saw For the first time in five years, Albanian ment of the business daily Vedomosti, its market share decline to 23.3% from power distribution company OSHEE Vladimir Rumyantsev, told the Duma's 26.5% in August. will not seek a price increase from information policy committee. energy regulator ERE in 2016. The utility has recently increased revenues Russia ranks just 60th out of 64 and seen a sharp decline of power countries as the most attractive des- losses after the government launched a tination for expats in terms of living campaign to combat electricity theft last standards and overall satisfaction, a sur- year. vey released by online expat community InterNations says. Russia fell one place behind Kazakhstan, but is one place Eastern Europe ahead of the alcohol-free Saudi Arabia. Top of the list were Ecuador, Mexico and Tycoon owner and chairman of Rus- Malta. Czech mining limits will be partially sian oil refining company Russneft lifted, the government has decided. The Mikhail Gutseriev may IPO his Neftisa controversial move will see CEZ allowed oil company after a mooted merger. to resume digging lignite at Bilina, but Earlier in October, Gutseriev said the Severni Energeticka will remain con- merger would only be possible if the oil strained at CSA. price exceeds $50/barrel, while the IPO would also be conditional on high oil Poland will raise PLN9.2bn (€2.17bn) prices. from its auction of LTE frequencies. However, there are fears the high pric- The leading Russian retailer Lenta ing could boomerang on the country by is preparing a $250mn secondary holding back infrastructure development. share offering, which could possibly be Winning bidders suggested they will need expanded to $300mn. Lenta is going to Eurasia to team up to build the network, and issue $150mn worth of GDRs, while its that they could launch legal action over shareholder the EBRD will sell its stake The financial closing of the multi- an auction process that "raised doubts". worth $100mn to $150mn. The funds billion underground expansion of raised from the SPO will be used to Mongolia’s flagship copper and expand its retail network development gold mine Oyu Tolgoi is expected Southeast Europe programme, Lenta said. by year-end, according to a statement by Rio Tinto, which controls 66% of American investment fund Apollo has the mine, the remainder being in the offered €1.2bn for a 58.11% stake in hands of the government. The company Telekom Srbija. Serbia’s government is is in the process of raising as much as looking to earn €1.5bn from the sale. $6bn in external funding for the project development. After being stalled for Russian VTB Bank is ready to expand almost two years, the project, the largest into the Bosnian Serb Republic, development in the country and widely according to the entity’s president, considered a barometer of its investment Milorad Dodik. VTB Bank has previously climate, is finally moving forward after supported the entity, providing loans to the government and Rio Tinto struck an help patch the budget gap. Russian media representatives have agreement in mid-May. slammed a draft bill that would force bne November 2015 The Month That Was I 9

Finance

Central Europe for the 10-year maturity, was strong, Sberbank CEO German Gref has and combined orders for the two recounted to investors in London Slovakia has joined the negative yield maturities exceeded €5.5bn, local news the extraordinary events of club. Bratislava sold €112mn of a 1.5% reported. Citigroup, HSBC, Raiffeisen December when panic and chaos coupon bond that matures in 2018 at an Bank International and UniCredit were in Russia led to a bank run and an average yield of -0.0449%. the managers of the deal. outflow of RUB1.3 trillion ($16bn) in one week, exacerbated by rogue Fitch affirmed the Czech Republic’s The Bulgarian National Bank adopted emails warning clients of imminent long-term foreign and local currency a plan to reform banking supervision. disaster. "All we could do was hope and Issuer Default Ratings (IDRs) at marks The plan should help restore confidence pray," Gref, a former economy minister for 'A+' and 'AA-, respectively, with a in the regulatory body, which remains under President Vladimir Putin, told stable outlook. The country’s ratings are poor after the country suffered a bank- delegates at the Sberbank investor underpinned by strong fiscal finances ing crisis when Corpbank, then the day at the St Pancras hotel in central and external balance sheet, Fitch said, country’s fourth largest lender, suffered London. "There was total panic and though the country has weak structural a bank run that deprived it of liquidity, chaos on the market. The participants indicators relative to the ‘A’ median such leading to it having to be taken over. thought the Central Bank had lost as lower levels of per-capita income and control." more volatile GDP growth. Eastern Europe

The EU has prohibited financial institutions from publishing analytical research of sanctioned Russian banks. The step was taken as such publications could help investors make decisions on investing in sanctioned assets, the Euro- pean Commission commented. Russian banks that are directly sanctioned by the EU include the state-controlled Sber- The postponing of the float of Polish bank, VTB, Gazprombank, development Eurasia real estate company Lokum Dewelop- bank Vnesheconombank, and Rosselk- er is just the latest in a series of IPOs hozbank (RusAgro). Caucasus and Central Asian countries planned on the Warsaw Stock Exchange need to tighten their monetary policy to be scrapped, as offers succumb to The foreign currency and gold reserves to anchor inflation expectations, but "market conditions". of the Central Bank of Russia gained excess tightening may weaken financial $3.5bn to reach $377.3bn as of the intermediation and hinder economy week ending October 16. As Russia was activity, the IMF warned in its Regional Southeast Europe affected by falling oil prices and Western Economic Outlook, presented in Almaty sanctions over Ukraine, its reserves on October 23. A Tirana court acquitted former Alba- dropped precipitously, but have been ris- nian central bank governor Ardian ing steadily since the end of July, gaining Mongolia’s bad loans (NPLs) Fullani of charges of abuse of office in about $20bn and reaching the highest amounted to MNT836.8bn (€368.5mn) connection to a multi-million euro theft point since January 2015. at the end of September, up by 41.7% from bank reserves and the bank’s acqui- y/y. NPLs are rising in the banking sition of the Hotel Dajti. The theft scandal sector as the Mongolian economy severely tarnished the reputation of the falters, following a credit boom a few central bank, and its new governor Gent years ago that was stimulated by easy Sejko has pledged to carry out reforms. central-bank policy. S&P warned in April it could cut Mongolia’s 'B+' rating, Romania issued €2bn of euro-denom- citing the country’s mounting fiscal inated Eurobonds with maturities of and current-account problems, which 10 and 20 years. The 20-year issue was are putting pressure on the financial the first with such a long maturity for system. the country. The demand, particularly 10 I Companies & Markets bne November 2015

Stephen Jennings, CEO, Renaissance Capital (AP Photo/Sunday Alamba) Out of Africa for Russia banking exile Jennings

Jason Corcoran in Moscow

enaissance Capital founder Stephen Jennings and the consumer lender Renaissance Credit to Prokhorov, may be enjoying better weather since fleeing while retaining ownership of the group's African assets. RRussia for Africa three years ago, but his problems seem to be mounting. Fast-forward three years and Jennings, an evangelist for African investment, is in hot water in Kenya, where New Zealand-born Jennings was ousted in November 2012 his difficulties make his problems in Russia pale into from the Moscow-based investment bank he founded 20 comparison. years earlier after his billionaire partner Mikhail Prokhorov rebuffed his requests for more cash for the cash-strapped Ta-ta to Tatu lender. Legend has it that Jennings lost the keys to the Plans by Jennings to build a new city costing $5bn and business after a showdown meeting with Prokhorov and stretching to 2,500-acres on an old coffee plantation outside Suleiman Kerimov, another tycoon who had substantial Kenya’s capital of Nairobi have been held up for years amid funds on account at Renaissance. Jennings requested more increasingly incendiary relations between him and his local funds to cover the firm's losses and the tycoons turned on partners. Tatu City is a 2,500-acre, mixed-use and mixed- him, demanding he hand over his 50% stake. income development, with plans for residential, commercial, industrial, tourism, social and recreation amenities for more Renaissance sources say Jennings, then 52, faked a heart than 70,000 residents and 30,000 day visitors. attack to escape. An ambulance arrived and the driver was paid handsomely to divert him to Sheremetyevo airport so he Jennings' partners, who are now his enemies, are Kenya's could escape to London. He hasn't been back to Russia since, richest man Vimal Shah and Nahashon Nyagah, a former and neither the Russian side nor Jennings has ever spoken governor of Kenya's central bank. At a public event in Nairobi about what actually happened. Jennings eventually signed in September, Jennings made a wide-ranging attack on Shah the papers that surrendered control of the investment bank and Nyagah. bne November 2015 Companies & Markets I 11

According to Jennings, Nyagah orchestrated the illegal transfer of a large tract of land worth $100mn, owned by Russia’s central bank limits the Tatu City investors, to members of his family. Police are now investigating the matter. Jennings described in foreign shareholder voting painstaking detail the "theft, fraud and extortion" by Nyagah and his associates and how his partner Shah had "provided him with the cloak of legitimacy to commit what is probably Jason Corcoran in Moscow the largest corporate theft in Kenyan history". He said Shah masquerades as a major shareholder when in fact he has New regulations recently introduced by the Central only invested $289,000 in the project with a shareholding Bank of Russia (CBR) are making it more difficult for equivalent to less than 0.3% of the total investment. foreign shareholders to vote at shareholder meetings, dealing a fresh blow to corporate governance standards Jennings recounted how he and some of his colleagues in that tend to suffer during recessions in Russia. January were summoned to the immigration department and interrogated for half a day about work permits. "In The disclosure requirements, which partially came 25 years working in about 35 emerging markets, this was into force in July, oblige foreign shareholders of my first experience of such cheap harassment. There is no Russian companies to emerge from the shadows and official file because this is a crude and corrupt shakedown." to provide more information about their identities. But Investigations by Jennings have led him to believe Nyagah many shareholders are refusing to fulfil the new legal and his brother were behind the interrogation. Neither provisions requiring fuller disclosure. Voting proxy Shah nor Nyagah responded to requests for comment. companies can't vote on their behalf and are being locked out of crucial corporate decisions, and run the Jennings said the organiser of the event TatuTrueTalk where risk of not receiving dividends for their clients. he spoke publicly about corruption by Shah and Nyagah had been"threatened with thugs who would beat him up" unless As a result of the new requirements, participation in he pulled out. One of his lawyers also received "a chilling, voting at annual general meetings has fallen by up to written letter of retribution". 30%, according to Bank of New York Mellon, a leading custodian bank which acts on behalf of stockholders.

Representatives from Norilsk Nickel told delegates at “Shah has provided Nyagah with the a Moscow investor conference in early September that cloak of legitimacy to commit what they had difficulty in reaching a quorum because of the new law. is probably the largest corporate theft in Kenyan history" The authorities want to force investors to make direct purchases of shares and to abandon the depositary receipt route. They are trying to expose opaque "grey schemes" that allow the real owners of shares to remain In his first interview with Western media since 2009, in the shadows. But custodians and registrars argue Jennings told the New Zealand Herald on October 8 that the CBR is throwing the baby out with bathwater, as the being so vocal about public policy and corruption issues was procedure is killing off voting by minorities at a time not his normal modus operandi. "We normally prefer to work when Russian companies are trying to wriggle out of behind the scenes. But normally we would get more support their obligations. Logistically, keeping track of the owner from government and more traction within the system," said of securities can be difficult when they change so quickly. Jennings, who says he now spends 70% of his time in Africa. "It's when we weren't getting that traction and we weren't The last economic crisis in 2008 led to many corporate getting that kind of support that we went more public with governance flare-ups in Russia when oligarch owners these issues." ran roughshod over corporate governance rules. Prosperity Capital, one of Russia’s largest foreign Asked whether he faces any personal danger, he replied: portfolio investors, suffered the most because of "We made the decision – and I think it was the right cancelled buybacks by oligarch Mikhail Prokhorov and decision – that it would have been more dangerous not Leonid Lebedev's utility TGK-2. to speak out."

Jennings said he is commissioning "a senior investigative journalist'' to write a book on the Tatu City saga. Another good read would be a tome on the life and times of the Kiwi oligarch in Russia. 12 I Companies & Markets bne November 2015

INTERVIEW: Moscow Exchange on a roll

Ben Aris in Moscow

fter lying fallow for the last couple of years, the green This pro-shareholder attitude is partly a function of the change shoots of recovery are appearing in Russia's capital in ownership structure of Russia’s exchanges. Previously, the Amarkets. Reforms that have connected the Moscow RTS, which celebrated its 20th birthday in September, was Exchange to international capital markets and the growth largely owned by market participants, whereas MICEX was of private pension funds could transform the landscape largely owned by the Central Bank of Russia (CBR). But follow- in the years to come, but this will be an evolution, not a ing the merger at the end of 2011, the exchange boasts a broad revolution, Evgeny Fetisov, Moscow Exchange’s (Moex) chief ownership and one of the highest free floats on the market. financial officer and member of the executive board, tells bne IntelliNews in an exclusive interview. And in the latest development, Russia’s capital market was hooked into the global financial system when Moex was Moscow Exchange has been putting its money where its mouth quietly added to the Clearstream and Euroclear international is: the leading Russian exchange now has the highest dividend settlement and clearing systems between 2013 and the yield of any exchange in the world after it increased the share of profits returned to shareholders in September, paying out 55% of its net annual income to its shareholders, up from the previous payouts of 30% in 2012, 40% in 2013 and 50% last “The pension assets under year. “We take what we need to continuing building up the management is not huge by global exchange’s infrastructure, but we believe strongly that what is left over after this should be returned to our shareholders,” standards, but this source of funds Fetisov says. is starting to be important” Moex has come to epitomise the best practices of the best stocks that are listed on its boards since Russia’s leading exchanges – the Russian Trading System (RTS) and the middle of 2014. Now investors can buy Russian stocks and Moscow Interbank Currency Exchange (Micex) – were merged bonds directly from the comfort of their own trading desks in 2011 to create Moex. As a result, the exchange has been one in London and New York. This investor-friendly approach has of Russia’s best performing stocks despite Russian equities in made the exchange a regular outperformer in the Russian general being walloped by the recession and the brouhaha equity universe. that surrounds the Kremlin’s increasingly aggressive tactics in first Ukraine and now Syria. Moex shares were up this year New role by 32% as of September 29, against the rises of just 2% for It’s too early to say that reform of Russia's capital market the dollar-denominated RTS index and 13% for the ruble- is complete, but with Moex the country now boasts easily denominated Micex index. the most sophisticated one in the former Soviet bloc. Moex ranks among the world's top 25 exchanges by total volume Part of Moex's strength is that in addition to being the of equities traded, and also among the 10 largest exchange platform for trading stocks and bonds, it also includes a platforms by bonds and derivatives trading. As of May 1, the central depository. This business earns regular fees from securities of 728 issuers were trading on the platform. holding these assets on behalf of investors as a global That depth is crucial after US and EU sanctions cut Russian custodian, and this income keeps coming irrespective of corporates off from the international capital markets, leaving the swings on the market. It also offers commodity trading, Moex as the only game in town – bar some state-to-state currency conversion, derivatives and other related financial funding by China and the sovereign wealth funds of the services – in short, a diversified range of income streams. Middle East. bne November 2015 Companies & Markets I 13

Foreign investors have always played a big role in the Russian stock market, and still own roughly half of the market's free float, in the hope of cashing in on the transformation of the country to a market economy. But capital markets play a Emerging Markets more important role for governments as an essential source of capital. A significant new pool of money is being created Direct – your data for investment into equities via the ongoing pension reforms in Russia that will be channelled through the exchange – and Russian companies are already complaining that development source for the is stymied due to the lack of long-term cheap funding. developing world Pension money will be the next big step-up for Moex, but reform of Russia’s pension system is not going smoothly. There have been at least two attempts to make sweeping CEE Banking Sector Report – 2015 reforms and neither produced much. The cash-strapped j.mp/ceereport government also raided the state pension fund last year by freezing some of the payments, but those funds were The CEE banking sector is still suffering from an unfrozen this year in May and, according to Fetisov, an outflow of liquidity towards parent banks. This, additional RUB600bn ( 8bn) from the funds is available € combined with weak credit demand (amid a soft to be invested in Russian assets. economic recovery) and reduced risk appetite by However the government is still stuck for cash and in banks, has led to subdued lending activity. September talk began again about reintroducing the freeze. The upshot of all the confusion is that the total value of • Most CEE countries’ banking sectors were profitable pension assets under management in Russia has risen from last year, with Poland hitting an all-time high. The about 3% to 5.6% in the last decade as of the end of 2014, exceptions are Hungary, where banks reported according to Goldman Sachs – a fraction of where it needs to a record high loss in 2014 due to regulatory-ordered be if Russia is going to be able to take care of its pensioners. one-off foreign currency loan settlements, Romania, where the industry started to recover after Nevertheless, over the longer term Russia’s growing pension resources represent a significant amount of capital that will a massive cleaning of the loan portfolio, and end up in the equity market and the amount of pension money war-torn Ukraine; going into the market is already significant. • Interest margins across the region, although tightened, are still much higher than in Western The state has introduced new investment-style accounts where Europe. Growth potential is also much stronger anyone investing up to RUB400,000 is eligible to get that 13% amid low levels of indebtedness compared to the income tax refunded if the investment is held for at least one more developed economies; year and is eligible for capital gains tax relief if they hold the investment for more than three years. These products are proving • M&A activity is focused mostly in Poland (where to be highly popular with the population, which is finally starting the regulator opposes further consolidation in to think about old age. “The pension assets under management is the sector), Hungary (where the state is the major not huge by global standards, but this source of funds is starting buyer of bank assets,) Romania, the Czech Republic to be important,” says Fetisov, who cites a recent Goldman Sachs and Slovakia; report that estimates pension funds under management will • With a few exceptions, the non-performing loan reach a total of $200bn by 2020 in a $1tn economy. (NPL) ratio remains uncomfortably high across the region, hurting profitability and credit growth. Creating an equity culture The pension story underscores the challenges that Fetisov and his colleagues are facing: financial literacy in Russia is very low and part of his job is to create the “equity culture” that imbues the more developed markets; only about 3% of the Russian population have any money invested in equities. The problem has been a series of unlucky coincidences. President Boris Yeltsin introduced the legal framework for mutual funds in 1995 and the first appeared in 1996 – about 18 months before the markets collapsed in the 1998 financial crisis. j.mp/emdstore More recently a similar thing happened when the government 14 I Companies & Markets bne November 2015 tried to rope the population into the “people’s IPO” listing of year ago, which includes aspects like new listing rules, which VTB Bank in May 2007. Russian punters put more than $1bn will take effect at the beginning of 2016. There are also new into the issue – only to suffer massive losses about 18 months rules to force independent directors onto company boards to later during the 2008 financial crash. oversee operations. Taken together, the new rules are another step forward in improving Russia’s corporate governance. Russians are now, unsurprisingly, wary of securities and mutual funds. Still, the most sophisticated can see there is The financial sanctions are also holding back another reform money to be made once the bear market ends, and Fetisov says that joining the international settlement system made possible. Moex has more than 1.1mn retail accounts, of which about Now that international traders can buy locally listed stocks on 70,000 are actively trading. The amount of money invested in their own systems, the need for depository receipts (DR) – an the stock market by day traders has become large enough to international proxy for locally listed shares and long a hallmark have a real impact on the index. of emerging market stocks – have become superfluous.

The bigger problem is that like the day traders, what passes As the price of the DRs is usually slightly different from local for institutional investors in Russia are also only speculating prices, investors were steadily buying DRs and converting on short-term gains. The lack of pension or insurance funds them to their local equivalents and making money on the means there are few long-term investors in the market. Even arbitrage. However, the sanctions include a clause that the foreign investors, which used to own about half of all prohibits the issue of “new” shares in international markets. equities listed, tend to be hedge funds, which have at best Ironically, the US Securities and Exchange Commission has a six-month time horizon. This short termism makes the ruled that converting DRs to local shares does not involve market shallow and volatile. “We want to see a more buy- the issue of “new” shares, as the local shares already existed, and-hold culture, as that would give additional depth to the whereas the EU ruled that the conversion does produce “new” market. We also need to develop the domestic investor base securities and so has banned the practice. – both institutional and retail investors. The introduction of individual investment accounts this year will help as they If the EU does drop its financial sanctions in December, which is are geared to one- to three-year investments. Over 50,000 a distinct possibility, then this business will restart and should accounts have been opened in the first nine months of this boost Russian share prices, as DRs are a lot more expensive to year, which together are worth over RUB6bn,” says Fetisov. hold than locally listed shares. ”DRs cost an average of 8% to 14% of dividend payments. It gets very expensive to trade DRs if A shortcut to improving the investor profile would be for you can do the same with local shares,” says Fetisov. “Investors someone to set up some domestic Exchange Traded Funds are still using DRs as a legacy of the transformation from an (ETF), says Fetisov. There are several foreign Russian-focused emerging market to a increasingly developed one.” ETFs. ”Why do we not have any ETFs here in Russia? The market is certainly big enough, and they are a simple and less The end of DRs would be welcomed by Russian companies, risky way for people to invest in Russian equities. However, so as they raise the cost of an IPO significantly. The company far there’s been no interest in establishing domestic funds,” has to satisfy two different sets of regulators and analysts says Fetisov. simultaneously on two separate exchanges with two sets of fees, ultimately reducing the size of the free-float to each class Low valuations of investment. The pile of problems – economic and political – that Russia is currently enduring has driven share prices down to rock Dispersed ownership with no controlling shareholder... bottom levels. But Fetisov argues on a fundamental basis that as of March 16,2015 can’t last forever, although he won’t speculate on when any CBR 11,7% recovery could begin.

Russia has always had an emerging market discount applied on its equities and on top of that a specific “Russia-risk” Free float Sberbank 10% discount. On a valuation basis Russian stocks should be 50,8% attractive, but a deep recession and lots of war-talk makes betting on Russian equities very risky right now. But Fetisov queries whether this is still appropriate to today's market. VEB 8,4% ”Russia has something like a 50% discount to other emerging markets, however we have corporate governance here, EBRD 6,1% transparent accounts, and the well-functioning financial infrastructure. The size of this discount is not justified – a large part of it is due to sentiment,” he says, adding that “another CIC 5,6% part of it is due to the missing domestic investor base.” RDIF 5,3% Russia introduced a new corporate governance code over a MICEX-Finance 2,1% bne November 2015 Companies & Markets I 15 Mattoni puts the fizz into Central European waters

Tim Gosling in Prague

or a brand to cross the divide to become generic is a sign Just like the huge client list from the early days, KMV had of a rare level of success – and Sellotape, Hoover and to deal with thousands of shareholders thanks to the messy FAspirin have all made the grade. In the Czech Republic, privatisation process in the country. The Italian owner had you're as likely to hear an order for a “Mantonka” as a mineral to hire a gigantic hall in Karlovy Vary's famous Pupp Hotel water. to host annual general meetings. It took until 2005 for the family to take full ownership, achieved thanks to a temporary To get to that point, Antonio Pasquale had to deal with window simplifying squeeze-outs. KMV is now fully owned by hundreds of shops, bars and restaurants as he resurrected Alessandro via a Netherlands-based holding, his father having Mattoni – the mineral water brand from Karlovy Vary – just retired in 2013. after communism fell. “There were no distributors in 1991 when my father came here from Italy,” explains Alessandro Returning thirst Pasquale, the current CEO of Karlovske Mineralni Voda (KMV) Alessandro Pasquale is busy building on his inheritance, and son of Antonio. “There were no products to distribute.” expanding the company's portfolio of mineral water KMV has introduced a large range of other bottled waters and brands and soft drinks, and growing into new markets via soft drinks in the intervening quarter of a century. However, acquisitions. KMV remains the market leader at home, with a it's still the mineral water brand from the spa town in the west share of 47% last year, according to a report on the segment of the country – a cherished client of Czech TV stations and from Euromonitor International. avid supporter of public events, whose giant eagle-shaped billboards guard Prague along the main roads coming from Pasquale claims KMV's lead has consistently increased in recent all directions – that has seen KMV retain top spot in the Czech years, despite the economic crisis suggesting cheaper bottled bottled water market throughout the years. water might erode its advantage. Neither has a conservation

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

Pasquale Snr was hardly alone when he arrived in the Czech controversy surrounding the now-abandoned spa built by Republic in 1991; Italian investors were amongst the first to Heinrich Mattoni around the spring appeared to have hit sales. arrive when the Iron Curtain fell. However, the crowd landed in Prague and concentrated on snapping up real estate. First-half results reflect the economic recovery in the region as consumer confidence returns. KMV saw record sales growth Having already run a successful water producer at home in of 31% on year in the six months to June, with revenue “the most developed water market in Europe”, Pasquale says reaching over CZK3.5bn (€130mn). And this growth should his father saw it as a natural expansion to head to Karlovy accelerate through the rest of the year, Pasquale hopes, Vary, where Heinrich Mattoni first tapped the spring in 1873. thanks to a searing hot summer in Central Europe and the Pasquale Snr was such an early mover that he initially had to recent acquisitions in Hungary. KMV expects to sell 1bn run the company as a joint venture with the state and wait for litres of water and soft drinks in 2015, and boost turnover to privatisation law to catch up. CZK6.3bn.”The crisis is behind us now,” the Italian insists. 16 I Companies & Markets bne November 2015

“Confidence is returning, but not as before. It was unhealthy in “I'm Italian,” Pasquale adds with passion. “It's in my DNA to the boom years, with many people taking on huge debt, and I preserve local flavours!” don't think we'll see that again.” Liquid markets On top of the return of consumer spending, some suggest the The small size of the Central European markets is another Czech bottled water segment will get an addition boost from bonus, the CEO suggests. “We're small, fast and flexible,” he recent legislation demanding that at least one drink in bars points out, noting that KMV has also consistently pumped and restaurants should be cheaper than beer. Full of disdain, earnings back into technology in order to raise productivity. Pasquale shrugs as he says the legislation may or may not help The Mattoni plant in Karlovy Vary has seen output rise by KMV's sales, calling it an empty political gesture. “They claim a factor of 20 since 1991 while retaining around 200 staff it's part of an effort to reduce teenage drinking,” he scoffs. throughout. “We're not a super modern family,” he laughs, “People know whether they want a beer or a water when they “but the factories are all completely new.” walk into a pub. A few crowns won't make any difference. They should look at the underlying causes for teenage drinking.” He points to KMV's new Hungarian bottled water producer Kekkuti Asvanyviz – producer of the Theodora brand – which was bought in March from Nestle, as an illustration. “We've held the company for eight months,” he says, “and in the first half “We're not a super modern of the year it reported a profit for the first time in nine years.” family, but the factories are A month later, KMV bought soft drinks producer Szentkiralyi all completely new” Asvanyviz, a move that saw KMV take top spot in Hungary for mineral water, Pasquale claims. He wants to double the size of the business in the country over the next five years. The awkwardness of the legislation also appears to stem from an effort to avoid the third rail of Czech politics. “Beer in The acquisitions – which followed the 2008 purchase of the Czech Republic is like the baguette in France,” Pasquale Austria's Waldquelle – will likely take some time for KMV to laughs. “You can't touch it.” digest, therefore. They also complete Pasqaule's “primary target” to take a leading share in four “similar” markets. However, he suggests, the ongoing emphasis on a healthy For the future, Pasquale would likely seek a larger pool – lifestyle is helping consumers switch to water. Indeed, suggesting Germany, Poland or even Italy – although he Euromonitor International points out that “Czech consumers bemoans a lack of good targets across the region. purchased more functional bottled water and natural mineral bottled water in 2014 with the developing health and wellness However, he insists KMV stands ready for any opportunities. trend in the country”. The company's retained earnings are “huge” he says, citing a conservative approach to spending by both KMV and the In the DNA family behind it. On top of that liquidity, private equity has In seizing that opportunity, Pasquale appears confident long been keen to hook up with KMV, and Pasquale says he that his “relatively small company” can continue to see off would be happy to look at any deal should it be needed. competition from multinationals such as Coca-Cola, Pepsi and Nestle. He also claims rising competition from local firms in Meanwhile, KMV is in the midst of trying to offload a small the region is a good sign. plant in Ukraine. “It has never really worked,” says Pasquale, with the crisis only sealing the factory's fate. “The economy is Kofola – producer of the eponymous communist-era Czech not developing, and you have a frozen conflict. Investment is cola substitute – is particularly keen. Having bought Slovenian about expectations,” he adds ruefully. mineral water producer Radenska earlier this year, the Warsaw-listed company says it is looking for acquisitions in the Czech and Slovak markets, as well as others. “I like the local competition,” Pasquale asserts. “The only expansion Kofola is carrying out is in the water segment. It tells you something about the future of the market. Water is the perfect answer to building health concerns.”

Meanwhile, respect for local flavours is key to fighting the multinationals' advantages of scale and product portfolio, he contends. “They try to convince the consumer to take a standardized product,” he says. “We go from the opposite end to respect local tradition. We don't offer orange-based beverages in the Czech Republic, but forest fruit flavours.” bne November 2015 Companies & Markets I 17 Business leader- turned-technocrat ready to mine Mongolia's “treasures”

Terrence Edwards in Ulaanbaatar

ne of Mongolia's premier dealmakers has taken on up to a third of Mongolia's annual GDP. "We own 34% the supreme task of putting the country's mining and [and] 66% shareholder Turquoise Hill has a $7bn market Oinfrastructure projects back on track after years of capitalization. That's just one asset.” delays – and he's doing so ahead of elections that could bring about yet another complete change in government and its Missed potential institutions. Known by many business leaders in Ulaanbaatar as Byamba, the Western-educated businessman cut his teeth as the head Mongolia was a magnet for investment until 2013, of Newcom Group, one of Mongolia's largest conglomerates. when foreign investors grew wary over problems that It was there that he led the development of the country's were plaguing the key mining sector. Poor management first wind farm. With one more and a solar farm also in the of state-owned mines, disputes with private partners and works, the Newcom subsidiary Clean Energy Asia has the years of dragging development on infrastructure that ambitious hope to someday export green energy throughout would remove bottlenecks on mining exports all took their northern Asia. toll. The slowdown in China, which consumes most of the gold, copper and coal produced here, hurt the economy But it's Byambasaikhan's tenure at Erdenes Mongol that will further. The Asian Development Bank is projecting just 2.3% likely prove the most challenging of his career. Case in point: growth for 2015, compared with 17.5% hit during the peak of Mongolia has squandered its enormous Tavan Tolgoi coking the mining boom in 2011. coal deposit since commercial production was launched four years ago. That includes numerous stops in production, These are the challenges that Bayanjargal Byambasaikhan will corruption scandals and a decision to give away most of face as he seeks to transform the country's most valuable its working capital for a short-lived social programme that portfolio of assets into a flourishing investment vehicle. State- handed out about $15 a month to each Mongolian. owned mining license holder Erdenes Mongol is where the country keeps its stakeholdings in the country's five most- Byambasaikhan's first victory was mending relations with valuable deposits for gold, copper, coal and other minerals global miner Rio Tinto for the relaunch of a $6bn underground that litter this resource-rich country. expansion at the Oyu Tolgoi copper mine. The project was stuck in limbo for about three years because of disagreements Erdenes translates from Mongolian into "treasure", but much between Rio Tinto and the government. Now Byambasaikhan of that remains buried deep underground because of poor is leading negotiations for a strategic partnership for the Tavan management by successive governments. “We're introducing Tolgoi coal mine after a deal from earlier this year to hand over new standards of business to the companies that run the management to China's Shenhua Energy, Japan's Sumitomo mines, starting with the financial and technical standards,” Corp and the locally-run Mongolian Mining Corp fell apart Byambasaikhan tells bne IntelliNews in an interview. because of objections by some lawmakers. “The dialogue should be corporate-to-corporate relationship; not sovereign- Currently, it's difficult to put a dollar estimate on the value to-corporate,” says Byambasaikhan about negotiations for of Erdenes Mongol's portfolio. But audits are currently Tavan Tolgoi. “That's how we succeeded in unlocking the underway, and the partial privatisations of the mines underground project at Oyu Tolgoi.” should help put accurate values on them. “Look at Oyu Tolgoi,” says Byambasaikhan, referring to the country's Treasure collector giant copper-gold mine that at full production could generate Success at Tavan Tolgoi as well as an investment agreement 18 I Companies & Markets bne November 2015

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

bne IntelliNews His inspiration is the Singaporean sovereign wealth fund Temasek, which currently manages a net portfolio of Large investors are pessimistic about the outlook for the $266bn. Byambasaikhan puts its success down to the quality Russian market and some are reducing their exposure, of its assets, its talented personnel and ability to operate according to an October report published by the London- independently. based advisory firm Global Counsel. Nigel Finch, managing director of the Sydney-based financial Although some groups are keeping their options open, advisory firm Saki Partners, says “there are no cons” to and some even seizing counter-cyclical opportunities, the Temasek model. “The main priority is to develop a dual unless the business environment improves more mandate strategy; to ensure the fund achieves the targeted groups will step back from the Russian market, economic returns while simultaneously delivering social Global Counsel said. impact in Mongolia,” says Finch, who is a honorary consulate in Sydney for the Mongolian Embassy and has hosted The report asked 46 of the biggest international investors Mongolian delegations seeking economic cooperation with on how they perceive the turbulent 18 months since the Australia. beginning of 2014, during which sanctions have been imposed, oil prices fallen, and Russian domestic and Byambasaikhan sees 10-fold economic growth for Mongolia foreign policy has been volatile. over the next 20 years, with Erdenes Mongol's portfolio expanding alongside that growth. But despite all his optimism, Six times as many correspondents view the Russian the upcoming parliamentary elections could put a hole in his market negatively than those viewing it positively, making grand plans. With Mongolians set to go to the polls in July a “bleak assessment”, driven by both structural and 2016, a change of government could see Byambasaikhan cyclical factors. Nevertheless, there are twice as many turfed out of his job. companies committed to expanding their presence in the Russian market as those planning to reduce it. Still, the When the 2012 election saw the Democrats take power away largest group of respondents are either standing pat or from the Mongolian People's Party, it set off a sea-change in not reporting any changes. government. New appointments were made at every level of government agency, and the entire ministry structure was Across sectors, healthcare had the most optimistic reformed. assessments of the market, while the financial and the energy sectors the most pessimistic. While comments on In the run-up to these elections, politicians could also Russian policy were hard to obtain, Global Counsel notes be tempted to criticise the government and people like that those collected concerned mostly the food embargo Byambasaikhan for handing over too much control of and the policies affecting the financial sector. valuable resources and infrastructure to foreign investors – which always goes down well with a population suspicious of At the same time, a number of large players are “dou- larger neighbours looking to control its economy. Oyu Tolgoi, bling down” and expanding their operations despite the Tavan Tolgoi and the railway all hinge on partnerships with pessimistic outlook, but the authors of the report are not foreign investors to lead and finance development. sure whether such strategies will be sustained, given the uncertainty stemming from the external environment and Regardless, Byambasaikhan insists he can do his job just fine internal policy. under any government. If he succeeds, maybe they will let him try. “Government is really convinced that state-owned “The next 18 months are likely to be critical in enterprises can run better, but the way to do it is to remove determining whether more international investors double political influences,” says Byambasaikhan, who asks for down or pull back from the Russian market,” commented nothing more than the ability to run his fund as freely as Gregor Irwing, chief economist of Global Counsel. any other company that operates in the country.

If the external environment does not improve, then the “Put me on the same ring as everyone else,” he says. “I don't number of foreign firms reducing their exposure to need any privileges or restrictions.” Russia is likely to increase, he added. bne November 2015 Companies & Markets I 19

Ukraine cities compete to attract IT companies

Graham Stack in Kyiv

irst the good news: in September global photo sharing Then a large Dnipropetrovsk web development company 908 app Snapchat bought Odesa-based start-up Looksery for announced it was entirely relocating its staff to Poland due to F$150mn – the biggest ever buyout of a Ukrainian-based pressure from the security forces. “In Ukraine the police can IT firm, less than a year after its launch. Looksery technology enter any company, confiscate the means of production and allows real-time modification of video images to brush up your keep hold of them,” the co-owner of 908, Andriy Khorsev, looks when chatting, or can transform you into a cast member wrote on Facebook, after law enforcement confiscated servers of “The Walking Dead”. Looksery's programming team was in connection with child porn allegations. “This is done with based in Odesa after being selected in national programming one goal – to put pressure on the company and force it to competitions, while the company was registered in San undertake certain actions… Such moves will kill a sector that Francisco. not long ago was a beacon of hope,” he lamented.

Now the bad news: Ukraine's IT sector, one of the strongest parts of the economy because of a plethora of talented coders, “Such raids by the police will kill is reeling after a series of raids by the security services, which has caused some local developers to shut up shop a sector that not long ago was a and relocate to more benign environments such as Poland. beacon of hope” "The large number of searches at IT companies is a cause for concern – in September alone there have been over five. This will hardly improve the investment climate,” the Lithuanian- The raids and corrupt activities by law enforcement agencies born economy minister, Aivaras Abromavicius, tweeted on add to an already unfriendly environment for those working September 23. Estimates put the total number of 'raids' of IT in IT in Ukraine. Fighting in East Ukraine – both the actual firms by the security services so far in 2015 at over 50. conflict zone in the Donbas region, but also the accompanying threat of being called up to the army – weighs on the minds of Outsourcing in 2013 brought in close to $2bn in revenue, for the young men who make up the bulk of coders. Together with the first time exceeding revenues from arms sales, Ukraine's a general decline in living standards set against the rewards other technology export, with a growth rate predicted at 25% for coding talent in the West, Ukraine's IT brain drain is pa. But in 2014 the crisis with Russia caused the estimated accelerating. The industry association IT Ukraine puts the total figure to fall back sharply, as swathes of the country were hit number of programmers who left Ukraine in 2014 at 2,500, by physical disruption. but the loss of whole companies is a new phenomenon that threatens to reduce the growth rate of Ukraine's IT sector from Now increasing pressure from Ukraine's unreformed law 25-30% in 2013 to 2-3%. enforcement is adding salt to the wounds. Raids on IT companies may not always be a sign of corruption, In early September, the Security Service of Ukraine, known the interior ministry points out in its defence, since the sector by its acronym SBU, raided the Dnipropetrovsk office of suffers unhealthy links to cybercrime, as bne IntelliNews has New York-listed international outsourcing company Luxoft, detailed. In August, the US Securities Exchange Commission reportedly after threats of a terrorist attack had been sent accused Ukrainian hackers of teaming up with local invest- from its IP addresses in June. One week later, the SBU raided ment banks to commit fraud in the US worth over $100mn. the Kharkiv offices of IT firm NIX Solutions, reportedly US regulators have also frequently accused Ukraine's IT sector looking for documents relating to a bank. of infringement of intellectual property rights. 20 I Companies & Markets bne November 2015

Lviv, Andriy Sadoviy, who is also head of the Samopomich “We just have to free ourselves from political party. Sadoviy is offering help in relocation, support bureaucracy and corruption and from Lviv town council's IT Cluster and Business Services section, “and protection from unhealthy attention from explain that coders are welcome 'people wearing epaulettes'.”

here and we will assist them" Ironically, September's landmark Looksery deal, while showcasing Ukraine's coding talent, also accelerated the IT brain drain, as the company closed its Odesa office to relocate Ukraine's government for its part suspects that the outsourcing staff to Silicon Valley. industry exploits its offshore nature to evade taxes, and also that many local programmers formally registered as individual But Odesa's reform-minded regional administration under entrepreneurs are in fact full-time employees of IT developers. former Georgian president Mikheil Saakashvili is now aiming to reverse the tide and like Lviv provide a friendly incubator Rolling out the welcome mat environment for IT companies. Furthermore, an adviser to With decentralisation a la mode in Ukraine, competition Saakashvili, former Microsoft lawyer Sasha Borovik, is now among cities and regions to provide the best conditions running for mayor of the city of Odesa and has made IT a for IT could now offer the best solution for the sector's major plank in his campaign. "I hope that in the future when problems. “Regarding the numerous recent 'mask shows' coders will talk about work in Ukraine, they will first and [raids by masked police] against IT companies in Ukrainian foremost think of Odesa… We just have to free ourselves from cities, I invite all developers who find their local situation bureaucracy and corruption and explain that coders are wel- scary and uncomfortable: Come to Lviv,” wrote the mayor of come here and we will assist them," he tells bne IntelliNews.

COMMENT: Once I lived the life of a millionaire…

Peter Szopo of Erste Asset Management

o, the title of this column is not the first line of the Even more depressing: while EM equities, supposedly a play autobiography of an erstwhile emerging markets on growth and convergence, declined for four years in a row, Ninvestor – although it could be. Somebody who developed equities soared by 40% (S&P 500) and 20% (Euro invested $1mn in emerging markets equities in May 2011 Stoxx 600, in euro), respectively, over the same period. $1mn would have only owned, roughly, $640,000 by the end of invested in May 2011 across developed markets equities September (based on the MSCI Emerging Markets Index). would have grown to about $1.13mn (not counting divi- Certainly nothing to cheer about. In fact, the column’s title dends) by October. comes from the blues standard “Nobody loves you, when you are down and out” – popularized by the great Bessie Smith in In the second half of August, the MSCI Emerging Markets the 1920s – which perfectly summarizes the sentiment towards Index hit bottom – for the time being. Since then, it gained emerging markets in recent months, if not years. in dollar terms 11.5% to October 16. Not spectacular, but bne November 2015 Companies & Markets I 21

significant enough to re-examine the investment case for EM recently. First, the possibility of another round of quantitative equities, particularly because the rebound was accompanied easing in 2016 in Europe and the US in response to sluggish by an improvement in a number of other indicators usually European growth and recession risks in the US. However, associated with a “risk-on” scenario, in which investor it is not clear how this would help EM equities, because the growth shock preceding further monetary easing would likely dominate the liquidity impact. Second, and more “It still is unlikely that the current beneficial for EM assets in the near term, would be further stimulus measures, particularly of the fiscal kind, in China. uptick in EM assets will turn into They would not only support demand for commodities, but also alleviate general China-related fears that, according to anything closely resembling the EM recent surveys, are the main risk factor weighing on investor bull market of the early noughties” sentiment.

Overall, however, it still is unlikely that the current uptick appetite for risk assets grows. The dollar weakened, oil and in EM assets will turn into anything closely resembling copper bounced, and the S&P 500 as well as Euro Stoxx 50 the EM bull market of the early noughties or the massive volatility indicators dropped sharply. rebound from 2009 to 2011. It may last another two weeks or two months – nobody can tell – but “a return to robust Swings in investor sentiment are often hard to understand and synchronized global expansion remains elusive”, as the at the time they take place. One factor triggering the change IMF pointed out in its recent World Economic Outlook (Page could have been China’s devaluation in mid-August. Initially xiii), and commodity markets will remain weak. Two of the it was seen as a confirmation of China’s growth problems key ingredients for a revival of the EM investment case, and, therefore, accelerated the drop in risky assets, including therefore, will be missing for the time being. EM investors, it EM equities. However, soon afterwards investors realised seems, need to wait some more time before they can return that previous concerns were likely overdone, and they to live a millionaire’s life. also started interpreting the currency move as a sign that Chinese authorities would not accept a massive slowdown in economic growth without attempts of counteracting. “Two of the key ingredients for a My expectation (expressed in this bne IntelliNews column) revival of the EM investment case of a better second half-year for Central European equity markets (Poland, Czech Republic, Hungary) has not will be missing for the time being” materialized, so far, in light of the generally poor third quarter for equities. However, within the EM universe, Central European markets proved to be more resilient to global turbulences than their peers (see chart), in line with the thinking in the previous column.

The recent rebound was also supported by the fact that in August the slide in earnings estimates for the EM corporate sector slowed and finally turned upwards. 2015 earnings will still decline (the third year in a row), but based on consensus estimates growth in 2016 could reach 12%. Together with a current valuation discount of 28% to developed markets against a long-term average of 21%, the earnings momentum will likely remain supportive. EM equities vs. Yuan

Likewise, the reluctance of the US central bank to start 100.0 6.4 raising interest rates in September was perceived by many investors as supportive for EM assets. However, as far as 92.0 6.4 equities are concerned, it is not clear whether the relief about the Federal Reserve’s inaction was appropriate. As low 84.0 6.3 interest rates are the consequence of feeble US or even global growth, EM equity investors should in fact be concerned 76.0 6.2 about the lack of upward pressure on interest rates. J-15 A-15 S-15 O-15 EM Central Europe Yuan/USD Chinese stimulus could provide near-term support Two more factors creating upside risk were brought up Source: Bloomberg; Erste Asset Management 22 I Companies & Markets bne November 2015

bne:Funds Fondul Proprietatea drives Romania’s privatisation agenda

Clare Nuttall in Bucharest

omania’s government is under pressure from the Hidroelectrica has been delayed because of the insolvency property restitution fund Fondul Proprietatea to procedures at the company, but there are hopes these will Raccelerate the country’s sluggish privatisation process be wrapped up by the first quarter of 2016. The best-case and move forward with IPOs and strategic sales of state-owned scenario would be an IPO before the summer, or failing that enterprises. in the second half of the year, according to Konieczny. Morgan Stanley has already been selected as investment banker for the Fondul Proprietatea (FP), “property fund” in Romanian, is process and preparatory work is proceeding, but a lot depends a closed-end fund set up to reimburse Romanians whose on when the insolvency issue ends. property was confiscated in the Communist era. Managed by US-based Franklin Templeton, it currently has €3bn under Hidroelectrica posted record profits in the first quarter of 2015, management. FP is listed on the Bucharest Stock Exchange and after carrying out a far-reaching restructuring programme. in April carried out a successful secondary listing in London. The most important step was cancelling contracts signed under This resulted in a broadening of the fund’s investor base with a number of new international investors – both large and small – becoming shareholders. “One of the reasons Fondul is

The size of FP’s portfolio has fallen sharply from almost 90 attractive for investors – both companies to 49, following a series of sales and IPOs. These local and international – is that included several high-profile IPOs of major energy companies in 2013 and 2014, with both electricity distribution company it’s a proxy for Romania” Electrica and gas company Romgaz holding dual IPOs in Bucharest and London. previous managers, under which it sold electricity at a loss to Privatisation by IPO has proved popular in Romania, primarily murky private traders, dubbed “smart guys” by the company. because it is a relatively transparent process. “A lot of questions Progress was finally made in early 2015, when Hidroelectrica have been asked about past transactions, and in the current won several court cases against the traders. political climate it’s very challenging to get the government to make decisions to sell stakes to investors,” the fund’s manager, Meanwhile, the IPO of CE Oltenia, the operator of several Greg Konieczny, tells bne IntelliNews in an interview. “So we coal fired power plants, has been postponed indefinitely, encourage the government first to list part of its holding, and although Romanian Energy Minister Andrei Gerea indicated on then take a decision on whether to further reduce its holding.” September 25 that a listing might be considered in spring 2016.

Two more companies, Hidroelectrica and CE Oltenia, have Unfortunately, former CE Oltenia managers were at the centre already been approved for IPO by the government, but there of a corruption case also involving Prime Minister Victor have been lengthy delays and the timing of the deals are still Ponta. Ponta is accused of forging documents to cover unclear. And the experience of the two energy companies illus- payments made to him in 2007 and 2008 when he was trates the challenges faced with privatisation in Romania, which working as a lawyer, Romania’s anti-corruption prosecutors has lagged behind its peers elsewhere in Emerging Europe. said on September 17.

Tales of corruption and bankruptcy More IPOs could be in the pipeline. The listing of salt The IPO of Romania’s largest electricity producer monopoly Salrom might be approved soon despite a comment bne November 2015 Companies & Markets I 23

from Minister of Economy Mihai Tudose on September 10 that the IPO was “not an option” given the company’s strategic importance. Emerging Markets Konieczny tells bne IntelliNews that Tudose’s comment had been “unwise”. It also contradicts an earlier government Direct – your data statement indicating that Bucharest is willing for the IPO to go ahead. Having shared more information on the IPO process and costs with the minister, FP expects a shareholder source for the meeting to take place within the next 30 days, at which time the IPO could be approved. This would pave the way for an developing world IPO before summer 2016, subject to market conditions.

A Romanian government committee is now drawing up a Polish Metallurgy Report – 2015 list of the next companies due for listing, which is likely j.mp/polishmetalreport to include Bucharest Airports, Constanta Port and Posta Romana, after the attempted sale of the company to Get an overall picture of the current trends and the Belgium’s bpost fell through in September. outlook for Poland’s metallurgical sector, which represents a significant part of the country’s indus- FP is keen to push ahead despite the uncertain investment trial base. It is dominated by the steel industry, which climate. “To prepare a company for IPO takes between six and 18 months. It’s very difficult to know what the market accounts for more than 90% of the country’s total will look like in a year’s time,” says Konieczny. metallurgical output. Copper production makes about 7% of the total, while other metals, like lead Nor does he expect Romania’s upcoming elections – the and zinc, make the balance. country will hold both parliamentary and local elections in 2016 – to affect plans to sell stakes in state-owned or • Poland’s steel production sector is mostly driven by partially state-owned companies, or to affect the appetite for the main domestic consumers - the construction investment into Romania. “Of course, locally there will be sector, the auto manufacturing industry, the a lot of noise around the election campaign. However, most investors realise that for all the main parties the goal is to producers of machinery and other metal products further integrate with Europe. There are no strong political and household appliances makers; voices against the EU as in Greece or Hungary. We don’t • Poland is the biggest steel producer in the CEE expect any major shift in policy,” he says. region and the sixth biggest in the EU, accounting for about 5% of the bloc’s total crude steel output; As FP exits some of its portfolio companies, the fund has the • After two years of contraction, Poland’s crude steel ability to make new investments. However, Konieczny says output grew 8.4% y/y in 2014 and is set to keep that under current market conditions, buying new companies on rising in the medium term, driven by robust would not benefit the fund. “We would consider buying new companies if the return from them is greater than the returns perspectives for the key domestic consumers – the we can generate for shareholders from buying back our own automotive and construction sectors; shares,” he explains. As of end-August, FP was trading at • After two years of contraction, Poland’s apparent a discount to net asset value (NAV) of around 30%. “If we crude steel consumption soared 18% y/y to an all- buy back our own shares, we get a return of close to 50%. time high of 12.19mn tonnes in 2014, as performance It would be very hard to beat that by investing into new improved at both the automotive and construction companies.” sectors while consumption is also set to grow further in the coming years, reaching new record-high levels; FP is expected to continue to get smaller, as the current €3bn is far too large for the local market. However, there are no • Poland’s copper sector is dominated by 32% state- plans to wind up the fund, which does not have a fixed owned KGHM, which is the sole domestic copper expiry date. mining company and one of the leading copper producers in Europe. In addition to supporting the privatisation process, FP has also helped to make Romania more accessible to investors by offering exposure to the Romanian market. As Konieczny points out, “One of the reasons Fondul is attractive for j.mp/emdstore investors – both local and international – is that it’s a proxy for Romania.” 24 I Companies & Markets bne November 2015

bne:Deal Signs of a resurrection in Russia’s moribund capital markets

Jason Corcoran in Moscow

ussian corporates, locked out of international capital JPMorgan, and UniCredit Bank and roadshowed by Gazprom markets for the past 11 months due to the Kremlin’s from October 5, the issue enjoyed double the proposed supply, Rinvolvement in the Ukraine conflict, can see light at the enabling a two-fold yield guidance cut from 5-5.125% to 4.75- end of the tunnel. 4.875%, to the final placement yield of 4.625%.

A new agreement brokered in Paris on October 2 to hold Norilsk's placement could "open the door for issuance from elections in East Ukraine, along with a ceasefire and a other Russian corporates," according to Sberbank CIB. "The continuing withdrawal of weapons from the front lines, placement shows that international capital markets are not boosted hopes that Russian companies will be allowed out of closed off for Russian corporate issuers, which is positive for the funding purgatory imposed for President Vladimir Putin's the short-term outlook for Russia's current account." annexation of Crimea and aggression in eastern Ukraine. This year alone, there was $16bn worth of euro and dollar Russian paper with a maturity date scheduled. Almost $4.5bn of that belongs Gazprom, while Rosneft, another state “Norilsk's placement could open behemoth, must service or refinance $26bn in debt from the the door for issuance from other second half of this year till the end of 2016.

Russian corporates" "An outright lifting of the sanctions can’t be dialled back quickly," Tom Adshead, chief operating officer at Macro Advi- sory in Moscow, tells bne IntelliNews. "What we could see is a This optimism has made Russia’s bond market the best marginal softening as Ukraine gears up to take control back performer among the major emerging markets so far this year, of its borders. That would manifest itself in the banking sector returning 17% year to date, according to Bloomberg. Franklin first with a nod from the very top to compliance departments Templeton excluded Russia from its portfolio in the summer to start softening their internal guidance on how sanctions are and missed out on the rally, but money managers at Aberdeen interpreted." Asset Management and Ashmore Group both say there is still more upside in Russia’s bonds. The banker who came in from the cold Some investors, however, remain to be convinced that Russia Russian issuers have seized the opportunity. Norilsk Nickel, risk is back on the table after the Paris talks over the future of the world's biggest producer of Nickel, on October 7 sold $1bn Ukraine. Paul McNamara, who manages $4.5bn in emerging in the first benchmark-sized Eurobond in a successful tilt to market assets at the investment firm GAM in London, points to test the improved political temperature over Ukraine. Norilsk sold double what it was planning to and managed to secure a seven-year note yielding 6.625%, down from initial guidance "If Paris is a game-changer, then of about 7%. That is the biggest deal from a Russian corporate since Gazprom sold a $700mn one-year bond last November. It I am the Pope” was also the first money borrowed in US dollars since January, according to data provider Dealogic. Russian companies also haven’t issued new debt in euro, sterling or yen bond the Norilsk deal being made up of mostly European banks. "If markets over this period, Dealogic said. Barclays, Citigroup, Paris is a game-changer, then I am the Pope,” McNamara ING Group, Societe Generale CIB and UniCredit were the lead tells bne Intellinews. managers on the deal. Financial sanctions preventing some Russian entities from Hot on the heels of Norilsk Nickel's $1bn bond placement, raising money in international capital markets have been far Russia's state gas company Gazprom placed three-year Euro- more effective than sectoral sanctions, asset freezes and visa bonds also worth €1bn on October 8. Organised by Banca IMI, restrictions. Even Russian companies not sanctioned are suf- bne November 2015 Companies & Markets I 25

fering from contagion, as banks are unwilling to lend to any recession since 2009 has decimated Moscow's investment Russian company for fear of incurring the wrath of a US or UK banking community, with many losing their jobs and the lucky regulator. few being relocated to London to work on other markets. Fees from mergers, bonds and equity deals for European banks The inability of large companies like Rosneft to refinance dropped 61% to $42mn in the year to October 5, according to their debts on the international market fuelled the collapse of the ruble and triggered a run on the banks in December. The oil giant sold a monster RUB625bn bond, which intensified pressure on the currency, as the market assumed it was to be "An outright lifting of the sanctions used to buy dollars. can’t be dialled back quickly"

With equity and debt markets largely shut, the only limited activity in the past year has been through the syndicated loan market. Even there, only $3.2bn worth of deals have been data provided to bne Intellinews by Freeman & Co in New York. made so far in a market that historically was worth about Fees earned by US banks plunged 90% to a paltry $9mn over $50bn a year. the same period.

Uralkali, Eurochem, Metalloinvest, and Gazprom Marketing A reopening of Western debt markets could feed into the and Trading are some of the small band of companies that equity market and open the door to more deals. It could have managed to secure deals. Other names in the market also lead to the lifting of informal bans on lending and new now trying to close deals are coal miner SUEK and steelmaker investments to Russian companies by international financial Novolipetsk Steel, which is struggling to close a deal worth institutions such as the European Bank of Reconstruction and $400mn following protracted haggling over pricing and Development and the World Bank’s IFC private equity arm, "sanctions documentation", according to a senior banker according to Adshead. "Sanctions won't be lifted because they working on the deal. are formally linked to Crimea, but we could see a loosening of the interpretation and that's all we need to get the show back Sanctions, the crash in commodity prices and the first on the road," says Adshead, himself a former EBRD banker. 26 I Companies & Markets bne November 2015

bne:FX Eurasia currencies continue to face devaluation pressures

Naubet Bisenov in Lima

espite significant devaluations already in 2015, Central Kazakhstan, Turkmenistan and Uzbekistan – will post a Asian and Caucasus currencies are continuing to face combined current account deficit of 2.7% of GDP in 2015 and Ddepreciation pressures because of sluggish economic 3.2% in 2016 against a surplus of 3.3%. While Azerbaijan and growth and worsening foreign trade, the IMF predicts in Uzbekistan will maintain their balance sheets in the black, its autumn World Economic Outlook, which was presented Kazakhstan’s current account will post deficits of 3% of GDP in during the IMF/WB Annual Meetings in Lima, Peru, on 2015 and 4.1% in 2016 against a surplus of 2.1% in 2014. October 6. Economic growth in the Caucasus and Central Asia will be The IMF said in the outlook that weakening commodity prices held back by lower commodity prices and spill-over effects had triggered “sizeable” currency depreciations since last from Russia (through trade, foreign direct investment, and spring, especially in August. Regional currencies have fallen by especially remittances), which will interact with existing 40-50% in value this year, most notably the Azerbaijani manat structural vulnerabilities. by nearly 35% and the Kazakh tenge by over 45%.

“Countries with weakening growth prospects and worsening "Exchange-rate depreciation has terms of trade are facing [further] currency depreciation pressures,” the outlook suggests. However, “exchange-rate generally been a useful buffer for depreciation has generally been a useful buffer for countries experiencing growth slowdowns – and has already been countries experiencing growth substantial – but could cause adverse balance-sheet effects slowdowns" where there is foreign-currency borrowing,” Maurice Obstfeld, IMF chief economist, warned as he presented the report at a news conference in Lima. The IMF predicts Kazakhstan’s real GDP growth will slow very sharply to 1.5% this year (from 4.3% in 2014) before Kazakhstan issued 10-year Eurobonds worth $1.5bn and recovering somewhat to 2.4% in 2016. Other countries 30-year bonds worth $1bn last October, while Azerbaijan sold will also experience much slower growth this year, before its first international bond sale of $1.25bn in March 2014. accelerating in 2016. Uzbekistan will grow by 6.8% this year and 7.0% in 2016; Turkmenistan by 8.5% and 8.9%; Tajikistan The IMF warns that policymakers “need to consider the by 3.0% and 3.4%; and Kyrgyzstan by 2.0% and 3.6%. impact of the exchange rate on their financial sector and take measures to ensure its health, especially given the sector’s In the Caucasus, it predicts Armenia will grow 2.5% and 2.2% substantial foreign currency lending to unhedged borrowers this year and next respectively, and for Georgia 2.0% and 3.0%. and short open foreign exchange positions”. Azerbaijan is the region’s only economy that will grow faster this year compared to last. The IMF predicts it will grow by The outlook predicts net energy exporters – Azerbaijan, 4.0% in 2015 (after 2.8% in 2014), falling to 2.5% in 2016. bne November 2015 Corporate Statement I 27 PASHA Bank finds consulting as important as financing in volatile times

s of this summer, PASHA Bank has a new CEO in the To the regions and beyond person of the young, but accomplished financier Taleh In an effort to promote regional development in Azerbaijan, AKazimov, who sat down with bne IntelliNews to discuss PASHA Bank has opened offices in the towns of Ganja and how he will inject dynamism into the bank's development by Zagatala, as well as a business centre in Zagatala focused on offering holistic solutions to clients that encompass financing supporting entrepreneurs working in agriculture. Looking to consulting. ahead, PASHA Bank is eyeing a further expansion of its regional network to Sumgayit and Guba. “We see a big Having been with PASHA Bank since its inception in 2007, potential for development in the regions of the country, the Kazimov is in no rush to make drastic changes to its strategy, demand for expertise and business consultations we provide,” preferring instead to keep a close eye on the market and adapt Kazimov explains. to changes as they come along. “In case of necessity, we can reconsider our growth programme in order to adapt to new In order to support the development of agribusinesses in market trends”, he says, adding that, “we see no need for Azerbaijan and Georgia, PASHA Bank has partnered up with changes in the strategic vision for now.” non-banking credit organisations like FINCA, whose inaugural bond issue on the Baku Stock Exchange and Georgian Stock That strategic vision, which has informed PASHA Bank's growth Exchange it underwrote. PASHA Bank also organises events in recent years, has been to contribute to the development of the aimed at bringing financiers together with agribusiness non-oil economy in Azerbaijan, to support the growth of small entrepreneurs to the same table; its February workshop on the and medium-sized enterprises (SMEs), regional development development of microfinance in agriculture is a case in point. and creating financial links between Azerbaijan and its closest commercial partners Georgia and Turkey – directions that In 2013 and 2014, PASHA Bank opened subsidiaries in Turkey largely echo Baku's growth strategy as well. and Georgia respectively, a choice of locations that was no accident according to Kazimov. “These countries are among One of the directions that PASHA Bank will pursue more the major trading partners of Azerbaijan. By establishing a proactively with Kazimov at its helm is the SME segment. At banking network within the economic triangle Azerbaijan- the moment, SMEs only account for 10% of Azerbaijan's GDP, Turkey-Georgia, we aspire to contribute to much higher which is low by Central Asian standards, where the average trade flows between the countries as well. We are more than contribution of SMEs to the economy is closer to 30-40%. But confident in the successful future of the region, ready to PASHA Bank wants to change that. “SMEs have always been become one of the engines of its economic development, and a priority for us. In late 2013, the bank opened the first out of plan to lend support both to the Azerbaijani entrepreneurs in four currently operating service centres dedicated exclusively these countries and local business,” Kazimov states. to SMEs. Just like with our corporate clients, we offer our SME clients tailor-made services; we have no interest in growing this Looking ahead, Kazimov believes that PASHA Bank's type of lending aggressively, though, through minimum analysis ability to guide its clients will set it apart from competition. and maximum security. Unlike other banks, we provide both “Considering the rising macroeconomic challenges in the financial and consulting services to our clients,” he explains. region, the financing provided by credit organisations becomes a minor product, while proper business consulting SME business owners need professional advice to channel takes centre stage. Entrepreneurs need competent and weighty their companies' growth in the right direction, and PASHA advice on how to improve business models, manage cash flows Bank offers such services for free. “Any bank is capable of and other topics, and PASHA Bank is making efforts to ensure providing a loan, but not every bank is capable of ensuring that the funds allocated to businesses contribute to their that clients will fully benefit from these funds,” Kazimov adds. development,” Kazimov concludes. 28 I Special report bne November 2015

Special Report: CEE/CIS Bank Survey 2015 bne November 2015 Special report I 29

Uphill battle to raise banking profitability

Ben Aris in Moscow

t has been a tough year for banks as a way of excluding the chaff of the The Ukrainian banking sector is probably across the bne IntelliNews region. more obvious scams and glorified the worst off following the collapse of IEconomic stagnation, civil unrest treasury operations that some banks are the economy, which is expected to shrink and even wars and terror attacks have – especially east of the European Union by 11% this year. A massive devaluation weighed on banks’ profits and muted (EU) member states. of the hryvnia, which has lost more than growth. half its value, has nearly bankrupted the The list was compiled with help from whole sector. bne IntelliNews has been ranking banks our partners Standard & Poor’s and Fitch every year for more than half a decade, Ratings, which provided some of the Russia and Belarus are not doing much but this year we have introduced a new numbers, in addition to bne IntelliNews’ better. Russia’s banks are now in an unof- methodology. In the past we ranked own research. The final ranking is not ficial slow-motion crisis as the Central banks in terms of asset size as the entire a definitive list, but it is comprehensive Bank of Russia (CBR) has been closing region boomed on the back of the and covers all the 30-plus countries in banks at the rate of several a week in transition process. But now as the region our patch. recent months – to the point where the moves into a more difficult low-growth funds of Russia’s Deposit Insurance Agen- phase, we decided to switch the focus The picture across the region is very cy (DIA) have almost been exhausted and to looking at profitability as the most mixed and the situation is highly it has had to ask the CBR for more cash. relevant metric in this environment. dependent on the local story. Taken as a whole, ROE has fallen across the entire The Russian list is remarkable for the We chose to rank banks on the basis of region to 3.0-3.5% in the first half of this total lack of state-owned banks near the return on equity (ROE) as the crucial year compared with 6% growth in 2014, top of the league. The two biggest banks variable and subdivided the bigger according to data from Raiffeisen Bank in the country, which enjoy significant banking sectors into groups by asset International (RBI). Risks remain high competitive advantages thanks to their size to be able to compare apples with and the worst problems are in Eastern state ownership, did very badly on an apples. However, we have also taken into Europe, which is dragging down the rest ROE basis: VTB Bank earned a mere account asset growth and profitability of the region. 5.51% ROE (308th place) whereas its 30 I Special report bne November 2015 sister Sberbank did slightly better with In Poland, lenders are facing a large bill Banks are also muddling through in 6.80% (260th place). on mortgage loans denominated in Swiss Southeast Europe with “their perfor- francs. Since the Swiss currency spiked mance and developments hampered Things are going better inside the EU in January, the political pressure has by both macro-related and structural accession countries in Central Europe been on. The current government has put issues,” RBI said. where the economies are less volatile together legislation to offer borrowers and financial sector regulation is a conversion scheme that would cost New loan volumes were sinking slowly stronger. the banks around PLN10bn (€2.35bn). in Southeast Europe in the first half However, with the populist Law & Justice of this year in real terms, especially in Banks have “more or less sustainable (PiS) likely to win the October 25 elec- Croatia and Bulgaria. The only exception single-digit loan growth, solid profitabil- tion, the bill could shoot up to anywhere is Romania, which has clearly turned ity on aggregate and on-going soundness between PLN30bn-60bn, depending on the corner and is recovering on the of the core funding base”, RBI analysts how hard any new proposals prove post- back of solid lending activity, but most Gunter Deuber and Elena Romanova election. On top of that, PiS has suggested of the countries in the region have to wrote in the bank’s annual banking it will levy some form of tax on the sector bear the millstone of non-performing report. However, the analysts warned that could cost lenders PLN1.7bn-5.0bn. loans (NPL). that there might be some “underwater stones” in the second half of the year In Hungary, meanwhile, banks could And times are tough in Central Asia. related to Poland’s changing regulations benefit from a cut in Europe's highest Kazakhstan is the only country with on foreign currency loans. bank tax in 2016, with further reduc- a fully developed banking sector and tions promised in the coming years. banks there have been hit by the deci- In Central Europe RBI predicts loan However, they remain wary of poli- sion of the government to free the tenge, growth will come in at 4-6% year on cymaking after several years of pain, leading to a 25% devaluation of the year (y/y) this year, with the outlook for including a big hit on forex mortgages in national currency. Czech Republic, Slovakia and Poland in late 2014. In the face of that, the central particular all looking positive, as most of bank is preparing measures to push “We would expect keeping overall profit- the bank sectors in the region will return them to raise lending if they want to ability in CEE in 2015 at the 2014 level to to profit in the second half of this year. benefit from the lowered tax. be an uphill battle,” RBI concluded. bne November 2015 Special report I 31

And the winners are…

Eastern Europe

Russia Group A Russia Group C Belarus Bank ROE Bank ROE Bank ROE Promsvyazbank 14.22 Deutsche Bank 40.65 Belagroprombank 5.38 FC Otkrytie 9.17 Sovcombank 32.34 ASB Belarusbank 5.08 Raiffeisen Bank 7.47 HSBC 32.15

Promsvyazbank won in the Russian A Deutsche Bank wins in the C group The winner of best bank in Belarus was category of biggest banks with an ROE with an ROE of 40.65%, but the German Belagroprombank, the state-owned of 14.22%. Russia’s leading commercial bank recently decided to close all its titan that funds the agricultural sector, lender, the bank is part of a larger investment bank operations and scale with an ROE of 5.38%. Just behind group owned by the conservative back to only maintain its corporate is Belarusbank (5.08%), the biggest Russian Orthodox brothers Dmitry banking services after its office bank in the country. An honourable and Aleksey Ananyev, who both sport was dogged by money-laundering mention goes to Priorbank, a Group enormous beards and made their first allegations. However, that didn’t stop it C bank set up in cooperation with the money by laying fibre optic cables and earning the highest ROE in our Russian European Bank for Reconstruction computers before building a banking rankings so far this year. and Development (EBRD), which empire. The bank has always focused had an impressive return of 35.46%, on quality mid-sized to large industrial the highest in its class, despite the enterprises in the private sector and economic problems in the country. seeks out quality customers with which it works closely, rather than chasing the easy-government money. Russia Group D Ukraine Bank ROE Bank ROE Runners up are Financial Company Financial Settlement Centre 269.84 Bank Petrocommerz Ukraine 124.13 Otkrytie (9.17%), a fast growing mid- Rapida 204.65 Motor Bank 52.37 sized investment bank that specialises StarBank 178.39 Bank Veles 51.40 in pension fund management among other things, and the Austrian Raiffeisen Bank, which has been in Russia since The winners in Group D highlight the The Ukrainian results are a bit the 1990s and was a pioneer of retail problems of dealing with Eastern meaningless this year, as the whole and corporate services in the country. Europe’s banking sector. The winner banking sector is in crisis and the is Financial Settlement Centre with a numbers they are reporting to the massive ROE of 269.84%, which would National Bank of Ukraine (NBU) are Russia Group B have made it the most profitable bank regarded as having little bearing on Bank ROE in the country – indeed the whole region reality. ING Bank 38.08 – except the CBR pulled its banking Citibank 26.88 license on August 3 when it was found to “not comply with anti-money laun- Ural Bank for R&D 8.97 dering laws of proceeds from crime and terrorism”. The B group was won by Holland’s ING Bank, which is Russia’s largest custodian bank with a ROE of 38.08%. 32 I Special report bne November 2015

Central Europe

Poland Group A Poland Group C/D Czech Republic Bank ROE Bank ROE Bank ROE

mBank SA 13.28 Idea Bank SA 14.00 Československá obchodní banka, a. s. 5.38

ING Bank Śląski SA 12.10 Bank Pocztowy SA 10.08 Česká spořitelna, a. s. 5.08 Bank Millennium SA 11.12 Pekao Bank Hipoteczny SA 2.15

Two out of the three top banks in Idea Bank and Bank Pocztowy are Ceskoslovenska Obhodni Banka (CSOB) Poland’s Group A – mBank and Bank both looking to raise funds to power is the winner in the Czech Republic with Millennium – are amongst the lenders rapid expansion. The innovative Idea an ROE of 17.27%. The third biggest with the biggest forex loans portfolios, issued PLN200mn worth of bonds in bank by assets is owned by Belgium’s and therefore stand to take a big hit late September, with plans to execute financial group KBC. Alongside runners should a costly "solution" be forced on another PLN300mn soon. The bond up Ceska Sporitelna and Komercni the banks. Germany's Commerzbank, issue follows the bank’s troubled IPO in Banka, it was one of the three major which owns mbank, has threatened April, when it only achieved an IPO price banks in the country before the fall of possible legal action. of PLN24 per share, having hoped for communism. All are owned by major PLN32. Eurozone banking groups and operate However, banks with forex loans stand in what is often described as the perfect to make lower profits whether or not Bank Pocztowy’s shareholders - state- banking market: stable, but a bit boring. legislation arrives. The regulator KNF is owned postal operator Poczta Polska already pushing exposed lenders to beef and state-controlled bank PKO BP – up capital buffers, hitting both financial boosted the bank’s capital by PLN60mn Slovakia results and dividends. The uncertainty in September, and plan to get an IPO off Bank ROE only adds to a year already set to prove as soon as market conditions allow. Tatra banka 15.46 mediocre for bank earnings, because Slovenská sporiteľňa, a.s. 14.40 of record low interest rates and fierce 9.91 competition between lenders to get Hungary ČSOB, a.s. Poland’s consumers to spend more. Bank ROE OTP Mortgage Bank 16.93 Tatra banka was established in 1991 as ING Bank Śląski, owned by the Dutch K&H Bank Zrt 9.85 the first private bank in Slovakia. It is group, looks to be in a more comfortable owned by Raiffeisen Bank International. Kereskedelmi es Hitelbank Zrt 6.24 place. It has few specific risks weighing (K&H Bank Zrt) Like the Czech market next door, on its balance sheet. Slovakia is seen as a stable market, but offering limited opportunity to boost Poland Group B: The winner in Hungary is OTP Mortgage returns swiftly. Bank ROE Bank with an ROE of 16.93%. The mortgage lender is owned by the Alior Bank SA 5.47 country’s largest bank by assets, OTP. Estonia Bank BPH SA 1.45 Runner up is K&H Bank, a unit of Bank ROE Belgium's KBC. All banks in Hungary Swedbank 49.62 Top performers Alior Bank and Bank are hoping to recover from tough Versobank 30.10 BPH are centre stage in ongoing treatment by the Fidesz government LHV Pank 20.84 speculation on a coming consolidation over the past five years, which has wave in Polish banking. Poland’s state- driven many into large losses. controlled insurer PZU took control of The winner in Estonia is Swedbank, Alior in May, and was reportedly close to with an ROE of 49.62%, a result that a deal to buy BPH from GE Capital until leaves most European banks far behind. talks broke down in October. In September, the Swedish lender acquired the retail banking businesses The uncertainty over the sector of Danske Bank in Lithuania and Latvia, impeded the pair from agreeing on growing its consumer base and loan a price. Meanwhile, KNF remains portfolio to strengthen its position in the opposed to any major acquisitions by Baltic region. existing large players, especially the foreign groups that mostly dominate. bne November 2015 Special report I 33

Turkey

Latvian Turkey Group A Turkey Group C Bank ROE Bank ROE Bank ROE ABLV Bank. 35.95 Türkiye Cumhuriyeti Ziraat Bankası 16.66 Citibank A.S. 18.43 A.S. Rietumu Banka 21.73 Aktif Yatırım Bankası A.S. 13.39 Türkiye Halk Bankası A.S. 14.22 Norvik Banka. 11.53 Türk Ekonomi Bankası A.S. 13.91 Citi started doing business in Turkey in ABLV Bank, with an ROE of nearly 36%, Turkish state-owned lenders dominated 1975 with corporate banking services is significantly more profitable than our list this year, led by state-owned and began to operate as a branch the majority of its European peers. Ziraat Bankasi, Turkey’s largest lender in 1981. In 2007, Citi acquired Opus ABLV is Latvia’s biggest locally-owned by asset size. French BNP Paribas’ Menkul Değerler A.Ş. and has started bank; Oleg Fils and Ernests Bernis Turkish unit Turk Ekonomi Bankasi to provide security services in Turkey as – who control the lender – regularly (TEB) was the only private lender in the Citi Menkul Değerler A.Ş. top the charts of richest Latvians. Its first group. expansion outside its home country has concentrated on the former Soviet The Turkish banking sector is highly Union, helping to concrete Latvia's dependent on external funds because of reputation as an EU base for capital low saving rates in the country. Turkish from that region. lenders have not faced visible problems in foreign borrowing yet, although the US Federal Reserve’s expected rate hike Lithuania could curb capital flows to emerging Bank ROE markets, with Turkey seen as amongst AB Šiaulių bankas 22.41 the most vulnerable to that. AB Citadele bankas. 11.52

AB bankas „FINASTA“. 10.33 Turkey Group B Turkey Group D Bank ROE Bank ROE Siauliu Bankas is the least profitable Türkiye Sınai Kalkınma Bankası A.S. 18.31 Deutsche Bank A.S. 17.50 of the Baltic winners, but its ROE still Şekerbank T.A.S. 5.17 Nurol Yatırım Bankası A.S. 12.59 stands at over 22%. The EBRD is the 5.13 JPMorgan Chase Bank N.A. 10.25 bank’s biggest shareholder with a İller Bankası A.S. stake of over 18%. Siauliu took over investment bank Finasta and Finasta State-owned lenders Turkiye Sınai Deutsche Bank Turkey is a provider brokerage services earlier in 2014 from Kalkinma Bankasi (TSKB) and Iller of corporate banking services, while investment group Invalda LT. Bankasi were among the top three Nurol Yatirim Bankasi is an investment lenders in the second group. Sekerbank bank and JP Morgan Chase Bank was the only private lender in the is a provider of financial services to leaders of the second group. corporates. 34 I Special report bne November 2015

Southeast Europe

Romania Bulgaria Moldova Bank ROE Bank ROE Bank ROE Banca Comerciala Româna 23.30 DSK Bank 21.71 BC „MOBIASBANCA - Groupe Societe 27.12 Generale” S.A. Banca Transilvania 10.38 Sibank EAD 14.36 BC „Moldindconbank” S.A. 25.93 BRD – Groupe Société Générale 9.66 Unicredit BulBank AD 13.56 BC „Moldova - Agroindbank” S.a. 21.38

Erste group’s Romanian branch DSK Bank, a state savings institution Moldova’s banking sector is in turmoil Banca Comerciala Romana (BCR) in the communist era, is Bulgaria’s as investigations into a $1bn bank returned to profit in H1 this year after second largest bank by assets, now fraud drag on, most recently resulting massive losses in 2014. But its non- owned by Hungary’s OTP Bank. A in the arrest of former PM Vlad Filat on performing loan (NPL) problem is still February 2015 survey by Client X October 15. The central bank’s decision not fully settled and the group has just found it was the most trusted bank in to liquidate the three banks involved abandoned plans to sell a €2.7bn bad Bulgaria. DSK was also the developer in the scandal does, however, create loan bundle, disappointed by the price of the mobile savings gaming opportunities for other banks to expand. offered. Banca Transilvania, in second application DSK Gameo in 2003. Mobiasbanca in particular could benefit place, recently acquired Volksbank from its status as part of international Romania. This allowed locally owned banking group Societe Generale. Banca Transilvania to overtake Societe Generale’s BCR to become the second largest bank in Romania. Kosovo Montenegro However, while the deal boosted Banca Bank ROE Bank ROE Transilvania’s market share the bank TEB Bank 35.59 Societe Generale banka Montenegro AD 18.08 also had to resolve NPL problems at ProCredit Bank, Kosovë 32.67 ERSTE Bank AD Podgorica 13.94 Volksbank, including with CHF debtors. Raiffeisen Bank Kosovo J.S.C. 28.63 Hipotekarna banka AD Podgorica 10.65

Albania Croatia Serbia Bank ROE Bank ROE Bank ROE Banka Kombëtare Tregtare 19.78 Privredna Banka Zagreb d.d. 10.59 Banca Intesa a.d. Beograd 195.45 Raiffeisen Bank Albania 15.73 Zagrebacka Banka d.d. 6.57 Unicredit Bank Srbija a.d. Beograd 16.14 Intesa Sanpaolo Bank Albania 14.96 Erste & Steiermärkische Bank D.d. 2.38 Raiffeisen banka a.d. Beograd 11.33

Banka Kombetare Tregtare (BKT), now Winner Privredna Banka Zagreb is a Banka Intesa is the largest Serbian part of Turkey's Calik Holding, is the member of Intesa Sanpaolo Group. bank with total assets of over €4bn biggest and oldest commercial bank The EBRD, a shareholder since 2002, and a 16.2% market share. Originally in Albania. sold its 20.9% stake to Intesa Sanpaolo Serbia’s first private bank, Delta banka, in June, citing the bank’s successful it is now part of Intesa Sanpaolo. development within the Italian group. Despite cost-cutting efforts, it still has Runner-up Zagrebacka Banka, part of one of the country’s largest branch UniCredit Group, was Croatia’s largest networks and an emphasis on customer bank by assets at the end of June, with service in a market where staff are Privredna in second place and Erste & traditionally rude and unhelpful. Steiermarkische Bank third. Runner-up UniCredit Bank Srbija is the country’s third largest bank with a focus on small and medium-sized Bosnia Macedonia enterprises. Bank ROE Bank ROE Raiffeisen Bank d.d. BiH 19.76 Eurostandard Banka a.d. Skopje 60.00 UniCredit Bank d.d. Mostar 12.52 Ohridska Banka a.d. Ohrid 22.08 bne November 2015 Special report I 35

Eurasia

Kazakhstan Group A Armenia Georgia Bank ROE Bank ROE Bank ROE Halyk Bank 23.86 ARARATBANK 23.41 JSC TBC bank 13.01 Tsesnabank 14.27 INECOBANK 19.59 JSC Bank of Georgia 10.60 Sberbank 2.37 Armbusiness 18.30

Halyk Bank, also known as Halyk Armenia's underdeveloped banking Georgia's banking sector has been no Savings Bank of Kazakhstan, is the sector, the assets of which stand at stranger to controversy, or operating country’s second largest bank in terms a meagre €6bn, has had its margins environment and currency devalua- of assets and first in terms of equity affected by a weak operating environ- tion shocks this year, but the country capital and profit. Halyk was one of ment, characterised by devaluation, continues to have the most competitive the few Kazakh banks not involved in economic slowdown and higher rates. banks in the Caucasus. The two winning reckless lending to high-risk projects Overall sector ROE in the first quarter institutions, TBC Bank and Bank of and in aggressive borrowing in the was a modest 0.7%, which may explain Georgia, are also the two largest lend- global capital markets during the credit why, of the banks we selected, only ers in the country, and are both listed boom preceding the 2008 financial Armbusinessbank, ROE of 18.30%, is on the London Stock Exchange. Bank crisis, which hit the Kazakh banking among the country's top five largest of Georgia caters largely to corporate sector badly. Historically, the bank has banks. The ranking is completed by the clients, while TBC Bank focuses on the always adhered to the highest corporate smaller Inecobank (9th largest bank, retail and SME segments. governance standards which have ROE 18.30%) and Araratbank (ROE allowed it to make the right strategic 23.41%). decisions. Halyk is the only Kazakh company to make Forbes magazine’s Azerbaijan Kyrgyzstan Global 2000 list of the world’s biggest, Bank ROE Bank ROE most powerful companies in 2015. AccessBank 33.13 Optima Bank 25.09 Kapital Bank 28.20 Rosinbank 18.39 Xalq Bank 6.07 JSC CB Tolubay Bank 17.50 Kazakhstan Group B Bank ROE Citi Bank Kazakhstan 39.74 Azerbaijani banks have withstood the Uzbekistan Delta Bank 22.37 shock of the decline in oil prices and a 33% devaluation of the national currency Bank ROE Kaspi Bank 19.34 thanks to their high liquidity, although Ipoteka Bank 27.50 the sector's high level of dollarisation Asaka Bank 15.09 may turn into a credit risk. A noteworthy Qishloq Qurilish Bank 13.46 exception may be International Bank, the country's largest bank, which may be privatised after reports of poor manage- Kazakhstan Group C ment led to an investigation that resulted Mongolia Bank ROE in a wave of arrests of executives from Bank ROE Home Credit Bank 23.37 different companies this May. Khan Bank LLC 24.81 RBS (Kazakhstan) 22.58 Trade and Development Bank of 20.22 After restructuring over 100,000 foreign- Mongolia LLC Altyn Bank 18.96 currency denominated loans this year, Golomt Bank of Mongolia 10.28 Azerbaijan’s banks have managed to post a 6.5% NPL rate, which may not reflect the true quality of their loan portfolio. Tajikistan AccessBank is an SME and micro- Bank ROE lender owned by international financial First MicroFinance Bank (The) 20.83 institutions; Kapital Bank is owned by CJSC Accessbank Tajikistan 12.62 one of the largest holdings in the coun- Orienbank 6.61 try, which can count on close ties to Baku and generous financial backing. 36 I Cover story bne November 2015

Turkey into the abyss?

Suna Erdem in London bne November 2015 Cover Story I 37

he abyss is a dark, miserable key is certainly not a ‘failed state’, nor A strong economic policy would be place and Turkey is on the verge is it yet the Sick Man of Europe, but the key to the success of any coalition Tof plunging into it with both trajectory is negative,” says Wolfango government – it needs to deal with a feet. Even before two suicide bombs Piccoli, of the political risk consultancy stubborn current account deficit, a hit Ankara just three weeks shy of the Teneo Intelligence. “In the best case slowdown in growth, the rocketing value general election, political instability, scenario there will be a coalition. But of the dollar, poor consumer confidence an economic downturn, violence along even if we assume for a second that the and a central bank that is fast losing Turkey’s southern border and renewed parties are able to talk, we could still credibility under attack from Erdogan. civil strife at home had been raising end up at the end of January with no A survey by MetroPoll, conducted just alarm bells. government in a country that has been before the bombings, found 63.9% of in a constant electoral cycle. Nothing voters believed that the economy was Since at least 99 leftists and Kurds were has really happened in terms of reforms mismanaged (compared with 52.9% killed at a peace rally in what has been since 2009.” a year earlier). described as Turkey’s 9/11, Turkey has been talked about as a “failed state” and Grand plans But party manifestos offer little hope. compared to Pakistan. President Recep The coalition most favoured by inves- Many promises are mere fantasies – Tayyip Erdogan’s increasingly frenzied tors and the international community at least they don’t pledge to abolish behaviour as he seeks to cement his rule is a union of AK and the main opposi- football’s offside rule, as one Turkish by changing the entire state structure tion Republican People’s Party (CHP). politician once did, but they all want to to favour his own presidential ambi- “All the signs are that this time around significantly raise the minimum wage. tions, has been likened to the impetu- a coalition deal will be stuck and the “It’s ridiculous,” says Piccoli. “Almost ous folly of King Lear. Once the star of a most likely one will be with the CHP. If 80% of workers are on the minimum troubled region, Turkey is now anything that happens Turkey would be a differ- wage – it’s unaffordable.” but. “We’ve been saying for years that ent place,” says a Western diplomat in if [the government] doesn’t change its Turkey. He says he finds the apocalyptic And even those close to Babacan are not polarising, discriminatory language, scenarios for Turkey “ludicrously over- confident that he will wield influence as this country would become unliveable and ungovernable,” warns Mehmet Y. Yilmaz, a leading columnist. “If the government doesn’t change its polarizing, November 1 sees a rerun of an election discriminatory language, this country would called, effectively, because Erdogan didn’t like the results of the last one in become unliveable and ungovernable” June. Then, his Justice and Development Party (AK) lost its majority for the first time since 2002 and was forced into stated”, while the CHP appears deter- foreign investors hope. Prime Minister coalition negotiations. Turkey’s inef- mined to restore some of the freedoms Ahmet Davutoglu strong-armed him into fectual opposition was complicit in the that have been restricted over the past running again, and the pair may feel failure of those talks, but it’s an open two or three years. “My sense is that the that after the elections the beleaguered secret that the supposedly impartial realists in all parties are trying to reas- Davutoglu will carry more weight – but president wanted a stalemate that would sert themselves.” he has so far failed spectacularly to stand necessitate new polls. up to Erdogan and is unlikely to do so in This grouping would have a big major- the future. It is seen as proof of Erdogan’s delu- ity and a broad base, but opposition sional state that opinion polls have been sources point out that previous coali- Need for peace predicting almost exactly the same tion talks fell apart when AK allegedly Even if a coalition is formed, many are results as last time, and not anything refused to offer CHP the long-term deal questioning how long it could last. With like the sudden swing back to AK from they were looking for. They are unlikely Erdogan sniping from the wings and people seeking a return to stability. The to accept anything less now, but will the CHP nursing a record of internal People’s Democracy Party (HDP), the AK offer it? squabbles, a year would be good going. Turkey into the abyss? Kurdish party which took 80 seats to deny AK its majority, is expected to get Optimists refer to former minister Ali And they also question how such a into parliament again. Babacan’s earlier comments that the two government could tackle the biggest parties had been close on the economy issue in its inbox – ending the fighting After four elections in two years, Turkey in previous talks. The mere fact that between the military and the Kurdistan is crying out for some sanity at the helm, the well-respected Babacan, who had Workers Party (PKK), which is tearing and observers believe Erdogan will have wanted to quit politics, is running again the country apart, and resurrecting to allow his party to share power. “Tur- is also seen as reassuring. the now moribund peace process that Inside this issue:

Russia feels let down by Europe 38 Cover story bne November 2015 China's EU bridgehead crumbles I Turkey's power to the people A long hot summer in Kyrgyzstan

July 2011 Special Report: www.businessneweurope.eu Ukraine on trial

Erdogan so brutally abandoned, losing Greek Cyprus boosts hope of an end to Whatever happens in the election and him whole swathes of liberal and the island’s 40-year division, which pits its aftermath, this could be the start of Kurdish support. Turkey against the rest of the world. a long and painful transition process away from the long, increasingly The CHP might see some point in A new Turkish government could autocratic Erdogan period. “Nothing trying to tackle it; an AK-HDP coalition also, surprisingly, find the country’s will be sustainable in the near future. BEYOND THE BURGER – unlikely due to mutual hostility – international standing benefiting from Will Erdogan actually serve out this Why are prices so high in emerging markets? would have to. There is also another the one thing that had sunk its ambitious term?” asks one disaffected former

possible alliance – between AK and the foreign policy – the Syria crisis. Europe AK politician. “Voices against him Inside this issue: Chaos deepens in Ukraine

Prague's nuclear Hunger Wall combative, hard-line Nationalist Action is so desperate for Turkey’s help in are growing. His recent behaviour Slovak corruption goes round and around

Macedonia’s ruling party May 2014 wins big www.bne.eu Party (MHP), whose members become stemming the flow of refugees across its is alienating the remaining sensible India flounders in Central Asia people in the party. He was completely disgraced by corruption allegations [in “I think pragmatism is returning even December 2013]. He’s cornered. I don’t GREAT think that there’s anything that he can in the highest office” do to improve his prospects.”

GAMEA hot peace rather than new Cold War loomsII A leaked internal AK document shows apoplectic at the mere mention of the borders that German Chancellor Angela senior party members know full well peace process. “God help the Kurds if Merkel ignored criticism to visit Istanbul why they are losing public support, they get in!” says a source close to what and offered to push forward Turkey’s notably the Kurdish issue, the economy remains of AK’s liberal wing. “There will dormant accession talks and speed up – and Erdogan. be a bloodbath.” visa-free travel to the EU for Turks in return. A major flaw in the transition theory is Kurdish academic Mesut Yegen warns, that there is no credible alternative to “If that happens, then any return to Anti-government Turks cringed at the Erdogan, who has for most of his years the peace process will be kicked into sight of Erdogan and Merkel side by at the top been an effective leader. the grass and the possibility of civilian side on what can only be described as The only commanding figure inside clashes will be constantly hanging over gold-encrusted thrones, but the visit also or outside AK is the former president, us.” But while the peace process has highlighted one of the few issues where Abdullah Gul, who could return to been pronounced dead, Yegen says Erdogan’s Turkey attracts praise – hous- politics more than a year after he was eventually Turkey and the PKK will have ing around 2mn refugees at a time when publicly snubbed by the party that he to get back to the table. He predicts that Europe’s richer countries argue over co-founded, but there are question imprisoned PKK leader Abdullah Ocalan how to accommodate tens of thousands. marks about his power base. will help find a face-saving way back. And while Russia’s involvement in Syria All talk of a steady transition As Hasan Turunc, a visiting fellow at has dangerously ratcheted up tensions presupposes that Erdogan will sit tight Oxford University, points out: “There are between the two countries, it has forced while the country moves on. But could many destabilising factors, but structur- Turkey’s foreign policy more into line Erdogan do something desperate to ally too much has changed for Turkey with the West on issues such as Ukraine hang on, such as trying to force the to return to the bad old days. From a and Nato. “I think Turkey’s foreign policy banning of HDP? And who is to say low-income country, Turkey has become is already becoming sanguine,” says a that the man who obsessively follows a middle-income country – that’s quite diplomat based in Ankara. “There has opinion polls won’t suddenly call yet an achievement. The central bank has been less virulence against Israel, less another election as soon as he sees AK’s become independent, many reforms against Egypt. They’re now taking a ratings go up? have been implemented – it can’t go harder line on Russia than they’ve ever back now.” done in public. I think pragmatism is “The worst case scenario? A third returning even in the highest office.” election in the context of a continued Foreign investment may be on hold, decline for the AK party and with but there is little sign of an exodus yet. ‘Sultan in the Palace’ Erdogan more and more out of control… Turunc adds that much is still happening Dubbed the “Sultan in the Palace” for The economy would take a complete away from the headlines. Next year his imperial-style ambitions and his hit,” says Piccoli. “I don’t think this will see Turkey and the EU upgrade expensive new presidential home, is likely, but in the end this will be a their Customs Union – a 20-year-old and surrounded by young, excitable decision taken by an individual. And we deal possibly more useful to businesses sycophants dispensing bad advice, the really can’t get into his mind.” than still elusive full membership to the man in the highest office, President bloc. And the recent election of new, Erdogan, is seen as the single biggest open-minded leaders in Turkish and problem Turkey faces. Inside this issue: Inside this issue: Inside this issue: Inside this issue:

Russia feels let down by Europe Made (badly) in Russia Russia's repo men Spectre of Yanukovych haunts Ukraine China's EU bridgehead crumbles Highway robbery in Czech Republic Putting some Polish bne November 2015 on the portfolio Will EU stand for Energy Cover story 39 Turkey's power to the people The lonely life of Turkish Cypriots Union? I Stalemate in Sofia? A long hot summer in Kyrgyzstan Mongolia's crucial month The Balkans' bear problem A Kazakh cattle prod July 2011 Special Report: June 2012 Special Report: May 2013 June 2014 Almaty in Wongaland www.businessneweurope.eu Ukraine on trial www.businessneweurope.eu Private equity in CEE/CIS www.bne.eu Special Report: www.bne.eu Turkey's time IS TURKEY TO THE EAST LOOKING WEST...

BEYOND THE BURGER Why are prices so high in emerging markets? POLITICAL FOOTBALL ...OR ALREADY IN THE WEST RISE OF THE PSEUDO-STATES AND LOOKING EAST?

Inside this issue: Inside this issue:

Chaos deepens in Ukraine Speeding after Russia's online consumer Prague's nuclear Hunger Wall How to spend it in Poland Slovak corruption goes round and around Turkey's ruling control freaks

Macedonia’s ruling party Gulnara Karimova falls out May 2014 wins big October 2011 of fashion www.bne.eu www.businessneweurope.eu India flounders in Special Report: Central Asia A Turkish star in the dark night sky GREAT

GAMEA hot peace rather than new Cold War loomsII War Games Defence firms battle for lucrative tenders in CEE

Inside this issue:

Rogers jumps on bearwagon

Latvia's fanfare for the common currency

Serbia's looming winter of discontent

October 2012 Saakashvili becomes prisoner www.businessneweurope.eu of scandal

Special Report: Azerbaijan

A PARLIAMENTARY KLEPTOCRACY Ukraine elections to decide who stays free

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Ensure that you get bne Magazine delivered to your desk every month. Go to j.mp/bnemagsignup to get your free annual subscription.

There is no obligation to pay and you can cancel at anytime. 40 I Central Europe bne November 2015

Melnikoff's ‘Metamorphosis’

Mike Collier in Riga

ranz Kafka's most famous short ming it as a hack writer in the Baltic What is not in question is that Mr MFF story, "Metamorphosis", begins states for the last decade and is a is a photographer. According to himself, Fwith the main character, Gregor dangerous spy about whom something he is a world-famous photographer; Samsa, waking up one morning to should be done. according to others, a photographer of discover he has been inexplicably somewhat lower rank. He runs a variety transformed into a giant beetle. It causes Putting aside for a moment the of colourful websites showcasing his a good deal of nuisance, but makes probability that if Russia's security abilities and others outlining a strongly surprisingly little difference to his basic services can carry out assassinations anti-Russian slant. For once, the world standing in society. with rare radioactive isotopes they 'Russophobe' seems justified (despite are probably capable of coming up the fact that he is Russian-born himself That's rather how your correspondent with names for their agents that aren't and now a US citizen), as he also has pet felt on October 10 when he awoke to quite so similar to their real names, theories about the physiological degen- discover that – according to one wacky plus the fact that Kolyerov is actually eracy of the entire Russian nation. Ukrainian website – he had been trans- banned from visiting the Baltic states, formed overnight into Modest Kolyerov, attention turns to why this backhanded In an article on one of his websites former Regnum news agency boss compliment was paid. (which later repeated the allegation that and master of the dark arts of Putinist your correspondent is a master spy), he information warfare. Admittedly, there Entirely coincidentally, two days advocates the deportation of 300,000 is a passing resemblance – we are both previously I wrote an article for Latvia's Russians from the Baltic states in cattle bald with beards – though I like to flatter public broadcaster, LSM, about another trucks and various other extreme views. myself I am not quite such a dead ringer man with identity issues. His name is Police are investigating. for Trotsky as my doppelganger. variously given as Sergey Melnikoff, Sergei Melnikov and his preferred Melnikoff is the creator of an exhibi- According to this eccentric piece of moniker, 'MFF' (presumably pronounced tion titled 'The People of Maidan' that news, Kolyerov has in fact been slum- “Mfffff”). opened in early October in central Riga, bne November 2015 Central Europe I 41

which purports to show his photographs cars, a truck and €50,000 for the Foun- The attempt to undermine the of the Ukrainian uprising centred dation's board members. credibility of your correspondent is on Kyiv’s main square that ousted perhaps one last desperate attempt the corrupt former president Viktor The Soul of Ukraine Foundation is by MFF and friends to keep their Yanukovych in 2014, along with lots of represented in the Baltic states by one unravelling circus on the road. Once biographical information about MFF and Sergey Alekseev, who also heads a you start digging into the weird and his tenuous connections to the rich and “patriotic” Latvian business entity called colourful world of MFF all sorts of famous. the Latvian Renaissance Foundation bizarre facts emerge. (LRA). It is the LRA that is the actual Within minutes of the first couple of organizer of MFF's exhibition and that It may also be worth noting that despite boards being erected outside the main in turn is linked to the 'MayDay news his anti-Putin views, in his own promo Latvian government building, the Cabinet agency' run by Russian Mikhail Alekseev, video, Melnikoff shows himself hanging of Ministers, they were attacked by two which seems to exist not so much to out with the Russian president in what young men apparently incensed by what disseminate news but to channel Russian may be a sun-drenched mountain top or they took to be a Pravy Sektor flag flying money through none other than the LRA possibly just a crude photo montage. proudly in the breeze. They also took the as part of a tax-reduction scheme. surprising measure of filming themselves What's really surprising is that no one at carrying out the attack and immediately As the LSM investigation shows, the Latvian Foreign Ministry thought it uploading it to social media. the links between MFF and the two was worth checking out the bona fides Alekseevs are strong – a fact made of MFF – the world famous photogra- Following a police appeal for witnesses, evident on October 15 when Collier/ pher no one has ever heard of. two men were arrested on suspicion of Kolyerov received a phone call from vandalism, though they have yet to be Mikhail and then an email signed by However, in amongst all the dirt, one tried. A few days later, the exhibition Sergey within minutes, asking him piece of information did emerge to lend was attacked again at 2:00am. The to confirm he was a Russian spy as weight to MFF's claims for photographic extent of the damage is unclear. In some reported on MFF's noxious news site. credibility. In 2009 he did indeed win reports, MFF says it was completely Tellingly, Sergey signed himself 'editor an award at a festival in northern destroyed, in others that he has a reserve in chief'. Spain for a picture of a mountain. exhibition ready to be erected at a The regional newspaper, La Nueva moment's notice. Curiously, the security One final fact uncovered by the Espana, ran a gushing story that reads that the organizers of the exhibition had LSM investigation is perhaps the suspiciously like a press release about promised to provide to both police and most important of all. The pictures how the “famous millionaire American Riga City Council failed to materialize MFF claims he took standing on adventurer” would soon land to collect for two nights in a row. Because of that, the barricades “from day one” of it “in his private jet”. the council revoked the licence for the exhibition – sparking accusations that Riga Mayor Nils Usakovs was censoring 'The People of Maidan' – and "The attempt to undermine your correspondent is it is now seeking a new home while Melnikoff demands compensation of one last desperate attempt by MFF and friends to €150,000 to avoid litigation. That is colloquially known as a shakedown. keep their unravelling circus on the road"

But in among the furore about vandalism, the main findings of the LSM investigation appear to have been overlooked, the Maidan protests in Kyiv are not and it is these that appear to have irked all his. Distinguished Ukrainian A few days later it ran another, rather MFF and his allies. photojournalist and Pulitzer Prize more downbeat story, about how finalist Efrem Lukatsky confirmed Melnikoff had failed to show up to Soul mining on October 14 that a spectacular collect his award. However, that didn't Chiefly these relate to an organization shot of riot police in flames – used by stop MFF faking the front cover of La called the Soul of Ukraine Foundation, a MFF to sell his forthcoming book of Nueva Espana at the end of his promo US-registered entity founded by MFF and Maidan pics at $1,000 a pop – is in fact video to make it appear that he was chaired by his daughter. Its mission is to his. Other images emblazoned with given the front page splash – dressed spread the word about Maidan far and Melnikoff's name have been identified as a cosmonaut! wide by means of MFF's own exhibition, as the work of Evgeny Feldman of AP while collecting charitable donations and even as coming from online photo You couldn't make it up. Or maybe you that can be spent on such items as three library Shutterstock. could. 42 I Central Europe bne November 2015

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

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

Photo: Paul Prescott Isolated Fico's government’s hardline stance is popular at home and appears to have Fico told to take his bolstered Smer’s support in the run-up to general elections next March. But Fico has been strongly criticised by trousers down Andrej Kiska, the country’s independent president, who said in a speech to parliament on October 7 that Slovakia had Robert Anderson in Prague left a “bad impression” and was now in an “isolated position”. Kiska added that he Party of European Socialists Fico has founded an increasingly close Slovakia could easily accept hundreds or and Democrats (PES), the alliance. Both continue to rail against even a thousand refugees. Tumbrella group for Europe’s the EU’s policy of mandatory quotas for centre-left parties, has put Slovak Prime refugees. Slovakia has said it will refuse “When Slovakia voluntarily announced Minister Robert Fico’s Smer party on to accept its quota, and will challenge the in July it would accept 100 people out notice for violating the group’s values. legality of the EU decision in the Europe- of the total of 40,000, we lost sympa- an Court of Justice. Bratislava insists the thies in most of Europe, and we lost the At a meeting of the PES presidency on vote on the issue should have been passed understanding and comprehension they October 9, the group stopped short of unanimously, rather than by majority. might have for our reasonable argu- suspending Smer, despite Fico’s recent ments," the president said. "Slovakia has negative comments about refugees and Slovakia says instead that it will accept become a target of jokes and ridicule in his refusal to accept more than 100 just 100 “Christian” refugees; the country European and global media.” into Slovakia. Alison Abrahams, PES does not have a tradition of accepting spokeswoman, told bne IntelliNews that refugees from Islamic countries, it says, As is not uncommon, Fico has got the group would continue to keep Smer and does not even have any mosques. The himself into deep water for playing to under observation. “The situation will refugees would not stay in the country his domestic audience with comments be monitored – there will not be an end anyway, Slovak officials have also argued, that he now has to try to explain to his date on such a monitoring,” she wrote but would head to Germany. “I can hardly international partners. via email. imagine Muslims integrating in Slovakia, without the members of their family, out Several European Social Democrats have The reprimand suggests Smer still does of their environment. They would not called for Smer to be expelled from PES, not grasp how to behave either as a have the opportunity to practice their including Italian MEP Gianni Pittella, progressive or a pro-European party. That weakness could prove embarrass- ing when Slovakia takes over the EU’s rotating presidency next summer. "We cannot tolerate an influx of 300,000 to 400,000 Slovakia is now in the EU’s naughty Muslim immigrants who would start building corner along with Viktor Orban, Hun- gary’s rightwing premier, with whom mosques all over the place" bne November 2015 Central Europe I 43

head of the Socialist and Democrat bums”, arguing that Slovakia should not High stakes in Group in the European Parliament, who enter the bloc as a beggar. said Fico “has embarrassed the whole Czech politics progressive family”. “The persistent Fico, himself a former Communist Party unwillingness to take responsibility and member, moved Smer into the vacant show solidarity in the framework of the space on the left only once he had taken The Czechs have a keen sense of irony refugee crisis contrasts with our values over the HZDS’ largely elderly, rural and (remember David Cerny’s 2009 art and political convictions,” Pittella said less-educated electoral base. After merg- installation in the European Council on September 23. “You cannot merely ing with the moribund Slovak Social building that lampooned national stereotypes?), so one politician’s bet with another over a betting law taps "You cannot merely call yourself a progressive; into that rich vein. you must also show it in your words and actions" Andrej Babis, the country’s second richest man who also happens to be the finance minister (or should that be the other way round?), and his call yourself a progressive; you must also Democrats, he was finally accepted into predecessor Miroslav Kalousek are show it in your words and actions.” PES, although Smer has never shared often at loggerheads since the latter’s the group’s views on minority rights nor TOP09 party was turfed out of power Fico was called to Strasbourg on October shown any sympathy for the problems of and Babis’ ANO came second in the 5 to explain his comments to Pittella Slovakia’s impoverished Roma minority. 2013 elections that brought it into and PES President Sergei Stanishe. In a government in a coalition with the follow-up letter sent on October 8, the Smer also moved to become more Social Democrats. Slovak PM denied having talked in the pro-EU when the country’s centre-right media about refugees or minorities in a parties, which had taken the country By all accounts they dislike each other discriminatory manner. He also high- into the bloc, themselves became more intensely, and this rivalry has now lighted a Slovak agreement with Austria Eurosceptic. Fico was able to wrap become pecuniary. In a parliamentary under which migrants are temporarily himself in the EU flag when the last committee debate over the 2016 budget housed on the Slovak side of the border. centre-right government collapsed in on October 24, Kalousek bet CZK10mn And he insisted that his government is October 2011 over whether to support (€370mn) that Babis' allegation that he “prepared to participate in all meaning- the European Financial Stability Facility, had been investigated by police over his ful initiatives which may bring solutions the Eurozone rescue fund. He won credit 2008 decision to allow betting on the to this migration crisis”. for ensuring the measure passed, though internet was not true. Babis accepted he insisted on fresh elections before that bet. Form agreeing to do so. Smer has form with the PES. Shortly Both men can certainly afford such a after joining, it was suspended in Unlike Hungary's Orban – who enjoys wager. Babis’ conglomerate Agrofert October 2006 when Fico formed his first provoking the EU and has had an easy makes him worth around $2.5bn, government in coalition with the overtly ride from the centre-right European according to Forbes magazine, while racist Slovak National Party (SNS). Jan People’s Party – the reprimand is likely Kalousek was deputy defence minister Slota, the then-SNS leader, was notori- to embarrass the Slovak premier. Even when controversial laws were ushered ous for once saying that the best way to more so because he hopes to be still lead- in that led to notoriously corrupt handle Roma was with a “long whip in a ing the government when it takes over procurement deals that has led to small yard”. Smer’s suspension was only the EU’s rotating presidency next July for numerous scandals. lifted in February 2008. the first time.

In reality Smer’s socialism has always Moreover, if Slovakia follows through been more of a marketing brand than with its threat to mount a legal chal- a matter of conviction. Initially, Fico’s lenge to the EU quota decision, PES may new party did not even pretend to be eventually feel compelled to suspend left wing, competing for voters with the party – a decision that requires a former premier Vladimir Meciar’s HZDS super-qualified majority of votes from using similar populist and nationalist its membership. Becoming EU president tactics. Like the HZDS, Smer was also after a public caning, and then being ambivalent about EU membership. Fico excluded from taking part in key party campaigned in 2002 with the slogan “To discussions, would really leave Slovakia the European Union! But not with bare with a bare bum. 44 I Central Europe bne November 2015

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

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

J&T gets Chinese But few analysts predict a significant correction in energy prices in the short term, and any capacity market oodles of cash payment would be dependent on political decisions in Germany and Italy, countries where EPH has virtually no Robert Anderson in Prague ability to influence policymakers, unlike in the Czech Republic and Slovakia, oracious Slovak corporate where we want to grow, both organically where it is reportedly close to Zeman raiders J&T Financial Group and through acquisitions,” J&T and Slovak premier Robert Fico. Vhave deepened their links with co-founder Patrik Tkac said. their mysterious Chinese investor, as Outside electricity, EPH is also reported they prepare for yet more audacious In parallel with its investment in to be joining with Kellner for a possible acquisitions such as part of Slovakia's J&T – and no doubt with the Slovak bid for PKN’s stake in Czech petro- main electricity producer. group’s assistance – CEFC snapped up chemicals group Unipetrol. J&T also is a bewildering array of Czech assets poised to spend big, by making a hostile CEFC China Energy Company, a in September, including football takeover bid for Croatian conglomerate shadowy Chinese investment group team Slavia Praha, brewery Pivovary Adris Grupa, according to local media focused on energy, has now doubled Lobkowicz Group, Travel Service reports. Adris Grupa has become even its stake in J&T to 9.9%, reportedly Airlines, media groups and property. It more attractive after it managed to sell paying CZK1.94bn (€72mn). CEFC has also acquired a historic building on its tobacco unit TDR to British American entered J&T in May, buying 5% for a Prague’s main shopping street to serve as Tobacco (BAT) earlier this year. reported €79mn. The Chinese group has its European headquarters. said it plans to boost its holding to 30% J&T and EPH’s acquisition sprees have eventually. J&T has also been busy this year, loading raised much speculation over the source up with out-of-favour coal-fired power of their apparently bottomless pockets. The link between J&T and CEFC appears assets that indebted European utilities J&T had to be bailed out by Kellner to have been forged during an official visit want to shed. On October 22, it was during the 2008-2009 global crisis by Czech President Milos Zeman to China reported that Italy’s Enel had reached because it had over-extended itself, and in October last year. Zeman was accom- a general agreement to sell part of its the financier was only finally bought out panied by J&T executives, and during the 66% stake in Slovakia's main electricity from EPH at great expense last year. trip a strategic co-operation agreement producer Slovenske Elektrarne to EPH, a between J&T and CEFC was signed. The Czech energy holding in which J&T holds Czech media speculate EPH has debts of announcement of the increase in the a sizeable stake, possibly even a majority more than CZK5bn secured on its assets, CEFC stake in J&T coincided with another one. And earlier in October, EPH said notably its stake in Slovak gas pipeline trip to China by Zeman. it has joined with PPF, the investment company SPP. And there has been group of Petr Kellner, Central Europe’s constant speculation CEFC is helping “In CEFC we have found a partner richest man, in the tender for Vattenfall’s to fund the acquisition drive. This is with the same vision as us as regards coal assets in Germany. EPH has already heightened by the mystery over the development possibilities in our region, bought E.ON’s coal assets in Italy. identity of its Chinese sugar daddy. bne November 2015 Central Europe I 45

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Try IntelliNews for free today at intellinews.com 46 I Southeast Europe bne November 2015

INTERVIEW: Stavreski says foreign investors keeping faith with Macedonia

Andrew MacDowall in Skopje

acedonia’s finance minister political crisis, some have temporarily expenditures. Even the United States admits in an interview with bne decided to wait for some time.” could not withstand this... pedestrian MIntelliNews that serious tracks, aqua parks, this and that... this allegations of abuse of power against The allegations come from apparently is insane!” the voice says, according his government have had an impact on wiretapped recordings released by the to a report by Balkan Insight. “We are prospective foreign investors, but insists opposition – which the government lunatics! We are spending on chocolate the investors, whom he did not specify, accuses of organising a “coup” when we don't have bread.” would continue with their plans now the through illegally-acquired materials crisis looks to be at an end. – and implicate Prime Minister Nikola Stavreski has not denied the recordings Gruevski and other senior officials. are of his voice, but says that they have Zoran Stavreski refuses to be drawn on the specific allegations, which include vote rigging, the undermining of "We need to be frank and admit that because judicial independence and covering up murder evidence. The controversy led of the political crisis, some investors have to street protests, and an EU-brokered deal between the government and temporarily decided to wait for some time" opposition that will bring early elections in April next year, with a caretaker government to be installed in January In one of the recordings, a voice that been “spiced up” a little. “When it comes to oversee the poll. “What is good is is apparently Stavreski’s seems to to the image of the government, allega- that no new investors have cancelled say that Gruevski had “lost sense of tions are allegations and there are allega- plans for investing in Macedonia,” reality”, and slams the government’s tions everywhere in the world in terms claims Stavreski. “However, we need to economic policy as mad. “We are of what has been done and what has not be frank and admit that because of the constantly adding new [budget] been done. Our position is that institu- bne November 2015 Southeast Europe I 47

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

A special prosecutor has been appointed bne IntelliNews to investigate the claims, who has said that the first charges could be put in Romania and its Moldovan neighbour’s reputations for corruption were place before the April election. However, highlighted again in October in a slew of unwelcome headlines. A leaked the opposition is already questioning the report from the Romanian Intelligence Service (SRI) claims that top civil independence of the process. servants belong to – and in some cases lead – criminal groups.

Avoiding direct denial, and emphasising The report on the security climate in 2014 notes that organised criminal the importance of the investigation, is groups have “succeeded in penetrating public bodies at high levels”. very much the government line, though Corruption has affected almost all strategic sectors in Romania, but has many officials add criticism of the oppo- had a particularly strong impact on the public administration. Civil servants sition’s use of allegedly illegally-acquired including high-level officials have been identified as members or even recordings. coordinators of some organised crime networks, while the decision-making process is subordinated to private interests, impairing the government’s It was clearly not a topic on which capacity to deliver public services. The report claims that abusive and Stavreski – who at one stage in the illegal activities by decision-makers at local level have been magnified by interview took a telephone call from the their links with members of criminal groups. prime minister – wished to dwell. The Macedonian government is at pains to It is unclear from the report whether the intensity of corruption is gaining stress its economic credentials at a time ground or diminishing. Most of the other security risks – including under- when its democratic and European ones financing of the public sector, lack of human resources, weak EU funds are being questioned. absorption – are mentioned as ongoing issues, presumably at constant levels. It’s the economy, stupid Macedonia rode out the global economic A clear illustration of this was the admission a few days later on October crisis and the Eurozone’s near-meltdown 12 by Romania’s former communications minister Gabriel Sandu in court through the efficacious use of fiscal that he had received a €4mn bribe in the so-called Microsoft case. Eight stimulus, but Stavreski says the govern- other former ministers are under investigation in the case, but Sandu is ment will keep an eye on public finances the only one to be indicted so far. The National Anticorruption Directorate to ensure that its currency peg does not (DNA) started investigations into the sales of educational software licences come under pressure. for Romanian schools in September 2014. The nine former ministers are suspected of receiving bribes in exchange for signing and later extending Stavreski draws an unveiled comparison contracts to license Microsoft software at above-market prices. Next door between the recent experiences in Romania’s poorer neighbour, Moldova, the news is even worse. of Macedonia on one hand, and “peripheral countries in Europe and Vlad Filat, a leading member of Moldova’s fragile ruling coalition, was some neighbours”. Many of the latter arrested and charged with involvement in a massive $1bn fraud on October were of course forced into pro-cyclical 15 after MPs voted to lift his parliamentary immunity. fiscal tightening when the crash came, exacerbating the downturn after years The arrest of Filat, a former prime minister and head of the senior ruling of mirror-image pro-cyclical stances Liberal Democratic Party (PLDM), threw the fragile pro-EU coalition into of loose policy fuelling booms. Greece disarray after 79 of Moldova’s 101 MPs voted in favour of lifting Filat’s is both a neighbour and a peripheral immunity, including those from the PLDM’s coalition partners. The vote Eurozone country, and continues was held at the request of head prosecutor Corneliu Gurin. After the vote, to block Macedonia’s EU and Nato officers of the National Anticorruption Centre (CNA) detained Filat for 72 accession processes over tedious hours and will ask a court to place him under police custody. historical arguments about its name. While the PLDM claims Filat's arrest is a plot, prosecutors say they have Stavreski argues that Macedonia’s evidence linking the politician to the massive banking fraud in which $1bn relative pre-crisis frugality allowed it to – around 10% of the country’s GDP – was siphoned off from three Moldovan loosen policy when it was most needed. banks. “I’d say our fiscal policy was reasonable, 48 I Southeast Europe bne November 2015 before the crisis, after the crisis, and the country’s biggest-ever outlay. The bizarre and unattractive vanity project during the crisis, in the following way. draft foresees spending of €3.18bn, 6% that has funnelled money to preferred Before the crisis, when Macedonia had up on 2015. The budget is based on an contractors. growth rates of between 5% and 6%, optimistic GDP growth forecast of 4%. we had surplus revenues, and reduced Stavreski defended state employment public debt from 33% to 23% of GDP. Before the budget, Erste had forecast levels, but he made clear that the When the crisis happened, we had a a deficit of 3.6% this year and 3.4% budget must not be allowed to get out very favourable starting position, and next, with debt rising to 41.5% of of control – with a side observation that during the crisis… we increased capital GDP in 2016. It said that public debt fast-and-loose fiscal policy will endanger expenditures, infrastructure spending. would move towards 50%, with “strong Macedonia’s currency stability, and thus That helped a lot both in the short run upward pressures” from road construc- risk overturning the economy entirely. by increasing our GDP and creating tion and the state-owned electricity Macedonia maintains a currency peg, jobs and activity for the construction company. fixing the denar against the euro. “Debt sector and other connected sectors, is kept at a level which is not particularly and in the long run these infrastructure Opponents say that debt may well be going to risk our debt sustainability,” he investments are important for improving higher than reported, and that the gov- says. “For a country like Macedonia, a the competitiveness of our economy.” ernment administration has swelled, as small country with small forex reserves the ruling VMRO-DPMNE party looks to and a fixed exchange rate regime, The sustainability of this fiscal stimulus, bolster its support ahead of the election there’s a need to keep the budget deficit however, is starting to be questioned. by spreading patronage via sinecures. under control or you’ll put pressure on Macedonia’s economy is expected Meanwhile, some of the vaunted infra- foreign exchange, and we don’t want to grow by 3.0% this year and 3.5% structure spending has been channelled that situation.” next, according to a July report by to the Skopje 2014 project, a makeover Erste Group. But after Stavreski’s bne of the capital’s centre intended to boost Returning to the issue later in the IntelliNews interview, he announced a national pride and the city’s appeal as a interview, Stavreski described manag- draft budget for 2016 that pencilled in place to live and visit. Others see it as a ing public finances as “an art more

Emerging Markets Direct – your data source for the developing world

Croatia Country Report – August 2015 Bosnia and Herzegovina Country Report – August j.mp/croatia-august 2015 j.mp/bosnia-august Croatia’s economy expanded by 1.2% y/y in the second quarter of the year, beating all expectations, The Bosnian government plans to invest €960mn in supported both by domestic and foreign demand. public projects in 2016-2018, according to an adopted The government announced plans to convert loans programme for public investments in the next three denominated in Swiss francs into euros, but a number years. Meanwhile estimated losses in agricultural of foreign banks reacted saying the measure would production, caused by the drought this summer, are breach EU legislation. over €102.3 million.

• Croatia's consumer prices fell 0.4% y/y in July, after • CPI deflation slightly deepened to 1.1% y/y in July staying flat the previous month, while the working- from 0.5% y/y in June; day adjusted industrial output rose 3.9%, speeding • The working-day adjusted industrial production rose by from 1.6% in June; 2.3% y/y in July, cooling from a 3.5% y/y growth in June, • The unemployment rate fell to 15.9% in July from due to slower rise of mining and manufacturing sectors. 16.1% in June, the fifth consecutive month of decrease.

j.mp/emdstore bne November 2015 Southeast Europe I 49 than a science”, while asserting that railway link to Bulgaria, and highway tem more investor-friendly has also been the country has a fiscal plan starting in development along European transport important. 2017 (conveniently after the election) corridors VIII and X are intended to miti- to rein in the deficit. “We will have a gate this to the greatest extent possible. After years of glossy advertisements gradual reduction in the next several in international business magazines, years, to enable us to keep our debt The government is also seeking inves- Stavreski trumpets the country’s high at a sustainable level, while gradually tors to build a large new hydroelectric ranking in the World Bank’s “Doing reducing public support for growth. In plant, an investment of several hundred Business” survey. It ranked 30th in the meantime we expect that the pri- million euros, as well as energy distribu- 2015, the highest in Southeast Europe vate sector will take over and increase tion networks in Skopje and other parts (including Greece and Turkey), and was its investments. We have to be more of the country. “There are various other sandwiched right between Japan and careful, as we are a small country with investments in the areas of education, France. The country has major investors small GDP. For us it was important to the health sector, environment, and including Dräxlmeier, Johnson Controls, adopt a strategy on public debt and many others,” Stavreski tells bne Intel- and Johnson Matthey. And in May, fiscal consolidation which would keep liNews. “Competitiveness means not despite the ongoing political stramash, Macedonia’s debt stable, or at a sustain- only taxes but labour costs, logistics and Lear Corporation announced plans to able level.” infrastructure. We invested in all these open an automotive seat cover plant in areas and it helped a lot in attracting Gostivar, in northwest Macedonia. Opening up through infrastructure investors. It’s a difficult game, as we However, Macedonia's government were unknown as a country.” Many of these investments are in insists that investments are necessary industrial free zones, so the value that to underpin long-term growth. When He points out that most countries in they feed back to Stavreski’s coffers has Macedonian officials are asked to name the region have low taxes (Bulgaria been questioned. But in a country a weakness that their country has, they has the EU’s joint-lowest flat income where unemployment tops 25%, invariably mention its landlocked posi- and corporate tax rate at 10%), while keeping the investment coming in tion. Infrastructure such as a restored administrative reform to make the sys- remains a priority.

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

Perhaps nothing symbolises Turkey's emergence in the market of glitzy healthcare facilities than the Bilkent Integrated Healthcare Campus – a $1.3bn project that is being constructed by an Azerbaijani company with German Turkey’s medical tourism money, which will cover 1.2mn square metres outside Ankara, employ 8,000 staff, and treat 35,000 patients a day industry looks a little pale once completed in 2018. Touted as "Turkey's largest ever project under the republic", the complex will also include Carmen Valache in Istanbul a hotel resort and a conference area, as hospitals do. ristine facilities, high-tech destinations: medical tourism is big equipment, renowned experts, business these days. But behind all the money that is Pluxurious spas, friendly pouring in and the picture-perfect and clean-cut nurses and doctors, And now Turkey is becoming a big image that Turkey’s medical travel services reminiscent of five-star player in this $50bn a year business, industry puts out, there are doubts hotels, all-inclusive packages in exotic rising in the ranks of the top-ten medical about some of the statistics, parts of 50 I Southeast Europe bne November 2015

the sector are hurting, and the current Russians, Central Asians, particularly appeals to both Europeans and Middle violence and instability in the country Turkic peoples like Azerbaijanis and Easterners. A service-oriented and fast will do nothing to help business. Turkmens, and patients from Southeast developing high-tech economy, Turkey and Eastern Europe account for the rest is famous for its hospitality, for its Travel for health of the foreign patients arriving in Turkey. skilled workforce – and increasingly its Medical tourism is certainly a budding, While the country's prices are not nearly affordable medical costs. lucrative, and very location-sensitive as low as India or Thailand's, they are a business. Its size is estimated at good 50% lower for certain procedures, According to the Turkish Statistical $38.5bn-55bn by Patients Beyond like heart bypasses, compared to prices Institute, the country has seen a surge in Borders, with 11mn cross-border in Germany. Its proximity to the above- medical tourists from 109,000 in 2010 to patients travelling every year for medical mentioned source markets also makes over 400,000 in 2014, making the coun- procedures, spending between $3,500 Turkey a destination of choice for medical try the sixth most popular destination and $5,000 per visit. Americans and tourism. for medical procedures in the world. But Western Europeans account for the Ankara doesn’t plan to stop here: it aims lion's share of medical tourists, with an Reliable statistics are notoriously difficult to become one of the top five medical estimated 1.2mn Americans crossing the to obtain in this business. In an effort destinations in the world, and to attract border with Mexico every year. to boost their standing in the industry, 700,000 medical tourists with a turnover many countries will count every single of $8bn by 2017, and for 2mn tourists and However, even in the most popular foreigner that sets foot in their hospitals, $20bn in turnover by 2023. The country's healthcare travel destinations, like including foreign residents who want goals are feasible, seeing how foreign Thailand and Singapore, which report flu vaccines or pissed-up tourists. patients spend a significant $2,000 to over 1mn medical tourists a year, Meanwhile, institutions like the US-based $4,000 per procedure, and between foreigners account for less than 10% of Joint Commission International (JCI), a $9,000 and $12,000 for the entire visit. total patients; of those, over 90% come globally-recognised accreditation body, from neighbouring countries. So while have profited from the growth in medical But for all of Turkey's keenness on the trend is growing, its proportion in tourism: over 600 medical facilities medical travel, the number of foreigners the overall healthcare business remains in developing countries have sought in its hospitals remains tiny compared to relatively low, and the mobility of their accreditation to date, and their the approximately 18mn Turks who use patients limited. number is rising at 15% to 20% a year. public and private hospitals every year. JCI is the healthcare version of Moody's Besides, the statistics the government Europe's ageing population and rating agency; if you do not have their puts out could be exaggerated. The congested public healthcare systems accreditation, fearful patients tend to largest operational private hospital have prompted many Western Europeans avoid you. group in Turkey at the moment, to seek cheaper private care nearby, Acibadem Healthcare Group, reports which has led to the rise of Emerging In rude health that it accounted for 20% of the $750mn Europe, Turkey and Israel in the medical In comes Turkey, a popular beach and medical tourism turnover in the country travel industry. Since the Arab Spring cultural tourism destination on the last year, but only treated about 42,000 started in 2011, the number of Middle edge of Europe that receives upwards medical tourists during that time, Eastern patients has also increased of 40mn tourists every year. A relatively which it claims represents 15% of the tremendously, and unsurprisingly they liberal Muslim-majority country, with total medical tourists visiting Turkey. favour Turkey over Israel. a wealth of culture and history, it That would put the number of Turkey's bne November 2015 Southeast Europe I 51 medical tourists at around 280,000, for hair implants," Dr Dilek Uzer from procedures like massages and facials," under the government's estimates. intermediary medical tour operator Siebel complains, adding that nepotism Turkey Health Tour, tells bne Intellinews. is a big problem in the spa business in Acibadem Healthcare, which operates 17 Turkey. “Many of these hotels are family- hospitals in Turkey and one in Macedo- Not all well with wellness owned, and they appoint inexperienced nia, treated over 3.5mn patients in 2014. One part of the medical travelling offspring in management positions, "We attend patients from 42 different business that Turkey is famous for, which is bad for business.” countries… and Western European coun- wellness tourism, is not doing so well, tries only account for 1,500 to 2,000 of according to Carmen Siebel, a spa But with the help of Turkish Airlines, our 42,000 medical tourist patients,” says consultant with 25 years of experience the airline that claims to operate flights Gokhan Izlisu, Acibadem's international advising hotel spas in Istanbul and in to the largest number of destinations relations supervisor. Turkey's beach resorts. “A decade ago, the in the world, medical tourism is focus was on high quality and inclusive bound to flourish. In October, Turkish The rest of the patients come from the packages, which is how Turkey attracted Airlines announced it would offer 50% Balkans, the Middle East, and Russia/ high-quality wellness clientele from discounts to medical tourists who seek Commonwealth of Independent States Western Europe," she tells bne Intellinews. treatment in Turkey and can provide (CIS), which perhaps explain why proof from the medical facility where neurosurgery, orthopedics, oncology But lately, she explains, hotels have they were treated. and organ transplants are the most moved to outsource their spas to outside popular procedures among its patients, companies, which have been forced to For all Turkey's shortcomings – and the and not plastic surgery. "Plastic surgery lower prices, and therefore the quality recent upsurge in violence as the poltical and dentistry are the most popular with and diversity of treatments. “Thalasso- situation worsens is one more – its many Western Europeans," Izlisu says. therapy and expensive procedures like benefits such as a location close to Botox injections used to be an important Europe and the Middle East, and an Meanwhile, Middle Easterners are revenue source for us, but not anymore. educated and skilled workforce will more concerned with their hair. Nowadays, we are operating with low- continue to support the growth of its "Most Arabs that approach us do so quality products and performing basic medical healthcare.

Emerging Markets Direct – your data source for the developing world

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

GDP increased by 3.2% y/y in Q2, decelerating from The European Union has decided to grant Montenegro 4.3% y/y in Q1, the country’s statistics office INS €45mn for infrastructure projects. On the other hand, reported in its flash estimate on August 14. Seasonally the agriculture ministry has estimated that Montenegro adjusted GDP inched up by a mere 0.1% q/q in Q2, will need billions of euros to protect the current quality after the 1.4% q/q advance in Q1. It slightly exceeded of water and to implement all directives of the EU. the pre-crisis peak level. Bosnia and Montenegro signed a border demarcation agreement. The two countries are the first ex-Yugoslav • Ruling coalition, opposition agrees over Fiscal Code republics to sign an agreement defining their borders. including 4pp cut in VAT rate to 20%; Montenegro's police arrested several high-ranking • Central bank argues for stimulating supply, not municipal officials in the resort town of Budva, demand; including the mayor, on suspicion of abuse of power • Market regulator decides on bankruptcy for Astra and damaging the budget in the range of millions of insurer; euros. • PM Ponta has no plans to resign before December. • The budget deficit increased by 52.3% y/y to 2016 elections. €115.5mn in the first seven months of 2015.

j.mp/emdstore 52 I Eastern Europe bne November 2015

Ukraine’s ‘shadow government’ investigated for money laundering

Graham Stack in Kyiv

wo core members of what has and this system is in a crisis,” he told massive influence,” he wrote in a become known as Ukraine’s ‘shad- his audience, who had flocked to groundbreaking cover article in leading Tow government’ are reportedly Ukraine expecting to hear cheerleaders journal Novoe Vremya on September 18. under investigation in Europe for money for the country’s heroic reform efforts. laundering, while the VIP aviation busi- Money-laundering suspicions ness of a key confidante of President Star investigative journalist-turned- According to Leshchenko, at least Petro Poroshenko could also make him a MP Serhiy Leshchenko then did some two of the three are facing money- target of international law enforcement digging, and came up with three key laundering investigations in the West. agencies. figures exercising shadowy power that And all three have surprisingly close goes far beyond their official remit: ties to Russia, given the current crisis “We essentially have a shadow Boris Lozhkin, Poroshenko’s chief of between the two neighbours. government – a parallel government,” staff, Mykola Martynenko, deputy Mikheil Saakashvili, former president head of the parliamentary group of Leshchenko argues that Poroshenko’s of Georgia turned governor of Ukraine’s the Peope’s Front party, and Ihor chief of staff, Boris Lozhkin, is at the Odesa region, told a shocked crowd Kononenko, deputy head of the Bloc core of the ‘shadow government’. of international business people and Petro Poroshenko parliamentary group. Lozhkin is Poroshenko’s top power politicians at the Yalta European broker and spin doctor – and ironically Strategy conference in Kyiv on “I have heard these names dozens the idea to invite top international September 14. “In reality, the country of times and after becoming an MP reformers such as Saakashvili to work is run by some parallel shadow system I have found much to confirm their in Ukraine was his brainchild. bne November 2015 Eastern Europe I 53

But Lozhkin’s past as a pro-Russian Leshchenko says Lozhkin has confirmed Swiss journalists report that authorities print media tycoon may now be the money-laundering investigation suspect Skoda JS, a Czech nuclear catching up with him, if Leschenko’s to him in a private conversation. engineering company owned indirectly information proves valid. Lozhkin made The presidential secretariat did not by Kremlin-run Gazprombank, of his fortune as owner of the Ukrainian reply to a bne IntelliNews request for having paid as much as $30mn in bribes franchises for Russia’s leading tabloid clarification. to Martynenko’s Swiss bank account in titles, such as Konsolmskaya Pravda – 2013, to win a contract for the upkeep Ukraine’s best-selling paper with a Atomic decay of Ukrainian nuclear reactors. print run of 230,000. In 2013, only Lozhkin is not the only core member of weeks before pro-EU demonstrations Ukraine’s ‘shadow government’ report- Swiss prosecutors have confirmed that kicked off in Kyiv against the regime edly facing a money-laundering inves- they opened a bribery case against of then-president Viktor Yanukoyvch, tigation in Europe, says Leshchenko. Martynenko in 2013. Martynenko Lozhkin sold his entire holdings to Swiss authorities are investigating Prime acknowledges as much, but says the a corrupt Yanukovych crony, the Minister Arseny Yatsenyuk’s chief fixer, case is fabricated by “lies concocted notorious ‘Wizard of Gas’ Serhiy Mykola Martnynenko, deputy head of in the imagination of oligarchs”, in a Kurchenko. the parliamentary group of Yatsenyuk’s message posted on Facebook. People’s Front party, on suspicion of tak- Lozhkin cashed in at least €160mn for ing a $30mn bribe from a Russian state- Army buddy shoots up the ranks his media holding – the size of a loan owned company, according to multiple Ihor Kononenko, deputy head and Kurchenko got from a state bank to reports. unofficial chief whip for the president’s fund the overpriced acquisition. The Petro Poroshenko Bloc, is another key collateral for the loan is now worth a Martynenko started out as a member of the ‘shadow government’, fraction of the loan value. Meanwhile businessman supplying Ukraine’s according to Leshchenko’s analysis, and Lozhkin was decorated in 2013 by colossal, crumbling and corrupt nuclear the closest to Poroshenko himself. Russia’s State Federation Council for power sector in the 1990s, before his outstanding contribution to Russia- moving into politics. He has headed Kononenko has known the president Ukraine business relations. the parliamentary energy and nuclear since the two performed army service power committee for over 10 years, together in the 1980s. Kononenko Now, as Austria launches a sweeping irrespective of frequently changing then partnered Poroshenko and Oleh asset retrieval effort on behalf of prime ministers and presidents. He is Gladkovsky, now first deputy secretary Ukraine, including recovery of money regarded as the unofficial ‘watcher’ of the National Security and Defence allegedly stolen by Kurchenko, over the sector that supplies Ukraine Council, in setting up the industrial Lozhkin may get caught in the net. with over half of its electric power, as holding Ukrprominvest (UPI), which Leshchenko argues that Lozhkin is well as a fundraiser and sponsor of the included the once mighty automotive now under investigation in Austria PM’s People’s Front. concern Bogdan Motors among its for money laundering after accepting divisions. Kurchenko’s tainted funds. Austrian According to political scientist André News Agency (ANA) reported Lozhkin’s Haertel, associate professor at the In August 2014, Kononenko took involvement on September 24, citing Kyiv-Mohyla Academy, Martynenko is, on a new role: as the unofficial a spokesman for the country’s anti- with the protection of president and organisational force behind the corruption prosecution office. “Neither prime minister, expanding his personal creation of Poroshenko’s eponymous Ukraine nor Austrian law enforcement agencies have asked me for information on investigations regarding myself,” Lozhkin told ANA in reply. "We essentially have a shadow government – “In public, Boris Lozhkin stays mum a parallel government" over the criminal investigation in Austria, “Leshchenko tells bne IntelliNews.” But offstage there is a hive of activity: Lozhkin’s lawyer influence over the broad network party, only two months before dealing with the sale to Kurchenko of of state energy companies. “While parliamentary elections in October UMH [Lozhkin’s media holding] and Martynenko in Switzerland is already 2014. With Kononenko at the helm, the deputy head of the presidential under investigation for taking millions the party has grown rapidly into a administration are now both in Vienna. [of francs] worth of bribes, he is also well-funded political machine, which They are trying to put out the fire while suspected of deploying corrupt schemes took just under a third of the seats in it is still on the roof, before the whole to relieve state companies of millions of parliament in the elections, and which house catches fire.” dollars,” says Haertel. has largely maintained its standing in 54 I Eastern Europe bne November 2015

the polls, despite harsh government At least one of the Cessna aircraft elite aviation business is a division austerity measures. provided to clients was owned directly of Kononenko, Poroshenko and by UPI together with Raiffeisen Gladkovsky’s UPI. In a recent interview with bne Intel- Leasing, according to the documents, liNews, Lviv Mayor Andriy Sadovyi and registered in Austria as OE-GBY. Tellingly, some Intraco payment accused both Bloc Petro Poroshenko and documents name Dariya Kononenko, the People’s Front of selling seats in par- The lessee was a local Viennese firm, JB the daughter of Ihor Kononenko, as liament. The pro-reform president of the Park GmbH, run by Dmytro Lytvynets, originator of payments, identified European Business Association, Tomas who is also director of Bogdan GmbH, by her UPI email, indicating that Fiala, had previously named the sum of an Austrian affiliate of Bogdan the Kononenko family were directly involved in running the business jet operation.

"The impressive list of Ukraine’s rich shows how According to the documents, UPI-linked structures may own or have long-term the jet service networked the Kononenko family lease arrangements for as many as 10 planes, operated mainly by Austrian with Ukraine’s oligarchs" and Ukrainian firms. Despite the size of the business, it has no official website or brand name, suggesting clients were acquired through personal contacts and $3mn-5mn per seat taken by the parties. Corporation, the automotive subsidiary word of mouth. “We have a lot of questions for Tomas of Ukrprominvest. Fiala to answer,” Kononenko countered The VIP jet service flies oligarchs and on Facebook on September 23. The documents name as contact top officials around Ukraine, Europe, person for JB Park a certain Daria and the world, with flights as far as While other members of the alleged Tsaregorodtseva, whose email address India and the Seychelles, according to shadow cabinet such as Martynenko uses the historic Ukrprominvest the documents seen by bne IntelliNews. and Lozhkin were already well-known domain, upi.com.ua. Tsaregorodtseva A round trip within Ukraine costs figures in politics, media and business, is also listed as representative for a upwards of $7,000, while it costs Kononenko was a dark horse at the British Virgin Islands shell company, $150,000 for the round trip to the outset just over one year ago. But since Intraco Management Limited, through Seychelles. then, he has shown significant pulling which many business expenses for the power over the purse strings and media secret VIP airline get paid. In Ukraine Frequent fliers on board the UPI across the whole spectrum of the Tsaregorodtseva is listed as owner and executive jets include top Ukrainian Ukrainian establishment. director of Business Airlines, which executives such as Igor Litovchenko, receives payments for the VIP flights, head of Ukraine’s leading mobile Secret flights, frequent fliers according to the documents; Business phone provider Kyivstar; Leonid One clue as to the origins of Airlines also used to be shareholder Chernovetsky, the eccentric former Kononenko’s sway over the rich and in an UPI subsidiary in Kyiv, Bogdan mayor of Kyiv, together with his powerful could come from his secret Electrotrans, according to Ukraine’s wife and five children; banker Vasily business as provider of VIP business company register. Intraco itself Khmelnitsky; land baron Yury Kosyuk; jet services to Ukraine’s gilded elite, owns real estate in Kyiv linked to automobile magnate Tariel Vasadze; according to documents seen by bne Bogdan Motors, underlining that the and tycoon brothers Hrihory and IntelliNews. Ihor Surkis and Oleksandr and Serhiy Buryak; as well as metals and mining Kononenko’s UPI industrial magnate Vadim Novitsky. holding secretly runs Ukraine’s leading executive jet business for VIPs, flying The impressive list of Ukraine’s rich top dogs around Ukraine, Europe and shows just how much the jet service has the world, according to the documents. networked the Kononenko family with Besides Poroshenko himself, the Ukraine’s oligarchs. VIP jet business has catered to a swathe of Ukraine’s top businessmen Foreign VIPs have also used the and politicians, including many bespoke aviation: Flamboyant Russian high-ranking officials in the ousted pop star Philip Kirkorov is a frequent administration of former president client, as is controversial Armenian Yanukovych. arms broker Davit Galstyan, whom the bne November 2015 Eastern Europe I 55

UN alleges supplied arms via Ukraine left Ukraine on board the UPI-linked After parliamentary elections in late from the Balkans to Libyan rebels in planes, but there are some open November 2012, both men left the 2011. Payment documents show that source clues: One Gulfstream private cabinet, ending their collegial relations. Galstyan’s arms company Mosston jet recorded at the time as having Thereafter their fates diverged sharply: Engineering paid €270,000 to Intraco flown from Kyiv to Vienna but then Poroshenko started preparations for a as late as June 2015. denied landing appears to have been bid for the presidency – which turned UR-PRM, one of the planes used for out successful in May 2014 under the Asked to comment, Kononenko UPI operations, according to the most unexpected of circumstances. told bne IntelliNews by email: “I am not documents. a beneficial owner or director of the In contrast, following his dismissal companies mentioned in your query. A list of private jet charters in Ukraine from the cabinet, Salamatin [The] origin of documents... is not was posted to Twitter on February immediately moved back to Russia, known for me. In my opinion they [sic] 20, 2014 – the day many Yanukovych where he remains. His final UPI- are signs of tampering.” cronies tried to flee the country after organised Moscow-Domodedov trip on the massacre of anti-Yanukovych December 29, 2012, cost UAH124,700 Cash-rich cronies protestors on Maidan, according to – around $15,000 at the time – which Remarkably, despite the huge cost Radio Liberty. The list does not specify Salamatin as usual paid in cash, of the VIP service, many clients, and the exact airplanes used. according to the documents. He could all government officials flying on not be reached for comment. the jets, paid in cash for their flights Spy in the sky – sometimes handing over the money One notable high-ranking frequent flyer At least one former high-ranking once on board the plane, according to had already left Ukraine on a UPI plane: Ukrainian official now believes the document. controversial former Ukrainian defence that Kononenko’s links to the secret minister and defence industry boss cash-rich VIP jet business leave Illustrating the scope of Kononenko’s Dymytro Salamatin. Salamatin, who him vulnerable to international political connections, UPI’s jet service apparently retained Russian citizenship investigation for money laundering did extensive business with luxury- while serving as Ukrainian defence – putting him in the same boat as loving officials in the pro-Russian minister, is widely suspected of having Lozhkin and Martynenko. Yanukovych administration, who spied for the Kremlin during his tenure all paid in cash for their flights. in office between 2010 and 2012, laying “The mentioned company [Intraco Many of these clients are now under the groundwork for Russia’s subsequent Management] is part of Ukrprominvest international sanctions and targeted by seizure of Crimea and incursion into Group, Kyiv Ukraine. Several financial asset retrieval measures. eastern Ukraine in 2014. operations are held monthly amounting from €100,000 to €300,000... The The records detail flights for Andriy Salamatin served alongside Poroshenko documents attached indicate money Kluev and Nestor Shufrich, the in Ukraine’s government in 2012, laundering,” the former head of hardliner head and deputy head, during which time Salamatin enjoyed Ukraine’s security service Valentyn respectively, of Ukraine’s national VIP flights to Moscow, as well as to Nalivaichenko informed the Financial security and defence council under Qatar, Delhi and India, paying a total Activity Task Force in a letter in August. Yanukovych, who together paid a of $149,000 in cash for the flights. Nalivaichenko claims Poroshenko total of $115,000 in cash in 2011- It was also in 2012 that Salamatin’s dismissed him in July after he started 2013. ‘Mr Azarov’ – either former ministry awarded Poroshenko’s shipyard investigating the company and other prime minister Mykola Azarov or his Leninska Kuznya a contract for the offshore entities connected to the son; ‘Mr Katsyba’, one of the Katsuba construction of the first two gunboats of presidential party. family formerly powerful in the gas a series of nine for Ukraine’s navy, as bne sector; Serhiy Arbuzov, former head IntelliNews earlier reported. of National Bank of Ukraine and former first deputy prime minister; and former energy minister Eduard Stavitsky all flew with the Kononenko- linked VIP jet service, handing over in cash a total of nearly $200,000 for their flights.

All of these clients except the "I have heard these names dozens of times and Katsubas fled Ukraine after the fall after becoming an MP I have found much to of Yanukovych. The documents do not show if the Yankovych cronies confirm their massive influence" 56 I Eastern Europe bne November 2015

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

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

In September, after a meeting between Lukashenko and his Russian counterpart Vladimir Putin, Moscow Photo: Shutterstock announced plans to establish an air base in Baranovichi, which many experts consider to be the Kremlin's response to Lukashenko is Belarus’ Nato's expansion towards its borders. A new air base would be a demonstration of Russia’s determination to defend its president but nobody’s geopolitical interests in the territories of post-Soviet countries in the aftermath of the Ukraine crisis that involved the friend annexation of Crimea and the stoking of a rebellion in the east of the country.

Sergei Kuznetsov in Minsk However, on October 6 Lukashenko unex- pectedly announced that there had been s expected, Belarus’ longstanding is trying to secure a new loan of around no discussions concerning the establish- autocrat Alexander Lukashenko $3.0bn-3.5bn from one of these institu- ment of any base. "I am the man in charge Awon another five-year term in a tions. But it still has to do much more of making such decisions and I know landslide presidential election on October before it anchors its case with the West nothing about such plans,” he said. “We 11. And as expected, the EU agreed days and reaps a funding windfall. "The IMF don't need a base these days. We don't later to suspend the current sanctions is not ready to give billions for 'political need military air forces either. We need against Belarus for the next four months in recognition that the election, while not strictly free or fair, was an improvement on the last rigged one in 2011, which "The IMF is not ready to give billions for 'political ended in riots and repression. prisoners' but only for reforms – look at Ukraine" However, a likely outcome of any EU rapprochement with Minsk is that Lukashen- ko will be well placed to convince Russia that the West wants to pull the former prisoners' but only for reforms – look at certain weapons. This is what I've been Soviet republic out of the Kremlin’s orbit, Ukraine," says Balazs Jarabik, visiting saying to Putin and earlier to [Russian and that his oft-proclaimed loyalty to scholar at the Carnegie Endowment for Prime Minister Dmitry] Medvedev.” Russia should therefore be contingent on International Peace, referring to the six more Russian cash to support the strug- jailed opposition activists pardoned by Many Belarusian experts believe this gling Belarusian economy. Lukshenko in the run-up to the election. unexpected rebuff to be a manoeuvre "So the rapprochement with the West – aimed at bargaining for more from the Currently, the Belarusian government is as always was the case – is to make sure Kremlin in return for Minsk's consent negotiating support packages simultane- that Russia maintains its subsidies [to to deploy Russian military potential on ously with the International Monetary Belarus]. These have, of course, been its territory. And the Kremlin appears Fund (IMF) and another potential donor, decreasing since 2006, but they are to be willing to play ball on this one. the Russia-led Eurasian Fund for Stabili- still a key external factor that keeps the "Putin will include the establishment of sation and Development (EFSD). Minsk economy afloat." the air base as a key condition for a new bne November 2015 Eastern Europe I 57

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

Try IntelliNews for free today at intellinews.com 58 I Eastern Europe bne November 2015 loan from the EFSD," Alexander Mukha, of the air base in Belarus as mainly focus on diffusing the Ukraine conflict a Minsk-based independent financial a PR move aimed at demonstrating whilst working to reduce tensions analyst, tells bne IntelliNews. Russia’s commitment to defending between the West and Russia. "This is its interests in the post-Soviet space. indeed a life-or-death issue for Minsk," But Mukha adds that the issue of the However, the Kremlin has now shown Jarabik says, noting that there is little air base in Belarus has become "less its determination to defend its interests room for an independent Belarus in significant" for Moscow, at least for the globally through the operation in Syria the so-called 'Russian World', which, time being, because of the launching and its support of Bashar al-Assad. according to Moscow's conception, of Russian air strikes in Syria. The includes the post-Soviet countries that expert believes that until recently Meanwhile, Jarabik believes that Minsk have a significant Russian-speaking Putin considered the deployment will resist "as much as it can" and will populations.

More bumps in Russia’s The Central Bank of Russia (CBR) is still working on fine-tuning the system and could announce a major overhaul within pension reform road a month, Sergey Shvetsov, first deputy central bank governor, told reporters in New York on October 7. Ben Aris in Moscow While the shape of the new system hort of the money needed to status in the world. The financial sanc- remains unclear, it looks like Russia close an estimated 2.8% budget tions imposed by the US and EU have cut will plump for some version of the Sdeficit predicted by the end of this the country off from the long-term cheap "three pillars" that was pioneered by year, the Russia's government decided financing it so badly needs to re-start Chile and taken up with enthusiasm to raid the pension system again on the virtuous circle of investment-profit- by the Baltic states in the noughties: October 7 and froze contributions to the growth. With the consumption-led growth the state pension fund will remain the state pension fund for a second time, model clearly exhausted, the new model is backbone providing cover for everyone, according to the chairman of Russia's based on low inflation, low interest rates but workers can then chose to have part Pension Fund Board, Anton Drozdov. and domestic investment, of which the of their social contributions managed pension funds are supposed to be a big privately and can also take additional The state froze contributions last source of long-term domestic capital. privately funded pension cover. Just year, but reinstated them again in how these parts are weighted and what May, as the economy appeared to be And pension reforms had been starting financial investments are put in place stabilising. However, a renewed bout to move, albeit at a gradual pace. Russian to encourage their growth is the meat of ruble and oil price instability over pension fund assets could triple and be of the current debate. "The new system the summer has wrecked Russia's worth almost a fifth as much as the entire can't be entirely voluntary," Shvetsov chances of a return to normalcy, economy by 2020 if the government said. "In any case, there'll be some kind leaving the state reaching for continues its reforms as planned, a recent of encouragement for either people emergency measures yet again. report by Goldman Sachs posited. "Hav- or companies to set money aside for ing cleaned up the pension system in non-state pension funds. We're trying The decision comes at a high cost. With 2013-14, the Russian government now to formulate an alternative that would the demographic dip caused by the seems ready to allow resumption of be less costly for the budget, but not less economic chaos in the 1990s about to contributions to private pension funds. effective in terms of the size of the funds hit the working population, the state The impact will be large: we forecast attracted from the population." pension fund is already underfunded; Russian pension fund assets will increase whereas the social contributions (a 6% to [approximately] $200bn by 2020 from Stop-start reform tax on income) from two workers used to $64bn today. The creation of this sticky, The modernisation of Russia's pensions fund the pension of one retired worker, long-term domestic investor base is likely began in 2002, when the government that ratio is rapidly moving towards one to produce significant benefits for Russian required 6% of every employee's salary worker per pensioner. capital markets, particularly for stocks," to be contributed to state or private concluded Goldman Sachs analyst Dmitry pension funds. Over the last decade On top of that, the pension funds are a Trembovolsky and his colleagues in a Russia has seen its pension assets under solution to the problem of funding that report titled "The rise of Russian pension management (AUM) go from 3.0% to has come with Russia's current pariah funds", released at the end of August. 5.6% of GDP today. bne November 2015 Eastern Europe I 59

However, the government is now assuming that the Western financial 'Farmer John' brings cheddar sanctions are a permanent feature, so it is being forced to build up domestic to cheese-starved Muscovites capital resources. And that is without the problem of funding generous pension payments in the coming years to relative young OAPs (women retire at 55 Jason Corcoran in Moscow and men at 60 in Russia). The upshot is that funding pensions is already eating A British farmer who bent Vladimir Putin's ear over milk prices is hitting into the federal budget. back at Russia's recession with a cheese offensive, ramping up his output of cheddar, edam and stilton for Muscovites who crave quality brands amid the According to official statistics, the ban on Western food. private pension funds client base has grown to 28mn people compared with John Kopiski, whose Bogdarnya dairy farm is located 200km east of Moscow 52mn in state pension funds, while the in the Vladimir region, already supplies large supermarkets including Azbuka asset split is $33bn in private funds and Vkusa, Stockman and the Crocus Group with 150kg of cheese per day, and plans $31bn in state, according to Goldman to double production to 300kg as demand for his artisan cheese takes off. Sachs. In short, private pension funds are slowly eating into the share of the Having fought off bankruptcy for years, the current sanctions against Russia State Pension Fund. have not been the worst news for Kopiski. Russian producers have been frantically making cheese since Moscow imposed the Western food embargo Like everywhere else, the key to pension in August 2014 – but no one is doing it very well. reform is putting in rules that prevent funds from taking excessive risks and Generally, domestic Russian produce is being rediscovered amid a gradual collapsing, leaving the state with a renaissance in the agriculture base: top steak restaurants in Moscow stock costly bailout. angus beef from Voronezh and scientists in Siberia are developing their own mozzarella, mascarpone, and roquefort. The current pension reform proposals include: a change in the legal status Kopiski is also right on cue with such offerings such as his Farmer John of pension funds to for-profit; the cheddar, which may not have the mature kick preferred in Britain, but is nutty establishment of a special insurance with a soft creamy texture and runs rings around local types. "Sanctions have fund to guarantee savings in the case helped us a bit," Kopiski tells bne IntelliNews. "But if there's a foreign cheese of bankruptcy; and merging the at RUB1,200 and a Russian cheese at RUB1,000, many people will still buy the previous regulator (Federal Service foreign cheese because there's still a distrust of Russian products. Fortunately, for Financial Markets) with the Central I have gotten exposure which tends to build a market following." Bank of Russia (CBR), and shifting oversight to it. Kopiski, a Russian citizen since 1997, achieved minor fame in April when he was one of the first people to quiz Putin during the president's annual The cash-strapped Russian government phone-in. Introduced by the anchor as "simple Russian guy John", Kopiski raided the fund and froze transfers to complained to Putin live on national TV that farmers like him were starved of private pension funds in 2013-14, but credit because of crippling interest rates and because banks wouldn’t provide pension contributions were unfrozen loans with a long maturity to allow farmers to develop. His questions were this year in May, with the government fielded deftly by the Kremlin boss, who took a visible shine to the straight- handing back RUB530bn ($8.4bn) talking, heavily-accented farmer. of employer contributions it kept in 2013 to private pension fund managers.

Still, the government says it plans to unfreeze pension contributions as soon as possible. And if the government sticks to its plan, then Goldman Sachs forecasts Russian pension fund assets will increase by about $120bn by 2020 to reach a total of $200bn, on a combination of inflows and investment returns. 60 I Eurasia bne November 2015

Photo: http://gov.ge

INTERVIEW: Georgian PM eyes free trade deal with China within a year

Monica Ellena in Tbilisi

eorgia hopes to complete its free we are the country that connects east The tarmac on the new Silk Road will trade deal with China within a and west as well as north and south. certainly be energy, but the project will Gyear, while it continues to pursue And Georgia is the natural gateway to encompass “everything, any goods” and a "pragmatic" approach to improving Europe from Asia. This is the reality,” the China is the trump card. The feasibility its fraught relations with Russia as 33-year-old PM tells bne IntelliNews on study on the free trade agreement (FTA) potential obstacles such as its desire to the sidelines of the Silk Road Forum held is over and an analysis showed that join Nato loom, Prime Minister Irakli in Tbilisi on October 15-16, which the deal would boost Georgia’s annual Garibashvili tells bne IntelliNews in an was co-organised with the Chinese exports to China by 95% and China’s excusive interview. government and attracted over 1,000 by 1.7%. “When I was in China [in delegates from 32 countries to discuss September] I got confirmation to start After years of terrible relations with how to revive the ancient trade corridor. actual work [on the terms of the deal], its former Soviet master that have which will begin on November 5,” says involved numerous trade wars and an Seven years after the war with Russia Garibashvili. “I am sure it will not take actual bloody war in 2008, Georgia is over the breakaway region of South too much time, and maybe it will be opening as many doors as possible to Ossetia that scared off investors and completed within a year.” diversify and strengthen its economy, allies, Georgia has proved to be “a betting on both east and west. reliable and stable country for the An FTA with China would be the latest transit of energy, trade and goods that of a string of such deals that the small “Georgia has a very strategic location, flow into this corridor,” he stresses. Caucasus nation of 4.4mn has signed bne November 2015 Eurasia I 61

over recent years. In June 2014 it it is obvious. Nevertheless, we made On September 25, Georgian Minister signed a free trade and association it very clear that there is the need for of Energy and Deputy Prime Minister deal with the EU, enjoys similar responsible and pragmatic dialogue Kakha Kaladze met with the Russian deals with many CIS countries and with Russia,” Garibashvili says. gas export monopoly’s chief executive, neighbouring Turkey, and in September Alexei Miller, in Brussels, and stated began negotiations over a deal with Even so, the PM is adamant that Geor- that “any developed country thinks the European Free Trade Association. gia’s Euro-Atlantic aspirations are set in of diversifying its energy supplies,” “This makes us unique,” the PM claims. stone. “[This is] the choice of our peo- and Tbilisi would consider additional ple, we’ve followed this policy and we’re supply from Gazprom if the proposal Russian roulette going to continue. I believe that Russia is commercially viable. This provoked Open trade with diverse countries should also be interested in a stable howls of protest in the media, suspicious is essential for Tbilisi, as Russia casts a neighbour country,” he says. “Our Nato of a Russian company that is used long shadow. Russia has traditionally aspiration is not against anyone, it is not by the Kremlin as a geopolitical tool been the main destination for Georgia's against Russia, it is for a better protected and is currently being investigated by exports (as well as the source of future for our next generation.” the EU for anti-competitive practices. remittances), so when Moscow banned “The main provider of gas is and will Georgian products in 2006 the country Such an ambition does not go down be Azerbaijan, our main strategic lost overnight about 80% of its export well in the Kremlin, which regards any partner,” insists Garibashvili, who market for key products like wine. moves by Georgia to deepen relations recently paid an unexpected visit to with the Western military alliance as Azerbaijan. “We have great relations, Since you can’t choose your a provocation. At the last Nato meeting why would we replace Azerbaijan gas neighbours, normalising relations in September 2014, Georgia did not with Gazprom gas? This is not our with Moscow has been a key goal of get the desired Membership Action intention – our policy is crystal clear.” the Georgian Dream coalition since it Plan (MAP), the last step before full won the general election in 2013. The membership, but instead received a “Gazprom supplies gas to Armenia via prime minister believes that what substantial aid package, including the Georgia, which proves Georgia also con- differentiates the new government’s establishment of a Nato training centre nects north and south [as well as east approach to that of the previous that opened in August. and west], and it has been like this for administration led by former president many, many years, even under the previ- Mikheil Saakashvili is its more practical Complicating matters is public opinion. ous administration,” he states, adding attitude. “We have proved in the last A non-binding referendum in early 2008 that the meeting focused on the poten- three years [that] we are a responsible on EU and Nato membership received tial increase of gas volumes for Armenia. player in the region… We are pragmatic people, we want to and we will avoid any conflict, because we truly believe "Maybe the free trade talks with China in solving problems through peaceful means, not by escalating them.” will be completed within a year"

The coalition is on the same page as Tedo Japaridze, chairman of the overwhelming public support. Fast- "They had to negotiate with the Geor- Georgian parliament’s foreign relations forward seven years and the support gian side regarding this issue because committee, who addressed the has turned lukewarm. A survey by the we keep a certain amount of gas from recent Bucharest Forum by saying that, National Democratic Institute (NDI) this pipeline,” he explains. Gazprom “we want to live with Russia, we don’t released on October 17 showed that 61% provides Georgia with about 200mn want to live in Russia.” of Georgians still support the Euro- cubic metres of gas per year (cm/y) as a Atlantic path, marking a 17-percentage- transit fee, out of the total 2.2bn cm/y Georgia considers Russia to be an point drop from a year ago. The the country consumes. occupying force, as Russian troops are government questioned the results, stationed in the breakaway regions which also showed a steady fall in Trouble at home of Abkhazia and South Ossetia, popular support for the ruling coalition. This year’s economic slowdown in the which account for about 20% of region has taken its toll on Georgia. The the country’s territory. “Russia still Meanwhile, Garibashvili stamped 35% devaluation of the Georgian lari continues its occupation policy. Of on speculation in the media that his versus the US dollar since last November course, we strongly condemn the government is negotiating with the has severely hit people’s pockets and creeping annexation – this is what Russian state gas company Gazprom Russia’s recession harmed Georgia we consider it – of our territories of to play a bigger role in its gas market, through falling exports and remittances. Abkhazia and [South] Ossetia. [The instead reinforcing the “key” energy In 2014, Georgia’s economy expanded by Russians] disregard international law, relations with neighbouring Azerbaijan. 4.7%; this year the government predicts 62 I Eurasia bne November 2015

growth of 2.5-2.8% and 3.0% for 2016. the central bank of its supervisory role Garibashvili rejects the accusations, “We managed this crisis situation strongly and transferred it to a newly estab- arguing that Rustavi 2 is not the only and efficiently,” the PM maintains. lished Financial Supervisory Agency opposition channel. “Which of the “There is a slowdown everywhere, oil (FSA) under parliamentary control, other channels are pro-government? prices dropped, devaluation in many raising investor concerns about the None of them. All of them are very countries – this has a negative impact on independence of financial regulation at critical of government and in the last Georgia, as there is a spill-over effect.” a critical time for the economy. “I can’t three years our government has proved judge the Constitutional Court, and of that we want to make media strong The government is looking to bolster course everyone has to obey its final deci- and independent,” he says, adding that growth through plans to attract more sion… We continue to work and coordi- Rustavi 2 is “a court case, it is not a foreign direct investment (FDI) and boost nate closely with the National Bank. I will government affair”. the economy via more local production; coordinate to make sure there is a good The president’s position on Rustavi 2 as well as his veto of the bill on the new FSA highlights the friction "Ivanishvili doesn’t make decisions" between the two highest government officials, which has often been played out through the media. about 230 new factories were set up with communication between the government, The government has accused the the help of government programmes in the Ministry of Finance and Economy, and president, who ran on the Georgian the last two years, the PM says. “Inflation the National Bank of Georgia. There is no Dream ticket, of a lack of “gratitude”, is [also] not high, which is why we are reason for dramatic scenarios,” he says. while the president has made thinly confident. The people with loans in US veiled criticisms of Ivanishvili for his dollars and salaries in lari are not in an Garibashvili rejects the accusation that Machiavellianism. The PM stresses ideal situation – they have had to extend his government is trying to influence that he personally has no issues with their loan period with the banks, which the media, specifically actions taken President Marghvelashvili. "When are finding new terms for them.” against Georgia’s most popular TV it is necessary, I call him and talk. station Rustavi 2, which is close to the Every time the initiator was me. But But the economy is not the only opposition United National Movement the president has his own agenda and challenge at home. Politically, the of Saakashvili. Rustavi 2 is currently vision – I don’t want to judge him.” government has faced criticism over embroiled in a property dispute that has its meddling with the central bank’s led to the freezing of its financial assets, As for the accusations against independence, alleged attempts to thus threatening its capacity to broadcast. Ivanishvili, Garibashvili is clear. “This limit the freedom of the press, and The management of the station has government was formed by my allegations that the former PM and accused the government of blocking a predecessor [Ivanishvili], with whom Georgia’s wealthiest man, Bidzina funding deal necessary to continue its I have worked for ten years and with Ivanishvili, is still pulling the strings operations. Human rights groups as well whom I am very close,” he explains. of government behind the scenes. as President Ghioghi Marghvelashvili “From the very beginning, I said have expressed concerns, while the US sometimes I may ask advice or he may The Constitutional Court has suspended embassy called any actions that give the give advice, but this is for our country. as an interim measure a controversial appearance of restricting media freedom I didn’t hide it... [and] he doesn’t make bill passed in September that stripped as “disturbing”. decisions.”

INTERNATIONAL BAR ASSOCIATION CONFERENCES A one day conference presented by the IBA Corporate and Mergers and Acquisitions (M&A) Law Committee, supported by the IBA European Regional Forum and Russian Arbitration Association. Now in its seventh year, this leading conference will once again bring together practitioners from around the globe to discuss the latest emerging developments and hot topics in Russian and CIS M&A law, as well as hosting input and commentary from some of the world's leading experts in the eld. Topics include: • Macroeconomic trends in M&A; • Civil Code Reforms: New Rules for M&A Transactions; • Cross Border M&A Transactions today: myths, realities, execution; • Distressed Assets Cross-Border M&A in the Russian Market; • Disputes: responsibility of shareholders and directors according to new Russian Civil Code; approach ANNUAL 12 November, 2015 of Russian and foreign court in applying Russian law provisions regarding liability of shareholders INTERNATIONAL Moscow, Ararat Park Hyatt and directors for the debts of the company; practical problems arising in insuring these risks, CONFERENCE Neglinnaya st., 4 developing of the code practice related to shareholders disputes and similar things. Who should attend? Lawyers in private practice, in-house counsel, investment bankers, accountants and other experts «Mergers and Acquisitions in the mergers and acquisitions sector. Details of the event can be found on the o cial website: www.iba-lfm.ru For more information regarding participation and registration, in Russia and CIS» please send am e-mail to [email protected] bne November 2015 Eurasia I 63

to appease the electorate by bringing A purge in Baku to heel a ministry that has become synonymous with human rights abuses and corruption. Reports of small businesses being unlawfully raided by the bne IntelliNews MNS and fearful owners forced to pay hefty bribes to avoid being thrown in jail purge at Azerbaijan's intelligence Trying to make sense out of the events under fabricated accusations or, worse, ministry has sent the Baku requires a great deal of supposition, for having their safety or that of their families Arumour mill into overdrive, not only does the authoritarian govern- threatened by the state's spies, are legion. raising questions about security in the ment rarely account to the public for its country and the president’s plans for the political acts, but it has stifled dissent to Man for all seasons various power factions that exist. such a degree that independent observers Mahmudov appeared a stereotypical daren’t express an opinion for fear of per- figure on Azerbaijan's political scene: The mystery began on October 17, when secution. However, one thing is certain: a career security bureaucrat, he had President Ilham Aliyev out of the blue Aliyev has become disenchanted with worked with the Ministry of Internal dismissed the country's security minister the performance of his security staff and Affairs between 1980 and 2004, when and close former ally, Eldar Mahmudov, is purging the ministry of Mahmudov's he was appointed minister of security. straight after returning from a summit most trusted employees and allies. He represented the country frequently in Kazakhstan, where Commonwealth of at international security conferences Independent States (CIS) heads of state Furthermore, by attacking a power- and seminars, and continued to do so had gathered to discuss, among other ful and connected minister like Mahmu- until as recently as October 9. things, the threat of Islamic terrorism. dov, Aliyev is reasserting his control He did so through a brief announcement over the country before Azerbaijan is But behind a rather uninteresting posted on the website of the Azerbaijani scheduled to hold parliamentary elec- appearance, Mahmudov had numerous presidency, which offered no tions on November 1. Mahmudov's private business interests. "Mahmudov explanation for the dismissal. influence in Baku, Moscow, Ankara and was more a businessman than a head of Jerusalem had gradually increased over special services," a haqqin.az editorial The following day there was an emergency meeting of the country's Security Council, according to haqqin.az. Then Turan news agency reported "unusual" "While he was definitely influential, he could be activity at the Ministry of National Security (MNS) headquarters; a usually disposed of, and that is exactly what Aliyev did" shut main gate was wide open, cars were going in and out, and people with briefcases and folders were reportedly seen leaving the building. "It looked like the last decade, and with it his personal claimed after the minister's dismissal. A a seizure of documents was taking place fortune and that of his family. His clan, well-connected individual, he was related inside," the news site reported. however, was not as powerful as the more to the former chairman of International notorious Pashayevs, Mammadovs or Bank of Azerbaijan, Jahangir Hajiyev, On October 20, seven high-ranking MNS Heydarovs, making it an easier target. who has reportedly been jailed. officials were arrested, four of them "Therefore, while he was definitely working at the ministry's monitoring influential, he could be disposed of, and According to a Facebook post by Arif centre, which oversees the listening of that is exactly what Aliyev did," Vadim Mammadov, former ambassador to the private telephone conversations, among Mukhanov, senior fellow at the Centre Organisation of Islamic Cooperation at other things. The charges brought against for the Caucasus and Regional Security the EU, Mahmudov took out a large loan them were extortion of private business at the Moscow State Institute of Inter- from IBA that he was unable to repay. people and embezzlement. On the same national Relations, tells bne IntelliNews. "This is not the first time Mahmudov has day, President Aliyev also appointed a "Aliyev might want to dispose of some fallen out of favour with the president," new deputy security minister, Deputy of the other ministers that have become Mammadov's post reads. "Once, he Justice Minister Madat Guliyev. On larger than life, but he cannot do that at blackmailed a business for a large sum October 22, three more employees of the moment because they have a lot of of money and did not pay it back, and he the monitoring centre were placed support from their clans." came close to being fired when Aliyev under arrest with similar charges. And found out. He got out of that by paying nine more MNS staffers from different The timing, coming less than two weeks the money back with interest. Now, departments, four of whom were before the parliamentary elections, he took out large amounts of money generals, were dismissed on October 23. could also mean that Aliyev is trying from IBA, which went to third coun- 64 I Eurasia bne November 2015

tries through the bank of the minister’s Fugitive Kazakh banker one step cousin, Chingiz Asadullayev, the owner of Azerigasbank. Mahmudov also estab- closer to home lished powerful personal ties with Israeli intelligence, something that could only concern Russia. Moscow may have dug out some serious discrediting evidence bne IntelliNews about the minister, and informed the president about it during his latest trip A former Kazakh banker accused of stealing up to $6bn from BTA Bank is [to the CIS summit]. The minister also one step closer to finding himself in a country that might then hand him defended other well-known ministers over to his native Kazakhstan, after the French government signed a decree from the presidential administration.” sealing his extradition to Russia. Another who spoke about the case, for- Ablyazov’s lawyer Peter Sahlas said on October 12 that his client was informed mer MNS employee Arastun Orujlu, also of the decision the previous week. French Prime Minister Manuel Valls pointed to Mahmudov's financial prob- apparently signed the extradition order on September 17, it was reported. lems as the cause of his dismissal. "He invested billions of the top leadership's BTA “applauds the Prime Minister’s decision as a crucial step towards money in Russia through his employees, forcing Mr Ablyazov to face justice for the billions of dollars that he stole from but those billions were lost because of the Bank”, the Kazakh bank, which Ablyazov once ran during the pre-crisis the sanctions against Moscow. In addi- boom years as chairman and controlled through an undeclared stake, said in tion, Mahmudov reached out to [Turkish a statement emailed to EurasiaNet.org. President Recep Tayyip] Erdogan's close circles with the help of his business part- Ablyazov will now appeal to the Conseil d'État, France’s supreme ner, a well-known billionaire in Turkey. administrative court. Should the Conseil d'État uphold the extradition decree, He tried to get the Turkish president's he will be deported by the end of the year. Observers say it would be highly support to be appointed prime minister. unusual for the Conseil d'État to rescind the decree. Ilham Aliyev did not like this; however, no one touched Mahmudov because of Amid the salacious details of luxury villas he used as hideouts in Europe Russia's support.” while on the run, his family and defence team have attempted to paint Ablyazov as a victim of a political witch-hunt by Kazakhstan’s authoritarian “This time, it was Moscow that President Nursultan Nazarbayev. surrendered him," he concluded in an interview with haqqin.az. Once a minister in Nazarbayev’s administration, Ablyazov first fell from grace when in 2001 he co-founded the Democratic Choice of Kazakhstan As Mahmudov spent more time handling (DCK), an opposition movement. After serving a jail sentence for abuse of cash than information, his work suffered. power, he became chairman of BTA Bank, then one of Kazakhstan’s largest Several arrests of Azerbaijani terrorists financial institutions, in 2005, while allegedly continuing to finance opposition who fought with Islamic State had to be movements. He stayed in the post until 2009, when the Kazakh authorities performed by Azerbaijan's international issued an arrest warrant accusing him of embezzling as much as $6bn. He counter-terrorism partners, according to has always rejected those claims, accusing Nazarbayev and his inner circle haqqin.az, which constituted a big failure of plotting to gain control of BTA Bank. on MNS' part to protect national security. That is despite it being well known in As his bank collapsed and had to be taken over by the state in February 2009, Baku that the nearby industrial town of Ablyazov fled to the UK where he was granted political asylum. However, BTA Sumgait has become a recruiting ground Bank started legal proceedings in the UK High Court as soon as he stepped for terrorist groups. onto British soil. He was eventually found guilty of contempt of court in trying to hide more than £34mn of assets from creditors and sentenced to 22 Regardless of the reasons behind months in jail in February 2012. Mahmudov's dismissal, it is a positive development, one expert, who declined By that time Ablyazov had already fled the country, though. He then hit the to be named, tells bne IntelliNews. headlines in May 2013 when the Italian police raided a villa in Rome where he "During his 10-year tenure at the was supposedly staying with his family. However, when they arrived the police MNS, the ministry became a tool for found only his Kazakh wife and six-year-old daughter. They were hastily repression, and for spreading fear in deported to Kazakhstan. Ablyazov was eventually arrested in Cannes, France, society. His dismissal may mean that in August 2013. the ministry might be reformed in the future," he says, hopefully. bne November 2015 Eurasia I 65

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

Try IntelliNews for free today at intellinews.com 66 Opinion bne November 2015

STOLYPIN: The limits of the Russian ‘patriotic mobilization’

Mark Galeotti of New York University

as Putin’s Russia become a mobilization regime? action, and while a combination of wall-to-wall media A common assumption is that the Kremlin is coverage and the inevitable initial appeal of what seems Hbecoming or has become dependent on a heady mix a “nice, victorious little war” explains this apparent flip- of paranoia, militarism and public spectacle, and war is a flop, the underlying concerns are unlikely to go away. It great way of supplying it. There is some truth in this, and is noteworthy how often the spectre of the Soviet war in certainly the Kremlin is pushing a nationalist line for all it Afghanistan – a “six month” and “limited” deployment that is worth. However, we should not assume the Russians are ended up lasting ten years and costing more than 15,000 wholly taken in by it, let alone that this means Putin needs Soviet lives – crops up even in the more supportive media. to manufacture crisis after crisis to keep his action show topping the ratings. Moderately quiet on the eastern front Besides which, Russians are no more simplistic in their The war will be televised perspectives on the world than anyone else. They can be Of course, Moscow is making much of its latest adventure. excited by the thought that their country is again shaping However, the black and white cockpit camera footage of global events; some of them at least can enjoy the videogame bombs hitting targets, the to-camera pieces shouted over the pyrotechnics as jihadists and rebels are hammered by the scream of jet engines, the shots of cruise missiles streaking might of the Russian military. But that does not mean they from warship launchers, are all long-established staples of cannot keep that in context, that they want to see their boys techno-war. They could as easily be drone footage from US coming home as “cargo 200” casualties. It also does not mean operations in Afghanistan, or reportage from Balad Air Base that they need to hold these feelings especially deeply, or in Iraq as American F-16s headed off for another mission. indeed that they are not also savvy enough to know what What modern war is not turned into a blockbuster, especially responses are expected of them when surveyed. in the early days, before friction, fate, and the ingenuity of the perfidious enemy bring to an end illusions that it can be managed and choreographed? "One has to ask just to what extent Meanwhile, the cast of nationalist ideologues and ordinary Russians really feel propagandists continue to ply their trade, smoothly pivoting from Ukraine to the Middle East. Veteran writer Alexander mobilized or respond to Kremlin Prokhanov – who first hit the big time in the 1980s with PR blitzes" hearty accounts of Soviet heroism in Afghanistan – is now telling young Russians to stop watching TV game shows and undertake their own “personal mobilization” for a clash of civilizations. And when not noting the “ideal” conditions for For that matter, just how mobilized do Russians feel? Life bombing in its weather forecasts, television news is delivering a has become harder – salaries have dropped in real terms for stream of accounts of successful missions and grateful Syrians. the last ten months – but most have adapted. Finland, for example, is suffering because the Russians who tended to However, there is a world beyond Perviy Kanal news and come to shop now spend only two-thirds of what they did Rossiya 24, and one has to ask just to what extent ordinary before the current crisis. But this is only in part because they Russians really feel mobilized or respond to such PR blitzes. are buying less overall, and in part reflects a shift to cheaper According to a recent Levada Center poll, 72% of Russians are online suppliers instead of coming to Finland to buy in a supportive of the air campaign against Islamic State, but that bricks-and-mortar shop. does not equate to any blanket approval of a wider military operation. Meanwhile, Russians continue to live their lives largely in blissful ignorance that they are supposedly locked in An earlier survey had found 69% opposing direct military economic and geopolitical conflict with the West. Airliners, bne November 2015 Opinion 67

trains and buses still shuttle back and forth across the the Syrian adventure as having three crucial virtues: as highly notional front line, and while the numbers travelling abroad successful (hundreds of Islamic State “mercenaries” are fleeing look set to fall by 40% this year, surveys show this is a the war zone, according to the official accounts); wholly safe product of the ruble’s decline, not any disinclination to visit for Russians; and well received everywhere but in the White the outside world. On a personal level, Russians seem to House. respond more with sorrow than anger when discussing the crisis with Westerners. This will not last. If Moscow wants to change the ground truths of this war, it will take a lot more than 30 aircraft and More generally, much of the outside world’s coverage some cruise missile strikes: brigades of combat troops, not of Russian hyper-patriotism comes from Moscow, a city a few “volunteers” and technical advisers will be required. admittedly festooned in St George’s ribbons and wallpapered In due course, there will be casualties, whether to accident in nationalist billboards. But how universal is this? A trip to or enemy action, and the risk of an upsurge in terrorism at St Petersburg this summer, for example, revealed a city far home cannot be discounted considering that many North less burdened by all the paraphernalia of mobilization. How Caucasus cells have pledged their loyalty to Islamic State. far is it really the case that Moscow is the face of a Potemkin And the operation is unlikely to win any long-term plaudits patriotism as much as anything else driven by an apparent other than from Tehran and Baghdad, and is already eager to present its lords and masters – how many of the complicating relations with Ankara, a potential regional ally. movers and shakers of today’s Russia venture far outside the A107 ring road? – with what they want to see? So the shine will soon dull and if anything the Kremlin – as with Ukraine – may well find itself the hostage of its triumpha- Neither master nor captive, but bit of both list propaganda. However, that does not mean that it will have Patriotic mobilization is used in a bid to distract Russians to pick some new war with which to replace it. Given that the from their current troubles and delegitimize any efforts to present patriotic mobilization is actually rather less powerful pin blame on the Kremlin. In some cases, actively dissenting and pervasive than might seem at first glance, with Russians voices are persecuted as backsliders, even traitors, but this not quite so quick to be taken in, it also means, mercifully, that is the rarity, not the norm. Instead, it is rather that quieter its failure is going to be less critical for the regime, and Putin is voices of uncertainty and misgiving are drowned out by the unlikely to feel an imminent need to pick another fight. official clamour.

For now, at least. Being 72% comfortable with the current Mark Galeotti is Professor of Global Affairs at the SPS Center for arm’s-length operation is one thing, especially when Putin Global Affairs, New York University and Director of its Initiative reassures his people that the government has been able to for the Study of Emerging Threats. He writes the blog In Moscow’s fund it out of the military’s existing budgets. However, this is Shadows (http://inmoscowsshadows.wordpress.com/) and tweets based on consumption of an official narrative that presents as @MarkGaleotti. 68 Opinion bne November 2015

COLCHIS: Revving Georgia’s economic engine

Michael Cecire of the Foreign Policy Research Institute

conomic development and growth in Georgia have it underscores that for all of the positive news to come out traditionally meant different things for different of Georgia, there is something about the country’s economic Epeople. Georgia recorded periods of strong economic formula that is not quite right. Georgia’s two-sided economic growth between 2004 and the present, and the country’s story begs many questions, but perhaps foremost is this: what physical transformation over that same period has been is the country’s economic driver? striking – urban revitalization in various cities and towns, increasingly modern infrastructure, and increasing emphases Blue-collar blues on convenience. Yet despite these undeniable gains, the Under the previous United National Movement (UNM) population benefited unevenly and unemployment has government, which ran Georgia between the landmark 2004 remained stubbornly high.

More contemporaneously, there are two ways to look at Georgia’s past year of mediocre economic growth. One is to focus on the bad, of which there is plenty. September data "For all of the positive news to come from the National Statistics Office of Georgia shows the out of Georgia, there is something economy sauntering at a leisurely 2.8% growth average for the first eight months of 2015. Foreign trade is down some about the country’s economic 13% from 2014. And the Georgian currency, the lari, has formula that is not quite right" depreciated almost 40% in the past year.

At the same time, there is some silver lining. Considering the constant pummelling from exogenous shocks, that Georgia is growing as strongly as it is might be considered a point in Rose Revolution and the hotly contested 2012 parliamentary its favour. That 2.8% number is nothing to write home about, elections, state economic policy was narrowly focused on but it beats dour 2015 growth estimates from the European attracting foreign direct investment (FDI) and establishing Bank of Reconstruction and Development (EBRD) by a a white collar, services-oriented economy. Economic good half-point. And to the relief of many, Fitch, the ratings development strategies mirrored this approach; tourism agency, has affirmed Georgia’s outlook as stable and kept its was emphasized, and large-scale urban makeovers became a bond rating at an investment grade ‘BB-’ . dominant element in revitalization programming.

This duality in Georgian economic performance has This moved the needle on economic growth. Between 2004 provided great fodder for both opponents and defenders and 2012, the Georgian economy averaged 6.2% in growth – of whichever government has been in power. Still, it also a strong rate on its own, but particularly so given large dips illustrates a rather scrambled and more difficult path to coinciding with twin shocks of the global economic crisis and economic prosperity in Georgia than is often assumed. And the August 2008 Russian invasion. bne November 2015 Opinion 69

Less tangibly, the now-ruling Georgian Dream coalition widely believed to be several times higher than the official inherited in 2012 a very different country than the one the rate. But the official rate is still useful as a proxy indicator of UNM had won in 2004. By 2012, Georgia had generally labor fluctuations. functioning transportation infrastructure, an increasingly established middle class, and a largely competent, if politically In contrast to the UNM, upon coming to power, Georgian polarized, state bureaucracy and civil society sector. Dream seemed to have little concern (at least relative to the UNM) for the quarterly drip-drop of GDP. Much of But for all of the UNM’s triumphs, its obsession with 2013 saw slow or stagnant economic growth as Georgian creating a white-collar economy did more to establish what Dream paused or canceled a slew of UNM building projects, were only the accoutrements of a post-industrial economy including ambitious plans for a greenfield megacity on superimposed over what remained, at its core, a still largely the Black Sea coast. Meanwhile, the new Georgian agrarian country. To wit: while only accounting for 9% Dream government unveiled a broad social welfare of GDP, Georgia’s agricultural sector was responsible for programme that included universal healthcare, raising some 56% of the labour force in 2014. By focusing on GDP pensions and eliminating tuition fees in many state growth and capital inflows, but largely ignoring labor, the university programmes. UNM developed an economic growth model that willfully discounted the role of agriculture. It is telling that the most Georgian Dream also made agriculture a centerpiece of its attention that Georgian agriculture gained under the UNM’s economic development programme. The state began offering tenure was the ill-fated plan to attract South African Boers to generous subsidies for key crop yields, and trade with Russia work prime Georgian farmland at fire sale prices. was reopened in a bid to revive agricultural exports. Russia quickly again became Georgia’s top wine export market, and By 2012, despite years of solid economic growth, the official became Georgia’s third largest trade partner overall by 2014. unemployment rate had actually risen to 15%. Because And concomitantly, if we accept official unemployment as a of the way unemployment is tabulated, the actual rate of proxy for actual unemployment,the unemployment rate in unemployment – or at least severe underemployment – is Georgia in 2014 fell to its lowest level since 2007.

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

After a tough year in FY14, domestic coal produc- It was a good year for the domestic textile sector, tion saw significant growth in FY15. The growth was backed by stable growth in exports. Depreciation of primarily due to the higher capacity utilization recorded the Indian rupee helped in making local textile exports by Coal India Ltd. Despite higher production, increase more competitive amidst competition from emerging in coal demand led to a 33% y/y rise in coal imports. markets like Bangladesh and Vietnam. The two largest However, the profit margins of coal players took a hit export segments, namely ready-made garments and due to a decline in coal prices and simultaneous rise in cotton textiles, each saw a double-digit growth in USD operational costs. Reforms in the coal sector and faster terms during the year. clearances have the potential to increase the annual production of coal in India. • In FY15, the sector export earnings grew by 16% y/y in USD terms, recording a second year of strong • After a strong performance in coal production during recovery after the decline in FY13; 2008-10, the sector took a beating in subsequent • As of FY14, ready-made garments were the largest years, partly due to the repercussion of coal block segment in terms of export contribution, accounting allocation scam. However, it recorded a significant for 46% of the total export earnings. recovery in FY15, growing by 8.4% y/y.

j.mp/emdstore 70 Opinion bne November 2015

Comparative advantages wine has become an increasingly popular and prominent Of course, disclaimers about correlation and causation offering in China and the Far East. Though Russian are in order here. It is not incontrovertibly apparent that demand has dipped, exports to China have grown some humming Georgian growth between 2004 and 2012 was 90% in 2015, and China is already the fourth largest not just a product of macroeconomic beta-convergence Georgian wine importer. And if trends hold, China could after the chaotic doldrums of the 1990s. And boosts to the move quickly up that list in the years to come. Georgian labour market in 2014 rely on one’s acceptance of state data as an effective proxy, despite being broadly The amazing growth of Georgian wine in the Chinese regarded as problematic. Nonetheless, those correlations market potentially hints at a far broader opportunity for are striking. Georgia. China’s appetite for Georgian wine is significant not only in its trade volume or potential, but also because At first glance, the dividends gleaned from Georgian it may help clarify a stubborn problem in Georgian Dream’s agriculture-first approach seem like an adequate economic policy. For years, the Georgian government and secret sauce for further gains against unemployment. But its consultants have sought to identify a clear economic Georgia’s big export market, Russia, is in the midst of a growth engine – an internationally competitive comparative severe economic reckoning from the effects of rock-bottom advantage – to help carry the country to prosperity. Given energy prices and international sanctions – not to mention the country’s heritage and labour composition, Georgian agriculture is often seen as a sector ripe for growth. Yet its potential as an agricultural producer has typically been seen as limited, given its restricting geography, the "The amazing growth of Georgian continued domination of smallholder cultivation, and the attendant costs of production, processing and export. wine in the Chinese market potentially hints at a far broader Wine is a good example. Georgia will never be able to match the major producing nations at price point or opportunity for Georgia" volume, which would seem to consign it the margins of the industry. Yet in China, Georgian wine has found success not as an inexpensive competitor to the flagship brands in Europe and the Americas, but as a niche good in its own the drain from the Ukraine and Syria conflicts and the cost right. And, like in China, Georgia can sell its wine to other of propping up an increasingly numerous constellation of emerging economies – in Asia and elsewhere – with large, separatist dependents along its periphery. Unsurprisingly, underserved luxury good markets. In this formulation, trade with Russia has gone down as a result. other Georgian offerings make similar sense – mineral water, spirits, and even some varieties of prepared food Yet other promising markets have stepped into the breach. products. Most notable is China, which has been content to play on the margins for years until more recently, and has There is no silver bullet for building and sustaining Georgian presented itself as an increasingly major league player in economic development and growth. Tapping emerging the economic realm. China has jumped into being Georgia’s luxury markets would only be one piece of the puzzle, and fourth largest trade partner (or third, depending on the trade with Europe, Turkey and even Russia will continue to numbers you’re reading) and a leading source of FDI. play a major role in the economy. Attracting FDI and, yes, developing a white-collar sector will also have a role to play in China’s sudden interest stems from Georgia’s position as the new Georgian economy. But the possibility of purveying a key connector state in Beijing’s New Silk Road (NSR) agricultural products to the enticing Chinese market, and initiative. NSR is envisioned as a trans-Eurasian trade in other emerging economies, may offer Georgia the most corridor that would offer China a direct, overland route to straightforward path to both addressing its long-running Europe, and vice versa. Tens of billions of dollars have unemployment woes, while developing a basis for strong, been set aside to make NSR a reality, and Georgia, sitting export-driven growth. at an important juncture squarely along its path, has attracted Chinese attention. Already, China and Georgia are negotiating a free trade area. And in a clear statement Michael Cecire is an associate scholar at the Foreign Policy of intent, Georgia just played host to the inaugural Silk Research Institute's Project on Democratic Transitions and Road Forum, co-sponsored by China and the Asian Black Sea regional analyst. Follow him on @mhikaric Development Bank.

The budding China relationship also holds promise in other ways. As its relations with Beijing develop, Georgian bne November 2015 Opinion 71

UPSIDE DOWN WORLD: Are emerging markets set to rally?

Dr Jerome Booth of New Sparta

ne can never tell exactly when markets are about to longer any common and linked vulnerability to being cut turn, but the signs are there. I expect, on balance, that off from capital, as there was pre-1998, sufficient to cause Othe next move by America’s Federal Reserve is likely widespread financial contagion. to be yet more “virtual money-printing” – which will become known as QE4. I also think the dollar’s long surge is nearing In other words, the prospect of mass sovereign defaults is an end and emerging market debt and equity could soon gone. That’s because, unlike in the 1990s, individual countries rally too. are more capable of withstanding shocks. Their investor-base is dominated by local institutions, while external investors are I set out my reasons below: generally long-only and unleveraged institutional money. Of course, EM fundamentals have been strong for a while. This Reason 1: Fundamentals in EM are strong has not changed recently, but is the backdrop for the other Emerging markets (EM) have no quantitative easing; are still reasons why we could soon see an EM debt and equity rally. growing much faster than developed countries; have avoided inflation resulting from US and EU monetary emissions; have Reason 2: US/EM terms of trade avoided any significant sovereign defaults, retain significant Dollar strength is damaging the US balance of payments insurance against future shocks in the forms of vast foreign sufficiently for it to now be regularly mentioned by the exchange reserves; and have more effective policy tools to deal International Monetary (IMF) and others as a reason the US with potential external shocks than the developed world. should not raise interest rates. Less well advertised is that it has created new vibrancy for emerging market exporters. I The rise in EM corporate indebtedness is modest and expect we will start to see more positive surprises in EM growth manageable, despite numerous Western commentaries to forecasts as a result. the contrary, and mostly helping companies grow faster whilst reducing dependence on banks – which is good. Reason 3: September Fed decision The September US Federal Reserve interest rate decision – which was to do nothing after a big build-up of expectations, again, that rates were about to go up – is proving to be a "The prospect of mass sovereign critical turning point in market expectations. The purpose of defaults is gone" the big build-up was to signal that finally, after seven years, the US economy was robust enough to tolerate higher interest rates. That the Fed then blinked uncovers the lie about the state of the US economy. For America’s recovery is modest, The emerging world remains highly diverse and within the fragile and largely jobless. Corporate indebtedness in the US seventy or so countries that most people invest in there is is also now becoming problematic – much more so than in huge heterogeneity. More EM economies are benefitting emerging markets. from lower commodity prices than are suffering. This message is creeping bit-by-bit into the consciousness There are always a few countries with self-inflicted economic of market participants as the most credible explanation of problems like Brazil, and a few with more chronic problems events. It takes time for people, faced with confusing data like Venezuela, but most are managed competently, even if incompatible with their world view, to change that world view. structural reform is significantly sub-optimal. There is no Yet it is difficult to make sense of the Fed’s September decision 72 Opinion bne November 2015

and also believe all is fine with the US economy. Unexplained more likely than not that Merkel will either close the borders market volatility and gapping liquidity are signs that dominant or lose power. This month’s Polish election, and the rising world views are, indeed, quietly being discarded. probability of Brexit, point to huge short- and medium-term uncertainty. All this is sufficient to spook markets into needing Reason 4: EU turmoil around the corner more QE. Politics always trumps economics. Things may be bad in Europe, but are not yet bad enough to lead to political change Reason 5: Growing awareness that EM is the solution and vigorous reform. The continuing farce over Greece Emerging markets are a huge source of global aggregate demonstrates this. The electorates of Northern Europe looked demand – the thing sorely lacking in the US and Western as if nothing was going to shake them out of complacency. Europe. Investing in EM infrastructure can soak up trillions of dollars in a non-inflationary way, significantly boosting productivity and growth. China has shown the way in "Emerging markets are a huge building infrastructure and now wants to help other emerging markets to do the same. We should welcome this, and the source of global aggregate new international financial architecture they are building to achieve it. As more people understand this, they are likely to demand" shift their investments.

This may be changing, however, because the politics is New Sparta is the private office of Dr Jerome Booth – economist, changing. Le Pen does now have a chance of winning in France entrepreneur, investor, commentator and leading expert in a run-off against Hollande. The problems in Greece are on emerging markets. New Sparta is majority owner of bne being eclipsed in German politics by immigration, with it now IntelliNews. Follow him on @Jerome_Booth bne November 2015 Opinion 73

INVISIBLE HAND: Rhetorical wizard Draghi conjures up a QE battle

Liam Halligan in London

ario Draghi is being hailed, once again, as a The ECB supremo has now taken on the air of a rhetorical rhetorical wizard. The president of the European magician. Back in mid-2012, when the single currency MCentral Bank has done it again. was imploding, the smooth-talking Italian pledged to do “whatever it takes” to save the euro. Previously febrile After the October meeting of the ECB’s Governing Council, bond markets calmed in response, and Eurozone officials Draghi dropped hints the Frankfurt-based bank would and politicians claimed the crisis was “solved”. So effective soon be unleashing yet more quantitative easing across the has Draghi been, his supporters point out, that he hasn’t Eurozone, further lowering interest rates. even needed to implement the so-called Outright Market Transactions programme, a more sustained form of central No matter that the ECB has been churning out €60bn of virtu- bank sovereign bond-buying. Just the prospect that he might ally printed money a month since March and is committed to has held bond markets in check across the Eurozone’s fragile do so until September 2016. That’s a Euro-QE programme of “periphery”. €1,100bn – an astonishing 8% of the Eurozone’s annual GDP. Amidst the QE sugar-rush, though, think twice before swallow- No matter, also, that the ECB’s benchmark interest rate is ing Draghi’s money-printing kool aid. “Deflation” is often cited 0.05%, with the central bank deposit rate at minus 0.2% – as the main motivation for QE – in the US, UK and Eurozone both record lows – or that Draghi has previously said such – but this is actually nonsense. Yes, Eurozone inflation was rates were at “their lower bound”. The ECB is now “vigilant” – negative in September, at minus 0.1%, down from 0.1% the a trigger word previously pointing to imminent policy action. month before – and that’s below the 2% target. But take out the 50% oil price drop and much lower food prices too, both On cue, stocks and bonds rocketed in expectation that, of which will soon fall out of the numbers, and Eurozone infla- at its next meeting in December, the ECB will unleash an tion was easily positive last month, at around 1%. additional stimulus. The Europe-wide Stoxx 600 share index closed 2% up, with Italian and Spanish benchmark 10-year The real reasons for QE are rather different. Western yields dropping to their lowest levels since April. politicians are certainly determined to keep the asset price rally going, pushing further into the future the inevitable Across much of “New Europe”, too, share prices rose. With market turmoil when the money-printing (and the prospect the European Bank for Reconstruction and Development of future money-printing) finally ends. Central bankers seem predicting little overall regional growth this year, and happy to oblige, even though such blatant bubble-blowing, a lacklustre 1.4% expansion in 2016, Western Europe’s history suggests, is unlikely to end well. performance is vital. It’s difficult to envisage a meaningful upswing in Central, Eastern and Southeast Europe, in fact, In addition, the big QE banks in London, Washington and unless the Eurozone is buoyant. “The outlook for our region Frankfurt, along with Tokyo and Beijing, are engaged in an is improving on the back of Eurozone monetary easing – ongoing currency war – all of them trying to secure a more there is definitely scope for optimism,” the EBRD said, when competitive exchange rate to boost their exports. Western releasing its last round of economic forecasts in May. “But nations have the further incentive of QE-ing their way to the on-going Russian recession is cause for concern”. weaker currencies to reduce the burden of the “hard currency” debts they owe to the rest of the world. When Eurozone QE began earlier this year, EBRD economists moved quickly to upgrade their growth forecasts for Poland, Draghi’s next move probably now depends on the Federal Slovenia, Hungary and the Slovak Republic, a move the Reserve. If the US central bank does finally raise rates, the institution said, “mainly reflected the Eurozone monetary euro would fall against the dollar. That, in theory, makes stimulus”. We could soon see a similar uprating of regional additional euro-QE less likely. Whatever happens, exchange growth projections – by the EBRD, other multi-laterals and rate movements across ‘New Europe’ will have little to do a range of commercial institutions – if Draghi delivers on with actual trade flows over the coming months, amidst a QE his pledge. battle between the world’s most powerful central banks. ARTS 74 I CULTURE& PEOPLE bne November 2015

ART REVIEW:The camera loves Tbilisi – and vice versa

Monica Ellena in Tbilisi

tills of a moving world on gigantic screens: Crimea’s It’s the philosophy of #Dysturb, the France-based collective steep cliffs standing over warm-hued hot bath domes, of freelance photographers, which by pasting large format SGreenland’s icy world casting a frosty light in a tucked photographs on city walls, cuts out from traditional publishing away Italian courtyard, the shrinking Aral Sea’s tragedy at avenues to offer a new visibility to photojournalism. odds with the greenery of a buoyant and buzzing square. Whose eye behind the lens? Tbilisi – “the city that loves you”, as its tourism slogan goes Educated in France, the world’s photographic Mecca, – certainly loves photography too. And once a year between Nijaradze is a descendant of Imeretian aristocracy and a September and October the Tbilisi Photo Festival (TPF) modern-day patron who staunchly supports an emerging turns the old town’s architectural bonanza into a spectacular generation of skillful professionals from the Caucasus. photographic nocturnal walk as the “Night of Photography” Many are women – like Georgia’s Mariam Amurvelashvili, – a Caucasian rendition of Arles’ “Nuit de la Photographie” – Anka Gujabidze or Armenia’s Inna Mkhytaryan and Piruza projects the work of some of the world’s best photographers Khalapyan – and “women are changing photography”. onto giant screens. “Their active involvement in photography is a new “The idea to bring high-quality, classy, photography to Tbilisi phenomenon – 20 years ago we would have not had such a developed in 2010 with Lionel Charrier of the French photo quantity and quality of work produced by women,” Nijaradze agency MYOP and former photo editor at Magnum,” TPF’s heart and soul, Nestan Nijaradze, explains to bne IntelliNews. “The festival wants to offer the city as a platform for an open and broad dialogue about identity and photography.” “The festival wants to offer the city as a platform for an open Mathieu Dupond’s human-scale photo of the devastated Syrian city of Deir Ezzor on Abo Tbileli Street or James and broad dialogue about identity Keogh’s Donestk in Gudiashvili Square aims exactly at that: narrowing the distance between photojournalism and people. and photography” ARTS bne November 2015 CULTURE& PEOPLE I 75

maintains. “They look at increasingly pressing social issues like The pair’s account of their 40-day trip across Soviet land, discrimination or migration with a different eye and a finer “The Russian Journal”, is filled with snapshots where politics sensibility, they tend to commit more to longer, documentary is mostly kept out of the frame and individuals dominate projects.” the picture – the tamada, the banquets’ toastmaster, or the students performing their morning exercises in a classroom Justyna Mielnikiewicz agrees. The multi-award-winning dominated by signs declaring “Cheers to the great Stalin!” are Polish photographer adopted Tbilisi as her home in 2002 fully-rounded human beings living in a region pulsing with to focus on long-term projects from the Caucaus and, more life, struggle, and grace. recently, Ukraine. “More women in photography reflect a dramatically different media landscape,” she says. “Surveys For Nijaradze, this passion for and from the 35mm should not show that half of professional photojournalists today are come as a surprise, because “Georgia has a history of a vibrant freelancers and the vast majority are women. We can multi- art scene, built on a rich cultural past and strong intellectual task and essentially adapt more easily to a market that is elite, which the USSR did not managed to tame.” Somehow constantly changing.” history provided an additional platform for photojournalism.

This change is also bringing female photojournalists together. Nazik Armenakyan, Anahit Hayrapetyan and Anush Babajanyan came together and founded the Yerevan-based 4 “Georgia has a history of a vibrant art Plus – a unique documentary photography centre with the aim of empowering women through photography. scene, built on a rich cultural past

Developing national talents and giving them a visible platform and strong intellectual elite, which is also what inspired Kolga Photo, the photography contest the USSR did not managed to tame” that, along with TPF, has turned Tbilisi into a photo-city.

The dynamics are different and the two events complement each other. Kolga started in 2002 as a photo competition for university students, recalls Beso Khaindrava, Kolga’s Nor is the French connection, strong in TPF, unexpected. The founder. “Initially what we had in mind was a contest for two countries have a long history of friendship. Georgian amateur photographers and it was a small scale competition. aristocrats were familiar figures in Paris’ intellectual circles After four years we dropped the amateur restriction and all and looked to France for diplomatic support during political photographers could participate, including professionals.” hardships – in 1810 King of Imereti Salomon II wrote to Napoleon seeking assistance against the Russian Tsar who Since then, the Kolga Award has grown into a whole week “had unjustly and illegally stripped him of his realm”. of photo events and it also features a specific prize – the Alexander Roinashvili Award, after the first Georgian History repeats itself: “At the top of my voice”, an account photographer – for Georgian professionals who have by Magnum photographer Alex Majoli of the war between contributed to the development of Georgian photography. Georgia and Russia over the breakaway region of South The 2015 award was awarded to AP photojournalist Shakh Ossetia is one of the highlights of TPF. Aivazov in May. As Kolga and TPF have laid the foundations for Georgia as an Walking Robert Capa’s walk international photography centre, Kolga's Khaindrava thinks Tbilisi is the heart of the Caucasus’ photojournalism world. there is room for further improvement, but “economic growth Blame it also on geography: neither Asian nor fully European, is key, as it will support those working in and for photography a key stop along the Old Silk Road, Tbilisi is where east and to invest further”. west meet, where civil wars and democratic revolutions unfold, and where a mystic Christian tradition is still intertwined with blunt Soviet pragmatism.

Georgia’s appeal is decades-old. In 1948, Endree Friedman, aka Robert Capa, and John Steinbeck said that Tbilisi was the only place [in the USSR] where they had a delicious dinner. Not that the combat photographer and the writer toured the then-Land of the Soviet to sneer with gratification over the country’s legendary food and supra, the feast. Rather, Capa portrayed the physical fatigue that each banquet inflicts on the non-trained body. ARTS 76 I CULTURE& PEOPLE bne November 2015

OBITUARY: Arpad Goncz – Hungary's first democratically elected president

Photo: posztos bne IntelliNews

rpad Goncz, Hungary’s first democratically indirectly conservative Hungarian Democratic Forum in the 1990 elected president after the fall of communism, died on democratic elections that ended four decades of communist AOctober 6 at the age of 93. rule. However, Goncz was elected president by parliament in a compromise between the rival parties. In 1995 he was Goncz's fatherly manner appealed to many Hungarians, re-elected for a second five-year term. winning him the nickname “Uncle Arpi”. He died surrounded by members of his family, the MTI new agency noted, citing While in office, Goncz was the country’s most popular politi- the head of the former head of state's secretariat. Announcing cian. He was credited for using the limited powers of the presi- Goncz's death to lawmakers, Deputy Speaker Istvan Hiller dency to enforce Hungary's fledgling democratic constitution. called him “a legend already during his lifetime”. Lawmakers One of the most prominent cases in which he clashed with the stood for a minute’s silence in honour of his memory.

Born in 1922 in Budapest, Goncz graduated from the Pazmany Peter University of Arts and Sciences in 1944. "He was a legend already during Charged with treason and sentenced to life in prison for his lifetime" his involvement in Hungary's 1956 uprising, Goncz was released in 1963 under a general amnesty aimed at easing tensions with the West. conservative government was his refusal to dismiss the heads While in prison he learned English, which helped him make of the state radio and television. That earned him the praise of a living in the years that followed. He became known for press-freedom advocates, but drew criticism from rightwing translating parts of JRR Tolkien's “The Lord of the Rings”, nationalists who accused him of overstepping his power. while also working as a welder and an agronomist. Ferenc Madl, a conservative, replaced him as president in His ascent to politics started in the second half of the 1980s. 2000. In his farewell speech, Goncz asked Madl to be aware He was a founding member of one of the main opposition of the social divisions created after Hungary began to build its groups that arose before the collapse of communism – the democratic systems. “No one should be measured by any scale Alliance of Free Democrats. In 1989, he became president of other than that of humanity,” Goncz said. the Hungarian League for Human Rights. In the following years, Goncz largely disappeared from the The Alliance of Free Democrats finished second to the limelight, devoting himself mainly to charitable causes. ARTS bne November 2015 CULTURE& PEOPLE I 77 Let me introduce you to QuERI

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Swiss bank UBS has further developed The Economist’s CrimeaCRIMEA river: RIVER: hard graft HARD for GRAFT a burger FOR in Kyiv A BURGER IN KIEV famous Big Mac Index by measuring the minutes LHS and bars = mins worked for Big Mac. RHS and dots = Big Mac Index ($) LHS and bars = mins worked for Big Mac. RHS and dots = Big Mac Index ($) it would take to earn enough money to purchase a Big Mac in various cities – the argument being that 50 4 the nominal price of a burger used by The Economist 40 may be misleading due to it being disproportionately 3 cheaper or costlier in other countries, whereas UBS’s 30 time-based method factors in the circumstances of 2 20 the average worker.

As the chart shows, burger-lovers in Kyiv have a raw deal, Riga Kiev Kyiv having to work for nearly an hour to afford a Big Mac – Vilnius Tallinn Prague Moscow Warsaw Istanbul

Budapest nearly triple the time it would take a Muscovite to earn Bratislava World avg. Sources: The Economist; UBS Price one. Those living in Western Europe would earn roughly & Earnings 2015 EuropeW. avg. enough money to buy four burgers in the same time.

Sources: The Economist ; UBS Price & Earnings 2015

ONLY 1 IN 5 UKRAINIANS KNOW HOW TO VOTE IN Only 20% of Ukrainians said they know how to vote Only 1 in 5 Ukrainians know how to vote in forthcoming election FORTHCOMING ELECTION in forthcoming elections, according to a recent poll PercentagePercentage ofof respondentsrespondents conducted by the Democratic Initiatives Foundation.

Yes, I know 20% In the same survey, only 9.6% of respondents said that the election will be conducted honestly and without any I vaguely know 55% fraudulent activity. 55.4% said that the local elections will not change anything for them, regardless of the result. I do not know 23%

No answer 2%

0 20 40 60 Source: Democratic Initiatives Foundation Source: Democratic Initiatives Foundation PUTIN POPULARITY HITS ALL-TIME HIGH FOLLOWING President Vladimir Putin’s popularity hit an all-time high PutinSYRIA popularity INTERVENTION hits all-time high following Syria intervention in early October, when the Russian leader’s approval Rating,Rating, percentagepercentage 89.9% rating hit 89.9% in polling firm VTsIOM’s monthly survey. 90.0 Putin’s recent decision to send Russian troops to conflict-ridden Syria and Iraq is a likely factor behind the 80.0 recent surge in support for the president. The previous highest rating was 89.1% in July this year. 70.0 However, Moscow-based polling firm Levada measured 60.0 Putin’s latest approval at 84%, 5% lower than its record high of 89% in June this year. Nov 11 Jul 12 Mar 13 Nov 13 Jul 14 Mar 15 Nov 15

Source: VTsIOM Source: VTsIOM

The recent drop in the price of commodities and China’s Borrowings of commodity producers BORROWINGS OF COMMODITY PRODUCERS concurrent growth slowdown has seen vast sell-offs of Percentage of total corporate debt emerging markets (EM) debt by foreign creditors over Percentage of total corporate debt the last few months, leaving many EM corporates in a Russia potentially precarious position. Argentina Nigeria As the chart shows, Russia’s exposure to not only Brazil commodities but also energy prices eclipses that of Thailand the next nearest country, Argentina. However, that the Indonesia Kremlin owns so much of the producing sectors means Poland that Russian corporates are not as at risk as other Peru Metals and mining EM country’s producers. Nearly a third of all Polish China corporate debt is issued by companies whose livelihoods Turkey Energy could hinge on an upswing in prices. 0 10 20 30 40 50 60 Source: IMF Source: IMF bne November 2015 New Europe in Numbers I 79

Russian pensionRUSSIAN reform PENSION could breathe REFORM new lifeCOULD into stockBREATHE market NEW LIFE INTO EQUITIES MARKET TOTAL PENSION ASSETS PENSION ASSETS PER CAPITA Percentage of GDP US Dollars

12K

EU 9K 46,209 41,627 27.6% 6K 10,260 2,897

3K 2,102 1,127

United Kingdom 700 619 197 189 96.0%

CEE/CIS Germany EU Italy

6.6% States Russia 6.7% United United Poland France Turkey CEE/CIS Kingdom Germany Russia Poland 5.6% 8.7% CHANGE IN ASSETS SINCE DEC 2013 Percentage, local currency

United States 60.0 38.2% 19.8% 50.2% 12.8% 14.3% 12.2% 10.8% 5.7% -

20.0 3.4% 84.6% 0.8% -20.0

-60.0 -100.0 EU Italy States Russia Sources: OECD, Pension Funds in Figures; bne United United Poland France Turkey CEE/CIS Kingdom IntelliNews research Germany Russia’s[Data gradual only cover process OECD of classification pension reform autonomous could see pension pension funds. funds All types ofGDP plans is are low included in comparison (occupational to some and Western counterparts. The accountingpersonal, for 55% mandatory ($60bn) and of voluntary)total free covering float on boththe domesticpublic and equityprivate sector Goldmanworkers.] Sachs report has suggested that this AUM-to-GDP figure market by 2020, according to a recent report by Goldman Sachs. could rise from its current 5.6% to almost 20% by 2020.

The increase in assets under management (AUM) could also mark the end of the finance drought Russia has suffered since EU- and US-led Sources: OECD, Pension Funds in Figures ; bne IntelliNews research sanctions froze the country out of international capital markets. [Data only cover OECD classification autonomous pension funds. All types of plans are included (occupational and personal, mandatory As the chart shows, Russia’s pension AUM as a percentage of its and voluntary) covering both public and private sector workers.]

TOP 25 PERFORMING CEE/CIS EQUITIES, OCTOBER 2015 Excluding Russia. Market cap $50m or more. End of day data, October 22, 2015. Price change (%) Mkt cap. Company name Sector 1-year 30-day ($mn) Kent Gida Maddeleri Sanayii ve Ticaret AS Turkey Packaged Foods and Meats 349.8 9.2 2,123

Joint Stock Company Ventspils nafta Latvia Oil and Gas Storage and Transportation 326.2 52.0 525

Alcatel Lucent Teletas Telekomunikasyon A.S. Turkey Communications Equipment 233.3 7.6 109

BIOTON S.A. Poland Biotechnology 165.2 8.5 242

Verusa Holding A.S. Turkey Asset Management and Custody Banks 162.6 -0.6 268

Cloud Technologies Spólka Akcyjna Poland Internet Software and Services 158.2 1.1 104

Vivid Games Spólka Akcyjna Poland Home Entertainment Software 148.4 27.8 51

Kiler Alisveris Hizmetleri Gida Sanayi ve Ticaret Anonim Sirketi Turkey Food Retail 148.1 35.5 237

BEST S.A. Poland Diversified Support Services 144.1 -9.7 96

Bytom Spolka Akcyjna Poland Apparel, Accessories and Luxury Goods 140.6 -4.9 57

Tukas Gida Sanayi ve Ticaret A.S. Turkey Packaged Foods and Meats 138.8 -4.5 219

Indykpol Spolka Akcyjna Poland Packaged Foods and Meats 135.1 8.3 78

Votum Spolka Akcyjna Poland Insurance Brokers 133.3 1.1 52

Selvita S.A. Poland Life Sciences Tools and Services 133.0 3.4 73

Finansbank AS Turkey Diversified Banks 123.9 113.6 6,747

Kernel Holding S.A. Ukraine Agricultural Products 122.8 18.5 1,058

Turker Proje Gayrimenkul ve Yatirim Gelistirme A.S. Turkey Real Estate Development 117.6 8.3 106

TAT Gida Sanayi A.S. Turkey Packaged Foods and Meats 117.4 0.3 303

Tesco Kipa Kitle Pazarlama Ticaret ve Gida Sanayi A.S. Turkey Hypermarkets and Super Centers 114.5 9.6 1,150

Klimasan Klima Sanayi ve Ticaret Anonim Sirketi Turkey Industrial Machinery 107.8 14.7 58 80 I New Europe in Numbers bne November 2015

MACROECONOMIC INDICATORS

Budget Current Inflation GDP, $mn GDP growth, local currency GDP composition (%) deficit account (CPI) Unemployment Ind. prod. Quarter, Forecast, GDP per Country 2014 total Annual Agri. Indus. Serv. % GDP % GDP Latest, YoY % YoY latest 2015 capita ($)

Albania 13,370 2.1 +2.5 +3.4 4,549 22 15 63 -5.1 -12.1 +2.2 Sep 17.3 2Q15 +16.8 2Q15

Armenia 9,529 5.9 +5.1 +3.3 3,551 22 31 47 -1.8 -7.9 +3.3 Sep 18.2 2Q15 +5.6 Sep +3.7 Azerbaijan 75,188 1.4 +3.4 8,060 6 62 32 -0.5 16.0 +3.7 Sep 5.0 2013 -0.7 2014 (YTD) Belarus 75,925 4.1 +4.4 +3.4 7,685 9 42 49 1.0 -6.7 +11.9 Sep 0.5 2014 -7.1 Sep

Bosnia & Herz. 19,191 1.1 +4.4 +3.4 4,735 8.1 26.4 65.5 -2.1 -7.7 -1.5 Sep 43.2 Aug +4.6 Aug

Bulgaria 55,733 2.3 +2.2 +0.8 7,418 6.7 30.3 63 -3.7 0.0 +0.1 Sep 9.2 Sep +4.3 Aug

Croatia 57,639 -0.4 +1.2 +0.5 13,415 5 26 69 -5.7 0.7 -0.8 Sep 16.2 Sep +2.8 Aug Czech 186,877 4.4 +4.6 +2.5 19,295 2 38 60 -2.0 0.6 0.4 Sep 6.0 Sep +6.3 Aug Republic Estonia 25,916 4.1 +2.0 +2.3 18,988 4 29 67 0.6 -0.1 -0.7 Sep 6.5 2Q15 -2.7 Aug

Georgia 16,898 4.7 +2.5 +3.2 3,785 9 24 67 -3.2 -9.7 +5.2 Sep 12.4 2014 +2.9 1Q15

Hungary 137,104 2.8 +2.7 +2.4 13,182 34 28 68.7 -2.6 4.1 +0.4 Sep 6.7 Aug +6.2 Aug

Kazakhstan 234,065 4.3 +1.7 +5.0 13,438 5 38 57 -1.2 2.2 +4.4 Sep 4.9 Aug -4.2 Sep

Kosovo 7,308 5 +0.2 +3.8 4,022 12.9 22.6 64.5 -3.5 -6.8 -1.2 Sep 35.3 2014 n/a

Kyrgyzstan 7,515 4 +7.3 +4.5 1,279 20.8 34.4 44.8 -0.5 -24.7 +5.8 Aug 2.3 Jul +11.4 Aug

Latvia 31,920 3.6 +2.7 +2.9 15,973 4.9 25.7 69.4 -1.4 -3.1 -0.5 Sep 9.8 2Q15 +6.4 Aug

Lithuania 43,911 3.8 +1.4 +3.0 16,206 3.7 28.3 68 -0.7 0.1 -1.0 Sep 9.6 Aug +0.2 Sep Macedonia, 11,327 5.2 +2.6 +3.4 5,066 10 26 63 -4.2 -1.4 -0.2 Sep 26.9 2Q15 +12.7 Aug FYR Moldova 8,337 4.6 +0.7 +3.4 2,284 15 17 69 -1.8 -8.0 +12.6 Sep 4.1 2Q15 -6.1 Aug +3.0 Mongolia 12,419 7.8 +7.5 4,069 16 33 50 -2.0 -25.4 +4.9 Sep 7.8 2Q15 +16.1 2014 (1H15) Montenegro 4,547 2.7 +3.4 +3.0 7,334 10 20 70 -3.9 -14.6 -1.7 Sep 14.6 Sep -5.1 Sep

Poland 543,255 3.3 +3.3 +3.2 13,888 4 33.3 62.7 -3.2 -1.4 -0.8 Sep 9.7 Sep +4.1 Sep

Romania 199,903 4.3 +3.4 +2.7 9,794 6 43 50 -2.0 -0.5 -1.7 Sep 6.8 Aug +3.6 Aug

Russia 1,261,604 0.6 -4.3 -3.8 6,843 4 36 60 -0.5 3.1 +15.7 Sep 5.3 Sep -3.7 Sep

Serbia 43,866 -3.6 +1.0 0.0 5,890 7.9 31.8 60.3 -4.6 -6.0 +1.4 Sep 17.9 2Q15 +12.9 Aug Slovak 99,795 2.2 +3.2 +2.5 18,090 3.1 30.8 47 -2.9 0.1 -0.5 Sep 11.4 Sep -0.5 Aug Republic Slovenia 48,051 2.6 +2.6 +1.8 23,262 2.8 28.9 68.3 -4.9 5.8 -0.6 Sep 11.8 Aug +5.2 Aug

Tajikistan 9,019 6.7 +6.4 +5.8 1,105 27 22 51 0.3 -7.9 +5.1 Sep 2.5 Jul +13.3 Aug

Turkey 843,173 2.8 +3.8 +3.3 10,852 9 27 64 -1.3 -5.7 +8.0 Sep 9.8 Jul +7.2 Aug

Turkmenistan 46,371 10.8 n/a +11.5 7,875 7.2 24.4 68.4 0.8 -4.4 +4.4 2014 10.6 2013 n/a

Ukraine 162,881 -8.2 -14.6 -2.3 3,792 10 27 63 -4.6 -3.5 +51.9 Sep 9.6 2Q15 -5.1 Sep +8.0 Uzbekistan 60,828 7.6 +7.1 1,995 19.1 32.2 48.7 0.2 1.2 +2.6 1Q14 10.7 2013 +8.1 1H15 (YTD)

Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank *All data are latest available official fig- of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute ures or independent estimates for Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Develop- ment Bank; National Statistical Committee of the Republic of Belarus; Haver Analytics

SPACE FOR AD/HOUSE AD SHOWING OTHE.. bne November 2015 New Europe in Numbers I 81

FINANCIAL INDICATORS SOCIAL

Stock market Total market cap., all publicly trad- Literacy Tertiary edu. ed equities

52-wk YoY YoY % local Stock market index Month 12-month Ytd low 52-wk high P/E Latest $mn % $ curr. % adults % pop. Albania (-) ------96.8 58.5

Armenia (-) ------99.6 46.1

Azerbaijan (-) ------99.8 20.4

Belarus (-) ------99.6 66.4

Bos/Herzegovina (SASE) +1.4 -2.1 -4.5 668.3 731.8 - - - - 98.2 23.2

Bulgaria (SOFIX) +0.3 -12.7 -14.1 438.3 547.0 10.0 3,697.9 -38.0 -29.6 98.4 92.8

Croatia (CROBEX) +1.6 -6.8 -1.2 1,672.3 1,846.0 11.6 19,285.6 -12.0 -0.5 99.1 63.0

Czech Republic (PX) +3.7 +3.8 +2.5 933.3 1,058.4 13.3 25,177.7 -23.5 -14.1 99 78.0

Estonia (OMXT) -0.2 +17.6 +14.0 732.6 914.2 11.7 2,018.5 -6.7 +6.0 99.9 33.0

Georgia (-) ------99.7 61.6

Hungary (BUX) +6.2 +27.8 +33.3 15,686.7 22,850.5 11.6 15,447.7 -4.4 +9.9 99.4 56.6

Kazakhstan (KASE) +5.7 -13.6 -5.3 761.0 1,064.0 - 11,975.9 -41.3 -36.1 99.7 55.2

Kosovo (-) ------91.9 47.6

Kyrgyzstan (-) ------99.2 -

Latvia (OMXR) +1.2 +40.2 +42.5 405.8 600.7 7.1 976.8 -13.8 -2.5 99.9 69.9

Lithuania (OMXV) -0.2 +7.5 +6.3 444.4 505.7 11.7 4,115.0 -10.0 -4.4 99.8 66.3

Macedonia, FYR (MBI10) -0.1 -7.7 -8.4 1,616.8 1,877.0 - 233.3 -12.0 +0.3 97.5 41.2

Moldova (-) ------99.1 38.4

Mongolia (MSETOP) -0.6 -14.4 -10.6 12,477.3 15,862.4 - - - - 98.3 55.5

Montenegro (MONEX20) ------98.4 62.2

Poland (WIG) +2.9 -4.1 -0.4 48,916.6 57,379.5 15.1 143,437.3 -26.2 -14.8 99.7 71.5

Romania (BET) +0.1 +1.1 +2.2 6,503.1 7,638.9 14.3 20,066.2 -22.6 -11.7 98.6 51.5 +6.4 / +25.0 / +20.2 / 1,380.4 / 1,838.2 / Russia (MICEX / RTS) 13.8 596,348.3 -19.7 +15.5 99.7 76.1 +13.5 -15.8 +14.7 629.2 1,098.7 Serbia (BELEXLINE) -0.6 -11.0 -6.5 614.8 746.6 10.8 2,990.6 -19.5 -7.0 98.2 56.3

Slovak Republic (SAX) +4.5 +31.8 +27.6 214.6 291.8 - 52,918.7 +25.3 +40.8 99.6 53.6

Slovenia (SBITOP) +3.7 -13.7 -11.4 646.7 836.3 11.9 5,828.8 -27.6 -17.8 99.7 84.4

Tajikistan (-) ------99.7 24.4

Turkey (XU100) +9.3 +0.9 -6.2 71,299.4 91,412.9 14.0 207,204.9 -15.2 +13.1 94.9 7.98

Turkmenistan (-) ------99.6 79.3

Ukraine (PFTS) -13.6 -38.8 -32.1 267.3 488.2 2.5 6,553.0 -72.9 -67.1 99.7 78.9

Uzbekistan (-) ------99.5 8.87

Sources: Bloomberg; Capital IQ; InFinancials *Official figure or independent estimate

AD SPACE TO BE CROPPED OUT AD SPACE TO BE CROPPED OUT 82 I Events bne November 2015

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