bne:Newspaper November 21 2014

November 21, 2014 www.bne.eu

See page 4

See page 2

bne:Newspaper

Follow us on twitter.com/bizneweurope

Content: 2 Top Stories 6 The Regions This Week11 Eastern Europe 15 Eurasia18 Central Europe20 Southeast Europe23 Opinion26 Lists

Putin looks to BRICS for back-up at G20 confrontation with West

Romania is set to face severe political turmoil after Victor Ponta, the country's centre-left prime minister, lost the presidential election in a shock result on November 16.

Thousands of people took to the streets of Bucharest and other cities to voice their anger at Ponta's government late on November 16 and demanded his resignation.

Klaus Iohannis, the low-profile mayor of Sibiu in

Romania faces turmoil after Klaus Iohannis elected president

Russian President Vladimir Putin had a rough time at the G20 summit in Brisbane, Australia, at the weekend of November 15-16, the first time he had met with the assembled world leaders since Russia annexed the Crimea in March.

Australian Prime Minister Tony Abbott said he would "shirt front" Putin when they met and

Canadian Prime Minister Stephen Harper told the Russian leader: "I guess I'll shake your hand, but I have only one thing to say to you: you need to get out of Ukraine." And US president Barak Obama bluntly accused Putin of not living up to a ceasefire agreement in Ukraine, signed in the Belarusian capital of Minsk on September 5.

Transylvania, won the election with 54.8% of the vote, after 98.55% of the votes were counted in the largest turnout since 1996. Iohannis, 55, is a Protestant ethnic German and a former physics teacher, who has been mayor since 2000.

Voters saw him as clean and independent, though he is vice-president of the centre-right National Liberal party and had been nominated by them

bne

bne Photo: kremlin.ru

Photo: salajean

Top StoriesTop Stories

and the Democratic Liberal party. He will take office on December 21.

In the first round on November 2, Ponta had a clear lead on 40.44%, followed by Iohannis on 30.37%. An opinion poll from CSCI/Infopolitic published on November 13 had shown Ponta with a 10-point lead over Iohannis in the run-off, with 54%.

Ponta conceded defeat at 11pm on November 16. “The people are always right. I called Mr Iohannis and congratulated him on his victory,” Mr Ponta told reporters, adding: “My colleagues and I will do our duty towards the country as long as we are in public office.”

An estimated 300,000 votes cast by Romanians living abroad, and not included in exit polls, may have swung the balance decisively in Iohannis’ favour. Some 160,000 of the diaspora voted in the first round.

Ponta was harmed by a scandal over the way many of the Romanians living abroad - who are estimated at some 4mn - were denied the right to vote in the first round because insufficient ballot stations had been set up. Huge queues and chaotic scenes were reported at embassies in London, Paris and other cities with a large Romanian diaspora, with many voters unable to enter the polling booths before the polls closed for the day.

This ignited big protests across the country. Past elections have shown that the majority of the Romanian diaspora typically vote for rightwing candidates. In 2009, for example, diaspora votes were critical in securing the presidency

for President Traian Basescu. On November 2, Iohannis took 46% of the votes from Romanians voting from abroad, compared with just 16% for Ponta.

Both Ponta and Basecu blamed the first round chaos on Foreign Minister Titus Chorlatean, who resigned on November 11.

Ponta was also harmed by a series of corruption scandals including a probe into the sale of software licences and IT equipment to schools – dubbed the “Microsoft case” – which has cast suspicion on top politicians and businessmen, including nine former ministers.

There were also concerns that with a relatively solid parliamentary coalition behind him, on becoming president Ponta might have gone down the road of “Putinisation” as seen in other countries in the region, with examples such as Hungary’s Victor Orban and Turkey’s Recep Tayyip Erdogan.

Iohannis' win will most likely replicate the often-tense cohabitation seen between Ponta and Basescu over the last two years.

Iohannis made it clear that, if he won, he would like to appoint a new business-friendly government. But with Ponta's PSD the largest party in both houses of parliament, Iohannis may not be in a position to topple the current government. As such, “he would likely attempt to shift the balance in the parliament and induce changes in the composition of the cabinet,” Teneo Intelligence argues.

On November 16 PM Ponta openly stated that he would not resign but his position is now precarious. Although the PSD is the largest party in parliament it relies on support from smaller parties to form a majority. The next regular elections are not due until 2016, and with his position weakened by the November 16 result he may struggle to hold onto power until then.

Romania faces turmoil after Klaus Iohannis elected president

November 21, 2014 businessneweurope I

Top StoriesTop Stories

The first task of the government to be appointed after the presidential vote will be to plan the 2015 budget. While discussions have been underway within the current cabinet, finance ministry officials have said that plans will be discussed with the IMF in December and endorsed in January by the new cabinet.

Romania’s economic performance this year has been a concern, after the country fell into technical recession in the first half of 2014.

While it is still unclear whether there will be significant changes to the government, fiscal tightening is expected now that the elections are over. Teneo Intelligence points out that, “The IMF has postponed the Romanian stand-by program review over Ponta’s fiscal policy loosening in the run-up to elections. The review will probably resume in late November and consolidation measures will likely be worked into the budget

proposal for 2015,” the consultancy says.

There is also pressure on the government to make better use of EU cohesion funds and boost infrastructure investment, though this would conflict with plans for a tighter budget. Along with neighbouring Bulgaria, Romania has the lowest absorption rate in the EU. During the 2007-2013 EU budgetary period, Romania absorbed only 37.2% of the ¤19bn available to it, spending around ¤7.1bn.

Other important decisions being put off until a new government is formed concern Romania’s ongoing privatisation programme. Following the successful IPOs of Electrica, Romgaz and Nuclearelectrica in 2013 and 2014, another major energy company Hidroelectrica is due to be sold off in 2015. Decisions are also expected in early 2015 on the privatisations of Constanta Port, Bucharest Airports and salt monopoly Salrom.

Historic yields are no guarantee for future yields. Fund shares can go up or down in value, and investors may not get back the amount invested. Before investing, please read the prospectus carefully. Full information on East Capital’s investment funds such as the prospectus, key information documents and financial reports can be obtained free of charge from East Capital, from our local representatives and are available on the website. Please also note that the funds, or some of the funds, may not be available for sale in your country.

We are specialists in emerging and frontier marketsRather than working from an office, we work on the ground, visiting more than one thousand companies in thirty countries each year. This tells us more about the markets than any index in the world ever could.

Read more about our award-winning funds at www.eastcapital.com.


Top Stories

affairs. The G20 summit is the perfect forum to push for this more "multipolar" worldview. "The GDPs of the BRICS countries calculated at purchasing power parity are greater than those of the G7. As far as I know, the GDP of BRICS is $37.4 trillion, while that of the G7, $34.5 trillion. What if they (G7) are told: ‘No, thank you, we shall be doing this and that here on our own and we don’t care how you will carry on?’ There will follow nothing but worse imbalance. If we really wish to decide something, we should decide it together," said Putin in an interview before the meeting.

It is not just Russia that is worried about the US dominance of geopolitics; Russia has found a willing ally in China, which is also keen to reduce Washington's clout on the global stage. The two are manifesting this change by ended the use of the dollar to price and settle international trade deals.

However, despite the frosty reception – Putin left the summit early before the joint communiqué was released – he met with key leaders to lay out his position. The summit showed that Putin has dug in his heels and is waiting for the West to make the next move.

"At the closing of the evening program of the G20 summit [in Brisbane] Vladimir Putin held bilateral meetings with German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker. The discussions were very long and thorough, bilateral relations have been discussed… The sides also focused on exchanging opinions on the situation in south-eastern Ukraine. President Putin explained in details the Russian approach to the conflict,” Presidential press spokesman Dmitry Peskov said.

German press reported that Merkel came out of the meeting unsettled. In comments to the press after the meeting she warned that Russia's actions was destabilising the whole of Eastern Europe.

"After the horrors of the WWII and the end of the Cold War, the whole of the European peace order is now in question. And the cause is the continuation of the Russian efforts to destabilise eastern Ukraine," Merkel said in comments reported by the Frankfurter Allgemeine Zeitung. She went on to warn Putin that the rest of Europe would "not back down as it once did in the times of the German Democratic Republic".

For his part, Putin is striving to unite the other emerging markets – and especially his allies in the BRICS (Brazil, India, China and South Africa) to form a political alliance, as well as an economic one, that will give them more clout in global

Putin looks to BRICS for back-up at G20 confrontation with West

YOUR BUSINESS PARTNER.www.rbinternational.com

CHANGES ARE GOOD


Top Stories

Fortaleza summit are nearing completion,” said Putin. He recalled that the bank’s aggregate capital constituted an impressive $200bn.

“In this way we shall obtain common mechanisms capable of stabilising the national markets of capital in case of critical situations in the global economy,” said Putin.

Russia will take over the rotating presidency of the BRICS group in April and has promised to focus on the further expansion of cooperation within the association.

“Russia is drafting an economic partnership strategy and an investment cooperation road map,” Putin said at a meeting of the BRICS leaders.

"We’re moving away from the diktat of the market that denominates all the commercial oil flows in US dollars," said Putin. "We’re boosting as much as possible the use of national currencies – both the ruble and the yuan."

The G20 is the to-be global workshop, but the practical day-to-day politics will be run under the auspices of the BRICS, which have started to build institutions to function as a multinational body (and is ironically a mirror image of the G7, an emerging market version of the biggest economic powers in the East).

“The decisions to create BRICS' financial institutions are being implemented successfully. The efforts to form the Development Bank and a pool of currency reserves instituted at the


The Regions This Week

The World Bank expects the Armenian economy to grow by 2.6% in 2014, down from the previous forecast of 2.7%. The forecast was revised downwards because of falling remittances sent home by Armenian labour migrants working in Russia, as well as because of global economic developments. In 2015 the World Bank estimates growth at 3.3%, although the forecast may be affected by negative trends in the Russian economy that Armenia heavily relies on.

Azerbaijan plans to build two new gas processing and petrochemical plants by 2020. The construction of the plants is estimated at $17.1bn. The plants are expected to produce around 3mn tonnes of petrol and nearly 3.6mn tonnes of diesel fuel per year, both meeting the Euro-5 standards. In addition, the plan is to produce about 1.7mn tonnes of A-1 jet engine fuel.

Differences in perceptions of business environment by firms that innovate and those that do not are great in Central Asia and Caucasus countries, according to the EBRD. The bank found that these differences were particularly large when firms were asked to assess the importance of corruption, workforce skills and customs and trade regulations. Kazakhstan turns out to have more patents than its spending on research and development would predict, whereas Armenia and Azerbaijan, with strong focus on information and communication technology in their innovation policies, have high levels of labour productivity.

Output at Azerbaijan’s Shah Deniz gas condensate field reaches 28mn cm per day. Shaz Deniz’s output between January and September reached 7.25bn cubic metres (bcm) of gas and 1.7mn tonnes of condensate. Gas production is expected to exceed 9 bcm by year-end, while the volume of gas condensate is forecast to be over 2.6mn tonnes.

EurasiaThe National Bank of Kazakhstan (central bank) intends to shift the inflation corridor to 5-7% from the current one of 6-8%. Inflation in October reached 7.6% y/y, which indicates that the bank's intentions are overoptimistic.

Kazakhstan increased refined gold production by 13% y/y to 21.482 tonnes in January-October. The output of refined silver shrank by 1.5% to 792.833 tonnes.

Two embattling Kazakh banks - Alliance and Temir - will join Forte Bank to form a new bank that will operate under the Forte Bank brand. The new bank will be the third largest by capital and eighth largest by assets in Kazakhstan.

Kazakhstan will block all unregistered SIM cards as of December 1. The number of mobile users is 25mn in the country and only 3% of users do not register their numbers.

Tajikistan's aluminium exports fell to 99,000 tonnes in January-October, down by 41.1% y/y from 168,200 tonnes in the same period of 2013. Lower prices and an overall weak demand worldwide are taking a costly toll on Tajik aluminium, which is the country's main export commodity. The country exported a total of 200,000 tonnes worth $370mn in 2013, down from 265,000 tonnes worth $536mn in 2012.

Turkmenistan may store as much as 71.21bn of tonnes of oil equivalent, according to government figures. Onshore reserves are estimated at 53.01bn tonnes and offshore reserves at 18.2bn tonnes. Turkmenistan boasts proved natural gas reserves of 17.5 trillion cubic meters (tcm), the world's fourth largest reserves after Iran (33.8 tcm), Russia (31.3 tcm) and Qatar (24.7 tcm), according to BP.

businessneweurope I November 21, 2014


The chances of an early election in Slovakia have risen on the back of the resignation of parliament speaker and Smer party head Pavol Paska, analysts suggest. The powerful Paska quit during local elections on November 15 as the third official to fall over a corruption scandal centred on procurement at Piedstany hospital.

Estonia and Finland have agreed a plan to build pan-Baltic LNG facilities. The pair has been bickering for some time over the issue, but have now agreed for twin terminals to go ahead, Helsinki announced.

Central Europe and the Baltics are lagging the EU on R&D spending. New members states make up the bulk of EU countries that fell more than 50% below the bloc average of a 2.02% of GDP spend on R&D last year, Eurostat reported. Only the Czech Republic - at 1.91% - and tech-centre Estonia (1.74%) came anywhere close. Latvia came bottom in the region, with R&D seeing just 0.6% of GDP in 2013.

Hungary's PM Orban was accused of courting Moscow at a football match this week. While he's a huge fan of the sport, the stir caused by Orban's presence at the Hungary-Russia friendly in Budapest illustrated how sensitive critics inside the country and in the West are to his lean towards Russia, which won the game 1-2.

The Czech interior ministry received a package containing poison. The mail, sent from outside the country to Minister Milan Chovanec, was filled with a cyanide-based substance. Similar packages were sent to ministries in September, with officials suggesting they were connected to the country's arms supplies to Iraqi Kurds.

Poland is accelerating its rescue plan for the coal industry. Various state funds, banks and companies are being pulled into the effort,

Central Europewhich seeks to avert massive job losses in the politically sensitive sector. While Europe's biggest coal miner Kompania Weglowa begged for more pace in the programme, there is concern amongst minority shareholders in state-controlled companies that they will suffer.

There is no space for Russia's new state broadcaster on Estonian airwaves, the Baltic state's media authority laments. Moscow's new Sputnik news agency had planned to start radio broadcasts in Estonia by the end of the year, but there are no free frequencies, Tallinn officials said.

Symbols of both Russia and the collapse of communism have been vandalised in Prague. The trousers of a statue of Soviet Marshal Konev were painted pink, while the Prague Service art group said it was behind the painting of the "Lennon Wall," a site of dissident graffiti during communist times that has been a tourist attraction for the past 20 years.

Struggling flag carrier Estonian Air is set to receive a ¤12m loan from the state. The handout is the third and final in a ¤57m package agreed in 2009. The EU is looking at the legality of the aid.

Polish conservatives branded Winnie the Pooh an "inappropriate hermaphrodite". Rejecting a plan to have an image of the Bear of Little Brain at the local playground, councilors in the central city of Tuszyn criticized Pooh for being half naked, and author A.A. Milne for slicing off his genitals with a razor.

Ano is pulling further ahead of coalition partner CSSD in Czech polls, threatening a split should the new party of billionaire and finance minister Babis decide to demand more power. However, some analysts suggest Ano will wait in order to continue to build support before risking its governing platform.


Southeast EuropeThe Romanian leading opposition party PNL has no intention of overthrowing the leftist government this winter, but will rather monitor it and demonstrate the political promises made by PM Ponta during his failed presidential bid were unrealisti. Earlier on November 18, President-elect Klaus Iohannis, who is still co-president of the PNL, said that his party wants to take full power in 2015 or 2016.

Prosecutors from Romania’s anti-corruption office DNA initiated a criminal investigation against Alina Bica, the head of the anti-crime body DIICOT, and asked to put her in police custody for 24 hours. The deeds are related to Bica’s past position at the property restitution body ANRP.

The secondary listing of shares of Romanian restitution fund Fondul Proprietatea on the LSE could take place in the first half of December, after the Romanian financial market regulator endorses the necessary documents, the funds’ manager Templeton Emerging Markets Group said.

Kosovo's two main political parties reached an agreement to form a coalition agreement, potentially ending more than five months of political stalemate following the June 8 snap elections.

The Croatian economy will shrink by 0.8% in 2014, according to the average projection of leading economists at the six largest Croatian banks. This is a downgrade from July's forecasts when they expected a 0.7% contraction.

The Croatian government reportedly accepted an offer from the US to act as a mediator in its dispute with Hungarian oil and gas group MOL over the management rights of Croatian oil firm INA.

Croatia will stage presidential elections on December 28 and a possible runoff will be

organised on January 11 next year. So far, six candidates announced their intentions to run for the presidential seat including incumbent President Ivo Josipovic, Kolinda Grabar Kitarovic, and Milan Kujundzic. A recent poll put Josipovic on 42.7% and Kolinda Grabar Kitarovic second on 27.8%.

A Bulgarian court suspended bankruptcy proceedings against Corporate Commercial Bank due to a pending appeal over the central bank's decision to withdraw the bank's licence that was filed by majority shareholder Bromak. Bromak, which is owned by controversial businessman Tsvetan Vassilev, is challenging the withdrawal of Corpbank's licence with the Supreme Administrative Court.

Albania's economy is expected to grow by 2.5% in 2015, Business Monitor International said in a fresh forecast, revising downwards its previous projection for 2.8% year-on-year growth. The growth would accelerate to 3% y/y in 2016. BMI attributed the revision to expectations for weakening of demand from Albania's key Eurozone trading partners, Italy and Greece.

In its new macroeconomic projections, Macedonia’s central bank retained its 2014 GDP growth outlook at 3.7%, but lowered its inflation forecast for this year to about 0%. The central bank reduced its projection for 2015 growth to 4.1% from 4.4% expected in April due to expectations for less favourable external environment.

A new poll revealed the Moldovan opposition parties that are against the country’s European integration lead with a wide margin of around 10pp in voters’ preferences, with 39%, versus 28-29% for the pro-European ruling coalition. Importantly, the poll was published by the Inter-parliamentary Assembly of Member Nations of the Commonwealth of Independent States (IPA CIS), which inevitably is not well disposed to the EU.



Eastern EuropeA Russian man from the Russian region of Izhevsk was convicted for telling a rather racist joke on Russian social media. He was convicted for "xenophobic hate crimes" for telling a joke that involved a Chechen, adapting a Soviet-era joke about a Jew being beaten on a bus.

Russia takes in a bumper harvest of 110m tonnes of grain. Farmers have harvested grain from 97.2% of the total area. The best harvest since 2007 will also help reduce inflation in 2015, which will top 9% this year.

The US military is worried that the Russians have launched a satellite-killer into space when the last Russian rocket put a new communications satellite. Known as "Object 2014-28E" it was first thought to be space junk but has been moving toward other Russian space objects. But it could also be a repair-bot. No one really knows.

Russia's largest oil producer Rosneft may to receive RUB300bn ($6.35bn) worth of state support from the sovereign National Welfare Fund (NWF), Kommersant reported, citing unnamed government sources. This is about 15% of the RUB2 trillion Rosneft initially requested, but attending to the company's full demands is "physically impossible", the sources say.

Ukraine’s President Petro Poroshenko will sell his Roshen confectionary plant "as soon as possible”. “We are now discussing the issue with one of the big investment banks,” he told the German newspaper Bild this week.

The Russian Central Bank said that the low demand at its first one-year dollar repo auction showed that there was no deficit of foreign currency among the country's banks. The bank placed $87.7m of 1-year dollar repos at an average rate of 2.1388%. The maximum volume had been set at $10bn.

New economic sanctions against Russia are not on the agenda of the European Council, German Chancellor Angela Merkel said this week, but names

of military figures in the disputed eastern Ukraine regions could be added.

Turnover of the Russian pharmacy market shrank by 8.5% to RUB603bn ($13.1bn) in January-September on the year, compared to a 10% growth in January-June, according to DSM Group's report. Nevertheless, 15 pharmacy chains with a market share of 24.6% grew by 14.7%.

The National Bank of Ukraine has recommended the Ministry of Finance to set the hryvna to US dollar exchange rate at UAH12.9-13 per $1 in next year's budget. The currency has crashed, losing more than half its value this year and is currently trading at about UAH15 to the dollar.

Former Ukrainian President Viktor Yanukovych will not be extradited by Russia to be prosecuted in Ukraine. Interpol has refused to put the former Ukrainian leaders on the wanted list because it says the charges against him are politically motivated.

An Australian-based human rights group has estimated 1.05m people in Russia live as slaves from a total of 35.8m slaves worldwide in The Walk Free Foundation's second annual slavery index.

Investors see Russia as the greatest threat to global financial markets, blowing the deadly Ebola virus and Islamic State terrorists out of the water, according to a Bloomberg poll. The Russia-Ukraine conflict was cited by 52% of Bloomberg Professional services users poll as top of the five choices. The Islamic State came a distant second with 26%.

Mail.ru Group yesterday announced the sale of 100% of job search portal Headhunter.ru to a pool of investors led by Elbrus Capital for RUB9.85bn ($214m). One of the largest job search portals in Russia, the deal is scheduled to be closed in 1Q15 and requires some third-party approvals.

Capital outflow from Russia could grow to $130bn this year, Finance Minister Anton Siluanov said Monday, up from earlier estimates of $100bn. This is the same amount that left in the 2009 crisis year.



bne Chart

A recent poll by Russia’s Levada Centre shows that 39% of Russians believe corruption has got worse in the last 15 years, down from 60% in 2010, while 20% of those polled believe that levels of corruption have improved.As the first bne:Chart shows, those who believe that corruption has worsened is at its lowest level since the poll was first conducted in May 2007.

Asked directly whether or not they believe that President Vladimir Putin has ever abused his power, only 6% of respondents said that he undoubtedly had. Nearly a fifth of respondents said that he had never abused

his power, and over 30% said that if he had, the overall improvement in Russia under his presidency is more important than any corruption he engaged in. When asked to rate various types of public officials on their levels of corruption, Putin was judged to be the least corrupt, with only 8% characterising him as very corrupt. Members of the State Inspectorate for Traffic Security (Russian traffic police) were judged to be the most corrupt (43%), followed by the Russian police force (39%) and customs officers (35%).

Poll shows Russians wise to corruption, but Putin comes out smelling of roses


Eastern Europe

puts integration with the European Union at the core of the government's foreign and economic policies. Last but not least, the coalition will launch a deep and wide-ranging programme of reforms to pull the economy back from the brink.

“We see our main task in ensuring the defence potential of Ukraine, economic growth, protection of rights and freedoms of our citizens,” says the document.

The economic reforms are pressing as the country is living hand to mouth on handouts from international financial institutions. The political deal is crucial as the IMF in particular says that it will not transfer any more money until it has seen a creditable reform programme on the table. An international donor conference that should have brought in billions in aid planned for November has been cancelled and pushed back to the start of next year.

Ukraine's economy has already collapsed, although no one is actually admitting to it. GDP will contract this year by about 9%, bank non-performing loans are 50%-60% by some estimates, the government is running a 4.2% budget deficit and a large current account deficit, inflation is running at 20%, the hryvna has devalued by half since the start of the year

One year after Maidan

Ben Aris in Moscow

ROn November 20 - almost one year to the day since the start of the Maidan protests that brought down President Viktor Yanukovych - a broad coalition deal was finally signed in Ukraine between the leading pro-European parties.

Ukraine’s People’s Front, the Radical Party, Samopomoshch (Self Help), the Petro Poroshenko Bloc and Yulia Timoshenko’s Batkivshchyna signed off on an agreement to establish a coalition in Ukraine’s parliament to complete the transformation from post-Soviet kleptocracy to a liberal pro-market and pro-reform government, hopefully for the benefit of the people, rather than those in power.

Ukrainian Prime Minister Arseniy Yatsenyuk’s People’s Front won the October 26 parliamentary elections with 22.14% of the vote, while the president's eponymous Petro Poroshenko Bloc came a surprising second with 21.81% of votes.

Amongst the promises made in the deal is to fully investigate the killings on Maidan in February this year. Also on the to-do list is to abolish political immunity and make deputies accountable before the law for corruption and self-serving practices that have plagued Ukraine for two decades. The document also


Eastern Europe

At the same time many of the "heroes of Maidan" who were brought into the government from the streets to oversee and supervise the reform process have already quit, saying the government is not committed to the promises it made.

In the meantime a banking crisis is visible on the horizon and further falls for the currency unless some fresh cash to prop it up is received soon. Despite the National Bank of Ukraine's insistence it has been making dollars available for exchange, reports from the ground say that cash dollars are impossible to come by in Kyiv and embarrassingly even the governor of the central bank was unable to exchange hryvna for dollars at a commercial bank in front of the press pack earlier this month.

"Western official creditors appear to be behind the curve in terms of assessing the seriousness of the situation on the ground in terms of the economic/financial situation. Ukraine needs speedy, and large scale support ASAP to avert financial and economic collapse, with severe political, geopolitical, social and security implications," says Tim Ash of Ash, head of emerging markets research at Standard Bank.

and the country has some $14bn of debts to pay, but only just over $12bn in reserves.

The debt to GDP ratio is over 60%, which means under the terms of a covenant on Russia's $3bn Eurobond issued in December 2013, the Kremlin can call this bond in at any time and precipitate a financial crash at will.

The only reason that international investors have not pulled the plug is that Ukraine is still hooked up to the international financial community life support system in theory, even if the cash has been temporarily turned off.

More worrying there are reports of deep divisions between the coalition partners, especially between the Yatsenyuk and Poroshenko wings. One of the big arguments that is going to be had is Poroshenko's desire to change the constitution (for a third time) to return powers to the president that were only recently returned to the Rada. Likewise, this government seems as reluctant to pass on the cost of things like gas tariffs – a key IMF demand — to the population as all the previous governments because of what that will do to its popularity, according to reports.


Eastern Europe

Since the start of the conflict in Donbass in the spring of 2014, Kyiv has continued to transfer funds to Ukrainian state organisations in rebel-held territories, as well as pay pensions and salaries, in the hope of retaining some loyalty among the local population, and strengthening Kyiv's claim to be the legitimate power on the territory. But despite the continuing transfers, many locals have turned away from Kyiv, because of what they regard as indiscriminate Ukrainian military aggression against civilians in Donbass in a conflict in which more than 4,000 have died, many of them civilians.

With Ukraine's economy in free fall and the government facing a ruinous budget deficit, Kyiv can no longer afford the transfers to the rebel-held regions, while receiving little or no tax payments in return. Kyiv has previously said that all pensions and salaries would be payable at a later date, on reintegration of Donbass in Ukraine.

However, Ukraine has said it would continue to supply gas, heat and power to the rebel-held territories, despite currently receiving no payment for doing so, for humanitarian reasons. Thus cutting off social payments and salaries will compensate for the losses on supplying energy, Ukraine's government hopes. "We've got enough funds for more than six months so that the money which hasn't been paid as compensations, social welfare,

Ukraine to cut financial ties to rebel-held Donbass

bne

Ukraine's president Petro Poroshenko has ordered all state institutions to withdraw from the rebel-held Donbass and to stop paying salaries and pensions from the state budget to residents of the region.

In a decree signed on November 15,Poroshenko ordered the National Bank of Ukraine to cut off all banking services in the rebel-held territories of Donbass within a month, both to legal entities and to the population.

He also ordered state organisations and local administrations in the rebel-held area to close and for personnel to be evacuated with in a week, together with property and documentation where possible. He declared that all remaining institutions, based on what he said were illegal elections of November 2, would be regarded as illegal.

The move follows what Poroshenko calls the breakdown of the Minsk peace accords signed on September 5, which ended fighting between pro-Kyiv forces and pro-Russian forces in Donbass. As part of the peace agreement, Kyiv introduced a law according special status to the rebel-held territories of the Donbass region, envisaging regional elections to be held jointly with Ukraine. But the decision by the Russian-backed rebels to hold independent elections on November 2 prompted a furious response from Kyiv, leading to the repeal of the law.


Eastern Europe

Ukraine has also decided to stop buying coal from the rebel-held territories, after revelations that around $150m had been paid from the state budget to mining companies in the Donbass since the start of the conflict for coal supplies needed to fuel power stations across Ukraine.

Given Ukraine's parlous financial state, the coal purchases from the Donbass - one of the world's leading mining areas - made sense, since they were denominated in hryvnia and substantially cheaper than coal sourced from abroad.

But the state budget's transferring of large sums of money to Donbass structures possibly supporting pro-Russian rebels, aroused a storm of controversy. This prompted Ukraine's energy ministry to source more expensive coal from South Africa, but the move in turn has prompted allegations of corruption regarding the deal, implemented by obscure intermediaries. Ukraine's prosecutor general has said it has initiated a criminal investigation of the energy ministry in connection with the deal.

As a result, Ukraine has finally gone for the not less controversial option of buying coal from Russia. Along with Poroshenko's decree on November 15 cutting off financial support to Donbass, was a decree on securing Ukraine's energy security, stipulating among other measures state purchases of coal and electric power from Russia.

subsidies and pensions could be transferred as payment for the gas and electricity," Ukraine's prime minister Arseny Yatsenyuk said, as quoted by Interfax.

Around half of the civilian population of the rebel-held region have fled, according to a number of estimates, and a large proportion of the remaining are pensioners, who will now be left without income. It is not yet clear whether they will be able to draw their benefits or salaries by travelling to regions held by Kyiv.

The move will force the rebel leaders to think seriously about sources of funding, likely prompting them to appeal to Russia for financial support, say analysts. This in turn will force the Kremlin to decide how far it can go in financing the rebel authorities in Donbass, at the risk of incurring further sanctions

In comments at the G20 summit in Brisbane, Australia, Russia's president Vladimir Putin criticized the Ukrainian decision, but made no commitment for Russia to step in with funding.

"I believe this is a big mistake because they are cutting off these regions with their own hand," Putin said of Poroshenko's decision, as quoted by Interfax. "One can understand that they are saving money, but this is not the time or case to economise," he added, reminding that even during the Chechen war, Russia's government never stopped budget transfers to Chechnya. At the same time Putin called for " a single political space," in an interview with the German TV on November 13.


from the Galkynysh gasfield in Eastern Turkmenistan, the second largest in the world, this route makes it around 1,000km shorter than previous pipelines.

From Galkynish it winds briefly through southern Uzbekistan, north across Tajikistan and then eastwards through Kyrgyzstan to China – a far more direct route than other sections of the network crisscrossing the region and its vast deserts. It will be capable of transporting 30bn cubic metres of gas per year (cm/y), approximately equaling the production capacity of phase 1 of the development of Galkynysh, which began last year. Once completed, this will raise CACGP’s gas exports to China to a total of 85bn cm/y.

However, the mountainous terrain of Tajikistan, where the longest section of Line D (410km) is being built, presents an expensive and difficult undertaking for project planners and engineers. It will not simply mean installing pipeline along relatively flat steppe and desert, as was the case with early phases of CACGP, but will instead necessitate costly and sophisticated engineering. These challenges include “the creation of 47 tunnels with a total length of 76km. In 24 of these cases, the tunnels will be underwater”, as President Rahmon himself highlighted, during the ceremony.

Construction time is expected to exceed three years, with project costs amounting

China shows faith in Tajikistan with $3.2bn investment

Olim Abdullayev in Dushanbe

The construction of a new $3.2bn Chinese gas pipeline through Tajikistan is the most significant investment in the country to date, offering a clear sign that Beijing believes Tajikistan will remain stable following the withdrawal of US-led forces from Afghanistan, despite a likely upswing in cross-border insurgency and crime.

At the heart of the project lies China’s appetite for Central Asian gas, mostly originating in Turkmenistan, which has grown insatiably over the last five years. This followed the inauguration of the first phase of the Central Asia–China gas pipeline (CACGP) in late 2009, a billion-dollar trans-national network. Today, over half of China’s natural gas imports come via this expanding array of pipelines, thousands of kilometres in length, that span Turkmenistan, Uzbekistan and Kazakhstan.

On September 13, the day after the Shanghai Cooperation Organization’s summit in Dushanbe, the president of Tajikistan, Emomali Rahmon, and his Chinese counterpart, Xi Jinping, broke ground on the fourth section of this network. This ceremonial start took place in the Rudaki District, south of Dushanbe, an area adjacent to the Uzbek border where the pipeline’s Tajik section begins.

With a length of only 1,000 kilometres, this Line D will be the shortest section of the CACGP network, an important point raised by Rahmon during the ceremony. As the pipeline originates

Eurasia


around $1bn to the country through aid projects over the 23 years following Tajikistan’s declaration of independence.

Together with the upcoming CASA-1000 project and trans-national rail connections, Line D is a mega-infrastructure project that is creating strong links between Tajikistan and its neighbours, bucking the previously seen trend of lacklustre inter-regional cooperation, and outright economic isolation of the country.

Line D is also a project of shared interest with Uzbekistan, as it crosses its territory and will provide its government with transit fees as well. However Uzbekistan’s economic blockade of Tajikistan still remains in effect – a move which severed Tajikistan’s international road, rail and energy connections. Mutual economic interest in realizing the Line D project certainly provides incentives for Tashkent and Dushanbe to resolve their longstanding diplomatic disagreement.

This investment also flies in the face of those who believe Tajikistan will be destabilized by the withdrawal of ISAF forces from its southern neighbour Afghanistan. A 1,300km border is difficult to guard and an upsurge in insurgent activity from this direction contributed significantly to the Tajik civil war of the 1990s. That China is embarking on a project of this magnitude at such a sensitive time in Central Asian geopolitics is a resounding vote of confidence in the government of Tajikistan to maintain stability during difficult times.

to an estimated $3.2bn. This will create approximately 3,000 jobs and provide a ‘‘significant contribution to the national budget,’’ according to Rahmon (an exact figure has not been made public). Tajikistan will not receive any of the gas being transported, but will instead be provided with transit revenues. At the time of writing, Tajikistan has no major exploited gas reserves of its own, however exploration is being undertaken by several multinationals across its territory, including China National Petroleum Corporation (CNPC), the initiator of Line D.

This state-owned energy colossus is the driving force and source of funding for the pipeline. Its management has signed an agreement to work in cooperation with Tojiktransgaz, Tajikistan’s government-owned natural gas distribution company. The latter has been largely without a significant source of gas to transport since the disconnection of major Uzbek gas pipelines feeding into Tajikistan. A specially created subsidiary of CNPC, Trans-Asia Gas Pipeline Company, is overseeing the construction and subsequent operation of the project, together with Tojiktransgaz.

This project represents the largest foreign direct investment in Tajikistan since the country received independence from the USSR. According to the World Bank, Tajikistan’s GDP in 2013 amounted to $8.5bn, which when compared with China’s state-led $3.2bn investment in Line D demonstrates just how significant this project is for the country. Comparatively, the US government has provided

Eurasia


The plant's old age and its location have fuelled debate over whether the facility should be shut down. In fact, Armenia is the last country outside of Russia that still uses a Chernobyl-type Soviet-model pressurized water reactor dating back to the 1960s.

The European Union (EU) has repeatedly asked for “the earliest possible closure” of the facility, arguing that the plant is a threat to the region. In 2000 it offered ¤138mn to the Armenian government to support the facility’s decommission, but Yerevan rejected the offer.

Calls for the facility’s closure faced opposition by the government, which argues that the plant has undergone considerable upgrades and had been passed as “acceptable” by the International Atomic Energy Agency (IAEA). The IAEA mission in 2011 also stated that the plant can withstand a 8 magnitude earthquake.

However, the Armenian government is also seeking funding, estimated as much as $5bn, for its plan to construct a new facility that can operate at double the generation capacity of the Soviet-built plant.

Armenia decision to extend the plant’s lifespan on September 13, 2013 sparked public outcry both nationally and internationally.

“The longer the reactor works, the more fragile it becomes; it loses flexibility, and the accident risk increases,” argued Hakob Sanasarian, chairman of Greens Union of Armenia Chair. He labelled the decision to prolong Metsamor’s life “sabotage against the nation”. Former Prime Minister Hrant Bagratian also voiced concerns and stated that Armenia could “face a danger worse than Chernobyl one day".

Armenia secures funding to modernise controversial nuclear reactorbne

The Armenian government has secured a Russian loan to extend the life of Metsamor, the controversial nuclear power plant that covers 40% of the country’s energy needs. Russia will lend Armenia $270mn for repairing and re-equipping the second unit of the plant, which will extend the facility’s operation from 2016 to 2026.

The finance minister, Gagik Khachatryan, stated that the loan (flagged a few months ago but only confirmed on November 19) is granted for a period of 10 years at a rate of 3% per annum, with the first payment scheduled for January 15, 2019.

On November 18 the facility was reconnected to the national power grid following a 45-day break to improve security and for refuelling, an operation that the Energy and Natural Resources Yervand Zakharyan said cost $7mn.

Metsamor stands out in a barren landscape some 30km from the capital Yerevan, a living though decrepit reminder of the USSR’s nuclear adventure. Built in the 1976 in a highly seismic area, the plant was closed in 1989 following a deadly earthquake measuring 6.9 on the Richter scale in 1988 that killed some 25,000 people and devastated much of northern Armenia.

One of its reactors was reactivated in 1995 amid an energy crisis brought on by the 1988-1994 war with Azerbaijan, and has controversially remained open ever since. Natural resources-deprived and with closed borders with Turkey and Azerbaijan, Armenia remains heavily dependent on Metsamor, which, as a testament to its reputation, means “black swamp” in Armenian.

Eurasia


Eurasia

Poland’s opposition PiS wins local elections

bne

The ruling Civic Platform party (PO) suffered a painful defeat in Poland's local elections on November 16. Despite an apparent turnaround in fortunes for the party recently, exit polls indicate the conservative populist Law and Justice (PiS) won comfortably, suggesting the national elections next year will be close fought.

With the economic recovery improving, PO had hoped to get a fresh wind under a new leader, Prime Minister Ewa Kopacz, after former premier Donald Tusk headed off to Brussels. Opinion polls indicated that the PO had halted a slide in popularity over the past couple of years that had handed the initiative to the conservative populist Law and Justice party (PiS).

However, the PiS won 31.5% of the vote, with PO trailing badly with just 27.3%, according to an exit poll by Ipsos. That hands the centre right party its first election defeat in seven years. Junior coalition partner, the Peasants Party, won a higher-than-expected 17% of the vote, according to the exit poll.

Prime Minister Ewa Kopacz, who came in during the summer as Tusk moved to head the European Council, insisted PO would come back for next year's general election. "Just a few months ago the distance [to PiS] was much bigger," she said. "If these results are confirmed, they will show we have done a pretty good job."

Meanwhile the opposition PiS was jubilant. "We won," PiS leader Jaroslaw Kaczynski announced. "That is, considering the circumstances, very good news. . . that creates prospects."

Tusk's victory in 2011 made the PO the first govern-ment since the fall of communism to retain office.

Final results from the local elections are still not available because of computer problems at the the National Electoral Office, the body in charge of the mechanics of running Polish elections. The head of the office subsequently resigned, accepting responsibility for the problems that have dogged the vote count.

Two party leaders, Leszek Miller of the ex-communist Democratic Left Alliance, and Jaroslaw Kaczynski, of the rightwing Law and Justice party, have formed an unusual alliance to call for a new election.

“No-one can save this result,” Miller said earlier this week, arguing that problems with the vote count, as well as the unusually large number of spoiled ballots, meant that Sunday's vote was invalid.

Bronislaw Komorowski, Poland's president, has tried to calm the atmosphere, stressing that all the votes that were cast on Sunday have been counted at the local level, and that the problem is with the computer system allowing for the votes in each region to be summed up. “Let's not go crazy, everything can be counted,” he said.

The problems with the computer system are being investigated by the country's official watchdog. The system was reportedly created over only four months and rushed into service just before the election for the bargain price of only 430,000 zlotys (¤102,000).

“Every mistake that could be made in the code was made,” one programmer told the niezalezni.plportal.

Central Europe


Central Europe

Hungarians back on the streets to call for Orban's headbne

Thousands rallied across Hungary on November 17 to protest against government corruption and Budapest's lean towards Moscow. The demonstrations increase the pressure on Prime Minister Viktor Orban, who has made several concessions recently in the face of mounting criticism. Calling for the sacking of tax officials implicated by the US in corruption allegations, and demanding the government pull back from its close relations with Russia, 10,000 were reportedly on the streets of the capital. Crowds also gathered in over 20 other Hungarian cities, as well as at events in London and Berlin on what organisers called a "Day of Public Outrage". The rallies continued a series of protests over the last month or so against Orban and his Fidesz party, which has ruled Hungary with a constitutional majority in parliament since 2010. The rare opposition demonstrations were sparked by the government's plans to introduce an internet tax, with the cause reportedly bringing over 100,000 onto the streets in late October. Those demonstrations led Orban to revert to type: he announced a retreat but was careful to leave the door to the planned levy open. In rough dealings - with Brussels in particular - over the past four years, the feisty PM has often proved he is ready to step back to allow for calm. However, he rarely allows himself to be diverted from his original course. However, opponents have announced that they hope to use the momentum from the internet tax protests to mount a wider challenge to Fidesz. The mainstream political opposition to Orban is feeble, while unlike the anti-corruption parties springing up elsewhere in the region, Hungary's new alternative party is the extreme right Jobbik.

A highly public fight with the US over corruption and the rule of law has only encouraged the crowds. Six Hungarian officials have been barred from entering the US over alleged corruption - the first ever such action against a Nato ally. Ildiko Vida, head of Hungary's tax authority (NAV), was amongst them. She was a specific target of the protest, with the crowd calling for her to be sacked. She denies any wrongdoing. The five other officials have not been named. Faced by riot police in front of the parliament, the crowd carried banners with slogans including: "We don't pay tax to criminals". They also chanted "Orban go away!" and "Europe, Europe!", reported Reuters. Hungary has been named as a country whose freedom is a concern by President Obama. While the EU has been expressing concern over governance in the country for some time, the US pressure was sparked by Budapest's lean towards Moscow in recent months. Earlier this year, just days after Orban met Gazprom CEO Alexei Miller and secured increased deliveries from the Russian gas giant, Hungary announced that it was halting the transit of EU gas supplies to Ukraine. Miller, meanwhile, came away talking confidently about South Stream, the 63bn cm pipeline from Russia that the EU is blocking. A deal at the start of the year meanwhile tore up an international tender on expansion of the Paks nuclear plant, handing the contract to Russian state agency Rosatom. Moscow will lend Budapest ¤10bn to fund the project. In late July, Orban claimed the West's democratic model was finished. He announced he is building an "illiberal" democracy with the likes of China and Russia as models.


Serbia and IMF agree new three-year precautionary loan deal worth ¤1bn

will be no need to issue Eurobond this year," Branko Drcelic, director in the public debt administration division of Serbia's ministry of finance, told IFR.

In September, Serbia reportedly lined up banks including Barclays, Deutsche Bank, JP Morgan and UniCredit for a potential bond, sources.

Serbia will now to undertake large-scale reforms to tackle its public debt problems, the IMF said. "Without comprehensive policy changes, public debt would continue to rise to unsustainable levels, undermining macroeconomic stability and growth potential," Murgasova said.

Serbia's public debt is forecast to rise to 68% of GDP by the end of 2014. As part of the standby loan agreement, Serbia will undertake fiscal consolidation.

This will focus primarily on scaling down the large public sector wage and pension bills and reducing budget support to public enterprises, said Murgasova."In particular, fiscal adjustment aims to halt the rise in public debt and put it on a downward trajectory by 2017," she added.

The government is also expected to set out its plans for 12 key state-owned companies, including Telekom Srbija, railway operator Zeleznice Srbije, power grid operator EMS, power producer EPS, postal operator Posta

bne

Serbia and the visiting International Monetary Fund have reached an agreement on a new three-year precautionary loan deal worth some ¤1bn, the head of the IMF mission to Serbia, Zuzana Murgasova, said on November 20, as quoted by news agency Beta.

The IMF stand-by loan deal is regarded by foreign investors as a crucial sign that the government is serous about embarking on reform and fiscal consolidation to support the economy, which is suffering from the effects of the floods earlier this year and the general slowdown in Europe.

Murgasova told a news conference that the arrangement now needs the approval of the IMF's management and executive boards. She said the economic programme that the government in Belgrade will implement with the support of the IMF aims to create conditions for macroeconomic stabilisation, sustainable economic growth and the creation of new jobs over the medium term.

No precise details on the agreed economic plan were made available. The IMF mission started its visit on November 4 and completed it on November 20.

The IMF deal means that Serbia does not need to issue a Eurobond this year, according to a ministry of finance official. "(The) deficit will be significantly lower than estimated, so there

Southeast Europe


by the government to reach an agreement with the IMF failed in 2013 when the parties again disagreed over vital fiscal austerity issues, with the Fund warning that any further support depends on cuts in the public sector and the pension system.

Srbije, state roads operator Putevi Srbije and water resources management firm Srbijavode.

Serbia's previous ¤1bn stand-by deal with the IMF was frozen by the Fund in February 2012 over signs of fiscal slippage. Another attempt

Southeast Europe


Bulgaria's new coalition gets down to business

has been registered by reactivation by Brussels of the suspended Environment Operational Programme.

Longer term, though, is stability in prospect? Already the contentious issue of the daily Turkish-language news broadcast on national TV has come up, with former Borisov aide and current key Deputy Premier Rumyana Bachvarova apparently siding with the nationalists in demanding its removal.

Meanwhile, there is the question of Christmas bonuses for pensioners – and ABV’s predilection for progressive taxation might eventually prove disruptive. And there’s energy: a 10% hike in household tariffs was decreed just before the elections, but may not bite for a month or two yet – as they bit in February 2013’s street protests – while PF’s faith in an “energy audit” as a means of bringing prices down could well prove troublesome in a situation where they probably need to go up if the system isn’t to be strained.

We’ll see. But perhaps the immediate prospects of instability aren’t so great. All participants in the coalition are deriving some political benefit from it, if only because forcing Bulgarians to the polls again wouldn’t be popular. Counting one referendum, one European Parliament election and two parliamentary elections, that would have been the fifth visit in two years, and record low turnout in October (48.7%) suggests that people are getting sick of voting, or of politicians, or of both. In those circumstances, one needs to think before rocking the boat. In addition, three political forces – ABV, Ataka, and BWC/BDC – are close enough to than crucial 4% to be unsure of re-entering parliament. And there’s some public scepticism of the larger opposition parties – BSP and MRF – that could limit their capacity (and taste) for extra-parliamentary rabble-rousing.

Sandy Gill in Sofia

Eleven days after being voted in by the most complicated parliament in Bulgaria’s post-communist history, what may be the country’s strangest ever government ever appears to be holding together satisfactorily – despite ominous rumblings among both free-market and ultra-nationalist rightists.

The government – or at any rate its support – is a curious combination of four elements: the centre-right GERB led by Prime Minister Boiko Borisov; the Reformist Bloc (RB), an uneasy coalition of five more conventionally right-of-centre parties; the Patriotic Front (PF), a relatively new radical nationalist formation; and the ABV, a breakaway from the mainstream Bulgarian Socialist Party.

Putting the coalition together was a tough and lengthy process, finalised over a month after the October 5 elections – and by no means bound to produce the outcome that it did. Quite how long a government put together so painfully and out of such disparate elements can last is an interesting question. For now, ministers – and parliament – are buckling down to urgent tasks arising from political deadlock in the last couple of months of the BSP-MRF government and the limits to what the subsequent caretaker government could do without a parliament in place.

They’re updating an annual budget that probably overestimated revenues from the start – and now has to take account of sizeable depositor compensation costs in the Corpbank case. European Funds Minister and Deputy Premier Tomislav Donchev – another GERB veteran – and various branch ministers are trying to ensure that very substantial EU funds are spent by December deadlines, while an early triumph

Southeast Europe


Opinion

Chris Weafer of Macro-Advisory

In a memorable speech delivered in late 1992, Britain’s Queen Elizabeth II described the year just ending as an “Annus Horribilis” as she referred to a year filled with misery and stress for the royal household. In economic terms, the year just ending in Russia may be similarly described. But better not to use that portrayal just yet. For the economy and companies operating in Russia, 2015 is looking increasingly likely to be more deserving of the dubious title. But for stock market investors, despite the miserable macro backdrop inevitable for the first half of 2015, this coming year may yet end up being described as an “Annus Mirabilis”.

Whether you are optimistic that sanctions against Russia will start to ease in mid-2015 and the price of Urals crude recover towards $90 per barrel, or you are pessimistic and assume some sanctions expansion, or extension, and lower crude prices, the one fact which both sides have no choice but to agree on is that most macroeconomic indicators for the economy will worsen through the next three quarters and will look a whole lot worse by the time we get to next summer. Where there can be more of a debate is about whether there will be meaningful recovery from next autumn, offering hope that the current slump will start to end as the next election season starts in 2016, or whether Russia’s economy faces several more years of stagnation.

For investors in Russia’s capital markets that is a key question. If on the side of the optimists, looking at the start of a recovery from next summer, then one should start to add to Russia

market exposure from early in the New Year. One factor we have all learned over the past 16 years is that if you wait for solid evidence of economic recovery or an end to crisis in Russia, then you miss the first 30-40% of the rally. During the last economic crisis, the RTS Index hit a low of just under 500 in late January 2009, but then doubled over the next three months (and quadrupled over the next two years), while the country’s macro indicators did not start to show a recovery until the autumn of that year.

As mentioned, regardless off one’s view of the economic outlook in the autumn, the next three quarters are going to be tough for all and downright miserable for many. The latest update from the Federal Statistics Service showed that GDP rose 0.7% over the first three-quarters of 2014. Not too bad given the battering that the ruble and capital flows have endured. The weak ruble and some sanctions have had a positive impact on demand for domestically produced goods, in particular in the food sectors, while the 33% increase in defense spending also boosted manufacturing. That has helped compensate for the much slower growth in retail sales, in the service sectors and the decline in investment spending.

But that trend is already starting to decline further. Retail sales in September were boosted because of a one-off rise in non-food sales as people used some of their depreciated rubles to buy goods at risk of scarcity or which might be priced higher over the winter. Some food items are certainly in both of those categories.

MACRO ADVISOR: 2015 looks likely to be Russian economy's “Annus Horribilis”


Opinion

Russia imports only about 35% of overall food consumption these days, down from nearly 50% in 2008, but that previous high percentage remains in the supermarkets and hypermarkets. Russia never has enough in adequate food storage facilities so higher prices and some shortages are inevitable as the summer/autumn supply ends. Consumer inflation, which reached 8.5% by mid-November is set to breach 9% by year end and will very likely hit 12% or higher by the spring. Interest rates, pushed higher in 2014 as the Central Bank of Russia tried to control inflation and the ruble, are not going to start falling until there is clear evidence that inflation has started to fall. Again, probably coming into next summer rather than earlier.

High interest rates have eaten into household disposable income at a time when nominal wage growth is slowing. Public sector workers, accounting for almost 20% of the national workforce, may expect a wage increase of 7.5% in 2015 or anywhere between a 3-5% real decline. High interest rates and a more difficult debt access market is also one of the reasons why investment by companies continues to fall. On top of all that is the prevailing low level of confidence by not only consumers and business owners, but also by those Russians with money to invest and by foreign investors. Both categories will keep their wallets firmly shut for Russia until there is solid evidence that the crisis has ended.

Over the first half of 2015 we may see Urals crude in the $75-80 per barrel range, inflation at 12%, the ruble trading in the range RUB55-60 against the US dollar (RUB68-75 against the euro), retail sales growth at less than 0.5% and a continuing slump in investment spending. That may translate into either zero GDP change or a small decline, with only the spending from the military-industrial complex and the modest positives from the weak ruble and sanctions providing some support to the headline number.

But that is where the bad news could end. At Macro-Advisory we are optimistic that full-year

GDP growth in 2015 will reach between 0.5 and 1.0%, with most of the recovery back-ended to the second half. We expect inflation to peak in the second quarter and then to fall slowly to a year end rate of 8.0%. We believe that while the ruble may trade in the mid-50s against the US dollar and the high 60s against the euro, the year-end rates should be a whole lot better. The table shows our base case assumptions for 2015 -2017 and those based on a pessimistic scenario, which assumes low oil for longer and tougher sanctions. We dismiss as most unlikely the optimistic case proposed by Russia’s Finance Ministry in its recent 2015-2017 budget submission.

The factors that will determine whether we end up with a pessimistic or base case result will chiefly be;

Sanctions: The only sanctions that have hurt the economy are those directed against the financial sector and they have hit hard since September. Interest rates are higher, the forex market is tight and access to capital is expensive. If the EU does not extend these sanctions when they end on July 31, there will be some improvement but only limited. If the US does not similarly drop its sanctions against Russia’s state banks at the same time, then EU banks will remain closed to Russia regardless of the official EU position. A unilateral EU move would help some areas of trade finance, but the US sanctions will be key to a full easing.

Oil: Opec producers are suffering budget strains just as Russia is. But the bigger producers, eg. Saudi Arabia, are willing to put up with that for some time while pursuing some important internal Opec objectives and slowing US shale production. Ultimately, the price may be affected by a sharper slowdown in the global economy, but if International Monetary Fund/World Bank growth numbers and the International Energy Agency’s demand outlook prove correct, then we should see Urals back above $90 per barrel by mid-2015.

Policy Actions: Government actions have been


Opinion

more reactive to the unfolding crisis this year. There has been a lot of discussion over what may be done and how financial reserves may be deployed. We have not yet had a clear response but hope to see that coming up to the next St. Petersburg Investment Forum in the spring. Hardly much before then. Already we know that the government’s latest development slogan is “Import Substitution” and while encouraging for long overdue changes in such areas as agriculture, food production, pharmaceuticals and some manufacturing sectors, it is still all too vague to be able to assess the medium-term impact.

Confidence: This is a tough ingredient to call. So much is wrapped up in consumer, business and investor – domestic and foreign – confidence.

That’s because it is a mixture or perception and reality. The only position we know for sure is that it is a whole lot easier to lose confidence than it is to recover it. This is one reason why, even under an optimistic view of Russia, sanctions and oil from mid-2015, a return to the targeted 4-5% annual growth will take several years.

Russia is not a market that, beyond blind luck, rewards either the brave or the foolish, or those intransigent in their optimism or pessimism. It is however a market which rewards those who take the time to look past the headlines and who are prepared.

Chris Weafer is Senior Partner at Macro-Advisory, which offers bespoke Russia-CIS consulting.


Weekly Lists Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure. For more information, please visit the website at www.bne.eu.

bne:InvestorIn 2015, Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS) will endure its fourth consecutive year of economic growth below 3% – the longest period of weakness since the early 1990s – and there are “significant downside risks”, according to the European Bank for Reconstruction and Development’s latest Transition Report. In "Transition Report 2014: Innovation in Transition", the EBRD predicts growth across its region will decline sharply to 1.3% this year (from 2.3% in 2013) and will remain depressed at 1.5% in 2015.

It blames the Ukraine crisis and the Western sanctions imposed on Russia, which have partly offset the impact of the improving Eurozone economy. This has had a significant knock-on effect on CIS countries that depend on Russia for trade, such as Belarus, or for remittances, notably Tajikistan.

It forecasts that in 2015 Russia will only have a mild recession, while Ukraine’s decline will become less severe – and it could even begin to grow towards the end of next year if macro-economic adjustment and structural reform are successful.

EBRD forecasts fourth consecutive year of below 3% regional growthbne

Hungary turns big guns on international retailers bne

The Hungarian government has proposed a bill to protect local retailers from being driven out of business by big foreign chains. The draft bill would force fast moving consumer good retail chains with an annual turnover of more than HUF50bn (¤164mn) to close if they fail to report a profit over two successive years. The government claims large chains have been deliberately running at a loss in recent years, using dumping prices to increase market share. While the international heavyweights can afford the losses, the tactic is driving smaller local retailers into the ground, says the bill, which was launched on November 18. "Posting losses on a sustained basis indirectly represents an abuse of dominant market position, because competitors are forced out and the enterprise with a strong capital position 'buys up' the market'," Economy Minister Mihaly Varga wrote in comments attached to the legislation, according to Reuters.


Slovak financial group Penta is looking to extend its recent foray into Slovak media by buying Zoznam, the country's second most viewed web portal, local media reported on November 20. Penta Investments has made Slovak Telekom (ST) an offer to purchase Zoznam.sk, public broadcaster RTVS reported. The bid was confirmed by the head of the National Property Fund (FNM) privatisation agency, Branislav Bacik. However, Penta is unlikely to get everything its own way. The economy ministry will ask ST, in which the state holds a 49% stake, to decline the offer. The ministry is concerned that the sale of the web portal might affect the valuation of the state's stake, which it is in the midst of trying to sell. Bratislava has previously said it hopes to get as much as ¤1bn for the stake, with the proceeds to be used to finance its budget gap. It hopes to push the sale through next year, but has been struggling to decide on the format.

Weekly Lists Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure. For more information, please visit the website at www.bne.eu.

Penta chasing top Slovak web portal

bne

MVM and Mol launch joint bid for Slovenske Elektrarne bne

Hungary's MVM and Mol have submitted a joint bid for Slovak power utility Slovenske Elektrarne (SE), they announced on November 20. The deadline for non-binding bids for the 66% stake in SE held by Italy's Enel was November 19. The Italian company announced on November 19 that it has received three non-binding bids. CEZ said the same day that it has sent a letter to Enel to express its interest.

Czech-based energy holding Energeticky a Prumyslovy Holding (EPH), which is controlled by closely-held Slovak financial group J&T, is also expected to have placed a bid.

bne:Deal


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

Weekly Lists

bne:BankerPolish watchdog KNF demands sale of FM Bank by Maybne IntelliNews

The Polish Financial Supervision Authority (KNF) has ordered Abris Capital Partners to complete the sale of its entire stake in FM Bank PBP by the end of April. The move is just the latest in the ongoing fight between Poland's financial regulator and the private equity firm over the mid-sized lender.

KNF says the demand stems from the failure of Abris to live up to earlier pledges made on the divestment. In May, Abris filed an official complaint with the Polish state and foreign affairs ministries demanding damages due to KNF's decision ordering it to sell its holdings. The regulator had issued an order demanding the sale by the end of 2014, but withdrew it in July citing legal risks.

Reports in early November claimed Hungary's top bank OTP has made a bid. Polish mid-sized banks Alior Bank and BOS Bank, and private equity firm AnaCap Financial, are also reported to have submitted offers for FM Bank, which has a book value of PLN300mn.

S&P especially negative on Russia's banking sector bne IntelliNews

Russian banks are facing the most pressure out of the major emerging markets, as the end of US quantitative easing leaves financing in those countries facing a new reality, according to a new report by credit rating agency Standard & Poor's. "We have a negative view on the banking industry in Russia," the report says, noting that almost 70% of S&P rating outlooks for Russian banks are now negative.

S&P sees all the banking sectors of major emerging markets under pressure, but Russian banks have been hit hardest of all for "idiosyncratic reasons". "Russian banks remain the most vulnerable [out of major emerging markets] due to the current operating difficulties created by Western sanctions and lower economic growth," write S&P analysts in the report.

According to S&P, Western sanctions on Russia, in response to its aggression in Ukraine, directly affects more than 50% of Russia's banking sector assets, by restricting state banks' access to US and EU capital markets.



Weekly Lists

Rosneft might get 15% of state aid requested bne Intellinews

Russia's largest oil producer Rosneft is going to receive RUB300bn ($6.35bn) worth of state support from the sovereign National Welfare Fund (NWF), Kommersant reported, citing unnamed government sources. This is about 15% of RUB2 trillion Rosneft initially requested, but attending to company's full demands is "physically impossible", the sources say.

The government over the past weeks has been stalling on the request of the head of Rosneft Igor Sechin for state support. The influential former aide of president Vladimir Putin argued that granting the company RUB2 trillion out of NWF 's RUB3.4 trillion would have a broad-based multiplier effect on all of the economy. It will eventually help improve Russia’s credit rating, he said. At the same time Moody’s VP Thorsten Nestmann said that should Russian government approve RUB2 trillion bid of Rosneft, this will increase economic risks and will put more pressure on the sovereign ratings.

Rosneft is intending to spend the funds on extraction projects in East Siberia, Far East, and sea shelf. Under the US and EU sanctions, Rosneft and other state oil companies have lost access to Western capital markets, as well as foreign technology and services for offshore shelf and shale extraction.

FinMin places less than 10% of “test” federal bonds auction bne IntelliNews

Russian ministry of finance placed RUB0.49bn worth of federal OFZ series 25082 bonds maturing in May 2016. This made less than 10% of the modest RUB5bn proposed. The ministry sold the bonds at an average 10.06%. The OFZ offering was the smallest in 14 months and was testing the market after five previous consecutive auctions were cancelled due to poor demand. According to Bloomberg on November 19 the bonds traded at 9.96%, jumping 24bps.

Previously, market participants surveyed by Kommersant on the upcoming OFZ placement were alarmed that 18-month bonds were on offer, seeing it as a signal of low demand expectations for longer-term securities on behalf of the ministry. Overall primary market placements are not expected to recover in the short term.

In October, the finance ministry said current borrowing rates (over 9.5% at the secondary market for 10-year OFZ bonds) are “acceptable” and confirmed the plans to borrow another RUB223bn until the end of the year, despite previously pledging not to borrow at rates that approached 10%.

bne:Credit



Russian stocks' secret membership of Euroclear Ben Aris in Moscow

Russian stocks are now clearable by the two biggest international settlement systems, Euroclear Bank and Clearstream Banking. At the press of a button earlier this year it became possible to buy shares in Russia's blue-chip companies listed in Moscow from the comfort of a chair on a London trading desk. It is a huge change in the way that Russia's capital market operates – not that you’d know it from the low-key way the landmark innovation was introduced.

Clearstream announced on July 27 that from the following week it would give foreign investors direct access to the Russian equity market. Though just two weeks prior to that, Euroclear said it was delaying its plans to offer the service.

Then on September 18, Alexey Zabotkin, an equity analyst with VTB Capital, informed his clients in an email that he had seen a document published on Euroclear’s website detailing how access to Russian equities was now available. "We believe this indicates that the depositary bank is to start settling Russian equities. However, there has been no official confirmation from Euroclear that this is the case."

Weekly Lists

Romania’s Property Fund close to secondary listing in London Iulian Ernst in Bucharest

The secondary listing of shares of Romanian restitution fund Fondul Proprietatea on the London Stock Exchange could take place in the first half of December, after the Romanian financial market regulator endorses the necessary documents, Greg Konieczny, executive vice president of Templeton Emerging Markets Group, was quoted by local daily Bursa as saying on November 20. The ¤2.6bn fund is already listed in Bucharest and its largest shareholder is Elliott Associates, which owns 19% according to Templeton, which manages Fondul Proprietatea.

The secondary listing will be carried out through depositary receipts, but this requires minor adjustments to national regulations in Romania, Fondul Proprietatea explained in late September. The fund has prepared all the necessary documents for listing, Konieczny assured. The listing in London is mainly aimed at narrowing the discount at which the fund’s shares trade to the net value of its assets, Templeton executive chairman Mark Mobius explained.

bne:Stocks


bne:Newspaper November 21 2014

Documents

Transcript of bne:Newspaper November 21 2014