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Content: 2 Top Stories 5 The Regions This Week10 Eastern Europe 13 Eurasia17 Central Europe20 Southeast Europe24 Opinion27 Lists

Hungary risks isolation as Orban miscalculates

Russia, Ukraine and the EU have signed a trilateral gas agreement securing the resumption of Russian gas supplies to Ukraine from November. The deal followed a total of 30 hours in talks continuing into the night of October 30, when the sides announced an agreement.

Russian Energy Minister Aleksandr Novak, EU Energy Commissioner Günther Oettinger and Ukrainian Energy Minister Yury Prodan signed a deal in Brussels fixing the price of winter gas

Gas war over as Russia, Ukraine and EU sign deal

Hungary's bungled handling of the US visa ban on what Washington calls corrupt government officials has focused international attention on institutionalised corruption in the country, leaving it isolated and Viktor Orban, the fiery prime minister, in a trap of his own making, say critics.

Meanwhile, the equally bungled attempt – believed by many to be Orban's personal idea – to introduce the world's first internet tax has galvinised the previously torpid Magyar public and precipitated public protests across the country at levels unprecedented since Orban swept to power in 2010. Orban signalled

to be imported by Ukraine at $378 per 1,000 cubic metres (cm), through to March. Ukraine currently pays $478 per 1,000 cm, as fixed in a controversial gas agreement signed between Russia and Ukraine in January 2009.

"No-one need freeze now," Oettinger said, calling the agreement "the first glimmer of a thaw" between the two countries after a "war-

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like situation," a veiled reference to Russia's annexation of Crimea in March and incursion into Ukraine in late September.

The president of the European Commission, Jose Barroso, said he hoped this was the last action that the European Commission had to undertake in relation to gas relations between Russia and Ukraine.

The three sides agreed that Russia would express the new price as a $100 rebate to the existing price of $478 agreed in 2009. Ukraine representatives called the price "just over market price”. Moscow will provide the rebate by waiving export taxes on gas sold to Ukraine, ensuring that the terms of the original 2009 contract remain de jure unchanged.

The new price formula thus represents a climbdown by Ukraine, since Kyiv had wanted the reduced price to be fixed in a new commercial contract between Russia's state energy company Gazprom and Ukraine's state energy company Naftogaz. Kyiv argued that this would prevent Russia unilaterally revoking the rebate for political reasons, as Russia did in March following the ousting of Ukraine's former pro-Russian president Viktor Yanukovych.

Russia however agreed to abstain from "take or pay" conditions in the original contract, which committed Ukraine to buying a minimum volume of gas. This gives Ukraine flexibility in buying as much gas as possible from non-Russian sources to reduce its dependency on Moscow.

Moscow failed to achieve one major goal in talks: to compel the EU to provide written financial guarantees for Ukraine's payments for Russian gas. EU Energy Commissioner

Oettinger said the EU would not provide written guarantees, but said that Moscow had been provided with evidence that Ukraine could pay. He said Ukraine's payment to Gazprom of $3.1bn in arrears would be paid out of International Monetary Fund (IMF) loans and was being held on a special account at Ukraine's national bank. Naftogaz would have enough funds from its own revenues and from the national budget to make ongoing payments unassisted, Oettinger said.

"Together with the European Commission we will find enough money to buy enough gas," Ukrainian Energy Minister Prodan said, as quoted by business daily Vedomosti. Ukraine's budget will receive ¤760m in already agreed loans from the EU before the end of the year, according to widespread reports, as support for crucial reforms.

A European Commission representative previously stated that Ukraine had requested ¤2bn in assistance to pay for gas. German Chancellor Angela Merkel had earlier raised the possibility of Ukraine receiving a bridge loan from the EU to make payments for gas in November and December, with the next tranche of financial support from the IMF due only in early 2015.

Ukraine is short of 4bn cm gas for November and December, Prodan said, as quoted by Vedomosti, totaling $1.6bn under the new price, and requiring an initial immediate advance payment of $770m for November, according to Russia.Short of cash to make ongoing payments, Ukraine may now move to quickly abolish massive gas price subsidies - estimated at 7.5% of GDP - provided to households and to utilities, that have proved financially crippling for Naftogaz, according to drafts of a coalition agreement for a new government in Kyiv following parliamentary elections on October 26. But Naftogaz is unlikely to be able to draw any revenues from territory in East Ukraine controlled by Russian-backed rebels, while continuing to supply gas to the territories, adding to its financial woes.

Gas war over as Russia, Ukraine and EU sign deal

October 31, 2014 businessneweurope I

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off communism]… From that high point of hope and expectation to rapidly being one where [we see] the weakening of the rule of law, the attacks on civil society, the lack of transparency and how rapidly those trends are taking hold, my statement last week was more of a concern for a valued ally.”

Goodfriend pointed to Hungary's sudden decision last January to expand the Paks nuclear facility using Russian technology and ¤10bn in credit as an example. “How was the decision made? Was it an open tender? Was there transparency in the decision? And that gets back to the discussion of… an overall environment in which corruption can flourish,” he said.

He also scolded Hungary for its statements on crisis-hit Ukraine. “At this time of Russian aggression in Ukraine… this is a time to

a climbdown on the tax this week, saying the levy cannot be introduced now in its current form. Instead, he said he plans to launch a public debate on internet regulation next year.

While his government, elected with 45% of the vote last April, is still firmly in control, the upsurge in criticism and discontent has rattled both Orban and his Fidesz party, while giving hope to opponents that the religious-like zeal of his core supporters may finally be weakening. “Never, in the last 35 years, including the last 10 years of the [communist] Kadar era, has Hungary been so internationally isolated as now,” thundered Ferenc Gyurcsany, president of the pro-Europe Democratic Coalition (DK), at a meeting with international press on October 28.

In the eyes of the former Socialist – and to many on the right, disgraced - prime minister, the reasons comprise Orban's “historically dramatic shift” in politics, “turning the car of Hungary from the west to the east,” and the accompanying growth in institutionalised cronyism and graft. “I'm not just talking about general corruption [typical of the region]. It's not just the domestic rivals of this government, but the main international players, like the US, saying that the whole government is infiltrated by corruption issues,” Gyurcsany proclaimed.

Indeed, in less strident tones – interlaced with profuse diplomatic praise and warm overtures to cooperate – Andre Goodfriend, the US charge d'affaires in Budapest, verbally lashed the Orban government on October 24.

Asked what he meant in a statement suggesting a possible breakdown in cooperation with Hungary as an ally, he replied: “Hungary was a country ahead of the others [in throwing

Hungary risks isolation as Orban miscalculates

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fraud. Except, critics point out, that these investigations are at subsidiaries of Glencore, Cargill and Bunge – three US-based food companies.

Budapest also continues to insist that Washington reveal the names and evidence behind the ban on six of its citizens entering the US. Orban, speaking to reporters in Brussels on the day of Goodfriend's multiple broadsides, stressed that Hungary could not begin an investigation without evidence being handed over, saying “many of us do not understand why this is not happening.”

stand firm with the EU, and understand the sensitivities on the ethnic nationalism question, particularly with calls for autonomy among Hungarian ethnic nationals in Ukraine. This is not the time to have that discussion… [nor] to break with EU partners and to publicly criticise the approach which the partners have taken,” he said.

Hungary steadfastly argues that it is intent on fighting corruption, with Mihaly Varga, the economy minister, telling parliament on October 27 that the tax authorities are investigating suspected large-scale VAT


The Regions This Week

Kazakhstan plans to release KZT500bn ($2.74bn) to the banking sector to deal with non-performing loans until the end of 2015. The central bank singled out the two banks - BTA and Alliance which have the highest shares of NPLs in their loan portfolios as recipients of KZT250bn from the National Oil Fund this year and the other half next year. A mechanism of the assistance and where the second half will come from have not been made public.

Citizens in Turkmenistan are protesting over shortages of gas as temperatures drop below zero. The protests in the country which sits on the world's fourth largest reserves coincided with Independence Day celebrations held on October 28. Reports say groups of women blocked motorways in protest in Dashoguz Region.

The Czech Republic's biggest builder PSJ will take part in construction of a city on artificial islands near the coast of the Caspian Sea in Azerbaijan. The value of the contract, signed by the PSJ for its participation in the project called the Khazar Islands, stands at ¤395m.

Authors of a gay poster that depicted a Kazakh composer kissing a Russian author have been given a huge fine in Kazakhstan. A court ruled the advertising agency that made the poster to pay nearly $0.2m in moral damages to students of the Kazakh State Conservatory named after the composer. Reports say descendants of the Russian composer are also considering a lawsuit against the authors.

Russia's flagship airline Aeroflot resumed regular flights between Moscow and Tbilisi on October 27 after six-year pause. Aeroflot will conduct flights with Airbus A320 from Sheremetyevo Airport on a daily basis. Russia

Eurasiacut regular direct air flights with Georgia in October 2006, following a spy row between the two countries. The flights were restored in March 2008, but were again suspended after a brief war between the countries in August 2008.

Insurance companies in Azerbaijan will pay a fine if they delay payments on insurance against accidents at work and disability resulting from occupational diseases. The country's insurers will have to pay a fine of 0.1 per cent of the amount payable for each day of the delay.

The Armenian government plans to cut maternity benefits by at least 20%. Yerevan defends the plans to pay between 40% to 60% of the current rate of maternity benefits depending on a woman's length of service. At the moment, the government pays 100% of women's wages for a period of 140 days.

The Kyrgyz government doesn't plan to increase electricity charges until December 1. It is now collecting opinion from industry specialists on the issue. The country is facing power shortages this winter due to dry weather in spring and summer and Uzbekistan's suspension of gas supplies to the country's south. Russia's Gazprom took over the country's gas distribution networks in April but has since failed to ensure "uninterrupted" supplies.

Mongolian coal producers are "burning cash" and face pressure in the next 12 months because low prices and weak demand from China will persist, according to Moody's Investors Service. Coking coal at Queensland has declined 17% this year to $112.80 per tonne. At that level, producers may just break even until prices recover to about $125 to $140 from the second half of next year, Bloomberg reports.

businessneweurope I October 31, 2014


The Warsaw Stock Exchange was hacked by proclaimed Jihadists on October 23. Mentioning "Allah" and "revenge" the attackers broke into the bourse's website, stole 30,000 log-in records and posted them online.

A majority of Czechs view Russia as a potential threat, a poll revealed on October 24. The Ukraine crisis has 65% of respondents worried over Moscow's future intentions, compared with just 36% who were worried in 2013.

Foreign companies are put off by Czech bureaucracy, a study by KPMG reports. Companies looking at investing in industrial facilities are also wary of the state of infrastructure in the country.

Polish and Baltic lawmakers met to discuss breaking contact with Russian energy grids on October 25. With Lithuania set to launch an LNG terminal, the Baltic "energy islands" are also pushing for power links to Poland and within the three states.

The Czech government is enjoying rising public support, a poll showed. With the population hugely sceptical of politicians of all stripes, approval of the centre-left coalition was just 38% when it took power in January. However, 49% of Czechs now say they trust the administration.

A "verbal cold war" is being waged against Hungary, the parliamentary speaker claimed this week as the country was bashed by the US and EU. Laszlo Kover added that Brussels cannot dictate to Hungary like once Moscow did, and threatened that his country could leave the EU.

Institutions across Poland were cleared after receiving bomb threats on October 27. Tax and customs offices and the WSE were amongst those targeted.

Blackmailers threatened to spread Ebola in the Czech Republic unless they were paid ¤1m in Bitcoins, police in Prague said on October 27.

Central Europe The unknown culprits claimed to have "biological material" from an infected patient in Liberia.

The spat over Croatian oil & gas firm INA broke out again this week. Zagreb said it plans to press for unpaid tax from the company, and added that it could still look to buy Hungary's MOL out of its stake.

An Estonian schoolboy shot and killed a teacher during class in a town in the south of the country. Police said they quickly apprehended the 15-year old gunman in what was the country's first ever shooting in a school.

Poland will move thousands of troops toward its eastern borders in a historic realignment of a military structure built in the Cold War, the country's defence minister announced. Tomasz Siemoniak said the troops are needed in the east because of the conflict in neighboring Ukraine.

Austrian bank RBI could leave some CEE markets, its CEO said on October 27. The second largest lender in the region has put some markets "on trial”, Karl Sevelda said. RBI has previously looked at divestments in Ukraine, Hungary and Slovenia.

Hungary's central bank left rates on hold at 2.1% on October 28 and suggested they will not move until 2016. The MNB said it will keep monetary policy at the current loose level to combat deflation and slowing growth, but suggested it has no intention to offer further easing.

Hungarian lobbying is "uncontrolled" Transparency International claimed in a report. Lack of regulation and the unprecedented concentration of power have both contributed to hidden, "unorthodox" forums of lobbying, it said.

Returning from a controversial visit to China, where he pledged his country fully recognises Beijing's right to rule both Taiwan and Tibet, Czech President Milos Zeman hitched a ride home from China on the jet of PPF, the murky financial group owned by the country's richest man, Petr Kellner, who also took part in meetings with Chinese officials.


Southeast EuropeAlbanian Prime Minister Edi Rama has postponed a visit to Belgrade until later in November after a brawl at a football match between the two countries sparked a diplomatic row. Rama’s visit to Belgrade, originally due to take place on October 22, will now be delayed until November 10 to allow tensions to calm.

New European Commission President Jean Claude Junker says he will consider measures to resolve a dispute over Turkish oil and gas exploration off the Cyprus coast. The Greek Cypriot government said that a Turkish vessel had entered its waters in a "provocative and illegal" action.

The Slovenian government plans to sell off telecoms operator Telekom Slovenje in early 2015, Finance Minister Metod Dragonja told a conference on October 22. There has been speculation over whether Slovenia’s new Prime Minister Miro Cerar would go ahead with the privatisation.

Russia has banned meat imports from Moldova on the grounds of health, following a downturn in bilateral relations in the run up to Moldova’s parliamentary elections in November. The head of Russian watchdog Rosselkhoznadzor said on October 22 that the agency had discovered meat imports from Moldova that were “unsafe products from the veterinary and sanitary point of view”.

Russian President Vladimir Putin received an unequivocally warm welcome in Serbia on October 17. The visit served to cement ties between Russia and Serbia in the diplomatic and military spheres, despite the latter’s prioritising of EU membership.

The Romanian government has issued ¤1.5bn of Eurobonds. The 10-year bonds have been issued with a record low yield of 2.97%, reflecting lower sovereign borrowing costs for Romania.

The International Olympic Committee has given provisional recognition to the Kosovan Olympic committee. The decision by the IOC’s executive board could enable Kosovan athletes to take part in the 2016 Rio Olympics, despite opposition from Serbia.

Romanian Prime Minister Victor Ponta has suspended three senior members of the ruling Social Democratic Party (PSD). Ponta said he had suspended the three, who include PSD vice president Dan Sova due to their involvement in scandals that could harm the party in the run-up to the November presidential elections.

The Serbian government hopes to sign a new stand-by agreement with the International Monetary Fund (IMF) by the end of this year, Prime Minister Aleksandar Vucic said on October 21. Much of the work towards securing the IMF deal was completed during a recent visit by Serbian officials to the IMF headquarters in Washington.

The European Investment Bank (EIB) is to issue a ¤150m loan to Romania’s third largest bank, Banca Transilvania. The loan will support lending to SMEs, as well as larger companies in the industry, services, agriculture and infrastructure sectors.

Kosovan Foreign Minister Enver Hoxhaj said on October 23 that Kosovo and Serbia must sign a peace agreement before Serbia enters the EU, and called on Serbia to recognise Kosovo as an independent state. Serbia has not yet responded to Hoxhaj’s comments.

The Romanian government has signed a deal with China General Nuclear (CGN) to build two new reactors at the Cernavoda nuclear power plant. The project is expected to cost around ¤6.45bn.

Serbia has set up a national committee on investments, which will focus on major infrastructure projects. Serbia is the first country in the region to set up this type of committee, according to Minister without portfolio for European Integration Jadranka Joksimovic.

Irish businessman Greg Turley and his brothers are planning to invest ¤250m in a bio-fuel plant in Macedonia, alongside US-based DuPont. The plant in Macedonia’s Pelagonia region will supply cheap ethanol to the European market.



Eastern EuropeMoscow will get its first ever Buddhist temple in 2017 that will symbolise Russia’s religious diversity and promote friendly interconfessional and interethnic relations, the city government has decided.

Russia has challenged the European Court of Human Rights' decision that the country must pay ¤1.8bn to the former owners of oil company Yukos. The European Court of Human Rights decided Russia violated law on providing a fair trial when considering Yukos' tax payments in 2000-2003. The Russian government accused management of tax faud and embezzlement.

Conservative Russian nationalist Vitaly Milonov wants to ban Tim Cook, the CEO of Apple, from entering Russia. Milonov, a deputy of the St. Petersburg legislature, opposes gay rights in general.

Russia's Formula One team Marussia, based in Britain and owned by Russian billionaire Andrey Cheglakov, was bought by British-Indian brothers Baljinder Sohi and Sonny Kaushal for a reported ¤70m.

Russia rose by 30 positions in a World Bank's Doing Business ranking, rising to the 62nd place out of 189 countries around the world. Putin told the government he wants to be in 20th place by 2018.

Second time lucky, Aeroflot is re-launching its low budget airline this time called Pobeda (Victory), after the previous incarnation Dobroflot failed thanks to western sanctions.

Ukraine’s current account deficit in September widened to $612m compared to $91m in the prior month, but it was still 4x less than the $2.5bn deficit in the same year-ago month. The result stemmed from a 38.1% year-on-year plunge in imports (goods

and services) against the backdrop of a 26.4% year-on-year exports contraction.

Two orca killer whales were in danger of going deaf and insane after being held in temporary tanks at the VDNKh exhibition centre in northern Moscow. The whales were supposed to be star attractions at the centre's new oceanarium, set to become Europe's biggest and the first in Russia to host orcas, and were flown to Moscow last December, but their tanks were not ready. The whales have been crying for months say local residents.

Almost half of the population do not want McDonald's in Russia, however, the idea to close all McDonald’s fast food restaurants has been more welcomed by those respondents who have never been there, a VTSIOM poll showed. The number of McDonald’s supporters was considerably down on their number in April (45%).

Swiss cheese exports to Russia increased almost fivefold on the year to 160 tonnes in September, says Russia's Federal Customs Administration. The demand for Swiss cheese is growing especially in the low price segment.

Rich Ukrainian businessmen fleeing the chaos at home are driving up demand for high-end apartments in Moscow by 10 to 15 per cent, a study by INCOM Real Estate concludes.

A video of a woman walking naked across the snowclad "oil capital" of Russia to a church, reportedly to shed off evil spirits, went viral. The woman, nude but for a purple turban, walked barefoot across the snow to the church where she bowed and crossed herself. Inside, the unidentified woman told astonished believers she was exorcising "evil spirits," Siapress.ru said.



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Russia's foreign minister, Sergei Lavrov, said in October that relations between Russia and the US are at a post-Soviet "rock bottom." But more worrying, relations with the EU have also sunk to a record low: a poll out October 21 shows that Russians have never held a more negative view of the EU than they do today.

The independent pollster Levada Center found that the number of Russians that see the EU in a negative light has risen to 66% - by far the highest level since the survey was launched over a decade ago.

The result is worrying. Russians have always been slightly stand offish with the US, their former nemesis in the Cold War and the same poll found that Russia's disapproval here is even higher: 82% of Russians view the US in a negative light.

Since the Berlin Wall fell 25 years ago, the east and west were supposed to embrace one another in a new spirit of global brotherhood and for most part that has been the case: the number of Russians who see Russia's relations with the US as specifically hostile has been in the low single digits for the last decade and was only 4% at the start of this year. That number has soared to 39% as of October 12, the Levada Center found.A certain prickliness with the world's only remaining superpower is perhaps understandable. But what is really scary is the rapid decay in relations with the rest of Europe; Russia is at the end of the day a European country with significant business and cultural ties with the rest of the Continent. But as the chart below shows, relations with Europe have gone from normal to bad in the space of nine months as hostility has soared since the start of this year.

Politics of hate: Russian hostility to EU soars


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Eastern Europe

the-post constituencies, and People's Front only 18, according to the Central Electoral Committee. This would give Poroshenko Bloc a total of 132 seats in parliament, clearly ahead of Yatsenyuk's total of 82. Another 96 MPs will enter parliament as independents, who are likely to gravitate to one of the major parties.

"I am pleased that my political force has won a convincing victory with over 130 MPs in parliament," Poroshenko said at a meeting of the judicial reform council, as quoted by Zerkalo Nedeli.

"We are leading with an absolute majority of Ukrainians' support," deputy prime minister Volodymyr Hroisman, one of the leaders of Petro Poroshenko Bloc and potentially Poroshenko's candidate for prime minister, also told a televised press conference.

But Yatsenyuk was sounding uncompromising about his newly founded party's claim to victory, saying that his continuing in the job of prime minister was conditional on his party initiating the drawing up of the coalition agreement. "Conforming with European practice, the first placed party initiates the formation of a coalition," he told the press conference, saying that it was also his right to nominate cabinet

Poroshenko's and Yatsenyuk's parties dispute victory in tight elections

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The People's Front party, founded and led by Ukraine's prime minister Arseny Yatsenyuk, and President Petro Poroshenko's eponymous Petro Poroshenko Bloc are disputing which of them won Ukraine's landmark parliamentary elections held on October 26. At stake is the right to draw up a crucial programme of sweeping reforms on which to base a coalition agreement - and to appoint the prime minister and government to implement it.

"We took first place in these elections," Yatsenyuk told a televised press conference on October 29. Ukraine's Central Election Committee, with 98% of votes counted, gave Yatsenyuk's People's Front - which was founded only in mid-September - 22.17% of the vote against Poroshenko's 21.82% - a difference of a mere 50,000 votes.

But Ukraine's election system is a fifty-fifty mixture of proportional representation and majority constituencies - meaning that the total vote count does not directly determine the number of seats won by a party. Petro Poroshenko's party will take significantly more seats in parliament than Yatsenyuk's, thanks to a significantly stronger showing across the country in the majority constituencies. Currently Poroshenko has won 69 first-past-


Eastern Europe

two pages detailing 36 laws to be passed by Ukraine's parliament by the end of this year.

The coalition agreement proposed by Poroshenko in contrast runs to 48 pages, with detailed proposals ranging from court reform, combatting corruption, to rebuilding Ukraine's devastated military in order to restore the country's territorial integrity. Poroshenko's program also foresees the abolition of subsidised gas prices for households by May 2015, a crucial demand of international donors.

Despite the difference in length, the two competing coalition agreement drafts appear to be broadly compatible with each other, making it less likely that the jockeying over poll position between Poroshenko will develop into a standoff, something that the EU and USA will also try to avoid, say experts.

ministers. "If the coalition isn’t formed along these principles, then another party will take on the task of forming a coalition, and there will be another prime minister," he warned.

Yatsenyuk has won international kudos for his technocratic management skills in talks with international donors, and is believed to be the West's preferred candidate for prime minister. He is likely to leverage this fact now in demanding a leading role in drawing up a reform plan, say pundits.

Both Poroshenko and Yatsenyuk's parties have posted draft coalition agreements on their websites that outline sweeping reforms. But in an indication of how unexpected Yatsenyuk's lead in the vote count has come even to the People's Front party itself, Yatsenyuk's plan runs to only two and half pages, with another

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The central bank made no mention of an early switch to a ruble free float, currently scheduled for January 2015, as some market participants had anticipated.

"No radical move in terms of a speedier move to inflation targeting/float as some had suggested, hence disappointment there," writes Standard Bank's Tim Ash. "The combination of inflation moving towards double digits and with the basket level for the ruble approaching the 50 mark, the CBR [central bank of Russia] decided that it had to do something more substantive on the rate front”.

The ruble was seen to continue a rally that took it to RUB42 to the dollar on October 30, in anticipation of the rate hike. After weakening to RUB42.4 immediately before its announcement, it strengthened again to hit RUB42.2 to the dollar, but then began to fall back.

“This rate hike is large, but the rouble rallied initially, and is now selling off, so they CBR better be prepared to back this up with further action if this does not work,” wrote Ash. “Seems like the CBR has been getting worried as the Ruble basket approaches the 50 mark.”

Russian central bank hikes interest rates by 150bp to stop ruble's fall

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Russia's central bank will hike the main interest rate from 8% to 9.5%, the bank said in a press release, seen by the market as an aggressive measure to stem the fall of the ruble.

Most analysts had been expecting a 50 basis point hike, so the 150 basis point hike came as a surprise move that strengthened the ruble while sparking fears it could tip the economy into recession.

In a press release, the central bank argued the move was motivated by its battle with inflation, which it forecast will remain above 8% till the end of 2014 and in first quarter of 2015, because of Russian sanctions on imports of Western foodstuffs, alongside the knock on effect of the ongoing devaluation of the ruble. The two factors combined would push consumer prices up by around 2.5 basis points, the central bank said.

The central bank also said that the economy grew by only 0.2% on the year in third quarter, but that slowing growth rates would not translate into decreasing inflation, since labour force and industrial capacities were already fully employed, leaving no slack.


the country's central bank figures - but officials estimate as much as one fifth of total remittances have dried up since the summer, the Financial Times reported.

At the same time, less external demand and lower prices for major export commodities such as cotton and aluminium caused the value of exports to contract by almost 15% on year in the first half of 2014 and translated into slowing industrial activity. Production at state aluminium smelter Talco alone was down 45.7% on year in the first six months of 2014.

So far, Tajikistan's economy has shown some resilience to adverse exogenous factors. Economic growth only moderated to 6.7% in the first half of 2014 from 7.5% a year earlier, and the World Bank still forecasts it growing at 6.5% and 6% in 2014 and 2015, respectively. Official unemployment was 2.5% in June, unchanged from a year earlier; the Tajik somoni depreciated less than other regional currencies, losing about 5% against the US dollar year to date; and the budget deficit and public debt still appear under control.

Yet "the main risks to the near-term outlook relate to the serious financial sector vulnerabilities and governance issues, fiscal risks caused by state owned enterprises (SOEs), a slower recovery in the prices of aluminum and cotton, and a further slowdown in activity in Tajikistan's main trading partners," the World Bank's report reads.

The authorities are already working on a set of reforms aimed at weathering such risks. Parliament has passed new laws and regulations

World Bank calls for Tajikistan reforms as economic challenges bite

Jacopo Dettoni in Almaty

The World Bank has called for "comprehensive" reforms in Tajikistan to tackle intensifying economic challenges rising from weak commodity prices worldwide and economic slowdown in Russia.

"Tajikistan needs to put in place a comprehensive structural reform program to bolster growth, job creation, and poverty reduction," a World Bank report released on October 27 reads. "Strengthening fiscal and external buffers will be critical for mitigating the impact of external shocks, particularly given Tajikistan's close links with Russia and such other trading partners as Kazakhstan, Turkey, and China. In the near term, prudent macroeconomic policies could help the country absorb the shocks, especially allowing for greater exchange rate flexibility."

The poorest country in the Commonwealth of Independent States (CIS) with a per-capita income of just $1,040 per year, Tajikistan heavily relies on the remittances sent back home by Tajiks working abroad, mostly in Russia, and the sale of a few major export commodity such as aluminium and cotton. Things have turned south for both remittances and export sales over the last months.

Remittances make up around half of the national GDP, turning Tajikistan into "the most remittance-dependent country in the world", to put in in the words used by the World Bank report. As Western sanctions and weakening oil prices took a toll on the Russian economy and the ruble, the flow of remittances has decreased for the first time in five years. The drop was only moderate in the first half of 2014 - down 2% on year according to

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Photo: Nikita Maykov


Local authorities are also trying to put Tajikistan on the map of foreign investors. A first-ever investment summit was held in mid-October in Dushanbe, attracting some 500 investors, state officials and representatives of leading international financial institutions. The Chinese have already pledged some $6bn for a gas pipeline, cement plants and a railway over the next three years - a game-changing sum for the $8.5bn economy. Authorities now hope that others will follow suit.

directed to improving banking supervision and registration of collateral; a number of measures to overhaul the troubled power sector in the country, which suffers from recurrent power shortages, have been approved too; and the government has teamed up with the World Bank's International Finance Corporation (IFC) to improve the country's hardly appealing business environment - Tajikistan ranked 143rd globally out of 188 in the World Bank's "2014 Doing Business" report.

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expectations," Dossayev was quoted as telling MPs by Tengrinews.

He said that nominal GDP was expected to total KZT40,959.1bn ($226.3bn) in 2014, KZT1,336.4bn ($7.4bn) more than the earlier figure. Updated GDP figures show that the economy was valued at KZT35,275bn ($229bn) in 2013, KZT1,754bn ($11.4bn) more than the earlier thought. The discrepancy in the dollar value of GDP is explained by a 19% devaluation of the national currency, the tenge, in February.

The delays in industrial oil production in the giant Kashagan field in the Caspian Sea dashed the government's plans to increase oil output to 83m tonnes this year. It now expects it to stand at last year's 81.8m tonnes. This plus sluggish global demand for metals forced the government to reduce forecasts of industrial output growth from the earlier 2.7% to 0.8% in the amended budget. The government also lowered forecasts of Kazakh exports by $5.3bn to $81bn and imports by $3.6bn to $48.6bn.

The government expects that lower-than-expected foreign trade volumes will mean a shortfall of KZT225.3bn ($1.2bn) in VAT on imports and KZT173.8bn ($960m) in taxes on foreign trade and operations.

Due to the lower-than-expected revenue, expenditure was reduced by KZT259.5bn ($1.4bn) but an increase of KZT325bn ($1.8bn)

Kazakhstan amends budget and plans spending cuts as oil price falls

bne

The lower chamber of Kazakhstan's parliament, the Mazhilis, has approved government plans to amend the central budget for 2014-2016 due to the lower oil price and poorer-than-expected economic performance this year so far.

At a plenary session on October 29, Kazakh MPs agreed to reduce expected revenue by KZT420.7bn ($2.3bn) to KZT3,940.4bn ($21.8bn) in the 2014 budget. They also agreed to increase the budget deficit by KZT164.2bn ($900m) to KZT1,082.8bn ($6bn), or 2.6% of forecast GDP in 2014 against an earlier target of 2.3% GDP.

Presenting the amended budget at the Mazhilis, National Economy Minister Yerbolat Dossayev explained that the preliminary results of economic performance in the first three quarters of 2014, trends on the global raw materials markets and updated 2013 GDP figure had prompted the amendments. The 2014 budget envisages the global oil price at $95 per barrel but a recent drop in the oil price to a four-year low of $81 per barrel gave the government the jitters.

The government kept the forecast oil price at $95 per barrel in the 2014 budget, but changed a forecasted increase of 4.1% in metal prices to a drop of 6.3% in 2014 compared with 2013."With account of the current situation in the economy, a real GDP growth is forecast at 4.3%, 1.7% percentage lower than the earlier

Eurasia


replenishing government reserves to the tune of KZT64.1bn ($340m), state purchases and government programmes to the tune of KZT68.5bn ($378m) and amount of budget funds worth KZT93.5bn ($517m) allocated but not expected to be spent (due to the cumbersome tendering process). At the same time, the government gave the reassurance that spending on social programmes would not be affected by the budget sequester.

At a meeting with the public in Astana on October 22, President Nursultan Nazarbayev said due to the worsening economic conditions in the global economy Kazakhstan was going to face two or three years of hardship and needed to trim its public spending. "However, wages, pensions and social benefits should be maintained at the current level," Nazarbayev said.

in transfers from the National Oil Fund and an increase in budget deficit means budget spending was increased by KZT65.5bn ($362m) to KZT7,190.3bn ($39.7bn).

All revenue from the extractive sector is accumulated in the National Oil Fund from where the budget receives guaranteed transfers worth $9.5bn (KZT1,480bn in the original draft of the 2014 budget). The February devaluation means the budget will receive additional funds (KZT325bn) due to the difference in the exchange rate.

The falling oil prices are also forcing the government to redraft the budget for 2015-2017 with the forecast oil price of $80 per barrel.The government said budget spending cuts would concern servicing public debt and

Eurasia






Eurasia

CEE banks pull through stress tests largely unscathedbne

Central and Eastern European banking systems are in a fit state to stand up to another bout of crisis, stress tests released on October 26 predicted. Overall, 25 of the 130 lenders that were tested failed, but the problems are very limited, providing a shot of confidence for the EU economy.

The weak economies dubbed the PIIGS were back to haunt regulators as they led the list of problematic banks in the asset quality review (AQR) by the European Central Bank and the European Banking Authority's (EBA) stress tests. Of the 25 banks whose liquid capital falls below the limits required to withstand the crisis scenarios, nine are Italian, while Greece and Cyprus have three strugglers each. Banks in Ireland, Portugal and Spain, as well as Belgium, Germany and France, were also earmarked.

Out of the 19 Eurozone banking systems tested (Lithuania, which joins the single currency zone next year was included), only the Italian, Greek and Cypriot systems failed to reach both the minimum base and adverse case thresholds. Those lenders that fail will need to raise capital, either via divestment or additional share issues. The total needed is estimated at almost ¤10bn.

Meanwhile, the Slovenian system failed the adverse scenario. Slovenia, which last year was battling to avoid an international bailout provoked by spiralling bad loans in the state-owned banking sector, was the only CEE country to see any of its lenders fail. The Bank of Slovenia quickly insisted both banks, NLB and NKBM, will cover the shortfall from profits, having boosted their financial performance this year.

Worries that Erste the second largest lender in CEE region, would fail the test proved unfounded. The concern was that non-performing loans in

Southeast Europe and losses in Hungary might have hit its capital buffers. That could have provoked worries over the stability of the sector across CEE.

However, the only Austrian bank to fail was the rump Volksbanken, which was not a great shock. An Austrian banking source told bne earlier in October that the lender, formerly Austria's fourth largest, was most at risk. However, it sold its large CEE bank network to Russian state giant Sberbank in 2012, and continues to seek to spin off smaller businesses such as insurance across the region. The Vienna-based Sberbank Europe (formerly Volksbank International) and fellow Russian state giant VTB Bank will have to pass the ECB tests from next year.

The tests are a prelude to the ECB's takeover of supervision of the Eurozone's largest lenders on November 4. Yet despite over two dozen banks reported to be set to struggle to maintain capital in the face of simulated stress, only 13 will now need to raise additional capital, the ECB reported. The other 12 already raised ¤8.9bn this year in a bid to shore up their buffers. The tests suggests the rest need to find ¤9.5bn.

Analysts at Daiwa suggest the tests should help boost confidence across the EU. "The results of the exercise were largely positive in terms of their assessment of the assets and capital of European banks, which along with the recently introduced ECB liquidity support and asset purchases, should help reduce further obstacles to the credit supply channel. But a marked acceleration in bank lending cannot be expected against a backdrop of weak demand growth. As such this is a step towards the rehabilitation of the euro area economy. But it is no panacea."

Central Europe


Central Europe

Enel insists bids on the way for Slovak power utility

bne

Enel expects to receive binding offers for Slovanske Electrarne (SE) within a month, its CEO insisted on October 30. That looks optimistic, as the list of potential suitors for the Slovak utility looks to have dwindled in the face of the government pressure to grab a bigger say or stake, geopolitics, and a problematic nuclear project.

Speaking at an Italian parliamentary hearing, Francesco Starace, head of the Italian energy group, said Enel still expects binding offers for SE by the end of November, according to Reuters. Enel announced in July plans to sell its 66% stake in the national utility, as well as Spanish and Romanian assets, by the end of 2014 in order to ease its debt burden.

However, initial expectations of a highly competitive race for SE have disappeared, with Russian potential suitors falling victim to geo-political realities, and others talking down the prospects of an acquisition.

In the immediate aftermath of the announcement that SE would be sold, the Slovak media was awash with suggestions that a Russian buyer was lined up. A surprising deal that saw Russian state-owned banking giant Sberbank hand SE a giant ¤870m loan the previous month drove the speculation, with a little help from Bratislava's clear sympathies with Moscow as Russia's relations with the EU and US deteriorated.

However, Bratislava has been brought back into line as the Ukrainian crisis worsened and

a Russian purchase is now out of the question. Meanwhile, suitors from the West are scarce to say the least, with European power markets in a dreadful state and recession fears once again stalking the Eurozone.

The Slovak state, which holds 34% in SE, has not helped whip up interest either. Prime Minister Robert Fico - a stanch opponent of privatisation - has made it clear that Bratislava wants more say in SE. Economy Minister Pavol Pavlis reiterated in mid-October that the government would like to buy at least some of the Enel stake, although the empty state coffers would make that challenging.

At the same time, the Italian group's privatisation of SE in 2006 was put under investigation almost immediately following the sale announcement. That pressure likely stems from the running battle Fico has fought with Enel over the delayed and over-budget project to expand the Mochovce nuclear plant.

All of which has left Czech utility CEZ as the frontrunner. However, with the state-controlled Czech company now looking likely to resurrect a ¤10bn tender to expand its own nuclear capacity, and still licking its wounds over a botched attempt in the last decade to build itself into a regional giant via acquisitions, it has appeared to be backing off from previous enthusiasm for the deal.

Reiterating recent comments on the complexity of SE's assets, CEZ CEO Daniel Benes told Reuters in comments published on October 24


Central Europe

that the Czechs see significant risks attached to SE.

"I don't think it is quite likely that CEZ would submit a bid for the 66% stake in Slovenske Elektrarne," Benes said, "and take over Enel's role without any additional solution of [the] risks. It is unlikely CEZ would do that."

The CEO also said CEZ - which has also come under pressure from Andrej Babis, the power finance minister who effectively took control of

the company's board in September - won't bid against the Slovak state. Instead, he suggested that Enel may have to stay in Slovakia, given the complexity of the Mochovce project.

All of which may leave Czech-based energy group Energeticky a prumyslovy holding (EPH) as the dark horse. The holding, which is controlled by closely-held Slovak financial group J&T, has a voracious appetite for energy assets in the region, and most importantly, appears to have found a way of working in cooperation with the prickly Fico.






Serbia not balancing EU and Russia, insists Vucic

impose sanctions. “We are not balancing,” Vucic insisted to bne. “As I said in front of Vladimir Putin – not because I’m here [in the UK], our strategic goal, our strategic aim, is our EU path. And I do not lie to anyone, all the politicians from all over the world know that.”

South Stream would carry Russian gas to Central Europe via Bulgaria and Serbia, bypassing Ukraine – the traditional transit country for Russian gas exports to Europe but one Russia is trying to cut out of the trade. The EU has ruled that the pipeline in its current format breaks competition laws, and there have long been concerns that it would merely increase Europe’s energy dependence on Russia, rather than help diversify Europe’s energy imports as is Brussels’ stated goal.

South Stream had been progressing more quickly than EU- and US-backed rival pipeline projects, but the Ukraine crisis changed the equation. In August, Bulgaria reluctantly suspended work on the pipeline under substantial pressure from Brussels, having staunchly backed the project to the extent of redefining it as an “interconnector” rather than a “pipeline” in an almost comic attempt to circumvent EU legislation.Serbia has also stood by South Stream, but on October 8 Vucic admitted that “it makes no sense” for the country to start work on the project. Perhaps not coincidentally, that was the same day a European Commission report on Serbia’s EU accession process suggested that progressing with construction might harm the

Andrew MacDowall in London

Serbia is not attempting to balance EU ambitions with close ties with Russia, Serbian Prime Minister Aleksandar Vucic told bne, indicating he would toe the Western line when it comes to issues like halting the Russian-led South Stream gas pipeline.

Vucic, speaking to bne in London on October 29, strongly implied that Serbia would not progress with Gazprom’s controversial South Stream gas pipeline through the Balkans without EU consent, even though he admitted it might take eight years for Serbia to achieve EU membership.

“[South Stream] is between the EU and Russia – if they agree on this, we’ll have it, we’ll provide the project,” Vucic said. “If they don’t have that agreement, we are not going to harm anyone, particularly not our European friends. We made a good contract with Russia, but we did not start any construction.”

But two weeks earlier, Vucic had welcomed Russian President Vladmir Putin to Belgrade with great fanfare, and reiterated that Serbia would not impose sanctions on Russia over the conflict in Ukraine. Vucic and Serbian President Tomislav Nikolic spoke of long ties between Serbia and Russia, and Putin’s visit was marked by Belgrade’s biggest military parade for almost 30 years, ostensibly held on the 70th anniversary of the city’s liberation by the Red Army.

Serbia is seeking to boost trade ties with Russia, despite coming under pressure from the EU to

Southeast Europe


Economics. “While Russia may not want its immediate neighbours in the EU, it does help to have friendly countries in the club,” Ker-Lindsay says. “Moscow will therefore be keen to see Serbia advance along the accession path. But this is precisely what many EU members will be worried about. They will be asking themselves whether they will be letting in a Russian Trojan Horse. Unless relations between Russia and the EU improve during Serbia's accession process, Belgrade may find itself facing calls to prove its loyalty to the EU or face the possibility of having its membership blocked.”

country’s membership prospects.Nonetheless, Vucic and Foreign Minister Ivica Dacic, who are seen by some as having long had a close relationship with the Kremlin, have both expressed hopes that South Stream can get back on track. Many in the region expect the project to restart if and when the Ukrainian crisis starts to fade – and a bitter winter with gas shutoffs could expose Europe’s lack of options.

Nonetheless, Serbia’s close relations with Russia may affect attitudes towards it, says James Ker-Lindsay, senior research fellow focusing on Southeast Europe at the London School of

Southeast Europe






Romanian PM favourite to win presidential election

He was selected as the candidate for the ACL, formed earlier this year through the merger of Romania’s two main centre-right parties, the National Liberal Party and the Democratic Liberal Party, with the aim of fielding a single candidate against Ponta.

Ponta’s camp have found relatively few grounds to attack their rival, focussing mainly on his personal wealth. Most recently, Ponta supporters criticised Iohannis for owning six houses, to which Iohannis responded on Realitatea television on October 27 that Ponta owned seven properties.

The pre-election period has been dominated by a series of breaking corruption scandals that have hit politicians from both left and right.

A scandal concerning the sale of software licences and IT equipment to schools - dubbed the “Microsoft case” - has cast suspicion on top politicians and businessmen, with no less than nine former ministers named by the Anti-Corruption Directorate (DNA) as suspects.

Ponta has carried out a series of reshuffles within the PSD in the run-up to the election, both to secure his position against potential rivals and to improve its reputation by purging members hit by scandal. On October 21 the party’s governing body said it was suspending three high ranking members, national executive committee member Sebastian Ghita and vice presidents Dan Sova and Marian Vanghelie, from their positions within the party. “I auto-suspended them,” Ponta told a

bne

Romania’s Prime Minister Victor Ponta is widely expected to win the country’s November 2 presidential election, which follow a campaign dominated by personal issues and corruption scandals, with economic policy taking a back seat.

For several months this has clearly been a two-horse race with Ponta and the centre-right Liberal Christian Alliance (ACL) candidate Klaus Iohannis well ahead of any other candidates.

Polls indicate that Ponta will not gain sufficient votes for a first round victory on November 2, but the PM is expected to defeat Iohannis in a run-off on November 16.

Recently, Iohannis has gained somewhat on Ponta, though the latter is still expected to take 40% of votes in the first round to his rival’s 29%, according to the latest poll published by CSCI/InfoPolitic on October 30. No other candidate is expected to take over 8% of the vote.

The current popularity of Ponta and his Party of Social Democrats (PSD) stems largely from the softening of earlier austerity cuts since the party came to power in the 2012 parliamentary electionsIohannis, meanwhile, has a much lower national profile than Ponta. One of the ethnic German minority present in Transylvania since the 12th century, and the mayor of the provincial town of Sibiu, he is running mainly on his clean reputation. He has been mayor of Sibiu since 2000, being re-elected by landslides in both 2004 and 2008 as he turned the town into a prosperous tourist hub.

Southeast Europe


always uneasy two-year cohabitation between the two. One of Ponta’s first actions after becoming prime minister in 2012 was to launch an attempt to have Basescu impeached by national referendum.

While the attempt was unsuccessful, it drew sharp criticism from the EU and has also raised questions about Ponta’s respect for the rule of law and the justice system should he become president. There are fears that Ponta could follow Victor Orban, prime minister of neighbouring Hungary, or Turkish President Reycep Tayyip Erdogan in the Putinisation” of another European country.

press conference, citing their alleged involvement in various scandals.

Basescu, a long-time political foe of Ponta’s, also increased the pressure on his expected successor by accusing him on October 14 of being a former spy. “Victor Ponta must admit that he was an undercover officer of SIE [Foreign Intelligence Service], between 1997 and 2001," Basescu said in an interview with Realitatea. Basescu claimed the news was “a reality which I am ready to prove". Ponta has denied the allegation.

If, as is widely expected, Ponta succeeds Basescu, this will bring an end to an often acrimonious,

Southeast Europe






Opinion

Liam Halligan in London

It’s 25 years since the fall of the Berlin Wall. Billed as the most important political event of the second half of the 20th century, the collapse of Communism has been much commented upon but rather less widely understood.

Far from marking the “end of history,” the demise of state planning in Russia and Central and Eastern Europe, and the subsequent dissolution of the Warsaw Pact, ushered in an era when history significantly sped up. Developments that took decades or even centuries in other parts of the world, have been compressed into just a few tumultuous years.

As the Wall fell in November 1989, the entire Soviet power structure – with its closed borders, economic oppression and ghastly mind-controls – started to come down with it. A welter of previously closed, moribund economies across CEE and the Commonwealth of Independent States (CIS), spluttered into life, enduring much hardship and uncertainty, yes, but clearly lurching forward.

Diverse nations, lumped together as the “Eastern bloc” in the news bulletins of my youth, began to open up and adopt free markets. Controlled prices were liberalized and voucher privatizations spread, constitutions were hastily re-written and companies began to incorporate.

Above all, across the region people previously living under communism, in their hundreds of millions, were suddenly able to work for

themselves, get a normal job, do business, travel, consume foreign media, express themselves, be part of the rest of the world. The “transition” was confused, chaotic, often deeply unfair and, in many countries, still has a long way to go. But, on balance, it’s extremely good news economic and political freedoms have been extended and totalitarian nostrums smashed.

Despite all that, Fukuyama’s “end of history” thesis, coined the year the Berlin Wall fell, was still glib, triumphalist nonsense. The message from this Harvard-trained Japanese-American academic was that now communism is over and the US has won, we’re on a fast-track to liberal democracy across the globe, an Anglo-centric nirvana where “the Western model” will reign supreme.

It hasn’t happened like that. A quarter of a century after the demise of an essentially bi-polar world, with two superpowers on either side of an Iron Curtain, we’ve ended up with something more complex. History in our new multi-polar, globalized age isn’t only faster and less predictable, but a lot more unstable. The West’s enemies are now numerous and extremely hard to identify, clustered under headings ranging from “terrorists” and “separatists” to “radical Islamists.”

While the ideological battle of the Cold War is over, it strikes me the true battle has only just begun. It’s no longer Marx versus the market, but a sustained struggle between the

INVISIBLE HAND: West-is-best delusion lives on 25 years after fall of Berlin Wall


Opinion

determination of Western hawks to maintain and sustain our economic and political hegemony, pitted against the determination of non-Western and increasingly powerful nations to assert themselves, finally taking full charge of their own natural resources and affairs.

As such, we now see the West directly involved, or pulling the strings, in a quite staggering range of crises and conflicts, not least in Iraq, Syria, Gaza, Libya and – in a (sort of) Cold War throwback – East Ukraine. All these tragedies, and thousands of related deaths, demonstrate that globalization hasn’t brought global governance. Since the Berlin Wall fell, a pattern of officially-recognized, easily-explained conflicts has given way to an anarchic, belligerent mess.

Politically-speaking then, Fukuyama’s “end-of-history” thesis could hardly have been more mistaken. But it was wrong economically too. For while state-planning has thankfully retreated and property rights have spread, the “Western model” most certainly hasn’t won. On the contrary, it’s suffering from a deep crisis of credibility.

Back in November 1989, songs of freedom rang out over Berlin's Alexanderplatz. Thousands of scruffy students braved the cold to smash down the Wall. I was proud to be among them, having absconded from university in the UK and hitchhiked to Berlin.

I vividly remember during those heady early days of change, and in the months that followed, taking part in numerous discussions in Berlin and elsewhere about what would happen next. There was a near-universal opinion among mainstream Western academics and commentators, almost an imposed blanket view, that we were about to see a worldwide upsurge of capitalism and liberal democracy. It wasn’t just Fukuyama arguing that Western economics and its associated lifestyle was the final destination of mankind’s social and political evolution. He just seemed to get the most publicity.

What we’ve seen, though, is that all kinds of countries have taken all kinds of economic routes – part capitalist, part state-planned – combined with democracy in various guises, from universal suffrage to none. It’s not true that nations across the CIS and beyond – with their own distinctive histories, cultures and codes of moral conduct – must go through some kind of replica Western European or American historical experience to achieve economic and political success. That was always an absolutist, nonsensical argument, however fashionable it was back in 1989.

The non-Western world, despite developing its own economic and political models, is catching up fast. In 1999, after a decade of traumatic transition, Russia’s GDP per head was roughly a quarter that of the US. Today, the figure is almost a half. Kazakhstan’s income per head was just a fifth of the US' 15 years ago. This year, it’s two-fifths. In Poland the same proportions are 30% and 44%. In China, they’re 8% and 22%.


Opinion

These numbers are clearly dependent on many factors – including starting point, resource endowments and population growth. But they show that while these four nations have each achieved an impressive partial “catch up,” they’ve used entirely different political and economic means to do so.

Russia’s model, while far more democratic and market-oriented than most Westerners give it credit for, still involves significant state intervention. China and, to a lesser extent, Kazakhstan, meanwhile combine rather vibrant and increasingly modern market economies with authoritarian dictatorship. Poland, by far the most “Western” of the countries mentioned above, while growing quite well, has actually staged the least impressive economic performance.

I’m not saying liberal democracy isn’t a good thing. But non-Western nations aren’t petri-dishes for Western social scientists and ancient societies aren’t made up of laboratory rats. Various emerging markets, across CEE/CIS and beyond are finding their own way, with no inclination to emulate the route we took – and doing fine, thank you.

Why would they follow the West, anyway, when they’re now seeing where the Western model leads? The 2007 sub-prime crisis was self-imposed, as woefully under-regulated Western banks collapsed, sparking a systemic meltdown of over-leveraged equity markets, so exposing and then compounding the fiscal weaknesses of some of the world’s leading economies. We’ve responded not by fixing the underlying causes of the most catastrophic break-down of Western economics in 80 years, by making meaningful regulatory changes and getting our public finances in order.

On the contrary, we’ve extended and pretended, hosing down difficult decisions with virtually

printed money and sticking our heads in the sand. Across the “advanced world” inequality is now spiraling, as is political unrest. And what growth we have lately mustered is largely dependent on debt. Why would anyone emulate that?

I’m less worried about non-Western nations not following precisely in our footsteps than I am about growing signs of systemic East-West conflict. The end of Soviet Communism, combined with the earlier decolonization of Africa and Asia, has seen the creation of a group of emerging markets which, while diverse and with conflicts of their own, shares an extremely powerful economic and emotional interest in showing that the West can no longer assume to run the world.

Such nations now account for over half of global GDP, three-quarters of foreign exchange reserves and four-fifths of humanity. Their economies, while very far from perfect, are certainly much faster-growing, more dynamic and far less indebted than those of the West. That makes them far better able, in an increasingly unstable world, to endure global financial shocks.

Yet the West continues to snub such countries, printing money like crazy and imposing self-serving currency depreciations, excluding them from the higher-echelons of supranational institutions, promising to change voting quotas at the likes the International Monetary Fund but refusing to do so in practice. Then we scoff when Brazil, Russia, India and China – countries with a combined GDP now nine-tenths that of the US and EU combined – set up their own development bank.

The adoption of Fukyama’s absurd, egocentric West-is-best thesis was just about forgivable during the early flush of our Cold War victory. Twenty five years on, its enduring influence amounts to dangerous delusion.


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:InvestorRussia's Doing Business rating leaps to 62nd place thanks to new method bne

Russia's ranking in the World Bank's latest "Doing Business" survey has leapt from 92nd place to 62nd place out of 189. The jump was almost entirely thanks to improvements made by the World Bank in its ranking method, rather than anything Russia did to its business climate, but moving into the top third of the ranking will give Vladimir Putin's country a much needed image boost.

The new ranking in the report, "Doing Business 2015: Going Beyond Efficiency," places Russia for the first time in the top third of what has become a benchmark ranking of a jurisdiction's friendliness towards entrepreneurs

The new ranking sees Russia placed between Moldova (63rd place) and Belarus (57th place), with Ukraine languishing at 96th place. But there is a long way to go to catch up with the most progressive former Soviet countries: Georgia at 15th place, Estonia at 17th place, Latvia at 23rd place and Lithuania at 24th.

Hungary state energy champion looks to accelerate building South Stream Tim Gosling in Prague

Hungary wants to have its section of the Russian-led South Stream gas pipeline up and running within two years, according to the head of state energy "champion" MVM. The comments appear simply further provocation towards the West from Budapest.

"We could put shovel to dirt as soon as six months from now but we would like to complete the Hungarian stretch by 2017," MVM CEO Csaba Baji told Napi Gazdasag, according to Reuters.

MVM owns 50% of the Hungarian stretch of the project, which is designed to bypass Ukraine's transit system to carry 63bn cubic metres a year of Russian gas under the Black Sea and to Austria's Baumgarten gas hub. Amidst the poisoned relations with Moscow over its role in the Ukraine crisis, Brussels is seeking to raise energy diversity - especially in CEE - has clamped down on South Stream, which it says breaks EU rules on liberalisation.


Swiss-based oil trade Gunvor, led by the Swedish trader Torbjorn Tornqvist, is to divest its assets in Russia, it said in a statement October 26. "Since a significant portion of our investments are in Russia, over time Gunvor will be looking to sell selectively part of those assets. We do not expect this will have any impact on our existing trading activities in Russia," the company said.

Currently, Gunvor owns stakes in the Baltic oil terminal Ust-Luga, and the Black Sea terminal of Novorossiisk.

Gunvor said it would divest its assets in accordance with the sanctions regime imposed on Russia by the West: "We will be undertaking this process in an orderly and responsible manner, adhering to all relevant sanctions considerations," it said in the statement.

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.

Gunvor to divest from Russia

bne

PPF boosts stake in 02 Czech Republic to over 83% Intellinews

Czech investment and financial group PPF has boosted its stake in telecommunications company 02 Czech Republic to more than 83%, CTK news agency reported citing a PPF filing to the central bank.

PPF initially bought a 65.9% stake in 02 Czech from Spanish Telefonica for ¤2.467bn in January 2014. Then it bought a further 7.2% in a buyout bid. The latest acquisition included shares of UniCredit Bank, which cut its stake in 02 Czech to 0.13% from 5.68%, Reuters reported citing a central bank filing.

Thus PPF is close to getting 90% of the telecommunications company, a move that would allow a squeeze out of minority shareholders.

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:BankerAustria's RBI eyeing CEE market exits bne

Raiffeisen Bank International (RBI) could exit some markets, the head of Emerging Europe's second largest lender said on October 27. Hungary and Ukraine are the obvious candidates, if the Austrian lender can escape relatively unscathed.

RBI has put some markets "on trial," Karl Sevelda said in a conference call according to APA. The discussion came after parent RZB comfortably passed the European Central Bank's stress tests.The CEO said the banking environment remains challenging, and that RBI will look to shed businesses that are struggling for profitability or tying up capital. While he offered little detail on which markets the bank could look to exit, he said earlier this month that the bank was operating healthily in every one of its markets except for Hungary and Ukraine.. Sevelda reiterated that those two markets are the main contributors to expectations of a loss in 2014 of up to ¤500m.

Austria’s Hypo Alpe to Sell Balkan Banks to Advent, EBRD Bloomberg

Hypo Alpe-Adria-Bank International AG, the bailed-out Austrian lender being broken up, agreed to sell its Balkan banking unit to U.S. private equity firm Advent International Corp.

The sale depends on approvals from the Austrian government as well as Advent and its co-investor, the European Bank for Reconstruction and Development, Hypo Alpe said in a statement. Hypo Alpe will continue to extend 2.2 billion euros ($2.8 billion) of loans to the division after the sale.

Hypo Alpe, which expanded rapidly into former Yugoslavia in the 2000s with the backing ofAustria’s Carinthia province, was nationalised in 2009 to avert its collapse. It has cost Austrian taxpayers ¤5.5bn since, and more is still expected to be needed to fund its wind-down. The sale of its operating businesses was required by the European Union in return for the state aid.



Weekly Lists

Hungary central bank holds rate steady and vows no change to 2016 Tim Gosling in Prague

The Hungarian central bank left interest rates on hold as expected on October 28. It pledged to keep monetary policy at the current loose level until the end of 2015 to combat deflation and slowing growth, but suggested it has no intention to offer further easing despite worries that growth and deflation will deteriorate.

With recession fears rising once again in the Eurozone, Hungary's economic recovery is stuttering and inflation remains below target. That has seen speculation rise that the Magyar Nemzeti Bank (MNB) is pondering a return to easing. However, for now it is keeping rates on hold at a record low 2.1%, where they have stood for the last three months. Before that, the central bank had slashed rates by 490 basis points in a 24-month easing cycle.

The decision to keep rates on hold was in line with recent efforts by central bank officials to temper rising speculation of a return to easing. Deputy Governor Adam Balog pledged earlier in October that rates will remain unchanged until the end of next year, with the MNB looking to hit its 3% medium-term inflation target.

Russian bill on flight capital amnesty submitted to the State Duma RAPSI

Senators Konstantin Dobrynin and Yury Biryukov have submitted a bill to the State Duma, Russia's lower parliament house, on a flight capital amnesty, to be effective from January 1 to August 31, 2015. The bill would set a 2.5% tax on repatriated capital.

The bill’s authors, who analysed foreign experience, propose setting a 2.5% tax on the returned capital. They write that in the first three months of 2014 legal capital was estimated at $200bn at the least, and that the year-end figure, including flight capital, could reach as much as $1 trillion.

“As a result of the amnesty, at least 10% of flight capital or approximately $100bn would return to Russia. The 2.5% tax on this sum would bring over $2bn to the state budget,” they said.

bne:Credit



Court orders Sistema to return Bashneft to state bne

Sistema, the Russian telecoms and oil holding, must return oil company Bashneft to state ownership, Moscow's commercial court ruled on October 30 in a hearing that lasted just 90 minutes. The court has not yet presented its reasoning behind the decision, and Sistema has made no statements about lodging an appeal, for which it has a month.

The lawsuit brought by the prosecutor general argued that Bashneft's shares had been illegally privatised in 2001-2002, and that Sistema had known this when acquiring the assets in 2009 for $2bn. Bashneft production and refining assets are located in Bashkortostan, and the fact that the son of the republic's president ended up as owner of entities originally controlled by the state strongly indicated corruption. The prosecutor general argued that Sistema had known of this fact when acquiring the company.

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Bucharest exchange aims to catch up with CEE heavyweights Clare Nuttall in Bucharest

A series of IPOs of state-controlled power companies has put the Bucharest Stock Exchange’s market capitalisation ahead of the Budapest exchange’s for the first time. The Romanian exchange is now setting its sights on overtaking Prague.

The Bucharest Stock Exchange (BVB) picked as its model the region’s most successful exchange, the Warsaw Stock Exchange (WSE). In July 2013, the BVB recruited former WSE chief executive, Ludwik Sobolewski, who headed the Polish exchange for seven years. “We convinced him to take this challenge... With his experience, he is trying of course to copy and paste good things from Warsaw but also to innovate,” Lucian Anghel, president of the BVB board of directors and CEO and president of the BCR Pensii management board, says in an interview with bne.

Anghel believes that the BVB is currently where the WSE was a decade ago, and that Romania “could be a second Poland” in terms of the successful development of its capital market. “We planted some seeds, and will benefit in the next three to five years. We are still at the beginning but the snowball has started to roll,” he says.

bne:Stocks


bne:Newspaper - October 31, 2014

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Transcript of bne:Newspaper - October 31, 2014