The Putinisation of Europe

Inside this issue:
25 years after Mauerfall
Russia's economy
is in the toilet
Critics deride Hungary's
Potemkin economy
November 2014
www.bne.eu
Breaking the Bank Asya
in Turkey
Special Report
Invest in Belarus
The Putinisation
of Europe
bne November 2014
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COVER STORY
6 The Insiders
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CENTRAL EUROPE
30 Property restitution haunts
Warsaw
8 The Putinisation of Europe
14 25 years after Mauerfall
32 Interest piqued in CEE's
riskier property markets
16 Perspective
34 Good EU citizens
17 Chart of the month
35 CEZ plays "double or quits"
36 English lessons for Czech
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18 Ukrainians elect proEuropean parliament
19 Poland's patience with
Ukraine begins to fray
20 Jim Rogers calls West
"foolish" and invests again
in Russia
38 Clouds gather over Poland's
economy
39 Erste creates new CEE bond
indices
40 Government critics
deride Hungary's Potemkin
economy
42 Cooperation not on the radar
22 Russia's economy is in the
toilet
25 Russia shale-acked
26 Another voice silenced in
Russia
28 Crimeans compete for best
Russian wine title
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Contents
46
I5
59
70
SOUTHEAST EUROPE
EURASIA
OPINION
44
Breaking the Bank Asya
in Turkey
52
The peril of using bikes to
bury Borat
64
The war that dare not speak
its name
45
An investigation ends but
questions begin
53
Kashagone
66
West-is-best delusion
lives on
55
46
Bulgaria’s agony continues
Russia rekindles interest
in Trans-Mongolian Railway
68
47
Bosnians to wait for
progress on economy
57
Uzbekistan cottons on
to criticism
Why a shrinking Russian
workforce might let Putin
off easy
70
49
Albania’s central bank on
trial
59
Baku’s European Games
Russians march for peace
in Ukraine
61
Life in Russia with $80 oil
Bumpy road for investors
in Romania
Tajikistan's investment story
is a hard sell
72
51
63
Not-so Great Aral Sea
SPECIAL REPORT
Follow us on twitter.com/bizneweurope
74
Invest in Belarus
82
UPCOMING EVENTS
6
I The Insiders
bne November 2014
THE INSIDERS:
Has the ruble fallen
too far?
Peter Szopo of Erste Asset Management
R
ussia’s economy is under pressure, the most salient
sign of this being the decline of the ruble.
The Russian currency lost nearly 26% of its value against
the dollar over the past 12 months (to mid-October). To
some degree, the ruble’s devaluation reflects the general
strength of the US currency, which gained almost 7% over
the same period on the back of the US Federal Reserve’s
switch to a tightening bias and the robust economic data
flow (which only suffered temporarily from seasonal
effects in the first quarter). In fact, the Russian currency
was already weakening at the beginning of 2013, but last
year it still moved mostly in line with other emerging
market (EM) currencies against the dollar. Since the
beginning of 2014, however, the ruble also has decoupled
from its EM peers, losing 17% relative to a GDP-weighted
currency index covering 23 emerging markets (see chart 1).
Current macroeconomic imbalances alone do not explain
the ruble’s slide. In 2014, Russia’s combined current
account and budget surplus is expected to exceed 3% of
GDP. The country is in a completely different situation
compared to other ‘fragile’ economies – originally there
1
Chart 1. RUB/USD vs. EM FX index (Jan 2010 = 100)
were five, but the number seems growing – which have
been characterised by a combination of massive current
account and budget deficits, high debt and/or significant
refinancing requirements (see chart 2; note that Ukraine
and Argentina, whose currencies devalued by around 60%
since May 2013, are not shown in the chart because the
data points would fall off the page).
Of course, the coincidence of the ruble’s decline with the
unfolding of the Ukraine crisis suggests some causality. The
"Current macroeconomic
imbalances alone do not explain
the ruble’s slide"
West’s sanctions are restricting the access of Russian banks
and other entities to international capital markets as well
as foreign investment in the country. A negative impact on
the currency is to be expected and sanctions are certainly
part of the story of why the ruble is heading south.
However, even if US monetary policy and geopolitical
factors have depressed Russia’s currency, the picture
remains incomplete without taking into account the key
factor driving Russia’s currency: the oil price. After trading
for more than three years mostly in a stable range of $105115 per barrel, the price of Brent dropped $30 per barrel
since the end of the third quarter, and is now at the lowest
level since December 2010. The ruble’s latest leg down
(-20% since June 30) was clearly triggered by the collapse
in crude prices.
Source: Bloomberg; GEMetrixx.
1) EMFX: Index of USD exchange rates of 23 EM currencies.
In an effort to untangle the various drivers of the RUB/
USD-rate, we estimated a regression based on monthly
returns from January 2010 to December 2013, using the
parameters of the regression to forecast the theoretical
forex rate changes for the first ten months of 2014. The
bne November 2014
Chart 2: Macro inbalances vs. FX
In other words, there is clear evidence
that the ruble is overshooting. This is
nothing rare in currency markets, and
is usually seen as a consequence of
different degrees of price flexibility in the real and the
financial sectors of the economy. In the ruble’s present
case the excessive devaluation is more likely the result of
the Ukraine crisis. The impact of sanctions and countersanctions, capital outflows, rumours (even if false)
of more bad things to come like capital controls, and
speculation about how the Russian economy will evolve
over the longer term are fuelling traders and investors’
expectations. In addition, the Russian Central Bank has
changed its approach and has allowed a higher degree
of currency flexibility than during previous periods of
turmoil.
deviation between the actual and the estimated devaluation,
ie. ruble movements that are not explained by the usual
fundamentals factors, are likely related to the Ukraine crisis
and its fallout. As explanatory variables we used in various
combinations the Brent spot price (or one-month futures),
the S&P industrial metals index, VIX, the gold spot price and
our own proprietary EM currency index.
The flipside of the argument above is that any signs of
a lasting de-escalation in Ukraine will likely trigger a
rebound in the ruble. As long as sanctions stay in place
– and there are strong reasons not to expect a reversal
anytime soon – the ruble’s upside is limited. However, an
appreciation of around 10% before year-end in response to
positive signals from the geopolitical front is realistic in my
view.
The outcome of this analysis (chart 4) suggests that based
on this year’s trends in oil and industrial metal prices as
well as considering the performance of EM currencies and
the risk backdrop (VIX), the ruble should have devalued by
about 11% year-to-date. In the first half of the year, oil was
stable and industrial metals, after a moderate decline, even
rebounded in the second quarter. According to the model,
the ruble should trade at rate of 36.4 to the US dollar, while
in fact it is trading close to 41 (mid-October), implying a
devaluation of 24% – more than twice as big as what can be
explained by the performance of the "usual suspects" like oil.
Of course, the usual caveat of "all other things staying
equal" applies. Unfortunately, they rarely do stay equal.
Arguably, the biggest uncertainty presently is oil. While
crude prices seem to approach both break-even points
of dollar shale-producers and fiscal break-even points of
producers in the Middle East, nobody knows how much
further the oil price will drop. $70 per barrel is in reach,
which – in the current environment – could push the ruble
easily down to 43-44 against the dollar. Thus, even seeing
the ruble overshooting does not imply that the pressure
will evaporate anytime soon.
Chart 3: RUB/USD vs Brent (USD/bbl)
Chart 4: RUB/USD - actual vs estimate
Source: Bloomberg; GEMetrixx.
Source: Bloomberg; GEMetrixx.
8
I Cover story
bne November 2014
The Putinisation of Europe
Cover Story I 9
bne November 2014
David O’Byrne, Kester Eddy and Nicholas Watson
W
hen Hungary’s Napoleonesque
prime minister, Viktor Orban,
declared in a grandiose speech in
July that Vladimir Putin’s Russia is a more
attractive political model than the liberal
democracies of the West, it confirmed
the worst fears of those who worry about
the dark night of fascism once again
descending on Europe.
taking root elsewhere in Europe. Orban
identified Turkey, but others are seeing
signs of it to greater or lesser degrees in
Romania and Bulgaria (both EU countries)
and EU wannabes Serbia, Macedonia
and Montenegro. While there are huge
differences among the leaders of these
countries, there are also some striking
similarities.
Those countries, Orban explained,
“capable of making us competitive
are not Western, not liberal, not
liberal democracies, maybe not even
democracies.” Instead, he picked Russia,
China, Turkey and Singapore.
What connects the leaders in these
countries is an idea that has taken root –
and articulated by the current editor of The
Economist no less in his book “The Fourth
Revolution: The Global Race to Reinvent
the State” – that the “21st century has been
Such a bald statement about something
that hitherto had only been discussed on
the fringes of the political discourse was
a gift to neoliberal Atlanticists who have
been warning of a growing trend in Europe
that bne identified in a piece about former
Ukrainian President Viktor Yanukovych’s
swing towards a Russian style of
management in 2010: “The Putinisation of
Ukraine”.
clinging onto power. December 2011 saw
100,000-strong crowds march in central
Moscow for the first time in nearly a
decade, but just two years on and Putin’s
popularity is near an all-time high even as
living standards begin to fall for the first
time; as of the last week of October, Putin
enjoyed an 86% approval rating, and even
in Moscow where opposition against him
is concentrated more than 60% want him
re-elected in 2018. The side effect of the
battle in Ukraine is that it has crushed
Russia's nascent opposition movement.
“The attacks against Putin are attacks
against Russia,” an influential speaker said
at this year's annual Valdai Club meeting
"What connects these leaders is an idea that
has taken root that the 21st century has been a
rotten one for the western model"
a rotten one for the western model.” As
Indian author and political essayist Pankaj
Mishra explains in an article entitled “The
western model is broken”, rather than
every society being “destined to evolve just
as the West did, where aspiring middle
classes created by industrial capitalism will
bring about accountable, representative
and stable governments… one event after
another in recent months has cruelly
exposed such facile narratives.”
in Sochi, where the press is forbidden from
naming speakers. "The Russian people
understand that if there is no Putin, there
is no Russia.”
But after failing to build up domestic
support, Yanukovych’s regime swiftly
collapsed in the teeth of protests against his
corrupt rule, the slumping economy and a
turn away from Europe, forcing him to flee
to Russia where he still apparently resides
(though bne sources reported seeing him in
Beijing this summer).
Thus the 21st century, rather than being
“the end of history” as political scientist
Francis Fukuyama declared in 1989,
is actually proving to be a period of
great economic and political upheaval
characterised by mass carnage. In such
uncertain times, people cry out for
stability – a desperate yearning that these
European leaders are successfully tapping
into. And with many predicting for Europe
a decades-long period of Japanese-style
stagnation, it’s likely this will prove fertile
ground for breeding more such leaders.
Goulash Putinism
Hungarians are wont to boast that
their country was the leading light for
political and economic reform in the
late communist era – enjoying the fruits
of a more liberal, so-called 'Goulash
Communism' for a decade or more pre1990.
A purer form of “Putinisation”, where
the emphasis is on establishing economic
stability as cover for the less liberal aspects
such as majoritarianism, appears to be
What particularly appeals to these
strongmen of Europe has been the
success of Putin's methods of maintaining
control in the face of opposition and thus
In Ukraine, what that entailed was a
creeping authoritarianism, nepotism
and cronyism, rampaging corruption by
connected elites, and a growing disregard
for civil rights and press freedom. However,
Yanukovych’s Ukraine lacked specifically
what had made Putin’s model so attractive
in the first place: economic stability. In
the decade after he came to power at the
turn of the millennium, Putin delivered
on 10-fold increases in many economic
measures, such as incomes, size of the
economy, stock market capitalisation and
international reserves.
Sanctions are justified by their Western
sponsors as undermining Putinism,
but Andrew Kuchins of the Center for
Strategic and International Studies in
Washington said at the Valdai Club: "It's
only encouraging Putinism."
Twenty years later, critics argue that with
the election of the first straight Fidesz
government under Viktor Orban, they
became the first of the new EU members to
disassemble those reforms and institutions
that were so painstakingly built up since
the collapse of communism, and usher in a
new era – which might be equally be called
'Goulash Putinism.'
10
I Cover story
Orban returned to power in 2010 – he'd
been prime minister in 1998-2002 as
head of a coalition – with a promise to end
corruption. Indeed, graft, along with the
“failed economic policies” of the previous
eight years of Socialist rule, were the
mantras repeated by Fidesz politicians and
its slavish right-wing media in the year up
to elections in 2010.
Orban returned to power with much
international good-will, certainly from the
European conservatives, most of whom
focused on his famous “Russians-go-home”
speech from 1989 rather than his clear
aversion to pillars of centre-right economic
policies, such as equity markets and
recognition of regulated price mechanisms
(eg. on household energy) in his previous
tenure.
But within weeks of taking the reins of
power – buttressed by an all-powerful
constitutional majority in parliament – his
“special taxes” were applied retroactively to
the financial, telecommunications, utilities
and retail sectors – all of which were
dominated by subsidiaries of large foreign
companies. The pretext was “the economy,
teetering on the brink of collapse, inherited
from the Socialists” – an argument that has
bne November 2014
become the common narrative, despite the
fact that economic growth had restarted in
the second half of 2009.
As the Orban-era progressed, opposition
politicians and intellectuals, and even
moderate Hungarian conservatives, have
becomes alarmed at what they see as the
prime minister's rushed drive to “renew”
the country. “Orban repeatedly used and
uses private members' bills to fast track
legislation: this is a parliamentary loophole
which avoids [otherwise mandated]
consultations with affected parties and
government bodies,” says Bernadett Szel,
co-leader of the green LMP party.
The democratic process was put into
reverse and affected all aspects of life:
Fidesz-loyalists were inserted into each
and every institution, including the
courts, state-controlled media, supposedly
independent watchdogs, churches,
education, security services and even the
constitution itself – a new 'fundamental
law' was rammed through parliament in
2011 with no cross-party consultation and
minimal parliamentary debate.
Meanwhile, as the European Commission
and Western powers, not least the US,
began to scrutinise and critique the mass
of legislation, independent media and
observers began to draw attention to what
they said was systematic abuse of power,
with large state contracts being awarded to
companies close to Fidesz.
In March, 2012, Transparency
International in Budapest warned in a
report that the “Hungarian state” had been
“captured by private interest groups” and
that there was a “symbiotic relationship
between the political and business
elite” and that doubts regarding the
genuine independence of watchdogs was
“common.” The government protested that
the report was not objective, and failed to
take notice of a host of recently introduced
anti-corruption measures. These included
a new public procurement act and a “far
more transparent” tendering process for
EU funds, along with Hungary joining the
International Anti-Corruption Academy for
the first time.
However, while such legislation looked
excellent on paper, a combination of
hard-working domestic journalists,
human-rights NGOs and several (often
naïve) whistle-blowers, continued to
reveal evidence of carefully planned,
Photo: Northfoto
bne November 2014
Cover story
"Hungary is the only country where one political
force could totally expropriate power"
mass cronyism. Examples included the
so-called "trafik fiddle" (the allocation
of licenses for newly created, statecontrolled tobacco retail outlets given,
in many cases, to Fidesz supporters) and
carefully selected farmers winning the
right to lease large tracts of state-owned
arable land at knock-down rates.
But what, for government critics, was
perhaps the most outrageous, in-yourface example of government hypocrisy
was the case of Andras Horvath, a
specialist tax inspector, who, after trying
to report his suspicions to the prime
minister's office – and failing to get a
result – went public in November 2013
with what he said was evidence of a
multi-million euro, cross-border VAT
fraud in foodstuffs such as sugar. Horvath
lost his job and faced police investigation
as a result.
In the same month, Balint Magyar, a
former liberal education minister and
leading dissident from the communist
era, published a book entitled “Hungarian
Octopus – the post-communist mafia
state”.
According to Magyar, the Orban
government, with its two-thirds
parliamentary majority, is unique within
the EU. “Even in the other EU postcommunist countries, Bulgaria, Romania,
Slovakia, etc, there is corruption, but
there is a system of rotation. Hungary
is the only country where one political
force could totally expropriate power,”
says Magyar. “Orban has power without
control."
The drift towards Putinisation reached
a chilling peak on October 17 when US
embassy in Budapest announced that
a group of Hungarians will be banned
from entering the US – mirroring the
personal sanctions applied to Putin's
inner circle – without specifying the
reason for the bans. However, the local
press reported that included on the list
are representatives of the National Tax
and Customs Administration (NAV) and
several Fidesz prominent figures. The
row has even pulled in Victoria Nuland,
the foul-mouthed US Assistant Secretary
of State for European and Eurasian
Affairs, who is better known for handing
out cookies on Maidan in Kyiv at the
height of the recent revolution there, who
met with Peter Szijjarto, Hungary’s new
minister of Foreign Affairs and Trade to
discuss the bans in October.
Nuland roasted Hungary in a speech at
the start of October for contesting liberal
democratic ideas, inflaming nationalist
sentiment and crushing the freedom of
speech. Replace the word "Hungary" for
"Russia" and she could have used the
same speech for having a go at Putin
again.
"Although the US has not revealed the
reasons behind the ban it has imposed,
it is most likely linked to the issue of
Hungarian companies avoiding paying
VAT in the foodstuff sector," wrote
Andrzej Sadecki in a note for the Centre
for Eastern Studies (OSW). "American
company Bunge, an important cooking
oil producer in Hungary, has been
complaining that this practice makes it
impossible for it to be competitive on the
Hungarian market. For several months
accusations have been appearing that
NAV is favouring companies linked with
the Fidesz business base."
Sultan of paranoia
Turkish Prime Minister Recep Tayyip
Erdogan is another that seems to have
been infected with Putinism. During
his first five years, Erdogan gave the
strong impression that his Justice and
Development Party (AKP) was both
capable and committed to forging a new
Turkey deserving of EU membership.
A far cry then from the increasingly
authoritarian and paranoid
administration seen today, where
officials openly blame rising opposition
on a shady "parallel state" groups and
I 11
Erdogan's top advisor warned that the
country's enemies were trying to kill
Erdogan using "telekinesis."
Many point to the Ergenekon and Balyoz
trials of 2008-12 as when it began to
go wrong. Those trials saw hundreds
of military and civilian officials jailed
on charges of plotting to overthrow the
government. Emboldened by having
effectively neutered the all-powerful
military, the government's attention
turned to civil society with many
previously independent institutions seeing
wholesale staff changes including the state
media, which became little more than a
government mouthpiece.
In the private sector, questionable
changes of ownership has seen many
media companies transferred to more
government-friendly owners. Other media
groups chose voluntarily to rein in their
coverage, with unexplained sackings of
writers and broadcasters openly critical
of Erdogan or the government becoming
a common occurrence. The fact that
the state was banging up journalists to
the point where Turkey now has more
journalists in jail than any other country
has also encouraged self-censorship.
The "Gezi" protests of mid-2013, in which
brutal police tactics left 11 dead and
around 8,000 injured, provided further
excuse for more brazen government
attacks on civil society, with Erdogan
choosing to blame social media and
subversive groups for inciting discontent.
On the latter he may have a point.
His acrimonious split with powerful
Islamic preacher Fetullah Gulen, whose
Hizmet movement is reportedly strongly
represented among senior police officials,
is widely understood to have resulted in
the police graft probes launched in late
2013, which forced the removal of four
senior ministers and the subsequent leaks
of dozens of recordings of phone calls
implying corruption at the highest levels of
government. In response, the government
ordered the blocking for several months
of YouTube and Twitter through which the
leaks were disseminated.
Cronyism and corruption have always
been a problem in Turkey, but even the
12
I Cover story
most cynical of observers have been
shocked both by the level of graft alleged
and the resulting wholesale purges of
alleged Gulen supporters in the police
and judiciary.
Russia is regularly described as a
kleptocracy, as part of the Putin model is
to keep a group of powerful state officials
close to him and allow them to enrich
themselves in return for loyalty. The word
has yet to be applied to Turkey, although
the distinction between the two countries
is getting increasingly difficult to see.
Markedly less shocking though has
been the subsequent shelving of the
graft probes and Erdogan's increasingly
strident rhetoric about the threat from
"the parallel state" – a euphemism
for Gulen supporters within the state
bureaucracy.
The threat of more damaging revelations
appears to have inspired recent draconian
new internet laws that allow websites
to be blocked within minutes without
a court order, as well as planned new
security laws which make it simpler for
police to put phone taps on suspects.
And here Erdogan has gone beyond
even Putin, who has tightened the state's
control over the internet but shied away
from actually closing down websites or
actually interfering with the freedom of
speech online by overt means.
All this should hurt Erdogan's popularity
at the polls, but doesn’t. Some 51% of the
vote that saw him installed as Turkey's
first elected president was significantly
higher even than the 43% the AKP
received in local elections in March.
Having made little secret of his ambition
to rule Turkey as an executive president
but lacking the two-thirds majority
in parliament needed to make the
necessary constitutional changes, it now
remains to be seen whether the AKP can
garner sufficient support in next year's
general election.
bne November 2014
On current showing, creeping
authoritarianism notwithstanding, few are
betting against them succeeding.
You looking at me?
In Serbia, the unrelenting march of
Aleksandar Vucic’s Serbian Progressive
Party toward being the preeminent
party of power is starting to cause some
concern.
Vucic has been carried to the top by a
wave of cynicism after years of isolation
and stagnation following the Balkan
Wars in the 1990s. Prime Minister
Vucic, a former information minister
for the former strongman Slobodan
Milosevic, is a man who gets things done:
establishing peace in Serbia’s former
province of Kosovo, arresting and jailing
the businessmen who have looted the
country, undertaking (or at least seeming
to) painful economic reforms.
Yet he is prickly and increasingly shows
certain Putin-like traits: berating
underlings on television in stagemanaged humiliation sessions; likes to
be caught on camera doing daring deeds
such as rescuing children in blizzards. Yet
this has inevitably led to some scorn and
ridicule, which either he or his flunkies
then overreact to, such as apparently
cyber-attacking websites, and pressuring
editors of newspapers and owners of
television stations to tone down the
criticism.
bne met him when he was deputy prime
minister in 2013 and found a young
man (he's 44) in a worrying hurry.
His manner of speaking, adopting a
grave tone when mentioning Kosovo,
declaring "I don't care" in a loud voice
with a steely stare when asked whether
the Serbian people might not sign up to
the pace of change he's pushing, are all
done in the manner of someone whose
character formation is struggling to
keep pace with his meteoric rise. Like an
extremely tall, slightly baby-faced Travis
Bickle practising phrases in the mirror.
"Erdogan has gone beyond even Putin, who has
tightened state control over the internet but
shied away from closing down websites"
Unlike Orban and Erdogan who are
fighting cultural wars at home and stoke
nationalism to undermine their enemies
at home and abroad, Vucic has so far
avoided making any conspirational
accusations against the EU and US. Quite
the contrary actually – Vucic is trying
to drag his country into the EU and is
juggling the difficult task of pleasing
traditional partner Russia and the US at
the same time.
With his attempts to reach out to old foes
in Kosovo and Albania, Vucic is clearly
being afforded some slack by the EU. But
Hungary and Turkey are increasingly
coming under the microscope in Brussels.
However, in general the EU is proving,
unsurprisingly, to be a paper tiger in
all these developments. In October,
Stefan Fule, the outgoing European
Commissioner for Enlargement and
European Neighbourhood Policy,
admitted to bne that the Commission had
not many powers to correct backsliders
such as Hungary, though said tougher
measures for future violators were being
prepared. “We should be first of all
stringent in our own cases to make sure
there is no double standards,” he said,
referring to the increasingly widespread
feeling that Brussels often tells its
members to do as it says, not as it does.
In October the European Parliament
held a debate late about the situation in
Hungary regarding democracy, rule of
law and human rights. Inevitably, this
ended up in a ill-tempered shouting
match as MEPs representing the Liberal
group, the Social Democrats and the
Greens raised questions concerning the
independence of the judiciary and media
freedom in Hungary, while MEPs of
the European People’s Party and other
conservative representatives accused the
left of mounting accusations against the
Hungarian government in light of their
successive defeats in Hungarian elections.
Given German Chacellor Angela Merkel's
Christian Democratic Union is a leading
member of that European People’s Party,
some would argue there's little chance of
the EU doing anything substantive about
Orban anytime soon. That is likely to only
encourage others to follow his lead.
Cover story I 13
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14
I Cover story
bne November 2014
25 years after Mauerfall
Nick Allen in Berlin
T
he busiest spot on the East Side
Gallery in Berlin is the mural
of Leonid Brezhnev’s full-on
fraternal kiss with East Germany’s Erich
Honecker, copied from a photo of the
leaders’ meeting in 1979.
Tourists admiring the artwork on this
preserved stretch of the Berlin Wall
invariably pose and lock lips here to giggles
and the flutter of iPhone cameras. No
matter that Gorbachev is often their best
guess when pressed to identify the kissers,
or that some might take it for a tribute to
the city’s prolific gay scene. This is simply
the hip Berlin vacation photo and quite
enough Cold War immersion before they
go in search of Hitler’s long-gone bunker.
Cold War kitsch
Okay, it’s easy to mock the tourists, and
maybe they do all Google the kiss when
they get home. But as Germany prepares
to mark 25 years since Mauerfall (the Fall
of the Wall) on November 9, it is curious to
observe Cold War history still in flux and
evolving into a gaudy parody of itself.
As the capital prepares commemorative
events like the 10-mile Lichtgrenze (light
border) of 8,000 illuminated balloons
marking the Wall’s route, the Cold War
tourism industry is also turning up the
heat, all the way to GDR-themed standup comedy acts. There are GDR-décor
hostels where you can slumber beneath
Honecker’s portrait, novelty Trabant
rides (East Germany's answer to the
Lada), ¤10 painted wall chunk souvenirs
(all genuine), and even Stasi "Funshirts",
complete with the emblem of the East
German internal security service that
crushed so many lives over an almost
50-year reign. “It’s a slap in the face
for the victims, as if someone would
go round in an SS T-shirt,” said Stefan
Weinert, a documentary filmmaker
whose new work "Die Familie" (The
Family) looks at the impact on relatives of
the deaths of 138 people shot dead trying
to escape from the GDR.
But serious reflection is there for those
who seek it. The Berlin Wall memorial
centre at Bernau Street, with photos of the
victims, preserved guard tower and "death
strip" between the parallel wall lines, is the
most sombre relic.
And while many Germans and Berliners
baulk at the prospect of another
anniversary splurge, it is part of a
continuing and painful healing process.
Only the passage of years has enabled
some people to tell their stories. Historians
are also still unearthing disturbing
revelations about the GDR period,
including Stasi collusion by respected
members of reunified German society.
bne November 2014
One man who was shot twice while
escaping from the GDR in 1963, Wolfgang
Engels, joined a recent protest over awards
conferred on a university rector who had
been revealed as an ex-Stasi informer.
Engels, 71, was shocked when elderly
colleagues of the academic came up to him
and hissed, “The Stasi should have taken
better aim that night”. “That these people
are still around us 50 years later and cling
to their old beliefs shook me more than
what happened in 1963,” he said.
Built and enlarged from August 1961, the
Berlin Wall was portrayed as an “antifascist barrier” intended to keep Nazis from
sabotaging the nascent GDR workers’ state.
In reality, it was meant to stop the outflow
of skilled workers and their families to the
West. Prior to construction, the flood of
refugees threatened to destroy the GDR’s
economy and overwhelm West Germany.
Some 3.5m people fled west before August,
including 100,000 in the first half of that
year.
But apart from surviving members of the
old guard, few people would argue today
that Mauerfall was a bad thing. Just as
Mikhail Gorbachev knew that the Soviet
Union had to reform in order to survive,
the stubborn refusal of the East German
regime to follow suit ultimately sealed
its fate.
Neighbours like Hungary and
Czechoslovakia decisively pricked the
bubble earlier in 1989 by opening their
borders, allowing thousands of East
Germans to flee to Austria. The demise
of the Berlin Wall and the inner German
border was only a matter of time.
But the irony lies in the true agenda of
Western leaders. While US President
Ronald Reagan publicly demanded that
Gorbachev “tear down this wall” in Berlin
in 1987, there was an underlying fear of
upsetting the European apple cart.
Stirring the embers
Nine months before the Wall fell, according
to Gorbachev’s adviser Anatoly Chernyaev,
Margaret Thatcher told the Soviet leader
that the UK and Western Europe were “not
interested in the unification of Germany”,
nor in “the destabilization of Eastern
Europe or the dissolution of the Warsaw
Cover story
Pact.” Reagan’s successor George H. Bush
felt the same, she assured Gorbachev.
Meanwhile, the economists are still
thrashing out how much reunification has
cost Germany since 1989. With estimates
running as high as ¤2 trillion, the issue
has triggered a fresh round of unseemly
squabbling in this commemorative year.
“Instead of recognizing and valuing this
as a great feat of solidarity that we have
accomplished in Germany, the discussion
is being reduced to a one-sided transfer
balance sheet,” Reiner Haseloff, the state
premier of the east German state SaxonyAnhalt, told media.
Nor does Cold War history end with the bill
for the momentous changes of the 1980s,
followed by the Soviet collapse in 1991.
Kremlin foreign policy is again turning
over the embers and sending tremors
westbound with the annexation of Crimea
and by waging a proxy war in Ukraine.
In April, two German tabloids sought to
do some historical revision by launching a
petition to remove two Soviet T-34 tanks
removed from their city centre pedestals
and relocated because of Russia’s actions in
Ukraine. “In an era when Russian tanks are
threatening free and democratic Europe,
we don’t want any Russian tanks at the
Brandenburg gate,” the organizers said.
The campaign failed after the German
government said it remained committed to
preserving Soviet war memorials.
I 15
There has been no such dedicated
preservation at the most iconic Berlin
Wall site of all, however. There is almost
nothing left of the original installations
at Checkpoint Charlie, with the last East
German watchtower being removed in
2000 to make way for an office block.
Now drenched in razzmatazz, the site’s
only authentic remaining relic is the
wooden checkpoint signpost. Still, like
the Socialist kiss, the details don’t seem
to matter much to visitors convinced
they are getting the ultimate Berlin Wall
experience.
But for all the shuddering about
commercialization, this could also be the
best affirmation of the hunger for freedom
that toppled the hated Wall after 28 years.
That you can ride an open-top Trabant
through East Berlin drinking champagne
and not wind up in a Stasi cell, buy a
random piece of painted concrete for ¤10, or
simply not know who Erich Honecker was.
Fast food giant McDonalds would seem to
think so, having opened an outlet at the
checkpoint site in 2009 in one undeniable
affirmation of the West’s triumph over
the Eastern Bloc.
But for those with a broader
Weltanschauung and palate, there is
always the complimentary taster at the
German Currywurst (curry sausage)
museum round the corner.
16
I Perspective
PERSPECTIVE:
No such thing as
a “safe haven” in
emerging markets
Dr Nicholas Spiro of Spiro Sovereign Strategy
S
hortly after the 2008 global financial crisis erupted, many
investment strategists argued that emerging markets (EMs)
had become anchors of stability.
Untainted by the problems of sub-prime mortgages, financially
stricken banks and heavy debt burdens plaguing many developed
economies, EMs – which at that time were hauling the global
economy back from the brink of an economic meltdown – were
even perceived to have “decoupled” from Western economies.
But when the Eurozone crisis escalated dramatically in the
second-half of 2011, the “decoupling” thesis was quickly
debunked as investor sentiment towards mainstream EMs tracked
the deterioration in market conditions in developed economies.
In 2011, outflows from EM equity funds amounted to $46bn,
compared with a record $96bn of inflows in 2010, according to
data from JP Morgan.
Last year’s “taper tantrum,” triggered by the unexpected
announcement by the US Federal Reserve in May 2013 that it planned
to start scaling back its programme of quantitative easing (QE) was the
final nail in the coffin for the “decoupling” thesis: outflows from EM
equity funds last year totalled $26.7bn, according to JP Morgan.
Indeed EM equity funds are still suffering net redemptions this year
despite enjoying huge inflows in the first-half of 2014 stemming
from the significant improvement in sentiment towards EMs.
So when rating agency Moody’s Investors Service, in a note
on September 30, referred to Poland – one of the largest EMs
accounting for 10% of JP Morgan’s EM local currency government
bond index (GBI-EM) – as a “safe haven,” there are plenty of
grounds for scepticism.
To be fair, Moody’s treats Poland as a safe haven solely within the
Emerging Europe region itself. Yet even this label doesn’t stand up
to scrutiny.
The zloty has been one of the worst-performing EM currencies
against the dollar of late, losing a whopping 10.5% since midJuly and 1.2% since the start of October. Polish shares have fallen
3.5% since the beginning of this month – a sharper decline than in
Turkey and Russia, and significantly worse than the 0.8% fall for
EM equities as a whole.
bne November 2014
If a safe haven is an investment that retains its value or even
increases its value in times of market turbulence, Polish assets
hardly qualify on that score given their status – in particular the
zloty – as a proxy for sentiment towards the Emerging Europe
region as a result of Poland’s deep and liquid capital markets.
Indeed over the past several years, Poland has become more
sensitive to shifts in risk sentiment. In 2010, foreign investors
accounted for some 20% of Poland’s local currency government
debt market. Now, they hold more than 40% of Polish domestic
bonds – one of the highest shares in EMs along with Hungary,
Malaysia and Indonesia.
The Fed’s withdrawal of monetary stimulus and the persistent
uncertainty about the timing and pace of US interest rate hikes
have thrown the vulnerabilities of EMs into even sharper relief.
More resilience
There are no safe havens in developing economies. There are,
however, countries whose financial markets are more resilient
than others, partly because of their stronger underlying
fundamentals. Moody’s is right to attribute Poland’s relative
resilience to the country’s “stable economic performance as well as
its sound and predictable policy framework.”
Despite the high share of non-resident investors in Poland’s bond
market, the yield on the country’s 10-year domestic debt currently
stands at just below 3% – down from 4.75% at the end of January.
Although the rally stems mainly from expectations that the European
Central Bank (ECB) will eventually be forced to launch full-blown QE
(and that Poland’s own central bank will once again trim interest rates,
which is likely to happen at its next rate-setting meeting on October
8), Poland’s strong fundamentals ensure that its bond yields remain at
relatively low levels during periods of financial market stress.
While the Czech Republic is the closest thing there is to a
perceived “safe haven” in Emerging Europe, mainly because
of the country’s modest debt levels, very low foreign currencydenominated debt and limited foreign participation in its domestic
debt market (14%), Poland qualifies as one of the cleaner shirts in
the dirty basket of developing and developed sovereign credits.
Playing in Poland’s favour is the persistently favourable view of
the country in the eyes of investors. Poland has enjoyed good PR
since the 2008 financial crisis erupted because of the country’s
solid track record of growth – the nation’s positive growth rate at
the height of the crisis in 2009 still figures prominently in articles
about Poland in the financial media – and, more recently, the woes
of Russia and Turkey which make Poland the only large market in
Emerging Europe whose reputation is still intact.
In the realm of investor perceptions, Poland is one of the most
successful EMs. Poland’s brand is strong and, for the time being,
is helping mask many of the country’s domestic and external
vulnerabilities.
This shows that the qualitative determinants of sovereign
creditworthiness are just as important – if not more – as the
quantitative ones in the minds of investors.
bne November 2014
Chart I 17
CHART:
Russia
Is Russia still
an "ethical"
investment?
Source: Sources: Heritage Foundation, 2014 Index of Economic Freedom; Reporters Without
Borders, World Press Freedom Index 2014; World Bank, Doing Business 2014; Transparency
International: Corruption Perceptions Index 2014.
Ethical index score (0-100)
0.0
I
s Russia still an ethical investment? bne sources say some
fund managers have been pulling their money out of
Russia, afraid of reputational risks or simply because they
don’t want to support a military aggressor on principle.
So just how does Russia stack up against its emerging market
peers for things like business freedoms, corruption, free
press and so on? Certainly the Russian stock market is being
punished by this sort of thinking: the RTS index broke out of
its 1,110-1,400 range at the end of October on the downside
on the back of more Russian war games in the Baltics, amongst
other bad news.
This month’s chart attempts to shed some light on the
question by comparing a raft of indices from organisations like
Transparency International, Reporters without Borders and
the World Bank.
Last first: we averaged all these indicators together to give an
overall score to every country that includes things like press
freedoms, property rights, corruption and so on. On this
(admittedly somewhat arbitrary) basis Russia comes out in the
middle of the range, but slightly ahead of all its BRICS peers,
bar South Africa. Russia's overall score was 49.9 out of 100,
versus China's 50.9, India's 56.9 and Brazil's 57.3. South Africa
was far ahead at 63.6 (where 100 is best) putting it on a par
with many European countries.
Other notable countries that did well include Kazakhstan
(61.1) and the standout of Georgia (71.8) that is on a par
with the leading economies in western Europe. The other
noteworthy result was Ukraine (50.6), which is slight worse
than Russia, yet is seen to be good enough to receive an
invitation to partner with the European Union.
100.0
Flicking through the various subcategories and as might
be expected Russia score card is mixed. It does badly
on property rights (25), corruption (22), and financial
freedoms (30). But in none of these is it that much
different from its peers (and on corruption it is again better
than Ukraine, which Transparency International dubbed
"the most corrupt country in Europe").
However, in other categories Russia does pretty well
compared with its peers. On press freedoms Russia (57.2)
easily beats China (27) and Turkey (54.1), which currently
has the most journalists in jail in the world. And in a few
categories like fiscal freedoms (85.6) Russia scores better
than many developed world countries. For example,
Russia is in the global top ten for the quality of its tax
administration – a function of the extremely simple flat tax
regime it adopted.
Putting the question the other way round: if investors
exclude Russia as an unethical investment, then they
would probably have to exclude all emerging markets
because they suffer from more-or-less the same problems.
The final question to pose is whether Russia should be
excluded for its unprovoked military invasion of Ukraine.
If this is grounds to withdraw investment, then fund
managers might also be forced to withdraw their
investments in the US, as Washington was arguably
responsible for launching an unprovoked war on Iraq.
To see the interactive version, go here: http://www.bne.eu/
content/story/bnechart-russia-still-ethical-investment
18
I Eastern Europe
bne November 2014
Opposition Bloc, which came in fourth
place with 9%. Pro-European nationalist
populists Oleh Lyashko and his Radical
Party, and Yulia Tymoshenko with her
Batkyvschina party, were on 8% and 6%
respectively.
Turnout decisive
The pro-European vote was helped by
a turnout that neared the 70% mark
in the West Ukraine regions of Lviv
and Ternopol, which boosted the vote
for Yatsenyuk's People's Front while
also propelling Lviv mayor Sadovyi's
Sampomich party to a surprising third
place.
Ukrainians elect proEuropean parliament
bne
U
krainians have elected a proEuropean parliament in snap
elections on October 26,
according to preliminary results. The
results show pro-European parties
headed by President Petro Poroshenko
and Prime Minister Arseny Yatsenyuk
respectively are neck-and-neck for first
place, with 20% of votes counted. Both
men said they would form a coalition
with each other.
The results broadly tally with preelection opinion polls and exit polls in
giving a large majority to pro-Europe
parties. But with parties registered by
Poroshenko – the Petro Poroshenko
Bloc – and Yatsenyuk – People's Front –
hardly older than the election campaign
itself, and around 30% of voters
undecided down to the wire, the exact
distribution of voters among the proEuropean parties was always uncertain.
As it was, it seems voters have given
a rebuke to Poroshenko, who took
a barnstorming 52% in presidential
elections held May 25 but whose
eponymous party has now managed
to garner less than half of that,
following a lost war against Russianbacked insurgents in East Ukraine and
the collapse of the currency in the
intervening months. Poroshenko's votes
went to Yatsenyuk's People's Front, who
like Poroshenko is a pro-Western liberal
technocrat, but has consistently taken a
more hawkish position on Russsia than
has the president.
Exit polls suggest that the two parties
would take over 50% of seats in the
Rada, which is elected using a mix of
proportional representation and firstpast-the-post constituencies.
Surprise performer of the day was the
Samopomich party of pro-European Lviv
The collapse of the pro-Russian vote is
the result of Ukraine's loss of control
over its former pro-Russian heartland
of Donbass and Crimea in the east,
following Russia's annexation of Crimea
and Russian-backed rebels seizing
control of Donbass.
But there were worrying signs of
political disaffection across the
Ukrainian-controlled south and east.
The voter turnout was low at just over
30% in the Ukrainian-controlled parts
of Donetsk and Luhansk regions, and
around 40% in Odesa and Kharkiv
regions. Exit polls showed that of
those who turned out to vote across
East Ukraine, around 30% voted
for the Opposition Bloc, headed by
figures associated with the former
administration of ousted president
Viktor Yanukovych. Yanukovych's Party
of Regions, which governed Ukraine
"There were worrying signs of political
disaffection across the Ukrainian-controlled
south and east"
mayor, Andri Sadovyi, which surged to
third place with just over 10% of the vote.
until Yanukovych's ouster in February,
did not run in these elections.
The traditional opponent of Ukraine's
pro-European groups – the pro-Russian
East Ukrainian voters –were represented
this time round by the newly formed
The only immediate response of rebel
leaders in Donbass to the Ukrainian
parliamentary elections was to announce
that they would not put the clocks back
bne November 2014
to winter time like the rest of Ukraine
did on October 26, but retain summer
time, thus switching to Moscow time, as
Crimea has already done.
Coalition talks
Pro-European forces announced that
talks on a coalition had already started.
The strong result of PM Yatsenyuk's
People's Front means he is almost
certain to retain his job. On the other
hand, President Poroshenko has until
now lacked his own political force in
the Rada. While the result of his Petro
Poroshenko Bloc came in lower than
expected, it will still entitle him to put
his own people in key parliamentary and
government positions.
Yatsenyuk was staying mum about the
demands his strong performance will
enable him to make, saying only that
the government should be "comprised
exclusively of professionals able to
conduct reforms needed to change
Ukraine," in a statement at his party
headquarters in the evening after the
vote.
The new government will have to take
responsibility for swingeing austerity
measures demanded of Ukraine by the
International Monetary Fund and EU,
the country's main donors, to fend off a
looming default.
One potential source of friction between
Porosenko and Yatsenyuk in coalition
talks, according to analysts, could be
Poroshenko's drive to secure a coalition
with a constitutional majority of over
two-thirds of seats, in order to amend
the current constitution. This would
necessitate including in the coalition
third place Samopomich and smaller
parties. "We will offer [participation in
the coalition] to very many parties… in
order to attain a constitutional majority,"
Poroshenko said in the wee hours of
October 27.
But Yatsenyuk is unlikely to see the
necessity of taking on board smaller
parties, and indeed in changing the
constitution, which in its current
position provides for a strong prime
minister, Volodymyr Fesenko of Penta
political consultancy told bne.
Eastern Europe
I 19
Poland's patience with Ukraine begins to fray
Jan Cienski in Warsaw
Poland has been Ukraine's most voluble supporter in the EU and a
strong backer of sanctions against Russia, despite the consequences for
the Polish economy – but Warsaw's patience with Kyiv is beginning to
fray.
There is a growing sense that Poland is being taken for granted, that
Ukraine is putting its own domestic political and economic interests
ahead of cultivating a close relationship with its western ally.
The latest irritant is Ukraine's refusal to buy Polish coal. Ukraine's coal
output plummeted by 96% in September compared with the same period
last year – a consequence of the war in eastern Ukraine, where most of
the country's coal industry is located. So when Poland offered to sell coal
to Ukraine, the feeling was that the Ukrainians would jump at the offer of
diversifying some of their energy needs away from Russia. But instead,
Ukraine decided to keep buying Russian coal. “We hear that that there is
only interest in Polish coal from the Ukrainian side on the condition that
it is free,” Janusz Piechocinski, the economy minister, said in a radio
interview on October 15. “I am disgusted by that.”
Poland is also furious that Ukraine has for months blocked the import of
some Polish meat for health reasons. “If there is a continuing problem
with 2,000 tonnes of meat on the bone, please don't be surprised if there
is a rise in unfriendly opinions about Ukraine,” said Piechocinski.
The complex internal dynamics of Ukrainian politics are also annoying
Poles. In October, thousands of Ukrainian nationalists demonstrated
in Kyiv, calling for the recognition of the wartime Ukrainian Partisan
Army. UPA, which has strong roots in the west of the country, had a
complicated war, wavering between support and opposition to the
invading Germans while fighting the Soviets. Members of the guerrilla
force also helped massacre local Jews, and the UPA ethnically cleansed
western Ukraine (which before the war had been eastern Poland) by
killing about 100,000 Poles.
Leszek Miller, a former Polish prime minister and head of the
ex-communist Democratic Left Alliance opposition party, tweeted on
October 14, “March of UPA supporters in [Kyiv]. `We are proud.' Of what?
Of massacring Poles in Volhynia [a region in western Ukraine]?”
The friction is likely to strengthen Poland's new foreign policy direction,
which is much more cautious about taking a leading role over Ukraine.
In her maiden address to parliament at the beginning of the month, Ewa
Kopacz, the new prime minister, stressed that Poland would no longer
be out in front of other EU countries when it comes to policy on Ukraine.
“It is impermissible for Poland to be isolated as a result of setting itself
unrealistic goals,” she said.
20
I Eastern Europe
bne November 2014
exclusive interview with bne from his
home in Singapore.
"The conflict in Ukraine has certainly
been a setback, but it's not the end of
the world. [US oil major] Exxon just
announced that it's found oil in the
North [Arctic] and [even if] Exxon
closes this camp and goes home,
then the oil is still there and it will be
exploited by someone. This is a blip
and no more," Rogers says confidently.
Photo: Gage Skidmore
Jim Rogers calls
West "foolish" and
invests again in Russia
INTERVIEW:
Ben Aris in Moscow
L
egendary investor Jim Rogers
calls the US government foolish,
arguing that the only longlasting effect which Washington's
confrontation with Moscow over the
fate of Ukraine will have is to drive
Russia into the arms of the Chinese –
something that is not in the US' longterm interests.
Best known for being the other half
of George Soros' Quantum Fund
that forced the Bank of England
out of the European Exchange Rate
Mechanism in the 1980s and made
the two men super-rich, Rogers
– who was hired by the Russian
investment bank VTB Capital last
year as an advisor – said he started
to invest in Russia this March,
following Russia's annexation of
Crimea. Despite the fraught political
situation and fallout from the civil
war in Ukraine, he says he is still in
the money.
Commentators have warned that the
West's attempts to isolate Russia will
set the country's development back
and the economy, according to the
World Bank's latest economic forecast
released in September, is already close
to stagnation. However, Rogers takes
a longer-term view. Being cut off from
Western finance and technology will
slow Russia's development, but that
does not mean it will be isolated. "The
upside of the US actions will be to
force Asia and Russia together. It will
be exploited and China and Russia are
welcoming each other with open arms.
In the long run this new relationship
will hurt the West more than it hurts
Russia," says Rogers, who speaks with
just a slight hint of an accent from
Alabama where he grew up.
Other places to go
The latest round of sanctions
imposed on Russia in September have
also more-or-less cut the Russian
government and the country's leading
companies off from the international
capital markets in London and New
York, but that problem too can be
overcome, says Rogers. "Hong Kong
and Singapore are not New York and
London, but they are both growing
"The conflict in Ukraine has certainly been a
setback, but it's not the end of the world"
"Two years ago Russia was like the
backend of the world and no one was
paying attention. Now the US has shot
itself in the foot," says Rogers in an
rapidly and there are gigantic pools
of capital in Asia," says Rogers. "The
problems in Eastern Europe will help
the Asian market to develop and catch
bne November 2014
Eastern Europe
up with the West. There is a lot of
money in Asia and expertise."
out to destroy a legitimately elected
government and it's backfired."
Behind the West's actions lie the
assumption that cutting Russia off
from Western money and technology
means it has nowhere else to go. But
that is not true, argues Rogers. "I'm
stumped when people call South
Buy on sound of cannons
Rogers is nothing if not a contrarian.
Having made his fortune by betting
against a central bank, he is playing
that role again with his Russian
investments. "Russia is perhaps the
"We need to engage in Russia – open our hearts
and minds to Russia – as engagement is always
better than isolation"
Korea an emerging market. Singapore
is also an emerging market, but yet
it is one of the richest countries in
the world on a per-capita basis," says
Rogers. "Emerging markets are only
those countries that you read about
in the Financial Times or the New York
Times."
It is these assumptions that have led
policy astray in the West and Rogers
thinks the US will pay a price, while
investors with the courage to continue
to invest in Russia and the other
emerging markets will benefit from
these misperceptions.
Rogers is quite outspoken, blaming
"bureaucrats" for mismanaging US
foreign policy. "The USA is acting
foolishly and accelerating the change
in the geopolitics of the world,” says
Rogers, recalling the well-known
leaked recording with US Assistant
Secretary of State for European and
Eurasian Affairs Victoria Nuland
telling the US ambassador in Ukraine,
"fuck the EU, we want to bring down
this government.”
Rogers complains that the US was
encouraging people to bring down
an elected government. "[President
Viktor] Yanukovych may have been
a horrible guy, but he was elected.
Presidents George Bush and Barack
Obama may also be horrible, but they
were also elected. However, the US set
most hated market in the world certainly it's in the bottom five. But
the reality on the ground has started
to change. [President Vladimir] Putin
is also a different man to what he
was in 2000 when he was elected,"
says Rogers, who says he has been
following the country's path since he
visited the Soviet Union as a student
in 1966.
Rogers began investing in Russia after
the market collapsed in March after
the annexation by Russia of Ukraine's
Crimean peninsula. "You shouldn't
listen to me as I'm the world's worst
market timer, but I am surprised and
delighted that the market today is
still above its levels in March," says
Rogers.
And he bought again in May, and says
he is looking to buy more, although
his Russian portfolio still represents a
tiny part of his overall investments.
Amongst the companies that Rogers
has invested into is the Moscow
Exchange that was floated in February
2013 following the merger of Russia's
two biggest stock markets, the RTS
and Micex. "Putin has committed
himself to making Moscow an
international financial centre. Many
may find that laughable, but it doesn't
matter if it works; Russia will spend
huge amounts of money to try and
make it work," says Rogers.
I 21
Other companies he's invested
in include Aeroflot and fertiliser
producer Phosagro, of which he was
recently appointed a director. "I'm
wildly bullish about agriculture and
definitely bullish about Phosagro,"
says Rogers. "Phosagro is an
opportunity in the agricultural sphere,
because agriculture is only going to
increase in demand. It's a very wellplaced company and even if sanctions
are imposed against it, it is still has
the opportunity to sell to Asia and
other countries."
With peace now possible in Ukraine,
Rogers thinks that once investors
switch from following current affairs
to looking to the future again,
investment will return. "There is an
old adage: invest when there is blood
on the streets and usually it is correct.
Investors have very short-term
memories – it’s a fact. Who remembers
Tiananmen Square in the 1980s?
But today we are pouring trillions of
dollars into the Chinese economy," he
says. "We need to engage in Russia –
open our hearts and minds to Russia
– as engagement is always better than
isolation."
22
I Eastern Europe
bne November 2014
Gulag Archipelago. They thoroughly
modernised the 25-year-old plant and
launched their flagship Veiro branded
top-end two- and three-ply toilet
paper into an increasingly competitive
market.
Russia's economy is
in the toilet
Ben Aris in Moscow
R
ussia's ruble is tanking and
growth has stalled. The
economic news could not be
much direr. But even in the worst
economic climate there is one product
that people will always need – toilet
paper.
"For the tissue paper market there has
been practically no crisis, as we are a
cheap product and, after bread and
milk, probably the third most essential
item in the average shopping basket,"
Mark Reznik, CEO of Syktyvkar Tissue
Group (STG), Russia's second biggest
maker of quality toilet paper, tells bne.
One of the most remarkable
differences between the current crisis
and the last big one in 1998 is that
the Russian population has so far
been largely sheltered from the pain.
Russia's macroeconomic picture is
bleak, but at the street level wages
have continued to rise by about 10%
a year since 2008, supported by the
slowly shrinking working population,
which has also led to record low
post-Soviet unemployment rates. It
has only been in the last half a year
that consumer spending has started
to slow and Russians became worried
enough about a currency devaluation
to start buying dollars again.
The toilet paper business turns out to
be a case study in the microeconomic
impact of the crisis on Russia's
development. At this level the picture
By 2005 Russia's boom was well under
way and many Russians had already
moved beyond buying little luxuries,
such as imported cigarettes or cured
meats, to bigger ticket items like
washing machines and cars. Changing
up from Soviet-era single-ply to
more luxurious products like Veiro
was a no-brainer for most people.
Quality toilet paper was already in
high demand, yet the market still has
a long way to grow. "In America the
people consume about 25kg of toilet
paper a year, whereas in somewhere
like Germany it is 15-20kg. In Russia
people only consume 3kg a year,
but we think the market should be
closer to southern Europe where they
consumer about 8kg a year. There is
a huge growth potential – the market
should at least double or triple in size
in the coming years," says Reznik.
From the launch in 2005, production
soared from 14 tonnes of tissue a year
in 2005 to 44 tonnes in 2013 – enough
to make 240m rolls of toilet paper.
Production increased five-fold, but
revenues have gone up ten-fold, from
RUB299m ($7.5m) to RUB2,419m
"In Russia people only consume 3kg a year, but
we think the market should be closer to southern
Europe where they consumer about 8kg a year"
looks much more like business-asusual, which has also supported
Russian President Vladimir Putin’s
sky-high popularity.
STG comprises a group of private
Russian investors who bought out
the Syktyvkar paper mill in 2005
in the Komi Republic, one of the
regional capitals of Solzhenitsyn's
($60.4m) over the same period. "The
increases are due to the factory's
modernisation and the growth of
the underlying market, which has
increasing by 10-12% a year over the
last decade," says Reznik.
Roll out the rolls
By 2008 STG's factory was running at
close to full capacity and the company
bne November 2014
Eastern Europe
began to look at raising money to
build a second facility. At first, STG
tried unsuccessfully to sell shares in an
IPO to raise the investment cash.
After the 2008 collapse of Lehmann
Brothers, the Russian stock market
index recovered from its low of about
500 in the spring of 2009 to over 2,000
by 2011, approaching its all-time high
of 2,488 set in May of 2008. It seemed
like a good time to float the company
the financial hatches. The economy
has been just ticking over ever since.
Business confidence has yet to recover
and the fight in Ukraine has only
made things worse; the RTS has been
range bound, trading between 1,100
and 1,400. STG's decision to pull its
IPO was the right one.
But the company still wanted to raise
money so it hired boutique investment
bank Velles Capital to find a partner.
"For the tissue paper market there has been
practically no crisis"
on the local Moscow Exchange. "We
had done the paperwork and were
ready to list on MosEx. There was an
interest in the press and also amongst
potential investors. MosEx was keen
to see the IPO happen as they were
promoting [small business] IPOs on its
exchange," says Reznik.
STG were hoping to raise RUB500m
($12m) from the sale of a 25% in
the company, but the management
pulled the IPO at the last minute as
the market began to fall heavily in May
2011, as fears of a third wave of the
crisis in Europe emerged. This spilled
over to businesses, which cancelled
investment plans and battened down
Eventually a 30% stake was sold to VIY
Management, a private equity fund
co-founded and managed by Andrei
Yakunin (the son of Russia Railways
boss Vladimir Yakunin), which also
recently bought into chocolate maker
French Kiss.
At the same time STG took a loan from
Gazprombank and used the capital to
build a second plant in the Yaroslav
Oblast, a few hundred kilometres
from Moscow, Russia's biggest
regional toilet paper market. "It was a
brownfield development, on the site
of a former mechanical parts factory.
But that meant it came with power,
railway links, all the infrastructure
Tissue market share
in Russia, % total in 2012
I 23
you need," says Reznik. "Raising the
money from the bank was not hard.
They can see there is a real project
from an existing company, which has
revenues and collateral to put up.
We could have taken the loan from
anyone," says Reznik.
Wiping clean the competition
However, STG is not the only group
to identify toilet paper as a lucrative
market. STG's Veiro rabbit finds itself
vying for attention on shop shelves
with Kleenex's cute Labrador puppies
and Turkish producer Metsa Tissue
Corp. cutsie lambs. (For obvious
reasons all the toilet paper makers use
cute animals for their brands, as they
can’t very well put attractive bottoms
on the packages.)
As of the end of last year STG has the
second largest market share (7%)
after SCA's 20% that trades under the
Zewe brand and is Europe's biggest
producer of toilet paper.
The other large players include
NChKBK (Naberezhnochelninsky
Kartonno-bumazhny Kombinat
National Enterprise), a Soviet-era
factory that continues to churn out the
pink pre-1991 style single-layer cheap
toilet paper, but has a 12% market
share. And half the market is still
made up of small legacy toilet paper
makers left over from the Soviet era
that have done little to change their
ways.
Tissue market share
in Russia, % total in 2020
(estimate)
Other 19%
SCA 21%
SCA 20%
Other 49%
NCHKBK 12%
Arkhbum Tissue
Group 10%
NCHKBK 9%
Hayat 11%
Syassky TSBK 9%
STG 7%
Metsa Tissue 3%
Syassky TSBK 12%
Metsa Tissue 5%
STG 13%
24
I Eastern Europe
The market share of the single layer
toilet paper makers is still big, but
is falling as average incomes rise:
in 2013 single-layer toilet paper
accounted for almost half the market;
two-layer paper was 45%; and only
8% was the top-of the-range threelayer paper. But Reznik says the
single-layer business should shrink
to about 25% by 2020 as competition
increases and prices fall in the next
few years.
All the main players are investing
in new production, and new players
such as Hayat from Turkey and
Arkham Ticcuo, Ukraine's leading
tissue producer, are expected to enter
the Russian market shortly, eating
into the share of the single-layer
producers. As a result, the market
will likely suffer from an oversupply
for several years, says Reznik, that
will peak in about 2018 and drive
margins down into the low teens from
about 23-24% now. "The overcapacity
will kill off the small firms left over
as a legacy of the old system, which
account for just under half of total
production now," says Reznik. "By the
end of last year their share had fallen
to 44% and we expect it will be 26%
in 2016."
A private future
Outside competition is going to get
stiffer, but the real threat to STG's
margins will come from inside Russia.
Russian retail is rapidly organising
with the leading supermarket chains
rolling out new branches without
pause, as like the toilet paper makers
they have also been largely unaffected
by the crisis.
The main retailers are increasingly
introducing "private label" brands
for generic products like packets of
pasta, cans of corn or toilet paper.
The thing with toilet paper is that it
is easy to make and no matter how
many layers of paper you use or how
cute your animal is, at the end of the
day if the supermarket's own version
meets some basic quality standards, it
will always win on price: in Germany
80% of toilet paper sold is already
sold as the private label of the leading
bne November 2014
Private label toilet paper market share 2013
90%
Belgium
80
70
Germany
60
Denmark
50
Switzerland
France
40
Austria
UK
Spain
Netherlands
Portugal
30
Canada
20
Italy USA
Finland
10
Russia
0
Toilet paper use (kg/yr)
2011
2015
25,0
20,0
15,0
10,0
5,0
USA
Germany Japan
S.Korea Brasil
supermarket chains and the range in
the rest of Europe is between 30% and
60%. In Russia the share of private
label is currently 10% of the total
market, one of the lowest shares in
Europe, but that is growing by 12% a
year, says Reznik.
The private label segment will
inevitably eat into STG's profit
margins in the long term, but its
rise also presents a new business
opportunity.
The company doesn’t produce its own
paper pulp, but buys the raw cellulose
it needs from the market: STG uses
China
Russia Indonnesia World
70% of this raw cellulose for its own
tissue production, but the other 30%
is already used to manufacture private
label tissues for corporate customers –
mainly in the hospitality and medical
industries. The private label business
currently accounts for 9% of STG's
revenues, but Reznik expects this to
rise of 25% by 2020. "We expected to
retain our current market share of our
own brand toilet paper, but in the long
term the private label production will
obviously become a more important
part of the business, even though the
margins there are lower," says Reznik.
bne November 2014
Eastern Europe
I 25
to leverage its domestic expertise,
though this will likely delay production
estimates by several years. As such, the
previous goal of producing 1m barrels of
shale oil a day by 2020 is not likely to be
reached until 2025 at the earliest.
Nails in the shale-coffin
Since Russia began throwing its military
weight around Eastern Europe in March,
the EU and US have walked essentially
hand in hand in their sanctions policy
against Moscow. Sanctions have
effectively restricted Western companies’
participation in Russia’s Arctic and
shale sectors. These sanctions are
compounded by restrictions already
in place that will limit the transfer of
technologies developed on US projects.
Russia shale-acked
Joe Parson in Strasbourg
W
ith the oil price falling to
$85 and Western sanctions
kicking in, Russia’s dreams of
exploiting its huge shale oil resources
are about to be shattered.
The US Energy Information Administration
in 2013 estimated that Russia holds the
world’s largest shale oil reserves at 75bn
barrels of recoverable crude oil, giving
rise to hopes in Moscow the country could
mirror the massive shale boom in the US
and help offset dwindling output from
mature fields in West Siberia. Shale oil
is liquid crude trapped within geological
shale rock formations that have not
merged into a conventional reservoir.
Because this oil is trapped in small and
disparate pockets within porous shale rock,
exploitation of these formations requires
a combination of horizontal drilling and
multiple-stage hydraulic fracturing, or
fracking – technologies that were refined
during the US shale boom.
The price of Russian crude is historically
closely tied to Europe’s Brent oil price,
which as of October 15 was trading at a
four-year low of $85.27 a barrel. Russia’s
own export blend price averages only
1.5% below Brent, thus it's rapidly
approaching the $80 break-even
price for Russia’s shale projects to be
economical. Some analysts assert that
the break-even price for these projects
is actually above $90, given unforeseen
expenditures and lessons learned
Before the Western sanctions were
imposed, a slew of companies were
involved in the Russian oil sector, most
notably ExxonMobil, Shell, Total, BP and
Statoil.
Total’s CEO, Christophe de Margerie,
commented on September 22 that its
joint venture with Russia’s independent
major Lukoil has ground to a halt due
to the sanctions. Salym Petroleum
Development (SPD), a longstanding
Shell and Gazprom Neft venture, has
likely already fulfilled initial exploration
and development investments and so
might be insulated from the sanctions
in the near term, but Shell announced
it is no longer able to continue work
with SPD. Although BP and Total could
resume certain generic geological
exploration activities, the companies
"Sanctions have effectively restricted Western
companies’ participation in Russia’s Arctic and
shale sectors"
from exploiting the US Eagle Ford and
Barnett shale deposits.
have shown no indication they intend to
violate the spirit of the sanctions.
As if the economics weren’t bad enough,
sanctions have forced US and European
companies to halt or reduce their shale
development plans. Russia could seek
Meanwhile, Rosneft’s continued
participation in ExxonMobil’s US
operations is unlikely given the
controversy over the latter’s continued
26
I Eastern Europe
Another voice silenced in Russia
bne
Russia's leading quality independent newspaper Vedomosti is set to be sold
to businessmen close to Russian President Vladimir Putin, in a move that will
further narrow the space for critical opinion in Russia's media.
According to Bloomberg, businessmen close to the president are preparing to buy
the respected paper that was founded in 1999, only months before Putin shot to
power on the back of a war against militants in Chechnya. At its launch, the paper
advertised with the slogan, "Any oligarch can buy us. At kiosks," referring to the
purchase months before of rival Kommersant by the late oligarch Boris Berezovsky.
The paper was co-founded by the Wall Street Journal and Financial Times, each
of which hold 33% stakes in the paper. Finnish media outfit Sanoma owns the
remainder. While Vedomosti has a print run of only 75,000, its high standard of
reporting has lent it wide influence.
Despite its foreign ownership and frequent criticism of the government, the paper
seemed to have been accepted as an institution and an integral part of Russian
public life, read in the Kremlin while also enjoying access to the top figures in
Russian politics and business, with Prime Minister Dmitry Medvedev having being
interviewed as recently as September.
The paper has also run hard-hitting and respected investigations into alleged
corruption in the Kremlin. In particular the paper has explored the links between
Putin and energy and finance businessmen such as Gennady Timchenko, Arkady
Rotenberg and Yury Kovalchuk – Putin friends of many years standing, who have
enjoyed meteoric rises to wealth during his time in power.
It is these investigations that may have prompted the paper's sale, reckon
experts, since they largely served as a basis for the West to impose individual
sanctions on these businessmen as a means of punishing Putin over Russia’s
aggression in Ukraine.
As part of a wave of anti-Western hostility in response to sanctions, Russia's
Duma passed a law restricting foreign ownership of any media resource to a total
of 20%, prompting Vedomosti's owners to seek a Russian buyer. Putin signed the
bill into law on October 15.
According to Bloomberg sources, it is likely that precisely the businessmen close to
Putin who were subjects of numerous Vedomosti investigations have now acquired
the paper, in the form of either Gazprom Media or banker Yury Kovalchuk.
However, Bloomberg reports that in order to make the deal acceptable to current
owners, there may be an intermediary buyer in the form of Peter Gerwe, a
Moscow-based American with Russian backing. Gerwe confirmed in an email
that he is interested in the assets, but denied he would act as an intermediary.
Putin’s deputy chief of staff, Vyacheslav Volodin, accused Vedomosti of serving
foreign interests at a meeting with Russian newspaper editors in September,
according to Tatiana Lysova, the paper’s chief editor.
Another respected Western-owned investigative publication, the Russian edition
of Forbes, is threatened by the restrictive law on media.
bne November 2014
operation within Russia’s Arctic. On
October 10, Norway effectively cut
off Statoil’s potential involvement by
announcing its support for the EU’s
latest round of sanctions imposed on
September 11, which included the
sanctions on oil and gas technologies.
Priced out
The oil price has actually been on a
downward trend since 2001. This is a
catastrophe for a 2014 Russian budget
that relies on an average oil price for
the year of $100. Bloomberg analysis
says the oil price would have to rally for
the rest of the year near $117 in order
to average out third-quarter declines,
while The Economist claims Russia might
require an average oil price in 2015 of
$110 to balance the budget.
Previous long-term forecasts of rising
oil prices relied to a large extent on
assumptions that demand in Northeast
Asia was set to continue growing –
an assumption that has since been
undermined.
The collapse in the oil price poses a very
distinct threat to Russia’s nascent shale
sector. Rosneft has frequently compared
its shale deposits to ExxonMobil’s
operations at the Texas Eagle Ford shale
deposit. Analysis by The Oil Drum, a
website devoted to energy issues, put
the actual break-even price for shale
oil produced at Eagle Ford above $90
a barrel. If these comparisons are
substantive, then Russian projects are
in peril. Without government support,
outside investors are not likely to stick
with Russian projects in the near term.
Last year, Gazprom Neft’s head of
Geological Research said that the
break-even price for Russia’s shale is
$60-80. The break-even price includes
the amount of money necessary to
cover day-to-day operating costs as
well as initial capital investment. The
break-even price is likely a very lowend estimate given that even Rosneft
estimates for only operating costs range
up to $40 per barrel.
Home-grown solutions
Many of Russia’s domestic oil
companies have some experience in
bne November 2014
Eastern Europe
"As such, the previous goal of producing 1m
barrels of shale oil a day by 2020 is not likely to
be reached until 2025 at the earliest"
both horizontal drilling and fracking,
which are also used to exploit
conventional deposits of oil and gas,
but few believe this will be enough to
make up for loss of Western know-how
and technology.
Surgutneftegas, a conservative oil
company with murky ownership and
suspected strong ties to the Russian
leadership, has been exploring
potential shale deposits in West Siberia,
but any economic discoveries have yet
to be announced. Some suspect that
exploiting unconventional oil and gas.
Indeed, the entry of a governmentfavoured services company could
well create obstacles in attracting
necessary outside expertise within the
conventional oil sector.
recent legal actions by the Russian
authorities against conglomerate
AFK Sistema and its owner over the
controversial acquisition in 2004 of the
oil company Bashneft could be driven
by Bashneft’s advanced experience
in fracking. Bashneft’s production
from fracking in 2013 was double that
achieved at Rosneft’s most successful
Samotlor field.
And Kremlin plans to create a national
oil services company are unlikely
to substitute Western expertise in
The only magazine covering
business, economics, finance
and politics in the dynamic
new markets of Emerging
Europe and the CIS.
In the medium to long term, it is likely
that if Western sanctions persist, then
exploration licences that have been
granted to foreign companies but
which are not currently being exploited
will be revoked. It is possible, though
unlikely, that Russia could revoke these
licences as a retaliatory measure to
Western sanctions.
Russia might be able to supplement
Arctic investment from Asian companies,
but there is no such near-term
alternative for the shale oil sector.
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28
I Eastern Europe
bne November 2014
Crimeans compete for best Russian
wine title
Ben Aris in Krasnodar
R
ussian sommeliers, oenophiles,
government officials,
businessmen and bibulous
journalists turned out in force to
attend a gala dinner in the grand hall
of the former imperial vineyards of
Abrau-Durso on October 18 next to
the Anapa lake in Krasnodar. They
had assembled to celebrate the annual
award of the title of "best wine in
Russia" to the leading producers in
the country. The big difference with
this year's competition is that the
Crimea counts as "Russia" for the first
time and wineries from the former
Ukrainian peninsular all made the trip
too, as they have been locked out of
their traditional Ukrainian market and
have little choice but to build up their
business in the rest of Russia.
The main event was the result of
the "best Russian wine for 2014"
competition, where much slurping
and sloshing of wine accompanied the
announcements as the audience had a
taste of each of the five finalists.
The white wine category was won
by a 2011 vintage from the wellknown (in Russia at least) Chateaux
le Gran Vostok, produced by Elena
Dnisova, a fruity and crisp beverage
that would not be out of place in
any good Western restaurant. The
winner of the red wine category went
to Verdernikov's 2012 Krasnostop
Zolotovsky (a well-known grape in
Russia), which has established itself
as one of the very best local wines
and is already on the menu at the
Ritz-Carlton in Moscow, Russia's
most exclusive hotel. "The Russian
wine industry is coming up very
quickly, probably more quickly than
somewhere like New Zealand's,
which took many years to mature,"
says Roger Joseph, an international
wine entrepreneur, former wine
columnist for The Telegraph and one
of the judges of the competition, who
has been coming to inspect Russia's
vineyards for about a decade.
After the awards ceremony was over, it
was time for what all the participants
were looking forward to most; down
into the cellars and a chance to try
many of Russia's leading wines. But
the talk quickly turned to politics. At
least four of Crimea's leading wine
bne November 2014
producers were official present at this
year's competition, as they are now
official "Russian producers."
Complex bouquet
Their reaction to the sudden change
of statehood was decidedly mixed.
"We were Russian before and now
we're back!" gushed Irina Pavlenka,
director Novi Svet, one of Ukraine's
best-known classic champagne
producers in Crimea.
The factory was founded by the same
prince Galitsin that set up AbrauDurso and was until recently owned
by the Ukrainian state. "We plan
to in double our production on the
Russian market to 2.5m bottles a
year," Pavlenka said with enthusiasm,
pointing to the increasingly affluent
society of 143m people. Since
Crimea's annexation, Novi Svet's sales
are already rising.
Other producers were less sanguine.
The sales director at the Esse stand,
who didn’t want to give his name, was
stoic about the change over. "What can
we do about it? We weren’t really given
a choice," he said with a glum face.
Owned by Ukrainian entrepreneur
Igor Samsonov, Esse is the maker
of a well-known (and extremely
palatable) red wine in Ukraine, selling
2m bottles a year on the Ukrainian
market and exporting another 3m
to Russia. It is also one of the few
Eastern Europe
"The Russian wine industry is coming up very
quickly, probably more quickly than somewhere
like New Zealand's"
Everyone admits that the Russian
bureaucracy is a major headache for
the latest addition to the Russian
vinifamily – even the government.
The Duma deputy Zvagelsky candidly
admits that the Russian rules are
too strict. "Currently, all alcohol
production comes under the same
regulatory regime – whether it is
beer and wine producers or whether
it is vodka and spirit makers. We
need a lighter regulatory touch for
winemakers to encourage the sector's
development," argues Zvagelsky.
And the problems run deeper than
mere red tape: the former Ukrainian
producers have been given a
temporary license to operate in Russia
and must complete the formalities
by January 1, 2015. However, the
whole operating environment in
Russia is totally different. Rapacious
tax officials and the threat of
expropriation by venal oligarchs are a
constant threat in Ukraine, where the
alcohol business is as opaque as mud.
Russia is not perfect, but its ranking
according to corruption watchdog
Transparency International has been
"We were Russian before and now we're back!"
Ukrainian wineries to have invested
in modern equipment. But since
March, the company's Ukrainian
business has more-or-less come to
halt, while it can't restart its sales
on the Russian market until it has
finished re-registering as a Russian
legal entity. "We want to live as we
did before, but Russia is a very big
and prospetive market. The trouble is
getting documents to work in Russia is
more difficult than in Ukraine."
I 29
improving in recent years, whereas
Ukraine officially became the "most
corrupt" country in Eastern Europe in
2012 under ousted president Viktor
Yanukovych. "The main problem for
the Ukrainian producers is 80% of
their work was on the black market
and they don’t know how to work in a
white market," says Zvagelsky.
A few of the Ukrainians at the event
were openly resentful of the changes
forced on them. "I was born in Crimea.
My family is from Crimea. We have
always lived in Crimea. But now I am
foreigner in my own country," says Irina
Segan, wife of the brand ambassador
for champagne producer Inkerman, a
household name in Ukraine.
Inkerman is a case in point: it produces
a whopping 30m bottles of wine a year
and used to sell 70% of its production
in Ukraine, exporting the rest to Russia.
Irina's husband is more pragmatic and
says it is still too early to tell how the
new flag atop the parliament will affect
business, as they are still ploughing
through all the paperwork. But he
made the trip to Anapa because clearly
the company has to re-orientate to the
Russian market.
On the other side of the fence
the small Russian producers have
welcomed the sanctions on European
food products that have helped
burnish their products' image.
Katarina Malik runs the Donskaya
Grozd vineyard together with her
father and is typical of the new
generation of Russian winemakers.
The Maliks went to the Russian Wine
Institute and got hold of some of those
seeds the Cossacks brought back from
Paris – the actual 200-year-old seeds
– and used them to populate their
vineyards.
Last year Donskaya Grozd produced
25,000 bottles including a Tsimlyansky
and Krasnostop – the same grape that
won this year's Russian competition
– as well as a Sibirkovy white wine, a
grape that only grows in Krasnodar,
and a Seperavi, the most famous of the
Georgian grapes. Malik says that the
current showdown with Ukraine has
altered Russians’ attitude to business
and will be a huge boon to producers
like Donskaya Grozd.
30
I Central Europe
bne November 2014
Property restitution haunts Warsaw
Jan Cienski in Warsaw
W
arsaw’s local government
election campaign is turning
on a topic that is almost 70
years old – the confiscation of much
of the city’s private property after the
war. This is an issue that continues
to drain the city’s budget, haunts real
estate developers and fills thousands
of tenants with terror.
The reason is that the Polish capital
has never dealt with the consequences
of the 1949 law, promulgated by
Boleslaw Bierut, the hardline Moscowbacked leader at the time, which
seized most of the property in the
devastated city. The ostensible reason
was to allow for a quick and uncomplicated reconstruction of the ruins left
behind by the German occupation, but
the main goal was to redefine prop-
erty in Warsaw to conform to the new
communist system.
Although Polish communism ended
in 1989, the legally tangled and very
expensive issue is still largely unresolved. As a result, students in one of
the city’s best middle schools, located
in the heart of downtown Warsaw, are
preparing to move after the city was
forced to return part of their school
territory to a businessman who had
bought the claim on the property from
the heirs of its pre-war owners.
In another case the heirs to the
Zamoyski family, Poland’s wealthiest pre-war aristocrats, two years ago
regained a plot of land located inside
one of the city’s loveliest downtown
parks. In another case, the previous
offices of the mayor of Warsaw have
been handed back to heirs of the last
pre-war owner. Even the Polish parliament has been stymied in its effort to
construct a new office building close
to the legislature because the ownership of the land is in question.
Sitting tenants
Elsewhere, pre-war owners are regaining apartment buildings filled with
tenants. In many such cases the new/
old owners increase rents both to
make their properties economically
viable and in some cases as a way of
expelling tenants in order to upgrade
and sell valuable buildings.
In September, dozens of protesters holding banners denouncing the
return of pre-war properties disrupted
bne November 2014
a city council meeting. In many such
cases, the pre-war owners, exhausted
by years of court battles and tangles
with the city bureaucracy, sell their
rights to well-connected business
people who seem to have a knack
for quickly bringing such cases to a
conclusion. In 1999, Jan Zamoyski,
the last pre-war owner of the family
fortune, sold off his rights to a downtown Warsaw palace for a fraction of
its value after trying for a decade to
get it back. The new owner managed
to arrange the return of the property
in just a few weeks.
The issue also bedevils property
developers, who have to deal with
claims from pre-war owners which
make it almost impossible to develop
many downtown lots.
The city of Warsaw had tried without success to get parliament to do
something about reprivatisation. As a
result, about 10% of the city’s annual
budget is spent on compensation for
confiscated property. In all, about
8,000 cases have been filed against
the city, and the full value of the
claims comes to about ¤10bn, or more
than three-times the city’s annual
revenues. Only about 200 cases are
resolved every year, meaning that
the issue will continue to complicate
life in the capital for decades. “The
problem is that Poland did not conduct reprivatisation after 1989,” Hann
Gronkiewicz-Waltz, Warsaw’s mayor,
told the Rzeczpospolita newspaper,
noting that before the war only about
15% of Warsaw was public property. “In the first instance we have
to defend schools and playing fields
against which claims have been filed.”
Poland is the only Central and Eastern
European country that has avoided
dealing with the issue of pre-war
property owners. And it is not just
thousands of Warsaw properties.
When the communists came to power,
all landed estates were confiscated
around the country, as were most factories, shops and private businesses.
While Hungary, the Czech Republic
and other CEE countries have largely
resolved the problem – often by pay-
Central Europe
ing previous owners a fraction of the
property’s value – Poland has not.
One reason is that there is little political will to pay out enormous sums or
to return attractive properties to the
children and grandchildren of Poland’s
pre-war elite.
Another is the added complication of
Jewish owners. Poland had Europe’s
largest pre-war Jewish community,
most of which was wiped out by the
Germans. Most of their property was
taken over by Poles, and the Polish
government has been sluggish about
returning it to the heirs of Holocaust
survivors, creating a perennial irritant
in relations between Poland and
Jewish communities in the US and
Canada.
"The city of Warsaw had tried without success
to get parliament to do something about
reprivatisation"
In 2001, a bid to pay owners 50%
of the value of their properties was
vetoed by the president as it applied
only to Polish citizens and would have
excluded foreign nationals. Since
then, governments have proposed
various legislative solutions, but the
efforts have stalled because of the
enormous costs and political risks of
such a scheme. “Finding PLN20bn
(¤4.8bn) in a situation when the state
is fighting with the deficit proved to
be impossible,” Marcin Kerwinski, an
MP for the ruling Civic Platform party
and author of a reprivatisation bill languishing in parliament, told the Gazeta
Wyborcza newspaper.
But the failure to craft an acceptable
solution has saddled the Polish capital
with huge potential costs and risks.
I 31
32
I Central Europe
bne November 2014
instantly shed over 8% to a two-year
low on the Warsaw Stock Exchange
after the announcement. However, the
shares recovered by the close on September 15 to reduce the loss to around
3%, with investors apparently split on
whether the time is right to start buying
CEE real estate again.
Recently appointed CEO Thomas
Kurzmann tells bne that the company
can't be left behind. "People are starting to move," he says, "and we must
be involved in that." Many industry analysts agree, but opportunities remain
highly speculative for the meantime.
Interest piqued in
CEE's riskier property
markets
Waking up
The property market in CEE has been
surprisingly quiet over the past six years,
given that a furious boom met such a
sudden and deep crisis in 2008. While a
steep selloff might have been expected
as investors struggled to reduce heavy
debt on assets with rapidly dropping
valuations, little actually happened.
BRICKS & MORTAR:
That's because lenders had few options
to enforce terms on that debt. On the
one hand, they stood to make losses
should they repossess and sell; on the
other, with credit markets seized and
a deep global crisis unfolding, there
were few potential suitors. “Extend and
pretend” was how one industry player
termed it.
Tim Gosling in Prague
However, with banks again ready to
lend, the markets are waking up, says
Hadley Dean, managing partner for
Eastern Europe at Colliers International. "We're likely to start seeing portfolio
sales now," he suggests. "Low interest
I
nvestors were underwhelmed in late
September when Polish real estate
investor GTC announced a rights
issue to fund an acquisitions drive
across Central and Eastern Europe. But
analysts also think that now is the time
to strike on real estate in riskier markets
in the region, although the strategy
remains simplistic.
Saddled with a portfolio weighed down
over the last five years or so by sluggish
economic growth around the region,
GTC has been struggling in recent
years. The ¤70.1m loss it reported in
the second quarter of the year was led
by huge cuts in valuations, with assets
in Croatia and Romania doing the most
damage.
However, with US fund manager Lone
Star in control since November, GTC is
now hunting for more capital to finance
acquisitions in the same region. The
"The Polish market hit bottom some time ago"
company announced on September 15
a plan to issue 140m shares, expanding
outstanding stock by 43%. Shareholders will vote on the plan at a meeting on
October 13.
rates make property an attractive deal
even with [real estate] yields pulling in,
while the pricing in bonds and equities helps make the sector even more
attractive."
GTC's share price, already having
slumped on the poor recent results,
In short, cheap money and the global
hunt for yield are pushing investors into
Central Europe I 33
bne November 2014
Following the macroeconomic recovery story, the more developed Central
European markets such as Poland and
the Czech Republic have already seen
the arrival of money accelerating. Now,
Hungary and Romania are rolling out
the welcome mat.
force for the likes of GTC, which is looking to leverage its regional experience
and greater appetite for risk to take
advantage as arriving cash pushes prices higher. It's a simple plan that casts
aside tricky issues such as fundamentals
or asset management. "Developed markets are becoming very expensive now,"
argues Kurzmann. "We want to buy
before investors arrive in CE and SEE.
We can buy top assets for 8.5-9.0%, and
with debt at 3.5-4.0%. Then you have
the capital from institutions arriving to
improve values."
Kurzmann pledges the geographic
balance of GTC's portfolio will be
maintained, with Poland accounting
for the largest share, but the main focus
As Motyl – clearly happy to see the US
fund directing strategy at GTC – notes,
Lone Star is opportunistic by nature.
"Romania and Hungary have liquidity
CEE. Lukasz Motyl, head of CEE Real
Estate for UniCredit Group, adds that,
"investors have now seen stable trends
in the region for macro-economics
and the real estate market for several
quarters."
"Now that the market is growing again, so must
we. Otherwise we may as well give up on real
estate and start in some other line of business"
of opportunity for many investors has
clearly moved south. "The Polish market hit bottom some time ago," points
out Dean, who says it makes sense that
GTC is scouting in Budapest and Bucharest. Supply and demand in those two
cities are balanced says Kurzmann, and
leasing is now picking up.
That sets up a simple equation. "Russia
and Turkey are out of the picture due
to politics," Motyl says, "and Central
European markets are already getting
crowded." He adds that while clients are
showing lots of interest in Hungary and
Romania, their eyes are also being drawn
farther afield to markets such as Serbia.
Bulgaria and Croatia, on the other
hand, remain "very quiet," the banker
adds. Oversupply in real estate and
continued economic weakness means
the banks are still not ready to lend to
property investors in those markets,
with the only activity centered on distressed assets.
Quick flip
That building interest is the driving
coming. I expect to see a lot flipping in
the former especially." Kurzmann notes
that if GTC sells newly acquired assets
quickly, "it will be due to pressure from
larger investors."
At the same time, as the caution of
institutional investors illustrates
it’s a strategy that carries risk. The
economies in the region remain highly
dependent on the Eurozone, which is
seeing its recovery stall. The banks in
Southeast Europe are still struggling
under mountains of non-performing
loans and government pressure, while
the US Federal Reserve's winding down
of quantitative easing threatens to raise
the cost of capital and dampen the hunt
for yield. To cap it all, the whole of
CEE is on tenterhooks over the Ukraine
crisis.
However, Kurzmann throws these concerns out one after the other. A weak
Eurozone will mean continued low
rates from the European Central Bank,
more competition to lend by European
banking groups, and attract investors
hunting for faster economic growth
34
I Central Europe
Good EU citizens
bne
Member states in Central and Eastern Europe often receive a regular
bashing from Brussels for their failure to implement EU policies. However,
a new report on infringements of EU legislation shows that they are better
than most at respecting the bloc's rules, with Latvia the most obedient of
all.
The relatively larger role of the state in the economy, dirty energy,
corruption and human rights protection are all issues that might be
expected to increase tensions between the new member states to the east
and Brussels. Yet a new report from the European Commission on cases
brought for violations of EU law in 2013 shows them outperforming the old
EU-15.
"The correct application of EU law is a cornerstone of the EU treaties and
at the heart of the Commission's regulatory fitness programme (REFIT),"
the report comments. As in 2012, most infringements (62% of all cases)
concern compliance with EU law on the environment, taxation, transport
and internal market and services.
Latvia presented the fewest problems for EU regulators, racking up just
20 instances of late or incorrect transpositions of EU legislation. The
Baltic state has just eight infringement cases open against it. It is closely
followed by Malta and fellow Baltic states Estonia and Lithuania.
That performance looks even more impressive given that the Baltics are
still recovering from the deep recession they tumbled into in 2009. It's
little coincidence that Italy, Spain and Greece are the worst offenders, with
Rome facing a total of 24 infringement cases, and 104 late or incorrect
transpositions.
Perhaps most surprising of all, however, is that Hungary sits happily in the
top 10 for obedience, with no more than 16 infringement cases against it.
Budapest has fought a running battle with Brussels since Prime Minister
Viktor Orban came to power in 2010, with the EU criticising government
policies on the economy, judiciary, media and human rights. The European
Parliament has just blocked the country's nominee for the European
Commission, with Tibor Navracsics judged unsuitable to oversee the
education portfolio.
The Czech Republic beat Hungary, despite being led by the eurosceptic
ODS until mid-2013, and then being under a caretaker administration
for the remainder of the year. Slovakia, the only Visegrad state in the
Eurozone, trailed some way behind.
However, Poland is the bad boy of CEE, with the sixth worst record, despite
Warsaw's strongly pro-EU policy in recent years. Despite Poland's heavy
use of coal and strong opposition to EU environmental targets, it was
taxation that incurred most of the 20 infringement cases opened against it
last year.
bne November 2014
compared with Western European markets, he claims.
The crisis in Ukraine offers similar
opportunity, he suggests. "We're optimistic it will end soon," the CEO says.
"Then we will see lots of money coming
into the region."
No choice
Others without a shareholder meeting
on the horizon are less bullish, even if
they support the strategy. "These are
very fragile markets," Dean admits,
"and a global shock would see a retreat
from Hungary and Romania. But the
macro risk is priced into the yields
already."
Yet that would hardly insure against
another serious wave of crisis. In short,
the dovish global environment has
investors brushing aside the risk. "We
can assume yield compression in these
countries in the coming years purely
powered by investor interest," sums up
Motyl.
That sounds eerily reminiscent of the
boom years before the crisis, albeit valuations are nowhere near the inflated
state seen in 2006. However, the UniCredit analyst offers a note of caution.
The banks, especially the German ones,
are getting very keen, and are starting to underprice risk as they fight for
business. "It's starting to remind me of
2007," Motyl worries.
Yet Kurzmann, who insists he has "no
idea" why GTC stock dropped when the
new strategy was announced, says he
fully expects shareholders to vote in
favour of the rights issue and acquisitions drive at the meeting later this
month. The company has no choice but
to buy and grow, he asserts. "We lost
heavily on purchases made in 2006
and 2007," he sums up. "Now that the
market is growing again, so must we.
Otherwise we may as well give up on
real estate and start in some other line
of business."
bne November 2014
Central Europe
I 35
of carbon credits. CEZ continues to
benefit from a generous allocation
of carbon credits secured from its
government owners, which it has been
able to sell for a profit in the market.
However, the European Commission
now plans to tighten the carbon credit
regime, which could threaten the
viability of CEZ’s lignite plants in the
long term.
CEZ plays "double or quits"
Robert Anderson in Prague
C
EZ, the largest power group in
post-communist Central Europe
by market capitalisation, is
reacting to the serious challenges it
faces by playing "double or quits" with
a possible large acquisition.
Power prices are expected to stay
near current lows, the EU is putting
together a tougher carbon credit
regime and CEZ’s foreign investments
have soured, yet nevertheless the
state-owned Czech group is planning to bid for its Slovak counterpart
Slovenske Elektrarne and build new
nuclear reactors at home.
Martin Novak, finance director,
admits that the short-term outlook for
power prices (and CEZ profitability) is
unpromising. “We don’t see any signs
of significant change [in prices],” he
says in an interview, pointing out that
forward contracts for next year – CEZ
is almost sold out – are barely above
the current low price of around ¤35
per megawatt hour (MWh).
According to some analysts, this price
level will soon make CEZ cash-flow
negative. “If your generating portfolio
is a bunch of large inflexible power
plants [like CEZ's], you will not make
much money,” says Jan Ondrich of
Candole Partners, a Prague-based
consultancy.
CEZ used to make big profits from
electricity exports to Germany when
prices were high, exploiting its lowcost installed base of lignite-burning
Novak argues that the lignite plants
are being retrofitted to extend their
life and make them cleaner, and that
in the shorter term CEZ will actually
benefit from an increase in the carbon
credit price and the knock-on effect on
power prices. He says CEZ will receive
carbon credits for free until 2020, and
any rise in the price of credits will
therefore boost its profitability. “For
our profitability, the higher the carbon
credit price the better,” he says.
Another splurge
During the boom years of high prices,
CEZ used its cash pile to go on a
spending spree in Southeast Europe,
snapping up distribution companies
in Bulgaria, Romania and Albania,
and building Europe’s largest onshore
wind farm in Romania. Many of
these investments, made from 2005
onwards, went sour after the global
financial crisis as local energy regulators intervened to cut power prices to
struggling households, and govern-
"E.ON recognised things were going wrong sooner
and acted; CEZ was reluctant, so they sat on the
assets"
and nuclear power stations. Since
the global financial crisis, howere,
power demand has fallen back – a shift
accentuated by improvements in the
energy efficiency of industrial companies and “non-market mechanisms”
introduced by governments to boost
renewable power, Novak says.
The power price has also slumped
because of low coal prices and a glut
ments made renewable energy subsidies less generous.
Ondrich blames CEZ for what he
calls “terrible value destruction” and
compares its speed of reaction to the
changing market unfavourably with
E.ON of Germany. “E.ON recognised
things were going wrong sooner and
acted,” he says. “CEZ was reluctant, so
they sat on the assets.”
36
I Central Europe
English lessons for Czech nuclear industry
bne
The EU gave the UK the green for public funding of its Hinkley Point nuclear
power plant, a decision that was welcomed in the Czech Republic, which
hopes to use a similar model to expand its Temelin facility. However,
Brussels warned the UK case is "not a blueprint" for the rest of Europe, and
Austria instantly launched a legal case.
On October 8, the European Commission as expected approved the UK's
"contracts for difference" funding model after London made concessions.
Under the approved contract, the UK will offer public guarantees to pay
£92.50 (¤118) per megawatt-hour over the next 35 years – double the current
market price – to EDF, the French operator of the first new nuclear plant to
be built in a generation.
The European Commission's earlier challenge to the UK project was seen
as a key part of the Czech government's decisions in April that it would not
give CEZ any guarantees for the ¤10bn expansion of the Temelin plant. The
state utility, having struggled throughout to win pledges of public support,
promptly dropped the tender on the project, which had been fraught by
controversy over the exclusion of France's Areva. Analysts welcomed the
news, having complained for years that the project was economically
unfeasible and would stretch CEZ's finances unreasonably.
However, the very same figures that helped kill the previous competition –
President Milos Zeman, powerful Finance Minister Andrej Babis, who has
since effectively taken control of the CEZ board, and Minister of Industry
and Trade Jan Mladek – were back within months calling for the scheme to
be resurrected. While apparently ruling out Russian state nuclear agency
Rosatom – one of the two finalists in the abandoned tender – the Czech
government says South Korean and Chinese companies have indicated they
intend to take part in the next hunt for a contractor.
CEZ CEO Daniel Benes told local press on September 30 that a green
light for London would help relaunch the Temelin tender. "It is always
good when someone big clears the way for you," he remarked to business
daily Hospodarske Noviny, adding: "I have tried to explain the contractfor-difference scheme... to probably three governments and it was always
difficult."
However, European Commission Vice-President Joaquin Almunia stressed
that approval for Hinkley Point "will not set any precedents". And Kelvin
Ross, editor of Power Engineering International, tweeted that European
Energy Commissioner Gunther Oettinger backed his colleague up when
speaking at a conference in October, saying that Hinkley Point is "a special
case, not a blueprint for other new build nuclear plants" in the EU.
Yet there is another potential obstacle to reviving the Temelin tender closer
to home than Brussels. Following up rising threats ahead of the Hinkley
Point decision, Austria confirmed immediately following the announcement
from the European Commission that it is launching a legal challenge.
bne November 2014
CEZ has recently reached a settlement
with the Albanian government to sell
its distribution company back for the
¤102m it paid, but it is still in dispute
with Bulgaria and Romania over
issues such as the investment commitments it made, as well as the level of
domestic power prices or subsidies for
renewable energy.
Novak blames the global financial
crisis for the group’s woes. “There was
a big portion of bad luck,” he says,
before adding that most of the investments were relatively cheap anyway.
He says that all of CEZ’s investments
are Ebitda positive now, but admits
that “some generate profits lower than
expected.”
“I would not look at it negatively. We
learned a lot," he insists.
Undaunted by this record, or the
unpromising outlook for power prices,
CEZ now plans to bid for the 66%
of Slovakian utility Slovenske Elektrarne that Enel of Italy has put up for
sale. Novak argues that the cultural
and technical similarities of the two
companies – which were once united
in the former Czechoslovakia – offer
substantial synergies. “There is nothing that would better suit us,” he says,
though he stresses that the shape
of the sale is still unclear. “It is all
about price and risk-sharing... Are we
obsessed with it? I don’t think so.”
The Czech centre-left government so far
appears divided over the merits of such
an acquisition. Social Democrat Economy Minister Jan Mládek is a supporter,
but Andrej Babis, the powerful finance
minister and leader of the centrist ANO
party, has questioned it on the basis
of CEZ’s troubled acquisition record.
Babis, whose ministry controls the
government’s 67% stake in CEZ, recently
cleared out the group’s supervisory
board to tighten his grip on the country’s
flagship state-owned enterprise.
Some analysts fear that acquiring
Slovenske Elektrárne (and its debt and
nuclear liabilities) could endanger
CEZ’s A- credit rating. “Acquisition
of whole SE would probably lead to
bne November 2014
lower dividends and negative market
reaction,” commented Petr Bartek of
Erste Bank Group in a recent note.
Patrick Hummel of UBS has estimated
that Slovenske Elektrarne has an
enterprise value (equity plus debt) of
up to ¤4bn, plus nuclear liabilities of
a further ¤3bn, and that there would
be a risk that CEZ would have to issue
new equity or hybrid debt to pay for it.
Novak dismisses such concerns, arguing that CEZ remains one of the most
profitable (in terms of Ebitda margin)
and least indebted utilities in Europe,
and points out that the company
Central Europe
state aid. A settlement between the UK
and Brussels has now been reached,
which could enable the Czech tender
to be reopened.
CEZ continues to push for the project,
but Novak admits that without some
kind of power price guarantee it will
not fly. “Without this kind of support,
nobody would be able to take the risk
of building the plant,” he says, though
he insists that it will happen one day.
Economy Minister Mladek also
remains keen on the project, pointing
out that “the Ukraine crisis supports
the case for building nuclear power in
"There was a big portion of bad luck"
recently announced plans for a 16%
cut in costs over the next two years.
He says the group could buy Slovenske
Elektrarne without needing to raise
equity. “An equity increase is one of
the last things we would do,” he says.
Nuclear horizons
Looking longer term, CEZ remains
keen on expanding the nuclear power
stations at Temelin and Dukovany,
which would maintain security of
supply – and make the country more
energy independent – when the ageing
lignite plants eventually have to close
as lignite supplies dwindle.
However, CEZ had to cancel the tender
for a partner for Temelin in April after
Brussels began a probe into whether a
similar investment contract between
EDF of France and the UK government
to build Hinkley Point C was illegal
the Czech Republic,” as the country
needs to become more energy independent, though he says that perhaps
a fully state-owned entity might have
to build the plants. The government
should publish a new nuclear power
strategy by the end of the year.
Novak admits that both acquiring its
Slovak counterpart and expanding its
nuclear plants would keep CEZ’s asset
portfolio focused on generation, at
a time when other struggling European utilities are trying to move away
from this. But he points out that CEZ
is also diversifying by investing into
renewable energy, gas supply, small
co-generation plants and customer
services such as telecommunications.
CEZ’s strong fundamentals mean, he
contends, that “there can be growth
through acquisitions to extend our
business further.”
I 37
38
I Central Europe
bne November 2014
Finally, the US Federal Reserve is likely
to start increasing interest rates next
year, potentially causing problems for
emerging markets like Poland, which
are dependent on external capital flows.
Poland also faces domestic uncertainty.
Donald Tusk, who headed the Polish
government since 2007, is leaving Warsaw to take the EU's top job of president
of the European Council. His successor,
Ewa Kopacz, has to seize control of her
fractious Civic Platform party and lead
it into next year's parliamentary election, trying for the party's third victory
in a row.
Clouds gather over
Poland's economy
Jan Cienski in Warsaw
A
dam Krzanowski lives in Krakow,
but he is being directly affected
by the Ukrainian-Russian conflict
1,500 kilometres to the east.
The co-founder of Nowy Styl, one of
Europe's largest office furniture makers,
he set up a Ukrainian subsidiary together with local partners operating a large
factory in Kharkiv producing largely for
the fast-growing Russian market. “There
is a double digit drop in sales in Ukraine
– about 30%,” he complains. “The Russian economy is also starting to sag.”
slowdown being battled by people like
Krzanowski, and by Polish exporters hit
by Russian sanctions.
To the west, the Eurozone seems to be
unable to restart higher growth, part of
a dismal record in Western Europe that
has the region performing more poorly
than it did during the Great Depression
Although growth in the first two quarters was still relatively strong, coming
in at an annual 3.4% and 3.3% respectively, the outlook is worsening. In its
analysis, Erste Bank predicts expansion
will slow through the second half of this
year and the only growth driver will be
Poland's large domestic market. “The
fragility of the Eurozone recovery and
aftermath of the Ukraine crisis poses
some downward risks to next year’s economic outlook,” the bank said, dropping
its forecast for growth in 2015 to 3.0%
from an earlier 3.5%.
However, even a glummer outlook for
this year and for 2015 still leaves Poland
as one of the fastest growing economies
"We are selling much less to Russia, but you
simply have to roll up your sleeves and work"
Krzanowski's troubles are one sign that
the atmosphere around the Polish economy is becoming a lot more troubled.
The prediction is for growth of 2.9%
this year and 3.1% in 2015 according
to Eurostat, the EU's statistical agency.
That compares to a lacklustre 1.6%
eked out last year, when the economy
appeared to be in danger of falling into
its first recession in two decades. But
those predictions are now being called
into question by a more hostile economic climate.
Squeezed
To the east, there is war and economic
of the 1930s. Second-quarter growth
showed small contractions in Germany (Poland's largest export market
accounting for a quarter of exports and
10% of GDP) and Italy, while France
remained flat.
“The external environment will remain
challenging in the coming months, with
spillover from the Russia-Ukraine standoff and weak growth in the eurozone
representing a downside risk,” notes a
new report by Standard & Poor's, the
rating agency.
in the EU (although that low bar for
success stands as a condemnation of
the EU's inability to kick-start a vibrant
expansion).
Sunshine through the clouds
There is some additional help on the
horizon. The country has seen inflation
turn into deflation, and the expectation
is that the central bank's rate-setting
Monetary Policy Council will cut the
already record low benchmark of 2.5%.
Erste predicts a total cut of 75 basis
points by the end of 2014.
bne November 2014
Kopacz is also scrambling to cement
her popularity before the 2015 parliamentary vote. In her maiden speech to
parliament on October 1, she promised
to slash the red tape that has been a
perennial complaint of Polish business,
as well as to make the tax system more
comprehensible, in measures aimed
at reducing structural impediments to
growth.
Although Poland has been rising in
the ranks of the World Bank's "Doing
Business" survey (it does slightly better
than its regional peers), it still has a
long way to go to match Europe's most
competitive economies. One measure
that could improve Poland's standing is
Kopacz's promise to improve procedures for construction permits, one
area where Poland has one of the worst
performance metrics in the world.
Central Europe
I 39
Erste creates new CEE bond indices
Nicholas Watson in Prague
Central and Eastern Europe’s bond markets are growing fast, outperforming
their more developed counterparts and showing scope for more
improvement. To capture this trend, Erste Bank Group has developed two
bond indices to help potential investors get a quick take on the region’s
government bonds.
The region’s third-largest bank on October 2 unveiled the “Erste CEE
Eurobond Index” and the “Erste CEE Local Currency Bond Index". The
countries included in those indices are Croatia, Czech Republic, Hungary,
Poland, Romania, Slovenia and Slovakia, while the last two are omitted from
the local currency index because they are both members of the Eurozone.
Russia and Turkey were excluded from both, as their size would simply
overwhelm any effect from the smaller markets. Poland is the largest in
terms of weightings.
Weights in Erste CEE Indices
The need for such steps can be seen
by Poland's growth statistics. Since
joining the EU in 2004, Poland has
averaged annual growth of 4.1%, but
the results in the last few years are
well below that average. “While the
Polish economy has recovered from
the slowdown in 2012 and 2013, its
middling real performance in [the
second quarter] points to an unsettled
recovery and a deteriorating business
sentiment across neighbouring EU
countries more generally,” says Marco
Zaninelli, assistant vice president of
Moody’s, in a new report from the rating agency.
While Kopacz and the central bank's
interest rates are important, Poland's
resilience really depends on people
like Krzanowski.
Nowy Styl recently bought a second
smaller German competitor, which
helps it compete in markets where a
“Made in Germany” label does much
more for sales than a “Made in Poland”
one. The company is also building a
factory in Russia, avoiding UkrainianRussian border troubles and the
potential impact of more sanctions
against Russia. “We are selling much
less to Russia, but you simply have to
roll up your sleeves and work,” says
Krzanowski.
weights
(2Q14)
Erste CEE Local Currency Index
Erste CEE Eurobond Index
HR
CZ
HU
PL
RO
HR
CZ
HU
PL
RO
SK
SI
3%
22%
17%
49%
9%
8%
9%
18%
40%
11%
6%
8%
“In order to better track performance of the region’s bonds, we wanted to
have one number to show how the region is doing. So we have introduced
two Erste CEE bond indices – two because not all investors are allowed
to invest in local currency bonds – which give investors a glance of the
performance of government bonds in CEE,” Juraj Kotian, head of macro/
fixed income research CEE at Erste, tells bne.
The indices are synthetic and non-investable, in that they simulate
investment in five-year government bond paper and calculate the total
return in euros, including the currency gain/loss if local bonds. “They are
instructive as an indicator of CEE bonds, not the CEE bond market,” Kotian
says, adding that Erste is in talks with Bloomberg about having the indices
fully updated with the financial data provider.
Kotian says the main reason behind the idea is that the CEE sovereign bond
market is now worth about ¤400bn, making it the fifth largest in Europe and
larger than the Dutch, Belgian or Austrian government bond markets. “Apart
from Poland, the bond markets of individual CEE countries are relatively
small, but pooling them together creates the fifth largest government bond
market in continental Europe,” the bank notes.
The region’s bond markets are also performing well; since the beginning
of this year to September 15, investments in CEE local currency bonds and
Eurobonds with a maturity of around five years were yielding a total return
measured in euros of about 5.3% and 6.9%, respectively. By contrast, the
five-year German Bund or French bond over the same time period returned
just 3.8% and 4.6% respectively. This in turn is attracting more money, as the
low interest rate environment forces more investors to diversify into other
assets outside of their traditional markets.
40
I Central Europe
bne November 2014
Government critics deride Hungary's
Potemkin economy
Kester Eddy in Budapest
R
ozsa Beer is crystal clear when
it comes to offering her opinion
on the Hungarian economy. Mrs
Beer, 59, who has retired from running
a small knitting business with her
husband, reels off a list of reasons why
she and her family are happy with local
economic developments.
"We've got a large house in the Budapest
suburbs, and the utility bills have really
got cheaper because of the [government
mandated] regulated price cuts,” she
says.
Her daughter, who is buying a house
with a foreign-exchange based mortgage loan, expects to see a “significant”
reduction in monthly repayments due
to the government's efforts to get such
loans judged “unfair.”
Meanwhile, having just had a baby, the
same daughter will see the extra housekeeping costs greatly eased by the latest
child benefit schemes.
“She can get full child allowance after
going back to work when the baby is 12
Little wonder Mrs Beer voted to give
Viktor Orban and his conservativenationalist Fidesz party a second
consecutive four-year term in general
elections last April – she “fully agrees”
with government slogans that “Hungary's doing better.”
"This government promised 1m new jobs when they
came to power in 2010. They have created nothing in
terms of private sector jobs – no net jobs whatsoever"
months. This, and the personal income
tax rate [of 16%], really favours families
with kids," she says.
Stats behind the slogans
Regardless of the prodigious output
from its formidable communications
bne November 2014
system – which typically repeats the
same upbeat news items in several
thinly disguised packages – the government claims are not mere rhetoric:
the Hungarian economy grew beyond
most analysts' expectations to hit
3.7% in the first six months, buoyed
by a strong performance in construction – up 19% in the second quarter
– and manufacturing, which continued to benefit from the expanding
automotive sector.
Central Europe
nothing in terms of private sector jobs
– no net jobs whatsoever. The public
sector jobs [public works schemes]…
are not sustainable from an economic
point of view,” says Lajos Bokros, a
professor at the Central European University and former finance minister in
the 1995-96 Socialist-liberal coalition.
As for GDP growth, while analysts
accept the veracity of the data, its
make-up is considered less than ideal.
foreign-currency loans into forints
will ultimately reduce the forex risk of
households, but they are adding huge
uncertainties to the financial sector,
Vertes argues. “Hitting the banking system by another HUF1,000bn
(¤3bn), the estimated costs of the
conversion, will make the recovery of
business lending impossible,” he says.
This, and talk of additional austerity
measures to keep the budget deficit to
Meanwhile, unemployment statistics
for July, released earlier in October,
put the jobless rate at 7.8%, down
from 10.2% a year earlier, and good in
comparison to the European average
of, coincidentally, also 10.2%.
"If you have to live off one job in Hungary, it's
darned difficult"
Based on such figures, together with
the healthy current account surplus
and the added fillip of the International Monetary Fund (IMF) raising its
forecast for full-year growth to 2.8%,
Orban boasted in a statement prior to
the EU summit in Italy on October 8
that Hungary had “proved that jobs
can be created while budget discipline
is sustained and state debt reduced.”
“This year, the expansion is partly
connected with temporary effects,
such as very high funding from the
European Union, much of which has
financed the boom in [state-driven]
construction projects,” Andras Vertes,
chairman of GKI, a Budapest economic
institute, tells bne.
While this conveniently ignored
news that Hungary's public debt had
climbed to a record high of 85% of
GDP at the end of the second quarter,
the economic progress, real or perceived, helped ensure Fidesz won out
in local elections throughout Hungary
on October 12 – replicating the party's
victories in the general election of
April and European Parliament election in May.
However, the seemingly good news
– and its sustainability – is, needless
to say, questioned by economists and
opposition leaders alike.
The employment statistics – boosted
as they are by Hungarians living
abroad but still registered in Hungary,
and by public works schemes designed
to get the long-term unemployed into
some sort of work routine – are treated with particular scepticism. “This
government promised 1m new jobs
[in the next decade] when they came
to power in 2010. They have created
True, with inflation at around zero,
real earnings are expected to rise by
between 3-4%, in turn boosting consumption by some 2% – a level not seen
since 2006. Yet despite this, and the
boost to higher earners by the introduction of a flat rate tax in 2011, Hungarians on average are worse off than a
decade ago. “Consumption in 2014 will
be 0.5% above that in 2010, but still 2%
below the level of 2004,” Vertes says.
At the heart of the matter is the uncertain business environment caused
by erratic government policy since
2010.“There has been a deterioration in the investment climate, and
legal security due to bad governance,
including hostile policy to the banks,”
says Vertes. This in turn has led to a
decline in investment. “Net foreign
direct investment over the first six
months this year was zero. If you
exclude the various bank recapitalisations, it was negative,” he says.
The latest government measures
aimed at forcing banks to convert
I 41
below 3% of GDP, makes many a Magyar wary of the economic future.
Awaiting passengers for his cycle rickshaw in downtown Budapest, Gergely
Nagy, 33, certainly sees his financial
circumstances very differently from
Mrs Beer. “I was an entrepreneur, but
there was no government support for
the self-employed, whatever they say,”
he tells bne.
As for growth of 3%, “I've not experienced that. This is my second, third
job even. I'm a swimming instructor
at a hotel for my main work,” Nagy
says, “If you have to live off one job in
Hungary, it's darned difficult.”
42
I Central Europe
bne November 2014
Cooperation not on the radar
Nicholas Watson in Prague
A
nother pan-regional project fell
by the wayside as the Czech
Republic said on September 30
it would hold an international tender
for a new radar system to replace its
obsolete Soviet system, abandoning
heavily criticised plans to try to build
its own system with other Central
European partners.
The project for a Mobile Air Defence
Radar (MADR) had taken on greater
urgency given justifiable worries by
the so-called Visegrad Group (V4) –
Poland, Hungary and the Czech and
Slovak Republics – about an increasingly assertive Russia. However, an
idea first mooted back in June by the
V4 to build their own system rather
than purchase an off-the-shelf system
from the likes of Saab, Thales, Selex
or Raytheon had caused consterna-
tion within defence circles, which
feared that such a strategic initiative
was being used as a means to prop up
the local defence industry rather than
promote regional security.
In the statement, the Czech defence
ministry said: "[it] has decided to
bidding process... In the first phase
till 2017, the requirement is for five
3D radars to replace the obsolete
Soviet design technology still in
the inventory. The envisioned lead
time is 18-24 months from contract
signature. To that effect, the Ministry
will soon prepare an international
"What might be a politically attractive project for
V4 would be extremely expensive and difficult to
maintain"
acquire a three-dimensional Mobile
Air Defence Radar (MADR) capability
through an international competitive
tender. The value of the acquisition is
expected to oscillate between CZK1.51.7 billion."
bne November 2014
The Czech MoD essentially acknowledged what defence insiders had
being saying all along: namely, that
such a complex system could not be
built within the short timeframe available.
Said Saab in a statement on September 21: "We launched our next generation air defence radar system at the
beginning of 2014 after more than 5
years of development, within a similar
timeframe as some of our international competitors. With the utmost
respect to the great expertise and skill
of the local industry, we are afraid it is
not realistic to produce such a sophisticated system considerably faster, as
the need of V4 armed forces demand."
Usual failings
Signs that the pan-regional plan to
build their own radar system was in
trouble had been building in the leadup to the Czech announcement.
On September 14, the Financial Times
reported that Poland, the regional
leader with the largest defence
industry and most aggressive posture
towards Russia, had decided to pull
out of the project, after concluding
that the other members of the V4
had little to contribute to the modernisation of its military and defence
industry.
A spokesman for the Polish defence
ministry denied to the FT that the
country had pulled out of the project,
saying discussions were a “work in
progress."
Without the Poles involved, insiders
said the Czech defence industry would
not be able to handle the project – Slovakia and Hungary have little in the
way of defence companies – within
the time constraints, and costs would
inevitably spiral. Given that the radar
market is already overcrowded with
prices to match, any domestic solution
would be far more expensive.
For this reason it would also be
uneconomic. Defence sources say
that in order for the project to be
economically feasible, the V4 consor-
Central Europe
tium building it would need to sell
a lot more of its radar system than
what could be absorbed by just the V4
countries. Given that the orders from
the four countries would only amount
to 17 radars worth about ¤300m, the
consortium must sell more globally
into what one industry insider calls
an already "saturated" radar market.
"The likelihood of finding a customer
outside the V4 is not realistic," says
one industry insider. "What might be
a politically attractive project for V4
would be extremely expensive and difficult to maintain."
Critics of the project also point out
that local industry would in any case
benefit if open tenders were held
by the countries in question. This is
because such defence projects inevitably contain what are called offset
programmes, whereby local industry
is involved in the delivery and maintenance of the project. For example,
Saab's offset programme for the Czech
Republic's leasing of 14 Gripen fighter
aircraft provided almost ¤1bn of work
to the broader local economy over a
10-year period.
Such a point was tacitly acknowledged
in the Czech defence ministry's statement September 30. "With a view to
the centrality of the order for national
defence, the supplier will be required
to be solidly embedded in the Czech
Republic; the Ministry will therefore insist on engaging the domestic
defence industry," it said.
Disconcertingly for the Central European governments, this is another
example of a failed attempt at a panregional project. Such regional efforts
have a poor history: for example, a
project to build a new nuclear plant
in Lithuania between the three Baltic
countries and Poland has fallen apart;
and since it achieved its initial goal of
getting the four countries into the EU
in 2004, the V4 has attempted to foster
cooperation in cultural and security
matters, but has to date singularly
failed to deliver anything in the way of
the latter.
I 43
44
I Southeast Europe
bne November 2014
performing loans (NPL) of 10% – way
above the 2.5% average for all Turkish
banks and the 3.5% average for Turkey's
Islamic lenders. "A high NPL ratio means
high provisioning, which again reduces
liquidity," explains the analyst, pointing out that despite the liquidity issue,
on paper at least, the bank remains in
good health with a capital adequacy
ratio of 15%, comfortably above the 12%
minimum decreed in Turkey's banking
regulations.
A TRY225m ($100m) capital increase
was approved on October 15, which will
provide the bank with some short-term
relief, but analysts suggest it’s likely to be
followed by further requests for funds.
Breaking the Bank Asya
in Turkey
David O'Byrne in Istanbul
A
little over a year ago, Turkey's
largest Islamic finance house,
Asya Katilim Banka, boasted
Sharia-compliant assets of $12.1bn –
enough to place it in the top 30 of the
world's Islamic financial institutions.
Today, however, the future of Bank
Asya, as it’s commonly called, is in doubt
following a roller coaster few months
that saw its shares repeatedly suspended
over mounting criticism of the bank's
operations and suspected government
pressure over its ownership.
Much of that criticism has come from
pro-government quarters, culminating in
the claim by Turkish President (formerly
prime minister) Tayyip Erdogan in midSeptember that Bank Asya was effectively bankrupt and that the country’s
banking regulator, the BDDK, should
step in and take it over.
Certainly market confidence in Bank
Asya, has taken a hit. Suspended for five
weeks to September 15, when the shares
started trading again on the Istanbul
Stock Exchange (BIST) they immedi-
ately fell by 40% to an all-time low of
TRY0.64, less than a third of their price a
year earlier.
In the short term the bank's problems
stem from second-quarter results that
showed a 25% fall in deposits over the
first half of 2014 – a capital outflow
widely blamed on state companies and
government supporters closing their
accounts. Media reports suggested this
resulted in as much as TRY4bn ($1.76bn)
being withdrawn in the second quarter alone. "A huge outflow of deposits,
especially from state companies, has
caused a short-term liquidity problem
for the bank," says a banking analyst at a
major Istanbul brokerage, asking not to
be identified.
This liquidity problem has been exacerbated by an unusually high rate of non-
Ownership issues
Analysts concur that Bank Asya's position
is unlikely to be solved without a change
in the bank's main shareholders.
Currently 54% of Bank Asya stock is
Photo: Dusan Milenkovic
traded on the BIST, with 40% of the
remainder held directly or indirectly by
the bank's eight-man board, all believed
to be supporters of the religious movement of US-based moderate Islamist
preacher Fetullah Gulen.
Heading a movement that reportedly
boasts anywhere from 1m to 8m adherents in Turkey and a business empire
that includes Turkey's Zaman newspaper
group and Samanyolu TV channels, and
a nationwide chain of schools, Gulen was
until around two years ago an important
ally of Erdogan's Justice and Development Party (AKP).
The relationship benefited both sides:
Gulen's support is widely credited with
having helped bring the AKP to power
in 2002, and the resulting favourable
economic climate in turn helped the
movement's businesses.
Bank Asya itself enjoyed a rapid expansion from being a minor participation
bank (as Islamic banks are called in
"Bank Asya didn't do anything wrong; before the
capital withdrawals it was in good shape"
Southeast Europe I 45
bne November 2014
Turkey) with a few branches, to a major
provider of small business loans with a
countrywide network of 272 branches
and even a branch in the Iraqi Kurdish
capital of Erbil.
An investigation ends but questions begin
That rapid growth though has contributed to the bank's current dire position,
argue analysts. Unable to compete
directly with Turkey's main small and
medium-sized enterprise (SME) loan
providers Halkbank and Garanti, Bank
Asya has grown aggressively by targeting
second-tier SMEs, which by definition
carry a greater risk of default.
A prosecutor on October 17 dismissed charges against 53 people in a corruption
case that targeted President Recep Tayyip Erdogan’s inner circle, and resulted in
the resignation of four ministers when the scandal broke in 2013. The prosecutor
argued there were problems with collecting evidence, and the case lacked proof
of criminal elements, though the move is sure to renew criticism that Erdogan
and his government are undermining the independence of the judiciary.
The spectacular fallout between Erdogan’s AKP and the Gulen Movement,
which resulted earlier this year with the
leaking allegedly by Gulen supporters of
illegally recorded phone conversations
suggesting corruption at the highest level
of government, has made that risk look
all the greater.
Manoeuvrings
What will happen now is unclear. Analysts suggest that the country’s banking
regulator could press for a change in the
major shareholders, but talks over the
summer between existing shareholders
and both Qatar's Islamic bank and Turkey's Ziraat bank came to nought, with
the latter instead being granted approval
to launch its own Islamic banking arm.
Bank Asya itself has warned it may
take the banking regulator to court if it
doesn't act to protect the bank from damaging reports. Indeed, Turkish banking
law allows for the prosecution of anyone
disseminating negative publicity about
a bank that could cause it to collapse
– a stipulation apparently lost on both
the government and much of the progovernment media. "Bank Asya didn't
do anything wrong; before the capital
withdrawals it was in good shape," says
Emre Deliveli, economic columnist on
Turkey's English language daily Hurriyet
Daily News, suggesting that the bank's
problems are a direct result of government actions.
"The bottom line is that if you do
anything to displease or anger Erdogan,
you can expect problems," he says.
Kivanc Dundar in Istanbul
The suspects included the sons of former interior minister Muammer Guler,
former economy minister Zafer Caglayan, Turkish-Iranian businessman Reza
Zarrab, and the former manager of the state-run lender Halkbank, Suleyman
Aslan, in whose home police found $4.5m cash in shoe boxes. Businessmen with
close ties to the ruling Justice and Development Party (AKP) were also detained
when the corruption scandal erupted on December 17, 2013. All suspects were
later released pending trial.
Zarrab was suspected of forming a criminal network that bribed state officials
to facilitate illegal gold trading with Iran via Halkbank, in breach of international
sanctions. The ministers Guler, Caglayan, and then EU affairs minister Egemen
Bagis were accused of taking bribes, and resigned from office. Ministers and
lawmakers can be tried in court only if parliament decides to remove their
parliamentary immunity. A special commission has been set up in the AKPdominated parliament to investigate the corruption allegations against the
ministers, but this investigation continues at a snail’s pace.
In February 2014, several audio recordings started to circulate on the internet,
through the social media platforms Twitter and YouTube, purportedly showing
corruption in the highest circles of the government. In one of these leaked
recordings, Erdogan was allegedly discussing with his son Bilal how to get rid of
vast sums of cash stashed at their home. The conversation between Erdogan and
his son was supposedly recorded shortly after the corruption investigation was
launched on December 17. The postings were all anonymous and the authenticity
of these leaked voice recordings has not been verified. Later the government
blocked access to Twitter and YouTube, prompting a backlash from the EU and
the US.
Erdogan always maintained that the voice recordings were fake and had been
fabricated by elements within the police and judiciary loyal to his foe US-based
cleric Fethullah Gulen. Erdogan also claimed that the corruption probe was a
conspiracy orchestrated by foreign powers and their local collaborators to topple
his government. Erdogan’s strategy played well with AKP’s core constituency. His
party won the March 2014 local elections and he won the presidential election in
the first round in August.
The government also responded by replacing and reassigning prosecutors and
thousands of police officers who took part in the investigation. In September,
dozens of police officers were detained on suspicion of illegal wiretapping.
On October 12, government-backed candidates defeated Gulen-affiliated
candidates in elections for the Supreme Board of Judges and Prosecutors (HSYK).
Government-backed candidates won eight of out of 10 seats in HSYK, a body
responsible for the appointment of judges and prosecutors.
46
I Southeast Europe
bne November 2014
Bulgaria’s agony continues
Sandy Gill in Sofia and Clare Nuttall in Bucharest
T
hree weeks after snap elections
were held October 5, former
prime minister and GERB
party leader Boiko Borisov was still
struggling to form a coalition. The
political instability that has plagued
Bulgaria for almost two years looks set
to continue.
On October 20, Borisov said he would
hold another round of talks with
potential allies in an attempt to avoid
a repeat of elections in Bulgaria. The
largest party in Bulgaria’s fragmented
new parliament, GERB (Citizens for
European Development of Bulgaria)
announced October 16 that it had
agreed with the nationalist Patriotic
Front coalition to work together in
government. The Patriotic Front also
agreed to support centre-right toughguy Borisov as prime minister. This
gives GERB the 19 seats held by the
Patriotic Front – comprising the Bulgarian National Movement (VMRO) and
the National Front for the Salvation of
Bulgaria (NFSB) – in addition to the
84 seats that it holds, meaning Borisov
will need to find at least another 18
seats for a majority in the 240-seat
national assembly.
Striking the deal with the Patriotic
Front was good news for GERB, which
the previous day had failed to make
headway in talks with the Reformist
tion expressing frustration with the
Reformists. Writing on his Facebook
page after the talks, Borisov slammed
the Reformist Bloc as “ill-prepared” and
"an unstable” partner. "I am extremely
dissatisfied with the Reformist Bloc's
preparation for today’s consultations,”
he wrote.
"GERB faces some unpalatable choices, including
an alliance with nationalist parties which might
strain relations with some of Bulgaria's Western
allies"
Bloc, the rightwing coalition considered to be its most likely ally in government. Six hours of talks on October 15
ended with no agreement between the
two parties, with the GERB delega-
After meeting all seven of the parties
represented in Bulgaria’s new parliament, GERB now plans to hold another
round of talks with four parliamentary
parties including the Reformists, the
bne November 2014
Patriotic Front and – more surprisingly
– the Bulgarian Socialist Party (BSP)
and the leftwing Alternative for Bulgarian Revival.
Southeast Europe
I 47
Bosnians to wait for progress on economy
Clare Nuttall in Sarajevo
"The natural ally for GERB is the
Reformist Bloc, which shares many
points of their platform, but there is
a very strong animosity between the
parties’ leaders," says a report from
the Centre for Eastern Studies (OSW).
"The Reformist Bloc... are traditionally
reluctant to engage with Borisov, as he
has taken over the centre-right electorate." Other areas of conflict include the
Russian-led South Stream gas pipeline project and the expansion of the
Kozloduy nuclear power plant.
Far end of spectrum
The deal with the Patriotic Front
confirms forecasts that Borisov would
have to search among Bulgaria’s far
right and nationalist fringe parties
to put together a coalition. Tim Ash
of Standard Bank forecast after the
vote that forming a new government
would be “acutely difficult” for GERB,
which faces “some unpalatable choices,
including an alliance with nationalist
parties which might strain relations
with some of Bulgaria's Western allies.”
The Patriotic Front "seems willing to
enter into a coalition, but its nationalistic rhetoric may raise tensions with Bulgaria’s neighbours and the EU," agrees
OSW's report.
Should Borisov fail to put together a
coalition, Bulgaria may have to yet
again head for early elections. However, President Rosen Plevneliev spoke
out against this option on October
20. “To me there is no option for new
elections,” Plevneliev told journalists,
according to local daily Sega.
The October 5 elections were Bulgaria’s
second early elections in less than two
years. It’s been political mayhem, in
fact, since early 2013, when Borisov
was pushed from office by mass demonstrations over high electricity bills
and other factors such as high-level
corruption. Though his GERB remained
the largest political grouping following
the elections, there emerged a precari-
Three nationalist candidates won the race for Bosnia and Herzegovina’s
rotating presidency on October 12, while no party took a majority in the early
parliamentary elections held on the same date. With the vote merely opening
the way for negotiations on a new coalition government, delays can be
expected before much needed action on the economy is taken.
Early elections were called in February after protests over corruption and
unemployment erupted into the worst outbreak of violence since the end
of the Balkan War in 1995. However, hopes of improvements this year were
dashed after some of the worst flooding on record hit large parts of the
country. At the beginning of this year, Bosnia was on track for annual GDP
growth of around 2%, but forecasts have now been slashed to close to zero,
because of a combination of flooding and slow recoveries in Croatia and
Bosnia’s other trading partners within the EU.
Investment decisions have also been put on hold during the last eight
months of political uncertainty. “Bosnia has a history of coping with an
unstable political environment, but... investors want stability,” Erste Bank
analyst Alen Kovac tells bne.
Nor has there been much progress on reforms to the business environment,
while privatisations of major companies including BH Telecom have stalled.
The European Bank for Reconstruction and Development’s (EBRD) “2013
Transition Report” identified areas where work was needed, including
infrastructure development, improving the business climate, energy sector
reform and privatisation of state owned enterprises.
“Since then, there hasn’t been much progress, especially in recent months
due to the combination of the pre-election period and the aftermath of
the floods,” says the EBRD’s lead economist for Southeast Europe, Peter
Sanfey. While things are “not at a complete standstill” – there has been some
progress for example on business registration and within the framework of
Bosnia’s IMF programme – “we would hope after there is a new government
there would be progress,” Sanfey says.
Speedy progress on these issues after the election is not expected, since Bosnia
has a history of taking a long time to form a new government. “Votes don’t mean
much – the party with the most votes will not necessarily be in government
because at least five or six parties are needed to form a government at the state
level,” Ivana Maric of Sarajevo-based think-tank Populari tells bne.
The latest round of elections has brought the complex power-sharing
structure of the Bosnian government under scrutiny, sparking calls for
political reforms. The system of two autonomous republics, intended to
ensure peace within Bosnia, has the downside of creating conditions for
political deadlock that has prevented reforms from being introduced, as well
as creating opportunities for corruption.
However, economic issues remain the most pressing tasks for Bosnia’s new
leaders. According to Maric the population is “moving forward from national
topics to real topics – unemployment, corruption and living standards.”
48
I Southeast Europe
bne November 2014
ous government of the former communist Bulgarian Socialist Party (BSP) and
the mainly ethnic Turkish Movement
for Rights and Freedoms (MRF), commanding exactly half the members of
the 240-seat parliament – and incongruously supported when necessary by the
extreme nationalists of the Ataka party.
The attempt in June 2013 to install
Delyan Peevski, a controversial MRF
parliamentarian and businessman, as
chief of the national security agency
triggered mass protests that continued in general anti-government mode
months after the appointment had
been withdrawn. The government rode
those out, only to succumb in June this
year to a cluster of catastrophes: poor
BSP results in European Parliament
elections unsettled the coalition, while
Brussels’ objections to Russia’s South
Stream gas pipeline – a project dear to
BSP hearts – divided it further. Then
a fallout between Peevski and his old
ally Tsvetan Vasilev provoked massive
withdrawals from the latter’s Corporate Commercial Bank (KTB), sending
Bulgaria’s fourth biggest lender into
special administration.
With the government promising to
resign in late June – and actually
doing so in late July – unfinished
business looms for Bulgaria’s next
government when it is actually
formed. Populist tariff cuts have
produced a massive and threatening
hole in electricity system finances. No
decision has been taken on rescuing
– or failing to rescue – KTB, whose
depositors are currently in limbo,
The only magazine covering
business, economics, finance
and politics in the dynamic
new markets of Emerging
Europe and the CIS.
Boby Dimitrov
denied access to theirPhoto:
deposits
or to
deposit insurance. And parliament
failed to agree on a budget update
that would manifestly be necessary well before the year’s end. Not
empowered to alter the budget or
raise foreign debt, the presidentially
appointed caretaker government of
Georgi Bliznashki that took over on
August 6 has been holding the fort.
GERB has a reasonably successful
record in government between 2009
and 2013, and during its election
campaign the party touted its demonstrated ability to get infrastructure
built and EU funds flowing. However,
the party first needs to bring new
allies on board if it is to create a stable
government capable of addressing
these problems.
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bne November 2014
Southeast Europe
I 49
Lack of supervision
While Fullani has not been accused of
direct involvement in the thefts, he is
ultimately responsible for the alarming
lack of supervision within the bank.
Since the BOA is also responsible for
supervision of the Albanian banking
sector, this concern extends to how
effectively it has carried out that role.
In particular, given Albania’s large
informal economy, and the problems
of drug and human trafficking in the
country, there are questions about to
what extent illegal profits have been
channeled through the banking sector.
Albania’s central bank
on trial
Clare Nuttall in Bucharest
T
he discovery that ¤5m worth
of cash had been stolen from
Albania’ central bank resulted in
a large-scale inquiry with more than
16 of the bank’s employees including
its now ex-governor Ardian Fullani
facing trial. The negligence discovered
on the part of Fullani and other senior
officials raises questions about the
supervision of Albanian banks, and
whether prosecutors will seize the
opportunity for a wider investigation
into suspected corruption in the
financial sector.
Thefts amounting to ALL715m (¤5m)
in cash emerged in July, when seven
Bank of Albania (BOA) employees were
arrested on suspicion of stealing from
the bank over a four-year period. One
economist confessed to police that he
had smuggled banknotes out of the
building inside his clothes or old books.
Ardian Bitraj told police he used the
money to gamble, stealing notes daily
during the 2014 World Cup.
As the probe widened, pressure
mounted on Fullani, who had chaired
the bank since 2004, to resign. On
September 5 he was taken into police
custody and is now under house arrest
while several charges against him are
investigated. And on September 18,
The Financial Action Task Force
(FATF), an inter-governmental body
that promotes policies to combat
money laundering and terrorist financing, reports that while the BOA established a task force to confirm banks’
compliance with customer verification
rules, “enforcement remains poor in
practice.”
Other reports point out that the relatively large proportion of cash transactions in the Albanian economy have
made it easier to launder funds. “The
relative size of the cash-based informal
economy facilitates the laundering and
integration of proceeds of crime,” says
a 2011 report from the International
Monetary Fund (IMF). “The number of
sectors identified with illegal practices,
including illegal gambling establishments and exchange bureaus, as well as
the vulnerabilities that relate to cross-
"The lack of responsibility in the management of
the Bank of Albania raises questions about the
supervision of the banking sector"
Albania’s parliament voted to dismiss
him from his post for alleged abuse
of office. A statement from Albanian
prosecutors said that Fullani, together
with the bank’s inspector general Elivar Golemi, “because of their inactions,
have created conditions to violate the
security of money in the administration of the Bank of Albania.”
border transportation of currency,
also make Albania at risk for [money
laundering] activity.”
A 2014 report by two members of the
Albanian National Bar Association,
titled “Laundering of Crime Proceeds
in Albania”, agrees that the country is
“a suitable place for money laundering
50
I Southeast Europe
because of the corruption, cash transactions and the informal economy...
The construction sector, creating commercial companies, and opening casinos and gambling are the main means
of money laundering in Albania.”
While the report adds that, “These
methods appear to be less sophisticated than countries that have developed
financial markets and where money
laundering is done through complex
bne November 2014
opposition from Socialist Party MPs.
Discussions on his re-appointment
took place at the same time as the
trial of former deputy PM Ilir Meta on
charges of asking for favours in return
for public tenders. Fullani’s wife was
one of the panel of judges who acquitted Meta.
Albania’s then prime minister, Sali
Berisha, whose Democratic Party of
Albania was the senior partner in the
"Albania has developed a reputation for being a
crossroads for drug trafficking, human trafficking
and money laundering"
financial transactions,” it is unlikely
that corruption on this scale is possible without involving the banking
sector.
“Albania has developed a reputation
for being a crossroads for drug trafficking, human trafficking and money
laundering. There is no way that these
activities could make up such a large
proportion of GDP without using
the banking sector,” Gary Kokalari,
founder of Albanians for a Democratic
Albania, which is involved in fighting corrupt practices in Albania, tells
bne. Kokalari believes that the “lack of
responsibility in the management of
the Bank of Albania” raises questions
about the supervision of the banking
sector.
Full of Fullani
This is not the first time that Fullani
has been the subject of controversy.
A career banker, he joined the BOA
as deputy governor in 1992, and was
appointed governor in 2004. However,
he was known for cultivating close
links with politicians from both left
and right, and was more often seen
in Tirana restaurants than behind his
desk at the bank.
In 2011, Fullani was re-appointed for a
second seven-year term, despite fierce
coalition government alongside Meta’s
Socialist Movement for Integration,
proposed that Fullani serve a second
term. The Socialist Party, which came
to power under Edi Rama in September 2013, opposed the appointment,
claiming it was connected to Meta’s
trial. Socialist PMs also accused Fullani of striking deals behind the scenes
with the government, including over
the financing of the budget deficit.
Albania is the most corrupt country
in Europe, according to Transparency International. In 2013, Albania dropped to 116th place among
the 117 countries on the anti-graft
NGO’s annual “Corruption Perceptions Index.” PM Rama came to
power promising, like many Albanian
leaders before him, to be tough on
crime, corruption and drugs. In June,
police launched a dramatic operation at Albania’s so-called “marijuana
mountain,” where an estimated ¤4.5bn
worth of the drug is produced every
year. Around 800 police were involved
in the operation, which resulted in
several arrests and the destruction of
billions worth of drugs.
However, according to Kokalari, this
was a relatively easy and high-profile
target compared to making progress
against trafficking in hard drugs,
money laundering or government
corruption – for example by revisiting
past privatisations of companies such
as Albtelecom and Albpetrol.
EU push
Tirana now has a new incentive to
address corruption. After numerous
failed attempts, in June the country
was finally given EU candidate status,
although European foreign ministers
said that more progress in tackling
organised crime and corruption would
be needed before it can join.
There is some evidence of progress
recently. A spokesperson for Albania’s
Ministry for European Integration tells
bne that Albania has been working in
close cooperation with European partners, and “anti-corruption measures
have been focused on increasing transparency and creating a track record.”
A 2014 report from the European
Commission also identified “continued
political will to act decisively... and
fight against corruption, as shown by
the adoption of new legislation in this
area.”
The government has prepared a draft
law on protection for whistleblowers,
with a focus on the public sector, that
is due to be presented to the parliament in November. The six months
after Rama’s election, from October
2013 to March 2014, also saw a 16%
increase in the number of corruption
cases referred to prosecutors, though
the conviction rate remains relatively
low.
Meanwhile, at the BOA Rama appears
determined not to appoint a Fullani
clone. Shortly after Fullani’s arrest
and subsequent sacking, the PM
indicated he could look outside the
country for a replacement. However,
with his first candidate – the former
governor of the Bank of Argentina
Mario Blejer – rejected by President
Bujar Nishani, it may be some time
before order is restored at the bank
under a new governor.
bne November 2014
Southeast Europe
Bumpy road for investors
in Romania
Clare Nuttall in Bucharest
I
n any discussion about the difficulties
of investing in Romania, the state of
the country’s transport infrastructure is
likely to compete with the tax regime and
corruption as the worst obstacle. Bucharest is
now drawing up a new transport strategy for
long-term development of the sector, but so
far successive governments have been long
on ideas and short on concrete progress.
At a conference in Bucharest in September,
Romanian President Traian Basescu struck
a chord with investors when he slammed
the way his country's governments had
failed to use EU structural funds to invest
in infrastructure. During the 2007-2013
EU budgetary period, Romania absorbed
only 37.2% of the ¤19bn available, spending around ¤7.1bn. “We must spend ¤12bn
by the end of 2015 so as not to lose this
money,” Basescu told the Forbes CEE
Forum, but adding sourly that, “I can’t be
optimistic that Romania will succeed.”
New strategy
A new transport strategy currently being
drawn up by the government is due to
be completed in October. However, the
presidential elections the following month
mean that decisions on the sector are not
expected immediately, and unless new
legislation setting out specific actions is
adopted, ambitious plans could yet again
fall by the wayside.
This is partly due to a government focus on
short-term over long-term goals. Bogdan
Belciu, partner at PwC Romania, points
out that despite a relatively generous
allocation of budget funds for infrastructure investment, “recently the government
has kept the budgetary deficit under tight
control mostly by limiting capital projects
spending. While this helps keeping the
macroeconomic stability of the country,
it fails to address Romania’s long-term
development needs.”
The long-running saga of delays and poor
decisions on Romania’s A3 motorway
highlights the lack of progress. First proposed back in the early 1970s, the A3 was
dreamed up as a way to connect Bucharest to the road network in neighbouring
Hungary across Transylvania via Ploiesti,
Targu Mores and Cluj-Napoca. Back in
2003, the Romanian government signed a
¤2.2bn deal with US construction company
Bechtel to build 415km of the planned
highway. The contract was finally cancelled
in May 2013 with just 52km completed,
although Bucharest still ended up with a
¤1.4bn bill, most of which was penalties
due to Bechtel.
The highway is finally close to completion,
but until that happens companies that set
up operations in central Romania are at a
clear disadvantage to their peers closer to
the Hungarian border; the latter benefit
from Hungary’s more developed road
network, which can quickly whisk their
products away to Germany and other European markets. Meanwhile, manufacturers
in central Romania are forced to build in
extra delivery time for exports due to their
slow and unreliable route to international
markets.
Poor road infrastructure is also affecting
the level of traffic through the Black Sea
ports in Romania and neighbouring countries. Manufacturers in cities as far northwest as Vienna are closer as the crow flies
to Romania’s Constanta than the North Sea
ports. However, “due to the poor state of
the Romanian roads, they send their goods
north to Hamburg or Rotterdam. Even
some companies in northern Romania
are choosing to send their goods north,”
according to Tomas Moser, chairman of
Danube Logistics SRL.
Reputation damage
Overall, Romania only has around 450km
of highway – a tiny amount for Europe’s
12th largest country. As a result, investors
continue to curse the lack of investment
into transport infrastructure. PwC forecasts
that infrastructure spending will increase
I 51
by a steady 5% a year to reach $30bn by
2025. However, the firm’s “CEO Survey
2014” finds that transport infrastructure is
still one of the country’s “main economic
vulnerabilities.” 88% of CEOs surveyed
said that the government should make
improving infrastructure a priority – the
highest percentage in any of the countries
in the worldwide survey. 78% of respondents thought the government had failed
to put sufficient emphasis on infrastructure. “Romania’s attractiveness as an
investment destination for manufacturing industries depends on improving the
country’s transport infrastructure,” Belciu
tells bne.
Other studies confirm the damage that a
lack of investment in road and rail infrastructure is doing to Romania’s reputation
among investors. The latest global competitiveness index from the World Economic
Forum (WEF) finds that although Romania advanced to 69th place on this year’s
index, its score is still dragged down by the
poor state of its transport infrastructure.
Romania’s roads are not the only problem. While railways operator CFR has
invested into some fast intercity lines,
the average speed of trains on intercity
lines is just 87km/hour. Data published
by Eurostat in December 2013 shows that
amid a pan-European decline, Romania
had seen one of the sharpest falls in rail
freight transport. Even river transport is
problematic; the stretch of the Danube,
one of Europe’s major waterways, along
the Romanian-Bulgarian borders is one of
the worst maintained of the entire river,
making it difficult to navigate and deterring traffic.
Despite these obstacles, PwC’s Belciu
believes that, “Romania could position
itself to be a European eastern gateway by
improving its transport infrastructure.”
This would require investment into
highways, developing sea and river ports,
making use of the Danube-Black Sea canal
and introducing multimodal connections
(truck and train) across the Carpathians.
The government’s new transport strategy
is expected to set out some new goals for
this sector, but only a serious commitment
to increasing spending will stop poor transport infrastructure weighing down the
Romanian economy.
52
I Eurasia
bne November 2014
l’Avenir on August 28. His positive
test followed those of the Iglinskiy
brothers, Maxim and Valentin, who
were both caught using the banned
blood booster EPO. Maxim had helped
Nibali to win the yellow jersey this
summer.
Speaking to bne at the beginning of
the Almaty Tour on October 5, the
current Astana Pro Team's general
manager, Alexandre Vinokourov said
that because of cycling, “Now the
whole world knows about Astana and
Kazakhstan.”
Indeed, but perhaps not in the way
that President Nazarbayev and his
advisers had planned.
The peril of using bikes
to bury Borat
Jacopo Dettoni in Almaty
I
talian cyclist Vincenzo Nibali made
his way towards the start line amid
dozens of excited fans wearing
sky-blue T-shirts celebrating national
cycling hero Alexandre Vinokourov
and flying Kazakhstan flags. Born
and bred in Sicily, Nibali sported a
cycling jersey printed with the colours
of Kazakhstan's national flag and the
name of the country's capital city,
Astana.
After his triumph on the ChampsÉlysées at the 2014 Tour de France, the
slender Sicilian stole the spotlight at
the start of the Almaty Tour on October
5, a professional cycling race that has
featured on the International Cycling
Federation's (UCI) calendar since
2013. Willing or not, he has become an
ambassador for Kazakhstan since he
joined the Astana Pro Team, a cycling
powerhouse backed by President
Nursultan Nazarbayev himself.
But as the Almaty Tour began, storms
were gathering over Nibali’s Tour
de France triumph and his Astana
Pro Team that threaten to leave
Nazerbayev sporting dream in tatters.
On October 16, it emerged that Astana
Pro Team is to be subjected to “a full
review” of its licence over the next
month following a third positive
Club of kings
Established in 2006 on the initiative
of Vinokourov himself when his
previous squad, the Liberty SegurosWürth team, went belly-up after a
doping scandal, the Astana Pro Team
has – with the president’s backing –
navigated its way through recurrent
doping allegations to emerge as a
major force in the cycling world.
It won a first Tour de France with
Spanish Alberto Contador in 2009 and
nailed a second success with Nibali
in 2014, although it never completely
shook off the reputation of being a
doping-prone team. Contador was
stripped of a second Tour de France
title in 2010 after testing positive for
"Winning important stage races like the Tour de
France really pays off in terms of image for the
whole country"
doping test in the space of a few
weeks. Ilya Davidenok, a young rider
who has spent the past two years with
Astana’s development team, returned
what the authorities described as
“adverse analytical finding” for
anabolic androgenic steroids in
a sample collected at the Tour de
traces of banned substance clenbuterol.
Another two of the team's top riders,
Kazakhstan's Iglinsky brothers, tested
positive for EPO just a few weeks before
this year's Almaty Tour, forcing the
team to eventually withdraw from the
Tour of Beijing, which ends the UCI
World Tour calendar.
Eurasia I 53
bne November 2014
Hoping to replicate the team's
achievements, at least those not tainted
by doping scandals, in other sports
and burnish the image of the country
further, Nazarbayev launched the
Astana Presidential Sports Club in
2012, which is a multi-sports club that
together with the cycling team also
includes: a boxing team, a basketball
team, a cycling team, a hockey team, a
football team and even a Dakar Rally
team.
"Our champions, just like our
[economic] success or our new capital
[of Astana], constitute Kazakhstan's
national brand,” Nazarbayev said
in 2013 during a celebration at the
club's headquarters in Astana. “Sports
achievements make our country
memorable by demonstrating our
strongest qualities to the world.
Kazakhstan should be known as a
nation of victors.”
In order to translate ambition
into sporting success, Nazarbayev
mandated Kazakhstan's sovereign
wealth fund, Samruk-Kazyna, to
provide the club with generous
financial support. The total budget for
2014 was on the order of $150m, with
¤15m going to the cycling team alone.
That’s big money for a sport which
traditionally requires much smaller
budgets than other mainstream
disciplines like football. “I chose to
join the Astana Pro Team in 2013
because the team brings to the table
an important budget able to build up a
team fit to compete for the best stage
races like the Tour de France,” Nibali
told bne.
Race to the finish
As Nibali and his fellow teammates
seize the opportunity to achieve
sporting and financial success,
Kazakhstan’s ruling elites are looking
at the bigger picture.
In a move that brings to mind the
obsession for sports of the old German
Democratic Republic or the USSR,
“the Nazarbayev regime has made
ample use of the strategy of promoting
sport as a means to simultaneously
increase nationalist sentiment and
Kashagone
Naubet Bisenov in Almaty
Delays in the resumption of oil production from the giant offshore Kashagan
field have dashed the Kazakh government's hopes of increasing oil output
before 2016. Fearing that the delay in the start of Kashagan’s commercial
production will damage economic performance, the government is trying to
compensate for the shortfall by increasing output from other fields.
Kazakhstan will maintain oil output at last year's 81.8m tonnes this year and
next year, Magzum Mirzagaliyev, deputy energy minister, told journalists at
the KIOGE oil and gas conference in Almaty on October 1. "Our plans for this
year remain at 81.8m tonnes. We expect we will fulfil the plans," Mirzagaliyev
said. "We are now looking for reserves, particularly, TCO [Tengizchevroil] has
a great impact on the [total oil] output." Tengizchevroil, which is developing
the onshore giant Tengiz field, is expected to produce 27m tonnes of oil this
year, he noted. TCO is planning repairs in October that are expected to be
completed quickly, Mirzagaliyev explained.
The deputy energy minister said that the government was in talks with
other oil producers to increase their output. "We are closely working with
each licence holder to issue necessary permissions and consider necessary
project documentation as quickly as possible," Mirzagaliyev said.
Production at Kashagan was launched on September 11, 2013, but a leak on
the gas pipeline running to the onshore processing facility at Bolashak led
production to be halted on September 24. An attempt to restart operations
was abandoned on October 9.
Astana expected Kashagan to resume production in July, and forecast it
would produce 2.5-3m tonnes of oil by the end of the year. Myrzagaliyev
suggested that production would now resume in the field in the second half
of 2016. "Judging by information we receive and technical forecasts we see, it
[resumption] should be in the second half of 2016," he said.
The Kazakh government is now holding talks with the Kashagan developers
on the penalties they will face for delaying commercial production, and costs
borne by them since the suspension will not be covered, Mirzagaliyev said.
"On September 11, 2013, you remember, the contractor [NCOC] achieved
commercial production. Costs borne under the phase one since October
will not be compensated for," he said. However, "the sum hasn't yet been
determined”.
The Kazakh government had, until recently, been forecasting a major leap
in oil output this year on the back of the start of commercial production at
Kashagan. Over the next five years, Kazakhstan's oil production was expected
to increase by around 25%, from 82m tonnes in 2012 to 102m tonnes in 2017.
Kashagan, in the Caspian Sea, was the largest oilfield discovery in the world
in the last three decades, and has estimated recoverable reserves of around
13bn barrels of oil.
Kashagan is being developed by the international consortium NCOC. Stateowned KazMunaiGas owns an 16.88% stake in the project, Eni, Shell, Total
and ExxonMobil hold 16.81% each, with Japan's Inpex owning 7.56%.
54
I Eurasia
bne November 2014
"The cycling team is seemingly benign, but this
impression is precisely what soft authoritarian
leaders seek to cultivate in their nation-building
projects"
international prestige (and thus
popular legitimacy),” Nicole Koch, a
researcher at Syracuse University in
the US, wrote in a 2013 paper focusing
on the Astana Pro Team experience.
“While the Astana cycling team
example is seemingly benign, this
impression is precisely what soft
authoritarian leaders seek to cultivate
in their nation-building projects… Not
only do they naturalize paternalist
state society relations in which
citizens are actively assigned the role
criticism for his patchy record on
human rights and democratic practices.
of passive spectator, but they are more
broadly put to work in legitimating
the unequal distribution of power and
wealth,” Koch wrote.
Deaf to critics, Nazarbayev has raised
the stakes by leveraging the Astana
Pro Team's PR success to launch a
bold bid to host the 2022 Winter
Olympics. It may pay off too; in a
surprising turn of events, Almaty and
Beijing are the only two cities still
running for the event, as all the other
bidders – Krakow, Lviv, Oslo and
Stockholm – have pulled out.
In power since the country's
independence from the Soviet Union
in 1991, Nazarbayev takes most of the
credit for the impressive economic
growth the country has experienced
over the last decade, thanks to the
development of abundant oil and
mineral resources. At the same time,
the “leader of the nation” has drawn
Nazarbayev, speaking at the Astana
Presidential Sports Club in 2013,
quoted German philosopher Hegel:
"if the strong men unite, they become
invincible.” The president might not
be the best example of fair play at
work, but for sure he is surrounded
by an aura of invincibility, at least in
Kazakhstan's sporting arena.
bne November 2014
Eurasia
I 55
Russia rekindles interest in TransMongolian Railway
Terrence Edwards in Ulaanbaatar
T
he Trans-Mongolian Railway
badly needs an overhaul if it is
to operate as an effective trade
route between Russia and China.
That could finally happen now both
of Mongolia's powerful neighbours
have good reasons for doing so,
which would have the added effect of
opening up more of Mongolia's vast
mineral wealth to foreign investors.
The Trans-Mongolian Railway is 1,800
kilometres of 1950s-era track bisecting
the landlocked country between China
and Russia. It is slow and can only
haul a little over 20m tonnes of cargo
across the country a year. The direct
route across Mongolia also fails to
reach the valuable mineral deposits
that are peppered throughout the
country.
Russia is a 50% partner with Mongolia
of Ulaanbaatar Railways, which owns
and maintains the rail route. But
Russia has shown little interest in the
joint venture in the years since it cut
Mongolia loose when the Soviet Union
broke apart. But now Russia’s disputes
with the West have put Mongolia in
an enviable position to facilitate trade
between Russia and China as well as
step up its own trade in goods such as
meat products.
Now Russia has promised to help
Mongolia upgrade the TransMongolian's rail capacity to 100m
"Developing the railway network will help
Mongolia to open up rich but for now hard-toaccess deposits"
56
I Eurasia
tonnes a year by 2020 as part of
Moscow's “pivot” towards Asia.
“Developing the railway network will
help Mongolia to open up rich but
for now hard-to-access deposits, and
make broader and more effective use
of its potential as a transit country,”
Russian President Vladimir Putin
said during a visit to Mongolia in
September.
Mongolia’s upgrade and expansion of
its railway network has been a slowgoing process, which has affected
the development of the country as a
whole. Bottlenecks in delivering coal
to China for example, has limited the
growth of the coal mining industry.
The metals and mining consultancy
CRU Group, in a report released in
October, notes that shortcomings
in Mongolia’s rail infrastructure
were a part of wider logistical issues
of “paramount importance” if the
country is to ever see worthwhile
returns from its still-infant mining
industry.
Giving mines rail access to deliver
minerals such as coal and iron ore to
China would cut transport costs in
half, argues the report. That counts
even more these days given the tough
market for coal and China's push to
wean itself off the black stuff in an
effort to clean up the polluted skies
above cities such as Beijing.
Gateway to Russia
Interest from Moscow in Mongolia's
rail has also pushed the country
to prioritise Sydney-listed Aspire
Mining's Northern Railways project.
The project has been added to a list of
projects the country is actively seeking
private partners to realise, according
to a statement from the junior miner
on October 13.
Aspire Mining's subsidiary Northern
Railways was established in 2010
to build 547km of tracks west from
Erdenet in northern Mongolia to the
Nuurstei and Ovoot deposits. The final
stop would be the Arts Suuri border
point in northwest Mongolia, which
also serves as a gateway to the Tuva
Republic of Russia.
bne November 2014
"Even though coal prices were high at the time, to
be an efficient supplier we needed rail brought to
the deposit"
Aspire hopes to negotiate a “buildoperate-transfer” contract with
Mongolia through Northern Railways,
under which it would manage the
line for at least 20 years, says David
Paull, Aspire Mining's managing
director. “We did it because we knew
we had a large discovery,” says Paull
about Ovoot, which is currently the
country's second largest known coal
deposit. Its coal is “a bulk commodity
some distance from existing rail. Even
though coal prices were high at the
time, to be an efficient supplier we
needed rail brought to the deposit.”
Mongolia would probably own at
least 51% of the rail line under the
partnership, Paull adds.
Exports to Russia from Mongolia
have never meant much, especially
compared with resource-hungry
China. But Yondon Manalaibayar,
Mongolia's state secretary for rail
and transport, points out that if
the Northern Railways line could
be extended even further north
into Russia, to the city of Kyzyl, as
Mongolia hopes, it would link up to
Russia's wider rail network. “Russia
and China are looking for 2.5-times
expansion of trade,” says Manlaibayar.
“We want to facilitate all this trade.
We [Mongolia and Aspire] have
mutual interests.”
Wrestling for dominance
China also stands to benefit from
an overhaul of the Trans-Mongolian
Railway. Mines linked to the TransMongolian will also now have access
to overseas markets such as Japan
or South Korea because China has
permission from Mongolia to deliver
up to 30m tonnes of freight a year to
eight additional sea ports.
Up until now, Mongolia has only had
access to the Tianjin port, but it has
never been much of a launch pad for
its minerals, aside from a small trickle
of copper from Mongolia's Erdenet
copper mine, says Manlaibayar.
“Tianjin is only a container site, but
what Mongolia really needs is what's
called break bulk shipping” for the
overseas transport of many tonnes of
minerals, he says.
However, one condition that Russia
might impose on Mongolia if it is
going to help finance renovations to
the Trans-Mongolian Railway is the
abandoning of any plans to build a
Chinese-gauge railine in Mongolia.
Russia has enjoyed strategic control
over the Trans-Mongolian since
it helped put it into commission
in the 1950s and Moscow is keen
to protect that. Local Mongolian
newspaper Udriin Sonin reported
in September that the president
of Russian Railways, Vladimir
Ivanovich Yakunin, wrote directly to
Mongolia's prime minister to try to
discourage construction of a Chinese
gauge rail. “To create a railway with
narrow gauge is the wrong decision,”
Yakunin wrote, adding that the
Trans-Mongolian “represents Russian
interests as much as Mongolia's in
terms of the railway.”
Russia uses a slightly wider gauge
of 1,520 mm compared with
China's 1,435 mm, which is also the
international standard. Those who
favour the Chinese gauge argue on
the grounds of the economic cost of
moving the coal from one wide gauge
carriage to one with the narrower
gauge when the train enters China.
But opponents lean on Mongolia's
historical misgivings towards China
and its favouritism to Russia. The
physical difference may be about the
size of a credit card, but its political
size in Mongolia is measureless.
bne November 2014
Eurasia
I 57
increased to 500,000 tonnes [a year] by
the end of 2015."
At the fair Uzbekistan signed contracts
to supply 580,000 tonnes of cotton
fibre to foreign consumers, 100,000
tonnes fewer than last year. According
to the Uzbek PM, major markets for its
cotton are China, Bangladesh, Turkey,
Russia, Singapore and South Korea – a
geographic spread explained by the
success of a campaign to boycott Uzbek
cotton launched in the West over forced
and child labour practices.
Photo: Tracing Tea
Uzbekistan cottons on to
criticism
Olim Abdullayev in Tashkent
U
zbekistan's government has used
an international fair to brag
about apparent achievements
that the country has made in its cotton
industry since it became independent
in 1991. But critics charge that despite
government attempts to cover up the
practice, it’s continuing to use forced
labour, including children, prompting
global retailers and apparel brands to
avoid the use of Uzbek cotton in their
products.
Uzbekistan is one of the world's largest
exporters of cotton, producing over 3m
tonnes of raw cotton and 1m tonnes of
cotton fibre annually. Cotton is a major
source of revenue for the impoverished
Central Asian state, raising roughly
$1bn in export earnings for the
government in 2013, Uzbek Prime
Minister Shavkat Mirziyayev told the
10th International Uzbek Cotton and
Textile Fair in Tashkent on October 13.
He said the country expects to earn
$1.2bn from exporting cotton and
textile this year.
Uzbekistan has been increasing
the volume of cotton processed
domestically, as it faces an
international boycott because of
the continued use of forced and
child labour in the cotton industry.
According to local media, the country
increased the volume of cotton
processed domestically from 7% of
total production in the 1990s to 44% in
2014.
Mirziyayev was quoted as saying by
Trend the government plans to increase
Forced labour
Mirziyayev praised local breeders that
developed 160 new varieties of cotton
with "exceptional whiteness, early
maturation, high yield and length of
fibre, as well as resistance to diseases
and pests" last year alone. This meant
that over 90% of cotton harvested last
year was of "superior" quality, according
to local media.
But observers says the high quality
of Uzbek cotton can be explained by
the fact it is mostly handpicked by
students and public-sector employees
such as teachers, doctors and nurses.
Mechanised picking is believed to
be damaging for cotton fibres if a
machine fails to remove cotton wholly
from the boll. This is confirmed by
the government figures that only
1,200 cotton-picking combines are
involved in this autumn's cotton
picking compared with over 40,000
in 1991.
"Although the government continues to publicly
deny the use of forced labour, the worst forms of
child labour in cotton production continue"
the share of Uzbek cotton processed
domestically to 70% by 2020. "The
Uzbek government is steadfastly
continuing a policy of reducing exports
of cotton fibre through creating new
production facilities and boosting
processing capacities, which will be
Despite ratifying the International
Labour Organisation's (ILO's) Worst
Forms of Child Labour Convention
in 2008 and the ILO's Minimum Age
Convention in 2009, Uzbekistan is still
widely accused of continuing to use
child labour. "In 2013, Uzbekistan made
58
I Eurasia
bne November 2014
no advancement in efforts to eliminate
the worst forms of child labour," the US
Department of Labour said in its 2013
“Findings on the Worst Forms of Child
Labour” report published on October 7.
"The national government maintained
the cotton harvest, a manager at a
small enterprise outside the capital,
Tashkent, tells bne. "Private small
businesses have to send at least one
employee to pick cotton," he says.
"Instead of releasing our workers
"Private small businesses have to send at least
one employee to pick cotton"
policies in the cotton sector, which
mandate harvest quotas and cause local
administrators to organise and impose
forced labour on children and adults.
Although the government continues
to publicly deny the use of forced
labour, including of children, in the
cotton harvest, information indicates
that children continue to be required
to engage in the worst forms of child
labour in cotton production.”
Tajikistan
Uzbekistan allowed the ILO to monitor
the cotton harvest last year, and its
monitors reported 57 confirmed cases
of children working in the cotton fields,
including 53 children aged 16 and
17. The US Department of Labour's
report cites NGOs and US embassy
information that "there were isolated
incidents of children as young as 10
working in the cotton fields."
The Cotton Campaign, an umbrella
of human rights organisations, trade
unions, socially-responsible investors
and business organisations, which
was established in 2007 to end forced
labour of children and adults in the
cotton industry in Uzbekistan, says
that every year the Uzbek government
forces "over a million children",
teachers, public-sector workers and
employees of private businesses to
manually pick cotton under threat
of expulsion from school or loss of
employment, pensions and child
benefits.
While the government has stopped
sending schoolchildren into the fields
to pick cotton, it is continuing to enrol
college students aged 16 and 17 in
we hire day labourers and pay them
UZS50,000 [$17 at the black-market
exchange rate] a day to pick cotton.”
Tesco jumps on bandwagon
Uzbek rights activists' efforts to
publicise the use of forced and child
labour in the Uzbek cotton industry
resulted in the launch of the Company
Pledge Against Child and Adult Forced
Labour in Uzbek Cotton, simply
known as the Cotton Pledge, in 2008,
which has now been signed by over
160 brands and companies which are
committed to preventing Uzbek cotton
from entering their supply chains.
"Markets for Uzbek cotton sourced with
forced labour continue to diminish as
consumers become more aware of the
egregious human rights violations that
occur during the Uzbek cotton harvest,
with over four million Uzbek citizens
forced to pick cotton under threat of
penalty," according to Responsible
Sourcing Network (RSN).
The RSN said in a press release on
October 9 that the world's second
largest retailer, Tesco, was the latest
multinational retailer to sign the pledge
to join Target, Walmart, C&A, Marks &
Spencer, Ikea, Adidas, Nike and H&M.
“I applaud Tesco and the other retailers
and brands for maintaining their
commitments to avoid cotton from
Uzbekistan,” the press release quotes
Patricia Jurewicz, director of RSN, as
saying. “Having the largest retailers in
the world standing united shows that
they are committed to doing their part
to end forced labour, both of children
and adults.”
bne November 2014
Eurasia
I 59
Photo: Lebedev_S
INTERVIEW:
Baku’s European Games
Carmen Valache in Baku
W
ith fewer than 250 days left
until the opening ceremony
of the European Games in
Azerbaijan, the Baku European Games
Operations Committee (BEGOC)
is hard at work to deliver an event
budgeted at more than $8bn, complete
with what it describes will be the
most spectacular show in Azerbaijan’s
history.
“This is going to be the most fantastic
show ever staged in Azerbaijan, one
that will make the Eurovision song
contest seem like a small local event,”
BEGOC Chief Operating Officer
Simon Clegg tells bne of the opening
ceremony, while refusing to reveal any
of the acts. However, the appointment
of Dimitris Papaioannou, the artistic
director of the Athens 2004 Olympic
Games ceremonies, as the artistic
director of the Baku 2015 opening
ceremony speaks volumes about the
intent to stage a show to remember.
BEGOC has expanded significantly
over the last two months, from 670 to
900 employees, reflecting a pickup in
the pace of the preparations. Clegg
cites time pressure – BEGOC only had
30 months to deliver the event – as
the key aspect that differentiates
these games from large-scale sporting
events elsewhere. “Our preparations
are time sensitive, and we have to
compress some elements that are
typical of multi-sport events, like
transportation, accommodation, the
accreditation process or dealing with
the international media.”
The Azerbaijani government is in
charge of ensuring that the 18 venues
in which competitions will be held
are ready for the June 2015 event.
All eyes are on the National Stadium,
a 65,000-person venue and on the
athletes’ village. The government will
take advantage of the occasion to
inaugurate a new airport terminal and
upgraded subway and bus systems.
Conversely, BEGOC will be responsible
for everything related to the
organization of the games. Attracting
high-quality athletes was an important
first step, Clegg contends, and it was
accomplished by ensuring that 16 of
the 20 participating sports can use the
Baku Games as a qualifying or ranking
event for the Rio 2016 Olympics.
Negotiating with broadcasters was
the next step. So far, broadcasters for
Turkey, Romania, Hungary, Belgium
60
I Eurasia
and Germany have been announced,
and talks are being held with a
number of other countries. While the
games will be a European event, Clegg
wants to ensure that it is broadcast
all over the world, from Australia to
South America.
The total budget for the event has
not been made public. However, an
October 2013 announcement revealed
bne November 2014
of purchase of tickets. Some 6,000
athletes and 3,000 officials from
the National Olympic Committees
of Europe have confirmed their
participation in the games, which
Clegg believes will be the “second
most important event in the history
of Azerbaijan after the signing of
the contract of the century in 1994,”
referring to deal with an international
consortium to develop the giant Azeri,
"This is going to be the most fantastic show ever
staged in Azerbaijan, one that will make the
Eurovision song contest seem like a small local
event"
that Azerbaijan’s 2014 state budget
had provisioned $7.7bn for the event,
$1.25bn of which would be allotted
to BEGOC for hosting the event,
according to Eurasianet.
Sponsors and visas
BEGOC’s two-tiered sponsorship
scheme will complement the budget
allocated by the Azerbaijani state. The
committee is seeking to sign up eight
official partners that would benefit
from branding and advertisement
at all the competition venues. So
far, six companies have agreed to
sponsor the event in this capacity,
including Azerbaijan Airlines (AZAL),
P&G, Tissot, Nar Mobile, as well as
SOCAR and BP. Clegg notes that
accommodating both energy giants
as part of the PR exercise “required
a bit of creativity on our part,” but
that it was important for them both to
sponsor the event, in their capacity as
Azerbaijan’s state oil company and its
largest foreign investor respectively.
The government has already altered
its immigration policy to waive the
visa requirement for all participating
athletes and officials in lieu of an
accreditation card. In addition,
all foreign spectators will receive
visas upon arrival based on proof
Chirag and deepwater Gunashli (ACG)
oilfields.
Clegg expects the vast majority of
spectators from abroad to be friends
and family of participating athletes.
Given this, the majority of the 900,000
tickets on sale will be marketed at
the local population. The ticketing
policy has not been made public yet,
but Clegg assures that pricing will be
reasonable. “We recognize that there
is not a huge culture in this country
of buying tickets for events outside
football and pop concerts. We have
had to be very reasonable with our
prices,” he explains.
Clegg concedes that this is the biggest
sporting event he has organised
and that the time pressure, coupled
with the fact that the brand of the
European Games depends on BEGOC’s
delivery, is “daunting, but exciting.”
An avid sportsman and former CEO
of the British Olympic Association,
his take on leadership at BEGOC is to
mould his management style to the
local culture to maximise results.
Conversely, he expects that the
1,600 staff that BEGOC will hire by
the beginning of the games and the
12,000 volunteers will walk away
with new skills and an appetite for
volunteering in sporting and other
types of events. Azerbaijan will host
a Formula 1 event in 2016, the Chess
Olympiad, the Islamic Games, and,
having bid twice for the Olympic
Games, it may ultimately host the
event in 2024 or 2028. “We are
up-skilling the workforce, either
to work in future sports events in
Baku, internationally, or to be better
positioned to provide leadership and
management roles in other sectors,”
he says.
Clegg’s definition of what constitutes
a successful first edition of the
European Games encompasses various
aspects. His main goal is to create a
great experience for athletes, because
“sports should always be about the
athletes. I would want the athletes to
go away with a fantastic experience
of Baku and of the European Games.”
He also wants to create a tradition of
the European Games after Baku, and
is hopeful that the competition will be
held regularly after 2019.
Lastly, he is hoping to achieve
President Ilham Aliyev’s goal of
showcasing Azerbaijan’s development
to the rest of Europe and to the world,
and to move sports up the social
agenda in the country. “Sport in itself
is a basic human right as recognized
by the UN, and the staging of sport
will help move sport up the social
agenda, it will create interest in sport
and will give greater access to sport in
Azerbaijan,” he concluded.
bne November 2014
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I 61
businesses were implemented in the
country."
Photo: Nikita Maykov
Tajikistan's
investment story is
a hard sell
CONFERENCE CALL:
Ben Aris in Dushanbe
M
ore than 500 investors, state
officials and representatives of
leading international financial
institutions gathered in the shadow of
the Pamir mountains in mid-October to
listen to the government of Tajikistan
sell the small mountainous republic at
the country's first ever international
investment conference. And it did a
reasonable job, but it was always going
to be a hard sell.
Wracked by a nasty civil war between
1992 and 1997, the country's economic
recovery has only gotten underway
relatively recently. The poorest
country in the Commonwealth of
Independent States (CIS), Tajikistan
still has everything to do – it can’t
even offer a reliable power supply. But
the government is well aware of the
problems and is grasping the nettle.
"We realise that we are not one of
the best countries in the world, or
the most attractive for investment.
Nor can we offer the best platform
[for investments]," Djamoliddin
Nuraliev, the ebullient and Englishspeaking first vice minister of finance,
who previously worked for both the
International Monetary Fund (IMF)
and the World Bank, told the Tajikistan
Economic & Investment Forum. "But
we are committed to change. We have
implemented serious reforms, started
to introduce [global standard] IFRS
accounts, and do everything possible to
facilitate investment."
The state has already made
considerable progress. Over the
last decade the size of the economy
has expanded ten-fold and the
poverty level shrank from 83% of the
population in 2003 to 35% today,
according to the government. "Reforms
only started in 1997 and so have not
had a very long history,” Tajik President
Emomali Rahmon told delegates
in his keynote speech October 15.
"The government of Tajikistan, in
its long-term development strategy,
identified the development of the
private sector and investment as one
of the top priorities of its economic
policy… Over the recent years, a series
of reforms in doing business aimed at
reducing administrative barriers and
state interference in the activities of
And these reforms are starting to have
an impact. While Tajikistan slid two
places in the World Bank's “2014 Doing
Business” ranking to 143rd place out of
188 countries, it has made great strides
in several of the key subcategories:
Tajikistan is ranked at 87th for the
ease of starting a business and 78th for
registering property, and has extremely
high rankings for contract enforcement
(39th) and protecting investors
(22nd).
"Business registration has been
simplified so there is a single
window to set up a company… and
four special economic zones have
been established where our partner
investors are released from almost
all taxes," Rahmon told the packed
room of investors. "Tajikistan is in a
sustainable development phase and is
strengthening its position every day.
But more needs to be done to bring our
investment climate into line with the
international norms."
The country earned considerable
brownie points after it successfully
acceded to the World Trade
Organization in 2012. "Tajikistan… has
been strengthening its position in the
global political and economic arena
every day. The accession of Tajikistan
to the WTO in 2012 as a vivid sign of
this policy will definitely open wider
horizons for the integration of our
country into the global economy and
global trade processes," the president
said.
Of course, there is still an enormous
amount of work to do, as the country
ranks near the bottom of the list in
things like getting electricity, issuing
construction permits, trade and paying
taxes. But the president laid out a
comprehensive programme of reforms
to deal with all these issues.
The simplification of the bureaucracy
surrounding business is also part of the
government's general drive to improve
transparency and reduce corruption.
Recently, the state begin to introduce
62
I Eurasia
international accounting standards
(IFRS) for the largest companies,
which is not obligatory but the
standards have been adopted by many
of the leading companies.
The main task that the government
faces today is mobilising investment
into the economy. Foreign direct
investment is a modest 2% of GDP,
but has recently had a huge fillip
after China earmarked several billion
dollars to build a gas pipeline across
the territory, though more is needed.
"Both [domestic] private investment
and foreign direct investment have
to rise dramatically if the standard of
living is to rise for the people," said
Richard Jones, the European Bank for
Reconstruction and Development's
(EBRD) Tajik country manager.
Power to the people
The answer to many of the
government's problems is to tap into
the country's enormous hydroelectric
power potential. The biggest problem
Tajikistan faces today is the country's
power deficit. There is sufficient
power in the capital of Dushanbe, but
blackouts and even power rationing
plague the countryside. But if the
government succeeds in its plans to
build several hydropower plants, not
only will domestic demand be met,
but the country could become a major
power exporter to the energy-hungry
region.
Hydropower was a constant theme
running throughout the conference.
The cost of power production in
water-rich Tajikistan is in the order of
2.5 cents per kilowatt hour (/kWh),
but neighbours like Afghanistan
and Pakistan with a power deficit
are willing to pay 18-23 cents/kWh,
making power exports extremely
profitable for Tajikistan. "We have
527bn kWh of potential power
production, but currently we are only
using 6% of this. And realising this
potential will not benefit just Tajikistan
but all our neighbours too," Rahmon
said.
Tajikistan already boasts the world’s
highest dam, the 300-metre Nurek,
bne November 2014
built in the 1970s, but the government
would like to add the even taller
Roghun hydropower plant that would
at a stroke solve all its problems.
However, the project has been plagued
by political and financial difficulties.
Still, several other smaller power
stations are in the works.
Business and banks
In the meantime the state is pushing
on with other reforms that should
help improve the investment climate.
The government has set up four
Special Economic Zones (SEZ) – in the
regions of Sughd, Panj, Dangara, and
Ishkashim – which offer substantial
tax breaks and investment incentives.
It has also established an enterprise
fund to support local business projects,
which will receive a big increase of
funds to TJS1bn ($200m) next year.
Perhaps most progress has been made in
the banking sector. Banking penetration
is still low with only about one in five
Tajiks holding a bank account and total
credits as a share of GDP are a modest
As the reforms take hold, the economy
is beginning to diversify, led by the
growth of small and medium-sized
enterprises (SME), which is also
bringing more business back into the
formal economy. However, the lack
of access to financing has slowed the
pace of this growth. "The SMEs are
developing, but they need access to
capital to grow and develop," says
Atobek. "Their main problem is the
rates are still very high – typically
about 25% a year – which means they
cannot borrow a lot and have to borrow
over the short term."
The low penetration of the banking
sector is behind the high rates and the
difficulty that small businesses have in
raising credit. Without a large deposit
base, banks are struggling to fund
loans, which in turn reduces their role
as financial intermediaries.
But the global financial institutions
are committed to helping and the
EBRD has already launched its highly
successful SME support programme in
"We realise that we are not one of the best
countries in the world, but we are committed to
change"
30%, according to the EBRD. However,
the sector is developing quickly with
the use of debit cards on the rise, and
consumer lending is also taking off,
partly thanks to stiff competition since
the leading Kazakh banks entered
the market a few years ago. And the
country recently launched its first credit
bureau to further support consumer
credit business. "The sector is starting
to develop more quickly now," Gulanor
Atobek, Deloitte's Tajik general director,
tells bne. "Just a few years ago plastic
cards were rare. In 2007 it was usual to
pay workers in cash, but more recently
companies have started paying into
workers’ bank accounts and people
are getting used to using cards in the
supermarkets."
Tajikistan, where it lends banks money
to fund loans and micro-loans to small
business.
The president neatly summed up
the challenges facing the country in
his closing remarks to the forum's
delegates: "We definitely need huge
investments to fully and effectively
use the outlined resources and
potential," he said. "Therefore,
the local businesses need to avail
this opportunity of your visit and
establish mutually beneficial
cooperation to identify priority areas
in the development of production and
expansion of export of final products to
overseas."
bne November 2014
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I 63
Not-so Great Aral Sea
bne
T
he eastern basin of the South
Aral Sea, also known as the Great
Aral Sea, completely dried up this
summer, according to NASA pictures
taken in August. The Aral Sea was
the world's fourth largest lake until it
started drying up in the 1960s because
of extensive cotton production in Soviet
Central Asia.
"Summer 2014 marked another milestone
for the Aral Sea, the once-extensive lake
in Central Asia that has been shrinking
markedly since the 1960s. For the first
time in modern history, the eastern basin
of the South Aral Sea has completely
dried," the NASA-run Earth Observatory
website said on September 26.
"This is the first time the eastern basin
has completely dried in modern times,"
said Philip Micklin, a geographer
emeritus from Western Michigan
University and an Aral Sea expert,
according to Earth Observatory. "And it
is likely the first time it has completely
dried in 600 years, since Medieval
desiccation associated with diversion of
Amu Darya to the Caspian Sea."
The Aral Sea started drying up in the
1960s when the Soviet government
diverted Central Asia's two major rivers the Amu Darya and Syr Darya - to cotton
fields. The sea, once covering an area
of nearly 70,000 square kilometres and
containing over 1bn cubic km of water,
split into the northern and southern
parts, now known as the Little Aral Sea
and Great Aral Sea, in 1989 and the
southern part split further into western
and eastern lobes in 2003.
Micklin explained that the eastern
lobe first disappeared in 2009 but it
rebounded the following year because
of wet years. The dry conditions in 2014
meant that the eastern lobe has now
disappeared completely.
The two pictures below show first the Aral
Sea in 1960, followed by the August 2014
image that shows the eastern lobe gone.
Little Aral
Despite the disappearing sea, cotton
is still the main crop in Central Asian
countries, especially Uzbekistan, after
the countries obtained independence in
1991. This has meant that water from the
Amu Darya and Syr Darya continues to
be diverted to cotton fields. The situation
on the Amu Darya is further complicated
by the fact that the Karakum canal which
feeds water to the Turkmen capital,
Ashgabat, withdraws up to 45% of the
river's flows. As a result, the Amu Darya,
which used to feed the sea from the
south, hardly takes any water to the sea
at the moment.
Unlike the Amu Darya, the water
released from upstream Kyrgyz reservoirs
along the Syr Darya for power generation
reaches the northern part of the Aral
Sea in winter and spring. In the 1990s
the local population on the Kazakh side
twice built a sand dam to stop water from
flowing into the south. Having realised
that the northern tip of the sea could be
saved by a dam, Kazakhstan completed
the $86m, 13km-long Kokaral dam across
the Berg Straight with funding from the
World Bank in 2005, which has resulted
in the sea level in the Little Aral rising by
12 metres from its low point in 2003. The
shore is now under 40 km from Aralsk.
Emboldened by the project, the Kazakh
government now plans to build another
dam to fill in the Saryshyganak Bay,
stretching up to 40km in length and
16km in width. This will bring water
to Aralsk and increase the water body
of the Little Aral from the current 27
to 59 cubic km and decrease the water
salinity to 3g per litre. The government
hopes the second phase of the project
will boost fishing and improve the
environmental situation in the northern
part of the Aral Sea.
64
Opinion
bne November 2014
The war that
dare not speak its
name
STOLYPIN:
Mark Galeotti
T
o German military thinker Karl Von Clausewitz, war
was a continuation of politics by other means. By the
same token, the present Western sanctions regime
against Russia ought truly to be considered a continuation
of war by other means, one geared for a post-industrial
and globally interconnected age. Of course, no one in the
West will admit this – any more than Moscow admits that
its activities in Ukraine ought really to be considered war,
too – but the implications are important, and need to be
acknowledged.
First of all, wars need clear objectives if they are to
be fought well and have a chance of being brought
to a successful conclusions – just look at the messy
and inconclusive conflicts in Iraq and Afghanistan as
cautionary tales – but it is still unclear what the Western
aims are. To a large extent, this reflects a lack of unity in
that inchoate bloc, "the West." Is it simply to force Moscow
"The Western sanctions regime
against Russia ought truly to be
considered a continuation of war by
other means"
to pull back from its aggressive adventure in eastern
Ukraine? That is doable, even if the key sticking point will
be the optics: Vladimir Putin needs to be able to claim
a victory, but Ukraine's Petro Poroshenko cannot afford
to give him that. Or is it to see Crimea returned to Kyiv's
rule – over the objections of a majority of the peninsula's
population? That will happen over Putin's (politically)
dead body, and this seems to be recognized, and it is
unlikely that this is truly an aim.
Or is it, even if no one may want to articulate this openly,
that the true aim is, in effect, regime change? This might
mean an actual change of the guard in the Kremlin, or at
least to force policy redirections so extensive and lasting
as to mean a redefinition of the existing regime. In other
words, a Putin government that is not truly sovereign – and
sovereignty is a central element of Putin's very concept of
Russia. It is hard to see Putin broken to the point at which
he is willing to, as he would see it, simply become the
West's local satrap.
Indeed, this would probably represent such an existential
challenge to Putin's image not just of Russia but of himself
(and we should never underestimate the power of the
vanity of a near-absolute leader) that he might even feel he
had no option but to up the stakes in the hope of scaring
off the West. Further incursions into Ukraine, escalating
pressures along the Nato border, digging in his heels
over Syria, massive cyberattacks, expropriating Western
corporate assets in Russia, militarizing the Arctic – all of
these might seem acceptable risks.
Risks for the West
After all, just because the sanctions regime is a sublimated
surrogate for war, that does not mean the policy does not
have risks and costs. Consider the present White House's
pyrotechnic enthusiasm for the drone as an instrument of
national security policy. Drones allow an administration
that has a terror of being entangled in foreign adventures,
yet which has been faced with a range of challenges it
feels it cannot ignore, a seeming opportunity to square this
circle.
Opinion
bne November 2014
Minimizing the flow of flag-draped coffins coming home
comes at different, less obvious costs, though. "Collateral
damage" – civilian casualties – from poor intelligence or
targeting decisions appear all the more inhumane when
all wars do. Nonetheless, in this economic war, the balance
of power is overwhelming in the West's favour, at least
if it can find the political will to mobilize its capacities.
Russia's "energy weapon" pales before the West's capacities
to withhold finance, and no, China isn't eagerly waiting to
step in at anything other than exploitative rates.
"Sanctions are an inverse neutron
bomb, leaving people alive while
shattering economic infrastructures"
delivered by robot, leading to yet greater resentment.
Furthermore, as drones cannot build schools or kick a
football with local kids, the range of policy options they
offer shrinks to essentially kinetic ones: killing people.
Sanctions, of course, don't kill people. In some ways, they
are an inverse neutron bomb, leaving people alive while
shattering economic infrastructures. But they also, as
Europe in particular is discovering, cost money to fight – as
But wars must end, and a well-planned war needs an
achievable, meaningful goal. Again, let the recent
adventures in Afghanistan and Iraq loom in the corner as
bloody reminders of the risks in having no such goal. Until
the West not only clarifies its collective goals, in the most
explicit terms, and communicates this to Moscow, the risk
is that Putin will assume the worst. I find more and more of
my Russian interlocutors from government circles talking
in apocalyptic terms, of a West determined to break, tame
or humble the Motherland. And if Putin comes to believe
he has nothing to lose in this undeclared war, what is
to stop him escalating, invoking the most extreme and
disruptive asymmetric options at his disposal?
Mark Galeotti is Professor of Global Affairs at New York
University's SPS Center for Global Affairs and blogs at In
Moscow's Shadows.
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65
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66
Opinion
bne November 2014
INVISIBLE HAND:
The West-is-best
delusion lives on
Liam Halligan in London
I
t’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 stateplanning 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 Indepemdent 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
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.
Catch-up economics
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
bne November 2014
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 stateplanned – 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%.
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.
"Non-Western nations aren’t petridishes for Western social scientists"
Russia’s model, while far more democratic and marketoriented 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.
Opinion
67
Why would they follow the West, anyway, when they’re
now seeing where the Western model leads? The 2007 subprime 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?
War by other means
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.
Liam Halligan is Editor-at-Large of Business New Europe.
Follow him on Twitter @liamhalligan.
68
Opinion
bne November 2014
Why a shrinking
Russian workforce
might let Putin off
easy
COMMENT:
Mark Adomanis in Washington
R
ussia’s economy is a mess right now: inflation is
above target and rising, capital flight shows no signs
of slowing down, consensus projections on full-year
economic growth have been repeatedly lowered towards
zero, major state-owned companies have been frozen out
of Western capital markets, and the ruble has fallen to its
lowest ever levels against both the euro and dollar. Oh, and
as if all of that wasn’t enough, the price of oil has gotten
clobbered over the past month, suggesting that Russia’s
previously (roughly) balanced budget could be thrown
into significant deficit. In such a bleak situation optimism
"How could unemployment continue
to fall when the economy is misfiring?
The answer lies in the demographics
of Russia’s labour force"
doesn’t seem merely unwarranted, but actively foolish.
Despite all of this bad news, however, Russians haven’t
turned against their government. Poll after poll has
shown that Russians remain supportive of President
Putin’s aggressive policy towards Ukraine, and Vladimir
Vladimirovich’s approval numbers remain in the
stratosphere (the latest Levada poll has him at 86%
support). Other polls have indicated general support for
the ban on Western produce, and even expectations that
sanctions will have a salutary effect on Russia’s economic
development.
At first glance this might appear completely irrational: why
would Russians, who have so enthusiastically embraced
Western consumer culture, be supportive of a leader who
is taking them straight towards economic stagnation and
ruin? Why aren’t they upset that Russia’s fitful attempts
at economic integration with the West are now moving in
reverse?
Russia’s relatively upbeat public opinion makes a lot more
sense when you look at the condition of the labour market.
Despite the litany of ills I’ve catalogued above, Russia’s
unemployment rate has actually been decreasing in recent
months. The trend of decreasing unemployment continued
unabated even after the introduction of sanctions and an
obvious reduction in the economy’s total growth rate. The
latest data from Rosstat showed that, over the summer,
Russia was at 4.8% unemployment – a level that could
reasonably be argued is actually above full employment.
How is this possible? How could unemployment continue
to march downward when Russia’s economy was so clearly
misfiring? The answer lies in the demographics of Russia’s
labour force.
Where did the workers go?
I’ve written widely on the recent improvements in Russia’s
demography. These improvements are real, and they
bne November 2014
mean that rather than naturally shrinking by 700,000 or
800,000 people a year, Russia’s population has actually
experienced modest growth over the past several years.
The future remains highly uncertain – population forecasts
over the next 30 years range from 120m to 150m – but
the improvements of the past several years are real and
important. Despite the moniker of being a “dying nation,”
by 2014 Russian life expectancy was at an all-time high and
the total fertility rate was marginally higher than the allEU average (and substantially higher than the EU’s newest
members in Central and Eastern Europe).
But how could the workforce shrink if the overall
population is growing? Precise definitions vary, but the
“active workforce” is generally defined as the number
of people between 20 and 65. It’s true that this is a
somewhat crude definition. Even in Russia, college has
become the norm and people do not generally get their
first job until they are 22 or 23. On the other side of the
spectrum, Russian law allows people to retire when they
are in their mid-50s (though in practice a great number
of “pensioners” continue to work other jobs). Looking
at this chunk of the population though does give one a
sense of the maximum possible number of citizens that
could be engaged in economically productive activity.
And even though Russia’s overall population is growing,
the workforce has been shrinking since late 2012 and will
continue to shrink for at least the next five years.
Put simply, the children born during the recent (and
rather modest) “baby boom” won’t enter the workforce
until the late 2020s or the early 2030s. And the recent
improvements in life expectancy mean that more and more
Russians (though still far too few!) are living past 65.
Perfect demographic storm
In the meantime there is a perfect demographic storm.
The cohort leaving the labour force is the large one born
during the post-war years, the last time that Russia had
substantially above-replacement fertility, while the cohort
entering the labour force is the tiny one born during the
Opinion
69
“demographic hole” of the 1990’s. There are simply too
few young people to replace all of the old ones leaving the
labour market.
This all suggests that Russia will continue to experience full
employment even in the absence of strong economic growth.
Given the basics of supply and demand (ie. a shrinking supply
of workers) wages will grow and employers will have to offer
more and more attractive deals simply to retain their existing
employees. To the man on the street, then, the Russian
economy will feel as if it’s performing reasonably well.
"Russia will continue to experience
full employment even in the absence
of strong economic growth"
The overall economic costs to Russia from a shrinking
labour force are real, and I do not intend to discount them.
In the long term, Russia will have to find a way to address
the issue, most likely through increased importation
of labour from Central Asia and “the near abroad.” But
in the short term, the shrinking labour force strongly
suggests that the anti-Putin uprising many Western
commentators have been predicting will not occur. The
“pain” from Western sanctions and from Russia’s own
policy miscalculations will only cause mass dissatisfaction
if negatively impacts the labour market – and the odds are
firmly against that occurring.
Mark Adomanis is an MA/MBA candidate at the Lauder
Institute at the University of Pennsylvania. He regularly
contributes Russia-related writings to a range of outlets such
as True/Slant, Salon, Forbes and The National Interest.
70
Opinion
bne November 2014
Russians march
for peace in
Ukraine
Julia Reed in Moscow
T
o many Russians, and certainly to most Russian politicians,
the issue of Ukraine seems as touchy as the subject of
teenagers leaving the nest feels to some parents: what’s
wrong with their home? Aren’t they happy with their parents?
Why now, at this inappropriate moment? It seems so unfair and
they so ungrateful. How dare the kids prefer the company of their
new friends and not even calling except when they need money?
It may be hard for an outside party to appreciate Russia’s
sensitivity when it comes to Ukraine’s decision to abandon the
Customs Union with Russia in order to sign a free trade and
association treaty with the EU. To Russians it feels like a betrayal,
the end of a special relationship that has lasted centuries.
A great number of Russians have Ukrainian roots and still have
family in Ukraine – and vice versa. There are strong cultural,
religious and emotional ties between the two countries. And
what’s more, quite a few Russians do not see Ukraine as an
independent state in its own right but as a “junior” sibling in
the Slavic brotherhood of Russia, Ukraine and Belarus, who
is rebelling under the influence of its cunning and calculating
new friends, the US and EU. The Crimea, in particular, is seen as
Russian territory, given away by former Soviet major domo Nikita
Khrushchev on a whim at the end of a drinking session. Seeing
Ukraine leave is hard for Russians to swallow.
The annexation of Crimea in March (supported by the Twitter
hashtag #Crimeaisours) is seen as moral restitution of a wrong
committed in another era when leaders could not even envisage
the possibility of Soviet dis-Union, let alone fragmentation.
So emotions are high and further inflamed by Russian TV, which
is fuelling the tension by running stories of how the rights of
Russians in Ukraine are being violated and how "new fascists" in
the form of the Ukrainian ultra-nationalists, also known as the
Right Sector or banderovtsi, have now come to power to burn
Russian homes and kill innocent Russians. The effect on ordinary
Russians is to lead some to volunteer to fight in Ukraine, while
others collect humanitarian aid and money at stalls outside of
Moscow shopping centres for the rebellious Donbass region.
Russians in support of East Ukraine do not mind the sanctions
imposed by the West nor the reciprocal food sanctions imposed by
Russian President Vladimir Putin, which ironically have probably
had a bigger impact on the average Russian than anything Brussels
or Washington could organise.
“How dare they impose sanctions on Russia? Why do the States
and the EU think they are allowed to rule the world?” fumed
Lyubov Petrova, 36, a manager in a souvenir-making company.
“I didn’t eat oysters and expensive cheeses, I prefer to buy local
food anyway. I’m not going to swallow my pride for mozzarella,”
smiled Mikhail Loktev, 39, a marketing manager in a chain selling
carpets.
“When I was growing up after the war, we lived very modestly. I’m
used to a simple and austere life. It’s the younger generation who
are going to suffer. They have been spoiled by trips abroad and
Western goods. I do not need very much, I will survive. I support
the course of my state,” says Galina Mitroshkina, 63, a pensioner.
Solidarity with Ukraine or “March of the Traitors”?
Feeding public support for the current Russian ideology of relying
on internal resources, rejecting global liberal values and replacing
them with the “Russian world,” uniting ethnic Russians of East
Ukraine with "the mainland" to create Novorossiya are the heavyhanded state propaganda, burgeoning censorship, and a fragile
and fragmented opposition movement.
But there is a minority of Russians who do not support the
annexing of Crimea or the pro-Russian separatist republics of
Donetsk and Lugansk. They are widely seen as traitors of Russian
national interests, as suckers to the West.
bne November 2014
Opinion
71
Not surprisingly the state media commonly airs prime time
documentaries on TV exposing the "secret-dealings and motives"
of these prominent "quislings" who have failed Russia by showing
open support of Ukraine and branded "friends of the junta."
Not surprisingly the state-run media was silent about a Peace
March held on September 21 in Moscow to allow ordinary
Russians who oppose Russia's actions in Ukraine to show some
solidarity with the new government in Kyiv.
An officially authorised March gathered an estimated 30,000
people – a large demonstration by recent standards. Despite
the general feeling that the opposition movement has faded
away in the face of the tsunami of nationalism that Putin has
successfully harnessed, this was about the same size protest as the
first big anti-Putin protest in December 2011, following flawed
parliamentary elections.
Prior to the event, I spoke to one of its key organisers, Serge
Sharov-Delaunay, 58, a historian and architect. A descendant of a
Napoleonic soldier who was wounded during the siege of Moscow
in 1812 and left behind in a hospital by the defeated French
army, Sharov-Delaunay sees himself as following the footsteps
of his Soviet dissident relative, Vadim Delaunay, who was one
of the seven dissidents that took part in a well-known protest
on Red Square on August 25, 1968, following the occupation
of Czechoslovakia by the Soviet tanks in attempt to supress the
Prague Spring.
“It is important to show the people of Ukraine our solidarity, that
not all Russians are pro-war," said Sharov-Delaunay. "It’s also
important for us and the government to see that opposition to the
current regime is not that small. We are expecting great numbers
to attend and not just in Moscow and St Petersburg.”
“I was only 12 when Vadim went to that protest on Red Square [in
1968]. I knew nothing about it. But I always knew that my family
was different, they didn’t support the Soviet regime, our circle of
friends were mainly dissidents. For a protest that lasted no longer
than a few minutes, Vadim got three years in a camp in Tyumen.
I decided not to join the Komsomol (the youth Communist
organisation) because of what happened to my cousin.” Vadim
Delaunay and his dissident wife left the country in 1975 and in
1983 Vadim died in Paris.
Sharov-Delaunay, in turn, has become well known for his affiliation
with the "Case of the 6th of May," which saw protestors on that
date in 2012 given long prison sentences. Sharov-Delaunay has
organized an extensive publicity campaign in order to encourage
scrutiny of the trials of the protesters jailed after that antigovernment protest on Bolotnaya square turned violent. Since
then, he has been an eloquent opponent of state policies and a
voice in support of freedom of speech and a fair court system in
Russia.
“As for the March of Solidarity, I have no doubt that most Russians
are against the war with Ukraine and this sentiment will grow
once our soldiers start coming back to Russia in coffins. They’ve
started coming already and so far the media largely managed to
keep it quiet, but they won’t be able to continue if the casualties
begin to mount. I have no doubt that the current policies of our
government are not sustainable in today’s world. They will not
be able to re-create the Soviet Union in the 21st century,” asserts
Sharov-Delaunay.
The voice of Sharov-Delaunay is echoed by an ordinary Muscovite
I met on the March on September 21: “I came today to show my
disagreement with what is going on in the only way I can. I try
to take part in as many protests as I can, if only they are deemed
to be legal. The government needs to know that people have an
alternative opinion,” comments Ekaterina Parkhomova, 41.
Following the protest, I asked a friend living in Ukraine to
comment on how she feels about such displays of solidarity. “I
was born in Lviv, but live in Dnepropetrovsk. Russian is mainly
spoken in this city, but I’ve always considered myself Ukrainian,
even though I speak both languages. It’s a lie that Russians have
been suppressed in Ukraine. There are a great number of Russian
schools in the city. The ethnic problem is manufactured by
propaganda. We are very tired of the war. And to me this march is
great support. It feels good to be united with the people of Russia
even though Russian TV has been turned off here for about a
month now.”
Despite the peace march having failed to gather the 100,000
people that were hoped for by the organizers, it clearly showed
a strong feeling of opposition by active young Russians to the
policies of isolation and generally to war with Ukraine. It was
also the first march where several democratic Russian opposition
parties have come together as organizers with similar slogans.
The march, whose participants were primarily people in their
40s and younger, was aimed mainly at showing solidarity with
Ukraine and did not have any political demands except for “Stop
the War!” Yet, it showed a growing public dissatisfaction with
the current regime and its attempt to re-create human values
and re-draw borders. Despite record presidential approval
ratings, there is a growing appetite for global, and European
in particular, integration amongst the young and educated
members of Russian society.
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Opinion
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Life in Russia with
$80 oil
Chris Weafer of Macro-Advisory
F
the previously close mutually beneficial relationship is no
longer there.
The weaker oil price certainly suits the US administration’s
geopolitical position and, as the US is still the world’s
biggest importer of oil, it also acts as a further stimulus to
the economy. But the idea that the White House is leaning
on the government in Riyadh to keep supply high in order
to kill the price is ridiculous. Relations between the two
countries have become very strained in recent years as a
result of the US support for Qatar and, most recently, the
plan to cooperate with Iran in the battle against ISIL. Qatar
has been a very open supporter of the Muslim Brotherhood
and gave substantial financial aid to Mohamed Morsi’s
government in Egypt. The Saudis have always had a huge
fear of a Muslim Brotherhood revival and the threat it
posses to the region. The Riyadh government, and others
amongst the Gulf Cooperation Council states, were very
suspicious of the Morsi government and were relieved to
see it replaced. Beyond that, the Saudi-US relationship
has deteriorated in recent years as the US weans itself
off Middle East oil and pursues its strategy of winding
down its military presence in Afghanistan. The need for
Saudi Arabian Oil Minister Ali Naimi has always said that the
Kingdom views $100 per barrel (Brent) as the correct price for
both producers and consumers. But he has also very clearly
stated that Saudi Arabia will not revert to its previous role as
swing-producer within Opec. Specifically, the Kingdom will
not unilaterally cut production in order to support the price
of oil for all other producers. It wants all Opec producers to
share in any cuts required to support the price.
rom late 2010 until the middle of August this year,
the price of Brent crude has traded within a relatively
narrow range and averaged close to $110 per
barrel. Over the past two months the price has collapsed
from a high of $115 per barrel to just over $80. For
commentators with more of a political than energy bias,
the explanation for the sudden price collapse is because
of collusion between the US and Saudi Arabia to damage
their respective enemies, Russia and Iran. It has also led a
spate of headlines suggesting that weaker oil will collapse
the Russian economy and bring about the demise of Putin’s
rule. Both are very wide of the mark.
Fed's fault
There are several reasons for the oil price fall, but the
catalyst came not from the political machinations of the
US President but from the actions of the 68-year-old,
silver-haired, mild-mannered chairman of the US Federal
Reserve, Janet Yellen. Her comments about Fed policy
resulted in a strong rally in the US dollar which, in turn,
undermined confidence in emerging market economies
and hit the oil price. Historically there is a very close
correlation between the value of the dollar and the price
of crude, because all of the major Opec producers have
currencies pegged to the dollar. Once the decline started it
was easy to pile on other reasons, such as the Internationa
Energy Agency's demand forecast cut and the partial
resumption of Libyan exports.
A major part of the reason for that stance is because of
the big increase in budget spending by the Arab producers
since the Arab Spring. They have all had to substantially
raise both social and defence spending in a sort of carrotand-stick response. At its current volume of production,
bne November 2014
close to 9.5m barrels per day, Saudi will need between
$85 and $90 per barrel to balance its budget in 2015,
depending on spending plans. But not before trying to
secure a new deal within Opec to ensure that any pricesupport cuts are spread amongst all member states.
The next policy meeting will take place in Vienna on
November 27 and that is likely to bring the showdown
between the Saudi, UAE, Kuwait faction on the one side
and the Iran, Venezuela led faction on the other. The
former group can live with a lower oil average for longer
than the latter, eg. Iran now requires $130 per barrel to
balance its budget because of the lost export volumes, but
will eventually have to try and rally the price back towards
$100 per barrel.
A period of weak oil seems inevitable ahead of that
meeting and until the moderate Arab producers get an
agreement on production cut sharing. Only then may we
see the market return to balance and the price rally. In the
meantime, of course, the risk of a price-supporting event
remains reasonably high. Libya has managed to raise daily
exports to close to 500,000 barrels, but the civil war there
is worsening rather than easing and that supply remains
vulnerable. For now the US-led coalition appears to be
containing Islamic State (IS), but one successful attack on
a southern oil pipeline or refinery would certainly spook
oil traders. Boko Haram has raised its threats against
Nigeria’s oil industry in recent weeks and Venezuela’s
ability to sustain current output is questionable. On top
of that, the cost of maintaining much of the US shale oil
production has been rising very steadily as the easy oil is
depleted and extraction becomes more difficult. Below
an $80 per barrel average, a lot of the oil added over the
past two years becomes uneconomic. So while a recovery
towards $100 per barrel is dependent on complex Opec
politics, traders are more likely to see $80 per barrel as a
support level because of the evident risks.
What $80/b means for Russia
For Russia, $80 oil would mean a ruble-dollar exchange
rate of approx RUB41.50. However, the Central Bank of
Russia (CBR) may reduce that to RUB40.0 if it raises its Key
Rate by at least 100 basis points later in October. At that oil
price and ruble exchange rate, the federal budget would
likely run a deficit of approximately 2.5% of GDP. Hardly
the sort of scenario which would crash the economy or kill
public support for the president.
The reason for the relatively benign scenario is because of
the CBR’s changed stance on the ruble since it last spent
over $200bn in a futile attempt to defend the currency
in 2008-09. Now it allows the ruble to free float against
the oil price. In the year to date, the ruble has dropped
25% against the dollar and that is exactly the same price
decline for Urals crude. The CBR’s currency flexibility,
which is not available to the major Opec producers, makes
Opinion
73
a huge difference this time around and places Russia
in a better position to ride out a period of lower oil. It
also has the added advantage of providing a boost to the
competitiveness of domestic producers and to efforts to
promote import substitution. But it is also only a survivalist
strategy and cannot lead to a recovery in growth.
Continuing capital flight, negligible foreign investment
flows, high inflation and an excessively high cost of capital
are more likely to lead to prolonged stagnation. Russia
needs reforms and an improved investment climate in order
to attract the much-needed boost to inward investment
which President Putin clearly identified in his state of the
nation address last December as an essential condition for
long-term growth.
In early 2009, when oil traded below $40 per barrel and
the economy was in recession, we saw a greater emphasis
on reforms and efficiency initiatives within government
and the big state enterprises than ever seen previously.
Regrettably the price of oil rallied too quickly in the second
half of 2009 and most of the reform plans were placed back
in the pending tray. Different this time? One big difference
is that Janet Yellen and Elvira Nabiullina are much more
important than many of the emotion-charged politicians.
For that at least we should be thankful.
Chris Weafer is Senior Partner at Macro-Advisory, which offers
bespoke Russia-CIS consulting.
bne:Invest in Belarus
This is an abridged version of the new monthly "bne:Invest in Belarus" monthly newsletter. You can sign up for free to the
newsletter by going to www.bne.eu and registering.
bne
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May 2008
Special report
I 75
Belarus' Snopkov says economy doing
better than it appears
Ben Aris in New York
B
elarus held its first investment
conference in New York on
September 22 to introduce the
Eastern European republic to the international investment community. Once
the production base for finished goods
in Soviet times, Belarus is looking for
help to retool and reform to retake
its place as the manufacturing jewel
of Eastern Europe. Nikolai Snopkov,
Belarusian Minister of the Economy,
talks exclusively to bne.
Like everywhere else, Belarus has
been hurt by the pall hanging over
the Continent and economic growth
is expected to be a modest 1.7% this
year, according the state committee
on statistics. "In the current global
economic situation it is not possible to
have high economic growth," says the
ebullient Snopkov, sipping coffee on
the 16th floor terrace bar of the Grand
Hyatt in New York where the Belarusian Investment Forum took place. "It
also would contradict the government's
policy of macroeconomic balances. We
are trying to rethink our situation and
looking for new factors for growth. We
are not pursuing high growth in the
near term. Instead, we want to invest
into the fundamentals and build up a
foundation so that we can grow in the
long term."
Belarus has a long tradition of manufacturing. Under the communists
production of nearly everything was
split between the various republics and
regions, but all these inputs were often
gathered in Belarus for final assembly
where the quality of work was highest. Since independence in 1991 the
republic has managed to hang onto this
tradition and is one of the few Eastern
European countries to export finished
goods – such as its famous Minsk
fridges and the giant MAZ dumper
trucks amongst other things – to the
rest of the world.
Green shoots
Despite the soggy growth, the minister
points to several signs that the Belarusian economy is doing better than it
might first appear. "The industrial
complex is showing signs of recovery,"
says Snopkov, "and services sector has
maintained its high rate of growth
throughout the crisis period."
No one is denying the economy remains
weaken by the years of crisis. The
country's hard currency reserves are
low, but still sufficient to ensure the
value of the currency following two
painful devaluations in recent years
(though the current account deficit
of $4.5bn in 2013 has shrunk to next
to nothing as exports recovered this
year). And the open trade regime that
Belarus runs – 50% of its exports go to
Russia and 20% to the EU – exposes it
to external shocks. "External shocks are
happening all the time," says Snopkov.
"Against this we have to ensure that
the internal growth of the economy is
well balanced, which makes it easier
to deal with these external shocks. But
if we have an open economy, then we
need to able to absorb these shocks and
improving efficiency, and attracting
investment will help make the economy
more robust."
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The key to reforming the Belarusian
economy will not just be attracting
more foreign direct investment, but to
improve productivity, says Snopkov,
and this means changing the way the
government works. "We need to change
the system of how the ministries work
from being just regulators to increasing
their productivity," says Snopkov. "This
means changing the system of internal
governance and separating the functions of who owns an industry from
who governs it."
This approach is being applied to the
whole economy, but part of these
changes will be privatisation. "The
main idea of privatisation is not just to
sell the companies, but to find a strong
investors that can run the companies
more efficiently than the state," says
Snopkov, who addressed over 100 US
investors at the conference.
Snopkov said the state is interested in
any deal that will deliver on this end
from an outright sales through joint
venture – everything, he says, will be
considered.
Opportunity in crisis
Even though the economy is growing only slowly, Belarus is still doing
better than most of its peers thanks
to the already relatively diversified
economy. And the sanctions that Russia
imposed on EU agricultural products
in September will give it another fillip
as Belarusian producers rush to fill
the gap. "Russian sanctions on food
imports from EU is an opportunity for
us, but we have a saying in Belarus:
'if our neighbour suffers, then it is not
possible to build our success on his suffering'," says Snopkov.
Still, Belarus will rally to Russia's aid
and its agricultural sector is expecting
to see exports of some products leap
in the short term. The sector can also
expect new investment from Russia.
However, Snopkov's comment on
neighbours is an illustration of a theme
that has run throughout the Belarusian
Investment Forum: when you invest
into Belarus, you don’t just tap its market of 9m souls, but have direct access
to the much larger market of 170m in
the Customs Union of Belarus, Russia
and Kazakhstan.
Belarus is an attractive and fast
growing market in its own right, but
this free trade area set up in 2010
(and about to become the even more
integrated Eurasia Economic Union in
January next year) means the small
republic could become an entrepôt or
manufacturing centre to service the
much larger area that currently could
soon also encompass Armenia and
Kyrgyzstan too. "Today we are intending to use this advantage to maximum
effect," says Snopkov, who has been
spearheading Belarus' efforts to modernise itself. "Currently the whole world
is in competition for investment and we
need to make the most of our competitive advantages if we are to stay in the
race."
Russia is already the second largest
consumer market in Europe and unlike
the countries in the West its retail
turnover continues to grow in double
digits in most segments. And Belarus is
catching up fast as its own middle class
emerges.
Today some two-thirds of Belarusians
consider themselves to be middle class,
while those who define themselves
as lower middle class only account
for 3.5% of the population and those
living in poverty are less than 1% of
the population. "In terms of the Gini
coefficient, Belarus ranks among the
top ten in the world," says Snopkov,
referring to the economic measure that
is used as a broad calculation of wealth
by including non-liquid assets like
property.
And the entrepreneurial class is also
growing, says Snopkov. About a third
of the middle class describe themselves
as entrepreneurs and these small and
medium-sized enterprises (SME)
already account for about a quarter of
GDP. "Our task is to increase this share
of SMEs to 50% of GDP by 20210," says
Snopkov, "as this is one of the most
important parts of the economy,
playing a fundamental role in the
wellbeing of the of the population."
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Special report
I 77
Belarus makes pitch to US investors
Ben Aris in New York
W
here is Belarus heading?
What will be the nature of
the structural and institutional reforms we are carrying out?
The answer to these questions is
both simple and complex: simple as
we know what we need to do, but
complex as this requires knowledge, resources and energy.
Belarusian Prime Minister Mikhail
Myasnikovich opened the first
Belarusian Investment Forum on
September 22 with a pragmatic,
rhetorical question and called on
US investors to take advantage of a
"reset" that the Republic is enjoying
in its relations with the West.
About a 100 US investors turned
out to listen to a high-powered
panel that as well as the PM included
the minister of the economy, the
deputy finance minster and the head
of the Republic's development bank,
expound on the progress the country
has made in recent years. "Our intention is to create a productive environment for companies that want to come
and work with us," Myasnikovich told
the assembled delegates.
Myasnikovich admitted frankly that
despite the recent progress and
recovery, Belarus needs help if it is to
fulfil its potential. "So we came here to
build a solid future together with our
American partners, and we want our
partners to benefit from our success
together," said Myasnikovich. "Our
economy is based on knowledge and
innovation, and we are committed to
opening up on these lines.
Buffing up image
The conference was the first step in
addressing the country's poor image
and low profile amongst the international investment community. And
obviously investors' curiosity was
piqued, as there was barely an empty
seat in the hall of the Grand Hyatt's
ballroom in the heart of New York.
But the PM has a good story to tell.
While this year's economic growth
is expected to come in at just 1.7%,
that is still a lot better than most of its
peers. And the country boasts a long
tradition of manufacturing excellence it has managed to capitalise on
post-independence; not only does
Belarus have a reasonably diversified
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economy, it is also the only country
to have significant exports to both
Russia (50%) and the EU (20%).
"Industrial production has increased
and surpassed the levels of in the
Soviet Union, while per-capita GDP
has increased three-fold since 2000,"
Myasnikovich told delegates. "Poverty
is amongst the lowest in the region
and indeed is lower than in most of
the developed countries of Europe. We
have a balance budget and low state
debt, while our trade has grown consistently each year. However, we need
to look for new sources of growth and
a key will be improving the productivity of the existing capacity."
That was the core of the pitch to the
US investors: we need your help to
continue the progress we have already
made. The government has been
investing heavily into its capital – both
fixed and human – and is already
reaping rewards in several sectors,
with IT standing out as the most
prominent amongst them. Capital
expenditure is running at about 30%
of GDP, with a third of this going into
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heavy industry, according to the Ministry of Economy.
The upshot is that Belarus has one
of the most diversified economies in
the former Soviet Union. Minister of
Economy Nikolai Snopkov rattles off a
long list of the republic's achievements
that are unique in Eastern Europe: the
republic produces 16% of the world's
Potash, 30% of its dump trucks, 6%
of its tractors and 16% of its linen. It
is the sixth largest cheese producer in
the world, the third largest butter producer and the number one IT services
producer in per-capita terms.
But this positive side of the Belarusian
story is not well known, which was the
point of the conference. The National
Investment Agency has recently been
beefed up and the state has introduced
a raft of incentives to appeal to potential
investors. The republic already offers
attractive tax conditions: profit tax have
been slashed to 18%, which is one of the
lowest levels in the CIS; and workers
pay a flat 12% income tax, slightly lower
than even Russia's 13% flat tax.
But the main focus has been, as in
other countries, on creating industrial
parks and special economic zones that
have been used to such great effect
by the Chinese. Today, there are six
special economic zones and several
specialist industrial parks, with a new
large Sino-Belarusian industrial park
in the works. In these business havens,
companies enjoy a 10-year tax holiday
and a 50% discount on profit for the
next decade. For the high-tech park,
profit tax is also 0% and VAT is 0%,
although companies have to pay their
workers social taxes.
For Belarus, it will be a hard sell to
attract the kind of share of FDI the
government needs, but it seems
committed to making the effort. “I
sincerely believe that this forum and a
series of other major political events
initiated by Belarus, including the
Ukraine peace process, will result in
the restart of the relations between
Belarus and the United States," the PM
noted. “We are open for a dialogue –
so is our country."
Special report I 79
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There is an extensive privatisation
programme on the agenda and the
plan is to sell off many of the companies via IPOs. But progress has been
slow and the poor state of the global
economy has stymied these efforts.
Belarus looks to develop
international financial
centre in Minsk
Ben Aris in New York
B
However a lot more progress has been
made with building up an insurance
industry, which is growing fastest. "It
is not large, but it has been developing
very dynamically in recent years," says
Yermolovich. "The total assets of the
sector were $750m in 2013, but that
was up 43% year on year. It is a huge
potential market."
Insurance has the advantage that it
has existed since Tsarist times. The
leading companies were taken over by
the Communists and today the stateowned BelGosStrakh remains the
market leader.
Currently, the insurance sector
accounts for about 1% of GDP, but the
minister says the goal is to increase
this to 3% of GDP by 2025, when a
single regulator will also come into
existence. "We are already ready for
foreign investors to come into the
sector and the Ministry of Finance has
already liberalised the legal framework to accommodate them.”
elarus plans to turn Minsk
into an international financial
centre as part of its ongoing
reforms to create a domestic capital
market.
of a capital market have already been
put in place," Deputy Finance Minister
Maxim Yermolovich told delegates
at Belarus' first international investment forum in New York at the end of
On September 22, Belarusian President Alexander Lukashenko signed
a decree to create the “Experimental
multi-purpose complex Minsk-Mir" – a
building that will house a new stock
exchange that the government hopes
will become the centre of the republic's international financial centre.
"All the legal instruments to that lay the
foundation of a capital market have already been
put in place"
The new building is a physical
manifestation of a raft of reforms the
government has pushed through to
deepen the country’s nascent capital
market and so make more financial
resources available to its leading
companies. "The financial markets are
growing dynamically and all the legal
instruments to that lay the foundation
September. "Large companies can now
report in IFRS and launch an IPO if
they want."
The government has been moving
towards establishing a liquid capital
market for some time, but the efforts
have begun to gather pace recently.
“After 2025, these companies will also
have access to the entire Eurasian Eco-
nomic Union markets of 170m people,"
Yermolovich added.
Currently there are some 25 insurance
companies operating on the market, of
which 11 have foreign capital participation.
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Belarus' agricultural sector set to
be big winner from turmoil
bne
B
elarus' agricultural sector is set
to be the big winner from the
turmoil in Eastern Europe. Happily, Belarus forecasts good harvests for
this year.
Following Moscow's decision to ban
imports of European agricultural
products earlier this year in retaliation
at Western sanctions, Russia has turned
to its smaller neighbour and fellow
Customs Union member to help keep
Russian shop shelves stocked.
Russia has long been one of the main
export markets for Belarusian agricultural goods, however the trade is getting
an enormous fillip from the fact that
most of the European competition has at
the stoke of a pen disappeared. In some
product categories exports to Russia are
expected to double or treble this year
alone.
Following Moscow's decision on the
EU ban on August 7, it immediately
turned to Belarus and agreed to increase
Belarusian agricultural exports to Russia, Russian Deputy PM Arkady Dvorkov-
ich told Russian news agency Tass on
August 13.
According to Adrian Rogstad, an analyst
at IHS Global: "Russia's ban on Western
food imports and its turn to Belarus for
increased import volumes is good news
for Belarusian exporters at a time when
regional exports have fallen, in large
part due to the regional instability as a
result of the conflict in Ukraine. Exports
to other Commonwealth of Independent
States (CIS) countries, including Russia
and Ukraine, fell by 5% year on year in
January-June 2014 due to the conflict in
Eastern Europe, while exports to other
countries rose by 3.5%.”
"Belarusian importers could benefit from
the ban as Western exporters seek new
ways of reaching the Russian market,"
Rogstad added. "Belarusian producers of
processed food, including seafood and
meat-based products, could benefit from
a re-direction of exports to Belarus for
processing ahead of export to Russia."
Belarusian dairy products in particular
are set to soar. Even before the bans,
Russia was a net importer of raw
milk and has now cut itself off from
major supplies in Western Europe. In
August-December, Belarus intends to
ship roughly 40% more milk and dairy
products to Russia than it did in the
same period of 2013, according to the
Belarusian Agriculture and Food Minister Leonid Zayats.
“In August-December 2014 the volume
of dairy supplies will grow by roughly
40%. Those will be cheese, skimmed
milk powder and full-cream powder,
whole milk products,” Zayats said in
remarks quoted to BelTA.
Next year, Belarus is ready to ship over
4m tonnes of dairy products in milk
terms to Russia, he added.
Meat products are another item where
exports will increase. The Agriculture
and Food Ministry estimates in 2015
that Belarusian manufacturers will be
able to ship about 400,000 tonnes of
meat products to Russia. “If necessary,
we can ship more without hurting the
domestic market,” Zayats said.
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Other products that will see the volume
of exports increase are: over 100,000
tonnes of rye flour; 12,000 tonnes of
colza oil; about 1m tonnes of potatoes:
107,000 tonnes of carrot, 30,000 tonnes
of cabbage, and 27,000 tonnes of apples.
Happily, Belarus along with the other
countries in the CIS are on track for
record harvests. “Despite the weather,
we expect a better vegetable crop than
last year and these will be high quality
vegetables,” Deputy Minister of Agriculture and Food Vladimir Grakun told
local newswires.
The boost to exports is like to feed back
into Belarus' industry, as the windfall
profits will be reinvested in domestic
production. For instance, the fight for
market share amongst cheese producers
has become fierce in recent years and
Ukraine in particular has several large
hard cheese producers in direct competition with Belarusian cheese producers
on the Russian market. However, as this
competition has largely disappeared
as a result of the tensions, Belarus is
expecting to see cheese exports to Russia become a veritable mountain – an
increase of 70,000 tonnes of cheese
exports in August-December alone.
“Belarus has a perfect chance to export
200,000 tonnes of cheese instead of
the current 100,000 tonnes,” the press
service of the Belarusian Ministry of
Agriculture and Food quoted Sergei
Fankvert, the head of Russia’s veterinary and sanitary watchdog Rosselkhoznadzor, as saying in August.
Another side effect of the sanctions
has been to improve trade relations
between Belarus and Western Europe.
As the smaller countries in the region
that are not under the Russian ban
scramble to feed the 143m-strong
Russian population, Minsk decided to
lift an import ban on live cattle from
Europe in order to adequately supply
its food processing industry with meat
to produce exports to Russia. Exports
of meat and meat products to Russia
were worth $1.35bn in January to May,
but are expected to rise by somewhere
between 15% and 40% in the second
half of this year.
Special report
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Lukashenko the most popular politician in
Ukraine, finds poll
bne
A survey conducted by the Ukrainian pollster Rating asking the population
about their attitude to global leaders found that the Belarusian president,
Alexander Lukashenko, was the most popular foreign leader.
Some 62% respondents in the “Ukrainians' attitude to global leaders” survey
said they have a positive attitude to Lukashenko, beating US President
Barack Obama (54%) and German Chancellor Angela Merkel (51%). Russian
President Vladimir Putin scored just 16%.
Lukashenko was most popular in the southern and eastern parts of Ukraine,
whereas those in the western, central and northern regions were more
inclined to support Obama, Merkel and Poland's president, Bronislaw
Komorowski.
In general, the survey found that Ukrainians have the most positive attitude
to Belarusians (53% definitely positive and 41% rather positive) amongst
their surrounding neighbours. The attitude to Russians has deteriorated
sharply (39% definitely positive and 33% rather positive).
The poll is mirrored by similar polls at home for Lukashenko: the president's
ratings have increased by five percentage points since December, to reach
39.9%, while over the past six months the number of Belarusians who think
that the country is headed in the right direction is up by nearly 10 points from
31.9% to 42.3% – the highest approval rating in three years, according to the
Independent Institute for Socio-Economic and Political Studies in Minsk.
Meat imports is one of the most
lucrative items amongst food categories under the interdiction. Russia
imported $17.2bn of food last year
from countries covered by the ban,
of which $9.2bn was in the affected
categories, the International Trade
Center, a joint venture of the UN
and World Trade Organization, said.
The ban should also catalyse joint ventures. Russia's milk deficit has already
spurred Belarus to open talks with
neighbour Lithuania on milk production
joint ventures, according to the Lithuanian Minister of Agriculture Virginija
Baltraitiene, who was in Minsk in August
shortly after Russia imposed its ban.
Perhaps the most significant effect
of the current crisis will be to allow
Belarus to set up agricultural companies in Russia, Belarusian President Alexander Lukashenko said in a
television interview on in September.
"They tell me however that all kinds of
outlets called Belarusskoye (Made in
Belarus) open in Russia and Ukraine;
however, these outlets sell nothing
made in Belarus. This brand is used
to sell anything but Belarusian. We do
our best to prevent it," the president
said.
But according to Lukashenko, Belarus
has been upgrading its facilities in
Russia and hopes to expand its
cooperation with Russia significantly.
"The high quality of Belarusian
products is well-known in Russia and
Belarusian products are very popular
there."
82
I Events
Upcoming events 2014
The Fourth Annual TEAS Business Forum London ECONOMIC DIVERSIFICATION IS THE KEY (5 November)
London, United Kingdom
21st Russian Banking Forum (2 - 4 December)
London, United Kingdom
http://www.russian-banking.com/AS2333BNBNE
Catalyst Cap Intro: Emerging Markets –
Macro Alternative Investing (8 December)
New York City
Catalyst Financial Partners
+1 212 966 2993
[email protected]
http://catalystforum.com/node/302
bne October 2014
84
I Events
bne October 2014