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Inside this issue:
What triggered the Maidan
massacre?
Russian coal keeps UK
lights on
To arm or not to arm Ukraine
March 2015
www.bne.eu
A salty outburst against
Orban
Ethnic riots dent image
of Kazakh utopia
Special Report
CEE Real Estate
AFTER
DEBALTSEVE
bne March 2015
Senior editorial board
Ben Aris (Moscow) editor-in-chief
Contents
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baris@bne.eu
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20
James R Hammond (Boston)
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publisher
jhammond@bne.eu
Nicholas Watson (Prague)
managing editor
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nwatson@bne.eu
Robert Anderson (Prague)
news editor
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randerson@bne.eu
Liam Halligan (London)
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editor-at-large
LHalligan@newsparta.net
Central Asia
Naubet Bisenov (Almaty)
bureau chief
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nbisenov@bne.eu
Eastern Europe
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bureau chief
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Central Europe
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bureau chief
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Southeast Europe
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Design
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COVER STORY
6 The Insiders
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31
22
8 After Debaltseve
14 Perspective
CENTRAL EUROPE
28 Central Europe’s media
searches for key to
independence
29 Still glad to be gay in
Slovakia
15 Chart of the month
31 Hungary: investing in Hell
EASTERN EUROPE
32 A salty outburst against
Orban
16 What triggered the Maidan
massacre?
33 Hungary’s industrial dreams
punctured
17 Dodging the draft in Ukraine
34 Poland’s politics, banks,
investors feel Swiss franc
effect
20 Russian coal keeps UK lights
on as winter grips
22 Russian bikers given
a heads-up
24 Belarus wary of the ‘Russian
World’
26 Trade finance proves safe
haven business for Russian
banks
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Cover photo: Separatists pose on a Gvozdika
self-propelled howitzer abandoned by retreating
Ukrainian forces outside Debaltseve. Demotix /
Maximilian Clarke.
Print issue: ¤68 / year Basic online package: ¤180 p/user, p/year Full subscription package: ¤500 p/user, p/year
bne March 2015
Contents
I5
69
43
36
37
53
SOUTHEAST EUROPE
51
Nagorno-Karabakh:
no war, no peace
69
The fall and rise of the
Moscow property market
Russia in rush to build
"Turk Stream"
53
Armenia and Turkey battle
over centenary events
71
Booming IT sector drives
Romanian real estate market
72
Hungary market
recovering but
government is wildcard
73
CEE property investment
volumes soar
Gulen dealt another blow
as Bank Asya seized
OPINION
39
Divergent economic paths
40
A new guv’nor in Albania
41
More power to the people
43
Wasted chances in
Romania’s recycling sector
56
EURASIA
46
Ethnic clashes dent
Kazakhstan's utopian image
47
Asian Development Bank
ups game in Eurasia
49
The ‘burbs come to Mongolia
50
Mongolian government Got
(No) Talent
Minsk deal offers
Ukraine tough long-term
opportunities
58
It’s the economy, stupid
60
Sowing the seeds of an
oil-price rise
74
Film review: Few Russians
left unmoved by “Leviathan”
To arm or not to arm
Ukraine
75
Book review: A year in
Hungarian Politics
SPECIAL REPORT
77
Obituary: Zhelyu Zhelev,
Bulgaria’s first freely elected
president
78
NEW EUROPE IN NUMBERS
82
UPCOMING EVENTS
ARTS, CULTURE & PEOPLE
62
65
Zlota 44 – a towering
problem in Warsaw
67
Turkey no longer forever
blowing (property) bubbles
Follow us on twitter.com/bizneweurope
6
I The Insiders
bne March 2015
West needs new
tactics to deal with
assertive Russia
bne IntelliNews
Over 100 participants attended the inaugural bne IntelliNews Debate
at Cass Business School, London, on Tuesday January 27, 2015.
M
ore than 100 participants at a feisty bne IntelliNews
debate in London expressed frustration with the
apparent failure of Western sanctions to modify
Russia’s belligerent behaviour, with some suggesting it is time
to try new tactics to ensure the fighting in the east of Ukraine
is ended for good – a new ceasefire took effect February 15
– and head off similar flashpoints in the future.
A sign of the contentiousness that epitomises the subject,
several speakers at the Cass Business School on January 27
even took issue with the debate’s title, “East-West Conflict –
Temporary Lapse or New Normal?”
“There is no ‘East’,” spluttered Sir Andrew Wood, a former
UK ambassador to Moscow, “it’s Russia – Russia is the
problem.”
For Erik Berglof, director of the Institute for Global Affairs
at the London School of Economics, it was the idea that
somehow what we are seeing in Russia-EU relations is
normal. There is nothing normal about this so-called ‘new
normal’,” said Berglof, “it’s very abnormal.”
Not so, pointed out Sir Rodric Braithwaite, another former UK
ambassador to Moscow on the panel: “Suspicion, fear, mutual
disapproval and occasional bouts of violence have always
characterised the relationship between Russia and the West –
they are the norm.”
Something that most of the speakers and attendees at the
debate – the first that bne IntelliNews intends to hold over the
coming months – could agree on was that the sanctions were
starting to seriously hurt Russia.
“There’s no question that the sanctions are having a negative
effect on Russia’s economy and the investment climate,” said
audience member Michael Calvey, a founder of the big Russian
private equity outfit Baring-Vostok Capital Partners.
However, few expected a quick resolution to the current
struggle between Russia and the West, and opinion was
deeply divided over whether sanctions would ever be
effective in forcing Russian President Vladimir Putin to
modify his current behaviour toward Europe. “Sanctions
are effective in terms of damaging the counterparty and
damaging yourself – I’m not very confident that they will
affect behaviour,” said Berglof.
Indeed, others argued that sanctions are having precisely
the opposite effect, actually pushing the Russian leadership
away from engagement and into adopting a more aggressive,
isolationist stance.
Ben Aris, editor in chief of bne IntelliNews, argued that
sanctions were reinforcing Putin’s domestic position and were
“Sanctions will not change Putin’s
mind at all”
therefore counter-productive. “Sanctions will not change
Putin’s mind at all,” he said, adding: “If anything, [they] have
only made him stronger.”
Pippa Malmgren, a former Special Assistant to the US
President for Economic Policy on the National Economic
Council and founder of the consultancy DRPM Group, took
this a step further, arguing that the sanctions were actually
making Putin act contrary to the desired conduct. “The greater
bne March 2015
the economic pain, the greater the inclination to engage in
a military response,” she argued, adding that the problems
between Russia and West are not isolated to Ukraine, but are
part of conflicts ranging “from the Arctic to Mediterranean,
to the Black Sea and beyond” that could in the future even
include the threat of nuclear weapons.
Even Edward Lucas of The Economist, a noted hawk on Russia,
conceded that the track record of using sanctions to make
countries do what the West wants “is fairly weak”, citing
Zimbabwe as a case in point. He argued that sanctions needed
to be made tougher to be more effective. “If we really wanted to
impose sanctions, we would go after the Russian dirty money in
the West,” he said, pointing out that this money meant, “we [in
the West] were riding first class in the Kremlin gravy train.”
“We are reinforcing all the bad traits in Russia,” said Berglof.
“We need to find a way back. We need to find areas where
there is a positive sum game. We need to find some kind of
conversation where we can engage.”
Top: Liam Halligan, Edward Lucas, Erik Berglof, Sir Andrew Wood
and Ben Aris
Middle: Sir Andrew Wood, Ben Aris, Sir Rodric Braithwaite
Bottom: Valery Morozov, Former Kremlin Advisor
8
I The Insiders
bne March 2015
The former chief economist of the European Bank for
Reconstruction and Development said that trade talks
between the EU and the new Eurasian Economic Union could
offer such an area for a constructive conversation.
Ben Aris, editor-in-chief of bne IntelliNews, argued that talks
on a new strategic framework for Europe could also be worth
trying, though Sir Rodric Braithwaite, former UK ambassador
to Moscow, dismissed this as impractical in the current
environment.
Better the devil you know
While “engagement” was generally agreed to be better than
“shouting” and “shooting”, some questioned whether it was
possible for the West to deal with the current crop within
the Kremlin who were driving policy. “My starting point is
whether Vladimir Putin and the people who advise him are
rational actors who can be deterred,” said Professor Michael
Ben-Gad of City University.
“If we really wanted to impose
sanctions, we would go after the
Russian dirty money in the West”
This has worrying implications for the conflict spreading
into other parts of Europe. “Given the way the West has
ignored the commitments it made to Ukraine under the 1994
‘Budapest Memorandum’, it’s an open question why Putin
should take Nato’s Article V commitments to, say, Estonia any
more seriously,” said Professor Ben-Gad.
So we need to talk about Vladimir. Lucas and Sir Andrew
argued that the goal of the West must now be to bring down
Putin. However, Aris and speakers from the floor warned of the
risk that what might come after could be even worse. “We might
miss him when he’s gone,” Professor Ben-Gad noted wryly.
There was more agreement on the need to bolster Ukraine
in the face of Russian aggression, which, if it works, could
encourage change in Russia itself. “The solution is much
more about trying to do the right thing in Ukraine,” said
Berglof. “If Ukraine manages to get through this very difficult
transition… that is the road to real change in Russia itself.”
Top: Michael Calvey, Senior Partner of Baring Vostok.
Middle: Prof Michael Ben-Gad and Dr Pippa Malmgren.
Bottom: The debte was webcast to a global audience.
However, change in Russia is rarely smooth or without
violence. “The question is, when will Russia begin to change
its system of government and can it change it without a violent
end?” summed up Sir Andrew.
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10
I Cover story
bne March 2015
After Debaltseve
Ben Aris in Moscow, Nicholas Watson in Prague
I
t was either an “orderly, pre-planned”
withdrawal of the Ukrainian army
(President Petro Poroshenko), or a
massacre of 3,000 demoralised, battleweary troops (pro-Russian separatists).
But whatever the taking of the eastern
town of Debaltseve was, it signals a new
phase in the Ukrainian crisis that will
have massive repercussions for Europe.
What does Russia, which is clearly
destabilising Ukraine to get its way in a
standoff with the EU over the country’s
future, actually want? The press is full
of speculation, but the truth is that the
situation remains highly unpredictable
and could go in several directions, ranging
The latest deal agreed in Minsk on
February 12 between Russian President
Vladimir Putin, Poroshenko, the EU, plus
the leaders of the rebels fighting in the
Donbas region, appears at the time of
writing to be a ceasefire in name only.
following Sunday on February 15. The
fighters on the ground had every incentive
to try and grab the last few kilometres
before the line was locked in and heavy
weapons withdrawn under the terms of
the deal. The rebels, backed by Russian
weaponry and allegedly troops, began
attacking the strategically important
railway hub town of Debaltseve even as
the deal was being signed in Minsk. It
ended with Ukraine's army there being
surrounded and Kyiv forced to concede a
humiliating defeat on February 18.
The Minsk deal was flawed from the
outset; the leaders met on the Friday but
the ceasefire didn't go into effect until the
Debaltseve is strategically important for
the rebels – it is a major transport hub,
the loss of which would have proved
from a decades-long armed insurrection
in the east, to an economic boom in the
rump of pro-Western Ukraine that could
offer investors the last unfulfilled great
investment opportunity in Europe since
the fall of the Soviet Union.
Cover Story I 11
bne March 2015
hugely disruptive for economic activity
in the territory held by Russia’s proxies
in the east of Ukraine. Its capture also
bolsters the rebels' position as they look
to build up their economic independence
from the rest of the country.
The defeat of the Ukrainian army at
Debaltseve could prove to be a decisive
point in the conflict. There are several
ways to read this result. The first is the
"it’s almost over" scenario and the battle
for Debaltseve was simply a mad rush to
grab a strategic asset before the ceasefire
came into effect on February 15, freezing
the line of demarcation.
Certainly bond and equity investors
were encouraged by the rebels' capture
of Debaltseve and believe it clears the
way for the beginning of the end of
hostilities. Russia’s junk-rated corporate
bond market has started to lift in the last
month from a six-year low hit on January
13, with the number of issuances in
the last month doubling from the year
before, according to Bloomberg, with
yields moving out of distressed asset
territory. "The nation’s equities and the
ruble have rallied the most in the world
this month. Corporate bonds returned
6.2% in the past one month, the best
performance among emerging markets
except Venezuela. And sovereign-bond
yields have fallen to the lowest level since
December 11," the newswire said the
same day as Debaltseve fell to the rebels.
Germany was less impressed with the
fighting that continued beyond the
deadline, condemning the battle as a
"massive violation" of the ceasefire. But
highlighting the West's extremely weak
hand once again, Berlin went on to say
that the Minsk deal was "damaged but
not dead". "The German government
resolutely condemns the military actions
by the separatists in Debaltseve. It is a
massive violation of the ceasefire that
went into effect on Sunday," Chancellor
Angela Merkel's spokesman said in
a statement. "We believe the Minsk
process is under strain, it has perhaps
been damaged, but we still believe it
makes sense to continue working."
The second "it's not over yet" scenario is
that Putin did not get what he wanted in
Minsk and was demonstrating to both
Kyiv and Brussels his military superiority
on the ground and his ability to turn
the fighting on and off at will. Germany
was putting a brave face on an unstable
situation, as a clearly "shaky" ceasefire
was obviously already an understatement
only days after the ceasefire was
supposed to start. Already on February
20 the Ukrainian military was reporting
that fresh fighting had broken out near
another strategic town, the Ukrainian
port city of Mariupol. Taking this back
from the Ukrainian army, which wrested
it from the separatists’ control last year
in in heavy fighting, would provide the
Russians and their proxies with a land
bridge to the Crimean peninsula, which
Moscow annexed in March last year, and
scenario, where the country is wracked
by terrorism and rebel raids for decades,
fuelled by arms and money from both
the US and Russia. Indeed, the situation
on the ground in Ukraine today already
looks similar to the fights against the
Tamil Tigers in Sri Lanka or the Farc
rebels in Columbia at their worst points.
At the other end of the spectrum is the
optimistic (and currently implausible)
outcome that the west of Ukraine still
controlled by Kyiv accepts the loss of
the east and starts to build a modern,
democratic EU candidate state. Of
all the countries in the former Soviet
Union, Ukraine has fallen the furthest
behind. The average income in Kyiv
in per capita terms ($8,970 in 2013,
"It is easy to turn these militias on but it is
a lot harder to turn them off again"
is widely seen by many commentators as
one of Russian President Vladimir Putin's
top goals in the conflict.
"Debaltseve, defended by very significant
Ukrainian forces, sends a clear signal
that Russian-backed rebels have the
potential, almost at will, to further
extend gains into Donbas, and even the
rest of Ukraine," says Tim Ash, head of
research at Standard Bank.
The long view
Looking further ahead, there are four
possible outcomes of this conflict over
the next year.
The most pessimistic outcome is that
the militias used by both sides to fight
what is in effect a proxy war between
East and West are so steeped in death
and hate that they continue to battle on
irrespective of deals made in Kyiv and
Moscow.
It is easy to turn these militias on, but
after they have lost so many fathers,
brothers, uncles and sons, it is a lot
harder to turn them off again. Putin and
Poroshenko could simply lose control of
the situation. This is a Sri Lankan-like
according to the World Bank) is a third
of that in Russia ($23,190) and it is the
only country (apart from Kyrgyzstan)
where the average income is less than it
was at the end of the Soviet Union.
Ukraine has missed out on most of the
catch-up growth enjoyed even by the
likes of Belarus ($16,950). If stability,
reform and real investment arrive
in Ukraine, the economy could soar.
It remains the last great investment
opportunity in the former Soviet Union
where investors can earn triple and even
quadruple-digit returns if things go well.
Neither of these scenarios is very likely.
Europe won’t tolerate a low wattage
war sputtering in its backyard and would
continue to turn the sanction-screws on
Russia until it at least produced a frozen
conflict. Likewise, after two decades of
dysfunctional government and endemic
corruption, Ukraine's leaders are unlikely to
be able to transform the system overnight
to attract the billions of dollars needed to
pay for it. Ukraine is not Estonia.
At this point the third option, a frozen
conflict, similar to Transnistria in
Moldova or Nagorno-Karabakh that lies
12
I Cover story
between Armenia and Azerbaijan, looks
the most likely outcome.
The problem with the Minsk summit
is that it focused exclusively on halting
the shooting. None of the substantive
aims that Russia is demanding were
addressed and the Kremlin is unlikely to
back off until it gets what it wants. Putin
will turn the hostilities back on again if
these negotiations go badly.
"Before last year, eastern Ukraine had
no history of ethnic conflict. Well-armed
‘separatists’ emerged on the scene only
when Russian President Vladimir Putin
bne March 2015
Moreover, the mood on the street in
Kyiv is becoming increasingly ugly.
The Maidan demonstrations began
as a protest against the now exiled
former president Viktor Yanukovych’s
decision to reject the EU's free trade and
association deal. However, the protests
quickly metamorphosed into an effort
to oust the kleptocratic Yanukovych
regime. But no one on Maidan signed
up for a civil war and the mood is now
swinging against the government as
standards of living drop and the body
count mounts. At the same time, so
many people have died (just under
6,000 according to the latest UN count)
“The ‘civil war’ that ensued is an artificial conflict
run by Russian security. It will last as long as the
Russians want it to last”
ordered them there. The ‘civil war’
that ensued is an artificial conflict,
run by Russian security and enhanced
by a sophisticated pan-European
disinformation campaign. It will last
as long as the Russians want it to last,"
Anne Applebaum opined in a recent
Washington Post column.
Finally, a slightly more optimistic version
of this end game is that Poroshenko does
manage to placate Moscow with promises
of no Nato membership; a trilateral trade
deal between Ukraine, the EU and Russia
is struck; and Ukraine pushes through a
sufficiently radical reform programme to
unlock foreign investment and substantial
Western aid. This is Europe's preferred
outcome and it is easy to argue that the
West's best response to Russia's aggression
is to ensure a strong and prosperous
Ukraine, as that in itself would undermine
Putin's power over the country.
Maidan III
The problem is that Poroshenko is now in
an almost impossible position. He may have
easily won the presidential election, but
he doesn’t have a clear mandate from the
people after his eponymous political party
came a narrow second to that of his much
more hawkish prime minister, Arseniy
Yatsenyuk in the parliamentary elections.
that no-one is in the mood to make any
compromises with Moscow.
"What Moscow wants is now fairly
clear to all sides – Ukraine to be pulled
from its current Western orbit, back
into Russia's sphere of influence, and
for a government to be formed in Kyiv
more amenable to Russian interests.
Russia probably also wants a resetting
of the European post-Cold War security
structure, and recognition as a result
of the war in Ukraine of clear Russian
spheres of influence, pushing Nato
expansion back beyond Ukraine's
Western border," says Ash.
However, if Poroshenko concedes any of
these points, then he very likely will face
a Maidan III – this time directed against
him. It is hard to see what Poroshenko,
as the head of a militarily weak and
economically broken state, can do to
plug the gap, especially following the
defeat at Debaltseve. "Public mood will
deteriorate and weaken the position of
the authorities in Kyiv, both domestically
as well as in negotiations with Russia
[following this defeat]," writes Witold
Rodkiewicz, Rafal Sadowski and Andrzej
Wilk of the Centre for Eastern Studies
(OSW) in a paper.
But one thing is clear: Poroshenko can
count on little help from the West. "The
continuing military pressure has several
aims: to gradually expand the area
controlled by the rebels (who have laid
claim to the whole of the Donetsk and
Lugansk regions); to weaken the morale
of the Ukrainian armed forces; to provoke
a split among the Ukrainian political elite;
and to deepen the mood of fatigue and
resignation among the Ukrainian public.
At the same time, the Kremlin is seeking to
demonstrate the complete powerlessness
of its Western European partners
and force them to recognise that the
establishment of a lasting peace in Ukraine
will be possible only on Russian terms:
the federalisation of Ukraine and the
abandonment of its pro-Western course,
while receiving financial assistance from
the West," the OSW analysts believe.
If the fighting does stop, then
Poroshenko will have his hands full
placating the growing dissatisfaction
in his government's performance.
Whatever optimism outside observers
have for the prospects of long-term
peace, within the country the people are
on the verge of revolt.
“People are slowly starting to come to
the realisation, though, that a great deal
of the Maidan’s ‘transformative’ impact
has been imaginary. The New Yorker
recently ran an excellent dispatch by
Sophie Pinkham, a Columbia University
doctoral student who is currently
writing a book about Ukraine, which
detailed just how slow change has been
in coming,” says Mark Adomanis, a
commentator for bne IntelliNews. “In
her account you meet Ukrainians who
have gone without electricity, water or
modern medical care, Ukrainians who
have lost their jobs, Ukrainians who
have seen the purchasing power of their
meagre salaries and pensions almost
entirely destroyed by rampant inflation.
These people are not terribly satisfied
with the ‘new world’ that has been
ushered in by Maidan, and they would
surely meet with incomprehension
anyone suggesting that their country is
now an example unto others.”
The OSW argues that there is a crisis
of confidence in public institutions in
Ukraine, with a poll showing a clear
bne March 2015
Tactically, Putin has been exemplary in
his battle over Ukraine with the West.
Strategically, it could go badly for him. The
Russian president since he came to power
has single-mindedly tried to transform
Russia from being a petrol pump to the
world into a modern, technologically
advanced country with Western standards
of living. But for this he needs Western
investment and know-how, which could
now be out of Russia’s reach for years to
come. Thus Putin could find that Russia
once again reverts to being little more than
a petrol pump to the world – and not a
very well paid one at that.
Putin must be banking on divisions in
Europe he has successfully exploited.
The EU sanctions on Russia, which
require a unanimous vote, are due
to expire in June and if there is a
semblance of peace in Ukraine, then
disunity amongst the EU members could
make it difficult to renew them. The US
sanctions are permanent unless action is
87.1%
80.0%
82.9%
80.0%
75.5%
70.0%
77.4%
74.0%
60.0%
2014
2013
2012
2011
53.7%
2010
By overplaying his hand at what should
be the beginning of the end of the
conflict, the West is more likely to leave
debilitating sanctions on Russia, cutting
the country off from the investment
and technology that it so badly needs to
modernise the country.
Gross external debt to GDP: 2008-present (%)
Gross external debt to GDP: 2008-present (%)
2009
Russia’s folly
Putin has been playing hardball in
Ukraine and seems to be holding all the
aces at the moment. However it could
well be that while he has won the battle,
he has lost the war.
Even if Ukraine has lost all the battles,
the obvious strategy for the West
now is to ensure that it can make the
transformation so many of its people
have fought and died for. And this is
pretty much the only effective policy
left open to Brussels at this point – but
don’t hold your breath. The EU has been
long on rhetoric, but short on action,
2008
The first real test for Poroshenko will be
the regional elections in East Ukraine
that were part of the Minsk deal. The
rebels cannot and will not allow open
and free elections in their region that are
organised from Kyiv, and they are bound
to produce another flashpoint or at least
institutionalise the Donbas' separation
from Kyiv, producing a frozen conflict.
Sources: CEIC Data; Concorde Capital
Hryvnia rate to the US dollar: 2008-present
Hryvnia rate to the US dollar: 2008-present
26.5
25.0
20.0
15.0
10.0
5.0 4.9
2009
2011
2013
2015
Source: Oanda
Total reserve
reserveassets
assetsand
and import
import cover:
cover:2008-present
2008-present
Total
40K
* Total reserves
30K
20K
Minimum recommended
level of reserves
10K
2009
2011
Source: State Statistics Service of Ukraine
I 13
complains Standard Bank's Ash. The fall
of Debaltseve may have represented a
turning point in the Ukrainian crisis and
the standoff between Russia and the
West over the country. But most likely
the “hybrid war” will turn to a “hybrid
peace”, in which Ukraine is left to wither
and both sides hunker down behind
their respective red lines, glaring at
each other.
taken to remove them.
$ millions
majority of the population not trusting
the parliament (56.9% of respondents),
the government (54.2%) or local
government (51.8%). In this climate,
Putin only has to spin out the conflict
and eventually Poroshenko will face yet
another popular rebellion.
Cover story
2013
2015
14
I Perspective
bne March 2015
Russia's
investment climate
deteriorates
bne IntelliNews
A
survey into Russia's investment climate by Detail
Communications found that investment confidence
has halved since the crisis hit. However, a third of
respondents – a mix of portfolio managers and analysts
from some of the most prominent investment banks, asset
management firms and hedge funds – expect the Russian
stock market to bounce off the bottom this year and put in
double-digit returns.
"Russia is arguably facing its most challenging times in
modern history. For the country, 2014 was marked by
tensions in Ukraine, sanctions, plummeting oil prices,
change in ownership of Crimea, currency devaluation and
economic recession. Needless to say, this did not go down
well with investors. By the end of the year, the market
capitalization of the entire Russian stock market was less
than that of one single corporation – Apple," said Timofey
Pletz, CEO of Detail.
Even so, Detail found that, "Almost a third of the respondents
showed great optimism and expect to see double-digit growth
from the Russian stock market in 2015. That’s despite the fact
that none of them forecast economic growth in 2015."
Despite expectations of a big 'dead cat bounce' this year,
similar to one that saw a tripling of asset prices in the spring
of 2009, investor confidence remains close to historical lows.
On a scale of 1 to 10, Russia had an average score of 5.6
for its investment climate before the crisis, which has since
Russia's macro invest confidence before and after crisis
Investment climate in Russia
before the financial crisis and
events in Ukraine
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Current investment
climate in Russia
10 points (highest)
9 points
8 points
7 points
6 points
5 points
4 points
3 points
2 points
1 points (lowest)
more than halved and is now equal to 2.5, the survey found.
Around 70% of investors gave Russia two of the lowest
possible scores.
Investors are concerned with a smorgasbord of problems, but
political risk and geopolitical tension are top of the list. That
said, one of the worries that don't appear to faze investors
is the fear that Russia will default on its debt: 92% of the
investors are either completely not worried or have only slight
concerns about Russia defaulting on its debt. "A Russia default
is also out of the question, with only 8% [of respondents]
saying they are very worried about it," says Pletz.
It’s an issue that bne IntelliNews raised in a recent chart,
questioning whether rating agency Standard & Poor's recent
decision to downgrade Russia to junk status was justified;
a look at the macroeconomic fundamentals raises a big
question mark over the decision.
Investors are also pretty pessimistic about the prospects
for near-term economic recovery: none of the respondents
expects the Russian economy to rebound in 2015. The largest
share (44%) believe it will happen in 2017. Almost 20% say it
will happen only in five years’ time.
As for attractive investment opportunities, oil and gas
remains the standout sector of choice for investors. "Despite
underlining the concern about how dependent Russia
remains on oil prices, which plummeted in 2014, almost half
of the investors (38%) named the oil and gas sector as the
most attractive industry," says Pletz.
These companies are the big winners from devaluation, as
their costs are in rubles but most of their revenue is in foreign
currency. Tied in second place are the metals and mining
industry, also a big winner from devaluation, along with
agriculture.
Interestingly, the survey finds that domestic issues are top
of the pile when it comes to making Russia a more attractive
investment proposition: almost 50% of investors say reform
and diversification of the economy is the top priority to
make Russia more attractive to investors. Peace in Ukraine
and sanctions being lifted are in third and sixth place,
respectively, the survey found.
Chart I 15
bne March 2015
S&P downgrades Russia to junk,
but figures tell different story
CHART:
S
tandard & Poor’s downgrade of
Russia to junk status on January
27 was met by the Kremlin
with accusations of US-influenced
politicking. Russian news agency RIA
Novosti quoted Deputy Foreign Minister
Vasily Nebenzya as saying that he has
“no doubt that this was done not even
on the prompting but on direct orders
from Washington”.
While there is little argument that 2014
proved to be a damaging year for the
Russian economy, a closer look at some
basic macroeconomic figures bears out
Russia’s complaints – especially when
compared to other economies still
ranked investment grade.
highest non-investment grade – was
the country’s newfound lack of access
to international capital markets. The
implicit message there is that, in the
not-too-distant future, Russia simply
will not be able to service its debt
obligations.
The widely used metric of public debt as
a percentage of GDP is seen as a broadly
reliable indicator of a country’s level of
indebtedness. A glance at the bne:Chart
below reveals not only how healthy
Russia is in this respect, at 9.2% of GDP,
but also the comparative fragility of
other nations – including those whose
sanctions led to the S&P downgrade.
Without access to capital markets,
Japan would have to use more than two
years’ total GDP to service just a single
year of public debt. Russia, on the other
hand, could pay its own off with little
more than a month of output.
"Russia could pay its public debt off with
little more than a month of output"
S&P’s main justification for
downgrading Russia to ‘BB+’ – its
Debt as % of GDP
211.7
200
150
132.6
92.1
79.5
United
Kingdom
76.9
Hungary
47.1
74
Germany
46.8
Poland
50
Czech
Republic
69.7
79.2
United
States
100
36.9
9.2
Japan
Italy
Spain
Kazakhstan
Belarus
Russia
0
16
I Eastern Europe
bne March 2015
What triggered the Maidan massacre?
Graham Stack in Berlin
T
wo separate investigations by
Germany's Frankfurter Allgemeine
and the BBC have produced
evidence that opposition demonstrators
on Kyiv's Maidan fired on police on
February 21, 2014, in the run-up to
an ensuing police massacre. The two
accounts help explain the events that
culminated with the flight into exile of
Ukraine's pro-Russian president Viktor
Yanukovych hours later.
In the early hours of February 20, 2014,
Ukrainian security forces successfully
used three riot-control vehicles fitted
with water cannons – newly acquired
from Russia – to drive protestors back
down from the steep hill leading up
to the government district and onto
Independence Square (known as
Maidan) itself. Towards morning, police
and interior ministry troops came in
behind the riot-control vehicles to
take up positions on the square itself,
for the first time since the start of
the opposition protest camp in early
December 2013.
Apparently concerned to avoid any
scenes of violence that might trigger
sanctions against the government, as
threatened by the EU, the riot police and
interior ministry troops used Western
methods of crowd control – moving in
no answer against the water cannons
– except that one of the vehicles was
reportedly disabled by a petrol bomb –
it seemed that the protestors' camp
would soon be dispersed.
Then something happened that seemed
at the time to the protestors to be a
miracle – the police abruptly pulled back
“Self-defence turned into cold,
indiscriminate killing”
behind the water cannons, linking arms
and using their massed weight to start
dividing up the protest camp crowd
– which at the start of working day
totalled at the most a few thousand.
With the police taking up positions on
Maidan itself, and protestors having
from the square and disappeared back
up the hill on Institutksa, towards the
government district.
Seeing the police retreat, scores of
protestors – with their trademark
improvised riot shields, miners'
helmets, petrol bombs and sticks –
Eastern Europe I 17
bne March 2015
rushed up the hill after them, intending
to re-erect barricades further up
Institutska road.
It was then that the security forces
started shooting, killing scores of
protestors in the following hours, in
harrowing scenes that then flashed
round the world on YouTube.
Why did the police pull back so
suddenly, snatching defeat from the jaws
of victory? And why, having refrained
throughout the night from using even
truncheons against protestors, did
security forces suddenly open fire on
protestors with live rounds?
Fired on
In the year of chaos that has followed
Yanukoych's departure, which has since
led to a global security crisis, these
questions have remained unanswered.
Now two accounts have come to largely
the same conclusion: the police, having
moved onto Maidan, and apparently
gaining the upper hand against the
protest camp, pulled back abruptly
because they were fired upon by armed
groups within the protest camp.
BBC reporters have now talked to a
man who claims he was equipped
with a high-velocity hunting rifle as
a member of an armed Maidan unit
housed in the Kyiv Conservatory. That
Conservatory directly overlooks the
part of the Maidan where the water
cannon-mounted vehicles had entered
from Institutska.
The man called Sergei tells the BBC
that his unit started firing on police
in the morning of February 20. “I was
shooting downwards at their feet,"
Sergei claimed. "Of course, I could have
hit them in the arm or anywhere. But I
didn't shoot to kill."
The BBC quoted pro-Europe MP and
former journalist Andriy Shevchenko
as saying that a police chief in charge
of officers on Institutska called him
frantically to inform that his men were
under fire from the Conservatory, and
that casualties were mounting. The BBC
also identified a Ukrainian photographer
Dodging the draft in Ukraine
Graham Stack in Kyiv
With Russian-backed rebels threatening to raise a 100,000-strong army and
the fighting in eastern Ukraine becoming increasingly bloody, the ceasefire
deal comes at just the right time for a Ukrainian army facing massive draftdodging.
The Ukrainian defence ministry on January 20 launched its fourth wave of
mobilisation of the country's reservists since its "anti-terrorist campaign"
started in April 2014. The army reserves comprise men who have undergone
one year of mandatory national military service. The ministry said a total of
just under 62,000 reservists had already received their draft papers in the
new wave, half of the overall target number.
But writing on Facebook, presidential advisor Yury Biryukov said that draftdodging, which is punishable by by up to three years in jail, had become
endemic, even in West Ukraine – the traditional heartland of Ukrainian
patriotism.
According to Biryukov, 57% of those called up in the western region of
Ivano-Frankivsk, named after a national poet, had simply ignored their draft
papers, while an estimated 37% of those called up had crossed the border
into Romania. “Unofficial sources tell us that hotels and motels on the other
side of the border with Romania are packed with draft-dodgers,” he wrote.
In the Facebook post – which he later deleted after a storm of controversy
– Biryukov alleged that 14 village councils in Ivano-Frankivsk had refused
to allow the distribution of draft papers in the villages. The same is true of
other West Ukrainian regions, Biryukov said, adding that 17% of draftees
from neighbouring Chernivtsi region had left for Romania.
Biryukov said that the draft was proceeding “normally” in southern
and central areas closer to the conflict, such as Odesa, Mikolaevsk and
Dnipropetrovsk. Other reports, however, spoke of difficulties there as well.
The army commissioner for Poltava region in central Ukraine on January 27
said that 50% of draftees had failed to show, Interfax Ukraine reported. In
the town of Kremenchug, the responsible official said that only around
10 reserve officers had showed up for service out of several hundred
registered locally.
One district council in Odesa region has resorted to tough measures to
improve the draft, posting on its website an order prohibiting reservists
from leaving the district until all call-up papers had been issued. The order
was later removed from the website. Other reports speak of widespread
corruption in the call-up system allowing draftees to buy themselves free.
Some military analysts argue that draft-dodging is a necessary evil to sort
the wheat from the chaff, with the patriotically motivated who answer the
call of far greater value to the army in action.
18
I Eastern Europe
bne March 2015
Initial records of police casualties for
that week show that three policemen
died between 9.30am and 10.30am on
February 20 from injuries sustained
on Institutska. “As the first men [from
the riot police] were injured, everyone
stormed forwards. Everyone who
was on the barricades stormed up the
Institutska Street... Our boys used their
weapons only once,” Parasyuk said, “as
they were storming [up the hill].”
According to Parasyuk, as quoted by
FAZ, this was the moment that police
marksmen opened fire. “They started to
provide covering fire for the retreating
[police units]” Parasyuk said.
According to FAZ, “The perpetrators,
whoever they were, may initially have
been in a sort of defensive position,
but then exceeded everything that
could be regarded as justified in this
position. Self-defence turned into cold,
indiscriminate killing,” FAZ reports.
A source staying in the Ukraina hotel
overlooking the Maidan and Institutska
also told bne IntelliNews of an opposition
rifleman demanding entry to guest rooms
and then firing from the window.
Parasyuk's role in the events of February
20, 2014 has largely remained unknown
until now. It was only the following day,
on February 21 that he made his name
with a dramatic public debut.
Volodymyr Parasyuk in his 'defence' days.
who saw and photographed armed men
in the Conservatory at the time.
The man apparently in charge of the
riflemen in the Conservatory was 27-yearold Volodymyr Parasyuk – today an MP,
but at that time simply leader of one of
the 'Hundred' units, responsible for the
defence of the city centre protest camp.
In an interview with Germany's
establishment newspaper Frankfurter
Allgemeine Zeitung (FAZ), published on
February 9, Parasyuk said many in his
group were armed. “A lot of lads came
to us then, who said we should take
up arms and attack… Many had guns
with them, often hunting rifles,” he was
quoted as saying.
Parasyuk confirmed to FAZ that his men
fired on the police, saying that this was
in response to initial police fire. The
police started firing over the barricades,
and the protestors “defended themselves
using their guns,” Pararsyuk said.
The government and opposition had
reached an EU-negotiated powersharing deal at around 1:00pm on
February 21, 2014 that envisaged
Yanukovych remaining in power until
elections towards the end of 2015. At
an emotional opposition rally on the
Maidan on the evening of February
21 to commemorate the slain, the
then-unknown Parasyuk seized the
microphone to fiercely denounce the
deal and the parliamentary opposition
that had signed it. Parasyuk told
Yanukovych that if he did not resign
by 10:00am the next day, his armed
men would come and storm the
presidential residence.
The crowd cheered this intervention,
and Parasyuk has since been given credit
bne March 2015
for prompting Yanukovych's flight from
his residence that same night, paving the
way for the pro-EU opposition to come
to power.
Parasyuk in his first press interview,
given to Ukrainskaya Pravda on
February 24, three days after his
dramatic intervention from the stage
Eastern Europe
guard stood nonchalantly outside,
where only hours before hundreds of
special forces and interior ministry
troops had thronged. Municipal workers
were already clearing away the rubbish
they had left.
Security forces also withdrew on
February 21 from Yanukvych residence
“Our boys used their weapons only once”
of the Maidan, made no mention
of any use of firearms during the
protests. But asked why he wore
army fatigues, he said he had had
paramilitary training with a range of
nationalist groups in his native West
Ukraine. He also said that it was his
group, numbering around 50, that
were occupying the Conservatory.
Flight of Yanukovych
Parasyuk's alleged connection to a
smallish armed wing of the protest
camp may explain one of the biggest
riddles about Ukraine's February 2014
revolution: Why did Yanukovych quit
power so quickly after winning a deal
that secured it?
One factor may have been the direct
physical threat to Yanukovych from an
apparent armed wing of the protesters
not under control of the parliamentary
opposition. This may have scared
Yanukovych so badly because, in the
afternoon of February 21, all security
forces pulled out of the centre of
Kyiv, as well as from Yanuokovych's
Mezhyhirya estate outside Kyiv, as part
of the political deal. Suddenly roles
were switched: Yanukovych was left
almost entirely without security, while
the Maidan camp remained intact and
had shown that it could shoot.
By 4:00pm on February 21, a bne
IntelliNews reporter walked right up
Institutskaya – where shots had still rung
out in the morning – to the building of
the presidential administration, and
knocked on the door. One unarmed
at Mezhyhirya, deputy head of the state
guard service, Mykola Reshetnyak, told
bne IntelliNews the next day.
Given Parasyuk's alleged connection to
an armed group, and that Yanukovych
had been stripped of his security,
Parasyuk's threat may have sounded
very real to Yanukovych.
I 19
Yanukovych fled by helicopter under
cover of darkness to East Ukraine,
and thence to Russia. This was an
astonishing political turnaround,
considering that police appeared to have
won the upper hand over protestors on
the previous day.
Parasyuk's own career has continued
upwards from that point – leading a
division of volunteer fighters against
Russian-backed rebels in East Ukraine,
before entering parliament as an
independent MP for his native Lviv
region in elections on October 25,
where he has continued to be a thorn
in the side of the establishment in
parliamentary sessions and talk show
appearances.
With hindsight, the events of nearly
one year ago, on a patch of central Kyiv
the size of a soccer field, have not only
determined the fate of Europe's largest
country, but the chances for global
peace.
"Parasyuk's threat may have sounded very real
to Yanukovych"
20
I Eastern Europe
bne March 2015
and say he’ll be sending Russian coal
east not west this year,” he says.
The players
Russian coal has the benefit of quality
and geography, says Nigel Yaxley,
managing director of the Association
of UK Coal Importers. The proximity
of Russian ports in Murmansk and
the Baltic makes Russia well placed to
compete in the Atlantic market alongside
Colombia, the US and South Africa.
However, while the Western sanction
lists do not name any individuals
linked to coal companies, that could
change: the big Russian coal companies
importing to the UK are all led by people
with close ties to the Kremlin.
Russian coal keeps UK
lights on as winter grips
Nick Kochan in London
A
s winter grips the UK, a group
of Russian coal companies
with leaders closely linked to
President Vladimir Putin is enabling
British power companies to keep the
country’s lights on – a precarious
position as the sanctions rhetoric rises
once again.
Three Russian firms, SUEK, KRU and
SDS Coal, produce most of the imported
coal to a country whose energy system is
creaking. These firms export to the UK
just under a $1.5bn worth of coal a year,
according to Greenpeace. EU data show
that the UK heads the list of European
importers of Russian coal; it imports
about 20mn tonnes of Russian coal each
year, most of which is bought by the six
big power generators.
Tony Lodge, a research fellow at the
London-based Centre for Policy Studies
think-tank and the author of “Clean
Coal – A Clean, Secure and Affordable
Alternative”, notes that while most of
the talk is about Russian oil and gas,
the UK has “a real liking for Russian
coal coming from the Baltic in summer
or Archangel in winter. I know of
traders who are looking to double their
coal import contracts to the UK now.
This is hard stuff. It’s about keeping the
lights on.”
At a time when the rhetoric on
sanctions grows louder as the situation
in Ukraine deteriorates, relying on
Siberian Coal Energy Company
(SUEK) – whose latest annual report
notes the UK is now the company’s
most important export market after
China, with 41% of “Atlantic” sales
– has Andrey Melnichenko as its
major shareholder and chairman.
His companies are listed as strategic
enterprises in Russia, allowing them
in some cases to rely on the support of
public institutions on a priority basis,
and he is reported to be close to the
inner circle of Putin.
Melnichenko’s business empire had its
origins in the purchase of MDM Bank in
the mid-1990s, but in the early 2000s he
went on to acquire coal assets including
“If Cameron says he does not like what Russia’s
doing in Ukraine, Putin can always turn round
and say he’ll be sending Russian coal east not
west this year”
growing quantities of Russian coal
to bridge an energy shortfall is a
dangerous position to be in, warns
Chris Kitchen, general secretary of the
National Union of Mineworkers. “If
Prime Minister David Cameron says
he does not like what Russia’s doing in
Ukraine, Putin can always turn round
SUEK and the nitrogen and phosphate
fertilizer company EuroChem. A heavily
publicised lawsuit with Shaft Sinkers, a
contractor hired to drill a mining shaft,
put it at odds with the trio of oligarchs
who hold shares in Eurasian Natural
Resources Corporation (ENRC), a
major scandal-hit shareholder in Shaft
bne March 2015
Sinkers. This has caused EuroChem, and
its founder, some embarrassment and
expense.
Melnichenko, 42, is a very colourful
character – even by the standards
of Russian oligarchs. He is worth an
estimated $11.4bn (according to Forbes
rich list in 2014) and owns one of the
world’s most striking super-yachts, the
‘A’, (named after his wife Aleksandra,
a former Serbian model). The yacht
was designed by Philippe Starck. Other
assets include a Boeing 737, a villa in
Antibes, an apartment overlooking
New York’s Central Park and a £24mn
property called the Harewood Estate in
Ascot, Surrey.
Melnichenko also has connections to the
British establishment. His long-standing
advisor is George Cardona, once a
special advisor to former chancellor
Eastern Europe
that the company’s coal production had
fallen 3% on year in January-September
2014 to 32.58mn tonnes. This partly
reflects the falling price of coal, which is
down about 50% over the last two years.
Sibirskiy Delovoy Soyuz (SDS) – a
subsidiary of the Siberian Business
Union – produces more than 20mn
tonnes of coal a year and is headed by
Vladimir Gridin and Mikhail Fedyaev,
who are close associates of the Russian
president. Gridin serves in the State
Duma for Putin’s United Russia
Party and is deputy chairman of the
Transport Committee. Fedyaev's son
Pavel became State Duma deputy for
United Russia in 2011.
Disruptive behaviour
Yaxley of the Association of UK Coal
Importers says that if there were a
breach in Russian supply for whatever
“Melnichenko is a very colourful character –
even by the standards of Russian oligarchs”
Geoffrey Howe. Cardona is on the
boards of SUEK’s parent companies (the
Cypriot Madrake and the Bermudan
company Westline), EuroChem and
seven other Melnichenko companies.
Kuzbassrazrezugol (KRU) is majorityowned by a Russian copper company
headed by Iskander Makhmudov called
UGMK (also known as UMMC).
About 15 years ago, Makhmudov brought
in Andrei Bokarev to run KRU. A measure
of Bokarev’s achievement was the
award of the Alexander Nevsky prize for
services to the Sochi Olympics in April
2014. This was seen as an indication that
he falls within Putin’s circle of trusted
industrial advisers. Bokarev, who heads
up Transmashholding, is involved as
director, shareholder or board member in
three different companies that have been
placed under sanctions by the US, namely
Kalashnikov, Rosneft and Transoil.
At the end of 2014, when announcing
its third-quarter results, KRU revealed
reason, there are plenty of companies
with coal ready to take up the slack.
“This is a very flexible market,” he says.
However, even the most diehard
proponents of sanctions on Russia
cannot the escape the fact that it would
be both costly and disruptive for the UK
to sever imports of Russian coal. The
Russian coal companies for their part
have found a market that is an eager
buyer of Russian coal. Declining demand
from China is likely to push them further
into the UK market.
Coal may be a more flexible energy
source than gas, but the UK shows
no signs of taking up the available
alternatives. The scale of imports are
such that customers would not be
prepared to pay the higher costs that
would result from importing coal from
further away. Nor would the government
want to in an election year. For the
moment, Russian companies have a
tight grip on the UK market and this is
unlikely to loosen any time soon.
I 21
Putin's daughter steps
into limelight
Ekaterina Tikhonova – reportedly the younger
daughter of Russian President Vladimir Putin –
is to oversee a $1.7bn expansion project at
Moscow State University, thrusting her into
the public limelight for the first time.
Tikhonova, 28 – who according to Russian media
reports uses her mother Ludmilla's maiden
name – is currently head of a firm drafting
plans for the expansion of Moscow University
facilities to include a new science campus, a
project appraised at $1.7bn. News outlet RBK
published an investigation into the expansion
project, and Tikhonova's role leading the design
firm Innopraktika, on January 29. But the
investigation did not mention that Tikhonova was
Putin's daughter, an indication of the sensitivity
of the topic; since Putin became president in
2000, his daughters Ekaterina and Maria have
been hidden from public view, with no reliable
photos of them available, making confirmation of
Tikhonova's identity difficult. Nor did it mention
her previous career as acrobatic dancer. The RBK
article merely questioned how a woman without
any previous known activity in science research or
administration had been given such a role.
Kremlin-critical blogger and journalist Oleg Kashin
first made explicit the Kremlin connection in a
subsequent blog post, while also posting footage
of dance routines. In comments to Forbes Russia,
long-serving Kremlin press secretary Dmitry Peskov
then said he "did not know" whether Tikhonova is
Putin's daughter. "I don't know who she is. I cannot
judge, I don't know. Many girls have claimed
before to be the daughters of Vladimir Putin",
Peskov said.
Now that Tikhonova has apparently taken on a public
role, attention will focus on any signs that she could
be destined for a higher state position, or even
potentially become successor to Putin, who is due
to step down in 2024 at the latest.
22
I Eastern Europe
bne March 2015
lasers, projects the map onto the inside
of the helmet's visor. The whole thing is
controlled by voice, basically using the
same sort of technology as Apple's Siri
service.
And it works. On activation, a map will
appear on the inside of the visor of your
helmet and using voice commands you can
choose your destination, change the view
or call up other services. Once underway,
a series of arrows will appear in the middle
of your field of vision showing the way to
go. Even if you turn your head sideways,
the 3-D display just swings as if on a gimlet
to continue pointing the guiding arrows in
the right direction.
Russian bikers given
a heads-up
Ben Aris in Moscow
I
n the last 20 years Russia has
produced precisely one hi-tech
consumer-product – the Yotaphone,
a smartphone distinguished by its two
screens: a regular one on the front and
an e-book reader screen on the back.
However, in May Russia should see
the second hi-tech consumer product
to be launched since the fall of the
Soviet Union: the LiveMap 'heads-up'
interactive GPS map that is projected
in full colour onto the inside of a
motorcycle helmet visor.
It's a fairly obvious idea and pretty cool
to use. While GPS maps for cars have
become ubiquitous, there is still nothing
analogous for motorcycles. You can have
a TomTom taped to the speedometer
on your motorbike, but that means you
have to look down and refocus to see
where you are, which can be dangerous,
especially when driving at speed. "I
went online and searched for heads-up
motorcycle map devices, but I couldn't
find anything at all," says CEO Andrew
Artishchev, who founded LiveMap and
put the development team together
about six years ago.
Some companies have tried to solve the
problem by adapting a Google Glass
splitter and using it as a motorcycle
helmet display, but this is less than
satisfactory, as the image is extremely
small and displays next to your eye
meaning the refocusing is even more
extreme.
Other companies have increased the size
of the display by mounting an attachment
Challenges
Artishchev has not done anything
technologically revolutionary, as
much of the technology already exists.
What he has done is overcome various
engineering and business problems to
put the helmet together.
LiveMap draws on Russia's long-standing
world-class aviation technology;
avionics is one of the few places where
Russia remains a leader. Heads-up
displays for fighter pilots already exist,
although these helmets come with
a set of problems to overcome. The
first is that the helmets are extremely
cumbersome. Second, they draw their
power from the plane, but Artishchev
wanted his heads-up display to be
powered by battery. Third, the display
itself is monochromatic: the fighter
pilot helmets only use green lasers. And
“I began searching in 2008 for experts who
had some experience in aviation helmets”
to the outside of the helmet. However this
ruins the aerodynamics of the helmet and
the turbulence it causes at high speed can
buffet the head. Plus, it still doesn’t solve
the refocusing problem.
Artishchev has got round both these
problems by building a projector into
the habit that comes over the top of
your head and, using low powered
finally the cost: fighter pilot helmets go
for a cool $25,000 apiece.
The voice recognition software and
operating system was developed by
Russian software engineers, another
of Russia's strengths. Artishchev then
hooked up with US and Japanese
producers of aspherical lenses in order
to produce a projector. These are special
bne March 2015
non-symmetrical lenses that have a much
more accurate point of focus, so the
projector tube can be much shorter and
lighter. Finally, the helmet itself is made
of carbon fibre – an extremely lightweight
material that is stronger than steel. "I
began searching in 2008 for experts
who had some experience in aviation
Eastern Europe
you can buy it off the shelf with the retail
price of $2,000 per unit. The pre-orders
should produce enough money to finance
the production of the first helmets."
Artishchev has been talking to a few
venture funds. German car company
Audi has such a fund that was looking
“We are going into commercial production in
May with a retail price of $1,500 per unit for
pre-orders”
helmets,” says Artishchev. "I ended up
meeting some technicians from Moscow's
Baumann Institute and from a university
in St Petersburg who had worked on
military helmet heads-up designs. We
also have as a shareholder Anatoloi
Yurlov, the chief engineer at [Russian
search engine] Yandex, who is in charge
of developing their search engine."
The projection system also proved to be a
problem. Producing laser light consumes
a lot of power and Artishchev wanted to
avoid using a cable attached to the bike
for power. In the end, he found the pico
projector that produces low-powered laser
light in a complete spectrum of colours.
Heads up, money in
The easiest bit seemed to be raising the
money. Despite the Russian government's
drive to promote innovation, the various
state-backed funds and institutes have
produced almost no commercial viable
projects since they were founded.
Artishchev got a $1mn grant from the
Skolkovo institute, a high-tech hub
sponsored by the government, and
another $300,000 from the Russian
Ministry of Sciences, as well as putting up
a significant amount of his own cash.
"We tried to avoid going to venture
capitalist companies as we wanted to
develop this project on our own," says
Artishchev. "And we should be able to
finance the production out of the revenue
stream. We are going into commercial
production in May with a retail price of
$1,500 per unit for pre-orders. After that,
at Artishchev's heads-up display and
also thinking of distributing the helmet
together with its Ducati motorcycles, an
Audi-daughter company. However the
deal fell through.
I 23
The car companies might in future
be interested in this sort of heads-up
display because they would work just
as well on a car screen as they do on
a motorcycle helmet visor. "We have
decided to stick with motorcycle to
begin with simply because we have no
competition and so it should be easy
to sell. In cars there are already a wide
range of alternatives that are much
cheaper and so there the competition
will be more difficult. But once we are
established, it’s an obvious place to go,"
says Artishchev.
Artishchev has high hopes for the
launch of the helmets. They go on sale
in the US in May and Artishchev is
expecting in the first year to sell 10,000
units, rising over the next five years to
500,000 units a year across the globe.
24
I Eastern Europe
bne March 2015
isolation from Europe and the US,”
Kazakevich tells bne IntelliNews.
He adds that the very structure of the
alliance between Belarus and Russia is
based on the premise that Russia always
acts as a supplier of financial resources
and economic benefits for Belarus. In
2014 alone, Russia provided $2bn in
government loans to Belarus.
Belarus wary of the
‘Russian World’
EurAsEC, which previously rescued
Belarus from a balance-of-payment
crisis in 2011 by offering a $3bn
aid package. According to initial
agreements, the final tranche should
be worth $440m. However, its fate has
been unknown since late 2013.
Belarus has been trying to negotiate a
new support programme with the IMF
since late 2010, when the previous standby loan programme for the country
ended. However, the multinational
lender has repeatedly stated that it
wants to see “a credible commitment to
a comprehensive package of consistent
and strong macroeconomic policies and
deep frontloaded structural reform” in
Belarus.
Andrei Kazakevich, director of the
Vilnius-based Institute for Policy
Studies Palitychnaya Sfera (Political
Sphere), believes that Russia will be
the principle source for maintaining
the country’s international reserves,
because refusal to do so would
However, the Belarusian government
has not completely abandoned the
idea of cooperating with the global
lender. A new visit to Belarus by IMF
experts is scheduled for March, and
the authorities could once again raise
the question of possible funding,
Sergei Kuznetsov in Minsk
B
elarus' foreign government debt
repayments have reached a peak
and the government is facing a
serious shortage of funding. The country
is required to pay $4bn this year, while
its foreign currency reserves stood at just
$4.7bn as of the beginning of February.
The Belarusian authorities are confident
that Russia will again provide financial
support, but at the same time Minsk
appears increasingly worried about
a possible threat from Moscow to its
sovereignty.
“We do not want to take on more
loans… However, if we encounter real
trouble, Russia will lend us a shoulder,”
Alexander Lukashenko, the president of
Belarus, said during a press conference
on January 29. Lukashenko added
that he “has a solid agreement” on this
matter with his Russian counterpart as
well as with the Russian prime minister.
Lukashenko said his government is still
relying on the final tranche of a loan
from the bailout fund of the Russialed Eurasian Economic Community,
IMF conditions
Stanislav Bogdankevich, former
governor of the National Bank of
Belarus, also believes that Russia will
continue to provide financial support
to Belarus. “To obtain a loan from the
International Monetary Fund (IMF),
it would be necessary to change the
existing economic model, to change
course. The latest statements by
Lukashenko suggest no willingness to do
so. He does not intend to abolish manual
economic governance,” Bogdankevich
tells bne IntelliNews.
“If we encounter real trouble, Russia will lend
us a shoulder”
inevitably entail in a "reformatting"
of the Belarus-Russia relationship.
"This would not be very favourable to
Russia now, because of the instability
in Ukraine and its general political
despite the low chances of a success.
“We continue to work with the IMF.
In March a planned mission of the
organisation will work in the country to
study our situation. We are not ruling
bne March 2015
Eastern Europe
out any possibilities as far as financial
cooperation is concerned. But the
consideration of these matters will need
time, at least several months,” Finance
Minister Vladimir Amarin said on
January 29.
part of it – because of the domination
of the Russian language in Belarus,
existing traditional ties [with Russia],
and the existence of a Union State
[Belarus-Russia bilateral integration
formation],” Kazakevich says.
It's a 'Russian World'
Despite their confidence in Russia’s
largesse, the Belarusian authorities
appear to have started worrying about
the Kremlin’s new aggressive policy
towards post-Soviet states. Moscow
After the eruption of the Ukraine crisis
and the active intervention of Moscow
in the situation there, including military
support for the separatists in the
Donbas, Lukashenko’s rhetoric towards
Russia has become tougher. “There are
“There are several interpretations of the concept
of the ‘Russian World’. In most of them, Belarus
is considered a part of it”
considers post-Soviet countries that
have a significant Russian-speaking
population and traditional economic
and interpersonal relations with Russia
to be part of the so-called “Russian
World”, and in Ukraine it has shown its
readiness to defend its influence there,
even by military force.
“There are several interpretations of
the concept of the ‘Russian World’. In
most of them, Belarus is considered a
I 25
Russia over the region which belongs to
the ‘Russian World.’”
Minsk has also become increasingly
ambivalent about the Eurasian
Economic Union (EEU), a trade bloc
recently created by Russia, Kazakhstan,
Belarus and Armenia. During his press
conference on January 29, Lukashenko
said that Belarus could leave the EEU
if the agreements between its member
states are violated. “If the agreements
we have reached are respected, we
will honour everything with regard to
the EEU. If they are not respected, we
reserve the right to withdraw from this
union,” Lukashenko said.
some ‘wiseacres’ who claim that Belarus
is, as they say, part of the ‘Russian
World’ and even almost Russia. Forget
about it: Belarus is a sovereign and
independent state,” Lukashenko said on
January 29.
However, Lukashenko later toned down
his rhetoric. The president said in an
interview with a Russian TV channel
on February 14 that the trade union
is beneficial for Belarus and that the
country “sees prospects in it”. On the
other hand, Lukashenko underlined
that “if it is too painful and tight [for
Belarus], there is a possibility of leaving
any agreement, even the [EEU].”
Kazakevich says that Russia’s approach
to the “Russian World” could indeed
be a potential threat to the Belarusian
state, because the concept “envisages
the political and cultural domination of
As Bogdankevich predicts, “Lukashenko
will maintain the eastern vector [of
his foreign policy] alongside moderate
liberalisation of his relations with
the West.
26
I Eastern Europe
bne March 2015
bne:Trade
Trade finance proves safe haven
business for Russian banks
Ben Aris in Moscow
F
ollowing Western sanctions and the collapse of the
Russian ruble's value in December, you would have
thought that the trade financing business for Russian
banks would be in desperate trouble. But actually it is doing
well and has turned into something of a safe haven business
line for those banks that offer the service.
Four Russian banks dominate the business: Alfa Bank, VTB
Bank, Sberbank and Promsyvazbank (PSB). The sanctions
imposed on a handful of Russia's leading state-owned banks
(including VTB and Sberbank) have affected the whole
business, and made funding trade deals a lot harder.
"Syndication has become much more difficult, but we have no
problem financing or issuing letters of credit for export," says
Alexander Mesheryakov, managing director of PSB and head
of global transaction banking. "Foreign banks have limited
operations to state banks to a maximum of 30 days as per the
terms of the financial sanctions. PSB is not under sanctions; all
our problems have more to do with the general deterioration
of the Russian economy and the negative outlook for this year,
than anything like the Russia sovereign downgrade."
PSB managed to close a syndication loan to fund trade
financing deals in the autumn of 2014 after sanctions were
imposed, although Mesheryakov says it remains impossible to
issue Eurobonds. Still, this has proven to be less of a problem.
PSB’s funding needs have fallen due to the general drop in
volumes, but more importantly the bank has seen significant
inflows of fresh deposits. "We are over-liquid now. Our
customers are not panicking, but we have seen lots of people
switch banks looking for more stable banks and we have had a
big inflow of new deposits," says Mesheryakov.
Trade finance deals come in three flavours: letters of credit,
letters of guarantee and trade loans. While the first two
instruments are still in use, Western banks now refuse to
contemplate trade loans, which means that if the trade
deal is done on debt, PSB has to lend the money from its
own resources, whereas before it could borrow to fund the
transaction.
The sanctions have also hit Russia's export business with
Asian counterparties. While countries like China have openly
supported Russia in its clash with the EU and US, Asian banks
still rely on funding from US banks and these lines of credit
have been closed to anything involving Russian companies.
The Russian state has stepped in and PSB has increased the
amount of work it does with the Russian export credit agency,
which can guarantee deals or provide funds.
Political problems notwithstanding, 2014 was actually a good
year for trade in Russia, with trade financing growing by
13-14% in cash terms in the first three quarters. But volumes
fell sharply in the last quarter as the ruble went into freefall
and trade volumes tumbled by some 30-40%.
Imports were obviously hard hit by the devaluation of the
ruble, which lost about half its value in the last few months of
2014, however exports have done well. "Oil producers were
hurt, as in addition to the devaluation, the price of oil itself
fell heavily. But all the other products – such as machinery,
coal, timber – have done well, as their costs are in rubles and
revenue in hard currency," says Mesheryakov. "Even when
you factor in devaluation, these companies are still making
significant profits and buoying trade finance."
Thus trade finance has become something of a safe haven
business line for banks in times of crisis; irrespective of the
value of the ruble or extent of the hostilities, companies still
need oil, gas and wood to make things.
"The sanctions have also hit
Russia's export business with
Asian counterparties"
bne March 2015
Eastern Europe
I 27
28
I Central Europe
bne March 2015
Central Europe’s media searches
for key to independence
Tim Gosling in Prague
J
ournalists may be among the
least trusted people on the planet,
but they're still not as disliked as
billionaires and politicians. That has
seen Central Europeans rally round
editorial teams as they jump from major
newspapers that are being snapped up by
the region’s oligarchs. Yet that support is
unlikely to be enough to keep the myriad
new, independent media companies
they're launching alive and kicking.
When Penta Group bought Slovakia’s
respected largest daily SME in October,
Editor in Chief Matus Kostolny and
four deputies walked out. The murky
Slovak financial group had clashed
with the newspaper in recent years, in
particular over its reporting of alleged
corrupt deals that Penta made with
senior government officials over the past
decade. In trying to buy Sme through the
acquisition of the Petit Press holding, the
editorial team insisted Penta was not a
financial investor but seeking political
influence, and that would put editorial
independence at risk.
a wave of public support for independent journalism. "We're looking at different models to combine investors and
paid readership," he reported.
By November 13, the former Sme team
had launched a temporary website
named Projekt-N, and launched a full
Conundrum
It's a conundrum many are facing in the
region. The crisis has seen losses piling
"Quality journalism is not cheap!"
subscription-based site – dennikn.sk
[www. dennikn.sk] – early this year.
The case made a big splash in Slovakia,
and former SME deputy editor Tomas
Bella told bneIntelliNews in the immediate aftermath of the walkout that the
team knows it must move fast to tap into
up at media publishing companies in the
small markets in Central and Eastern
Europe. That has the international giants
that moved in during privatisation in the
1990s selling out to powerful local business groups, and even politicians.
The highest profile case was the
Central Europe I 29
bne March 2015
purchase in July 2013 of Mafra Group
– publisher of several of the largest
newspapers in the Czech Republic – by
Andrej Babis. Owner of the country's
largest employer Agrofert, the billionaire became finance minister in January
at the head of his own political party
ANO, and is viewed as increasing his
power on an almost daily basis.
However, many other titles in Slovakia,
the Czech Republic and elsewhere in
the region have seen similar changes of
ownership. That has seen editorial teams
walking out one after another to form
new ventures. Now they face difficult
decisions to find the investment and business models that can sustain independence, even as the global media industry
struggles to adapt to new realities.
While projects across the region talk of
an impressive amount of public support
for their principled stance, that will
only go so far when it comes to paying
salaries, printers and web servers.
There are some non-profit alternatives,
says Vaclav Stetka, a senior researcher
at Charles University in Prague, such as
community-based funding or foreign
NGO grants. "However, [most projects]
can only hope they find a workable
business model," he adds. With large
question marks hanging over profitability in the region's media sector, and
therefore the motivations of any large
investor, that puts the onus on readers
and advertisers.
Bella says the Project-N model relies
on payment from users. "The one big
advantage in Slovakia," he suggests, "is
that paying for online content is much
more developed, and readers are used
to it." That's a reference to the Piano
Media paywall system, which many
Slovak media titles went behind in
2011. Bella is a co-founder and board
member at Piano Media. bne IntelliNews
went behind a Piano Media paywall in
November.
Bella says Projekt-N is also looking at
other business models in the region.
The Slovak journalist has been discussing the project with Dalibor Balsinek,
who left Czech daily Lidove noviny when
Still glad to be gay in Slovakia
Benjamin Cunningham in Bratislava
Just 21% of eligible Slovak voters took part in a February 7 referendum that
sought to limit the rights of same-sex couples, far below the 50% needed to
make the result legally binding. However, with around a million approving the
motion, the vote offers more evidence of the shifting political winds in Slovakia.
It was a triumph of apathy rather than a sign of liberal leanings on the
part of the wider public that the referendum failed. Those that did turn
out overwhelmingly supported all three questions on the ballot, which
was promoted by the Alliance for Family (AZR). The first, seeking to define
marriage as between a man and woman, received 94.5% support, while a
second which sought to ban adoption by same sex couples was given the nod
by 92.4%. Meanwhile, 90.3% voted for legislation that would allow parents to
opt children out of sexual education classes in school.
Outright fatigue was also likely a factor in the low turnout. This was the fifth
time Slovak voters have taken to the polls in the past 12 months. Just 13%
made it to vote during European Parliamentary elections last May, a new EU
low. "I don't care, it's none of my business," said Alena Duharova, a 55-year
old entrepreneur from the western Slovak city of Dubnica nad Vahom, who
did not vote. "All this was created because of the church."
Slovakia's constitution already bans gay marriage. Parliament adopted a
constitutional amendment defining marriage as between one man and one
woman last year. Still, leaders from the AZR argued that more was needed to
protect children. They were able to collect 400,000 signatures on a petition to
pave the way for the vote, well over the 350,000 required for a publicly-driven
ballot initiative and a sign of grassroots political organising clout.
Campaigning in recent weeks had taken an interesting turn, with major
media – public and private – declining to air AZR advertisements.
Referendum organisers complained of censorship and accused broadcasters
of bowing to political pressure, although it is unclear from where pressure
would come. Church leaders, including the Bishops Conference of Slovakia,
were outspoken in backing the referendum.
For his part, Prime Minister Robert Fico kept his cards close to his chest.
Whilst he told media he planned to vote, he didn't specify which way, and did
little to urge supporters to cast ballots. Leaders from the LGBTI community
simply asked supporters to stay at home.
Speculation now focuses on whether the leaders of the conservative AZR will
seek to parlay their referendum efforts into a wider ranging political project.
Even given the low turnout, around 1mn offered support. That's comparable
to the number of votes carried by the ruling Smer in the 2012 general
election, which saw them secure an outright majority in parliament.
That may be part of the reason AZR leaders felt able to claim a victory on
February 8. "The process has been important; people are more oriented
toward family values than before," Anton Chromik, one of those at the forefront
of the movement, told bne IntelliNews. "We will try again if needed."
30
I Central Europe
Babis bought Mafra to set up the Czech
"internet daily" Echo 24. Bella suggests
that a regional network of independent
news sites, including the likes of Hungary's 444.hu, could be "imagined" in
the future.
However, some may already be finding
the funding challenge a little too daunting. One commentator speaks of "specu-
bne March 2015
months was unrealistic. "The investment needed was much bigger," she
says.
While instinct might suggest that starting a new media company is simpler
and cheaper in the age of the internet,
many argue exactly the opposite. The
weight of competition is so great, and
revenue options so limited, that the
"Lots of people are concerned at the moment
about corruption, and the threats to democracy
and media freedom"
lation Echo24 is backed by similar sort
of guys to those they were running away
from." That refers to suggestions that
Martin Roman – disgraced former chief
of Czech state-controlled power giant
CEZ and reputed political power broker
– is ultimately behind the project, albeit
there's little evidence. Balsinek failed
to respond to a request for an interview
from bneIntelliNews.
Eye of the tiger
Yet Project-N can look to much of CEE
for inspiration and potential business
models. "There's the same kind of readership and concerns across the region,"
points out Stetka. “Lots of people are
concerned at the moment about corruption, and the threats to democracy and
media freedom."
Latvia's Ir is the great survivor, having
launched under very similar circumstances to Projekt-N in 2009, when the
daily Diena was sold to local oligarchs.
Like Bella and his colleagues, the editorial team there looked to harness the
anger that the events threw up in the
country quickly, says Editor-in-Chief
Nellija Locmele.
"We got small amounts, typically around
LVL5-10 (¤7-14), and with around a
dozen or so investors that gave us a
start up of around LVL200,000," she
estimates. However, she warns that the
team's initial hope of getting the new
project off the ground within three
likes of Ir went to the other end of the
spectrum. Ir was a hardcopy magazine
from day one, and relies on selling a
quality product, notes Locmele. "We
said from the start we're not cheap," she
says. "Quality journalism is not cheap!"
Readership is around 60,000, the editor
says, pointing out that's a big number in
a country of just 2mn.
Michal Musil at the glossy Reporter
magazine in Prague – set up by another
set of Mafra orphans – says the team
had been eyeing the impact of online
media on the industry with concern
since 2011. The acquisition by Babis was
just the kick out of the door on a project
The funding and business model remains
fluid, Musil notes. Around a year ago,
the non-profit Reporter Foundation
was set up for donations, however the
business model focus at Reporter, which
mixes political features with culture
and lifestyle, is firmly on advertising.
"If we tried starting with a website we'd
struggle to gain enough traction to
attract advertisers," he points out. "We
would have needed a big investor. We
didn’t have one."
Instead, Reporter has gone straight to
banks, financial services firms and travel
companies to pay for a printed magazine. Sponsorship packages, including
cover mounted logos, features and a
slice of the 30,000 print run to hand out,
accounted for around 70% of the first
issue he estimates. Similarly, he guesses
revenue is split 30-70 between donations
from "those that know of the Babis issue"
and from ads.
That illustrates that the big question for
the range of independent media projects
now cropping up across the region –
Stetka mentions several more have set
up, especially in Hungary and Romania
– remains.
Without the promise of large profits or
political influence, the motivation at
first for larger investors in Ir was ethical,
suggests Locmele; mostly drawn from
the diaspora or members of the business
"It's nice as a journalist to feel some support
from the public for a change"
they had been working on for around
18 months before they put out the first
issue in September.
"The time of the big media houses is
clearly coming to an end," he suggests.
"A small organization can better control
costs and revenue. The big companies
are hardly able to start contemplating change to keep up. The old, single
publication model is dead. Society is
fragmenting."
community interested in a free Latvian
media. However, that can't replace fundamentals. "Our aim is to be profitable,
and we are," the Latvian states. "Media
independence starts with financial
stability."
For the meantime, "it's nice as a journalist to feel some support from the public
for a change," laughs Musil.
bne March 2015
Central Europe
I 31
ket while supporting growth through a
“predictable” regulatory and legislative
environment.
Triumph of hope over experience
All sides hailed the agreement – originally proposed by Erste – as a turning
point in the previously stormy waters
of Hungarian government-banking
relations, while stressing it also had
positive ramifications for the broader
economy. After admitting to the earlier
“difficult relationship” between the
banks and the government, the time
had come “to move forward”, EBRD
chairman Suma Chakrabarti told MTI,
the state news agency, after the signing.
Hungary: investing
in Hell
Kester Eddy in Budapest
H
ungary is backing investments in
Hell. Really.
The Hungarian Investment Promotion
Agency (Hipa), the state office charged
with boosting trade and investment,
has signed a “cooperation agreement”
designed to “support the expansion” of
Hell. A deal with the devil? Not quite.
Hell, in this instance, is a Magyar energy
drink that Hipa is keen to promote: so
it's all just a catchy marketing stunt. The
joke, however, is probably lost on those
investors whose Hungarian experience
has proved diabolical.
The list is long: it includes electricity, gas
and water utilities, banks, telcos, retail,
real estate, agriculture, media and recycling companies, all of whom complain
– sometimes publicly, more often in
private – of sudden legislative changes,
usually enacted without consultation,
that have turned their business model
upside down, and sometimes closed
it altogether, often to the benefit of
domestic competitors. Most, but not all,
affected are foreign-owned, typically
with German, French, Austrian or a US
parent.
Common to all these complaints is a
government led by Viktor Orban, a
former law student and anti-communist
firebrand who heads Fidesz, the party he
helped found in 1988 and which today
claims to be “moderate conservative”:
critics label it nationalist-populist, even
autocratic.
But on February 9, in a surprise deal,
Orban, for the Hungarian state, along
with the European Bank for Reconstruction and Development (EBRD), signed
a memorandum of understanding to
each take up a 15% stake in Erste Bank's
Hungarian subsidiary. Erste pledged to
support the Hungarian economy with
a new loan package worth €550mn,
while the government promised to both
reduce the bank tax and provide a level
playing field for all in the banking mar-
The markets certainly welcomed the
news: shares in OTP, Hungary's largest
bank, jumped almost 5% on the day
of the announcement, adding another
4.4% the following day. But while
the news was universally welcomed,
long-time observers of Orban's Hungary were understandably cautious.
“Perhaps it's hope over experience,
in the sense that the government will
take a less interventionist approach,
[but] I think the government has finally
realised that if the banks are hit with
extra taxes, plus the effects of the
forced exchange of FX loans into forint,
it severely hits their ability to do business,” Nigel Rendell, economist with
London-based Medley Global Advisors,
tells bne IntelliNews.
Part of the problem for Orban's government is what Rendell termed the “artificial measures” to encourage lending
to business, primarily the central bank's
'Funding for Growth programme',
which has proved “less successful than
many in government had hoped,” he
says.
And with Orban famously pledging to
create 1mn new jobs prior to elections back in 2010 – a pledge looking
ever more difficult to honour half way
through the time plan – action was
needed. “Therefore, much better to cut
the taxes, leave the banks alone to do
what they do best – lend to the private
sector. This should boost the domestic
economy and ultimately the country's
longer term growth potential,” he says.
32
I Central Europe
A salty outburst against Orban
bne March 2015
But, as even the EBRD's Chakrabarti
admitted, rebuilding trust after a sustained period of unpredictable behaviour is “always the most difficult thing”.
Kester Eddy in Budapest
Lajos Simicska, a Hungarian media mogul long seen as one of the closest
oligarchs to Viktor Orban, has lashed out at his boyhood friend in a series of
media interviews that could cause lasting damage to the prime minister’s
future.
Simicska, who shared a college dormitory room with Orban in the 1980s,
accused the mercurial prime minister of seeking to build a dictatorship,
muzzle independent media and of leading Hungary into a dangerous liaison
with Russia in a flurry of expletive-rich media interviews published on
February 6. “Viktor Orban is spunk,” he declared in his most outrageous
comments, incensed at what he views as the “traitorous” defection of senior
editors at his three main media outlets out of loyalty to the PM.
Andras Petho, co-founder of Direkt36, an investigative website, points out
that “spunk” is probably the worst thing you can call someone in Hungarian.
“That word is so nasty you would hardly ever see it in newspapers, until
now,” he says. “There have been rumours since the April elections that this
alliance [between Orban and Simicska] had broken up, but there was no
hard evidence. The events of February 6 made it clear in a very spectacular
way that these rumours are true.”
Quite what caused the schism remains unclear. Various pundits have
mused that Orban, high on confidence after his second consecutive (and
resounding) victory in elections last spring, was keen to reduce his financial
dependency on Simicska.
Speculation of a rift grew in January after reports emerged of a meeting
between Orban and pro-government media owners in which the PM declared
the government would drastically reduce its advertising spending in private
media channels. Added to this, changes to a controversial advertising tax are
set to raise by a factor of five the tax on Simicska's media businesses. It was
this that appears to have precipitated Simicska's declaration of a “media war”
against Orban – a declaration that in turn triggered the defections of Simicska's
leading editorial staff who wanted to appear loyal to the prime minister.
Simicska, however, appeared indifferent in his various media outbursts to any
future financial worries caused by the modified tax: rather, he voiced various,
hitherto unexpressed, political and moral concerns. “You may think it funny,
but I am a committed democrat. I don't fucking like the methods the boys
[ie. Orban and his government] are using in this country,” he told Magyar
Narancs, a current affairs weekly. “You can believe it or not, but my alliance
with Orban started out because we wanted to demolish the [communist]
dictatorship and post-communist system. It turned out that was no easy
thing – we had to sweat at that. But no fucking way was there the intention of
raising another dictatorship in its place. I'm no partner in that.”
Reporters questioned Simicka's about the risk of reprisals by Orban, given
the former party treasurer's intimate knowledge of Fidesz's economic history.
As he noted to Magyar Narancs: “I've known him [Orban] 35 years – does that
tell you something? I know him, and I know a lot about him, sure. And? What
are they going to do, shoot me? Let's hope it doesn't come to that.”
Rendell is less diplomatic: not only has
Hungary become “an unpredictable
destination for many foreign investors”
under Orban, but investor sentiment
has been further damaged by his praise
for Russia and Turkey during last summer's infamous “illiberal democracies”
address, he said.
Some relief
Clearly, the big question is whether
Orban can be trusted to hold to the deal.
Erste feels that the role of the EBRD
is, if not a trump, at least an ace in the
arrangement. The London-based bank
has pledged to “strongly support” and
“carefully monitor” the deal, which is
subject to six-monthly reviews.
This, along with the personal involvement of Prime Minister Orban at the
signing, points to a “strong commitment” by the government to carry
this through, Axel Reiserer, the EBRD
spokesperson, tells bne IntelliNews.
“Thirdly, and this goes beyond the
EBRD, but we think is the strongest
point, having acquired more than 50%
of the Hungarian banks, I think the
government has begun to realise that
bashing the banking sector is no longer
productive… it's shooting itself in the
foot,” Reiserer said.
Although it was unusual for the EBRD to
partake in a deal which enlarged state
ownership of any sector, in the Erste
case it was an encouragement for Erste,
as a large, private bank, to stay in the
country, Reiserer argued.
Of course, even assuming the Orban
administration keeps its word, as
Mihaly Varga, the economy minister
admitted on February 10, the bank tax
will still remain “quite high” after the
planned cuts. For the banks then, the
new deal will bring positive relief, but
no return to the heady, heavenly profits
attainable before the crash of 2008. A
kind of purgatory, perhaps – but that's
still better than investing in hell.
bne March 2015
Central Europe
Hungary’s industrial
dreams punctured
Kester Eddy in Budapest
T
he “Hungarian model” is really
working very well and recent
results prove this, declared Peter
Szijjarto, Hungary's foreign minister,
as the foundation stone was laid at
a new manufacturing facility in the
south-western town of Zalaegerszeg on
January 27.
The new plant, a HUF4.5bn (¤14.5mn)
investment by Edelmann, the German
printing and packaging company, will
create 100 new jobs and make Zalaegerszeg the second largest of the group's
six European production bases, according
to state news agency MTI, citing Dierk
Schroder, Edelmann's managing director.
A day of photo-shoot grins for Schroder,
then; but for every German industrialist
smiling in Hungary right now, a dozen or
more are gnashing their teeth.
On New Year's day, Budapest introduced
a new road freight registration and tracking system – known by its Hungarian
acronym as Ekaer – for all but the smallest of commercial deliveries by road.
Ekaer requires a mass of detailed data
about commercial consignments, including the contents, value, sender, recipient, truck registration numbers, and
times of arrival and unloading – all to
be sent to the tax authority in advance
of shipping. Any failure to comply, if discovered by mobile inspectors, can result
in the confiscation of goods and fines of
up to 40% of the shipment's value.
The new regulations, the government
says, are needed to combat VAT fraud
rackets involving phantom cross-border
consignments of goods. But industry
leaders and hauliers alike are condemning the measures as a bureaucratic
nightmare. “Ekaer… is an extra administrative burden, it imposes unnecessary
costs and weakens the competitiveness
not just of our company, but of the whole
Hungarian automotive industry,” Thomas
Faustmann, managing director of Audi
Hungaria, a flagship German investor in
the Magyar auto industry, told autopro.
hu, a industry-specialist website.
Faustmann, whose plant in western Hungary produced more than 135,000 cars
and almost 2mn engines last year, continued: “Just think about it… every day we
receive nearly 30,000 parts from 1,500
suppliers. How is it possible to administer
all these item by item in the new system?
We just don't have the capacity for this”.
Audi Hungaria would have to recruit 20
more staff for each of three shifts simply
to administer “this pointless task”, he
explained, adding: “I fully support the
fight against VAT crooks. But not at such
a price.”
Audi Hungaria declined to comment further to bne IntelliNews, only confirming
that the autopro.hu story was accurate.
Other industry professionals and associations support the German car maker's
lament. “This is terribly time and cost
consuming. I will have to take on at least
10 more staff, only for this job of typing
in administration,” Arpad Vasarhelyi, head of DB Schenker, part of the
German-based logistics group, tells bne
IntelliNews. Asked how much this would
add to costs, Vasarhelyi replied: “It's very
hard to say. It's all so very [uncertain],
every single day we get new information,
other information is no longer valid”.
In a press statement, the Hungarian
Association of Logistics, Purchasing and
Inventory Management (MLBKT), which
has 600 members, demanded that the
law be rescinded in its present form, calling the new system “chaotic, contradictory" and saying it wouldn't achieve its
initial aim. “Ekaer… puts law-abiding
and fair producers, traders and freight
I 33
forwarders into a difficult situation. The
initial aim was to prevent VAT fraud...
the law still leaves lots of loopholes to
avoid paying taxes,” the MLBKT said.
Second thoughts?
Not for the first time, the Hungarian
government has been accused of failing
to consult with industry professionals
when preparing legislation. “Parts of the
law are simply unenforceable: companies
are often obliged to provide data that are
impossible to receive in time from their
international partners,” said the MLBKT.
And while the initial intention was “good
willed,” finding a genuine solution to
VAT fraud “must involve thorough professional preparation and collaboration
with economic actors,” it said.
As a result of the mass outcry, and somewhat belatedly, the government appears
to be having second thoughts. Asked to
comment on the industry's complaints, a
spokesman tells bne IntelliNews that the
government had extended what it terms
the “trial run” of Ekaer, meaning it will not
impose penalties if hauliers are found to
have paperwork out of compliance with
the new system, until March 1. “In light of
remarks and proposals received from market participants and experiences gained
during this two-month period, the Ministry for National Economy will evaluate the
necessity and possibility of amending the
regulation,” the spokesman says.
For Hungary's frazzled industry leaders, it offers a glimmer of hope. Yet, as
Audi's Faustmann pointed out, the entire
affair makes a mockery of the government's supposed long-term intentions
of becoming Central Europe's “centre of
industrial production”.
“For this, you need to create framework
of appropriate conditions. This is also
in line with our strategic agreement,
signed with the government”, Faustmann told autopro.hu, adding, as a
warning, that Hungary could easily lose
out if the mess continued.
“In the neighbouring countries – in
Slovakia, the Czech Republic, Romania
and Poland – dozens of factories are on
the lookout, just waiting for orders,” he
said.
34
I Central Europe
bne March 2015
bne:FX
Poland’s
politics, banks,
investors feel
Swiss franc effect
bne:FX
Jan Cienski in Warsaw
T
boom, the value of the zloty had peaked at just under PLN2 to
the franc.
Poland has taken Hungary's place as the Central European
country most exposed to the vagaries of the Swiss franc.
Hungary's government pushed through several schemes that
have more or less ended the issue of foreign currency loans,
but they remain a significant problem in Poland. In all, francdenominated loans account for about 9% of Poland's GDP,
making up 14.6% of outstanding loans and 37% of household
debt.
Policy-makers immediately scrambled to help minimise the
shock of the stronger franc. Polish banks were put under
enormous pressure to feed through Switzerland’s negative
interest rates to their customers, and to reduce their often
rapacious spreads – the fees charged to convert zlotys into
francs to make mortgage payments.
he Swiss National Bank's decision to end its franc's peg
against the euro in mid-January ricocheted in Poland.
It caused nightmares for the 550,000 people with
mortgages denominated in Swiss francs, played havoc with
the share prices and values of local banks, and is causing
growing political problems during an election year.
In Poland, as elsewhere in Central Europe and Austria, Swiss
franc loans had been enormously popular before the 2008
economic crisis. By the turn of the millennium, much of the
region had established modern banking systems and for
the first time banks started offering long-term mortgages.
However, interest rates in Polish zlotys, Hungarian forints and
Romanian lei were significantly more expensive than those
denominated in francs. Austrian banks, which had spread
across the CEE region, were already familiar with the product,
as it was very popular with Austrians, and enthusiastically lent
Swiss francs.
But borrowers, banks and regulators all underestimated
the risk of borrowing in a foreign currency. The size of that
gamble became apparent with the advent of the economic
crisis, when the value of CEE currencies plummeted against
the Swiss franc, which became a global safe haven.
Drowning Poles
The latest lurch in the value of the Swiss franc has been
particularly painful for Poles. The franc briefly hit PLN4.30,
before settling just below PLN4. Before the 2008 crisis, a
period which marked the high point of a Polish real estate
As a result, many mortgages are under water, with borrowers
owing more than the value of their properties, and the overall
size of most loans is significantly larger today than on the day
the mortgage was taken, despite eight years of payments.
But there is a growing sense in Poland that a more systemic
approach will have to be taken to finally cleanse banking
"I can only say that if I had to choose
between the interests of the banks
or the interests of those who took
such loans, I will stand on the side
of the people"
balance sheets of the Swiss franc mess. So far only 3.1%
of franc loans are in trouble, compared with a 3.6% nonperforming ratio for zloty loans, but there are worries that
the franc's strength could worsen those numbers. “The
rapid appreciation of the Swiss franc, if sustained, will likely
increase the cost of installments for borrowers, negatively
affecting their debt-servicing capacity, and likely lead to
nonperforming loans for this asset class surpassing the level of
bne March 2015
nonperforming loans of the zloty-denominated mortgages,”
said Moody's Investors Service, a rating agency.
The issue has become political. The ruling Civic Platform
party of Prime Minister Ewa Kopacz is in a tight race with
the opposition Law and Justice party ahead of this autumn's
parliamentary elections. Most franc borrowers are from the
urban middle classes, Civic Platform's natural electorate. While
they may not be enticed to shift to Law and Justice – which
has been making sympathetic noises about their plight – they
may simply not bother to vote, hurting Kopacz. “I can only say
that if I had to choose between the interests of the banks or the
interests of those who took such loans, I will stand on the side
of the people,” Kopacz said in a recent interview, quickly adding
however that any solution that helps franc borrowers “should
not be done at the cost of the budget”.
Central Europe
I 35
For now, the slight strengthening of the zloty against the
franc, plus steps like passing through negative interest rates,
are mitigating some of the shock caused by the Swiss central
bank’s unexpected decision. Furthermore, the banking sector
is solid; stress tests last year showed that a 30% rise in the
franc would cause the sector’s Tier 1 capital ratio to fall by
only 20 basis points to 13.28%.
Demetrios Efstathiou of Standard Bank says that Poland
would be hit hard by any further swing in the Swiss franc,
but it’s arguably best placed to deal with it. “Poland has a
strong economy with 2014 GDP growth rate at 3.3%, and a
similar rate expected in 2015, with per capita GDP now over
USD14,000. Meanwhile, its banks are well capitalised,” he
notes.
Mateusz Szczurek, the finance minister, has been sceptical
of any quick move to help franc borrowers, remarking that if
mortgages were recalculated into zlotys at the rate they were
first taken out, banks could see a one-year PLN20bn (€4.8bn)
hit to their bottom lines. Andrzej Jakubiak, head of the Polish
Financial Supervision Authority, is suggesting a plan that
would convert franc loans into zloty ones at a cost of about
PLN1.2bn a year over the next two decades. Banks are cool
to any such idea, and the sector is discussing the issue with
regulators.
Scaring investors
The uncertainty surrounding the issue is also worrying
investors. Some of the most aggressive franc lenders like Bank
Millennium, a subsidiary of Portugal's BCP, and Getin Noble,
a Polish bank, have seen their share prices plummet in recent
weeks. Shares in Getin, with about a fifth of its outstanding
loans denominated in Swiss francs, have fallen by 24% in the
last month.
The Swiss problem is also affecting the sale value of banks.
Several banks, many with a Swiss loan portfolio, are being
considered for sale. The latest is Raiffeisen Polbank, the Polish
subsidiary of Austria’s Raiffeisen Bank International, which
is offloading its Polish operation because the cost of growing
its market share is simply too high. Martin Gruell, RBI’s chief
financial officer, told a conference call recently that he had
no intention of selling the bank on the cheap. “In Poland we
expect a price above book value,” he said.
But potential buyers are warier, in large part because of
the €2.8bn in Swiss franc loans on the books of the Polish
subsidiary. Luigi Lovaglio, CEO of Bank Pekao, the country's
second largest and a unit of Italy's UniCredit, told reporters
that he has no plans of paying above book value. “Currently
it is very difficult to buy a bank above book value, not just in
Poland,” he noted.
"The Swiss problem is also affecting
the sale value of banks"
36
I Southeast Europe
bne March 2015
Photo: Dusan Milenkovic
Russia in rush to build "Turk Stream"
David O'Byrne in Istanbul
I
f the offer made by Russian
President Vladimir Putin last
December to re-route his South
Stream gas pipeline through Turkey
came as a complete surprise to Ankara,
then the offer made by Gazprom CEO
Alexei Miller on January 27 to deliver
the first gas to Turkey by the end of next
year appears to have convinced Ankara
of Russia's serious intent. Commenting
on the offer, Turkish Energy Minister
Taner Yildiz suggested discussions over
the project would now continue at a
more serious level. The venture is not
without its risks, though.
Developing major international gas
pipelines takes years of planning before
a single pipe is welded. Promising to
lay close on 900 kilometres of pipeline
through the inhospitable and surprisingly deep Black Sea in order to deliver
gas within two years implies seriousness verging on desperation.
Putin's offer to reroute his pet 63bn
cubic metre a year (cm/y) South Stream
gas pipeline was made not through any
altruistic intent to Turkey, but rather
to avoid having to bow to EU rules
stipulating that should the line follow
the preferred route through Bulgaria,
it would have to be open to third-party
because the sole reason for constructing
South Stream was to bypass Ukraine,
with which Moscow has long running
"issues", in order to maintain absolute
control over its main gas export route to
Southeast Europe.
According to a statement by Yildiz,
Russia's latest offer involves developing
the new "Turk Stream" pipeline, as it
has been dubbed. It will consist of four
"Ankara will need to tread carefully if it wants to
avoid annoying either Russia or Azerbaijan"
access. This is a condition that Russia
is in no mood to comply with, not least
separate lines with annual capacities
of 15.75bn cm/y, the first of which
Southeast Europe I 37
bne March 2015
will be laid via the Black Sea to deliver
gas to Turkey's European province of
Thrace, through which Turkey currently
receives 14bn cm/y of supply from
Russia via the Transbalkan pipeline
from Ukraine. That gas supplies both
Turkey's main residential and industrial
conurbation of Istanbul and surrounding cities, as well as the power plants
which supply most of north-west of
Turkey with power.
Leverage
The offer makes sense for Russia,
despite the huge expense of laying a
single offshore line across the Black Sea
to supply a single customer, which is
unlikely to be able to pay for itself, even
before Turkey's long-standing request
for a 15% discount on the price it pays
Gazprom for the gas it already buys. On
the one hand it will be able to make use
of pipe and onshore facilities already
ordered for the now cancelled South
Stream line, while also replacing the
gas it already supplies Turkey in Thrace
at the point it currently receives it –
addressing many of Ankara's concerns
about the project.
At the same time it would avoid all
the time-consuming bureaucracy that
would be needed to lay a new line
largely overland through Turkey – a process which would involve host government agreement, an inter-governmental
agreement, an environmental impact
assessment, compulsory excavation of
any archaeological sites on the route
etc. Turkey already ratified an agreement to allow South Stream to pass
through its Exclusive Economic Zone
(EEZ) in the Black Sea, which would
only have to be modified to allow landfall and a short overland section.
It also allows Russia the option of
halting or severely reducing gas flows
through the existing Transbalkan line,
thus cutting supplies to Ukraine as well
as most of Southeast Europe without
affecting Turkey. It wouldn’t then have
to restart supplies to Southeast Europe
until it got round to completing the other three planned "Turkish stream" lines
– a useful bargaining chip for a regime
which appears to have no intention of
backing down on either its covert mili-
bne:Deal
Anadolu gobbles up Migros
David O'Byrne in Istanbul
Turkish banking officials in February seized control of Bank Asya, an Islamic
bank believed controlled by supporters of US-based cleric Fetullah Gulen,
on the same day Turkey's foreign ministry confirmed that Gulen's Turkish
passport had been cancelled.
The future of Bank Asya has been the subject of speculation for more than a
year, following the collapse of relations between Gulen's Hizmet movement
and Turkish President Recep Tayyip Erdogan’s Justice and Development
Party (AKP) government.
Turkey's banking regulator, the BDDK, said it had authorised the seizure of
63% of the equity of Asya Katilim Bankasi (Bank Asya) by Turkey's Savings
and Deposits Insurance Fund (TMSF), the body that guarantees bank
deposits, on the grounds the bank does not have "transparent and clear
partnership structures and organisation schemes" allowing effective auditing
of the institution. According to disclosures made on February 4 to Istanbul’s
stock exchange by Bank Asya, the TMSF has taken over the rights of 120
unnamed shareholders and appointed a new board to administer the bank.
After a series of political scandals over the past year that the government
accused Hizmet of being behind, a number of public institutions and stateowned companies removed deposits held at the bank, causing deposits to
fall by 25% over the first half of last year and leading to trading in Bank Asya
shares on Borsa Istanbul being twice suspended during 2014. Shares in the
bank are down by as much as 70% over the past year.
The TMSF takeover of Bank Asya guarantees deposits held at the bank, as
well as any dividends payable to the bank's shareholders. However, it is
unclear what the long-term future of the bank will be.
Gulen left Turkey for self-imposed exile in the US in 1999. The precise reason
for the collapse in relations with the AKP is unclear, but Erdogan has made
repeated statements over the past year blaming Gulen’s movement for being
behind a series of graft probes against his government, and accusing the
movement of forming a "parallel state".
The investigations launched in December 2013 resulted in allegations of
widespread corruption at the highest levels of government and the resignations
of four senior ministers. Subsequently the corruption inquiry was halted, with
thousands of police, prosecutors and judges sacked or transferred to other posts.
The first anniversary of the launch of the graft probe was marked by a
Turkish court issuing an arrest warrant for Gulen, leading to calls for his
extradition. A foreign ministry official confirmed to bne Intellinews that a
Turkish court had cancelled Gulen's passport on January 22 on the grounds
that it had been obtained fraudulently and that news of the cancellation had
been transmitted to Gulen and to the US authorities.
However, he was unable to confirm whether any application had been made
to the US for Gulen's extradition, suggesting that such a move would have to
be made by Turkey's justice ministry.
38
I Southeast Europe
bne March 2015
"The offer makes sense for Russia, despite the
huge expense of laying a single offshore line
across the Black Sea to supply a single customer"
tary involvement in the insurrection
in eastern Ukraine or on its apparent
intention to use gas as a "weapon" to get
what it wants from the EU.
jarto, who announced in Ankara also on
January 27 that Hungary has already
launched talks with Turkey, Greece,
Macedonia and Serbia over transiting
the gas to central European markets.
When and how those other three lines
with their total 47.25bn cm/y capacity will be built is unclear, although
it seems safe to assume that unlike
the first line, the other three will be
constructed more exclusively over land,
cutting costs and increasing development time, which again could prove to
be a useful bargaining tool.
Turkish officials later denied that they
had opened any such talks, mindful
perhaps of the possible effects on its
own existing plans to transit Azeri
and possibly Turkmen gas through the
planned 31bn cm/y TANAP pipeline,
which is also planning to supply Central
European markets, albeit via Italy.
Interest in the gas that these lines will
supply has already been expressed by
Hungarian Foreign Minister Peter Szij-
Whatever decision it opts to take over
Putin's "South Stream" offer, Ankara
will need to tread very carefully if it
wants to avoid annoying either Russia,
its main gas supplier; or Azerbaijan, the
single biggest source of foreign investment in Turkey and soon to become its
second biggest gas supplier.
It remains to be seen just how much
Ankara takes into account its difficult
relations with Russia over other issues,
namely Russia's treatment of its own
Muslim minority populations such as
the Chechens, and its role in arming
and supporting the Assad regime in
Syria, which Turkey has vowed to help
overthrow. Not to mention its actions in
Ukraine, a country which has for
decades been Russia's main conduit for
gas exports to Europe and which now
faces the twin prospects of losing large
swathes of territory and its gas
supplies.
Image: gazprom.com
bne March 2015
Southeast Europe
I 39
mies, and incomplete implementation of
structural reforms,” the report says. “On
the positive side, certain factors could
lead to a stronger-than-expected boost
to global and EU growth stemming from
low energy prices.”
Divergent economic paths
Clare Nuttall in Bucharest
E
conomic growth rates in Southeast
Europe will vary dramatically in
2015, with Turkey expected to
achieve the continent’s fastest growth
at 3.7%. At the other end of the scale,
Serbia, whose economy was hit by
flooding in 2014, will contract by 0.3%,
while at just 0.2%, Croatia’s growth
forecast is the lowest in the EU.
The European Commission’s winter
forecast, published on February 5,
reveals that for the first time since 2007,
all EU member states will show positive
growth. Contributing factors include
falling oil prices, the European Central
Bank’s (ECB) quantitative easing decision, and a new Investment Plan for
Europe, according to the Commission.
"Europe's economic outlook is a little
brighter today than when we presented
our last forecasts,” said Pierre Moscovici,
European Commissioner for Economic
and Financial Affairs, Taxation and
Customs, in a statement. “The fall in oil
prices and the cheaper euro are providing a welcome shot in the arm for the EU
economy. Meanwhile, the Investment
Plan for Europe and the ECB’s important
recent decisions will help create a more
supportive backdrop for reforms and
smart fiscal policies.”
However, their impact across the
28-country bloc will vary, with both
Bulgaria and Croatia expected to have
minimal growth this year, and a modest
increase to just 1% in 2016.
The Commission’s report acknowledges
that, “the divergence in economic performance across the EU is likely to continue". Deleveraging rates differ strongly
across the EU, while the impact of falling
oil prices on European economies will
depend on the country’s energy mix. Oil
producers such as Albania and Romania
will not benefit to the extent of those
countries that rely wholly on imports.
Alongside this divergence, the Commission’s report also identifies an increase
in uncertainty over the economic
outlook. “This is due to geopolitical
tensions, renewed financial market
Out of recession
Rising exports are the sole reason behind
Croatia’s expected emergence from its
six-year recession this year, while other
factors will continue to drag on the
economy. Domestic demand growth will
remain negative as investments continue
to contract. Uncertainty over whether
Croatia’s numerous Swiss franc debtors
will be able to continue to service their
loans, together with the weak labour
market, will result in flat private consumption.
Bulgaria managed to weather a year of
political uncertainty to achieve 1.4%
growth in 2014, but this is expected to
dip to just 0.8% this year. Confidence
in the banking sector was eroded by the
run on Corporate Commercial Bank in
mid-2014, and the future of the bank,
which was taken under central bank
administration, is still uncertain. Private
sector consumption is also expected to
take a hit from fiscal tightening and the
expected weak growth in real disposable
income.
Meanwhile the recovery in investment
seen since mid-2013 is coming to an end,
and public sector investment is expected
to decline in 2015, while private companies are also expected to either freeze or
postpone investment plans.
By contrast, both public and private
sector investment are expected to rally
in neighbouring Romania after falling in
2014. Along with higher private consumption, this will contribute to Roma-
"Europe's economic outlook is a little brighter
today than when we presented our last forecasts"
volatility in a context of diverging
monetary-policy across major econo-
nia’s “above potential” growth of 2.7%
in 2015, rising to 2.9% in 2016 – though
40
I Southeast Europe
A new guv’nor in Albania
bne IntelliNews
The Albanian parliament voted overwhelmingly on February 5 to appoint
career banker Gent Sejko as the new governor of the Bank of Albania
(BoA). Sejko will replace Ardian Fullani, who was sacked in 2014 after a
decade at the helm when thefts of around ¤5mn from the central bank were
uncovered.
105 MPs voted in favour of Sejko’s appointment at a session late on
February 5, with just three dissenting votes and four abstentions, in a rare
show of unity in the parliament.
One of Sejko’s main tasks will be to restore confidence in the BoA, after an
internal audit revealed ALL715m (¤5mn) in cash had been stolen from the
bank’s vaults. Speaking to BoA staff on February 6, Sejko promised that,
“the Bank of Albania will be an institution meriting the trust and respect of
the public".
The scandal broke in July 2014 when seven BoA employees were arrested.
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.
Fullani was taken into police custody on September 5. Two weeks later, the
parliament voted to dismiss him from his post for alleged abuse of office,
though he has not been accused of direct involvement in the thefts. He is
now among 19 former central bank officials awaiting trial.
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". The revelations about the lack of supervision at the
bank also raised concerns about how effectively it carried out its role of
supervising the Albanian banking sector.
The theft scandal threw the spotlight onto the high level of corruption
in Albania, which is one of the most corrupt countries in Europe.
Transparency International’s “2014 Corruption Perceptions Index” puts
Albania tied with Kosovo, in 110th place out of 175 countries, the lowest
rank of any European country except Belarus, Russia and Ukraine. While
Albania was accepted as an EU candidate country in 2014, EU foreign
ministers told Tirana that progress on fighting corruption and organised
crime must be made if the country is to progress towards EU accession.
bne March 2015
Photo:
Boby Dimitrov
this represents a modest
slowdown
compared to 2013 and 2014. Romania
is unusual among EU countries in this
respect, since across the bloc, “sputtering investment has so far prevented a
broader and more robust acceleration
of domestic demand", according to the
report.
Slovenia’s strong 2014 performance
was driven by EU-funded investment
together with rising exports. However,
this year, higher private sector investment is expected to only partially
compensate for a deceleration in investments co-funded by the EU, resulting
in a modest fall a slight slowdown 1.8%
growth this year, before rebounding to
2.3% in 2016.
Slovenia’s fiscal deficit has also
dropped substantially from 14.6% of
GDP in 2013 to just 5.4%, and the Commission expects that decline to continue
given that the risks of “additional bank
related one-off costs affecting the 2015
deficit appear to have been mitigated”.
By 2016, the deficit is expected to drop
further to just 2.8% of GDP.
With the exception of Serbia, growth
in Southeast Europe’s EU candidate
countries is set to outstrip most existing
member states.
In Turkey, the region’s fastest growing
economy, private domestic demand and
falling energy prices are expected to
be the main factor behind the forecast
3.7% and 4.0% growth in 2015 and
2016 respectively. A rise in consumers' purchasing power will offset the
decline in output growth caused by
falling exports to Russia, Ukraine and
the Middle East, and the appreciation
of the lira.
Strong growth is also expected this year
in Macedonia (3.5%), Albania and
Montenegro (both 3.0%), Public
infrastructure projects will be the
driving force for growth in both
Macedonia and Montenegro, though in
Montenegro in particular this has raised
concerns about fiscal risk connected to
a hike in the government’s infrastructure spending.
bne March 2015
Southeast Europe
I 41
January 1 has proved to be unrealistic.
“When it comes to household customers, there is a formal opening of the
markets in most contracting parties,
but not a real opening,” says the Energy
Community's secretariat deputy director, Dirk Buschle. While customers
formally have the right to choose their
supplier, and suppliers the right to supply any customer, “when we look at how
many customers are actually supplied
by alternative suppliers, things look
different”.
More power to the people
Clare Nuttall in Bucharest
M
ost would-be EU member states
from Southeast Europe met the
January 2015 deadline for a full
opening up of their electricity markets,
though in reality few households yet
have the ability to select their supplier.
While only Macedonia backed away from
its commitments, adopting a new law
that will delay liberalisation until 2020,
governments across the region have
shied away from full market opening
amid fears of the political impact of
rising prices.
In October, the Macedonian parliament
approved amendments to the energy law
that will postpone full liberalisation of
the electricity market for five years, until
July 1, 2020. The decision was clearly
politically motivated. When Economy
Minister Bekim Neziri announced the
plans on October 9, he cited research
indicating that liberalisation would
result in price hikes of up to 20% for
consumers. The price of electricity “has a
social note”, he added, according to the
Macedonian daily Dnevnik. “To us it is
important to protect citizens from possible price shocks.”
Skopje pushed ahead with amending the
law, despite strong opposition from the
Energy Community – an international
organisation established between the EU
and several third countries to extend the
EU internal energy market to Southeast
Europe. As well as being “a very clear
breach of the Energy Community Treaty”
that aims to bring prospective EU members into line with EU energy policy, the
law would also leave consumers “stuck
with the incumbent utility EVN”, the secretariat’s director, Janez Kopač, warned.
Infringement procedures were launched
against Macedonia on January 30.
Virtual liberalisation
While Macedonia is an extreme example,
an immediate and full opening of local
electricity markets enabling all households to choose their supplier from
Even in Serbia, considered the frontrunner in energy sector reforms within
the region, state power company EPS
has retained its dominant position. EPS
director Aleksandar Obradovic said in a
December interview with Serbia’s state
news agency Tanjug that he did not
expect EPS to lose household customers,
since the price set by EPS is 30% below
the market price in the region.
This has already proved to be the case
with corporate customers. Among large
and medium-sized power consumers,
who saw their markets opened in 2012
and 2013 respectively, some 97% were
still EPS customers as of late 2014.
While the electricity market was fully
opened for households from January
1, smaller consumers will keep their
right to supplies from EPS at prices set
by the Serbian Energy Agency (AERS),
and consumers deemed to be “underpriviledged” will receive a free monthly
electricity allowance, Tanjug reported.
Fear of price hikes in a deregulated
market is unsurprisingly a concern for
governments. Rising electricity prices
recently sparked demonstrations in both
Albania and Kosovo. Buschle believes
that without taking the risk of full
liberalisation, neither governments nor
consumers will get to see the benefits of
a competitive energy market. In addition, most subsidies are applied to all
"When it comes to household customers, there
is a formal opening of the markets in most
contracting parties, but not a real opening"
42
I Southeast Europe
households rather than focusing on vulnerable customers. “We have a vicious
circle, a situation where prices are being
regulated pretty much across the board
for household customers, so there is no
incentive to change supplier or for new
customers to come into the market,” he
says. “As a result, we fear that the state
will not give the markets the freedom
to develop, and they will never find out
what happens when prices are determined by the market.”
Private sector companies are deterred
from entering markets where they cannot compete on equal terms with the
incumbents, but according to Buschle
the incumbents also suffer. The situation,
“puts a lot of strain on national electricity
companies who have to supply customers
at prices which do not cover their longterm costs, thereby draining money that
under normal circumstances would be
available for investment,” he says.
Positives and negatives
A spokesperson for Norway-based
Statkraft, Europe’s largest producer of
renewable energy and a pioneer in entering the Albanian market, told bne IntelliNews that the “positive attitude from
the authorities in order to develop and
deregulate the electricity market” was a
bne March 2015
deciding factor alongside the country’s
“untapped hydropower resources, economic growth and increasing demand”.
Despite the decision of its partner, Austria’s EVN, to drop out, Statkraft started
construction work on the ¤535mn Devoll
hydropower project in 2013.
“In the case of Albania there has been,
and still is, a strong interest from private
sector investors to participate in the
in Albania which are necessary steps to
move in the direction of gradual liberalisation of the market,” Sayed says.
In particular, Tirana has launched a campaign to tackle the chronic problem of
electricity theft, setting prison sentences
of up to three years for those found guilty
of stealing power. Theft and arrears by
state companies were among the reasons
for the failure of Czech utility CEZ’s 2009
"We fear that the state will not give the markets
the freedom to develop"
domestic and regional market,” says
Tahseen Sayed, country manager for
the World Bank office in Albania. “This
should bring benefits to consumers and
the economy while enhancing security
of supply.” However, Sayed notes that a
competitive power market needs customers to pay their bills, power utilities to
provide quality of service and be accountable to consumers, and a well functioning
independent and competent regulatory
authority. “These are all steps being taken
investment in Albania. Demonstrating
how seriously the government is now
taking the issue, in December Deputy
Environment Minister Diana Bejko was
sacked for allegedly failing to pay electricity bills for her summer house.
At around 42%, technical and commercial losses in Albania are among the
highest in the region, according to the
World Bank, which also has the effect of
pushing up prices for paying customers.
Given the high poverty levels in Albania,
“It is important that all consumers face
the same reasonable tariff for energy
and that government maintains a wellfunctioning safety net to ensure that
poor families have access to a minimum
amount of power as well,” Sayed tells
bne IntelliNews.
High poverty levels across the region
are at the root of why a full opening up
of Southeast Europe’s energy markets
for households is a gradual process.
Buschle points out that not only
would-be EU members, but also many
long-standing member states also use
their regulatory powers to keep down
power prices for households. The
difference in Southeast Europe is that
incomes are considerably lower than in
Western Europe, and electricity bills
make up a higher proportion of total
income, increasing the incentive for
governments to ease the financial
burden on households.
bne March 2015
Southeast Europe
I 43
out into manufacturing numerous types
of waste. Using technologies developed
in Asia, the company started recycling
plastic bottles into synthetic fibre for the
automotive industry. And since 2009, it
has set up plants to treat electrical and
electronic waste, and recycle light bulbs
and glass. “We strongly believe in the concept of the circular economy. Maximising
utilisation of the resources around us
can create another stage of development
for industries currently in crisis,” Damov
tells bne IntelliNews. “We have created
2,000 jobs by turning lazy resources that
nobody wanted into a new industry.”
Wasted chances in
Romania’s recycling
sector
Clare Nuttall in Bucharest
R
ecycling levels in Romania are
among the lowest in the EU,
held back by a lack of economic
incentives and education. Green Group
has overcome considerable obstacles to
introduce new recycling technologies to
Romania, becoming a market leader that
is now poised to expand at home and
internationally.
Back in 2002, when Green Tech, the
first company within Green Group, was
launched, its co-founders – Constantin
Damov, the head of the Romanian Recycling Association, and Taiwanese investor Clement Hung – were faced with a
market that barely existed. Packaging
use was growing sharply at the time, but
there was virtually no collection of recyclable materials. Difficulties in sourcing
materials for the company’s PET processing plant in Buzau, southwest Romania,
meant that collection and transportation
costs exceeded the value of the finished
products, resulting in heavy losses in the
first two years of operation.
Fortunately, concerns about the explosion of plastic littering encouraged the
Ministry of the Environment and Climate Change to step in with incentives
Today, Green Group has a substantial
share of the Romanian market. In 2014,
the group handled around 50,000
tonnes of PET and 10,000 tonnes of
glass. However, while its business has
grown, Romania’s recycling industry
has not developed at a similar pace.
European Environment Agency data
show that Romania along with Bulgaria
had the lowest level of household waste
recycling in the EU; Romania recycled
just 1% of municipal waste as of 2010.
Intelligent waste
Despite the emergence of numerous
small-scale collection and sorting businesses, low collection rates remain one
of the biggest obstacles. Bucharest and
other major cities boast recycling bins
on many street corners, but a closer look
shows that they are used to deposit all
types of household rubbish indiscriminately. Formal collection rates are further
reduced by the large number of homeless
scavengers who rifle through the bins in
"We believe SIGUREC is a 21st century solution
to replace the 20th century solution of bins in
the street"
for waste collection. Although they only
lasted for three years, it was enough
to get fledgling collection and sorting
businesses off the ground, and to create
a sector strong enough to continue functioning without government subsidies.
Since then, Green Group has branched
search of anything they can sell, including
plastic bottles and other recyclables.
While working with a large number of
small collectors, Green Group recently
launched its own intelligent waste disposal stations, SIGUREC. The electronic
depositories allow users to choose by
44
I Southeast Europe
touch screen how to be compensated
for their deposits, issuing hypermarket
discount vouchers or donating funds to
charity. “We believe SIGUREC is a 21st
century solution to replace the 20th century solution of bins in the street. Like
the recycling bins, our system is based on
education, but it also places a commercial
value on the waste generated by households, and rewards citizens for using it,”
says Damov. “There are no subsidies – it’s
a self-sustaining system based on the
commercial rules of the market.”
By cutting out the middlemen, it also
speeds up the process – a bottle deposited in a SIGUREC station can be recycled
within 24 hours.
The system has proved to be popular. 25
stations have already been installed, and
Green Group expects to have more than 70
in action by the end of this year, increasing
to 200 across the country before long.
Landfill full
However, Romania’s recycling sector
also suffers from a lack of government
action on landfill taxes, which are currently set at between €10 and €15 per
tonne. As a result, for businesses looking
to minimise costs landfill is a better
bne March 2015
option than sending waste for recycling.
Damov blames political populism for the
lack of progress, saying the debate over
recycling is “very superficial”. “Unfortunately it’s like debating football – everybody can understand it, everybody has
an opinion, but at the end it depends
what the players are doing in the field,”
he says.
Currently, Green Group is present in
Germany as a buyer, but the group is
considering an investment in Germany
and possibly the UK as well to set up its
own synthetic fibre production. “We
would like to process this material,
which is going on a 14,000km round
trip to China, in Europe,” Damov tells
bne IntelliNews.
Lack of raw materials has forced Green
Group to look outside Romania for supplies, setting up collection and processing operations in nearby countries such
“Not many west European companies
produce fibre from plastic waste; most
have bottle-to-bottle systems. They also
have high costs for collection, sorting
"Romania can play the role of Europe’s China"
as Macedonia and Serbia where the
sector is at a similarly early stage. It also
imports from Western European countries like the UK and Germany where
domestic recyclers cannot keep up with
the high collection rates. Surplus PET
waste from the two countries is now
shipped to China for recycling and the
synthetic fibres are re-imported – 90% of
the synthetic fibre used in Europe’s automotive industry is imported from Asia.
and recycling because these are labour
intensive. However, technologies are
advancing and we don’t see why this
transformation can’t be done locally in
Europe. Romania can play the role of
Europe’s China,” he says.
Green Group may also make the transition to investing in local recycling
plants in other Balkan countries, if this
proves to be economically viable. Currently, it carries out collection, grinding
and washing, but when enough raw
materials are collected locally, it may
invest into recycling plants.
Back in Romania, Damov is confident
about the future potential of the
market. At just over half the EU
average, packaging waste in Romania is
steadily rising. Collection rates are also
expected to increase. Just catching up
with the rest of Europe would require a
sixfold expansion of the sector. In
addition to rolling out new SIGUREC
stations, Damov wants Green Group to
double its recycling capacity in Romania, including by building a new plant
in Transylvania, which would give it a
presence in the northwest of the
country. The group also plans to branch
out by recycling waste from construction and demolition, and wood waste,
as well as setting up a waste-to-energy
plant.
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• Business, finance, economics & politics from
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Southeast Europe
I 45
46
I Eurasia
bne March 2015
Ethnic clashes dent Kazakhstan's
utopian image
Naubet Bisenov in Yntymak, South Kazakhstan Region
A
murder does not usually merit
much attention in Kazakhstan,
but when an ethnic Tajik killed
an ethnic Kazakh during a row over
money in the country's denselypopulated, ethnically-mixed south in
February, the crime made headlines
due to the resulting inter-communal riot
– an occurrence which so far has been
extremely rare in post-independence
Kazakhstan.
As ethnic Tajik property was attacked
and set on fire on the night of February
5, the Kazakh authorities scrambled to
control the situation, deploying heavily
armed security personnel and cutting
off mobile and internet communications
in the area. Embarrassingly, all this took
place on a day that President Nursultan
Nazarbayev had celebrated "the unity
of our people and accord in our multiethnic society".
The incident took place in the village of
Yntymak (which ironically translates
from Kazakh as "unity" or "solidarity"),
when protests by a group of ethnic
Kazakh men culminated in an angry
raid on Tajik neighbourhoods. Although
no physical harm was inflicted on any
ethnic Tajiks – who hastily organised
self-defence groups – the rioters broke
windows and burnt several cars and
lorries, as well as a number of houses
belonging to Tajiks. Although some
Kazakh houses were hit in reprisals, the
material damage in the village seemed
to be selective.
Some local Kazakhs said the violence
was intended as a warning to Tajiks
and other minorities. "People's anger
has been building up for years and this
murder was just a pretext to warn Tajiks
that they have become too audacious,"
a local Kazakh who gave his name as
Ospan told bne IntelliNews. "This will
also serve as a lesson to other ethnic
groups to behave."
Such talk belies President Nazarbayev's
cultivated message of ethnic harmony.
Since independence in 1991, the Kazakh
president has portrayed the country
as an island of political, economic and
inter-ethnic stability in a sea of intercommunal strife elsewhere in the former
Soviet Union. The relative stability of
Kazakhstan, a home to some 120 ethnic
groups, was achieved largely thanks to an
oil-fuelled economic boom in the decade
to 2008. "Kazakhstan is one land, one
people, one future," Nazarbayev declared
on February 6, citing a popular slogan
trumpeting unity.
Nazarbayev was speaking at a session of
the Assembly of Kazakhstan's People, a
pro-government body of ethnic groups
Eurasia I 47
bne March 2015
set up 20 years ago, designating this
year as the “Year of the Assembly of
Kazakhstan's People”. "Our Kazakh
path is a path of peace, accord and
development," he said ingratiatingly.
Asian Development Bank ups game
in Eurasia
Yet many ordinary Kazakhs are growing
increasingly sceptical of the government's
assertion that the many ethnic groups in
Kazakh society live together in a tatu-tatti
manner (which translates from Kazakh
approximately as "lovey-dovey"). If this is
true, people mutter, why do inter-ethnic
conflicts occasionally erupt in different
parts of the country?
Ben Aris in Baku
Troublemakers
Ethnic Tajiks, who number 9,000 in
Saryagash District's 310,000-strong
population, told bne IntelliNews that they
did not see the raid coming following
the personal dispute over money for
leasing greenhouses. They expressed
anger at being singled out for collective
punishment for the crime of one man,
who is now under arrest.
Some speculated that the raid was
carried out by outsiders, by Kazakhs
not from the area – a view indicative
of the lack of reliable information that
surrounds such events, due to the
government’s kneejerk clampdown
on the press and social media, which
inevitably gives rise to wild rumours and
assumptions. Ethnic Tajik villagers spoke
on condition of anonymity, fearing
reprisals from the local authorities, who
imposed a blockade on the village in
all but name. Tajiks said the raid was
a deliberate and planned provocation.
In support of their suspicions, they
said mobile networks had gone down
a few hours before the violence started
– a claim bne IntelliNews could not
independently confirm.
Four days after the night-time incident,
Yntymak still remained cut off from
the internet, while mobile telephones
supported only limited 2G services.
By shutting down the internet and 3G
services in the entire South Kazakh
Region, the authorities hoped to
prevent videos of the riot from leaking
onto YouTube and other video-sharing
websites, and stop trouble spreading to
other parts of the country. According to
If you hear the name Asian Development Bank (ADB), the first thing you are
likely to think of is China. But after a decade of transformation the Middle
Kingdom is doing well on its own, so the development bank has spread its
wings across Eurasia.
The ADB has 64 members from both the developing and developed worlds
that provide the funds to encourage development. "The focus was initially
on Asia and the Pacific Rim when we opened our doors in 1994, but we have
expanded since," says Betty Wilkinson, Director of the Public Management,
Financial Sector and Trade Division for Central and West Asia at the ADB.
China remains the most important country in the patch, but the ADB limits
its lending there to $1.5bn from a total of about $11bn a year of lending –
and even then these investments are very targeted at things like renewable
energy. "It’s amazing how fast and aggressively China dealt with the issue of
poverty. We have a saying at the ADB: if you have a good idea and the Chinese
like it, then you better put your running shoes on as you are going to be
running to keep up," says Wilkinson.
The ADB does two types of lending: ordinary capital instruments, which
are offered to countries that are already well on the road to recovery, and
assisted instruments for poorer countries that are still struggling. "The
Chinese take loans for things like renewable energy projects, but the other
[poorer] countries borrow to build things like infrastructure. We do a lot of
transport, especially roads, and energy projects," says Wilkinson.
The bank has a wide brief and also supports some urban development, water
and sanitation, financial sector and education projects.
The ADB has been working for a long time in Central Asia with a lot of
Kazakh projects under its belt, but more recently it has become more active
in the other countries in Central Asia and the Caucasus, traditionally the
stomping ground of Western development banks like the World Bank and
European Bank for Reconstruction and Development (EBRD). To highlight its
increased interest, the ADB will hold its annual general meeting this year in
the Azerbaijani capital of Baku in May, a few weeks after the EBRD’s annual
shindig in the next-door Georgian capital of Tbilisi.
"We overlap with the other development banks, but according to our
estimates the infrastructure spending needs through to 2020 runs into the
trillions of dollars so there is plenty of work to go round," says Wilkinson,
who gave a talk on online innovations that banks can use during the
“Azerbaijan Banking and Finance Forum” that was organised by Adam Smith
Conferences in Baku in February.
And the help is welcome. The whole region is feeling the aftershocks of
the collapse of the Russian ruble in December and those countries without
natural resources to fall back on are in serious trouble, notes Wilkinson.
48
I Eurasia
a statement handed to bne IntelliNews on
February 9 at the police headquarters
set up to investigate the murder, the
situation in the area "has been fully
stabilised" and "all services are operating
in a routine mode". The police refused
to admit the conflict was inter-ethnic,
maintaining it was "domestic".
Zaure Khamzayeva, head of the
Saryagash District internal policy
department, also denied to bne
IntelliNews that the conflict was interethnic and said it was a "domestic
conflict between two former friends".
Asked why there were so many heavily
armed security officers if the conflict
was purely domestic, Khamzayeva
replied: "In order to maintain accord
between people."
The local authorities in South Kazakhstan
Region, the country's most populous
bne March 2015
It is not yet clear where and when he
will be tried, but one police officer
told bne IntelliNews on condition of
anonymity that the trial would likely be
soon, in order to show that justice can
be delivered. This would go some way
to appeasing locals who complain that
corrupt police, prosecutors and courts
often allow rich offenders to evade
justice.
Greenhouse effect
There is some evidence this latest ethnic
flare-up is the result of social problems
and the growing rich-poor divide in the
region. "You won't find a Tajik who doesn't
drive a good car," lamented one Kazakh
man who declined to give his name.
South Kazakhstan Region had the
highest share of the population living
below the poverty line at 6.9% versus
the nationwide level of 2.9% in the third
"Our car was burnt down and our house was
damaged. Will we be compensated for that?"
region with the highest share of a
minority population apart from ethnic
Russians – ethnic Uzbeks constitute
nearly 17% of its total population –
play down the ethnic factor in the
conflict, fearing it will cast doubt on the
government's claim that Kazakhstan is a
land of inter-ethnic harmony. Yet this is
not the first time that the region has been
shaken by a dispute involving minorities.
In 2007, a Kazakh mob attacked ethnic
Kurdish families over suspected sexual
abuse against a four-year-old Kazakh
boy by a 16-year-old Kurdish adolescent.
In order to ensure the security of the
Kurdish families whose houses were
burnt down, the authorities had to
relocate them to a safer place.
With the aim of pacifying angry Kazakhs
in this latest event, the authorities
announced the detention of the
suspected killer and his extradition
from Uzbekistan, where he had fled
after the murder (Saryagash District
borders Uzbekistan) within three days.
quarter of 2014, which grew to 8.9%
in rural areas (4.6% nationwide). Yet
ethnic Tajiks appear relatively well-off,
as evidenced by the bigger houses in
their neighbourhoods.
Tajiks themselves explain their relative
wealth by hard work as crop farmers.
Weather conditions allow locals to grow
tomatoes in a myriad of greenhouses
dotted around the Saryagash District
– one of which became the catalyst for
the conflict, sparked by the Tajik lessee's
debt to the Kazakh lessor.
Tajik farmers complained that they
can't now reach their plots because
of the police presence, and as well as
now fearing for their security they have
to find money to repair their trashed
houses. A middle-aged Tajik woman told
bne IntelliNews that her plans for tomato
greenhouses had been crushed by the
attack: a mob tried to set her house
ablaze and burnt a new car she had
recently bought with two years' worth
of savings. While her holding is not big –
only 1,200 square metres – it generated
enough revenue for her family of three
children and four grandchildren to live
off. She said she had hoped to make
around $8,000 this year by growing
tomatoes like in previous years, but the
loss of the car and uncertainty over her
family's personal safety would make it
difficult to grow a good harvest. "Our
car was burnt down and our house was
damaged. Will we be compensated for
that?" she asked rhetorically.
Not just farmers but other businesses
are also suffering from the aftermath
of the riot. Since the authorities
blocked communications networks in
the district, people have complained
about temporary problems with buying
car insurance or dealing with their
pension accounts, as insurance and
pension agents could not access online
databases. Even the local Tajik-language
school, whose glass entrance was broken
by a stone thrown by the attackers, was
temporarily shut for security reasons.
Not so lovey-dovey
In the aftermath of any riot, the big
question is what impact this will have
on community relations elsewhere in
the country – something this Kazakh
government is fixated on to the point
of obsession. President Nazarbayev
styles himself as the guarantor of the
constitution and stability in society,
and this latest inter-ethnic conflict will
be hugely concerning for the elites
in Astana, not least because it could
hurt the country's image abroad. That
image was already tested by the violent
suppression of striking oil workers
in Kazakhstan's western Mangystau
Province in December 2011, which left
at least 14 protestors dead in the oil
town of Zhanaozen.
Such ethnic clashes raise questions
about how stable inter-ethnic relations
really are in Kazakhstan. Given it is
hard for the authorities to admit the
presence of ethnic tensions as it would
imply a failure of Nazarbayev’s policy,
the true picture cannot be discerned or
discussed in an open and transparent
way until it is too late and the situation
boils over.
bne March 2015
Eurasia
The ‘burbs come
to Mongolia
Terrence Edwards in Ulaanbaatar
T
here is no hint when standing
in the desolate Yarmag district
in Ulaanbaatar that you are
near the centre of one of the world's
fastest growing economies. But what
today is just a mostly empty valley, for
developers will be the next magnet for
Mongolia's rising middle class – unless
a property crash happens.
The growth of Mongolia's capital
city has been fuelled by the floods of
money from the export of the country's
vast mineral resources to China and
elsewhere. But troubles in Mongolia’s
mining sector and slowing growth in its
southern neighbour have put the brakes
on its own economic expansion.
Ulaanbaatar, which translates as
“Red Hero”, was built by the Soviet
government in the 1950s in the Tuul
river valley. The central business district
is where companies such as the global
mining conglomerate Rio Tinto are
locally headquartered, within walking
distance of the country's parliament and
some ministries.
Companies such as Asia Pacific
Investment Partners (APIP) are
continuing to build in Ulaanbaatar
despite the economic slowdown since
2011 (though growth should still
have been around 7% last year), even
in such far-flung areas as Yarmag.
Although this suburban area is decades
away from catching up with the more
developed city centre, the difference
is less stark when compared to the
city centre of 13 years ago. That was
when APIP CEO Lee Cashell first began
renting out apartments to project
workers in the early noughties. “The
city was a big village,” he says. “You
could still see horses down streets. It
was a good time to get to know the
area and explore the city created by the
Soviets.”
Cashell's company has since grown from
a small rentals operation utilising three
Soviet-style apartments purchased at
$10,000 each, into a large-scale property
developer for luxury homes, with
subsidiaries for property management
and producing construction materials.
Head for the hills
The wide open spaces in Yarmag
strongly contrast with the city centre,
where developments are practically
piling up on top of one another.
APIP's Village @Nukht was built in
Yarmag with eight penthouse units as
well as shopping and office space, with
the expectation that the area would
develop into a new urban centre. Other
more affordable options are appearing
too, along with schools and shopping
centres. It's also where Ulaanbaatar's city
administration has long-term plans to
relocate its offices. “We've been watching
Yarmag for a number of years, and the
real estate agency has done transactions at
I 49
coal and sometimes even harmful
substances such as plastics from their
trash to stay warm. The smoke emitted
from neighbourhoods where these homes
are clustered are causing birth defects and
lung disease, health experts say.
Although Ulaanbaatar has partnered
with local groups and the World Bank to
try to combat the “airpocalypse”, there’s
been little progress. The government's
long-term strategy is to get those living
in gers into apartments and houses
hooked up to the city's central heating
grid – an admirable strategy but one
that will take years.
Not built to last
In the rush to meet the growing demand
for housing in Ulaanbaatar, many of the
new apartment buildings and houses
were thrown up and are notorious for
their poor quality.
Many new homeowners are unhappy
with what they've bought. Some
complain they were cheated, as the
shoddily built homes quickly need
expensive repairs or renovation. Many
construction workers also lack the
skills in modern building techniques
to provide decent standards of
construction. “I think there's a big
lack of trust in construction,” says
Gabrielle Francesch, director of business
“I think Ulaanbaatar will grow faster than
Kazakhstan, and luxury in Kazakhstan is still
double the price of what's in Ulaanbaatar"
Nukht Valley where the wealthy are living
and currently building,” says Cashell.
Yarmag also provides escape from
Ulaanbaatar's choking air pollution. The
World Bank considers the Mongolian
capital one of the most polluted cities
in the world. During winter, when
temperatures can dip below -30°Celsius
at night, the Red Hero transforms into
the Smoky Hero, or Utaabaatar.
Residents living in the traditional whitefelt tents known as gers burn low-grade
development for Ulaanbaatar-based
construction and design firm Global
Ideas. “People distrust anyone in
construction because there's so much
bad work being done, and its not very
professional still.”
Francesch, who is also a managing
partner, says his firm has fared well in
the last few years, despite the economic
slowdown, by relying on skilled foreign
architects to deal with the unique
challenges found in the world's coldest
capital city. For instance, while some
50
I Eurasia
spaces can get relentlessly hot from
the radiators connected to the city's
central grid, other new buildings need
to produce their own heat and manage
sewage for themselves. “We look
for expertise in detail and technical
solutions,” says Francesch. “Not for the
foundations, but more for insulation,
heating ventilation, detailed drawings
and other complicated things people in
Mongolia can't do at the same level.”
Whether or not prices can be sustained
at the current levels is also becoming
a concern. The fear is that rampant
speculation and oversupply will lead to a
property market crash.
Mongolia no longer has the mining boom
that was attracting foreign investors in
droves up to 2011, when the economy
grew an astonishing 17.5%. Although the
government hasn't released last year's
growth figures, most analysts don’t expect
anything much above 7%. Mongolia's
unresolved disagreements with foreign
mining companies caused foreign
investment to slump 74% last year.
Cashell says his properties locally range
between $2,300 and $2,900 per square
metre. But as many of the high-end
homes remain empty in another growing
district called Zaisan, fears are growing
that prices are set to fall. Cashell, though,
says he isn't worried, since prices are still
well below those of other growing cities
in Southeast Asia as well as Almaty, the
capital of neighbouring Kazakhstan. The
oil-based economy in 2008 suffered a real
estate crisis as the global credit crunch
took hold, sending property values down
40%. “I think Ulaanbaatar will grow
faster than Kazakhstan, and luxury in
Kazakhstan is still double the price of
what's in Ulaanbaatar,” says Cashell.
Despite these concerns, developers do
not appear to have slowed the pace
of building, banking on the idea that
economic growth will soon pick up again.
Mongolia's new prime minister has made
getting the country's largest mining projects
going again a priority. Meanwhile, a new
international airport near to Ulaanbaatar
is bringing in fresh investment, and many
are hoping that work will finally begin on
long-awaited power plants.
bne March 2015
Mongolian government's Got (No) Talent
Terrence Edwards in Ulaanbaatar
Simon Cowell and Mongolia both cheered when a deal was made last year
to bring the “Got Talent” TV show to the formerly remote Soviet satellite. But
Mongolian voters were less than enthused when Mongolia's new prime minister,
Chimed Saikhanbileg, took a page from Cowell's book by asking citizens to
take to their phones to vote how they think he should run the country.
Only 10.3% of the 3.3mn mobile phone subscribers bothered to respond.
The poor turnout may be a sign of cynicism among voters who have turned
out in high numbers for official elections – even though those figures too
are steadily declining. Some 74% of voters went to the polls for the 2008
parliamentary elections and 65% in 2012, compared with 98% for the first
democratic election in 1990.
Those that did bother to vote in the referendum chose the less painful option of
reinvigorating the mining sector over more budget cuts. Mongolia is attempting
to recover from an 85% collapse in foreign investment between 2013 and 2014.
Referendum participants who responded by texting “1”, voted for the
government to work with private partners to get the country's largest mining
projects growing again. That includes launching work on a $5.4bn expansion
project for the Oyu Tolgoi copper mine. The second option rejected that path,
instead calling for budget cuts and savings. The low turnout, however, made
the vote virtually irrelevant.
“I don't think [the PM] actually conducted this survey to really get public
opinion,” said Gan-Erdene Tsendmaa, a 26-year-old office manager. “He just
needed support for doing something confidently, but lots of people are really
sceptical about what he's doing and how he'll improve the economy.”
The economic downturn that prompted the referendum is largely an effect
of troubles in the mining sector, which fuelled the 17.5% economic growth
recorded in 2011 compared with expectations for around 7% this year.
Although Mongolia has repealed laws that had deterred foreign investment,
a dispute with global mining giant Rio Tinto over developing the Oyu Tolgoi
mine drags on and is souring the investment climate.
Oyu Tolgoi missed a fourth deadline in two years on December 31 for a $4bn
project financing package to fund the construction of an underground mining
network that is needed to extract most of the resources there. The project
financing required will be one of the largest in the world, but any lenders
need to see some resolution to the dispute with the government before they
will open their wallets.
Erdene Lkhagva, one of the producers that is bringing “Got Talent” to Mongolian
TV, said they were still trying to figure out how they will implement their own
voting system to prevent tampering. He, too, wondered about the veracity of
the government poll. “We haven't figured it out yet on ‘Got Talent’, but I am very
sceptical on the SMS poll,” he said. “This kind of impromptu involuntary poll
sampling will only get the responses from the crazies and most radical.”
bne March 2015
Eurasia
I 51
Minsk Group – to cut through the
Gordian knot. On January 27, the
Minsk Group released an unusually
strongly-worded statement “deploring
the upsurge in acts of violence resulting
in loss of lives, and [calling] on the
sides to demonstrate responsibility and
avoid steps that would lead to further
escalation”.
In 2014 the two presidents, Azerbaijan’s
Ilham Aliyev and Armenia’s Serzh
Sarkisyan, resumed face-to-face talks
and they have met three times between
August and November, but have been
unable to narrow their differences.
As diplomacy fails, soldiers wait on
opposing sides a few hundred metres
away from each other in WWI-like
trenches along the 100km ceasefire line.
Only six international monitors are left
to oversee the line.
Nagorno-Karabakh:
no war, no peace
Monica Ellena in Tbilisi
According to Thomas De Waal, senior
associate at the Carnegie Endowment
for International Peace and author
of “The Black Garden: Armenia and
Azerbaijan Through Peace and War”,
Azerbaijan, the losing side in the
conflict, has more of a reason to keep
the ceasefire unstable so as to remind
the world that the line cuts across the
internationally recognised territory of
Azerbaijan and that territories behind
it lie under Armenian military control.
“However, although the Azerbaijani
side is probably responsible for a
greater quantity of ceasefire violations,
the Armenians also like to demonstrate
their power,” he wrote recently.
ince the 1994 ceasefire the
Armenian-Azerbaijani conflict
over Nagorno-Karabakh has
languished in a state of “no war, no
peace”. A landlocked mountainous
region, Nagorno-Karabakh is an enclave
in Azerbaijan’s territory, a de facto
independent statelet in the hands of its
ethnic Armenians, backed by Yerevan.
S
The fighting hasn’t cooled down in the
New Year.
But after two decades, the last 12
months of the frozen conflict – one of
three in the South Caucasus alongside
Georgia’s Abkhazia and South Ossetia –
have been more about fire than ice.
“The Azerbaijani side is probably responsible for
a greater quantity of ceasefire violations, but the
Armenians also like to demonstrate their power”
Skirmishes have been common since the
ceasefire, but last year tension started
brewing and violence has become a daily
routine, peaking in early November 2014
when Azerbaijani forces downed what
Baku said was an Armenian military
helicopter east of Nagorno-Karabakh,
killing three crew members. It was the
first time an aircraft had been shot down
in the conflict zone in the past 20 years.
“We were very used to measuring
ceasefire violations by the number of
shots fired,” says Richard Giragosian,
director of the Yerevan-based
independent think-tank Regional
Studies Centre. “Unfortunately, now
the escalation is so serious [that] we
measure ceasefire violations by the
number of casualties.”
Face-to-face
The clashes have thwarted international
efforts – led by the Organisation for
Security and Cooperation in Europe’s
The immediate trigger for the escalating
violence is in the growing regional
tensions in the relationship between
Russia and the West which have also
begun to disturb the South Caucasus,
according to Neil Melvin, director of the
programme on armed conflict and conflict
management at Stockholm International
Peace Institute Research Centre.
52
I Eurasia
“When Armenia rejected the EU’s
Association Agreement and opted for
the [Russia-led] Customs Union, this
immediately raised the question of
whether [Nagorno-] Karabakh would
be integrated into the Union through
Armenia which a number of countries
have opposed,” he says. The political
uncertainty initiated by these events was
the catalyst for violence but longer term
trends prepared the ground, notably the
bne March 2015
Events unravelled and by the time the
USSR started melting from Riga to
Bishkek, Armenia and Azerbaijan were
engaged in a fully-fledged war.
A Russian-brokered ceasefire in 1994
left Armenian-backed forces in charge of
the region and seven surrounding Azeri
districts, with more than 30,000 dead
and half a million Azerbaijanis displaced.
The ethnic Azerbaijanis, about 25% of
“Domestic politics has been a key factor
in preventing both sides reaching a
peace agreement on Karabakh”
transformation of the Karabakh conflict
into an interstate conflict between
Armenia and Azerbaijan.”
A contested cradle
In the dying days of the Soviet Union,
Nagorno-Karabakh was one of the
first clashes between the principles of
peoples’ self-determination and the
republics’ territorial integrity in the
USSR and its successor states.
In 1988 the majority Armenian
population asked the central Soviet
authorities in Moscow for the region to
join the then-Soviet republic of Armenia.
the pre-war population, left their homes,
while ethnic Armenians fled the rest of
Azerbaijan. Neither group has returned
home since the end of the conflict.
Armenia, an ally of Russia, and
Azerbaijan, oil-and-gas rich, got
very close to solving the stalemate,
notably in 2001 in Key West, Florida,
but neither of the then-presidents,
especially ageing Heydar Aliyev,
pushed the deal home. After two
decades of reciprocal isolation, harsh
rhetoric and propaganda – pleasing
to public opinion at home- trying to
make peace is a daunting task. A peace
deal remains on the table, but as De
Waal puts it in his book, “it asks to do
something that runs against the grain
of their national narrative for two
decades”.
“Domestic politics has been a key factor
in preventing both sides reaching a
peace agreement on Karabakh,” agrees
Melvin. Leaders [in both countries]
have used the threat of conflict around
Karabakh to justify their rule and crackdown on opposition forces.”
Arms race
Last year Azerbaijan looked past
falling crude prices and increased
military spending by more than a
quarter to AZN5bn ($4.8bn). So did
Armenia, whose defence outlays
reached AMD200bn ($446mn), from
AMD64.4bn in 2005. Azerbaijan’s oilrich economy dwarfs Armenia’s limping
economy as the defence allocation of
the former exceeds the latter’s total
budget spending by $3.2bn.
“The Armenian forces, however, are
very well dug in and have significant
defensive capabilities,” explains Melvin.
“In the mountain areas, the Armenians
enjoy advantages. In this context,
an Azeri attack would likely endure
high causalities and there is still no
guarantee of military victory. Given
this, the primary aim of Baku’s weapons
purchases has been seen to break
Armenia’s economy through an arms
race rather than provide the capacity
to launch a military attack.”
Whatever the reason, Azerbaijan is
flexing its muscles. On February 2 the
Defence Ministry announced it had
started military exercises involving
all units of military forces – including
20,000 soldiers, 300 armored vehicles,
200 missile launchers and artillery
units, and up to 20 military jets.
bne March 2015
Eurasia
I 53
including Presidents Barack Obama
and Francois Hollande, for a large-scale
set of events to mark the 1915 events.
In an open letter to Erdogan released
in January, the Armenian president
stated that the move shows Turkey is
continuing “its traditional policy of
denialism.” Erdogan’s spokesperson
labelled Sargsyan’s remarks on Turkey as
“insults and hate speech”.
Armenia and Turkey
battle over centenary
events
Monica Ellena in Tbilisi
I
Poor timing
Every April Armenians around the
world mark the Medz Yeghern, the
Great Crime, referring to the hundreds
of thousands of Armenians who died
when the Ottoman Turks deported them
en masse from then-western Armenia,
now eastern Turkey, to the Syrian
desert and elsewhere in 1915-16. They
were killed or died from starvation or
disease. Remembrance Day is set on
April 24 – the day (also known as Red
Sunday) that the Ottoman authorities
rounded up and arrested 250 Armenian
intellectuals and community leaders, in
then Constantinople.
Turkish officials say that the mass
killings were a result of widespread
chaos in the dying days of the Ottoman
empire, but argue that there was no
systematic attempt to destroy the
Christian Armenian population and
that many Turks also died in the
turmoil of war. The total number of
dead is disputed. Armenians say 1.5mn
died, Turkey says the number is up
to half a million. In 2014, the Turkish
t looked like an olive branch. When
in 2014 Recep Tayyip Erdogan,
then Turkey’s prime minister,
offered an unprecedented expression
of condolence for the “inhumane”
massacres that Armenians suffered at
the hands of Ottoman soldiers in 1915,
the world hailed it as a sign of softening
in the Turkish rhetoric.
"A new front in the war over those terrible events
has broken out"
The historic first, however, did little
to satisfy Armenians, who want the
deaths of an estimated 1.5mn people
recognised as genocide. And now a
new front in the war over those terrible
events has broken out between the two
adversaries in the run-up to centenary
events to be held in April.
day that Armenians will observe the
centenary of the Armenian massacre.
The move has raised a few eyebrows,
including in Turkey, and sparked
a RSVP war between Ankara and
Yerevan.
To remember the 100th anniversary
of the World War I battle of Gallipoli
on April 24, Erdogan, now president,
Sargsyan had little choice but to refuse
the invitation. Armenia is preparing
its own roster of international guests,
has invited over 100 heads of state to
Turkey, including Armenian President
Serzh Sargsyan. But this is the same
foreign ministry criticised a US Senate
resolution that described the killings
as genocide, arguing that it “distorts
history and law”.
The Gallipoli campaign, also known
as the Dardanelles Campaign (or
Canakkale Savası in Turkish) marks one
of the Allies’ major defeats during WWI.
It is also a defining moment in Turkey’s
54
I Eurasia
history and it led to the founding of
the Republic of Turkey eight years
later under Mustafa Kemal Ataturk,
who rose to fame as a commander at
Gallipoli. It is also considered the birth
bne March 2015
Centre Studies, although adds that
“each declaration not only offers and
expands the space for dialogue and
engagement, but also helps to at least
'sustain the momentum' and to foster a
“There is a deep divide and stark split over
the genocide issue”
of a national consciousness in Australia
and New Zealand: the two countries
remember their fallen soldiers on April
25 when their army corps landed on
the peninsula (hence Anzac Day).
Turkey, on the other hand has
traditionally commemorated Gallipoli
on March 18, the date that 18 British
and French battleships, guarded by
other warships, first attacked the
Dardanelles forts.
The decision to move the
commemoration back to April 24 is
certainly “bad timing”, wrote Richard
Giragosian, director of the Yerevanbased independent think-tank Regional
new environment more conductive for
both sides to re-engage”.
Confronting the past
According to the Armenian National
Institute, 21 countries officially
recognise the Armenian genocide,
including Switzerland which is currently
at the centre of a high-profile legal battle
at the European Court of Human Rights
focusing on Dogu Perincek, leader of the
Turkish Workers Party, who called the
Armenian genocide “an international
lie” while in the country in 2005.
While until a decade ago talking about
the 1915 events was a feat of bravery,
today critical voices calling for Turkey
to confront its past are growing inside
the country. “Turkey has long lost the
battle of truth. The destruction of the
Armenian population on its ancestral
land is a sheer fact, whatever else you
might call it,” wrote Cengiz Aktar, a
senior scholar at the Istanbul Policy
Center.
The issue is highly sensitive. “While
many in Turkey see the selection of
24 April as a mistaken and obviously
disingenuous move to counter the
Armenian genocide commemoration,
many also feel that Turkish moves to
return property and to discuss the 1915
events are not adequately appreciated,”
Giragosian says.
On February 2, for example, the Turkish
authorities returned the ownership
of an historic Armenian cemetery
in central Istanbul to the Armenian
community, in the wake of new legal
amendments that allow the return
of properties seized from minorities.
And on January 29, Erdogan said that
Turkey is ready to “pay the price” if
found guilty of the mass killings of
Armenians a century ago, adding
that his country would take the
necessary steps if historians conclude
that it was at fault for the World War
I-era massacres that Armenians say
amounted to genocide.
In a twist of fate, the Turkish Foreign
Ministry has mistakenly published
a picture of the Armenian Genocide
monument in Yerevan amidst a
collage of photos for an official day
planner that has been prepared to
commemorate the 100th anniversary
of the Battle of Canakkale. The foreign
ministry vowed to find and punish the
person responsible. “There is a deep
divide and stark split over the genocide
issue,” sighs Giragosian.
bne March 2015
Eurasia
I 55
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56
Opinion
bne March 2015
Minsk deal
offers Ukraine
tough long-term
opportunities
STOLYPIN:
Mark Galeotti of New York University
W
ith the ceasefire brokered in the second Minsk
summit seemingly in trouble, the gap between
a brittle and temporary ceasefire and a true and
lasting peace remains broad and unlikely to be bridged
by Minsk-2. Instead, what we are likely witnessing is the
transformation of the conflict to a new stage, one dominated
by a longer-term struggle over governance as much as
warfighting capability. This is a struggle in which Moscow
begins stronger, but Kyiv actually has some opportunities to
level the field.
The Minsk-2 accords lay out a roadmap for peace which
envisages first a withdrawal of heavy weapons from the front
line, then local elections in the rebel-held areas and also
constitutional changes in Kyiv to decentralize powers to the
regions, and then the return of control of the border to the
“This is a struggle in which Moscow
begins stronger, but Kyiv actually
has some opportunities to level
the field”
or share power if others won. These will be at best tainted
and at worst wholly fraudulent snap elections, which Kyiv
and outside observers will essentially have to accept or
watch the whole peace process unravel. Given that Moscow
is also relying on the local leaders in this new confederalized
Ukrainian state to be its agents and veto, especially in case of
renewed moves to align the country more directly with the
west, Russia also will need to ensure its allies win.
Furthermore, while Ukrainian President Petro Poroshenko
may be willing to commit Kyiv to this constitutional reform, he
needs to get it through a fractious and divided Rada. Already
nationalists have been making bloodcurdling threats, not
least to assassinate any pro-Russian legislators elected from
the Donbas region in the east, and they may well spearhead
resistance to reforms that appear to reward rebellion.
Should the ceasefire fail, then the risk is magnified that the
nationalists might be able to surge on the resulting public
anger and push for an even more intransigent line.
Without these changes, without accepting deeply questionable
local elections in the south-east of Ukraine, and without being
able to control its own soldiers, including the notoriously
freewilled ultra-nationalist militia units, then Kyiv will be
unable to enjoy the fruits of Minsk-2. Not least among them
is regaining control of the border over which currently freely
flow Russian troops, volunteers and weapons.
government. This all makes sense in theory, but as many have
already noted, there are numerous weak links in this chain of
events.
There is thus a depressingly good chance that this ceasefire
will not hold, especially not long enough for the full peace
process to be carried forward.
The rebel leaderships, for example, have hardly demonstrated
themselves to be self-effacing servants of the democratic
principle. They are unlikely to allow a free and fair election
campaign in the regions under their guns, let alone surrender
Advantage Kremlin
Whom does this benefit? Moscow may well be calculating that
this is to its advantage. The outcome is likely to be a frozen
conflict, the creation of local pseudo-states under its control
bne March 2015
that are not valuable in themselves – unlike Crimea, the southeastern Ukrainian campaign was never intended as a simple
land grab – but as instruments to continue to destabilize and
influence Kyiv. With part of its country outside its control,
and an economy continuing to be depressed by the war
and Russian manoeuvres, then regardless of its aspirations,
Ukraine would not be joining Nato or the EU in the foreseeable
future.
Meanwhile, the Kremlin is likely calculating that without
actual fighting taking place, Western attention will soon
waver and redirect. Some new crisis will monopolize public
attention, perhaps one in which Moscow’s help might be
convenient. Those voices calling for a more placatory policy
would be more likely to be heard. Businesses suffering because
of sanctions would lobby for a relaxation. At the very least, the
pressure to arm and fund Kyiv will diminish.
Of course, an unspoken central assumption of the Kremlin’s is
that this is a moment of temporary and unexpected weakness.
This is a product of the fall in oil prices, as well as the
unusually sustained and vigorous Western outrage at events in
Ukraine, stoked by the “bad luck” – as the Kremlin would see
it – of the MH17 shootdown. Thus, a delaying action makes
tactical sense. If Kyiv cannot be forced to acknowledge Russian
hegemony now, freeze the conflict and wait a while for the
correlation of forces and circumstances to be more propitious.
However, it could well be that time is not on Russia’s side.
Already, the economic crisis is having an impact on the
security apparatus. The intelligence and law enforcement
agencies are having to absorb cuts of 10% or more in their
budgets and some military procurement plans are quietly
being put back. Russia’s economic woes are not going to
end soon, so the costs of supporting client states, continued
military reform and balancing the guns vs. butter equation
– perhaps best regarded as “might abroad vs. popularity at
home” – will become all the more onerous.
Opinion
57
political and administrative challenges they face, while
maintaining a strong but dignified stance towards Moscow,
they may begin to gain serious credibility in the West. At
present, they are, to be honest, viewed with more pity than
respect.
The second is governance. Whatever the flaws of the actual
vote, it is hard to question that most Crimeans genuinely did
want to join Russia. This owes less to historical affinity than to
a sense that Kyiv had failed them for more than two decades.
If rump Ukraine can develop as a better-run, transparent,
working liberal democracy and market economy, then the
people of the south-east may well see their future in the west.
Just ask the ethnic Russians of the Baltic states, who may
grumble about “prejudice” against them, but have no desire to
head to Russia instead.
Finally, Kyiv could use the time to prepare the ground
militarily, too. One of many reasons for its lack of success
in the war has been that its underfunded and undertrained
army was still in many ways a shadow of its Soviet self, geared
for a mass war in the west rather than counter-insurgency
in the south-east. Over the coming months, even if Kyiv
cannot afford to mobilize larger forces, it can at least retrain,
reorganize and rearm for this mission.
In short, Minsk-2 is just a lull in the war, not an end. However,
while Moscow clearly feels it is getting the best out of the deal,
it does offer Kiev some interesting opportunities. But only if it
is serious, daring and determined enough to take them – and
the West continues to be willing to help.
Mark Galeotti is Professor of Global Affairs at the Center for
Global Affairs, New York University. He writes the blog In
Moscow’s Shadows.
Counterattack on 3 fronts
Ukraine, of course, hardly looks in a good state. Even with the
International Monetary Fund's (IMF) latest $17.5bn loan, it
faces lean, hard years. To that can be added the challenges of a
still largely unreformed bureaucracy (sad to say, but Ukraine’s
is more corrupt and arguably even less efficient than Russia’s),
sharp political divisions, and unrealistic public expectations.
However, with a right combination of domestic political will
and external financial and technical assistance – and it is
hardly a given that either will actually materialize – then it is
not impossible that the country will begin to find its feet. In
this context, then Kyiv actually can begin slowly to mount a
counter-attack on three fronts.
The first is geopolitical. Kyiv has been assiduous in courting
the West, but as a victim more than a partner. If the Ukrainians
begin seriously to start tackling the fundamental economic,
“In short, Minsk-2 is just a lull in the
war, not an end”
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Opinion
bne March 2015
MACRO ADVISER:
It’s the economy,
stupid
B
ill Clinton famously won the first of his two presidential
elections using the slogan: “It’s the economy, stupid”.
He recognised that while support for the first Gulf War
had been strong, people were starting to focus much more on
the poor state of the US economy and fearful about their jobs.
The incumbent president, George Bush Snr, had mistakenly
assumed that war euphoria would remain strong enough to
carry him to a second term. British wartime prime minister
Winston Churchill also found that out in 1945 when he finally
ran out of war victory credits and lost the general election
to the Labour Party, which had focused on jobs and social
welfare reforms.
Is Russian President Vladimir Putin about to learn a similar
lesson which, while not exactly costing him a re-election in
March 2018, might substantially reduce his currently very
strong majority support and lead to much less social and
political stability during his fourth term in the Kremlin?
Or, will the combination of growing public concern and
weakening economy lead to a greater effort to calm the
situation in eastern Ukraine, bring an early end to sanctions
and finally put Russia on a more serious path towards long
overdue reforms?
Cracking support
Throughout most of 2014, Russian public support for the
government's stance in eastern Ukraine remained very strong.
A majority of people initially supported even the absorption of
the region into the Russian Federation, although that changed
relatively quickly to support for independent statehood with
close ties to Russia. But remember that was against a backdrop
of a stable ruble, high oil and generally stable macro trends.
That strong support for the Kremlin’s position on Ukraine
has started to noticeably crack in recent months as the
deteriorating trend in the economy has become much more
noticeable. A growing percentage of the population are now
less convinced the country is heading in the right direction,
albeit a majority still does, and are focusing much more on
the rising rate of inflation and on the fear of wage cuts or
job losses. And they are certainly right to be concerned. The
next three to six months will be awful in terms of economic
indicators and that is bound to have an impact on public
support for the government and the president.
Russia’s economy managed to record modest growth of 0.5%
for 2014 which, frankly, was a good result given the huge
headwinds battering the country. As expected the growth in
the consumer sectors, which have been the main engine of
“Right now the Kremlin is in what
can best be described as survival or
damage limitation mode”
growth for most of the past dozen years, fell sharply to only
2.5% and investment spending, which expanded by over 6%
two years earlier, contracted by 3.5% last year. The steady
rise in the cost of borrowing, declining wage growth, rising
inflation and the growing uncertainty over the future of the
economy all combined to cut activity.
But against these negative trends, there was a positive in the
form of import substitution. The sharply weakening foreign
exchange value of the ruble and the block on some imported
food from last August helped boost demand for locally
produced goods. That helped the manufacturing sector grow
relatively strongly in the latter months of the year, ending with
full year growth of 2.1%.
Year of living dangerously
The trend for the next few months will be severely
Opinion
bne March 2015
downwards. A contraction of up to 5% is expected in the
current quarter and, possibly, for the first half year. Retail
sales will be hit hard as the cost of servicing existing debt
was pushed up even more by the Central Bank of Russia’s
decision to raise its Key Rate to 17% in mid-December, albeit
it has pulled that back modestly to 15% since. Headline
inflation was already at 15% by early February and seems
destined to reach 20% in the coming months. The CBR will
not cut its Key Rate again until convinced that inflation has
peaked and is heading lower. That may not be until the midJune policy meeting.
Last year real disposable incomes fell by 1% and that was the
first contraction since 2000. This year that contraction will be
larger, as nominal wage growth will be a lot lower than the
expected inflation rate. Russian companies have a preference
for cutting wages rather than jobs during times of crisis, albeit
we are already seeing more of both since the start of 2015.
Across the board, indicators are expected to be well down on
last year, as already evidenced by the 25% cut in the volume
of new vehicle sales in January when compared with the same
month of 2014. That said, the trend in industrial production is
expected to remain positive because of the import substitution
effect plus the still fast rising spending in the defence
modernization programme.
The oil price is the critical factor for the economy and the key
determinant for the country’s fiscal and monetary policies.
However, sanctions, especially the block on accessing
external credits beyond 30 days, are also hurting. Russia
will do nothing to try to revive the oil price, but easing the
financial sector sanctions later this year will help to stabilize
the economy. Hence the greater impetus to try and achieve a
peace deal in eastern Ukraine; the assumption probably being
that if a deal can be achieved and peace holds, then there is a
greater likelihood that the most damaging sanctions may not
renewed by the EU when they expire on August 1. Although
the US is expected to keep a tougher position, ie. especially
by the candidates for the November 2016 election, the hope is
that the White House may be pressured by the EU to at least
ease on some restrictions if the war has stopped.
The forecasts in the table below represent our base-case
assumptions. The core assumptions are that sanctions start to
ease from the EU expiry date, albeit not entirely removed until
mid 2016, and that the oil price tests the 2009 lows of $40 per
barrel in the coming months but has a more solid rally in the
autumn. A more optimistic scenario, based on financial sector
sanctions easing earlier and oil staying close to the $60 per
barrel level, is possible and would result in a stronger second
half rally. Equally, the case for greater pessimism can be made
and lead to a much larger contraction in the economy, also
extending into 2016.
Survival mode
Right now the Kremlin is in what can best be described as
survival or damage limitation mode. The CBR’s Monetary
Policy team has been restructured, which along with some
administrative changes in the ruble market, should help
prevent a repeat of the volatility seen late last year. The
Finance Ministry has provided RUB1 trillion to support the
banking system, which may not be enough but is a strong
commitment to prevent a crisis. Almost 200 companies have
been designated as strategically important, which means that
they can get fast access to state support should they need it.
Inevitably, many companies will have financial problems this
year but the bigger companies should not.
Survival mode can only go so far of course. The actions taken,
and others expected in the next few months, should prevent
a credit crisis or a collapse in the important industries. There
is enough money in reserves to allow for that if managed
efficiently. But by late spring or summer the pressure will have
grown for a more effective response if, by then, there is not
a clearly improving trend in key indicators such as inflation
and interest rates, and stability in the ruble market. The table
below shows that while most people are not interested in
taking part in street protests, a rising number believe that
these are possible if the trend in the economy continues to
weaken.
The next parliamentary elections will take place in December
next year. If the poor state of the economy and low confidence
in the government’s management is not to dominate that
election, there needs to a more effective response later this
year. A greater effort to bring peace to eastern Ukraine and,
hopefully, an easing of sanctions later this year, are at least
part of the required response.
Chris Weafer is Senior Partner at Macro-Advisory, which offers
bespoke Russia-CIS consulting.
Is Russia Headed in the Right Direction?
Jan '15
Dec '14
Nov '14
Oct '14
Aug '14
Yes
55%
56%
59%
60%
66%
No
27%
27%
20%
23%
19%
Don't know
18%
18%
19%
17%
15%
Source: Levada Center
59
60
Opinion
bne March 2015
INVISIBLE HAND:
Sowing the seeds of
an oil-price rise
Liam Halligan in London
I
s the oil price crash over? In mid-February, Brent crude
traded at $63 a barrel, up from a $45 low a month earlier.
Does that sharp rise mean oil will now climb steadily back
above $100?
Triple-digit oil prices, after all, have become the normal in
recent years. The black stuff spiralled to almost $150 in late
2008, ahead of the global financial crisis – before falling back,
as the world economy endured it worst peacetime shock for 80
years and asset markets collapsed.
As global growth returned, though, and traders remembered
that the populous emerging markets were still becoming
more populous, their energy demands ever rising, oil quickly
recovered. During the three and a half years from early 2011 to
mid-2014, oil was above $100 pretty consistently. Prices then
started falling last June, by some 60% to their mid-January
low. But Brent crude is now up 36% during the four weeks to
the time of writing. So has the oil market now turned?
Temporary dip
Forecasting the oil price is a mug’s game. But crude is so
important to modern life, and the path of the global economy,
that for all the prediction pitfalls, any decent economist
needs to take a view. With energy importers like the US and
EU benefitting from cheaper oil and exporters suffering,
price predictions can often appear partisan – driven more by
emotion than rational analysis.
During these recent months of East-West conflict, I’ve heard
numerous Western analysts express pleasure at the impact of
cheaper crude on the Russian economy, for instance, while
happily predicting further falls – perhaps without thinking
about the painful impact on their own energy producers (in
the UK’s North Sea, for instance, or US shale fields).
My (entirely data-driven) opinion is that the price dip is
temporary and, even after the recent increase oil remains
heavily over-sold. But prices aren’t always driven by data, of
course. So we could easily see oil temporarily drop further, in
another speculative short-selling frenzy.
Eventually, though, supply-and-demand realities apply. In
my view, the fundamentals – high drilling costs and pitiful
discovery rates on the supply-side, coupled with ever-rising
global demand – point to oil between $80 and $120. I’d also
say that – beyond the hype, and the fact that traders must
react in the short term to hype if everyone else is reacting,
even if they don’t accept it – such fundamentals are widely
understood. As such, unless we see another 2008-style
systemic meltdown on global markets, I’d venture $100 will be
back in sight towards the end of 2015.
To understand why oil prices are likely to recover, we must
understand why they fell. One major reason is Janet Yellen.
Last autumn, the Federal Reserve chairman announced
that the US is to rein-in quantitative easing. Since then, on
the strength of less virtual money-printing, the dollar has
surged. The passing of the QE baton back to Japan, with the
Eurozone about to follow, has helped drive the greenback
to a near seven-year high against the yen and the euro to
an 18-month dollar low. Given that oil is priced in dollars
and all major Opec producers peg their currencies to the
dollar, when the US currency rises, the quoted oil price
axiomatically falls – which is what we’ve seen since Yellen
made her move.
I believe that, for all the huffing-and-puffing between Athens
and its creditors, a deal will soon be cut to keep Greece in the
Eurozone. Germany has blinked during every previous euro
crisis and Berlin has too much political capital invested in
“My (entirely data-driven) opinion is
that the price dip is temporary”
monetary union to allow “Grexit”, which could then see other
“Club Med” countries leave, threatening not just the euro but
the entire “European project”. After a Greek settlement, and
once euro-QE kicks in, the single currency will strengthen.
That will push the dollar down over the coming months,
raising headline oil prices.
bne March 2015
Opinion
61
Another reason oil prices fell from last autumn, of course,
aside from the dollar, was the wave of new crude extracted
from “tight” oil formations in America. Since 2009, US shale
oil production has grown from almost nothing to 4% of global
output. That’s driven the US' total crude production up from
7.5mn to around 10mn barrels daily – approaching peak US
production of 11.3mn barrels back in the 1970s.
While judging between falling US rig counts and high
stockpiles, traders have also lately absorbed news that in 2014
global oil discoveries fell for the fourth year in a row – the
longest run of annual declines since the 1950s, despite the
incentive of $100-plus crude during much of that period. The
16,000 barrels of oil-equivalent found last year was less than
half of total 2014 consumption and the lowest for six decades.
A supply increase of this magnitude clearly didn’t go
unnoticed by the Opec exporters’ cartel. At a time of souring
relations between the US and Saudi Arabia – not least due to
American overtures to Iran in the battle against Islamic State
and support for Qatar, a key backer of the anti-Saudi Muslim
Brotherhood – Opec decided not to cut their export quota.
Riyadh convinced other cartel members to suppress prices,
instead, protecting Opec’s market share by squeezing upstart
US shale producers – which have high production costs and
often heavy debts – so as to knock them out of the market.
While “conventional” crude costs up to $60 per barrel to
produce, unconventional oil – shale, deep-water and tarsands – generally absorbs $80-$100. Over the last decade,
more than two-thirds of the 12mn-barrel rise in daily global
oil production that has prevented prices spiralling in the face
of fast-growing demand has come from “unconventional”
When oil is below $80, many shale producers, particularly
the relatively small outfits that have driven US' recent
production increase, simply don’t make money. So
production stops, as does investment in future wells.
American energy companies, large and small, are now
rapidly laying off field workers in response to cheaper oil.
In January, the US “rig count” was down 10% on the month
before, amounting to a drop of no less than a third since
October. The number of active domestic US wells has, over
just four months, plunged to a three-year low.
Discovery drought
The oil price rise since mid-January admittedly reflects
other supply-side developments, not least concerns over
fighting in the Middle East. Violence in Libya has lately shut
all major ports, reducing oil exports to just a trickle. Iraq's
semi-autonomous Kurdistan Regional Government has also
threatened to withhold crude exports as part of a broader
dispute with Baghdad. Having said that, many traders
have been struck by the extent to which high-cost US shale
outfits are now suffering due to cheaper oil. While some
such producers have hedged their price exposure, many
are unhedged as well as heavily indebted, which puts them
in a very weak position. Depleting far more quickly than
conventional wells, ongoing shale production when prices
are low and below cost requires ever more debt capital,
which is currently scarce. No wonder, given increasing
market chatter about the non-performing loans of US shale
producers potentially sparking another “Lehman moment”.
Oil market bears point out, rightly, that after four years of
rising US shale production, and an on-going ban on almost
all energy exports, US crude stocks are now high at almost
420mn barrels. That puts downward pressure on prices.
Having said that, with the US still importing a net 9mn barrels
of oil daily, a long way from “energy independence”, this
stockpile could quickly deplete. The threat that cheap crude
poses to domestic production will also eat into inventories.
“The fundamental supply-side trends
point to more expensive energy”
sources. Lower prices make much of that production
uneconomic while deterring investment in future capacity –
sowing the seeds of an upcoming price rise.
The fundamental supply-side trends, then, point to more
expensive energy. Then there’s the demand side, where the
fast-growing emerging markets now account for over half of
total global consumption. In each of the last three years, world
production has lagged actual usage by upwards of 3mn barrels
daily, mainly due to rising emerging market demand.
While this reality has lately been overshadowed by the
US “shale revolution” and the drama of Riyadh defying
Washington, the insatiable energy appetite of the East, in the
face of ever-rising oil production costs, remains one of the
defining economic trends of our time. It will soon reassert its
grip on the global market for crude.
Liam Halligan is Editor-at-Large of bne Intellinews.
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Opinion
bne March 2015
To arm or not
to arm Ukraine
Mark Adomanis in Philadelphia
A
s the war (there's no point any longer in using hedging
words like "crisis" or "conflict") in eastern Ukraine has
intensified over the past several months, an idea that
would have once been considered radical has rapidly gained
traction among mainstream pundits. I'm talking, of course,
about the prospect of sending weapons, “lethal defensive
aid” in the parlance of Pentagon bureaucrats, to assist the
Ukrainian military.
In a debate that was already rather contentious, the issue of
“defensive*” weapons has stood out for the extreme intensity of
views on both sides. The normally rather staid world of security
think-tanks has erupted into the rhetorical equivalent of a bar
fight. People whose prose normally is replete with phrases like
“engagement with a broad group of multilateral stakeholders”
are now openly calling their opponents “apologists” or
“warmongers” or any number of other epithets that you would
never normally encounter in elite foreign policy debates. The
point is not to laugh at the awkwardness of the situation, but to
highlight how worked up and agitated everyone is.
Most analyses are unambiguously and openly partisan: giving
weapons to Ukraine is either the equivalent of Lend-Lease or
it is going to be the start of World War III. There is merit in
trying – as calmly, clearly and honestly as possible – to lay out
the pros and cons.
The pros
Proponents of providing weapons make several distinct but
related armaments. The first, and most basic, is that a more
capable Ukrainian military would "change Putin's calculus"
by raising the costs of intervention. Most analysts focus on
the direct financial costs that Russia would incur to replace
lost equipment. Facing a Ukraine armed with high-tech US
weapons, Putin would have to feed more and more materiel
into the cauldron of eastern Ukraine merely for the separatists
to maintain their current position. Given Russia’s tenuous
economic situation, the hope is that even a modest increase
in the Ukrainian army’s combat efficacy would bring the
Kremlin’s finances to the breaking point.
Other analysts, clearly a minority but by no means a tiny one,
place a higher emphasis on indirect costs, namely the political
damage that Putin would suffer from ever-larger casualties in
the Russian military. This line of thought holds that the Kremlin
would rapidly lose support among the Russian public once it
was widely understood that Russian soldiers were fighting and
dying on the territory of another country. While Putin might
be able to maintain his hold on power, these analysts suggest
that mass casualties among the Russian armed forces would
inevitably cause a wave of public resistance and would make
continuation of the campaign in East Ukraine impossible.
In general, then, proponents of arming Ukraine assert that
deliveries of Western military equipment will make the
Ukrainian army a substantially more potent fighting force and
“Escalation dominance means that
if the West gives Ukraine 20 new
tanks, then Putin will send 40 into
the Donbas”
will, through a combination of elevated financial and political
pressure, force a change in Russian policy.
The cons
In comparison to proponents, who by and large fall into two
distinct groups, the skeptics of arming Ukraine are a somewhat
more diverse cast of characters. Given space constraints it isn’t
possible to list every argument they’ve made, but the most
significant ones can be reviewed.
Probably the single clearest rejoinder is the idea that Putin
enjoys “escalation dominance”, meaning that he is willing and
able to meet or exceed any amount of assistance that the West
bne March 2015
Opinion
provides Ukraine. In crude fashion, escalation dominance
means that if the West gives Ukraine 20 new tanks, then Putin
will send 40 into the Donbas. People will have to make their own minds up about the
advisability of arming Ukraine by answering the following
questions:
“Realist” opponents of arming Ukraine also highlight the
hierarchy of interests: Ukraine is quite simply a much higher
foreign policy priority for Russia than it is for the West. Great
powers rarely compromise when it comes to their core security
needs, and since Ukraine is a core Russian interest (perhaps
even the core Russian interest), these analysts say that we
shouldn’t expect the Russians to back down.
1. What price is Russia willing to pay to keep Ukraine out of
the West’s orbit?
Another group of people who argue against arming Ukraine
focus more on the defects of the Ukrainian state. This
argument doesn’t so much concern Russian capabilities
or desires, but the simple fact that the Ukrainian army is a
broken and ineffective institution whose problems run much
deeper than a simple lack of high-end Western weapons.
These analysts tend to have more exposure to the lived reality
of modern armed forces, and note that without substantial
improvement to the Ukrainian military’s "command control
and communications" (eg. where to put weapons and how and
when to use them) new hardware won't have any impact.
The takeaway
There aren’t any easy answers to the war that Ukraine now
faces, no quick solutions to a nightmare of increasing severity.
63
2. To what extent is the Russian public supportive of their
government’s current policy in Ukraine?
3. Would Western assistance to Ukraine elevate or reduce the
Russian public’s level of support for the separatists fighting in
Donetsk and Lugansk?
4. How easily would the Ukrainian military incorporate new
systems?
*I’ve never read an adequate explanation for what a
“defensive” weapon is, but for the purposes of this article
let’s accept the dubious proposition that there are weapons
which can be configured in such a way as to make them nonthreatening to anyone but an attacker.
Mark Adomanis is an MBA/MA student at the Wharton School of
Business and the Lauder Institute. Follow him on
Twitter @MarkAdomanis
64
I Special report
bne March 2015
Special Report:
CEE Real Estate
Special report I 65
bne March 2015
Zlota 44 – a towering problem
in Warsaw
Jan Cienski in Warsaw
T
he views from the apartment on
the 50th floor of the Zlota 44
tower are stunning, with floor
to ceiling windows showing the whole
of Warsaw’s skyline as the Vistula river
curls off into the distance. The only
problem is that the apartment is so far
the only completed residence of the
52-storey building, which has been
under construction since 2008.
The tallest residential tower in the EU
was designed by Daniel Libeskind, the
American architect with Polish roots,
and its steep point is supposed to evoke
the Polish eagle soaring off into the
sky. It was the signature project of
Orco Property Group, a Franco-Czech
developer with properties scattered
across the region. During the launch of
the project almost eight years ago, eager
punters crowded into Warsaw’s national
theatre to listen to Libeskind and to take
About 20% of the building’s planned 266
apartments were sold – but the project
is still very far from completion, and it
“Critics complain it has been finished with
cheaper materials, giving it more of a plastic
look that does not follow Libeskind’s glassand-steel design”
a look at a mock-up of what a future flat
would look like. This was at the peak
of Warsaw’s pre-crisis property boom,
where plunking down €10,000 per
square metre of property seemed like a
sensible idea.
won’t be Orco that finally finishes Zlota
44. The developer sold off the unfinished building last year for €63m, after
reportedly spending about €166m on
the project. After paying a contractor,
Orco put €50m towards its bottom line.
66
I Special report
Despite that, the company still owes
€186m on a portfolio worth €322m, and
is still having trouble covering its debt
payments. Shareholders have taken a
bath. Orco shares have lost about 99%
bne March 2015
at giving Orco any more funds. The
exterior of the building is completed,
so the tower is no longer an eyesore on
the Warsaw skyline, although critics complain that it has been finished
“This was at the peak of Warsaw’s pre-crisis
property boom, where plunking down ¤10,000
per square metre of property seemed like a
sensible idea”
of their value over the last five years,
and are trading on the Warsaw Stock
Exchange at PLN1.54 (€0.37).
Orco the killed whale
Orco was founded in 1991 in Prague by
French developer Jean-Francois Ott and
rapidly grew as Central Europe shook off
communism and the region’s economies
started to revive. The problem was that
he over-extended himself and took on
too much debt – something that just
about killed his company after the collapse of Lehman Brothers in late 2008.
Ott put Orco under the protection of
a French court while negotiating with
bondholders. As the region emerged
from crisis, he put a lot of hope on the
Zlota 44 project as a way of reviving his
company’s fortunes.
But the building was jinxed with enormous problems. Construction began in
March 2008, but stalled a year later with
17 floors built when Orco ran into financial difficulties. Then Warsaw authorities blocked construction because of
issues with the building permit. After
that, neighbours in surrounding buildings objected to the design, causing
yet more delays. Construction finally
restarted in January 2011, and the plan
was to have the building completed by
mid-2014. The sale of the rest of the
apartments was going to provide a massive cash injection that would help right
Orco.
Instead, the developer got into a huge
fight with its general contractor and
construction stopped last year after
banks financing the project baulked
with cheaper materials than originally
proposed, giving it more of a plastic
look that does not follow Libeskind’s
glass-and-steel design. But the interior
is nothing more than floor after floor
of grey concrete. Orco’s problems and
the construction delays, coupled with a
decision to increase prices to €15,000 a
metre in order to underline its desirability, made it almost impossible to
find buyers.
The final construction is now in the
hands of BBI Development, a Warsaw
property developer, and Amstar, a USbased property fund, which bought the
project from Orco last year. The partners expect to spend about PLN180mn190mn and to have the building
completed by the second quarter of
next year.
Just who will buy the flats is a little
problematic. Almost all of the initial
investors are people from outside of
Warsaw. The capital’s luxury property
market is still a far cry from the optimistic days of 2008. Zlota 44 also has more
competition. The completed Cosmopolitan Tower, just a couple of blocks away,
has 250 luxury flats (where prices are
reportedly about €6,000 a metre), while
Platinum Towers development, also
in central Warsaw, is selling for about
€4,000 a metre. For now, the new owners of Zlota 44 are sticking with top-end
prices for their flats, but it is not clear
that there is enough demand at the top
end of the market.
Their hope is that the luxury market follows the broader trend in Polish residential property. Reas, a property analysis
firm, reports that last year marked a
record for transactions in the country’s
six largest cities. “Over 43,000 flats were
sold on the six analysed markets in the
whole of 2014, up by nearly 20% as compared to the record-breaking 2007 and
2013, when around 36,000 units were
sold in each year,” the report noted.
The problem is that average property
prices in Warsaw are stable, hovering at
around €1,800 a metre. Zlota 44’s new
owners will have to justify the enormous
gap between those prices and those for
flats in their building if they want to
avoid Ott’s fate.
Special report
bne March 2015
I 67
executive presidency, with the predictable effects on sales of big ticket items
such as property.
Little wonder then that sales over the
first ten months of 2014 registered
a fall of 1% to 926,932, against the
same period in 2013 when sales were
themselves affected by the countrywide
protests in June, July and August.
Turkey no longer
forever blowing
(property) bubbles
David O'Byrne in Istanbul
D
espite repeated claims of a growing property market bubble in
Turkey, all the indications are
that while there may have been speculative pricing in some small geographical areas, the overall market remains
healthy and will continue to be so for
the foreseeable future.
Mitigating in favour of such an optimistic prognosis are Turkey's continued
economic strength and the demographics of its still growing population, which
analysts concur should be more than
sufficient to ensure continued buoyancy in the face of other factors that
might otherwise have put downward
pressure on sales. "People are always
predicting a bubble but not much has
changed. There are some regional
bubbles in areas where prices are
above TRY10,000 per square metre, but
overall the market is still very buoyant,"
says Kerim Gokoz, real estate analyst at
Istanbul’s Garanti Yatirim.
Certainly the figures for 2014 bear up
that analysis. On the face of it last year
should have seen a far more cautious
market given that Turkey went through
a particularly tense period of electoral uncertainty. Countrywide local
elections in March led to a period of
heightened tension as results in many
areas were disputed amid allegations of
electoral malpractice.
Tensions were further heightened with
speculation that then prime minis-
In the event, the presidential poll was
completed without incident and sales in
the last two months of the year rallied,
reaching 1.165mn for the whole year,
a shade under 1% up on the 1.157mn
recorded in 2013. An impressive result
given the challenges. The more so given
that the sales figures for both years
were all-time records, suggesting greater buoyancy yet to come should Turkey
manage to keep a lid on its perennial
political tensions.
The results for 2014 were even more
impressive given that in addition to
political uncertainty the year also saw
a major hike in mortgage rates from
an average 9.7% in 2013 to an average
11.9% last year – a rise that saw the
number of mortgages granted over the
year fall by 15% to 390,000.
Equally encouraging despite far from
ideal conditions were the sales of
property to foreigners – a key factor in
a number of regional housing markets.
Sales rose by 56% across the country as
a whole from 12,181 in 2012 to 18,959
in 2014.
Encouragingly this included a market
recovery in sales in the Istanbul area,
"People are always predicting a bubble but not
much has changed”
ter Tayyip Erdogan would run as the
governing AKP's candidate in Turkey's
first ever popular votes for the country's president in June – a move feared
by many to be a first step towards an
which had been badly affected by the
protests in 2013 an effect which could
have been expected to continue in 2014
given the continued political uncertainty.
68
I Special report
In the event sales in Istanbul rose from
20% of total sales in 2013 to 29% of
total in 2014, when 5,580 properties
were sold while sales in other areas
popular with foreign retirees also
registered volume rises albeit with their
overall share of sales declining. Sales in
the most popular region, Antalya, for
example declined from 45% of total to
34% last year although actual sales rose
from 5,481 to 6,446.
The one dark cloud hanging over the
property market in 2014 was that of
office property, which analysts concur
is distinctly lacking in buoyancy.
Vacancies in Istanbul's central business
district rose from 16.2% in the last
quarter of 2013 to 235 by the third
quarter of 2014, leading to warnings
that average rental yields may fall from
the current rate of 6.5%.
bne March 2015
Optimistic outlook
Overall, though, the prospects for 2015
are reckoned to be similar to 2014 with
no fall in demand or sales anticipated.
Unlike much of Europe, continued
growth in Turkey's GDP is accepted as
inevitable with the OECD predicting
3.25%, the World Bank 3.5%, and
Turkey's own central Bank 4.0%.
Garanti Yatirim concurs with the 4.0%
growth prediction and adds that it
expects the construction sector to
grow by as much as 5.0% on the
back of an anticipated pre-election
spending spree.
Priming the pumps ahead of the June
poll may indeed prove to be a major
factor in boosting property sales,
with Turkish Prime Minister Ahmet
Davutoglu announcing on January 28
that his government plans to help firsttime buyers by contributing as much as
155% of the sum necessary for a
down-payment. No details have yet
been announced, but it is safe to assume
that they will be made public in plenty
of time to accrue maximum benefit
ahead of the June polls.
Coupled with a widely expected
drop in interest rates on the back
of improved inflation figures and
increased government pressure on
the central bank, any move to help
first-time buyers looks certain to boost
the property market. "45% of sales
in 2014 were to first-time buyers so
anything that helps them will increase
sales," says Gokoz, pointing out how
increased interest rates affected the
market during 2014.
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at boot
E2
No. R7.
Special report
bne March 2015
I 69
The current cycle has its roots four or
five years back as developers with access
to plenty of affordable FX financing
took on, quite reasonably, ambitious
expansion projects starting a new
post-crisis real estate cycle. Across all
sectors, record levels of stock came to
the market. Given the expectations of
economic growth at the time as well
as the massive undersupply of quality
commercial real estate space, there
should have been sufficient demand
to absorb the supply created by megaprojects such as Moscow City.
COMMENT:
The fall and rise of the
Moscow property market
Tom Mundy of JLL
O
ne of the more surprising aspects
of Russia’s current downturn
has been the pace with which
the commercial real estate market has
responded to the dislocation in the rest
of the economy.
As the ruble has crashed and the cost
of borrowing has soared, Moscow’s
commercial real estate market has
adjusted with impressive efficiency.
Prices have moved without the lag that
that one should expect in a market with
such little transparency and which we
experienced during the 2008-2009
crisis. In this short paper we look at
why look at why this has been the
case by considering the reaction of
three important real estate indicators:
the cyclical nature of rising vacancy
rates; falling rents driven by economic
downgrades and ruble volatility; and
finally a slowdown in completions as
developers adjust their expectations. In
the residential market, which behaves
quite separately to the commercial
market, mortgage issuance (a common
proxy for residential sales volumes)
was driven up aggressively by rapidly
worsening ruble assumptions before
being strangled at the end of last year by
intolerable lending rates.
Vacancies
The first indicator that has reacted has
been vacancy rates. Vacant space, that
is to say the amount of available stock in
a building, had been building gradually
As economic expectations ebbed away
through 2014, it became abundantly
clear that all this extra space could not be
absorbed in the near term and vacancy
rates moved out with alarming speed.
From 18% at the end of 2013, the average
vacancy rate for Class A office space had
climbed to 29% by the end of 2014. In
some areas, such as Moscow City, Class A
vacancy rates have reached 45% already
and could well climb further.
Rent
The second area where the impact
of the economic downturn is clear is
through the rapid adjustment in the
rents that tenants pay. Rents have
been heavily impacted not just by
the increase in vacant space, but also
because development is financed almost
exclusively in FX. This means that rents
are denominated in FX as well. Hence
companies that derive revenue in rubles
and pay their costs in FX are absorbing a
very painful currency mismatch and are
seeking to reduce their costs by either
renegotiating rents down in FX terms,
“Contrary to popular belief, there is little evidence
to suggest Russians have become more active in
real estate purchases abroad”
through 2014 across all sectors, mostly
due to the nature of the real estate cycle.
Saying that, the collapse in demand
towards the end of 2014 did exaggerate
the pressure as vacancy rates soared in
the last quarter.
or by switching to an effective ruble
rental rate. The latter is, however, not a
straightforward alternative for landlords
with FX debt who will be limited by
their lender’s willingness to accept
rouble exposure. Furthermore, for an
70
I Special report
asset valued in FX a switch to ruble
rent will have an impact on valuations
given the slimmer income that the asset
will generate. Thus, while it is clearly
a tenant’s market right now, and many
landlords are giving temporary respite
by offering ruble terms, it is unlikely that
this window for renegotiation will be
open too long.
We would also assume that in many
cases it is not the landlord that is setting
the limit to what is tolerable, rather it’s
the bank who will determine at what
rental rate the landlord can service
their interest payments. Rents across all
sectors have already fallen a long way
and we would suggest that with rates
that are already below the worst point
in the 2008-2009 crisis, they may not
have much further that they can go.
It is notoriously difficult and perhaps
disingenuous to calculate an average
bne March 2015
rent given the individual circumstances
of each landlord, but we would estimate
that compared to the end of 2013, in
dollar terms, Class A office rents were
20% lower by the end of 2014 and have
fallen at least a further 10-15% since the
start of the year.
Completions
The third area that is already being
affected is the level of completions. As
suggested above, developers have to
adjust their expectations to account for
the fall in demand and the availability
of debt. In the current environment,
projects are increasingly likely to be
either postponed or cancelled entirely if
they are at an early stage.
However, the good news for landlords
is that quite quickly, assuming some
improvement in demand as the economy
levels out, as completions become more
Moscow average Office Vacancy Rates.
Moscow Mortgage Transactions per month
Source: JLL
scarce vacancy rates will move down in
turn, supporting an upward revision in
rental rates.
Thus, though we are well aware that
the market looks gruesome at the
moment, the structural undersupply
of space across all real estate sectors
(Moscow has less Class A office space
per capita than Bucharest), will help
landlords more quickly through the
cycle as the demand supply equation
comes into balance quicker than many
casual observers would expect. Indeed,
we anticipate office and industrial rents
to level out through the middle of 2016
and given current oil price assumptions
possibly be back to pre-crisis levels in
dollar terms by the end of 2017.
No home abroad
Finally, unsurprisingly, the weaker
ruble has pushed Muscovites looking
for the safe-haven of bricks and mortar
to invest heavily in the residential
market. According to central bank
figures, the number of mortgage
transactions increased in 2014 by 23%
against the previous year. This dynamic
built through the year until December,
when central bank policy rate hikes
effectively strangled the mortgage
market. Given that the residential
market, unlike the commercial market,
is financed largely through pre-sales,
as funding and financing dry up,
completions will inevitably follow in
turn. Like the commercial market, it
will not be long before the residential
market also finds its equilibrium.
One of the more surprising trends
through 2014 was that contrary to
popular belief there is little evidence
to suggest that Russians have become
more active in real estate purchases
abroad. This may have its roots in the
political environment where state
officials have been reluctant to be seen
moving assets out of Russia. It is more
likely, though, that it has more to do
with the pace with which the ruble
moved. In a few short months last year,
real estate in London doubled in price
in ruble terms. As shocked Russians
contemplated their next move, Asian
and Middle Eastern buyers snapped up
what little London stock there was.
Special report
bne March 2015
I 71
December 2015. The company has
already started work on its second
business park, AFI Business Park, with
the first part to be finished in 2017.
Booming IT sector
drives Romanian real
estate market
INTERVIEW:
Clare Nuttall in Bucharest
R
omania’s booming IT and
outsourcing industries are
boosting demand for office space
in Bucharest, as a growing number of
international companies expand their
operations in the Romanian capital.
Romania has been establishing
itself as a hub for the IT industry
and shared services such as business
process outsourcing (BPO). As well
as international companies taking
advantage of the educated and relatively
cheap workforce, its closeness to Western
Europe and North America compared to
Asian offshoring centres, domestic IT and
services companies have also expanded
both in Bucharest and regional cities such
as Iasi and Timisoara.
This has been a major factor behind the
increase in demand for high-end office
space, according to David Hay, CEO of
property developer AFI Europe Romania.
“There has been an increase in demand
in the last two to three years, due to two
main sectors – IT, and business process
outsourcing and shared services,” Hay tells
bne IntelliNews. “This is a real expansion,
you can feel it in the market. The office
segment is very active at the moment,
with many pre-lease deals being signed.”
Multinationals such as Endava, Microsoft
and Oracle have been expanding in
Romania, creating an impetus for the
many new developments now going up
in both Bucharest’s main business district
and in the centre-west of the city around
Bucharest polytechnic, which is emerging
as a new hub for the sector. As of late
2014, between 100,000 and 120,000
square metres (sqm) of new office space
was being developed.
AFI Park was one of the first major
office developments to be built in
centre-west Bucharest. Three of the
development’s five buildings are fully
leased, mainly to multinationals in the
IT sector, while the third, completed in
January, is leased to Endava Romania
and TELUS International. Two further
buildings are due to be completed by
More malls
The company is also the developer
of Romania’s largest mall, AFI Palace
Cotroceni, which opened in 2009 with
a gross leasable area of 81,000 sqm.
Hay is optimistic about the long-term
growth of the retail sector, where
turnover increased by 8.6% in the first
half of 2014, according to the National
Statistics Institute. “During the crisis it
was difficult for everybody, I think we
saw the start of change only in 2014,”
Hay says. “People are spending more,
and since Romanian GDP is well below
the EU average there is the potential for
catch-up. The growth of industries such
as IT is resulting in increased spending
power.”
Hay believes there is room for more
malls in Bucharest, where the amount
of retail space per 1,000 people is much
lower than in other Central and Eastern
European capitals such as Budapest,
Prague or Warsaw. Some of Romania’s
secondary cities are also under-served,
and AFI, which opened the first modern
mall in central Ploiesti, an industrial
town 60km from Bucharest, in 2013
is now considering opening in other
regional centres.
While the retail and office markets
have been forging ahead, Romania’s
residential property market has been
subdued since 2008, when a boom
triggered by Romania’s EU accession was
brought to an abrupt end by the onset of
the international economic crisis.
However, AFI’s Hay believes the longdormant residential sector is on the
verge of a turnaround, after first hints
of a revival in 2014. “The turnaround
started in 2014, with a slow and very tiny
increase in demand and prices. We expect
a further increase in 2015 and 2016.” AFI
already has land for a future residential
development, however, Hay says, before
it launches construction work, “we are
waiting for the residential market to
again become a healthy market, with
healthy demand and prices.”
72
I Special report
bne March 2015
driven mainly by good macroeconomic
factors,” says Tamborsky. “If the
economic environment remains stable
and without any unexpected events, the
recovery should continue.”
And there’s the rub; Viktor Orban’s
government is anything but predictable
and already has form when it comes to
hurting foreign investors.
Hungary market
recovering but
government is wildcard
bne:Funds
Nicholas Watson in Prague
H
ungary’s real estate markets
have been showing signs of life
over the past year, but actions
by the country’s mercurial government
threaten to derail this.
After bottoming in 2013, a broad-based
recovery in Hungary’s property markets –
office, retail, residential and logistics – was
observed in 2014, which some analysts
expect to continue this year and next.
The office segment of the market has
been especially buoyant, with Erste
Group Immorent reporting that new
office completions more than doubled
in 2014 to 66,000 square metres (sqm),
while the vacancy rate decreased 2.2%
on higher demand from international
companies like Vodafone, British Telecom
and SAP, as well as local IT companies.
The net absorption stood at 125,000
sqm, which is the highest level since
2011, and if the net absorption stays
stable around the average of the last four
years, then Martin Tamborsky, author of
a recent Erste research report covering
the Hungarian real estate market,
predicts a decrease of the vacancy rate to
14.5% by 2016. In addition, “The rents
have been stable over the last two years
and we do not expect any significant
change this year,” he says.
The logistics market performed even
better than the office part last year
as industrial production remained
high. The vacancy rate of leased stock
fell by 5.5% to 15.7% in the greater
Budapest area. In 2014, new supply was
390,000 sqm; big names like Lego and
Bridgestone expanded by more than
100,000 sqm each. Net absorption was
at a six-year high of 130,000 sqm.
The residential market also started
recovering slowly in 2014, with
construction activity and prices growing
slightly after six years of decreases.
Retail remains subdued, with no
new shopping mall currently under
construction and none expected in 2015
and 2016. However, the retail market
environment is favourable, driven by
a recovery in private consumption and
falling unemployment, while wellknown retailers like H&M, Desigual and
Massimo Dutti are expanding their stores.
“We are expecting good performing real
estate markets in the following years,
To add to a long line of business sectors
that have been targeted by the Fidesz
government for special taxes and laws,
Hungary's retail sector saw legislation
passed before Christmas that bans
Sunday and overnight trading at all
but the smallest shops. Furthermore,
inspection fees for businesses with
incomes of over HUF50bn (€160mn) are
to become progressive, leading to a leap
in total fees for the largest companies
from HUF2bn in 2014 to HUF30bn
this year; and, from 2017, any business
above the same HUF50bn threshold that
reports losses for two consecutive years
must be closed down.
The large foreign-owned retailers, which
see themselves as the main target of this
new package of laws, say all this will
seriously affect their businesses and
inevitably hit profitability. On January
12, Tesco, the country's largest retailer
and pioneer of 24/7 trading in Hungary,
said it would close 13 out of a total of
222 stores in Hungary, with the loss of
“about 500” jobs. Other supermarket
chains have also muttered about
job losses.
Gyorgy Vamos, general secretary of the
Hungarian retailers association (OKSz),
told bne IntelliNews that this will affect
not just the stand-alone supermarkets,
but also shopping centres and malls,
which all contain supermarkets. As a
result, loss of customers will inevitably
have a knock-on effect on “all sorts” of
associated businesses, from cinemas to
cobblers, hotels and catering, he says.
Then on New Year's Day, the Hungarian
government introduced a new road
freight registration and tracking system
– known by it's Hungarian acronym
as Ekaer – for all but the smallest
commercial deliveries by road, which
Special report
bne March 2015
threatens to impact the industrial and
logistics real estate market.
Ekaer requires a mass of detailed data
about commercial consignments,
including the contents, value, sender,
recipient, truck registration numbers,
and times of arrival and unloading – all
to be sent to the tax authority in advance
of shipping. Any failure to comply, if
discovered by mobile inspectors, can
result in the confiscation of goods and
fines of up to 40% of the shipment's
value.
The Hungarian Association of Logistics,
Purchasing and Inventory Management
(MLBKT), demanded in a statement
that the law be rescinded in its present
form, calling the new system “chaotic,
contradictory" and saying it wouldn't
achieve its ostensible aim of preventing
VAT fraud.
Thomas Faustmann, managing
director of Audi Hungaria, said in
an interview with autopro.hu that
the entire affair makes a mockery of
the government's supposed longterm intentions of becoming Central
Europe’s “centre of industrial
production”. “For this, you need to
create framework of appropriate
conditions, Faustmann said. “In the
neighbouring countries – in Slovakia,
the Czech Republic, Romania and
Poland – dozens of factories are on the
lookout, just waiting for orders.”
What these measures against foreign
investors will do to the gradually
growing real estate investment volumes,
which are still low compared to other
Central and Eastern European markets,
remains to be seen.
Erste expects solid investment
volumes in 2015, after Hungary saw
approximately €450mn-460mn of
income-producing and €130mn-140mn
of non-income producing real estates
transactions in 2014. “There is a lack
of core assets available for sale on the
market,” says Tamborsky. “Value-added
assets are expected to be on transaction
list in 2015. Investors from the EU15 and
US are expected to be increasingly active
on the Hungarian market.”
I 73
CEE property investment volumes soar
Colliers International
Fuelled by steady demand for office and retail assets, and increasing
investor appetite for the industrial and logistics sector, Central and Eastern
Europe saw last year’s investment volumes significantly exceed expectations
in nearly every market. Accounting for more than 17% of all transaction
volumes in 2014, which is significantly higher than the EMEA average of
around 9%, this boom in demand for industrial and logistics properties
illustrates the changing composition of the market from being heavily
dominated by office and retail to include a greater share of other sectors.
“Overall, 2014 closed with a healthy level of investment volumes across
the CEE region, with the majority of countries posting a positive result,”
commented Damian Harrington, Regional Director of Research for Colliers
International, Eastern Europe. “Despite the continuing crisis in Ukraine,
investment volumes for the region closely matched 2013 levels, which
should provide confidence to investors seeking investment opportunities
across the region in 2015.”
The core Visegrad markets of Poland, Hungary, and the Czech and Slovak
Republics all performed exceedingly well in terms of investment volumes,
with Poland leading the market for the entire region. Living up to a similarly
high level of transactions recorded in 2013, Poland saw just over ¤3bn
exchanged and accounted for 30% of the region’s activity.
Additionally, investment volumes in Hungary and the Czech and Slovak
Republics all increased significantly on a year-on-year basis by an impressive
70-80%. The Czech Republic posted investment volumes close to ¤2bn,
accounting for 19% of all investment volumes in the region, while Slovakia
completed its best year on record with more than ¤500mn transacted. Similar
volumes were also reported in Hungary, indicating that improvements in the
economy and investor sentiment are beginning to filter through at a country level.
Outside of the Visegrad markets, Romania and Bulgaria experienced a drastic
turnaround in investment volumes, witnessing a year-on-year rise in activity
of almost 300% and 160%, respectively. This increase pushed investment
transactions in Romania to over ¤800mn, significantly exceeding its 2013
levels, and points to a shift in market sentiment toward Tier 2 and 3 locations
across the region as well. “Countries across the region should continue to
benefit from these favourable market conditions, provided that funds seeking
commercial real estate opportunities continue to invest,” added Chris Sheils,
Director of Investment, Colliers International, Czech Republic. “The current
cycle is expected to run for another couple of years, during which time, I
believe the CEE markets will continue to maintain this outstanding growth rate
so long as they remain competitively priced against their EMEA counterparts.”
A new generation of trends such as pan-European distribution, e-commerce
and multichannel retail operations are all contributing to this expansion
of the industrial/logistics sector. Given investors are already assessing
opportunities across the CEE region, this sector is expected be one of the
most dynamic investment preferences over the coming years.
74
I
ARTS
CULTURE
& PEOPLE
bne March 2015
FILM REVIEW:
Few Russians left
unmoved by “Leviathan”
Anna Kravchenko in Moscow
A
ndrei Zvyagintsev’s “Leviathan”, probably the most
anticipated film in post-Soviet Russia, hit the screens of
more than 600 cinemas on February 5. The film made
RUB7.2mn (€97,000) in its first day of release, an impressive
sum for the Hollywood-dominated Russian distribution
market. Weekend box office is not counted yet, but it’s
expected to reach RUB55mn-60mn, according to Booker’s
Bulletin, which is one and a half-times more than "Birdman"
on its premiere day and three-times more than the total box
office receipts of Zvyagintsev’s previous film, “Elena”.
"Leviathan" has already won a number of prestigious
international awards, including best screenplay at the 2014
Cannes Film Festival and a Golden Globe. Before the film
was released at home, Russian Minister of Culture Vladimir
Medinsky slammed it as “extremely opportunistic” and said
that taxpayers should not pay for films that "openly spit on"
the government. Medinsky’s criticism drew attention to the
film like no prize could.
On January 10, a copy of the film was leaked online and was
downloaded 30,000 times during the first two hours, and up
to 6mn times by the end of January. What was happening
around “Leviathan” quickly became as complex and
interesting as the film itself. After “Leviathan” won the Golden
Globe for best foreign film and received an Oscar nomination,
it was impossible to open Facebook or a news site related to
the film without finding a heated discussion below of whether
the film portrays Russia and Russians accurately.
"Leviathan" has split viewers, leaving very few of them
indifferent to it. Officials hurried to join Medinsky.
Communist Party leader Gennady Zyuganov called the film
“anti-national”. He added that this is another Russian film
that illustrates Russian life using the example of a ramshackle
village, which one can find in any country.
Sergei Markov, member of Russia’s Civic Chamber, called
for Zvyagintsev to publicly repent, Raskolnikov-style. “What
the film does is it dehumanizes Russians, and thus justifies
a genocide of Russian people. If I were Zvyagintsev, I would
recall the film release, come to Red Square, fall on my knees
and ask for forgiveness,” Markov said in an interview with
GovoritMoskva radio station.
Putin’s press secretary, Dmitry Peskov, took the opposite tack.
“It’s great that we have films like this. A film should provoke discussion,” Peskov said. He also said he would support "Leviathan"
in the Oscar race. That put a stop to officials’ commenting on it,
but not the numerous discussions on social media.
Traditional storytelling
Leviathan’s story-telling style is conservative – it is a
traditional drama, with spelled out motives and heavyhanded symbolism. Yet it’s truthful and powerful, and, despite
showing the grim life of a poor village, heightened and poetic.
A corrupted mayor of a small town in Russia’s north is after
a piece of land where Kolya, a talented car mechanic and a
drinker, built his house. Kolya, his wife, and son will have to
“I, of course, despise my motherland
but it vexes me if a foreigner shares
this feeling with me”
leave. Kolya’s army friend, a lawyer from Moscow, digs up
some dirt on the mayor. Inevitably, it all ends tragically.
Many saw the film as an attack on Russians. Viewers also complained that the film is too grim and hopeless, with no “positive
characters”. “Many of us have enough fear in real life to be willing
to experience it in cinema,” reads one of the Facebook comments.
Zvyagintsev also broke the rule about washing one’s dirty
linen in public. Some commentators expressed concern about
what foreigners might think. Russian poet Alexander Pushkin
reflected on that same issue two centuries ago: “I, of course,
bne March 2015
despise my motherland but it vexes me if a foreigner shares
this feeling with me”.
Do Russians drink that much? Are they that helpless in the
face of corrupt authority? Are rotary dial phones still used?
Many believe the director figured out that the film that
answers ‘yes’ to all those questions would please Europeans
and Americans.
“If not for the beautiful landscapes, the film would be just
a politically biased pamphlet. It reminds me of the selfflagellation films of Perestroika,” one commentator notes.
“If Leviathan was not a chernukha, nobody in America would
pay any attention to it,” another comment runs, referring to
films popular in the 1990s characterised by a pessimistic and
cynical view of Soviet society.
Those who loved the film argue that these kinds of stories
happen in Russia all the time. The film starts with crashing
waves, and the fear of a wild force threatening destruction is a
feeling known to anyone who has lived in Russia long enough.
“From the beginning, I felt myself in Serebryakov’s [actor
who played Kolya] place. The scariest thing is, in all the
circumstances, I would act exactly the same. And the outcome
ARTS
CULTURE
& PEOPLE
I 75
would be the same. There are thousands of stories like this.
I’ve been working as a lawyer for 18 years, and I say thank you
to Zvyagintsev,” a supporter of the film writes.
“Don’t know about others but it sparks a healthy anger in
me, and energy to resist. I want to get up and throw out this
‘authority instituted by God’… It urges you to change things,”
another comment reads.
The reaction to Zvyagintsev’s film shows how dramatically
the mood has changed in Russia, where anti-nationalist
sentiment is suffocated by the government and its supporters
as the economy tanks and the war in Ukraine grinds on. Made
in 2013, Alexander Veledinsky's “The Geographer Drank His
Globe Away” was also set in a deprived province with a drinker
as protagonist, but went almost unnoticed compared to the
hysteria that has followed “Leviathan”.
“Leviathan unexpectedly and probably to the authors’ surprise,
turned out to be an ideal film for Russia in the era of trolling,”
film critic Stanislav Zelvensky says in his review for afisha.
ru. “A country where trolling has become the basis of at first
internal and then foreign policy, desperately needs a statement
from which one can step up… The main thing is to have the
opportunity to comment, then comment on the comment, and
then softly dive into exhausting fight leading nowhere.”
BOOK REVIEW:
A year in Hungarian
Politics
Kester Eddy in Budapest
2
014 was a watershed year in Hungarian politics:
Viktor Orban, the pugnacious prime minister, and his
nominally conservative Fidesz party, fought and soundly
won three elections – for the national parliament, European
Parliament and local municipalities.
Furthermore, after four years of frenzied law making,
once returned to power last Spring, Orban – or his righthand men – immediately continued with controversial
and confrontational policies, for example alleging that
non-governmental organisations (NGOs) critical of the
government were agents of foreign powers, making warm
approaches to Russia and the east while denigrating the
“failing” West, and embroiling Hungary in a diplomatic
row with the US. Most infamously, in July Orban publicly
enthused on the effectiveness of “illiberal” democracies,
citing Russia, China, Turkey and Singapore as examples for
Hungary to follow.
How and why has Orban done all this? Where does it leave
Hungary, politically, socially and economically? And what of
the country's future? Gabor Gyori as author, and Andras BiroNagy as editor attempt to answer such questions in "Hungarian
Politics in 2014" – an 80-page booklet just published on
76
I
ARTS
CULTURE
& PEOPLE
January 23 with the assistance of Friedrich Erbert Stiftung, a
German foundation of Social Democratic heritage.
Economic populism
Gyori, who (along with Biro-Nagy) is a political analyst with
Policy Solutions, a Budapest think-tank, makes no attempt
to dilute what to him is clearly an unpalatable truth: “Fidesz
returned with another landslide victory,” he declares in the
opening chapter. Although Fidesz saw its share of the vote slip
to 45%, almost 8 percentage points down on the 2010 result,
by re-writing the election law it still won a two-thirds majority
in parliament.
Meanwhile, the opposition left-wing alliance “suffered
another disastrous defeat”. Perhaps equally unsettling for
the left-liberal camp, the far-right Jobbik strengthened
its position, gaining 19.1% of the vote to become “firmly
established as a prominent presence in the Hungarian political
landscape”.
Gyori cites a number of reasons why Fidesz succeeded in
securing a “core base” of at least 1.5mn voters, including
its re-writing of the electoral law and its dominance of
the media. But he also argues that because economic
developments in post-communist countries “tend to be more
closely connected to the success of a government than in
more developed economies”, the “timely” return of economic
“The dark underbelly of this
economic policy is that it is based on
keeping millions employed in cheap
industrial labour, with little social
mobility”
growth and the impact of the government-mandated cuts
in utility prices were particularly important for electoral
success. “Fidesz’s economic populism (ie exceptional sectoral
taxes on banks and energy companies, as well as intense
state interference in setting utility prices) was bold enough
to allow it to enact policies that run counter to economic
orthodoxy and democratic principles… [This] satisfied
the material desires of broad swathes of the electorate”,
he writes.
There are, however, dark clouds on the horizon for Fidesz:
economic growth in 2014 was to a great extent “due to
massive state outlay, including the well-timed conclusion of
(largely EU-financed) infrastructure projects”, meaning the
apparently healthy expansion is not sustainable.
All this may not matter, at least in terms of political power,
because in essence the Hungarian poor do not vote. And in
bne March 2015
Gyori's assessment, Orban has a vision of a highly stratified
society in which a limited middle-class, mostly connected
to Fidesz oligarchs, control the economic services while
the masses are employed in cheap labour manufacturing
– unwilling to complain for fear of losing even that limited
income.
“Apart from the blatant cronyism apparent in the lighter
[tax and regulatory] burdens imposed on enterprises owned
by Fidesz-aligned oligarchs, the other dark underbelly of
this economic policy is that it is based on keeping millions
employed in cheap industrial labour, with little social
mobility,” he reasons, citing government tax and subsidy
policy to aid the middle and upper income-groups, along with
restrictions on higher education and unemployment benefits
as evidence.
It is a decidedly frightening vision, but one that is not at all
removed from reality. But though Gyori notes that Orban's tax
policies hitting foreign investors have specifically avoided the
manufacturing sector for fear they may up sticks and leave,
there is no reason why, if Orban needs the money, he might
in future introduce some form of extra “temporary” taxation
targeting foreign-owned manufacturers – albeit probably in a
milder form than those levied on the banks and retail sectors
today.
The author seeks to analyse Orban's vision of “illiberal
democracy” – what he terms “the attacks” on critical NGOs
and, in a section entitled “Operation, capture, control and
contain”, pays special attention to the Fidesz government's
media policy.
In his conclusions, Gyori avoids any hard and fast predictions
on the economy, but warns that, “poverty is increasingly
emerging as the single most important social issue facing
Hungary”. Saying that 2014 for Fidesz has been “a successful
year [that] ends on a bitter note”, he argues foreign pressure
– mostly from the US, but also possibly from Germany – has
tempered Orban's previously unbridled enthusiasm for
Vladimir Putin (although the Russian president is visiting
Budapest in February) and notes that the planned introduction
of an internet tax stirred an unprecedented public show of
discontent with Orban's policies. However, given the failure of
spontaneous protests in the past, whether that develops into
any meaningful political opposition is debatable.
"Hungarian Politics in 2014" offers a grand critique of – and
insight into – Fidesz's most controversial policies since elected
in 2010. At the presentation on January 23, Biro-Nagy, the
editor, claimed that it is the first annual review of its kind
in English: given the complex and convoluted nature of the
subject, many will hope it is not the last.
"Hungarian Politics in 2014" is downloadable, gratis, here:
http://www.policysolutions.hu/en/news-read/hungarian_
politics_in_2014_yearbook
ARTS
CULTURE
& PEOPLE
bne March 2015
I 77
OBITUARY:
Zhelyu Zhelev, Bulgaria’s
first freely elected president
Clare Nuttall in Bucharest
Z
helyu Zhelev, the dissident philosopher and Bulgaria’s
first democratically elected president, has died at the
age of 79.
Born in 1935 in the small village of Veselinovo, Zhelev
graduated in philosophy from Sofia University and briefly
became a member of the Bulgarian Communist party.
However, as his political views diverged from the prevailing
ideology, he was expelled from the party in 1965 and banned
from Sofia the following year.
This was the beginning of Zhelev’s emergence as a leading
figure in Bulgaria’s democratic opposition in the later years
of the communist regime, a position that was sealed with the
publication of his best-known book, The Fascism, in 1982.
The book analyses three fascist societies, Nazi Germany,
Fascist Italy, and Franco’s Spain. While the book did not
overtly criticise the Bulgarian regime, the obvious similarities
between the fascist societies it described and the situation
within Bulgaria caused it to be banned three weeks after
publication. This move backfired, as The Fascism became
Bulgaria’s most sought-after book until the overthrow of
communism in 1989.
Zhelev and other opposition leaders had no direct involvement
in the coup against Todor Zhivkov, Eastern Europe’s longeststanding communist dictator, who was deposed by the
Bulgarian politburo. However, increasingly vocal criticism and
mass rallies organised by the democratic opposition increased
pressure on the regime as 1989 drew to an end. Zhivkov’s
discrimination against Bulgaria’s large ethnic Turkish
minority added to the unrest, as thousands of Turks went
on hunger strike.
His reputation as an outspoken critic of the communist regime
made Zhelev an obvious figure to look to for leadership after
1989. Zhelev was one of the founders and the first chairman
of the Union of Democratic Forces (UDF), set up by dissident
groups in 1989. He was elected to the new parliament in
1990 and headed a round table created to draw up plans for a
democratic Bulgaria.
In August 1990 Zhelev was elected president by fellow MPs
and, after the adoption of a new constitution in 1991, was
re-appointed in the country’s first direct and democratic
presidential elections.
The main achievements of Zhelev’s five-year term as president
took place between 1992 and 1994. The November 1991
parliamentary elections resulted in a majority for the UDF,
which formed a government alongside the mainly ethnic
Turkish Movement for Rights and Freedoms (MRF), with
Philip Dimitrov as prime minister.
Numerous reforms, including the launch of a largescale privatisation programme and a new law on foreign
investment, were launched under Zhelev and Dimitrov.
Bulgaria was recognised internationally as a state forging
ahead towards a democratic market economy. Other
achievements included soothing tensions between Bulgarians
and Turks, which averted ethnic unrest at a time when
neighbouring Yugoslavia was descending into
inter-ethnic war.
However, with tensions rising both between the UDF
and MRF, and within the UDF itself, Dimitrov lost a
no-confidence vote in 1992. He was replaced by presidential
advisor Lyuben Berov at the helm of an interim government
supported by the Bulgarian Socialist Party (BSP), the MRF
and some UDF MPs.
In December 1994, the BSP, the successor to the Bulgarian
Communist Party, returned to power, spelling the end
of the brief period of reform under Zhelev’s presidency.
Unsurprisingly the relationship between Zhelev and new
Prime Minister Zhan Videnov was tense, with the two sparring
frequently over the economy and foreign policy.
Along with other East European transition economies, the
final years of Zhelev’s term saw an increase in economic
problems, with a decline in GDP, rising inflation and a slump
in the value of the Bulgarian currency. Speaking at the World
Summit for Social Development in Copenhagen in March
1995, Zhelev said that Bulgaria was facing difficulties on
its path to a market economy, with economic liberalisation
leading to a fall in living standards for many and an upturn
in corruption. “There has been a growing sense of frustration
and insecurity,” he acknowledged.
I New Europe in Numbers
78
bne March 2015
Kazakh retail deposits, 2008-2014, year end (billion tenge)
2008
2009
2010
2011
2012
2013
Russians appear blasé toward sanctions
2014
70
66
4,438
3,905
4K
% of respondents
Foreign currency
Tenge
3,371
Total deposits
2,995
3K
Tenge (billions)
60
2,724
2,195
1,893
2K
1,240
1,059
865
1,137
42
40
28
30
24
22
20
1,717
1,587
1,473
1K
2,188
2,059
50
1,433
1,312
10
955
834
0
608
Continuation of the
fighting in Eastern
Ukraine and
Donbass
0K
The collapse of the
ruble
American and
Western European
sanctions against
Russia
New Year holiday
and vacation
The continued drop
in oil prices
With the low oil price and the weak currency of the country's main
trading partner Russia, pressure is building on Kazakhstan’s central
bank for another currency devaluation.
A recent poll by Russia’s Levada Center has shown that Western
sanctions left scarcely more of an impression on Russians than their
New Year holidays did.
As the bne:Chart shows, Kazakh’s faith in the stability of the tenge
has taken a blow, as foreign currency retail deposits are now more
than double tenge depoits.
As the bne:Chart shows, when asked January 23-26 what they
considered the most important event of the last month to be, 28%
said that they believed it to be continued Western sanctions – only 4%
more than said it was their New Year holiday or vacation.
Russia's reserves and months of import cover, 2004-present
Standard & Poor’s downgrade of Russia to junk status on January 27
was met by the Kremlin with accusations of US-influenced
politicking. A closer look at some macroeconomic figures does
make the decision by the US rating agency look out of kilter.
2004 Fitch upgrade to investment grade
S&P downgrade to junk status
Months of import cover
35
600K
As the bne:Chart shows, at the time of its downgrade Russia had
one-and-a-half times the months of import cover and over triple the
reserves that it did when it was upgraded to investment grade by
Fitch nine years ago – hardly the sinking ship that would warrant a
junk rating.
500K
30
400K
25
300K
20
200K
International reserves (USD million
40
S&P’s main justification for downgrading Russia to ‘BB+’ – its highest
non-investment grade – was the country’s newfound lack of access to
international capital markets. The implicit message there is that, in
the not-too-distant future, Russia simply will not be able to service its
debt obligations.
15
International reserves
10
100K
Months of import cover
2005
2007
2009
2011
2013
2015
TO TA L FE DE R A L TA X
Top 10 regions by total federal tax revenue, Jan-Oct 2014
1
Khanty-Mansi Autonomous Area - Yugra (Total)
2
Moscow (Total)
RUB 1,401,113.5M
3
Yamalo-Nenets Autonomous Area (Total)
4
St. Petersburg (Total)
5
Republic of Tatarstan (Total)
RUB 184,058.9M
6
Moscow Oblast (Total)
RUB 182,702.1M
7
Krasnoyarsk Krai (Total)
RUB 137,357.5M
8
Samara Oblast (Total)
RUB 131,326.2M
9
Orenburg Oblast (Total)
RUB 118,264.4M
10
Perm Krai (Total)
RUB 103,464.8M
RUB 764,800.0M
RUB 482,549.9M
RUB 267,586.0M
RUB 0.0M
With oil, fuel and gas accounting for 70% of Russia’s $450bn
exports in 2014, it is no surprise that seven of the 10 largest overall
contributions to federal tax receipts came from regions whose
economies are heavily energy-focused.
RUB 500,000.0M
RUB 1,000,000.0M
RUB 1,500,000.0M
Of the ten largest regions for total tax contributions, seven came from
regions that also featured in the top ten for mineral extraction tax.
Only the city of Moscow, the wider Moscow Oblast and St. Petersburg
featured in the overall top 10 contributors for all tax types combined.
bne March 2015
New Europe in Numbers
2015 MACRO OUTLOOK:
Ryszard Petru, Chairman of the Association
of Polish Economists
Henry Kirby in London
In spite of regional unrest, 2015 will be Poland’s best year for over half a decade,
predicts Ryszard Petru, chairman of the Association of Polish Economists.
“We haven’t been hit too hard by the Russian crisis, which is a positive surprise.
Internally, prospects are very promising, with growth of 3.5-4.0%,” he explains.
Consumer prices in Poland have fallen for six consecutive months, which Petru
attributes to a fall in oil and food prices. This, along with a “3.5-4.0%” increase
in wages, he says, will help fuel the projected growth for 2015 through higher
consumer spending.
Private investment is another area Petru sees playing a pivotal role in any growth
that Poland is to enjoy after what he describes as “a sluggish” half a decade. “I
don’t want to call it a very strong rebound, but I’d expect to see growth of 5-10%
this year in private investment. That, combined with deflation and a new inflow of
[EU] funds, will provide a boost to an extent we have not seen since 2007.”
This spike in investment is not dependent on foreign interest, either, Petru says:
“Foreign investments are of course important, but not to the extent that people
seem to think. They do account for 20% of total investment. But 70% of investment
in the country comes from local investors.”
The Swiss Bank’s (SNB) decision in January to unpeg the Swiss franc from the
euro is one issue that Petru says could, in conjunction with a potential Greek exit
from the Eurozone, cause serious problems in the coming year.
With over half a million Poles holding Swiss franc-denominated mortgages, Polish
banks are now under pressure from Warsaw to slash rates to negative figures in
order to ease the burden on mortgage holders saddled with higher repayments
as a result of the Swiss franc’s appreciation against the zloty. “If things calm
down, the Russian crisis does not escalate, and there is no Greek exit, then the
zloty should appreciate and holders of Swiss franc mortgages should remain
unharmed. “However, if things deteriorate and the zloty weakens, then politicians
will start talking about it. It’s an election year, so there is a risk that they will make
rash decisions on that front.
While the resurgent Swiss franc could prove problematic for Poland, Petru believes
that the fallout from Western-led sanctions against Russia pose less of a threat.
“In a global sense, yes, it is relevant in terms of trade, but only 5% of Polish trade
is with Russia. 25% is with Germany, 60% is with the Eurozone, and the EU makes
up 80% of our trade.
“Recently-published data shows that, despite the embargo, Poland was actually
exporting more food than ever. All they have done is shift from Russia to other
markets,” says, concluding that, “Without downplaying the situation, Russian
sanctions are all but irrelevant to Poland.”
I 79
Moody's Investors Service assigned
on February 6 a ‘Baa2’ rating to
Bulgaria's ¤8bn Global Medium Term
Note (GMTN) programme, the same as
that of the sovereign. The rating reflects
the country's weak economic growth
outlook in an environment of moderate
credit expansion and persistent
unemployment, Moody's said in a
statement.
The EU has lost approximately
¤21bn because of sanctions imposed
against Russia over the Ukrainian
crisis, Spanish Foreign Minister Jose
Manuel Garcia-Margallo said.
Opec expects the world’s oil demand
to rise in 2015 by 1.17mn barrels a
day (b/d) to 92.32mn b/d. Non-Opec oil
supply is projected to grow in 2015 by
0.85mn b/d, down 0.42mn b/d from the
previous assessment. Oil is currently
trading at $58 a barrel.
The Albanian parliament voted
overwhelmingly on February 5 to appoint
career banker Gent Sejko as the new
governor of the Bank of Albania. Sejko
will replace longstanding central bank
governor Ardian Fullani who was sacked
in 2014 after thefts of around ¤5mn
worth of cash were revealed.
Investors' average confidence in
Russia has more than halved since
last year, according a poll by Detail
Communications, a Moscow-based
financial communications firm. The top
concern was "political risk" (38%)
followed by "geopolitical tension" (35%).
Turkey’s automotive production rose
37% y/y to 102,574 units in January while
passenger car output was up 16% y/y to
60,414 units in the first month of the year,
the Automotive Manufacturers’ Association
said on February 11. The domestic market
grew 7% y/y during the month.
Irish oil company Petroceltic plans
to curtail its exploration activities in
Romania, Bulgaria and Greece under a
broader plan aimed at cutting operational
costs and the capital expenditures.
Investments will be focused on
production and development operations
in Algeria, Egypt and Bulgaria.
80
I New Europe in Numbers
bne March 2015
MACROECONOMIC INDICATORS
GDP composition (%)
Gross domestic product ($mn)
Country
Total
(2014)
YoY (%
annual)
YoY (%
qtr)
2015
Forecast
Per capita
($)
Agri.
Indus.
Albania
13,175
2.1
+0.7
+3.4
4,549
22
Armenia
10,703
2.6
+5.3
+3.3
3,551
Azerbaijan
77,239
5
+2.5
+3.4
Belarus
72,857
1.6
+2.0
Bos/Herzegovina
17,953
0.7
Bulgaria
53,752
Croatia
57,251
Czech Republic
203,014
Estonia
Budget
deficit
Current
account
Inflation (CPI) Unemployment Ind. prod.
Serv.
Bud%
GDP
% GDP
Latest,
YoY
Last
year
%
YoY
15
63
-6.6
-11.0
+0.7 Dec
1.7
17.0
+11.6
22
31
47
0.0
-7.7
+4.6 Dec
7.1
17.1
+4.3
8,060
6
62
32
0.0
14.6
+1.3 Nov
2.7
4.9
+1.8 2013
+3.4
7,685
9
42
49
0.1
-8.5
+0.6 Dec
15.4
0.5
-1.4
+0.6
+3.4
4,735
8.1
26.4
65.5
0.0
-11.0
-0.4 Dec
-0.5
43.7
-2.9
1.4
+1.5
+0.8
7,418
6.7
30.3
63
-3.4
2.1
-1.0 Jan
-1.6
10.7
+0.9
-0.5
-0.5
+0.5
13,415
5
26
69
-5.0
0.9
-0.5 Dec
1.1
19.6
+5.3
2.3
+2.4
+2.5
19,295
2
38
60
-1.3
-1.0
+0.1 Dec
1.0
5.9
+7.3
24,917
1.8
+2.7
+2.3
18,988
4
29
67
-0.4
-1.5
-0.5 Dec
2.1
4.7
+7.7
Georgia
16,997
5.4
+3.9
+3.2
3,785
9
24
67
0.0
0.3
+1.9 Dec
0.2
14.6 (2013)
+11.1
Hungary
130,200
3.9
+3.1
+2.4
13,182
34
28
68.7
3.3
4.1
-0.9 Dec
1.4
7.1
+7.1
Kazakhstan
234,065
4.3
+4.0
+5.0
13,438
5
38
57
4.6
0.3
+7.4 Dec
4.9
5.0
+0.8
Kosovo
7,308
5
ñ
+3.8
4,022
12.9
22.6
64.5
0.0
-7.7
-0.4 Dec
0.2
30.0 (2013)
ñ
Kyrgyzstan
7,515
4
+3.6
+4.5
1,279
20.8
34.4
44.8
0.0
-14.2
+11.6 Dec
6.0
2.4
-10.4
Latvia
31,762
2.6
+1.9
+2.9
15,973
4.9
25.7
69.4
-1.5
-2.5
+0.2 Dec
-0.4
9.0
-0.5
Lithuania
47,310
3
+2.4
+3.0
16,206
3.7
28.3
68
-1.2
0.1
-0.3 Dec
0.4
9.4
+3.8
Macedonia, FYR
10,466
2.4
+4.1
+3.4
5,066
10
26
63
-3.1
-4.6
-0.5 Dec
1.3
27.9
+0.7
Moldova
8,126
2.4
+5.6
+3.4
2,284
15
17
69
0.0
-6.2
+4.7 Jan
3.9
3.3
+12.7
Mongolia
12,207
6
+7.0
+7.5
4,069
16
33
50
0.0
-12.5
+10.7 Dec
9.9
6.4
+14.8 2013
Montenegro
4,547
2.7
+3.5
+3.0
7,334
10
20
70
-0.2
-14.2
-0.3 Dec
1.8
15.1
-7.0
Poland
534,622
3.3
+3.0
+3.2
13,888
4
33.3
62.7
-3.6
-1.3
-0.5 Dec
1.0
12.1
+8.4
Romania
195,327
3
+2.6
+2.7
9,794
6
43
50
-2.0
-0.9
+5.4 Dec
1.9
6.4
+3.1
Russia
2,109,358
0.6
0.0
-3.8
14,421
4
36
60
-0.5
3.2
+15.0 Jan
6.3
5.3
+3.9
Serbia
42,095
-1
-1.6
0.0
5,890
7.9
31.8
60.3
0.0
-5.4
+1.8 Dec
4.9
17.6 Sep
-5.3
Slovak Republic
98,069
2.4
+2.4
+2.5
18,090
3.1
30.8
47
-3.0
1.1
-0.1 Dec
1.0
12.5
+0.7
Slovenia
48,051
2.6
+3.2
+1.8
23,262
2.8
28.9
68.3
-5.4
5.9
+0.1 Dec
1.3
9.7
+0.1
Tajikistan
9,019
6
+6.7
+5.8
1,105
27
22
51
0.0
-2.1
+7.4 Dec
3.6
2.5
+7.1
Turkey
843,173
2.8
+0.4
+3.3
10,852
9
27
64
-1.3
-6.1
+8.2 Dec
7.7
10.7
+2.6
Turkmenistan
46,371
10.8
ñ
+11.5
7,875
7.2
24.4
68.4
0.0
0.2
+6.0 '13
5.3
ñ
ñ
Ukraine
162,881
-8.2
-5.3
-2.3
3,792
10
27
63
12.0
-9.2
+24.9 Dec
-0.1
9.5
-17.9
Uzbekistan
60,828
7.6
+8.1
+7.1
1,995
19.1
32.2
48.7
1.3
3.9
+11.2 '13
7.0
4.9 (2013)
+8.1
Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank
of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute
for Statistics; InFinancials; EuroStat; Trading Economics; International Labor Organization; Asian Development Bank; National Statistical Committee of the Republic of Belarus
*All data are latest available official figures or independent estimates
SPACE FOR AD/HOUSE AD SHOWING OTHER..
bne March 2015
I 81
New Europe in Numbers
FINANCIAL INDICATORS
SOCIAL
Total market cap., all publicly traded equities
Stock market
Literacy
Tertiary edu.
Month
12-month
Ytd
52-wk
low
52-wk high
P/E
Latest $mn
YoY
%$
YoY %
local curr.
% adults
% pop.
Albania (-)
-
-
-
-
-
-
-
-
-
96.8
55.5
Armenia (-)
-
-
-
-
-
-
-
-
-
99.6
46
Azerbaijan (-)
-
-
-
-
-
-
-
-
-
99.8
20.4
Stock market index
Belarus (-)
-
-
-
-
-
-
-
-
-
99.6
62.6
Bos/Herzegovina (SASE)
-1.7
-0.4
-1.5
677.3
738.1
-
-
-
-
98.2
37.7
Bulgaria (SOFIX)
-4.6
-8.5
-4.4
494.0
622.9
6.3
4,914.2
-7.5
+3.9
98.4
91.4
Croatia (CROBEX)
-0.6
-2.2
+1.5
1,644.3
1,930.3
n.m.
19,125.6
-11.1
+1.0
99.1
64.1
Czech Republic (PX)
+6.2
-3.5
+6.7
901.3
1,046.1
23.3
26,411.7
-11.8
-5.5
99
76.6
Estonia (OMXT)
+9.3
+3.1
+12.8
729.0
856.6
-
2,046.7
-20.3
-5.1
99.9
27.9
-
-
-
-
-
-
-
-
-
99.7
61.6
+12.0
-12.8
+10.2
15,686.7
19,300.5
n.m.
13,436.3
-26.1
-12.2
99.4
59.6
-5.3
-10.9
-12.0
826.5
1,312.8
14.3
13,791.2
-30.8
-18.9
99.7
44.5
Kosovo (-)
-
-
-
-
-
-
-
-
-
0
41.3
Kyrgyzstan (-)
-
-
-
-
-
-
-
-
-
99.2
-
Latvia (OMXR)
+0.6
-11.1
+3.8
405.5
480.9
5.5
987.1
-26.1
-12.0
99.9
73.9
Lithuania (OMXV)
+3.4
+3.9
+4.6
478.3
428.3
11.7
4,114.8
-7.2
+4.1
99.8
65.1
Macedonia, FYR (MBI10)
0.0
+7.8
-0.5
1,586.1
1,877.0
-
259.3
-80.6
-79.7
97.5
40.1
Georgia (-)
Hungary (BUX)
Kazakhstan (KASE)
Moldova (-)
-
-
-
-
-
-
-
-
-
99.1
38.4
Mongolia (MSETOP)
-5.5
-16.8
-6.4
13,856.2
17,243.7
-
-
-
-
98.3
-
Montenegro (MONEX20)
+3.0
+17.2
+2.1
9,665.6
12,610.1
-
-
-
-
98.4
61.1
Poland (WIG)
-0.1
+2.5
+1.9
49,520.9
55,636.8
13.0
161,526.6
-14.0
+1.5
99.7
73.1
Romania (BET)
+2.1
+10.3
+3.2
6,135.6
7,278.0
8.9
20,979.1
-10.3
+6.2
98.6
51.5
Russia (MICEX / RTS)
+19.9 /
+23.9
+13.3 /
-43.3
+28.0 /
+20.1
1,237.4 /
629.15
1,673.9 /
1,421.07
11.8 /
8.7
551,334.0
-30.7
-9.2
99.7
76.1
Serbia (BELEXLINE)
+1.1
+15.8
-0.2
560.0
706.6
-
3,278.5
+4.0
+30.8
98.2
52.3
Slovak Republic (SAX)
+15.1
+24.0
+14.4
202.9
254.7
-
35,650.5
+66..
+740.0
99.6
55.1
0.0
+12.9
+0.1
685.5
839.4
-
6,792.3
-1.0
+17.9
99.7
86
-
-
-
-
-
-
-
-
-
99.7
22.4
-2.8
+43.8
+0.4
61,189.2
91,412.9
12.8
209,992.6
+0.7
+7.9
94.9
-
-
-
-
-
-
-
-
-
-
99.6
69.3
Ukraine (PFTS)
+6.0
+26.8
+10.0
298.0
483.3
3.3
1,746.1
-95.2
-57.3
99.7
79.7
Uzbekistan (-)
-
-
-
-
-
-
-
-
-
99.5
-
Slovenia (SBITOP)
Tajikistan (-)
Turkey (XU100)
Turkmenistan (-)
Sources: World Bank; CIA Factbook; CEIC Data; Statistical Office of the Republic of Slovenia; Central Bank
of the Republic of Kosovo; Bloomberg; Finanzen; S&P: CapitalIQ; IMF: WEO October 2014; UNESCO Institute
for Statistics; InFinancials; EuroStat
*Official figure or independent estimate
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SPACE TO BE CROPPED OUT
82
I Events
bne March 2015
Upcoming events 2015
Russia Retail Forum 2015 (23 - 25 March)
Moscow, Russia
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Annual Investmet Meeting 2015 (March 30 - April 1)
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Northeastern European Real Estate
Awards (NEE Awards) (March 26 - 27)
Minsk, Belarus
www.europaproperty.com
European Bank for Reconstruction and Development
(EBRD) 24th Annual Meeting of Board of Governors
and Business Forum (May 14-15)
Tbilisi, Georgia
www.ebrd.com
The Banking Association for Central and Eastern Europe (BACEE)
will hold the
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AprilOpportunities
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