bne:newspaper - march 20, 2015

March 20, 2015 www.bne.eu

Putin returns but does not clear up mystery of his absence

The Ukrainian finance ministry's plan to reduce external sovereign debt by $15.3bn by giving international bond holders a haircut is getting messy.

Institute of International Finance (IIF) executive director Hung Tran, which is not formally representing the private investors but has been in consultation with them, said too many entities are

Ukraine's debt restructuring gets messy

Russian President Vladimir Putin has reappeared in public after an 11-day absence that had sent the media into a frenzy of speculation.

Putin said on March 16 that the various reports and theories on the reason for his absence – ranging from birth of his alleged fifth child, through palace coup and on to death – were just "rumours".

“It’d be boring if there weren’t rumours,” Putin said wryly, without explaining where he had been.

Putin flew from Moscow to St Petersburg on the morning of March 16 and appeared in front of the cameras before meeting Kyrgyz President Almazbek Atambayev.

being exempted from a plan to reduce the amount the state and its companies owe, and therefore the burden is unfairly falling on a restricted group of private investors.

Ukraine owes a total of some $40bn to external creditors but only private investors, which own

See page 4

See page 2

Ben Aris in Moscow

bne IntelliNews

bne:Newspaper

Follow us on twitter.com/bizneweurope

Content: 2 Top Stories 5 The Regions This Week10 Eastern Europe14 Eurasia17 Central Europe20 Southeast Europe23 Opinion25 Lists24 Lists

Top Stories

some 20% of the total, are being asked to take the haircut. "Our observation is that the wider community of Ukrainian creditors — not just international private sector but also domestic and official sector creditors — should contribute," Tran said. "The burden should be shared."

The World Bank and IMF are owed $12bn and Russia another $3bn, but are not included in the finance ministry plan to cut the size of the debt. Russia has excluded itself from the debt restructuring talks and made clear it expects to be paid in full when its debt matures in December, Russian Finance Minister Anton Siluanov said on March 16.

The IMF is also reluctant to accept a haircut as it just approved an additional $17.5bn emergency loan programme to prevent Ukraine from collapsing and has paid out the first tranche of just under $5bn.

The private investors are bristling at the international financial institutions, which they believe are dictating the outcome before the investors have had a chance to have their say.

"They have started the process of restructuring by specifying the sum rather than letting it be the end result of negotiations between creditors and Ukraine," Tran said, local media reported.

If the private investors dig their heels in then the whole programme may stall as Franklin Templeton, the single largest private holder of traded Ukrainian debt with $6.5bn, is in a position to block any restructuring proposals under majority voting procedures. The fund, which made a killing on buying huge amounts of Irish debt well ahead of a European Union bailout, has hired Blackrock's advisory group to represent it

in the upcoming negotiations. Kyiv has hired the investment bank Lazard to face off against them, which comes to the fight fresh from representing the Greeks in their bailout talks.

A second problem is that if the goal of the restructuring was to keep within the parameters of the IMF's four-year plan, which calls for a reduction in the ratio of sovereign debt (plus guarantees to state-owned companies) to GDP to under 70% by the end of this year, then even the haircut being proposed will not achieve this goal, says the IIF.

Ukraine's debt is climbing rapidly. Having started the current phase of the crisis last year with a debt to GDP ratio of the order of 35%, it has already breached the 60% threshold set by the Russians in its bond covenant that allows Moscow to call in its debt at any time, and is on course to end the year at more than 100%. Indeed, the IIF estimates that Ukraine will have total debt of $128.9bn by the end of this year, or around 130% of GDP, putting the country on a par with debt-burdened Italy. Other economists put the end of year figure even higher.

"If the aim of [private sector involvement] is to get enough debt forgiveness from private investors to fund the programme, then talk of haircuts is completely irrelevant because you don't have enough principal maturing between now and 2018," Tran said, adding that excluding the Russian $3bn bond, only $9bn will mature between now and 2018.

The numbers do not up add up despite the IMF's total $40bn aid programme unless western governments and IFIs stump up another $24.7bn, according to the IMF's plan, which was leaked to the press on March 12. The IMF plans to provide $10bn to Ukraine in 2015 and $2.5bn in each of the years 2016-2018. Other donors are expected to to provide $6.3bn in 2015 and $1.0bn in the next year. But so far the other lenders have been extremely reluctant to lend anything to Ukraine, which has yet to get to grips with its corruption problems or bring an end to the armed conflict in the eastern regions.

Ukraine's debt restructuring gets messy

March 20, 2015 businessneweurope I

Top Stories

The talks about to start with the private investors are a crucial first step as a $5bn hole remains in Ukraine's financial needs in 2015, even with the IMF's latest loan and assuming the arrival of other western money, worth a total of $21.4bn in 2015, according to the IMF plan. This gap is supposed to be plugged by getting the private holders to take a haircut of $5.2bn this year alone, according to the IMF's plan, and there is no wiggle room in the negotiation for a compromise if the private investors don’t agree. In other words, the private investors are not being given a choice and they are not happy about it.

But perhaps the IMF and Kyiv have miscalculated as the private investors are also in a position to refuse to cooperate. Private investors are disappointed as they were expecting a simple extension of maturities and not cuts in principal owed, like Russia imposed on its $40bn worth of bondholders in its financial meltdown in August 1998.

Analysts in Kyiv believe that the subject of

extending maturities may come up again as one of the few options available to create enough cash to get through this year.

"At this stage, it’s clear that Ukraine will try to seek to extend the maturity of all its sovereign and guaranteed Eurobonds due in 2015-2018, including the $3bn Eurobond issued to the Russian State Welfare Fund and $0.5bn in state guaranteed debt of Naftogaz to Gazprombank," Alexander Paraschiy, an analyst with Concorde Capital said in a note on March 16. "All that debt totals $12.0bn, we estimate, so the core question is what else will be included in the total restructuring offer of $15.3bn."

Another option yet to be mentioned is to swap the existing debt for new instruments with longer maturities and lower interest rates. The government has said it wants to complete the talks on restructuring by June before the IMF next review of its lending agreement is due.

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

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

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


documentary was his admission that the soldiers wearing unmarked uniforms that appeared across Crimea in the run-up to a rushed referendum on secession were indeed Russian regular forces. A long-standing treaty with Ukraine allowed Russia to station just over 20,000 troops in Russian military bases on the peninsular. But ahead of the vote these soldiers moved out into the streets and towns, creating an atmosphere in which international observers said a free and fair vote on secession could not be held.

Putin also said that he had been prepared to go to the brink over Crimea – including putting Russia's nuclear weapons on stand-by – and faced down a welter of calls from Western leaders during the annexation. He responded by saying Crimea was "our historical territory", that Russians living there "were in danger and we cannot abandon them", but because he was so direct added that, "no country was in the mood to start a war" with Russia over Crimea.

The documentary was aimed at the domestic audience and was replete with what has become the standard rhetorical position for the Kremlin: he blamed the US for masterminding the Maidan protests in Ukraine and the subsequent "coup" that ousted Ukrainian President Viktor Yanukovych, calling Washington the "puppeteers".

"Formally, the opposition was primarily supported by Europeans, but we knew very well… that the real puppeteers were our American partners and friends. It was they who helped prepare nationalists [and] combat troops," Putin said, adding that he ordered the Russian security services to prepare to take over Crimea the day after Yanukovych fled the country. Russia's goal was to secure control over its main warm water naval port in Sevastopol.

Ukrainian Prime Minister Arseniy Yatsenyuk called on the International Tribunal in The Hague to take the documentary as evidence of Russia's premeditated invasion of Crimea, which is illegal under international law.

Putin returns but does not clear up mystery of his absence

Putin appeared in rude health and jolly spirits, nixing the theories that he had undergone more plastic surgery – he is believed to have received Botox injections – or had thrown his back out again. He hurt his back during a minor crash in a microlight last year.

Atambayev said that Putin was not just on his feet, but also “hot-rodding behind the wheel”. “[Russian President] Vladimir Vladimirovich just drove me around the territory. That’s just so there’s no rumours,” Atambayev was quoted as saying by the Russian state-owned Sputnik newswire.

While he was absent, Putin appeared in a documentary on the annexation of the Crimea, where he confirmed what was widely assumed but always denied by the Kremlin and its supporters: that Russia sent in unmarked soldiers, the so-called "little green men" of world media reports, and de facto took the peninsula by force.

In the three-hour documentary, "Crimea: Path To The Homeland", broadcast on Russia's First Channel on March 15, Putin explained that troops, inlcuding special forces, were sent in to protect Russian military personal stationed in the disputed peninsular, which was transferred to Ukraine's territory in 1954.

“We monitored the situation and had to bring in our equipment,” Putin said. “[Russian troops already stationed in Crimea] would have been wiped out after the first salvo.”

Top of the revelations in the pre-recorded

Top Stories


The Regions This Week

A French man was detained as he tried to smuggle his Russian wife into Poland in a suitcase. The pensioner wrongly assumed his bride would not be allowed into the EU as the couple crossed the border from Belarus headed for Nice on a train.

Hungary's tax office failed to collect €13bn in debts in 2009-2013, the State Audit Office (ASZ) said in a report. The results are in contrast with an internal investigation in early March led by NAV head Ildiko Vida. The official hit the headlines late last year as she admitted being amongst the six Hungarian officials banned from entering the US over suspicion of corruption. The tax office has in the past been accused of favouritism towards well-connected companies.

Though it looked close to throwing in the towel on its dreams of becoming a European game changer on the back of shale gas, Poland could be set for a tight gas bonanza, the country's Geological Institute claimed this week. A report estimates tight gas recoverable reserves at 200bn cubic meters.

Support for Hungary's far-right Jobbik is at a record-high while ruling Fidesz loses ground, a poll suggests. The Ipsos survey found backing for Jobbik has risen to 18%, 2pp higher than a month earlier. Fidesz continues to be the country's most popular party, but has seen support slip to 21%. Last year it won the general election with 35%. The Socialist Party manages no more than 11%.

Central EuropeVodafone is seeking €14mn in damages from O2 Czech Republic in a lawsuit. The UK mobile operator claims O2 CR of abusing its dominance of the country's infrastructure in the Czech fixed broadband market to prevent Vodafone competing for customers.

Slovakia remains the world's largest car producer per capita, turning out 183 cars per 1,000 people in 2014. That heavy reliance on the auto sector is likely to deepen as the likes of VW and PSA expand investment.

Hungary pulled the state acquisition of Budapest Bank from public oversight by declaring the deal “strategic for the economy". The status means the competition office and other regulators cannot assess the buy. Budapest did similar with last year's acquisition of MKB Bank, as well as the nationalisation and swift re-privatisation of Takarekbank.

Enel will accept bids for its 66% stake in Slovenske Elektrarne until May 9, it said this week. The Italian utility noted in results that writedowns on assets in Italy and Slovakia had done most to drop 2014 net profit by around 85% y/y. Czech power groups CEZ and EPH are joined by Hungary's MVM and Mol in having declared interest in SE. The Slovak state also says it wants to increase its 34% holding to a majority.

businessneweurope I March 20, 2015

Southeast EuropeConcerns ranging from corruption and unemployment to a lack of media freedom were raised in a European Parliament session on the Western Balkans. Western Balkan countries hoping to join the EU in the medium term, “still have a number of obstacles to overcome, such as the economic crisis, corruption and the need to guarantee media freedom”, read a European Parliament statement published after the plenary session on the progress of six states in the region's progress towards EU integration.

The Romanian anti-corruption office DNA submitted a formal request to place the former finance minister Darius Valcov in custody. Valcov is alleged to have received €2mn in bribes for awarding public contracts on a preferential basis while serving as mayor of Slatina municipality. PM Ponta has accepted Valcov’s resignation.

Nine people suspected of recruiting more than 70 men to fight in Syria are on trial in Albania. Governments across the Balkans, in particular in the majority Muslim countries of Albania and Kosovo, have been trying to prevent recruitment of their citizens to join jihadi groups in Syria and Iraq. Another trial of suspected recruiters is currently underway in Serbia.

The Albanian economy is expected to grow by 3% in 2015, despite recent flooding and the slowdown in the oil sector, the IMF said at the conclusion of a mission to Albania.

The Council of the European Union said that it welcomes the statement declaring the country’s pro-EU commitment adopted by Bosnia’s presidency, political parties and parliament, noting that the country has met all necessary

conditions for entry into force of the Stabilisation and Association Agreement it has signed in 2008.

Bulgaria’s parliament adopted amendments to the law on bank insolvency, which allow the appointment of a temporary receiver in the collapsed Corporate Commercial Bank (Corpbank), bTV reported. A temporary receiver is now expected to enter Corpbank by the end of next week, replacing the central bank's administrators.

US Mohawk Industries, a leading global flooring manufacturer, has agreed to buy Bulgarian tile producer KAI Group for €195mn, Capital weekly reported. The seller is global private equity firm Advent International. The deal is expected to be completed in Q2.

The mayor of the Croatian capital Zagreb, Milan Bandic, detained on March 10 after attempting to influence a witness in a corruption and abuse of office case, will remain in custody. The Zagreb County Court has rejected Bandic’s appeal, while the decision that his HRK15mn (€2mn) bail should be seized and paid into the state budget has become final, Poslovni daily quoted the court’s spokesman Kresimir Devcic as saying.

Croatia could hold a referendum on the planned hydrocarbons exploitation in the Adriatic Sea, the country’s Prime Minister, Zoran Milanovic, said. Ecology groups and activists of the Human Shield civil society have asked for a referendum on hydrocarbons exploitation, warning that such activities could harm the environment and Croatia’s tourism industry.

Kosovo’s lack of energy security is the main obstacle to the country’s socio-economic development, according to the World Bank.



Eastern EuropeInvestigators have brought charges against all five men accused of killing opposition leader Boris Nemtsov. Khamzat Bakhayevwas who was detained in connection with the murder, has now been formally charged. Police are still holding two more men without charging them. All the suspects are from the Caucasus.

Russia's government is making cuts all round. Putin has lopped 10% of top Kremlin salaries and, following up, the Moscow government promised to slash the number of civil servants by 30% by July 1st.

Russia held more very large-scale military exercises this week. The entire northern fleet was put on alert, ballistic missiles were deployed to Russia's western border, strategic bombers were sent to Crimea and massive 500-strong tank exercises were held in the western military district.

Ukraine's Finance Minister Natalie Jaresko said the IMF $5bn is not enough to restore economic growth but was enough to stabilise the banking sector. Ukraine faces a $5bn shortfall in the IMF plan to store the economy, which it hopes to gain from restructuring privately-held debt by June.

The share of FX in Russian deposit accounts has risen from 19.4% to 35.7% in the last year as of February 1, the CBR reports. That is higher than in the 2009 crisis when the share of FX reached 35.3%, but less than the record 40% set in 1999. The growth in FX deposits came mainly from the corporate accounts, which doubled to 41.3%, because of sanctions fears.

Russia held on to its number two biggest arms exporter title with $13bn of arms sales in 2014. China, Russia's newest best friend, overtook France to take number three spot in global weapons trade. The US is still far in the lead.

Someone has stolen a solid gold loaf of bread found at ousted Ukrainian President Viktor

Yanukovych's Mezhyhiria residence after he fled the country. The gold bread was only one of a number of valuable gifts at the ex-president's house.

Finnish media conglomerate Sanoma will sell the Moscow Times and its sister publication Vedomosti to former CEO of Kommersant publishing house, Demyan Kudryavtsev, news agency RBC reported citing an unidentified source. The Australian media mogul has also been linked to Kudryavtsev. Several of the less successful magazines are also reportedly in the package.

Russia celebrated the first anniversary of the "return" of Crimea to the Russian Federation this week. A poll found that two-thirds of Russians say the country benefits from "reunification" with Crimea.

Russia may postpone building a huge gas pipeline to China that is part of a $400bn gas supply deal signed last year. Delays in starting on construction on the pipeline have left the deal in limbo.

Some 70,000 Russian have been fined for failing to declare a foreign passport or residency permit in another country. The law was introduced last year by Putin and affected citizens were supposed to confess by October. Failure can result in a fine of up to 200,000 rubles ($3,200), or up to 400 hours of community service. 900,000 Russians did own up to having a second passport issued by another country.

Some 127,000 Russians lost their jobs so far this year as unemployment begins to rise slowly. The total number of unemployed could rise to a maximum of 2.4mn over the course of the current crisis, the government says.



EurasiaKyrgyzstan’s trade deficit decreased by 47.7% y/y to $135.1mn in February. Exports increased by 15.6% to $145.6mn in the given period, whereas imports decreased by 26.9% to 280.7mn as a weakening som has hit demand for imported goods – the som depreciated by 4.7% against the dollar year-to-date.

Kyrgyzstan’s debt owed to China’s state Export-Import (Exim) Bank amounted to $1,115mn at the end of 2014, up by 51.1% from $758mn in 2013. The debt to China made up around a third of Kyrgyzstan’s total external debt at the end of 2014, which amounted to $3,437mn, or equivalent to 50.9% of GDP. The World Bank’s International Development Association is the second largest lender with $671.5mn and the Asian Development Bank is third with $583.6mn.

Tajikistan exported over 110mn kWh of electricity to Afghanistan in January and February, up by 57% from 70mn kWh in the same period of 2014. Total proceeds for the sales of electricity to Afghanistan grew by 70% y/y to $3.9mn in the period.

Tajik President Emomali Rahmon has appointed his 27-year old son Rustam Emomali as anti-corruption tsar. Prior to this appointment, Rustam Emomali had headed the country’s Customs Service since late 2013. Nepotism and corruption remain a major problem in this Central Asian country, where President Rahmon has ruled the country with an iron fist since 1997. The appointment may be an indication that Rahmon is grooming his son as a potential successor.

The National Bank of Tajikistan has halted direct sales of dollars in a move aimed to limit a further weakening of the Tajik somoni in the currency market. Commercial banks are still allowed to sell dollars, but under the strict control of central authorities.

German firm Ferrostaal Industrial Projects will start works at a $115mn wind farm in Mongolia in April. The wind park will have a total installed capacity of 54MW and will be up and running by the end of 2016.

Mongolian non-performing loans (NPLs) stood at MNT667,018bn ($336mn) at the end of February, up by 11.6% from a year earlier. Excluding the NPLs belonging to three banks currently in liquidation (Anod Bank, Zoos Bank and Savings Bank), NPLs amounted to MNT424,430mn at the end of February, up by 47.3% from February 2014.

Kazakhstan has cut the export duty on crude oil from $80 to $60 per tonne because of the low price of oil. Oil producers have asked the government to make the duty zero as the low price of oil is forcing them to cut investment in production and to lay off the personnel. They argue that the reduction in the duty from $80 to $60 per tonne decreased the tax burden on oil companies only by 2%.

The shares of Kazakhstan's national power grid company, Kegoc, have fallen by more than 30% since they floated on the Kazakhstan Stock Exchange (Kase) in early December under the government's "People's IPO" programme. The shares were sold to the population in a month-long campaign at KZT505 ($2.8) per share. They traded at around KZT347 ($1.87) on March 19.

Georgia intends to revive the Soviet-era Tskaltubo Spa Resort with French property developers. Tskaltubo was popular during Soviet times and had a busy train line running weekly to Moscow. The project requires a total investment of $750mn to restore thermal baths, rehabilitate state-owned hotels and build new facilities, including medical ones, restaurants and tropical gardens.



bne Chart

0K 2K 4K 6K 8K 10K 12K 14K 16K 18K 20K 22K 24KGDP per capita ($)

30

35

40

45

50

55

60

65

70

75

80

85

Cor

rupt

ion

Perc

eptio

ns In

dex

scor

e

Bulgaria

Bulgaria

Croatia

Croatia

Czech Republic

Czech Republic

EstoniaEstonia

Hungary

Hungary

Latvia

Latvia

Lithuania

LithuaniaPoland

Poland

Romania

Romania

Slovakia

Slovakia

Slovenia

Slovenia

Albania

Albania

Armenia

ArmeniaAzerbaijan

Azerbaijan

Belarus

Belarus

Bosnia and Herzegovina

Bosnia and Herzegovina

Georgia

Kazakhstan

Kazakhstan

Kosovo

Kosovo

Kyrgyzstan

Macedonia

Macedonia

Moldova

Montenegro

Russia

Russia

Serbia

Serbia

Tajikistan

Tajikistan

Turkey

Turkey

Turkmenistan

Ukraine

Uzbekistan

Uzbekistan

Median GDP

Median CPI/AML score

The impact of corruption on GDP per capita Comparing per capita GDP to Transparency International's Corruption Perceptions Index 2014 (CPI) and the International Centre for Asset Recovery'sAnti Money Laundering Index (AML) illustrates a clear correlation between wealth and levels of corruption/propensity for money laundering.

Anti-Money Laundering Index 2014

Corruption Perceptions Index

EU member

Non-member

Index measureAll

Sources: International Centre for Asset Recovery; Transparency International

Transparency International’s annual Corruption Perceptions Index (CPI) measures the perceived levels of corruption in different countries across a number of studies. Comparing the results of the 2014 CPI with per-capita GDP across Central and Eastern Europe/Commonwealth of Indepedent States (CEE/CIS) reveals a clear correlation between poverty and corruption.

As the bne:Chart shows, countries with low per-capita GDPs appear to suffer higher CPI scores. The same trend exists when GDP is held up alongside the International Centre for Asset Recovery’s Anti-Money Laundering Index, which measures a country’s propensity for money laundering and terrorism financing.

The bottom-right quadrant of the chart represents countries that enjoy a high level

of GDP per capita as well as a low score for corruption perceptions. Not a single non-EU country occupies it, while only two EU member states – Romania and Bulgaria – fall outside of it.

The undesirable top-left quadrant represents high perceptions of corruption and money laundering combined with low GDP per capita. It is occupied almost exclusively by Western Balkan states whose post-Soviet redevelopment was hindered by drawn-out conflicts in the 1990s, and CIS countries that have little scope for any real political opposition to their current government.

The top-right quadrant of the chart represents countries that enjoy a higher income alongside high perceptions of corruption. The two notable occupants of this area are Russia and Kazakhstan – both big oil and gas producers.

Poorer CEE/CIS nations are fertile ground for public-sector graft

Sources:

International Centre

for Asset Recovery;

Transparency International


Europe in the first half of 2008, Russian car sales tumbled as the crisis that year unfolded, dropping by half year-on-year in 2009. Sales started to recover in the following years, but collapsed again after an orgy of buying in December as Russians rushed to convert their cash into tangible assets and protect their savings from the rapid devaluation of the ruble. Car sales were down 38% in February year-on-year and there is little prospect of a recovery this year.

The Kremlin was understandably disappointed by GM's decision as it has invested a lot of time and effort into building up the domestic production of cars in partnership with foreign producers.

"The company, unfortunately, disadvantages itself amid the period when the market starts its activation phase. Anyway everything develops in a cyclical manner and growth will come after the sales drop. We can say it for sure now. Then the company will find itself among the losers," Russian President Vladimir Putin's spokesman Dmitry Peskov said.

GM's main rival Ford also plans to cut production, but as it has less exposure to Russia the cuts will not be as dramatic. Last year, GM sold 189,000 cars in Russia, making it the fifth-largest producer, while Ford sold 66,000 vehicles, according to data compiled by Bloomberg. Nissan Motor decided to suspend production at its St Petersburg plant between March 16 and March 31 because of weak sales in the Russian market.

Eastern Europe

Foreign firms flee Russia

bne IntelliNews

Having made a fortune in Russia in the boom years, today, with no end to the current economic downturn in sight, more and more foreign companies are deciding to pull out.

The latest in a growing list of global brands shuttering or reducing their Russian operation is US carmaker General Motors, which said that it would close its St Petersburg car plant and stop selling its Opel marque in Russia by the end of this year.

The group is not departing entirely. GM said that it would focus instead on the premium end of the market with its Cadillac brand, while it will stop producing Chevrolet cars, but will import them from the US instead. It will also stop the contract assembly of Chevrolet vehicles at the plant of the Russian carmaker GAZ this year as well.

Sales of Chevrolet, which was the eighth best-selling brand in Russia last year, fell 29% in 2014, while Opel sales fell 20%, both falling faster than the overall market decline of 10%.

GM has been one of the longest standing foreign investors in Russia having set up operations in the 1990s in the progressive region of Kaluga a few hundred kilometers south of Moscow.

GM expects to take a net charge of up to $600mn in the first quarter of 2015 as a result of its decision.

After briefly becoming the largest car market in


Eastern Europe

Banks have been even harder hit by the devaluation than manufacturers or industry. Austria's Raiffeisen Bank International said in February it would cut back in Russia as part of a radical overhaul to protect the bank's core capital.

The move mirrors similar decisions following the 2008 crash when several foreign owned banks beat a tactical retreat. Italy's Unicredit shrank its Russian business and both Britain's HSBC and Barclays bank abandoned efforts to roll out retail services in Russia, incurring very large loses in the process.

In other sectors the damage has been less visible but one noticeable departure was the US PR firm Ketchum, which ended the bulk of its work for the Russian Federation in the US and Europe. However, Ketchum's decision to give up on Russia was probably driven was much by the

political tensions with the West that have made its job impossible than for business reasons.

Still, if the European and American companies are pulling out then other companies from the emerging world are happy to come in and fill their shoes: Chinese investment into Russian economy will match those from Europe within two to three years, CEO of Russian Direct Investment Fund (RDIF) Kirill Dmitriev said on March 11.

"We think that this year and next year there will be much more money coming from China, which will replace the European money. Within two to three years the investment inflow from China may be equal to that from Europe in recent years," Dmitriev said, adding that he was referring to tens of billions of dollars worth of investment all across Russia.


Eastern Europe

Among the main points in the deal is for Russia to secure its border with Ukraine and hand over control of the region to Ukrainian authorities. This week's decision notes that the Minsk II agreement will not expire until December, leaving Russia on the hook until then. Hence the link to Minsk II agreement is a de facto six- month extension of sanctions – a compromise between the hardliners like Poland, and Russia's friends in the EU.

The decision will come as a blow to Moscow, which had been hoping that divisions within the EU would prevent the sanctions from being extended. The EU's sanctions are due to automatically expire between July and September unless there is a unanimous decision by EU members to extend them.

In recent months several members of the EU have expressed their concern over the sanctions and their apparent unwillingness to re-impose them when the current resume expires. This "pro-Russian" group includes countries like Hungary, Spain and Bulgaria, all of which have significant economic ties to Russia. Even Germany is seen to be sitting on the fence: on the one hand Merkel is adamant that Europe should not cave into Russian aggression, but on the other hand the German business lobby, which is heavily invested into Russia, is keen to normalise the situation and get back to work.

The Financial Times (FT) reports that Poland has been isolated in Brussels in its push for the toughest response to Russia. Tusk has been

EU links Russian sanctions to fulfillment of Minsk agreements

Ben Aris in Moscow

The European Union has voted to link the extension of sanctions on Russia to the fulfillment of the two Minsk ceasefire agreements. It stopped short of immediately re-imposing the sanctions regime, which is due to start expiring in July, but nevertheless the decision, at a summit in Brussels on March 19, will mean a de facto six-month extension of European sanctions.

A formal, legal decision on whether to extend the sanctions on Russia's financial, defence and energy sectors that expire in July will only be taken at the next EU summit in June.

"This evening, we discussed Ukraine and Russia. Leaders decided to align our sanctions regime to the implementation of the Minsk agreements brokered by [German] Chancellor [Angela] Merkel and [French] President [Francois] Hollande," European Council President Donald Tusk told journalists after the first of two European Council meetings. "The European Council agreed that the duration of economic sanctions will be clearly linked to the complete implementation of the Minsk agreements, bearing in mind that this is only foreseen by the end of 2015," he said.

There have been two attempts to end the bloodshed in eastern Ukraine that produced agreements at summits in the Belarusian capital of Minsk in September and March. A 13-point package on the implementation of a ceasefire and other measures agreed at the September 2014 Minsk summit was adopted at the February talks.


Eastern Europe

"Linking EU sanctions to full implementation of the Minsk agreement means they are here to stay for a long time," Dmitri Trenin, head of the Carnegie Endowment for Peace in Moscow said in a tweet.

While the Minsk agreements laid the ground work for a de-militarized zone and a line of demarcation between the Moscow-backed separatists on one side and the Ukrainian army and its related militias on the other side, the agreements did not broach the topic of how to deal with the substantive issues behind the conflict, such as Russia's objections to Ukraine's Nato membership bid or the proposed trade regime with the EU, which need to be resolved before the conflict can be brought to an end.

Russian President Vladimir Putin is expected to keep forces in the field in Ukraine's Donbas region until these questions are solved. And that could take a very long time.

holding out not only for restrictions on Russian-sanctioned banks raising finance in the western capital markets and on exports of oil drilling technology to Russia, but also wants new EU powers to reject members' gas supply contracts signed with Russian state-owned Gazprom if they were deemed to break EU law.

“Most bilateral contracts with our dominant supplier, Russia, are concluded on a long-term basis, sometimes more than 20 years. That can be unhealthy,” Tusk said, reports the FT. However, observers say that Tusk will keep working on this aspect of potential sanctions, which might be added at a later date.

“It is not an empty conclusion, you can be sure,” Tusk said. “I feel after today’s decision, when it comes to energy security, all member states are ready to co-ordinate and co-operate with the institutions and the commission to ensure gas contracts are secure for Europe.”

However, yesterday's communiqué only mentioned the economic and financial sanctions, leaving the EU with the possibility of "rewarding" Moscow for progress in implementing the Minsk agreements by lifting some of the visa bans and thawing asset freezes the EU has imposed on scores of Russian and Ukrainian citizens and organizations if the situation in Eastern Ukraine improves."If things deteriorate on the ground, we will strengthen sanctions. If, on the other hand, the situation remains stable and improves, then we might envisage a re-examination of the scale of the sanctions package and possibly ease it," a French diplomatic source told Reuters.

Linking the European sanctions regime to the implementation of the Minsk agreements will in effect perpetuate them for the foreseeable future as the conflict is unlikely to be resolved by the December deadline: Russia is holding out for much bigger changes in Ukraine and is unlikely to loosen its hold over the Donbas until it ticks off all the items on its wish list.

YOUR BUSINESS PARTNER.www.rbinternational.com

CHANGES ARE GOOD


the time of signing, €142.4mn today) to Sokhumi - support that Vladislav Surkov, Putin’s aide in charge of relations with the two regions, promised will not fall short despite Russia’s economic challenges.

The West has condemned both treaties. The US State Department stated that it does not recognise the legitimacy of any so-called treaty between the de facto leaders of Georgia’s breakaway region of South Ossetia and the Russian Federation and expressed concern regarding the timing. The agreement between Putin and Tibilov was signed on the same day as the 31st round of the Geneva Talks, the platform launched after the August 2008 conflict. Georgia’s chief negotiator in the talks called the treaty and its timing a “deliberate insult” against these talks.

For the European Union, the agreement “goes against efforts to strengthen stability in the region”. Nato labelled it as “yet another move by the Russian Federation that hampers ongoing efforts by the international community to strengthen security and stability in the region”.The final text is similar to the treaty signed with Abkhazia, but it contains clauses that envisage a much deeper integration over a term of 25 years, renewable for an additional 10 years.

The Kremlin pledged RUB9bn (€139.9mn) for “projects for social and economic development” of South Ossetia between 2015 and 2017. The Russian President added that an additional RUB1bn (€15.4mn) will be allocated to implement “the goals” laid out in the treaty and added that

Eurasia

Russia tightens grip on South Ossetia

Monica Ellena in Tbilisi

As Alexander “The Surgeon” Zaldostanov and his Night Wolves paraded through Sevastopol’s streets this week to celebrate Crimea’s whirlwind annexation by Russia one year ago, the Kremlin tightened its grip on another chunk of land beyond its borders.

The “alliance on integration” Russian President Vladimir Putin and South Ossetia’s leader, Leonid Tibilov, signed on March 18 represents a merger of key institutions, including security and customs, as well as a “simplification of procedures to acquire Russian citizenship”. The Georgian Foreign Ministry condemned the treaty, calling it an “actual annexation of occupied Tskhinvali region” by Russia.

South Ossetia and Abkhazia broke away from Georgia in the early 1990s as the Soviet Union collapsed. Russia officially recognised both regions as independent states after a brief war against Georgia in 2008. Since then the Russian Federation has effectively gained complete control over both regions.

Putin said that the implementation of the alliance “is backed by serious financial resources”, a statement that made the treaty sound like an investment deal. After inking the document, Tibilov hailed the agreement as “the best possible guarantee of state security”.

The treaty comes four months after Moscow signed the “alliance and strategic partnership” with Abkhazia, Georgia’s other breakaway region. Then Moscow pledged RUB9.2bn (€205mn at


Eurasia

between 2008 and 2014 Moscow’s assistance to Tskhinvali amounted to RUB43bn (€665.4mn).

It envisions a joint defence and security zone between the two countries, integration of customs agencies and an open border. It also contemplates setting up a Joint Information-Coordinating Centre of law enforcement agencies to “coordinate” the fight against “organised crime and other grave crimes”.

The Kremlin committed to co-finance a gradual increase of state employees’ salaries, bringing them up to current wages in Russia’s North Caucasus Federal District, and to increase pensions for residents holding a Russian passport from 2016.

On the surface, both regions could hardly be more tied to Moscow than they already are. Their people – 240,000 in Abkhazia and an estimated

Movement (UNM). The calls began when dozens of officials during the years of former president Mikheil Saakashvili’s rule from 2004 to 2013 were arrested on charges such as abuse of office and corruption. In February, the special rapporteur of the Council of Europe’s Parliamentary Assembly, Pedro Agramunt, condemned Georgia’s pre-trial detention practises after Ugulava’s request for bail was denied on February 18.

According to Ugulava’s defense lawyer, the decision to bring harsher charges was aimed

Tbilisi court controversially extends ex-mayor’s pre-trial detention

Monica Ellana in Tbilisi

A Tbilisi court on March 15 accepted the request of the Prosecutor’s Office of Georgia to scale up charges against Gigi Ugulava, meaning that controversially the capital’s former mayor, who has been in jail for eight months now, will remain in detention until his trial begins.

Since the Georgian Dream coalition gained power in 2012, the Georgian government has been urged by its Western allies to not use the justice system to settle scores against its political opponents in the former ruling party, the United National

less than 50,000 in South Ossetia – are left with few choices. They rely politically, economically, and militarily on their big neighbour. Russian troops help maintain their de-facto independence and the Russian market provides an economic lifeline. Russia sidelines the local languages in everyday life, the ruble is the local currency, and 90% of the population holds a Russian passport. Moscow also pays pensions to those with a Russian passport. As for Abkhazia, every summer hundreds of thousands of sun-hungry Russians flock to its pebbled beaches, providing much-needed income.

However, while Sukhumi has been maintaining its independence, even from Moscow, for years, South Ossetia has been more open to the idea of being reunified with its mighty neighbour. As Tbilov said on June 2, 2014, South Ossetia is already integrating with Russia, in preparation for joining the Russian Federation “at the right time”.


Eurasia

specifically at extending the opposition politician’s pre-trial detention, which was otherwise due to expire in early April.

“The content of the charges actually remains the same, but they [the prosecutors] made the charges graver, which has only one purpose – to ask the court to keep Ugulava in prison,” the ex-mayor’s defense lawyer, Beka Basilaia,told journalists on March 14.

The Prosecutor’s Office revised the charges stemming from events that occurred in November 2007 when police violently ended several days of peaceful demonstrations organized by Georgia’s opposition calling for early elections and the release of political prisoners. The confrontation also led to a police raid on and “seizure” of Imedi TV station and other assets owned at the time by tycoon Badri Pararkatsishvili, who died in February 2008.

Ugulava has been in pre-trial detention since early July 2014 in connection with a separate, though unrelated case involving money-laundering charges. But the maximum term of pre-trial detention is nine months, which was about to expire. As the Tbilisi City Court has positively ruled on prosecution’s motion for pre-trial detention, Ugulava will now remain in custody.

Saakashvili, of whom Ugulava is a close ally, former prime minister Vano Merabishvili and ex-defence minister Davit Kezerashvili are also facing criminal charges in the same case. Charges against Kezerashvili as well as former minister of justice Zurab Adeishvili have also been escalated.Former president Saakashvili has been out of the country since November 2013 and has failed to appear at the Prosecutor’s Office after being summoned for questioning. He is currently in Ukraine where he was appointed an adviser to President Petro Poroshenko.. The Prosecutor’s Office has applied for the extradition of both Saakashvili and Adeishvili, who is also living in Ukraine, but the request has been denied.

In February, Merabishvili was sentenced to five

years for abuse of office, while Kezerashvili lives in France. In February, a court in the southern French city of Aix-en-Provence ruled out his extradition on account of what “appeared to be politically motivated” request from Georgia.

The new leadership in Georgia denies accusations that they are conducting a political witch-hunt and have promised fair trials. But Western countries have expressed concern that the new government has used selective justice and political persecution against opponents.

In a statement released on March 14, the US embassy in Georgia criticised the court’s decision and said that the revision of criminal charges “appears to be an effort to subvert the nine-month limit on pre-trial detention”. “We encourage the government of Georgia to take steps to strengthen the rule of law and avoid any perception it may be engaging in a campaign of politically-motivated justice,” the statement read.

Last December, the European Parliament ratified the free trade and association deal with Georgia, welcoming the Georgian authorities’ “recent reforms” to “strengthen” democratic institutions”. The accompanying resolution, however, also expressed concern about “the lack of accountability of the prosecutor’s office” and about numerous former government officials and current opposition figures being charged and imprisoned. It also warned against “the potential use of the judicial system to fight against political opponents, which could undermine Georgia’s European course and the efforts of the Georgian authorities in the area of democratic reform.”

Civil.ge reported that on March 9, the chairman of the EP group, Manfred Weber of the European People’s Party, wrote an open letter to Prime Minister Irakli Garibashvili stating that, “bringing new charges against a major political figure solely aimed at keeping him in detention will be viewed as proof of politically-motivated prosecution and will continue to be destructive for Georgia’s international image.”


Central Europe split by Moscow's WWII ceremony

Russian Foreign Minister Sergey Lavrov said on March 17 that Moscow expects Slovak Prime Minister Robert Fico to attend, TASS news agency reported. However, Fico's spokeswoman Beatrice Szaboova refused to confirm, saying only that a decision on his participation has not yet been made.

Russia has invited 68 world leaders to participate in the celebrations. Among those who have confirmed they will attend are the Chinese, Indian, South African, Vietnamese, and North Korean, Lavrov says.

Poland and the Baltic states, which have been pushing for the EU to toughen its stance towards Russia for more than a year, will not be going to Moscow. "There is no way that the president of Poland would partake in this celebration … amid the continuing war in Ukraine," President Bronislaw Komorowski said on Polish television on March 17, according to Tass. Komorowski has instead invited Western leaders to an alternative commemoration in Gdansk on May 8, infuriating Moscow.

US President Barack Obama and German Chancellor Angela Merkel, alongside several others, have said they will not attend the Russian event. However, at EU level there is little consensus. Countries such as Greece have already announced they plan to attend. Some suggest that the likely presence of other European leaders - including, according to the

Central Europe

bne IntelliNews

Russia is no doubt delighted to see the invitations to its May 9 event to mark the 70th anniversary of the end of World War II illustrate the tensions in the EU over the ongoing geopolitical stand off. Nowehere is this more obvious than in Central Europe.

Slovak President Andrej Kiska announced on March 18 that he will turn down the invitation due to Russia's annexation of Crimea a year ago, as well as the conflict in East Ukraine. In contrast, Czech President Milos Zeman is once again courting controversy by agreeing to attend the event, which is expected to be boycotted by most western leaders.

"Considering the developments in Ukraine and Crimea, I don't want to take part in a celebration of army power at a military parade, but I do want to commemorate those who deserve it most from us, namely the soldiers who died in WWII," Kiska said according to TASR.

The contrasting stances highlight the way that Zeman, an opponent of sanctions on Russia, continues to disrupt the Czech government's attempt to show that the country is united in support of the EU stance against Russia. Meanwhile in Slovakia, Kiska - an independent and political novice who upset expectations by winning the presidential election in March 2014 - plays almost the opposite role. While he has clearly proclaimed his support for a strong EU policy towards Moscow, the Slovak government remains somewhat ambivalent.


However, the Slovak political establishment, and particularly the ruling Smer party, still has close ties to Moscow. On top of the clear pressure Moscow is able to exert via the energy sector, that makes policy - and therefore a flight to Moscow in May - a tricky call for Fico.

In the Czech Republic, former Social Democrat premier Zeman exhibits no such ambivalence. He has long been noted for his Russian links, and has raised fury with several controversial statements over recent months, including calling the conflict in Ukraine a "civil war". These comments have provoked a war of words between Foreign Minister Lubomir Zaoralek and Prague Castle, with many claiming Zeman is actively seeking to undermine foreign policy.

Criticism at home over Zeman's planned attendence at the Moscow commemoration is growing as the date approaches. The Czech president, however, claims his absence would be disrespectful to the Russian soldiers who helped oust the Nazi regime.

Opposition politicians have urged the government to refuse to finance the president's trip. However the request, filed by former lower chamber speaker Miroslava Nemcova from the rightwing Civic Democrats, was declined by the Social Democrat-led government. Illustrating the difficulty of his position, Prime Minister - and sworn Zeman enemy - Bohuslav Sobotka insisted the government must follow protocol.

The government has been careful to try to tread a neutral line on Ukraine. Like Slovakia, it has supported EU sanctions after some initial hesitation, but Sobotka has questioned their usefulness, though not in such forthright terms as Fico. Voters for Zeman and the Social Democrats - who are increasingly found in the provinces - tend to be sceptical of sanctions and receptive to fears about the effect on the Czech economy.

In Prague, Zeman's decision to go to Moscow is only stoking the public anger that has been

Central Europe

Russian press, delegations from France and the Netherlands - will strengthen speculation that EU commitment to maintaining sanctions against Russia is waning.

Merkel has said following talks with Ukrainian President Petro Poroshenko in Berlin that the issue of prolonging sanctions against Russia will be decided by June. Political discussions on the economic measures will be resumed at the European Council summit on March 19-20, with a focus on compliance with Minsk ceasefire agreements for the conflict in eastern Ukraine.

At the other end of the scale to Poland, Hungary is now one of Russia's staunchest allies in the European bloc, after signing deals on nuclear energy and gas in recent months. For the meantime, it seems Budapest is not especially keen to discuss the May 9 event. However, given Putin's controversial official visit to Hungary in February, and Prime Minister Viktor Orban's penchant for thumbing his nose at policymakers in Brussels, it may be safe to assume the plane is already booked.

Slovakia, previously a clear opponent of the West's stance on Russia, has been turning its foreign policy around in recent months. Pressure from Washington and Brussels, and Russia's insistence that it will divert gas flows headed to Europe away from Ukraine appear to have had a strong effect. Slovakia, which carries the gas westwards from the Ukraine border, would be the biggest loser in the EU should Moscow shift gas transit to the south as it claims it plans.

In September, Slovakia opposed some of the proposed EU sanctions against Russia relating to capital markets and the ban on exports of some dual-use goods and technologies. Moreover, it claimed the country could lose up to 10,000 jobs if Russia decides to respond to the EU's sanctions by banning car imports from Europe. However, it has since become a stalwart of the effort to send EU gas to Kyiv; the country has meanwhile reported Russian deliveries under its own contract have been cut.


The petition comes at a time when support for the increasingly controversial president is declining. A survey by STEM agency showed in February backing for Zeman fell to 43% from 57% four months earlier. Zeman's pro-Russian stance provoked street protests late last year. The president was booed and pelted with eggs during celebrations of the 25th anniversary of the Velvet Revolution on November 17.

Central Europe

rising around the president for some time. A petition signed by 11,000 Czechs was delivered to the Senate on March 18 calling on the the upper house to investigate Zeman's actions and consider impeachment proceedings. According to the organisers, Zeman's opposition to sanctions against the Putin regime means the president is acting against the interests of the Czech Republic, reports Radio Praha.

“From what I hear from some MPs, the discussion is probably going to be very heated,” the premier said ahead of the session.

However, the vote came amidst growing fears in Lithuania – as well as its Baltic neighbours Latvia and Lithuania – of Russian aggression. Moscow annexed Crimea a year ago and is accused of supporting rebel forces in east Ukraine. Officials in Moscow have, meanwhile, continued to make comments about the rights of the sizable ethinic Russian population in Latvia and Estonia.

At the same time, Russian military aircraft have been buzzing the region. Seven fighters and bombers were intercepted by the Nato Baltic Air Policing mission while flying in international airspace near Latvia on March 18.

In response, the Baltic states have increased defence spending and are actively pursuing military drills with Nato allies. The so-called Operation Atlantic Resolve drill is currently under way, with a convoy of Nato troops and equipment to move through the region in the next few weeks.

Lithuanian parliament approves reintroduction of conscription

bne IntelliNews

The Lithuanian parliament voted overwhelmingly in favour of the reintroduction of conscription on March 19, as fear of Russian aggression continues to build in the region.

A total of 112 out of 141 MPs voted for the motion, which will see up to 3,500 men drafted each year. The legislation aims to boost the number of Lithuanian troops to 17,000-22,000, from the current 15,600.

It's estimated Lithuania will need to spend roughly €6mn on conscription this year. Lithuanian generals have been complaining ever since the abolition of the draft in 2010 that they cannot fill up even half the barracks.

Despite Lithuania's relative lack of ethnic Russian population compared with its Baltic cousins, the strong support for the motion was somewhat surprising. The response amongst the likely recruits has not been enthusiastic, while analysts have suggested that given the huge superiority of the Russian military, and Nato's preference for professional armies, the move is little more than a nod to the domestic political audience.

Prime Minister Algirdas Butkevicius had warned that the parliamentary debate could be divisive.


Southeast Europe

EU energy dream made real as Turkey breaks ground on Azeri gas export route to Europe

operator Botas has 30%, and BP, which is the operator of the Shah Deniz field and only formally joined the TANAP consortium on March 13 after two years of negotiations, has 12%.

Of the 16bn cm/y that TANAP will initially carry, 6bn cm/y will be taken by Botas and supplied to consumers in north-west Turkey. The remaining 10bn cm/y will be transited to the Turkey-Greece border, from where it will be transferred to the planned 20bn cm/y Trans Adriatic Pipeline (TAP), which will carry the gas through Greece and Albania, and then across the Adriatic to Italy, from where it can either supply the domestic Italian market or be transited to Central Europe.

That 16bn cm/y of gas will be supplied from Azerbaijan's Shah Deniz field, which is being developed by a consortium led by BP (28.8%) and with major shareholders including Turkey's state oil company TPAO (19%) and Socar (16.7%).

The ground breaking ceremony for TANAP brings to an end more than 15 years of discussions on how to realise the EU's long-mooted "Southern Gas Corridor” – a project borne out of the bloc's increasing dependence on imports from Russia beginning in the late 1990s, which prompted the EU to launch proposals for a new route for imports from the Caspian and North Middle East via Turkey.

With the construction of TANAP guaranteed by Baku and Ankara, and 16bn cm/y of gas secured from the consortium developing Azerbaijan's Shah Deniz gasfield, the development of TAP is also now certain, and the development of the long-planned corridor also now guaranteed. The only question remaining is how to fill the remaining 15bn cm/y of TANAP’s capacity.

David O'Byrne in Kars region, Turkey

Turkey has formally broken ground on the construction of the 31bn cubic metres a year (cm/y) Trans Anatolian Gas Pipeline (TANAP), which when operational by the end of 2018 will carry Azerbaijani gas to European markets and reduce the bloc's energy dependence on Russia.

The pipeline of 1,850km will initially carry 16bn cm/y of gas from Azerbaijan's Shah Deniz gasfield, with the remaining 15bn cm/y of capacity expected to be filled with gas from other Caspian fields or elsewhere in the region.

At a ground breaking ceremony on March 17 in Turkey's Kars region, attended by presidents Tayyip Erdogan and Ilham Aliyev, the Azerbaijani president announced that he expects the first gas to flow through the line in 2018, and beyond that he foresees the line will be able to carry more Azeri gas. “We have proven [gas] reserves of 7.6 trillion cm, and more optimistic estimates suggest the real reserves could be double that,” he said.

Erdogan for his part stressed the importance of the pipeline for the whole Eurasian region. “[The EU energy project] the Southern Gas Corridor, when it is fully implemented, will provide a strong link between the Caspian and Eurasia region and Europe,” he said.

The importance of the project for Europe was also stressed by Maros Sefcovic, vice president in charge of the energy union for the European Commission. “This project is of immense importance for Europe, as it will supply the only new source of gas currently available,” he said.TANAP is being developed by a consortium in which the Azeri state energy firm Socar holds 58%, Turkey's state gas importer and Transit


Southeast Europe

With more Caspian gasfields yet to be developed and the prospect of both Turkmen and Iraqi gas being available, Azerbaijan has already floated the possibility of a second TANAP line to be laid parallel, doubling the currently planned capacity. That, though, will depend on how much gas the European market needs and when.

With Turkey and Russia already in serious talks over the construction of Moscow's planned 63bn cm/y so-called “Turk Stream” pipeline through Turkey, serious questions remain over when, and indeed if, an expanded TANAP could become viable. Not to mention the question of whether Turkey wants to go against the interests of its close ally Azerbaijan, damage its prospects of joining the EU, and further increase its dependency on Russia, which already meets close to 60% of Turkey's gas needs.

While both Socar and BP have stated their preference for using gas from other Caspian fields in which both companies have interests, the inter-governmental agreement between Turkey and Azerbaijan for TANAP also allows for the line to carry gas from Turkmenistan, and the Turkish parliament recently approved a bill allowing Turkmen gas to be transited through Turkey to Europe.

That possibility was further bolstered last year when Malaysia's state oil company Petronas, which already holds the rights to three gasfields in the Turkmen sector of the Caspian took a 15.5% stake in the Shah Deniz consortium. Petronas already holds the rights to three gasfields in the Turkmen sector of the Caspian and is looking for markets for the gas. Whether this will result in the construction of a long-planned gas export line across the Caspian from Turkmenistan to Azerbaijan remains to be seen.

However, an alternative exists in the form of exports overland via existing infrastructure through Iran – the sole hurdle being the need for Tehran to finalise a deal with the West over its nuclear programme.

Also technically possible would be for gas from Iraqi Kurdistan to be transited via TANAP. Both the Kurdistan Regional Government and developers operating in the region have stated that gas could be made available for export to Turkey and Europe as soon as 2018. Although for that to be realised, it would require both the approval of the Iraqi central government in Baghdad and an agreement between Turkey and Azerbaijan to amend the inter-governmental agreement for TANAP.

With several options for filling TANAP – and by extension TAP also – the EU should be reassured that its Southern Gas Corridor is finally being realised. However while 31bn cm/y is a healthy start for the corridor, it is still dwarfed by Russian exports to Europe which topped 160bn cm in 2013 and are expected to continue rising.

SilverSponsor

DiamondSponsor


Southeast Europe

incomes cannot benefit of the state guarantees. Notably, the bill does not apply to loans that have been sold by local lenders to foreign entities. This is the case of some foreign financial groups that have sold portfolios of loans to entities within the group operating abroad. In some cases, the debtor is not even aware of the change.

The CHF loans cannot generate systemic problems in Romania because of the small share in total loans or GDP, but the CHF’s strengthening has created major problem for debtors and several banks that accumulated the bulk of the loans denominated in Swiss francs. Conversion of the loans at the historic exchange rate, namely the exchange rate when contracts were signed in 2006-2007 – as debtors have asked - would cost banks RON5.7bn (€1.3bn), or 0.8% of GDP, central bank governor Mugur Isarescu estimated.

The stock of CHF loans is currently around RON9.8bn (€2.2bn), or 4.6% of the stock of non-government loans, the central bank said. However, this figure does not include the stock of CHF loans transferred by local financial institutions to their foreign entities, a practice that mainly applies to OTP Bank loans.

The distribution of the CHF loans by banks is as follows: Bancpost Romania (32%), Volksbank Romania (24%), Piraeus Bank Romania (20%), Raiffeisen Romania (11%), Banca Romaneasca (7%), OTP Bank (2%) and other banks (4%). Of the 40 local banks, 11 have extended CHF loans.

Romanian government drafts bill to help CHF loan debtors

bne IntelliNews

Romania’s government has completed and published for public consultation the draft of a bill aimed at helping people who have defaulted on their foreign currency loans because of significant exchange rate variations.

The bill was drafted in response to the protests of CHF debtors, whose instalments surged in February after the Swiss central bank abandoned the fix exchange rate regime. The mechanism is also available to debtors of loans denominated in any other foreign currency that strengthens significantly against the national currency.

The government, through the national guarantee fund for small and medium enterprises (FNGCIMM) will insure half of the loan converted from foreign currencies to local currency, after the bank applies a 15% discount to the value resulting from the conversion at the exchange rate at the date of conversion. The conversion is requested by the debtor and has to be approved by the bank. The recipient of the state guarantee will have to pay a fee in exchange for the insurance extended by FNGCIMM. The bank is entitled to demand from the debtor the other 50% not covered by the state guarantees.

Only debtors with incomes below a certain threshold – set under the draft at RON3,000 per month - can benefit from the guarantees extended by the state under the draft bill. Separately, debtors whose monthly instalments after the conversion of the loan from foreign to local currency does not exceed 25% of their monthly


Opinion

Suna Erdem in London

They’re banning Minecraft in Turkey. Great, I’m moving back. Shame they had to un-ban Twitter and YouTube. They should go the whole hog and prohibit the internet – then we parents could flock there, safe in the knowledge our children won’t be trolled, shamed or groomed online.

But paranoid parents apart, most would judge a ban on Minecraft to be ridiculous. It’s also arbitrary. If you worry about violent games, ban Call of Duty, not a children’s construction game where they blow up the occasional pig. However, like many eye-catching stories that emanate from Turkey, it’s not quite true.

Much uttered about Turkey in recent years has the flavour of a joke – stories of criminalising adultery and banning abortions turned out to be false. The hapless parliamentary speaker Bülent Arınç recently said ludicrously that women shouldn’t laugh in public, and an outcry ensued when the government restricted alcohol advertising. Yet women still guffaw with impunity and a friend who owns a restaurant says obtaining an alcohol license is easier than ever.

These stories are entertaining – and I had great fun during my years as Turkey correspondent of The Times – but the regular reference to the government’s perceived Islamist ambitions often disguises what’s really happening.

Prime minister-turned-President Recep Tayyip

Erdogan’s party came to power in 2002 and was for many years one of Turkey’s best ever governments. It presided over a remarkable economic turnaround and improved Turkey’s international standing.

I’ve interviewed Erdogan a few times, and his charisma is undeniable. But he’s also like many authoritarian Turkish men I knew and was irritated by while growing up there. He delights in a brashness he believes to be authentic and is quick to take umbrage – as the many he sued for satirizing him can testify. If you dent their pride, these men burn boats.

Early on, Erdogan broke taboos and invested much political capital in changing Turkey’s hard line policy on Cyprus and securing candidacy for EU membership. He felt snubbed when Europe allowed Cyprus to become a veto-wielding EU member while still divided, and again when Angela Merkel and Nicolas Sarkozy openly opposed full Turkish membership, reinforcing his view that the EU doesn’t want a Muslim state in the fold.

At home, Erdogan was also under siege from a vocal urbanised elite worried he would put their daughters in headscarves. I spent many a dinner party arguing this was unlikely and was called desperately naïve by people who believe 9/11 was a conspiracy by “the CIA and the Jews”.The fears persisted, and in 2008 the Constitutional

BEYOND THE BOSPHORUS: Erdogan – a victim of hubris


Opinion

Court nearly shut down Erdogan’s Justice and Development Party (AK) for alleged Islamism. Then came the shock of military intervention in the presidential elections. Erdogan’s government stormed the ensuing snap polls, but his paranoia increased as he felt slighted at home and abroad.

This is where his politics started going wrong, and the wild stories written about him began to converge with the truth. Erdogan teamed up with a wily Muslim cleric to neuter the politically overactive military and its anti-democracy supporters. But the cause expanded to encompass those Erdogan or his allies simply didn’t like. He also took control of much of the media through his cronies. The brutal crackdown on young anti-government protesters in Istanbul’s Gezi Park two years ago was a defining moment. From campaigning against the media-controlling establishment, Erdogan suddenly personified everything he was supposed to be fighting against.

With eyes only for his grassroots supporters, Erdogan is now surrounded by sycophants. “He doesn’t care any more what people think of him,” one of his close aides told me, “or what the West thinks.” One wonders what might have happened if he’d felt more welcomed by the EU – whose demands on human rights and the economy had been a great driver for Turkey’s early 21st century renaissance.

Despite his international fall from grace, Erdogan clings on. Detractors talk about his iron grip, crushing of dissent and promotion of backward, knuckle-dragging Islamists. But the main reason his support remains strong is the economy. It was no coincidence AK was elected in 2002 after Turkey’s worst post-war economic crisis – and, under Erdogan, GDP per head has grown from $3,000 into double figures. Many voters care little

about You Tube bans, but like what they see – new roads, bridges, shopping centres, public transport, houses, mortgages, landscaped kerbsides, the power of the lira in their pocket…

When I worked in Turkey for Reuters in the 1990s – dark years of state violence and a dismal economy – my wages increased by several million lira each month. AK has managed to knock six zeroes off the currency. A senior opposition politician told me that even his mother won’t support him: “She doesn’t care how rude Erdoğan is – as long as she can afford better vegetables at the market, he gets her vote.”

Turkey is on tenterhooks, as the economy is now struggling. Moody’s has the country on its lowest investment grade rating, Baa3, with a negative outlook. The current account deficit remains wide and both Fitch and Standard & Poor’s could also soon issue a downgrade. This is probably why Erdoğan has been unusually reticent after being slapped down by Deputy Prime Minister Ali Babacan, as well as the central bank chief, for trying to force a vote-winning interest rate cut.

The most recent polls show more Turks oppose AK than support it and many are undecided. Fears of an impending economic crisis are widespread. As he battled real and imaginary demons, has Erdogan taken his eye off the ball and forgotten to insist on good governance?

So forget the headlines about headscarves and alcohol and a supposed sympathy for Isis, Erdogan looks like he has fallen prey to hubris after three terms in power, and neglected the things that matter. It’s something that has happened to many a leader, from Thatcher to Blair. Simple, quotidian and devoid of any conspiracy or dangerous Islamism. How disappointingly boring.


bne: Infrastructure

Weekly Lists

Russia’s regions trail Putin’s roadbuilding drive bne IntelliNews

Russia's cash-strapped regions are in trouble as they have been unable to fulfil President Vladimir Putin's orders to double spending on roads. The failure will be a blow to the Kremlin which was hoping to give the economy a Keynesian boost growth from upping spending on infrastructure.

Road building as been a centrepiece of Russia's plans to spend over $1 trillion on infrastructure and an extra ruble of tax was added to the price of petrol to pay for it. However, despite the extra funds, the crisis has hit Russia's regions even harder than the federal government, and desperately needed spending on road building has been the first victim.

Spending on roads was RUB345bn ($5.6bn) in 2014, according to the Association of Regional Road Management (RADOR), reports Vedomosti, which is down from the previous year's spending and about half of the 2008 total.

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

Romania plans sale of airport, port and energy companies bne IntellinNews

The Romanian government plans to sell 25% of hydropower company Hidroelectrica by the end of the year, Prime Minister Victor Ponta said at a meeting with foreign media on March 17, quoted by Ziarul Financiar daily.

The plans sketched by Ponta are highly optimistic, since Hidroelectrica is still under insolvency, and given the complexity of preliminary evaluation and due diligence needed before floating the shares of a company of this size.

The manager of Romania’s Fondul Proprietatea (FP) previously said that no major state-owned companies are expected to hold IPOs in 2015. With Hidroelectrica still under insolvency procedures, even an IPO in 2016 “could be very challenging”, Greg Konieczny, executive vice president of Templeton Emerging Markets Group and manager of FP, told journalists on January 21.

The government also wants to float shares in Constanta port and Bucharest airport in dual listings in Bucharest and London this year, Ponta added. At least 15% of the shares in the two companies would be sold in the planned IPOs. The government will also agree with the financial market regulator ASF a list of the state-controlled firms that could sell part of their assets or shares. Energy group CE Oltenia will be on the list.


Scripps Networks Interactive announced on March 16 it has won the race to buy a 52.7% stake in Polish multi-platform media company TVN.

The US developer of lifestyle TV and internet content has agreed to buy the Polish station from ITI and Canal+ Group for €584m in cash, while it will take on €840m of debt.

TVN gives Scripps, which joined the race to buy Poland’s largest media group only in the last few weeks, a portfolio of free-to-air and pay TV lifestyle and entertainment channels. It includes Poland’s leading 24-hour news channel TVN24 and business news channel TVN24 Biznes i Swiat. TVN enjoyed a market-leading 22% share of Polish viewing in 2014.

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

Scripps wins race for Poland’s TVN bne IntelliNews

EU investors buy Bulgaria’s Vivacom

bne IntelliNews

LIC33, a group of unnamed EU investors, has agreed to buy a majority stake in Bulgaria’s largest by revenue telecommunication company Vivacom, Dnevnik daily reported quoting a company statement to the Bulgarian News Agency (BTA). LIC33, which claims to be specialising in investments in troubled companies in emerging markets, has acquired stakes also in "other leading companies in Bulgaria" that are not named.

The new owner will refinance Vivacom's debts, estimated at €900mn. The deal is subject to regulatory approval. Vivacom is the brand name of the Bulgarian Telecommunications Company (BTC), formerly the state-owned fixed-line monopoly.

Controversial businessman Tsvetan Vassilev is presently BTC’s biggest shareholder with a stake of slightly over 43%. VTB Capital, the investment unit of sanctions-hit Russian financial group VTB, holds a stake of about 33% and the remaining shares are held by BTC creditors.

bne:TMT



Weekly Lists

Cargill's leap from Ukraine's Delta Bank may have been too lateGraham Stack in Kyiv

Cargill, the US food commodities trader, took over around $100mn in assets from Delta Bank just weeks before Ukraine's fourth largest bank was declared insolvent on March 2, according to newspaper reports and leaked documents. The reported move has sparked huge controversy, but it is not clear whether America's largest privately owned company will actually be even able to realise the value of the assets it has allegedly taken over.

According to a report in Ekonomicheskaya Pravda, Cargill, which has a 30% equity stake in Delta, reassigned to itself Delta Bank assets in February, in the form of letters of credit provided to Ukrainian traders totalling nearly $100mn. According to the report, the sum was roughly equivalent to the value of Cargill's equity stake. The article argued that Cargill - ranked by Forbes in 2014 as the largest US private company with revenues of $134.9bn - by this means rescued its equity investment before the bank collapsed, at a cost to depositors.

Delta Bank was Ukraine's fourth largest commercial bank by assets, and the second largest privately owned bank, until it was declared insolvent. Cargill took a 30% stake in Delta Bank in 2010, after having provided wholesale financing to Delta Bank in the run-up to the financial crisis of 2008-2009.

Poland’s Idea Bank sets ambitious target for IPObne IntelliNews

The maximum price on the forthcoming initial public offering of Poland's Idea Bank has been set at PLN32 (€7.75) per share, owner Getin Holding announced in a regulatory statement on March 19. The pricing sees the Polish financial group targetting a valuation of PLN2.8bn on the unit, or what looks to be an ambitious 1.9-times book value.

The bank will offer up to 7mn existing and up to 20mn new shares. Overall, the listing on the will see 30.7% of the bank listed on the Warsaw Stock Exchange. Idea plans to debut on the bourse on April 16, despite the current pressures the Polish banking sector is facing.

The IPO aims at raising capital in order to grow Idea's core lending business for small and medium enterprises, as well as boost factoring and leasing business lines. Analysts suggested Idea's need for capital must be strong, and it will be aware that it will have to accept the valuation the market offers.

bne:Banker



Weekly Lists

Romania extends MTN programme bne IntelliNews

Romania’s government has increased the limit of the external borrowing under the 2014-2016 medium-term notes (MTN) programme by €3bn to €18bn in order to accommodate planned issues of Eurobonds aimed at public debt financing in 2015 and next year, Ziarul Financiar daily reported on March 18.

The 2014-2018 MTN programme is in fact an extension of the previous programme opened in 2010 and it was initially designed to cover €7bn financing over the three-year period (2014-2016) on the top of the other €8bn financing under the initial MTN programme 2011-2013. The extension for 2014-2016 was decided by the government in November 2013, when the cap on the programme was lifted from €8bn to €15bn.

The Romanian government has sent out a request to banks for proposals for a new euro- denominated bond, Reuters reported earlier in March quoting unofficial sources. Romania last tapped the bond market in October 2014, when the sovereign issued a €1.5bn 10-year bond with a 2.875% coupon, at a yield of 2.97% (185bps above mid-swap) - the lowest cost in the 25-year post-communist period.

Hungary looking east for new bond bne IntelliNews

Hungary is mulling a bond issue in the Middle East and/or Far East next year, the recently appointed head of state debt manager AKK said on March 18.

Gyorgy Barcza reiterated that the country does not plan to tap the foreign debt market in 2015. Yet, next year the country will have to repay €5.5bn of foreign currency debt, significantly above the €2.3bn due in 2015, so AKK might return to the international markets.

However, despite the momentum on European markets thanks to the ECB's bond buying programme, the debt manager said he is examining new markets. Barcza mentions the Middle and Far East as potential targets.

bne:Credit


bne:newspaper - march 20, 2015

Documents