bne:Newspaper - April 3, 2015

April 3, 2015 www.bne.eu

Russia extends Ukraine’s gas discount for another three months

Uzbekistan's strongman president, Islam Karimov, won the March 29 election with 90.4% of the vote on a 91.1% turnout, according to the preliminary results announced by the Central Electoral Commission on March 30.

"A total of 17.2mn people or 90.39% of voters who took part in the election voted for Islam Karimov," the commission's chairman, Mirzo-

Uzbekistan's Karimov wins re-election with 90% vote

Ukraine has signed a new agreement on natural gas purchases from Russia which stipulates an effective price of $248 per 1,000 cubic metres (vs $229 per 1,000 cu m in the previous “winter package”), while other conditions remain the same as were agreed in October.

Ukraine in the first quarter of 2015 paid $329 per thousand cubic metres for Russian gas under the

'winter package' deal, with Kyiv winning a $100 discount per 1,000 cu m until the end of March. This discount has now been extended for another three months.

"It is a victory of an economic approach to relations between Naftogaz and Gazprom over

Ulugbek Abdusalomov, told a news conference in Tashkent.

According to the law, only registered political parties are eligible to nominate candidates for president. Karimov stood from the favoured Liberal Democratic party (UzLiDeP). Stalking-

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horse candidates from a further three parties registered in Uzbekistan received between 2.05% and 3.08% of the votes, Abdusalomov said.

This comes as no surprise as voters complained during the election campaign they did not know enough about the alternative candidates, and if they knew, they were not sure that the candidates would even vote for themselves. An unofficial observer told bne IntelliNews the campaign did not look like "a real election campaign with proper competition" and other candidates had behaved as if they campaigned for Karimov.

Most voters bne IntelliNews talked to said they would still vote for the incumbent because they saw no alternatives, partly because of state propaganda, which presented Karimov as the best guarantee of stability.

The Organisation for Security and Cooperation in Europe's Office for Democratic Institutions and Human Rights (OSCE/ODIHR) deployed a limited election observation mission which said in a statement on March 30 that the election had been held with "persistent legal and organisational shortcomings". It also pointed out the incumbent's breach of a constitutional limit of two consecutive terms and raised doubts about the independence of the Central Election Commission which nevertheless registered Karimov as a candidate.

"The rigidly restrained media gave the incumbent a clear advantage," the statement said, adding that "proxy voting on behalf of several voters appeared to be universally practised". The election monitoring mission also said that electoral commissions at polling stations had not established the number of signatures of voters

on the voter lists and had not matched it with the number of ballot papers cast, pointing to vote rigging and ballot stuffing.

"The electoral legal framework does not provide for the conduct of democratic elections, as a number of provisions contravene OSCE commitments and other international obligations and standards, and laws and supplementary regulations contain contradictory norms," the mission said. "The possibility to stand as an independent candidate has been abolished since the last election. Some previous OSCE/ODIHR recommendations were addressed by regulations; however, fundamental freedoms of association and expression remain effectively curtailed," it concluded.

Uzbekistan has never held presidential or parliamentary election regarded as free and fair by the OSCE.

Uzbekistan's Karimov wins re-election with 90% vote

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gesture that only reflects falling gas prices in general.

Tim Ash, head of emerging markets research at Standard Bank, said in a note that this did not show "Russian 'warming' to the government in Kyiv, rather that Moscow can sell this to its allies in Europe, e.g. the Tsipras government in Greece, as an example of it being reasonable towards Ukraine, when in reality to does not really entail any significant concession".

According to unofficial reports, the price of Russian gas to non-CIS consumers in Europe is projected by the finance ministry to fall as low as $222.1 per 1,000 cu m in 2015 due to lower oil prices.

Gazprom CEO Aleksei Miller said on March 30 that the company had asked the government to allow an "optimal" three-month extension of the discount "because the spring-summer season is coming, and also because of high gas price volatility on the global market”.

Planned for five months, the discounted rate was set in October last year after talks between Russia, Ukraine and the European Commission. A warm winter since then also reduced Moscow's leverage through gas prices in its stand-off with the West over Ukraine.

During trilateral talks in Brussels on March 20, Russia and Ukraine agreed most terms of new deliveries from April 1, including a reset of the take-or-pay rule and payment by Ukraine's Naftogaz of $3.1bn of previously accumulated debt to Gazprom.

However, Demchyshyn later upset the apple cart by saying Ukraine would stop buying gas from Russia from April 1 because it was cheaper to get it from EU neighbours.

"There is no reason to buy gas at a higher price than the price at which we can buy it from Europe. We will simply stop buying it," Demchyshyn said.Disagreements also remain over the sum

Russia extends Ukraine’s gas discount for another three months

a political one," Energy Minister Volodymyr Demchyshyn said on the ministry's website after several days of confusion about the final rate. Ukraine will still be required to pre-pay Russia for its gas supplies, he added.

Ukrainian energy officials had expected a lower price for Russian gas as consumption falls in milder weather, reminding that the prices reflect low global oil prices. After much wrangling with Russia, Ukraine got an "economically rational" market price, lower than the cost of buying reverse supplies from Europe, Demchyshyn emphasized.

The minister said he hoped the terms of Russian gas prices to the end of the upcoming 2015-2016 heating season would be settled during talks between Russia, Ukraine and the EU on April 13-14.

Russian President Vladimir Putin had approved a request by Gazprom to supply discounted natural gas to Ukraine for three more months on March 31, saying the arrangement would be reviewed later as oil prices changed.

“Let’s do it [extend the discount],” Putin told Prime Minister Dmitry Medvedev at a Kremlin meeting, adding that the volatile oil price to which gas prices are pegged would inevitably change in the coming weeks.

"In three months we’ll have to check what’s going on in the sector and after that make a supplementary decision,” Putin added.Medvedev played up the discount as a boost to Ukraine amid its current economic dire straits. But some observers dismissed it as a contrived

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translates into a limited dividend yield of 1.5%,” VTB Capital analysts estimated in a note.

Adding to the squeeze, Gazprom had to pay around $1bn (RUR56bn) in compensation to its partners in the cancelled South Stream gas pipeline construction. In December, it bought out the original share in project of Italy’s Eni, France's EDF and Germany’s Wintershall, the company said.

South Stream was due to run from Russia through the Black Sea to Bulgaria, Serbia, Hungary and Slovenia to Austria. Russia pulled out late last year because of obstacles put in place by Bulgaria and the EU, the 2014 Crimean crisis and the imposition of Western sanctions on Russia.

Ukraine owes Gazprom under an earlier take-or-pay agreement, which is currently being argued in a Stockholm arbitration court. Russia has demanded more than $20bn of penalty fees from Ukraine. The take-or-pay clause was suspended in the winter package but re-established from April 1 at the recent talks in Brussels.

Gazprom hurtingMeanwhile, Gazprom on March 31 reported a 70% slump in 2014 net profit under RAS, to RUB188.9bn from RUB628bn in 2013. Revenues decreased to RUB3.99 trillion from RUB3.93 trillion in 2013. “If no FX adjustments are made to the net income, the reported financials might imply a dividend of RUB2 per share, with

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The Regions This Week

Lithuania is full of Russian spies, the Baltic state's intelligence agency claims in a report. One third of Russian diplomats in the country are there for espionage, VSD alleges.

UK retailer Tesco will create a single management unit for Central Europe. The downsizing is part of a cost-cutting drive across the group. Speculation has been rife that the retailer could look to sell its operations in Slovakia, Hungary, the Czech Republic and Poland.

Travel Service has completed the acquisition of a 34% stake in struggling Czech flag carrier CSA. The deal sees the state's stake drop to 20%. Korean Air, which owns 44% of CSA, used an option - agreed when it bought into CSA in 2013 - to buy the stake and then transfer it to the Czech budget airline operator. Brussels does not allow non-EU companies to control European carriers.

Prague's metro will be the first in Europe to have luggage porters when four new stations

Central Europeopen on Easter Monday. Despite the line having failed to quite make it to the airport, the Veleslavin station on the extension to the A line will become the main public transport gate bringing tourists to the city. However, the new station, connected to the air hub by bus, is not equipped with an escalator.

The Dragoon Ride left the Czech Republic on April 1 having received a hearty welcome. Czech activists had suggested opposition to the US army convoy snaking its way from Estonia to Germany on a tour designed to show Nato support for Central Europe in the midst of the geo-political stand off with Russia. However, crowds waving US flags showed less ambivalence than the political elite.

Hungary has seized HUF160bn of assets connected to the bankruptcy of Quaestor. The claim came just a day after the parliament passed legislation allowing the pursuit of assets to compensate clients.

businessneweurope I Page 5April 3, 2015

Southeast EuropeAlbania is considering a draft law on gambling intended to combat the informal economy and reduce the social consequences of gambling. If adopted, it would restrict casinos to tourist areas and five-star hotels, as well as giving the authorities the power to ban individuals from casinos at the request of family members.

Croatia’s revenues from tourism rose 2.8% to €7.4bn in 2014, the country’s tourism ministry said on April 1, quoting data from the central bank. The share of tourism in last year’s GDP was 17.2%.

Rosia Montana Gold Corporation said on April 1 it will lay off 35% of its employees due to delays with its Romanian gold mining project. The company has been trying for the past 15 years to go ahead with plans to develop Rosia Montana, which it says could become the largest gold mine in Europe.

EPS Trgovanje, the Slovenian arm of Serbian state-owned energy producer EPS, started electricity trading on the Hungarian power exchange HUPX on April 1. This is the first time in 24 years that EPS has sold electricity on the exchange without a mediator.

Cable operator Telemach, controlled by US private equity firm Kohlberg Kravis Roberts, has completed the takeover of Slovenia’s third largest mobile firm, Tusmobil, the latter said on April 1. The size of the transaction is estimated at around $150mn.

Bosnia’s parliament approved the country’s new government on March 31. The cabinet, under pro-EU Prime Minister Denis Zvizdic, was approved five months after the October elections.

Udruga Franak, which represents Croatians holding loans denominated in Swiss francs, announced on March 31 it will quit talks with the finance ministry and the central bank. The

association said it will organise a mass protest on April 25 and asked the central bank’s governor Boris Vujcic to resign.

Sergiu Lucinschi, the son of former Moldovan president Petru Lucinschi, has been charged with blackmail, Romania’s National Anticorruption Directorate (DNA) announced on March 31. Former Romanian President Traian Basescu’s son-in-law Radu Pricop is also under investigation in the case.

Romania’s central bank cut the policy rate by 25bp to 2% at its March 31 monetary policy board meeting. The move was in line with expectations, and was the latest cut in a cycle started in mid-2014.

Bulgaria’s revenue agency has blocked the sale of telecoms operator Vivacom and other assets held by fugitive tycoon Tsvetan Vassilev to Luxembourg-registered special purpose vehicle LIC33. The Bulgarian competition authority has also launched a probe into the deal.

The International Monetary Fund (IMF) forecasts 3% GDP growth for Kosovo this year, as steady inflows of remittances have helped support the economy. However, it says support for faster growth and investments in energy infrastructure is needed.

Montenegro has opened two new chapters in its European Union accession negotiations. After opening chapters on taxation and external relations, Montenegro has opened 18 of the 33 chapters, of which two have been provisionally closed.

Milan Bandic, the mayor of Croatia’s capital Zagreb has launched a political party, despite being held in police custody on corruption charges. Milan Bandic 365 - The Labour and Solidarity Party will run in parliamentary elections later this year, Bandic said.



Eastern EuropeThe Council of Europe said Ukraine has failed to properly investigate the violence during the Maidan protests, including the Maidan massacre of February 20, 2014, in a critical report.

Ukrainian banks saw a seven-fold increase in losses in February m/m to UAH66bn ($2.9bn), compared with UAH8.5bn seen in January, the National Bank of Ukraine (NBU) said.

Russia is reforming its narcotics laws by subdividing classes of drug and reducing the sentence for possession of some types of drugs. Authorities seized 3.5 tons of Afghan heroin worth more than $1bn in 2014, Russia’s Federal Drug Control Service (FDCS) said.

Russia's Investigative Committee said it has identified the mastermind of the killing of politician Boris Nemtsov. A man known only as Ruslik, provided a gun and a car to the hit men, promising them RUB5mn ($85,200 dollars) each. However, Zaur Dadayev later withdrew his confession and says he has an alibi.

Billionaire philanthropist George Soros promised to invest $1bn into Ukraine if the EU takes the lead and underpins the investment with "political leadership." Soros earlier called on the West to invest $50bn into Ukraine to get it back on its feet.

The EU suggested that Russia extend Ukraine's "winter discount" on gas prices to 2016 ahead of the expiration of the deal in April. Ukraine is struggling to pay its existing gas bill and wants to avoid seeing the price of gas increased this year.

Russia's 30 biggest banks recorded losses of RUB22.8bn ($477mn) in the first two months of this year, according to the CBR, down from the profit of RUB131.5bn ($2.3bn) they made in the same period last year. In previous years the sector used to make about RUB1 trillion in profits a year.

Russia's advertising market will shrink 16.5% in 2015, the ZenithOptimedia agency said. That's a turnaround from 2014, when the market expanded for the first time since the crisis began in 2008, growing from a low base by 4.3% in money terms.

Elevated levels of inventory and declining demand saw the rate of residential construction collapse outside of Russia's urban centres, down by 40% since the start of this year. This follows on from a post-Soviet record construction volumes last year, with delivery of 81mn m2 in new homes, a 14.9% boost year-on-year, of which 43.5% were private homes.

Only 2% of Russians count the devaluation of the ruble's against the dollar as Russia's biggest problem, state pollster VTsIOM found in a poll this week. "The economy" (21%) has overtaken "inflation" (17%) as the biggest worry, with "external politics" (13%) in third place.

Former Finance Minister Alexei Kudrin on Tuesday predicted 5 years of stagnation for Russia's economy and urged President Vladimir Putin to use the sky-high rating he has earned on the back of the Ukraine crisis to push through economic reforms, Kudrin said at a round table discussion devoted to the 15th anniversary of Putin's first presidential election victory.

A district court in Novosibirsk, Siberia's largest city, fined a local farmer $188 on Tuesday for emptying a dung cart in front of a Sberbank branch office in February as a protest against the bank's credit policy.

Russian manufacturing industries PMI index fell slightly to 48.1 points in March from 49.7 points in February 2015, according to HSBC, adding that a weakening in external demand was mostly responsible for the mild slowdown.



EurasiaUzbekistan’s Uzavtosanoat and Germany's MAN are working on a project to produce cabins for locally-assembled trucks in the Samarkand Region. Uzavtosanoat and MAN established MAN Auto-Uzbekistan in 2009 to assembly trucks and other equipment for the local market. Uzavtosanoat holds a 51% stake in the venture, with MAN owning the remaining 49%.

Turkmenistan’s exports of hydrocarbons will decrease to $13,954mn in 2015, from $18,535mn in 2014. Turkmenistan produced over 76bn cubic metres (cm) of natural gas in 2014, and exported 45bn cm, whereas 2015 production should increase to 80bn cm, according to government figures. Most of Turkmen gas exports go to China through the Central Asia-China gas pipeline, which is currently able to handle 55bn cm of gas per year, and 25bn cm/y through Tajikistan - the construction of this line is underway and slated to come online at the end of 2017.

The European Union (EU) has signed an agreement to provide €30mn to Kyrgyzstan for the improvement of the social protection sector. The agreement is the first one in a series of documents within the framework of bilateral cooperation between the EU and Kyrgyzstan in 2014-2020. The EU allocated €184mn for that period to support development in Kyrgyzstan.

Russia has committed to providing Tajikistan with military assistance worth around RUB70bn (€1.14bn) to strengthen the Central Asian country’s ability to handle the security challenges stemming from its permeable, 1,350km long border with Afghanistan. The funds will be spent on beefing up Tajik military forces in the coming years.

Mongolia’s foreign reserves stood at $1,362mn at the end of February, down by 37.9% from a year earlier, according to the latest figures published by the Bank of Mongolia. On a monthly basis, foreign reserves slightly increased by 2.6% at the end of

February after falling down to $1,327mn in January, the central bank’s figures show.

Kazakhstan expects to harvest 17.2mn tonnes of grain in clean weight this year, roughly the same amount as last year. Grain will be sown on a total area of 15.2mn hectares, including wheat on around 12.2mn hectares, which is 2% less than in 2014. Nevertheless, in 2015 cultivated crops will be planted on an area of 21.5mn hectares, which is 0.1mn hectares more than in 2014. Kazakhstan’s exports potential in 2014-2015 is expected to reach 7mn tonnes of grain, the minister revealed. As of end-March, deliveries amounted to 4.7mn tonnes.

Kazakh exchange bureaus sold $1.4bn in February, slightly less than $1.46bn seen in the first month of the year. The forthcoming presidential election, which was first proposed on February 14, seems to have eased a run on the tenge. The decision on holding an early presidential election on Apr 26 gives society confidence that no devaluation will be held at least in April. In December, Kazakhs rushed to exchange bureaus to buy more than $4bn because of a panic caused by the Russian ruble's crash on December 15.

Kazakh health authorities are concerned about growing obesity rates among children. According to a survey, 13.7% of children in urban centres and 13.3% of children in the countryside eat fast food every day. Meanwhile, 25.5% of town kids and 22.7% of village kids drink sugary and energy drinks every day.

Ukraine has declined Georgia’s request to extradite Georgia’s former President Mikheil Saakashvili, who now serves as Ukrainian President Petro Poroshenko’s adviser. Saakashvili is wanted by the Georgian authorities on multiple criminal charges that he says are politically motivated. A court in Tbilisi ordered the former president pre-trial in absentia in August 2014.



bne Chart

It has become an extremely rare event: on March 24 one of Russia's leading supermarket chains, Lenta, held a successful $225mn secondary public offering (SPO), pretty much the only significant new issue of shares since Lenta IPO'd last year.

The issue went off with a little help from the state-backed Russian Direct Investment Fund (RDIF), a $10bn sovereign wealth fund, which was the anchor investor in the new issue. The proceeds will be used to pay for Lenta's rapid store expansion programme across Russia, the fund explained in a statement.

“This placement is notable because it represents strong interest of geographically diverse group of foreign institutions to invest in a leading Russian company despite the challenging market environment. RDIF is pleased to have helped Lenta in sourcing not only Asian and Middle Eastern investors, but a number of major European funds as well," Kirill Dmitriev, CEO of RDIF, said in a statement.

Obviously, investors who bought the new shares hope they will go up, but that is unlikely. Russian IPOs have a terrible record: over the last eight years all but six of the 87 IPOs have lost money, and the 10 worst are all down by over 90%. Even investors who bought into Lenta's IPO almost exactly a year ago must be disappointed: the

company's stock is trading at a 30% loss since its IPO in March 2014.

Longstanding investors in Russian shares know that Russian IPOs almost never outperform the market. In the past, owners (and investors) have been greedy and overpriced their stock. They have gotten away with it, as the bulk of Russia's IPOs naturally happened during the boom years that were brought to a close by the 2008 crisis.

Now Russia is stuck in an economic and political quagmire, the number of new issues in recent years have been few and far between, and of the 18 IPOs that were held since 2008 all but four have lost their investors money. Interestingly, three of the four were from the tech sector: software engineers EPAM and Luxoft as well as payment service Qiwi. The tech sector is currently the only part of the Russian economy that is flourishing and managing to pique the interest of international investors, based on Russia's 143mn population and the fast growth of internet penetration. The only other company to make investors money was fertiliser producer Acron.

Technology is the only sector in Russia that has produced positive returns for investors, producing an average return of 16% since their IPOs. All the other sectors have lost anything between 8.25% (chemical and fertilisers) to 88% (restaurants).

Russian IPOs underwater

10 'best' performers, most recent prices

Source: Capital IQ


the running of the bank, which is headquartered in his stronghold of Dnipropetrovsk.

The claims were made in the context of a bitter clash between Poroshenko and Kolomoisky over control of key state oil and gas companies, which Kolomoisky is believed to have de facto controlled for over a decade. Kolomoisky lost the dispute when Poroshenko stripped him of control of the companies and fired him as governor of Dnipropetrovsk region in the small hours of March 24.

During the clash, Poroshenko's allies made damaging allegations linking Kolomoisky to past – and recent – murders. Ukraine's security service (SBU) chief Valentyn Nalyvaichenko on March 23 sensationally alleged that the Kolomoisky-led Dnipropetrovsk state administration was linked to the murder of one his officers and the kidnapping of a second, on March 21.

At a hastily convened press conference on March 23, Nalyvaichenko accused the Dnipropetrovsk administration of abetting “a single organised crime group” involved in trafficking and abductions in the Dnipropetrovsk and Donetsk regions, which had been uncovered by the murdered SBU officer. Nalyvaichenko said officials in Dnipropetrovsk were now trying to block the investigation of the murder.

Headed by Kolomoisky, the Dnipropetrovsk

Eastern Europe

Fight between Ukraine's govt and oligarchs embroils largest lender Privatbank

Graham Stack in Kyiv

The war between Ukraine’s government and the oligarchs has reached into the fragile banking system, as the central bank felt moved to reassure depositors in Privatbank, the country’s largest, after allies of President Petro Poroshenko made murder allegations regarding its owner, Ihor Kolomoisky.

The National Bank of Ukraine (NBU) issued an unusual statement on March 27 to quell reports of what it called “false and provocative information in the media regarding Privatbank”. The statement referred to an allegedly concerted smear campaign mounted against Privatbank in the media and on social networks. “Clients and partners of [Privatbank] do not have grounds for concern regarding the dissemination of incorrect information pertaining to the activity of the aforementioned institution,” the NBU said, without specifying what information was meant.

Privatbank itself said in a parallel statement on March 27 that it was “aware that provocative and fake information about the bank will appear in coming days, disseminated by pro-Russian forces and the Russian media.”

These attempts to reassure the public follow sensational murder claims made by allies of Poroshenko involving Kolomoisky, Privatbank's co-founder. Kolomoisky, who shares ownership of the bank with his longstanding partner Hennady Boholyubov, is believed to be closely involved in


Eastern Europe

administration was staffed by his longstanding associates Hennady Korban and Svyatoslav Oliynik, who both vehemently refuted Nalyvaichenko's claims at a press conference held in response to the allegations on March 24. Oliynik said he had been questioned about the allegations and had demanded the opportunity to challenge key witnesses. Both also said they fully supported the SBU investigation, while demanding that Nalyvaichenko undergo mental health checks.

Serhiy Leschenko, an investigative journalist-turned-MP for President Poroshenko's party, the Petro Poroshenko Bloc, then escalated the controversy surrounding Kolomoisky in an op-ed published in the Kyiv Post on March 27. Leschenko detailed a criminal investigation in 2005 into the billionaire's alleged involvement in a business-linked murder. “In 2005, Kolomoisky was suspected in the attempted murder of Sergei Karpenko, a lawyer who refused to contribute to the oligarch’s attempt to gain control over Dneprospetsstal, a steel producer,” Leschenko wrote.

Kolomoisky and his associates claim all the allegations against them are part of a Russian-backed smear campaign. Kolomoisky alleges that Poroshenko has bowed to demands to fire him made by Russian President Vladimir Putin. Kolomoisky also accused rival oligarchs of financing the campaign.

Despite the gravity of the claims, Poroshenko and Kolomoisky appear to have stepped back from the brink, with both now saying that they harbour no animosity towards each other. But the intensity of the locking of horns – inevitably covered on national TV – and the repeated talk of murder would suggest the clash has only abated for now.The NBU and Privatbank's allegations of an organised smear campaign against it also relate to reports in Ukraine's most read newspaper, the government-critical Vesti. One quoted anonymous sources as saying that other leading banks had already closed lending limits for Privatbank. “This is not the case and amounts to a fabrication,”

Privatbank press officer Oleh Serga assured bne Intellinews.

Vesti had also quoted Serga as saying that refinancing loans to Privatbank only covered one-third of deposit flight from the bank, and complaining that the NBU is helping only state-owned banks.

The bank has had its share of negative coverage recently. As bne IntelliNews reported, a number of open-source journalist investigations identified apparent large international outflows from Privatbank in 2014. The outflows took the form of lending to related parties, totalling over $1bn allegedly moved abroad via Privatbank's Cyprus branch. The bank says the investigations, although open source, were based on falsified data. On March 30, the Kyiv prosecutor informed MPs that there was no ground for suspicion of wrongdoing on the part of the bank.

As if warring with Poroshenko was not enough, Kolomoisky also accuses rival fuel trader and MP Ihor Eremeev, owner of the Kontinuum fuel concern and head of the parliamentary group Volya Naroda, for running a smear campaign against him. On March 13, MP Oleksandr Onishcenko, an MP in Eremeev's group, registered a draft bill on the nationalization of Privatbank "to ensure the stability of the financial system." Privatbank called this a "provocation and stupidity." The bill was later withdrawn.

As Ukraine's leading savings bank with 26% of retail deposits, Privatbank is highly exposed to swings in public sentiment. Ordinary Ukrainians are flocking to the country's troubled banks to withdraw their savings as hard currency cash. This has already led to the crash of Ukraine's fourth largest lender Delta Bank in early March.According to Privatbank figures filed to the NBU, hard currency deposits held by individuals at the bank dropped from the hryvnia equivalent of $7bn at the start of 2014 to the hryvnia equivalent of around $3bn a year later, allowing for devaluation of the hryvnia to the dollar.


Eastern Europe

But apart from the damage already done to its reputation that could accelerate deposit flight, Kolomoisky's conflict with Poroshenko will have a very direct impact on Privatbank: the cash-rich state oil companies that Poroshenko reclaimed for the state comprised a major part of Privatbank's corporate business for over a decade and they could now take their business elesewhere.

According to Dragon Capital's Bezpyatov, "it may take some time before real change of management happens” at the oil companies, but when it does, it will be bad for Kolomoisky's bank. Privatbank's accounts show that 20.23% of its lending goes to one customer, fractionally exceeding the maximum of 20% allowed under NBU regulations. The customer is believed to be the Ukrnafta oil and gas company, which is likely to have equivalent funds on deposit at the bank.

Energy Minister Volodymyr Demchyshyn said on March 23 that state companies would now transfer their business to state-owned banks Ukreksimbank and Oschadbank. Ukrtransnafta alone has deposits totalling “several billion hryvnia” with Privatbank, Demchyshyn said, adding, “I do not know whether we can access them”.

Privatbank's Serga told bne IntelliNews that the minister's fears were unfounded. "In the whole history of the bank, there has never been an situation when a corporate client has been unable to access its accounts," he said.

The outflow from Ukrainian banks continued unabated in the first quarter of this year, according to the NBU. “Liquidity is now concentrated in the big state-owned and foreign-owned banks,” NBU first deputy head, Oleksandr Pysaruk, told the UNIAN news agency on March 27.

Privatbank's current liquidity ratio of cash assets to short-term liabilities, at 83.9%, remains well within the NBU normative of 40%. At the start of 2015, its 11.2% capital adequacy exceeded the NBU minimum of 10%. The bank is set to boost capitalisation by 26.2% in April, it said on March 18, by issuing shares to its current shareholders.

As evidenced by the NBU's swift dismissal of what it termed the “false and provocative information” against it, Privatbank is confident it will continue to enjoy strong central bank support, despite the controversy surrounding one of its shareholders. "Given that this is the number one bank in Ukraine, it is likely the state will support Privatbank," reckons Dragon Capital analyst Andrey Bezpyatov.

On March 27, the NBU announced a further stabilisation loan to Privatbank of UAH800mn, which takes the volume of its stabilisation credits in February and March alone to UAH4.9bn ($200mn). According to the NBU, all credits were secured with valid collateral, including railway rolling stock, aircraft and shares in the bank, and would be used exclusively to fund payments to retail depositors.


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was one of the sellers of a major stake in the oil company to Sistema. But Russian legal experts told business daily Vedomosti that it was unlikely that Sistema will be able to recover the funds from Ural Invest.

In March, Fitch Ratings affirmed the long-term Issuer Default Rating (IDR) of Sistema at BB-, setting a stable outlook and removing the ratings from the Rating Watch Negative (RWN) list. The rating of Sistema was removed from RWN, as Fitch believes that the holding is no longer at risk of litigation in connection to Bashneft.

The loss of Bashneft had only a limited negative credit impact on Sistema, Fitch said. The loss of dividends was compensated by removing Bashneft's debt from the balance sheet, reducing off-balance liabilities and cost-cutting measures. Over the span of owning Bashneft, the company received about RUB190bn in dividends vs RUB84bn paid for the asset, Fitch estimates.

Sistema is a diversified holding company with its main asset being a controlling stake in MTS (BB+/Stable) wireless major operating in Russia and the CIS.

Sistema makes $5.3bn loss in Q4 after losing Bashneft

bne IntelliNews

The Russian industrial holding Sistema reported a net loss of $5.3bn in the fourth quarter of 2014 compared to a $48mn net profit for the same quarter of 2013, the company said on April 2. Adjusted net loss, not accounting for the recent loss of core asset Bashneft, amounted to $2.6mn.Sistema, which is owned by billionaire Vladimir Evtushenkov, had to return its stake in oil company Bashneft to the state in October after a Russian court deemed its acquisition in 2009 an "improper privatisation". Sistema's 2014 revenues dropped by 29.5% y/y to $3.9bn, attributed also to a 46% ruble devaluation in Q4.

It also reported a $290mn loss on mobile asset impairment in India and $92.5mn in provisions for cash and deposits in a Ukrainian bank.

Evtushenkov was placed under house arrest for three months last September on charges of money laundering andfreed in December. Meanwhile, on October 30, a Moscow court ordered Sistema to return Bashneft to the state.

The same court later awarded Sistema damages of RUB70.7bn ($1.1bn) from Ural Invest for losses arising from the seizure of Bashneft. Ural Invest


In early March, the current government, led by the Georgian Dream (GD) coalition, pledgedto return properties illegally confiscated by the previous administration as part of its commitment to “restoration of justice”.

Khardziani spent two years in prison on what he claimed trumped-up drug-related charges and filed a lawsuit in an attempt to reclaim assets. He won the case in a court of first instance, but the case is now in a court of appeal.

Khardziani recently appeared at a political talk show on the Georgian TV station Imedi together with other businessmen, who are also trying to regain their assets, and warned that “if the justice is not restored”, there will be “fight” and Georgia will turn into a “Sicily of the 1970s”.

The late businessman’s friends and family members believed the murder was related to this court case. They told local media the person who they believed "ordered the murder” was linked to the UNM.

The Prosecutor’s Office said that an ad-hoc team had been set up to investigate the crime as a premeditated murder.

Eurasia

Prominent Georgian businessman shot dead in central Tbilisi

bne IntelliNews

Besik Khardziani, a well-known Georgian businessman, was shot at the entrance of his house in the centre of the capital, Tbilisi, and died in hospital, Civil.ge reported on March 27, quoting police and hospital sources. Witnesses said that that the businessman had been shot by a man wearing a black motorcycle helmet who fled on a scooter. The police found an abandoned scooter and black helmet in a street not too far from the crime scene.

Besik Khardziani was the owner of properties at Tbilisi’s popular recreational zone of Kus Tba (Turtle Lake) and was among a group of entrepreneurs who claimed their properties had been illegally seized by the country’s previous government, led by former President Mikheil Saakashvili.

Some property owners, including Khardziani, claimed of having been forced or threatened to hand over their properties to the former government for free or for a token amount of money; and some successful business owners were pressured by the former ruling United National Movement (UNM) party to hand over company shares to party members.


Eurasia

government announced that it would allocate KZT20bn (€100mn) to encourage the domestic car-assembling industry. The funds will be channelled into the provision of cheap car loans to individuals and the offer of financial leasing to legal entities," National Economy Minister Yerbolat Dossayev explained. "We believe this tranche will significantly boost the domestic car market and will make it to be more competitive," Dossayev said.

According to Akab figures, the country's dealerships sold 31,157 cars and 2,567 buses and lorries assembled in Kazakhstan last year, correspondingly 1% down and 12% up year on year. In total, official dealerships sold 163,600 cars in 2014 – falls of 1.3% in volume and 2% in value ($3,939.6mn). The picture was even bleaker in January 2015: dealerships managed to sold only 7,774 new cars, a 28.53% decrease year on year 40.42% on December 2014, of which only 936 cars were domestically assembled – a 62.2% slump year on year.

The number of Kazakh-assembled cars sold (31,157) in the country compares unfavourably to the number of cars Kazakh citizens imported from Russia. According to industry figures, Kazakh motorists imported over 40,000 cars from Russia in November and December alone and, according to Tengrinews, a further 50,000 in the first two months of 2015. In Kazakhstan cars are priced in dollars, which makes purchases

Kazakhstan to revive car sales with low interest loans

Naubet Bisenov in Almaty

Kazakhstan will start subsidising loans to purchase domestically-assembled cars in order to revive the country’s embattled automotive industry. The measure, which will take effect from April 20, has been prompted by the strong tenge and high prices of new cars sold by official dealerships. Kazakh motorists have instead sought bargains across the border in Russia, where the ruble has stumbled by over 40% in the past year.

"Everything is being worked out now, but, as we have planned, we will sign final documents on April 20 and within a week will start working under this programme," Andrey Lavrentyev, president of the Association of Kazakh Auto Business (Akab), told Tengrinews. He noted that no new requirements would be set for obtaining low interest loans to buy a car. "The package of documents is the same."

The loans at an annual interest of 4-6% will be issued to buy only Kazakh-assembled cars, the price of which doesn't exceed KZT5.6mn ($30,000 or €28,000). "This is an excellent programme which aims to support the Kazakh middle class," Lavrentyev added. Kazakh borowers have complained that Kazakh banks have stopped issuing tenge-denominated mortgages and car loans in anticipation of a devaluation of the tenge.

In response to Kazakh motorists' shopping spree in Russia, in February the Kazakh


Eurasia

expensive in tenge terms when the national currency falls against the dollar, while in Russia cars are priced in the ruble and the weak ruble means that cars sold there become cheap in dollar terms.

The Russian ruble has plummeted by 40% and remains extremely volatile under the weight of the low price of oil and Western sanctions over the Kremlin's annexation of Crimea and continuing support to rebels in Eastern Ukraine. In contrast, the Kazakh authorities have maintained the exchange rate of the tenge at around KZT185 to the dollar, fearing a loss of trust in the national currency following a 19% devaluation in February 2014. Kairat Kelimbetov, head of the central bank,

had repeatedly said that the National Bank of Kazakhstan would not allow sharp fluctuations of the tenge this year in an attempt to damp expectations of devaluation ahead of February - both devaluations in 2009 and 2014 took place in February.

Despite the enormous pressure the low price of oil and the weak ruble are exerting on the tenge, the government is maintaining the exchange rate at least until after an early presidential election on April 26 or even inauguration soon afterwards, as it would be hard for President Nursultan Nazarbayev to sell his re-election as a guarantee of prosperity and stability to the population if people's savings had been wiped out.


Russia reportedly threatens nuclear strike over Baltics

Putin has increasingly invoked Russia's nuclear arsenal during the standoff with the West over Ukraine, which kicked off in late 2013 as the EU pressed Ukraine to sign up to a free trade and political agreement and Moscow sought to head the deal off. Putin said in a documentary aired March 15 that he had been ready to put nuclear forces on alert as Russia annexed Crimea in March 2014.

Some analysts see the trend as a deliberate ploy to keep the West off balance by suggesting there exists an unpredictable and dangerous leadership in the Kremlin.

"There’s a rationale in being perceived as unpredictable," a recently-departed Moscow ambassador, who also knew Putin in St Petersburg, tells Newsweek. "The Russian strategy is to scare the West by portraying Putin as unpredictable. If you’ve got a madman in power, a country’s nuclear weapons take on a completely new dimension."

However, the Baltic states, on edge for months and warning of Russian aggression, will likely insist that the danger is very real. Buzzed continually by Russian military jets, there have been various claims of imminent invasion, or that low level warfare is ongoing while Lithuania reintroduced conscription last month.

Latvia and Lithuania have increased their defence

Central Europe

bne IntelliNews

Russia has threatened a nuclear strike over Nato's buildup in the Baltic states, as well as to deter any threat to its control of Crimea, according to unsubstatiated reports in the UK press.

Moscow has threatened all-out war with the West, including the use of its nuclear arsenal, should Nato continue to strengthen its presence in Estonia, Latvia and Lithuania, The Times reported on April 2. The newspaper claimed to have accessed notes taken by US personnel at a secret meeting with Russian intelligence and military officials that took place in Germany in February.

Russian generals are also said to have warned that any attempt to return Crimea to Ukraine, or to arm Kyiv's forces in the fight against Russian-backed separatists in the east of the country, would provoke a "spectrum of responses from nuclear to non-military". The military officers said they were speaking directly for Russian President Vladimir Putin, and that any of these moves by Nato would be met "forcefully, includ-ing through the use of nuclear force".

The Kremlin has been swift to refute the report. “This is a classic example of the continuing hysteria and the demonization of our country," Putin's spokesman told reporters, according to RT.


threshold of perception and reaction."

"The political aim is to destroy confidence between the Baltic states and the Nato alliance... and European Union that they are part of," he continued.

The notes suggest Moscow would avoid "injections of troops and heavy weapons in favour of other tools," reportsThe Independent. "Russia would hope slowly to entice those Russian populations towards Russia without giving Nato a pretext to deploy troops," the document adds.

For its part, Nato has said it plans to continue to step up its presence in the Baltics. In February, defence ministers of Nato member states agreed to establish a rapid reaction unit known as Spearhead Force and six command and control centres in the Baltics and other CEE states during a meeting in Brussels.

The decisions are officially part of the alliance’s wider response to recent "security challenges" in Eastern Europe, the Middle East and North Africa. Nato chief Jens Stoltenberg was more direct in noting the major culprit for the military alliance's view of the current "very critical time for security in Europe."

“In Ukraine, violence is getting worse and the crisis is deepening. Russia continues to disregard international rules and to support the separatists with advanced weapons, training and forces," he claimed.

Central Europe

budgets for this year. The three countries have recently spent a relatively large €300mn on purchasing of new military equipment.

The leaked notes from the meeting also claim that Russia sees the Baltic states as having "the same conditions that existed in Ukraine and caused Russia to take military action". That's a reference to the ethnic Russian populations in Latvia, Estonia and - to a lesser extent - Lithuania.

The Russians reportedly told their US counterparts that they are keen to engage in "destabilising actions [in the Baltics] that would be even harder to trace back to Russia than those of eastern Ukraine".

The Baltics have welcomed the increased presence of Nato forces, claiming that the Kremlin is waging a "hybrid war" against their countries, which includes cyber attacks and agitation of the local ethinc Russian population.

"The first stage of confrontation is taking place," Lithuanian President Dalia Grybauskaite told the BBC on March 7. "I mean information war, propaganda and cyber attacks. So we are already under attack. Will it be extended to conventional confrontation? Nobody knows."

James Sherr of UK think-tank Chatham House told bne IntelliNews that hybrid war is "a form of warfare that is designed to cripple a state before that state even realises the conflict has begun. It's a model of warfare designed to slip under Nato's


Central Europe

a vote of no-confidence in Orban following the insider trading claims.

Andras Schiffer, co-leader of LMP, said that if Orban had known Quaestor was about to collapse and failed to pass that information onto the financial watchdog and the police, then he should be held responsible via his personal assets. Meanwhile, a Budapest court placed Csaba Tarsoly, erstewhile head of Quaestor who was detained on March 26, in pre-trial detention.

The ongoing scandal has become a political hot potato. After the Fidesz government took effective control over the central bank in 2012, the MNB took over the role of financial markets regulator. Now it is being held to blame for failing to supervise the brokerage sector properly. However, the government and MNB claim that the Buda-Cash scandal developed under the previous Socialist administration, even though Fidesz has been in power for the past five years.

In a statement on March 29, the Fidesz accused the opposition of attempting to avoid responsibility for what it called the “Socialist brokerage scandal”. “Socialist politicians allowed financial corruption to strive untroubled for decades,” it claimed.

The Socialists, meanwhile, demanded the release of a letter sent by Tarsoly to Orban, as well as the minutes and recording of the February 25 cabinet session. That would shed light on whether a crime had been committed and prove the charge of insider dealing, they claim.

Hungarian opposition tries to pin blame for brokerage scandal on Fidesz

bne IntelliNews

The Hungarian LMP party announced on March 29 that it will submit a motion seeking a freeze of the assets of senior government officials who knew of the impeding bankruptcy of broker Quaestor but failed to act, as the ruling Fidesz party desperately tried to shake off blame for the country's brokerage scandal.

The green party's bill will be submitted as an amendment to a proposal by the ruling Fidesz government to be discussed by parliament on March 30 under which assets of business leaders will be frozen when economic crimes are suspected, according to MTI. The assets seized would be used to compensate the clients of Quaestor - one of three brokerages shuttered in recent weeks.

The Hungarian government denied on March 25 accusations of acting on insider information about the ongoing brokerage scandal when the foreign ministry withdrew state funds from Quaestor just days before it filed for bankruptcy protection and had its licence taken by the Magyar Nemzeti Bank (MNB).

Quaestor was the third brokerage whose licence has been revoked in the past few weeks. The MNB also suspended the licences of Buda-Cash and Hungaria Ertekpapir. The trio is suspected of fraud involving €1bn.

Prime Minister Viktor Orban said he had ordered all ministries to withdraw funds kept at brokerages following the collapse of Buda-Cash because of fears of a domino effect. Leftist opposition parties held talks last week to discuss


Southeast Europe

Bulgaria scraps nuclear deal with Westinghouse

would launch a competitive tender for the plant’s construction within the next year. The plant was due to be operational by 2023.

The cost of the project was not officially disclosed. After the deal was signed in August 2014, Bulgaria’s then interim energy minister Vassil Shtonov said it would cost an estimated $8bn. However, according to the Bulgarian media, a senior Westinghouse official later said the cost was only expected to be around $5.2bn. Westinghouse has not commented on Borisov’s decision to scrap the project.

The Kozloduy expansion is the second major project to increase Bulgaria’s nuclear power generation capacity to have flopped.

Atomstroyexport, a subsidiary of Russia’s Rosatom, agreed back in 2006 to build the new Belene Nuclear Power Plant, and a deal on the construction of the plant was signed during Russian President Vladimir Putin's visit to Sofia in January 2008. However, the start of construction work was repeatedly delayed amid disputes between Bulgaria and Russia over the cost of the project, and the decision of German strategic investor RWE to withdraw.

Belene was finally scrapped by Borisov’s previous government in November 2012. After the government resigned, the decision was confirmed by the Bulgarian parliament, which voted in February 2013 to permanently abandon the project in favour of building a new unit at Kozloduy.

Bulgaria already produces considerably more electricity than it consumes - in 2012 the country generated 43.7bn kWh of power, of which 31.2bn kWh was consumed domestically, according to EIA data. This has allowed Bulgaria to establish itself as one of the Balkan region’s main power exporters, selling electricity to countries including Greece, Serbia and Turkey.

bne IntelliNews

Bulgaria has scrapped plans to expand its sole nuclear power plant after it failed to reach agreement with supplier Westinghouse on financing for the project, Prime Minister Boyko Borisov said on April 1.

The previous Socialist-led government signed a preliminary deal on the project with Westinghouse Electric Company in August 2014. However, Borisov’s centre-right government then set March 31 as the deadline to decide whether to go ahead with the plan.

The project envisaged the construction of a 1,000MW reactor at the Kozloduy nuclear plant on the Danube River. The plant currently operates two Soviet-made 1,000MW reactors that supply 30% of the country’s power. Kozloduy’s older reactors were shut in the run-up to Bulgaria’s entry to the EU in 2007.

The Bulgarian government had invited Westinghouse to take a 49% stake in the new nuclear unit but the US-Japanese firm refused to invest in the deal, Borisov told the Bulgarian parliament on April 1. The prime minister said the country cannot afford to finance the deal unless Westinghouse joins as a strategic investor.

“Yesterday the deadline to confirm the contract with Westinghouse for the construction of the seventh block of NPP Kozloduy, which the previous government signed, expired,” Borisov wrote on his Facebook page. “We are ready to work on the agreement if Westinghouse comes in as an investor and the project is profitable,” he added.

Westinghouse announced on August 1, 2014 that it had signed a shareholder agreement on the Kozloduy expansion, under which it would provide equipment, design, engineering and fuel for the plant. The company also announced that it


Southeast Europe

is the second biggest country after Poland, it was the first to have its own office,” said Rafał Andrzejewski, investment director Poland. “This reflects our confidence we will not make just one or two investments in Romania, but many over the years.” CEE Equity Partners has also opened an office in Budapest, and on April 2 plans to open its fourth in Zagreb.

Despite the plans to step up its activity in SEE, Fawkner-Corbett said in an interview with bne IntelliNews that he expects Poland to remain the primary investment destination, accounting for up to half the fund. Although there is no country allocation, no more than half the fund can be invested in a single country.

Fawkner-Corbett pointed out that risks tend to be higher in SEE, which he acknowledges is “a concern”. Romania and other SEE countries have also suffered from a shortage of equity. “People have tied to find ways around that, one of which has been bank debt. We think by bringing equity into an area where it has been in short supply, we can add a lot of value,” he says. By contrast, the environment in Poland, the Czech Republic and the Baltic states is “much more competitive”.

The fund’s focus is on two areas: infrastructure and specialised manufacturing. In the infrastructure sector, the firm has been looking at opportunities for exposure to roads, railways, ports and airports across the region. Octavian

Chinese private equity fund to make first investments in Southeast Europe

Clare Nuttall in Bucharest

The China-CEE Investment Cooperation Fund is close to making its first investments in Southeast Europe, after investing in the more established markets of Central Europe during its first year of operation.

The $500mn private equity fund, whose founding investor is China Eximbank, covers 16 countries in the region from Estonia in the north to Albania in the south. However, its four investments so far have been concentrated in the northern part of the region, with three of the four in Poland and one in Hungary.

“That’s been natural because we are based in Warsaw and the majority of our team are Polish, but we do have pressure from our Chinese investors to spread our investments throughout the region, so we are now actively moving outwards,” Bill Fawkner-Corbett, investment director for Central and Eastern Europe at the fund’s investment advisor CEE Equity Partners, told a press conference in Bucharest on March 31.

According to Fawkner-Corbett, the firm is close to making its first SEE investment in Bulgaria, which is likely to be followed by a deal in Serbia. Its first investment in Romania, where it opened its first office in the SEE region, is expected by the end of 2015.

“We are gradually building up a number of offices throughout the region. Given that Romania


Southeast Europe

The fund is expected to be fully invested within two to three years of its launch in 2014. However, discussions on a second fund with a further investment of $1bn from China Eximbank are currently underway, a potential investment that was announced during the December 2014 China-CEE summit in Belgrade.

In addition to providing its own funds, the Chinese state-owned bank is expected to approach export-import banks from the CEE and SEE region, as well as other Chinese investors.

This reflects China’s growing interest in Southeast and Central Europe, as shown by the approximately $10bn worth of deals signed during the Belgrade summit. According to Fawkner-Corbett, the fund operates on commercial principles, with no direct connection between its investments so far and Chinese interests in the region, although he adds that a Chinese dimension is a “small plus”.

However, Beijing has also shown a wider interest in infrastructure in SEE, in particular due to the region’s potential as a transport corridor between the Greek port of Piraeus, partly managed by China’s Cosco, and the EU member states of central Europe. Aside from the China-CEE Investment Cooperation Fund, China also agreed in December to finance a €1.5bn high-speed line from Belgrade to Budapest, the Albania-Macedonia motorway and several energy projects.

Vidu, investment manager for Romania, told journalists that there are a number of opportunities for investment in various sectors in Romania, citing energy and telecoms, as well as more specific areas such as grain storage, transport and storage of oil and gas, and multi-modal transport.

Renewable energy is another area of interest, which has already been targeted through a joint investment with renewables specialist Enlight Energy into Polish wind farms in 2014. However, Fawkner-Corbett pointed out that regulatory changes affecting several countries including Bulgaria and Romania “tend to put us off to some extent”.

“Regulatory risk prevented us from investing into renewables in Romania. After the sudden changes to the whole gameplan, we made no investments, and we are now looking very carefully at any change in legislation so that we can finally decide whether we will invest or not,” added Vidu.

Despite the large number of companies up for privatisation across SEE, the fund is also unlikely to invest in state-owned enterprises. “We don’t rule privatisations out but they tend not to be at the top of our list. The process is usually slow and uncertain, and typically quite a big operational and cultural turnaround is required,” said Fawkner-Corbett.


Opinion

Robert Anderson in Prague

Czech politics currently has an air of unreality. The Czech Social Democratic Party (CSSD) and the populist Ano party make a big show of disliking each other and acting more like rivals than coalition partners. Journalists speculate on when Ano’s leader, Finance Minister Andrej Babis, will pull the carpet from under Prime Minister Bohuslav Sobotka, and take advantage of his party’s opinion poll lead to seize the premiership for himself.

And yet there is a distinct lack of substance to the disputes within the government, which seem more like shadow boxing before the next election – not due until late 2017 – than signs of an imminent fracture.

The differences between the country’s two most popular parties were on full display at their respective annual conferences in March.

Ano’s conference was a poorly constructed Potemkin village. The party – only founded in 2011 – masquerades as a populist movement against corruption, but is in reality the personal political project of the country’s second richest man.

It has barely any members (2,500) and Babis runs it like a branch of his agro-chemical conglomerate Agrofert. Leading personalities or experts are hired as ministers or political figureheads after an interview with the leader, and are then fired or sidelined when they are deemed to underperform.

“It is not a grassroots movement, it’s astroturfed,” says Sean Hanley, lecturer in politics at the School of Slavonic and East European Studies, University College London.

At the party’s March congress Babis’ unanimous re-election as leader was reminiscent of the majorities that Central Asian autocrats like Islam Karimov of Uzbekistan rack up. Even Babis looked embarrassed at the spectacle. The party’s statutes – which were approved without discussion by 164 votes out of 173 – also give him virtually sole authority.

Moreover, many of the party’s key officials come from his company. The gap between Agrofert and Ano is so paper-thin that the deputy party leader, Jaroslav Faltynek – who was also elected unopposed – is able to be both party leader and an Agrofert director at the same time.

The party still lacks a clear ideology, though Babis uses this to differentiate Ano from the discredited traditional parties. Up to now it has struck a pragmatic, centrist stance, and in the absence of anything closer it joined the ALDE liberal group in the European Parliament. But now Babis has realised how few liberal voters there are in the Czech Republic and he is moving the party towards the right, where a huge space has opened up since the implosion of the last Civic Democrats-TOP09 rightwing government in a welter of corruption and spying scandals. Though

VISEGRAD BLOG: Czech party congresses mask political realities


Opinion

he currently rules it out, this could eventually pave the way for a future centre-right coalition.

The lack of party democracy, or ideology, or even policies do not seem to harm Ano, which has around a 7-point lead over CSSD in the opinion polls. Babis maintains an image as a strong, successful manager who has reluctantly – and generously – decided to take on the onerous task of cleaning out the Augean stables, besmirched by the country’s squabbling, incompetent and corrupt politicians.

Whether Babis will be able to keep up this act, without some evidence of good management or cleaning up corruption, is questionable. “It is difficult to play the anti-politics card for ever,” notes Hanley.

There is also a growing risk that the personalities he has recruited will demand more say in how the party is run. “It does not have any valves to let off steam,” says Jiri Pehe, who parodies the party as ‘Anofert’. “I can’t see how he can hold this together for a long time.”

The third danger is that Ano will eventually be damaged by the conflict of interest between Babis as finance minister, and Babis as a tycoon who is prospering in the country’s murky business environment. If the conflict does become visible, it could be devastating, as anti-corruption is Ano’s main selling point.

So far Czech journalists have hardly begun to investigate these conflicts of interest – perhaps not surprisingly, given that Babis now owns two out of the four serious national newspapers.The CSSD congress was also by its standards a very subdued affair, but not because there is any lack of internal opposition to Sobotka’s uncharismatic leadership.

Instead, the traditionally fractious leftish party appears stunned to find itself in such rude health after a deeply disappointing general election, followed by an attempted putsch orchestrated

by President Milos Zeman, the party’s estranged former leader.

CSSD – founded in 1878 – has been the strongest Czech political party for nearly two decades, only coming second at a general election once since Zeman led them to power in 1998. The left now is the dominant force from the presidency down to both chambers of parliament and much of local and regional government.

The collapse of the rightwing Civic Democrats (ODS), their traditional rivals since the restoration of democracy, left CSSD without serious opposition. However, Babis’ creation of Ano stole from them the clear victory they should have achieved in October 2013, and gave Zeman his chance to revenge himself on the party’s leaders who had sabotaged his first tilt at the presidency in 2003.

Sobotka played that crisis well, and since then Zeman’s self-destruction, combined with the government’s relative stability and popularity, have kept potential rivals such as Interior Minister Milan Chovanec in check.

At the party's congress, the prime minister ran unopposed and won 85% of the vote. Sobotka also secured the re-election of lieutenants such as Foreign Minister Lubomir Zaoralek, who had been expected to struggle because of his strong backing for sanctions against Russia.

Yet this apparent success also masks the true state of the party. Membership is just 21,000 (though this is eight times Ano’s), and predominantly old and male. Its support is strongest among this same demographic in small towns, rather than among younger, educated voters in large cities, which is the pattern for leftwing parties across Western Europe. This does not bode well for the party’s future vitality.

Unlike most Social Democrat parties in the region, CSSD is not the old Communist party renamed.


Opinion

And yet it is not a modern West European Social Democratic party either. It remains stuck in a defensive crouch, protecting welfare benefits while displaying little vision of the kind of country it wants to build that could attract young, progressive voters. “They project themselves as a kind of trade union for older, socially disadvantaged people,” says Pehe.

True, the party still has by far the strongest base in local and regional government, but this could be an Achilles’ heel, as corruption is rife at this level. Babis’ newspapers have already tried to tar Sobotka with old controversies from the CSSD’s 1998-2007 governments. A fresh scandal here could furnish Babis with a pretext to leave the government, if he needs one.

At his congress, Babis promised to be tougher on CSSD in the future and muttered darkly about how the party was “burdened by a controversial past”.For their part, Sobotka and other CSSD leaders made noises about how the finance minister was blocking tax increases, and disparaged his democratic credentials. “He is at a permanent risk of conflict of interest," Sobotka said.

Yet the odds are that the coalition will hang together until the next election, but with increasing tension. Both parties are polling higher since the election – with Ano’s percentage

in the high 20s and CSSD’s in the low 20s – and economic growth is accelerating.

The coalition has no major planned reforms or looming challenges that look like they could unsettle this picture, though the 2016 budget is bound to provoke more posturing.

Difficult decisions such as when to adopt the euro have been kicked into touch. The coalition appears content to drift on for another two years. “I do not see any progress [on reform] or even indications of preparations,” says Blanka Kolenikova, senior analyst at IHS.

If Ano maintains its support until the election and afterwards can govern with the right, it may decide to do so, as a way of cementing its position as the new alternative to CSSD.

But the votes may not be there, and even if they are, the squabbling rightwing parties may not be so eager to be cannon fodder. The ODS’ Euroscepticism would also be a problem, admits Pavel Telicka, a member of the European Parliament on Ano’s ticket who acts as the party’s foreign policy expert. “There are not that many options,” he admits.

So the Social Democrats and Ano may just be stuck with each other.


bne: Infrastructure

Weekly Lists

World Bank to lend Ukraine $800m for road repairs bne IntelliNews

The World Bank will provide $800mn to Ukraine for roads construction and repair, Ukrainian Prime Minister Arseniy Yatsenyuk said on March 31. "The World Bank is providing $800mn for the construction of the Poltava-Kharkiv road, but we agreed to divide this amount by halves. Half of the funds will be allocated for construction of the Poltava-Kharkiv road, and half for repair of [other] existing roads because their condition is just awful," he said. Yatsenyuk stressed that the government must now pass several reforms for the World Bank money to be disbursed.

After six months of negotiations, the World Bank in January confirmed its intention to invest the $800mn in the Poltava to Kharkiv stretch of the M-03 highway from Kyiv to Dovzhansky. It will be one of the institution's largest investments to date. When finished, the strategic route from the capital to the north-eastern city of Kharkiv will have been completely renovated.

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.

Kazakhstan to invest $20bn in infrastructure to 2020 bne IntellinNews

Kazakhstan plans to invest $20bn in infrastructure development until 2020, First Deputy Minister of Investment and Development Zhenis Kasymbekov said at a Kazakhstan-Batumi business forum on March 30.

The investment will mainly go into infrastructure projects the East-West corridor, towards the Caspian Sea and further to Azerbaijan, Georgia and Turkey. He noted that most of the funds would be channelled into the development of the new railway line Beynau-Zhezkazgan and into the Altynkol-Khorgos railway passage. This would help attract Chinese transit towards the Persian Gulf and the Caucasus.

Kazakhstan is interested in using the Baku-Tbilisi-Kars railway line, which is due to start operations this year. Astana is busy with efforts enabling to benefit from Kazakhstan's favourable location between Europe and Asia by developing relevant transport infrastructure. Investment in transport is among priorities of the Nurly Zhol development plan announced by the Kazakh leader, Nursultan Nazarbayev, on November 11, 2014.


Slovenian Prime Minister Miro Cerar asked parliament on March 31 to dismiss Defence Minister Janko Veber for abuse of office after he ordered the intelligence services to assess the impact of Telekom Slovenije's ongoing privatisation on the country's defence system.Cerar announced his decision to seek Veber's resignation on March 30 but gave the minister one day to file his resignation himself. Since Veber failed to resign, Cerar submitted the proposal to parliament.

Cerar told a news conference on March 30 that his confidence in Veber had been shaken after the minister failed to adequately explain why he had singlehandedly engaged the intelligence services to analyse the impact of the ongoing sale. Cerar argued that there are other special bodies in charge of protecting key state infrastructure that should have been asked to make the analysis, if there had been any need for it.

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.

Slovenian premier tries to oust defence minister in row over Telekom Slovenije sale bne IntelliNews

Wirtualna Polska plans IPO on Warsaw bourse

bne IntelliNews

Polish media group Wirtualna Polska announced on March 30 that it will launch an IPO, capitalisting on a boom in activity in Polish TMT as consumer spending grows.

The private equity owners of the operator of Poland's leading internet portal WP.pl had suggested earlier this month that they could be building towards an exit. Wirtualna Polska will seek to raise PLN80m-100mn (€19mn-24mn) from the issue of new shares, while Innova Capital and MCI Management are set to put up a stake of up to 23.5%.

"Funds from the issue of new shares will be put to finance new acquisitions within the framework of the group's approved strategy and for paying down debt from bank loans," the company said in its statement.

The offer is set to take place in the second quarter of 2015, depending on market conditions, Wirtualna Polska said in a statement. The sale is directed predominantly to institutional and retail investors in Poland. Only a limited effort will be made to reach to institutional investors abroad.

Innova Capital bought Wirtualna Polska in 2014 for PLN383mn. MCI Management bought into Grupa Wirtualna Polska for PLN60mn last year. Earlier this month the local fund manager suggested the company could be worth as much as PLN1bn.

bne:TMT



Weekly Lists

Sberbank posts net profit of RUB292m

bne IntelliNews

Russia's biggest lender Sberbank on March 27 reported a net profit under IFRS of RUB292.2mn in 2014, which is a 19.7% decrease y/y. Total revenue grew by 18.7% y/y to RUB1.333bn, while total costs increased by 12.3% y/y to RUB598.2mn. RoAE of 14.8% for 2014 was driven by 27% fee growth versus 12% cost growth.

During a conference call, Sberbank’s management said it expected 2015 to be a difficult year for the bank. Sberbank forecasted a single-digit balance sheet growth, 3-3.5% cost of risk, and moderate NIM compression.

Despite the solid financial results, the analysts reiterate the ‘sell’ recommendation on Sberbank stock as they expect the crisis in the Russian financial sector to roll into 2016.

Idea Bank IPO flops in Warsaw

bne IntelliNews

Getin Holding, the Polish investment and financial group, has failed to sell a large stake in its subsidiary Idea Bank because of its ambitious valuation and the current unfavourable market conditions.

Idea had planned to sell up to 20mn new shares, while Getin and its managers hoped to offload a further 7mn existing shares, representing 30.7% of the new planned total equity. However, Getin said in a market filing on April 1 that it will not now sell any of its holdings, and instead will sign up to buy some of the new shares the unit is putting on the market.

Getin had said on March 19 as it announced the offer that it hoped to price the debut on the Warsaw Stock Exchange at up to PLN32 (€7.75) per share. That indicated it was targeting a valuation of PLN2.8bn (€689mn) for the unit, or an ambitious 1.9-times book value.

bne:Banker



Weekly Lists

Central European manufacturing enjoys German boost bne IntelliNews

Forward looking data released on April 1 offered more evidence that Central Europe's economies continue to gain strength. Purchasing Manager Indices (PMI) for March extended their strong start to the year, pointing to robust growth in the region's vital manufacturing sector on the back of increased momentum in the Eurozone, particularly in Germany.

Heavily orientated to manufacturing exports, the economies in the region were stressed in 2014 by the sluggish recovery in the Eurozone. Diminished demand out of Russia and Ukraine has not helped, especially in Poland. However, industrial activity has been improving in recent months.

Central to that is an uplift in the single currency area. Playing an important role in the German supply chain, manufacturing in the Czech Republic, Hungary and Poland followed suit. On top of the boost from the ECB, monetary policy both at home and abroad also appears to have offered momentum to the region's performance.

Romania pushes ahead with tax cuts despite IMF opposition bne IntelliNews

Romanian Prime Minister Victor Ponta has appointed a new finance minister as the government prepares to push a revised Fiscal Code through parliament in April. However, the International Monetary Fund (IMF) warns that the impact of the new code, which will introduce a raft of tax cuts ahead of elections in 2016, should be more carefully evaluated.

The government endorsed the new Fiscal Code, which includes cuts in profit and income taxes and VAT, on March 25, ignoring earlier warnings from the IMF. Bucharest also plans to introduce a substantial VAT cut in June, ahead of the introduction of the new fiscal regime in January 2016.

Ponta told a press conference on March 27 that the government expects to post a RON1.5bn (€340mn), or 0.2% of GDP, surplus in Q1 instead of the expected 0.85% of GDP deficit, Romanian daily Adevarul reported. This would pave the way for the government to cut the VAT rate in June, by either 4pp to 20% for all goods, or to just 9% for selected food items, Ponta told journalists.

bne:Credit


Documents

bne:Newspaper - April 3, 2015