bne:Newspaper - December 12, 2014

December 12, 2014 www.bne.eu

CIA torture report ricochets in Poland

Ukrainian sovereign bond yields rose sharply this week after reports that a $15bn fiscal gap in Ukraine had been found by the IMF. "The news prompted a massive selloff of Ukrainian sovereign bonds, which fell more than 6% in price along the whole yield curve," wrote Kyiv brokerage Concorde Capital.

Credit default swaps on five-year sovereign bonds hit a five-year high at 2,134bps on December

Ukraine bond yields soar after report that new bailout needed

The release of the US Senate committee report on the CIA's use of torture is ricocheting in Poland - which allowed the US agency to use a base in northern Poland to hold detainees in 2002 and 2003 - as politicians scramble to distance themselves from the US findings.

Leszek Miller, Poland's prime minister at the time, and Aleksander Kwasniewski, the former

president, held a joint press conference on Wednesday, insisting that neither they nor the Polish government had done anything wrong in agreeing to tighter links with US intelligence following the September 11 al-Quaeda attacks in the US.

11. Yield to maturity of Ukraine's eurobonds for redemption in September 2015 soared to 48% on December 10 from 35% on December 9.The Financial Times report on December 10 said the IMF believes Ukraine needs as much as 30% of GDP worth of financial support - the $17bn committed by the IMF and an additional $15bn,

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Jan Cienski in Warsaw

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and that the IMF is not prepared to provide this sort of cash itself.

This passes the buck to the EU, say analysts, but the EU has no facilities for massive lending to non-members. It has already lent Ukraine ¤1.61bn in 2014, with a further ¤2bn planned for 2015, which already counts as an extraordinary support measure for an external country.

It is also unlikely that any individual nations will go it alone on loans to Ukraine, due to domestic political pressures. Even the US also only managed with difficulty to reach domestic political agreement on a $1bn loan guarantee for Ukraine.

Prime Minister Arseny Yatsenyuk admitted Ukraine will default without international help, telling parliament on December 11 "To avoid a default, we need an international donor conference".

"We have received $9bn in international financial assistance from the IMF, the World Bank and other international financial institutions. We have paid back $14bn in debts and credits," Yatsenyuk argued.

"This is a notable change of language from Yatsenyuk who previously drilled home the line that Ukraine would never default," commented Standard Bank's Tim Ash.

Ukrainian press also reported Ukraine's newly appointed economy minister, Lithuanian investment banker Aivaras Abromavicius, telling a parliamentary sub-committee on December 10 that Ukraine was "de facto bankrupt".

However, new Finance Minister Natalie Jaresko, a US-born investment banker who was a surprise appointment to the post on December 2, in an

interview denied reports that Ukraine was close to default. "We are not in a state of default and also not in pre-default state. This question is not even being considered in the government. But no one is hiding that the situation is very serious - Ukraine needs urgent stabilisation of the financial system in particular the banking sector," she said.

Some analysts argue that the current IMF programme combined with austerity measures and reforms announced by a new government appointed December 2 could see Ukraine through 2015.

"Another $6bn are expected to arrive from other lenders in 2015," write analysts at Kyiv brokerage Concorde Capital. "With this non-IMF support, Ukraine should have enough funds to cover its foreign currency needs," they add.

EU finance ministers met on December 9 to discuss Ukraine's financial crisis. Pierre Moscovici, the EU economics chief, said the European Commission was weighing a third rescue programme on top of the ¤1.6bn ($2bn) it has already committed to Kyiv. But Pier Carlo Padoan, the Italian finance minister chairing the discussion on December 9, said EU resources should only be dispatched if Kyiv made a “stronger effort” towards implementing reforms.

The members of the G7 group of countries have also discussed the possibility of providing $4bn in financial assistance to Ukraine, the Wall Street Journal reported on December 9.

A donor conference for Ukraine has been mooted for February 2014, but would likely be too late, according to analysts.

Ukraine is sure to leverage geopolitics in its search for an expanded bailout, says Olena Bilan, chief economist at Kyiv brokerage Dragon Capital. "Without additional aid, Ukraine will hardy be able to avoid a financial meltdown and a new wave of social unrest. This would give Russia another ideal opportunity to regain its grip on Ukraine and ultimately win its geopolitical showdown with the west," Bilan wrote in a column in the FT.

Ukraine bond yields soar after report that new bailout needed

December 12, 2014 businessneweurope I Page 2

US relations. Although Ewa Kopacz, Poland's prime minister, talked with president Barack Obama on the eve of the release of the report, and she later said the report would not negatively affect US-Polish ties, she did also call for a quick explanation of the CIA site in Poland. Kwasniewski was blunter, saying “Poland must use methods of limited trust in relations with its largest ally".

The Poland that allowed the US to use the Stare Kiejkuty base was a more fragile and less confident place than it is today. The ex-communists running Poland at the turn of the millennium were keen to stress the strength of their country's alliance with the US. Poland had only joined Nato in 1999 and was not yet a member of the EU.

Paradoxically, Poland is now bearing the brunt of the consequences for the US torture programme. While no US officials have been prosecuted for

CIA torture report ricochets in Poland

The redacted summary of the Senate report does not mention countries, but the phrase “Blue Site” seems to correlate with Poland and its Stare Kiejkuty airbase. According to the US document, Abd al-Rahim al-Nashiri, a Saudi suspected of being the mastermind of the October 2000 bombing of the USS Cole in Yemen, was brutally treated there. He was placed in a “stress position” with his hands over his head for two days, was threatened with execution and with a power drill, slapped and warned that his mother would be raped.

Abu Zubaydah, a suspected al-Qaida member of Palestinian origin, was also held at Site Blue, where he says he was tortured.

US officials wanted to send three more terrorist suspects to the site, but the host country baulked, only relenting after a payment was made. The Washington Post has earlier reported that Poland received $15m in cash.

Kwasniewski admitted the existence of the ‘black site’ and that “the financial question written up in the report took place” but said it was not linked to cooperation with the CIA.

An unrepentant Miller told Polish TV on Tuesday that “everyone is worried about the fate of murderers, talking about their rights, but no-one is talking about the rights of the victims. So I am speaking about the right of victims.”

The CIA stopped using the Stare Kiejkuty base in 2003, after Kwasniewski talked to former president George W Bush in the White House, saying he had become “uneasy” about American activities there.

CIA activities continue to cast a cloud over Polish-

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their role in torturing prisoners, earlier this year Poland lost a case before the European Court of Human Rights, which ruled that Warsaw had violated the European Convention on Human Rights in allowing prisoners to be held at the base. Zubaydah and al-Nashiri were each awarded ¤100,000 in damages, with Zubaydah getting an additional ¤30,000 in costs.

Polish prosecutors have also been looking into the issue since 2008. Reportedly, Zbigniew Siemiatkowski, Poland's head of intelligence at the time the CIA site was operating, as well has his deputy have been charged, although there is little public information in the top secret case.

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There are no reports of officials from countries like Lithuania and Romania, which also hosted US detention facilities, being similarly charged.

Siemiatkowski on Wednesday told Polish radio it has been a “total mistake” for the Senate to release the report, and insisted that he had nothing to be ashamed of in helping foster closer ties between Polish and US intelligence agencies.

But Siemiatkowski and other former Polish officials are not yet in the clear. Bronislaw Komorowski, Poland's president, said he hoped the US report would “revive” the slow Polish investigation.

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The Regions This Week

The Mongolian tugrik will remain weak throughout 2015, according to the Economist Intelligence Unit (EIU). The exchange rate will average MNT1,817 to the dollar in 2014 and MNT1,875 to the dollar in 2015, the EIU estimates. The tugrik touched new lows against the dollar in November, when a political crisis within the government that forced Prime Minister Norov Altankhuyag to resign sank the exchange rate down to MNT1,895 to the dollar.

Turkmenistan's GDP increased by 10.3% year on year in January-November, according to the Economy and Development Ministry. The figure is roughly in line with the World Bank's forecast for this year, which says that GDP will expand by 10.4% year-on-year in 2014.

Tajikistan's inflation rate grew to 7.1% year-on-year in November from 6.7% year on year in October, according to the National Bank of Tajikistan. Monthly inflation stood at 0.7% in the given month, whereas accumulated inflation year-to-date was 6.8%.

Foreign direct investment in Kyrgyzstan fell by 35.4% year on year to $443.3mn in January-September, the Finance Ministry says.

Georgia’s foreign direct investment doubled to $508mn in the third quarter compared to July-September 2013, when it stood at $255mn. This marks the biggest inflow in a single quarter in the last six years. The FDI hike in the third quarter pushed the net inflow in the first nine months of 2014 to $924mn, an increase by 29.2% year on year. In the second quarter, FDI lagged at $151mn.

Azerbaijan has stable economic growth and will close the current year with a budget surplus, according to Finance Minister Samir Sharifov. The sharp drop in oil prices in the short term by more than 40% and oversupply of oil on global markets can have an impact on budget revenues, he admits. Oil-rich Azerbaijan has calculated

Eurasiathe 2015 budget based on an oil price of $90 per barrel, down from $100 this year, but the government is confident the Azerbaijani economy can withstand a drop down to $60 per barrel.

Armenia is about to adopt a visa-free regime for US citizens starting from January 1, 2015. At the same time, procedures for Armenians wishing to travel to the United States will be eased, according to Foreign Minister Edward Nalbandian. The decision aims at increasing the number of US tourists visiting Armenia and facilitating access for Armenians to the US where a sizeable Armenian community live.

Kazakhstan's KazMunayGas E&P oil and gas company will slightly cut its oil output in 2015. The company says that its production target for 2015 is 12.2mn tonnes, slightly down from 12.263mn tonnes projected for this year. In 2013, the company produced 12.378mn tonnes of oil.

Meanwhile, Kazakhstan intends to set domestic petrol prices on a monthly basis to quickly response to a change in prices in Russia. Russia supplies about a third of petrol and diesel fuel Kazakhstan consumes. The Kazakh government regulates the prices of 80 and 92 octane petrol and diesel fuel to keep inflation under control (transport costs are believed to make up to 50% of the price of finished products in Kazakhstan).

Kazakhstan will draft a feasibility study for building its first nuclear power plant in 2015-16. The construction will take at least another 10 years, according to the Energy Ministry. The government plans to start building it in the town of Kurchatov in 2018 and is considering Lake Balkhash as a possible site for a second plant. The first plant may start generating power in 2023 or 2024. Kazakhstan is the world's largest producer of uranium since 2009 and it produced 22,500 tonnes of uranium in 2013, all of which was exported.

businessneweurope I Page 5December 12, 2014


Lithuania hopes to jump-start a shale gas push. The parliament approved a clear and attractive tax regime for explorers, as it seeks to reinvigorate interest from investors.

Hungary wants to introduce drug tests for children. The ruling Fidesz party is looking at legal issues around mandatory tests for 12-18 year olds. Politicians and journalists are also at risk of the annual test.

The US is ready to help Hungary and other CEE countries build energy infrastructure to reduce dependence on Russian oil and gas, Charg� d'Affaires in Budapest Andre Goodfriend told a newspaper. The comments came in the wake of the abandonment of Russia's South Stream project.

Lithuania's adoption of the euro will consolidate the Baltic region, Bank of Latvia Governor Ilmars Rimsevics insists. Lithuania will join its two Baltic peers in the Eurozone next year. Investors see the Baltic states as a single market, the central banker noted.

Poland's "Tolerance Rainbow" has been torched yet again. A drunken man was arrested as he lit one corner of the controversial installation that spans a central square in Warsaw. Several attempts have been made to burn the structure, formed by plastic flowers, since it was erected in 2012.

Estonia bought its first gas from Lithuania, proving a Baltic market is possible. The small deal for gas from Lithuania's new LNG terminal was completed despite Russian control of Latvijas Gaze, which operates Latvia's pipelines, used to deliver the gas.

Croatia will open its court case against the head of Hungary's Mol on February 12, it said this week. Zsolt Hernadi will be tried in absentia on charges of bribery related to the purchase of

Central EuropeCroatian energy firm INA, over which Mol and Zagreb have been fighting for years. Former Croatian PM Ivo Sanader is serving a ten year term for taking a �5mn bribe from the Hungarian company.

The head of Hungary's debt agency quit just days after his bank's licence was revoked. Istvan Torocskei's resignation from his post at AKK came after the tiny Szechenyi Bank – 49% state owned – was shuttered due to concern over its stability.

The Czech-Polish food fight has broken out again. Stinging barbs have been thrown across the border as Polish officials have accused their peers of using health inspections to try to block exports. The resumption of hostilities, which had settled down after a spat in 2013, comes as the Russian embargo starts to bite.

The Czech state wants to stop beer being the cheapest drink in bars and restaurants. Part of a bid to fight alcoholism, the ministry of health is preparing a bill to force establishments to make sure the cheapest beverage is a soft drink.

Poland has wriggled out of a contract to start buying LNG in 2015. Utility PGNiG reports that it has persuaded supplier Qatargas to try to sell the 1.5bn cm of gas – due for delivery under a 2009 contract – to other buyers. The Polish company will make up any losses for Qatargas. Poland's first LNG terminal at Swinoujscie is not now due online until late 2015.

Hungary's tax chief filed a suit against the senior US diplomat in Budapest. NAV head Ildiko Vida was told by PM Orban earlier in the week that she should sue charge d'affaires Andre Goodfriend or face the sack, despite the US official's diplomatic immunity. Vida is the only one of six Hungarian officials to have admitted being banned from the US over corruption claims.


Southeast EuropeFour candidates will run in the Croatian presidential elections scheduled for December 28, the country’s State Electoral Commission (DIP) said on December 8. Polls indicate that incumbent president Ivo Josipovic, backed by the ruling Social Democratic Party (SDP), would receive over 40% of the vote.

Bulgarian lawmakers approved the 2015 budget in its first reading on December 8. The budget projects a deficit equal to 3% of expected economic output.

Albanian President Bujar Nishani has nominated a new central bank governor, Gent Sejko, deputy general manager of Societe Generale Albania, to succeed long-standing governor Ardian Fullani. Albania’s parliament dismissed Fullani in mid-September for alleged abuse of office after thefts of over ¤5mn worth of cash were uncovered.

Romania’s headline inflation eased to 1.26% y/y in November from 1.44% y/y in October and 1.54% y/y in September, the Romanian statistics office announced on December 11. Low oil prices and subdued inflation in Romania’s trade partners are likely to support disinflation in future.

Turkey may propose to Russia building an LNG terminal in an energy complex on its border with Greece, as part of talks on planned new gas pipeline with Russia, Energy Minister Taner Yildiz said on December 11. The news comes shortly after Turkey signed an agreement on the construction of a new gas pipeline from Russia.

The Turkish government has prepared a draft bill on the privatisation of state oil company TPAO. The bill will be will be submitted to the cabinet of ministers soon, Energy Minister Taner Yildiz said on December 11.

Moldovan Prime Minister Iurie Leanca is expected to remain in his post following the November 30 general election. The largest party

within the ruling coalition says it will nominate Leanca to form the new cabinet.

Croatia's GDP contracted by 0.5% in the third quarter of 2014, the statistics office said on December 10, confirming its flash estimate released in November. This is Croatia’s 12th consecutive quarterly economic contraction.

The prime ministers of Serbia and China, Aleksandar Vucic and Li Keqiang, will inaugurate in mid December the Zemun-Borca bridge built in the Serbian capital Belgrade by China Road and Bridge Corporation (CRBC). CRBC started works on the ¤170mn bridge over the Danube in October 2011.

Bulgaria's industrial production rose for the first time in four months in October - by 0.4% y/y - thanks to a better performance in the utilities segment. Seasonally-adjusted industrial output increased 0.5% from September, when it grew 1.8% m/m.

Croatia will issue bonds worth some ¤1bn on foreign markets early next year and HRK3bn (¤391mn) worth of government bonds on the domestic market by the end of 2014, finance minister Boris Lalovac confirmed on December 8. A new Eurobond issue is also possible next year.

The European Bank for Reconstruction and Development (EBRD) said it has extended two sovereign loans worth up to ¤305mn for transportation infrastructure projects in Macedonia. Skopje will receive ¤145mn to complete a key east-west 34km rail section of Pan-European Corridor VIII, and ¤160mn for the Public Enterprise for State Roads.

The support of Slovenian citizens for the ruling Party of Miro Cerar (SMC) plunged to just 12% in December down from 29% in July when the SMC won the early elections and formed a coalition with smaller parties, the results of an opinion poll carried out by daily Delo showed on December 8.



Eastern EuropeRussia resumed gas deliveries to Ukraine after a six-month hiatus, after Kyiv paid a $378mn bill for 1bn cubic meters of gas to get it through the winter.

Currency speculators contributed an additional 8-10 percentage points to the ruble’s 49% drop this year but the central bank does not plan to restrict them, CBR Chairwoman Elvira Nabiullina said at a policy meeting this week.

Economic Development Minister Alexey Ulyukayev said in an interview that he expects sanctions to remain in place until 2017. Russia’s earlier macro-economic forecast assumed that the sanctions would be lifted in 2015, Ulyukayev said.

Western sanctions imposed against Russia have cost the EU as much as they cost Russia, Prime Minister Dmitry Medvedev said in an interview. The European economy has lost ¤40bn this year and will probably lose ¤50bn next year. Russia has spent about $100bn in reserves to protect the ruble but the economic slowdown has cost Russia something between $200bn and $600bn.

The World Bank expects the Russian economy to contract by 0.7% in 2015 in its new baseline scenario before growing by 0.3% in 2016. The bank also assumes an average oil price of $78 per barrel for 2015 and of $80 per barrel for 2016.

As a publicity stunt the makers of the third instalment of the Hobbit movie have the eye of Sauron glowing above one of the towers in Moscow City financial district this week.

Demand for rubles rocketed as bargain hunters head to Russia in the border regions of neighbouring Kazakhstan as people rush across the frontier to snap up bargains. People are snapping up fridges, tellies and other durable white goods, which have suddenly been discounted by up to 40% by the fall in value of the Russian currency.

France will not deliver the disputed Mistral helicopter frigate that Russia has ordered until there is a real ceasefire in east Ukraine, French President Francois Hollande said following his impromptu meeting with Putin in a Moscow airport last weekend. The statement highlights that all talks with Russia and the EU are on hold until a real ceasefire in Ukraine is made to stick.

Russia’s reintroduction of the "cash for clunkers" scheme has bolstered the automotive market in November, when sales fell only 1.1% year-on-year from nearly 10% a month earlier. Nine out of 10 of the car sales were made by Russia-based producers. The Lada, made by Avtovaz, was one of the biggest winners from the scheme.

The CBR may issue infrastructure bonds to finance the construction of rail and bridges in Crimea. The long mooted bonds are a way to provide long-term financing and offer Russia's pension funds a new investment vehicle.

The day after Putin announced the end of the South Stream gas pipeline, Russia's state-owned Gazprom set up a new company to build a gas pipeline to Turkey instead called Gazprom-Russkaya.

Russia may build up to 24 nuclear power units in India. Putin was in Delhi on Thursday to discuss the deal as the BRIC countries continue their drive to work more closely together.

Russian businessman Alisher Usmanov bought American biologist James Watson’s Nobel prize medal for $4.1mn at Christie’s auction and plans to return it to the scientist who won it for the discovery of the double-helix structure of DNA. Watson, 86, sold the medal to raise money for scientific research.



bne Chart

The plunge in the value of the rouble this month has led to press reports that Russian GDP, having previously been valued at more than $2,000bn, is now worth just $1,300bn.

Having been the world’s eight-largest economy, the argument goes, Vladimir Putin’s Russia is now languishing in 13th place, only slightly ahead of still-stagnating Spain.

On closer inspection, though, such analysis is rather crude and certainly selective. While the ruble has clearly fallen sharply against the dollar, the Russian economic picture is somewhat less bleak.

The ‘Russia-is-now-Spain’ headline hinged on devaluing Russia’s 2013 GDP by the entire extent to which the ruble has fallen against the dollar from the end of 2013 (RUB32.8) to December this year (RUB50.3). On that basis, the GDP contraction was indeed enormous – from $2,090bn to $1,370bn, a fall of 34.6%.

This is dubious methodology for three obvious reasons.

First, to take the daily rate of the ruble as a clear indicator of the overall size of the Russian economy would be to say it can grow or shrink by several hundred basis points a day. Between the last Friday of November and the first >

Flippant claim that ‘Russia is Spain’ is wide of the mark


bne Chart

Monday of December, the ruble lost 5.9% of its value against the dollar. An economy shrinking by such a number over an entire year would be disastrous yet believable. To claim it could happen over a single weekend to a country that has registered GDP growth in every quarter of 2014 is fanciful, if not simply misleading.

Secondly, Russia’s energy-heavy economy is not measured only in rubles. Its vast exports, which make up 28% of its GDP, are measured in dollars. If its ruble-based economy is devalued to reflect its weakness, then surely its dollar-denominated wealth should be inflated reciprocally. Doing this using the ‘Russia-is-Spain’ methodology would see the economy shrinking to $1,880bn, slipping just one place down the world rankings, from eighth to ninth. This method still takes a single day’s exchange rate as symbolic of the overall economy. Thus using instead the far more representative

average exchange rate for the year to date (RUB36.9) would be more appropriate, albeit still rather crude, and result in the economy shrinking by 4.5% to $2,030bn.

Even factoring in Russia’s foreign currency-denominated exports into the equation fails to recognize that the majority of Russia’s trade is actually with the Eurozone. Repeating the calculation with the ruble’s value against the euro rather than dollar shows the economic climate to somewhat less volatile than suggested by the ‘Russia-is-Spain’ headline-writers. Devaluing to the RUB62.6/EUR rate at the beginning of December would see a 9% contraction, while a devaluation using the year-to-date average rate of RUB49.2/EUR would result in a contraction of only 3% and Russia remaining the eighth-largest economy in the world.


growth, Sberbank CIB's Tom Levinson argues. Market participants have also grown more accustomed to the new CBR's moderate currency intervention policy, Sberbank CIB analysts believe. Piotr Matys from Rabobank International in London told Bloomberg that for CBR “preventing a full-scale financial crisis is far more important than avoiding recession".

Russia's central bank is blaming large corporates and banks, including state-owned ones, for accelerating the ruble's downwards spiral by speculative trades with currency derivatives.

"We have witnessed how large Russian corporations have made massive losses on OTC [over the counter] forward currency contracts," head of the Central Bank's department for financial stability Sergei Moiseev told business dailyVedomosti.

According to Vedomosti, the central bank has an Achilles Heel in its financial regulation - an enormous hidden market of OTC forward currency contracts, the total size of which regulators have no idea about, "because neither the volume of the market nor the volume of losses is disclosed to us".

"The central bank frequently declared its plans to move to a ruble float, and it was entirely obvious that this would lead to more volatility, but still many banks managed to sell significant volumes of OTC forward contracts to their clients, mostly large corporates," Moiseev said. "As a result, when the price of oil fell, many of these contracts were triggered."

Eastern Europe

Russian central bank hikes interest rates by 100bp to stop ruble's fall

bne IntelliNews

Russia's central bank has increased the key interest rate by 100bp to 10.5%, the fourth hike of the interest rate this year from an initial rate of 5.5%. The increase was largely expected, with the analyst consensus surveys indicating a rate hike of 100bp-150bp.

The CBR attributed the increase to acceleration of inflation and currency devaluation expectations, contributing to significant inflationary risks. The central bank, which expects headline inflation to reach 10% in the first quarter of 2015, maintained that interest rate increases could help bring inflation down to 4% in the mid-term perspective. Previous toughening of the monetary policy did not influence inflationary dynamics, the CBR said, and pledged to increase the rate further should the inflationary risks persist.

At the same time, the central bank's comment acknowledges waning credit growth, against a background of increased interest rates, and forsees the economy expanding by 0.6% in 2014.

Analysts surveyed by Prime do not believe that the interest rate hike is going to influence the situation on the currency market. Some of the traders and analysts expected a bold 4pp-5pp interest rate hike targeting the worst ruble devaluation since 1998. But a gradual rate increase is likely to be ignored by the market, the same as in November, and is not going to shake off strong ruble dependency on oil prices.

On the contrary, higher interest rates will further feed the pessimistic growth outlook on economic


Eastern Europe

owned bank actively encouraged exporters to take out forward contracts to sell it dollars, by offering reduced interest rates on loans to those who did so. Now margin calls are being triggered as the ruble exchange rate collapses.

Moiseev said that the situation was now under control. "Most of these contracts have either been terminated early with payment of compensation, or are restructured (...) luckily there are not trillions of dollars worth of positions [as in case of US Lehman Brothers in 2008] so it was possible to regulate the situation more or less quickly," he said.

Head of state-owned bank VTB Aleksei Kostin recently said he would punch anyone who suggested his bank was speculating against the ruble, media reported. Russian president Vladimir Putin for his part said in his address to parliament December 4 that speculators betting against the ruble "would be punished".

According to regulators, in part this market is adding to the massive downward pressure on the ruble, although the bankers say they are simply hedging their risks.

"A large part of the derivatives are not real hedges, but have been taken out for the purpose of reducing interest payments on credits, or for earning speculative money on currency fluctuations," Moiseev said.

As oil and the ruble drops precipitously in value, exporters who have taken out such contracts to sell banks their dollars at a future date, are forced by margin calls to close the position early, adding to the pressure on the ruble exchange rate, and causing huge losses to the companies in question, Moiseev said.

Large state banks and energy companies may be among the main players in this game. According to Vedomosti sources, for example, one state-


Eastern Europe

As part of its drive to deregulate the economy in a similar way to reform poster boy Georgia, only "28 out of 56 regulatory authorities will remain after the first stage of reforms," and the number of supervisory functions will be slashed from 1,032 to 680, Yatsenyuk said, with the required laws to be passed in early 2015.

At the same time, Ukraine will embark on the complex transition from Soviet industrial standards to European standards, introducing 1,500 new standards for goods in 2015.

The government's plans also encompass radical fiscal decentralisation, handing over fiscal and taxation powers to local self-government. "With the money we will give them responsibility, as rights always imply responsibility," Yatsenuk said.

Yatsenyuk announced a string of new anti-corruption initiatives: the establishment of a National Anti-Corruption Agency, a National Anti-Corruption Bureau, a State Bureau of Investigation, expenditure and income monitoring of civil servants, and the creation of a national police force, as part of a reform of the Interior Ministry. Yatsenyuk also said that the judiciary would be completely reformed, with recertification of all judges.

Yatsenyuk promised that armed forces spending would be boosted to 5% of GDP.

New Ukraine government pledges to 'utterly transform' economy

bneIntelliNews

Prime Minister Arseny Yatsenyuk announced on December 9 that his new government would embark on a programme of sweeping reforms to "utterly transform" Ukraine's economy. "Our answer is decentralisation, deregulation, de-bureaucratisation and responsibility of each government official," he said when presenting his Action Programme at a government meeting on December 9.

Yatsenyuk said that - first up - the number of state officials would be slashed by 10% in 2015, following the 28,000 officials he claimed had been fired in 2014.

"Reducing the quantity [of state employees] and increasing efficiency and wages - this is the path we have chosen," he said. In return, he promised that the remaining public sector workers would receive salary boosts. "This concerns not just officials, but all people who work in the public sector - teachers, doctors, all those who receive funds from the budget and serve the country," he promised.

The intended shake-up will affect all walks of public life, Yatsenyuk assured. "Making changes at the level of the government is not enough. Similar changes must be carried out in each ministry, in each department, in each administration both on regional and district levels, and in all authorities in general." In early 2015 the government will also introduce transparent competitive appointments to the civil service, Yatsenyuk added.


Eastern Europe

unfunded. The proposals would drastically cut back the remnants of the Soviet cradle-to-grave welfare state.

Among the most startling proposals are to reduce the number of MPs from 450 to 150, reduce obligatory schooling from 11 to 9 years, and abolish the constitutional guarantees of free education and medicine, as well as abolishing a constitutional norm prohibiting closure of existing institutions (such as schools and hospitals).

Perhaps most controversially, the finance ministry is proposing to raise the pension age for both men and women to 65, from currently 57 for women and 62 for men, canceling pension indexation for inflation, and slashing all travel benefits (such as free travel for pensioners).

New Finance Minister Natalie Jaresko, a US-born investment banker who was a surprise appointment to the post on December 2, said that it was "too early to talk about concrete figures," but that it would be necessary to "review the existing benefits provided to large groups of the population in favour of aid targeted at people who really need it".

Regarding the internationally crucial energy sphere, Yatsenyuk said he would set up two public-private corporations to manage Ukraine's natural gas transit and storage systems and that 49% stakes in these firms would be sold to investors from the EU and the US as early as 2015, with Ukraine’s energy system to be fully integrated into the European energy system by 2017.

Yatsenyuk proposed privatising 1,200 out of the currently 1,500 state-owned firms currently excluded from privatization, but only after prices had recovered from the current economic downturn, he said.

Ukraine's nuclear power generation will also be upgraded, said Yatsenyuk, with two new nuclear reactors for Khmelnytskiy power station to be completed by 2018 and others enhanced, as measures to lessen Ukraine's energy dependence on Russia.

According to leaked documents drawn up by the finance ministry, the new government, is readying sweeping reform of the entire budget sector.The 120 pages of proposals outline changes to the constitution and legislation to reduce the state's spending obligations to the order of UAH496bn (¤24bn), much of which remains in fact chronically


between the two countries and will pave the way for expanding bilateral trade and economic ties and new Russian loans for buying weapons.

Despite talk of Uzbek purchases of Russian armament and an "increase in Russian military-technical presence" in Uzbekistan it is not clear whether Tashkent will rejoin the Moscow-led Collective Security Treaty Organisation it left twice - in 1999 and 2012.

Observers suggest that the withdrawal of Nato troops from Afghanistan and a boost in activity by Isis in Syria and Iraq and the Taliban in Afghanistan are forcing Tashkent to seek closer cooperation with Russia to "preserve peace, stability and tranquillity in our countries and the region as a whole".

Nor it is clear whether Putin's announcement that the countries agreed to start consultations on the establishment of a free trade zone between Uzbekistan and the Eurasian Economic Union will eventually lead to Central Asia's most populous nation's membership of the free-trade bloc. Uzbekistan has shied away of multilateral economic and political blocs within the CIS, preferring to do business on a bilateral basis.

A year ago the speaker of the Uzbek parliament's Senate, Ilgizar Sobirov, hinted at Uzbekistan's possible membership of the Customs Union of Russia, Kazakhstan and Belarus (it will be

Eurasia

Moscow writes off Uzbek debt, Tashkent agrees to talk about free trade zone

bne IntelliNews

Russia has agreed to write off Uzbekistan's debts in return for Tashkent's consent to consultations on the establishment of a free-trade zone between Central Asia's most populous nation and the Moscow-led Eurasian Economic Union. Regional security and the ongoing geopolitical tensions caused by the conflict between Russia and Ukraine were also top of the agenda on Russian President Vladimir Putin's flying visit to the Uzbek capital, Tashkent, on December 10.

"Today we agreed that we would start consultation regarding a possible signing of a treaty between Uzbekistan and the Eurasian Economic Union on a free trade zone," Putin said. "I want to stress this is only consultations."

Ahead of the visit Russian observers speculated that Uzbek President Islam Karimov wanted to get closer to Russia in order to shield his country from challenges posed by the withdrawal of US-led troops from Afghanistan.

Another reason, observers suggest, for the thaw in Uzbek-Russian relations may well be Moscow's outrage at the new Ukrainian government's drift away from its orbit towards the West.

Moscow agreed to write off $865mn of Uzbekistan's $890mn debt to Russia - $500mn in principal debt and $388mn in interest, with Tashkent having to pay a token $25mn. The deal will solve the problem of mutual financial claims


President Islam Karimov's figures, Russia accounts for a fifth of his country's foreign trade, but according to Putin, trade with Russia accounts for almost a third of Uzbek foreign trade. Uzbek official statistics are notoriously unreliable: Tashkent claimed bilateral trade exceeded $7bn in 2013, whereas Putin put the figure at $4bn. It grew by 8% year-on-year to over $3bn in January-September 2014, according to Putin.

Russia has invested $8bn in the Uzbek economy in the past 15 years, with oil giant Lukoilinvesting $3.5bn in gas projects in the country and Russian mobile operators Vimpelcom andMTS active in the Uzbek market.

Eurasia

transformed into the EEU in January 2015) after his meeting with Valentina Matviyenko, the chairwoman of the Russian parliament's upper chamber, the Council of Federation.

Since Putin sees the EEU more as a political union and a counterweight to the West, Uzbekistan's membership will be a coup for Russia despite the low level of the country's economic development compared to the existing members of the bloc. The fast-track membership Russia offered to Armenia and Kyrgyzstan sets a precedent for Uzbekistan should Karimov decide to take his country into the EEU.

Russia is one of Uzbekistan's largest trading partner and largest investor: according to Uzbek


Georgia’s major commodity imports (oil, food) could help to save on imports in coming months.”

Monetary regulators in both countries sough to downplay their currencies’ depreciation. The president of the National Bank of Georgia (NBG), Georgi Kadagidze, said in a televised statement that the steep fall was because of “the frenzy of market players, which is generally characteristic of financial markets in such times", adding that financial and macroeconomic stability face “no threat whatsoever".

In Yerevan, the Central Bank of Armenia (CBA) attributed the dram’s fall to “recent developments in the regional and international financial markets", adding that the “exchange rate is in the “stabilisation zone” and that “reserves are absolutely sufficient for preventing all kinds of artificial exchange rate fluctuations and ensuring financial stability”.

Armenia and Georgia have similar macro stories, small economies – steady growth rates, low budget deficits/public debt ratios and free-floating currencies. However “their weaknesses are both on the external financing side, i.e. persistent current account deficits, and limited FX reserve cover,” said Ash in his note.

Both also have significant agro exports to Russia, and “had hoped to benefit from Russian sanctions on the West – but massive Russian devaluation is clearly threatening this trade".

The depreciation has reduced the real monetary value of the vital remittances from Russia, where the bulk of migrant workers from both countries are based. Individual money transfers from Russia to Armenia have been falling since June and plunged 17% year-on-year in October. Likewise, remittances to Georgia were down 6% y/y in October, but the decline from Russia was by 9.2% y/y.

Eurasia

Georgian, Armenian currencies tumble on Russian ruble’s fall

bne IntelliNews

The Georgian lari has tumbled against the dollar to its lowest level in a decade and the Armenian dram hit his lowest since 2006, as analysts warn of a spillover effect of the Russia’s ruble collapse across the former Soviet Union.

On December 5, the Georgian lari slumped 2.86% against the dollar, extending its rout to 11.2% since November 5 and the Armenian dram fell 1.4% versus the dollar, marking a decline against the greenback of almost 10% over the same period.

As Russia is an important trading partner for both countries, the “currencies weakening are only to be expected", wrote Standard Bank’s head of emerging markets research, Timothy Ash, in a note to investors on December 5.

Both Yerevan and Tbilisi have been benefiting from falling oil prices and growing remittances, one of the their main sources of external financing, but these are inevitably decreasing following the ruble’s devaluation. The heat is stronger on Georgia, as for the second year the government is failing to spend what it allocates in the budget plan, while links are growing between Russia and Abkhazia, one of its two breakaway regions.

The lari remained broadly stable throughout 2014 while other currencies significantly lost value against the dollar, according to a note released by Tbilisi-based Gart & Taggart Brokerage on December 8. G&T analysts think that the currency’s recent depreciation “was triggered by market overreaction, as was adjusting to weaker external environment and there was growing demand for imports owing to seasonality and increased government spending...Some relief could come in the medium term as winter season will attract tourists, and falling world prices on


Support for Hungary’s ruling Fidesz party plummets

One of the officials on the list is Ildiko Vida, the head of the national tax administration. She launched a legal case for public defamation against Andre Goodfriend, Charge d' Affaires at the US Embassy, on December 11. Orban had earlier remarked that she should either bring the action or quit.

However, the polls also illustrate the challenge Hungarian opposition parties. The majority of voters abandoning Fidesz have moved over to "undecided", with that group now accounting for 36% of eligible voters.

The opposition Socialist Party (MSZP) and others on the left have consistently struggled to mount any challenge since Orban took office in 2010. The MSZP's rose to just 12% from 8% in the Ipsos poll. The far-right nationalist Jobbik remains Fidesz closest rival, and boosted its approval rating to 15% in the same survey.

Meanwhile, Fidesz has time and space to continue with its policy and rebuild support. The lull in support for Orban comes just months after Fidesz won a second constitutional majority in general elections in April. The party also won a strong majority May's elections to the European Parliament, as well as local elections in October. Hungary does not now have any scheduled elections until 2018.

However, since the summer speech when Orban referred to his admiration of “illiberal democracies” and held up China and Russia

Central Europe

bne IntelliNews

Two polls released on December 11 showed an unprecedented decline in support for Hungary’s ruling Fidesz party. The survey suggests the government's approval ratings continue to plunge in the wake of recent mass protests and US pressure on Budapest. However, the trend is doing little to strengthen opposition parties.

In a poll by think tank Median, support for Fidesz among eligible voters plunged to 26% from 38% in October. The results show that Prime Minister Viktor Orban’s party has lost 900,000 potential voters, which is the largest drop recorded by any party in Hungary since the end of communism in 1990.

An Ipsos poll released the same day has Fidesz losing 800,000 supporters over the past two months, reports MTI. The government's approval rating among eligible voters fell to 30% in November from 35% in October and has now fallen further to 25%.

Fidesz' waning popularity is seen as mainly a result of the mass protests over the government’s plan to introduce an internet tax at the end of October. Those plans were later scrapped by Orban.

In addition, Orban's percieved lean towards Moscow - particularly in the energy sphere - has sparked a diplomatic row with the US, raising fears amongst the population of isolation from the West. Washington banned six Hungarian officials from entering the US on grounds of corruption in November, the first ever such action against a Nato ally.


As one Western diplomat put it: “This two-thirds majority has to some extent gone to their heads; they are able to pass laws at will and they do.” The implication being that their repeated success and very powerful position has led to a feeling of untouchability.

Central Europe

as model systems, international reactions to his policies, coupled with a flurry of scandals involving the newly-acquired wealth of leaders of his governing Fidesz party, have begun to erode confidence even within hitherto loyal supporter groups.

Baltics splurge ¤300mn on upgrading defence in last 6 months

at Stanford University on December 8, he underlined the need for “a thought-out” national defence strategy. “On one hand, we strengthen our security through a broad-scale national defence model and on the other hand, through Nato membership. Nato’s presence in the Baltic region must continue and increase,” he said. “The current security situation will stay with us for a long period of time. This is not just bad weather, this is climate change.”

The Russian annexation of Crimea and its support for rebels in eastern Ukraine has acted as a wake-up call to all three Baltic states, each of which endured half a century of Soviet occupation before regaining their independence in 1991.

Russian military planes and warships are also now skirting Baltic airspace and sea borders on an almost daily basis. Over the weekend of December 6-7 alone, BAP scrambled multiple times to intercept clusters of Russian bombers flying close to Baltic airspace with their transponders turned off.

While Estonia has been more hawkish than Latvia or Lithuania (it retains national service and since 2012 is the only one of the three to spend the Nato-mandated minimum of 2% of GDP on defence), all three, after joining Nato and the EU in 2004, have welcomed assurances from their Nato allies that any aggression against them will be regarded as an attack on the alliance as a whole.

Mike Collier in Riga

Estonian Defence Minister Sven Mikser's sealing of the biggest military procurement deal in his country's history on December 9 marked a major new step in the efforts of the Baltic states to defend themselves.

The deal, worth ¤138mn, sees the Baltic nation of 1.3mn people buy 44 used CV90 combat vehicles and six old, but still formidable, Leopard tanks from the Netherlands. “This takes our combat abilities to another level,” Mikser said at the signing ceremony in The Hague. “Our soldiers will have greater striking power, freedom of movement and better protection.”

It comes less than a month after Mikser signed another deal, this time worth ¤40mn and with the US, to buy 40 Stinger missile systems for delivery in 2015. And Andres Sang, spokesman for the Estonian Defence Ministry told bne Intellinews Estonia's plans for military purchases were far from finished. “In our long-term plans there are three main objectives for procurement: new-generation anti-tank weapons, infantry fighting vehicles and self-propelled guns. The first two have been signed by today, the third order is still waiting,” he said.

Estonian Prime Minister Taavi Roivas was in the US when the deal was signed, meeting with companies belonging to the Estonian Defence Industry Association about future deals. At a lecture


5 & 6 February 2015 - Tbilisi, Georgia

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2nd AnnualSouth CaucasusInfrastructureNew EnergyInvestment Summit

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Central Europe

But in order to match deeds to the fine words Latvia and Lithuania have also started spending serious money on upgrading their own military capabilities, as well as playing host to crack foreign units on continuous “training” missions in which they don't forget to bring their own tanks.

In August the Latvian government approved plans to buy 123 CVR(T)s or Combat Vehicles Reconnaissance (Tracked) for ¤48mn from the UK, with the price tag rising to ¤70mn when they have been equipped with new Spike missile systems. Then in November another deal was agreed with Norway worth ¤4mn for the purchase of 800 Carl Gustav anti-tank weapons plus 100 assorted military trucks and off-road vehicles. Latvian National Armed Forces chief Raimonds Graube said the large number of anti-tank weapons was “very necessary to deal with any potential aggression.”

In September Lithuania signed a ¤34mn deal with Poland to buy the GROM air defence system, and in October the Lithuanian defence ministry said it would spend ¤20mn on a fresh supply of Javelin missiles from the US, bringing the total Baltic military spend in six months to more than ¤300mn. “Due to the events in Ukraine, 2014 is a year when the rhetoric’s among politicians on the defence spending significantly changed,” says defence expert Kristine Rudzite-Stejskala, in a paper for the Latvian Institute for International Affairs published on December 5.

Rudzite-Stejskala points out that of Nato member states, currently only the US, UK, Greece and Estonia actually meet the 2% of GDP rule with even France spending just 1.9%. “After the Russian aggressive actions in Ukraine, both [Latvia and Lithuania] were among the first ones to react in regards of defence budget increases. Currently the Lithuanian defence budget is 0.89% and Latvia’s 0.91%. Lithuania plans to raise it up to 1.1% of GDP and Latvia not less than 1% of GDP in 2015. Compared to 2014 defence budgets, this would mean 30% and 18% increases in nominal terms, but since GDP is forecast to grow, it will likely be an even bigger increase. Estonia as a

regional leader in terms of defence budget growth, also plans to raise the defence budget up to 2.05% of GDP which is a 7% increase,” she says.

Nevertheless, there is a barely-concealed sense in Estonia that the spending increases need to come even faster. “It is vital for Estonia that also Latvia and Lithuania are willing to increase their levels of defence costs to 2% of gross domestic product,” Estonian PM Roivas said at a meeting with his Latvian and Lithuanian counterparts on December 5.

While the amounts the relatively poor Baltics can afford pale into insignificance against the estimated ¤60bn (3.4% of GDP) due to be spent this year by the Russian military machine – which is expected to rise by a further ¤20bn next year – they do show that the Baltics are no longer relying solely on the protection of their Nato allies.


Southeast Europe

Southeast Europe agrees to search for alternatives after scrapping of South Stream

of gas supplies. The group’s first task will be to draw up an action plan to integrate Central and South-Eastern European gas markets and interconnections, an EC statement said.

Options to diversify supplies including building liquefied natural gas (LNG) terminals and developing offshore reserves in the Eastern Mediterranean and Black Sea, as well as pushing ahead with the Southern Corridor project to tap into gas supplies from the Caspian and Middle East. Under this project, the first deliveries of gas from Azerbaijan’s offshore Shah Deniz field are due to arrive in Europe by 2019.

“To achieve this common objective, and in view of the vulnerability of the region as demonstrated in the recent stress tests, it is crucial to swiftly complete projects already underway and speed up development of projects of common interest identified as being of strategic importance,” says an EC statement on December 9.

However, these will not be on the same scale as South Stream, which would have carried 62 billion cubic metres of gas a year into Southeast and Central Europe. The pipeline would have transported Russian gas across the Black Sea into Bulgaria, bypassing Ukraine, but the European Commission pressed Bulgaria to suspend work on the project on the grounds that it violated EU competition rules that are intended to stop gas supplies being dominated by an export monopoly such as Gazprom.

On a visit to Ankara on December 1, Russian President Vladimir Putin said that Russia was

bne IntelliNews

Energy ministers from countries that would have been part of the now-defunct South Stream gas pipeline agreed on December 9 to work together on alternative ways to diversify their gas supplies and reduce reliance on Russia. A deal was signed on the same day between Bulgaria, Romania and Greece on the Vertical Gas Corridor, an inter-connector linking the three countries’ gas grids, which may help take some of the pressure off the Bulgarian government after the collapse of the South Stream project.

The Vertical Gas Corridor will transport gas from Greece’s Revithoussa LNG Terminal and - when it becomes operational - the Trans Adriatic Pipeline (TAP), which will transport Azerbaijani gas into Europe. Ministers from the three countries said in a joint statement that they reaffirmed their “commitment to promote secure, sustainable energy supplies at affordable and competitive prices ... ending the isolation of member states and promoting diversification of routes".

The deal is of particular importance to Bulgaria, which suffered a severe blow when Russian President Vladimir Putin announced on December 1 that Moscow was dropping plans to build South Stream.

However, Bulgaria is just one of seven EU countries that would have benefitted from South Stream. Energy ministers from Austria, Bulgaria, Croatia, Greece, Italy, Romania and Slovenia agreed at a meeting in Brussels on December 9 to set up a working group on cross-border projects and trans-European projects on the diversification


Southeast Europe

conversations took place between Medvedev and the two East European leaders this week to discuss further interaction in the power sector.

Meanwhile, the market for the Russian pipeline through Turkey is still very much in doubt. Turkey has signalled that it will press on with plans to construct a 20bn cubic metre a year (cm/y) pipeline to import Iraqi gas.

unable to proceed with construction of the South Stream pipeline. Instead, Russia plans to use the pipeline section already built in Russia to launch a new southward pipeline, running under the Black Sea to Turkey.

However, Russian Prime Minister Dmitry Medvedev has since reached out to both Vucic and Hungarian Prime Minister Victor Orban. Telephone

Kosovan parliament set to approve LDK-PDK government

investment. He also said he would work to promote the rule of law, and to continue the dialogue with Serbia.

The peaceful handover of power from Thaci to Mustafa is a highly important step for Kosovo, which has yet to have a transition of power since independence. Before the PDK-LDK deal was struck, it seemed that Kosovo might have to head for another round of elections to resolve the crisis. There were also fears that the vacuum could add to political unrest in Europe’s youngest state.

Mustafa, who served as Kosovo’s finance minister in exile during the 1990s, later becoming mayor of the capital Pristina, gets the top spot in the new government after the LDK refused to support a third term for Thaci.

However, the concessions the LDK has made to the PDK are not clear. Thaci is expected to become both deputy prime minister and foreign minister. There are rumours in the Kosovan press that Thaci will also get support from his coalition partner for a bid to replace Atifete Jahjaga as president when her term expires in 2016.

bne IntelliNews

Kosovo’s two largest parliamentary parties have struck a coalition deal, putting an end to a six-month political vacuum following the June 2014 elections. The agreement will mean that the Democratic Party of Kosovo (PDK) will remain in power alongside the Democratic League of Kosovo (LDK), whose leader Isa Mustafa is set to become Kosovo’s new prime minister.

At a session on December 8, MPs approved Kadri Veseli as parliament speaker, by a majority of 71 votes to 42, opening the way for the parliament to approve a new government, which is expected to take place later today.

Under the agreement between the PDK and LDK, Mustafa will replace long-standing PM Hashim Thaci of the PDK. With the combined seats of the PDK and LDK, and backing from 20 MPs representing minorities, the new government will have a stable majority in parliament, and Mustafa’s election by MPs is expected to go ahead without a hitch.

In an address to the parliament on December 8, Mustafa told MPs that he would offer a stable government, with a focus on economic development and promotion of foreign


Southeast Europe

coalition from taking power led to Mustafa eventually breaking with his former allies to join the DPK.

The formation of a new coalition brings to an end the lengthy deadlock, which had a damaging effect on the economy, with many companies reportedly putting off investment decisions until they could be sure of a more stable political environment.

The British Ambassador to Kosovo, Ian Cliff, told students in Pristina on November 5 that the political crisis had created “major problems” in an already challenging business environment, Albeu reported. By early December, there were indications of a 6% drop in custom duties and a decrease in tax collection. Finance Minister Besim Beqaj blamed the decline on a combination of the political situation and the fall in foreign investment.

Kosovo remains one of the poorest countries in Europe, with high levels of corruption and organised crime - the latest Corruption Perceptions Index released by Transparency International in December puts Kosovo on a par with Albania in 110th place out of 175 countries, the lowest in Europe aside from Belarus, Russia and Ukraine. The average monthly salary is just ¤350, and an estimated 34% of the population lives below the poverty line on under ¤45 a month, according to the World Bank. Unemployment is 45%, with youth unemployment as high as 70%.

The deal will keep Thaci, who has clung determinedly to power since the June election, at the heart of Kosovan politics. Despite taking 30.38% of the vote on June 8 to the LDK’s 25.24%, the DPK was unable to find coalition partners until it struck a provisional deal with the LDK in late November.

Instead of giving way to the coalition of opposition parties that sought to take power, Thaci mounted a constitutional battle, insisting on the DPK’s right, as the largest party in the parliament, to nominate the candidate for speaker. However, with four opposition parties ranged against him, it proved impossible to get his choice passed by the parliament. On July 17, the parliament voted Mustafa, the opposition nominee, in as speaker, but the following day the DPK appealed to the country's constitutional court, claiming that his appointment was “unconstitutional and unlawful”. This appeal was backed by the court.

The first signs that the lengthy deadlock was nearly over came in November, when a deal, brokered by the US, was announced between the DPK and LDK.

Until then, Mustafa’s LDK had planned to form a government with the Alliance for the Future of Kosovo (AAK) and Initiative for Kosovo (Nisma), later bringing on board the nationalist Vetëvendosje party, which allowed the parties to secure a majority in parliament. However, Thaci’s determined campaign to prevent the four-strong


Opinion

Ben Aris in Moscow

There has been a spate of articles recently suggesting that Russia is on the edge of a complete economic meltdown. There was an article in the UK's The Daily Telegraph suggesting that its economy has lost a third of its value in dollar terms and dropped from eighth largest economy to 13th largest on a par with Spain. Then The Economist ran a cover story claiming that, "Russia is closer to crisis than the West or Vladimir Putin realize," because it was running out of money. And most recently Professor Anders Aslund of the Peterson Institute for International Economics wrote a blog suggesting that nearly $200bn of Russia's hard currency reserves somehow "don’t count" and that it doesn’t have enough money to meet its debts.

To be clear: Russia is not in crisis. It is going through a very painful adjustment caused by tanking oil prices, but its economic fundamentals remain extremely solid – far better in fact than most of the countries in Western Europe, let alone the rest of the Commonwealth of Independent States (CIS). It is Ukraine that is on the verge of an economic meltdown.

Professor Aslund wrote in an op-ed on December 1 entitled "Russia's Economic situation is worse than it may appear", and followed up a week later with "The Russian Economy is headed for disaster." In both pieces he claims that the Central Bank of Russia’s (CBR) $420bn reserves number is a fiction and actually it only has $203bn in "useable" money.

Drilling down into the $420bn number, Aslund says: "Of this amount, $45bn is held in gold, and $172bn in the two sovereign wealth funds, the Reserve Fund and the National Wealth Fund. The Ministry of Finance controls those two funds, much of which is deposited in state banks or invested, so these funds are not liquid reserves. If we deduct gold and sovereign wealth funds, the official reserves shrink to $200bn. In the last year, Russia's international reserves have declined by $103bn. In the coming year, they are likely to fall by another $100bn, because Russia has to pay back about $150bn a year, while its current account surplus is about $60bn a year. When the market realizes that Russia's reserves are running short, capital outflows will accelerate in anticipation of capital controls and the exchange rate will fall further." Aslund's numbers also deserve closer examination:

• $45bn is held in gold: Aslund argues that because these reserves are in gold, they are not liquid and so can't be counted as reserves. Firstly it is completely normal for countries to hold part of their reserves in gold as a hedge against currency movements. Russia holds just under half of its reserves in euros, which have done poorly against the dollar this year, so holding something else, like gold, is actually a plus. Moreover in times of crisis – and Russia going into default would not only cause turmoil on European markets, but would cause several CIS countries like Tajikistan

MOSCOW BLOG:

Russia is running out of money – not…


Opinion

and Armenia to collapse, possibly sparking an Asian-style global crisis – gold's value goes up. And as the international bullion market is worth $2.5tn – twice the size of the UK Gilt market – to suggest gold is not a liquid asset is risible.

• $172bn in the two sovereign wealth funds: this is a more valid point. The funds are under the control of the Ministry of Finance, but as to "much of which is deposited in state banks," this part is unclear. There are very strict rules on how this money can be used and while this money may be less liquid than the CBR reserves, Moody's Investors Service says most of this money is on account in the CBR and is confident it is available if needed. Looking at this issue from a different perspective, the CBR is currently providing the bulk of liquidity to the bank sector to the tune of about RUB7tn, or $140bn, but this is provided in rubles, which the CBR can print if it needs and those dollars can be made available if needed.

• $103bn decline in international reserves: this is true. But in the last year the ruble was still in the exchange corridor and the CBR was obliged to defend it. However, from December the currency is now truly freely floating. Traders have been freaked out by the fact that the CBR is not intervening much, the whole point of which is to preserve Russia's hard currency reserves. So the proposition that, "in the coming year they will likely fall by another $100bn," is questionable.

• $150bn of debt Russia has to pay in 2015: is the reason reserves have to fall. However, more than half of this debt ($90bn) is owned by just two state-owned companies, Rosneft and Gazprom, both of which earn hard currency for their exports and both of which are able to pay their debts out of their cash flow, so this will have no impact on the CBR's reserves. The current account surplus is enough to cover the rest. In any case, Russia's companies and banks have spent this year building up hard currency reserves and according to Moody's are already in a position to meet their obligations. Aslund himself quotes JP Morgan, which estimates Russian banks have accumulated

$292bn in foreign assets, but speculates without proof that this belongs to the sovereign wealth funds, ignoring the fact that this sum is actually $120bn more than those funds collectively hold.

• $120bn net capital outflow: Aslund names this number elsewhere in his articles and it is true that capital outflow is running much higher this year – almost double the level of last year. However, drilling into this number and it is not quite so scary. Firstly, Russia is a net exporter of capital, and always has been, as it invests more money overseas than it receives as investment – mostly in the other CIS countries. This "capital flight" has been running at about $50bn a year for a decade. Secondly, a quirk of Russia's accounts mean that the profits earned by these Russian-owned firms abroad that are reinvested in these foreign companies are counted as "capital flight" too – almost no other country does this – and runs at some $20bn a year. And finally, after slowing down in the middle of this year "capital flight" took off again in the third quarter to the tune of just under $30bn. But this was exactly the same time as Russia was cut off from the international capital markets by the EU-US financial sanctions. In other words this is not Russian money fleeing a collapsing Russia, but simply companies that are unable to refinance their debts so paying them off with cash instead, argues Evgeny Gavrilenkov, chief economist at Sberbank, thus reducing Russia's vulnerability shocks even further from an already low level. It should also be noted that even if total "capital flight" this year is $120bn, this is still only 6% of GDP – well down on the approximately 15% Russia was losing a year in the 1990s when capital flight really was capital fleeing the country.

This whole article and many similar articles are full of Schadenfreude, scaremongering or raw, unjustified speculation that assumes a collapse.Take this paragraph for example: "Russia has no problem with its budget balance, its public debt, or its current account. They all look rock solid. Yet we are seeing the beginning of a depreciation-inflation cycle and economic decline.


Opinion

The Central Bank of Russia will be forced to raise interest rates further to limit both inflation and depreciation. A fall in the oil price of 40% means that Russia’s exports will fall by 20% or $100bn, which will reduce investment, consumption, and GDP. Although Russia’s banks are considered to be well capitalized, many banks are bound to suffer from currency mismatches and the ever-cheaper ruble. The costs of bank failures are bound to end up on the state budget."

If you strip out the speculation, you are left with this: "Russia has no problem with its budget balance, its public debt, or its current account. They all look rock solid… Russia’s banks are considered to be well capitalized." So citing Aslund's own facts, the Russian economy is strong and so are its banks.

To finish, Moody's issued a report on December 5 entitled "Foreign Exchange Reserves Decreasing but Sufficient to Cover 2015 External Debt Needs."It said: "According to official data, the Bank of

Russia (CBR)'s [foreign currency reserves] (as of 1 December 2014) are at $361bn. This is more than sufficient to cover the country's external debt payment obligations through 2015, which amount to roughly $130bn across government, banks and corporate debt. That assumption holds even when excluding the $150bn of FXRs counted as the central bank reserves that come from the government's two special savings Funds – the National Wealth Fund (NWF) and Reserve Fund (RF). While these two Funds have specific mandates and are therefore unlikely to be used either to intervene in the foreign exchange market or to finance the government's external debt payments, like the CBR's own reserves, the amounts placed in the central bank contain liquid, marketable assets, that can be utilized if required."

Why don’t the anti-Russia crowd just confess that what it is passing off as "analysis" is actually wishful thinking?

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Weekly Lists

Turkish growth slows to 1.7% in Q3 bne IntelliNews

The Turkish economy surprised on the down side, expanding at a rate of 1.7% year-on-year in the third quarter, after growing 2.2% y/y in the previous quarter and 4.8% in Q1. The market had predicted a 3% y/y growth for the third quarter. On a seasonally and calendar-adjusted basis, the economy expanded 0.4% quarter-on-quarter in Q3 after contracting 0.5% q/q in Q2, the statistics office, TUIK, said on December 10. TUIK revised up the Q2 GDP growth to 2.2% from a previous 2.1%. With the Q3 data, the economy has grown 2.8% y/y in the first nine months of the year, sparking concerns about the pace of growth.

The government forecasts a GDP growth of 3.3% for 2014 and an $810bn economy this year while it expects higher growth rates of 4% next year and 5% in 2016. The government may step up pressure on the central bank to cut interest rates next year to boost growth before the crucial June 2015 general election. The country’s large current account deficit is expected to shrink because of the declining oil price, which will also have a positive impact on inflation, which is currently stubbornly high at 9.15% y/y, well above the official target of 5%.

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.

One of many foreign investors banned from leaving Mongolia calls on UN for help Terrence Edwards in Shanghai

Justin Kapla, former president of the mining unit operating the Ovoot Tolgoi coal mine for Mongolia-focused miner SouthGobi Resources, has been barred from visiting home for more than two years because he is suspected of tax fraud.

Mongolia's reputation as a investor-friendly destination and a democracy that respects human rights has suffered as foreign investors have become increasingly afraid to visit the country and worried about any new investments they might have made. With a growing number of expats complaining they are trapped in the country, many investors fear they could be the next ones barred from leaving if the authorities – perhaps for ulterior or corrupt motives – accuse them of crimes such as tax avoidance or fraud. Simply opening an investigation into a foreign or Mongolian individual is enough for authorities to ban them from leaving the country.

Prime Minister Chimed Saikhanbileg, who last week won approval from the parliament to form a new government after taking office in November, has ordered an investigation into cases concerning at least 50 foreigners denied exit visas because of worries it is scaring away already scarce foreign direct investment (FDI).

bne:Investorbusinessneweurope I Page 27December 12, 2014

Czech brewer Pivovary Lobkowicz has bought full control of peer Rychtar after exercising an option to buy the 30% it did not previously own,it said in a statement on December 10.

Lobkowicz bought a 50% stake in Rychtar in 2008 and raised its holding to 70% in 2011. Lobkowicz, majority owned by entrepreneur Marin Burda, owns seven local breweries and is one of the country’s top five beer producers.

The brewer debuted on the Prague Stock Exchange in May, becoming the country's first listed brewer. It closed the first nine months of the year with revenue of CZK923.4mn (�33.4mn), up 2% y/y. Total beer production in the period grew 3.5% to 687,222 hectolitres.

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.

Czech brewer Lobkowicz buys full control of Rychtar bne IntelliNews

Shares in Russia’s conglomerate Sistema plummet on new Bashneft speculations bne IntelliNews

hares in Russian private oil-to-telecom conglomerate Sistema on December 8 dropped in Moscow by 16% to RUB7.5/share, reaching their lowest level since March 2009, Prime reports. The decline continues for nine consecutive trading sessions and is facilitated by unconfirmed reports that the process of transferring Sistema's 74% stake in its main asset Bashneft to the state has started. There have also been speculations that the state might demand to recover Sistema's dividends from Russia's 5th largest oil producer the conglomerate privatized and consolidated for $2.6bn in 2006. Such claims might amount to RUB190bn ($3.6bn).

Net profit of Sistema dropped by 72% y/y to $379mn in Q3. Company's revenues declined by 4.3% y/y to $8.9bn. Decline in net profit was attributed mostly to $357mn currency loss. Adjusted OIBDA declined by 7.3% y/y to $2.3bn.

bne:Dealbusinessneweurope I Page 28December 12, 2014


Weekly Lists

Real-life stress tests expose Ukraine's rotten banksbne IntelliNews

Ukraine's national bank (NBU) closed down City Commerce Bank on November 21 after it turned into a financial black hole after running an apparent pyramid scheme – the bank throughout 2013 offered 24% interest on deposits, 6 percentage points over the market rate. Internet portal Forbes Ukraine viewed the bank's accounts following the NBU takeover, and found that over half of the bank's loan book comprised of UAH1.3bn ($80mn) in loans made to a dozen interlinked firms all associated by market participants with money laundering activities, according to the report. City Commerce Bank's former owners could not be contacted for comment.

City Commerce Bank is just one of nearly a dozen banks the NBU has declared insolvent since the ousting of former president Viktor Yanukovych and the ensuing economic and political meltdown, many of which were basically small money laundering institutions.

According to a new report on Ukraine's banks published by Investment Capital Ukraine (ICU) - a securities brokerage founded and run by NBU head Valeriya Gontareva until taking over at the helm of the NBU in June – some top 10 banks are candidates for imminent nationalisation, as the banking system comes under massive stress.

World Bank office becomes case study of Ukraine's legal problems bne IntelliNews

Men wearing military uniforms, and reportedly bearing arms, burst into the Kyiv building where the World Bank is headquartered on December 5, according to media reports, in an apparent attempt to seize the building. The episode is the latest episode in a battle over control of the prestigious office building, and is not related to the activity of the World Bank, media reported.

While the World Bank is not thought to have been targeted by December 5's raid, the case illustrates the problems with Ukraine's legal system that causes the World Bank to rank Ukraine at 96th place in the world for investment climate, in its Doing Business 2015 ranking.

The case also highlights new problems with Ukraine's investment climate deriving from the Russian-backed separatist insurgency in East Ukraine: According to Forbes and Interfax, Babushkin regained ownership of Lira 2000 using a decision by a court in the rebel-held Luhansk region. This is the second high profile case of corporate raiding featuring international investors and court decisions based in the rebel-held territories. The rebel-held territories in Luhansk and Donetsk region are de jure part of the Ukrainian legal space, but de facto a legal black hole.

bne:Bankerbusinessneweurope I Page 29December 12, 2014


Weekly Lists

Mechel submits debt restructuring proposal to creditors bne IntelliNews

Mining and metals company Mechel, one of the most indebted industrial holdings in Russia, has proposed a debt restructuring plan to its creditors, Mechel vice president Andrei Slivchenko told the press. As of end of Q3 Mechel's net debt amounted to $7.84bn, including RUB26.8bn and $1.4bn to state-controlled Gazprombank. The other two main creditors are the state-controlled banks VTB and Sberbank.

VTB confirmed receiving the proposal from Mechel, but said it was premature to call it a breakthrough. It was not disclosed what the terms of the debt restructuring proposal are.

Petropavlovsk – Going Through Restructuring Sberbank CIB

Petropavlovsk has unveiled the restructuring plan for its $310mn convertible bond that matures in February. The plan includes a fully underwritten equity issuance by rights offering of a $235mn share issue at GBP0.05 apiece and requires the approval of senior lenders, shareholders and bondholders. With 62% of bondholders already supporting the deal, we think it is highly likely to be realized. This would reduce the company’s net debt to around $700mn as of end 2014, or 3.2 times 2014E EBITDA, and allow it to proceed with the development of newly discovered ore zones. Although Petropavlovsk hiked its 2015 output guidance by 13-17%, we keep our estimates unchanged for now.

bne:Creditbusinessneweurope I Page 30December 12, 2014


Moscow Exchange shareholding may be limited to 10% maximum stakes Sberbank CIB

Duma deputies are considering introducing a 10% cap on any single shareholding (direct or indirect) in Moscow Exchange, according to today’s Vedomosti. The limit would come as part of an amendment to the “Law on the Securities Market,” which is currently due for its second Duma reading of three required to pass. Also, any acquisition of a more than 5% stake would have to be preapproved with the Central Bank. The rationale for the limits cited in the report is to ensure the independence of the exchange as a systemic operator of the financial market’s infrastructure and to respect the interests of all stakeholders and market participants.

Our view: We generally support the measure, as it would help sustain Moscow Exchange’s high standards for corporate governance. However, we would like to see some more details of the proposal, for example its timing and scope. Currently, only the Central Bank holds a stake greater than 10%, and this is legally required to be sold off by end 2015. It is not clear whether the stakes held by VEB (8.4%) or RDIF (a VEB subsidiary holding 5.3%), together exceeding the 10% limit, would be considered a single shareholding or whether the limit would be applied to stakes already held when the amendment is passed.

Weekly Lists

Kazakh power grid monopoly ends disappointing "People's IPO" campaign Naubet Bisenov in Almaty

Kazakhstan's national power grid operator KEGOC on December 5 ended its sales promotion for the latest share issue under the government’s "People's IPO" programme, which is designed by the government to offer shares in big state-owned companies to the Kazakh population to help develop the local stock market and nurture a shareholder culture.

Despite the price of shares was set at a "very conservative" KZT505 ($2.8) per share, Kazakh retail investors showed little interest in becoming shareholders of KEGOC. Indeed, the national postal operator Kazpost, which was appointed to conduct the subscription campaign, received bids for around 743,000 shares worth just KZT375mn ($2.07mn) between November 5 and 13. According to Kazpost, as of December 4 only about 11,000 people had bought 4.698mn shares worth KZT2.372bn ($13.1mn). Yet the company's "People's IPO" programme envisaged the sale of 26mn shares, equal to a stake of 10% minus a share, to the general population.

bne:Stocksbusinessneweurope I Page 31December 12, 2014

Documents

bne:Newspaper - December 12, 2014