bne:Newspaper - February 13, 2015

February 13, 2015 www.bne.eu

Raiffeisen draws in its horns in CEE

After a marathon negotiating session that lasted 17 hours, Russia, Ukraine and the EU have thrashed out the framework for a partial peace deal to bring the fighting in the east of Ukraine to an end, the various parties announced on February 12.

Russian President Vladimir Putin said in a brief statement, after what has been dubbed the "Duracell summit" in the Belarusian capital of

Marathon talks produce partial peace deal for Ukraine

Raiffeisen Bank International (RBI), the second largest lender in Central and Eastern Europe, will sell its banking operations in Poland and Slovenia, and scale back its exposure to Russia and Ukraine in order to boost its capital buffers.

The decision follows steep falls in the Austrian bank’s shares and bonds in January sparked by the Ukraine crisis and the Swiss central bank’s

decision to end the Swiss franc’s peg to the euro. RBI is heavily exposed to Russia and Ukraine, and has thousands of clients in the region who have taken out Swiss franc mortgages.

The bank said in a statement on February 9 that the moves should help increase its Tier 1 capital ratio to

Minsk, that a ceasefire would come into effect at midnight on Sunday, February 15, when both the Ukrainian army and the pro-Russia separatists must withdraw their heavy weapons.

"I would ask conflicting parties to stop the bloodshed at the earliest possible date and start a

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bne IntelliNews

Robert Anderson in Prague

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Content: 2 Top Stories 5 The Regions This Week10 Eastern Europe13 Eurasia17 Central Europe20 Southeast Europe23 Opinion25 Lists24 Lists

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political process," Putin said in a brief statement to the press after the meeting broke up.

French President Francois Hollande was reported by newswires as saying that a full peace deal had been reached; German Chancellor Angela Merkel was yet to speak to the press.

Ukrainian President Petro Poroshenko, whose brief handshake with Putin and glaring showed the extreme tension hanging over these difficult talks, confirmed that all foreign troops, mercenaries and regular army were going to be pulled back from the conflict line as of the beginning of the ceasefire on February 15. A 50-kilometre demilitarized zone that includes a 70-140km no-rocket zone between the two sides will be imposed, according to reports.

Putin also said that there would be "constitutional reform for the rights of the people in Donbas", which suggests strongly that Putin has won some concessions for his demand for the federalisation of Ukraine. Moscow wants the eastern part of Ukraine, where pro-Russian separatists have fought a bloody war for almost a year, to be granted more autonomy from the pro-European west of the country.

Poroshenko also made a few comments to journalists in the Belarusian presidential palace. He confirmed that Ukraine would decentralise some powers to the Donbas region, but added that there would be no federalisation or autonomy for the region.

That suggests the two sides are still some way apart on this. From the scanty details available, it seems that the two sides failed to agree on several other key issues.

One of the biggest disagreements has been over the military position of the two sides. Putin said that Kyiv was refusing to talk directly to the rebel leaders from Donbas who attended the summit. He also said that there was disagreement over the fate of some Ukrainian forces that have reportedly been encircled in the town of Debaltseve. Rebel leaders claim that Poroshenko had been misled by his commanders into believing that the Ukrainian forces are not in trouble.

Clearly this caused a clash in the talks, as Putin said in his statement that experts would be sent to determine "what the situation on the ground is."

The military situation will be very important, because neither side will want to give up any gains they have made since the last ceasefire came into effect in September and subsequently broke down. The crucial question is whether the rebel structures will sign up to the deal and the ceasefire actually hold on the ground, Alexander Zakharchenko and Ihor Plotnitsky, leaders of the two self-proclaimed breakaway East Ukraine republics – the Luhansk People's Republic (LPR) and Donetsk People's Republic (DPR) – were reported to have refused to co-sign the agreement in Minsk, due to the situation in Debaltseve, where the rebels claim they have encircled Ukrainian forces forming a 'pocket'. Reuters reported that the rebels were demanding a Ukrainian withdraw from Debaltseve.

"Poroshenko is still being misled by reports that [the Ukrainian army] is doing well in the Debaltseve pocket," Denys Pushylin, the DPR's chief negotiator, tweeted on February 12.

While the rebels claim to have cut off Ukrainian forces in the railway town, the easternmost town held by Ukraine, on February 11 Ukraine's defence minister, Stepan Poltarak, disputed this, saying that Ukrainian reinforcements were still getting through. Other sources said that the Ukrainian forces were well dug in, having buried whole trains that are now being used as bunkers.

Some Ukrainian frontline commentators dispute

Marathon talks produce partial peace deal for Ukraine

February 13, 2015 businessneweurope I Page 2

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this. “[Army head] Viktor Muzhenko continues to report false information to the commander-in-chief [Poroshenko]... although everyone knows that the enemy retains control over the road [westward from Debaltseve],” frontline commentator and journalist Yury Butusov wrote on Facebook on February 12. “The lack of supplies is already seriously limiting the tactical options

for the Ukrainian forces – noticeably lowering the activity of our artillery [located] within the blockade.”

Another point of contention on the ground is around the Ukrainian-held port of Mariupol, where Ukraine's irregular Azov battalion reported heavy fighting on the morning of February 12.

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end of last year it had RWA of ¤8.4bn in the country.

In Ukraine, where RWA at the end of last year were ¤3.0bn, the cut will be 30%. RBI had also considered selling its Ukraine business, where it lost ¤290m in 2014 after raising loan-loss provisions to ¤533m.

In Hungary, RBI said that “further optimisation of the operation will be undertaken” through a reduction in the branch network and a focus on the higher end of the market, but it was no longer planning to exit the country, despite losing ¤398mn last year. Some ¤251mn of this loss was a result of government measures to penalise banks that sold loans to households denominated in foreign currencies like the Swiss franc.

RBI said in late 2013 that it was ready to listen to offers for its Hungarian business, as it looked to have tired of the punishment meted out by the government to foreign banks over these forex loans. However, it soon retreated when it got just one offer, of ¤1.

Sevelda told the investor conference call that the environment was now improving in Hungary, following the government’s pledge to halve banking taxes. “We see light at the end of the tunnel,” he said.

The bank is also significantly scaling back its operations in Asia by the end of 2017 and the US by end-2016. The pullback in Asia would represent most of the ¤500mn-550m costs of the refocusing strategy, Finance Director Martin Grull told the conference call.

The bank said that implementation of all these measures would result in a reduction in its RWA of approximately ¤16bn by the end of 2017, from its total of ¤68.7bn at the end of 2014. RBI has already cut some ¤10bn from its RWA during the fourth quarter of 2014.In its full-year unaudited preliminary results, also announced on February 9, RBI recorded a loss of ¤493mn, compared with a profit of ¤557mn in 2013. No dividend will be paid. The results were affected by goodwill write-downs of ¤148mn in Russia, ¤99mn in Poland and ¤51mn in Albania, as well as by a cancellation of deferred tax assets at head office and in Asia.

Raiffeisen draws in its horns in CEE12% by the end of 2017, compared with 10% at the end of last year. “By implementing these measures RBI will improve its risk profile, strengthen its capitalisation and ensure sustainable profitability,” said Karl Sevelda, RBI’s chief executive.

The bank will also write down the value of its international operations by ¤306mn, which pushed it into a loss of ¤493mn in 2014. RBI’s shares rose 8% in trading by lunchtime on February 10 to ¤12.29, but they were still down 57% compared with a year ago.

The announcements, which were fleshed out on an investor call on February 10, represent a significant refocusing of RBI’s portfolio of assets and goes some way to answering criticism that it was too thinly spread across the CEE region.

The sale of the Polish unit had been widely predicted. RBI’s Polish operations are its biggest foreign subsidiary and the country is one of the most promising CEE markets. However, the bank ranks only number eight in Poland and further growth would require capital that RBI can no longer afford. “Significant investment would be necessary to be a top five player and we are not able to make such investments due to our deleveraging strategy,” Sevelda told the conference call.

Selling the bank could, though, put RBI on a collision course with the Polish financial regulator. The KNF has stated several times its opposition to further consolidation in the country’s banking sector, and would be likely to apply extremely strict conditions on any potential buyer. The KNF is also insisting that RBI keeps its pledge to float some of the shares in its Polish operation, a promise the bank said it planned to keep. RBI is also selling two small loss-making businesses: its internet bank Zuno and its Slovenian operations. The sale of the latter is close to being agreed, it revealed.In Russia, RBI will cut its risk-weighted assets (RWA) by approximately 20% until the end of 2017. At the

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The Regions This Week

The strike at Poland's JSW has the coal miner at risk of losing customers. Steel maker ArcelorMittal said this week it may slash supplies from JSW due to the risk of delivery disruptions. JSW output halted at the end of January. Arcelor said earlier this month it has secured extra supplies from overseas.

Russian gas transit through Slovakia remains 25% below normal, PM Fico noted as he visited Kyiv on February 6. Fico said he did "not want to comment on the cause". Ukraine bought more gas from Slovakia than Russia in January, Ukrainian PM Arseniy Yatseniuk said, noting both Bratislava and Kyiv want to maintain transit of Russian gas to Europe.

Weak results at O2 Czech Republic bolstered expectations of dividend cut. Shares in the mobile operator fell again as it posted a 30% drop in earnings. CEO Budnik said no comment on the payout will be made before O2 CR splits off its infrastructure and makes a controversial CZK25bn loan to new parent PPF.

Five suitors are reportedly lined up for Citi's Czech retail business. The US bank said it would sell out of the Czech market in October. Local units of Erste, KBC, Societe Generale, and RBI – as well as local Fio – are said to be eyeing the asset.

Skoda Auto is set to expand Czech production. Already the largest exporter in the country, the German-owned car company plans to invest CZK7bn in a new plant to produce SUVs. The state and regional governments are due to put in over CZK1bn.

Hungary's high profile anti-immigration campaign continues. Police detained 1,022 illegal immigrants during a single day at Hungary's southern border with Serbia. Over 1,200 were apprehended the previous week, authorities said. PM Orban launched the campaign in the wake of

Central Europethe Charlie Hebdo attacks in Paris, and the issue has kept headline writers busy since.

Poland is set to seize control of the only overland route carrying Russian gas to Europe that does not pass through Ukraine, local media reports. A long-standing rift concerning control over EuRoPolGaz - operator of the Polish stretch of Yamal - could come to an end on March 9. On that date, Polish gas utility PGNiG should take control via a deal with its partner in Gas Trading, which holds a 4% swing vote in EuRoPolGaz. PGNiG and Gazprom control 48% each.

The Latvian parliament is pressing on with efforts to ease cash for visa requirements. The controversial scheme, which offers a Schengen visa to those investing in real estate and other assets, was tightened a year ago over fears of dirty money arriving from CIS. However, there is now a push to drop the levels of investment needed to qualify. The defence ministry warned the move is a threat to national security.

Hungary's pledge to reduce the bank tax could help the country return to investment grade, Fitch's lead analyst suggested on February 11. Budapest has been chasing an exit from junk since all three major agencies cut its rating in 2012.

The Slovak cabinet approved the privatisation of the country's 49% stake in Slovak Telekom on February 11, and hopes to submit the plan for parliamentary approval by March 6. Officials suggested the long winded effort to sell the stake will see it floated on public markets, after failing to find a strateig investor.

businessneweurope I Page 5February 13, 2015

Southeast EuropeThe Bosnian parliament has approved Denis Zvizdic as the country’s next prime minister, four months after the October 2014 elections. His appointment should pave the way for long-awaited economic reforms in the country.

Two bombs exploded in Albania's capital Tirana on February 10, damaging the apartment of a senior police officer and destroying a pharmacy owned by the father of Interior Minister Saimir Tahiri. No one was injured in the bombings described by Prime Minister Edi Rama as terrorist acts.

Irish oil company Petroceltic plans to curtail its exploration activities in Romania, Bulgaria and Greece under a broader plan aimed at cutting operational costs and capital expenditures. Investments will be focused on production and development operations in Algeria, Egypt and Bulgaria.

The number of tourists visiting Croatia rose 14.2% y/y to 194,166 in December, the statistics office said on February 11. Tourism is one of Croatia's key economic sectors with a 16.5% share of GDP in 2013.

Serbia stepped up security along its border with Hungary on February 11 after reports that tens of thousands of Kosovans illegally entered the EU across the border. Milorad Veljovic, head of the Serbian interior ministry’s criminal police directorate, said on February 11 that Serbia and Hungary will cooperate on increasing security along the border.

A group of 16 non-government organisations from Montenegro, neighbouring countries and Italy, have sent a letter to Italy's A2A, asking the company not to back plans to build a second unit at Montenegro’s TE Pljevlja thermal power plant. The NGOs claim the plans do not comply with EU climate policy.

Italian utilities company Enel expects bids for its Romanian units by the end of March. Potential

buyers reportedly include local companies Electrica and Nuclearelectrica, and foreign companies E.ON and GDF Suez.

The High Court of Cassation and Justice has approved prosecutors’ request to detain Romanian MP and former presidential candidate Elena Udrea in police custody for 30 days. Udrea is a suspect in several corruption cases.

The number of employees in Serbia's state administration will be reduced by 5% in the first half of 2015, Deputy Prime Minister Kori Udovicki has said. The move is part of the government's ambitious plan, agreed with the IMF and World Bank, to overhaul the overburdened public sector by raising efficiency and cutting spending.

Serbia will create a single company, Aerodromi Srbije, to manage its airports within the next two months, Transport Minister Zorana Mihajlovic said on February 11. Serbia has around 25 airports of which the largest are Belgrade's Nikola Tesla Airport and Konstantin Veliki Airport in Nis.

Turkey’s automotive production rose 37% y/y to 102,574 units in January while passenger car output was up 16% y/y to 60,414 units in the first month of the year, the Automotive Manufacturers’ Association said on February 11. The domestic market grew 7% y/y during the month.

Shareholders of Turkish Islamic lender Bank Asya began legal action on February 11 in an attempt to regain control of the bank. Earlier this year, banking regulator BDDK decided to transfer management of Bank Asya to the state-controlled Savings Deposit Insurance Fund.

Montenegrin airport operator Aerodromi Crne Gore is to start talks with the European Bank for Reconstruction and Development (EBRD) on a ¤20mn loan for the construction of a second terminal and new facilities at Tivat international airport.



Eastern EuropeUkrainian President Petro Poroshenko has signed a bill raising the maximum age for compulsory military service to 27. The law also limits the reasons for deferred service and introduces criminal liability for draft evasion.

A meat processing factory in St Petersburg has taken Russia's sanctions battle with the West into new territory with plans to launch a line of sausages under the name “sanctions”, news reports said late last week.

The European Union has lost approximately €21bn, because of sanctions imposed against Russia over the Ukrainian crisis, Spanish Foreign Minister Jose Manuel Garcia-Margallo said Monday.

Russia's third-largest food retailer Dixy group imposed a one-month price freeze on February 9 as prices soar due to rising inflation in a marketing stunt to keep its stores full.

US investment bank Goldman Sachs expects Russia’s Central Bank’s to lower its key interest rate to 11% from the current 15%, Bloomberg reports. Goldman Sachs’ experts forecast the Central Bank’s key interest rate will decline by 100 base points every quarter, to reach 7% in 2016.

A Russian Orthodox priest living in the US was accused of high treason for allegedly passing on secrets to American spies. Father Yevgeny Petrin met the spies during his work but passed them secrets on the inner workings of the Russian Orthodox Church, according to LifeNews. Last week a mother of seven was arrested for treason after she called the Ukrainian embassy to inform them of troop movements in her village.

The State Duma, the Russian parliament's lower house, is set to consider a bill toughening the penalty for employers that report lower employee earnings in order to reduce payable tax, RIA Novosti reported on Monday.

OPEC expects world oil demand to rise in 2015 by 1.17mn barrels to 92,32mn barrels a day. Non-OPEC oil supply is projected to grow in 2015 by 0.85mn barrels a day, down 0.42mn barrels from the previous assessment. Oil is currently $58 a barrel.

An international donors conference in Kyiv in April hopes to raise at least $15bn to stave off Ukraine from bankruptcy and rebuild the country. Expected to attend are the European Union, the United States, Japan, development banks and the United Nations, but many first want to see a comprehensive list of its investment needs from Kyiv before they commit money.

Investors' average confidence in Russia has more than halved since last year, according a poll by Detail Communications, a Moscow-based financial communications firm. The top concern was "political risk" with 38%, followed by "geopolitical tension" (35%).

The Ukrainian Rada has submitted a draft law to suspend diplomatic relations with the Russian Federation, the Rada press service reported on Tuesday. No decision has been made yet.

Kazakh President Nursultan Nazarbaev described the US and EU sanctions against Russia as “barbaric”, saying that they are harming Kazakhstan. He also called for the "de-dollarization" of the Central Asian country's economy.

Russia will downsize the Federal Security Service (FSB) and reduce the police force by 10% due to the country's severe economic downturn. The first cuts to be made will be to the FSB's regional financial planning and economic divisions.



EurasiaA consortium of Korean companies will build two new units at an Uzbek hydropower plant for $178mn. The consortium involving Hyundai Engineering & Construction and Daewoo International will install an additional capacity of 145 Mw at the Tupolang facility within the next 45 months.

Uzbekistan’s gold production grew to 102 tonnes in 2014, from 98 tonnes a year earlier, according to the US Geological Survey. That places the country at seventh place for gold production in 2014. The three largest gold producers were China (430 tonnes), Russia (230 tonnes) and Australia (265 tonnes).

India has reiterated support for a gas pipeline from via Afghanistan and Pakistan. The TAPI pipeline will pump 33bn cubic metres of natural gas from the giant Galgynysh field. The project, first initiated in the 1990s, has been stalled over security concerns in Afghanistan.

Kyrgyzstan’s annual GDP growth stood at 8.4% in January, slightly less than the 8.6% achieved in the same month of 2014. Economic growth excluding Kumtor, the country’s largest gold mine and single contributor to GDP, was 3.4%, as a result of growth in the construction sector (+11.6%), services (+3%) and agriculture (+1.2%).

Tajikistan’s annual consumer price inflation (CPI) reached 7.7% in January, up from 7.4% in December. The prices of food items grew by 10.3% year on year in January; the cost of non-food items increased by 3% year on year in the given period, and services went up by 6% year on year.

Tajikistan’s annual economic growth is set to slow down to 4.4% year on year in 2015, from 6.7% in 2014 and 7.4% in 2013, according to the European Bank for Reconstruction and Development (EBRD). The country will be hit by the economic downturn in Russia, a weakening ruble and decreasing remittances.

Mining behemoth Rio Tinto has shown little interest Mongolian government proposals to renegotiate ownership of mines. Rio Tinto's Turquoise Hill is developing the copper and gold mine Oyu Tolgoi in which the government owns a 34% stake. The government proposes to increase royalties in return for its stake.

Kazakhstan registered 699,578 cars in 2014, a 16.2% growth year on year. The total number of cars registered in Kazakhstan amounted to 4mn units as of January 1, 2015. In 2014 the number of cars registered by individuals increased by 16.3% year on year to 665,785 units and by legal entities by 13.8% year on year to 33,793 units. In 2014, 147,705 cars aged under three were registered against 46,012 a year earlier. The number of registered cars aged over 10 was 365,951 against 342,646 in 2013.

Production in Kazakhstan's giant Tengiz oil field is expected to be 26.7mn tonnes in 2015, or at the level of 2014 when output decreased from 27.1mn tonnes in 2013. The reason was protracted maintenance work in the field. The next stage of the field development should be finalised this year, so output increases to 38mn tonnes in 2021.

The number of property deals decreased by 1.9% year on year and by 17.8% month on month to 11,384 in Kazakhstan in January. In December, the number of deals declined by 6.6% year on year but grew by 6% month on month to 13,856 deals. The holiday season is the reason for decrease in January.

The International Finance Corporation (IFC) has issued a $2mn loan to Georgian major winemaker Tbilvino. The loan aims to spur job creation and generate tax revenues for the state budget, helping economic growth. Wine is one of Georgia’s key export products. In 2014 the country exported 59.07mn bottles of wine worth $184.3mn, marking a 26% increase compared to 2013. Russia is the largest market with 63% of total exports.



bne Chart

With oil, fuel and gas accounting for 70% of Russia’s $450bn exports in 2014, it is no surprise that three of the five largest nominal tax contributions came from regions whose economies are heavily energy-focused.

As this week’s graph shows, the Khanty-Mansi region contributed just under RUB1.2tn and accounted for 49.5% of all federal mineral extraction tax (MET) receipts between January and October 2014 – the most recent available data from Russia’s finance ministry

Moscow’s VAT and corporate profit tax receipts were the second and fourth largest federal contributions, respectively. The city’s profit tax alone accounted for more than half of all federal profit tax receipts. The concentration of services industries and large population density in the Moscow area are likely the main drivers behind its dominance in these fields.

However, disentangling energy-related tax revenue from non-energy revenue is difficult, as the fiscal footprint of the energy sector is so pervasive in Russia, contributing to MET, profit

tax, VAT and excise duties

Despite coming top of the pile for nominal VAT and profit tax contributions, on a per-capita basis both Moscow’s profit tax and VAT receipts ranked third in the country.

The Yamalo-Nenets region and Sakhalin Oblast generated the highest per-capita VAT and profit tax revenues, respectively, with Yamalo-Nenets – where Gazprom’s main production fields are based – at RUB199,302 and Sakhalin Oblast at RUB54,428.

The Leningrad Oblast and West-facing port city of St Petersburg recorded the highest nominal and per-capita tax revenues for excise duties – likely a result of the port city being one of the largest outward trade gateways in Russia

Certain types of tax revenues are received only by individual regions and are not recorded by the Ministry of Finance as contributing to federal receipts. These are: corporate property tax; individual property tax; land tax; vehicle tax; and personal income tax (PIT).

Energy sector dominates analysis of Russian tax revenue

RUB 0.0M RUB 500,000.0M RUB 1,000,000.0M RUB 1,500,000.0M

TOTA

L FE

DER

AL

TAX

1 Khanty-Mansi Autonomous Area - Yugra (Total)2 Moscow (Total)3 Yamalo-Nenets Autonomous Area (Total)4 St. Petersburg (Total)5 Republic of Tatarstan (Total)6 Moscow Oblast (Total)7 Krasnoyarsk Krai (Total)8 Samara Oblast (Total)9 Orenburg Oblast (Total)10 Perm Krai (Total)

RUB 1,401,113.5MRUB 764,800.0M

RUB 482,549.9MRUB 267,586.0M

RUB 184,058.9MRUB 182,702.1M

RUB 137,357.5MRUB 131,326.2MRUB 118,264.4MRUB 103,464.8M

Top 10 regions by total federal tax revenue, Jan-Oct 2014


key fronts. They have maintained strong fiscal discipline [a 2014 deficit of 4.6% of GDP versus a target of 5.8%]; they have adopted a flexible exchange rate regime; and they have significantly increased household gas prices to 56% of the import price and heating prices to about 40% of the import price in 2014. In addition, in the first such move in many years, they have begun to strengthen the country's anti-corruption and anti-money laundering framework."

In addition, Lagarde pointed out that the Ukrainian government is dedicated to further sizable energy tariff increases, restructuring of the banking system as well as reforms to the judicial system and implementation of anti-corruption measures. “The government is committed to front-loaded measures under the new programme – including further sizable energy tariff increases; bank restructuring; governance reforms of state-owned enterprises; and legal changes to implement the anti-corruption and judicial reform agenda. This programme will require the authorities’ steadfast determination to reform the economy. To help cushion the adjustment, especially for the poorest groups, measures are being taken to strengthen and better target the social safety net."

The IMF managing director also admitted that the Ukrainian government intends to hold consultations with the holders of its sovereign debt with a view to improving medium-term sustainability. From these various sources taken together, a total financing package of around $40bn is estimated over the four-year period, she added.

Media previously reported that the IMF had identified a $15bn gap in Ukraine’s finances for 2015, despite Kyiv having a $17bn IMF stand-by credit facility, with $10bn promised from other donors.

Eastern Europe

IMF agrees $17.5bn facility with Ukraine to give total aid package of $40bn

Kateryna Illyashenko in Kyiv

The International Monetary Fund (IMF) has tentatively agreed a $17.5bn extended fund facility with Ukraine, part of an overall $40bn funding package for the country over the next four years, the fund's managing director, Christine Lagarde, said on February 12.

The package will go some way to assuaging growing fears among investors that the country is heading towards a default as the year-long conflict with pro-Russian separatists in the nation’s east ravages the economy and drains precious resources. “The hope will be to send a signal to [Russian President Vladimir] Putin and to Ukrainians that the West stands behind Ukraine and will not let it fail financially,” Timothy Ash of Standard Bank said in a note to investors.

Lagarde announced that the IMF team, which has been working in Kyiv since January 8, has reached a staff-level agreement with the Ukrainian government on a new economic reform programme that "would be supported by an Extended Fund Facility of SDR12.35bn [about $17.5bn, ¤15.5bn] from the IMF, as well as by additional resources from the international community."

"I intend to recommend this programme for consideration to the IMF Executive Board. This new four-year arrangement would support immediate economic stabilization in Ukraine as well as a set of bold policy reforms aimed at restoring robust growth over the medium term and improving living standards for the Ukrainian people," she said.

Lagarde noted that the Ukrainian authorities have proved their commitment to reform. “Over the past year, despite the challenging environment, the Ukrainian authorities have clearly shown their commitment to ambitious reform on several


Eastern Europe

the prospect that the European Union will lift asset freezes on a number of officials who served under Yanukovych, as a result of Ukraine's failure to provide evidence of crimes committed.

Critics also accuse Yarema's office of failing to bring charges over the massacre of pro-EU protestors in Kyiv on February 20-21, when police marksmen shot over 50 unarmed demonstrators.

Ukraine's chief prosecutor resigns

Graham Stack in Kyiv

Ukraine's embattled prosecutor general Vitaly Yarema is reported to have resigned amid public criticism of his failure to bring corruption cases to court, as well as allegations of graft among his subordinates.

The Interfax Ukraine news agency received confirmation of the resignation from the prosecutor general's office, with a number of MPs and media also reporting the same development. There has been no official comment on the move from any government office. Yarema has not commented personally on his resignation.

The resignation, if confirmed, is a blow to Ukrainian President Petro Poroshenko, who is seen as Yarema's main backer in the post. Poroshenko nominated Yarema for the position last June after his election as president on May 25.

But Yarema's slow progress in prosecuting corruption and crimes of repression committed under the administration of Poroschenko's ousted predecessor, Viktor Yanukovych, sparked widespread criticism. In addition, the extensive personal wealth and property of some of his subordinates came under close scrutiny. Over 140 MPs reportedly signed a motion calling for his resignation in January.

As bne Intellinews reported earlier, the prosecutor general's office failed to bring charges in cases despite compelling evidence compiled by investigators, fuelling suspicions that prosecutors had struck backroom deals. Ukraine now faces

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Eastern Europe

Poroshenko may now try to regain the political initiative by nominating a surprise reform-oriented figure to the post, possibly a foreigner, analysts have speculated. Poroshenko and Prime Minister Arseny Yatsenyuk have to date appointed three foreign experts to ministerial posts, and four as deputy ministers.

Deputy prosecutor general Viktor Shokin has been appointed acting prosecutor general, according to Interfax. Shokin, like Yarema, is a longstanding ally of Poroshenko. He is a an experienced figure, who first served as deputy prosecutor general in 2002 under the administration of President Leonid Kuchma.

Shokhin is Ukraine's fourth prosecutor general or acting prosecutor general over the last year. Viktor Pshonka, prosecutor general under Yanukovych, fled the country following the latter's ouster in a dramatic airport scene captured on CCTV cameras.

Immediately following the exit of Yanukovych and his ally Pshonka, the nationalist Svoboda party nominated their member Oleh Mahnitskyy as prosecutor general. Mahnitskyy was however dogged by allegations of corruption and ineffectiveness, leading Poroshenko to replace him with Yarema.

The influential head of Ukraine's foreign business lobby, European Business Association, has said that corruption has remained the same in Ukraine despite the ousting of Yanukovych after anti-corruption protests.

“My expectation was that they would immediately enforce zero tolerance for corruption once they took power,” Tomas Fialasaid in an interview with Novoe Vremya portal. "There is no mafia-style corruption created by the Yanukovych regime, but corruption overall remains rampant, engulfing the political parties and national leadership,” he said. “For me and the local business community, and Ukrainian society as a whole, it’s a bitter disappointment.”

Fiala argues that Ukraine's only hope is to

follow the Georgian example of mass arrests to eliminate corruption, a policy carried out under the presidency of Mikheil Saakaschvil from 2003. “In Georgia, which has a population of 4mn, it took incarcerating 100,000 people to eliminate the practice of giving and taking bribes. The number relative to Ukraine’s population would be over 1mn,” Fiala argued in the interview, also calling for a Georgian-style cull of up to 80% of government personnel, in return for hikes in salaries for the remaining.

According to Fiala, politicial corruption is a major obstacle to any meaningful reform: each political party spent up to $100mn in election campaigning for parliamentary elections held on October 25, with seats in parliament being sold for as much as $5m, Fiala says. “It’s the money of their oligarch sponsors, whose goal now is to recoup and earn a hefty profit on their investment,” he argued.


accounts for up to 30% of Kazakhstan's GDP, over 50% of revenue and 60% of exports, while Russia is the country's largest supplier, accounting for a third of its imports.

At the same time, he fended off criticism that the country's membership of the Moscow-led Eurasian Economic Union was the source of the problem. "The weakening Russian ruble and growing pressure on goods on the Kazakh domestic market are damaging our local producers, but this has nothing to do with the Eurasian Economic Union," the Kazakh president said, adding "to believe this is the fault of the Eurasian Economic Union or the Customs Union is complete amateurship". Kazakhstan and Russia along with Belarus set up the Customs Union in 2009, which transformed into the Eurasian Economic Union in January 2015. Armenia joined the free-trade bloc in 2015 and Kyrgyzstan is expected to follow suit in May.

He noted that the Western sanctions against Russia imposed over its continuing support for rebels in Eastern Ukraine had resulted in Russia ending up in a "complicated situation". The Russian economic troubles are in turn hurting the Kazakh economy, which seems to have led Nazarbayev to harden his rhetoric on the economic war between Moscow and the West.

"These barbaric sanctions are not helping anyone as Europe is losing $25bn while Russia is losing $41bn," Nazarbayev said in unusually undiplomatic remarks carried by the nur.kz website. "I am sure

Eurasia

Kazakhstan slashes budget, blaming 'global crisis'

Naubet Bisenov in Almaty

Kazakh President Nursultan Nazarbayev has ordered his government to adopt new "anti-crisis" measures including cutting budget spending by 10% in order to overcome the current economic difficulties. Nevertheless he claimed that "there is no economic crisis in Kazakhstan" and blamed the "global" economic crisis for the country's economic troubles.

At a government meeting on February 11, Nazarbayev announced a 10% cut in central budget spending, or KZT700bn ($3.78bn), which should not affect government spending on social programmes. Nazarbayev also said that the Samruk-Kazyna sovereign wealth fund and national companies it runs would cut their spending by KZT337bn ($1.8bn), including capital spending by KZT240bn ($1.3bn).

One of the areas where the country could save money, Nazarbayev suggested, are the preparations for the Universiade in Almaty in 2017, which many regard as nothing more than a PR exercise, and the construction of the underground in Almaty. The former's price tag is, according to Nazarbayev, KZT100bn ($540mn), while the second stage of the Almaty underground requires funds worth KZT227bn ($1.23bn).

The low prices of oil and other minerals and a weak Russian ruble are the main factors of the global crisis that are hurting the Kazakh economy, Nazarbayev admitted. According to S&P - which downgraded Kazakhstan's credit rating to BBB on February 9 because of the fall in the oil price - oil


Eurasia

and we are sure that Russia will overcome this situation with honour and will be developing and flourishing, as will we along with it."

The oil price and the ruble are putting significant pressure on the Kazakh currency to devalue but the governor of the National Bank of Kazakhstan, Kairat Kelimbetov, reassured the president at the meeting that he would not allowsharp fluctuations, ie a one-off devaluation, of the tenge.

"If there are changes in the foreign capital markets then we correspondingly will not allow a single-step shock devaluation but will work within a smooth and flexible change in the exchange rate," Kelimbetov said.

The National Bank has over $100bn in foreign currency and gold reserves which it can use to support smooth "correction" of the exchange rate, Kelimbetov noted. "I have no grounds not to trust the National Bank," Nazarbayev reassured. "I tell the Kazakh people again that we won't conceal anything," he said in reference to previous unannounced devaluations of the tenge.

The president also urged Samruk-Kazyna national companies to support the exchange rate of the national currency, even though a weak tenge benefits them as their products become more competitive on foreign markets.

"Kazakhstan will try not to allow sharp fluctuations of the exchange rate of the tenge and take into account your interests," Nazarbayev said. "I understand what is the point." Major metal companies operating in Kazakhstan, namely copper producer KAZ Minerals and steel smelter ArcelorMittal Temirtau, have announced plans to either suspend unprofitable enterprises or cut wages for their personnel, citing financial difficulties.

Expectations of a devaluation of the tenge in February - the previous two single-step devaluations took place in February 2009 and February 2014 - has led to a high level of dollarisation of the Kazakh economy. According

to National Bank figures, Kazakh citizens are stacking away their savings in foreign currency, the share of which in total retail deposits increased to two-thirds at the end of 2014.

Kelimbetov said that the central bank and the government would in the near future announce anti-dollarisation measures by tightening controls over payments, foreign currency and foreign exchange players.

While pledging KZT250bn ($1.35bn) in emergency funds to support local machinery, small and medium-sized businesses, agriculture and exporters, as he did during the previous crisis, Nazarbayev called on Kazakh consumers to keep spending to support the economy - this time, however, on local products. "Let's appeal to all Kazakhs to be patriots in this complicated situation and buy our Kazakh goods. This will be help to our economy from our citizens," Nazarbayev said.

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Eurasia

Central Asia-China gas pipeline network should be completed.

However, Beyond China, it is not clear yet who will buy Turkmen gas in the future.

Turkmenistan’s government has begun pushing the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project, which would give it access to the Pakistani and Indian markets. Yet “there are huge political risks”, Andrei Kazantsev, a native of Turkmenistan who is director of the Analytical Center of the Moscow State Institute of International Relations, tells bne IntelliNews.

“[Among others] there is a very high risk posed by the situation in Afghanistan, which makes it difficult to implement the TAPI project in the foreseeable future,” he says.

The 1,800km-long TAPI pipeline will allow Turkmenistan to supply gas from its Galkynysh field - one of the world's largest, with estimated reserves of 13,100bn cm - to the Pakistani and Indian markets through Afghanistan. At full capacity it will export up to 33bn cm of gas annually. The project has been on the table since the early 1990s. However, as soon as the Taliban seized power in Afghanistan, it became clear that no financial institution would take the risk of financing it - total costs are estimated at some $10bn.

Turkmenistan struggles to gain access to Indian and European gas markets

Jacopo Dettoni in Almaty

Hydrocarbon-rich Turkmenistan is striving to gain access to the Indian and European gas markets as both Russia and Iran, two of Ashagabat’s largest clients, loosen ties with the Central Asian country.

Turkmenistan produced over 76bn cm of natural gas in 2014, and exported 45bn cm. Looking forward, the government plans to make the most out of the country’s generous natural gas endowment by increasing exports to 170bn cm in the mid-term – Turkmenistan’s reserves are estimated at 17,500bn cm of natural gas, according to BP’s 2014 Statistical Review of World Energy, second only to those of Iran, Russia and Qatar.

Yet Russian gas powerhouse Gazprom, which historically used Turkmen gas as a back-up supply for low margin CIS markets, announced earlier in February that it would cut imports of Turkmen gas to 4bn cm in 2015 from 10bn cm in 2014. Also Iran, which imported another 4.7bn cm of Turkmen gas in 2013 to cater to the needs of northern provinces, is planning to cut imports to boost local production.

As of today, China stands out as Ashgabat’s only long-term client. Turkmenistan has quickly emerged as China’s largest supplier of natural gas, covering almost 50% of Beijing’s gas imports in 2013, or 24.4bn cm, according to BP’s report. Gas exports to China are set to reach 80bn cm by 2020, when an upgrade of the


Eurasia

Kazantsev said. “Additionally, standing in the way of the construction of the Trans-Caspian gas pipeline is the Azerbaijan-Turkmen dispute on the ownership of the gas-rich part of the Caspian Sea [de facto operated by Azerbaijan, but Turkmenistan considers this part of the shelf to be its own].”

The legal regime of the Caspian sea has remained uncertain since the collapse of the old Soviet order as each one of the three new Caspian states – Azerbaijan, Kazakhstan and Turkmenistan – claimed its rights over the basin’s generous hydrocarbons resources.

Russia and Iran have always proved reticent to strike any deal that would somehow compromise their old hegemony over the basin. This all resulted in a fragile order where Russia, and to some extent Iran, retained a veto power over the oil and gas development in the basin. Within this context, the Kremlin has always opposed a trans-Caspian gas pipeline linking Turkmenistan and Azerbaijan that would pose a potential threat to its monopoly of European gas supplies.

Turkmen President Gurbanguly Berdymukhamedov has recently shown a commitment to revive the project. Yet securing financing for TAPI remains an uphill struggle. In September both Exxon Mobil and Chevron pulled out of the race to lead a consortium that would raise money for the project because of Ashagabat's refusal to grant the two companies equity in the pipeline. Total of France and Malaysia’s Petronas have been rumored to be interested in the job, but neither has ever confirmed such interest.

Looking west, Turkmenistan is trying to build some momentum around the project of a trans-Caspian pipeline that would link its gas fields with Azerbaijan and then on to Turkey and Europe bypassing Russia, which represents the biggest opportunity, but also the biggest challenge for the whole project.

“Two countries that are very firmly standing against the implementation of the Trans-Caspian project are Russia and Iran, and they can be very successful at it, because the legal status of the Caspian Sea has not been well defined,”


Hungarian media mogul breaks with Orban in salty outburst

Quite what sparked the origin of the schism remains unclear, although various pundits have mused that Orban, high on confidence after his second consecutive (and resounding) victory in elections last spring, was keen to reduce his financial dependency on Simicska.

Speculation of a rift built up last month after news reports spoke of a meeting between Orban and pro-government media owners in which the prime minister declared that the government would drastically reduce its advertising spending in private media channels.

Added to this, news in early February of proposed changes to the controversial advertising tax appeared to finally tip Orban's trusted ally over the edge. The tax, introduced last summer, was progressive and levied on advertising revenues (rather than profit): small media outlets paid nothing, or minimal sums, while RTL Klub, Hungary's biggest, and most popular TV station, contributed roughly half of the total levy.RTL responded with a relentless barrage of stories highly critical of the government. With its popularity waning in the opinion polls, Orban reportedly sought peace with RTL in behind-the-scenes deal thrashed out in January.

But Orban would not capitulate entirely: the advertising tax would stay, except that instead of being progressive, it will be levied at 5.3% on all media advertising, regardless of turnover. According to the daily Nepszava, this move will raise Simicska's media businesses tax by a factor of five.

Central Europe

Kester Eddy in Budapest

Lajos Simicska, a media mogul long seen as one of the closest oligarchs to Viktor Orban, the Hungarian Prime Minister, and his ruling Fidesz party, has lashed out at his one-time schoolboy friend in an unprecedented series of media interviews that could cause lasting damage to Orban's political future.

Simicska, who shared a college dormitory room with Orban in the 1980s, accused the mercurial prime minister of seeking to build a dictatorship, muzzle independent media and of leading Hungary into a dangerous liaison with Russia in a flurry of expletive-rich media interviews published on February 6.

“Viktor Orban is spunk,” he declared, in his most outrageous comments, to two Hungarian news portals, incensed at what he views as the “traitorous” defection of senior editors at his three principal media outlets – television news channel HirTV, Magyar Nemzet, the leading rightwing daily, and Lanchid Radio.

“This is by far the biggest story [in Hungary] in a very long time,” Andras Petho, co-founder of Direkt36, an investigative website, told bne IntelliNews.

“Orban and Simicska have been friends since high school: they built Fidesz together. Orban took care of the politics, Simicska took care of the finances. There have been rumours since the April elections that this alliance had broken up, but there was no hard evidence. The events of February 6 made it clear in a very spectacular way that these rumours are true,” Petho said.


Thus far the prime minister and government have avoided any comment on Simicska's derogatory outbursts, which have set new highs – or lows – in personal insults in the media.

“Spunk is probably the worst thing you can call someone in Hungarian. That word is so nasty that you would hardly ever see it in newspapers, until now,” Petho said.

Reporters also questioned Simicka's about the risk of potential reprisals by Orban, given the former party treasurer's intimate knowledge of Fidesz's economic history.

As he noted to Magyar Narancs: “I've known him [Orban] thirty-five years, does that tell you something? I know him, and I know a lot about him, sure. And? What are they going to do, shoot me? Let's hope it doesn't come to that.”

Whatever, Simicska told the paper he'd be going on holiday for a week. Perhaps just in case.

Central Europe

It was this that appears to have precipitated Simicska's declaration of a “media war” against Orban – a declaration which in turn triggered the defections of Simicska's leading editorial staff, who appear loyal to the prime minister.

Simicska, however, appeared indifferent in his various media outbursts to any future financial worries caused by the modified tax: rather, he voiced various, hitherto unexpressed, political and moral concerns.

“You may think it funny, but I am a committed democrat. I don't fucking like the methods the boys [ie Orban and his government] are using in this country,” he told Magyar Narancs, a current affairs weekly.

“You can believe it or not, but my alliance with Orban started out because we wanted to demolish the [communist] dictatorship and post-communist system. It turned out that was no easy thing, we had to sweat at that. But no fucking way was there the intention of raising another dictatorship in its place. I'm no partner in that,” he said.

liberal leanings on the part of the wider public that the referendum failed. Those that did turn out overwhelmingly supported all three questions on the ballot, which was promoted by the Alliance for Family (AZR).

The first, seeking to define marriage as between one man and one woman, received 94.5% support, while a second which sought to ban adoption by

Slovak vote to restrict gay rights fails

Benjamin Cunningham in Bratislava

Just 21% of eligible Slovak voters took part in a February 7 referendum that sought to limit the rights of same sex couples, far below the 50% needed to make the result legally binding. However, with around a million approving the motion, the vote offers more evidence of the shifting political winds in Slovakia.

It was a triumph of apathy rather than a sign of


Speculation now focuses on whether the leaders of the conservative AZR will seek to parlay their referendum efforts into a wider ranging political project. Even given the low turnout, around one million offered support. That's comparable to the number of votes carried by the ruling Smer in the 2012 general election, which saw them secure an outright majority in parliament.

That may be part of the reason AZR leaders felt able to claim a victory on February 8. "The process has been important; people are more oriented toward family values than before," Anton Chromik, one of those at the forefront of the movement, told bne IntelliNews. "We will try again if needed."

While Fico and Smer continue to dominate public opinion polls, the country's centre-right remains divided and disorganized. With a year or so to go before a general election, the AZR may offer just another sign of shifting political winds.

A year ago, political novice Andrej Kiska defeated Fico in a runoff for the presidency. Since taking office in June, Kiska has served as a moderate - if largely rhetorical - check on the previously "invincible" PM and his party.

In another recent development, the extra-parliamentary Slovak National Party (SNP), has started to poll above the 5% threshold required to enter parliament. Should the nationalist party continue that trend, it is likely to drain away some Smer support, though it may also provide a potential coalition partner, as after the 2006 general election.

Fico and Smer remain dominant, but they may also now be wondering what will happen if the AZR leaders throw their weight behind an existing rightwing party, or perhaps start their own.

Central Europe

same sex couples was given the nod by 92.4%. Meanwhile, 90.3% voted for legislation that would allow parents to opt children out of sexual education classes in school.

Outright fatigue was also likely a factor in the low turnout. This was the fifth time Slovak voters have taken to the polls in the past 12 months. Just 13% made it to vote during European Parliamentary elections last May, a new EU low.

"I don't care, it's none of my business," said Alena Duharova, a 55-year old entrepreneur from the western Slovak city of Dubnica nad Vahom, who did not vote. "All this was created because of the church."

Slovakia's constitution already bans gay marriage. Parliament adopted a constitutional amendment defining marriage as between one man and one woman last year. Still, leaders from the AZR argued that more was needed to protect children. They were able to collect 400,000 signatures on a petition to pave the way for the vote, well over the 350,000 required for a publicly-driven ballot initiative and a sign of grassroots political organising clout. Campaigning in recent weeks had taken an interesting turn, with major media - public and private - declining to air AZR advertisements. Referendum organisers complained of censorship and accused broadcasters of bowing to political pressure - although it is unclear from where pressure would come. Church leaders, including the Bishops Conference of Slovakia, were outspoken in backing the referendum.

For his part, Prime Minister Robert Fico kept his cards close to his chest. Whilst he told media he planned to vote, he didn't specify which way, and did little to urge supporters to cast ballots. Leaders from the LGBTI community simply asked supporters to stay at home.


Southeast Europe

Moldovan minority government fails to win vote of confidence

Constitutional Court in October 2013, the new cabinet has to be endorsed within 90 days of the date when the previous cabinet’s term expired. Under the latter stipulation, the new cabinet would have to be endorsed by March 9.

The February 12 vote opens the door for the continuation of negotiations, fruitless so far, between the three pro-EU parties represented in parliament. There is speculation that the coalition will manage to bring on board a fellow pro-EU party, the Liberal Party of Moldova (PL), for its second attempt at forming a government, albeit one with a fragile parliamentary majority.

In a last minute statement before the vote on Leanca’s cabinet, PL leader Mihai Ghimpu asked for the vote to be postponed until February 17, but parliament speaker Andrian Candu rejected his request.

The PLDM-PDM coalition had also looked to the Communist Party of Moldova (PCRM) for support, after the party backed its nomination of Candu as speaker. However, policy differences between the coalition and PCRM are substantial. While Leanca and other members of the coalition want to press ahead towards EU integration, the PCRM wants to revise Moldova’s 2014 EU Association Agreement and to maintain ties with Russia.

As a result, the coalition is expected to become more flexible in its negotiations with the PL, which

bne IntelliNews

Moldovan Prime Minister Iurie Leanca has failed to win a vote of confidence for his minority coalition government, more than two months after general elections gave a narrow victory to pro-European Union parties.

The coalition will now make a second attempt to rally support for its government among opposition MPs. A second failure would result in early elections, precipitating a deep political crisis in Moldova.

The proposed cabinet received only 42 votes on February 12, nine fewer than needed, Publika.md TV station reported. It was backed only by MPs from the minority coalition formed by the Liberal Democrat Party of Moldova (PLDM) and the Democratic Party of Moldova (PDM).

President Nicolae Timofti is now expected to nominate a new prime minister designate, who could be either Leanca, currently Moldova's acting prime minister, or another candidate. The nominee is expected to be from the same coalition, though this is not a requirement.

There is some ambiguity about how long Moldova has to form a new government. Under the constitution, if the parliament fails to appoint a prime minister within 45 days of the first negative vote, the president can dissolve parliament, Publika.md explains. However, according to an alternative interpretation issued by the


Southeast Europe

was originally expected to join the government. In earlier negotiations, the PL demanded significant representation in the public administration, as well as radical reforms that are broadly reflected in Leanca’s governing programme published on February 11.

The PL remains the most natural partner of the minority coalition, but the lack of internal reforms within the PLDM and PDM could be an obstacle to agreement between the three parties. While Ghimpu did not openly raise this issue, the Moldovan press speculates that it is is at the root of the PL’s failure to strike a deal with the coalition.

The delay in forming a new government in Moldova means that plans to push forward with EU integration and other reforms will be put on hold. This is also likely to delay efforts to resolve the crisis in the Moldovan banking sector, where there have been a series of untransparent takeovers of major banks in recent years. Three banks - Banca de Economii, Banca Sociala and Unibank - were taken under special administration by the central bank in late 2014.

Talks on the Transnistria conflict in the 5+2 format under the aegis of the Organisation for Security and Cooperation in Europe have been postponed since before the elections, and will remain on hold until a new government is formed.

insistence, branches of the court will be set up in the towns of Zubin Potok and Leposavic.

EU High Representative for Foreign Policy Frederica Mogherini announced the agreement on February 10. “Just signed agreement on justice: great result of resumption of dialogue Belgrade/Pristina! Thanks to both sides,” Mogherini tweeted.

Working groups will resume to take forward the work on implementation of the agreement, according to a statement from the EU External Action Service.

Talks between Serbia and Kosovo have been on hold since March, as 2014 was an election year in

Serbia and Kosovo strike deal on judiciary

bne IntelliNews

Serbia and Kosovo reached agreement on February 10 to set up ethnically-mixed courts in Kosovo’s northern Mitrovica region, which has a mainly ethnic Serb population. The EU-brokered deal resolves one of the most contentious issues between the two countries, and is seen as a significant step in attempts to normalise relations.Serbian Prime Minister Aleksandar Vucic and his Kosovan counterpart Isa Mustafa initialled the deal on creating an ethnically-mixed court after a day of often tense negotiations.

According to a statement from the Serbian government, the court will have nine Serb and nine Albanian prosecutors, 14 Albanian and 11 Serb judges, and a Serb president. On Belgrade’s


Southeast Europe

normalising their relations, in April 2013. However, progress since then has been relatively slow, despite a strong incentive in the form of progress towards EU accession.

Vucic said on February 10 that he hoped the result of the latest round of talks “will contribute to have the first chapter in the accession negotiations with the EU open soon, to give Serbia a new impetus to European integration.”

“Serbia’s behaviour will be welcomed and assessed as serious,” Vucic added.

The normalisation of relations with Kosovo is one of the key sticking points to Serbia’s entry to the EU. Aside from this, Serbia has made strong progress towards EU integration under Vucic, and is expected to open its first accession chapters in the near future.

Meanwhile, Mustafa also indicated he was also hopeful that a breakthrough in the talks would support his country’s progress toward EU entry.

"We have set priorities that are in line with what the European Union expects from us in the field of economic development, in the field of rule of law and public reforms. We consider it essential that we make significant strides in economic development,”Mustafa said on February 9 after talks with EU Commissioner for European Neighbourhood and Enlargement Negotiations Johannes Hahn.

In 2014, Kosovo moved closer to its the goal of EU accession, when it signed its Stabilisation and Association Agreement. However, entry to the EU remains a far off ambition with numerous obstacles including high corruption levels and recent revelations of mass illegal migration into the EU blocking Pristina’s path.

both countries. The six-month delay in forming a new government in Kosovo after the June 2014 election further postponed discussions.

Speaking after the discussions with Mogherini and Mustafa, Vucic said the talks had been “difficult” but that the “maximum has been obtained under the circumstances”.

The meeting came at a time of increased tensions between Belgrade and Pristina as well as within Kosovo.

In January, the Kosovan parliament was poised to vote on a new law on public enterprises, which would have paved the way for Pristina to take over the giant Trepca Mining, Metallurgical and Chemical Combine. This angered Belgrade, since Trepca is also claimed by Serbia. Mustafa backed down at the last minute, informing the parliament on the day of the vote that the draft law had been removed from the agenda.

Another dispute erupted over comments made by Aleksandar Jablanovic, one of three ethnic Serb ministers in the Kosovan government. Jablanovic called a group of Albanians who tried to stop Serb pilgrims visiting a monastery during Orthodox Christmas “savages”. On February 3 Mustafa dismissed Jablanovic from his post as communities minister, causing a backlash among Serb List MPs.

The combination of the Trepca dispute and the anger over Jablanovic’s comment sparked the worst outbreak of unrest Kosovo has seen since independence eight years ago. Mass protests took place in Pristina on January 24 and 27, with fighting breaking out between protesters and police. There were also fears of unrest within Mitrovica where Trepca is located.

The two countries signed the Brussels Agreement, an EU brokered deal aimed at


Opinion

Ben Aris in Moscow

The situation in the heart of Europe looks pretty bleak at the moment. A shaky ceasefire deal is supposed to take effect on February 15, but many of the substantive elements of a deal that would allow all sides to walk back from a bloody war in Ukraine were missing from the final text.

Is Europe doomed to a new Cold War or at least a Great Game II, as some have suggested? Actually the prospects for a productive and peaceful partnership between Russia and the EU are pretty good – at least in the long-term – if Russian President Vladimir Putin has any success in fulfilling his vision of creating a "Greater Europe" that stretches from Lisbon to Vladivostok.

Putin has said over and over again that, "Europe is Russia's natural partner," starting with the now infamous speech he gave at the Munich Security Council speech in 2007.

Destabilising Ukraine and starting a proxy war with the Western powers seems a pretty odd way of cosying up to the rest of the world. But as Putin also said in his Munich speech, he wants this partnership to be on equal terms and for the West to respect Russia's legitimate interests. Clearly from the Kremlin's perspective this didn’t happen in the "bilateral" free trade deal between the EU and Ukraine that Russia was, by definition, excluded from. Hence the war.

But at the heart of Russia's long-term foreign policy is the creation of a "Greater Europe". This phrase has not caught much attention in the

press, but the Kremlin has been repeating it constantly for many years. And German Chancellor Angela Merkel has clearly woken up to it. "The Russians repeat this [Greater Europe] phrase repeatedly and Merkel has started introducing it into her speeches, for example she mentioned it in her speech at Davos earlier this year," says a western diplomat who didn’t want to be named. "I think she is just playing lip service to it as part of her strategy to soften up Russia in the current negotiations, but it is clearly important to Putin."

Russia's desire to move close to Europe is not as crazy as it sounds. In the short term Putin is concerned with getting the West to respect what he sees as Russia's interests in Europe and he has decided to draw a line in the sand over Ukraine.

At the same time Russia has been allying itself with other emerging markets that share his desire to create a "multipolar" world where the leading economies share global responsibility, rather than the current "unipolar" system where the US is in charge – another Russian foreign policy meme.

And this plan is progressing. The current showdown has been described as a "new Cold War" or maybe better as "the Great Game II" where Russia is in conflict with the West. But as bne IntelliNews and others have argued Russia is not totally isolated, but has continued to build up its ties with the other emerging markets, particularly the so-called BRICS and especially China.

MOSCOW BLOG:

Putin's vision – building a Greater Europe by 2050


Opinion

Moreover, Western Europe is far from united in its condemnation of Russia; only this week Bulgarian conservative parliamentarians started collecting signatures for a motion to withdraw from Nato. Putin was in Turkey in January and a new “Turk Stream” gas pipeline is in the works that will supply southern Europe, while on February 9 Putin was being feted in Egypt, Russia's latest new best friend in the Mediterranean basin. Putin has a lot of work to fulfil his dream of a “Greater Europe”, but long term Russia remains extremely wary of China, which is not and never has been its natural partner. "The Russians don’t trust the Chinese, and while economically it makes sense to tie up with them now, eventually they will become rivals," the diplomatic source says.

You can understand Russia's concern. Beijing is far away and has little impact on life in Brussels, but Russia shares a 4,380km border with China, which became the biggest economy in the world in 2014 in purchasing power parity terms. As Harvard economist Niall Ferguson and author Ian Morris have both argued, the West's dominance has been a historical aberration caused by the benefits of the industrial revolution. But that is wearing off now thanks to the end of the socialist experiment and the spread of technology.

The world is reverting to what it was a thousand years ago when GDP was simply a function of how many people a country had. In these terms Russia is set to be easily the most important country in Europe, as it has half as many people again as Germany. The trouble is, as far as Putin is concerned, China will once again become by far the biggest and most powerful economy on the planet.

The former head of the World Bank James Wolfensohn told bne IntelliNews at a conference in Moscow: "In 2050 China will make up about a quarter of global GDP with India just behind, but Russia will account for 5% at best." Currently Russia accounts for 2.6% of global GDP despite being the eighth largest economy on the planet. PwC predicted China's share will peak at 20%,

while the EU's share will fall from the current 33% to 25% in 2050 in its report this week.

To hammer home the point, PwC released a report on February 10 entitled "PwC's World in 2050", which leads with, "The decline of the west: China, India to replace the US, EU on the world arena by 2050”. "The global economic power shift away from the established advanced economies in North America, Western Europe and Japan will continue over the next 35 years. China has already overtaken the US in 2014 to become the largest economy in purchasing power parity (PPP) terms. In market exchange rate (MER) terms, we project China to overtake the US in 2028 despite its projected growth slowdown," the report said.

And that is why Putin so desperately wants to create an economic bloc that stretches from Lisbon to Vladivostok. Together, a “Greater Europe” of Russia and the EU will push its collective GDP up into the teens and be large enough to challenge China. On its own, Russia will be little more than a raw materials appendage. Even in the midst of the current brouhaha, the Kremlin is still pushing this agenda. In a little reported story on February 12, Russian Foreign Minister Sergei Lavrov called on the West to start serious discussions on a Euro-Atlantic security pact – an idea floated in Berlin by Dmitry Medvedev as the first thing he did after taking over as president in 2008.

Today this project seems inconceivable, or even ridiculous. However, Putin has time on his side. He will walk the 2018 elections and probably retire (or at least step down as president) in 2024: if a week is a long time in politics, then a decade is a geological age. Set that against the four-year election cycle in Europe and the US, which seems to be in perennial election mode; the 2016 presidential race is already informally underway. The downside of the democratic system is that typically few politicians in the West think further ahead than the next election campaign.


bne: Infrastructure

Weekly Lists

Poland close to winning control of gas pipeline bne IntelliNews

Poland is set to take control of its section of the Yamal pipeline, the mainline route carrying Russian gas westwards, local press claimed on February 11.

The long battle over EuRoPolGaz - the operator of the Polish stretch of Yamal - could come to an end on March 9, Puls Biznesu reported. Warsaw hopes to seize control of the operator by taking over the company that holds the balance of power, the newspaper says, citing unnamed sources.

Poland's dominant state-controlled gas company PGNiG and Russia's Gazprom each own 48% in EuRoPolGaz. That leaves the 4% held by Gas Trading with the deciding vote. Under the current plan, PGNiG would take control Gas Trading.

Gas Trading's EGM has been called for March 9. On the agenda is a move to lower the majority threshold for major decisions at the company from 75% to 66.6%, with a 60% turnout requirement. That would allow PGNiG - the largest stakeholder - to win a majority, provided that it reaches agreement with Polish industrial investment group Bartimpex.

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.

China's TEPC looks to invest ¤0.5bn in Republica Srpska bne IntellinNews

China’s state-owned Tianjin Electric Power Construction Company (TEPC) is interested in investing BAM1bn (¤511.3mn) in energy projects in Republica Srpska, according to the Bosnian Serb Republic's website.

The Republica Srpska’s government will provide the Chinese company with specific projects with technical details so that TEPC can decide on investments, Energy Minister Petar Djokic said in the statement following a meeting with company representatives.TEPC proposed the build-operate-transfer (BOT) and turnkey business models for the projects, which will be financed possibly through China’s Exim Bank.


The Slovak cabinet approved the privatisation of the country's 49% stake in Slovak Telekom (ST) on February 11, and hopes to submit the plan for parliamentary approval by March 6.

Bratislava will prefer to carry out the sale via the capital market, Economy Minister Pavol Pavlis said, although it has still not ruled out a divestment to a strategic investor if it can find one. The sale process is expected to be concluded by mid-year. Slovakia hopes to earn around ¤1bn from the sale. In July, FNM signed agreements with JP Morgan and Citigroup regarding management of the divestment.

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.

Slovakia to float 49% of Slovak Telekom bne IntelliNews

Ljubljana extends Telekom Slovenije bidding deadline as opposition to privatisation grows

Clare Nuttall in Bucharest

Slovenia has reportedly extended the bidding deadline in the tender for the privatisation of Telekom Slovenije, the most valuable company up for sale under the current privatisation programme. The government is reportedly eyeing ¤1.6bn from the sale of its 73% stake in the company.

The latest delay comes amid tensions within the Slovenian ruling coalition over the programme. On February 7, around 3,000 people took to the streets of Ljubljana to protest against planned privatisations. Demonstrators chanted “privatisation is theft” and warned that selling off the 15 major companies earmarked for privatisation risked pushing up unemployment.

bne:TMT



Weekly Lists

Erste makes peace with Orban in landmark deal

bne IntelliNews

Hungary will ease pressure on the banking sector in return for a stake in the local unit of Austria's Erste Group and a commitment to greater lending, it was announced on February 9.

In a landmark deal following five years of pressure on the banks, the Hungarian government has agreed to reduce Europe's highest banking tax "considerably". In return, it will be able to buy a 15% stake in Erste Hungary, which will give a boost to Budapest's growing ownership of the sector. At the same time, Erste has agreed to pump an extra ¤550mn in loans into the economy.

Under the deal, the Hungarian state and the European Bank for Reconstruction and Development (EBRD) will acquire 15% each in Erste Hungary. It is yet to be decided whether Hungary and the EBRD's acquisitions of stakes in Erste will be done via a capital increase or an actual sale, Orban said. He added that a deal will be agreed "provided we can agree on the price".

Moscow appeal court discards delicensing of Russian unit of Montenegro's Atlas Banka

bne IntelliNews

The appeal court in Moscow has discarded an earlier decision of the arbitration court to revoke the licence of the local unit of Montenegro's Atlas Banka, the bank said in a statement.

In May last year, the Russian central bank (CBR) withdrew the operating licence of Moscow-based Atlas Bank, saying the lender has repeatedly violated the regulator's rules on countering money laundering and criminally obtained income. A temporary central bank administration has been in control of the Moscow-based bank in the meantime.

CBR representatives told the arbitration court Atlas Bank was delicensed due to the work of eight clients and due to two technical mistakes when sending files online. They added that among the reasons is also the fact that this is a lender owned by a foreign bank, which did not have a significant presence on the Russian market. On the other hand, Atlas Group, the owner of Atlas Banka, showed proof that CBR's decision is illegitimate, i.e. the decision is disproportionate to the weight of the alleged wrongdoing.

bne:Banker



Weekly Lists

Romania fails to revive IMF stand-by arrangement bne IntelliNews

Romania’s stand-by arrangement (SBA) with the International Monetary Fund remains in limbo after Romanian officials failed to reach agreement with an IMF mission on gas price liberalisation and other key issues, Prime Minister Victor Ponta said on February 9.

The Romanian government also objected to the IMF's suggestion to liquidate mining and power generation group CE Hunedoara, and for a tough restructuring programme for another mining and power group, CE Oltenia.

Despite the apparent deadlock, the Romanian authorities still hope for an amicable agreement on the country’s third SBA, which was signed in September 2013. The agreement will not go off track, Ponta stressed on February 9. However, no letter of intent on the SBA will be drafted before April, when negotiations will continue, he added.

This means Romania will be unable to draw down any monies under the SBA until April at the earliest. However, Bucharest has no urgent need of funding, and treats both the SBA and the balance of payments programme agreed in parallel with the European Commission as precautionary.

S&P cuts Kazakhstan to BBB on oil price fall bne IntelliNews

Standard & Poor’s Ratings Services has cut its long-term foreign and local currency sovereign credit ratings of Kazakhstan from BBB+ to BBB with a negative outlook. At the same time, the agency affirmed the country's short-term foreign and local currency sovereign credit ratings at A-2. In addition, the agency downgraded the country's national scale rating to kzAA+.

The main reason for the action is a sharp drop in oil prices - by more than 50% since June 2014 - which prompted the S&P to revise the oil price for 2015-2018. S&P believes that given the Kazakh economy's dependence on the oil sector, the decline in oil prices materially affects the outlook for the country’s economic growth as well as for external and fiscal balances. This led S&P to forecast real GDP growth at 1.5% in 2015 and 2% in 2016. S&P estimates that the oil sector accounts for an estimated 20-30% of GDP, over 50% of revenue, and 60% of exports.

bne:Credit


Documents

bne:Newspaper - February 13, 2015