bne newspaper may 23 2014

May 23, 2014 www.bne.eu

Russia strikes gas deal with China

Ukraine goes to the polls on May 25 in a crucial presidential vote that is planned to end the political vacuum and help reduce the instability that has plagued the country since former president Viktor Yanukovych fled the country in February.

There is little doubt about who will be the next president in Kyiv: oligarch Petro Poroshenko holds

Ukraine heads for crucial presidential election

Russia and China closed a $400bn gas deal on May 21 that will see Gazprom supply energy to the burgeoning Chinese market for at least the next decade. The agreement represents a new and deeper strategic partnership between the two biggest BRIC countries.

Together the Sino–Russian partnership has been called "the best synergy on the planet." The

trouble is they don't like each other very much. Even during the Communist era, China and Russia failed to unite against the capitalist world.

Yet in the last few years the two countries have been growing together in a marriage of convenience. Chinese President Xi Jinping chose

an enormous lead. The only unknown in terms of results is whether Poroshenko will win in the first round by taking more than 50% of the vote. Should he fail, a second round will take place on June 15.

However, the real question is whether the elections will win widespread recognition. With

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Ben Aris in Moscow

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no pro-Russian candidate standing a chance, Moscow has been destabilizing the eastern and southern regions of the country specifically to undermine the legitimacy of the vote.

Kyiv has been pushing to quell the pro-Russian militias that have taken control of several cities in the Donetsk and Lugansk regions. Moscow gave cautious backing to referenda held on May 11 that called for independence in the eastern regions, but has held back on requests for it to annex them, as it did Crimea in March.

However, with reports of numerous murky private forces emerging on both sides, the conflict has stepped up as the vote draws closer. May 22 saw the biggest loss of life for the Ukrainian army as an ambush in Donetsk left at least 14 of its soldiers dead. Anti-Kyiv forces have reportedly occupied up to 13 of the 34 electoral commissions in the eastern Donbas region, but the elections will nonetheless be valid according to Ukrainian law, even should some regions fail to take part.

The Kremlin's goal is to prevent Ukraine moving closer to the EU, and possibly Nato. If Russia ties Ukraine into a "frozen conflict", then that could effectively stymie accession ambitions in Kyiv and Western Ukraine to eventually join the European bloc.

Poroshenko was a strong supporter of the Euromaidan revolution that deposed Yanukovych, and has built up his credentials to move Ukraine to the West on the campaign trail. At the same time, the chocolate magnate is a political butterfly – he served in the pro-Western government of Viktor Yushchenko as well as Yanukovych's more eastern-oriented administration. He has stressed that mending ties with Russia quickly is vital.

A swift and conclusive election is needed first however, so Kyiv can attempt to diffuse the trouble in the east. Poroshenko has called on outlying candidates among the 22 entering to pull out of the race so that a new president can restore order as soon as possible.

"The logic of those who increasingly support Poroshenko is that he will win in any case… so why should we wait three more weeks to vote in the second round and put Ukraine under new risk?" suggests Alexander Paraschiy at Concorde Capital. "A three-week delay… is considered as an additional risk for the country by many, including the risk of more aggression from the Russian side."

Washington and Brussels have been pushing the presidential vote hard as the only route to solving the crisis. For its part, Moscow is keeping Kyiv and the West guessing.

Ukraine heads for crucial presidential election

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Russian President Vladimir Putin has recently performed an about-face, and cautiously endorsed the vote, describing it as a "step in the right direction". The Russian forces that had amassed so ominously on the border since the start of the year have also begun a partial withdrawal. Putin claimed the order was designed to help the vote go off smoothly.

Yet conflicting signals are emerging from Moscow. While Putin hinted this week that Russia "may" recognise the results as valid, Prime Minister Dmitry Medvedev said it might not.

"Although Russia doesn't seem keen about the elections, it is appearing to 'accept' them and

clearly much will depend on the new president's skill to find a longer-lasting solution that keeps the country functioning as a state with the support of the EU/US and Russia," write analysts at Commerzbank. "Poroshenko seems to be the candidate with the path of least resistance."

The first item on the agenda for the new president is likely to be natural gas. Moscow is threatening to cut off Ukraine unless it is paid the $3bn or so it is owed. That risks an interruption of supplies to the EU. However, with the West providing a large rescue package to Kyiv, the only thing missing it seems is a Ukrainian figure with whom Moscow will agree to talk.

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The Gazprom deal means not only will China have to spend $400bn on Russian gas imports over the next 30 years at a rate of 38bn cubic metres a year (cm/y), but the real commitment is the even larger sums it needs to spend on building a gas distribution network in the north east region the gas will power. Countries don't make this sort of infrastructure investment lightly.

The upshot is that this gas deal is a de facto strategic partnership treaty that needs to be maintained for decades and probably much longer. Ukraine's pipeline network that links Russia to Europe, for example, has been in existence for more than 50 years; even in the Soviet-era Russia continued to export gas to Western Europe despite being in a Cold War with the Nato allies.

There is no word on the all-important price of the gas. The Russian side was reportedly insisting on between $350 and $380 per 1,000cm – the same sort of price Russia charges European clients. The Chinese, realising they have Russia over a barrel, were asking for a price close to that paid by the states closest to Moscow - $180-$200.

It's a buyer's market. The Chinese did not have to do a deal with Russia. They have already done extensive gas supply deals with the countries of Central Asia. A gas supply deal signed with Turkmenistan could meet much of China's immediate needs in the short to medium term. China can afford to shop around. However, the Kremlin is showing itself to be very business-minded and driving as hard a bargain as it can.

The deal is also indicative of a shifting balance of power in the world. Several of the emerging markets are starting to converge rapidly with the developed world. Last year the UNDP upgraded Russia to a "high income" country – in other words it is now officially an "emerged" market. Likewise, China has gone from a backward bucolic economy to the powerhouse of global growth in the last two decades.

Russia strikes gas deal with China

to visit Russia first following his appointment in November and Russian President Putin has thrown enormous resources into developing Russia's Far East to better tap the Chinese market.

The Socialist ideology no longer reigns in either, and the two countries have little problem trading with each other. The Chinese are nothing if not mercantile and the Russians are also these days most interested in making money. But their relationship will change following the gas deal.

Going into business togetherRussia's showdown with the West over Ukraine has meant that the Kremlin has swallowed its traditional misgivings about cozying up to China and decided that the two countries should go into business with each other. China currently relies heavily on coal to fuel its power plants, and suffers from pollution as a result. The Chinese would love to import Russian gas, especially to its underdeveloped northwest territories.

The point with gas is that it's best suited to be sent through pipelines (though liquified natural gas shipped by tanker is growing). The point with pipelines is that once they have been built they cannot be moved. It is a binding relationship.

The EU worries about Russia's power to cut off its gas supplies, though the Kremlin is as dependent on the revenues from their gas exports as the EU is dependent on Russian energy imports. The same is true for China - with knobs on.

The big difference between China and the EU is that Brussels has already built an extensive distribution network that runs throughout the continent. China's gas pipeline network is limited.

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The Regions This Week

Azerbaijan is to enrol France in helping to develop its space industry as EADS-Astrium and Azercosmos show interest in expanding cooperation. EADS-Astrium is expected to train Azerbaijan’s space specialists. The country’s first telecom satellite Azerspace/Afrisat-1a was launched with France’s help in February.

Armenia plans to see a $1.5bn copper smelter break even in just over a year. Yerevan hopes to earn $1.2bn a year by recycling tailings from a copper and molybdenum plant in the country’s south. President Serzh Sargsyan believes the smelter will generate about 10% of the country’s GDP.

Chinese companies will produce about 40m tonnes of oil in Kazakhstan after the supergiant Kashagan field starts pumping oil sometime in the next two years. China’s CNPC bought an 8.33% stake in the field for $5bn when ConocoPhillips quit the project. In return, Astana received $10bn in soft loans from Beijing at the height of the financial crisis.

Kyrgyzstan plans to bridge its wide trade gap with China with agricultural produce, at least partially. The country’s foreign minister believes its giant neighbour is ready to import Kyrgyz crops and animal products. Imports account for 95% of Kyrgyzstan’s trade with China, which stood at $1.5bn last year.

Already the region’s major trading partner and investor, China is increasing its soft power in Central Asia. Beijing has announced it will allocate grants to 1,500 Kyrgyz students over the next five years. Impoverished Kyrgyzstan, which is about to join the Russian-led Customs Union, heavily depends on external donors to run its social, education and healthcare sectors.

Azerbaijan has restored direct air links with Tajikistan. The route linking Baku and Dushanbe will do much to help the remote and isolated Central Asian country, with Tajikistan under a de

Eurasiafacto blockade imposed by Uzbekistan. Tashkent is furiously trying to stop its neighbour building what will be the world’s tallest dam to tap into its hydropower potential. The Rogun dam, Dushanbe believes, will compensate for poor supplies of Uzbek natural gas; Tashkent fears the dam will starve its cotton fields of water.

While building bridges to faraway countries, Azerbaijan is failing to maintain meaningful relations with nextdoor neighbour Armenia with which it contests the Nagorno-Karabakh region. "Armenia is the only country threatening the regional security and conducting open aggressive policy in the region," a top official in the president’s office in Baku complains.

Kazakhstan is using its language laws to ban alcohol imports. Astana said it will block imports from July 1 of any bottles lacking labelling information in Kazakh. Alcohol importers argue that the ban should exclusively concern products originating in fellow Customs Union member states Belarus and Russia but exempt alcohol products from the outside bloc. The Kazakh alcohol ban is the latest in tit-for-tat trade wars waged between seemingly barrier-free trading partners within the Moscow-led integration group using non-tariff measures.

Kazakhstan plans to build a $100m solar power plant with a capacity of 50 MW in time for Expo 2017. Astana has no shortage of sunshine but temperatures often drop to below minus 40 centigrade in winter, forcing the city to burn almost 2m tonnes of coal and over 20,000 tonnes of oil to keep it warm.

Uzbekistan has still not resumed gas supplies to southern Kyrgyzstan. Tashkent cut off gas to its neighbour to the south east due to unpaid bills. Russian giant Gazprom’s takeover of the Kyrgyz gas distribution company was meant to have fixed the problem, but the Kyrgyz prime minister complains Tashkent has ignored requests to resume supplies or explain the situation.

businessneweurope I May 23, 2014


Poland is set to export dairy products to China. Beijing has handed accreditation to over 60 companies. The sector has struggled as Russia has blocked imports and demand in Ukraine has dropped.

Hungary began shipping gas to Ukraine on May 20 after testing its delivery system, local media reported. Testing of the route began on May 1, but 2.5m cm was sent as a first step towards a daily capacity of 16m cm.

Lithuania has chosen an LNG supplier, PM Butkevicius said on May 20. Vilnius has been talking with the likes of Norway and Qatar over supplies for its LNG terminal, which is due to be operational next year. A deal with the unnamed supplier is likely in the near future, the PM said.

Hungarian PM Orban is eyeing the presidency, local media suggests. The PM said in 2012 he was looking to move Hungary towards a presidential system. The constitutional majority Fidesz claimed in April's election opens up that possibility.

Twenty one years after the velvet divorce, Czechs are expanding their lead in life expectancy over Slovaks, a report said. Czech men are now expected to live to 75, compared with 68.5 in 1992; Czech women's life expectancy rose to 81 from 76. In Slovakia, the rise was slower.

Hungary's central bank chief signaled another cut in interest rates is due next week to battle sinking inflation. Gyorgy Matolcsy said the Magyar Nemzeti Bank has "room to maneuver".

Hungary is mulling limits on bank lending to households, a central bank report revealed on May 22. The move is under consideration, even though lending remains sluggish, as the MNB seeks to prevent systemic risks building up once household borrowing gains momentum.

Central EuropePoland is pushing ahead with surveying for its first nuclear plant without the proper permitting, claims Greenpeace. The environmental organization says it found markers exactly where subcontractor Worley Parsons wants to drill 200m deep holes for their site assessment, despite the lack of an environmental impact assessment.

PSA Peugeot Citroen plans to build its next C3 compact model in Slovakia instead of France, sources told Reuters on My 22. Carmakers are making more use of the cheaper production available in their CEE plants as the industry struggles to recover.

The Estonian government approved a bill to award full cohabitation rights to all on May 22. The controversial legislation, which will treat all couples – regardless of sex - equally in matters of finance, inheritance, care and visitation rights, now heads to parliament.

Hungarian prosecutors are awaiting their chance to charge a far right politician with spying for Russia. The state prosecutor has asked Brussels to remove the immunity of of Bela Kovacs – an MEP from Hungary's Jobbik. The European parliament says it will vote on the issue should "KGBela" – as the press have dubbed him - remain after the May 25 election.

Czech brewer Lobkowicz Group attracted strong demand for its Prague IPO, sources claimed on May 22 as it closed. Domestic retail investors led the interest for what will be the only beer maker on the Czech bourse.

Telefonica Czech Republic stock declined the most in six months on May 22 after new owner PPF said it will buy out minority stakes for less than expected. PPF has been at odds with financial authorities as it prepares to make a mandatory offer in the wake of its acquisition of 66% in the telecom in November.


Southeast EuropeGeorgia and Moldova are due to sign wide-ranging trade and association agreements with the EU on June 27 and have voiced fears they will face a Russian backlash. Bloomberg cited two Russian government officials as saying that Russia is considering trade barriers against Moldova if the former Soviet republic follows Ukraine in seeking an association agreement with the EU.

The Turkish central bank cut its main policy rate by 50bp to 9.5% on May 22, leaving other key rates unchanged. Following the surprise move, analysts said it looks like the bank will continue to ease policy over the coming months.

A Turkish protestor has died after police shot him. The man was hit in the head as police clashed with protesters in Istanbul last week. Police used tear gas and water cannon and fired live bullets into the air to try to disperse a crowd angry at the mining disaster that killed 300.

The CEO and general manager of the company operating the Soma mine were arrested on May 19 as part of a probe the disaster. Soma Komur Isletmer officials Can Gurkan and Ramazan Dogru were among 25 who were taken into custody initially. Eight are reported to have charges hanging over them.

The Soma disaster is shining a light on the ruling AKP party's close ties to the coal industry. Opposition lawmakers accuse PM Erdogan's government of allowing mining companies to get away with lax safety standards and low wages.

Foreign direct investment in Turkey reached $4.2bn in the first quarter, up almost 50% on year, the Turkish Economy Ministry announced.

Croatia sold ¤1.25bn of bonds in its first offering in the Eurozone currency since 2011. The issue was boosted by bets the European Central Bank will ease monetary policy. The newest EU member

state sold the eight-year debt at 270bp above midswaps, versus the 285bp initially targeted.

Slovenia is moving forward with privatization plans, the government of the cash-strapped Eurozone member claimed this week. Ljubljana said bids on its stakes in the country's main airport and bank NKBM are due in July.

An IMF team will visit the Romania in June to review the two-year stand-by agreement signed last autumn, the government said. One of the issues that will be studied is needed changes to the budget to meet commitments.

The US conducted a successful test of the missile-defense system which will be based in Romania, and form the cornerstone of the US missile shield in CEE. The test was conducted on a land-based Aegis weapon system in Hawaii, similar to the equipment the US plans to deploy next year in Romania.

Romanian police arrested four judges from Bucharest Court on corruption charges. The authorities claim the judges took bribes during insolvency and liquidation cases.

A political crisis in Macedonia is looming as the Social-Democrat opposition said it will not recognise the last election results in the country and denounced the new government as "a dictatorship".

At least 6 people were injured and 27 arrested in two days of riots in Skopje sparked by the murder of a teenager in a western suburb of the Macedonian capital earlier in the week.

Lawyers for Ratko Mladic began their defence of the former Bosnian Serb military commander at the International Criminal Tribunal for the former Yugoslavia. Mladic faces 11 charges, including genocide and crimes against humanity, dating to the 1992-95 Bosnian war.



Eastern EuropeRussia's industrial output rose three times faster than expected in April, up by 2.4% month-on-month. Analysts were expecting Western sanctions to slow output more deeply. The rise was spurred mainly by production for the domestic market. Irkutsk declared a state of emergency due to forest fires, which have spread to local villages, prompting large-scale evacuations. The Russian Direct Investment Fund (RDIF) has signed off on the joint-venture with the China Investment Corporation (CIC) that plans to raise an $800m fund to invest in infrastructure for senior living centers and to tap rising Sino-Russia tourism. Russia has invested $200bn in Ukraine’s economy over the last 20 years, including discounts on natural gas prices, Russian Finance Minister Alexei Ulyukayev claimed. Nato has launched large-scale exercises in Estonia, said chief Anders Rasmussen in more sabre rattling over Ukraine. Rasmussen blamed Russian aggression against Ukraine, which has posed a challenge to a fundamental idea – "the right of sovereign states to choose their own path." Moscow will sell off some of its most expensive land that overlooks the Kremlin on the riverbank by Red Square where the Hotel Rossiya used to stand. The city hopes to raise several billion dollars from the sale.

Russia's Putin ordered the release of 23,000 convicts in accordance with a presidential amnesty, which has been arranged to coincide with the 20th anniversary of the Constitution of the Russian Federation. The amnesty applies to individuals convicted of minor offenses and medium-gravity crimes. Gazprom plans to list on the Singapore Exchange in July, a company official said this week. The announcement is part of the Moscow's efforts to reorientate to the east as they face Western sanctions.

Eleven years later than planned, the glass towers of the Moskva-City international business center will be completed by 2018, Moscow's chief architect Sergei Kuznetsov claimed. The wife of a Russian oligarch won the biggest ever divorce settlement this week. A Swiss court awarded Dmitry Rybolovlev's ex-wife more than $4.5bn. Six died as a freight train hit a passenger train just south of Moscow on May 20. Carrying car parts to Romania, the cargo train came off the rails, with the initial investigation blaming a broken piece of track. Russians prefer to elect their mayors directly than have them appointed by the Kremlin, poll found this week. In one of the few concessions to real democracy, Putin reintroduced direct elections in his second term. However that decision has more recently been reversed. Russians are less likely to demonstrate than any time since the economic crisis began in 2008, says the Levada Center. The poll found that a record high 85% would likely not take part in political protests, up from 82% a year earlier. The ruble strengthened sharply this week in defiance of the ongoing political crisis in Ukraine. The Russian currency was trading at 34.8 against the dollar and was 1% up against the euro to 47.75. The ruble reached historic lows in mid-March, hitting 36.6 rubles to the dollar and almost 51 to the euro.

A Russian circus crocodile was injured when an accountant fell on him. The 120kg bean counter tumbled from her seat as the bus the pair were traveling in took a sharp turn near Murmansk in the arctic north. Fedya ended up vomiting for three hours, although a vet said he had no serious injuries. Despite the tangle with the 2m croc, the accountant got away with a sharp bump and a bruise.



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Vladimir Putin has been accused of wanting to rebuild the Soviet Union; women in the region might well support that dream (were it not for the high levels of domestic violence that the Soviets also bequeathed).

As this week's chart from Grant Thornton shows, alongside southeast Asia, the CIS states lead the way on women in business leadership by some margin.

Globally, Russia (43%) has the highest proportion of women in senior management, a figure that has held fairly stable since 2004, helped by a gender ratio that favours women by 6:5. Elsewhere in in CEE, the Baltics (39%), Georgia and Armenia (both 35%) and Poland (34%) are all well above the global average.

"This can be traced back to the promotion of women in the former Soviet Union," the study claims. "The communist leaders promised ‘equal opportunity for all’, best demonstrated through the promotion of women in the rapidly expanding services sectors, such as health, education and accountancy."

At the same time, it seems likely that the rapid development of market economies is also a factor. The pool of capable candidates to lead businesses is simply smaller, making prejudice an unaffordable luxury, while the old school tie has never existed.

While in developed markets in Europe and the US, the use of quota's is increasing, it doesn't appear to be resulting in more women in boardrooms, with the global average stuck at 24%. A lack of childcare support is likely an issue here, the report suggests.

By way of contrast, in southeast Asia (35%), women tend to have extended families to help out with caring for the kids. Chinese women, meanwhile, likely have both the socialist past and one-child policy to thank.

As it has since 2004, Japan comes bottom of the list, with just 7% of senior management roles held by women. Other patriarchal societies such as India and the UEA (both 14%) also rank in the bottom five.

Ex-Soviet sisters in charge


the Slovak and Ukrainian side," said Tomas Marecek, chairman of Eustream, according to Reuters.

However, the executive added that the volume of gas could come in lower than the capacity. Eustream wants to evaluate bids for booking the pipeline's capacity by the end of June, Marecek said, although initial bids will be for less than full capacity and instead for flows that Eustream will be certain it can transport.

PrioritiesThe lack of enthusiasm is nothing new for Bratislava. Poland and Hungary began pumping gas to Ukraine - which usually transits Russian gas the other way - in 2012. Those flows have only become more important due to the crisis in Ukraine. However, Slovakia - which sits on the main pipeline route into Europe and therefore could make the biggest contribution - has been stalling on a deal for years.

Slovakia has spent recent months alternately warning that it's vulnerable to legal steps from Moscow should it implement the reverse flow on the main route, or busy looking for a technical solution. Officials, from Prime Minister Robert Fico down, have insisted throughout that Slovakia is not delaying the launch of the reversal on purpose.

"We are ready to help them, but any kind of help has its bounds and it is economically limited," the PM said in March. "Slovakia's first priority is to ensure guaranteed and secure Russian gas deliveries through Ukraine to the country."

Eastern Europe

Russia approves Slovak limits on gas to Ukraine

Tim Gosling in Prague

Slovakia and national pipeline operator Eustream continue to prove less than enthusiastic in their efforts to pump gas from the EU to Ukraine, even as the company said on May 19 that the limited reversed route it has set up should be ready to operate at full capacity by the start of September.

Meanwhile, as if to offer Bratislava the Kremlin's blessing, Russian Foreign Minister Sergei Lavrov said Moscow has "no complaints" over the Central European country's agreement to send up to 10bn cubic metres (cm) across its eastern border.

One of its most potent weapons to put pressure on the cash-strapped interim government in Kyiv, Russia has raised gas prices for Ukraine by almost 100%, and has said it will cut supplies unless Kyiv pays its outstanding bill. The EU has been pushing to reverse pipelines that usually run east to west to carry cheaper gas to the country. However, Slovakia has dragged its feet.

Seeking a significant contribution to its annual consumption of about 55bn cm, Kyiv was pushing for Bratislava to reverse one of the mainline pipes that carry Russian gas to Europe. That would have supplied 30bn cm per year. However, Bratislava insisted such a move would break contracts with Gazprom.

On April 26, it announced that it has agreed instead to send 8bn-10bn cm to Ukraine via an unused pipeline. "With 90 to 95% probability, we should be able to ship 8 to 10 [bn cm] per year already as of September 1, depending that certain technical preconditions are met on both


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as a representative of Moscow's interests," the analyst warns.

Moscow apparently understands. Following a meeting with Slovak Foreign Minister Miroslav Lajcak in Moscow, Lavrov sought to offer Russia's support.

"Of course we follow the discussion of the topic of gas reverse to Ukraine from the countries that buy gas from Gazprom, as there are corresponding intergovernmental agreements and there are contracts, and the way the Slovak leadership treats this topic absolutely does not violate such arrangements with Gazprom and the Russian Government, so here we have no pretensions," said Lavrov, according to Ukrainian News.

Eastern Europe

On the one hand, Slovakia is fully dependent on Russian gas and earns large revenue from transiting Russian gas to the west. On top of that, the country's vital auto sector makes significant exports to Russia and, according to the FT, the Slovak military is reliant on parts from Russian suppliers.

However, at the same time as Ukraine has been struggling to persuade Bratislava to help lower its gas bill, the Slovaks have also been renegotiating their own gas contract. Bratislava sealed a 15-year gas price discount from Russia late last month. On April 24, Bratislava extended an oil supply and transit deal with Russia.

At the same time, questions have started to be asked over the role of the Czech business figures that control Eustream. Energy holding EPH - controlled by closely-held financial groups PPF and J&T - bought control in the Slovak pipeline operator in 2013.

In particular, PPF - owned by the Czech Republic's richest man Petr Kellner - is under the spotlight. Kellner has considerable investments in Russia and strong links to the St Petersburg oligarch circle surrounding ICT Group. Meanwhile, J&T is speculated to have close ties with Fico.

SuspicionThe failure to persuade Bratislava and Eustream to play ball puts Brussels' difficulties presenting a united front to Russia's aggression in Ukraine in a nutshell. Moscow is a master at picking off individual member states. A glance to the south sees Bulgaria furiously opposing Brussels' attempts to block South Stream - Gazprom's planned gas pipeline into southern Europe.

Jakub Groszkowski at the Centre for Eastern Studies (OSW) says Bratislava is now being viewed with suspicion. That hints that the agreement on the smaller route is a bid to alleviate pressure from Brussels and Washington. "Slovakia has begun to be viewed


and efforts to destabilise the Balkans". The region is “like vacant ground, where pro-Nato and anti-Nato policies are also coming into strong conflict”.

The Russian foreign ministry said it saw Prime Minister Djukanovic’s characterisation of the situation as “hostile” to Russia. Russian daily Rossiyskaya Gazeta, a mouthpiece of the Kremlin, then weighed in, accusing Montenegro of mistreating Russian compatriots and rumbling on about Russian plans to settle the score by ending a visa-free regime and trade preferences. Such threats have so far proved empty. Neighbouring Albania, a Nato member since 2009, which also agreed to impose EU sanctions, has been spared such bombast.

On the surface Montenegro, with a population of just 600,000, seems in no position to stand up to Russia, especially given its heavy dependence on it economically. As many as 7,000 Russians are permanent residents, while 40% of real estate is in Russian hands and 300,000 Russians a year holiday there. Russians are reckoned to own as much as a third of foreign-owned businesses; setting up a business is one of the key steps for gaining residency.

But Russia may not have the whip hand that these figures suggest. "Djukanovic has been around forever. He is a sly fox. He was around during [Serbian strongman Slobodan] Milosevic's time," says Flessenkemper. "When he has a problem he gets rid of them."

Sanctions against Russia may in fact be a blessing in this, helping to impede any Russian bid to withdraw investment form the country. A tussle over the proceeds from the sale of a bankrupt aluminium smelting plant, co-owned by Montenegro's government and Russian tycoon Oleg Deripaska, has already been in full swing for months.

Eastern Europe

Russia poses problems for Balkans' EU journey

Phil Cain in Graz, Austria

The standoff between Russia and the West since Moscow's annexation of Crimea and continued meddling in eastern Ukraine promises to complicate the already painfully slow and rocky process of the Balkans' journey towards the EU.

"Russia has huge potential for creating disturbances [in the region]," says Tobias Flessenkemper of the European Institute CIFE in Nice. "The challenge for the EU is to stick to the enlargement process."

However, that's a process under scrutiny like never before, Flessenkemper points out. European citizens, already disgruntled at the Eurozone crisis, the bailouts, immigration and the admission of new members with dubious records on aspects like corruption, are set to register their disapproval at the polls with a likely eurosceptic swing in May's European elections.

The past few weeks have shown that traditionally Russophile Balkan nations that cling to their European aspirations can expect a tongue-lashing at the very least from Moscow.

Montenegro would be a “legitimate target of Russian missiles” if it joins Nato, blustered nationalist Russian deputy Mikhail Degtyarev in May, according to Montenegrin website IN4S. Montenegro's stubborn refusal to bow to Russian invective may yet be rewarded with Nato entry in September.

Montenegro's crime in Russian eyes was its March decision to go along with imposing EU sanctions on 33 Ukrainian and Russian officials, some close to Russian President Vladimir Putin. A month later Montenegro's perpetual leader Milo Djukanovic visited Washington and called for a "bold start" on the further expansion of the Euro-Atlantic security zone. He pointed to an "interdependence between the crisis in Ukraine


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like Macedonia, Turkey and Hungary, some doubt Russia can or will carry much sway in the Balkans. "Yes, Russia can occasionally annoy the EU, but only if the EU is not united itself," says Gerald Knaus of the European Stability Initiative, a think-tank focused on Southeast Europe.

In Kosovo, Russian interference is not necessary when five EU members do not even recognise it. And EU divisions over Bosnia's future are also causing enough problems without Russia having to lift a finger. "I do not think Russia has the ability to disrupt EU plans in the long term, but it certainly is able to disrupt," says Florian Bieber, Professor of Southeast European Studies at Graz University in Austria.

A policy study published in May by Bieber's Centre for Southeast European Studies argues the ability of Russia to disrupt Balkan affairs will depend, not only on Russia, but also on the degree to which the EU re-engages in the region.

Eastern Europe

Slavic brothersBeyond Montenegro, Serbs feel the closest emotional bond with Russia among the people of the five Balkan EU-outsiders. The Serbian government has maintained a studied silence on Crimea's independence, ruling out sanctions. Any pro-western statement would mean trouble for newly-elected EU convert Aleksandar Vucic, particularly among the prime minister's own Serbian Progressive Party, which was formed out of a split from the ultra-nationalists.

Milorad Dodik, president of the Bosnian Serb Republic (Republika Srpska) has had no such qualms, hailing Crimea's snap referendum split from Ukraine as a triumph of democracy, and threatening to hold a similar one in Republika Srpska to cede from the hate multi-ethnic state of Bosnia-Herzegovina.

But Serbian-Russian ties may not be all they seem. "Russia does not care about Serbia – they just use them," says Flessenkemper, adding that on the flip side "Serbs do not want to join Russia."

Serbia, he argues, hopes to leverage its diplomatic predicament to "increase the price" when dealing with the EU, which is keen to bring Serbia into the European fold. However, this approach carries the risk of Serbia "derailing" the EU course it has just achieved after making a historic breakthrough over Kosovo, he says. Dodik meanwhile, has applauded independence votes for many years irrespective of Russian backing.

Perpetual EU candidate Macedonia, locked out of the EU for the foreseeable future due to a tedious dispute with neighbouring Greece over its name, could be a long time waiting yet. It is debatable whether or not its leaders are even seriously looking to join the bloc anymore. Recently re-elected Prime Minister Nikola Gruevski has held his tongue on Crimea, but appears to be taking Putin's authoritarian, anti-gay model of governing as a template for exercising power outside the EU.

Paper tigerFor all the diplomatic tiptoeing around and Putin-like political overtones growing in European spots


internal audits as well as external audits from the "Big Four" accountants PricewaterhouseCoopers and Deloitte. He also questions the methodology of the investigators. "All they've done is shown sums of findings in reports," he says. "They've never presented us with materials that show how they've come up with those numbers."

Kapla didn't actually learn about his second travel ban until a colleague, SouthGobi's legal advisor Sarah Armstrong, was stopped at the airport in October 2012 when flying home to Australia. Armstrong was allowed to return home in time for Christmas that year, but she left behind three colleagues from SouthGobi who are still subject to travel bans but have yet been formally charged of any crime.

Then there's a banking consultant for Standard Bank, Chris Bradley, who received a travel ban from November to December last year for what many regarded as only tenuous links to fraudulent documents submitted by Just Group to take out a loan from the bank. Just Group defaulted on its debt following its 2013 implosion, which brought down with it Mongolia's fourth largest bank at the time, Khadgalamj Bank.

While Bloomberg has reported that there are about 50 expats prohibited from leaving Mongolia because of alleged connections to open investigations, Kapla reckons there's tens more. Says Allyson Algeo, a spokesperson for the US

Eurasia

Arrested developments in Mongolia

Terrence Edwards in Ulaanbaatar

Mongolia's vast natural resources have enticed foreign investors to what is still very much a frontier market. Politicians' re-writing of investment rules has been one major risk for intrepid investors, but another more worrying hazard is emerging: arrest and travel bans.

Since the 1990 Democratic Revolution in Mongolia, the country has established itself as a beacon of democracy that outshines the authoritarian neighbours of Russia and China that it is sandwiched between. However, the Mongolian authorities' increasingly liberal use of travel bans on expats is starting to concern many investors and long-time residents of the country.

Take the case of Justin Kapla, a veteran in Mongolia's mining industry with a Mongolian family. Kapla had held the post of president at SouthGobi Sands, the license holder for the Ovoot Tolgoi coal mine in the Gobi desert, for just six months when prosecutors raided his offices on May 8, 2012, investigating illegal dealings with a former head bureaucrat at the Mineral Resources Authority, who was charged and later convicted of corruption. Kapla was banned from leaving the country, though this ban was lifted about a month later, on June 20. However, he received a second travel ban after investigators decided that after looking at SouthGobi's books the company was suspected of evading taxes and laundering billions of dollars.

Kapla denies the accusations, citing as proof


a statement from the company accompnaying its first-quarter results for the year.

From the start, claims Kapla, the authorities have been bending the law to reach a specific goal — proving some kind of wrongdoing by SouthGobi's management. "Basically, all tax cases must originate from the Mongolian Tax Authority's audits," says Kapla. "In this case, it doesn't."

The figures don't add up either. SouthGobi was accused of selling twice as much coal as it reported in 2012, according to Kapla's legal defence, when it reported a loss to shareholders. They also claimed it laundered over $4.5bn during the year, or over a third of Mongolia's 2012 GDP.

But there is still the possibility of civil action, and the travel bans for Kapla and two of his former co-workers remain in place. Meanwhile, Kapla worries about the health of his father-in-law back home and whether or not he'll ever be able to see his grandfather again. "My grandfather is going to be 102. At 102, there aren't many birthdays on the horizon for him," he says.

Australian Didi Anandakalika says she too has faced the situation of Mongolian authorities rushing to judgment against foreign residents after groundless accusations have been made. Having lived in Mongolia for 21 years – enough time to see the wild deer that once roamed the streets of Mongolia's capital pushed out by luxury Hummers and BMWs – Anandkalika has been denied an exit visa since the beginning of this year due to accusations that she embezzled funds from the orphanage to which she has dedicated her life. She denies the charges made against her by colleagues, saying she suspects the intent is a land grab against the orphanage. “I was surprised how many things I can be accused of” without any evidence from the accusers, says Anandakalika. “People can make all kinds of complaints. You have to prove yourself innocent,” she says, noting how little was required to make such a serious claim against her.

Eurasia

Embassy in Ulaanbaatar: "We continue to raise our serious concerns regarding [Kapla's] case with Mongolian authorities and to urge them to resolve any outstanding issues through a fair and transparent process, conducted in an expeditious manner."

The reason for this worrying trend is manifold, say observers. Mongolia's police are gung-ho about rooting out graft due to the strong anti-corruption stance taken by Mongolian President Tsakhia Elbegdorj since he was elected in 2009. Some expats attribute their problems to political motives, as many of the alleged crimes occurred during the notoriously corrupt government of former prime minister Sukhbaatar Batbold, who led the Mongolian People's Party from 2009 to 2012. Many corruption cases that involve foreign companies are related to officials who were in power during that time, as was the case for SouthGobi. There is also a fair bit of mistrust among some Mongolians toward foreign investors due to the widening wealth disparity that occurred during Mongolia's mining boom, as well a general perception that foreigners are plundering Mongolia's natural resources.

Then there are suspicions that the travel bans are being used as leverage in contract disputes. "We are concerned by reports that the Mongolian exit visa system is being misused to pressure foreign investors to settle civil and investment disputes,” says Algeoa of the US embassy. “Such concerns could have a chilling effect on international investors considering whether Mongolia is a viable destination for foreign direct investment.”

Shaky foundationsCertainly, in many cases bne has looked into the evidence doesn't warrant such drastic action as the imposition of travel bans, lending weight to the idea that other considerations are at play here.

Nearly two years after Kapla was first prohibited from leaving Mongolia, a judge on May 12 rejected the case against SouthGobi for tax evasion, arguing it was too weak to proceed, according to


ProtestPereboyev said that the average support for Eurasian integration in the CU member states stood at 68% which was "significantly higher" than support for the EU in its member states which is slightly over 50%. "We can see that Euroscepticism in the European Union is so far not comparable to the so-called Euras-scepticism which we observe in our countries," he said.

He admitted, however, that "Euras-scepticism" is on the rise, adding that it doesn't necessarily concern a country's current or future membership of the CU but rather is about "economic issues". Impoverished Armenia and Kyrgyzstan are fast-track candidates to join the EEU, either at its establishment or soon afterwards.

Kazakhstan's membership of the Customs Union has led to numerous protests since the country joined as a co-founder in 2010. An anti-Eurasian forum was held in Almaty on April 12, while earlier in the year during the "panty protest" against a ban on cheap lacy underwear, female activists were fined for trying to place knickers on the Monument of Independence in the country's biggest city.

The opposition is widening across Central Asia. RFE/RL reported earlier this month that activists from Kyrgyz NGOs held a rally to protest government plans to take the country further into Russia's orbit. They claim Kyrgyzstan's membership in the union will "restrict its political and economic independence". The Kyrgyz protestors say they worry membership will damage trade with countries outside the club, increasing import tariffs, as happened in Kazakhstan.

Some Kazakhs believe membership has been disadvantageous, pointing to figures from the Kazakh Statistics Agency which show Russia's

Eurasia

Euras-scepticism on the rise in Central Asia

Naubet Bisenov in Astana

"Euras-scepticism" is on the rise in Central Asia, as the Russian-led Customs Union prepares to transform into the Eurasian Economic Union, deepening ties and expanding membership.

Polls show that Kazakh support for closer integration with Russia and Belarus is falling, while prominent anti-Eurasian integration activists say they've been questioned by the Kazakh intelligence service ahead of the signing of a treaty that will transform the Russia-led Customs Union (CU) into the Eurasian Economic Union (EEU) in 2015. The treaty is due to be signed at a summit in Astana on May 29.

A panel on the public perception of Eurasian integration at the Astana Economic Forum on May 21 heard that Kazakh support for the CU has fallen steadily from 80% in 2012 to 73% last year, according to the Eurasian Development Bank's (EDB) Centre for Integration Studies. The Integration Barometer study also shows support in Russia fell by 5 percentage points to 67%. Meanwhile, the figure jumped by 5 percentage points to 65% in Belarus.

"This has taken place at the expense of an increase in the number of those polled who are indifferent to their countries' participation in the CU-EEU," the study said. The poll involved 14,000 people in CIS countries, plus Ukraine and Georgia, with up to 2,000 surveyed in each country. Ukraine said it would leave the CIS after Russia's "aggression and occupation of Ukrainian territory" on March 19.

"There will most likely be a further decrease in the support for membership of the Customs Union" in 2014, Vladimir Pereboyev, director of the EDB Centre for Integration Studies, told the panel. "It's hard to talk about specific numbers now" because the opinion poll is still under way, he said, "but we hope the decrease will not be significant".


Eurasia

is blamed exclusively on Russia, whereas all this is not true." He went on to claim Ukraine would "win" from CU accession, but lose "whole sectors of its industry" from integration with the EU.

Meanwhile, Kazakhstan is also seeking to quash criticism of the CU and EEU. The country's KNB intelligence service has reportedly questioned two prominent opponents of Eurasian integration recently. Inga Imanbay and Zhanbolat Mamay told RFE/RL the KNB wanted to head off any protest planned for the May 29 summit.

Mamay, Imanbay and other opponents claim - contrary to the Kazakh president and officials - that the project is a political union. "The Eurasian Economic Union is not just an economic bloc but a political organisation between states," Mamay told bne in April. "This is Putin's dream of recreating the former Soviet Union, bringing Ukraine back into the fold and uniting former Soviet states into the Russian Empire."

share of total exports from the country actually fell - from 8.2% to 7.0% - between 2009 and 2013, while the share of imports rose from 31.3% to 36.2%. That has seen the trade deficit with Russia more than doubled to $11.9bn since the establishment of the Customs Union. The trade gap with Belarus has moved similarly.

Politicised"Euras-scepticism … is a quite new phenomenon," Pereboyev noted, adding that its a "normal process". He suggested the EEU should learn from Brussels, which proactively promotes itself among its own citizens.

Pereboyev admitted that the crisis in Ukraine is helping to depress support for the Russian-led project. "It is impacting the perception of Eurasian integration, but here political issues should be separated from issues of economic integration," he insisted to bne. "The problem is that the situation is getting very politicised and everything


Lithuania seals control of gas industry

it would not be able to pump any gas it imports from the floating facility.

"This strengthens the state's ability to seek energy independence," Finance Minister Rimantas Sadzius said, according to Leta. Prime Minister Algirdas Butkevicius added: "This transaction consolidates Lithuania's position in seeking strategic goals in the energy sector." The PM also said that Lithuania has now chosen an LNG supplier for the terminal, which should be operational at the start of 2015. Talks have been ongoing with Norway and Qatar amongst others.

The confrontational stance towards Moscow looks to be reaping results for the tiny Baltic state. With Gazprom set to lose its total dominance of the market, it agree in early May to a price discount on the gas it sells Lithuania. However, that only applies to the current contract, which runs out next year. Talks on a new deal are ongoing.

For the meantime, Gazprom continues to hold 37.1% stakes in both Lietuvos Dujos and Amber Grid. However, it hinted last year it could sell, especially if Vilnius were to take control. Meanwhile, Lithuania's competition watchdog approved applications from Lietuvos Energija and EPSO-G to be allowed to take over full ownership of the companies.

However, Gazprom may well stall on agreeing a sale while negotiations on the new supply contract are ongoing. Vilnius and Moscow have been stockpiling leverage against one another for some time, and the ownership issue is one of the chips on the table.

Central Europe


Lithuania finalized a deal with E.ON on May 21 to buy its stakes in the country's national gas utility and pipelines. The acquisition gives Vilnius a controlling stake in Lietuvos Dujos and Amber Grid, and is a major step in its ongoing push to gain some energy independence from Russia.

The deal with the German giant has been under discussion for months. Having signed off, state-owned energy Lietuvos Energija will pay ¤63.4m for a 38.9% stake in gas utility Lietuvos Dujos, boosting its holding to 56.6%. State-owned EPSO-G will pay ¤49.8m for a similar stake in national gas transmission company Amber Grid. Russian state-controlled gas exporter Gazprom continues to hold 37.1% stakes in both companies.

As part of the package with E.ON - which like other German utilities has been shedding assets in smaller markets - Lietuvos Energija will also buy 11.8% in power distribution grid Lesto ¤24.1m.

The deal hands Lithuania control over its gas pipelines, as well as the main buyer of gas. That has been a target for the country over the last few years as it seeks to break its 100% dependence on Russian gas. Vilnius leveraged the EU's Third Energy Package regulations to force the unbundling of the pipelines from Lietuvos Dujos last year, despite stiff opposition from Gazprom, which complained of political pressure.

Securing control of the companies is vital for Lithuania's plan to have a liquified natural gas (LNG) terminal up and running by the end of the year. Without control of the country's pipelines,


Central Europe

Hungary's central bank again forecasts exodus of foreign lenders

same time that foreign banks hold around ¤10bn in assets at their Hungarian units.

Orban has previously demanded that the banking sector should be mostly in Hungarian hands. Following up on that theme, Nagy suggested bank ownership should be "diversified". He claimed that Hungary and the Czech Republic are examples of foreign dominance, marking out Slovenia as a good example of local ownership. Ljubljana avoided an international rescue by the skin of its teeth last year, as it was forced to bailout its large state-owned lenders.

No saleThe harsh treatment handed out since he came to office in 2010 - large new taxes, fines and pressure to take on losses on forex loans - was seen as a means to push foreign owners to sell out at bargain prices. However, while several lenders were reported to be mulling an exit late last year, no deals materialized, and the likes of Raiffeisen Bank International and UniCredit Group have since reiterated that they intend to remain.

In November RBI had admitted it was studying offers for its Hungarian unit. However, by January it emerged that it had received just one - a ¤1 bid from the tiny Szechenyi Kereskedelmi Bank - majority owned by the CEO of the Government Debt Management Agency with the state holding 49%. That was revealed as RBI issued financial accounts showing it recapitalised the subsidiary at the end of 2013.

The debacle illustrated the lack of serious suitors in the market, should any of the banks be looking for an exit. The one serious candidate, local giant OTP, has only just returned to talk of acquisitions, having spent the last year or so


Officials from Hungary's central bank claimed once again on May 20 that an exodus of foreign lenders is expected in the coming months. The country's banks however insist they're going nowhere.

Several banks are set to leave Hungary and the number of major lenders in the market is also expected to decline in an ongoing transformation of the sector, Magyar Nemzeti Bank (MNB) director Marton Nagy told a banking conference. "Consolidation has started, although for now it only means a shifting of market shares, but nobody has any doubt that several banks will leave the country," he pronounced, according to Portfolio.hu.

The claim comes a day after the head of the Hungarian Banking Association said that the four or five banks currently in a difficult position will now choose to reduce their size rather than exit the country, despite the fact that they are likely to face a high bill on foreign currency loans. The government said this week that its planned relief scheme for borrowers with forex loans will now be revealed in the autumn.

However, Nagy soldiered on. "There may have been statements to the contrary but we still think there will be fewer large banks on the market," he said. Adding an ominous note, he also warned that the sector will end up with a poor structure if the market is entrusted with its own consolidation.

The central bank, now controlled by Georgy Matolcsy - a close ally of Prime Minister Viktor Orban - said in November that it expects up to half of the country's large foreign banks to withdraw from the market. Nagy suggested around the


Meanwhile, the election in April - which saw Fidesz retain power for another four years - at least passed without additional populist policy, either regarding the banking sector or state fiscal management. The Hungarian economy is also looking much brighter, which should allow lenders to cut losses. The Eurozone is also in recovery - albeit at a slower pace - meaning less pressure on the parent groups to cut investment to subsidiaries or even sell them. With government pressure remaining in Hungary, valuations are likely close to the bottom. All of which suggests any exodus would only come under duress.

Central Europe

in conflict with the government over its policies towards the sector. As bne reported in April, the country's biggest bank is said to now be ready to offer Bayerische Landesbank a route out of Hungary.

The German bank has to sell MKB - Hungary's fourth largest lender - by 2015 to meet the terms of a 2009 state bailout. However, the extent to which OTP's relationship with the government has been patched up and the depth of the bank's appetite for acquisitions is unclear as yet. CEO Sandor Csanyi did, however, suggest recently that he thinks up to five banks could seek a Hungarian exit in the medium term.

DuressWith the major EU banks that dominate the market having reiterated their commitment to the market this year, the claim that they are now set to throw in the towel seems unlikely. A year ago when they faced huge uncertainty in Hungary over government policy, at a group level some were clearly tempted, but when it came to the crunch there were no reasonable suitors or offers. While certain lenders still need to sell - MKB being the prime example - most look to have weathered the storm.

Although the wait for a forex loan scheme drags on, the government is clearly wary of provoking a legal challenge or rocking the economic recovery boat, and the general consensus is that although costly, the eventual programme will not prove to be devastating for the banks. "Our base case," wrote Commerzbank on May 20, "is eventually for a burden sharing agreement between banks, borrowers and the government (the latter through loss deduction against the bank levy) drawn out over a multi-year timeframe."

That outlook is far brighter than the fears that stalked the market last year. At the same time, the delay on a new relief scheme has seen non-performing loans rise dramatically. That ¤10bn portfolio will hardly have budged in the last six months therefore.

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Southeast Europe

Balkan countries seek funds, may delay reforms after floods

Andrew MacDowall in Belgrade

Facing its worst flooding since modern records began, the Western Balkans will need billions of euros to rebuild homes, infrastructure and businesses wrecked by the region’s biggest catastrophe since the end of the Yugoslav Wars. The region's governments might also delay crucial reforms required to fix their feeble economies.

Following a meeting with Serbian Prime Minister Ivica Dacic in Brussels on the afternoon of May 21, European Commissioner for Regional Policy Johannes Hahn promised that money from the ¤500m European Stability Fund (ESF) will be available for Serbia, as a formal candidate for EU membership. Croatia, which joined the EU last year, can also access the ESF, but Bosnia-Herzegovina, which has been worst hit by the floods, will have to rely on other mechanisms.

“Once the most immediate work of getting people to safety and dealing with the emergency has abated, the recovery, in terms of public costs of repairing infrastructure, water and transport links, is where the ESF can help,” Hahn’s spokeswoman Shirin Wheeler told bne. “Serbia as an accession country has a right to access the fund on exactly the same terms as any member state. Bosnia cannot benefit from the ESF, though there is a lot of discussion about how we can help via pre-accession funding and cross-border funds.”

Wheeler emphasised that Serbia and Croatia between then were unlikely to receive all the ¤500m in the fund – which was halved just months ago – but that other EU funding streams might be tapped to support the recovery efforts. “The Serbian

government is open for any kind of international help that can be sent,” a government spokesman told bne. “With the help of the international community, we will repair the infrastructure, hospitals, houses, and ensure power plants run at full capacity – an absolute priority.”

Damage estimatesThe flooding, which started in mid-May after exceptionally heavy rainfall, has so far claimed more than 50 lives in Serbia, Bosnia and Croatia, while 70,000 people have been displaced. The toll may rise further, and on May 21 the banks of the River Sava in Belgrade, downstream from the flooding, were lined with sandbags in anticipation of a surge of water. Many were laid over the previous weekend by the volunteer army that has sprung up through social media.

The damage in Serbia alone totals at least ¤1bn, according to the government, which has been marshalling resources to rescue stranded citizens and protect major power stations that together supply more than half the country’s electricity.

Bosnia’s foreign minister has compared the destruction to that caused by the country’s 1992-1995 war. Some 1m Bosnians are without clean water, and 100,000 homes have been destroyed. Many roads remain impassable, and thousands of landslides have damaged infrastructure and property, while also shifting wartime minefields. Meanwhile, on the night of May 20, 19 convicts escaped from prison in northern Bosnia as guards battled flooding that had filled cells a metre deep with water.


Southeast Europe

“The longer-term economic damage will take some time to assess, but it's already clear that serious damage has been done to the vital transport infrastructure,” says Biju Nair, CEO of ArcelorMittal Zenica, a steel mill that is one of Bosnia’s top-three export earners, and a major driver of foreign investment. “This is a mountainous country, and the main road and rail links inevitably follow the river valleys, where the flood damage is at its worst. Restoring them must be the first priority once the safety and well-being of the people is secured.”

In Serbia, the agricultural sector has been hit particularly hard, with livestock drowning in the floods; the army has been deployed to clear the carcasses as concerns about disease rise. Flooding was diverted around two coal-fired plants with total capacity of 1.12 gigawatts (GW), but the 1.65GW Nikola Tesla A station, which supplies around half of Serbia’s electricity, remains offline.

More than 20 EU countries have contributed equipment and relief workers to Serbia and Bosnia, as have the US, the UAE and Japan, according to the government spokesman. Russia’s controversial Emergencies Ministry (EMERCOM), which maintains a base in southern Serbia, was one of the first on the ground.

The future of reformsThe Serbian government has established a PayPal account to facilitate donations from abroad, an unusual move which the government says allows contributions to be processed without becoming entangled in Serbia’s banking and tax systems.

International support is all the more important because of the countries’ tough economic and fiscal positions. Serbia expects to run Europe’s largest budget deficit this year, at 7.1% of GDP, while Croatia is expected to endure a sixth consecutive year without economic growth. Bosnia’s economy is in even worse shape, already heavily reliant on funding from the EU and International Monetary Fund, some of which has been suspended over political deadlock between ethnic factions.

Serbia’s new government, appointed just over three weeks ago, has a sweeping majority with a mandate for long-delayed reform, including the privatisation of more than 100 companies and an overhaul of the labour code. As well as hitting business and the fiscal position, the disaster may also delay these measures.

But Milan Parivodic, an investment consultant and former minister of foreign economic relations, is more upbeat. “I see that in this horrible situation, there is potential as well in sense that I can unite and motivate people, in combination with very strong government with four-fifths of parliamentary seats, could push through reforms without major negative reactions from any quarter,” he says.

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Southeast Europe

IKEA investigating its past links to Romania's Communist secret police

Andrew MacDowall in Belgrade

IKEA, the Swedish furniture retail giant, has launched an internal investigation into allegations that it was involved in running hard-currency payments to a company controlled by Romania's brutal Communist-era secret police, bne can reveal.

The claims, initially made by Romanian newsportal HotNews.ro, and published internationally for the first time by bne, allege that in the 1980s IKEA ran an "overbilling" operation that channelled cash to a firm run by the Securitate, responsible at the time for torture, assassinations and the suppression of opposition for the quasi-Stalinist regime of Nicolae Ceausescu. Ex-Securitate officials and their allies are widely seen as having continued to wield influence in Romania after the revolution in 1989, and indeed to this day.

IKEA says that its arrangements in Romania in the 1980s were entirely normal for that era, and says that it has yet to find evidence that it did business in breach of its own code of conduct. But the company is not able to deny the alleged arrangement outright.

According to HotNews.ro, for at least two years between 1985 and 1985, 6.2% was added to orders of furniture produced by Romanian export-import company ICE Tehnoforestexport in an "overbilling" operation. IKEA was, and still is, a large puchaser or Romanian-made furniture goods. Of this, 1.85 percentage points were channelled by Tehnoforestimport to a Securitate-run and staffed firm, ICE Dunarea, with the remaining 4.35 points sent to an IKEA account in the former East Germany (the DDR).

The details of this arrangement were uncovered by HotNews.ro correspondent Claudiu Zamfir in the archives of the National Council for Study former Securitate Archives (CNSAS). HotNews.ro admits it "did not find any document bearing signatures of both IKEA and Securitate representatives," and IKEA says that it has found no evidence of a direct link to the Securitate. But Henrik Elm, IKEA's Global Purchase Manager, was unable to refute the claims entirely in an interview with bne.

And HotNews.ro editor Dan Tapalaga is in no doubt of the Swedish firm's culpability for its involvement with the secret police, even if indirect. "ICE Dunarea was one of the most important state companies before 1989, controlled by the Securitate," he tells bne. "The Securitate spread terror among ordinary people, immediately arresting anyone attempting to protest against Ceausescu's regime. Human rights were smashed in the '80s. Doing business with such a state only to increase your profits, helping a criminal communist regime to survive by paying the Securitate, is a shame for a western company. They must be exposed at least for this hidden, shameful economic compromise 30 years ago. People have the right to know and to judge."

Hard cashExperts on Romania during and after Communism say they aren't surprised by the allegations. "Anyone familiar with the nature of the foreign intelligence operations during the Ceausescu era should know that they were meant to serve the regime's voracious appetite for hard currency," Vladimir Tismaneanu, a Romanian-American


Southeast Europe

professor of political science at the University of Maryland, tells bne. "This was the dark world from which many of the influential figures of the post-communist transitions (politicians as well as oligarchs) emerged in Romania and in other former Soviet Bloc countries. In the Romanian case, the Securitate was the "sword and shield" of a particularly grotesque and murderous tyranny."

Tismaneanu cites the torture assassination in prison of Gheorghe Ursu, an opposition activist, for the crime of keeping a diary detailing the state's failings; and the savage interrogation and long jail sentences meted out to protesting industrial workers in Brasov in 1987. "Such terrible facts were known to any decent person who cared about human rights," he says.

Tom Gallagher, an emeritus professor at the University of Bradford in the UK, tells bne that, "it is hard to believe that IKEA was altogether unaware of the ruthless Ceausescu operatives with which it was transacting business… Rather a lot of important European businesses seem relaxed about dealing with autocratic regimes however much they disrespect basic political rules."

While IKEA's Elm defended the company's Communist-era business in Romania and insisted that the company's own investigations had yet to find evidence that company officials knew it was funding the Securitate, he admits that, "the fact that the business referred to took place 30 years ago makes it difficult to get a complete picture".

"We take all matters of this kind very seriously," he tells bne. "We are trying to put the pieces together to get a better picture of how the business was running. The documents we have inside IKEA don't cover all the details that far back

in time, we are trying to find out more details. In the '80s the handling of hard currency and money was not a very easy process."

Elm says that the so-called "overbilling operation" was very common in Communist-era Eastern Europe. He asserts that it was a commission paid on top of the purchase price of the Romanian furniture shared between Technoforestimport as a representative of the suppliers, and IKEA, as payment for the latter's investment in plant and training in Romania, bringing valuable knowledge and technology transfer to the country. "We had only one business partner, Technoforestimport, which set up the [financing] structure, a very normal commission-based structure," he says. "It is nothing confidential."

However, IKEA has come a cropper for its dealings in Communist-era Eastern Europe in the past. In 2012, the company apologised after an independent investigation that it had commissioned found that its suppliers in the DDR had used forced labour, and that IKEA representatives were probably aware that political prisoners were involved. IKEA's code of conduct has been strengthened since the fall of Communism, most recently in 2000, though Elm says that much the same rules applied in the 1980s. "We have the same demands as on every supplier, including a code of conduct – a very, very robust code of conduct – and a very good way of verifying this code of conduct and if there are any dealings that were not in line with the code of conduct," says Elm.

He also cites a list of countries that IKEA will not do business with, though many would say that Ceausescu's Romania, a notoriously egregious abuser of human rights, had as much reason to be on the blacklist as any.


Opinion

Annabelle Chapman in Bratislava

This year’s GLOBSEC security forum in Bratislava on May 14-16 took place under the shadow of the unrest in Ukraine – and its implications for the wider region. We live in a far more dangerous neighbourhood than we previously thought, said Slovak’s foreign minister, Miroslav Lajcak, opening the conference.

Despite the emphasis on European cooperation and unity in the face of the Ukrainian crisis, the rifts between different countries’ positions were easily discernable – even within the Visegrad Group (V4) of the Czech Republic, Hungary, Poland and Slovakia, which forms the centre of the event. Just before the event began, Hungarian Prime Minister Viktor Orban had called for autonomy for Ukraine’s Hungarian minority – a controversial remark which was broadly perceived as a stab in the back for the authorities in Kyiv at a difficult time.

Orban’s position is not new, said Natalia Galibarenko, Ukraine’s first deputy minister of foreign affairs, who was the Ukrainian dignitary present at the forum (Prime Minister Arseniy Yatsenyuk was unable to make it in the end – for understandable reasons). But it is especially striking in this situation, when Ukraine is counting on more constructive support from EU countries, she added coolly, speaking to an audience of European journalists including bne’s correspondent.

The Hungarian prime minister’s position seemed particularly strange when sharing a platform with Donald Tusk, his Polish counterpart, perhaps the European leader who has been most engaged in the Ukrainian crisis. Speaking to the press, Tusk

acknowledged this rift, saying differences are normal but that the important thing is to build a common position.

Ukraine kept coming up at the panels over the three-day forum. In one memorable moment, Ian Brzezinski rejected his father Zbigniew Brzezinski’s controversial idea of the “Finlandization” of Ukraine, saying that would reward Russia for its aggression and betray the spirit of the Euromaidan protests that toppled the notoriously corrupt president Viktor Yanukovych in February.

Possibly one of the most interesting discussions took place at a late-night session on Russia, where one of the speakers suggested that the West had stayed with “The End of History”, whereas for Russia the world is now about “The Clash of Civilisations” - both references to two influential works of political science from the early 1990s. There was something of a consensus that “puny guy” Putin was coming out the winner, having gained the respect of some important leaders around the world.

A parallel session on Afghanistan also received praise. When discussing Nato in the context of Ukraine, it’s important to look at its not-too-distant history – namely Afghanistan, Farkhunda Zahra Naderi, a member of the Afghan Parliament who was among the speakers, told bne afterwards.

While Orban’s unpopular stance caused a stir at the conference, the lasting sense that emerged from the conference, which kept coming up indirectly, was the question of how Germany’s position on Ukraine would develop.

VISEGRAD: A more dangerous neighbourhood than thought


Weekly Lists

Russia seals raft of deals with China bne

Ahead of signing off on a $400bn gas deal on May 21, Russia reaped a bumper crop of investment deals during Russian President Vladimir Putin's trip to Beijing on May 20. The visit is cornerstone in Putin's attempt to realign Russia with the east in the face of the nosedive in relations with the West over Ukraine.

Deals included an agreement by Novatek to supply 3m tonnes of LNG to China, a JV between Sibur and Sinopec to set up rubber plant and an investment of $520m in a Tula Region car plant by Great Wall Motor. China may also take part in the privatization of another stake in Russian oil giant Rosneft, Moscow officials claimed. Underpinnning it all, VTB and Bank of China agreed on national currency settlements.

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.

Poland's stance on its coal industry increasingly difficult to defend bne

When a country's prime minister says that a sector's profits aren't important compared to its social and political benefits, you know you're in deep economic trouble. Polish PM Donald Tusk recently gave that eulogy to his country's troubled coal industry, which lost ¤65m last year and faces a predicted eye-watering loss of ¤846m this year.

The problem for the coal sector is that most of Poland's mines are old and deep. That means that coal is expensive to dig out, and the mines need massive investment to keep them running. A weak market in Europe and more competitive imports are hitting the industry hard, while the EU is pushing for tighter environmental regulation to cut out fossil fuels.

Will EU stand for Energy Union? bne

With tensions rising to Poland's east, Prime Minister Donald Tusk has been calling for the creation of a European energy union that would boost the EU's energy security by giving the member states more clout when dealing with powerful suppliers like Russia's Gazprom. Many at home and in Europe's capitals remain sceptical, however.

So far, Tusk's idea has won the backing of several European politicians. German Chancellor Angela Merkel said that "in principle" she supports Poland's idea of closer EU energy cooperation, though she was less sure about the details.

But Gunther Oettinger, the EU's Energy Commissioner, remains unconvinced. "Gas is a product, not a policy weapon for the EU," he said on May 15. Meanwhile, Oettinger has expressed his desire to play a mediating role in the gas row between Russia and Ukraine, which he hopes to resolve by June 1.

bne:Investor


The Turkish Competition Board on May 21 approved the sale of Turkish vehicle maker BMC to Ethem Sancak, a close ally of Prime Minister Recep Tayyip Erdogan.

Sancak offered TRY751m ($360m) on April 25 to buy the manufacturer of armoured vehicles, trucks and buses from The Savings Deposit Insurance Fund (TMSF). The state fund seized the company from Cukurova Holding last year over alleged overdue debts. TMSF initially estimated BMC's value at TRY958m, but Sancak's company, Es Ayotom, was the only bidder.

In the midst of a sluggish auto sector, the transaction has a political edge. While the sale of BMC to a new owner should solve the short-term cash flow problems, it will also offer an opportunity for the company to fulfil a long-term ambition of PM Erdogan for the development of an all Turkish passenger car.

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.

Turkey approves sale of truck maker to government ally bne

UK electronics retailer to sell Central Europe's ElectroWorld Reuters

Hungary's MOL eyes more retail acquisitions after Eni deal Reuters

Dixons Retail, Europe's No. 2 electronics retailee has agreed to sell its ElectroWorld operations in Central Europe to local specialist NAY. Electroworld operates 26 retail stores across Czech Republic and Slovakia. It made a pretax loss of GBP5.6m on turnover of GBP129m in Dixons' 2013-14 year.

Following completion, which is expected to take place during the summer, and which remains subject to regulatory clearance, Dixons expects to receive a small deferred cash consideration spread over three years.

Hungarian oil and gas group MOL plans further acquisitions to boost its retail market share in central Europe, where an economic recovery is underway and motor fuel sales are rising, MOL's downstream chief told Reuters.

As a part of the strategy, MOL, which has more than 1,700 filling stations in central Europe and the Balkans, signed a deal earlier this month to buy the Czech, Slovak and Romanian units of Italy's Eni, including 208 stations.

With the European refining market set to remain depressed due to excess capacity, MOL wants to expand its retail network, possibly adding several hundred more filling stations this year, Executive Vice President for Downstream Ferenc Horvath said.

bne:Deal



Weekly Lists

IHS downgrades Ukraine's banking-sector risk rating to Extreme category IHS

The IHS Banking Risk Service has downgraded the risk rating on Ukraine's banking sector to 75 from 65 on the back of increasing multiple risks amid a weakening economic environment, political turmoil, and fear of civil war or war with Russia.

The sector's very high risk of capital depletion, in combination with lingering liquidity concerns, mounting credit risk pressure, and numerous qualitative risk indicators, puts Ukraine's banking-sector risk rating in the bottom of the emerging-market banking sectors under our coverage.

Given expected significant weakening of the economic environment, continuation of political turmoil, and fear of civil war or war with Russia, the likelihood of further adverse pressures building up in the banking sector is elevated, which would lead to a further increase in the final risk rating score in the next 12 months, as reflected by the Negative outlook on the rating.

Erste lashes out at "political" ECB stress test design Bloomberg

Vietinbank seeks Prague outpost Radio Praha

Erste Group Bank said it will fight a "political" design of European regulators' bank stress tests, which it said favors southern Europe.

An exam designed by the European Banking Authority this year will test how well banks can withstand an economic crisis that is the bleakest scenario ever simulated by European regulators. The test, for instance, simulates a 10.1% GDP decline in the Czech republic, compared with a 6.1% fall in Italy.

"Why is the southern European region much less affected than the Czech republic or Croatia?" Chief Executive Officer Andreas Treichl said at Erste's annual general meeting. "There has been a dramatic political intervention. I don't want to indulge in fantasies about it, but to me this all seems very illogical and not right, and it will be one of our tasks in the next weeks and months to fix this."

One of Vietnam's biggest banks is looking to make its debut in the Czech Republic. Vietinbank wants to open a Prague branch as part of a European expansion also taking in Poland and the United Kingdom according to bank's 2013 annual report.

Vietinbank, which is around two thirds owned by the state, is seeking to provide services for the Czech Republic's substantial Vietnamese minority as well as commercial relations between the two countries which are expected to take off in coming years.

bne:Banker



Weekly Lists

EM recovery to boost further rebound for bonds Danske Bank

There are still very serious concerns about the situation in Ukraine and over the past month violence has escalated further. There are also still serious concerns about Chinese growth. However, it seems as though investors are now willing to believe in the EM recovery and overall Emerging Markets have continued to rebound over the past month.

The major changes to our allocation this month is mostly for Turkey and South Africa, where we moved Turkey to overweight and South Africa became even more overweight. We became further overweight on Hungary. We kept Russia as still strongly underweight.

S&P raises Romania to investment grade bne

Russia retains budget rule for 2014 Alfa Bank

Standard & Poor’s on May 16 raised Romania to investment grade for the first time since 2008, reflecting the government’s success in bringing down external debt and reining in public spending. While Romania is already visibly experiencing reform fatigue, growth rates will likely continue to outstrip most of Emerging Europe and maintain the country's position as one of the region's most favoured investment destinations.

The international rating agency said it raised Romania to 'BBB-', the lowest investment grade. Romania’s success in shedding its junk rating after more than five years follows a strict austerity programme, with S&P saying that the upgrade “underlines our view that progress toward consolidating the fiscal accounts and bolstering financial sector stability will continue”.

A new IMF programme and some steel in the government's political will has seen the country’s economy grow quickly and its stock market soar. Romania is now being pegged as successor to Turkey as the new darling of international investors.

The Finance Ministry updated the 2014 budget draft, incorporating the new ruble exchange rate that is RUB3/$ weaker than previous expectations. The new budget includes an extra RUB 0.8 trillion in revenues (1% of GDP) and an unchanged 5% YoY spending growth plan.

Each RUB1/$ depreciation boosts annual budget revenues by RUB200-300bn, while the opportunity to tackle the National Welfare Fund (also discussed in the media recently) will allow staying within the initial budget spending plan this year, and retaining the budget rule. As a result, we reiterate our $110/bbl breakeven expectations for 2014; however, the upcoming discussion on the budget for the next three years remains a concern.

bne:Credit



Emerging markets stocks advance to six-month high Bloomberg

Emerging market stocks rose to a six-month high on May 19 as India’s benchmark gauge soared to a record and Russian equities rose, offsetting declines in China and Brazil.

The Sensex Index added 1 percent, while the rupee appreciated 0.3 percent on bets India’s new government will take steps to revive the economy. Russia’s Micex rose to the highest since late February as Gazprom posted a record-long streak of gains.

The MSCI Emerging Markets Index increased 0.4 percent to 1,035.62. Narendra Modi’s Bharatiya Janata Party swept to power on May 16, putting him in a position to bolster Asia’s third-biggest economy. Russian President Vladimir Putin’s visit to China this week is helping spark the longest rally in Gazprom since 2006 on bets the leader will return with a long-sought gas supply agreement.

Weekly Lists

Hungary's Wizz Air revives bid to list in London bne

Banks shortlisted for Slovak Telekom sale bne

Wizz Air Holdings announced on May 22 that it is to revive plans to conduct an IPO on the London Stock Exchange in June. CEE's biggest budget airline hopes to raise around $200m through the sale of new and existing shares.

The capital raised in the float will be used to expand routes in CEE and further to the east. That will see it chasing underserved markets with a growing appetite for flying, rather than fighting for a European market still in the doldrums.

Hungarian flagcarrier Malev was one of several European airlines to bite the dust during the crisis when it folded in 2012. That allowed Wizz Air to swiftly step in to boost its capacity at Budapest airport, and the struggles of flagcarriers in the Baltics, Poland and Czech Republic have only strengthened its hand.

Citigroup and JPMorgan were shortlisted to advise Slovakia on a ¤1bn sale of the country's largest phone company, Bloomberg reported on May 19.

The government's National Property Fund will by the end of May pick one or both banks to advise on the sale of a 49% stake in Slovak Telekom, a spokeswoman said. The sale will be completed by the end of the year.

Deutsche Telekom owns 51%. The government prefers to sell its shares in an IPO as the German operator has a pre-purchase right if a direct sale to an investor is chosen.

bne:Stocks


bne newspaper may 23 2014

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