bne:Newspaper - February 27, 2015

February 27, 2015 www.bne.eu

Moody's downgrades Russia to junk rating

The Ukrainian authorities are battling to prop up the hryvnia, without having the reserves to intervene in the market, as the currency slides closer to a full meltdown.

The hryvnia continued its roller coast ride all week, collapsing on February 23 and 24 towards the UAH32 to the dollar mark, a 50% devalution since the start of the year. On February 25 the National

Ukraine central bank blames illicit forex outflows for hryvnia’s slide

Moody's Investors Service on February 20 downgraded Russia's sovereign debt rating from investment-grade Baa3/Prime-3 to speculative Ba1/Not Prime (NP) with a negative outlook. It was the second rating agency downgrading Russia's rating to junk after Standard & Poor's, which will mean that some international funds will not be able to hold Russian debt.

Russian Finance Minister Anton Siluanov called the downgrading “beyond reason” and "guided primarily by political factors”.

Moody's said the move was driven by the continuing crisis in Ukraine, coupled by oil price and exchange shocks undermining Russian

Bank of Ukraine pulled the emergency brake, effectively closing down the interbank market that determines the official exchange rate. But the same day it withdrew the rule after a political outcry. The exchange rate then fall back to UAH28 to the dollar on February 26, and on the morning of February 27 moved again past the UAH30 to the dollar mark.

See page 4

See page 2

Graham Stack in Kyiv

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The surprise move on February 25, to prohibit banks from purchasing hard currency for their clients for three days, did stop the hryvnia's fall, but it provoked a political storm, since it contradicted the conditions for a $17.5bn bailout from the International Monetary Fund (IMF), as it requires that Ukraine has a market-based exchange rate.

The NBU's move wreaked havoc on financial markets, with spreads widening to as much as UAH10 between asking and selling price for cash dollars. The regulator was left as the only purchaser for hard currency revenues that Ukraine's exporters have to sell domestically. It caused the average weighted exchange rate to spectacularly leap UAH10 in the course of the day to UAH21.7 to the dollar.

At the same time, the black market rate dropped towards UAH40 to the dollar. Retailers of import goods questioned by bne IntelliNews were adjusting their prices according to an exchange rate of UAH38-40 to the dollar, the price quoted on the black market.

The NBU's unilateral move provoked a furious reaction from Prime Minister Arseny Yatsenyuk. "The National Bank of Ukraine on its own, as always, with no consultations whatsoever, made a decision to close the interbank foreign exchange market, which will definitely not add to the stability of the currency, which is what the National Bank is responsible for," he said.

Yatsenyuk demanded a meeting with President Petro Poroshenko and NBU head Natalia Gontareva for the latter to explain the situation.

Following the meeting with top government officials, Gontareva backtracked on the controversial rule announced in the morning.

She said that the market had “misconstrued” the rule, and that the NBU had never intended a blanket ban on banks from buying hard currency for their clients, except in the case of advance payments on import contracts.

The NBU on February 24 had already targeted one of the oldest tricks in the book – moving hard currency out of the country under the guise of advance payments for import contracts. Exporters with large hard currency revenues, of which they are required to sell 75% on the market, are currently using fictitious import contracts with advance payment conditions to circumvent these strictures, Gontareva alleged. The NBU will now check individually all import contracts requiring advance payment, and any advance payment of over $500,000 will require a letter of credit from a foreign bank which has an international investment rating.

“It is business, not individuals, that are negatively influencing the market,” Gontareva said on February 24, as quoted by Finmaidan. “Importers and exporters are using import contracts with advanced payment conditions to export capital, and this is what is putting pressure on the foreign currency market,” she alleged. “All operations with advanced payments will be checked for legality and correctness,” Gontareva warned.

Both Jaresko and Gontareva claimed that there were no fundamental reasons for the hryvnia collapse since tight controls were removed on February 6, triggering a devalution of around 50%. Gontareva called the market's behaviour “speculative” and “irrational”, while Jaresko said that it was “driven by emotions”.

Gontareva said that Ukraine could receive as much as $8bn from the IMF in 2015 alone. In email comments to Bloomberg on February 25, the IMF said the programme would be “heavily

Ukraine central bank blames illicit forex outflows for hryvnia’s slide

February 27, 2015 businessneweurope I Page 2

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front-loaded, including a significant initial disbursement.”

Ukraine desperately needs the IMF funds after international reserves fell to $6.4bn in January 2015, comprising around three weeks' export cover, down from $17.8bn in January 2014.

Jaresko said that the IMF's board would meet on March 11 to consider Ukraine's request for an Extended Funding Facility. “We should receive the first tranche some days after the IMF takes the relevant decision," she added.

Ukraine's parliament is currently debating amendments to its budget for 2015 to reflect IMF conditions. Jaresko said that the parliament would vote on the package on March 3, and all parties in the governing coalition had declared their support. The 2015 budget is based on an exchange rate of UAH21.7 to the dollar.

According to sources quoted by Bloomberg, one remaining risk to the IMF deal is a major escalation of hostilities in East Ukraine, including open Russian intervention.

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and downward pressure on the exchange rate and the balance of payments.

The agency expects fiscal and foreign exchange buffers to erode further, despite planned fiscal measures currently taken at face value. Consolidated government deficit is expected at RUB1.6 trillion (2.6% of GDP in 2015), while the non-oil deficit is expected to widen, which would be financed by drawing from the Reserve Fund.

If the recession persists into 2016 and the government has to turn to the domestic market to finance at least a share of the deficit, the debt-to-GDP ratio could increase to 20%. Sovereign FX assets of the central bank and the government are expected to more than halve from approximately $330bn as of end-2014 due to continued capital flight and restricted access to international capital markets.

Moody's downgrades Russia to junk rating

economic strength and medium-term growth prospects. Moody's also saw the government's financial strength diminishing under fiscal pressures and continued erosion of FX reserves in light of ongoing capital outflow and restricted access to international capital markets.

Finally, although still very low, the agency sees rising risks of an international response to the conflict in Ukraine triggering Russian authorities to directly or indirectly undermine timely servicing of external debt.

The negative outlook reflects potentially more severe economic and political shocks, related either to the conflict in Ukraine or a renewed decline in oil prices, further undermining Russia's public and external finances.

Moody's expects a deep recession in 2015 and continued contraction in 2016, with decline in confidence and incomes constraining domestic demand and exacerbating “already chronic” underinvestment. The agency does not believe that policymakers will be able to address the multi-faceted dilemmas of a falling exchange rate, large capital outflows, declining economic activity, and rising inflation.

Monetary authorities face conflicting objectives of keeping interest rates high enough to restrain exchange rate decline and curb inflation, and low enough to support growth and banking solvency. Rapid key interest cuts are expected to heat up currency depreciation and inflation, further weighing in on purchasing power.

Meanwhile, and despite preparing budget consolidation strategy at lower oil prices, fiscal authorities will remain inherently vulnerable to new volatility that might trigger fresh capital flight

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The Regions This Week

Hungary's Fidesz lost its parliamentary supermajority after a byelection defeat. Zoltan Kesz, an independent supported by the leftist opposition, won the vote in the town of Veszprem on February 22. The ruling party will still likely be able to push through constitutional laws should it wish, but the result is seen as symbolic of recent protests against the authoritarian government.

The EU is reportedly seeking to block Hungary's nuclear plant deal with Russia. Brussels is probing the ¤12bn deal to expand Paks on state aid grounds and the legality of contracts awarded to Rosatom and its affiliates without a tender in December.

Lithuania signed a deal to pipe gas through Latvia. The agreement sealed by Litgas – operator of Lithuania's new LNG platform – with Latvian grid operator Latvijas Gaze is a step towards its ambition to create a regional market and offer an alternative to Russian supplies.

Political scraps continue to dog the Czech Republic ahead of a party summit of senior coalition partner CSSD. Powerful finance minister Andrej Babis – head of the country's leading party Ano – is fighting CSSD trade minister Mladek over the Czech Export Bank's return to funding exporters to Russia.

Hungary's TV advertising revenue rose for first time in five years in 2014, a survey suggests. The revenue growth comes amidst Budapest's controversial tax on media, which is based on revenue from advertising.

Central EuropeRussia's Sberbank is reported to be selling its Slovak and Hungarian units. The state-controlled lender is thought to be struggling to fund the businesses due to EU sanctions. Penta, OTP and Unicredit are said to be eyeing Sberbank Slovakia.

Riga has confirmed EU fund Marguerite is its preferred bidder for E.ON's Latvijas Gaze stake. Riga does not want to see a Russian buyer of the 47% stake in Latvia's gas monopolist, the economy minister said. Gazprom controls a majority in LG, meaning it has a veto on a regional Baltic gas market due to its control of the country's pipelines.

Slovakia has called an energy security summit for February 27 after Russia threatened to cut gas to Ukraine, and warned it could hit EU importers. The government will meet with gas supplier SPP and TSO Eustream to assess the threat.

Hungary's Wizz Air priced its London IPO towards top of its range at £11.50 as it reported strong demand. The listing comes after two aborted attempts in as many years. The company now aims to raise a total of £257mn, although £154mn will go to current shareholders.

London listed San Leon hopes to resuscitate Polish shale gas dreams as it reported it is on the verge of its first commercial flows. The company reported "highly positive well test results" for its Rawicz-12 well. The announcement saw San Leon shares spike by as much as 67%.

businessneweurope I Page 5February 27, 2015

Southeast EuropeThe Bank of Albania has approved the appointments of several new heads of department. The bank was the subject of a wide-reaching investigation in 2014 after thefts of more than ¤5mn in cash were uncovered and several key officials have since been dismissed.

Bulgaria's parliament adopted the ¤8bn Global Medium Term Note (GMTN) programme proposed by the government, on February 25. The new debt will be used to repay maturing obligations and finance budget deficits between 2015 and 2017.

Zagreb has selected Barclays, Erste Group, JP Morgan and UniCredit to arrange Croatia’s sovereign Eurobond issue. Croatian Finance Minister Boris Lalovac said in January the country wants to raise around ¤1bn.

Croatian oil and gas company INA is expected to restart production at its Sisak refinery in April, Reuters reported on February 25, quoting Economy Minister Ivan Vrdoljak. The processing of domestic oil at Sisak was temporarily suspended on January 14 due to “depletion of domestic crude stock”, INA said at the time.

The European Commission (EC) said on February 25 it will decide in May if it activates the excessive imbalance procedure (EIP) for Croatia. Croatia is experiencing excessive macroeconomic imbalances, which require decisive policy action and specific monitoring, the EC in a statement.

The Kosovan government approved its programme for 2015-2018 at a meeting on February 25. The programme sets out Prime Minister Isa Mustafa’s government’s vision for the next four years. Its focus is on economic development, effective governance and strengthening of the rule of law, according to a government statement.

The first part of an economic stabilisation and recovery programme in Transnistria is due to be

completed by March 1, the Moldovan separatist republic’s Economic Development Minister Alevtina Slinchenko said on February 24. Budget revenues in the first two months of 2015 dropped by 70mn Transnistrian rubles compared to the same period of last year.

Medicine sales increased in Romania in 2014, but the sector faces rising systemic risks following the government’s decision to enforce an existing healthcare ministry order that would result in a lower cap on medicine prices, according to market research company Cegedim. Bucharest says some medicines cost 25% more than in other European countries.

Romania’s government plans to approve the revised Fiscal Code in a second reading around March 18-25, Prime Minister Victor Ponta told a government meeting on February 25. Both opposition parties and the International Monetary Fund have criticised the planned revisions.

Turkish state-owned lender Halkbank is expected to become the owner of its Serbian peer Cacanska Banka in the coming ten days following lengthy takeover negotiations, Serbian Trade Minister Rasim Ljajic said on February 25. Halkbank is reportedly offering over ¤10mn for the 76.6% stake on sale.

The European Bank for Reconstruction and Development plans to approve financing for new projects worth between ¤100mn and ¤200mn in Bosnia in 2015, according to the head of the bank in the country, Ian Brown. The EBRD plans to provide financing to 10-20 projects.

On February 24, oil and gas company INA said the Croatian economy ministry has again revoked its exploration licenses in the Drava area, which were restored under a High Administrative Court ruling in January. The decision will put additional pressure on the already tense relation with INA’s other major shareholder, Hungary’s MOL.



Eastern EuropePutting the shivers up Europe? Russian President Vladimir Putin threatened to cut off natural gas supplies to Ukraine within days if Kyiv did not immediately prepay sufficient volumes. Putin and senior Gazprom officials warned on February 25 that halting gas flow to Ukraine could also affect transit supplies to other European customers.

Meanwhile, the number of smokers in Russia fell by 17% since judo black belt Putin put a choke hold on one of the nation’s favourite vices in 2013. Legislation inked by the Kremlin boss banned smoking in public places, required graphic warning labels on cigarette packs and prohibited advertising of tobacco products. But despite the assault on smoking, not to mention Russia's double-digit inflation rate, latest polling by the Levada Center shows Putin’s approval rating at home has hit a record 85%.

Other Russian ratings are not faring so well. Moody's Investors Service downgraded Russia’s sovereign debt rating on February 20 from investment-grade Baa3/Prime-3 to speculative Ba1/Not Prime (NP) with a negative outlook. It followed Standard & Poor's downgrading to junk. Finance Minister Anton Siluanov denounced the move as being "guided primarily by political factors”.

The Ukrainian hryvnia became caught in a public tug-of-war between the government and central bank. After a 50% devaluation of the currency over the past month, the National Bank of Ukraine on February 25 prohibited banks from buying hard currency for clients for three days. The move was reversed the same day after the government rebuked the central bank for contravening terms of a $17.5bn bailout expected from the IMF. The hryvnia is now rated as the world's worst performing currency.

As the hryvnia convulses, the National Bank of Ukraine also capped foreign currency payments at $500,000 to limit outflows. The decision only

affects business entities, but companies with a letter of credit from foreign banks are exempt.

It wasn’t all bad news for Ukraine. The European Investment Bank (EIB) is ready to allocate $1.1bn in additional funding to Kyiv in 2015. Bank President Werner Hoyer says the European Council has also agreed to double the EIB's investment in Ukraine from ¤1.5bn to ¤3bn over the next three years.

Ukraine will in March launch a television channel called ‘Ukrainian Tomorrow’. Partially funded by US sources in an effort to counterbalance the Kremlin-funded network Russia Today, its strategists feel the project cannot fail to get the upper hand over the Russians: “They have only today, but we have tomorrow,” says Minister of Information Policy Yuriy Stets.

While often still dubbed ‘Europe’s last dictatorship’, Belarus attracted $11.2bn of foreign direct investment in 2014. Russia remains the biggest investor (44.7%), followed by the UK (22.5%). Most of the money went into retail and transport. Despite its negative international image, Belarus’ developing economy has produced a middle class that presents an attractive investment target. Most of the money (87.7%) was invested in the form of debt.

The demand for Russian assets has surged as the price of Brent crude rebounded 32% from a six-year low on January 13, leading Russian equities and the ruble to rally the most in the world in February. Corporate bonds returned 6.2% in the past month, the best performance among emerging markets except Venezuela. But sovereign-bond yields fell to the lowest level since December 11.

Russia's state-controlled Sberbank is reportedly preparing to sell its Slovak and Hungarian units. The largest Russian bank had suggested in December that its strategy would change due to worsening market conditions. But as yet there are no buyers are in sight, sources say. Sberbank’s operations in Czech Republic will not be touched.



EurasiaBeeline Uzbekistan’s 2014 Ebitda stood at $461mn, up 33% from a year earlier, as revenues grew by 7% y/y to $718mn. The controversial Uzbek subsidiary's performance was the best among Vimpelcom telecom group's Central Asian assets in 2014.

China Machinery Engineering Corporation (CMEC) will build a $20mn chemical plant in Uzbekistan. The facility will produce 240,000 tonnes per year of synthetic fertilisers. Works will wrap up by the end of 2015.

Centerra Gold has agreed that the Kyrgyz government will get a 50% share of the 2014 profits generated by Kumtor, the country’s largest gold mine it operates. Operating profit margins at Kumtor fell by 25.95% y/y to $250.1mn in 2014 because of decreasing production and sales prices.

Kyrgyzstan has announced a new tender to develop the Jerooy mine, considered the country’s second largest gold mine after Kumtor. Jerooy is thought to hold 80 tonnes of gold. A tender was already called in 2013, but no bids had been received as the $300mn starting price was considered too high by the industry. This time a minimum bid was set at $100mn. Interested parties have time until March 23 to submit their bids.

Bank deposits stood at KGS81,917bn ($1.34bn) in Kyrgyzstan at the end of January, up 16.5% y/y from a year earlier. Deposits in foreign currency grew by 33.8% y/y to KGS46,308bn in the period, and deposits in soms increased by 3.2% y/y to KGS35,608mn. The weakening som has prompted depositors to convert their savings to foreign currency fearing a further devaluation of the som.

Remittances Tajikistan received in 2014 decreased by 8.3% y/y to $3.9bn. Remittances from Tajik migrants working abroad, mostly in Russia, were equivalent to 45.6% of 2014 GDP,

confirming the country as one of the world’s most dependent on remittances.

Rio Tinto-controlled Turquoise Hill Resources has agreed to sell its stake in a Mongolian coal miner to Chinese investment firm Novel Sunrise. Turquoise Hill will sell its 22.27% stake in SouthGobi it still owns to Novel Sunrise at a price of CND$0.35 per share, which represents a discount of over 37% on the shares February 24 closing price.

Mongolia’s trade surplus reached $225.4mn in January, up from a $15.9mn deficit a year earlier, thanks to growing copper exports at flagship mine Oyu Tolgoi. Exports of copper concentrate grew by 111% y/y to 133,000 tonnes in real terms in January, and by 179% to $268mn in monetary terms as Rio Tinto-operated Oyu Tolgoi, which came online in July 2013, reaches full capacity.

Mongolian President Tsakhiagiin Elbegdorj has pardoned three former employees of coal miner SouthGobi Resources who had been convicted on tax charges in January. A US citizen and his two Filipino colleagues were granted the presidential pardon following an official request by Filipino President Benigno Aquino.

Chinese sea port Lianyungang and Almaty, the financial hub of Kazakhstan, have been linked by a direct cargo train service. The first train of around 100 containers left the seaport and is expected to reach Almaty in 12 days. In 1995 Kazakhstan and China agreed the use of the Chinese port of Lianyungang for cargo traffic.

Kazakh refineries will meet the country’s fuel demand in 2017, according to the government. Following the completion of the upgrading of refineries will increase oil refining by 29.4% to 18mn tonnes per year. Kazakhstan imports annually 1.7mn tonnes of petroleum products from Russia to satisfy internal demand and regularly faces fuel shortages.



bne Chart

A recent note by Ukraine-based investment firm Concorde Capital paints a worrying picture for the near future of Ukraine’s struggling economy.Currency weakness, inflation levels, as well as contractions in industry and manufacturing output have all worsened in 2015, following already poor figures in the final months of 2014.Since the beginning of the year, the hryvnia’s official rate has fallen against the dollar by more than 1.5 times, or by UAH9.79, to UAH26.05 per dollar.

An inflation forecast of 26% – up from an initial 13.1% – means that a nominal GDP increase of 20% on year will still see the overall economy of Ukraine shrink by 7% in real terms this year.The decrease in overall output is not, however, solely attributable to inflation. According to the State Statistical Service of Ukraine, the fourth quarter of 2014 saw a year-on-year contraction of 15.2% in GDP – a figure which excluded the Crimea, Donetsk and Luhansk areas, which are still mired in conflict despite the recent signing of a ceasefire agreement between Ukraine and the pro-Russian separatists.

Industrial production in Ukraine also saw a January fall of 21.3% on year, following December’s 17.9% year-on-year fall. Month-

on-month figures in January present an even direr picture, with industrial output contracting by 19.7%– a massive worsening from the 2.1% month-on-month contraction seen in December.The ominous outlook for Ukraine comes at a vulnerable time for the ex-Soviet republic. As the bne:Chart below shows, foreign exchange reserves are dangerously low, currently well beneath the minimum recommended level of three months of import cover.

Increasing levels of indebtedness are also a serious cause for concern, with gross external debt for the last quarter of 2014 at 82.9%. This figure will only increase in the first months of 2015, as a recent agreement between Kyiv and the International Monetary Fund over a $40bn funding package demonstrates.

Things to get worse before they get better for Ukraine economy

2009 2011 2013 2015

5.0

10.0

15.0

20.0

25.0

Hryvnia rate to the US dollar: 2008-present

Source: Oanda

4.9

26.5

2009 2011 2013 2015

10K

20K

30K

40K

$ m

illio

ns

Total reserve assets and import cover: 2008-present

Minimum recommendedlevel of reserves

* Total reserves

Source: State Statistics Service of Ukraine

2008

2009

2010

2011

2012

2013

2014

60.0%

70.0%

80.0%

53.7%

75.5%77.4%

74.0%

80.0%

82.9%87.1%

Gross external debt to GDP: 2008-present (%)

Sources: CEIC Data; Concorde Capital


currently at around 15% in 2015,” Shalayskiy tells bne IntelliNews.

“In 2014 two islands of corruption in state procurement remained – that was [state-owned gas producer]Ukrgazvidobuvanie and Ukrainian Railways, despite having new CEO's appointed after Maidan,” says Shalayskiy. “But in both cases the new CEOs have been fired and in the first case arrested. Now there is a chance that in both companies corruption can be stamped out.”

Apart from public procurement fraud, anti-corruption efforts have also eliminated numerous rent-seeking schemes - where legal red tape creates profitable business for private structures linked to officials, says Shalayskiy. Thousands of such schemes existed covering the whole spectrum of state regulation, and many are now being eradicated.

Shalayskiy lists a number of such “schemes” that had existed for years but are now ended: the requirement for cargo ships entering port to have ballast water certified as clean before shedding it; appointments as official suppliers of car licence plates; appointments to sell property confiscated by the state in lieu of taxes.

“If we can describe a scheme accurately, and get support from anti-corruption MPs, it gets closed down very quickly,” says Shalayskiy. “We

Eastern Europe

Tide turns against corruption in Ukraine one year after Maidan

Graham Stack in Kyiv

One year after opposition protests ousted Ukrainian president Viktor Yanukovych, the fight against Ukraine's endemic corruption has begun for real – and the tide has started to turn.

“Corruption has not been eliminated since Maidan but it has been noticeably driven back where it was most visible,” says Oleksa Shalayskiy, founder of NGO Nashi Groshi, - meaning 'Our Money' in Ukrainian.

Allegations of spiralling corruption under the administration of Yanukovych fuelled opposition protests that rocked Kyiv in the winter of 2013-2014 and led to his ousting on 22 February 2014. One year later, corruption remains endemic - Transparency International ranked Ukraine as the world's 28th most corrupt country out of 175 in 2014 - but the tide has started to turn, say campaigners.

Nashi Groshi has been on the front line of the fight against corruption in Ukraine since 2011, monitoring public procurement by comparing prices paid by state organisations and companies with market prices, and establishing links between the winners of rigged tenders and state officials.

“We see clearly in public tenders – the size of kickbacks has fallen from around 50% under Yanukukovych to 35%-40% in 2014, and is


Eastern Europe

celebrate roughly one success per week, where documenting a corrupt scheme leads to the firing of the official responsible. Law enforcement officials have even started to come to us for help in investigations,” he adds.

Shalayskiy acknowledges that corruption remains strong in the hidden sectors, where NGOs such as Nashi Groshi have no access to data. This include the tax and customs services and the state treasury. Black market schemes for tax evasion continue to operate with the suspected collusion of tax officials. “Every businessman knows the names of the platforms providing such services,” says Shalayskiy. Kickbacks are also still required for exporters to have VAT returned, as well as for suppliers to the state to receive payment from the treasury.

The other sphere where corruption remains unchanged, says Shalayskiy, is the everyday level of policing, education and medicine. “This is the reason people feel that nothing has changed in the country, because they still may have to pay bribes in everyday life. The fact is, doctors, teachers and policemen cannot afford not to be corrupt – if they cannot supplement their income with informal payments, they will have to quit their jobs and find other work.” Entry-level state employees – even with many years of university education in the case of doctors - are paid around UAH2000 per month, which after Ukraine's currency collapse is now only worth around $70. “No one can live on that salary,” says Shalayskiy.

Transparency International's Andrei Marusov likewise believes that while corruption remains immense in Ukraine, there has been progress since Maidan in creating institutions to combat it:“The creation of the National Anti-Corruption Bureau, the National Agency for Anti-Corruption and a number of legal amendments, for instance increasing jail time for corruption offences, are all milestones, meaning that the tools to fight corruption will soon be available,” says Marusov.The greatest hopes rest on the National Anti-Corruption Bureau (NAB), which will start

work later in the year. The NAB is tasked with investigating corruption among top office holders, with law enforcement obliged to act on its findings.

Its success will depend on the reputation and independence of its head, but there are difficulties finding a suitable candidate within Ukraine, says Marusov.

Ukraine is now holding a competitive application process for the position, open to all comers – in itself a small revolution - with 161 applications received, and sessions of the application commission streamed online. The appointment commission will select the three most qualified candidates, and President Petro Poroshenko will then nominate one of these to parliament for approval as head of the NAB.

Transparency International examined the applications of five leading Ukrainian contenders for the position and found major deficiencies in all five – ranging from past connection to corrupt schemes, to most of their income being declared as earned by spouses “And these people are our top contenders for the position of chief anti-corruption official,” laments Marusov.

Perhaps for this reason, the candidate believed preferred by President Petro Poroshenko is Georgian David Sakvarelidze, a member of former Georgian President Mikheil Saakashvili's team of reformers, who was made deputy prosecutor general on February 16.

Because many qualified Ukrainians have a chequered past, under Poroshenko's watch around a dozen reform-minded foreigners have been named to top posts or given adviser status. Four Georgian deputy ministers are to be appointed alone to the justice ministry, following Georgian appointees to the health and interior ministries. Poroshenko named Saakashvili himself presidential adviser and head of the Advisory International Council for Reforms on February 13.Another source of fresh blood in the political elite


Eastern Europe

have been journalists and civil society activists who entered parliament in October 2014. Former leading journalist and anti-corruption campaigner Serhiy Leschenko is now MP in Poroshenko's eponymous party.

Leschenko acknowledges that corruption remains endemic in Ukraine one year after the ousting of Yanukovych. “But at least we have not seen any gigantic corruption over the past year comparable to that under Yanukovych,” he says.

Leschenko believes that one new appointment should now make an enormous difference in the anti-corruption fight. In an historic first

for Ukraine, prosecutor general Vitaly Yarema resigned on February 9, after Leschenko gave voice to mounting public dissatisfaction at Yarema's inactivity. The new prosecutor general, Viktor Schokin, has already made two arrests of leading former Yanukovych officials in one week, the first such arrests since the ousting of Yanukovych one year ago.

Leschenko argues that going forward it will be crucial to prosecute current officials, rather than rounding up Yanukovych's gang. “Nothing sends a more powerful signal to the elite that the rules of the game have changed than the sight of one of their own going to jail,” he said.

this "will lead to a complete cessation of Russian gas supplies to Ukraine," he warned.

Miller also stressed that this situation created "serious risks for gas transit to Europe" through Ukraine.

On February 23, Naftogaz said that Gazprom had not fulfilled the Ukrainian application for the supply on the previous day of prepaid natural gas, which violated tripartite gas agreements negotiated in Brussels.

Instead of 114mn cubic metres of gas requested under the contract, Gazprom had supplied only 47mn cubic metres, the state-owned Ukrainian gas company claimed in a statement. "Naftogaz considers the failure to comply with the application

Gazprom threatens to cut off gas to Ukraine

bne IntelliNews

Russia is ready to halt gas supplies to Ukraine as of February 26 because its neighbour has not paid for March deliveries, Gazprom CEO Alexey Miller said on February 24, warning also of a possible knock-on impact on supplies to Europe.

Ukraine was extracting all it could from the current paid-for supply, with prepaid gas volumes now standing at 219mn cubic metres, according to the Gazprom chief. "Ukraine has not made a timely next prepayment for gas. As of today, only 219mn cubic metres of prepaid gas are left," he said.

Miller noted that it takes about two days to transfer funds from Naftogaz to Gazprom accounts. If further gas withdrawal exceeded an existing application for 114mn cubic metres,


Eastern Europe

response procedure in the case of disputes.

On February 19, Naftogaz submitted an application for the supply of the 114mn cubic metres via the gas measuring stations Sudzha, Pysarivka, Sokhranovka, Valuiki, Kobrin and Mozyr.

Also on this date, according to the company, it made an advance payment for 454mn cubic metres of gas. At the start of business on February 23, the prepaid balance amounted to 287mn cubic metres of gas, Naftogaz says.

as a violation of the gas supply contract between the companies and the tripartite legally binding protocol signed by Russian Energy Minister Alexander Novak, the European Commissioner for Energy Gunther Oettinger and Energy Minister Yuriy Prodan on October 30, 2014 in Brussels," the statement reads.

On February 23, Naftogaz handed a notice of breach of contract and a copy of the Brussels tripartite protocol to the Ukrainian Cabinet of Ministers, the European Commission and the Energy Community Secretariat as part of a rapid


murdering two missing top managers of Kazakhstan's Nurbank in which Aliyev held a stake. According to Kazakh prosecutors, Rakhat Aliyev was involved in a criminal group that kidnapped the bankers Zholdas Timraliyev and Aibar Khasenov in January 2007, who were murdered a few days after the kidnapping.

Aliyev held a number of high-profile posts in Kazakhstan and was the country's ambassador to Austria and international organisations based there until his downfall in 2007 when he turned into Nazarbayev's vocal opponent.

Eurasia

Suicide of Kazakh president's former son-in-law clears succession path

bne IntelliNews

Rakhat Aliyev, former son-in-law of ageing Kazakh strongman President Nursultan Nazarbayev, has committed suicide in an Austrian detention centre. Aliyev was under investigation for a number of serious crimes, including murder and kidnapping, which he denied as "politically motivated".

The death of Aliyev, one of the most hated figures in the Kazakh establishment, may now pave the way for the grooming of Nazarbayev's eldest daughter Dariga and her eldest son Nurali Aliyev as potential successors. The possible designation of either Dariga, Aliyev's former wife, or Nurali as successor would have met opposition from elite groups within the Kazakh establishment because of the fear of Aliyev's comeback after Nazarbayev's departure. Aliyev's death will now quell these fears.

Dariga, 51, is currently a deputy speaker of the Kazakh parliament's lower chamber, the Mazhilis, whereas Nurali, 30, started his political career as deputy mayor of Astana in December 2014. According to the Kazakh constitution, candidates must be at least 40 to become president.

The Austria Press Agency reported that Aliyev's body was found in Vienna's Josefstadt prison in a cell in the morning of February 24. He had hanged himself in a bathroom, according to the press agency. "He committed suicide,"Reuters quoted a spokeswoman for the Austrian court as saying.

Last December Austrian prosecutors brought charges against Aliyev for murdering two bankers in Kazakhstan in 2007. Kazakhstan sought Aliyev's extradition for high treason, plotting a coup and kidnapping and sentenced him in absentia to 40 years in prison in 2008.

In May 2011 Kazakhstan charged Aliyev with

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Eurasia

Armenia. "Of these the Azeri move was the most surprising, given that they have a much longer track record of holding the manat fixed," Timothy Ash of Standard Bank said in a note to investors.

Azerbaijan has been less affected than other former Soviet states by Russia's economic problems but its economy is heavily exposed to price swings on global energy markets. The devaluation raises fears of a spike in inflation because it will make imports more expensive. The decision is also expected to sharply increase the domestic demand for dollars and euros.

Azerbaijan devalues manat by one third against the dollar

bne IntelliNews

Azerbaijan's central bank devalued the energy-rich country’s currency, the manat, by 33.5% to the dollar and by 30% to the euro on February 21 as falling oil prices and economic turmoil in Russia continued to create waves across the former Soviet Union. The new exchange rates are set at AZN1.05 to the dollar and AZN1.195 to the euro, the Central Bank said in a statement released on February 21.

The move “aims at stimulating the diversification of Azerbaijan's economy, strengthening the international competitiveness of the economy and its export potential, and guaranteeing stability in the balance of payments”, the regulator stated.

The bank abandoned the manat’s dollar peg on February 16 and began using a dollar-euro basket to manage the exchange rate. With oil and gas accounting for 95% of the country’s exports and 75% of government revenues, the Azerbaijani economy has begun to feel the heat since June: crude prices have dropped nearly 50% since then and Western sanctions against Russia over the annexation of Crimea and the conflict in eastern Ukraine have put additional pressure.

It has spent hugely in recent months defending the manat, eating into its foreign-currency reserves. Those fell $1bn in January to $12.68bn and by nearly $1.13bn in December.

The Central Bank also added that “the adjustment of the manat’s rate is also directed at offsetting negative effects from the devaluation of national currencies of Azerbaijan's trading partners”.

The plunging Russian ruble and falling oil prices affected the national currencies of many ex-Soviet countries, including neighbouring Georgia and

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Lithuania to reintroduce conscription to meet 'changed geopolitical situation'

Lithuania, and Grybauskaite in particular, has been perhaps the feistiest of the three Baltic states in pushing to free the region from Russian influence, and calling for a hardline stance from the EU and West on Moscow's involvement in the war in Ukraine.

To no little extent that is due to the fact that Lithuania has a freer hand in dealing with Russia. It is the one Baltic country that does not share a long border with Russia proper, although it does border Russia's Kaliningrad Oblast exclave. It also has a relatively small ethnic Russian minority. Latvia and Estonia on the other hand both have large minorities. Moscow has spent years complaining that they face discrimination and a lack of rights.

The Russian air force has been increasingly active in the area, pushing Nato to scramble its warplanes off its Estonian base several times. Russian navy vessels have also regularly encroached into Estonian waters.

All three Baltic countries have been pushing to increase military capabilities in response. They have also welcomed the raised Nato presence in the region.

At the same time, Vilnius has led efforts to push back Russian interests in the region. It fought a bitter fight with Gazprom over recent years to free its gas networks. That led Lithuania to launch an LNG platform at the start of the year - the first non-Russian gas supply in the region. It is now pushing to use the facility to challenge Moscow's

Central Europe

bne IntelliNews

Lithuania will reintroduce military conscription because of "changes in the geopolitical situation", President Dalia Grybauskaite announced on February 24.

The announcement followed a meeting of the country's State Defence Council. It is part of efforts in the Baltic region to raise defence capabilities as Lithuania, Latvia and Estonia eye events in Ukraine with rising fear over Moscow's imperial ambitions.

Lithuania suspended conscription several years ago, opting for a professional army. However, it should be reintroduced in light of the changes in geopolitical situation, Grybauskaite said after the meeting.

"We must reinforce the country's defence capacities. Under new geopolitical circumstances, the army must be properly prepared for the country's armed defence even in times of peace," the president said, according to Baltic News Service. "Today's geopolitical situation requires that we strengthen and speed up the manning of our army. Therefore the State Defence Council has decided that it is necessary to temporarily, for five years, reintroduce compulsory military draft."

Under the proposal, compulsory military service would apply to men between the ages of 19 and 26. The plan is to draft between 3,000 and 3,500 men each year. Exemptions would apply to university students, single fathers, men with health issues or otherwise unsuitable for military service.


market - which at consumption of 4mn-5mn cubic metres per year is tiny - it has not held back on the political issues. The run up to the EU meeting in November - at which Yanukovych backed out of the EU deal - prompted Russia to extend punishing trade bans and customs regimes against Lithuania's vital dairy and transport sectors.

Central Europe

dominance of the Latvian and Estonian gas markets.

It also helped lead efforts to get former president Viktor Yanukovych to sign Ukraine up to an association agreement with the EU. The breakdown of that deal led directly to the crisis still unfolding.

While Moscow appeared fairly relaxed in the face of the campaign to challenge it in the Baltic gas

A study shows that the monthly income of farmer's households more than doubled since Poland joined the EU in 2004, rising from PLN2,298 (¤552 at current exchange rates) in 2004 to PLN5,044. However, the average worker has seen monthly income rise from around the same level to no higher than PLN4,289.

Part of that is due to an enormous inflow of EU funds, which have transformed the Polish countryside over the last decade. Poland is expected to get ¤23.5bn in 2015-2020 for agriculture from the EU. Polish farmers get an annual payment varying from ¤184 to ¤221 per hectare of farmland.

Farmers can also take advantage of a subsidised social security system. The average farmer plays less than a third of what other workers pay in social security taxes, with much of the rest being subsidised by the state. Last year, the

Polish farmer's fury falling on deaf ears

Jan Cienski in Warsaw

Enraged Polish farmers have set up a protest in front of the prime minister's office in central Warsaw and used tractors to block roads around the country as they push the government on a raft of claims. However, public support has been slow to come.

The protests bring back memories of a wave of rural strikes in the early 1990s. Shock therapy economic reforms drove many farmers into bankruptcy, sparking often-violent protests around the country. A political party - the populist Self-Defence - was even formed.

However, this time around, protesting farmers are having difficulty galvanising broad public support for their demands, which include help with damage caused to crops by wild boars, changes to milk buying policies and preventing foreigners from buying Polish farmland. That's largely because farmers have done extremely well over the past decade.


Unions sense Kopacz's vulnerability as she races the opposition Law and Justice party for parliamentary elections this autumn. Izdebski has demanded Kopacz take part in talks with farmers, saying "the crown won't fall off her head" if she does.

Marek Sawicki, the agriculture minister who has been a favourite target of Izdebski, says most of the farmers' demands have already been settled, including compensation for hungry boars. Meanwhile, preventing foreigners buying farmland - something that will be allowed by 2017 - or tweaking milk-buying schemes would rub up against EU rules.

With the protests taking an increasingly political tone, Kopacz's position appears to be hardening. "Certainly farmers are not going to choose ministers in my government," she said recently, adding "demands being presented by protestors and those blocking roads are demands that have no link to reality."

Central Europe

government paid PLN17bn into the designated rural pension and medical schemes. On top of that, farmers are sitting on increasingly valuable property; farmland has more than quadrupled in price in the last decade.

The results of all that cash could be seen as farmers drove gleaming tractors costing more than ¤100,000 to blockade roads. "God have mercy peasants, get a grip," Eugeniusz Klopotek, an MP from the Polish People's Party, which gets most of its support in rural areas, told Poland's RMF radio. "Most Poles don't earn as much as you do."

Slawomir Izdebski, a fiery farmer and politician who was once a senator from Self-Defence (the party imploded in 2007) leads the protests. Although he has galvanised a few thousand farmers at most, the demostrations are a political problem for Prime Minister Ewa Kopacz, whose government has already buckled this year in the face of striking coal miners.


Southeast Europe

Erdogan accuses central bank of treachery after 25bp interest rate cut

time he publicly suggested a link between Basci and the Gulenist network. Erdogan has accused Gulen and his followers of being the architects and masterminds of last year’s corruption investigations, targeting Erdogan’s inner circle. Erdogan claims that Gulen and his networks wanted to topple his government. During the Gezi park events in 2013, Erdogan also held what he called “interest rate lobby” responsible for the anti-government protests.

After Erdogan’s comments about the bank and Basci on February 25, the lira weakened against the dollar, trading at 2.4911, a two-week high.Basci has not responded yet to Erdogan’s comments.

On February 24, the central bank trimmed the main one-week repo rate for the second straight month in a row, and also reduced other rates. It lowered the one-week repo by 25bps to 7.50%, cut its overnight lending rate from 11.25% to 10.75% and the overnight borrowing rate from 7.50% to 7.25%.

bne IntelliNews

Turkish President Recep Tayyip Erdogan stepped up his criticism of the central bank on February 25, questioning the loyalty of Governor Erdem Basci, and prompting a slump in the value of the Turkish lira.

The 25 basis point rate cut the central bank delivered this week was not enough and the current rate levels are not suited to the realities of the Turkish economy, said Erdogan, adding that he respects the bank’s independence but he would not hesitate to criticise its mistakes.

Erdogan also questioned the loyalty of the bank and Governor Erdem Basci. “Are you [referring to the bank Basci] in an independence struggle against us, are you under the influence of some other places?” asked Erdogan. Erdogan’s remark about the vague “external influence” was widely interpreted as a reference to his foe, Fethullah Gulen, an Islamic cleric living in the US.

In the past Erdogan has strongly attacked the country’s monetary policymakers but for the first

stamp will help convince investors of its fiscal consolidation efforts, and plans to treat the programme as precautionary. Prime Minister Aleksandar Vucic has said Serbia did not secure the arrangement to raise money, but needs it for security, to attract investments and as a

IMF approves ¤1.2bn stand-by arrangement with Serbia

bne IntelliNews

The International Monetary Fund (IMF) has approved a ¤1.2bn stand-by arrangement with Serbia, aimed at restoring the health of Serbia's public finances and the resilience of its financial sector.

The Serbian government believes the IMF


Southeast Europe

making enterprises and mandatory spending. As a result, public debt climbed to 70% of GDP at the end of last year and is expected to continue rising until 2017 when the current reforms should start showing results.

To address these serious fiscal imbalances and structural weaknesses, Serbia and the IMF drafted the stand-by arrangement on three main pillars.

The first of these is strong fiscal consolidation over the programme period and rebalancing of the policy mix. The fiscal adjustment, already initiated in late 2014, is largely based on curbing mandatory spending and reducing state aid to state-owned enterprises. The tighter fiscal stance will create space for easing of monetary policy, which will foster credit growth to the economy.

Secondly, the strengthening of the financial sector. The program aims to support financial sector stability and resilience and improve financial intermediation. While the banking sector (composed mostly of foreign-owned banks) has remained adequately capitalised and highly liquid, NPLs are a significant challenge. Addressing NPLs will be essential to improve the creditworthiness of potential borrowers and recovery of credit to the economy, which has been contracting until recently.

The third pillar is boosting competitiveness and growth. Structural reforms are essential to enhance Serbia’s growth potential, the IMF says. There are three broad priorities to be implemented over the medium term: job creation, improvement of the business environment and competitiveness, and the reform of state-owned enterprises, with the aim of significantly reducing the number of these enterprises (a first group of about 500 companies is currently slated for resolution or privatisation).

guarantee that it is on the right way to reform.

Among the main pillars of the programme is an agreement to resolve the status of state-owned enterprises and reducing the government's fiscal exposure to them. In this light, there were fears that the recent failure of the privatisation of troubled steel mill Zelezara Smederevo to US firm Esmark could have delayed the IMF approval.The fund's first deputy managing director and acting chair, David Lipton, said in a statement following the approval of the deal by the executive board on on February 23 that the wide-ranging reform of state-owned firms, especially large ones, will be critical for reducing state aid and limiting its impact on the budget.

"Serbia’s high and rising public debt calls for fiscal consolidation in the period ahead," Lipton said. "The authorities’ fiscal package, which aims to place the debt-to-GDP ratio on a downward path by 2017, is appropriate. The focus on containing mandatory expenditure, reducing state aid, and minimising fiscal risks arising from state-owned enterprises is warranted."

Lipton pointed out that a healthy financial sector would safeguard the economic recovery, noting that Serbia should undertake special diagnostic studies to verify the health of its banks and create a comprehensive strategy to address the high level of non-performing loans (NPLs).

The Serbian economy contracted by 2.0% last year following the devastating floods in May and is expected to shrink by a further 0.5% in 2015 as the flood recovery continues and the government embarks on its ambitious fiscal consolidation. The IMF added that the recession in 2014 was the third in the last six years.

At the same time, the fiscal deficit rose to 6.6% of GDP in 2014 because of higher state aid to loss-


Opinion

Chris Weafer

In 2009 Russia took the easy path and waited for oil prices to recover rather than implement a comprehensive package of reforms to boost economic growth. That has directly led to the damaging results now visible. Today Azerbaijan faces a similar choice. Will the government in Baku take heed? Does it even have the option of waiting until oil prices recover or gas export volumes to the EU double?

Azerbaijan’s budget and economy are highly dependent on oil and gas exports to the European Union, Turkey and CIS states. Energy exports account for almost 95% of total exports, approximately 45% of GDP and 70% of budget revenues. Hydrocarbon revenues have helped sustain real GDP growth over the past five years and have improved the nation’s balance sheet. However, progress with reforms has been very slow, if at all. The country ranks badly in such surveys as Transparency International’s Corruption Perception Index and the World Bank’s Ease of Doing Business survey. FDI was a modest US$2.4bn last year and while investment spending reached US$27bn, almost half was in the oil and gas sectors.

The government in Baku keeps talking about the need to advance reforms so as to attract a higher and sustainable volume of investment into other parts of the economy and has even adopted a programme aimed at boosting investment into designated sectors by 2020. Inevitably, last year’s oil price collapse, which will lead to a lower pace of growth in the economy this year, has invigorated

the debate over reforms and the need for faster change.

The problem is that Azerbaijan is within three years of substantially boosting gas export volumes to the EU, and along with it, gas revenues into the budget. The danger, therefore, is that the government simply decides to take the easy path and wait until either the oil price recovers or the gas export volumes double.

The country’s over-reliance on oil and gas revenues led to a slower pace of growth in 2014. GDP expanded by 3% compared to 5.8% the previous year. Forecasts for this year are lower still and concern about the double-whammy hit from lower oil and the collapse in Russia’s ruble forced the government to devalue the manat on February 21. A devaluation had been expected, but the scale of the hit, at 33% against the US dollar, was a surprise. It is a reflection of just how strong are the economic headwinds buffeting the country as a result of the oil price fall and the recession in Russia. The budget deficit will rise to approximately 5% of GDP from just above breakeven last year; while the current account is expected to shrink considerably, to 3% or 4% of GDP, as a result of lower oil and gas export revenues.

Although the oil price collapse should ordinarily be something of a wake up call, the government knows that by 2018 it will have the potential to double gas export volumes to the EU as a result of Phase 2 of the Shah-Deniz gas project and

MACRO ADVISER: How Azerbaijan can avoid Russia’s mistake


Opinion

the TANAP-TAP pipelines coming online. Thus, it may take the view that it just needs to ride out this interim period of lower revenue and wait for the extra gas volumes. Hence the surprisingly large devaluation of the manat, which will reduce imports, protect budget revenues from the lower oil price and allow for a slower drawdown on national savings. October 2018 is also the date for the next presidential election and President Aliyev, who won a third consecutive five-year term in 2013, is known to want a fourth term. Stability, rather than taking reform risks, may seem like a sensible strategy to his advisors.

That said, according to the Azerbaijan 2020 development program, the key areas for future growth, as well as investment opportunities, should be in tourism, construction, telecoms, banking & financial services, real estate and agriculture related sectors. Having hosted the Eurovision Song Contest in 2012, Azerbaijan’s next major event will be to host the first European Games in June this year. By engaging in such high profile events, the government hopes to attract further foreign investment to the non-energy sectors.

The country is also in a relatively good position to use its low debt position, which is less than 15% of GDP, and its national savings to help create a more diversified economy, should it wish to. The success of the past two decades in the country’s hydrocarbon sector has enabled Azerbaijan to accumulate substantial reserves valued at more than $50bn, which are held at both the Central Bank and the national energy fund SOFAZ. With a strong reserve base, FX stability and a steady growth profile, Azerbaijan is actually in a relatively good position to weather any regional economic distress in the wake of a Russian recession. That of course is both a positive and a negative depending on how you view the pressure to get more serious about reforms.

Apart from where the oil price trades and the contagion from Russia’s ruble collapse, two additional factors could shake the assumption

that the country can simply wait until Shah-Deniz II comes to the rescue. One is the fact that rating agency S&P has perched Azerbaijan’s sovereign credit rating just above investment grade. A poor response to the slowing economy could pull that rating to sub-investment grade and reduce the pool of available investors. The government finalised its 2015 budget late last year but this remains optimistic unless the oil price rallies strongly in the second half of this year. The assumption is for total tax revenue of US$22.8bn and spending of US$24.8bn. The resulting deficit, of US$2bn, would equal 2.8% of planned GDP. However, most independent observers assume a worse outcome, i.e. a 5% budget deficit because of an assumed lower oil price. The country is expected to come to the external markets for new debt and use some of the near $40bn of savings in its sovereign wealth fund to cover the deficit. The former would be a lot more difficult if S&P were to cut to junk status, albeit the latter will now be less expensive after the big devaluation.

Currently Azerbaijan has only one sovereign Eurobond listing. That is the $1.25bn bond with a maturity in March 2024 and a coupon yield of 7.36%. It is rated BBB- by S&P and, in mid-February, it was yielding 4.9%. The next most liquid issue is from the state oil company, SOCAR. It has a $1bn bond, maturing in 2023, rated BBB- by S&P and with a coupon yield of 6.62%. It was yielding 6.1% in mid February. There are also some smaller issues from AzRail, International Bank of Azerbaijan and from SOCAR. The International Bank of Azerbaijan is reported to be planning a $200mn-300mn Islamic Bond (sukuk) in the coming months, a task which would also be more difficult with a lower credit rating.

The other risk is the continuing state of war with Armenia over Nagorno-Karabakh. That conflict always appears to be close to a much more serious escalation and the number of fatal cross border skirmishes has been increasing since last summer. More clashes, and more threatening rhetoric, are expected ahead of this


Opinion

year’s parliamentary elections, scheduled for November. Any return to full scale fighting would leave Russia, the US and the EU in a difficult position and might slow investment flows and hurt political relations.

One additional area of concern for the authorities and which could either spur a greater effort towards faster reforms or a tougher crackdown on political opposition is that social unrest has risen over the past 24 months with some large-scale protests held in several major cities across the country. Although poverty has more than halved over the past fifteen years, from 30% in 2001 to 8% in 2014, the significant disconnect in the living standards enjoyed by the country’s elite and ordinary citizens remains the key complaint.

One way to address those concerns of course is to focus on economic reforms and create a more diversified economy. The other way is to stamp harder on protests and opposition groups and wait for the oil price to recover and Shah-Deniz II to start pumping more gas to the EU. Choosing the latter path would result in more international criticism and impact on non-energy sector investment but, as plenty of examples show, it would not diminish the EU’s appetite for gas imports.

Chris Weafer is Senior Partner at Macro-Advisory, which offers bespoke Russia-CIS consulting.


bne: Infrastructure

Weekly Lists

EU fund preferred bidder for Latvijas Gaze stake bne IntelliNews

Riga confirmed on February 24 that an EU fund is the leading suitor for E.ON's 47.23% stake in Latvian gas monopolist Latvijas Gaze.Prime Minister Laimdota Staujuma said on February 18 that a “potentially suitable” buyer had been found, but did not disclose the suitor's name. Local media, however, quickly named Marguerite - an investment fund backed by several European banks, including the European Investment Bank, Germany’s KfW, and Poland’s state-controlled PKO.

Economics Minister Dana Reizniece-Ozola said in an interview with Latvian Radio on February 24 that according to unofficial information, Marguerite is indeed the prospective buyer. The full name of the fund is the 2020 European Fund for Energy, Climate Change & Infrastructure. It has been speculated to be interested in LG for some months.

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.

Lianyungang and Almaty linked by direct cargo train service bne IntellinNews

Chinese sea port Lianyungang and Almaty, the financial hub of Kazakhstan, have been linked by a direct cargo train service. The first train of around 100 containers left the seaport and is expected to reach Almaty in 12 days.

The train service will be carried out twice a week. The trains from China will carry to Kazakhstan medical supplies, car spare parts, daily necessities and electronic products from southern parts of China, Southeast Asia, Japan and South Korea. At the same time, the trains departing from Kazakhstan will transport ferro-alloys, potash fertilisers and wheat.

The train uses a new railway line constructed by Kazakhstan and China and goes via Khorgos, a dry port built on the Kazakh-Chinese border.


Romania and Bulgaria are the lowest ranked countries on the European Commission’s 2015 Digital Economy and Society Index (DESI), which rates countries in terms of their use of digital technologies and competitiveness in this area.

Romania, the worst performing EU country has a score of just 0.31 points on the index - less than half that achieved by the best performing country, Denmark with a score of 0.68. Bulgaria’s performance is little better, while fellow Southeast European countries Croatia and Slovenia are in 24th and 20th place respectively.

From the CEE region, only Estonia, Lithuania and the Czech Republic make it into the medium-performance group, while the top performers - Denmark, Sweden, the Netherlands and Finland - are all from northwest Europe.

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.

Southeast Europe trails EU on digital index bne IntelliNews

Romania to auction new telecom licenses in H1

bne IntelliNews

The Romanian telecom regulating body ANCOM is considering plans to auction new operating licenses for the frequency bands of 3.410-3.600 MHz and 3.600-3.800 MHz that would be used for broadband telecom services, Ziarul Financiar announced on February 26.

The decision is part of a broader 2015-2025 development strategy plan drafted by ANCOM for the 3400-3800 MHz frequency band and made public for consultations. The strategy drafted by ANCOM is aimed at addressing local telecom operators’ demand for new frequency bands that can be used for broadband services, but is also aimed at addressing the European Union’s decision 2014/276/UE on the use of 3.400-3.800 MHz band.

The new licenses will be valid from January 2016 for a period of 10 years. The license holders will deliver data transfer and internet access over the sub-frequencies allotted. ANCOM proposes to allot blocks of 10MHz, in pairs of 2x10MHz for the 3.400-3.600 MHz band and in single blocks of 10MHz for 3.600-3.800 MHz.

bne:TMT



Weekly Lists

Sberbank reported to be selling Slovak and Hungarian unitsbne IntelliNews

Russia's Sberbank is preparing to sell its Slovak and Hungarian units, Czech media reported on February 23, quoting unnamed sources. Russian largest bank had suggested in December that its strategy was set to change because of worsening market conditions.

In December, a source close to Sberbank told Reuters that it was looking to sell the two units but had no buyers.

The state-controlled Russian bank does not plan to sell its operations in Czech Republic, Lidove Noviny reports, quoting unnamed sources. "A deal is already being prepared in Hungary and Slovakia," one source told the newspaper. Alongside the Czech unit, the Hungarian and Slovak units make up the three largest businesses in the Sberbank Europe network.

Croatians no longer able to pay Swiss franc mortgages might transfer property to state, banks

bne IntelliNews

Croatians who can no longer afford to pay mortgage loans denominated in Swiss francs might have their properties as well as their debt transferred to the state or the bank, according to two proposals made by Croatian Banking Association HUB, Hina news agency reported on February 20.

The models would apply only to mortgage holders who are no longer able to pay their installments due to job loss, a considerable reduction in income or loss of working ability, the head of HUB, Zoran Bohacek, said adding that banks are willing to cover all costs of debt relief for them. According to HUB’s proposal, if property is transferred to the state, mortgage holders will still be able to remain in their flats as tenants and will have the right to buy their properties back in the future. The other option envisages the transfer of the property to the bank in exchange for a debt write-off.

bne:Banker



Weekly Lists

Bulgarian parliament approves ¤8bn foreign debt plan bne IntelliNews

Bulgaria's parliament adopted on February 25 the ¤8bn Global Medium Term Note (GMTN) programme proposed by the government. The assembly thus ratified an agreement signed by the government with Citigroup, HSBC, Societe Generale and Unicredit Bank, which will manage the debt issue. The new debt will be used for repaying maturing obligations and for financing the budget deficits in 2015-2017.

The ratification was supported by the ruling party CEDB, its coalition partner Reformist Bloc, the leftist ABV, which has one minister in the cabinet, the opposition predominantly ethnic-Turk MRF party, and the Bulgarian Democratic Centre. Only the opposition parties socialist BSP and nationalistic Ataka voted against. The nationalistic Patriotic Front abstained although it supports the government in principle.

Notably, both ABV and MRF had opposed firmly the ratification prior to the debates. However, their positions changed when finance minister Vladislav Goranov pledged that at least BGN2bn (¤1bn) of the total debt amount will not be used.

Slovenia, Hungary challenged by subdued growth prospects, large debtsMoody's

Both Slovenia and Hungary face the challenges of subdued growth prospects and large debt stocks, but the risk factor from external shocks is considerably higher in Hungary due to its higher burden of foreign currency denominated debt, rating agency Moody's said on February 23.

Both countries posted higher than expected growth in 2014, thanks to strong public spending on EU-funded projects, but this performance is not expected to be repeated in the coming years as different structural weaknesses limit the growth outlooks, Moody's said in a statement. It rates Slovenia at Baa3 stable and Hungary at Ba1 stable.

bne:Credit


bne:Newspaper - February 27, 2015

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