bne IntelliNews Dailywww.bne.euA special edition for the EBRD AGM

Interview with Ukraine's Economics Minister p.6

Mongolia, Rio need Oyu Tolgoi tax deal as election looms p.10

Lithuanian tech start-ups begin to draw world attention p.13

Winds change for renewable energy in Southeast Europe p.14

May 14, 2015

Georgia president: challenge is to create modern liberal democracy

Sir Suma: ready, steady, reform!

bne: How has Georgia been affected by the regional economic slowdown and what are the economic prospects for the country?

Giorgi Margvelashvili: We have been facing problems and our economic growth has been decreasing. At the same time, falling remittances have also caused prob-lems – especially because of the Ukraine crisis. The prediction that we will have 5% economic growth has been reduced to 2%. Of course we are not happy about it, as last year we had 4.7% growth, yet the potential of the country is enormous.

And we have added to this potential. We signed the Deep and Comprehensive Free Trade Area (DCFTA) with the EU, which opens up a market of 500mn high-income consumers to Georgia.

This is an enormous market if you com-bine it with the 400mn consumers we al-ready had due to other free trade agree-ments with Turkey and the other countries in the region. Add to this the very low taxa-

Liam Halligan in Tbilisi

Georgia has “enormous potential” and its success “is being closely watched” by other post-Soviet economies, according to EBRD President Sir Suma Chakrabarti.

Praising Georgia’s “clear progress” and “proven ability to attract foreign invest-ment”, Sir Suma suggests that the coun-try “could become a benchmark for other emerging markets” if the reform effort of the last decade is sustained.

“In a quarter of a century, students at Har-vard Business School could be reading about the case study that is Georgia,” Sir Suma

tells bne IntelliNews in an exclusive interview ahead of the EBRD’s 24th annual meeting.

“We’re not there yet, but that’s the next leap Georgia needs to make, where it is regarded not just as a 10-year success story, but a success story that is locked in across political parties and different administrations – and I think that could happen,” he says.

Georgia’s economy grew by 4.7% in 2014, with the impact of geopolitical tensions rel-atively contained given limited trade links with Russia. Between 2004 and 2014, GDP

annual growth averaged 4.4%, as succes-sive governments cut red tape, pared back the state, and improved the predictability and transparency of business regulation.

The country ranked 15th in the World Bank’s “Doing Business” survey for 2015, ahead of stalwart reformers such as Poland, Estonia, Latvia and Lithuania. Per-cap-ita income remains low though, at $3,699 according to International Monetary Fund figures for 2014, compared with $4,781 in Albania and $14,378 in Poland. Unemploy-ment in Georgia is still high, at 14%.

tion rates, the low crime and local corrup-tion, and one of the highest levels of ease of doing business in the world according to the World Bank survey. Taken together, Georgia is one of the most attractive countries for investment and development.

bne: To what extent is Georgia re-orient-ing to the European markets versus main-taining its traditional regional markets?

GM: Georgia has a strategic location in the region. Looking at the map you see we are between the Caspian and Black Seas. Georgia is a gateway through which all the assets around the Caspian can pass on their way to European markets.

We have been developing very interest-ing relationships even with the regions be-yond, especially our Chinese friends, and we are very active in developing the whole concept of the “New Silk Road”. An enor-mous contribution to this project will be a railway that will be opening at the end

Yet Sir Suma remains upbeat when out-lining why Georgia was this year chosen to host the annual meeting, with the most im-portant event in the EBRD’s calendar com-ing to the Caucasus for the first time. “It’s very important to showcase what has been achieved here in Georgia,” he says. “This success story is being closely watched elsewhere – in Ukraine, for instance, where the Kyiv government is thinking what it can do to emulate Georgia in terms of turning around an investment climate and tackling corruption.”

The EBRD’s total investment in Geor-gia now stands at €2.6bn, which includes a 2014 inflow of €214mn across various sectors, from energy to small and medi-um-sized businesses. “Georgia is one of the most innovative of the 30 or more countries

See page 2 >

See page 2 >

bne IntelliNews interviewed President Giorgi Margvelashvili, who was elected Georgia’s head of state in 2013 on the Georgian Dream ticket, in his presidential office ahead of the EBRD meeting.

Top Stories May 14, 20152 bne IntelliNews Daily

of this year running from Baku through Georgia to Kars [in Turkey] and linking the major communication systems of Asia with Europe.

bne: Regional relationships between George and its neighbours Azerbaijan and Turkey have been developing especially fast: is a regional bloc emerging?

GM: Georgia has been developing these relationships from the very start. A month ago we launched a joint project that shows the content of our partnership: the three presidents – myself, [Azerbaijan's Ilham] Aliyev and [Turkey's Recep Tayyip] Erdo-gan – signed an agreement to transport Azerbaijani gas to Italy. The content of our partnership is to secure and deliver stable energy supplies to European markets.

bne: How are you coping with the Ukrain-ian crisis?

GM: We have had a complicated history with Russia. The main message we are try-ing to set at this point is that Russia should look at Georgia as an equal partner and try to work with Georgia for our mutual bene-fit. But of course any relationship must be based on the return of occupied territories to Georgia so the country's territorial integ-rity is restored.

We believe at some point the politicians in Russia would understand that having a friendly, stable and economically developed Georgia is an advantage, as having prosper-ous and stable neighbours is an advantage for every country.

Georgian president: challenge is to create modern liberal democracybne: Despite the political tensions, eco-

nomic ties remain strong and the Russian market has reopened to Georgian goods.

GM: The market has reopened and we are happy for this improvement in our re-lationships. We are working to improve the economic and cultural ties, and hopefully

that process will lead to the reconciliation of some of the most difficult issues we are facing.

bne: Do the sanctions on Russia and the counter Russian sanctions on Europe cre-ate an opportunity for Georgia?

GM: Sanctions are a method of sending a message in the context of the Ukrainian crisis and the Russian annexation of Crimea. But to be frank our policy is not to try to benefit from other people's problems. Those benefits are always shortlived. What we're looking for is sustainable stability in the region that will create opportunity for the enrichment and the deepening of ties with Russia.

bne: The EBRD annual meeting is an opportunity to showcase Georgia; what in particular would you like to draw delegates’ attention to?

GM: We have made a good start, but there is much more to be developed in Georgia. Our energy resources – and I am not just talking

about the transit of energy but the endemic potential energy output of Georgia's hydroe-lectric production - has huge potential. In ad-dition to domestic [electricity] consumption, we can supply energy-hungry south Russia and energy-hungry north Turkey.

The tourism sector is growing fast and we are starting to develop traditional healthcare capacity. There is also great po-tential in agriculture.But maybe the most interesting is the logistics business. If you look at all the lines of communication pass-ing through the country and you can im-agine the logistic capacities that could be developed here.

bne: Moving towards Europe means adopting European values as much as it means lowering import tariffs. Given the country's history and location, is that go-ing to be hard?

GM: Georgia has been constantly Euro-pean from its very foundation. Georgia has a long tradition of statehood. It has been built on the values that European society developed. I'm talking about values of indi-vidualism, respect for differences and re-ligious diversity. And it has been a society that has been able to protect those values in a very complicated environment – much more complicated than in Europe.

There is a challenge to transform the cultural Europeanism character of Geor-gia into state institutions and traditions, to create what we would call a contemporary liberal democracy. That is the challenge for a country which has a Soviet past.

However, we already have a great re-cord in this respect, because we have been able to change one government with one political party to another with a different political party through peaceful free and fair elections. We have already started to develop and consolidate the democratic process in Georgia.

Sir Suma: ready, steady, reform!

where the EBRD supports transition to free and open markets, which has allowed us to introduce new investment instruments here before taking them elsewhere,” says Sir Suma, citing equity investments for small corporates and risk-sharing facilities allowing banks to lend in local currencies.

“While Georgia doesn’t have oil, it does have water – and its use of hydroelectric power to export energy to Turkey and else-where has been very successful,” Sir Suma says. “Now we have a new EBRD project which has brought us together with the In-ternational Finance Corporation, the Asian Development Bank and Tata Power of India, to create a fantastic hydropower facility at Shuakhevi [in south-west Georgia] that will also export energy.”

New capitalCountries within the EBRD region have “recently attracted significant capital” from other emerging markets, according to Sir Suma. “Georgia has won investment not just from Tata, but also form Jindal Steel & Power of India,” he says. “Across the Bal-kans area, from Slovenia down to Greece, many of our member states are now receiv-

ing inflows not just from Western Europe and North America, as they should, but also from the Gulf, India and China.”

“When I talk to investors not just across Europe, but in India and across Southeast Asia, they regard Georgia as a small coun-try, but a country that’s definitely going in the right direction,” says Sir Suma. He added that he wants to see “considerably more such South-South capital flows, from other emerging markets” into the EBRD region.

“South Korea, for instance, has made investments totalling €1.3bn over the last 24 years into our countries of operation – well, I went to Seoul and said that’s not enough,” says the EBRD President. “India has invested only €800mn with us – again, that’s a good start, but remains way under-weight for the size of the Indian economy, especially given that Prime Minister [Nar-endra] Modi is now encouraging overseas investment..

The EBRD is to do “much more mar-keting across Asia as part of our medi-um-term strategy,” says Sir Suma. “My colleagues and I have been doing work-shops in Seoul, in Mumbai, in Singapore, and we now have a representative office

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"Russia should look at Georgia

as an equal partner and work

with us for our mutual benefit"

in Tokyo – there is clearly considerable interest in our region,” he says.

“Investors from the Far East have al-ready entered places like Russia, Turkey and Egypt with us, countries they know something about and often have historic ties with,” says Sir Suma. “The next step is to get them interested in countries they don’t know so much about, but where there are still great opportunities – Tajikistan, for instance.”

Global MittelstandGoing beyond large foreign corporations, the EBRD is now trying to encourage smaller overseas companies to invest. “It is relatively easy for us to engage with the big conglomerates in places like Singapore, South Korea and Japan – and there are, of course, already large business-houses from these countries operating in our re-gion,” he says.

“What I’d really like to do now is what we’ve already been successfully doing in Germany, convincing the Mittelstand – the medium-sized companies – to expand into our region” he says. “It would be great to get the Asian Mittelstand more involved in

our part of the world, but these smaller companies need a lot more political com-fort than their larger counterparties when it comes to investing, so it’s our job to give them the information they need.”

During this two-day annual meeting, the EBRD’s economists will publish new economic forecasts for numerous coun-tries from Central and Southeast Europe, through to the Caucasus, Central Asia and the southern and eastern Mediterranean. They will show that a return to growth across the region as a whole “remains elu-sive”, with economic weakness in Russia continuing to have an impact well beyond that country’s borders – even if the Geor-gian economy has so far remained rela-tively insulated from the slowdown of its giant neighbour.

When asked what he wanted the central message of this Annual Summit to be, Sir Suma launches a clarion cry for further reforms. “Our region covers such a range of countries, from Casablanca to Vladiv-ostok, that it is difficult to generalize,” he says. “But I’d argue that in a world where countries and companies are compet-ing for scarce investment resources, it’s those who reform fastest, who get their investment climates right, who get their governance right, that are most likely to win that race.”

Sir Suma Chakrabarti, EBRD President

Watch bne IntelliNews editor at large

Liam Halligan interview with Sir Suma

Chakrabarti, EBRD President here:

www.youtube.com/watch?v=MNCFB3lMa

EA&feature=youtu.be

Watch bne IntelliNews editor-in-chief

Ben Aris interview with Giorgi

Margvelashvili, President of Georgia here:

www.youtube.com/watch?v=55qzGC72W8

o&feature=youtu.be

Top StoriesTop Stories bne IntelliNews Daily 5May 14, 2015 May 14, 20154 bne IntelliNews Daily

Giorgi Kadagidze is used to navigating stormy seas. When he was appointed head of the central bank in February 2009, the Georgian economy was still reeling after the double-whammy of the conflict with Russia over the breakaway region of South Ossetia in August 2008 and the global financial crisis that started the following month. Tough decisions were required, and despite critics stating that at 28 he was too young and inexperienced to chart an independent course as governor of the National Bank of Georgia, Kadagidze responded with radical measures.

Six years on, Georgia’s banking system is considered one of the strongest and most stable in the post-Soviet space, and much is owed to the youthful governor’s fierce determination to bring the country’s financial system in line with the world’s most developed. To those who know him, it was no surprise that he was named central bank governor of the year for Europe in 2010 and 2015 by The Banker. “We’ve come a long way, doing a tremendous job in reforming an ordinary post-Soviet failed country,” Kadagidze tells bne IntelliNews in an interview. “But we need further reforms, which I call secondary reforms, to support the country’s competitiveness. We cannot afford [to relax], as Georgia is [still] one of the poorest countries in Europe.”

Despite the headwinds, the economy grew at an average of 5.7% a year between 2010 and 2013, and the c o u n t r y r a n ke d highly by other major economic m e a s u r e s – ease of doing business, reforms and investment climate. But clouds are once more gathering on the horizon and, Kadagidze

INTERVIEW: Georgia’s young central bank chief defies his critics

warns, “we are heading towards very difficult times.”

The deepening economic crisis in Russia and Ukraine is hitting the country’s exports, remittances from migrants and tourism. Last year the economy grew by 4.7%, short of the 5.0% prediction, and for 2015 the government has cut its forecast from 5% to 2%.

The instability is also keeping a lid on investment. In 2014 foreign investment increased by 35% to $1.27bn, marking the highest inflow since the depths of the crisis in 2008, though Kadagidze notes this is still “not enough to support growth.”

In June, Georgia signaled to Russia where its future lies by signing a free trade and association deal with the EU, which will grant Georgian products and services access to Europe's 500mn-strong market. However, Kadagidze warns that this by itself will not be enough. “The deal [with the EU] is a huge plus, but it doesn’t lead to immediate flow in investment,” he says. “Let me put it bluntly: if we have the same tax burden and bureaucracy as eastern European Nato members, why would investors come here given that there is a much more political instability in that region?”

Lately lari worriesThe crisis in Ukraine and Russia is also proving a currency headache for the NBG. Georgia marked the end of 2014 with a sharp weakening of its currency against the dollar; between November and March

the lari lost 29% of its value against the dollar, falling to GEL2.22 to the dollar from GEL1.7 in early November.

Kadagidze opted for safeguarding the NBG’s reserves rather than use them up fighting to maintain the lari’s value. “Experience [in other countries] shows that any central bank going against market fundamentals is not going to end well,” he explains. “Spending

reserves to cover up the fundamental shortages will not help at all – it would

only postpone the problem.”The central bank has had a few targeted foreign

exchange auctions, but with a policy of

inflation targeting it intervenes only

in cases where depreciation

starts affecting

prices.

The NBG’s currency reserves were $2.469bn at the end of February, slightly down from $2.699bn as of December 31.

The International Monetary Fund (IMF) stated that it “fully” supports the NBG stance to refrain from intervening and allow the lari to float. “We’re intervening only to prevent large [daily] fluctuations, which would create more uncertainty, so we try to smooth that down. But in no way are we trying to guide the exchange rate in one direction or another – that’s just not possible.”

Not everyone agrees. In February, former prime minister, Bidzina Ivanishvili, Georgia’s richest citizen and widely believed to be the “grey cardinal” calling the shots in the government, accused the central bank chief of “inaction and wrong actions”. But Kadagidze, the last remaining high-ranking official appointed by the former government led by ex-president Mikheil Saakashvili, who some think is being made a political scapegoat for the lari’s weakness, counters that his stance is not an isolated one. “All our counterparts in [international financial institutions] are on our same page,” he stresses.

From his top office of the towering steel petals-like building that is the central bank headquarters, Kadagidze enjoys wide views over the capital Tbilisi and its

centres of power – from the presidential palace to Ivanishvili’s $5mn steel-and-glass mansion. “Internally there is a lot of undeserved criticism, but that will not make us change course. Our government paper trades at good yields, banks are healthy and portfolio investors are ready to invest, and we are we not witnessing capital flight, as in many emerging markets,” he points out. “Investors trust the prudence of our monetary policy and our banking supervision – there’s no way we can give that up.”

Stable groundThe banking system indeed looks in fine fettle, esepcially compared to those in surrounding countries. The central bank remains one of the most conservative in the former Soviet space, demanding stringent levels of capital and liquidity, and maintaining close supervision. “We have a very prudent banking system, our banks have enough capital buffers to absorb shocks, we are in a very strong position,” he states, adding proudly that no bank has needed to be bailed out.

Prudence is also behind the NBG decision, announced last October, for commercial banks to spin off their non-

core banking businesses by December 2015, claiming that “the practice creates a conflict of interest”.

The previous liberal policy of Georgia’s central bank had allowed banks to wade into real estate and healthcare as part of a strategy to overcome the 2008 financial crisis, but as the sector is now on a strong footing, the time has come for prudence over profits. “It is a preventive measure,” explains Kadagidze. “Banking-holding investors are more than welcome in any field of the Georgian economy, but we say but let’s not do it through the banking balance sheets, let’s keep those nice and clean for banking and do the rest though different means.”

Over the years, the central bank has supported the development of local capital markets. As high dollarization remains “one of [Georgia’s] biggest macroeconomic challenges”, since 2010 the NGB has pushed for a “larisation” of the financial sector. The result is that now more than half of all individual loans are in the national currency. In 2014, the EBRD issued the first lari-denominated bond worth €20.7m and in 2015 the International Finance Corporation (IFC) and the Asian Development Bank (ADB) followed suit. The issuance of local currency bonds by international financial institutions will further support the supply

of long-term lari resources on the market and the de-dollarisation process in general, Kadagidze argues.

Still, Georgia’s capital market is embryonic and banking remains concentrated in the hands of just two banks – Bank of Georgia and TBC Bank, which are both listed on the London Stock Exchange. “It comes only with the development of the country, you cannot have a low-income country with developed capital markets, there’s not enough liquidity,” says Kadagidze. “It is a work in progress. We developed the forex market, then government and central bank local paper, then last year the corporate bond market. The EBRD made a pioneering move, and we followed by cleaning up all the regulations around it. Once that market is consolidated, we will be approaching equities. But you cannot skip [stages]. We could buy up-to-date software from LSE, Nasdaq and put everything up, but it’d be empty if there are no buyers and sellers... Things don’t work that way.”

By the time these reforms start bearing fruit, Kadagidze will not be overseeing Georgia’s financial system, as his mandate expires in February 2016. “I’ll make up my mind in summer about the future,” he says, “but I’d like to work in education.”

Tunisia, Jordan and Morocco have struggled with security challenges and overdue reforms to fiscal and monetary policy, as well as the banking and private sectors. The trio remains shunned by mainstream emerging market investors despite support from the International Monetary Fund (IMF) programmes and EBRD, amongst others, as well as the promise of cash at the the G8 Deauville summit.

Tunisia, Morocco, Jordan struggle against security and reform challenges

Tunisia has it especially bad after its burgeoning tourism sector took a hit fol-lowing a terror attack on the Bardo Na-tional Museum in the Tunisian capital city of Tunis in March. The country successfully elected a new government in 2014 – the fifth civilian-Islamic party coalition since the 2011 revolution – and saw a $1bn sov-ereign bond issue oversubscribed, but the terror attack saw its first-quarter MSCI stock market performance turn negative

Gary Kleiman of Kleiman International

Khachapuri. If you do nothing else cultural during your time in Georgia, you have to try the star of the Georgian cuisine - khachapuri. Famous across the entire former Soviet Union, the cheesy bread could be described as "Georgian pizza" but that doesn’t really capture it – 88% of Georgians prefer Khachapuri to pizza.

Made with a tangy local cheese not available in the west (think of Feta mixed with Gouda) there are several types, but the classic is the Imeretian khachapuri, which is round with melted cheese on top, or Megruli khachapuri, which is the same but with extra cheese on top. Alternatively there is Adjaruli khachapuri, where the bread is formed into a boat and an egg baked on top, and several other alternatives stuffed with potatoes or spinach. It is best eaten with another classic, "Krasni Lobio" (hot red kidney beans) and lots of red wine.

Poll shows political apathy is rife among Ukrainians (March 6-16, 2015)

Petro Poroshenko Bloc

Self Reliance'Samopomich' PartyRadical Party of Oleh

LyashkoFatherland

'Batkivshchina' Party

Opposition Bloc

Right Sector

Freedom 'Svoboda'Party

People's Front

Other

Would not vote

Don't know

13.2%

23.1%

24.1%

5.6%

5.3%

5.7%

2.7%

2.5%

5.4%

8.0%

4.4%

Party popularityPetro

PoroshenkoYulia

Tymoshenko

Oleh Lyashko

AnatoliyHrytsenko

OlehTyahnybok

Serhiy Tihipko

ArseniyYatsenyuk

Other

Against all

Would not vote

Don't know

19.2%

20.1%

10.1%

23.9%

2.1%

4.2%

1.7%

6.3%

5.0%

5.3%

2.1%

Candidate popularity

Poll shows political apathy is rife among Ukrainians (March 6-16, 2015)

A recent poll by Kyiv-based sociological researchers R&B Group has revealed an overwhelming sense of political apathy among Ukrainians.

Looking at the chart on the left, with 19.2% Poroshenko also led the poll for individual candidate popularity when respondents were asked whom they would vote for were an election held. Even this rating fell short of the 20.1% who

said they would not vote for any of the current potential candidates. 23.9% were undecided.

As the chart above shows, a meagre 13.2% rating was enough to see incumbent president Petro Poroshenko’s ruling bloc lead the party polls, yet this figure fell short of the 23.1% who said they would not vote for any of the parties or the 24.1% who were undecided.

along with the res of the frontier Mideast components.

The country also put a new constitution in place, enshrining secular and female rights, but the economy has been stuck in a high-debt, state-run rut. Tunisian GDP growth may rise marginally to 3% this year, accord-

ing to the IMF – around half the pre-Arab Spring average as youth unemployment is stuck at 25%. The various governments have tried to quell the restive population by raising salaries and spending, and delayed food and fuel subsidy cuts, so the collapse of oil prices will bring some relief, but Tuni-sia's budget deficit will hit 5% this year, as government debt to GDP approaches 50%.

Stubborn inflation at 5% erodes real in-come, while 40% of the population are still employed in the informal economy, turning to smuggling and other illegal activities to make ends meet. The biggest state-owned bank is bust, and non-performing loans con-centrated in the hospitality sector are esti-mated at one-quarter of the total. Rural and non-coastal regions have been undeveloped for decades with high double-digit poverty. the poverty makes residents easy prey for Islamic State recruiters, promising thou-sands of dollars a month to fight in Syria. On the other hand European trade, foreign direct investment and remittances have foundered and left a chronic current account gap.

Morocco is hailed as the "reform leader" after inking a second $5bn IMF precaution-ary pact in mid-2014. Good rainfall could propel agriculture-dependent GDP to 4%

“Investors trust the prudence of our monetary policy and our banking supervision”

Georgia on my menu

growth this year, and phosphate export prices have started to recover. The Insti-tute for International Finance cited “bold” energy subsidy adjustments in its March outlook, which could bring the fiscal deficit below 4%, and a 15% currency deprecia-tion to aid external accounts. Consecutive

global bond issues have been snapped up, and banks have gained on the stock ex-change with their continental expansion.

However, the decline in household pur-chasing power amid a spurt in inflation has sparked popular grumbling, and business fears that the IS threat could cause the King to harden his stance both on civil and com-mercial liberties. Anti-corruption groups have muted criticism of royal elites running the big-gest conglomerates, who argue their holdings are “strategic” and should be protected from home-grown and foreign competition.

Jordan directly suffers from the Iraq and Syria conflicts closing borders and creating refugees, and it relies on Persian Gulf grants and remittances to maintain its dollar peg and service public debt. Tourism has held up, and the central bank cut interest rates in February to sustain growth. Like its Magh-reb neighbours, Jordan routinely registered 5% GDP growth in an earlier reform era, with the privatisation of state enterprises carried out against a harsh geopolitical backdrop. Tunisia could inject that kind of momentum in the aftermath of the latest security scare by recalling the revolt’s jas-mine roots and allowing economic impera-tives to flower.

“The trio remains shunned by mainstream emerging market investors”

bne IntelliNews Daily 7May 14, 2015 May 14, 20156 bne IntelliNews Daily Eastern Europe and the CaucasusEastern Europe and the Caucasusand in the Cabinet of Ministers we removed the 15% discount and a organised a new auction," Abromavicius said. The oligarch blocked the new auction for two months, but then "in March we sold the oil without a discount for the first time in the history of Ukraine. The tycoons were earning be-tween $150mn-200mn a year from this scheme," Abromavicius claims.

Corruption is widespread and not lim-ited to the oligarchs, so Abromavicius has

launched an initiative to properly compen-sate state employees and bureaucrats to incentivise them to work for the benefit of the state, which will be presented to par-liament in the coming months.

The next priority will be to sell off these assets after they have been cleaned up. "This year we have UAH17bn (€743mn) in the budget as proceeds from the privatiza-tion process, so we are definitely going to attempt to sell something," says Abromavi-cius. "I believe a state with weak institutions, like Ukraine, is a bad owner of the assets. We can only make our economy more suc-cessful and dynamic by selling the assets to, preferably Western, investors, who will make them more dynamic and transparent."

The reform of Ukraine's industrial base is not going to be easy because, says Abro-mavicius, "resistance is still massive wher-ever you look.” However, he remains opti-mistic that the worst is over. "Finally we have a critical mass of people that want to change the country in the government, in the parliament, in the presidential ad-ministration and on the streets, to ensure Ukraine finds the right path.”

Global beer groups Carlsberg, Heineken and Olvi are flourishing in the Belarusian market after taking over local breweries in the last decade. The trio are putting in solid financial returns and have stolen a march on their local rivals, which are now paying dearly for the state's failure to privatise the local companies.

The state-controlled brewer Krinitsa is the biggest beer producer in Belarus. The company brewed a third (31.8%) of all the beer in Belarus in 2014. However, de-spite its potential the brewer has suffered heavy losses in recent years and relies on financial support from the government. “At present, the company is one of the lead-ers of the Belarusian economy in terms of losses,” Oleg Andreyev, managing director of investment banking at Minsk-based En-terInvest, tells bne IntelliNews.

In April 2014, the brewer’s situation came under the steely eye of Belarusian President Alexander Lukashenko, who commented: “Only 55% of Krinitsa’s ca-pacity is being used... A great amount of money has been injected into the compa-ny's production and only half of it is in op-eration. And now the company is asking for money to pay off its loans.”

Despite this telling-off, the company’s predicament has not significantly improved since; just 63.6% of the brewer’s production capacity was in use in 2014. This stands in stark contrast to three foreign-controlled beer makers – Alivaria (owned by the Carls-berg Group), Lidskoe Pivo (owned by Olvi) and Heineken in Belarus – which have pro-duced significantly better results in terms of capacity utilisation.

Beer has been a bellwether in transition countries, as it is usually one of the sectors to be privatised that results in an explosion of sales and profits on the back of dramat-ically improved quality. Krinitsa missed its chance when the authorities baulked at selling the company off to foreign inves-tors several years ago. The government handed Krinitsa over to Priorbank, Raif-feisen Bank International’s subsidiary in

INTERVIEW: Ukraine economy minister tightens grip on state companies

Global brewers flourish in Belarus Bank of Georgia to spin off private healthcare business

Belarus, in 2003 on a five-year trust basis, explains Andreyev, to try and attract inves-tors. The company built up a 50% market share by 2007-2008 and many international companies, such as Oasis Group and Efes Beverage Group, had a real interest in tak-ing it over. “Success was close enough,” Andreyev says.

However, the government got cold feet and cancelled the sale. Andreyev says the unwillingness to privatise has always seemed paradoxical. “There is a feeling that Krinitsa had a patron [inside the gov-ernment] who put aside the asset ‘for themselves’.”

Too much frothBrestskoe Pivo, situated in the eponymous region on the border with Poland and 90% owned by the state, is also experiencing chronic problems. The brewer’s capacity

usage is the lowest among the country’s brewers, at just 42.3% in 2014, and in No-vember it was declared bankrupt by a Be-larusian court.

Like Krinitsa, the authorities’ negotia-tions with potential buyers came to nothing because a price could not be agreed and the state loaded the company with such heavy social obligations the project would have been "completely unprofitable and ineffi-cient”, says Andreyev.

The regional authorities are due to make a last ditch attempt to offload the brewery on May 5, with an initial asking price of BYR163.6bn (€10.3mn). However, the au-thorities were in danger of repeating past mistakes, by imposing extremely tough

Amongst the first things the Lithuani-an-born fund manager and investment banker Aivaras Abromavicius did follow-ing his appointment at the end of 2014 as Ukraine’s new economy minister was to order a stock take of all the state-owned enterprises under his control.

“We have 3,000 state-owned enterprises, of which only 1,833 are operational, but

conditions, in particular a requirement to invest at least $10mn in the first 12 months after the sale, as well as repaying its debts to the state. The new owner would also not be allowed to sack any workers for three years, and their salaries should remain on a par with the regional average.

Daniel Krutzinna, managing partner with Civitta consulting company, notes that Obolon, Ukraine’s largest beer maker, and Detroit Investments, a Cyprus-registered beer and beverages producer, were once interested but probably won’t bid this time round. “The brewer should have been sold long ago, when it was in better financial shape and when greater demand existed,” Krutzinna tells bne IntelliNews.

And this is not a great time to be sell-ing breweries. The regional crisis has led the Russian beer market, by far the big-gest in the region, to fall by 30% between

2008 and 2014, according to the Russian brewer Baltika. All three of the leading for-eign-owned beer groups have lost exports as a result. At the same time the cheaper ruble has made Belarusian beer even less competitive.

In the meantime, Belarusians continue to favour spirits over beer: Belarus has one of the lowest rates of annual beer consumption in Europe – about 50 litres per head, compared with the continental leader, the Czech Republic’s 143 litres. “Seven years ago we were distressed be-cause Belarusians consumed too much strong spirits... Strong alcoholic spirits are still popular, while demand for beer is the same,” Lukashenko said last year.

aged in the interests of some private own-ers, not the state. We need to change that.”

The ministry has already changed the way the heads of state-owned enterprises are appointed, namely that they must now be approved by a committee of ten people: “five ministers all with investment banking backgrounds like myself; and five inde-pendents including the heads of the World Bank, the EBRD, IFC in Ukraine, [the newly appointed] Business Ombudsman and the

rector of the Kyiv School of Economics.” The top-50 companies will also now be forced for the first time to carry out audits with one of the big recognised auditors to produce transparent accounts.

The abuse of state-owned assets was highlighted by the recent showdown between the government and Ukraine's pre-eminent oligarch, Ihor Kolomoisky, who owned 43% of oil and gas producer Ukrnafta with the state holding another 51%. Previously, the compa-ny's charter required 60% of shareholders to be present at shareholder meetings, leverage that Kolomoisky used to his personal advan-tage. “After years of attempts, finally [in April] the parliament reduced the requirement for quorum from 60% to 40%," Abromavicius says. “As the president said: state assets need to be managed by the state and private assets by private companies. This is the be-ginning of the process of de-oligarchisation. It was bold move and a very necessary move.”

For years Ukrnafta sold its oil through auction at a 15% discount at which only Kolomoisky could participate. "So when I became minister I appointed myself as chairman of the commission that sold oil

IIB stays relevant

Ben Aris in Moscow

"We are back in the game and growing rapidly after we appointed a new management team two and a half years ago," says the ebullient chairman of International Investment Bank (IIB), Nikolay Kosov.

IIB is a little piece of Soviet history that’s alive and well in modern Europe. Set up in the 1970s, the bank was supposed to be the development bank of the Comecon countries. Its goal was to encourage and finance cross-border investment that would bind the economies of the Communist world together more tightly.

This legacy is apparent in today’s shareholder structure: there are five Emerging European states that are now EU members (Bulgaria, Czech Republic, Romania, Slovakia and Hungary, whose request to rejoin IIB was approved by the IIB Council in November); Russia, which is the largest single shareholder; and there are two Asian countries (Vietnam

and Mongolia); as well as Cuba, the only international financial institution (IFI) that the Caribbean state is a member of.

Headquartered in Moscow in one of the three towering bank blocks on Masha Poryvaevoy Street, the former home of the Soviet-era Gosbank, it's tempting to think of IIB as a Russian bank. However, the voting system in the Council, IIB’s highest governing body, is “one country one vote” (irrespective of the numbers of shares a country holds), with the five EU members holding the majority of votes. All decisions require at least a three-quarters majority of votes, while some require a unanimous vote. That means Russia is in the minority, despite being the largest contributor to the paid-up capital.

But the bank's multinational make- up means after the EU and US imposed financial sanctions on Russia last year there was an explicit decision in Europe

in July to exclude IIB from the sanctions regime, recognising the bank as a true IFI operating independently from the Russian government. "IIB is one of the world’s older development banks and is a normal IFI enjoying the privileges that come with international inter-government agreements. We are not subject to a national regime or answerable to any central bank, and we are accredited with the UN as an international organisation," says Kosov.

The bank is medium-sized by interna-tional standards, with authorised capital of €1.3bn and paid-in capital of €272.6mn, of which Russia has contributed a 55% stake. When Hungary is fully signed up Russia's share will fall further to 51.2% and even-tually the plan is to reduce Russia's share to the 40% it held when the bank was first set up.

Following the collapse of the Soviet Union, the bank was directionless and floundered for almost two decades; when Kosov took over two years ago 80% of the loan portfolio had gone bad. "2012 marked a new beginning and the bank adopted a new strategy in June of that year. Internally, the team was significantly renewed with more than 60% of staff having joined us since then," says Kosov. "We have also put in place a new risk management system that

has been accepted by the rating agencies as corresponding to the best international practices.”

IIB’s member countries are an odd mix, but Kosov claims this works to the bank’s advantage. The bank doesn't have the same level of resources of some of its peers, so has focused on providing small and medium-sized enterprise (SME) support to financial institutions in its member countries, which now makes up 65% of the bank’s loan portfolio. "It has been a very popular programme," says Kosov. The bank has lent some €7bn since its establishment, the vast majority before 1990, but it now has aggressive expansion plans. Over the last two years the bank signed loans totalling around €320mn and aims to achieve €1bn in assets by 2017. Its current assets represent €611.5mn.

IIB has carved out a nice regional niche for itself, and now it has become more active its profile is rising. However, given its legacy there are some obvious lacunae in its membership list – a problem that the bank hopes to rectify. Other countries like Ukraine, Poland and Belarus are obvious candidates for membership, and Kosov says that talks with these countries have begun, but admits they will go slowly given the political tensions in the region.

“The brewer should have been sold long ago”

“This is the beginning of the process of de-oligarchisation”

Sergei Kuznetsov in Minsk

bne IntelliNews

The Georgian central bank’s decision to tighten regulations and force banks to ditch non-financial assets will force Bank of Georgia to spin off its flourishing health-care business before the end of this year.

“Bank of Georgia Holding intends to IPO the healthcare business, Georgia Health-care Group (GHG), through a planned stock market listing in London. We are targeting an IPO in 2015,” Bank of Georgia’s chief executive, Irakli Gilauri, confirmed to bne IntelliNews.

London is a market that Bank of Georgia knows well, as the bank has been traded on the London Stock Exchange since 2012.

The IPO, which includes healthcare ser-vices and health insurance, is likely to prove popular with investors. The busi-ness reported a GEL13.2mn ($7.5mn) profit in the first nine months of 2014, up from GEL11.3mn ($6.4mn) during the same pe-riod in 2013. The floatation will also play to a region-wide trend of expanding private health services that appeal to the emerging middle classes looking for better quality services for their families.

Bank of Georgia’s holding company has been buying up healthcare facilities, mostly in the capital of Tbilisi, and currently owns some 38 hospitals and clinics with over 2,000 beds, which accounts for just under a quarter of the private healthcare business in the country.

“The event itself [the IPO] is more im-portant than the actual valuation as a key re-rating catalyst for the [Bank of Georgia] stock,” says Renaissance Capital’s head of financial sector research, David Nangle, confirming his ‘Buy’ rating on the bank's stock.

Although the healthcare business has proven to be a good investment, the central bank is not keen on commercial banks in-vesting in non-core businesses irrespective of how profitable they prove to be. In Oc-tober the National Bank of Georgia (NBG) ordered banks to ditch their ancillary busi-nesses by the end of 2015, creating an at-tractive opportunity for investors.

“This practice creates a conflict of in-terests,” the NBG noted, adding that the central bank welcomes shareholders and owners of commercial banks investing in non-banking services, but only if carried out separately from the bank.

The share of non-financial assets as a proportion of banking sector assets re-mains relatively small, according to ana-lysts, though the NBG decided to nip a po-tential problem in the bud by toughening restrictions. During boom times, banks have a tendency to build up exposure to the most profitable sectors (typically real estate investments), which recent history has taught usually ends in tears when the inevitable downturn arrives.

The NBG has been tolerant of non-core investments in the last few years as the banks struggled to make ends meet fol-lowing the 2008 crisis. But now the sector is back on its feet, it deems the time for prudence over profits has arrived.

Ukraine has just embarked on what is arguably its first concerted attempt to reform its economy and run it on a market basis. The new Minister of Economy Aivaras Abromavicius talks to bne IntelliNews about the challenges that lie ahead.

Ben Aris in Moscow

there is a high concentration of assets: the top 100 control 92% of the revenues, but a little over half are losing money,” Abroma-vicius tells bne IntelliNews in an exclusive interview on the eve of the EBRD annual meeting. “These companies have a dividend yield of about 0.1%. They are not sharing cash flows with their main shareholders – the state. For years they have been man-

bne IntelliNews Daily 9May 14, 2015 May 14, 20158 bne IntelliNews Daily Eastern Europe and the CaucasusEastern Europe and the Caucasus

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Russia has been giving everyone fits re-cently. The speed of the collapse in the ruble in late 2014 caught many experts by surprise. Its almost equally rapid rebound through the first four months of 2015 did too.

Professional prognosticators have been admirably honest about the limits of their insight and about the positively enormous uncertainty currently hanging over Russia’s economy: many will openly admit that they genuinely have no idea what’s going to hap-pen next and that “wait and see” is the only responsible option.

Some predictions call for a modest re-cession (around a 1-2% loss in output) fol-lowed by a swift return to growth. Business as usual, in other words. Other predictions expect an economic downturn that will be far more harrowing than the one which struck Russia in the aftermath of the global financial crisis: a devastated and devalued currency, a bond market in ruins and an up to 10% loss in overall output.

It being Russia there are several good arguments in favour of both of these schools of thought, which, for simplicity and clarity’s sake, I will call the optimistic and pessimistic. It’s worth presenting them in as fair and balanced a manner as possi-ble, and allowing readers to subscribe to whichever theory they find more plausible.

Reasons for pessimism

Foreign trade is getting clobberedAccording to the latest data from Rosstat, which cover January-February, Russian exports fell by 25.4%. Imports fared even worse, declining by a whopping 38% year over year. Altogether Russia’s total foreign

COMMENT: Reasons to be cheerful – and despondent – over Russia

trade turnover decreased by a full 30.1% in comparison to 2014.

To place that -30% performance in com-parative context, in 2009, the year during which Russia was most significantly im-pacted by the global financial crisis, inter-national trade experienced a 35% decrease.

The ruble crisis, then, has initially ex-erted a negative impact on Russia’s foreign trade that was of roughly equal magnitude. That, in turn, would suggest that the ulti-mate impact on Russian output will also be of a roughly equal order of magnitude. Since Russia’s GDP declined by 7.2% in 2009, the 2015 performance should be in the same ballpark.

This oil price collapse is supply driven (and therefore longer in duration) While the oil price declines of late 2008 and 2009 were of almost exactly the same magnitude as those of 2014-15 (and, in inflation-adjusted terms were probably even more severe) the reasons underlying the collapses in prices were very different.

2008-09 was about the sudden popping of a commodities bubble that, by virtually any reckoning, had grown wildly out of step with global fundamentals. Supply hadn’t suddenly changed, there weren’t any no-ticeable changes to the global oil supply, but as the bottom fell out of the global fi-nancial system there was a sudden shock to demand. As this shock dissipated, prices rebounded reasonably quickly: the price of Brent crude more than doubled over the course of 2009.

The 2014-15 situation is very different. Even as prices marched relentlessly down-ward production of US crude has continued

to grow. The world oil market is currently awash with excess oil. According to the US Energy Information Administration (EIA), world oil inventories have been explod-ing, growing by 1mn barrels a day (b/d) throughout 2014 and with projected aver-age growth of more than 1.7mn b/d through the first half of 2015.

The EIA doesn't expect consumption to match supply until early 2016, and only at that point will prices start to grow.

The government has less “dry powder” At the end of September 2008, as oil prices began to crash and the economy began first to decelerate and then lapse into crisis, Russia's total foreign reserves amounted to $557bn, of which $542bn were highly liquid foreign currency. In nominal dollar terms Russia’s economy at the time was roughly $1.66 trillion, so its reserves were about 33% of its total GDP. This sizable financial cushion enabled the Russian government to defend the ruble and to engage in sub-stantial anti-crisis measures.

This time around, Russia has substan-tially less room for manoeuvre. At the end of September 2014 Russia's foreign reserves amounted to $454bn of which $409bn were foreign currency: they were thus both smaller in absolute terms and marginally less liquid. However, the most important fact is that the reserves now amounted to only about 20% of Russia’s $2.2 trillion economy.

This suggests that, unlike in 2008-09, the Russian government won’t be able to throw as much money at the problem: it will have to be a bit more careful about picking and choosing which industries get assistance.

Reasons for optimism

The initial hit to industrial production has been quite modestThrough the first two months of the year (the latest for which data is currently avail-able) Russia’s industrial production was a mere 0.4% lower than it had been during the same period in 2014. A 0.4% decrease is, to be sure, still a decrease, but it was more muted than many analysts had pre-dicted and much less severe than the de-cline which took place during the worst of the 2008-09 financial crisis.

When you also consider the unexpected growth that the economy experienced in the fourth quarter of 2014, it’s not even clear that Russia has technically entered a recession yet. Yes, a recession is at this point inevitable, but it’s been late in coming and modest in its early impact. It suggests that the overall decline to total output will be on the lower end of the spectrum, or somewhere between 2.5% and 3.5%.

Inflation might have already peaked (and interest are starting to come down)Due in large part to the extraordinary sen-sitivity of Russians to inflation, the Russian central bank keeps a very close eye on prices. Fears over excessive inflation in the aftermath of the ruble’s collapse were what inspired the Central Bank of Russia (CBR) to hike interest rates so massively: regu-lators were more afraid of run-away price growth than they were the downturn that would inevitably result from having credit become so ruinously expensive.

Well, it took a while for the rate hike to really "bite", but recent data indicate that year-over-year inflation has finally started to decrease: between April 7 and April 13, inflation fell by a modest 0.1% to 16.8%. The CBR, then, seems likely to continue its modest ratcheting-down of interest rates.

Inflation is obviously still high, as are in-terest rates, but for the first time in many months they are heading in the right di-rection. This won’t magically propel the Russian economy into rapid growth, but it will have a positive impact on output in the second half of 2015.

The ruble has leveled off (for the moment)The ruble’s sudden collapse (driven in large part by declines in the world price of oil) was what really kick-started Russia’s crisis. As the ruble weakened, foreign borrowing became more expensive, as did imports of foreign goods. The ruble’s swoon also spiked inflation, and, as noted previously, forced the CBR to engage in a potentially output-crushing hike in the interest rate. Currency crises have a way of spinning out of control, and so long as the ruble was nose-diving it was hard to see how Russia’s economy was going to stabilize.

Well the ruble pulled off a rate feat, moving from "worst to first" in the blink of an eye and clawing back many (but by no means all) of its earlier losses. Could the ruble resume its downward slide? Yes it very well could. Forecasting the ruble has been a dangerous game lately, and given the persistent supply glut in oil another tumble in prices is far from impossible.

But the more dire economic forecasts all had the ruble substantially cheaper than its current level of RUB53 per dollar, a level that would spark further inflation and pre-vent the CBR from cutting rates.

Mark Adomanis in Philadelphia

In 2007, the Central Bank of Russia (CBR) made a definitive change in the way it works: it formally dropped attempts to manage the exchange rate and focused entirely on inflation targeting. Today, in the aftermath of last year's ruble crisis, the bank has in effect been forced to abandon inflation targeting.

Russia suffered hyperinflation in the 1990s (technically defined as inflation above 50% a year) and inflation remains a highly emotive issue. For most of last year inflation was put at the top of the lists of regular Russians' worries, ahead of the conflict in Ukraine, although since the start of this year the economy has overtaken it, as real wages began to fall for the first time in more than a decade and unemployment started to tick upwards.

However, the CBR lost control of the situ-ation in December last year when the ruble crashed on the back of tumbling oil prices and the regulator was forced to hike rates by 6.5% to 17% in one day. The commercial cost of capital rocketed to a growth killing 20%-25%. Since then the CBR has had one task: get interest rates down as fast as possible as the economy has simply ground to a halt and will stay stopped until interest rates are back into single digits. The CBR surprised analysts with a 2% cut in January, a 1% cut in March and most recently a 1.5% cut on April 30, bringing the minimum repo rate to a better, but still high, 12.5%.

The first question the rush to cut rates raises (and the banks would like to go even faster) is: won't slashing rates send infla-tion shooting back up?

In a statement accompanying the last rate cut the CBR said inflation was running

Russia's inflation target becomes a mirage

at 16.5% as of April 27 and was expected to fall to below 8% in 12 months' time and to 4% in 2017.

Economists such as Alfa Bank's Natalia Orlova and Sberbank's Evgeny Gavrilenkov have said that upward pressure on inflation caused by the 50% devaluation of the ruble in December has worked its way through the system faster than expected; the spike in inflation caused by a sharp devaluation usually takes about six months to work its way through an economy, but in Russia's case inflation is thought to have peaked in March instead of April or May. That gives the CBR some wiggle room for faster-than-usual rate cuts. The rate cut was further

supported by a rally in the ruble vs the dollar and a partial recovery of oil prices.

Secondly, the governor of the CBR Elvira Nabiullina believes inflation pressure is mainly coming from factors such as soar-ing food prices (the price of cabbage has tripled) - which are the result of agricul-tural sanctions imposed by the Kremlin last year on EU and US goods - rather than

monetary policy decisions ie. the cause of the current inflation is something that the CBR has no control over.

The upshot of all this upheaval is that the CBR's inflation-targeting policy has gone out the window as it administers a string of cardio-vascular rate cut shocks in an attempt to revive Russia's moribund economy.

"The main reason given by the central bank for the [April interest rate] cut was 'lower inflation risks and persistent risks of considerable economy cooling', which rein-forces the direction of the monetary policy taken after the CBR's U-turn in January 2015," said Danske Bank in a note. "Since

then, the central bank is seriously tak-ing into account economic developments rather than purely targeting inflation."

However, independent economists are worried and think that inflation is going to be harder to defeat than the CBR is predicting.

"That the current inflation spike to 16.9% year-on-year is transitory is a view shared

by the majority of analysts: the effects of exchange rate depreciation and the import ban will evaporate soon," said Alfa Bank's Orlova in a note. "However, CBR expecta-tions of single-digit inflation by January 2016 are optimistic, in our view, as year-to-date inflation had already hit 7.5% by the end of the first quarter of 2015 and would have to stay at 0.3% month-on-month for the rest of the year to meet that target. We, on the contrary, expect inflation at 11% for the full year."

Orlova also pours cold water on the CBR's target of 4% inflation in 2017. The market consensus is for inflation of 7% in 2016 and 6% in 2017.

Part of the problem is Russia's election cycle will end up boosting inflation. Usually inflation is brought down partly by slowing nominal wage growth, but Russia goes to the polls to elect a new Duma in 2016 and to (presumably) reaffirm President Vladimir Putin in his job in 2018, and in the past the government has dramatically hiked both public wages and pensions in the run-up to elections. This time round the Kremlin will have to spend heavily to keep the rul-ing party of power United Russia in office; it barely cleared the 50% threshold in parlia-mentary polls in 2011 and has been loosing support steadily since then.

Splashing money about in the public sec-tor might stem that slide, since about half of Russia's population is directly or indirectly dependent on state wage spending, while state social spending accounts for 20% of household incomes, according to Alfa Bank. This will give all give another boost to infla-tion, burying the central bank's target and its pretence of targeting.

Ben Aris in Moscow

“The CBR is seriously taking into account economic developments rather than purely targeting inflation”

Turkey takes centre stage in energy battle

The fight between the West and Russia over energy supplies is increasingly centring on one country that is itself struggling to de-fine its place in Europe: Turkey.

On May 8, EBRD President Suma Chakra-barti said during a visit to Baku that the multilateral lender will extend a syndicated loan for Azerbaijan's biggest gas project, the second phase of the Shah Deniz project, which will produce 16bn cubic metres cm of gas a year (cm/y) from 2019-2020, with 10bn cm earmarked for Europe and 6bn cm for Turkey. The gas will be transported from Azerbaijan to Turkey via Georgia through the South Caucasus Pipeline (SCP) and planned Trans-Anatolian Natural Gas Pipe-line (TANAP). From the Turkey-Greece bor-der the gas will be sent to Europe via the planned Trans Adriatic Pipeline (TAP).

The size and terms of the loan have yet to be decided, Chakrabarti said. However, analysts say the move is a measure of the project’s importance to the EU as an alter-

native gas supplier as Europe tries to re-duce its reliance on Russian energy.

At the same time, Russia is pressing ahead with its Turkey-centred gas pipeline, the so-called Turkish Stream. On May 7, Gazprom CEO Alexei Miller said after talks with Turkish government officials in Ankara that the first consignments of Russian gas would flow through Turkish Stream by the end of 2016.

Turkish Stream was dreamed up by the Russians in response to the EU’s objec-tions to its proposed South Stream pipe-line, which would have sent 63bn cm/y of Russian gas into Europe up through Southeast Europe. The EU’s strict rules over third-party access to pipelines under its Third Energy Package and its stricter stance over Gazprom’s alleged abuse of its dominant market position in Emerging Europe has, say analysts, set in motion a major policy shift at Gazprom in the way it exports gas to Europe. “This shift in Rus-

sian gas export strategy is a direct result of issues that Gazprom and the Kremlin have seen emerging in Europe over the past decade,” says James Henderson of the Oxford Institute for Energy Studies. “Its suggestion of a Turkey-Greece hub seems to be a concession that new delivery points are an option, potentially at the border of Europe rather than at the borders of con-suming countries.”

The new line – which will fully comply with EU laws, the Russian side emphasises – will deliver an estimated 49bn cm/y to a

planned hub at the Greek border (Turkey will take about 14bn cm/y), from which EU customers can help build and own the line's extension into Europe, Gazprom says. The Greek government has been actively courting Russia in hope of receiving bil-lions of dollars of advance payment for its role in extending Turkish Stream into the EU. However, the US is putting pressure on Greece to concentrate on the completion of TAP rather than Turkish Stream following a May 8 visit to Athens by Amos Hochstein, US special envoy for energy affairs.

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MONGOLIA GDP AND GDP GROWTH, 2008-PRESENTMongolia's GDP (USDmn) and GDP growth (Y/Y, %) since signing the 2009 investmentagreement with Rio Tinto

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Mongolia’s government has made big strides in resolving a tax dispute with mining giant Rio Tinto that’s holding back a $5.4bn expansion of the huge Oyu Tolgoi copper-gold mine. But time is running out to finalise a deal as politicians gear up for elections in 2016 that will inevitably involve some multinational bashing.

The mine was supposed to double the size of the economy within a few years and transform the country, but quickly got bogged down in a nasty tax row that has been dragging on for two years and wrecked Mongolia's reputation as the world's hottest frontier market. The signing of the investment agreement in 2009 saw the country’s GDP swing from a contraction of 1.3% that year to the world-beating peak growth of 17.5% just two years later. But the dispute has taken the wind out of Mon-golia's sails, which expects 7.8% growth this year, falling to 4% in 2015 and 2016 unless the mining work is ramped up again, according to the Asian Development Bank.

“If Oyu Tolgoi's not running, the whole economy is suffering,” says Marcel Ven-hofen, executive director for the German Mongolian Business Association.

So investors were cheered on April 4 by remarks from Mongolian Prime Minister Chimed Saikhanbileg, who claimed that a final deal was near for the underground expansion of Oyu Tolgoi, which is 66% owned by Rio Tinto indirectly through its majority-owned unit Turquoise Hill Resources. The Mongolian state owns the remaining 34%.

Rio Tinto wants to extend the mine un-derground in a second phase that will cost another $6bn, where it says 80% of the ore deposit is found some 80km from the Chinese border.

Mongolia and Rio need tax deal for Oyu Tolgoi as election clock ticks

“The two sides have reached agreement, in principle, on the main points of dispute,” Saikhanbileg said during a televised speech. “Now the parties are finalising their respective internal processes and will soon officially announce the results to the world.”

Rio Tinto’s chief executive, Sam Walsh, also hinted to bne IntelliNews that progress was being made during a visit to Mongolia on March 29 to commemorate the millionth tonne of copper ore shipped from the mine. “There are issues we're working through with the government, and I’m hopeful we'll bring [them] to resolution,” he said. “My visit here is to show that commitment, to show our interest, and show our good will in regard to the progress in negotiations.”

Despite the positive words, a deal over the second phase of Oyu Tolgoi won't be possible until both sides can agree on a $127mn tax dispute that has since been reduced to $30mn. The amount may now be relatively small, but Rio Tinto's Walsh said the miner in November delivered its “best and final offer,” which includes a request for the government to spell out how exactly

tax officials determined the figure. “It's more about seeking clarity than anything particularly special,” said Walsh.

Cabinet Secretariat Minister Sangajav Bayartsogt has objected on the grounds that Mongolia is not able to grant special tax arrangements for just one company, no

matter how important – although, arguably, the 2009 investment agreement drawn up for Oyu Tolgoi did just that. Badral Munkh-dul, the head of market intelligence group Cover Mongolia, warns that: “It looks like the tax law has to be changed to solve the tax dispute.”

And with elections looming the rhetoric will hot up. Several politicians have made themselves household names by saying the mine was benefiting only the oligarchs and the elite. Publically supporting the expansion of the mine could mean political suicide. Prime Minister Saikhanbileg gave himself some political cover in February by holding a text message referendum. However, the result was close and voter response unremarkable.

Turkmenistan is still some way off from opening up to portfolio investors, although this country of almost 5.5mn people with a PPP-based GDP per capita of almost $13,000 has been on the radar of many of the world’s major corporations for some time. Finally the winds of change are building in Central Asia’s last closed economy.

A number of economic and geopolitical events are making it less easy, and much less comfortable, for the government in Ashgabat to remain as isolated as it has been in the past. The mixture of energy price weakness, contagion from the Russian ruble’s collapse and the possible rehabilitation of Iran is starting to have an impact on Turkmenistan.

Turkmenistan has been able to sustain double-digit headline growth for many years and has a macroeconomic profile

that compares favourably with others in the region and other frontier economies. That growth, and the relative economic stability, has mostly come from the steady growth in gas revenues. Initially, revenues came from the higher price Russia's Gazprom was willing to pay, while in recent years China has taken Russia's place as the growth market.

But lower gas and oil prices has been a bucket of cold water over the head, made worse by the near 50% devaluation of the Russian ruble during the last quarter of 2014. The value of gas export revenues is expected to fall by approximately 25% this year, as both Russia and Iran cut back further on purchases and China pays a lower price even as it raises import volumes.

Spending cutsBudget revenues are down and the government has had to rethink its spending plans. The president has ordered a 10% cut in spending for this year with particular emphasis on cancelling, delaying or stretching the time-line on large infrastructure projects. At the same time, the government took the surprising step of devaluing the manat by 19% against the US dollar on January 1 in order to force a reduction in imports and to help limit the loss of domestic competitiveness against ruble-priced imports.

Turkmenistan being pushed out of its comfort zone

Social and security spending appear to be exempted from the cuts. State sector wages, pensions and some social programmes will see a 10% increase in expenditure this year as the government tries to protect people from the impact of higher inflation and to limit the risk of protests if the economy deteriorates or inflation accelerates. Security spending is also expected to rise (no public data) as the country responds to growing radical Islamism in the region, such as IS and the Taliban, which is threatening the whole Central Asia region.

Still, the economy is still expected to expand by 9.5% this year, down marginally from last year's 10.3% growth. Retail sales may again see double-digit growth (due to base effects and higher salaries/pensions) and the industrial sector is expected to post above 10% expansion.

Inflation will be higher this year due to the currency devaluation and social spending programmes. However, the expected 7.5% increase is still modest in regional terms. Ending fuel and energy subsidies for the general population is also a factor, and is another reason for concerns over social unrest and, hence, another factor pushing up security costs in the budget.

The country’s balance sheet is in relatively good shape: sovereign debt/GDP is around 20% and financial reserves are sufficient for approximately 22 months, according to a recent state report. The fact that exports are expected to decline faster than imports is one reason why the current account deficit is expected to nearly double to 7.5% of GDP this year. The budget reported a surplus equal to 0.8% of GDP last year, but despite the president’s order to achieve a balance in 2015, we are factoring in a deficit equal to 2% of GDP. Nevertheless, in general the country is in good financial shape, and ready to ride out the external energy and ruble contagion for several years.

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

Chris Weafer of Macro Advisory

Terrence Edwards in Ulaanbaatar “The winds of change are building in Central Asia’s last closed economy”

“Mongolia cannot grant special tax arrangements for just one company – no matter how important it is”

bne IntelliNews Daily 13May 14, 2015 May 14, 201512 bne IntelliNews Daily Central Europe and Baltic StatesCentral Europe and Baltic States

Across central Europe the newest mem-bers of the EU are raiding their pension systems in a desperate hunt for cash to avoid harsh punishment under the EU’s excessive deficit procedure.

During an April 7 session of parlia-ment, Czech Finance Minister Andrej Babis pledged to table a new plan for reforming the country’s pension system by June. This would be the latest pension policy shift in Central Europe but hardly the first in recent years: it comes amid a general rolling back

by governments of plans to divert pension savings into private funds, in an attempt to shore up state finances.

Hungary started that ball rolling when seized private pension fund savings back in 2010 were dressed in populist rhetoric that spooked international investors. “In-

Lithuania might be a tiny dot on the world business map, but the splash its technology start-ups are making is big.

Pixelmator, a powerful image editor, which was named the best iPad app of the year by Apple in 2014, and GetJar, which has become the biggest independent cross-plat-form mobile app store by market share, are just the cream of the crop. More than a score of Lithuanian high-tech start-ups have made their name in just the last year.

Software-as-a-service start-ups Eylean Board, TrackDuck and Planner 5D have successfully expanded their user list, with the first one boasting British Petroleum, Tesla and Velux among its clients. All of the companies, which provide access to software and its functions remotely, gener-ated six or even seven-digit euro incomes last year and raised substantial funding for new, innovative ideas.

Among Lithuanian marketplace start-ups, Vinted, a global buy-and-sell-or-share network for second-hand clothes, stands out. Vinted reportedly closed a €24.7mn funding round from Accel Partners and Insight Ventures at the end of last year. Yplan, an app that lets one find and book the best events around, is also reported to have received €34.5mn in funding over the past few years.

In financial technology, TransferGo, a tool for cheap money transfers, and Wora-Pay, an open mobile payments network tar-geting remote payments, have also drawn attention.

Some €46mn has been poured into 38 Lithuanian enterprises by more than 25 for-eign and domestic venture capital funds over the last year, according to Versli Lietuva, an agency established to promote Lithuanian

At the third "East Forum Berlin" held on April 22 in Berlin, there was high praise and lofty talk of the need to engage more with the East and Russia in particular. The mayor of Berlin, Michael Müller, chimed in calling for a common economic area from “Lisbon to Vladivostok”, echoing similar calls from German Chancellor Angela Merkel. At the same time, sanctions against Russia were lamented but grudgingly accepted as a necessary measure to “guide the country back onto the path of virtue.” The alienation felt between Western Europe or the European Union and Russia has seemingly deepened to a post-Soviet Union low. This may in large part be due to the fact that Europe has never fully engaged with Russia economically in the first place.

The EU’s essential belief that economic integration would lay the foundations and be necessary for peace was at the heart of Europe’s drive for co-existence. While it was administered to many former Eastern Bloc countries, it was seemingly largely absent in Europe’s dealing with a post-Soviet Russia.

This Europe engaged economically with Russia at a scale that indicated some tepid rapprochement rather than a willingness to merge essential interests. The stock of total foreign direct investment (outward), as proxy for genuine economic interests, in Russia of Eurozone countries (excluding financial offshore centres Cyprus and Luxembourg), to represent the leading EU countries, amounted to $158bn at end-2013. This puts Russia on 13th place behind Sweden (Russia is the 8th largest economy in the world). It amounted to a mere $1,100 per head. Former Eastern Bloc EU member countries Czech Republic, Hungary and Poland obtained foreign direct investment from Eurozone countries of $8,237, $7,790 and $3,094 per head, respectively. Eurozone foreign direct investments in Russia represent 8% of Russia’s 2013 GDP compared with 62% in Hungary, 44% in Czech Republic and 24% in Poland.

Many would argue that conditions had not been right to invest in Russia (the Eurozone represents 23% of Russia’s foreign direct investment received). This may indeed have been the case. Politics though could have made all the difference and promote, possibly at a high cost, conditions to make investments sufficiently attractive. There may just not have been the vision, in particular during the early period after the collapse of the Soviet Union, that massive economic engagement would have helped broker peace in Europe over the long term. The same logic that brought together age-old enemies like Germany and France was not applied to Russia. Whatever the stated intent, the outcome indicates that Europe left Russia economically largely in the cold.

Central Europe’s senior moment over private pensions

Lithuanian tech start-ups begin to draw world attention

COMMENT: Europe’s historic lack of economic engagement with Russia

itially the profits were high and pension funds made money,” says an economist at one major Hungarian bank. “But the gov-ernment played a game that made them out to be some kind of vampires.”

What was once controversial is now seen as commonplace. Poland took simi-lar steps last year. Unwieldy EU budgetary rules are at least part of the explanation for this change of course as governments look to meet tighter rules set in Brussels, but regional investors are left wondering what

comes next as demographic trends make additional reforms inevitable.

The most obvious manifestation of the resulting Polish investment lull is the stagnation of the Warsaw Stock Exchange (WSE) – the WIG index ended 2014 flat, even as Frankfurt’s DAX reached an all-

business. Though still tiny, the investment is three times larger than the previous year, according to Versli Lietuva. To put this in con-text, total private equity investment in Baltic start-ups during 2007-2013 represented less than 1% of the region’s GDP, which puts the Baltics on the bottom of the EU ranking.

“We saw 2013 as very successful for our start-ups, but the last year has beaten all records,” Mantas Nocius, Versli Lietuva's director general, tells bne IntelliNews. “For example, Vinted has received €20mn in in-vestment and the other high-flying Lithua-nian start-up YPlan pocketed over €21mn. The solid investments not only served as an impetus to the more rapid and global

expansion of the start-ups, but also revved up the establishment of new start-ups.”

Still, the small size of the market is the major impediment to the growth of Lithu-ania's high tech sector. Despite a few high profile successful investments, the bulk of start ups rely on either the €260,000 the government invested or tapping into Eu-ropean Union (EU) funds. The lack of in-stitutional investment or business support means that most projects unable to make big investments have to focus on projects

with a “tangible”, ready-soon production and a short-term return on investment, says Gediminas Gricius, an IT lecturer and project manager at Klaipeda University in western Lithuania.

The small talent pool is another problem. Not only is there a shortage of software engi-neers but all the ancillary staff that support a fast growing business. “[Start-ups] are also often weak in marketing, internal financial controls and managing company growth risks. For this they need specialists who can position their companies properly. They need accountants or CFOs who will provide strict financial controls, and managers who know how to avoid the pitfalls of small company

growth," says Arunas Pemkus, the manag-ing director of consultancy Fipra Lithuania.

Pemkus believes that given the current environment, Lithuania’s start-ups should be applauded. “Some of the start-ups out there have generated significant tax rev-enues and have begun establishing foot-holds in the international marketplace. All start-up entrepreneurs are ambitious, have high-flying ideas and fantasise about making an impact in the business commu-nity,” he says.

time high and is still rising. Last year the WSE was Central Europe's great hope for its own vibrant equities market and now it is moribund. "The only explanation for the huge difference is pension reform,” says Adam Czerniak, chief economist with Pol-ityka Insight, a Warsaw based think-tank.

Second pillar reforms across the re-gion were meant to allow savers to divert a portion of their savings into private pen-sion funds. This is a step away from the existing pay-as-you-go systems where to-day’s workers finance today’s pensioners. Instead, a second pillar account is directly tied to its saver. And in Poland, pension funds overseen by Allianz, Aviva, Axa, Gen-erali and ING were required to invest do-mestically, a welcome source of capital for the WSE.

Without a functioning second pillar the WSE has lost its so-called “pension pre-mium” as pension funds shrank by some PLN2.1bn between February 2014 and Feb-ruary 2015. At the same time, the funds be-come more conservative, despite an easing of the restrictions on investing abroad. On the flip side, foreign investors remain hes-itant to invest in the WSE until some sort of “new equilibrium is achieved”, Czerniak says, which could take years.

At least Poland had a second pillar: in the Czech Republic the scheme barely got of the ground but will be wound up in Janu-ary 2016 after only 83,000 opted to put their pension money in private hands – about a

tenth of the number originally envisaged, says Pavel Racocha, CEO of Komercni ban-ka’s pension arm, one of the five firms li-censed to offer a second pillar fund.

Of the 28% of Czech workers' income paid as social security, they had the option of diverting 3% into the second pillar funds, which they then matched with an additional 2% contribution of their own. The workers can get the cash they invested back, but the funds they invested into are facing big losses.

Slovak workers are in the same boat. The government has introduced a second pillar four times since 2005, but once again has decided to abandon the scheme and work-ers have until June 15 to pull their money out. The government hopes to recoup about €400mn. Despite the government vacilla-tions on running a second pillar about five-times more Slovaks than predicted actually opted into it, which will lead to a big hole in the state budget so the government is trying to push savers back into the public pension system. Slovakia’s three licensed pension fund providers, Allianz-Slovenska Poisovna, Generali and Union, are also fac-ing big losses.

Of all the countries in the region, the Baltics are doing best. They too raided their second pillar funds for cash during the crisis years, but as they emerge from the worst the tiny northern states have begun to bolster second pillar policies once again.

Benjamin Cunningham in Prague

Linas Jegelevicius in Vilnius

Ousmène Mandeng in London

“With only few local start-ups making it through, even fewer get on top”

“The government played a game that made private pension providers out to be some kind of vampires”

Poles and Czechs: we need to talk about the euro

When the EU expanded into Central Europe in 2004, the new member states committed to adopting the euro, though no deadline was imposed. While the smaller economies of the Baltic countries, Slovakia and Slovenia have all adopted the euro in recent years, today, more than 10 years after accession Poland and the Czech Republic look no closer to joining than they ever were.

The Polish government and central bank have devoted almost no effort to selling the idea of the euro in recent years and opinion polls show the results. A poll taken by the CBOS organisation last year showed 68% of Poles are opposed to joining the euro.

The business argument for joining is also less clear than for some of the smaller Central European members. Poland's internal market is large – merchandise trade as a percentage of GDP comes to 77%, while in the three Baltic countries and Slovakia it ranges from 101% to 170%, a sign of how much more those economies rely on imports and exports.

There is a slow shift taking place in official thinking, especially in the ranks

of the ruling Civic Platform party, in part driven by security worries because of Russia's aggression in Ukraine and in part fuelled by worries that a consolidating Eurozone will leave it permanently on the outside.

Poland is also edging closer to meeting the criteria for joining. At the moment it meets interest rate and inflation targets, but is under the EU's excessive deficit procedure for running a deficit above 3% of GDP. However, the finance ministry estimates that the deficit this year will be below the EU's 3% limit. Public debt, at about 53% of GDP, is well below the EU's maximum of 60%. That means by next year the decision on whether or not to join becomes more one of politics and less of economics. “Adopting the euro is a political decision,” Marek Belka, the central bank governor, recently said in Brussels. “It will not be taken by economists but by political leaders.”

The problem is that Poland's constitution makes such a decision very difficult. The constitution grants the National Bank of Poland the right to issue currency and set

monetary policy, and changing it to give those powers to the European Central Bank requires a two-thirds majority in parliament. Neither the current coalition led by Civic Platform, nor any probable government formed after the elections, will have anything like the votes needed to push through such an amendment. “A specific Polish problem is that our constitution does not allow us to join the eurozone,” said incumbent president Bronislaw Komorowski.

The Czech Republic meets all the Maastricht criteria for joining except for the requirement to be in the ERMII exchange rate mechanism for two years. This means keeping the koruna stable against the euro and not devaluing in the two years prior to entry, a task that is not insuperable in present conditions.

The economy is also in good shape, with growth of 2.6% expected this year; it is competitive in export terms; and it has 80% of the average GDP per capita in the EU, though the convergence has stagnated since the global financial crisis. Czech business is also much more dependent on the Eurozone than most of the new member states – 30% of exports go to Germany alone.

The obstacles in Prague are mainly political, with arguments based on how the currency should be stronger, or how public debt should be reduced further, or how structural reform is needed, acting merely as economic excuses for political prevarication. Much of the resistance to the euro can be traced back to Eurosceptic

former premier and president Vaclav Klaus, whose thinking lives on in the rightwing Civic Democrats that ruled from 2007-13 and the current central bank board that Klaus appointed.

Milos Zeman, the current president, and the ruling Social Democrats (CSSD) favour the euro, but the coalition has agreed not to join in this parliamentary term, instead talking in terms of 2020. “We must overcome the legacy of Mr Klaus,” Jan Mladek, the Social Democrat economy minister, told bne IntelliNews at the end of last year.

Though the CSSD-ANO coalition looks likely to win re-election in 2017, it is still far from certain that it will be able to take the country in. Adopting the euro does not require a change to the constitution or a referendum, but a nervous government might feel the need for this kind of political backing, which would be very hard to win. Three-quarters of Czechs currently remain opposed to the euro, according to recent opinion polls.

Jan Cienski in Warsaw and Robert Anderson in Prague

bne IntelliNews Daily 15May 14, 2015 May 14, 201514 bne IntelliNews Daily South-eastern EuropeSouth-eastern Europe

On paper at least, the Balkans looks like the ideal location for clean-energy produc-tion, and for several years the region has been a magnet for investment and subsi-dies. But lately there appears to have been a rethink on the part of governments and investors alike.

Both Bulgaria and Romania enjoyed a brief boom in renewable energy invest-ments in recent years, especially in wind and solar power, when their governments introduced generous incentives in an at-tempt to meet EU targets.

More recently, however, Bulgaria and Croatia have backtracked, cutting incen-

tives for renewable energy investment af-ter making faster than expected progress towards meeting the targets. This follows similar cuts in Romania and several other European countries.

The Bulgarian parliament voted in Feb-ruary in favour of legislation that will scrap preferential pricing for new renewable en-ergy installations. Incentives for renewa-ble energy producers have already been scaled back in the last two years, with

Winds change for renewable energy in Southeast Europe

Sofia citing higher electricity tariffs and the rising debt burden at the state power company NEK.

Electricity tariffs are a sensitive issue for the current Bulgarian administration under Prime Minister Boyko Borissov, following protests over rising electricity bills that forced the resignation of his previous gov-ernment in 2013. But generous incentives resulted in Bulgaria becoming one of the first EU countries to meet its 2020 targets for renewable energy generation almost a decade before the deadline.

In a recent interview with bne IntelliNews, Oliver Joy, political affairs spokesman for

the European Wind Energy Association (EWEA), said that Bulgaria actually pro-duces too much electricity and has to ex-port the surplus to Turkey, Greece and the Balkans, meaning there is little motivation for investment in yet more generation ca-pacity. “However, given that [the Bulgari-ans] rely almost 100% on Russian gas, their electricity sources are not very diversified. The potential for wind and solar energy is there if they decide they want to reduce

their dependence on a single country for energy imports,” Joy points out.

Meanwhile, Croatia does not plan to pro-vide any new licences for solar projects this year, despite the high potential for solar generation there.

Romania also decided to slash incen-tives for renewable electricity generation following a dramatic boom in the sector between 2010 and 2013. Bucharest’s gen-erous “green certificate” incentive scheme

attracted numerous international investors from Europe and Asia, in addition to local companies.

However, in June 2013 the Romanian government announced cuts to green cer-tificates issued to generators of wind, solar and small hydropower plants put into oper-ation after January 1, 2014. This resulted in new projects being cancelled, while many of those already under construction were put on hold.

Investors are now responding in a sim-ilar way to Zagreb’s decision. On January 26, Germany’s Luxor Solar, which controls around 10% of Croatia’s solar power gener-ation sector, announced it had completed a greenfield solar system with capacity of 360 kilowatt peak (kWp). “A further installation of similar size is due to be constructed in spring 2015 before the relevant licence be-comes invalid. The two installations will be amongst the last of their kind in Croatia, as greenfield systems will no longer receive sufficient support in this sunny country,” the company said in a statement.

The cutbacks have raised the ques-tion about whether countries in the re-gion will meet medium- and long-term renewables targets. Under the EU’s Re-newable Energy Directive, the bloc as a whole has set a target of generating 20% of electricity from renewable sources by 2020, although individual country targets vary from just 10% in Malta to 67.5% in Norway (a non-member that has joined the initiative).

Along with Bulgaria the only other EU countries to have already met their target are Estonia and Sweden. Currently for the EU as a whole 16.3% of power is produced by renewable sources. But southeast Eu-rope’s three EU member states are close. Croatia generated 16.8% of energy from renewable sources compared with its 20% target, at 22.9% Romania was slightly be-low its 24% target, and Slovenia, which is targeting 25%, was on 20.2%.

Industry members say government's flip flopping on the renewables issue makes it impossible to invest in the sec-tor: "“Bulgaria and Romania are paralysed at the moment. Sudden changes have pe-nalised investors and may scare them off from coming back even if the incentives are changed again in future due to the un-certainty,” says the EWEA’s Joy.

Clare Nuttall in Bucharest

“The key is stability around incentive schemes”

Two years ago Slovenia’s banking sec-tor was in crisis, and the country looked odds-on favourite to become the sixth Eu-rozone member to require an international bailout. It didn’t happen. A good 2014 has seen a turnaround and the state is gradu-ally pulling out of the banking sector, which should give a fillip to efficiency-improving competition.

Several of Slovenia’s largest banks posted good results for 2014. Among the state-owned banks, Nova Ljubljanska Bank (NLB) announced positive results for the first time since 2008, with net profit after tax hitting €62.3mn. The chairman of the bank’s supervisory board, Gorazd Podbev-sek, told journalists on February 27 that 2014 marked a “pivotal change in the op-erations of the NLB Group”. Nova Kreditna Banka Maribor (NKBM) also rebounded

from a €648.4mn loss in 2013 to earn a €35.9mn profit in 2014.

In the private sector, the country’s larg-est foreign-owned bank, UniCredit Slove-nia, closed 2014 with a small profit, a result the bank’s chief financial officer Guenter Friedl says was, “clearly driven by our tight cost management.”

Both NLB and NKBM were recapitalised by the Slovenian government in 2013 and

Slovenia’s bank sector sees better times ahead

in 2014 Ljubljana spent another €3.5bn to support the sector, as well as setting up a "bad bank" known as the Bad Assets Management Company (BAMC). Today, the government is looking to sell its holdings in the country’s three largest banks that were taken over during the bailout. The Bank of Slovenia also set up a special fund for bank resolution at the end of March.

As banks work through their legacies of bad loans and resolve capital adequacy is-sues, the better performance of the sector is expected to continue in 2015, although Fitch Ratings reported at the end of March that the sector "remains fragile".

“We have seen a lot of progress over the last 18 months, but there are still some challenges, such as privatising national-ised banks, improving corporate govern-ance and continuing with corporate re-

structuring,” the European Bank for Re-construction and Development's (EBRD) Slovenia country economist, Bojan Mark-ovic, told bne IntelliNews.

Slovenia has also made progress in tack-ling the non-performing loans (NPL) that are the legacy of the narrowly missed fi-nancial crisis. The share of bad loans has dropped from 18.1% in November 2013 to 11.6% as of January 2015, partly as a result

of the creation of the BAMC. “Non-per-forming loans are still high but are coming down. In terms of resolving NPLs, Slovenia is ahead of other countries in the region,” says Markovic.

Still, Slovenia is not out of the woods yet as its banking sector is being impacted by the regional slowdown affecting every-one. Lending in January-November 2014 falling 19.6%, partly due to the transfer of bad loans to the BAMC, according to the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia.

However, UniCredit’s Friedl expects lending to revive in 2015, in line with the general strengthening of the economy. The EBRD forecasts GDP growth of 1.6% this year – up from an earlier forecast of 1.0%, though still below the 2.7% expansion in 2014. “Competition for good clients will prevail in 2015. A lot of banks are chasing them, but we want to have the right clients with the right ratings, and not to pursue growth at any price,” Friedl says.

The banking sector's health will be further improved if the state managed to sell off its main assets. NKBM is re-portedly in the final stages of talks with US investment fund Apollo, which is be-lieved to have topped an offer from Hun-gary's OTP. Slovenia Sovereign Ljubljana also plans to exit its 75% stake in NLB as well as finding a buyer for the country’s third largest bank, Abanka, following its planned merger with the smaller Banka Celje. All three banks are included in the list of 15 major companies earmarked for privatisation and are expected to be sold by the end of this year – a process that the OECD said on May 4 is essential together with pension reform to ensure long-term financial stability.

Clare Nuttall in Bucharest

“We have seen a lot of progress but there are still some challenges”

Turkish firms sense opportunity as Iran emerges from isolation

Kivanc Dundar in Istanbul

Following the breakthrough in the interna-tional talks on Iran’s nuclear programme on April 2, Turkey is well placed to benefit from better relations through increased trade and investment. So it was fitting that Turkish President Recep Tayyip Erdo-gan paid an official visit to Iran just a few days later.

Erdogan, a pragmatic politician, sought to focus on economic issues, and avoided talk about regional politics during his trip to Tehran. Turkey’s main export market, Europe, has not fully recovered from its deep economic crisis and Turkey’s $800bn economy needs to maintain good relations with its oil-producing neighbour.

However, Erdogan has recently taken a swipe at Iran over Yemen and its rising regional ambitions. Iran, and the terrorist groups it supports, must withdraw from Yemen, Erdogan said on March 27, claiming that Tehran was trying to dominate the re-gion and antagonising Ankara, Saudi Arabia and the Gulf states in the process. Turkey’s disagreement with Iran is not limited to Yemen; Ankara actively supports the Syrian opposition, while Iran is Syrian President Bashar al-Assad’s closest ally in the region.

Following Erdogan’s comments, the Ira-nian foreign ministry summoned Turkey’s charge d'affaires in Tehran, asking for an explanation, while Iranian lawmaker Man-sour Haghighatpour said: “Anyone who speaks against Iran cannot be our guest.” There was calls to postpone the visit.

Erdogan went anyway, arriving in Tehran on April 7. He walked hand in hand with President Hassan Rouhani over the red carpet to enter the Saadabad Palace in Teh-ran, and during the joint press conference he addressed Rouhani as “my brother” and emphasized that Turkey and Iran should join their efforts to bring a peaceful out-come to the Yemeni crisis.

Maintaining dialogue with Iran has al-ways been important for Turkey, Hikmet Ce-tin, a former foreign minister, told Al Moni-tor. Trade between Turkey and Iran stood at $13.7bn in 2014, down from $14.6bn in the previous year. Turkey’s exports to Iran were at $3.9bn last year, or 2.5% of Turkey’s total exports, while imports from Iran (mostly energy) were $10.9bn, or 4% of Turkey’s total imports. With GDP of about $366bn, Iran's economy is about 20% smaller than it would have been without sanctions, ac-cording to a study by the US Congressional Research Service, but the end of sanctions will provoke a boom.

“If you put together the consumer po-tential of Turkey, the oil reserves of Saudi Arabia, the natural gas reserves of Russia, and the mineral reserves of Australia you have it all in one country," Ramin Rabii, CEO of Iranian investment firm Turquoise Partners, told CNN.

Gallup World Poll: 2013 and 2014 Positive Experience Index “Gallup's 2014 "Positive Experiences In-dex" revealed Latin America to be the world’s happiest region, while Southeast Europe, Eastern Europe and the Caucasus emerged as the unhappiest.

Uzbekistan was the highest-scoring Cen-tral and Eastern Europe and Commonwealth of Independent States (CEE/CIS) country for the second year running, with 2013 and 2014 scores of 76 and 78, respectively. Poland fol-lowed at 70. The rest of CEE/CIS was below Greece's score of 67.

The lowest scoring CEE/CIS countries were Serbia and Turkey, at 54, followed by Lithuania, Georgia and Bosnia-Herzego-vina on the same score as Afghanistan at 55. One spot above were Ukraine, Azerbai-jan and Moldova.

The biggest loser was Kosovo, whose score fell from 68 in 2013 to 58 in 2014. The most improved CEE/CIS nations were Kyr-gyzstan and Turkmenistan, whose scores both improved by 6 points to 67 and 65, respectively.”

May 14, 201516 bne IntelliNews Daily Events Schedule

AlbaniaMr Shkëlqim Cani, Minister of Finance

ArmeniaMr Karen ChshmaritianMinister of Economy

AzerbaijanMr Shahin MustafayevMinister of Economy & Industry

BelarusMr Vladimir SemashkoDeputy Prime Minister

CyprusMr Harris GeorgiadesMinister of Finance

Czech RepublicMr Martin ProsDeputy Minister of Finance

EgyptDr. Naglaa ElEhwanyMinister of International Cooperation

EstoniaMr Sven SesterMinister of Finance

FYR MacedoniaMr Zoran StavreskiMinister of Finance

GeorgiaMr Irakli GaribashviliPrime Minister

GreeceMr George StathakisMinister of Economy

HungaryMr Mihály VargaMinister of Economy

IcelandMr Bjarni BenediktssonMinister of Finance & Economic Affairs

ItalyMr Pietro Carlo PadoanMinister of Economy & Finance

KazakhstanMr Bakhyt SultanovMinister of Finance

JordanMr Imad Fakhoury, Minister

of Planning, International

Cooperation & Tourism

KosovoMr Avdullah HotiMinister of Finance

Kyrgyz RepublicMr Temir SarievMinister of Economy

LatviaMr Janis ReirsMinister of Finance

LiechtensteinMr Thomas Zwiefelhofer

Minister of Home Affairs,

Justice & Economic Affairs

LithuaniaMr Rimantas ŠadžiusMinister of Finance

MaltaProf. Edward SciclunaMinister of Finance

MoldovaMr Stéphane Christophe BrideDeputy Prime Minister

MongoliaMr Gantsogt KhurelbaatarMinistry of Finance

PolandMr Marek BelkaPresident of Narodowy Bank Polski

RomaniaMr Eugen Orlando Teodorovici Minister of Public Finance

Russian FederationMr Sergey StorchakDeputy Minister of Finance

Slovak RepublicMr Jozef MakúchGovernor of National Bank

TajikistanMr Jamshed YusufiyonFirst Deputy Chairman of National Bank

UkraineMs Natalie JareskoMinister of Finance

United KingdomMr Mark BowmanDirector General International Finance

United StatesMr Nathan SheetsUnder Secretary for International Affairs

EDITORIAL

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