bne newspaper november 28 2014

November 28, 2014 www.bne.eu

Ukraine considers appointing Georgian reformers to cabinet posts

Russia's economic growth has slowed to a crawl. The latest official forecast is 0.8% growth this year, but a range of analyst and international financial institutions are predicting growth will be lower and there could be no growth at all next year as Russia enters stagflation territory.

The fall of the ruble and the tumbling oil prices are partly to blame but more serious is the lack of

Russia's consumption and investment motors stall

Ukraine's President Petro Poroshenko is looking to hire international reform talent for the new government, with former Georgian president Mikheil Saakashvili tipped to become deputy prime minister.

According to multiple reports in the Ukrainian media, Poroshenko’s administration has hired international headhunters to recruit reform talent

both for a new government and to head new anti-corruption law enforcement agencies.

Georgia's former government - credited with successfully carrying out sweeping reforms between 2003-2013 - may supply a number of officials to Ukraine, if Poroshenko can convince

domestic investment and the worsening position for Russia's shoppers as real incomes stagnate after almost a decade of strong gains.

The latest macro statistics for the first 10 months of this year continue to paint a picture of consumption-driven growth, with retail trade up

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2.2% year-on-year and investment down 2.5% year-on-year for the period, reported Alfa Bank.

"However, we expect accelerating inflation, the risk of new rate hikes and the lack of aggressive social spending to weaken retail trade growth in 2015," Natalia Orlova, chief economist with the bank, said in her monthly economic wrap on November 25. "Meanwhile, no further need to accumulate FX will assist companies in redirecting financial flows to capex, thus supporting our more positive view on investment for next year."

Consumption has been the backbone of Russia's economic recovery in the last decade. Even during the crisis years after 2008 incomes continue to rise at about 10% a year. Meanwhile, companies are increasingly being squeezed between the rising cost of borrowing and lower sales. A drum-tight labour market, with unemployment at historic lows, means they had to continue to increase wages, but this situation is clearly unsustainable.

Retail trade growth stayed at 1.7% year-on-year in October, according to Rosstat, but the underlying fundamentals are deteriorating, said Orlova."While the market expected retail trade growth to decelerate to 1.2% year-on-year last month, in reality it was close to our more optimistic expectations, remaining at September's 1.7% year-on-year level, and in the first 10 months of this year growth stayed at 2.2% year-on-year," said Orlova. "The sources financing this growth continued to deteriorate, with unemployment spiking from 4.9% to 5.1%, and real wage growth reported at only 0.3% year-on-year in October versus 2.4% year-on-year in 9M14, which was also anticipated."

The way out of this mess is obvious: companies need to invest and build new production to sustain growth. However despite Russian President Vladimir Putin's success in moving Russia up the World Bank's Doing Business ranking, this hasn't translated into a more appealing investment environment. Business owners have simply suspended investment plans until there is some more clarity about the future.

The latest investment numbers disappointed yet again, despite strong industrial output growth at the start of the autumn. Industrial production soared by more than 5% month-on-month because the sanctions imposed on the European Union by the Kremlin stimulated a measure of import substitution. But economists say the bump is temporary and will not turn into a trend because the constraints on international borrowing hinder any real expansion of industry. If anything the already bad situation with investment is getting worse.

"The investment trend surprised on the downside, decreasing 2.9% year-on-year in October and 2.5% year-on-year in the first two months of this year," says Orlova. "At the same time, the real [economic] sector kept industrial production growth strong at 2.9% year-on-year in October and 1.7% year-on-year in the first 10 months, reflecting projects sponsored by the Russian military and pipeline construction in Siberia."

The outlook for consumption next year is bleak or poor because of the exceptionally high rate of inflation. The Central Bank of Russia (CBR) has been struggling to bring inflation down all year but is under pressure to cut interest rates. While inflation was running around 8% until recently, the CBR believes the core inflation was closer to 4%-5%. But Putin has upset the economic balance of forces with his punitive sanctions on EU agricultural imports imposed earlier this year. That pushed food inflation into double digits, something that the central bank can do nothing about.

Russia's consumption and investment motors stall

November 28, 2014 businessneweurope I

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Then, after the oil price began to slide in September, sending the value of the ruble tumbling, the central bank was forced into hiking interest rates dramatically. That should have brought inflation down, but the rate hike failed to stop the devaluation of the ruble, which continued to slide and will stoke even more inflation. The forecast for this year now is more than 9%. All of this is going to weigh heavily on consumption.

"Deteriorating household income supports our expectations of weaker consumption growth going forward," says Orlova. "The key concern is the above-expected inflation that is growing 0.3% week-on-week and is currently close to 9% year-on-year, and the recent ruble depreciation will likely push it to 12% year-on-year by mid-2015, limiting real income growth. A new round of rate hikes, which we now see as possible in the first quarter of next year, will also lower households’

ability to boost leverage. Finally, the government’s intention to increase nominal social payments by only 5.5% year-on-year next year underlines the lack of sources to finance retail trade growth, which we now see at 0.5% year-on-year for 2015."

The only good news that Orlova has to offer is that investment might start to recover in 2015 as companies have built up sufficient reserves of hard currency – their main concern for the current quarter was to salt away enough FX reserves in their treasure chests to meet maturing debts.

"Corporate FX accounts with banks increased by $7bn in October and $24bn year-to-date; however, the CBR’s decision in November to introduce ruble free-float has apparently put an end to this process," says Orlova. "We believe that companies have sufficient FX for foreign debt redemption, allowing the real sector to finance more capex in 2015."

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the country, and an adviser to Poroshenko, was previously said to have been offered the job of economy minister in Ukraine's new cabinet, but died suddenly last week.

Poroshenko did not mention any specific names during his address, but the head of the parliamentary group of Poroshenko's eponymous party, former interior minister, Yuriy Lutsenko, told reporters that at least five foreign citizens of other states would take positions in the cabinet. An MP from Poroshenko's party told Ukrainskaya Pravdathat citizens from the US, Georgia, Germany, Poland and Lithuania were under consideration.

Deputy head of Poroshenko's presidential administration Dmitry Shimkiv is reported to be organising a special fund out of which foreign ministers could be paid an internationally

Ukraine considers appointing Georgian reformers to cabinet posts

Prime Minister Arseny Yatsenyuk of the necessity of hiring international talent. In particular, Poroshenko may be backing Saakashvili for the post of deputy prime minister, according to sources cited by the Kyiv Post.

Saakashvili, who left Georgia after losing elections in 2013 and the opening of criminal cases against him by the new administration, currently lives in New York. On November 27 the Chief Prosecutor's Office in Georgia filed criminal charges against him in relation to the high-profile murder of banker, Alexandre Girgviliani, in 2006. Saakshvili has said that all charges brought against him are political.

Saakashvili has been an enthusiastic supporter of Ukraine's Euromaidan protest movement, which he addressed on a number of occasions, but he has not made any public statements about whether he could join Ukraine's government. Poroshenko is also reported to be backing a close Saakashvili ally, Zurab Adeishvili, for the post of deputy interior minister. Adeishvili served as justice minister, interior minister and prosecutor general in Georgia from 2003-2013. Another Saakashvili ally Eka Zguladze could head Ukraine's not yet existing anti-corruption bureau. Zguladze is credited with tacking organised crime in Georgia.

"I propose inviting to this post a person from outside Ukraine," Poroshenko told the first session of the new parliament on November 27. "He will have an advantage – no connections in the Ukrainian political elite," Poroshenko added. Georgia's former economy minister, Kakha Bendukidze, renowned for slashing red tape in

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attractive salary. Poroshenko in his address to parliament proposed amending Ukrainian legislation so that foreigners could take high office in the country, or could acquire citizenship through an accelerated process.

But Poroshenko's proposal to appoint foreigners may not just indicate that Ukraine is getting real about its much hyped reform drive, but also that rivalry between Poroshenko and Yatsenyuk - who parliament re-elected as prime minister on November 27 - is entering a new phase, say pundits. Poroshenko may be trying to seize the initiative in forming the government from Yatsenyuk, who according to Ukraine's parliamentary-presidential constitution, restored in February 2014, has the right to propose ministers to parliament.

The pro-European parties who formed the coalition initially subscribed to the principle that positions in the new government should be filled with 'professionals' and not decided by party quota. But Yatsenyuk is fighting for party colleagues who are incumbent ministers to stay in their posts, in particular interior minister Arsen Avakov and justice minister Serhiy Petrenko. Yatsenyuk is reported to be arguing that the government will be unmanageable if government appointments are not made according to party quotas. Vyacheslav Kyrylenko, an MP in Yatsenyuk's People's Front, said “a golden mean” should be found between politicians and business professionals in the new government, as quoted by the Kyiv Post.

Ukraine took a step closer to having a government at its opening session on November 27, voting for Yatsenyuk to stay as prime minister, and Poroshenko ally Volodymyr Hroisman to become speaker of the house. Kyrylenko said that agreement on government appointments could be reached at the next meeting of parliament on December 2.

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However, the controversy over hiring foreigners into government may slow the process of appointing a government, which Ukraine urgently needs. Four weeks after elections and with the country on the verge of default, Ukraine's pro-Europe and pro-reform majority still lacks a government.

The process of appointing a new government has been slowed by the results of the election, in which Poroshenko and Yatsenyuk's respective parties took an almost equal share of the vote, with both parties claiming victory. Poroshenko's party returned 132 MPs, ahead of Yatsenyuk's People's Front, which returned 82 MPs. But Yatsenyuk's party took a marginally larger share of the vote than Poroshenko's - 22.12% to 21.82% - sparking a dispute as to which party should lead coalition discussions and take the post of prime minister.

Poroshenko has conceded to Yatsenyuk the premiership and the task of leading discussions on a coalition agreement, which was signed on November 21. Under the constitution, Yatsenyuk as prime minister proposes ministers to the house, with the exception of the foreign and defence ministers, who are proposed by the president.

Under the constitution, the prime minister and government answer to parliament and handle domestic policy independently of the president. This means that Poroshenko could lose control over domestic policy to Yatsenyuk, if he does not exert influence over the cabinet through appointments, pundits say, making the question of appointments to the cabinet highly charged. Poroshenko's proposal to appoint foreign experts is sees as an attempt to sidestep Yatsenyuk's likely sway over the cabinet.


The Regions This Week

Kazakhstan plans to postpone the repairs of one of the country's three oil refineries until spring 2015. The repairs of the Shymkent and other oil refineries are usually scheduled for autumn but acute petrol shortages in late summer and autumn this year are forcing the government to move the scheduled repairs to spring to avoid shortages. Up to a third of petrol and diesel fuel consumed in Kazakhstan are imported from Russia.

The arrival of Carrefour in Armenia has sparked fears of price hikes and unfair competition. The French retailing giant is scheduled to open its first hypermarket in the Caucasus country at the end of January 2015. Carrefour is believed to demand up to 15% discounts from suppliers in contrast to 3-5% requested by other supermarket chains. Local observers fear that this will force producers to raise prices to ensure profits which, in turn, will hurt consumers.

Kazakh oil output is expected to reach 100mn tonnes of oil in 2020. Kazakhstan, which is among the world's top 15 largest holders of proved oil reserves and top 20 largest holders of gas reserves, is failing to increase oil production due to repeated delays in commercial production in the giant offshore Kashagan field. The country's output will stand at last year's 81.7m tonnes in 2014.

Turkmenistan has supplied 93 billion cubic metres (bcm) of natural gas to China since 2009 when a pipeline between the two countries was built via Uzbekistan and Kazakhstan. The 1,833km-long pipeline will reach a capacity of 55

Eurasiabcm a year in 2014, of which Turkmenistan will pump up to 40 bcm a year to China. Ashgabat and China are building a branch of the pipeline, known as Line D, via Uzbekistan, Tajikistan and Kyrgyzstan. It will be completed by 2018 and will ship another 25 bcm of Turkmen gas to China, bringing total exports to 65 bcm a year by 2020.

Armenia's national currency, the dram, has lost 4.5% in value last week, and is expected to further weaken as a result of Russia’s economic slowdown. Armenia heavily depends on trade with and remittances from Russia. The country's Central Bank says that the exchange rate was within the "stabilisation zone" and that it has enough reserves to prevent artificial exchange rate fluctuations and ensure financial stability.

The average monthly salary in Kazakhstan amounted to KZT118,884 ($656) in October. In nominal terms, the salary went up by 12.2% year on year and by 4.3% year on year in real terms. The highest salaries were in the industrial sector (KZT240,800), the mining industry (KZT237,700) and in financial and insurance services (KZT203,800). The lowest average salary was in education (KZT74,400).

Mongolian farmers harvested a total of 489,400 tonnes of wheat in 2014, an improvement from the depressed 2013 crop, which did not exceed 369,048 tonnes. The increase was possible thanks to better weather conditions and a 6% expansion in acreage. Higher wheat production cut cereal imports, forecast to total 70,000 tonnes in 2014, down by 22% from 2013.

businessneweurope I November 28, 2014


Fighting to hold his own against the rampaging gains in support by coalition partner Ano, Czech PM Sobotka is trying to block a large salary hike for MPs, proposed by members of his CSSD party.

US troops will remain in the Baltics and Poland for at least the next year amid continued tension with Russia, the commander of US land forces in Europe said on November 23. The deployment of troops earlier this year was part of Washington's efforts to reassure nervous allies that Nato would offer protection.

Estonia's government is backing plans to launch an independent Russian language TV channel. Wary of the risk that Russian media could provoke their large ethnic Russian populations, the Baltics have been clamping down on Russian media. Tallinn sees a ¤4m investment into setting up its own broadcasts as another way to ease the worry.

Prague's long delayed Blanka Tunnel will now not open until the spring. Dogged by claims of corruption since construction started in 2007, the bypass has seen its budget rise hugely and spats between the city and contractors. It was originally set to open in 2011; earlier this year, officials proclaimed cars would be on the route by December.

Drones are set to patrol Polish coal trains to protect them from thieves. Rail freight operator PKP Cargo says it loses coal worth millions of zloty each year. PKP has reported almost 900 cases of theft this year, with the situation set to deteriorate in the winter months.

Lithuania pledged military aid to Ukraine. President Dalia Grybauskaite also slammed Russia's "terrorist" interference in the separatist insurgency in eastern Ukraine.

Czech consumer confidence turned positive for the first time in more than seven years in November. Analysts say the CNB's action to

Central Europekeep the koruna low is helping to boost domestic demand, but warn that won't persist if the Eurozone continues to stutter.

Lithuania has accused Russia of erecting new trade barriers. Cars and lorries are stuck in queues at customs posts due to tightened cross-border procedures, Vilnius complained to the Russian ambassador. Similar customs issues stalled much of Lithuania's vital transport sector a year ago, as Vilnius prepared to host the EU summit which kicked off the crisis in Ukraine.

American beer is "just filthy water" according to the Czech president. Following up on an expletive-ridden radio interview that enraged Czechs, and protests which saw him pelted with eggs, Milos Zeman made the remark to his Kazakh peer as he continues to press for greater trade links in the east.

Hungarians protested government plans to close private pension funds. Budapest already wiped out most funds when it diverted most of their assets into the state scheme in 2010. Now it is moving to mop up those remaining.

The head of the EBRD blasted the government's plan to increase local ownership of Hungarian banks. Without actually naming the country, EBRD President Suma Chakrabarti said changes in bank ownership should be market driven and criticised "targets for national ownership in any sector". PM Orban has said he wants 60% of Hungarian banks in local hands.

Movie mouse Stuart Little uncovered a missing Hungarian masterpiece. An art historian tracked down the long-lost Sleeping Lady with Black Vase by Robert Bereny after he spotted it used as a prop in the film. The painting is now back in Hungary to be auctioned.


Southeast EuropeRomania’s attractiveness for investors considering whether to establish operations in CEE increased by 2pp to 9% - only 2pp below the Czech Republic, according to Ernst & Young's European Attractiveness Survey 2014. However, this occurs at a moment when the region’s atttractiveness as a whole is fading.

Matteo Cassani, the 42-year-old general manager of Enel Energie and Enel Energie Muntenia – the distribution companies held by Italian group Enel in Romania which are currently under investigation – died in a fall from the roof of his company’s four-storey building in downtown Bucharest on November 27. The circumstances are unclear, but suicide is suspected.

The leaders of the ethnic Hungarian party in Romania, the UDMR, have decided to pull out of the governing leftist coalition, though regional leaders have to endorse the decision on December 13 to make it effective. UDMR leader Kelemen Hunor explained that the move was not designed to generate political instability, as the government can operate without support from the party, rather it was a response to ethnic Hungarians who voted overwhelmingly for the opposition candidate in the presidential elections.

Serbia plans to cut its budget deficit to around 4% of GDP next year, mainly through savings, Prime Minister Aleksandar Vucic said.

Albania's central bank cut the base interest rate by 0.25pp to a new historic low of 2.25% citing weak inflationary pressures. The monetary easing is expected to create better conditions for meeting the mid-term inflation, while encouraging domestic consumption and investment.

Albania’s economic programme is on track and the authorities’ policies and reforms, especially in the electricity sector, could restore economic

growth, an IMF team said in a statement after a visit to the country.

Bulgaria's finance ministry lowered further its 2015 economic growth projection to 0.8% from the 1.2% forecast last month on slowdown in domestic demand and subdued exports growth. The European Commission sees Bulgaria's GDP rising by 0.6% in 2015.

Russia will start building the offshore section of the South Stream gas pipeline that will stretch to Bulgaria on December 15, Gazprom said. Construction on the project had to be delayed for a month, Markov added, without specifying what caused the delay. Bulgaria froze the implementation of the project on its territory in early June after the European Commission opened infringement proceedings against the country for failing to comply with EU rules on procurement and construction of the local pipeline section.

Croatian privately-held concern Agrokor has selected consulting firm Rothschild to advise it on a public offering which could value the business at ¤4bn, Reuters reported on November 26, quoting unnamed sources.

The Croatian government said an independent study showed that local energy company INA saw a 23% decrease in its oil and gas reserves and a 30% decline in its production in the past five years while, the company’s investments decreased at an annual rate of 40% since 2010. The comments came as a response to a statement by MOL in which the Hungarian company, which is fighting Zagreb over control of INA, claimed it has saved INA from bankruptcy, stabilised its financial situation and turned it into a profitable company.

The leaders of Kosovo's two major political parties promised President Atifete Jahjaga to form a government by December 8.



Eastern EuropeRussia is losing around $40bn in a year because of sanctions and another $90bn to $100bn because of a 30% drop in oil prices,” Russian finance minister Anton Siluanov said during a forum in Moscow.

Russia's answer to Facebook, Vkontakte.ru has more users/viewers than any of the (state-owned) TV stations, a study found this week. Russia is criticised for the state's control of the media, but thanks to social media the state has little control over dissemination of information.

Russia's Duma submitted a bill that would ban state-owned companies from hiring the Big Four western auditors to check their accounts. The deputies argue that it is not a good idea to share sensitive information about strategically important companies with foreigners.

OPEC members met in Vienna but didn’t agree on production cuts to support sagging prices. $80 oil for 2015 is on the cards, which will cause Russia economic pain, but won’t be a disaster.

Russia needs to update its three-year budget to reflect $80 oil prices that are expected on falling global demand. Previously the budget forecast oil prices of $100 per barrel, Finance Minister Anton Siluanov said this week.

Ukraine will hold a referendum to decide on NATO membership President Petro Poroshenko said. If the referendum goes ahead then the country will have to change the constitution and dump its current commitment to a neutral status.

Russian banks' profit fell 10% in 2014 compared with 2013, says the CBR. But MDM Bank posted a net profit of RUB934m in the first nine months of 2014, up 140% from the same period last year. State-owned powerhouse VTB Bank posted a 90% fall in profits in the third quarter.

Norway has suspended all political contact with Moscow and has cancelled a previously planned joint military exercise with Russia because of the conflict in Ukraine, the Norwegian prime minister said. The only interactions that remain between the two countries are "local-level contacts" related to maritime transport and fishing.

Independent radio station Ekho Moskvy has introduced social media postings guidelines after host Alexander Plyushchev said the death of 37-year-old son of the Kremlin's chief of staff, Sergei Ivanov was "proof of the existence of God/higher justice”. Ivanov killed a 68-year-old pensioner with his car in 2005 but was not prosecuted.

Moscow has tightened restrictions on meat imports from Belarus to Kazakhstan due to sanction-busting smuggling. The Kremlin is cracking down on its Custom Union member partners who are profiting from its ban on the import of EU agricultural products.

One in two suicides in Russia are related to alcoholism and the country is in the world top 10 for suicides. Drug addicts are also 50-times more likely to attempt suicide than the average person.

Russian construction swelled by 23.7% between January and October against the same period last year to 56.1 million square metres of housing, or nearly 730,000 apartments. Russians are increasingly buying housing as a hedge against devaluation.

A Ukrainian roofer who painted a Soviet star on top of a Moscow landmark in his country's blue and yellow colors said he has officially changed his name to "Slava Ukraine”, (Glory to Ukraine). He remains wanted in Russia on vandalism and hooliganism charges, but appears to have absconded to Ukraine.



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Profits are tumbling amongst Russia's leading banks as the financial sanctions imposed by the West really begin to bite. Almost all of Russia's retail-orientated banks are currently losing money and 170 of 828 banks were in the red in October 2014, according to the Central Bank of Russia (CBR).

The bad news is coming in a steady stream. Last week state-owned VTB admitted that its earnings were down by 87% to RUB6.1bn ($139m) in the third quarter, only to be followed a week later by its sister bank, the retail giant Sberbank, which reported earnings have fallen by just over a quarter (27%) to RUB71bn ($1.6bn). All in all the Central Bank of Russia (CBR) predicts that profits in the banking sector as a whole will fall by 10% this year or more.

Russia's banks are caught between the rock of being cut off from external sources of funding because of western financial sanctions and the hard place of a stagnating economy. VTB has already asked the state for RUB250bn ($5.4bn) in subordinated loans from the National Welfare Fund (NWF) to cover its funding needs. The state said 'No', preferring to keep its power dry for the moment.

"Management guidance after the third quarter results carried the unsurprising message that the fourth quarter is likely to be as painful as preceding quarters this year," says Andrew Keeley, a bank analyst with Sberbank CIB. "Elevated corporate risk costs will continue to eat up profitability, even as delivery improves in retail banking and cost control."

Moody's was similarly downbeat in a recent report on Russia's banking sector. The ratings agency predicted total lending growth will fall

to 5%-10% in 2015 in nominal terms, down from 17% in 2013. Likewise non-performing loans could increase from 7% of total loans at the start of this year to 9.5% next year, says Moody's.

Russia's banking sector is currency almost entirely reliant on the CBR for funding and the regulator recently reduced bank's access to ruble liquidity as all the banks were doing was taking the central bank's cash and using it to speculate on the FX market: the ruble's fall and the CBR's efforts to manage the fall with market interventions created a one-way bet for bankers, who were making easy profits using the state's own money.

"The funding profile of the system continues to principally rely on domestic customer deposits (about 55% of total liabilities) and other domestic sources," Moody's said in its report. "Among these domestic sources, the role played by the CBR and its ability to replace diminishing international funding and minimise currency volatility will remain crucial for the stability of funding [in 2015]."

The share of the central bank's money in the liabilities of the sector is creeping up steadily and was 10% in August and will only increase from there, says Moody's. The slow bleed of gross international reserves, which have fallen from about $500bn to $420bn as of November, has led some to estimate that Putin has about two years to achieve his goals in Ukraine before the money runs out and spawns another big crisis.

However, the lack of cash is already showing up in bank's capital adequacy ratios (CAR), a measure of solvency. Russian banks typically

Russia's banks struggle as sanctions bite


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used to have a healthy CAR of 20% but as the funding dried up increasingly banks have been forced to use their own capital to fund their lending operations. Banks' CAR has been falling steadily towards the mandatory minimum of 10% and edged down from 13% at the start of

this year to 12.8% as of the start of November – still on a par with Russia's emerging market peers, says Moody's. The closer banks get to the minimum 10%, the more vulnerable they become to collapse if a panic causes a run on their accounts.


But according to Fitch Ratings, Russia is not in the 'high risk' group of countries, should the price of oil continue at $80 in 2015. In a new report, Fitch argues that Russia - the world's largest crude oil producer - is in the same group with middling vulnerability to low oil prices as Saudia Arabia – the country with the largest reserves.

Fitch sees both Russia and Saudi Arabia running a fiscal deficit in 2015 because of the oil price drop, which will erode existing fiscal and external buffers, such as sovereign wealth funds, creating problems later. “For these sovereigns, ratings pressures could build in 2015 if prices do not recover,” writes Fitch.

The speed and extent to which this happens will depend on two factors: firstly the size of the existing financial buffers, international reserves and sovereign wealth funds - of which Saudi Arabia has the largest; secondly, thebroader impact of cheap oil on the economy, whereby, Russia with a more diversified economy, is more protected, since import substitution through devaluation will soften the impact of low oil prices, according to Fitch. Policy responses will also play a crucial role, says the ratings agency.

The countries most at risk from low oil are those with high fiscal break-even prices – the price of oil they need to balance the budget – and which are already running deficits at high oil prices, such as Bahrain, Angola, Ecuador and Venezuela, Fitch argues, with Norway and Kuwait among the oil exporters at least risk, because of their large pro capita production.

Eastern Europe

Russia to adjust budget amid warnings of 'middling risk' from low oil price

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Russia is set to adjust the three-year federal budget to reflect oil prices of $80-90 per barrel, Russia's finance minister Anton Siluanov said on November 26.

“Our fiscal and economic plans need to be compiled based on fresh macroeconomic events, which likely won’t change soon. The new price for oil of $80-90 [per barrel] will most probably remain for the long term,” Siluanov told a session of the Federation Council on November 26, as quoted by newswires.

“If the current situation continues with the exchange rate and oil prices, we could lose around RUB500bn ($10.7bn) in revenues," Siluanov added. Slowing economic growth would cost the budget the same amount again, he said.

Oil prices have fallen sharply in 2014, with Brent crude dropping from $115 per barrel in mid-June to close to $80 per barrel currently, and this is set to hit oil exporters through their budgets and through their trade balances, according to analysts.

Talks between OPEC members Saudi Arabia and Venezuela and non-OPEC Russia and Mexico in Vienna on November 25 failed to bring about a production cutting agreement that could support the price of oil.

Russia is hit by a double whammy of low oil prices and sanctions imposed by the West over aggression in Ukraine, cutting off Russia's financial sector from international capital markets.


Eastern Europe

Currently the fund, one of several, contains $82bn but has already fallen 13% from its peak in 2011. The state has proposed releasing RUB100bn ($16bn) from the fund to support state-owned companies that have a heavy external debt repayment schedule to the end of the year, but have been cut off from international capital markets by the west's sanctions regime.S&P said that if the government sticks to this amount then that “alone would probably not breach a threshold for us", but that a downgrade is possible if such a decrease were compounded by additional sanctions and a prolonged decline in oil prices.

Some analysts were surprised by the S&P's tough talk, which appeared to contrast with its own note that said Russia is not in immediate danger of a downgrade. "Surprisingly harsh statement I thought from S&P - I have argued that Russia is a long way from seeing its IG status removed, but maybe the rating agencies have a lower threshold than I imagined," said Tim Ash, head of emerging markets research at Standard Bank, in a note to clients.

Several state-owned companies such as Rosneft and VTB bank have already been to the government with their hands out for money, but so far the finance ministry has rebuffed their pleas for bailouts.

S&P last month kept Russia’s sovereign rating at BBB-, an investment grade that is only one notch

S&P threatens Russia with junk rating if it raids National Welfare Fund

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Russia's sovereign credit rating risks being downgraded to "junk" by Standard & Poor's if the government carries through a proposal to raid its so-called rainy day wealth fund, the ratings agency said on November 26.

The cash-strapped Russian government is hunting for ways to finance budget spending and money to prop up indebted state-owned companies without raising taxes. It has proposed to release money from the National Welfare Fund, a reserve of money siphoned off in previous years from oil taxes and intended to support future pension payments.

S&P warned that the government has only "limited room" for using money from the fund to cover budget spending without getting a ratings downgrade.

Russia's rating was marked up to "investment" grade by the agency in 2003, but with public finances deteriorating through a combination of poor economic growth and sanctions, its financial standing has weakened.

“If money is spent to support the economy, to support specific companies -- that would lead to a decline of those fiscal buffers beyond what we currently expect,” S&P analyst Christian Esters said in an interview in Moscow, reported Bloomberg. The rainy-day funds “are strong mitigating factors for the stresses Russia has been experiencing".


Eastern Europe

have put the state's finances under a great deal of pressure. The official forecast for GDP growth this year is 0.8% but economists say it could be lower and the outlook for next year is flat growth or recession according to most experts. Russia's gross international reserves have been under pressure after the state spent some $100bn in managing the currency lower and other growth-boosting schemes. The ruble has been one of the worst performing currencies in the world this year.

Russia’s “usable” currency reserves will shrink to about four months of imports by 2017, down from eight months this year, as a result of “liquidity support” provided by the central bank to the economy, according to S&P, reports Bloomberg. On a gross basis Russia has 1.7 years of import cover, where three months is the recommended minimum by economists. Usable reserves are defined as total holdings adjusted for investments made by the central bank on behalf of the government.

As Russian borrowers struggle to access foreign capital markets amid US and European sanctions over Ukraine, the government approved channeling more than RUB400bn ($8.6bn) from the Welfare Fund to Russian Railways and other companies including fixed-line operator OAO Rostelecom and Avtodor and the state road-building agency. The Economy Ministry has also given its preliminary approval for allocating another RUB300bn from the fund.

above "junk" status. Junk status precludes some investors, such as international pension funds, from taking buying Russian assets. A downgrade would add to Russia's funding woes and reduce the size of the already limited pool of international money it can tap. S&P's next review is slated for April.

However, sentiment is definitely flowing against Russia. Both its debt and equities are trading well below "fair value" estimates based purely on macroeconomics and companies' earnings performance.

"Some would argue that the market is already trading Russian sovereign as "junk" with Russia 5Y CDS at 300bps, that is 130bps wide of Turkey now which S&P only rates BB+, with a negative outlook, and also 30bps wide of Croatia which S&P also rates as junk these days, at BB. Meanwhile - and some would say quite remarkably, Russia trades wide even of Egypt, by 15bps, which is rated B- by S&P," says Ash.

Apart from the lack of cash, Russia's economic fundamentals are strong otherwise. It is currently running a triple surplus – the federal budget, current account and trade balance are all positive – which remains unusual on the planet. Also the government's net external debt is very low by international standards at about 35% of GDP.

However, a sliding ruble and tumbling oil prices


stressed that the US “will not recognise the legitimacy of any so-called treaty between Georgia’s Abkhazia treaty and the Russian Federation".

Grumblings about Moscow’s moves are expressed within Abkhazia as well. On November 24 two demonstrations were held in Abkhazia’s capital Sukhumi, one in support of the treaty, one against it. In early October, during an interview with Ekho Kavkaza, the speaker of Abkhazia's de-facto parliament, Valery Bganba, voiced concerns that the document “in many places” amounts to a “loss of sovereignty". The original document drafted in Moscow was then amended following the Abkhazia’s 35-member strong parliament recommendations.

But Sokhumi-based think-tank, Ainar, criticized the revised draft and called on the authorities to negotiate with Russia a treaty that would “rule out threats for the Abkhaz statehood".

The treaty follows the political upheaval in late May when thousands of protesters stormed the presidential residence and ousted the then-president Alexander Ankvab, in a move regarded as staged by the Kremlin. In the snap presidential ballot in August 27 Raul Khajimba was elected president. It was his third attempt after missing the target in 2004, when he counted on Moscow’s support, and then in 2011, when he didn’t.

Abkhazia fought a 13-month bloody war in 1992 to gain independence from Georgia. The price

Eurasia

Russian-Abkhazian alliance treaty provokes outcry

bne IntelliNews

Russia’s President Vladimir Putin and Abkhaz leader Raul Khajimba signed an “alliance and strategic partnership” during a meeting in Sochi in November 24 that states that the Abkhazian government will align its foreign, defense, economic and social policy with Moscow. In particular, it promotes a military merger, coordination of police, and economic alignment with the Russia-led Eurasian Economic Union (EEU) that is due to start operating on January 1.

Russia also pledged to “double” assistance to Abkhazia. In 2015 Russia will disburse RUB5bn ($100mn), mainly to implement the treaty, and over the next three years will allocate a total RUB12bn ($267mn), a sum which is twice the Black Sea region’s 2014 budget.

The agreement, which overrules an older document adopted in 2008, sparked a wave of international condemnation as it is seen as a move from the Kremlin to pocket Abkhazia after the annexation of Crimea earlier this year.

Georgia, like Ukraine, has agreed on closer political and economic ties with the European Union. Georgia’s president, Giorgi Margvelashvili, denounced the move as “a step forward toward annexation” of Georgia’s breakaway region. The EU foreign policy representative, Federica Mogherini, said that the agreement “is detrimental to ongoing efforts to stabilise the security situation in the region” and reaffirmed the EU's position on “Georgia’s sovereignty and territorial integrity.” The US State Department


Eurasia

Russia sidelines the Abkhaz language in everyday life, the ruble is the local currency, and 90% of the population hold a Russian passport. Moscow also pays Abkhazian pensions. Every summer hundreds of thousands of sun-hungry Russians flock to Abkhazia’s pebbled beaches, providing much-needed income.

While Sukhumi has been waging its independence, even from Moscow, for years, South Ossetia has been more open to the idea of joining Russia. As Leonid Tbilov, its leader, said on June 2, South Ossetia is already integrating with Russia, in preparation for joining the Russian Federation at the right time.

was an independence recognised by no one. Then in 2008 Russia, and a handful of states including Venezuela, recognized the region as an independent republic following a six-day conflict against Georgia on its other breakaway province, South Ossetia. Tbilisi still considers the two regions as territories “occupied” by Russia.

On the surface, the region could hardly be more tied to Moscow than it already is – and its 240,000 people are not left with many choices. Abkhazia heavily relies politically, economically, and militarily on its neighbour. Russian troops help maintain its de-facto independence and the Russian market provides an economic lifeline.


in late 2012 for the second time. "Obviously, Uzbekistan wants to improve relations with Russia and has been trying to test the ground in this direction," Andrey Kazantsev, director of the Moscow State Institute of International Relations' analytical centre, told Russia's Nezavisimaya Gazeta.

He suggested that Uzbekistan could get close with Russia either via Eurasian integration or the CSTO. Russia, Kazakhstan and Belarus are part of the Customs Union, which will be transformed into the Eurasian Economic Union in January 2015. Armenia will join them in the new year and Kyrgyzstan some time next year.

Karimov's flattery of Nazarbayev as a man who is getting "wiser" with every passing year may well prove Kazantsev right. Karimov must have also kept Russia in mind following Moscow's outrage at the new Ukrainian government's drift away from its orbit towards the West. Karimov, 76, has not announced yet whether he will stand for another term in the forthcoming presidential election in March 2015. The Uzbek president may feel the need to reassure the Kremlin that his successor would not be anti-Russian should he decide not to stand. Russia's Vladimir Putin is expected to visit Tashkent in December.

Karimov also used the visit to reiterate his opposition to the plans by upstream Kyrgyzstan and Tajikistan that feed water to Uzbek cotton fields. "Today we

Eurasia

Uzbek president courts Kazakh leader to improve relations with Russia

bne IntelliNews

Uzbek President Islam Karimov has courted Kazakhstan's Nursultan Nazarbayev in order to seek a wise man's advice on how to shield the region from challenges emerging as a result of the rapidly changing geopolitical situation. Another reason Karimov went to Astana is to find ways of improving relations with Russia, according to observers.

"They [these challenges] require us to cooperate more closely to preserve peace, stability and tranquillity in our countries and the region as a whole and ensure the sustainable development of national economies and improving the welfare of peoples," Karimov said during a visit to Astana on November 24-25. "The early stabilisation of the situation in Afghanistan and establishment of peace in this country is of crucial importance for security and stability in the Central Asian region and beyond."

The Uzbek leader criticised the speedy withdrawal of forces by the US and its allies from Afghanistan as this may lead to "unexpected" results. "It is not ruled out that all this might lead to something that's happening in Iraq at the moment," Karimov said, referring to Islamic State.

In this light, Karimov is seeking to secure Nazarbayev's assistance in improving the deteriorated relations with Russia following Tashkent's departure from the Moscow-led CIS Collective Security Treaty Organisation (CSTO)


had quadrupled to over $2bn between 2005 and 2013. In the nine months of 2014, it exceeded $1.5bn. However, Uzbekistan still accounted for only 1.2% of Kazakhstan's exports and 2.6% of imports.

Karimov's visit to Astana coincided with Czech President Milos Zeman who concluded his visit on the day Karimov arrived in the Kazakh capital. Whether Karimov met Zeman while both men were in Astana is not clear, but the two presidents have long been seeking a meeting: Karimov's visit to Prague in February was cancelled when Zeman came under pressure from human rights activists.

The Kazakh presidential press service told RFE/RL that the visiting presidents would meet Nazarbayev separately and there would be no trilateral talks. However, the press service refused to clarify whether Zeman and Karimov would meet separately, officially or unofficially.

Eurasia

confirmed a joint position on the construction of new hydrotechnical facilities on the upper reaches of the Syr Darya and Amu Darya rivers which should be conducted in strict compliance with commonly admitted norms of international law and conventions of the UN and with mandatory coordination with all countries located on the lower reaches of these rivers," Karimov said.

"Cooperation in this vitally important sphere is possible only on the basis of mutual trust. Transparency and account of interests of all regional countries without exception should be ensured," Nazarbayev echoed Karimov.

Kyrgyzstan is planning to build the Kambar-Ata 2 hydropower station on the upper reaches of the Syr Darya, while Tajikistan is building what will be the world's tallest dam, Rogun.

According to Nazarbayev, bilateral trade between Kazakhstan and Uzbekistan is on the rise and


Final Polish local election results have PiS crying foul

The vote counting process is being investigated by Poland's government watchdog agency, and the whole commission which runs Poland's elections has resigned.

One analyst speculated that the Polish People's party did so well because its candidates were on the first page of a confusing booklet of party lists, and that some voters could have voted for the party by mistake. Even party leaders seemed taken aback by their unexpected success.

In the end, PiS will be in charge of only one region – the same it ran before the election, while the ruling coalition will be in charge of the rest of the country. PiS is not widely trusted by other Polish political parties, which are generally wary of joining in coalitions with a party that has the reputation of destroying its partners.

Although the result is a short-term disappointment for Kaczynski, it does allow him to create a narrative for his supporters ahead of next year's presidential and parliamentary elections. PiS has long portrayed the Polish state as fundamentally dysfunctional and corrupt, the result of a misbegotten deal with the ailing communists a quarter century ago.

He can now point to the obvious problems in running the elections as an example of the incompetence in the way the country is run, as well as spinning tale of conspiracies which snatched PiS's victory away. That promises to make the political invective over the next year even more bitter than usual.

“The level of hypocrisy coming from the prime minister is such that it is unclear if this is a person worth speaking to,” Kaczynski said in an interview with the Wprost news weekly, comparing Kopacz to an odious spokesman for the communist regime during martial law more than three decades ago.

Central Europe

Jan Cienski in Warsaw

Poland's opposition leader Jaroslaw Kaczynski has gone from leader to loser in the country's convoluted local elections, but the disputed outcome leaves him in a strong position to fire up his aggrieved electoral base.

Kaczynski's rightwing Law and Justice (PiS) party appeared to score well in the November 16 local election.Exit polls showed the party taking 31.5% of the vote, about 4 percentage points ahead of the governing Civic Platform party, representing PiS's best electoral performance in nine years.

But over the last week, Poland's vote counting system system broke down, victim of bad planning and faulty programming. When the results were finally announced over last weekend, PiS had taken only 26.85% of the vote, a fraction ahead of the 26.36% scored by Civic Platform. Civic Platform actually did slightly better in winning seats in the country's 16 regional assemblies, taking 179 to 171 for Law and Justice.

The big surprise was the Polish People's party, junior members of the governing coalition, which took a record 23.68% of the vote and won 157 regional seats, up from 93 four years ago.

The delayed vote count, the surprising discrepancy between the exit poll and the actual result and the high number of invalid ballots – 18% compared to 12% four years ago – had Kaczynski crying foul.

He called the election results “untrue, unreliable, not to say faked", adding that his party would contest the outcome in court and in the European Parliament.

Ewa Kopacz, the prime minister, whose position was strengthened by Civic Platform's better-than-predicted performance, denounced Kaczynski's criticisms as “destroying the foundations of democracy”.


Central Europe

Slovaks join Central Europe's protest season

There are also demands that officials overseeing the health sector should not be named on political grounds, according to local media. Rallies are expected to continue, with the next one called for November 28 in Kosice, Paska's power base. Opposition MPs have also demanded an investigation into other health sector companies they say are controlled by the Smer politician.

Meanwhile Fico, whose support has slipped over the past year or more, has launched a populist spending programme since he surprisingly lost the presidential election to independent Andrej Kiska. While the government's budget deficit is heading towards EU limits, he has handed out salary increases in the public sector, free train transport for students and seniors, and reduced taxes for people with low incomes.

Slovaks are hardly alone in their anger. The streets around the region have been filled with protestors in recent weeks. Twenty-five years after the fall of communism, Central European populations are fighting similar battles to those of the early 1990s.

Protests have taken place in Hungary, the Czech Republic and Romania calling for an end to corruption and measures to protect democracy. All have also shown their dissatisfaction with established politicians in recent elections. In most, an inept opposition means voters have little chance of unseating populist and authoritarian governments.

bne IntelliNews

Around 5,000 Slovaks gathered in front of the parliament on November 25 to protest against corruption and demand the resignation of Prime Minister Robert Fico.

This was the third protest organised in the Slovak capital Bratislava. It all started in mid-November, sparked by a corruption case linked to over-priced acquisitions of medical equipment by hospitals. In the immediate wake of the scandal, the health minister and the parliamentary vice-chair Renata Zmajkovicova stepped down.

However, that was not enough to placate Slovaks, who rallied to demand the head of parliament speaker Pavol Paska. The deputy leader of the ruling Smer party is accused of being the ultimate beneficiary of the company that sold the medical equipment. He denies he has anything more to do with the company.

Amid public pressure, Paska, who had been seen as the next likely PM had Fico won the presidential elections in March, resigned on November 16. The same day, Slovaks voted independents into the majority of seats in major cities in local elections.

Yet the protests continued, with the crowds demanding more measures to stop corruption in the country, such as a ban on the participation of shell companies in public tenders and the establishment of a special commission to supervise the investigation of the "Gorilla" corruption case from 2011.


Central Europe

private pension schemes. Another protest is expected in early December.

Prime Minister Viktor Orban has faced regular protests in the past month against government policy. Opponents of his "illiberal" democracy concept - modelled on the likes of Russia and China he claimed in the summer - have been encouraged by a turnout of more than 100,000 in late October to demonstrate against plans to tax the internet, and have organised several protests over the weeks.

Meanwhile, in the Czech Republic at celebrations of the 25th anniversary of the Velvet Revolution on November 17 President Milos Zeman was booed and pelted with eggs. Thousands protested in Prague against his calls for dropping sanctions on Russia, as well as his comments during a recent visit to China that Taiwan and Tibet have no claims to independence. An expletive-ridden radio interview was the icing on the cake.

At the same time, it's little coincidence that the unrest comes in the midst of huge geopolitical tensions between the West and Russia. The Visegrad states have found themselves on the frontline because of their closer ties with Moscow, which is pressuring them to opt out of EU policy.

Poland, the one country in Visegrad with a clear stance, is the only one not to have had similar unrest on the streets. Poles had plenty of reason to protest should they have felt the urge, with a botched vote counting system delaying the results of November 15 local elections by over a week. When finally announced, the results were at odds with exit polls, and the recently revived opposition to the centre-right ruling Civic Platform complained of skullduggery.

Yet the Poles have stayed at home. Meanwhile, as Slovaks filled a square in Bratislava on November 25, more than 2,000 Hungarians were rallying in Budapest against government plans to eliminate


Southeast Europe

Moldova’s voters to decide country’s external orientation

still appeal to the Supreme Court of Appeal. The Electoral Bureau asked on November 26 for the court to invalidate the party’s participation based on evidence of foreign (Russian) financing. In case the Supreme Court upholds the lower court’s ruling, Patria's voters will probably migrate to either the leftist Socialist party (PS) or, less likely, to the PC. The banning of Patria would however radicalise a party that already enjoys the support of some 10% of the voters. Patria’s president Renato Usatii has already announced demonstrations.

Moldovans working abroad might play an important role in the elections but their preferences are unclear - all electoral polls are conducted on Moldovan territory. But up to 800,000 or one third of the working age population is assumed to reside outside the country, one third irregularly, according to research by Nora Ratzmann of the Centre on Migration, Policy and Society (COMPAS) at Oxford University. About 65% of the migrants go to Russia and 30% to EU – 20% to Italy, with Portugal, Spain, France and Greece being other notable destinations. While the workers in Russia are dispersed, those in Italy and Portugal are expected to be more active in the November 30 vote.

The two options – EU or the Russian-led Custom Union, are more or less equally supported by Moldovans, as revealed by polls. Broadly speaking, the older, conservative voters having experienced the Soviet-era period, are more inclined to stick with the Custom Union, while the younger voters who have travelled abroad and even worked in the EU tend to prefer European integration.

The choice is difficult as Moldova’s future EU membership is not yet officially discussed, while

bne IntelliNews

Moldova’s 3.2mn voters will determine on November 30 not just who will be the 101 members of the parliament for the next four-year term but also the country’s external orientation, towards either the European Union or the Russian-led Custom Union.

The fragile pro-EU coalition now in power in Chisinau took firm steps toward European integration, but further actions depend on popular support at a time when the conflict between Western democracies and Russia leaves little room for neutrality. Polls reveal that the ruling coalition might get a majority in Parliament, but it might also need supplementary support. Such supplementary support depends on compromises and could slow the European integration process. The mixed recent economic performance and the still high levels of corruption and poverty have not significantly strengthened voters’ pro-EU sentiment.

The anti-EU parties are not united – at least judging from their pre-electoral statements - but a post-electoral coalition of anti-EU parties is still a plausible scenario. The Communist party (PC) still enjoys the broadest base of voters and its leader Vladimir Voronin seems increasingly willing to play a more active role. He has avoided expressing his preference for post-electoral alliances so far, which has made pro-EU advocates hope for his support. But Voronin has consistently expressed approval for Russian President Vladimir Putin’s policy and has questioned the benefits of EU membership.

The radical anti-EU party Patria was excluded from the parliamentary elections by the Chisinau Court of Appeal on November 27 but the party may


Southeast Europe

turnout among Moldovans working in Russia is expected to be low. Russia and anti-EU parties in Moldova have reportedly discussed the option of sending home Moldovan workers for the vote.

If the polls conducted in the past weeks are confirmed by the ballot, the continuation of Moldova’s integration might depend on the pro-EU ruling coalition being joined by the Communist party. Even if some see PC as the most appropriate intermediary for turning conservative-inclined voters toward the values of the EU, such assumptions have no grounds so far, as long as Voronin praises Moldova’s performances during the Soviet period.

Moldova’s Communist party might join the pro-European coalition after the parliamentary elections on November 30, according to Vladimir Socor, a political analyst of East European affairs for the Jamestown Foundation and its Eurasia Daily Monitor. However, the PC is losing ground, partly because Russia is supporting the rival Socialist Party [PS], Socor explains. PC and Russia have a relationship of mutual distrust and, despite the superficial impression of a common vision, they are not supporting each other. Instead, it is the Socialist party led by Igor Dodon that is sponsored by Russian, Socor argues, explaining that this is aimed at weakening the Communists’ position.

the Eurasian Economic Union will only come into force next year and is in the early stage of setting up its own institutions. Furthermore, the frozen conflict in the separatist region of Transnistria complicates Moldova's European integration. The breakaway region of Transnistria is entitled to make its own choice independently in case Moldova chooses to take formal steps toward EU or Nato membership, Russia’s foreign minister Sergey Lavrov stated in October. The Association Agreement signed by Moldova with the European Union, however, covers the territory of Transnistria.

Moldova already took major steps toward European integration when it signed the Association Agreement with the EU earlier this year. The agreement has been already ratified by the European Parliament. But the hopes for further EU membership are underpinned only by an official note specifying that the agreement would not be the final step of the country’s integration process. The most committed advocate of Moldova’s EU membership, the senior ruling PLD party, set 2020 as the target accession year.

Moldova’s Nato membership is even more problematic since it requires prior amendment of the constitution, which states the country's military neutrality. The junior ruling party PLD advocates amending the constitution and joining Nato. However, the ruling coalition as a whole does not openly share such views, as confirmed by Prime Minister Iurie Leanca on November 27. Moldova should remain neutral and join no military block, he said in a statement that was probably aimed at avoiding taking radical stances before the parliamentary elections.

On the other side, joining the Eurasian Economic Union would be supported by the large number of Moldovans working in the Russian Federation, as well as older voters educated during the Soviet regime, and ethnic Russians themselves. Russia’s vice-premier Dmitri Rogozin estimated the number of Moldovans working in Russia at 0.7mn – meaning 22% of the total voters. But the


Southeast Europe

largest corruption case related to the process so far, but given the size of the restitution process and the ambiguous procedures, it could well be followed by a series of similar cases.

Some half of the shares of the Property Fund (Fondul Proprietatea) were given to restitution rights holders illegally – either against forged documents, or against overvalued properties - George Baesu, head of the Romanian restitution agency ANRP, said on B1 TV station this week. The fraud rate in the case of cash restitution was even higher, he added.

President Traian Basescu endorsed a new controversial bill on property restitution, drafted by the government and aimed at compensating the victims of communist nationalisation, in June 2013. Under the legislation, the government postponed new restitution claims until 2016. During 2014-2018, the state would however compensate in cash the 14,000 recipients of restitution rights that have had their claims reviewed and approved. The rest of the recipients whose files would be reviewed in the meantime will be compensated mainly in kind (starting as of 2016) – namely by giving them state properties, or in cash gradually paid out over seven years starting 2017. The compensation in kind would however be done under a complicated system, involving a bidding procedure for each real estate asset.

The government surprisingly announced in 2013 that there are still 200,000 restitution claims to be reviewed, which is a very large amount compared with the 13,000 already reviewed and compensated, plus the 14,000 reviewed but not compensated yet. The state has already had to allocate large resources to this – 9,000 buildings, more than 1mn heactares of land, and ¤5bn in cash and shares in the Property Fund. This makes it one of the most generous restitution processes amongst the former communist countries.

bne IntelliNews

The former head of Romanian restitution body ANRP, an institution set up to compensate people who had property confiscated by the Communists, was arrested for 24 hours at the request of prosecutors of the anti-corruption body DNA, online news agency HotNews announced on November 24.

Prosecutors have interrogated Crinuta Dumitrean, who headed the ANRP during 2011-2013, at their headquarters in connection with a corruption case involving the former head of the anti-crime body DIICOT Alina Bica, and they plan to ask a law court to place her in police custody for 30 days.

In terms of political affiliation, Dumitrean was backed by the centre-right PDL party, which was in government in 2011 but is now in opposition, and personally by PDL MP Ioan Oltean.

Prosecutors have started a criminal investigation into Dumitrean and arrested her for 24 hours, a DNA statement said. Prosecutors provided evidence they claim points toward the restitution body’s committee headed by Dumitrean being aware of the overvaluation of a plot of land outside Bucharest. The property was valued at more than ¤90mn instead of its fair value of ¤30mn, resulting in damage to the public purse of some ¤60mn, prosecutors allege. The plot was claimed by Gheorghe Stelian who purchased the restitution rights from former owners now living in Italy for ¤1.5mn. Based on the evaluation accepted by the ANRP committee, Stelian was given Property Fund [Fondul Proprietatea] titles in the amount of over ¤90mn.

Property restitution in Romania has turned into a never ending process that is incurring endless costs for the state, because of the unclear, changing procedures and corruption among state bodies that manage the process. The case involving DIICOT head Bica and former ANRP head Dumitrean is the

Former head of Romanian restitution office arrested in corruption probe


Opinion

Mark Adomanis in Washington DC

Ever since returning to power in the spring of 2010, when his “centre” right Fidesz party managed to win a two-thirds majority in parliament despite netting only a little more than 50% of the popular vote, Hungarian Prime Minister Viktor Orban has gradually attracted more and more criticism.

Paul Krugman, despite being far better known for his macroeconomic commentary, was the first high-profile Western analyst to really sound the alarm bell about Orban and his plans for Hungary. Ever since late 2011 when he published a (in retrospect, shockingly prescient) column about the corrosive impact of recession on the country's democratic institutions, Krugman has regularly warned that Orban is a wolf in sheep’s clothing and that his protestations of democratic values should not be trusted. Hungary is too small a country to be a constant front-page topic, but in addition to his own output Krugman has frequently allowed one of his Princeton colleagues (Kim Lane Scheppele) access to his priceless internet real estate to warn the broader public about Fidesz and its slow-motion march into soft authoritarianism.

Orban has only really started to draw a lot of negative attention, though, since his foreign policy took on a noteworthy pro-Vladimir Putin tinge. Despite fierce resistance from Brussels and the fact that it blatantly violates a number of Europe-wide energy commitments, Hungary's parliament recently approved a law that would allow Russia's

Gazprom to start building the huge South Stream gas pipeline, which will bring Russian gas up through Southern Europe into the heart of Europe. In case anyone still missed the subtext, Orban's government also recently took out a significant loan from Moscow to expand a nuclear power plant (with Russian technical assistance).

Many of the tricks that Orban has employed – packing the courts with loyal supporters, steering government contracts to firms run by privileged insiders, even directing newspaper advertising revenue away from opposition-linked publications – to consolidate his power should sound familiar to students of Russian politics. Orban has been careful not to run too blatantly afoul of the law or of democratic best practice, but the general thrust of his policies, and their focus on strengthening his personal power, is impossible to miss.

Although both the US and the EU have grown increasingly alarmist in their declarations about Hungary, the practical steps they’ve taken thus far have been limited. The EU has written a report and issued a number of statements, but the actual costs imposed on Hungary by Brussels have been negligible. There’s been talk of cutting off aid and limiting access to various EU funding streams, but to date it’s been just that, talk.

The US, for its part, has been slightly more active. In a policy that bears a distinct echo of the "Magnitsky Act" – legislation designed to punish to Russian officials allegedly responsible for the

COMMENT: What is to be done about Hungary?


Opinion

death of Russian whistleblower Sergei Magnitsky in a Moscow prison in 2009 – the US has gone so far as to impose travel bans on a number of Hungarian government officials. Despite hollow protestations that these bans "aren't related to Hungarian government policy," it seems clear that the Obama administration has decided that Hungary should be treated more like an adversary than an ally. Even the travels bans (which would have been unimaginable just two or three years ago) are still not that dramatic of move, and have had no apparent impact on Orban’s decisionmaking.

The reason that no one has really done anything about Orban is a simple one: there’s not very much that can be done. The West has gotten very good at sanctioning and punching countries that are outside of its warm embrace, but it’s never really had to police its own ranks very diligently. The simple reality, one that has been long known to “transitologists” and other students of the EU as an institution, was that the most effective lever was the offer of membership: once a country was in the fold, Brussels’ practical ability to influence its policy disappeared almost entirely. This is why no one really knows how to handle Orban because by all of the EU rulebooks he simply shouldn’t exist.

Probably the single most obvious lesson that can be drawn from Hungary is the importance of institutional design and, more particularly,

just how bad the elite in charge of European integration has been at it. Much like with the euro currency (whose institutional failings became clear only in a moment of existential crisis), the architects of the EU never thought about the possibility of expelling a member. The assumption was always that if a country had ever achieved the level of good governance and democratic institutionalization necessary to join the EU, then it would not regress. Progress, in this simplistic worldview, was a one-way street: away from authoritarianism and towards democracy.

Hungary also drives home the importance of ensuring that countries only join “the West” when they are truly ready. In the aftermath of the war in Ukraine’s Donestsk and Lugansk regions, there has been an awful lot of talk about rapidly incorporating Ukraine into Nato and, eventually, the EU. The regression of Hungary under Orban shows that this would be a short-sighted and ultimately counterproductive step, as the ability to truly compel Ukraine to reform would be lost the moment the ink on its accession treaty was dry.

As if any reminders were necessary, history hasn’t ended. The European elite needs to do some very hard thinking about how it is going to deal with the many forces (nationalism, xenophobia, authoritarianism) that it thought had been banished from the continent forever.


Weekly Lists

Russia looks to golden horde for financial support bne IntelliNews

Russia's central bank is replenishing its reserves with domestic bullion, after spending more than $100bn slowing ruble depreciation over the last twelve months. The central bank's reserves have declined from $524bn at the end of October 2013 to $421bn in mid-November after it tried to brake the ruble's depreciation, notably during the annexation of Ukraine's Crimea in March 2014 and following the imposition of sectoral sanctions.

Now the Central Bank is looking to replenish reserves to rebuild confidence – and has found an easy way of doing so: gold purchases from domestic producers. Russia mined 248.8 tonnes of gold in 2013, making it at third largest gold producer in the world, after China and Australia, according to Thomson Reuters. The move has been made easier because of sanctions imposed on Russian banks by the West. This makes international banks leery of buying gold from Russian commercial banks that buy it from producers for resale internationally.

As a result, Russia'a gold reserves now put it at sixth place in the world, overtaking officially declared Chinese reserves in October, having overtaken Switzerland earlier in the year.

Below is a selection of stories from bne's lists. bne offers a variety of daily, weekly and monthly lists to subscribers, including: daily lists for Russia, Turkey, Ukraine, Central Europe, Southeast Europe and Eurasia; the weekly lists Banker, Deal, Credit, Investor, Stocks; and monthly lists Real Estate and Infrastructure. For more information, please visit the website at www.bne.eu.

Poland continues to surprise on the upside Jan Cienski in Warsaw

While the western European economies look increasingly troubled, Poland continues to surprise on the upside, with new reports showing falls in unemployment and resilience in consumer spending – not long after flash third quarter GDP numbers also came in better than expected.

The driver behind the good news seems to be domestic demand, the same factor that helped keep the economy from falling into recession during the early years of the economic crisis. The country’s statistical agency showed retail sales rising by an annual 3.7% in real terms in October, the fastest pace since May – this despite lacklustre car sales because of changes in tax regulation.

“This reinforces our view that private consumption is likely to remain an important contributor to economic growth in the coming quarters, as the real wage bill and consumer lending continue to grow at a high pace,” noted Cezary Chrapek of Citi Research.

bne:Investorbusinessneweurope I November 28, 2014

Poland's largest internet portal, Onet.pl, has agreed a deal to buy the country's second most popular social networking service NK.pl, it announced on November 24.

Owned by Ringier Axel Springer, Onet.pl will buy the social media site - formerly known as Naszaklasa.pl - from Excolimp Investments, in turn owned by Rubylight Limited. The value of the deal has not been revealed. Its completion depends on approval from antimonopoly office UOKiK.

NK.pl has 5.2mn users and is one of the leading hubs for online gaming in Poland. Onet.pl, which already offers three gaming services, stresses it wants to build the segment.

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Polish portal Onet.pl buys social networking service NK.pl bne IntelliNews

Slovenske Elektrarne shareholders increase Mochovce budget to ¤4.6bn bne IntelliNews

The Slovak government and Italy’s Enel - which together own power utility Slovenske Elektrarne (SE) - agreed on November 21 on yet another budget increase for the expansion of the Mochovce nuclear plant. That only adds to the potential bill for potential bidders for Enel's stake in SE.

The delays and budget overruns on the project to build two new reactors at Mochovce have been the source of vicious fighting between Bratislava and Enel. However, the Italian company has now got the nod on a further ¤830mn in costs, which will raise the total to ¤4.63bn, economy minister Pavol Pavlis stated, according to TASR. The project was originally set to cost ¤2.8bn.

Apart from the rise in the budget, the two shareholders in SE - Enel holds 66%, with the Slovak state owing the remaining 34% - confirmed that the first of the two units will start commercial operation in November 2016, with the second to follow a year later. The installation of the extra 880MW is already more than two years behind schedule, partly because of increased security demands in the wake of the March 2011 Fukushima disaster. SE's general director Luca D'Agnese explained that one of the reactors is 80% complete, the second 60%.

bne:Dealbusinessneweurope I November 28, 2014


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Hungarian banking sector swings to loss in Jan-Sept on higher provisionsbne IntelliNews

The Hungarian banking reported a pre-tax loss of HUF314.6bn (¤1.03bn) in the first nine months of the year, reversing a pre-tax profit of from HUF76.4bn a year earlier, data from the central bank showed. The deterioration could be mainly attributed to the provisions made by the financial institutions related to the recently approved legislation on FX borrowers relief. In particular, the lenders made HUF669.4bn in provisions in January to September, including HUF221.7bn in Q3 alone.

The sector's operating performance improved as the income from fees and commissions increased by 16.4% y/y and more than offset a 0.4% y/y decline in interest income. Net income from financial operations advanced by 12.7% y/y to HUF109.2bn. The banking sector’s operating costs edged down by 2.6% y/y to HUF457.6bn.

Regarding NPLs, the share of bad and restructured loans continued to increase in the period. The value of all bad and doubtful loans reached HUF2.73tn as of end-September, rising by 2.9% on the year. In quarterly terms, the stock of the NPL edged up by 0.4% in Q3. The sector's capital adequacy ratio stood at 17.8% at end-September, up from 17% a year earlier, and up from 17.4% at end-June.

Slovak banking system stable reports central bank bne IntelliNews

The Slovak banking system is stable on the back of a strong domestic economy, the central bank said in its Financial Stability Report released on November 26. However, it warns of growing external risk.

The favourable climate has seen retail loan growth in Slovakia push to among the highest in the EU. An increase in mortgage loans is supported by decreasing interest rates and stable property prices.

However, the central bank warns that a potential further slowdown in the euro area could see the single currency region tip back into recession. It is wary that competition on the retail loans market may be seeing lenders underestimate that risk. Last month, the central bank advised banks to pull back on the volume of loans granted with a high loan-to-value (LTV) ratio (90-100%).

bne:Bankerbusinessneweurope I November 28, 2014


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Polish central bank governor wrestles with rate setters for more cuts bne IntelliNews

Polish deflation shows that there is room for further interest rate cuts, the governor of the National Bank of Poland (NBP) said in comments published on November 25. The claim comes as Marek Belka continues to try to reassert influence within the Monetary Policy Council (MPC).

Belka sought to increase the pressure for a more dovish policy in an interview with tabloid Fakt. In the Fakt interview, the NBP governor admits that the MPC he formally heads remains divided over the issue. Indeed, just a few days before Belka's renewed push, the MPC's Jan Winiecki insisted there is no room for further interest rate cuts.

With low demand depressing inflation across Europe, Poland's CPI was a negative 0.6% in October, following price falls of 0.3% in the previous two months. The current run is the country's first deflation in 40 years. Early this month, the MPC surprised as it kept the benchmark rate unchanged at a record low 2%.

Czech EGAP needs to restructure ¤360mn of loans to Russian firms bne IntelliNews

The state-owned Czech Export Guarantee and Insurance Corporation (EGAP) will have to restructure about CZK10bn (¤360mn) worth of loans to Russian firms, Lidove noviny daily reported, citing EGAP spokeswoman Hana Hikelova. Most of the loans are denominated in euros and the Russian companies are now facing problems repaying their debts due to the depreciation of the ruble.

The ruble has dropped in value against the euro by some 20% and by 30% against the US dollar since the start of the year. Russian companies mostly use loans, insured by EGAP, to finance supplies from Czech exporters.

Russia is the most important market for EGAP; the agency’s exposure to that country stands at CZK56bn, or a quarter of EGAP's portfolio. Azerbaijan and Turkey follow with much lower volumes.

bne:Creditbusinessneweurope I November 28, 2014


Granolio IPO to add grist to the Croatian equity mill Guy Norton in Zagreb

It’s been a long time in the offing, but after a near six-year interregnum the Croatian equity market is finally set to witness an initial public offering (IPO) this week. November 25 will see the start of a three-day subscription period for the sale of shares in agricultural company Granolio. After an investor presentation in the Croatian capital Zagreb late last week, reportedly attended by 50 investors from local equity and pension fund firms according to local media, lead managers Privredna Banka Zagreb and Erste Bank are set to offer institutional buyers the chance to pick up shares in an offer range of HRK134-166 per share, meaning that Granolio is looking to reap between HRK90mn and HRK131mn (¤11.7mn-17.0mn) from the sale of a maximum number of 789,157 shares to be sold.

Given that the minimum subscription level in the IPO involves the purchase of 5,800 shares for a total of commitment of at least ¤100,000, the offer is clearly targeted at professional investors. But it is hoped that the all-too-rare IPO will help to shine a welcome spotlight on the Zagreb Stock Exchange (ZSE), whose financial fortunes have been in the doldrums since the onset of a six-year recession in Croatia.

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Bashneft should not remain state-owned, says Ulyukaev bne IntelliNews

Russia's economy minister Aleksei Ulyukaev has called for regional oil company Bashneft to be privatised once it is transferred from conglomerate Sistema, following a controversial court decision that it was illegally acquired in 2008.

In an interview with Germany's Frankfurter Allgemeine Zeitung, Ulyukaev said that Bashneft should now be reprivatised to a private company "by the usual mechanisms", rather than sold to a state company. "Bashneft should be privatised by the generally accepted mechanisms [by the state property fund] and not by sale to a state-owned energy company," he said.

"Bashneft should not stay in state ownership and we will include this company in our privatisation plan," said Ulyukaev. "But this also depends of course on the situation on the market," he added. "Russia's oil sector is very competitive and so there is no reason for the state to keep a stake in it," he said.

bne:Stocksbusinessneweurope I November 28, 2014

bne newspaper november 28 2014

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