bne newspaper april 11 2014

April 11, 2014 www.bne.eu

Eastern Ukrainians show little appetite for Russian rule

The global economic recovery will continue to gain traction, the International Monetary Fund (IMF) predicts in its latest World Economic Outlook released on April 8. However, it sees growth becoming more uneven, with emerging markets presenting the greatest risks.

During the second half of 2013, growth in advanced economies rebounded by 1.3 percentage points, a trend that should strengthen further in

IMF sees EMs presenting greatest risks to global recovery

Barbed wire, barricades and balaclavas. Welcome to the "Donetsk People's Republic", a three-day-old unrecognised microstate in eastern Ukraine where Russian rock band Zemlyane blasts in the background, babushkas wave flags and reminisce fondly about the Soviet Union, and young men with faces hidden wield wooden batons.

On April 6, in what seemed to be an orchestrated

move, pro-Russian protesters simultaneously stormed administrative buildings in key cities across eastern Ukraine, including, Kharkiv, Mauriupol and Luhansk, as well as Donetsk.

In Kharkiv, protesters were quickly ousted from administrative buildings following a counter

2014-15, the IMF forecasts. That will help global growth rise from 3.0% in 2013 to 3.6% in 2014 and 3.9% in 2015, which is broadly unchanged from the October 2013 outlook.

"The recovery… in advanced economies is becoming broader," the report opens. "Fiscal consolidation is slowing, and investors are less

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Harriet Salem in Donetsk

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Content: 2 Top Stories 5 The Regions This Week10 Eastern Europe13 Eurasia17 Central Europe21 Southeast Europe23 Opinion25 Lists

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worried about debt sustainability. Banks are gradually becoming stronger. Although we are far short of a full recovery, the normalization of monetary policy - both conventional and unconventional is now on the agenda."

However, emerging markets look set for a tougher ride. "These dynamics imply a changing environment for emerging market and developing economies," the IMF analysts continue. "Stronger growth in advanced economies implies increased demand for their exports. The normalization of monetary policy, however, implies tighter financial conditions and a tougher financial environment. Investors will be less forgiving, and macroeconomic weaknesses will become more costly."

That puts the onus on structural reform for many emerging markets, the international lender insists.

Although the report admits that "appropriate policy measures" differ across emerging economies, it maintains that the priorities are constant: free floating currencies; tight monetary policy; lowered budget deficits; and reform of infrastructure and market entry.

All of which suggests a split between the new members of the EU, whose open economies are set to benefit most from increased export demand from advanced markets - particularly the Eurozone - and the other emerging markets in the Commonwealth of Independent States (CIS).

Growth across the EU is seen at 1.6% this year, which is a slight rise on the last IMF forecast,

with CEE states doing the most to boost the number. The largest upgrade in the bloc was handed to Slovenia, while Hungary and Poland are also among those at the top when it comes to improved outlooks.

By way of contrast, the near-term prospects in Russia and many other CIS economies have been downgraded, with growth set to be hampered by the fallout from the crisis in Ukraine and the related geopolitical risks.

"Investment had already been weak, reflecting in part policy uncertainty," the report states. "In emerging and developing Europe, growth is expected to decelerate in 2014 before recovering moderately in 2015 despite the demand recovery in western Europe, largely reflecting changing external financial conditions and recent policy tightening in Turkey."

Already leading the recovery thanks to increased export demand and robust fiscal management, Central Europe's relatively open economies are set to accelerate the most on the back of the brighter prospects in the Eurozone. Growth in Hungary and Poland is forecast to strengthen in 2014 to 2.0% and 3.1% respectively, from 1.1% and 1.6% in 2013.

"In both economies the strengthening is being driven by a pickup in domestic demand, supported by monetary easing, improvements in the labor market, and higher EU funds, which are expected to boost public investment," the report says.

However, in line with the concerns expressed by investors over the landslide re-election of Hungarian Prime Minister Viktor Orban on April 6, the IMF cautions that Hungary's still-high external vulnerabilities, although declining, could weigh on growth, particularly as the region's recovery progresses. By 2015, Hungary is set to see the slowest growth in Visegrad, with Romania and Bulgaria set to overtake it.

IMF sees EMs presenting greatest risks to global recovery

April 11, 2014 businessneweurope I

The claim, whilst not outlandish in the face of the recent annexation of Crimea, is hard to substantiate. Whilst provocateurs may be amongst the protesters, the majority appear to be local.

However, far more damaging than any Russians disguised as Ukrainians is the Kremlin's tactic of toxic propaganda. The back-to-back programmes and news broadcasts of Russian state television channels, widely watched across the east of Ukraine, claiming that bandits and fascists have seized power in the capital play on deep-seated historical cultural and linguistic divisions between Ukraine's east and west.

Now the concern for Kyiv's fledgling government is that the events in Donetsk are a bid to mimic the pattern of events in Crimea, where a Kremlin-orchestrated putsch resulted in the southern peninsula's invasion and annexation by Russia in March.

Eastern Ukrainians show little appetite for Russian rule

move in the early hours by Ukraine's security service. But in Donetsk, where the takeover of the administrative building is the fourth to occur in a matter of months, the pro-Russia protesters, hunkered down behind three lines of ever growing barricades, have proved much harder to dislodge.

Speaking to bne, Roman Enko, the self-appointed commander of the occupied building, says that they will not leave until their voices are "heard". "These people in Kyiv have taken power and never even asked the opinion of people in the south and east," he says, jauntily adjusting his faux military cap. "This is why we need a referendum to decide our future".

Behind him on the wall, a map of the eastern Ukrainian region of Donbas in which Donetsk lies has, rather prematurely, been labelled as Russia.

As well as declaring independence, the protesters have attempted to establish their own government; a ragtag of political unknowns who spend a fair amount of time squabbling with each other over what to do next. Thus far, their demands include presence of a Moscow-led "peacekeeping force" and a referendum on the status of Donbas, to be held before May 11.

Unseen handThe establishment of the People's Republics is the culmination of unrest that has rocked Ukraine's predominantly Russian-speaking east since the new administration in Kyiv took the reins of power in February. A series of protests, violent clashes and building occupations have left one dead and dozens injured.

Kyiv has accused Moscow of having a hand in the eastern disturbances, bussing in protesters from across the border and financing agitators.

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Veiled threats from the Kremlin about protecting Russian speakers, and the massing of Russian troops on Ukraine's eastern border, currently estimated at around 40,000, are certainly an alarming indication that there remains the potential for military intervention. In practice, however, the threat of further Russian incursions in Ukraine seems to be receding by the day. Not least because unlike in Crimea, a vehement hotbed of pro-Moscow sentiment and Russian military bases, public opinion in Ukraine's east is much more divided.

Numbers don't add upPro-Russian demonstrations in Donetsk, the epicentre of the eastern protests, have, at best, attracted crowds of around 5,000 in a city with a population of more than 2m. Opposing rallies in favour of a united Ukraine have also attracted similar numbers.

A survey by Donetsk Institute of Social Research and Political Analysis shows that 77% of Donetsk residents oppose the occupation of administrative buildings. "The whole thing is ridiculous," says 25-year-old Antushyin Vitaliy founder of a local NGO for young people. "I have no time for this sort of thing and nothing good to say about these people - they are rough criminals with too much time to spare".

Even those sympathetic to Russia are tiring of perpetual flag swapping and protests. "This mess is bad for attracting customers," grumbles 35-year-old Yulian Brilev, who runs a small business on the edge of Lenin Square. "Most of my friends are for Russia and I would vote for Russia if there is a referendum, but I think it's better to stay out of politics now. We should all just get on with our lives. I don't have time for this rubbish."

Still smarting from accusations of indecisiveness over Crimea, the Ukrainian government this time has issued a clear ultimatum to the protesters to negotiate a peaceful withdrawal in the next 48 hours or be forcefully removed.

Both of the region's well-respected oligarchs, Rinat Akhmetov and Sergey Taruta, the newly appointed governor of the Donbas region, have visited the demonstrators in an attempt to hash out terms for a peaceful withdrawal. But so far the response appears to have been tepid, with barricades being reinforced rather than dismantled.

Standing beneath a fluttering Russian flag on the roof of the barricaded building, 22-year-old Agat oversees the preparation of Molotov cocktails. Around him are piles of paving stones, ad hoc weapons on standby in case of an attack. "They are for emergencies," he says pointing to a pile petrol bombs. "We are ready to fight the police and western banderas - anyone who tries to remove us from here."

Whilst those inside the fortified building represent a fringe minority in Donetsk, Kyiv must handle removing them extremely sensitively. Moscow may not be about to send in troops, but if it is successful in stirring up long-term unrest in the east, this will hamper the efforts of Ukraine's new government at a time when all its energy needs to be focused on reviving the country's bankrupt economy.

Inaction in tackling the protesters may well be interpreted as a sign of weakness, but any violent incidents risk playing straight into the Kremlin's hands and re-igniting the fires of pro-Russian sentiment.


The Regions This Week

With Russian action in Ukraine raising concern, Kazakhstan has protested against "unacceptable" remarks by Russian officials. Speaker of the Russian Republic of Khakassia's parliament Vladimir Stygashev said this week that Moscow has "historical rights" to eastern Kazakhstan. Other Russian figures have suggested in the last month that Russia should annex northern Kazakhstan, or even incorporate Central Asia as a federal district.

Kazakhstan is to toughen penalties to fight separatism. Astana is set to pass a bill that will allow sentencing for those infringing on its territorial integrity to up to 10 years in prison. The authorities are also ready to switch off broadcast networks and block access to websites, as security forces tests their capability to maintain public order in areas bordering Russia.

The Kazakh government was forced to defend membership of the Customs Union after lawmakers claimed prices and imports of foodstuffs had shot up since the creation of the Russia-led economic bloc.

A French court halted the extradition of Kazakh fugitive billionaire Mukhtar Ablyazov to either Ukraine or Russia. Ablyazov is wanted by Kazakhstan for allegedly embezzling billions of dollars during his tenure as chairman of embattled BTA Bank. He has dismissed the accusations as "politically motivated". Ukraine and Russia, where BTA Bank has branches, also accuse Ablyazov of wrongdoings.

Kazakh lawmakers urged the government to suspend the operations of the SCAT airline following the launch of a probe after its aircraft made two emergency landings within the space of a week in April. In January 2013, a SCAT aircraft crash killed 21 people.

Kyrgyzstan inched closer to joining the Russia-led Customs Union but insisted it wants to alter

Eurasiaterms on trade during the transition, and called for financial help in preparing for entry. Kyrgyzstan is a member of the WTO and its commitments within the Customs Union will clash with its WTO obligations.

Kazakhs withdrew nearly $1bn during a bank run in February, authorities said this week. The panic was caused by rumours of the imminent bankruptcy of three banks following the 19% devaluation of the national currency. Kaspi Bank said 35% of deposits withdrawn had since returned.

A mine blast on the contact line separating forces killed three Azeri soldiers, prompting claims that Armenia has broken the Nagorno-Karabakh ceasefire. Baku also complained that the Minsk process on the Nagorno-Karabakh settlement was not progressing satisfactorily.

Uzbekistan intends to fully digitise broadcasting by spending $92m by 2018, of which $78m will come from Japanese loans. During the first stage of the project, the capital and 10 regional centres will get digital television by 2016, and the rest of the country will be digitised during the second stage.

Over 300 oil subcontractors are on strike in western Kazakhstan over pay and working conditions, as falling living standards in the country increase social tension. The Kazakh government is sensitive to labour problems after oil workers' protests in 2011 led to violent clashes with security forces, leaving at least 15 people dead.

Production delays at Kashagan may spoil the Kazakh government's plans for vanity projects such Expo 2017 and Winter Universiade 2017, as Astana is losing revenue it had long earmarked. Production at the giant offshore field was halted weeks after it started in September, and is now not expected to resume until July.

businessneweurope I April 11, 2014


A Czech fraudster on the run from prison stole stole CZK10m after being hired as chief economist at a museum. Vladimir Prokop evaded police when they cam to arrest him at the National Agriculture Museum.

Optimism among Slovak CEOs over the economy has grown dramatically, a survey by PwC and Forbes reveals. Last year, just 15% expected the world economy to fare better in the year ahead, the proportion has now sprung to 45%.

Poland's Constitutional Tribunal will rule on the rise of retirement age on May 6. The increase to 67 was implemented last year; a reversal by the court would be a huge blow for the ruling PO. Leftist opposition PiS has pledged to overturn the change should it come to power.

At just 65, Latvian men have the shortest life expectancy in the EU, data from Eurostat says. Life expectancy for men at age 65 is 13.6 years in Latvia, well below the EU average of 17.7. Average life expectancy for Latvian women at age 65 is 18.5 years, which is longer than in Romania (17.7 years) and Hungary (18.1 years).

Estonia has frozen assets belonging to the recently appointed mayor of Sevastopol, Aleksey Chalyi. Two companies, Tavrida Electric Export and Tavrida Electric Holding are affected, according to the Estonian Police Board.

The Baltic states plan to create a pan-regional Russian TV channel in a bid to counteract "propaganda" broadcast by transmissions from across their borders. Both Latvia and Lithuania have temporarily shut down Russian channels, which they claim aim to unsettle the sizable Russian minorities in the region.

A Czech plan to sell 12 subsonic fighter jets to Iraq still requires lengthy negotiations, the country's defence minister said on April 8, in comments designed to dampen local media

Central Europeexcitement about the deal.

The Hungarian government has called for calm as protests against a Holocaust monument in Budapest have turned angrier. Critics say the statue, which is under construction in the centre of the capital, glosses over Hungary's active role in the Holocaust.

E.ON is "definitely" not interested in buying a stake in CEZ's massive Romanian wind park, the head of the German giant's local unit said. With Bucharest reducing subsidies for green projects, the Czech company claims several parties are interested in investing in the ¤1bn wind park.

The National Bank of Slovakia is set to get more extensive supervisory powers over financial institutes. An amendment to the Bank Act – co-sponsored by the finance ministry - will implement a number of EU directives to ensure greater supervision over banks.

Hungary will set up a non-profit utility to serve industrial consumers, and plans to have the legislation in place this year, Minister of National Development Zsuzsa Nemeth said on April 9. After squashing energy prices for households ahead of last week's election, Budapest says its needs to quash energy prices to aid economic development.

Hungarian lenders are ignoring lower court rulings in forex loans cases, local media claimed this week. Magyar Nemzet says in two cases in which lower courts declared the contracts on loans invalid, the lenders terminated the agreement and launched proceedings against the client anyway.

The Pastafarian religion can receive official status in Poland, a Warsaw court ruled this week. The court overturned an earlier ruling, which rejected an appeal by the Church of the Flying Spaghetti Monster because it was late submitting documents. Pastfarians are now free to apply to have their religion recognized.


Southeast EuropeTurkish authorities defied court orders to reaffirm a ban on YouTube imposed after the posting of illicit recordings of top secret security talks that was cited by Prime Minister Tayyip Erdogan as part of a "dirty campaign" to topple him.

The EU's top enlargement official has stepped up criticism of Turkey. Stefan Fule said controversial steps taken by the government over the past few months had created doubts about Turkey's commitment to joining Europe.

The lira dropped the most in three weeks after Moody's lowered its outlook on Turkey's debt rating to negative from stable on April 10. The rating agency cited "increased pressure on the external financing position driven by heightened political uncertainty, lower global liquidity and slowing near-term economic outlook" as reasons for the decision. The rating was affirmed at Baa3.

Turkey issued its first Eurobond of the year, selling ¤1bn of nine-year bonds, which garnered strong demand from international investors. The treasury said in a statement that its bond due April 11 2023 yields 4.2% and has a coupon of 4.125%.

Turkish industrial production remained firm in February, despite losing pace in growth, thanks to a strong export performance that outstripped stagnation in the domestic market. According to data, calendar-adjusted industrial production rose by 4.9% in February compared with the same month last year.

Despite continuing protests against shale gas exploitation, US company Chevron said it's ready to start work in eastern Romania in the next few weeks.

Romania could enjoy a more productive economy and gain hundreds of millions of euros a year

in tax receipts if it integrates its young and impoverished Roma minority, a World Bank study showed.

Almost half of Bulgarians are pessimistic about the country's development, and only 4.2% of them think that it is headed in the right direction, according to a poll by sociological agency AFIS, held between March 31 to April 7.

Slovenia mandated consultant Daiwa Corporate Advisory to act as a financial advisor in the privatisation of 72.9% of metal products maker Cinkarna Celje , state investment fund SOD said. Cinkarna is one of 15 firms that Slovenia earmarked for privatisation last year to increase the budget income and improve corporate governance in the country.

Slovenian Prime Minister Alenka Bratusek will seek another vote of confidence on April 25, as factionalism within her own party has again begun to challenge her position. Bratusek will likely win the vote, however analysts say this episode highlights the continuing risk to government stability.

Serbia's central bank stepped in to purchase euros for the third straight day on April 9, aiming to add liquidity to the local market and prevent excessive strengthening of the dinar currency, dealers said. This is the bank's sixth attempt to cap the dinar's gains since the Serbian Progressive Party (SNS) won a snap parliamentary election in March, fuelling expectations of a new reform drive.

Macedonians will vote in the first round of a presidential election on April 13 in what is expected to be a close race between conservative incumbent Gorge Ivanov and Socialist challenger Stevo Pendarovski. The vote comes two weeks before a potential presidential run-off and a snap parliamentary election.



Eastern EuropeThe Eurasian Economic Union Agreement documents will be signed at the end of May, laying the groundwork for the launch of the political union next year, according to the foreign minister of Kazakhstan, Erlan Idrysov. A meeting in Astana at the end of May will complete the formal agreements. A surprise good result for Ukraine after state tax collections were up by 24.1% year-on-year to UAH36.4bn in March, according to a State Treasury report released on April 3. The main contribution was that VAT reimbursements dropped by a third to UAH 8.9bn. Ukrainian former president Viktor Yanukovych and Russian agents were responsible for the Maidan killings of 100 people, Ukraine’s key law enforcement leaders announced on April 3. They insisted there is creditable evidence that Russia's FSB played a role. Several people have already been arrested and more are likely to follow. Russian Prime Minister Dmitry Medvedev cancelled Ukraine's zero gas export duty that knocked $100 off the price on April 3. Without the discount, the price of Russian gas to Ukraine for April is $485.5/tcm, Gazprom CEO Alexei Miller says. Russian state exporters are toying with the idea of billing commodity exports in rubles. The CEO of VTB Andrei Kostin called for the change recently and Gazprom said it is also thinking about making a similar move. Last week the Russian equity market was among the top performers globally, gaining more than 4%. The rise was thanks in part to a strong 1.9% spike on Friday, which was driven by positive sentiment from the easing geopolitical risks related to Crimea. This week, a small group of pro-Russians took hold of the administration building in Donetsk, declared independence, claimed it will hold a secession vote on May 11, and asked Russia to send peacekeepers. Needless to say, that knocked the markets off the rails once more.

The economic situation in Ukraine continues to decay. While the IMF promises of aid have not yet turned into action, Ukraine's gross international reserves fell $383m to $15.1bn (or only 1.8 months of imports cover), according to the National Bank of Ukraine. Russia's consumer confidence remains stuck at its lowest level for three years. Data for the first quarter of the year showed consumer confidence stabilizing at minus 11% after dropping for two consecutive quarters. The indicator remains the lowest since the beginning of 2011, says Rosstat. All the members of the Duma have moved all assets back to Russia, according to their income declarations, the head of the parliamentary income control commission said this week. In May, Vladimir Putin signed a law banning lawmakers and state officials, their spouses and underage children, from owning any foreign assets and accounts. Russia's biggest gold miner Polyus Gold is considering delisting from the London Stock Exchange due to the crisis surrounding Ukraine. The Russian government has called on its companies to move their listings to Russia. A major operation was carried out to retake government buildings in Kharkiv, acting Interior Minister Arsen Avakov said. He claimed 70 people were arrested. However, the Kyiv authorities are still trying to get pro-Russian protesters to quit official buildings in other cities in the east of the country, and have offered amnesty if they leave now. State-owned Russian oil major Rosneft has hired the 25-year-old son of CEO Igor Sechin to a chorus "neopotism". Ivan Sechin has been appointed deputy chief of one of the company's offshore production units. The salary for his position may range from RUB300,000 - $600,000 a month. Rosneft encourages these types of dynasties provided two or more relatives don't find themselves in the head office, a spokesman said.



bne Chart

US magazine American Interest has released an infographic that shows Ukraine's regional GDP.

The map neatly shows that most of the Russophile eastern regions have all the money, whereas the pro-European western regions drag behind. The east is home to Ukraine's limited onshore oil and gas reserves, as well as most of its heavy industry. The west has a few nice towns and mountains.

The uneven distribution of wealth is likely to cause problems. While it's the nationalist western regions that want to rush into Europe's arms, this has resulted in Russian economic pressure, forcing the interim government in Kyiv to accept a bailout from the IMF.

In other words, the country is about to heavily increase its debt load, and it will have to increase the tax base to pay for it. However, the distribution of wealth means the eastern regions

of the country will pick up the largest part of the bill. Resentment will likely result, driving a further wedge between an already divided population.

With a per capita income of $4,335, Kyiv is not even the richest region in the country. It comes in fourth, trailing Dnepropetrovsk with $5,298, Donetsk with $4,500 and Poltava with $4,439. Meanwhile, the western regions sit at around $2,500 or below.

Yet even the richest regions of Ukraine are well behind the rest of Central and Eastern Europe. Russia's per capita income is around $17,000, and even Belarus manages $16,000, according to the CIA's World Factbook. Ukraine is the one country in the Commonwealth of Independent States which is yet to regain the level of income it had in 1991. To say it's an economic basket case is an understatement.

Ukraine not only split by ethnicity

1. Kiev City $10,0412. Dnipropetrovsk $5,2983. Donetsk $4,5904. Poltava $4,4395. Kiev $4,3356. Kharkiv $3,5227. Zaporizhzhya $3,4728. Odessa $3,2439. Luhansk $3,15710. Sevastopol $3,09411. Mykolayiv $2,94712. Cherkasy $2,65513. Lviv $2,58014. Kirovohrad $2,508

15. Sumy $2,49416. Crimea $2,45217. Ivano-Frankivsk $2,44118. Chernihiv $2,43819. Vinnytsya $2,23820. Khmelnytsky $2,17421. Zhytomyr $2,16422. Volyn $2,14023. Kherson $2,14024. Rivne $2,10725. Ternopil $1,89626. Transcarpathia $1,82027. Chernivtsi $1,666

Ukraine's Gross Regional Product Per Capita in 2011

1

2

7

9

10

16

23

18

811

13

14

15

17 19

21

22

25

2726

24

2012

6

3

45

www.the-american-interest.com/wrm/2014/04/06/can-putins-ukrainian-strategy-be-countered


Estonia, and 28% in Latvia, but had been declared "non-citizens" by the two governments. Official figures show in Latvia that 27% of the population is ethnic Russian against 25% in Estonia and 6% in Lithuania. The "non-citizen" label is because these Soviet-era migrants who stayed on in the Baltic states after the restoration of independence in 1991 have never bothered to take the simple naturalisation tests required to gain citizenship.

Chizhov said that Russia remains concerned about the actions of the governments of Estonia and Latvia towards ethnic Russians in the two countries.

His comments come amid growing tension in eastern Ukraine. Clashes between ethnic Russian protestors demanding greater autonomy (or outright independence via referenda) and Ukrainian security forces are growing, with the Russian Foreign Ministry warning on April 9 that a crackdown by the authorities could lead to civil war. "We are calling for the immediate cessation of any military preparations, which could lead to civil war," the ministry was reported by CNN as saying in a statement on its website.

During a question-and-answer session at the lunch, one guest asked the ambassador who the mysterious masked figures were that had appeared in Crimea prior to the takover. The well-armed, professional military men had no identifying markings on their uniforms. "They were not Russians," replied Chizhov. "They were the Crimea self-defence organisation that spontaneously sprang into action." Nobody questioned the reply. The source said: "It would have been rude, but people agreed afterwards that it was not a very good lie."

A guest from Greece light-heartedly pointed out that Crimea used to be part of Alexander

Eastern Europe

Russia's EU ambassador raises fears of intervention beyond Crimea

Fiona O'Cleirigh of Exaro

The Russian ambassador to the EU's blunt comments to a private lunch in Brussels about "protecting" ethnic Russians abroad in places like Estonia and Latvia, left the western diplomats attending stunned and raised fears about further armed intervention in Europe, the London-based investigative website Exaro can reveal.

In comments made to a lunch club held at the Russian embassy in the Belgian capital a fortnight ago and leaked to Exaro, Vladimir Chizhov, permanent representative of Russia to the EU, described Russia as "the most dispersed nation on earth," and said that its president, Vladimir Putin, was very conscious of this. "President Putin wants to protect them," he said.

The ambassador referred to a report that he said was produced by Javier Solana during his term as the EU's high representative for foreign and security policy. This, Chizhov claimed, said that if the minority population from one nation made up at least 20% of a country's population, then they should have equal rights with everybody else.

One source who attended the lunch told Exaro that the Russians were preparing an excuse for intervention further afield than Crimea. "It sounded as if the foreign office in Moscow had been researching busily through obscure documents," the source said.

Russia has justified its annexation in March of Crimea, the Black Sea peninsula that previously was part of Ukraine, on the grounds that it was protecting ethnic Russians in the region, who make up a majority of the population. The region was previously part of Russia.

Chizhov told the lunch club in Brussels that Russians made up 38% of the population in


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The source told Exaro: "Having attended many previous lunches, he offered many weeks previously to host a lunch himself, and to give a talk. His subject was not specified at the time. Events happened, and the occasion turned out to be perfect for discussing the hot subject of the day – Crimea."

Kirill Ivanov, press attache at Russia's permanent mission to the EU, declined to comment on Chizhov's comments. Ivanov said that the meeting was "closed", under the Chatham House Rule, "and this is why any comments on that are impossible."

Chizhov's comments came as Nato's supreme allied commander for Europe, General Philip Breedlove, said that Russia may have another region in its sights after Crimea, mentioning in particular Transdniestria (also known as Trasnistria), which declared independence from the former Soviet republic of Moldova in 1990 and whose leadership have expressed a desire to join the Russian Federation.

Eastern Europe

the Great's empire. Perhaps, Crimea should be handed back to Greece, he suggested. The source said: "We all laughed a lot, and even the ambassador laughed. But I do not think that is going to happen."

Chatham House RuleThe informal group, mainly Brussels-based diplomats and Belgian businessmen, meets once or twice a month at different locations in Brussels. It hears talks from special guests under the so-called "Chatham House Rule", meaning that attendees are asked not to attribute comments to the speaker.

Chizhov was scheduled as a speaker several months ago, before tension between Russia and Ukraine reached crisis point over Crimea. A former deputy foreign minister, Chizhov was Russia's special representative for the Balkans between 2000 and 2002. He speaks English, Greek and French.


meanwhile, has baulked at dropping prices significantly below those it can earn in Europe.

Gazprom claimed there has been progress at the talks on pricing, according to Reuters, but offered no details. It added that it expects a contract to come into force by the end of 2014. That would mark a victory of sorts for President Vladimir Putin, who has warned the West that attempts to isolate Russia over its annexation of Crimea will be resisted.

However, the devil will be in the details, with China clearly not unaware that the standoff between Russia and the US and EU strengthens its hand significantly. Tim Ash of Standard Bank suggests that "developments in Ukraine seem to have encouraged Russia to soften its previous position… Moscow had been pushing for a price about $400, but this might now be lower."

Moscow has over the years regularly claimed a deal with China is close, and signed off on various government level agreements on volumes and terms. However, a deal on price has never yet been reported to be close, let alone sealed.

VTB Capital appears underwhelmed by the claims for the time being, although admits geopolitics could offer added impetus. "We do not expect any market reaction," they write in a note. "but given the overall move in Russian policy towards the east, we now think the probability of a deal has increased. In our view, the most important parameters are the price (we believe the market expects to see it at the European netback level, i.e. $370-40/kcm) and whether there is a take-or-pay clause in the contract."

Eastern Europe

Russia claims Chinese gas deal "close"

bne

Russia says its state gas giant Gazprom could finally sign off on a gas deal with China during President Vladimir Putin's planned trip to Beijing in May. Sealing an agreement after over a decade of stalling between the pair would boost Moscow's efforts to turn eastwards away from Western sanctions, but could come at a price.

With talks yet again going on between Gazprom and the Chinese government, Deputy Prime Minister Arkady Dvorkovich claimed the pair is close to sealing a deal that would also involve construction of a pipeline to carry 38bn cubic metres (cm) of gas per year. A start date for deliveries of 2019 has also been agreed, according to Vedomosti.

Russia has been chasing a deal to supply its energy-hungry neighbour for years, as it would diversify its markets. Much has been made of Europe's heavy reliance on Russian gas in recent years - and that has accelerated during the Ukraine crisis - but by the same token, Russia is confined to serving European customers for the most part.

"The sides are close to agreement," Dvorkovich said, according to Itar-Tass. "The only issue remaining is... the price. We really hope that the contract will be signed in May."

The price is rightA contract to supply China has been under discussion for at least ten years, but has persistently fallen at the last hurdle: pricing. Beijing - which buys huge volumes of gas from South America and around Pacific - is well known for its hardball negotiating tactics. Moscow,


"There will be equality in the court as each party [member state] delegates two judges," Sagintayev said, adding that the alliance is not political but economic.

The official also insisted that membership in the Eurasian Economic Union, which is expected to be formed in 2015 by members of the Customs Union, which should also by then include Armenia and Krygyzstan, will not prevent Astana from developing relations with other countries. "It is important to stress that according to the treaty nothing bans us from concluding treaties with third countries and international organisations," Sagintayev told a news conference. "This is our principle of multi-vector foreign policy."

However, sensitivity to speculation that the plans are little more than a "resurrection of the Soviet Union" remains. Russia's First Deputy Prime Minister Igor Shuvalov floated an idea in March that a Eurasian Central Bank could be set up by 2025. That revived speculation seen in recent years years that Kazakhstan could at some point lose its national currency to adopt either the Russian ruble or another Eurasian currency.

Sagintayev, however, dismissed such talk out of hand, and insisted Kazakhstan will not give up the tenge. "I don't know where rumours about a single national currency of the Eurasian Economic Union come from, but we've never discussed these issues. Kazakhstan has had, and will have, the tenge," he said. Forbes Kazakhstan has reported that a single financial regulator for the Eurasian Economic Union will be established in the Kazakh financial capital Almaty.

Eurasia

Worries grow in Kazahstan over Customs Union

bne

Kazakhstan's membership of the Russia-led Customs Union continues to cause controversy. The bone of contention has so far been the damage the membership it's inflicting on Kazakhstan's economic interests, but the Kremlin's behaviour towards Ukraine is clearly raising tension amongst Kazakh officialdom.

On April 8, Kazakh First Deputy Prime Minister Bakytzhan Sagintayev wayed into the simmering debate, which this week centred on claims Kazkhstan's food security is suffering due to its membership in the free trade area that also includes Belarus. Addressing a press conference, the official insisted Kazakhstan will have levers available to protect it from any danger of domination by Russia once the project widens.

As the second largest of the former Soviet economies, Ukraine's participation in Russia's pet project to form a Eurasian version of the EU, the so-called Eurasian Economic Union, is seen as crucial. Moscow's pressure on the interim authorities in Kyiv is widely understood to be part of a effort to force it to abandon plans to sign up to a political and trade pact with Brussels. The Russian annexation of Crimea in March has prompted concern in Kazakhstan over ceding sovereignty to the Eurasian Economic Union, a structure which will be dominated by the Kremlin.

ResurrectionAddressing these concerns, Sagintayev said Astana would be able to defend its interests using two supranational bodies - the Eurasian Economic Commission and Eurasian Court - in which, he claims, the equality of parties will be ensured.


that criminalizes separatist activities. Calls for illegitimate, unconstitutional changes to the territorial integrity of Kazakhstan or disintegration will be considered a criminal offense," Arman Ayaganova of the Prosecutor General's Office, announced, according to Tengrinews. Under the new legislation, calls for the illegitimate violation of Kazakhstan's territorial integrity will be punishable by up to 10 years in prison.

Analysts say the move bars the way towards federalization and creation of national autonomies, but warn that due to vague language the law could also be used against any protest - noting the recent rise in complaints over the economy since the devaluation of the tenge in February.

Russia insists that federalization is the only route out of the standoff in Ukraine. Kyiv rejects the call, saying such decentralization would set the scene for further secession of regions.

Eurasia

Nervously watching UkraineDespite the authorities' insistence that Kazakhstan is a full and equal partner in the project, there are signs that Astana is nervous as it watches events in Ukraine. Russian forces are reported to be massing on the border with eastern Ukraine, and Moscow insists it reserves the right to move in to protect ethnic Russians from what it claims are fascist forces in Kyiv. Ukraine, meanwhile, blames Russian provocation for the ongoing protests and occupation of government buildings in cities in the east of the country.

Kazakhstan also has a large Russian minority, mainly in the north of the country, and is clearly wary of any similar action against its sovereignty. On April 8, local media reported that the government is to criminalize "separatist activities" and raise tough new penalties, in a new draft of the criminal code.

“The draft criminal code will have a new article


Eurasia

(FDI), falling coal exports, compounded by highly expansionary fiscal and monetary policy have created balance-of-payment (BOP) pressures. While the depreciation of the [tugrik] has already stabilized the current account deficit, relieving BOP pressures, stabilizing the MNT and containing inflation will require a tightening of economic policy to rein in domestic demand growth. Mongolia’s economic prospects also remain highly vulnerable to economic trends in [China] and the global economy, while current policies offer little buffers to cope with possible external shocks," the report said.

bne spoke to Jan Hansen, ADB senior country economist, to get a better grasp of the challenges and opportunities that lie ahead for Mongolia dynamic economy.

bne: Mongolia has approved many reforms in 2013 aiming to boost investor confidence and sustain the economic cycle. Yet you sharply reviewed downwards your 2014 growth forecast. What has changed over the last year to prompt such a decision?

Hansen: We didn't expect a 55% drop in 2013 FDI inflows, which is really affecting economic growth. FDI inflows are very important for Mongolia's non-mining sector such as the wider service industry and in particular trading. Even if they largely finance imports, they increase value-added in the service industry, which is labour intensive and creates many jobs, for example. At the same time, the tugrik depreciation (Mongolia's currency has lost 27% against the US dollar since early 2013) is affecting the disposable income of Mongolians through higher import prices. China's decreasing demand for Mongolian coal and the country's struggle to compete with other coal exporting

ADB cuts Mongolia 2014 economic forecast to single-digit growth

Jacopo Dettoni in Ulaanbaatar

On April 1 the Asian Development Bank joined the International Monetary Fund and World Bank in downgrading its outlook for Mongolia's economy in 2014. One of the world's fastest growing, the Mongolian economy faces problems on several fronts in 2014 that promise to make this year a turning point.

ADB economists now see 2014 GDP growth at 9.5%, down from a previous 14% estimate, according to the latest figures published in the ADB's annual Asian Development Outlook 2014.

With the IMF and the World Bank having already cut their forecasts, a growing consensus over Mongolia's slowdown has now emerged. The country still fares among the world's fastest growing economies - GDP grew by 11.7% in 2013 - but a number of pending issues are taking a toll on its economic cycle and 2014 is set to become a turning point.

A long-awaited agreement over a $6bn expansion of Rio Tinto's copper-gold Oyu Tolgoi (OT) mine is expected in the coming months. OT represents a major barometer for the country's business climate and international investors, whose confidence in this frontier market has flagged over the last 18 months; FDI inflows were down 55% in 2013.

The government successfully bolstered the slowing economy through generous fiscal and monetary policies in 2013, but the ADB report labelled such policies as “unsustainable,” calling on the government to phase them out. All in all, Mongolia's outlook remains “promising,” it said, although there are “downside risks” that have to be taken into account.

"Rapidly declining foreign direct investment


Eurasia

bne: The report highlights the need to reign in “unsustainable” macroeconomic policies. The banking and construction sectors have largely benefited from generous monetary stimuli and strongly contributed to keep the economy running in 2013. Are the two sectors going to face distress as the central bank phases out its expansionary programmes?

Hansen: Periods of very high lending growth, as last year for example, often create challenges in banks' portfolios one-two years later when loans are seasoning. Currently, the level of non-performing loans, including in the construction sector, is quite low. Problems in banks’ portfolios often emerge when real economic activity is slowing down significantly, as happened at the end of 2008, but this is not the case in our current forecast of the economy.

bne: The report calls for an incorporation of off-budget spending into the official budget in order to fully comply with the Fiscal Stability Law's (FSL) 2% deficit ceiling. At the same time, total public debt is well above the FSL's 40% ceiling for 2014. Do you think parliament should increase the ceiling or try to reduce the public debt?

Hansen: There is little borrowing space for the government this year under the current debt ceiling of the FSL. Mongolia as a lower-middle income country is currently at an early stage of the investment cycle to develop the mining industry, diversify the economy and provide essential social infrastructure for the population. Investment in human capital is also essential. A 40% debt/GDP ceiling is not very high, but simply focusing on one particular number for the optimal debt level is therefore not very fruitful. Another critical issue for the quality of investment is planning and project management capacity which needs to be further developed.

countries has also affected our forecasts (the value of coal exports was down 40% in 2013).

bne: Authorities hailed the new FDI legislative framework approved in October as a silver bullet to unleash FDI inflows. But the ADB report reads: “The resumption of significant foreign capital inflows may take some time despite the adoption of the new investment law.” What is holding back international investors?

Hansen: At this stage, there are no clear indications that sentiment among foreign investors has already substantially improved. If the macroeconomic situation stabilizes, and agreements over major projects such as Rio Tinto's OT and state-owned Tavan Tolgoi proceed, that would probably be seen by international investors as a sign of confidence. All in all, our figures do incorporate a rebound in FDI inflows, starting this year, based on an improved legal framework, but more significantly impacting on the macroeconomic situation rather in 2015.

bne: It looks like you don't expect the OT expansion to kick off in 2014. Should the current dispute between the government and Rio Tinto continue throughout 2014, what are the risks for the economy as a whole?

Hansen: In the current situation, an immediate agreement is not widely expected. The March 31 deadline for funding commitments is past already. In case of an agreement in late summer or later, economic growth this year would probably not be very much affected. An agreement on the OT second investment phase with clear benefits for all involved parties would probably be seen as a sign of confidence and support other FDI flows - and the other way around. The first OT investment agreement concluded in 2009 supported subsequent FDI inflows.


Hungarian PM claims mandate to press on with unorthodox economic policy

a sweeping victory, and Orban insisted during an international press conference that it gives the party a mandate to continue its work. With a wary eye on Jobbik's surge to over 20% of the vote, the PM stated that voters had rejected hatred and leaving the EU, claiming that they have called for a new public administration system, new economic policies and governance by a people's party.

Fidesz made much of the recent Eurozone-led economic recovery during the election campaign, and Orban reiterated that the results of the past year or so are not temporary, and that the economy will continue to grow thanks to much-debated policies that voters have now endorsed. Hungary will be a "forerunner in the region", and stands on the cusp of a great era with a "broad future," he said, according to a government statement.

However, that will likely depend on Fidesz's ability to revive bank lending and investment. Turning to the battered banks, the PM said it is justified to maintain the banking tax. "We are glad to see that the financial institutions have incorporated the banking tax into their operation and are again making profits," he said. He also hinted that the planned new scheme on foreign currency debt will not go lightly on lenders, claiming that keeping the banks within the system of fair burden-sharing is also the right move.

However, many analysts suggest the government can't escape the fact that it may need to ease its handling of foreign investors in particular, if it is to maintain the rate of growth and keep a lid on fiscal accounts. "The long-awaited solution on the FX mortgage issue is unlikely to be a radical one including loan conversions in large sizes," suggest

Central Europe

Tim Gosling in Prague

With Hungary still waiting for counting to finish to confirm whether or not the ruling Fidesz party will enjoy another constitutional majority, Prime Minister Viktor Orban claimed on April 7 that he has been handed a mandate to continue with his controversial economic policies. That's likely bad news for the banks and utilities, although some analysts expect him to plough a more conciliatory course in order to keep the recovery on track.

As expected, the April 6 election brought a clear victory for Fidesz, handing it around 44% of the vote. However, that leaves open the question of whether the centre-right party can retain its two-thirds supermajority in parliament. The numbers are so close that the answer is not likely for several days. Estimates suggest Fidesz has won 132-134 of the 199 seats in the lower house, depending on the results in certain close-run districts.

The higher end of that scale would hand the government another constitutional majority, such as it has held since 2010. That has allowed it to ram through numerous changes to the country's "fundamental law" as its called - such as changing legislation on the electoral or judicial systems - and highly controversial economic policy.

The lower end of the scale would see it forced to rely on other parties to effect constitutional changes; that would likely involve the radical right-wing Jobbik, denoting a step further into nationalism for the government. The count of 2,000 overseas votes in the race for a district in south Budapest is due on April 12, and could make the difference.

Broad future?Whichever way that count goes, Fidesz clearly won


energy price cuts and the FX mortgage loan relief program remains to be seen. We see 10-year yields to increase to 6.00% until this year-end, and the forint could appreciate..."

However, William Jackson at Capital Economics is less certain. In the near term, Orbán’s new mandate is likely to see a strengthening economic recovery, he suggests, but dropping investment and a continued cap on lending will only exasperate the need for structural reform. “The bigger picture is that there are unlikely to be any reforms to address the structural problems that emerged during Orban’s previous term," he writes. "As such, over a medium-term horizon, we think the Hungarian economy is likely to remain a regional laggard.”

Central Europe

analysts at Citigroup. "We expect smoothed impacts but with most of the burden to remain on banks."

BNP Paribas agrees, saying it expects government policy to become more “orthodox” and less confrontational. “The key to maintaining a robust investment climate will be policy predictability, which has proved to be a significant obstacle in 2010-2014,” the analysts note.

"It still remains to be seen if the government changes its tone to be more market friendly," note Gergely Gabler and Orsolya Nyeste at Erste Bank. "However, big social distribution systems (pension, healthcare) are not expected to be modified. Further steps in hot topics such as the


Central Europe

CEZ finally pulls plug on Czech nuclear plant tender

pay out more in dividends that can be used to fund the government's spending programmes.

On April 9, Czech President Milos Zeman called for the tender to be scrapped and a new one initiated. The controversial decision by CEZ to eject France's Areva from the tender in 2012 left the field with just two remaining bidders, but given the crisis in Ukraine a decision in favour of the Russian bid would be tricky.

So Zeman, a long-term supporter of both nuclear power and major state-connected deals, floated the idea of a new tender with Areva back in - which has long challenged its ejection - as well as the introduction of an unnamed bidder from South Korea as a way "to lower the price". A representative of KEPCO was part of a South Korean delegation to the Czech capital recently.

In today's statement, CEZ said the decision to scrap the tender does not mean nuclear power plant construction in the Czech Republic is dead, given the risk that "within 20 years we will not be able to cover consumption of our country is still acute," Benes said.

However, Benes went to say that its plans "will have to be adjusted to changes currently being prepared in Brussels" – a reference to the European Commission's recent trashing of the UK's planned subsidy scheme – so-called contract for difference - for the Hinkley Point B nuclear power station. "Apparently, in the future it will be necessary to cooperate closely with the state in order to secure further development of nuclear energy," Benes said.

Many hope today's decision spells an end to CEZ's nuclear expansion plans for the foreseeable future. "The cancellation of the tender… [is] positive in our view in the current environment of depressed wholesale power prices," Petr Bartek at Erste Bank says, adding that he had included a CZK30 per share risk provision for the Temelin expansion in his share price valuation of CEZ.


Czech power utility CEZ announced on April 10 that it has cancelled the tender to expand the country's Temelin nuclear plant. The move comes a day after the government made its strongest statement yet that it would not offer the ¤8bn-10bn project any state support.

State-controlled CEZ said it has informed bidders - US/Japanese Westinghouse and a consortium led by Russian state nuclear agency Rosatom - as well as the earlier ejected bidder France's Areva that the tender for two additional 1,200MW reactors at the plant in the south of the country has now been halted.

Explaining the reasons behind the decision, CEZ's chief executive, Daniel Benes, said in a statement that: "Since 2009, when the public tender was launched, until today, electricity sector in Europe has evolved turbulently. While originally the project was fully economically feasible given the market price of electricity and other factors, today all investments into power plants, which [sic] revenues depend on sales of electricity in the free market, are threatened."

However, to many the project has been unviable from the start - a view that has only gained weight as time has passed. "CEZ should have made the decision to cancel the project a long time ago - it would have saved tens of millions of euros of shareholders' money as well as time and energy the bidders had to put in," says Jan Ondrich of Candole Partners, a Prague-based advisory firm that has been a long, trenchant critic of the project. Given the worsening economics surrounding the project, CEZ has been trying for years to secure state support for it. The previous government refused, and the new coalition that came into office in January has done likewise, with Prime Minister Bohuslav Sobotka the latest in bluntly ruling it out on April 9. The move to cancel the tender also comes as the power giant attempts to fight off growing pressure from the coalition government to


Czech grid smarter, better interconnected and more robust. "Then consumers will be able to profit from cheap German wind and solar power," he says.

Central Europe

Candole's Ondrich argues that given the healthy and abundant power supply in Europe, the Czech government would do well to focus on making the

Poland finally moves on green energy bill

auctions. Several major producers - such as French giant GDF - threatened legal action against Poland over the course of the last three years over earlier proposals to cut support levels to existing investments.

However, the approved bill could yet upset the larger investors in the sector. According to reports in November, the latest draft included plans to exclude hydroelectric power plants exceeding 1 megawatt of capacity from the new system. The rules would also cut subsidies for biomass co-firing, the country's major source of renewable energy currently, by up to 50%.

That has long appeared the more likely reason that the issue has hit the headlines so frequently. The government has throughout the last three years been seeking to cut support for the largest and most populated segments - co-firing and onshore wind - suggesting micro-generation, solar power and offshore wind would see more encouragement.

EU requirements call for Poland to expand its level of green energy production to 15% by 2020. The country currently produces nearly 90% of power from coal, and the government has recently been pushing its state-owned utilities to rapidly build new coal-fired power plants - as well as the country's first nuclear facility - in order to curb a threat of insufficient capacity.

The current renewables tariffs cost consumers about PLN4bn (¤960m) annually, according to 2013 estimates from the economy ministry. The government has warned that without revision, the cost of the system would rise to PLN7.5 - 11.5bn by 2020.


The Polish government on April 8 finally approved a long-awaited draft bill on state support for renewable energy producers. Warsaw says the legislation offers investors greater security, but the devil is likely to be in the details.

Poland has been struggling to put together a new system of support for renewables since 2011. While the heavily coal-dependent country argues with the EU over climate targets, it has also bickered with investors, who have objected to several drafts over the years. In line with the trend across Europe, Warsaw says it has to rebalance support in order to reduce the bill for consumers and avoid speculative development in certain segments.

Under the draft law, which requires final approval by parliament and the president, developers and owners of new renewable installations can sell their energy at auctions for a fixed price that would be guaranteed for 15 years regardless of market prices, reports Reuters. The proposal would also set a ceiling on the subsidy. The previous subsidy system was criticised for not providing enough long-term guarantees.

“Auctions are a more efficient system that allows us to choose the projects with lowest production prices from competing ones,” Deputy Economy Minister Jerzy Pietrewicz said in November, according to Bloomberg. “Additionally, investors will get predictability for their projects for a long period as they will be settling a price level they offer.”

Upset giantsCrucially, the bill will allow projects already in operation to keep current subsidies or choose to join the


Southeast Europe

Desperately seeking light at end of Croatia’s recessionary tunnel

Guy Norton in Zagreb

In recent years the IMF’s economic predictions for Croatia have generally proved to be far more optimistic - and ultimately far less accurate - than many of the local economic analysts, whose relative pessimism has proved to be much closer to the mark. So the latest blow to the government's immediate economic hopes came April when the International Monetary Fund (IMF) slashed its growth forecast for Croatia.

In its spring economic outlook report, the Washington-based supranational predicted that Croatia will this year remain mired in what it has termed “an unusually drawn out recession”, with GDP set to shrink by 0.6%. That’s in stark contrast to the IMF’s autumn 2013 economic outlook report, when it forecast that the country might indeed register positive GDP growth of 1.5%, thus ending a six-year long period of economic contraction.

The IMF’s sharp downward revision of its growth forecast for the Balkan state further undermines the credibility of the current centre-left coalition government’s own prediction that foresees GDP expanding by 0.2% this year, after contracting by a cumulative total of 12% since 2009.

The consensus among Croatian economists has long been that this year there will be no meaningful improvement on 2013, when output shrunk by 1%.

The potential light at the end of the tunnel lies in the fact that the IMF still believes the country could actually exit from recession in 2015 and post positive economic growth of 0.4%.

Mixed macro bagIn terms of the IMF’s other economic predictions for Croatia for this year, the news was decidedly mixed. Inflation, which came in at an annualised rate of 2.2% in 2013, is now forecast to fall to just 0.5% this year, sharply down on the 2.5% level the IMF predicted last October. While, that’s nominally positive, it does still leaves open the prospect of a near-stagflationary economic environment in Croatia, characterised by falling output and prices.

On the current account front, the IMF is now predicting a surplus of 1.5% of GDP, versus the 0.7% deficit it forecasted last autumn. While that once again points to a nominally positive outcome, the reality remains that cash-strapped Croatia is increasingly less able to afford foreign goods and services, rather than pointing to any meaningful growth in the country’s exports.

On the employment front, there was no good news at all, with IMF analysts predicting that the country’s jobless rate will come in at 16.8% this year, versus their October 2013 prediction of 16.1%. IMF analysts believe unemployment could rise further in 2015 to reach 17.1%.

Overall, the IMF’s generally gloomy prognosis for the Croatian economy will pile further pressure on Croatia’s finance minister, Slavko Linic, who is currently compiling a revised budget for this year that it is hoped will receive the seal of approval from EU mandarins in Brussels at the end of April. Earlier this year Croatia entered the Excessive Deficit Procedure (EDP), under which the country must curb its burgeoning budget


Southeast Europe

deficit and public debt levels. Last year, Croatia’s fiscal gap has been estimated at over 6% of GDP, more than double the EU’s desired maximum level of 3%, which the country must achieve by 2016. Meanwhile, government indebtedness reached 66.8% of GDP in 2013 - up an alarming 11 percentage points on the previous year - taking it well past the 60% level demanded by the EU.

Olli Rehn, the EU’s finance commissioner, is looking for Croatia to cut its budget deficit by 2.3 percentage points this year, but the authorities in Zagreb are reported to be looking at a more modest reduction, based on worries that cuts in public spending will further depress economic output and consumer demand in Croatia - and snuff out any light at the end of the country’s recessionary tunnel.

Turkey sets guidance on 9-year Eurobond amid market rally

over the past month, the most among the 93 global major benchmarks. Foreign investors made net purchases worth almost of $680m in Borsa Istanbul throughout March.

The new bond issue from Turkey is expected to cover its remaining external financing needs for the year. The country has issued $4.6bn year to date, which compares with the $6.5bn annual external Eurobond financing target. "Through this new deal they will come close to covering their financing for the year - the administration will take this as a vote of confidence in them," says Tim Ash of Standard Bank.

Ash is one of the growing number of investors who are turning more optimistic about Turkey's prospects. "We are pretty constructive Turkey local and TRY, as we think that rebalancing will pan out over the next few months, bringing portfolio flows back to the Turkey story, attracted by double digit nominal rates, positive real rates, and a still depreciated lira," he says.

Turkey is rated 'Baa3' by Moody's Investors Service, 'BB+' by Standard & Poor's and 'BBB-' by Fitch.

bne

Turkey on April 8 set official guidance of 4.25% area on its upcoming issue of a nine-year euro-denominated bond, according to reports. The yield was down on initial price thoughts of around 4.375%, reflecting the rally that Turkish assets have been enjoying over the past few days.

On April 8, the dollar fell below the 2.10 threshold against the Turkish Lira for the first time since December 26, when a massive corruption scandal followed by the US Federal Reserve tapering its quantitative easing programme caused investors to flee this emerging market.

Since hitting a record low of TRY2.39 against the dollar in January, the lira has climbed more than 10% as fears over Turkey's macroeconomic vulnerabilities recede and the embattled Prime Minister Recep Tayyip Erdogan's ruling Justice and Development Party (AKP) won a landslide victory in the March 30 local elections.

Foreign money has begun flowing toward emerging markets again; MSCI's emerging-market stock index has advanced 4.6% over the past month. Turkey was a particular beneficiary of this, with the Borsa Istanbul 100 rallying 17%


Opinion

Kivanc Dundar of IntelliNews

Turks voted in municipal elections on March 30 amid Turkey’s worst political turmoil in decades. The political of future PM Recep Tayyip Erdogan, who has been in power for 11 years, depended on the results of the local elections. The ruling Justice and Development Party (AKP) was expected to emerge as the winner of the elections but its support, many thought, would have eroded after the corruption scandal broke in December.

In the event, Erdogan and the AKP did much better than most had expected on March 30. AKP officials had previously said it would have been a success if the party would get a 38.8% share of the vote (which was what the AKP got in the last local elections in 2009). The ruling party chalked up 49% of the votes in the 2011 general elections.

But according to preliminary results, Erdogan’s AKP got 45.43% of the vote. The main opposition CHP won 27.78% (versus 23.1% in 2009 and 26% in 2011) and the nationalist MHP got 15.26% (vs 16% in 2009 and 13% in 2011). Anything below 40% would have been a disappointing result for the AKP and opposition victories in Istanbul and Ankara would have been a major blow to the government. But AKP candidates also won in Istanbul and Ankara.

Erdogan’s troublesOn the surface, the main conflict/fault line seemed to be the power struggle between Erdogan and his former ally, US-based Islamic cleric Fethullah Gulen. However, problems for Erdogan had been running much deeper even

before the March elections. In may last year, a local sit-in protest in Istanbul against plans to raze Gezi Park suddenly turned into nationwide anti-government protests. After weeks of rioting, eight people were killed, and thousands were injured and arrested. Even before the protests, many Turks (mostly liberal, urban, well-educated and secular) had begun complaining about Erdogan’s increasingly intolerant and authoritarian style. The police crackdown on the Gezi Park protesters was the last straw to many Turks. Millions finally took to the streets, calling for the resignation of the PM.

The protests - according to security sources, 3.6m people took part in anti-government demonstrations in Turkey’s 80 cities - shook Erdogan’s hitherto unchallenged authority, but could not force him out of office. Instead of seeking reconciliation, the embattled PM responded by consolidating his power base. Erdogan blamed the shadowy “interest rate lobby”, “foreign powers” and their local collaborators (including businessmen) for the unrest.

In the wake of the protests, Erdogan became an even more divisive figure as his harsh remarks about protestors and his critics further polarised the country and outraged many. However, as the local elections would later show, this tactic can pay dividends. Erdogan weathered the wave of street protests last summer and has maintained a solid base of support, especially among the poor and the religious. But the Gezi protests were only the beginning of the PM's problems.

COMMENT:

Markets stable after Turkey local elections but for how long?


Opinion

Corruption ScandalOn December 17, the police detained dozens of people, including the sons of the interior, economy and environment ministers, the head of state-controlled Halkbank and businessmen close to Erdogan as part of a graft and bribery probe. Allegations included money laundering and illegal gold trading with Iran (in breach of international sanctions). What followed was truly unprecedented. Two anonymous Twitter accounts started to publish voice recordings purportedly showing corruption in the highest circles of the government. In one of these leaked recordings, Erdogan was allegedly discussing with his son Bilal how to get rid of vast sums of cash stashed at their home. Three ministers resigned after their sons were taken into custody, but all were later released. One of the ministers (the environment minister Erdogan Bayraktar) later said Erdogan was aware of everything and called on the PM to resign. Erdogan’s response? The PM again blamed a wide range of malicious lobby groups for his woes. Erdogan maintained that the voice recordings were fabricated by elements within the police and judiciary service that were loyal to Gulen.

The AKP and the Gulenists were once allies, working together to defeat Turkey's secular establishment and mighty army. But after the Gezi protests, they turned on each other. In response to corruption allegations, the government has reassigned, sacked and purged thousands of police officers, judges and

prosecutors, stalling the investigations. Erdogan even said if the AKP emerged as the winner in the local polls, his party would be cleared of corruption charges. The opposition and government critics were furious.

Post-Gezi protestsProtests flared up in March with the news of the death of a 15-year-old boy, Berkin Elvan, who had been in a coma since last June at the height of last year's anti-government protests. Elvan was hit in the head by a tear-gas canister when he went out to buy bread. Elvan’s death sparked protests in 32 cities across the country. According to security sources, more than 2m people attended the protests, which immediately turned into anti-government demonstrations. The funeral and fresh demonstrations (there were violent clashes in Istanbul and Ankara) only showed how tense and fluid the situation remains in Turkey. Once again Erdogan adopted harsh rhetoric: he labelled the boy and protesters as terrorists.

Even before March, anti-government protests, albeit on a smaller scale, spread across Turkey’s major cities after the corruption scandal broke. It looked like the government was under immense pressure and many thought Erdogan’s days were numbered and he would go after an embarrassing defeat in the local elections.

This is an edited version of a longer article on our website. To view the full piece please go to: http://tinyurl.com/o964g8p


Weekly Lists

Virtual reverse gas flow to Ukraine requires no Russian permission, says Slovakia's Eustream Ria Novosti

Reversing gas flows from Slovakia to Ukraine would not require the permission of Russian gas giant Gazprom if it is virtual, not physical, the spokesman of the Slovak gas transmission operator Eustream told Ria Novosti.

"Eustream [has] total control over all gas transportation operations in Slovakia. Therefore, we cannot confirm the information that Eustream needs some sort of permission from Gazprom for reverse flow of fuel to Ukraine," said Eustream, adding that the statement applies only to virtual reverse flows.

"The negotiations with Ukraine are going on as scheduled. Our Ukrtransgaz counterparts accepted the invitation to visit Bratislava for a business meeting next week," said the Slovak company.

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.

Visaginas economically unviable says Lietuvos Energija CEO bne

Lithuania's project for building a new nuclear power plant is not economically viable at the moment, the chief executive officer of the state-owned energy group Lietuvos Energija (Lithuanian Energy) said on April 10.

Dalius Misiunas added that Lithuania continues to cooperate with its regional partners. "Cooperation is difficult, but nobody said it would be easy," he added.

The viability of the project is not impacted by internal factors, the CEO claimed. Instead he blamed issues such as CO2 prices and the fact that as Lithuania's closest neighbours currently "live on low prices". Scandinavian decisions on the development of renewable energy resources and nuclear energy are important he said.

Polish gas importer seeks revised deals from Russia and Qatar bne

PGNiG CEO Mariusz Zawisza told the press that the Polish gas company seeks to alter agreements with Gazprom and Qatar Gas. The revised contracts are expected by the end of the year, he claimed.

Zawisza said that talks had kicked off with Qatar concerning the prcing, volume and flexibility of the current LNG contract. The prospect of supplies from Qatar, as well as potential imports from the US, can be used by PGNiG as arguments in the November re-negotiation of the contract with Gazprom, Zawisza suggested.

"One of the key risks in PGNiG is the fixed priced and take or pay agreements in the contracts with Gazprom and Qatar Gas," writes Erste. "In this environment of falling gas prices, PGNiG could get stuck in these agreements causing large losses. However, as the government is worried about the security of supply, it may push the company to maintain these agreements despite financial losses."

bne:Investor


Russian group Evraz has sold its Czech division Evraz Vitkovice Steel (EVS) to a group of private investors, EVS's spokesman Jaromir Krisica told CTK on April 4, without disclosing the price of the transaction.

Server Patria.cz has said the price of EVS was $89m. In addition, the new owners also acquired EVS's obligations totaling $198m. The new owners want to continue to develop EVS as an independent player on the market for rolled products, Krisica said.

The new owners are Martinley Holdings, Nabara Holdings, Vitect Services, Hayston Investments and Dawnaly Investments, each buying 20%. "Investors intend to improve the economy of EVS through the synergies arising out of an opportunity to purchase raw materials from various independent suppliers," Krisica said.

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

Russia's Evraz sells Czech steel plant to investor group CTK

Poland's BZ WBK gets approval to buy Santander Consumer Bank

WBJ

PKN Orlen discussing merger of refinery with Czech pipeline operators

Erste

WSE-listed lender BZ WBK was granted clearance by Poland's financial watchdog KNF to takeover a 60% stake in retail bank Santander Consumer Bank. Both entities are owned by Spanish Banco Santander.

BZ WBK signed a deal in November 2013 to acquire 3,120,000 ordinary and preferred shares in Santander Consumer Bank representing 67% of the votes at the general meeting of the shareholders of Santander Consumer Bank.

Poland's PKN Orlen is in talks with Prague over a potential merger of the Czech Republic's major refiner, Ceska Rafinerska and Cepro and Mero, according to local media. Mero is the state pipeline operator, while Cepro controls freight, storage and sale of oil products and operates Czech national reserves.

Analysts at Erste say a deal could be mutually beneficial. "One of the key issues for the weak profitability of Ceska Rafinerska is the high fees charged by Cepro and Mero," they write. "As the refining marketplace in Europe is showing low profitability, there is a compelling pressure also to decrease Ceska Rafinerska capacity. We expect several solutions: either PKN Orlen (via Unipetrol) buys out Cepro and Mero or PKN Orlen divests its refineries to the Czech state and agrees on the long-term supply to the petrochemical lines and retail. We like any of these changes as the current setup is not ideal and Ceska Rafinerska burns cash for the group in its current state."

bne:Deal



Weekly Lists

BNP's Polish unit raises free float in bid for acquisition approval bne

Battling a regulator dubious about more consolidation in the banking sector, French bank BNP Paribas on April 7 sold 5m new shares to raise the free float of its Polish unit.

The bank raised PLN228.5m (¤55m) via the share issue. The unit, previously 99.89% owned by its French parent, issued the shares to meet the regulator KNF's requirement that it raise its free float to 15%.

The move follows a deal agreed by BNP in December to buy Poland's Bank BGZ from Dutch lender Rabobank for around ¤1bn. KNF has said it will not give a decision on approval of the acquisition before August.

The regulator insisted in the summer it would be unwilling to give any new major deal the green light. Speculation over a wave of consolidation in the Polish banking sector was kicked off in early summer by the purchase of Nordea's Polish assets by PKO. The state-controlled giant PKO was forced to delay the deadline on the deal several times as it awaited the nod from KNF. Nordea finally announced on April 1 that it has now divested the assets.

Raiffeisen closes Crimean branches

Reuters

Hungary's top court reportedly set to delay decision on forex loans Erste

A subsidiary of Raiffeisen Bank International will close all its branches in Crimea by mid-month, the bank said on April 5, following Russia's annexation of the Black Sea peninsula.

Ukraine and the West do not recognize Russian seizure of Crimea and companies that have been active in the region do not know how the change could affect their business.

Raiffeisen Bank Aval, in which Austrian Raiffeisen Bank International holds 96.41 percent of shares, will close the last remaining six of 32 branches the bank had in Crimea by April 15, a spokeswoman told Reuters.

According to Hungarian daily Magyar Nemzet, the top court (Kuria) may make its decision on the applied FX spread and interest rates of banks only in the autumn, despite the expected decision of the EU court on April 30. The government will only be able to take a step after that.

This means that most probably more FX debtors will enter the existing FX barrier system until then. The news has no real effect on the share price of OTP Bank.

bne:Banker



Weekly Lists

Russian consumer confidence near 3-year low VTB Capital

Russian consumer confidence remained at -11% in 1Q14, similar to the previous quarter, with some changes across components. The index of the expected economic changes in the short term was the key drag, decreasing to -11% during last quarter (from -9% in 4Q13), the lowest value since 2Q09. Also, the index of expected changes in the level of incomes was down to -6% (from -5%).

The index would likely have worsened had the poll been conducted in March (and not in February, as was the case), when geopolitical tensions started to eat into consumer confidence via the so-called "uncertainty shock".

Looking ahead, the headline inflation (fuelled by a weaker RUB) and an anticipated rise in the unemployment rate (SA), along with a moderation in wages growth (in both the private and public sectors, as they have to optimise costs) are likely to weigh on consumer confidence during the coming months, even under a scenario of no additional external shocks.

Hungarian easing cycle close to end WSJ

EU lawmakers back Lithuania's bid to join Euro Bloomberg

Hungary's rate-cutting cycle is nearing its end and there won't be a rate cut in April if global financial markets deteriorate, minutes from the central bank's Monetary Policy Council showed.

Seven of the nine-member strong monetary policy council voted in favor of a 0.1-percentage-point rate cut in March as expected by analysts. Two members, Janos Cinkotai and Gyula Pleschinger remained cautious and voted to keep the rate on hold, the minutes from the March meeting showed.

The central bank cut its policy rate to 2.60% in March for the 20th time in as many months, but the rate-setters said the smaller rate-cut step indicated caution amid the U.S. Federal Reserve's tapering of its bond purchases, economic vulnerability in some emerging-market countries and the Russia-Ukraine conflict.

European lawmakers endorsed Lithuania's bid to adopt the euro, with the ex-Soviet republic scheduled to become the 19th member of the single currency next year. Approval by the European Parliament's economic and monetary affairs committee in Brussels means Lithuania remains on course for final consent in July to join the bloc on January 1.

The country is forecast to meet the single currency's membership criteria, which "demonstrates the extraordinary determination of the Lithuanian government to adopt the euro as quickly as possible," Werner Langen, a German member who is spearheading the issue in the European Union's 28-nation parliament, said in a statement.

bne:Credit



Russian government advises local companies listed overseas to come to Moscow

VTB Capital

First Deputy Prime Minister Igor Shuvalov tabled advice for Russian public companies (i.e. those with assets principally located in Russia) that are listed overseas to consider listing their shares on the Moscow Exchange as well. Although the initial headlines implied that the initiative presupposed a subsequent delisting from the foreign exchanges, it was swiftly clarified that this was not the government's intention.

Shuvalov also made it clear that the initiative was advice to companies to examine their situation on a case-by-case basis and take the most justified decision in each instance. No mandatory regulation on the matter has been considered at this stage.

The advice is motivated by the consideration that companies need to strive to be less dependent on the overseas financial infrastructure at a time when Western governments are exploiting these dependencies in their response to geopolitical tensions. The comments in the press suggest that the companies will indeed evaluate their circumstances, and responses will vary.

Weekly Lists

Czech stock market the highest-yielding in the world The Daily Telegraph

Polish bourse second busiest in Europe for IPOs bne

Research from Hargreaves Lansdown, the stockbroker, found that the Czech Republic was currently the highest-yielding country in the world, with the average share paying 6.1%. Close behind is Pakistan, yielding 5.6%, and Poland at 5.3%. European countries dominate the top 10, with Spain, Norway, Russia and Hungary all featuring.

Jacob de Tusch-Lec, manager of the Artemis Global Income fund, warned that some economies were cheap for a reason. He has a technique for working out which markets are genuinely good value: he compares the yield on a country's stock market with the interest rate its government has to pay to borrow money, known as the bond yield.

The Warsaw Stock Exchange ranked second in Europe in terms the number of IPOs hosted in the first quarter of the year, according to the latest quarterly PwC IPO Watch Europe report.

There were 10 IPOs on the Warsaw Stock Exchange in Q1 2014 (two on the Main Market and eight on NewConnect). WSE's share in the aggregate number of IPOs in Europe was 15%. The London Stock Exchange remained the leader with 32 listings.

The aggregate value of IPOs on WSE in Q1 2014 was ¤18m, which ranks WSE eighth in Europe by the value of IPOs. The value was far below the ¤58m seen a year previously. The biggest offering was that of Vistal Gdynia at ¤12.1m.

bne:Stocks


bne newspaper april 11 2014

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Transcript of bne newspaper april 11 2014