bne weekly newspaper august 22 2014

August 22, 2014 www.bne.eu

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Content: 2 Top Stories 5 The Regions This Week10 Eastern Europe12 Eurasia14 Central Europe17 Southeast Europe20 Opinion22 Lists

Russian central bank drops support for ruble

The Russian-backed insurgency in the Donbass region of east Ukraine is forcing numerous industrial giants to suspend operations. With the region accounting for over 25% of Ukrainian exports, the effect will hit hard currency revenues and the embattled hryvna.

The flashpoint marking the start of the industrial collapse in Donbass was the Lysychansk oil refinery, which in mid-July went up in a huge pillar

Ukrainian industry ravaged by war

The Central Bank of Russia (CBR) widened its corridor for the ruble and announced a cut in interventions on August 18. The central bank said the move is part of its effort towards a free-floating ruble, and comes despite the ongoing pressure on the currency due to geo-political tensions.

"The permissible range of the dual-currency basket ruble values (floating operational band) was symmetrically widened from 7 to 9 roubles, according to a CBR statement. The central bank added that

it will no longer intervene in the foreign exchange market if ruble is within the permissible band; it has previously been intervening at specific levels.

The move, which takes the trading band against the mixed dollar/euro basket to 35.40 - 44.40, reverses a strengthening of exchange rate controls which was undertaken in March - the same month Russia annexed Crimea from Ukraine, procuring the wrath

of black smoke. Symbolic as that explosion at Ukraine's second-largest refinery was, however, it will actually have little impact since the facility had already been mothballed for over two years.

More troubling is the eerie emptiness in regional capital Luhansk, a formerly bustling industrial centre home to over 400,000. Half the population

Graham Stack in Kyiv

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is estimated to have fled, with water, food and power shortages only compounding the constant shelling in recent weeks. Alongside hundreds of other companies, locomotive maker Luhanskteplovoz - the town's largest employer with a work force of around 6,000 - closed its doors early August after its power was cut.

Gorlivka, an industrial town of around 250,000 about an hour's drive from the city of Donetsk, is another industrial centre turned ghost town as it is surrounded by Ukrainian forces laying siege to rebels. The country's largest chemicals producer, Stirol, halted production in early May due to the risk of an environmental catastrophe, according to owner Ostchem - the holding group of oligarch Dmitro Firtash.

Ostchem categorically denies statements made on August 12 by the locally-based press secretary of Stirol, who spoke of a potential toxic disaster if Kyiv were to continue its offensive. Ostchem claims he spoke under pressure from the local rebel leadership.

ParalysisHowever, those shutdowns only signified the start of a wider collapse in the former industrial heartland of Donbass caused by the Russian-backed insurgency and Kyiv's "anti-terrorist operation". The shutdowns have been snowballing as Kyiv's offensive has escalated through August, with damage to the power grid and rail links, and the collapse of security, paralyzing industrial giants.

That's bad news for cash-strapped Kyiv. With Donbass the motor of Ukraine's export economy, the collapse will impact the export revenues Ukraine desperately needs to achieve economic stablisation.

Among the latest casualties are Ukraine's largest coking coal producer, Avdeevka, which stalled

production on August 18 due to a power outage resulting from shelling. "Electricians have no more than 24 hours to restore power supplies. After that irreversible processes will begin in the coking batteries that will lead to their full standstill. And there are no guarantees of the resumption of operations," owner Metinvest said in an ominous press release.

While Ukrainian forces have recaptured most of the town of Avdeevka, they're still battling rebels in the neighbouring railroad node of Yasinuvata. Metinvest also announced the shutdown of Enakievo Steel Works on August 13, to ensure workers' safety after the town came under artillery fire, and suspension of operations at two further Donetsk plants August 18.

Metinvest is the metallurgy division of System Capital Management, owned by Ukraine's richest man, Rinat Akhmetov and also incorporating DTEK. The power generator and miner announced Ukraine's largest mine, Konsomolets, will suspend operations after shelling on August 17 led to fire and power outages. Konsomolets mines 8% of the coal produced in Ukraine and employs 4,800. DTEK already suspended operations at six mines in the Luhansk region in July.

Another Donbass industrial giant, Alchevsk metal works, suspended operations on August 15, due

Ukrainian industry ravaged by war

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to disruption of rail connections. According to reports in pro-Kyiv media, attempts to repair the rails ended when rebels opened fire on workers, killing one.

Damning statisticsStatistics already show the inevitable economic collapse resulting from the conflict. Ukraine's industrial output declined 12.1% in July year on year. Donetsk saw a 28.5% in output, while there was an astonishing 56% collapse in the Luhansk region, according to the State Statistics Service. Among the worst affected sectors were the Donbass staples of mining and metallurgy, machine-building and chemicals.That collapse is only deepening in August. Rail freight in Donbass fell 2.4 times in the first half of the month compared to June, according to Ukraine Railways. That illustrates another major problem for those companies still working, how to move output. The drop was due not only to falling production, but also disruption of the railway network. Luhansk's railroads have largely ground to a halt and the westward connection from Donetsk to Dnipropetrovsk and onwards is also disrupted.

In the context of a civil war the collapse is not surprising and could easily have been worse, but the hurt is multiplied because of the key economic role played by Donbass. The area - which groups the Donetsk and Luhansk regions - accounts for over a quarter of Ukraine's $70bn annual exports. Its real share may be even higher, according to economists, since many trading companies for Donbass producers are registered in other regions.

This means the local economic collapse will directly and swiftly impact the hard currency revenues Ukraine needs to shore up its economy. "Export is already falling, and it's mainly due to war. Export from Donbass may fall 2-2.5 times [during] these crisis months," says Concorde Capital's Aleksandr Paraschiy. "Cities such as Donetsk, Gorlivka, Luhansk, and Stakhanov - as well as the coal-producing districts of the southern Luhansk region - have no access to

the outside world, which is being reflected in the weakened local currency."

Kyiv authorities, troubled by the ongoing slide in the value of the hryvna, are aware of the problem. "The industrial potential of the Donbass is being almost totally destroyed," President Petro Poroshenko told his security council on August 18, blaming the Russian-backed rebels. "They destroy infrastructure, substations, bridges, facilities. The terrorists and their foreign backers are guilty," he said. The president called for new tactics to minimise the damage to the economy, but many are skeptical about the wisdom of such a move. "Unfortunately this would simply give the rebels more leverage over Ukrainian authorities," believes Dmitry Tymchuk, director of the Centre of Military-Political Studies.


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regime, one of the essential conditions for the successful realization of which is stopping managing the exchange rate," the central bank said, reiterating that it aims to move to a free float by next year. The CBR has announced that the ruble's trading corridor will be completely abolished by January 2015, and that regular daily interventions will cease, barring emergency interventions required to preserve financial stability.

Despite the ongoing pressure, analysts welcomed the move as proof of the CBR's determination to allow the currency float, particularly in the current environment. They also point out that it only makes another interest rate hike next month even more likely, albeit the ban on food imports from the West enacted in late July had already made that a shoe-in due to its effect on inflation.

"The central bank had recently said that it would take such a step, so [the] decision was unsurprising," suggest analysts at Sberbank. "The consistency in moving toward a freely floating RUB amid a worsening market environment is a strong testament to the regulator's resolve to shift to full-fledged inflation targeting. We expect one or two more basket adjustments later this year before the band is finally removed in January 2015. We could see a reduction in intervention volumes, further band widening, or both."

"We welcome the fact that despite persistently high geopolitical tensions, the CBR has returned toward a free-floating ruble," adds Alfa Capital's Natalia Orlova. "All else being equal, looser FX management suggests a higher reliance on interest rate policy tools, which speaks in favor of another rate hike during the next CBR BoD meeting in mid-September."

VTB Capital analysts also expect a rate hike in December: "[S]hould the RUB come under significant pressure, the CBR will be inclined to increase rates further, citing inflationary risks related to FX pass-through. That said, the probability of a rate hike at the next meeting has increased in any case in light of elevated food inflation."

Russian central bank drops support for rubleof the West. The same month, the CBR hiked its intervention threshold from $350m to $1.5bn.

That allowed the central bank to pledge $25bn to support the currency after steep falls alarmed markets and aggravated capital flight as the population rushed to buy dollars. However, the CBR also took the threshold back to $350m as it returns its focus to inflation.

That support for the ruble over the last six months or so has clearly been important, however. The US and EU sanctions against Moscow over its alleged support for pro-Russian separatists in eastern Ukraine have left it one of the worst performing currencies in the world, recording new record lows against the dollar.

The ruble is currently down around 9% against the US currency since the start of the year. It also continues to trade with high volatility. An unconfirmed claim from Ukraine on August 15 that it had destroyed part of a Russian military convoy saw the Russian currency drop 0.51% to finish the day at 41.70 against the basket, to leave it 6.4% below levels in June.

WelcomedHowever, the CBR's move to reduce support was initially welcomed by the market, with the ruble strengthening 0.3% in the wake of the announcement, Analysts at SEB write that they "expect further steps to relax the control of the RUB to come in the months ahead." That said, they also warn that their 12-month outlook for the USD/RUB currency pair remains at 38.5, compared with a current range of 35.95-36.15. "We see the deprecation as a result of a weak economic outlook and a likely continuation of political uncertainty," they write.

"The stated changes have been made within the framework of moving to an inflation-targeting


The Regions This Week

Kazakh petrol prices have risen 10% in August amid shortages caused by scheduled repairs at an oil refinery and limited imports of petroleum products from Russia, which account for over 30% of consumption. The Kazakh government regulates the prices of certain types of fuel imports, meaning they have become unfeasible due to a 19% devaluation in February.

The Customs Union has reduced Kazakh beef import quotas. Astana will be able to import 10,000 tonnes of beef in 2015 from outside the Eurasian trade bloc, against 15,400 tonnes this year. Despite being an importer Kazakhstan wants to export up to 10,000 tonnes of meat as it bids to take advantage of the Russian embargo on food imports from the West.

Cinema technology giant RealD will install 3D technology in seven cinemas in Kazakhstan in its first push into the Central Asian country. Kazakhstan has seen strong box-office growth recently, with rising 10% in dollar terms to $63.6m in 2013.

Uzbekistan will launch 22 new textile factories by the end of August. The projects, with a total cost of $73m, will help the industry grow by 23% to over $800m as Tashkent pushes to raise its leverage of its huge cotton industry. The country hopes light industry revenue will treble to $2.3bn by 2020.

Gas-rich Turkmenistan is "smoothly" switching to a green economy, President Gurbanguly Berdymukhamedov claims. Turkmenistan is a major gas producer in the region, supplying nearly half of China's gas imports. The country now wants to turn into a significant electricity exporter and supply power to next-door Afghanistan, Tajikistan and Pakistan.

Uzbek strongman President Islam Karimov's celebrity daughter Gulnara Karimova complains she and her daughter are being treated "worse

Eurasiathan dogs". In February Gulnara was placed under house arrest after a fallout with her father, but managed to smuggle a message out of the country.

Georgia temporarily suspended the transit of Russian gas to Armenia after a mudslide damaged pipelines on August 20. Armenia will receive gas from Georgian storage until the pipeline is repaired.

A Kazakh student has pleaded guilty to aiding the Boston bombers in a US court. Dias Kadyrbayev, a friend of bombing suspect Dzokhar Tsarnayev admitted obstructing the investigation into the terrorist attack by removing a backpack from Tsarnayev's dorm room. The Kazakh national faces up to seven years in prison.

Uzbeks are the most satisfied with security and law-enforcement in the CIS according to Gallup. In a poll, 88% said personal safety is good in Uzbekistan, compared with 64% of Kyrgyz, 59% of Kazakhs, 57% of Russians and 53% of Ukrainians who feel the same in their respective countries.

Armenia intends to settle about 200 Yezidi families from northern Iraq in Nagorno-Karabakh, a project for which Yerevan has allocated $50,000. Nagorno-Karabakh is defacto controlled by Armenia, despite international recognition placing it in Azerbaijan.

The shadow economy accounts for nearly 30% of GDP in Kazakhstan. With the aim of boosting tax collection, the Kazakh government will conduct an amnesty campaign to bring businesses out of the shade between September 1, 2014 and December 31, 2015. The campaign is expected to legalise capital and property worth $12bn.

In an attempt to improve its image ahead of bidding to host the Winter Olympic Games in 2022, authorities in Almaty decided to replace one of the region's largest bazaars with Western-style shopping malls. A collection of over 30 markets, collectively known as Barakholka, had sales worth $1.7bn in 2010.

businessneweurope I Page 5August 22, 2014


Poland is mulling a ban on Russian coal imports, FM Radoslaw Sikorski said late last week. Not only is Warsaw amongst the most hawkish in the EU on Moscow, but it is pushing to help its vital but struggling domestic coal industry.

Pro-Russian Ukrainian hackers launched a cyber attack against Poland, due to its actions as "sponsors of fascism in Ukraine". The websites of the Polish presidency and the Warsaw Stock Exchange were hit by a group calling itself Cyber Berkut.

Corruption in Slovakia goes practically unpunished, Transparency International claims in a report. Analysing court rulings, the NGO said half of all bribery prosecution concern amounts of under ¤20. Only 5% of cases deal with serious cases of corruption connected with public procurement, EU funds or elections.

Latvia's environmental minister has been denied access to state secrets. The Constitutional Protection Bureau said there are doubts over Romans Naudins' ability to not divulge classified information.

Hungary's government may be looking to dump "liberal" democracy, but their neighbours say they are headed the other way. Czech coalition partner Ano launched a liberal think tank, which it says will strengthen such values in the EU. That's according to billionaire Ano leader and Finance Minister Andrej Babis, whose growing power and conflicts of interest have many worried.

Responding to a Russian statement of concern, Hungary denied it is supplying Kyiv with weapons. The claim came from Moscow was based on media reports that T-72 tanks have been delivered to the Ukrainian government.

The EU will support companies hit by the Russian food imports embargo, it announced on August 18. Brussels' measures will include market withdrawals and compensation for non-harvesting. The scheme

Central Europewill run to the end of November, with a budget foreseen of ¤125m.

Germany's Angela Merkel promised the Baltic states yesterday that NATO would defend them, although it will not send permanent combat troops. Germany started "air policing" flights in Latvia on August 20.

Estonia and Finland are requesting EU funding to research a gas link route, local press reported. The pair, which has been squabbling over the project for months, filed a joint application for help on the Baltic connector gas pipeline route, which would connect Finland with the gas networks of Baltic states.

Hungary's banks launched their legal challenge to the forex loans scheme on August 22. Overall, 35 lenders have registered lawsuits over Budapest's law that they must repay payments made by borrowers under "unfair" rate hikes.

Lithuania will shutdown 900 MW of gas-fired generation due to high fuel prices. Lithuania's biggest power producer, Lietuvos Energijos Gamyba, said it will close the capacity by 2016.

In the face of the Russian sanctions tit-for-tat, Prague is pushing companies to expand to trade with other CIS states. Czech exporters might find new opportunities in Belorussia, Kazakhstan or Azerbaijan.

Raiffeisen reopened the possibility it could sell up in Hungary this week. The CEO of the Austrian banking group said RBI is keeping the unit under review, and could eventually exit, although it has no specific plans. RBI said it was reviewing offers late last year, but reiterated its commitment to the market after receiving just one bid of ¤1.

Warsaw officials complained after a German sports announcer suggested the Polish team would steal the locals cars. The Polish foreign ministry has demanded an explanation from organizers of the European Swimming Championships after the crowd was told: "a large group came from Poland that will return home with our cars."


Southeast EuropeBrussels has called on Serbia not to take advantage of Russian sanctions against EU producers in order to boost its own exports. Major Russian retail chains such as Dixy and Tander-Magnit are already looking to Serbia to make up the shortfall in food imports.

IKEA opened its first store in Croatia on August 21. Following the Zagreb opening, the company plans to open more stores in Croatia and Serbia.

At just ¤507m, or 9.91% of GDP, Kosovo has the lowest public debt in the Balkan region. Three countries in the region - Albania, Croatia and Serbia - have public debt amounting to more than 60% of GDP.

Dusan Mramor has been nominated as finance minister in the new Slovenian coalition government being formed under political newcomer Miro Cerar. Mramor, an economics professor and former finance minister, will be responsible for steering Slovenia out of economic crisis.

Telecoms regulators in the Balkans may cancel roaming charges within the region. Regulators from Albania, Bulgaria, Macedonia, Serbia and Turkey are close to making a decision on the issue.

Former Romanian PM Adrian Nastase has been released early from prison. Nastase was arrested on corruption charges in 2012, and shot himself in the neck after being given a two-year sentence.

Romania’s construction sector contracted by 10.2% year-on-year in the first half of 2014 - the largest decline across the EU, Eurostat data shows. The decline is attributed mainly to a lack of investment in public infrastructure.

Slovenia’s tourist sector has been hit by a decline in Russian visitors; numbers are down around 20% this year, due to the crisis in Ukraine and the depreciation of the ruble. Although Russians only account for some 6% of tourists in Slovenia, they are typically the biggest spenders.

Slovenia has been ordered to start bankruptcy proceedings for sporting goods manufacturer Elan by the EU. The company, which produces ski equipment and other goods, is unable to repay a ¤10m loan.

Cigarette smuggling hit new peaks in Romania in July, seeing its highest level in three and a half years. The proportion of cigarettes sold illegally has risen steadily to the current 17%, according to a new report.

The government of Bosnia's Muslim-Croat Federation is to extend an MoU with Shell until autumn 2015. Shell is considering investing up to $700m in exploring oil and gas reserves in the state.

Bulgaria is considering extending the fence along its border with Turkey, which has drawn criticism from human rights groups. The barrier seeks to halt refugees from Syria and Iraq crossing into the country illegally.

Opposition to plans to privatise Croatia’s motorways is growing, as trade unionists plan to collect signatures for a referendum. Zagreb plans to complete monetisation of the country’s motorways by February.

PM Aleksandar Vucic has appointed Zeljko Sertic Serbia’s new economy minister. Sertic, the head of the Serbian Chamber of Commerce, will carry out the privatisation of hundreds of state-owned companies.

Montengro has launched a new attempt to sell the Bajo Sekulic saltworks. After ten unsuccessful attempts, bankruptcy administrators have dropped the reserve price to ¤179m.

Bulgaria is planning to overhaul its armed forces. Defense Minister Velizar Shalamanov has announced a BGN1bn (¤511m) programme to modernise the military and reduce dependence on Russian imports.



Eastern EuropeHopes for a peace are pinned on a meeting in Minsk on August 26. However, while Ukrainian President Petro Poroshenko says he will urge for the withdrawal of rebels, counterpart Vladimir Putin is unlikely to hand over the initiative, despite Kyiv's success on the ground. Hit by soaring prices and shortages at food processors and farmers, Russia dropped its import ban on several products from the West. Seed vegetables, sugar maize and salmon and trout hatchlings are now allowed into the country from the EU. Prices for banned goods have soared and the price of pork, for example, is already up by a quarter. Russia threatened to ban the import of foreign-built cars should the US and EU introduce any more sanctions. The Russian market is big business for most European producers, with luxury brands like Mercedes and Rolls Royce likely to be hardest hit. Foreign brands produced in Russia would presumably be exempt. Russian companies are asking Moscow for help after being hit by the sanctions war with the West. The country's airlines are struggling, while oil major Rosneft has applied for $42bn of financing from the government has it is reportedly struggling to raise financing to complete its take over oil company TNK-BP.

Ukrainian companies must sell 100% of hard currency earnings to the central bank, the NBU ruled this week. Analysts said this was a step back to 1990s methods of macroeconomic management. Four Russian branches of McDonalds were shut down this week. Authorities cited alleged sanitation violations. However, no one is swallowing that. Burger King's first Siberian outlet was also closed.

Rosneft announced that it is to start exploratory drilling in the Norwegian sector of the Barents Sea this week together with Norway’s state-owned oil company Statoil.

Nato cannot provide military aid to Ukraine, Finnish PM Alexander Stubb said this week. Under article five of its foundation treaty, Nato can only provide military support to members. Over 180.000 Ukrainian refugees are now reported to have fled. Some 26,000 have gone to Belarus, and 155,000 to Russia. The fight for Donetsk and Luhansk has stepped up this week and there are reports of civilian casualties mounting rapidly. A Russian court sentenced four more protestors to between 39 and 42 months on rioting charges stemming from demonstrations in May 2012. Opposition leaders say they have been jailed on political grounds. Donetsk separatists introduced corporal punishment, including the death penalty, in what is believed to be an effort to maintain discipline amongst the armed militias. Looting and abuse has been widely reported as the fighting in east Ukraine intensifies. Strapped for cash the government in Kyiv asked the IMF to speed up the next tranches of aid and increase the overall size of the rescue package to be given to Ukraine. The government is proposing the IMF lump the third and fourth payments together into one payment of $2.3bn by the end of 2014 as part of a $27bn package. Ukraine will lose 15% of its projected harvest this year due to military campaigns PM Arseniy Yatsenyuk said this week. Good weather had previously suggested 2014 would deliver a bumper harvest. British tycoon Richard Branson called on world business leaders to broker a peace deal in Ukraine and prevent a return to the "misery of the Cold War." eBay founder Jeff Skoll, restaurateur Arkady Novikov and Max Levchin, co-founder of PayPal Ukraine have all pledged their support.



bne Chart

Much is made of the demographic challenges in Central and Eastern Europe and the potential effects on economic growth. Less workers and consumers will hamper the region's drive towards convergence with developed markets, so conventional wisdom goes. However, as this week's chart from Capital Economics suggests, it may be that more powerful forces that reign over Emerging market economies' chances of catching up with their Western peers.

Population growth has been credited with driving much of the growth in EMs since the mid-1990s. Now, with working age populations in CEE shrinking, concern is regularly raised in some quarters.

Yet productivity is much more important for economic growth. The analysts note that EM GDP growth has accelerated since 2000, despite

the fact that working age population growth has slowed in that time.

A quick glance at the slowdown seen in Russia since 2011 is a case in point. Growth dropped from 4.3% in 2011 to 1.3% in 2013. While fresh cyclical and geo-political pressures look set to leave the economy flat in 2014, the drop is not on the same scale. The slowdown thus looks primarily structural in nature, according to the IMF and many other analysts.

"While several EMs are now likely to run into demographic headwinds over the next decade, this may not necessarily be the disaster that some seem to expect," Capital Economics sums up. However, that will depend on concerted action to raise productivity and lower structural obstructions to growth.

Productivity trumps demographics in driving EM growth


Eastern Europe

pessimistic according to Sberbank's monthly Consumer Confidence Tracker. The index shows consumer confidence has remained negative since at least November, with 70% of respondents describing economic conditions as "unstable".

Buying white goods such as washing machines (which hold their value and are easy to sell) has been a classic tactic to preserve wealth for the average Russian for decades, and they were slightly more likely to make a big ticket purchase in July than in the previous month. However, a double digit car sales fall of 23% in July, according to the Association of European Businesses, shows the consumer is still far from confident. The sales of cars and vans made by Russian company GAZ were especially poor, falling by 28% in the first half of this year.

Meanwhile, at the top end of the market, luxury good sales - Russian being the fifth biggest market in Europe - are expected to contract this year for the first time since 2009, according to Altagamma - an Italian foundation representing the largest luxury companies and brands - according to the Moscow Times. Luxury good sales were worth $5.8bn in 2013, up 5% on a year earlier, but are expected to fall by 4%-6% this year.

Perhaps the most telling of all is that Russian's propensity to save was up in the last quarter: just under a quarter of Russians (23%) told Sberbank that now is a good time to save, up from 18% at the end of the first quarter.

The Russian consumer is not happy

Ben Aris in Moscow

Russian's claim they are unconcerned by Moscow's ban on EU and US food. However, consumers were already unhappy.

With everything from Polish apples to Parma ham sliding from the menu, pictures of empty shop shelves have been circulating on social media, accompanied by infographics showing which products are due to disappear from larders. According to vox pops, the man on the street claims to be willing to forego Canadian bacon and Gouda cheese for the sake of patriotism.

However, the Russian shopper was already out of sorts, and retail sales were tanking before the ban on Western delicacies was introduced.

Russian retail sales growth tumbled yet again in July to below 1% year-on-year - the fourth month in a row that consumer spending showed slowing growth. That leaves retail sales growth at its lowest rate in nearly 50 months, according to VTB Capital.

That's a serious issue for Russia. The consumer has been the only signficant driver of economic growth over the last few years, with construction and investment both on the floor.

Consumer's spirits have risen slightly since March, when fears of another devaluation of the ruble led to panic buying of apartments and the dollar to protect savings. However, although these fears have receded, that has not translated into a pick up in sales. Russian shoppers remain


Eastern Europe

Inflation in particular is becoming an increasing drag on growth. The CBR was hoping to bring headline inflation down to its core level of 4-5% this year, but instead the international political brouhaha and sanctions fight will almost certainly drive inflation up to 8-9%, and so hurt consumers further. The headline consumer price index (CPI) increased by 0.6% month on month (MoM) in June and was up 7.8% year on year, compared with 7.6% a month earlier, according to Rosstat. The price increase was led by the food category at 0.6% MoM.

Finally, the relentless wage hikes seen through the last six years will have to slow further. Companies have continued to increase wages to hold on to their best people, but with sales falling, margins are being squeezed and something will have to give. So far unemployment remains at historical lows, but while nominal wage growth has continued, real wages (adjusted for inflation) have now begun to fall, down 2.9% in July.

"The medium-term risks are rising," warns Alexei Devyatov, an economist at Uralsib. "We believe that the Russian economy is unlikely to grow any faster than 1.5-2.0% per year in 2015-16."

Dropping wages, rising prices Several factors are weighing on consumer sentiment. The most obvious is the volatile situation in Ukraine, but this has done more to provoke a sense of patriotic pride than undercut confidence.

Much more important has been the inevitable slowdown in wage hikes. Through the crisis, wage growth has stood at around 10% per year; in the last six months, real income growth has slowed to only a few percentage. Consumers spending power has also been curbed by the Central Bank of Russia's efforts introduced last year to clamp down on consumer lending, in a bid to avert an obvious bubble. High inflation - particularly on food, which will only get worse in the wake of the ban on imports - and a weakening ruble have added to the increasingly sour mood amongst shoppers.

"Component-wise, the [year on year] growth in the food component dipped further into the negative area (-1.2%), while a double-digit drop in car sales weighed heavily on the non-food part. For the rest of the year, we see further weakness in consumption and so do not rely on consumer spending as a major driver of economic recovery near future," says VTB Capital.


However, analysts are wary of suggesting the deal will see the two sides pull closer on more important points. "It's a positive step, but not a major development" said Bontoi Munkhdul, head of the market intelligence firm Cover Mongolia. "It's just a contractual agreement. I wouldn't call it an achievement, really."

Rather, the major victory, suggests Munkhdul, would be approval of a $4bn project financing agreement supplied by investors such as the European Bank for Reconstruction and the World Bank's financing arm, the International Finance Corporation (IFC). That funding would be used to power the underground mine expansion that Rio says will allow it to extract 80% of the deposits wealth. However, the government has been fighting against the plan.

Race against timeHowever, the move does demonstrate that Mongolia and its Western partners are at least moving forwards, despite a $130m bill recently handed to Oyu Tolgoi by the tax man, who claims it underpaid in 2010-2012. Turquoise Hill Resources - through which Rio Tinto holds its 66% of the mine - responded by triggering a "notice of dispute".

Under the terms of the investment agreement on the mine, that gives the pair until mid-September to negotiate a resolution before it can be escalated to arbitration. However, negotiations are stalled while Rio waits to see if Mongolia decides to change its mind.

Power agreement on Mongolia's Oyu Tolgoi a small step in race to secure financing

Terrence Edwards in Ulaanbaatar

Rio Tinto secured an essential agreement for the construction of a power generation plant to feed its $6.5bn Oyu Tolgoi copper project on August 14. While the news is positive for the investor, it doesn't guarantee that the $5bn expansion that holds the key to 80% of the booty buried in the mine will get the green light.

The Oyu Tolgoi LLC mining unit will be the primary consumer of energy generated from the new power station, which is planned to be built near the state-owned Tavan Tolgoi coal mine. Currently Oyu Tolgoi sources power from China's state-owned Inner Mongolia Power Corporation, but the 2009 investment agreement on the project requires that it secure a local power source by 2017.

After the signing of the Power Sector Cooperation Agreement (PSCA) - attended by Prime Minister Norov Altankhuyag - Rio Tinto Copper CEO Jean-Sebastien Jacques said in a statement: “The PSCA is a positive development for Oyu Tolgoi. It demonstrates how the Government and we can work together to achieve shared objectives—in this case, developing a long-term, economically competitive, and reliable power supply in the South Gobi.”

Energy Minister M.Sonompil also sounded happy, adding: “Successful implementation of the PSCA will add significant domestic power capacity, strengthening Mongolia’s energy supply network. It will also encourage investment and jobs – both during construction and in operation.”

Eurasia


"With respect to timing, it's [the pre-feasibility study] virtually complete, and we are just waiting on a little more clarity on the other issues that we are working through to distribute it to the government," said Kay Priestly, Turquoise Hill's CEO told investors on August 12.

However, Turquoise Hill is racing against a September 30 deadline to secure that financing. Should it not make it, it will be up to investors whether or not to extend until December 30. Given that the deadline has already been extended three times, patience on all sides may be wearing thin.

Officials suggested that could be possible, but of course that would just gobble up more precious time. "When auditors conclude findings, it's not the final opinion of the General Tax Authority," Tunrev Batmagnai, Mongolia's tax commissioner, told bne. "If the taxpayer [Oyu Tolgoi] confirms the conclusion, that's the final word. If not, there's a tax dispute council."

All of which just puts yet another obstacle in the way of the swift effort needed to get the project financing back on track. A pre-feasibility study on the mine expansion also needs to get approval from the Oyu Tolgoi board, as well as Mongolia's mining authorities. Economic Development Ministry officials will also have to sign off on the terms to receive the funding from the IFC.

Eurasia

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Before the embargo, Polish food was already about 40% cheaper, and the difference is expected to grow. About two thirds of the enclave's food is imported.

The 1m or so population of Kaliningrad's has had easier access to Lithuania and Poland for the last couple of years. Almost a quarter of a million have now filled out paperwork allowing them to travel to the neighbouring EU regions without a visa. The result has been a flood of Russian shoppers besieging discount food retailers and shopping malls across northern Poland.

Poles tend to travel in the opposite direction to buy cheap petrol and cigarettes. The visa waiver programme has not been affected by the rising tensions between the EU and the Russian government, with Poland and Lithuania at the forefront of those calling for a hardline approach to Moscow's alleged support for separatists in east Ukraine.

The Russian embargo is also reportedly wreaking havoc on Kaliningrad's food production industry. The region has several meat processing plants, mainly supplied by Polish pork, but imports of the meat have been banned for most of this year by the Russian veterinary service. There are also fish processing plants that rely on Norwegian salmon, which is also affected by the Russian ban.

Russian food embargo sends shoppers to Poland

Jan Cienski in Ilawa, Poland

Russia's embargo against food imports from the EU is causing pain for Polish producers, especially apple growers, for whom Russia is the leading export market, but there are gains as well, as Russian shoppers flock across the border.

The principal beneficiaries are shops in north-east Poland. They are seeing a marked increase in Russian customers from Kaliningrad, the Russian enclave on the Baltic Sea, tucked between Poland and Lithuania.

Border officials say that car traffic jumped after the August 7 ban. The Polish Press Agency reports that in the week prior to the embargo, just under 6,000 Russian cars a day were crossing into Poland. Since, the embargo traffic has jumped by around 10%.

"After the imposition of the embargo, we have to count on an increase in trips to Poland by people from Kaliningrad," Tadeusz Baryla of the Centre for Eastern Research in Olsztyn told the newswire. "The situation on the market [in the Russian enclave] is going to worsen," he adds in reference to Russia's traditional struggles with inflation, "so the only possibility to buy cheaper goods will be shopping trips to Poland."

Rising food prices in Kaliningrad - as reported by the Polish press at least - only threaten to extend the advantages enjoyed by the Polish shops.

Central Europe


Eurasia

Bratislava ups pressure on Slovenske Elektrarne as it seeks power boost

Tim Gosling in Prague

Slovak Prime Minister Robert Fico announced on August 20 that a probe at the country's largest power generator Slovenske Elektrarne (SE) will show that it was privatized below value. The comments come a day after the PM said the state has a plan to increase its stake in the utility as majority owner Enel looks to sell its 66% holding.

"I am very glad that proceedings have begun in the case of Slovenske Elektrarne's privatization," Fico told journalists, according to Bloomberg. "Demonstrably, a revaluation of assets took place before the privatization that significantly reduced the value," he added.

Police raided SE offices and facilities across the country on July 23, hunting for documents related to its 2006 privatisation. One of the locations hit was the Mochovce nuclear power plant. Enel has come under huge criticism from Bratislava over delays and budget hikes on expanding the facility. The Italian company pledged to add two new blocks as part of its purchase of the controlling stake in SE with a ¤840m bid.

The raids came less than two weeks after Enel, following months of speculation, announced on July 10 that it will seek to sell its Slovak assets as part of a debt reduction drive. The Slovak state retains the remaining 34% in SE, and has the right to approve any buyer of the Enel stake.

Continuing his August 20 statement, Fico claimed that the accounting operations being investigated by police saw SE valued at SKK32bn (¤1.05bn). "Several weeks" after the sale went through,

another review of assets raised its value to SKK54bn, he said without elaborating.

ForbiddingThe PM's claim of dodgy dealing looks especially forbidding for Enel given the bashing he offered the Italian company the previous day as he explained that the Slovak government wants to raise its stake in the utility. State pressure on the company will clearly not do much for SE's valuation.

"If Enel decides to sell its share in Slovakia, we are ready to significantly strengthen the state's position," Fico said according to the Sita newswire. The PM added that he has a "plan" to achieve his aim, although did not reveal details.

That raises suspicion that the ruling Smer party may have been watching events across its southern border. In Hungary, Prime Minister Viktor Orban has overseen a campaign of regulatory and policy pressure on utilities and banks that has seen the state buying out several. It is widely suggested that the pressure is planned to convince the foreign owners to sell, and at bargain prices.

Fico - a long time opponent of privatization - echoed Orban's mix of populist and nationalist rhetoric as he slammed Slovak politicians and foreign investors for their roles in shortchanging the population.

"People who literally passed around state property and put it into the hands of foreign owners are behaving like protectors," the PM continued. "These people who talk about strategic companies should

Central Europe


be silent. First of all, I would recommend that they go and look at how the French and German owners treated SPP [gas utility Slovensky Plynarensky Priemysel], and how Italian company Enel behaves towards SE."

Suitable suitors?However, unlike Orban, the Slovak PM has no state cash to throw around. He has instead overseen deals that have seen Western giants sell to CEE-based investors with ties to Bratislava, with the state then handed some greater degree of control. That could be the model Fico envisages for SE.

France's GDF Suez and Germany's E.ON sold SPP - which owns the main pipeline bringing Russian gas into the EU - last year to EPH. That rapidly growing regional energy group is controlled by Slovak financial group J&T. A deal was then sealed this year that saw the state handed full ownership of the gas importing part of the business. Fico, and several senior Smer figures have close ties to

Moscow, and have been notable for their reticence over sanctions or aiding Ukraine during the current crisis.

As is compulsory in any energy related sale in the region these days, EPH is noted as a potential suitor to buy Enel out of SE. Czech state giant CEZ is another frontrunner. However, speculation in local media is also rife that Russian state nuclear agency Rosatom is keen, despite the obvious geo-political barriers. Rosatom is the ultimate supplier of technology and fuel for Mochovce.

An ¤870m loan from Russia's Sberbank to SE in June sparked that talk. Analysts have noted it's around the volume of cash needed to finish the expansion of Mochovce, and also that such a sizable credit line is rare in Central Europe to be offered without syndication. It has also been suggested that the Russians must have been granted a deep look into SE's accounting and other paperwork to agree the deal.

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Central Europe


South Stream fight rocks Bulgaria once more

That could imply that the cash injection was made unilaterally by Gazprom, which is controlled by Moscow and is the original investor in South Stream, but the possibility of that is unclear. Brussels, which is seeking to reduce dependence on Russian gas as well as support the Ukrainian government, has clashed with Sofia and other CEE states set to host the pipeline, which is planned to carry 63bn cubic metres of Russian gas into southern Europe, bypassing Ukraine's transit system.

Shtonov says he wrote to BEH on August 7 ordering the company to stop all action on the pipeline, adding that he reiterated the decision at a meeting the following day. The meeting also covered the next steps in bringing the project into line with EU standards. The ministry statement also says that BEH’s executive director wrote to Gazprom chairman Alexey Miller and to South Stream Bulgaria on August 11, warning them “not to take steps to increase the capital and to take no related action to begin implementation of the contract for engineering ... and construction of the pipeline.”

“This action [the capital increase] by the management of South Stream Bulgaria, constitutes a breach of [the] decision of the Minister Vassil Shtonov … to cease all activities in the project to bring it into line with European legislation,” the statement continues. The ministry

Clare Nuttall in Bucharest

Just a day after ordering all work on Bulgaria’s section of the South Stream gas pipeline suspended, the country’s economy and energy ministry revealed on August 19 that South Stream Bulgaria has raised its capital by almost ¤200m. The tussle illustrates the pressures at play on member states at the Eastern end of the bloc as Brussels and Moscow face off.

A joint venture with both state-owned Bulgarian Energy Holding (BEH) and Russia’s Gazprom holding 50%, South Stream Bulgaria raised its capital to BGN397.6m (¤204m) from BGN15.588m, according to a statement from the ministry. The increase was registered the day after Economy and Energy Minister Vassil Shtonov made an official statement suspending all action on the controversial pipeline. Shtonov said on August 18 that the project could not proceed since it did not comply with European Commission requirements.

BEH, which holds a 50% stake in South Stream Bulgaria, issued its own statement refuting responsibility for the capital increase. The company said it has “undertaken all necessary actions for freezing the activities under [the] South Stream project until all issues related to the procedure for awarding the engineering, procurement and construction contract have been finally clarified and in compliance with the requirements of EC.”

Southeast Europe


Gennady Timchenko's Volga Group and one of the targets of US sanctions – to build its section of the pipeline only added fuel to the foire. The EU has also launched infringement procedures citing a lack of transparency in the tender process.

Indeed, the capital increase is not the first time that suspicions have risen over Sofia's verbal commitments to put South Stream on hold. Despite earlier pledges, the government was revealed to still be moving forward with the project in late July. Immediately before Oresharski’s government resigned, the Bulgarian press reported BEH was preparing to make a decision on a ¤620m loan from Gazprom to finance the pipeline's construction. This was nipped in the bud by President Rosen Plevneliev, who said on July 22 that all activities related to South Stream should be suspended pending an agreement with the EU.

The latest news suggests the new, interim government - appointed after over a year of political instability - has yet to get a grip on the situation. Although it will only hold power until October, the caretaker administration is currently embarking on an overhaul of the energy sector. Interim Deputy Prime Minister Ekaterina Zaharieva said on August 19 that a new energy board will be created by the end of the month.

"The main goal of the energy board is to propose solutions for the stabilization of the sector, which is on the verge of collapse, due to imbalances accumulated as a result of inefficient decisions made under political pressure," Zaharieva said according to Novinite. In addition to the thorny issue of South Stream, the caretaker government is also considering other questions such as reviewing incentives for renewables producers and whether to lift the ban on fracking and allow shale gas extraction to go ahead.

says it plans to ask the prosecutor’s office to investigate.

LandfallBulgaria’s previous government made South Stream a priority project, eyeing transit fees and cheaper gas, for which Bulgaria is fully dependent on imports from Russia. As relations between the West and Russia have deteriorated, former Prime Minister Plamen Oresharski, whose government resigned in July, reluctantly announced the suspension of construction on the Bulgarian section.

That decision was made under pressure from the EU, which has upped long-held objections to the project as the Ukraine crisis has deepened. Leveraging the bloc's legislation on energy market liberalization, Brussels insists that the contracts between Gazprom and the host nations must be redrawn, and the European Parliament voted in April to put the project on hold.

Bulgaria is not the only country to object to the EU stance on South Stream. Serbia, Hungary and Austria are also keen on the ¤16.6bn project, the first line of which Gazprom still says it hopes to launch in 2015. Moscow's well-practiced skills at splitting the EU were illustrated in June, when Austria's OMV signed up to provide the main hub for the pipeline, despite the ongoing tensions and sanctions spiral.

However, with Bulgaria the spot that South Stream makes landfall from its travels under the Black Sea, Sofia's handling of the situation has drawn particular criticism from Brussels. It has also seen fighting within the country, with domestic opponents claiming the ¤3.5bn local project cost is inflated. The selection by Oresharski’s government of a consortium led by Stroytransgaz – a Russian company owned by

Southeast Europe


Southeast Europe stock exchanges team up to encourage investment

raising and price formation. “Each of the markets in Southeast Europe is under-developed, but at the same time certain groups of investors – especially institutional investors – are growing quite fast, and their home markets can no longer provide sufficient investment alternatives,” he tells bne.

MSE CEO Ivan Steriev hopes the project could bring international investors back to Skopje. “Over the past years, foreign portfolio investors have been largely absent from the Macedonian capital market,” he admits. “We believe this project would give investors easier access to the regional markets, will increase the visibility as a whole, and will make them more attractive for foreign portfolio investors.”

Listed companies have also called for more integration. The CEO of Zagreb-based Atlantic Grupa called for a regional approach in June. “The problem is that markets in the region are quite fragmented – I would like to see a joint stock exchange for the region,” he said.

As planning for the joint system gets underway, the three participating exchanges have each provided ¤80,000 in capital for SEE Link. In June, the EBRD agreed a ¤540,000 grant.

While acknowledging it's hard to forecast how large the benefits will be, the project says it expects other exchanges will join in future. Gazic suggests talks with other bourses could start by the end of the year, while Takev forecasts more will join once they see the platform in action. “If the project proves to be successful and viable in the long-run, I expect more exchanges will reconsider,” he says.

Clare Nuttall in Bucharest

Southeast Europe’s small and fragmented capital markets have been slow to develop. Now three regional exchanges – in Bulgaria, Croatia and Macedonia – plan to set up a common platform to facilitate cross-border trades and attract more international investors.

The three exchanges have agreed to set up a joint order routing platform, which will allow brokers registered with any of the three exchanges to access the others with no need to register or pay additional fees. International investors already active on one of the exchanges will gain the same benefits.

SEE Link was set up by the trio in May, with each holding an equal share. Detailed plans for the project are due to be completed by September, with the platform set to go live in mid-2015.

The aim is to increase the leverage of the small, fragmented markets. “Stock exchanges were launched in all the new countries after Yugoslavia split in the early 1990s. Being part of small economies, these were small markets, and we all struggled with liquidity,” explains Ivana Gazic, CEO of Croatia's ZSE.

Plans for a regional platform for the exchange of orders have been under discussion for several years. However, with all the former Yugoslavian exchanges involved, negotiations dragged on, and eventually the Skopje (MSE) and Zagreb-based exchanges decided to go it alone, later asking BSE to join.

Lack of liquidityIvan Takev, CEO of the Bulgarian bourse notes that the common lack of liquidity hinders capital

Southeast Europe


Opinion

Mark Galeotti of New York University

Reports of an armoured Russian incursion surfaced over the weekend, but how close is Russia to invading Ukraine? It will take more than a few APCs to invade Ukraine.

Amidst the contradictory reports of an armored Russian incursion, met and repulsed by Ukrainian artillery, it is inevitable that the talk is of Moscow moving to a new level; of the inevitability of war—or that it has already started.

Ukrainian President Poroshenko has accused Moscow of planning a “direct invasion.” NATO Secretary General Anders Fogh Rasmussen claimed a “high probability” of such an intervention. Military logic would suggest that Russia is neither invading nor wants to, though. The question becomes: how far is logic in the driving seat? And if this is no prelude for invasion, does it mean the conflict is nearing an end?

British journalists on the ground saw a force of 23 armored personnel carriers (APCs) and their logistical support vehicles cross the Ukrainian border. This is not the stuff invasions are made of. Russian mechanized forces blend tanks, infantry in APCs, artillery and air-defense elements to combine offensive punch and defensive strength. On their own, APCs are vulnerable, little more than lightly-armored trucks.

If the Russians ever come genuinely to invade, then it will come as a thunderbolt, with massed airstrikes and artillery bombardments intended to shatter the command structures, supply

lines, morale and cohesion of the Ukrainian forces. Moscow would use its overwhelming air superiority to strike deep into Ukraine, not least to prevent quick reinforcement of the frontline forces, cratering runways, blasting bridges and ripping railway lines. Meanwhile, its special forces, the infamous Spetsnaz, would spread chaos with sabotage, assassination and misdirection, supported by a massive cyberattack.

The reason for this “shock and awe” approach is not only because it is envisaged by Russian doctrine, but also reflects the way that Russia’s tactical advantage has steadily been eroded over recent months. August is one of the ideal times for Russia to launch military adventures, because its spring cohort of conscripts are now fully trained, fit and deployed.

However, while Russia still has perhaps 40,000 troops on the border, Ukraine’s security forces have regained much of their operational capacity after the near-crippling collapse of the chain of command following the fall of Yanukovych. Three mobilizations have seen reservists called back into the ranks, and nationalists have been encouraged to volunteer for National Guard, a force which has born the brunt of much recent fighting.

While the National Guards have in the main received only the most basic of training and in many cases suffer from problems with discipline and restraint, nonetheless they represent an extra force of some 35,000 fighters. Furthermore, the country has 77,000 regular troops and 35,000 Interior Ministry security troops.

In this context, should Moscow be contemplating direct military intervention, then unless it is willing to strip forces from its other commands and borders—something which would be expensive and impossible to conceal from spy satellites and social media photographers alike—it would have to rely on the ‘force multipliers’ of technological superiority, surprise and disruption to have any hope of victory.

STOLYPIN: Russia not invading, nor yet backing down


Opinion

Any hope is not the same as much hope, though. Such an invasion would not only galvanize Ukraine’s resistance (and there are still thousands more reservists to muster if need be), it would trigger an unprecedented Western reaction. While there is no real prospect of NATO personnel intervening, everything from direct transfers of hardware through to extensive intelligence and electronic support would be forthcoming, along with a sanctions regime designed to do everything possible to cripple the Russian economy.

Whatever the success of the initial onslaught, Russian advances would likely be met with resistance by the Ukrainian units on the ground. Even if fighting piecemeal, with no common strategy, they would likely inflict serious losses on the attackers.

Putin would thus be denied his preferred tactic, a rapid and unexpected revision of the truths on the ground, presenting the West with a fait accompli (think Crimea, think Georgia). He would also know that very soon Russians would start to notice the costs of this war, from a flow of ‘Cargo 200s’—the Russian designation for fatal casualties—to serious economic costs.

Of course, one could respond that this is a logic that might not resonate with the new-model Putin of his third presidential term, a man increasingly clearly driven by a sense of a nationalist mission. Or, indeed, that he may not even be aware of these stark realities. It is certainly clear that he now listens to a much smaller circle of allies and confidants, none of whom are in the military.

Nonetheless, despite German Chancellor Merkel’s claim that Putin is in “another world,” there is little reason to think that the Kremlin is at all eager for a military adventure that promises massive risks and minimal chances of a quick and easy victory.

Indeed, behind the rattling sabers, the Russians appear to have stepped up their efforts to reach

some diplomatic resolution. Rather than gearing up for an invasion, Moscow is hoping rather to be able to negotiate its way to some face-saving formula which would allow Putin to abandon the increasingly-expensive political liability that is Novorossiya while claiming it as a success.

And that Russian “invasion force”? That was probably just one more consignment of military materiel intended to help the rebels hold the line long enough for Putin to get his deal. After all, according to Aleksandr Zakharchenko, new head of the Donetsk People's Republic, they have already received at least 30 tanks and 120 APCs, and this is likely a distinct understatement.

But even if Russia does not plan or want an invasion, that hardly means it cannot continue to cause serious, even critical trouble for Ukraine. Indeed, even the fall of Lugansk and Donetsk, which would effectively end any coordinated insurrection, would not necessarily bring peace.

After all, the essence of Russia’s new doctrine of “non-linear war” means using everything from economic leverage to subversion and sabotage to pressurize countries to making the desired concessions. Take out the rebellion and still the Kremlin has a wealth of weapons in its arsenal, from gas shutoffs and intelligence operations, through economic penetration backing friendly politicians, to empowering criminals and strategic leaks and rumors.

So, the military aspect of Russia’s campaign looks unlikely to be about to escalate. But without some political settlement between Moscow and Kiev, it is likely simply to be succeeded by a more covert but equally destructive phase of underground subversion.

Mark Galeotti is Professor of Global Affairs at the SCPS Center for Global Affairs, New York University.


Weekly Lists

Russia may ban car imports The Moscow Times

Russia may tighten retaliatory sanctions against Western nations to include a ban on imports of cars, if the United States and the European Union impose additional sanctions on Moscow, Vedomosti reported on August 18. While the measure would not affect factories inside Russia, high-end brands such as Daimler AG's Mercedes-Benz could be more vulnerable as they have to be imported.

According to Vedomosti, a ban on vehicle imports was among proposals put before President Vladimir Putin. While Putin rejected the idea it remains an option in the event that Western nations impose new sanctions on Russia.

In the first half of 2014, around 27% of the passenger cars sold in Russia were imported, while for trucks and buses the proportion was 46% and 13% respectively.

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.

Lithuania signs first LNG purchase deal with Statoil Reuters

Lithuania has signed its first liquefied natural gas (LNG) purchase deal with Norway's Statoil as it seeks to cut its dependence on natural gas imports from Russia.

Prime Minister Algirdas Butkevicius told a press conference on August 21, that Lithuania - which currently imports all its gas from Russia - expects to start LNG imports in 2015.

Under the five-year contract with Statoil, Lithuania will import 0.54 billion cubic metres of LNG per year, with the price linked to gas price on the British National Balancing Point (NBP), according to Litgas.

Astana starts preparations for Expo 2017 bne

Kazakhstan's glitzy capital Astana has started preparations to host the Expo 2017 international fair. The organisers believe the project, which includes construction of all facilities from scratch, will be completed in time to allow participants to start setting up their exhibits in January 2017, despite the tight deadline.

The theme of the Astana Expo will be green energy, and organisers say they hope it will draw attention to sustainable development, renewable energy, and energy efficiency in Central Asia and the CIS.

The government also hopes that the private sector will invest at least $500m in building residential and commercial properties, as well as leisure and shopping centres for the exhibition.

Proponents hailed the bid to host Expo 2017 as a chance to showcase the country's achievements, and gain an impetus to innovative development and infrastructure, while critics have voiced concerns over the use of public funds for the project.

bne:Investor


Spooked by Russia's role in the crisis in Ukraine, Poland is preparing to boost military spending. In August, it accelerated efforts towards building a state arms manufacturer, Polska Grupa Zbrojeniowa (PGZ).

On August 19, anti-monopoly office UOKiK cleared PGZ to take over eight companies specializing in the design, manufacturing and servicing of military equipment, including munitions and missile manufacturer Mesko and tank producer Bumar-Labedy. This is the third and final round of takeovers, that once completed will give PGZ an estimated value of PLN 6.5bn (¤1.55bn).

The government is also working on legislation that will increase military spending to 2% of GDP, which will boost the defence budget by PLN800m annually. In 2013, Prime Minister Donald Tusk announced a revised defence strategy that will see total spending reach PLN130bn in the coming decade. "Events in Ukraine are making it clear for everybody that Poland must have a strong arms industry,” Treasury Minister Wlodzimierz Karpinski said in June.

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.

Poland races to complete state arms builder bne

Sanctions aim at Russia's Arctic push

bne

Polish fertilizer giant eyes foreign takeovers

Polskie Radio

US and EU sanctions are threatening to derail a monster exploration and production project in the Russian Arctic between state-owned Rosneft and US oil major ExxonMobil.

The latest round of sanctions includes bans on the transfer of technology vital to the future development of Russia's increasingly hard-to-get-at oil and gas deposits.

For the time being, sanctions apply only to new contracts. That could cause problems should ExxonMobil and Rosneft, which opened an Arctic Research Center in June 2013, seek to expand their cooperation to new deposits. Meanwhile Schlumberger - the world's largest oilfield services company - says it will begin adapting to the sanctions in order to continue operations in Russia and "mitigate predicted short-term impacts on operational costs and efficiency".

Grupa Azoty, the largest Polish chemical company and the second in Europe, has published a strategy that includes possible takeovers on foreign markets.

The six-year strategic plan is aimed at boosting the company's value by 2020 through acquisitions, organic growth and a PLN7bn (¤1.66bn) investment plan.

One of the goals in the strategy is to expand into new markets, Grupa Azoty's CEO Pawel Jarczewski has told the media. The company will make use of both its own funds and debt financing to cover necessary expenses.

bne:Deal



Weekly Lists

RBI 2Q14 results clearly above expectations Erste

Raiffeisen Bank International (RBI) net profit was ¤183m (+14% q/q, +53% y/y) 23% above our estimates and 35% above the consensus, mainly due to 10% lower than expected provisions resulting in sequentially stable risk costs of 1.54%.

With 1H14 provisions of ¤568m and based on the confirmed guidance of ¤1.3-1.4bn, a major impact of ¤0.7-0.8bn is to be expected for 2H14. We would expect significantly higher CoR levels in the next two quarters.

Concerning the new law in Hungary, RBI booked ¤67m in 2Q14, which is around 40% of their previous guidance of ¤120-160m.

The good news was that the NPL ratio was up only 10bp q/q to 10.7% (mainly Russia, Ukraine and Poland) and that NPL coverage stabilized at 65%.

Austria's Oberbank to expand in Hungary

BBJ

Austrian banks' CEE risks will drag on 2014 profits Fitch

Austrian bank Oberbank, which currently has seven branches in Hungary, will open seven to 10 new units in the country by 2016, Oberbank's CEO Franz Gasselsberger announced. The bank is planning to open 12 new units in the long run.

Because of several factors, including a high banking tax, a costly FX loans relief scheme and the political climate, Hungary is seen as a "problematic territory" by big Western banks but not by Oberbank, said its CEO.

Oberbank's expansion plans were boosted by the fact that big foreign banks such as Erste Bank and CIB have closed down some of their branches. But Oberbank is only planning organic growth. "We are not buying anything from other banks, and we are not buying other banks", Gasselsberger stated.

Austrian banks' risks from central and eastern European exposures will drag on 2014 profits and leaves them more vulnerable ahead of the ECB's stress test later this year, Fitch Ratings says.

Overall profitability is being negatively affected by currency depreciation, high loan impairment charges and poor loan growth in some CEE markets. Adverse legislative actions, particularly in Hungary, and sizeable bank levies in several key markets also play a role.

The three largest Austrian banks - Bank Austria, Erste and Raiffeisen Bank International (RBI) - rely heavily on profit generation from a few CEE markets, mainly Russia, Turkey and the Czech Republic. RBI's and Bank Austria's sizeable Russian units leave them more exposed to geopolitical tensions from the situation in Ukraine.

bne:Banker



Weekly Lists

Ukraine’s 2014 budget gap to be 5%/GDP bne

Finance Minister Oleksandr Shlapak told reporters in Kyiv that he wants $1bn of second tranche of IMF aid package for Ukraine’s budget.

Kyiv wants the third and fourth tranches of the loan combined into a $2.2bn disbursement, and would like to expand the IMF package, though doing so would require a new programme. Ukraine needs more cash beyond the IMF loan, and will organize a donor conference in September.

Tim Ash of Standard Bank said in a note that Shlapak is “just saying what has been obvious to most neutral observers for some time, that the IMF programme needs more cash - the original programme assumptions were way too optimistic. The government has been forced to make some very difficult choices ... all of which are growth subtracting in the short term, and weigh on the fiscal side."

Polish industrial growth continues to slow Erste

Hungarian focus on car loans no extra threat to banks Erste

The pace of industrial growth continues to slow. Although the 2.3% y/y growth dynamics were above market expectations of 1.8% y/y, this fits the overall downward trend that has been visible in industry for the last few months already.

We do not expect any rebound soon, as the PMI index was below 50 and the external environment has not been recovering strongly enough to sustain the positive dynamics of new export orders in Poland. Recent sanctions and the ongoing Ukrainian-Russian conflict only add to the uncertainty over the economic outlook in the Eurozone and Poland.

The data is not disappointing enough to convince the central bank’s Monetary Policy Committee (MPC) to cut the policy rate in September. We may actually see a further slowdown of GDP growth in 3Q14.

On August 21, a few misleading comments were heard about the regulation of car FX loans. EconMin Varga said that Hungary is considering steps for FX loan car purchases to ease the burden of borrowers.

However, the regulation of unilateral contract modification and the FX spread are also valid in the case of FX car loans. They might want to convert these loans into HUF as well. Conversion is possible, but it does not mean an extra burden on the banking system if it happens without a haircut. This news is neutral, so we do not expect a share price reaction.

bne:Credit



Southeast Europe stock exchanges team up bne

Southeast Europe's small and fragmented capital markets have been slow to develop. Now three regional exchanges - in Bulgaria, Croatia and Macedonia - plan to set up a common platform to facilitate cross-border trades and attract more international investors.

The three exchanges have agreed to set up a joint order routing platform, which will allow brokers registered with any of the three exchanges to access the others with no need to register or pay additional fees. International investors already active on one of the exchanges will gain the same benefits.

SEE Link was set up by the Bulgarian Stock Exchange (BSE), the Macedonian Stock Exchange (MSE) and the Zagreb Stock Exchange (ZSE) in May, with each of the exchanges holding an equal share in the new company. Detailed plans for the project are due to be completed by September, and the platform is expected to go live in mid-2015.

Weekly Lists

Market hopes Turkey’s Babacan will remain bne

Murtaza Rakhimov questioned in Bashneft privatisation criminal case VTB Capital

Investors are hoping Deputy Prime Minister Ali Babacan will remain in charge of Turkish economic policy following the August presidential elections, which PM Recep Tayyip Erdogan won. Shares in Istanbul rose the most in almost five months on August 20, as investors speculated Babacan will retain his post until next year’s general elections, Bloomberg reported.

The Borsa Istanbul 100 Index (XU100) advanced 2.5%, the most since March 28, according to the newswire. Bonds gained while the lira was little changed. Banks led the benchmark index higher, with Akbank, the country’s second-largest publicly traded bank by market value, and Turkiye Garanti Bankasi both gaining.

However, the following day, Erdogan’s nomination of close ally Ahmet Davutoglu as the new PM raised strong speculation that Babacan is set to be left out of the new cabinet.

Bashkiria's ex-president, Murtaza Rakhimov, has been questioned in the case against his son, Ural Rakhimov, who has been accused of illegally selling Bashneft shares to AFK Sistema for $2.5bn, Kommersant reports.

AFK Sistema's and Sistema-Invest's stakes (84% of the voting shares of Bashneft) had share-transaction limits imposed on them in the middle of July. As a result, Bashneft cancelled its SPO, which was tentatively planned for September.

bne:Stocks


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bne weekly newspaper august 22 2014