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June 28, 2013 www.bne.eu

Czech president hijacks political crisis

With the words, "the Nabucco project is over for us," OMV's chief executive Gerhard Roiss finally brought the curtain down on the increasingly unloved EU boondoggle to bring Caspian gas direct into the heart of Europe.

Instead, it appears that the private sector Trans Adriatic Pipeline (TAP) project has been given the nod by the consortium developing Azerbaijan's giant Shah Deniz field to transport 10bn cubic

Curtain comes down on Nabucco pipe dream

President Milos Zeman named his economic aide Jiri Rusnok as caretaker prime minister of the Czech Republic on June 25, setting up a fight with parliamentary parties on all sides. Zeman announced he is backing an interim government in the wake of the June 17 resignation of PM Petr Necas over recent raids by anti-corruption police. The move sweeps aside a

bid from the current ODS/Top09 coalition to build a new cabinet to see out their term, which ends in May 2014.

The president, who has sole authority for the meantime to name a new government leader, has also sidelined the demands of the opposition CSSD

metres of its gas annually from the Turkish border to EU markets.

The Austrian energy group OMV, which has been cheerleading a group trying to build Nabucco for over a decade, said in a statement on Wednesday, June 26 before a hastily called news conference that the "Nabucco West project was

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Nicholas Watson in Prague

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not selected by the consortium" developing the second phase of Shah Deniz.

"While OMV accepts the decision of the consortium, OMV is of the opinion that the offer which was submitted by [Nabucco Gas Pipeline International Gmbh] met all the selection criteria and was highly competitive," it sniffed.

Nabucco West is the remnant of an overly ambitious EU plan to bring gas about 4,000 kilometres from Azerbaijan – and perhaps later Turkmenistan – to Austria, avoiding Russia. Nabucco had huge political backing given it would help diversify Europe's gas supplies, but it simply wasn't economically or practically feasible. It planned to bring 31bn cm/y of gas a year, but found few suppliers other than Shah Deniz II's 10bn cm/y (16bn cm/y will be made available from the field, but Turkey will take 6bn cm/y for its own use).

Nabucco West, was only 1,300km long with a capacity of 10bn-23bn cm/y and was designed to pick up from the planned Trans Anatolia Natural Gas Pipeline (TANAP) that's currently being built by Azerbaijan and Turkey. Construction of TANAP, estimated to cost $7bn, is scheduled to start in 2014 and will be completed by 2018.

However, Nabucco West faced stiff competition from TAP, which has so far not publically commented on the decision but is the only alternative to Nabucco West.

The 10bn-20bn cm/y TAP offers a shorter route across Greece and Albania and under the Adriatic Sea to Italy, with fewer transit countries and partners to complicate matters. Even Nabucco West's own partners weren't convinced of its chances; in April, Germany's RWE left the consortium of OMV, Hungary's Mol, Romania's Transgaz, Bulgarian Energy Holding, Turkey's

Botas, selling its 16.7% stake back to the Austrian firm.

TAP also had the huge advantage that shareholder Statoil is a lead member of the Shah Deniz consortium, together with BP and Azerbaijan's state-owned Socar. On June 17, the European gas infrastructure group Fluxys said it's considering taking a stake in TAP if it got the nod; analysts say other companies may also now jockey to join the project.

Kjetil Tungland, TAP's managing director, had been increasingly optimistic that his ¤2.5bn pipeline would get the nod over the more expensive Nabucco West in the run-up to the decision. "I think the odds are highly in our favour because we were more in front technically and commercially all the time, but politically we had to catch up," Tungland said in an interview.

Although no reasons for the Shah Deniz decision have been given, at the press conference Roiss questioned whether higher gas prices could be achieved in skint Greece or enough gas could be supplied to Italy, the two main markets that lie on the TAP route. "The question of whether that is a fig leaf for a political decision I leave to you to judge," he said.

Indeed, only on June 21 it was announced that Socar had reached an agreement with Hellenic Republic Assets Development Fund to acquire a 66% stake in Greece's natural gas transmission system operator, DESFA, as a way to increase its gas sales in Greece and neighbouring Bulgaria. "I can only speculate that the DEFSA privatisation to Socar tipped the balance between the two options in the end," says Andrew Neff of IHS Energy.

Roiss' comments that the Nabucco project is "over" also probably puts paid to the idea that Shah Deniz might want both pipelines built, just at different times. That notion was given credence earlier this year by comments from Socar officials that Nabucco West and TAP were "definitely not mutually exclusive."

Curtain comes down on Nabucco pipe dream

June 28, 2013 businessneweurope I

Czech president hijacks political crisisfor early elections. Although he acknowledges that is the likely eventual outcome, Zeman is playing the percentages to boost his own power. The left-leaning CSSD - which Zeman led as PM over a decade ago before falling out with the current leadership - is a certainty to win any new election.

While Rusnok - a former CSSD finance minister - will clearly not find the simple majority support demanded by the constitution in parliament, Zeman retains the power over a second nomination, and hence he could still fill in for close to a year, unless the lower house forces snap elections.

Voting for Christmas That leaves the departing coalition with a dilemma: to endure 12 months of effective rule by the president, or support the CSSD in its push for early elections, which would be tantamount to a turkey voting for Christmas.

However, Erste notes that there may be a third option. Should Zeman play hardball and retain a Rusnok cabinet despite a lack of support in the lower house, "parliament can then turn to Constitutional Court (41 MPs suffice for this) [to ask] it to rule whether or not such conduct is in line with constitution."

The weakened centre-right parties may well push that in order to get the chance to draw up a 2014 budget in line with its strict austerity - one of the first items on the list according to Rusnok – as well as the need of several senior figures to avoid losing immunity from prosecution.

Nemcova called Zeman's decision "an irresponsible step," according to AP. Miroslav Kalousek, deputy head of Top09 and outgoing finance minister, called Rusnok "an irresponsible friend of an irresponsible president," and insisted on his right to draw up the next budget.

Such a thought will have most of the country shuddering, with Kalousek's harsh austerity over the past three years or so having helped sink the country into its longest ever recession. The pledges of the CSSD to raise extra revenue in order to loosen the state purse strings has helped it into a position from which victory is certain at the next elections, whenever they may fall.

On to business Rusnok, who said he will act quickly to have his government sworn in within two weeks, called the preparation of next year's financial plan a "key task". However, he appeared to rule himself out of making any call on the ¤8bn-¤10bn nuclear tender to expand the Temelin plant. "I won't make strategic decisions," he said when asked about the September deadline set by state-controlled CEZ for selecting a winner from the Russian and US/Japanese offers.

"For now, nothing is changing, but next week we should have a clearer understanding of the timeline and will be better able to comment," CEZ spokesman Ladislav Kriz told Dow Jones.

However, Erste points out that, "Zeman is well known for his positive stance towards nuclear energy," noting that as PM in 1998, he approved the first two blocks at Temelin. The US bidder will likely be wary of any decision under the temporary administration given the president's well-documented connections with Russian business, in particular Lukoil.

Hospodarske noviny notes that the last caretaker government - led by Jan Fischer - made several controversial decisions on major projects after its rule was extended by the Constitutional Court. Eventually, it ran the country from May 2009 to July 2010.

Such governments have been unusually common in the Czech Republic, and business tends to find a way to proceed. Zeman and his cohorts are unlikely to leave the huge sums involved in the Temelin expansion dangling for too long should snap elections not follow swiftly.

Top Stories

June 28, 2013 businessneweurope I

The Regions This Week

Georgian PM Bidzina Ivanishvili said on June 25 that he cannot rule out the arrest of President Mikheil Saakashvili after he stands down following the October presidential elections. Saakashvili could be called for questioning over several cases including the 2008 war against Russia and the takeover of Imedi IV.

Polish Foreign Minister Radoslaw Sikorski says the EU is concerned about the situation in Georgia, where the opposition is “being threatened publicly with the use of prosecution services.” NATO Secretary General Anders Fogh Rasmussen has also urged Tbilisi to ensure that democratic reforms continue.

At $22.5bn, Kazakhstan attracted a record level of foreign direct investment in 2012, despite negative trends in global investment flows, according to Kaznex Invest. The structure of FDI inflows has changed since 2010, with a greater share of investments now directed at the manufacturing sector.

Kyrgyzstan's president signed a law denouncing the agreement on the Manas Transit Centre near Bishkek. President Almazbek Atambaev's signature means the base, which supports US and coalition operations in Afghanistan, must now close down when its lease expires in June 2014.

Uzbek President Islam Karimov slammed migrant workers who travel to Russia and other countries to earn money as “lazy” and a “disgrace”. “Nobody is starving to death in Uzbekistan,” Karimov thundered.

Georgia hopes to increase exports to Russia to $100m in 2013 following the lifting of a Russian ban on exports of wine and mineral water.

Purchases of new cars exceeded pre-crisis levels in Kazakhstan in 2012, with a total of 87,000 cars - worth $2bn - sold during the year.

EurasiaIn addition to growing incomes, the increase was attributed to Kazakhstan’s entry to the Customs Union and new restrictions on purchases of old cars.

A Chinese company has been awarded the $101.3m contract to modernise coal mining operations in Uzbekistan’s Surkhandarya region. China Coal Technology & Engineering Group will have until 2016 to put two new coal production complexes into operation and develop new coal fields.

Kazakh farmers are expected to import almost 42,000 head of cattle by the end of 2013, as a programme to build up the country’s herds gathers momentum. Farmers have already imported around 24,000 head since the start of 2013, according to Agriculture Minister Asylkhan Mamytbekov.

A group of Uzbek entrepreneurs claim to have seen their social networking platform quickly gather momentum since its launch in March. Modero.co, which was developed in Tashkent and California, sorts and shares photographs.

Kyrgyzstan made dramatic progress on the Fund for Peace’s 2013 Failed State Index, allaying fears over the country's direction. For the second year running, Kyrgyzstan was among the most improved states on the index, which assesses the political, economic and social pressures experienced by states.

Armenia is planning to launch its first satellite as part of a $250m space programme. The announcement follows the launch of the first satellite by neighbouring Azerbaijan earlier this year.

businessneweurope I June 28, 2013


The EU approved Hungary's exit from the Excessive Deficit Procedure on June 21. The country's first escape from the budget offenders prgoramme after nine years of membership in the bloc is seen as a victory for PM Viktor Orban ahead of next year's elections. Latvia and Lithuania were also released from the EDP.

Polish banks will be hit with a new tax in 2014, after parliament approved a levy on June 21 which could eat up as much as 8% of the sector's earnings. The charge will be used to create a stabilization fund to support any lenders that get into trouble.

Telecoms regulator CTU responded to earlier objections to the sale, and a spectrum auction to attract a new Czech mobile operator is due by November.

Poland's Getin Noble Bank plans to buy back up to 2.2% of its outstanding shares for PLN2.2 each, 16 percent above the starting price when the announcement was made on June 21. The buyback kicked off on June 24 and will finish on July 4.

Czech Unipetrol agreed a contract to buy 8.28m tonnes of Russian crude to 2016. The deal, signed with state giant Rosneft, is designed to ensure a stable supply from the Druzhba pipeline – which saw severe restrictions in deliveries last year.

Poland has the lowest food prices in the EU, according to a new study by Eurostat. The statistical office found that average prices for food and non-alcoholic drinks in Poland during 2012 were 39% below the EU average.

Warsaw has no plans to pull KGHM into Opole, an official insisted on June 25. Local media speculated earlier in the week that the state-controlled copper miner could be put in harness as the government pushes utility PGE back into the PLN11bn project to expand its coal-fired power plant.

Central EuropeHungary's Supreme Court postponed its decision on a crucial case for the country's banks this week. The court was due to deliver a verdict on the inclusion of the bid-ask spread as a cost in forex loans. The decision could void the contract in the case, but more importantly, act as a precedent, leading to huge losses for the banks.

The creation of Lithuania's newly spun off gas distributor was finalized on June 25. Amber Grid was registered in state commercial lists and its bylaws approved at an EGM. The spin off is key to loosening Russia's grip on the country's energy supply.

Slovakia is losing its fight to hit tax revenue targets, the finance ministry revealed on June 27. The struggle is putting strain on Bratislava's plan to cut the budget deficit below EU limits as early as this year.

Poland is set to boost the role of coal in its energy mix, PM Tusk said on June 27, as he officially pushed PGE back into the flagship project to expand the coal-fired Opole power plant. The move raises further questions over Warsaw's confused energy strategy, its relations with Brussels, and the share prices of state-controlled companies.


Southeast EuropeGerman chancellor Angela Merkel cancelled a visit to Zagreb to mark Croatia's entry into the EU on July 1, in what is being widely seen in the bloc's newest member as a high-level snub.

Slovenia will probably ask for a bailout to prop up its ailing banks should Europe's debt crisis worsen, with government bond yields near record high yields, Capital Economics reported.

The currently closed Gezi Park will be reopened for public use in a few days Istanbul Governor Hseyin Avni Mutlu said this week. Municipality work continues at the site, which has become the heart of the anti-government protests in Turkey.

Bulgarian Prime Minister Plamen Oresharski defied calls to resign from thousands of protesters and the former ruling party, which is now in opposition.

Turkey's Capital Markets Board has open a detailed investigation into financial orders at brokerages, with a focus on foreign transactions between May 20 and June 19, when Turkey's main stock exchange, Borsa Istanbul, fell by nearly 20%. Clearly motivated by officials claims that the huge protests that have rocked the country have been supported by an "interest rate lobby" the move threatens to further unsettle investors.

Romania hopes to start talks soon on a new standby loan from the IMF after the fund concluded a review of the current two-year deal by saying the economy has stabilised.

EU foreign ministers on June 25 backed a German proposal, postponing EU membership talks with Turkey for about four months.

Romania has taken the first step towards adopting a new constitution. The commission in charge of the process approved the first draft on June 25, including some changes that previously stirred debate.

Moldova's parliament has called on international partners to stop separatists from seizing territory in eastern Moldova. Lawmakers adopted a statement urging the US, the EU, Russia, Ukraine and the OSCE to "resolve the situation in Transdniester."

Egypt became the 100th country to recognise Kosovo as independent, the Pristina government said on June 25 - a milestone for the former Serb province's pursuit of full international acceptance.

Bosnia's has agreed a short-list of bids to expand a power plant in Tuzla. Japan's Hitachi, a Spanish-led group and a Chinese consortium are in the running.

Prime Minister Iurie Leanca said Moldova has confirmed the completion of negotiations on an EU association agreement, and Brussels expects the document to be initialled in the fall.

Turkey hopes to welcome 48.5m tourists annually between 2014 and 2018, a 4.6% increase over the 2007-2012 period. The country also aims to increase income per visitor 2.3% to $932.

Parliament approved Romania's acquisition of 12 second-hand F-16 multirole jet fighters from Portugal this week. Brussels has been fighting efforts to make the procurement order without an open tender for years.

Serbian Prime Minister Ivica Dacic welcomed the EU's "historical decision" on June 25 to open accession talks with Belgrade, adding that Serbia would like to join the bloc "in four or five years' time."



Eastern EuropeA revised amnesty for economic crimes in Russia has gone to the Duma for approval. The amnesty was the first major policy initiative by business ombudsman Boris Titov. Some 13,000 businessmen falsely accused of economic crimes should be released from jail, but oil tycoon Mikhail Khodorkovsky is not expected to be among them.

A fresh fight between Russia and Ukraine over unpaid gas bills threatens to break out. Gazprom said this week it's set to send another huge bill to Kyiv for failing to take enough gas so far in 2013 under the terms of its contract. The state-controlled company sent Kyiv a $7bn bill under the same terms in 2012, which remains unpaid.

Chechnya will spend $500,000 on importing 16 English teachers to give a three-week course. The teachers must have a PhD and previous experience. They will be housed in “luxury suites in a five-star hotel” in Grozny and could pal around with French actor Gerard Depardieu, who also received an apartment in Grozny.

The collapse of Russia’s non-state investment banking sector continues. Moscow brokerage Aton Capital cut its research team by half and star strategist Peter Westin has returned home to Sweden after spending a decade and a half in the Russian capital.

Russian conglomerate AFK Sistema is in talks to buy blocking stakes in two major Asian telecoms. The company is looking at acquisitions of Japan's largest mobile carrier NTT docomo, as well as India’s TataTeleservices.

Russia’s has relaxed its drinking and driving limits. In the battle against rampant drunk driving, Moscow imposed a 0.0% alcohol content rule, enraging some who were banned on the basis of margin-of-error problems in the measuring equipment. Motorists are now allowed to register traces of alcohol.

Russia has formally outlawed financial pyramid schemes making their formation a criminal offence. Since 2008 more than RUB40bn ($1.2bn) has been lost in financial pyramids by over 400,000 people.

State-owned oil major Rosneft is about to consolidate 100% control over natural gas producer and trader Itera. Russia’s Anti-monopoly Service (FAS) is expected to approve the deal this month. Itera was set up in the 1990s and was widely believed to be a vehicle for the former management of Gazprom to steal billions of dollars, although the accusations have never been proven.

National flag carrier Aeroflot has been removed from Russia's privatization programme “for the time being.” Confusion surrounds the push, as opposing forces in politics and management fight to prevent the sale of state companies.

Moscow heat broke a 100-year record on June 27, with temperatures set to head higher. Thermometers hit 31.4 degrees Celsius, the highest for that day since 1911. Temperatures are currently 8 degrees higher than normal, but remain well below the peaks seen during heatwaves in recent years that sparked massive wild fires.



The world is being wracked by protests, but why are they all happening now?

The protests that exploded in Istanbul’s Taksim’s square in recent weeks have been dramatic and unexpected. But something more fundamental seems to be going on than simple the middle classes claiming their democratic rights. Over the last two decades, regime after regime has been afflicted by protests of one sort or another.

The pot banging citizens and tear gas wielding police of Turkey have caught the headlines, but less well reported have been protests in Romania over power tariffs, Bulgaria over elections, Kyrgyzstan over ethnic tensions, Kazakhstan over mining concessions, and Albania over elections, to name just the protests in bne’s patch in just the last six months.

If you widen the brief then Brazil, Thailand, Indian, Indonesia and even New York, Paris and London have seen crowds in the streets in the last two years. Indeed, if you step a little further back then the fall of the Berlin wall in 1989 and subsequent collapse of the Soviet Union in 1991 were also the result of popular dissatisfaction with government.

What unites all these protests? Nothing obvious is the answer. However, this week’s chart is from Ian Morris’ 2010 book “Why the West rules… for now” and shows human development since the

dawn of history (on a logarithmic scale).

It shows that humanity is in the midst of an explosion of development. For about 10,000 years social development was stuck at below 100 on Morris’ scale, but since the industrial revolution in the second half of the 19th century humanity has been transformed out of all recognition. And the process is still in the midst of exponential growth. The advent of computers and the internet to replace steam and then electricity is only pushing the process faster.

Seen in these terms then the issue is not protest, but social development in general. In these terms the addition of the periphery countries to the European Union and their subsequent economic revolution, as well as the rise of the “Asian tigers” in the 80s, are the peaceful manifestations of the work of the same forces.

The difference between those developments and the current protests is that the transformation was carried out by forward looking governments, whereas the more recent protests are against backward looking governments, many of which have been in power for at least a decade and are struggling to keep up with the pace of change. But when things are going this fast what government could keep up? That’s why there are protests in west as well as the east.

Rising protest a

symptom of human

development

bne Chart


Eastern Europe

Russian-US relations strained as whistleblower stops over in Moscow

bne

Piling extra strain on the problematic relations between the US and Russia, National Security Agency whistleblower Edward Snowden remains stuck in the transit area of Moscow's Sheremyetovo Airport after flying in from Hong Kong on June 23.

The former US intelligence contractor was revealed last week as the source behind leaks detailing the US government's massive internet and phone surveillance operations known as "Prism". He flew from Hong Kong to Moscow as the first leg of a trip scheduled to leapfrog US allies.

He was expected to head to Cuba on June 24, before flying to Venezuela, and then finally Ecuador, which has said it is "analysing" whether to grant him asylum.. However, he missed that flight, and reporters have been haunting the airport ever since hoping for a sighting.

The US, fearful of more secrets being revealed, is desperately trying to intervene. However, it appears that China, Russia and the collection of Latin American states are colluding to keep Snowden out of its grasp. Washington said in a statement that it expects the Russian government to "look at all options available" to expel the former analyst to the US on spying charges, while politicians have been blustering about

"consequences" for Moscow. Both Russia and China have rejected US claims of assisting the fugitive.

However, Russia has repeated insisted that it has "no grounds" to extradite Snowden, and reiterated on June 27 that as he remains air side of immigration he has not technically entered the country. Both Wikileaks and Russia have denied reports that the Russian secret police have questioned the analyst.

Amidst the rising rhetoric coming out of Washington, President Barack Obama has attempted to strike a more pragmatic stance. "I have not called President Xi personally or President Putin personally and the reason is ... number one, I shouldn't have to," he said. "Number two, we've got a whole lot of business that we do with China and Russia. I'm not going to have one case of a suspect who we're trying to extradite suddenly being elevated to the point where I've got to start doing wheeling and dealing and trading on a whole host of other issues."

Poor relations A US spokesman attempted to highlight the "intensified co-operation" between the US and Russia after the Boston Marathon bombings in April, and their record of working together on law enforcement matters. However, the hide-


and-seek between reporters and the US fugitive around the Moscow airport is the latest chapter in a story of deteriorating relations between Russia and the US.

The pair are at loggerheads over the ongoing civil war in Syria, and the atmosphere was tense between the two countries' presidents at the recent G8 meeting. The passing of the Magnitsky Act in the US – which blacklists dozens of Russian officials and police figures due to their alleged role in the death of lawyer Sergei Magnitsky – provoked fury in Moscow. Russia promptly passed a ban on US adoptions of Russian children, citing abuse cases that have regularly hit the headlines in Russian media.

Last month, Moscow paraded a bewigged US spy before the cameras, after claiming to have caught him red-handed with a special agent's kit, complete with cash and a letter offering a potential informant a long-term deal. A more serious side of that debacle came when Russian intelligence named the top US spy in Moscow, a move analysts said is outside the accepted rules of the game.

Even though Russia's role in Snowden's flight remains unclear, Moscow is certainly not going to help Washington get its man.

The US revoked Snowden's passport before he left Hong Kong on June 23. That means both China and Russia are effectively ignoring the fact that he is traveling without valid documents. Russia, of all countries, is famously pigheaded over even the smallest discrepancy in official documents, so to allow someone to enter and then leave on documents that are clearly invalid implies a certain level of complicity.

That risks deepening the freeze in relations between the two countries, and US officials are already pushing that angle. Senator Lindsey Graham warned Russia that there will be "serious consequences" if Moscow is proved to have actively thwarted attempts to prevent Snowden's

trip from continuing. However, there's little Washington can actually do – while with relations close to a post-Soviet nadir, there's little either it can realistically expect from Moscow.

Eastern Europe

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Ben Aris in Moscow

With global stock markets volatile and Russian shares among the least popular in the emerging markets, the timing of Luxoft Holding's IPO seemed poor. Yet this spin-off from Russian software developer IBS Group managed to price the shares on June 26 in the middle of the range at $17, and the shares rose as much as 23.5% on their first day of trading on the New York Stock Exchange.

The deal values Luxoft, which provides software and consulting services to international clients such as Boeing and Deutsche Bank, at around $684m. And the surge in price could be partly explained by the deal being priced at an approximately 20% discount to EPAM Systems, another software developer that is mostly based in Belarus and listed last year on the NYSE, whose shares have almost doubled since then.

Luxoft issued 4.1m of class A shares on the NYSE, which is approximately 12.5% of the company's capital, raising about $35m. IBS sold the remaining 2m shares, and will retain control of 72% of the economic rights of Luxoft and 83% of the voting shares after the IPO. Investment banks Cowen & Company, Credit Suisse, JP Morgan, UBS and Russia's VTB Capital, which acted as the underwriters of the IPO, have received a 30-day option to buy additional 613,800 shares of Luxoft.

Pulling off the IPO of such a technology company might have seemed difficult given the state of the global economy and world markets. Yet Anatoly Karachinsky, the founder and president of the parent group IBS, told bne that the crisis has actually been good for business. "The slowing global economy is not a big issue, as a slowdown drives management to dramatically cut costs looking for more efficiency. Software is an easy way to cut the costs in most businesses,"

Karachinsky said in an interview on the sidelines of the St Petersburg International Economic Forum on June 20-22.

Karachinsky is a pioneer of software engineering in Russia and set up IBS in the late 1980s during Perestroika. He computerised much of the Soviet administration and many of the leading Russian companies as they attempted to move into the 20th century. But thanks to the Soviet educational emphasis on hard sciences, his low-cost but high-quality engineers quickly found a market overseas; Luxoft was established in 2000 to handle the growing volume of international contracts. "Our engineers are two- to four-times cheaper, but work twice as hard," says Karachinsky.

The decision to separate Luxoft from IBS's largely Russian business is necessary to crystalise the differences between the two companies, says Karachinsky. "There is widespread interest in Luxoft, as it is a totally western business. But some investors don't understand what IBS and its Russian business is doing in there and it confuses and distracts them," says Karachinsky. "On the other side of the coin: if you are an investor with an emerging market mandate, then they don't like investing into an emerging market operation with a lot of business in the US."

Luxoft's biggest markets are in the US and Europe, which accounted for 39% and 32% of last year's revenue of $314m. Germany accounts for another 13% of Luxoft's revenue and Russia 9%. Revenue was growing by 28% a year (CAGR) until the current slowdown hit in 2013. This year, Karachinsky thinks revenue growth will slow to about 12%. Though this is still better than the parent company IBS' expected growth of 5%, he is confident that business will pick up again next year. "We have not

Eastern Europe

Russia's Luxoft successfully IPOs despite difficult conditions


been as affected in the international business - all is good in the American market and all is okay in the European one," says Karachinsky.

Software for financial services accounts for half of Luxoft's international business (and Deutsche Bank is the single biggest customer), with automotive and aviation sectors being second and third biggest earners.

As international banks recover from the 2008 crisis, they have refocused on improving efficiency and so have been investing heavily into their IT systems, which remains a mainstay of Luxoft's business.

The automotive sector is becoming increasingly important for Luxoft, which already supplies all the major European manufacturers with software services. And in September last year, Luxoft broke into the US market, signing a "very interesting system" deal with Ford, according to Karachinsky, to build an integrated platform covering everything

from in-car entertainment systems through navigation and control of the engine.

Energy is another potential source of work for Luxoft and the company is already heavily involved in writing software to control the European grid that is part of the EU's energy liberalisation programme. However, more interesting is the US market, which recently put a new green energy law in place, which Karachinsky says, "lays out a vision for local energy companies and managing power consumption using technology."

Karachinsky believes the prospects for both Luxoft and IBS are good for many years to come. "Everyone understands we are on the border of a great technology revolution with everything moving into the cloud. That means that the last 30 years of code will have be entirely rewritten. On top of this everything will get a chip and be interconnected, which also needs a mountain of code to manage it. In effect societies infrastructure will move into the cloud too and all this needs to be built."

Eastern Europe

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Incumbent wins Mongolian presidential election

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Mongolian President Tsakhia Elbegdorj looks to have been returned to the presidency for a second term after taking a majority in the first round of voting, according to preliminary results. With the incumbent seen as the most investor-friendly of the three candidates in the election, his victory is likely to partially relieve investor concerns over rising resource nationalism.

The early count suggests Elbegdorj, leader of the ruling Democratic Party, took 50.23% of the vote, the General Election Commission announced at a briefing on June 27. Former wrestling champion Badmaanyambuu Bat-Erdene was the runner up as expected, taking 41.97% - but that was not enough to force a second round, the GEC's director Choinzon Sodnomtseren announced, according to Bloomberg.

Health Minister Natsag Udval, seen as a proxy candidate for former president Nambaryn Enkhbayar - who is serving a prison term on corruption charges - took just 6.5%. Official results will be issued within five days, but the GEC said preliminary results show that Elbegdorj will return for a second term without the need for a second round of voting.

The president's re-election sees the Democratic Party continue its dominance of Mongolian politics. In addition to Elbegdorj, Mongolia's prime minister and parliament speaker, as well as the mayor of the capital Ulaanbataar, are all party representatives.

"The parliament of Mongolia, the government of Mongolia and the president of Mongolia will work as one team in the remaining period," Prime Minister Norov Altankhuyag said late on June 26, according to Bloomberg.

The verdict is seen as good news for international investors. While the president has been leading efforts to increase the state's share of certain projects, he is also viewed as far more investor-friendly than main rival Bat-Erdene. With the election out of the way, this is likely to pave the way for progress on mega mining projects - in particular the Oyu Tolgoi copper and gold deposit.

Mongolia's GDP growth - the fastest in the world until recently - has slowed dramatically over the last 12 months, mainlydue to the slowdown in neighbouring China, which is the primary market for Mongolian exports of coal and other natural resources. This is combined with the lack of progress at Oyu Tolgoi. Amidst tough talks between developer Rio Tinto and Ulaanbataar over the state's demand for a larger share of the operating company, the launch of commercial production was delayed until after the presidential vote.

Elbegdorj's re-election now offers the opportunity for those negotiations to continue - Bat-Erdene is closely connected to efforts at a stronger form of resource nationalism. The British-Australian multinational is also struggling to agree on the second phase development of the mine with the government.

Eurasia


Eurasia

Georgia starts clampdown on Iranian investment

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The Georgian government and central bank claim they are now working to prevent Iranian companies investing into the country's banking sector, as US concern that Tehran is using Tbilisi to bypass international sanctions rises.

Speaking to journalists in the capital, National Bank of Georgia President Giorgi Kadagidze said on June 25 that the central bank has stepped up efforts to prevent Iranian companies entering the banking sector. Following increased US pressure, the central bank has blocked "attempts of several Iranian banks and individuals, associated with the Iranian authorities, to enter the banking sector of Georgia," Kadagidze claimed.

The blocked investments reportedly include an attempt by Pasargad Bank to open a representative office in Tbilisi. The Iranian lender dropped its plan after the Georgian authorities refused to issue a licence.

The NBG now plans to look into the situation at InvestBank, which since 2011 has been controlled by three Iranian investors - Houshang Hosseinpour, Pourya Nayebi and Houshang Farsoudeh – via a Liechtenstein-based investment fund called KSN Foundation, reports the Wall Street Journal. They also recently set up airline FlyGeorgia and have established several other investments. The trio insists they have no connection to the government in Tehran.

However, they star in the nightmares of officials from Washington and Brussels, who have expressed worry that Iran is trying to use the

Georgian financial system to bypass international sanctions, which have been implemented over concern that Tehran's nuclear programme is seeking to develop arms. Iran insists the goal is purely civil.

Sanctioned Iranian energy companies and firms tied to Iran's elite military unit, the Islamic Revolutionary Guard Corps, are among the firms that have sought to do business in Georgia, according to Iranian and Georgian officials, the Wall Street Journal reports. Two US delegations have visited Tbilisi in recent months to discuss the issue, according to both US and Georgian officials.

That pressure is now having effect on the ground. Georgian Justice Minister Tea Tsulukiani announced on June 21 that in a bid to comply with the sanctions, Tbilisi has frozen around 150 bank accounts linked to Iranian businesses and individuals. The investigation into InvestBank follows hot on the heels of a preliminary inquiry into KSN Foundation launched by regulators in Lichtenstein.

Georgian officials also said Tbilisi is considering altering its policy on visa requirements for Iranian nationals. Since 2011, Georgia has waived the visa requirement for Iranian nationals, fueling a boom of Iranian tourists and businessmen. Iranian investment in the country has boomed in the meantime, as other markets have shut access.

That push has come as Iran casts around for loopholes in international sanctions that are


Eurasia

increasingly biting. Until the changes, Georgia was one of just three countries in Europe and the broader Middle East that offers Iranians such easy visa access.

The others are Armenia and Turkey. Ankara has been battling a clampdown on its purchases of Iranian energy for over a year. State-controlled Halkbank is reportedly continuing to act as a hub for a convoluted scheme which sees Turkey importing huge volumes to gold to pay Iranian couriers, despite US attempts to close it down.

Like Turkey, Georgia is noted as a rare strategic ally of the US in the neighbourhood, which

ironically offers it the opportunity to leverage leeway. "Investing in Georgia is a way of skirting the sanctions," Iranian media quoted a development official in Tehran as saying in December, according to the WSJ.

However, with the issue now hitting the front pages, Washington insists it is determined to close the loophole. "We are focused intently on shutting down any Iranian attempts to evade sanctions, including through possible business connections in Georgia," David Cohen of the US Treasury said recently. "We are working closely with the Georgians on the issue."

Armenia in talks over ArmRosgazprom sale to Russia

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An Armenian official has confirmed that the government is in talks with Gazprom over a possible sale of the state's 20% stake in gas distribution company ArmRosgazprom. The move is part of ongoing negotiations between Yerevan and Moscow over a recent hike in gas prices.

Armenia's Minister of Energy and Natural Resources Armen Movsisyan told parliament on June 19 that no decision has yet been made and talks with the Russian energy giant are due to be completed by the end of 2013. A sale of the government's stake in ArmRosgazprom would have to be approved by the Armenian parliament, he added, according to PanArmenian.

The issue was discussed during Movsisyan's visit to Moscow on June 17. The official said Yerevan

is looking to ensure a long-term supply of natural gas.

The government is currently struggling to deal with a price hike in Gazprom's gas exports to Armenia. The increase was introduced several months ago, but consumer gas prices have so far been kept artificially low.

The Armenian Public Services Regulatory Commission recently gave the go-ahead to increase tariffs for both gas and electricity, since some of Armenia's power stations are gas-fired. The decision was politically unpopular, and Armenian government officials say they are still hoping to agree on a subsidy with Russia.


Kazakh consortium makes revised offer to ENRC shareholders

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A consortium formed by the founders of Eurasian Natural Resources Corp (ENRC), in tandem with the Kazakh government, has made a new offer to buy the company. While it would offer minorities a lower value deal than a previous bid rejected in May, 26% shareholder Kazakhmys conceded it may be the best option available.

The new offer, announced on June 24, values ENRC at around GBP3.043bn. Kazakh mining giant Kazakhmys said in a statement that while it considers the offer may undervalue ENRC, acceptance is "the best alternative" for Kazakhmys and other minority shareholders.

Eurasian Resources Group B.V., a newly incorporated company set up by ENRC founders Alexander Machkevitch, Alijan Ibragimov, Patokh Chodiev, alongside Kazakhstan's State Property and Privatisation Committee has been trying for several months to buyout minorities to de-list ENRC from the London Stock Exchange (LSE) as a corporate governance crisis and fraud probe by UK authorities sends its share price plummeting. The consortium, which currently owns 53.9%, is offering $2.65 in cash, plus 0.230 Kazakhmys shares, for each ENRC share.

Based on Kazakhmys' closing share price on June 21, the deal values ENRC's shares at about GBP2.34. That's around 7.5% lower than the offer made in May, since Kazakhmys shares have dropped 20% since the original offer, and the dollar-pound exchange rate has also dropped. The offer is also conditional upon Kazakhmys agreeing to sell its 26% stake.

Kazakhmys said in its statement: "The board of Kazakhmys believes that the offer may undervalue

ENRC and its assets but ... has concluded that there is no prospect of obtaining improved terms ... Moreover, the board considers the prospects of realising greater value from ENRC in the short to medium term to be remote and the risks of further erosion in value to be considerable... The board believes the offer is the best alternative open to Kazakhmys and other ENRC minority shareholders."

Visor Capital writes in an analyst note: "We believe that the news is negative both for ENRC and its 26% shareholder Kazakhmys. We believe if the consortium has failed to come up with the improved offer, it may result in ENRC's Independent Board declining the offer. We understand that even if the offer is declined, the consortium may still remain firm with its bid, having the "green light" right for the transaction to pass to Kazakhmys."

ENRC's founders announced on April 23 that they were considering a buyout of the company, which could result in it being delisted. The Kazakh government joined the consortium shortly afterwards.

ENRC's committee of independent directors on May 17 rejected the consortium's initial offer, which proposed a price of 175p per share, plus 0.231 of a Kazakhmys share. The offer amounted to slightly over GBP2.53 per ENRC share, which the committee chairman Dr Mohsen Khalil said at the time "materially undervalues ENRC".

The push to take ENRC private kicked off as the company's operations in both Kazakhstan and Africa came under increasing scrutiny. The UK's Serious Fraud Office has launched a formal investigation into contracts worth $100m awarded to a company linked to ENRC CFO Zaure Zaurbekova.

Eurasia


Central Europe

Poland pulls punches as it unveils pension reform proposals

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The Polish government unveiled on June 26 its long-awaited - and feared in some quarters - plans for pension reform. While the market was relieved to hear that Warsaw is not plotting to grab all of the assets in the privately-managed "second pillar," the three options it has put on the table will reduce its role significantly.

The reform of Poland's private pensions system (OPF) - first introduced in 1999 - has been a point of hot debate this year between a government watching the billions it collects each year with envy, and markets warning of the effects on the stock and bond markets. As it turned out, Finance Minister Jacek Rostowski presented three options, which the government will decide on after another month of public debate.

As expected, the proposal includes a phased transfer of assets for the last 10 years of a saver's working life from OPF to the state system (ZUS). Two of the options presented would make participation in OPF voluntary, while the third would shift the PLN120bn or so in government bonds held by OPF into ZUS.

"The key for us is that the changes don't lead in any way to nationalizing the shares," said Rostowski - who oversaw a reduction in the flows to OPF (from 7.3% of salaries to 2.3%) in 2011.

While the pension fund operators that have been

fighting the reform process warned of apocalypse, the equities market exhibited relief that the proposals are relatively moderate compared with the potential scenarios that have been sketched out over the past few months.

The Warsaw Stock Exchange (WSE) tumbled to a 10-month low just ahead of the release of the proposals, before recovering most losses. The equity market is highly vulnerable to the reform given the high volumes invested by OPF.

In fact, the review seeks to offer further support to the WSE - unsurprising, given that successive Polish governments have long pushed the exchange to dominate the region. Under the recommendations, the current cap on equity holdings by OPF would be lifted, but they would be banned from buying bonds.

However, Warsaw has managed expectations well, and thus far has avoided a significant sell-off on financial markets. It has taken advantage of the emerging market bond rally to allow it to provoke the long and heated debate that preceded the recommendations, without disturbing yields. That kerfuffle set the scene for the markets to more readily accept the relatively modest proposals that have now been issued.

The major point for Warsaw, however, is to help the government's fiscal management efforts. Like


Central Europe

CEE peers Slovakia and Hungary, as it battles the crisis Poland has been gazing wistfully at the huge capital flows the private pension system diverts into private hands. The finance minister has been a particular critic of the 1999 reform, blaming it for boosting public debt.

By way of contrast, the Czech Republic introduced its first private pensions system at the start of the year. While it has certainly not caught the population's enthusiasm yet, Prague is moving to circumvent the long-term liabilities that the traditional pay-as-you-go system stores up. Yet the assets in private hands have proved too tempting for its neighbours.

Reiterating that OPFs lost PLN20bn during the most recent sell-off on the WSE, although he admitted that the private funds have had a positive impact on economic growth, employment and the savings rate, the finance minister laid the blame for destabilization of public finances squarely at their door once more.

"We want to curb the growth in public debt caused by the pension system," Rostowski added, reports Bloomberg. "If we hadn't introduced the capital pillar in 1999, our public debt would be below 40% of GDP, less than the Czech Republic's, and our debt service costs would also be lower."

Poland's state debt stood at just over the constitutional limit of 55% of GDP in 2012. Having complained during the recent emerging market bond rally that the constraints were preventing it taking full advantage of record low borrowing costs, Warsaw has been trying to engineer more flexibility by juggling accounting methods of state debt, and on June 26 the finance ministry also suggested it will push for changes in the rule.

As analysts at Erste Bank point out however, whatever tinkering Warsaw performs merely kicks the bigger issue - how to cover the cost of an ageing population down the line - into the long grass. What the current government takes out

of the pension system now to help it through the crisis, future administrations will have to find to cover liabilities. "There is no free lunch related to this move," they note, "due to equivalently increased future liabilities. These will become a problem only in the future, however, and they will be magnified by pressure from an ageing population."

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Hungary set to plough HUF100bn into cooperative bank network

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Hungary is set to pump HUF100bn (¤335m) into the state-controlled cooperative bank network Takarekbank, as the government looks to boost lending and extend the role of the state in the country's banking sector. Budapest says it plans to sell unnamed state assets to power the plan.

Prime Minister Viktor Orban's ruling Fidesz party will spend the cash to "reorganize" the country's cooperative banks, a government spokesman told MTI on June 24, according to Reuters. Andras Giro-Szasz told the news agency the government will find the cash by selling state assets. However, he offered no details on the reorganization, nor on which assets might be sold to finance it. Market speculation however, instantly turned to the state's 21% stake in energy giant MOL.

The banks remain key for the populist Fidesz, which began hammering the foreign-dominated sector as soon as it took power in 2010, leveraging the anger over the banks' role in the global crisis to help push through a high emergency tax. That has been followed by further levies, as well as schemes forcing them to take losses on foreign currency loans. Unsurprisingly, the banks have pulled their heads in, and lending activity has dropped through the floor, helping to plunge the country into recession.

Desperate to maintain a constitutional majority at next year's parliamentary elections, Orban needs to turn that around. The urgency to offer the electorate some brighter prospects has already sparked a scheme from the central bank to push cheap loans. The Fidesz-controlled Magyar Nemzeti Bank rolled out the Funding for Growth Scheme on June 1,

providing 0% refinancing loans worth HUF750bn to commercial banks to lend to small businesses at a margin of no higher than 2.5%.

Takarekbank, the umbrella group for Hungary's savings cooperatives, is at the forefront of the scheme, despite currently holding just 5% market share overall. However, its wide network of 1,600 outlets - constituting close to 40% of bank branches in the country - helps make it an ideal vehicle for the conservative Fidesz to make its mark amongst its core electorate beyond the major urban centres.

The bank has long been identified by Orban's government as key to increasing the state's role in banking. Late last year, the PM said that "at least 50%" of the country's banks should be Hungarian-owned. While, a couple of small-scale deals involving sales by foreign owners have gone through since, and the country's biggest bank OTP claims to be negotiating with more than one potential seller, there's a long way to go to reduce the influence of the major Eurozone groups, which currently control around 90% of the market.

Last year, state development bank MFB bought the 38% stake in Takarekbank held by Germany's DZ Bank. The local cooperatives hold a 56.6% majority. The acquisition was part of a strategy announced by Orban for the state to fill the lending void. "It is not the MFB group's job to move instead of commercial banks," CEO Laszlo Baranyay said as the development bank put in its offer for the Takarekbank stake in May 2012. "But there are times when - for a transitionary period - we need to take their place."

Central Europe


Southeast Europe

Berisha concedes crushing defeat in Albanian election

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Following days of silence, Albanian Prime Minister Sali Berisha put growing worries of the potential for violence to bed as he finally accepted the inevitable late on June 26, conceding that his alliance of rightist parties suffered a huge defeat in the recent parliamentary elections.

Under pressure from the EU to respect the result, Berisha appeared in public for the first time since the June 23 poll to try to put some gloss on a humbling defeat. The vote saw the long-time PM's challenger - former Tirana mayor Edi Rama and Socialist Party-led coalition - win 84 of the 140 seats in parliament. The rightist alliance, headed by Berisha's Democratic Party, managed just 56.

"We lost this election and all responsibility for the loss falls only on one person, me," Berisha told supporters. "These have been the most free and fair elections Albania has ever held and I congratulate my opponent on his victory."

Rama's party will be the biggest bloc in the parliament with 67 seats; another 15 went to the Socialist Movement for Integration under former premier Ilir Meta. Two small groups, the Human Rights Party - representing the country's ethnic Greek minority - and the Christian Democratic Party, each won a single seat.

Berisha's failure to publicly acknowledge the victory of his bitter rival, and end of his own long-term reign, had raised concern that things could turn nasty, as they have in the past. "We continue

to calmly wait for our opponent to accept defeat," Rama told supporters late on June 25, as crowds chanted, "victory, victory."

This was probably Albania's freest election since the end of communist rule over two decades ago, and the EU had stressed the conduct of it was crucial to the country's hopes of joining the bloc. However, there were fears that Berisha - who has dominated Albania's political scene since the end of communism in 1991 and was gunning for a third term in power - and his supporters would struggle to accept defeat. That raised fears of a repeat of the violence that stalked the previous election in 2009, which led to years of bitter rivalry between the PM and opposition leader Rama, resulting in political paralysis.

Reflecting that bad blood, international observers said the election, while mostly free, was marred by an atmosphere of political mistrust, as well as incidences of violence. The Organisation for Security and Co-operation in Europe's (OSCE), which sent 380 observers to join about 900 local and international peers, said in a statement that the vote went "relatively well, albeit with some procedural irregularities."

However, the slow counting process – due to delays in appointing officials – was criticised. The election was "substantive" and offered real choice, the OSCE noted, but the atmosphere of mistrust between the Socialists and Democrats had "tainted the electoral environment and challenged


Southeast Europe

the administration of the entire electoral process."

A fight over the composition of the Central Election Commission also marred the run-up to the vote, while the most serious incident came the day of the poll itself, as an opposition activist was killed and a Democrat candidate wounded in a shoot out in the northwestern Lac region.

Rama, a towering former basketball player and modern artist, has promised to do for the corrupt and rusting country what he did for the capital Tirana when he was mayor, which was to revitalise the local economy and spruce up the environment. He says he will reboot Albania's EU bid - which would be helped by a good report on the election

from the OSCE - and make the country more business friendly by easing the burden on SMEs and introducing a progressive tax system.

Corruption, though, remains the thorniest problem. Albania ranks 113th on Transparency's International's most recent survey. According to The Economist, in a recent interview Rama claimed the problem is that the whole system has been corrupted during Berisha's eight years in power.

"If you put Albanian civil servants in Germany they will not be corrupt because there is no space for it," he said, "but if you bring Germans here, after a few months they would be. It is not about people but the system."


Southeast Europe

Bulgarians back on the streetsSandy Gill in Sofia

With quite remarkable speed, the new government of Bulgaria is unravelling.

It's less than a month since Plamen Oresharski – the socialist-aligned finance expert touted as a "technocrat" and "the Bulgarian Mario Monti" – assumed the premiership. He did so in the wake of an election campaign precipitated by protests in February over high electricity bills, and dominated by revelations about wiretapping and other alleged iniquities by senior members of the then ruling party GERB (Citizens for the European Development of Bulgaria).

Less than a month in power and Oresharski has already managed to shoot himself in the foot with an appointment of spectacular ineptitude, provoking mass demonstrations that, despite the reversal of that appointment, have now continued for 12 days and prominently feature demands that the government should resign. While there's no sign of a resignation yet, few Sofia pundits are betting on this government's longevity and some think it may be gone in weeks or even days.

Poisoned chalice It was never going to be easy; not with the parliamentary constellation produced by elections on May 12. With almost a quarter of voters opting for parties that didn't clear the 4% barrier needed to enter parliament, the four that did qualify for the 240-member unicameral assembly were a problematic bunch.

GERB had the largest contingent of 97 MPs, but was regarded as untouchable by the other three. The former communist Bulgarian Socialist Party (BSP) and the liberal and mainly ethnic Turkish Movement for Rights and Freedoms (MRF) were amicable enough, and had 120 members between them – just enough to form a government, but not to ensure the parliamentary quorum needed to allow such formation to take place. With the fourth party being the ultra-nationalist and rabidly anti-

MRF party called Ataka, that was a bit of a problem.

In the end, Ataka's temperamental leader Volen Siderov provided the vote needed for the quorum, on the grounds that a government, any government, was needed; that GERB had to be kept out; and that he would be watching the government's doings. With GERB talking gleefully of a "three-way coalition" and a "political Frankenstein" – and many nationalists dismayed at Siderov's actions – the Oresharski government was voted through.

Talked up in advance as "technocratic" or a "government of experts," the catchword mutated in the last few days to "hybrid" – partly expert and partly political. While a good many ministers weren't political figures, some appointments certainly were. Oresharski himself, once a right-winger, is a member of no party nowadays – and, arguably, isn't much of a politician – but he's been effectively aligned with the BSP since 2005. And, to take just one example, Economy and Energy Minister Dragomir Stoynev is not just a close associate of BSP leader Sergei Stanishev, but also has a background, not in energy, but in social policy – a sphere from which he seems to have been excluded by the claims of MRF heavyweight Hasan Ademov.

While reviews of the cabinet were mixed, however, the big personnel faux pas came a fortnight later on June 14, when the government proposed its candidate for the State Agency for National Security. Known by its Bulgarian acronym of DANS, this is often – if imprecisely – described as the "Bulgarian FBI" and had just been enhanced by a law controversially transferring the police agency dealing with organised crime to its jurisdiction. The candidate was MRF-aligned MP Delyan Peevski and the result was uproar. It was partly a matter of Peevski himself. Aged just 33, his experience outside parliament had been as a rather junior state investigation official and, briefly, a deputy minister who resigned – though


Southeast Europe

was then cleared – over a corruption scandal. But in a year where "oligarchy" has been a favourite boo-word, his oligarchic credentials were rather more impressive. Along with his mother, Irena Krasteva, he controls the powerful New Bulgarian Media Group (NBMG). And NBMG is generally assumed to have the financial backing of the Corporate Commercial Bank – a bank much criticised of late for its more-than-healthy share in state enterprise deposits. Even Peevski's looks didn't work in his favour: if a Hollywood director were seeking to cast a fearless upholder of law, it's a fair bet that Peevski wouldn't make the shortlist.

But it was partly also the way the appointment was carried out. Parliament voted Peevski into the post just a quarter of an hour after he had been proposed, with no discussion whatever – let alone public consultation beforehand – and he was sworn in immediately. This effect was admittedly helped by a GERB boycott of parliament, in which it said it has been denied its fair share of committee posts. But the uncritical silence of the government's supporters was shocking. And, duly, shocked.

The same day, protests began on Bulgaria's streets, mobilised by social media – a Facebook group opposing Peevski had acquired 58,000 members within hours. Daily protests continued, with the blessing of President Rosen Plevneliev, one of the few politicians in Bulgaria to enjoy much respect nowadays. He declared that the government had "exhausted its credit of confidence" with him – no mean feat for an administration less than three weeks in office.

Signs of a climb down began to appear almost immediately. Peevski professed himself willing to withdraw if asked to do by the governing parties. Though there were mumblings about Peevski's apparent quality of "determination" standing him in good stead and the desirability of having an "outside expert" in the DANS post, Oresharski was soon acknowledging that "we underestimated the controversial image that has been established for Mr Peevski". And so on June 19 parliament duly reversed the decision to appoint him. To date, there's

been no new appointment and, ironically, there's some legal question as to whether Peevski – having been sworn in and served as DANS head even briefly – can now resume his seat in parliament.

But the retraction hasn't stopped the daily demonstrations, or reduced their size. As with February's protests over electricity prices, their scope has broadened: key demands include the resignation of the Oresharski government and electoral reform. Social observers have noted the presence of the young, the educated and the middle class among the protestors. And, though the 1990s anti-communist slogan of "Red trash" has been prominent among the chants, the atmosphere has been remarkably good humoured and peaceful, with children and even pets brought along by protestors. Dismissive remarks by a BSP-aligned psychology professor led to some protestors gleefully bearing signs identifying them as "internet lumpen."


Southeast Europe

EU recommends green light for Serbian accession

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Serbia's efforts to normalise relations with its erstwhile province but now independent Kosovo look to have paid dividends, as EU ministers on June 25 recommended giving the Balkan country a start date for accession talks.

The decision - which must still be formally ratified by EU leaders at their summit meeting on Friday, June 28 - will mean talks with Serbia would begin in January at the very latest, but perhaps "as early as October," according to EU Enlargement Commissioner Stefan Fule.

Defying the cynics, Kosovan and Serbian leaders managed to stitch together an 11th hour EU-brokered deal on April 19 over normalizing relations. There had been worries that a deal was beyond the two foes. The province of Kosovo unilaterally declared independence from Serbia in 2008 after Nato helped stopped a civil war several years before between the ethnic Albanian and Serbian populations. And while many countries recognise Kosovo as an independent country, Serbia still does not and has been holding on through various means to the Serb-dominated north of the country. About 140,000 ethnic Serbs live in Kosovo out of a total population of 1.7m; about a third of them live in the north. And it was the fate of those Serbs in the north that was the main sticking point in the talks.

Unsurprisingly given the region's history, the deal is complicated, but basically says that while Serbia does not recognise Kosovo as a state, it accepts its legal authority over the whole territory. In exchange, the Kosovo authorities have conceded a level of autonomy to four Serb-controlled areas of northern Kosovo, which will form one large community. This region will then receive broad rights and authority in issues pertaining to police, justice, education, health care and culture.

Kosovo too has gained from deal hashed out with Serbia; European heads of state recommended starting talks with Kosovo on an accord that would bring closer ties and could eventually lead to EU membership talks starting. "This is a good day for both countries," Fule said. "They have exceeded our expectations in putting their relations on a new footing. And I see this decision today by the member states as another proof of the credibility of the enlargement process."

However, no one is under any illusions that the process will be quick. Croatia is due to become the 28th member of the EU on July 1, but to get there it has taken the ex-Yugoslavian state almost eight years since it started the accession talks.


Opinion

David O'Byrne in Istanbul

It's a safe bet that few, if any, Turkish politicians are familiar with "Healey's first law of holes", the proverb attributed to former UK chancellor Denis Healey that states, "If you find yourself in a hole, stop digging." More simply, don't make an undesirable situation worse, by continuing to do whatever caused it.

For confirmation we need look no further than recent events in Turkey, where protests by a small group of young environmentalists against the imminent destruction of the tiny Gezi Park in central Istanbul, spiralled into countrywide protests that have seen hundreds of thousands take to the streets in demonstrations against the government of Prime Minister Recep Tayyip Erdogan, which left five dead and thousands injured.

The destruction of the park quickly became a rallying point for opposition groups unhappy at what they see as Erdogan's increasingly authoritarian Islamist rule, which has all but gagged the media, and placed draconian restrictions on the sale and distribution of alcohol.

Sadly, instead of taking note of Healey's maxim, Erdogan and his officials have chosen instead to blame the protests on an "international conspiracy," with the PM personally embarking on a series of mass rallies around Turkey.

Sounding shrill Employing a worryingly aggressive rhetoric spiced with references to the Sunni Islam of Turkey's

majority community from which he draws his support, Erdogan has blamed the protests on "drunks and illegal groups" within Turkey, manipulated by a mysterious global conspiracy run by the international media and a previously unknown group he has described as "the interest rate lobby", utilizing Twitter.

As has often been observed with Erdogan, his rhetoric is aimed largely at the core support for his Justice and Development Party (AKP), support that Energy Minister Taner Yildiz confirmed in a recent interview is not "well educated." In other words, a devout Muslim constituency that is unlikely to look favourably on "drunks", organisations that charge "interest" or indeed a foreign woman with the first name "Christiane," and are all too ready to believe in nefarious foreign conspiracies.

This is largely expected for Erdogan himself, but it could be hoped that senior ministers might opt to "stop digging." Alas, no.

The worst allegations were quickly repeated by several senior ministers and other officials both in speeches and, ironically, via their own Twitter accounts. As well as by much of Turkey's "mainstream media," which is either under direct government control, or owned by companies with close links to the government.

Allegations against the international media include Erdogan personally naming CNN and the BBC, Ankara mayor Melih Gokcek launching a bizarre

Turkey moves from tragedy to farce


Twitter campaign denouncing BBC reporter Selin Girit is a "British agent", and the daily Takvim printing a bogus interview with CNN anchor Christiane Amanpour, in which she "confesses" that CNN's editorial board was trying to "destabilize Turkey for international business interests".

Time to stop digging now perhaps? But no, this is barely scratching the surface, with senior ministers including Ali Babacan (deputy PM with responsibility for economy), Mehmet Simsek (finance minister) and Zafer Caglayan (economy minister) all repeating allegations that behind the protests lies the mysterious "interest rate lobby" - a group that none of the three has yet felt moved to identify.

Worse even than this has been the tweeting of senior ministers and officials clearly unaware of Healey's first law, with Simsek becoming involved in a series of increasingly bizarre "twitter spats," including one with Harvard Economics professor Dani Rodrick over whether Turkey's GDP had more than tripled in real terms over the past decade (Simsek) or was just 43% higher (Rodrick).

Stranger still have been increasingly shrill statements and tweets from Turkey's minister for EU affairs, Egemen Bagis. One statement released on June 17 in response to criticism by the European Parliament of the brutal tactics employed by Turkish Police in suppressing the protests claimed to offer reassurance of Turkey's continued commitment to the fundamentals of democracy. Instead, it offered the bizarre warning that, "We know the national and international players in this plot," and opining that, "Turkey has the most reformist and strongest government in Europe and the most charismatic and strongest leader in the world."

More bizarrely, Bagis chose to remind Turkey's European critics that, "Turkey is not a banana republic" - one of a shrinking number of criticisms which it appears has yet to be levelled. At 208,000 tonnes in 2012 (marginally up on 2011), Turkey's own banana production is minimal and the country is demonstrably not located in either central or South America, with which the term is normally

associated. Unless of course he was referring to a broader definition of a banana republic, which might be one ruled by a politico-economic oligarchy that controls and exploits the country's economy for its own benefit, which again has yet to be suggested - at least by the European Parliament.

Again time to stop digging perhaps, but no Bagis chose to end his statement with a warning against the EU adopting a stance that "may lead Turkey-EU relations to an irreversible point." A statement that in terms of the Healey maxim could perhaps be described as hitting bedrock.

Other factors As the mass protests against Erdogan's government show no sign of abating, it's worth bearing in mind that the AKP can rightly claim credit for stewarding the political and economic stability that has led to the most sustained period of economic growth in Turkish history; one achieved while much of Europe has been in recession. But it's also worth noting that the AKP did not instigate the revival, rather it inherited it in the form of the deal brokered with the International Monetary Fund by the then-outgoing economy minister, Kemal Dervis.

Nor are they responsible for the dynamism of the underlying economy, which can rightly be claimed not by the government but by Turkey's increasingly well-educated business and technocratic class, whose abilities and aspirations have been the driving force both behind the resurgence of Turkish industry over the past decade, and less obviously behind the recent protests.

A recent survey of 137 company CEO's by Turkey's Ekonomist magazine revealed that over 90% supported the protests to some extent and that almost half had themselves visited the core protesters in Istanbul's Gezi Park, where as numerous other media reports confirmed they were joined by bankers, brokers, architects, engineers and others from across the spectrum of Turkish society.

A fact that Erdogan might do well to take note of and stop digging.

Opinion


Weekly Lists

CNPC to join Yamal LNG UralSib

Novatek announced on June 21 that it has signed a framework cooperation agreement with China's CNPC. Under the agreement, CNPC plans to acquire 20% in the Yamal LNG project, with Novatek keeping 60% and Total, 20%. CNPC and Novatek also plan to sign a long-term contract under which CNPC will buy at least 3m tpa of LNG from Yamal LNG. Finally, CNPC will assist Novatek and Yamal LNG in securing financing for the project from Chinese financial institutions. The acquisition is expected to be closed by 1 October.

The same day, President Vladimir Putin approved the gradual liberalization of LNG exports. The energy minister plans to start working on the terms of exports immediately.

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.

Ukraine eyeing $25bn shale gas investment from ChevronXinhua

Ukraine is hoping Chevron Corp. will invest $25bn to develop the potentially large Olesska shale gas deposit in the west of the country, a senior energy official said on June 25.

"This sum exceeds the amount of foreign investment that Lvov and Ivano-Frankovsk regions have attracted over the 20 years of Ukraine's independence," Volodymyr Ignashchenko, adviser to Ukraine's minister of ecology and natural resources, said.

Poland's Baltic Canal Plan Makes ComebackWSJ

Russia ready to finance South Stream through SerbiaReuters

Poland's public debate over the need to build a canal that would reduce Russian influence over its shipping trade has resumed after a break of several years amid a political campaign of one of its supporters.

Plans for a new canal giving Poland access to the Baltic Sea without crossing Russian waters were first mooted by the right-leaning government of Jaroslaw Kaczynski, who took a combative stance toward Russia when his Law and Justice party ruled Poland in 2005-2007.

Russia is ready to fully finance the section of the South Stream gas pipeline through Serbia, and the Russian partners have accepted the proposal on the extension of the section through Serbia i.e. construction of a southern leg of the pipeline, Serbian Minister of Natural Resources, Mining and Spatial Planning Milan Bacevic told Tanjug.

Bacevic said that he was assured by the Gazprom Board of Directors that Serbia should not worry about the expenses of the South Stream construction since it has been mostly agreed how Russia can help Serbia not to incur further debts.


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.

Rosneft considers buying Bashneft

Alfa Bank

According to Vedomosti, Rosneft is considering buying Bashneft. According to some sources close to Sistema (a major shareholder of Bashneft), Rosneft made an appraisal of Bashneft, though it has not made an official offer yet.

On the positive side, the acquisition of Bashneft, with an $11.2bn mcap, may be financed from a $60bn advance payment to be received from CNPC under the terms of a contract signed last week. Furthermore, Rosneft would gain exposure to Bashneft's Trebs-Titov greenfield project in Timano-Pechora, which is expected to go on stream by the end of 2013. Bashneft's modernized and efficient refinery fleet is another valuable asset that may be attractive for Rosneft, increasing its refining cover from 44% to 52%.

On the negative side, unlike in the case of TNK-BP, it is hard to find any plausible synergies coming from this deal for Rosneft, while the unknown acquisition price implies a risk of some value-destruction for Rosneft shareholders. Furthermore, we think the takeover of one more privately-held oil company by a Russian state giant will only deteriorate the investment case for the entire Russian oil industry, and draw a lot attention from the antimonopoly watchdog.

OMV plays down report of Czech exit

Reuters

Ukraine’s Vetek buys United Media Holding

bne

Austrian energy group OMV has no plans to quit retail markets within reach of its refineries, it said on June 24, playing down a report it was in talks to sell its Czech gas stations to Unipetrol.

Czech weekly magazine Euro reported that Czech group Unipetrol, which wants to boost its share in the domestic retail market as part of a $1bn investment plan, had held talks with OMV over the past several months.

United Media Holding Group (UMH) signed an agreement with Vetek over for the sale of a 98% stake in the media holding, it announced on June 21.

It is planned that the deal will be closed in the first quarter of 2014. Until the final closure of the deal, the management of the UMH Group will stay unchanged. A 98% stake in the company has been passed to an escrow agent in the UK.



Weekly Lists

RBI shareholders authorise capital increase VTB Capital

On June 26, RBI’s AGM approved 2012 dividends at ¤1.17/share, as had been announced before. Also, shareholders have authorised the management board to increase the group’s shareholder capital by up to 50% (98m shares, or ¤2.2bn at the current market price) within the next five years (subject to supervisory board approval).

For an increase of up to 10% with a contribution in cash, shareholders agreed that the statutory subscription rights of shareholders can be partly excluded. Those rights shall also be excluded in the event of a capital increase through contributions in kind. Shareholders have authorised the management board to issue convertible bonds for a total nominal amount of ¤2bn within five years.

Poland's banks - a tax shocker ahead?

FT

Hungary replaces tax on municipal debt with one off charge on FTTErste

Polish bank earnings are set to take a hit next year after the lower house of parliament approved a new quasi tax, which could take away up to 8% of the sector's earnings.

MPs voted on June 21 to approve a proposal to create a stabilization fund that will be used to bailout banks threatened with insolvency. The fund will be managed by the Bank Guarantee Fund (BGF), which was set up in February 1995 to guarantee bank deposits and prevent banks from going under.

On June 26, the Hungarian government gave up its plan to introduce a 7% tax on municipal debts taken over by the central budget, due to the possibility of selective default. However, later in the day, the government announced a new one-off tax.

The new tax is 208% of the transaction tax paid by the banks between January and April. This means approx. an HUF 75bn tax, compared with the original HUF 40bn for the banking sector and an approx. HUF 16bn tax for OTP (Hold), which is higher than the original proposal by HUF 6bn. This also means an additional HUF 400mn in the case of FHB (rec. under review). The banks would have not paid any tax in the case of the original proposal. The tax will be abolished at the end of the year.



Weekly Lists

German IFO survey shows first improvement in business outlook for four months

Nordea

Further signs of the German economy regaining momentum were provided by the IFO survey's headline index rising for a second successive month in June. The improvement comes soon after Markit's flash PMI likewise signaled a second consecutive upturn in the rate of growth.

The IFO's main Business Climate rose from 105.7 in May to 105.9 in June, rising further from April's recent low to reach a three-month high. The index is a simple average of two sub-indices, one of which measures current business conditions and one looking at companies' future expectations. It is the latter which, counter-intuitively, has historically had a closer relationship with official economic growth data, acting as a coincident indicator of GDP. It is therefore reassuring to have seen this future expectations index rise for the first time in four months in June.

Hungary continues easing cycle bne

Slovakia set to miss tax collection target as economy slows Bloomberg

Hungary's central bank continued its easing cycle on June 25, cutting its benchmark rate by 25bp to 4.25% as expected. In its statement, the MPC heavily hinted that the outlooks on both inflation and growth mean it will cut again in July, however, it also suggested that the room for manoeuvre is limited by the pullback on financial markets.

In particular, it was noted that the council's new inflation report – which dropped the 2013 CPI forecast by a full 0.5pp to 2.1% - clearly did not incorporate another round of energy tariff cuts for households, as the government has suggested is in the works. On top of the pressure on EM currencies and bond yields, with inflation now expected to spike to 3.2% in 2014, and growth to push to 1.5%, analysts suggest after a move to 4%, the rate cuts will be finished for the year.

Slovakia is set to miss its target for tax revenue more than previously projected, putting strains on the contry's plan to cut the budget deficit below the European Union's limit as early as this year.

Tax revenue this year will probably be ¤347ms ($452m), or 0.5% of gross domestic product, lower than projected four months ago, the Finance Ministry said in a revised forecast e-mailed from Bratislava, Slovakia. In 2014, the shortfall will reach 0.8% of GDP and continue widening to 1.3% in 2016.



Polish stocks' "pension premium" in danger

bne

Poland's stock market has long enjoyed a "pension premium", the higher share price that results from pension funds pumping cash into local shares. But that premium is now in danger as the government pushes reform of the second pillar, which it blames for driving up public debt.

"Over the past 14 years, the pension funds have helped to shape the Polish capital market, increasing its liquidity and attractiveness for foreign investors," note Wood & Company analysts. They worry that dramatic changes to the pension system could have negative consequences for Polish equities.

Warsaw revealed a three option reform package on June 26, with a final version due in the next month. Wary of the effect on the financial market, the government offered relatively modest options – which saw the WSE recover from the 10-month low it slumped to just ahead of the announcement – but the strongest of the recommendations could still essentially scupper the country's private pension investors.

Weekly Lists

TNK-BP Holding shareholders file complaint against Rosneft chief

bne

TNK-BP Holding's minority shareholders have filed a complaint against Rosneft President Igor Sechin over allegations that he manipulated the stock market during the takeover of TNK-BP, Vedomosti reported on June 25, citing shareholder Alexander Strizhko.

Strizhko said statements made by Sechin caused TNK-BP Holding's share price to drop from RUB90 at the start of the transaction, to less than RUB37 by the end, wiping over $40bn off its market cap.

TNK-BP Holding shares should now be exchanged for Rosneft shares at their October price, or else Rosneft should buy the TNK-BP shares at the price originally offered to majority shareholders, Strizhko insists.

Central European bourse merger talks gain "momentum"

WBJ

The CEE Stock Exchange Group (CEESEG), which controls the Vienna Stock Exchange and others, is interested in the further consolidation of stock exchanges in the region, the company's representatives told the Polish Press Agency (PAP). In the company's opinion, cooperation with the Warsaw Stock Exchange could attract more investors and increase turnover. The two bourses revealed in April that they were in preliminary merger talks.

CEESEG chief executive Michael Buhl told PAP that talks with the WSE have "gained momentum," but time to discuss key issues is necessary. "We must work out a common concept that will be advantageous for all shareholders and for the market," he said.


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