Central & eastern Europe

Many see foreign direct investment as a key prerequisite for an economic breakthrough in Ukraine. Yet, as this Financial Times article reports, political and security problems in Ukraine prevent FDI from climbing back to its pre-war levels. With the onset of the conflict with Russia, FDI flows to Ukraine experienced an unprecedented decline, falling from $8.5bn in 2012 and $4.5bn in 2013 to just $410m in 2014. Despite a certain rebound, driven by the recapitalisation of foreign-owned banks, FDI has so far failed to return to previous levels.

It is important to note, though, that foreign investment in Ukraine has often served as a veil for local (and sometimes Russian) big business, which uses special purpose entities in Cyprus and other tax havens to secure special legal treatment, conceal the ownership of assets and minimise taxes.

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By Nick Kochan

The 250,000 protesters on the streets of Bucharest yesterday will not welcome it, but Romania’s new government are to be congratulated for reversing what has become a national obsession with corruption.

The announcement that they are planning to decriminalise some forms of official misconduct, pardon some 3,000 people convicted of minor acts of graft –the legal measure covers those who stole less than $50,000 from the state – and release them from jail not only frees up the prisons but sounds a warning to its over-zealous National Anti-Corruption Directorate (DNA). Read more

Donald Trump won the US election on a promise to ‘make America great again’. Now he is in the Oval Office, he will actually have to make good on those promises. He will need to create new jobs and improve living standards for America’s ‘left-behind’ who turned out en masse to vote him in. Trump appears to believe that the quickest way to achieve this is by revamping and restructuring the US’s global economic relationships, particularly with China.

Inevitably, such an upheaval will cause geopolitical tensions and Britain must be careful not to get sucked into a vortex of trade warfare. However, if we play our cards right, the process could provide a fantastic global opportunity for the UK. Read more

Vladimir Putin will look back on 2016 as an annus mirabilis. Isolated and straining under the impact of western sanctions 12 months ago, the president has managed to transform Russia’s international fortunes thanks to an extraordinary run of good luck. Brexit, the migration crisis and the current surge of right-wing populism have enfeebled Europe and weakened its resolve to maintain a tough collective stance towards Russia. Putin’s military intervention in support of Bashar al-Assad has put his ally within sight of victory in the Syrian civil war. Best of all, Donald Trump is about to enter the White House on a promise to repair US-Russia relations on the Kremlin’s terms. On every front, the tide of events appears to be flowing strongly in Putin’s direction.

The new mood was apparent last month when he met Rodrigo Duterte, his counterpart in the Philippines, at the Asia-Pacific summit. Duterte used the occasion to complain about western “bullying” and declared his desire to be part of a “new order” led by Russia and China. When you consider that the remarks come from the leader of a country that has been a mainstay of the US alliance system in Asia since the early years of the Cold War, it is clear that something significant is afoot. Putin is managing to extend Russia’s diplomatic reach beyond its traditional constituency among the world’s radical and anti-American regimes. Read more

By Nick Kochan

The election of a majority Social Democratic PSD party in Romania this past weekend gives the country a chance to push the reset button on its relations with foreign investors.

After a year when the government has been drawn into fruitless squabbles in commercial courts and arbitrations with no less than five international companies, now is the time to reassure investors that Romania is open for business. The time to close the book on introspective and opaque government is long overdue.

Energy companies have been in the forefront of these battles with Romanian officialdom. So the government took Enel, the Italian energy company, to court over a breach in a privatisation contract but ended in July 2016 facing a €1bn bill. E.on, the German energy company, won an arbitration dispute in Paris and the government was forced to pay its legal costs. Read more

By Ariel Cohen, Atlantic Council

The mood is festive in the Russian capital, and expectations are high that Donald Trump’s elections may turn a new page in the difficult relationship between Moscow and Washington.

The death spiral of US-Russian ties stretches back through the Barack Obama years to George W. Bush’s second term, when Russia invaded neighboring Georgia. Things got as bad as during the darkest days of the Cold War, but now the time may have come to reverse course.

Mr Trump, Moscow’s logic goes, has a warm place in his heart for Russia’s long-serving president, Vladimir Putin. He expresses realpolitik instincts compatible with Putin’s worldview. Read more

One of the most striking features of the new cold war has been the aggressiveness with which the Russian state has turned the institutions of openness into weapons against the west while simultaneously denying its opponents the use of equivalent institutions at home.

Every facet of democratic life, from free speech to the independence of civil society, has been manipulated as part of the Kremlin’s strategy of information warfare. The same goes for western systems of justice. The rule of law doesn’t apply in Russia, especially when the interests of the governing elite are at stake. Courts function as an extension of Vladimir Putin’s power, convicting and sentencing his enemies on command. Yet the Russian state is able to avail itself of the west’s independent legal systems on the same basis as everyone else, and frequently does so to pursue its victims on foreign soil. Read more

The cornerstone of Vladimir Putin’s strategy for political longevity has been his projection of Russia as a besieged fortress fighting off the menacing encroachment of the US and other western powers. By presenting himself as the only leader capable of protecting Russia from those who seek to undermine her, the authoritarian president has skilfully managed to distract his people from the rapidly deteriorating economic conditions that would doubtless sink the leader of a more democratic country.

But the cost of maintaining a war footing is considerable, with massive spending on defence depriving the rest of the economy of much needed state support. Putin understands this well and Donald Trump’s election might provide him with an opportunity to rebalance public expenditure. Read more

Ukraine’s track record of massive corruption in energy is a sadly familiar story. Billions of dollars have been siphoned off annually into political largesse and party war chests. Successive administrations have proclaimed reform even as insiders fought over energy franchises. Unless corrected, the energy sector will continue to corrupt Ukrainian politics and make the country vulnerable to external threats.

Ukraine’s energy sector is also crucial to its neighbours. Although its advantages in energy transit have been eroded, Ukraine still transports nearly half of Russia’s gas exports to Europe, at least until additional bypass pipelines – Nord Stream 2 and Turkish Stream – can be built. Russia has steadfastly built new pipelines to bypass Ukraine, and employed transit deals to compromise its leaders and to demonstrate to European customers that Ukraine is an unreliable transit partner. Read more

Investors in Ukrainian assets have been well rewarded on the back of the country’s improved economic performance. The local currency UX equity index is up 22 per cent year to date while the Euro denominated WIG-Ukraine Index is 33 per cent higher. That compares with a 15 per cent gain in the MSCI EM Index over the same period. Debt instrument investors have also shared in the gains with, for example, the yield on Ukraine 2020 sovereign debt dropping from 9.8 per cent at the start of the year to 8.2 per cent in early October. The performance of some corporate issues has been even better with, for example, the yield in the MHP 2020 Eurobond dropping from 12.1 per cent to 9.4 per cent in the same period.

The question now is whether the solid progress achieved in the economy over the past 12 months can continue, and drive asset prices even higher, or whether Ukraine is about to enter a more difficult and dangerous phase that may disrupt the recovery and again boost the perception of investment risk. Read more

As Ukraine prepares for the annual IMF/World Bank meetings this weekend, its delegates will be acutely aware that the central topic they will be pressed on in Washington is the future of the reform process in their country. This is because Ukraine continues to send mixed signals, when clarity is needed more than ever.

Only days after the IMF approved the third tranche of its support package for Ukraine on September 14 came a government move to take control of Ukrtransgaz, the company that runs the gas transit infrastructure that takes Russian gas across Ukraine to Europe, away from its parent Naftogaz and place it under the direct control of the economy ministry. Read more

By Septimus Knox, Alaco

Remote, long-forgotten industrial towns rarely make the front pages in Russia, never mind internationally. But for a few days in September Norilsk, home to the world’s largest producer of nickel and palladium, hit the headlines, although for all the wrong reasons.

A chemical spill turned the Daldykan River red, and photographs of the contamination went viral. Norilsk and other so-called monotowns are located in some of the most inhospitable parts of the country. Centred on a single factory, plant or mill, they fuelled Soviet-era industrialisation.

They remain key to Russia’s economy, yet many are now in terminal decline. Read more

Over the past five years Russia has reinforced its dependence on hydrocarbons in exports and in domestic use. It has continued to increase and modernise oil and gas production, initiated a pivot to the east to diversify its export markets, and accelerated construction of transit avoidance pipelines on the European gas front.

Its recent history of championing pipes to Bulgaria and Turkey showcases Moscow’s agility in mixing geopolitics with hydrocarbons. Through the leadership of Novatek, a relative upstart, Russia is fast approaching liquefaction and shipping of LNG in material quantities. By most measures, and despite sanctions, Russia is a formidable force in the extraction and commercialisation of hydrocarbons. Read more

Viktor Orbán’s illiberal administration is preparing for a national referendum next Sunday, October 2.

Supposedly, it’s all about the migration crisis: the Hungarian people will be asked, in a confusing and misleading question, whether they agree to the European Union forcing the mandatory settlement of non-Hungarians in Hungary against the will of parliament.

In fact, in legal terms the referendum is a nonsense. Hungary’s new constitution does not allow a national referendum without a legally binding result.

The whole show is nothing but an attempt to milk the emotional fears of a misinformed people. Orbán’s intention is to strengthen his voter base and mobilise Hungarians against our main international allies, the EU and Germany – using taxpayers’ money to do so. Read more

Tourists steer clear of Brazil, Russia, India and Nigeria because of onerous visa requirements, EM Squared reported last week. But even with easy tourist visas in place, these emerging market giants won’t reach their full potential. The real key lies in enhancing the ease of doing business and developing adequate infrastructure.

Visa policies are certainly a real barrier to tourist arrivals. No matter how beautiful or intriguing your country is as a tourist destination, if you make it too complicated for tourists to visit, they will stay away. That problem is not limited to emerging markets. A few years ago, US Travel Association estimated that the US lost the equivalent of 467,000 jobs due to the difficulty for citizens of primarily Brazil, India and China to obtain a visa. Read more

Nord Stream 2 is a controversial, €10bn gas pipeline project designed by Gazprom, Russia’s state-controlled gas monopoly, which has a 50 per cent stake, and five European companies, each with a 10 per cent stake. The planned 1,200 kilometre dual pipeline will go under the Baltic Sea from Russian to Germany with enough capacity to transport 55bn cubic meters of gas a year.

Yet there is already enough capacity to transport gas from Russia to Europe and the project’s predecessor, Nord Stream 1, is operating at half its capacity. So why is Gazprom embarking on another project? And why is the EU joining in, when Nord Stream 2 will give no access to a new source of supply or a new supplier, and further increase the excess capacity from Russia to the EU? Read more

As political jostling continues about the future of Europe, it is important to remember that there are six countries in the Western Balkans that have firmly tied their colours to the European mast.

Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro and Serbia are all actively working towards the ultimate goal of EU membership. All six have a formal contractual arrangement with the EU through Stabilisation and Association Agreements which are all now in force.

The European Bank for Reconstruction and Development (EBRD), an international financial institution that sees cross-border integration as one of its priorities, fully supports this goal. For the countries of the Western Balkans, EU approximation does not just mean reform and investment. It also represents a vision of lasting peace and prosperity – goals that the EU itself has achieved for its member countries. Read more

Russia is suffering, that much is clear. After two years of dramatically lower oil prices and western sanctions the economy is shrinking, the fiscal deficit is growing and the budget gap is becoming increasingly hard to plug.

Russia is fortunate that its professional central bank has played a key role in stabilising the macroeconomic picture. But still one in seven people – that is, 20m — live under the poverty line, effectively eliminating a decade of economic growth. Since July 2014, the rouble has devalued by more than 50 per cent. Inflation continues to hover around 7 per cent. And the Russian economy ministry itself predicts that that real incomes will fall by 4 per cent this year alone. Read more

When it comes to containing Vladimir Putin’s aggressive posture in Eastern Europe, the conventional wisdom advises strengthening NATO, diversifying Europe’s energy sources, and combating the Kremlin’s propaganda.

There is nothing wrong with any of these recommendations. Yet few things would be as effective in weakening Mr Putin as positive examples of countries in Russia’s immediate neighborhood that have liberated themselves from the shackles of domestic oligarchy and the Kremlin’s influence, and become a success story.

At the moment, only one country has the potential to do that: Ukraine. That is why its economic and political success is not just a matter of a “far-away country” and “people of whom we know nothing,” as Neville Chamberlain used to say about Czechoslovakia. Instead, Ukraine’s success is in the West’s immediate interest. Read more

Timothy AshHow should we read Russia, and Vladimir Putin’s game plan with respect to the US, the west and Ukraine?

My own view is that Putin is in waiting mode, reflected by the fact that Russia has stepped back from further military intervention in Ukraine and seems to be adopting a holding pattern in Syria. In both conflicts Russia would likely have to commit significant military resources to ensure delivery on its strategic objectives, and this side of elections to the Duma (September 2016) and perhaps also the presidency (March 2018) this just presents too many risks. Read more