Euroscepticism in the Czech Republic: A Central European Disaster Or Hot Air?

The rise of euroscepticism in Central Europe has been well documented, particularly in the Czech Republic. Among the nations of the Visegrad Four, anti-EU sentiments have long provided easy fuel for political actors willing to appeal to populist instincts to secure political power, but rarely do such sentiments crystallize into concrete anti-European movements. In the Czech Republic, however, political instability and populist rhetoric employed at the highest level is frequently warned against as a harbinger for a potential earthquake in Czech – and potentially Central European – relations with the EU. But how likely is such an event in real terms?

It is no secret that the Czech Republic harbours one of the highest levels of eurosceptic sentiment in the European Union, a fact which has drawn plenty of analytical attention from outsiders and – particularly in light of the tectonic consequences of the Brexit referendum in 2016 – no end of warnings and extrapolations by parties concerned that a similar ‘Czexit’ referendum could very well take place. In the immediate term, it is certainly justifiable for external investors and third parties to be concerned by Czech euroscepticism as an economic and political risk; Eurobarometer has historically recorded significant levels of discontent with the EU both pre- and post-accession, which has never appreciably declined, and in late 2017 36% of Czechs recorded were unhappy with their status as an EU member, the highest percentage of any EU Member State.

The roots of Euroscepticism

Euroscepticism in Czech is an ongoing study; whilst the country benefits enormously from EU funding, the EU is nevertheless often held as the cause of economic woes by a salient portion of the Czech populace. Grassroots resentment over inequalities in salary between the Czech Republic and neighbour countries (for example, in Germany, where an occupation as sales assistant can yield a salary five times greater than its Czech counterpart) is widespread.

Socially, the story is similar: the advent of Brussels-imposed migration quotas in 2015 was almost universally poorly received in the Czech Republic, where anti-migrant and Islamophobic sentiment is extremely widespread, and to this day the migrant quota debacle has dramatically deteriorated Czech perceptions of EU membership, regardless of the fact that the migration quotas were rejected by the Czech government, and that Czech economy and society continues to benefit from and grow with the aid of EU funding programmes.

Potential outcomes

The EU continues to be scapegoated by Czech politicians seeking support from the eurosceptic vote. In real terms, the consequences of this may be dramatic: persistent whispers at the highest levels of Czech politics calling for a Czexit referendum suggests that Czech euroscepticism could, if unchecked, become the groundswell behind an anti-EU movement that eventually leads to a referendum on Union membership with dramatic consequences.

However, whilst the victory of Czech President Miloš Zeman in the January elections of this year, and the reappointment of Andrei Babiš to the post of Prime Minister were received by European analysts as indicators that euroscepticism is gaining ground steadily, the reality may be quite different. Both Mr. Zeman and Mr. Babiš stand to gain very little from a Czech departure from the European Union; Mr. Babiš in particular is unlikely to follow through with any threatened referendum on Czech membership given his economic interests in remaining within the EU. In particular, however, it is noticeable that both Mr. Zeman and Mr. Babiš have distanced themselves publically from the extreme anti-EU voices within the Czech government, refusing to enter into cooperation with hardline or single-policy parties advocating for EU departure. Following the 2018 presidential election results, only one extreme eurosceptic party entered the Lower House of the Czech Parliament, the SPD (Freedom and Direct Democracy) party under Tonio Okamura.

Ahead of the October 2018 Czech parliamentary elections, the outlook on the future of Czech euroscepticism may not be as negative as has been posited by some analyses. As long as political movers rely upon the European Union’s status as scapegoat – whether in the form of President Zeman’s reprimands over perceived bureaucratic incompetence in Brussels, or Prime Minister Babiš’ invocation of the sensitive subject of migration quotas – to build their support base, Czech euroscepticism will be considered a potential risk to EU-Czech relations and the interests of external actors in the Czech Republic. However, those with the greatest power in Czech politics – although perfectly content to utilise euroscepticism and populism as tools in their political arsenal – are very well aware of the damage a Czech departure from the European Union would cause to the Czech Republic.


Louis is a political analyst and researcher currently based in Prague, Czech Republic. He has worked previously as political advisor in one of the major political groups in the European Parliament, assigned to the Foreign Affairs, Security and Defense and Human Rights committees.

New Regulations For Shipping In Russia Arctic: The Case of Novatek

In early August Novatek, Russia’s largest independent natural gas producer, launched the second train of Yamal LNG even earlier than planned. Although gas production is ahead of schedule, Novatek’s shipping capacities are lagging behind – and there are regulatory factors to contend with as well.

New rules in the Arctic

Since last year, new regulations have been developed for Russia’s Arctic. The Northern Sea Route Directorate, a new overarching authority, was created to take care of the development of regional infrastructure, and manage a nuclear icebreaker fleet. In June 2018, Rosatom won a power battle between different governmental agencies as to who will be in charge of the Northern Sea Route. Vyacheslav Ruksha, a former Director General of Atomflot, Rosatom’s entity, was appointed the new head of the Directorate. The Ministry of Transport upheld the right to grant Russian and foreign vessels permission to sail via the Northern Sea Route. Had the right remained with Rosatom, it could have threatened Novatek’s shipping independence.

Earlier, in December 2017, the federal shipping code was amended stating that the shipping of oil, natural gas, gas condensate and coal which is extracted on the Russian territory along the Northern Sea Route must be loaded to vessels registered under the Russian flag. In light of the ongoing import substitution policy, the amendment aimed to bolster the position of the Russian shipping industry and to limit the involvement of foreign shipping companies.

The new bill would be a major headache for Novatek as it heavily relies on foreign-registered vessels to transport its LNG from the Arctic. Even Sovcomflot’s Christophe de Margerie is registered in Limassol, Cyprus. However, after Novatek’s lobbying, an exception was made to the bill stating that agreements for foreign-registered vessels signed before 1 February 2018 will be allowed to proceed. In addition, the new law defined the Northern Sea Route as the stretch of the Russian Arctic coast between the Novaya Zemlya and the Bering Strait but excluded Murmansk and Arkhangelsk, two major Arctic ports.

These loopholes are of key importance for Russia’s largest independent natural gas producer, Novatek. While the first exception will allow the company to use its fleet of 15 LNG carriers for Yamal LNG, the second exception will help the company to come up with a new strategy for its Arctic LNG-2.

Need for more ice tankers is growing

In early August Novatek launched the second train of Yamal LNG even earlier than planned. By January 2019, Novatek is planning to commence the last third train. The three train LNG terminal is expected to produce 16,5 million tonnes per year (mtpa). In 2022-2025, Novatek plans to start its second LNG terminal – Arctic LNG-2, adding another 20 mtpa. Together, both Arctic terminals will produce more than 55 mtpa of LNG by 2030.

Although gas production is ahead of schedule, Novatek’s shipping capacities are lagging behind. For Yamal LNG, Novatek ordered 15 icebreaking LNG carriers ice-class Arc7 from South Korea’s Daewoo Shipbuilding Marine Engineering. For Arctic LNG-2, approximately the same number of LNG carriers will be needed. Currently, only 3 LNG carriers are in operation, while the rest are set to be delivered by 2020. However, the company will not own any of the 15 carriers.

Novatek’s fleet ownership is divided between Russian Sovcomflot, Canadian Teekay, Japanese Mitsui O.S.K. Lines, Greek Dynagas and Chinese COSCO and LNG Shipping. Sovcomflot, a Russian maritime shipping company, owns only one LNG carrier –Christophe de Margerie. Hit by Western sanctions, Novatek struggled to fund construction of the terminal, let alone its transportation expenses. The costs of Arc7 class carriers are high – $320 million per carrier, resulting in a shipbuilding deal worth $5 billion.

Novatek’s short- and long-term strategies

As the fleet for Arctic LNG-2 should be domestically built, Novatek developed different strategies. In the short term, Novatek is planning to use 5 nuclear-powered icebreakers (60 MW capacity) owned by Rosatomflot. To cope with the production output, two reloading terminals will be built in Murmansk and in Kamchatka where LNG will be reloaded onto conventional tankers. Alternatively, Norway can be used as another reloading terminal. This will allow the optimisation of the logistics: by cutting the distance of expensive-in-usage icebreakers, the transportation costs will be reduced. The first ship-to-ship operation could already start mid-November 2018.

In June 2018, Novatek signed a strategic cooperation agreement with Sovcomflot to develop an effective logistics model on the Northern Sea Route. “Combining our efforts with Sovcomflot, one of the global leaders in navigation in harsh ice conditions, will allow us to achieve maximum efficiency in managing our transportation costs,” said Leonid Mikhelson, Novatek’s chairman.

In the long term, Novatek considers to order LNG carriers with Zvezda, a Rosneft-led shipyard in the Far East. However, experts say that at Zvezda the costs will be 60-80% higher than those made in South Korea and there is no guarantee of the quality or the delivery date. Zvezda still lacks expertise and experience in building ice-class tankers. A cooperation agreement signed with South Korea’s Hyundai Heavy Industries might compensate it though.

In May 2018, Novatek announced that the company decided to build its own shipping company “Maritime Arctic Transport”. In doing so, Novatek’s long-term strategy is to “optimize transport cost and ensure a well-balanced, centralized management structure to improve the competitiveness of NOVATEK’s Arctic projects,” said Mikhelson.

Both Yamal LNG and Arctic LNG-2 are planned to be in operation all year around, but the non-stop shipping via the Northern Sea Route is complicated by climate factors. As the eastern route is free of ice for only 2-4 months in summer, special ice tankers are needed. To face this challenge, a special icebreaking LNG carrier is to be designed. The contract to build a super-powerful nuclear-powered ice tanker “Lider” was obtained by Rosneft’s Zvezda. Designed to break 4-meter-thick ice, its completion is planned for 2027. The contract was assigned for political reasons rather than based on technical expertise.

Unfair competition between shipbuilding companies, together with the lack of expertise in building ice-class tankers, could jeopardize Novatek’s long-term strategy. It is unclear whether the company will resolve its mismatch between production capacity and export capacity in the near future.

Dr. Maria Shagina holds a double PhD degree from the University of Lucerne and University of Zurich and a M.A. from the University of Dusseldorf.

Chinas Belt and Road Heightens Sovereign Debt Risks in Tajikistan

At the People’s Bank of China-IMF joint conference in Beijing back in April, IMF head Christine Lagarde warned about potential debt risks for countries involved in China’s Belt and Road Initiative (BRI). This grand development initiative aimed at dismantling foreign investment barriers and improving international logistics has provided much-needed infrastructure support to its recipient countries. However, the BRI-related project loans may cause a problematic increase in sovereign debt in certain host countries.   

Debt risks posed by BRI-related financing  

As one of the poorest countries in Eurasia, Tajikistan is assessed by the IMF and World Bank to have a “high risk” of debt distress. However, as the “first leg” of overland infrastructure projects of BRI, Tajikistan is still planning to increase its external debt to pay for infrastructure investments in the energy and transportation sectors.

The Tajik government recently issued $500 million in Eurobonds to finance part of the costs of construction of Roghun hydroelectric power plant, an embankment dam in the preliminary stages of construction on the Vakhsh River in south Tajikistan.

The Vahdat-Yovon railway, which will link Tajikistan’s central part with the southern provinces of Khatlon and enhance the overall transportation capacity of the country, was financed by concessional loans provided by the Chinese government.

The construction of Vahdat-Yovon railway was contracted to China Railway Group and the railway went into full operation in 2016. The $72 million project loan was attracted from the Export-Import Bank of China (China Exim Bank) at concessional rates. In addition, a $3 billion portion of the Central Asia-China gas pipeline (Line D) was also reportedly financed through Chinese foreign direct investment (FDI), although there could be pressure for the Tajik government to cover some of the financing costs.

Tajikistan’s debt-to-GDP ratio is rapidly increasing, rising from 33.4% of GDP in 2015 to an expected 56.8% in 2018. Tajikistan’s debt to China, Tajikistan’s single largest creditor, accounts for almost 80 percent of the total increase in its external debt over the 2007-2016 period. If Tajikistan fails to pay back these infrastructure loans, which often entail the use of sovereign guarantees, tensions may arise on the bilateral relationship between two governments.

Why is sovereign debt even riskier?

For rich developed countries, properly managed sovereign debt is actually beneficial to financial development and can also stabilize macroeconomy because it enables the government to increase its budget deficit as the financial system comes under pressure. However, it is not the case in many emerging economies, where lending mechanism and accounting practices are poorly developed. It is hard to know how much debt any government can safely issue before risk premiums start rising in a dangerous manner, and regulators are always unable or unwilling to measure risks appropriately.

In addition, private debts can always be powerful leverages because private lenders can negotiate with the borrowers to acquire their physical assets in order to compensate for the failed repayment. However, it is not easy to make such a deal when it comes to sovereign debt, which entails sovereign guarantee and government reputation. For example, to reduce the debt burdens, Sri Lanka announced in last December that it would hand over control of the Hambantota port, which was financed by loans, to a state-owned Chinese enterprise China Merchants Port Holdings. However, this 99-year lease deal with China enraged Sri Lankan government critics, who are complaining that the deal has seriously threatened the nation’s sovereignty and the price being paid for reducing the China debt is even more costly than the debt burden Sri Lanka seeks to reduce.

Problems with the lending mechanism of BRI

One of the major problems with the current lending mechanism of BRI is that China does not report cross-border project financing in a standardized or transparent manner. Chinese Development Bank and China Exim Bank do not disclose the terms of their loans, making it difficult, if not impossible, to accurately assess the present value of the debt owed by a host country to China.

In addition, most of the private financial actors, namely investment banks and commercial banks, shy away from BRI projects due to high political risks. In the case of Tajikistan, security threats on the Tajikistan-Afghanistan border and conflicts among different domestic interest groups all created investment barriers for private the sector.

Multilateral loans: a saving grace?

In order to mitigate the concerns about potential debt risks caused by BRI, China has demonstrated a willingness to provide additional credit to protect borrowers from default risks, but a clear policy framework aligned with global standards is still absent.

The participation of multilateral financial institutions, such as AIIB and the World Bank, can contribute to a more sustainable lending mechanism for the BRI projects in that they play a vital role in promoting transparency as well as making financing terms for loans to sovereign governments publicly available.

Default risks are a huge obstacle for smaller commercial banks to finance BRI projects. However, extending credits for large-scale infrastructure projects in the form of syndicated loans allows commercial banks to jointly raise capital for large sovereign borrowers at reduced costs. This would also bring emerging economies like Tajikistan greater visibility and flexibility in their project financing.


Yueyi Chen is a graduate student at the Center for Eurasian, Russian and East European Studies, School of Foreign Service, Georgetown University.

Is Russia Approaching A China-Style Control Over Its Internet Community In Real Time?

The latest investigation by the Russian Anti-Corruption Foundation, led by opposition activist Alexei Navalny, found that they have been censored from the Russian Internet with surprising speed. It took two days for the national IT regulatory body to begin issuing warnings to media and providers. 

Forbidden content

new inquiry by Navalny’s team focused on oligarch billionaire Oleg Deripaska and his alleged – and possibly corrupt – ties to Deputy Prime Minister Sergei Prikhodko, considered a key figure behind Russia’s foreign policy.

The evidence revealed, via a social media account of escort model Anastasia Vashukevich, also known as Nastya Rybka, features photos and videos of Prikhodko caught aboard Deripaska’s private yacht. Navalny claimed that the oligarch bribed the high-ranking official by hosting Prikhodko on his yacht.

Navalny and the Anti-Corruption Foundation previously made considerable gains regarding their investigations into the business empire of the son of Russia’s prosecutor general and into Prime Minister Dmitry Medvedev’s corruption involving charity funds, yet none of the scandals elicited such an immediate and unambiguous reaction as the new inquiry, dubbed as Rybkagate.

The day after the inquiry’s publication, a local court in Ust’-Labinsk, a small town in the southern Krasnodar region and Oleg Deripaska’s hometown, ruled that the presented materials infringe upon Deripaska’s privacy. Provided with legal grounds, the Russian IT regulatory body, Roskomnadzor, entered the investigation into the registry of banned content.

Besides promptness, the reaction to the Rybkagate scandal was surprising with its comprehensiveness. After publication, at least four online news media outlets received demands from Russia’s Roskomnadzor to remove reports about the investigation from their respective websites. Alexei Navalny called for his supporters to help disseminate the information, however likely unheard – as Navalny’s entire blog was included in the registry of banned information along with his investigation.

Gradual tightening

The state’s control over the Internet has been on a clear upward trend since the early 2010s. In 2012, Roskomnadzor set up a unified registry of banned content that served as a guideline for Internet providers who were obligated to block those on the list.

Initially planned as a mechanism to monitor websites with harmful content, i.e. child pornography, the registry quickly became a tool targeting content with opposing views. The process escalated after 2011, especially after the Ukrainian crisis of 2014, when several independent news media outlets were blocked for what Roskomnadzor interpreted as a call for mass riots.

In addition, opposition activists in Russia frequently report Distributed Denial of Service (DDoS)-attacks, which are conducted in a seemingly organized way at critical times. For example, similar attacks occurred during the anti-corruption protests in March 2017, that were organized in different parts of Russia through online campaigns.

Starting in 2016, Roskomnadzor began pushing international companies to comply with national law regarding personal data that requires all account information belonging to Russian citizens to be held on servers within the country’s borders. Most Internet giants, i.e. Facebook and Google, were exercising similar methods at the time and were under threat of losing the Russian market to Roskomnadzor’s blocking.

Eventually, most major players in the industry agreed to transfer their data to Russia-based servers. The only exception was LinkedIn, which refused to comply and was permanently blocked in Russia by the end of 2016.

The most recent update was made in late 2017, when the State Duma adopted a new law that bans the use of virtual private networks (VPN) and other anonymizers in Russia. Although many Russian officials admit that the legislature is unlikely to eliminate the use of anonymizers, the range of access options available to Russian users is becoming uncomfortably slim.

Self-sufficient Runet?

German Klimenko, an Internet adviser to president Putin, has been openly promoting a similar China-style control over Russia’s Internet. Most recently, Klimenko claimed that Russia is technically prepared to become completely cut off from the global web. In Klimenko’s view, this situation could occur if the West orchestrated a measure against Moscow, and may not result in much damage because the Runet is already a self-sufficient market with services and information already provided to local users.

It is easy to interpret Klimenko’s words as a sign of continued tightening of the Kremlin’s control over Russian Internet. The demands for more control is clear, with the blocking of the Rybkanet’s investigation a vivid demonstration of the Roskomnadzor power, it seems very unlikely that the authorities would go all the way to recreate the Great Firewall of China.The opportunity to construct a firewall at a minimal cost has been lost, as the Runet has made its giant leap forward in the late 1990s – early 2000s and flourished under almost complete freedom.

Even more important is the fact that the authorities have yet to face the fact that Russians consume a lot of foreign content, from social media to YouTube channels in Russian to Netflix shows. The profile of this audience is considerably wider than the Moscow-based liberal bubble that the Kremlin has been simply ignoring so far, and that renders the idea of a self-sufficient Runet politically an unlikelihood. The most likely form of control could show itself as a smooth cooperation between the courts and Roskomnadzor – exactly the way it happened with Rybkagate.

Yaroslav Makarov has worked as a political and economics reporter for two leading Russian news agencies and spent five years as a foreign correspondent in Japan.

Why Erdogan’s Popularity Remains Unmatched Despite Growing Authoritarianism

Since the failed coup in 2016, Erdogan has tightened his hold on all aspects of political, social and legal institutions and life in Turkey. While concerns over the president’s authoritarian tendencies has been steadily growing among the North Atlantic Alliance (NATO) and the European Union (UE), Erdogan is still very popular in Turkey. The president’s nationalism and pugnacity are seen as a source of stability by a significant segment of the population. Despite numerous allegations of irregularities during the vote, the narrow victory of the yes’ camp in the April 2017 constitutional referendum, which paved the way for the implementation of a presidential system of government after the 2019 elections, seems to have shored up the president’s popularity ratings.  

Erdogan’s popularity unmatched despite growing authoritarianism

One obvious reason behind Erdogan’s appeal and power is the widespread fear of mass arrests, as the Justice and Development Party (AKP) has ruled under emergency powers since the failed coup attempt. According to Human Rights Watch, more than 110,000 people have been detained in the post-coup crackdown, including 28,000 teachers and 2,200 judges alleged to be Gülen supporters. Under martial law, the government has passed many decrees extending its legal powers, including the confiscation of property without judicial review, police custody of up to 30 days, and the denial of access to a lawyer in certain cases. Moreover, the government has gone to great lengths to limit freedom of expression and the media. According to a recent report released by the Committee to Protect Journalists, the AKP has jailed 73 journalists. Dozens more still face trial after being charged with anti-state crimes.

However, fear of arbitrary arrest is not the only factor explaining Erdogan’s unrivaled popularity. Last month’s survey results from Risk Pulse surveys, a new approach to measuring political instability by Dalia Research, showed that 46 percent of Turks approve Erdogan’s job performance. Only 26 percent expressed their disapproval of the president and 28 percent neither approved or disapproved. Data also indicates high support for the AKP as well as Erdogan’s strong leadership style. Notably, 47 percent of the respondents are generally in favor of a strong leader without institutional constraints, whereas only 26 percent are against the idea of a president with extended powers.

Anatolia’s heartland votes for stability

Last April’s referendum reflected a country sharply divided. A little more than 51 percent of Turks voted in favor of the executive presidency, with a turnout of over 85 percent. While Turkish major cities have opposed the several amendments introduced by the reform, generally  more religious and conservative rural voters, were in favor of them. For the first time, Erdogan lost the majority in the country’s largest cities.Turkey’s western coastal regions and its urban centers voted firmly against the reform. In Istanbul –the city where the president started his political career and was elected mayor in 1994 — 51.4 percent voted “No,” while that figure was 51.1 percent in the capital, Ankara. In the Aegean coastal city of Izmir, 68.8 percent of the voters opposed the reform project.

In contrast, the Anatolian heartland voted overwhelmingly for Erdogan’s proposed changes, highlighting the emergence of an urban-rural divide. The deep divisions within the Turkish society, namely Secularists versus Islamists, liberals versus conservatives and Turkish nationalists versus Kurdish nationalists, played a crucial role in the Yes vote’s victory. They can also provide an explanation with regard to Erdogan’s popularity. For the majority of Turkey’s rural electorate (with the exception of the Kurdish southeast, also largely rural, which opposed the referendum), Erdogan embodies political stability, religious freedom and a more than a decade of economic success.

Religious and economic gains under passive secularism

Under the rule of the AKP, Turkey moved from “assertive secularism,” where religion is banned from the public sphere and is limited to a private affair, to “passive secularism,” where the state assumes a passive role in accommodating the public visibility of the religion. A spate of laws was passed to increase space for Islam in public life, which included the opening of new religious schools; the removal of restrictions on Islamic head scarves for women in universities, the army and the civil service; the improve of opportunities for graduates of the Islamic Imam-Hatip schools; and the expansion of the teaching of the Quran. Furthermore, Erdogan is also perceived as one of the few successful Turkish politicians in terms of expanding the rights of Christian and Jewish associations – for instance, in helping them to recover properties that had previously been confiscated. For a large, pious section of the population,  Erdogan represents a defender against the assertive secularism that had been dominant in Turkey throughout most of the 20th century.

Erdogan has also brought significant material gain to much of the country. Since the AKP came to power in the general elections of 2002, Turkey’s economy has grown considerably. Until the 2016 failed coup, economic development was the basis of both socio-political stability inside the country and of the pro-EU foreign policy agenda pursued by Erdogan. Between 2002 and 2007, Turkey’s economy grew at annual rate of 7.2 percent. The country even performed well throughout the global financial crisis: after a slowdown in gross domestic product (GDP) growth to just 0.6 percent in 2008, the economy picked up again in 2010, producing an impressive 9.2 percent growth in 2011. Since Erdogan became prime minister in 2003, average incomes have risen from $3,800  to around $10,000 as of 2017 according to World Bank data. Hence, the AKP rule saw the number of people living below the poverty line dropped from 23% of the population to less than 2%.

Over the last two decades, Turkey has significantly improved people’s material well-being with the implementation of a well-designed welfare safety net. According to datacollected by the Organization for Economic Cooperation and Development (OECD), public social spending as a percentage of GDP climbed to 13.5 percent in 2014, compared to 7.7 percent in 2000. One of the major reforms carried out by the AKP government has been the creation of a general healthcare insurance system that covers both citizens and foreign residents in the country. The government also provided colossal amounts of money for the renovation of public hospitals and the establishment of an individual pension system. Many worry that all these social and economic advances will be reversed if Erdogan leaves office, reversing the country’s drift towards passive secularism buoyed by welfare policies and improvements in people’s living standards.

The 2019 elections in sight

Will this relative popularity be enough for  Erdogan and the AKP to win the 2019 municipal, parliamentary and presidential elections? According to Dalia Research, if Turkey was to hold presidential election tomorrow, the AKP would come in first with 36 percent of the vote, followed by the Republican People’s Party (CHP), which would receive 12 percent of the vote. This would prevent Erdogan from reaching the 50 percent threshold for victory in the first round. The data fuels concerns within the AKP to that the president will eventually be defeated, especially if Abdullah Gul, a former president and co-founder of the AKP, decides to run. Former Minister of the Interior and vice-speaker of the parliament Meral Aksener, Turkey’s ‘Iron Lady,’ also looms on Erdogan’s political horizon. After breaking away from the right-wing Nationalist Action Party (MHP), she formed the Good Party (IP) and is determined to capture the conservative vote in the 2019 presidential election.

In this way, the March 2019 municipal elections may act as a prelude to difficult presidential and parliamentary elections the following November. Erdogan has launched a vast rejuvenation operation in view of the municipal elections, sidelining both long-standing Istanbul and Ankara mayors in what was seen as a show of force. Since the president’s political future depends on clear victories in all three elections, the government is likely to intensify the repression against political opponents, critics and other perceived enemies of the state.

However, the AKP’s focus on domestic power struggles and foreign policy challenges is not without risks, as it will block the economic reforms needed to improve the business and investment climate. Political instability and fluctuations in global liquidity, a result of anticipated shifts in US monetary policy, domestic policies, and geopolitical tensions the Middle East present potential risk to foreign capital inflows to Turkey. These inflows are crucial to Turkey’s large external financing requirements. he shift in capital flows has put the lira under severe pressure since late 2016, causing inflation to rise. Polling results from Dalia Research suggest that the increase in prices has already impacted a large spectrum of the Turkish population: 73 percent of the respondents believe the gap between the rich and poor has increased over the past 12 months, and 78 percent declare feeling angry regarding the increase in wealth inequality. If faced with social discontent following the acceleration of inflation, the Central Bank of Turkey will be under considerable political pressure to not raise interests further, and will therefore be constrained in its ability to tighten monetary policy. In the event of another severe weakening of the lira, an abrupt tightening of policy, may be necessary. Such a scenario could strangle Turkey’s economic recovery and cost Erdogan a large part of his political base.

Leo is a Toronto-based analyst who holds a MSc in International Affairs from the University of Montreal and a double BA in Political Science & International Affairs from HEIP.

Signs That Russia’s Leadership May Be Ready For Tax Reform

The Kremlin is considering a major budgetary move following the presidential election in March 2018. The plan may require some very unpopular measures such as increases in retirement ages and an income tax rate hike. Is Russia’s leadership ready to take a risk?

A long-delayed budget move

The idea of a so-called “budget maneuver” for Russia is not new. In 2011, a group of Russian and foreign academics put together a long-term economic plan known as Strategy-2020 which emphasized investment in human capital and infrastructural development as a method to offset demographic decline and capital depreciation. At the same time, the plan proposed significant cuts of defense expenses and pension system reform. Disagreements over specific measures and new risks, particularly the rising protest activity of 2011-2012, eventually resulted in Strategy-2020 being shelved.

But the proposal survived the following years and currently has a number of high-profile supporters, including the head of Central Bank of Russia Elvira Nabiullina. The idea is also championed by former finance minister Alexei Kudrin, who is considered to be one of the most prominent independent experts with direct access to highest echelons of power in Russia. In 2017, he published a report warning that any further delay of the budget reform will result in long-term stagnation of Russian economy.

When asked about the reports about a possible budget refocus emerging in Russian media in mid-January, Putin’s press secretary Dmitry Peskov stressed that no final decision has been made yet. However, later comments by other major speakers, particularly by the finance minister Anton Siluanov, hinted that this time the government is determined to proceed with the maneuver. The exact way in which it will be implemented is still not entirely clear, though.

A range of options for tax and pension reform

Siluanov claimed that the funds needed for the maneuver will come from the improved efficiency of the corporate tax collection system. Russia has a long tradition of tax evasion, especially by small and medium enterprises. In 2017, cracking down on those practices allowed the Finance Ministry to recover up to 1 trillion rubles ($17.7 billion) for the state budget. But there is no guarantee that the efficiency of the system remains high in the future. Therefore, other options – which are far less popular – remain on the table.

One possibility is to increase the income tax burden on working Russians. Currently, the tax residents of Russia enjoy a relatively low flat rate of 13 percent compared to other countries with large social security systems. In recent years, several governmental agencies proposed to increase it to 15-17 percent. Alternatively, the government could reduce the ever-growing pressure from state pension system by raising the retirement age. While both options are very risky politically, they constantly feature in public discourse, suggesting that the Russian leadership is preparing the electorate for inevitable change. In particular, President Vladimir Putin himself, during his annual press conference last December, admitted that an eventual retirement age increase is almost unavoidable but promised to execute it mildly.

Several other possible measures involve less of a sacrifice for the general population but still can be politically difficult to implement. For example, Alexei Kudrin proposed to relax the fiscal rule that puts a cap on spending  revenues coming from the natural resource trade. According to the current rule, the spending part of the Russian budget receives up to $40 per oil barrel sold while the surplus goes to reserves. Kudrin’s idea to allow re-investment of this oil revenue is not very popular among Russian elites, though. Under the pressure of Western sanctions in 2017, Russia had to finally exhaust its Reserve Fundwhich was built up by saving the surplus from oil trade in early 2000s. As Putin made clear recently, the Kremlin is determined to use the recent new uptick in oil prices to restore its safety cushion with the new surplus.

Finally, the funds for a budget maneuver could come from the reduction of other expenses, particularly those on defense, which have grown steadily in recent years. It would be very unlikely for the Russian leadership to take this route given the ongoing reform of the military sector in Russia and its role in president Putin’s general platform. But at the same time the Russian military often draws attention to its relative efficiency, for example its operation in Syria which is allegedly financed entirely through funds reserved for regular training activities – at least, in its early stage. This allows the Kremlin to be somewhat flexible about potential cuts.


The presidential election in March will open a window of opportunity for a possible budget maneuver. Whether the Kremlin would use it will depend a variety of factors, most importantly the outcome of the election. While there are no doubts about the name of the next president, there is a general understanding that the leadership is concerned about a decline in public support for Vladimir Putin. It might manifest itself in low voter turnout, which is likely to become the key metric for the upcoming election.

If implemented, the maneuver will also become a major win for the so called liberal wing of Russian political establishment. The “liberals” took a significant blow at the end of 2017, with former economy minister Alexei Ulyukayev’s harsh sentencing. Ulyukayev supported the budget maneuver while in office. The verdict in his corruption case was widely interpreted as evidence of the conservatives solidifying their influence in the Kremlin. But proceeding with a reform that significant would show that the country’s leadership remains above elite infighting.

Yaroslav Makarov is a candidate for a master’s in international affairs at University of California, San Diego, and is a fellow at the Laboratory on International Law and Regulation.

Gas Sector Reform In Ukraine: Vested Interests Continue To Stand In The Way

Reforming the gas sector remains one of the most crucial pre-requisites to achieving a genuine political transformation in Ukraine. The gas sector has been notorious for its corruption schemes, widely used by the Ukrainian political elites in the past. In 2015-2016, a number of reforms were introduced by the government in exchange for international loans. Since 2017 the reform pace has stalled, as vested interests are not keen to lose control of a lucrative business sector.  

New sources and higher prices

In line with the EU´s Third Energy Package, Ukraine complied with proposed reforms to  provide the unbundling (separating transmission from other gas services such as production and supply) of Naftogas, the state-owned oil and gas monopoly, and liberalize the national gas market.

For the first time in 2016, Ukraine did not import any gas from Russia. Being previously highly dependent on Russian gas, Ukraine managed to diversify its routes and sources, mainly via reverse gas flow from Slovakia, Poland and Hungary. By reducing the amount of import gas significantly, the bills were cut from $12 billion in 2009 to $2 billion in 2017.

To reflect the market prices, the government introduced subsequent price hikes for individual households – 200-300% in some cases – to offset the high price of import gas. Over two and a half years, the gas tariff was hiked nearly ten times, resulting in high household bills. To cushion the drastic increase, the government overhauled the system of energy subsidies for poor households. The increase in prices has been a longstanding requirement from the IMF to enhance Naftogas´ financial standing and to improve energy efficiency in the sector.

Management reform of Naftogas

In May 2016, a management reform of Naftogas was launched. A new supervisory board was created for the first time, including three foreign professionals from the UK. Aimed at restructuring Naftogas, the supervisory board approved a gas sector reform plan and developed a new model of corporate governance. The fact that Naftogas, the country´s largest taxpayer, was never profitable points out the scale of corruption in the sector – $2-3 billion is estimated to have been siphoned each year. In 2014, Naftogas ended up with a deficit of 106.6 billion hryvnyas ($8.2 billion), which constituted about 6.7% of the country´s GDP. Due to its new effective corporate model, the company ran profit of $1 billion in 2016 for the first time in its history. Similarly, in 2017, Naftogas recorded profits which accounted for 16% of Ukraine´s GDP.

Naftogas vs. Gazprom

In December 2017, Naftogas won a dispute with Gazprom in the Stockholm Arbitration Court. The court threw out Gazprom´s claim that Naftogas has to pay $56 billion in line with the so-called “take or pay” gas clause. Under this approach, Gazprom obliged any party to pay for gas even if it was unused. The court also reduced the gas price for the 2nd quarter of 2014, linking it to  market prices instead of the price of oil. Finally, the court allowed Ukraine to re-export Russian gas, which was previously impossible under Gazprom´s contract conditions.

Vested interests

In 2017, however, reform progress was stalled by presidential forces and vested interests. In March, the government ordered the prescribed amount of gas to be delivered to regional gas distribution companies at a fixed price. 70% of the regional gas distribution companies are controlled by Dmytro Firtash, an oligarch who is currently under arrest in Vienna facing corruption charges. To bypass the new requirement separating transmission from production and supply activities, shell companies were created. This breach of the unbundling commitment was strongly criticized by Naftogas, the World Bank and the Energy Community.

At the same time, the Ukrainian government tried to undermine the independence of Naftogas´ management. The decision was made to expand the supervisory board from five to seven members, thus leaving the international members in the minority. As a result of this political meddling in the reform process, in August and September the three foreign professionals resigned. As it would jeopardize the political survival of the current political elites, the independence of Naftogas´ management and its planned process of unbundling met strong opposition. Later, the government changed the process, by canceling open selection of the supervisory board members. The supervisory board was then reshuffled to include four foreign and three Ukrainian professionals from the energy sector.

What to watch in 2018

Domestically, numerous secondary acts will need to be adopted, such as Law on the Cabinet of Ministers, Law on Pipeline Transport, and Law on Oil and Gas, which would allow the full implementation of the Natural Gas Market Law and the proper unbundling of Naftogas.

The process of unbundling is crucial to the reform of the entire gas sector. This is strongly influenced by pro-presidential forces that try to meddle in the separation of Ukrgazvydobuvannya and Ukrtransgas from Naftogas. The former two companies are the most profitable branches of the state-owned monopoly. The failure to unbundle them will endanger the whole process of gas sector reform in Ukraine and will block the restructuring of related sectors. The continuous battle between the Ukrainian government and Naftogas needs to be followed closely.

The ruling on the second dispute in Stockholm on the transit contract case (due on 28 February) will be a pivotal moment, as the planned unbundling is supposed to start after the court´s decision. The transfer of Ukrtransgaz´ assets to the newly created transmission system operator is planned to take place within 30 days after the Stockholm tribunal´s verdict.

Finally, Ukraine´s decision to cooperate with Poland and Lithuania to build cross-border interconnections could strengthen the country´s energy supply security. In a similar vein, planned participation in the development of Croatia´s LNG terminal would be beneficial for Ukraine´s energy diversification.

Maria Shagina is an Analyst at Global Risk Insights. She holds a double PhD degree from the University of Lucerne and University of Zurich and a M.A. from the University of Dusseldorf. As originally appears at:

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.


5 Reasons Russia’s Banking System Is Heading For Trouble

Russia’s recent bailout of two major banks will cost the country billions of rubles. But the future of the Russian banking system, and its impact on the nation’s economy, is still uncertain.

Russia is finally emerging from a serious recession, with growth predicted for 2018. However, the recent rescue of B&N Bank and Otkritie Bank highlighted serious problems in Russia’s banking industry – problems that have not gone away following the bailouts, and could endanger the economic recovery if it doesn’t progress quickly enough.

A tale of two banks

Bank Otkritie FC, Russia’s biggest private lender in term of assets, started seeing huge cash outflows in June 2017. Then, in August, came a sudden ratings drop by Fitch.

“Otkritie, B&N Bank, Prosuyazbank and Credit Bank of Moscow are among the banks that have been subject to Russian media speculation in recent weeks, regarding the liquidity position of some and the potential knock-on effect on others.”

Fitch Ratings report, 18 August

The day before, Moody’s had placed Otkritie on review for a possible downgrade, citing increased financing of assets held by its parent company Otkritie Holdings, and volatility of customer deposits.

“Since mid-2017 and following the recent regulatory changes regarding the placement of non-state pension funds’ and state budget deposits, BOFC has experienced a significant outflow of customer deposits.”

Moody’s report, 17 August

It wasn’t long before the Central Bank of Russia (CBR) was forced to intervene. In late August, it became the biggest owner of Otkritie with a 75 percent stake, worth approximately US$51 billion. The strategy was to assuage depositors’ fears of losing their deposits, and stabilise the Russian banking system.

The takeover hurt Otkritie’s shareholders. Their ownership in the bank was reduced to a maximum of 25 percent, with the risk of seeing their investment wiped out completely. CBR deputy chairman Vasily Pozdyshev indicated that the bailout and Otkritie’s recapitalization would cost between US$4.34 billion (250 billion rubles) and US$6.96 billion (400 billion rubles), though the final tally could be higher. This bailout far surpassed the CBR’s rescue of the Bank of Moscow in 2011, which totaled 395 billion rubles. But another disaster was soon to follow.

Three weeks after the Otkritie bailout, B&N Bank, also known as Binbank and Russia’s 12th largest bank by assets, sought help from the CBR. Customers reportedly withdrew approximately 56 billion rubles from B&N in September 2017. Affiliated lender Rost Bank and other banks were rumoured to also require emergency financing from the CBR’s Fund for the Consolidation of the Banking Sector.

The five reasons behind Russia’s banking system troubles

1. Rapid expansion

Otkritie and B&N both had a propensity for rapid expansion through acquisitions. Otkritie was permitted to grow at a very fast pace by purchasing Russian banking competitors such as Nomos, bailing out Rosneft Bank in 2014, while diversifying into non-bank companies. B&N had ambitiously expanded its operations after 2010 by acquiring smaller institutions such as Moskomprivatbank, SKA-Bank, and others, prior to making its biggest acquisition in 2016 by merging with MDM Bank, a large Russian lender. However, it turns out that the banks that B&N acquired had financial problems more serious than previously reported. B&N’s assets expanded fivefold in less than four years while also obtaining funds from the state in order to salvage smaller banks. As it turned out, Otkritie and B&N purchased big financial headaches that later came back to haunt them – and other Russian banks may be in similar situations.

2. International sanctions

US and EU sanctions over Ukraine probably did more economic damage than President Vladimir Putin is willing to admit – and Russia’s banking sector has not been immune. B&N’s situation was aggravated by the residual effects of an economic slowdown partly caused by the sanctions, and the rise of bad debt during the previous three years. Moreover, a key provision of the sanctions prevents Russian banks from raising financial capital on Wall Street. This prevents American investment firms and commercial banks from buying equity stakes or making long-term financing deals, and restricts Russian banks access to foreign capital. For example, Vnesheconombank (VEB)’s access to foreign capital was cut off due to the sanctions and looking at in foreign currency debt totaling US$16 billion. A bailout of VEB could cost the Russian government at least US$18 billion or 1.3 trillion rubles.

3. Sharp decline in oil prices

Under Putin, Russia has effectively become a petrostate, heavily dependent on oil as a source of revenue for the government. The higher the price of oil, the more rubles the Russian government can deposit into state and private banks resulting in a greater influx of financial capital. However, the price of oil has dropped in recent years as the market has become awash in oil due to increased uses of clean energy. This has lowered the amount of funds the Russian government can put into the nation’s banks and, therefore, hurt their cash flows. Compounding the problem is that Russian banks made loans to the nation’s oil companies under the assumption that oil prices will rise.

4. Ruble devaluation

The Russian ruble has lost value in recent years leading to a lack of liquidity for the nation’s banks. In an attempt to stabilize the ruble exchange rate, the Bank of Russia raised interest rates to 17 percent from 10.5 percent.  But this move was not enough and the ruble devalued further. The combination of a depreciating ruble and rising inflation has made it more difficult for large, and especially small Russian banks, to remain liquid. As many Russian banks rely on cash as their main asset, the ruble’s depreciation causes them to lose value and have to acquire more funds. This means increased borrowing at possibly higher rates or seeking government bailouts so they can stay solvent.

5. High number of bankruptcies

As if Russia does not have enough financial headaches, the country has seen a wave of bankruptcies among banks in recent years. Adding to these closings is the increased amount of non-performing loans (NPLs). For example, NPLs went from 6 percent in all of 2013 to 9.2 percent in the first quarter of 2016. The higher the number of NPLs, the greater the chance of bankruptcies among Russia’s financial institutions. Officially, these NPLs make up about 10% of all loans. However, the International Monetary Fund (IMF) estimates the true level of bad loans could be closer to 13.5%. Either way, many Russian banks are facing financial catastrophe. In order to stem the tide of these bankruptcies, between January 2014 and mid-2016, the CBR revoked 214 bank licenses and placed 28 banks into open bank resolution, using public moneys totaling 1.1 percent of Russia’s GDP.

Persistent risks

“The bailout was good for investors, probably bad for the system. They prevented the Lehman effect in the Russian banking system and created a too-big-to-fail mentality.  How many other banks in Russia with the same sort of problems will need a bailout soon?”

Dmitri Barinov, Portfolio Investor, to Bloomberg News

In September there seemed to be a glimmer of hope when Fitch revised upwards the outlooks of 23 Russian banks. Tellingly however, this was off the back of a sovereign outlook upgrade, meaning that it wasn’t the strength of the sector that prompted the change, but the allegedly improved ability of the state to bail them out if required.

Even that capability is in question. Russia is probably in worse financial and economic shape than its policymakers and leaders are willing to admit. It’s well known but worth repeating, that Russia has become too dependent on oil at a time of sustained low oil prices. Oil was supposed to be Russia’s source of financial capital that it could put into its banks and always provide them with the cash flow they needed in good and bad economic times.

But now Russia is walking a financial tightrope that could impact the nation’s banking system for years to come. Unless Russia makes a strong economic recovery in the near future, its banking sector could see more hard times that the CRB will not have the power or resources to bring under control.


Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School. Article as originally appears at:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

The Turkish Lira Continues To Slide, Are Bonds Next?

The Turkish lira is languishing at near record lows as December dawns.

The currency, which touched its lowest ever levels against the US dollar on November 23, found itself close to that level as November ended and December began — and its slide may not be over yet.

Further weakness in the lira will impact local currency-denominated bonds unless steps are taken to counter its decline.

How can the sliding lira impact Turkish bonds?

Between local currency-denominated equities and bonds, currency movement generally has a bigger impact on the latter since the absolute returns are usually smaller.

A weakening local unit will lower returns from a bond denominated in that currency when converted to the comparable foreign unit. Hence, since the Turkish lira has been declining against the greenback, returns from Turkish bonds denominated in the lira will fall when converted into dollars. Conversely, Turkish bonds denominated in dollars would see their returns rise.

This can be expected to be the case going forward, given market expectations of a further weakening in the lira.

But there is a caveat.

Central bank action

Turkey has been wrestling with elevated levels on inflation; it has been in double digits for most of 2017 so far. As shown by the graph below, after falling into single digits in July, prices began to rise again and for October, they stood at their highest level in nine years.

If the Central Bank of Turkey were to raise its key rates at this juncture, it would not only help in controlling price rise, it will also support the sliding lira.

But will the central bank take this action, and why has it not done so already?

The answer lies with the now even more empowered presidency.

In late November, President Recep Tayyip Erdoğan had said that the “artificial inflation” in exchange rates would revert to normal soon.

During the event, he also reiterated his belief that higher interest rates actually caused inflation rather than restraining it.

Apart from his belief, another reason why the President wants interest rates to remain low is to enable cheap credit via which he intends to fuel economic growth as well as maintain his popularity with people.

Hands tied

This stance by an exceptionally powerful political establishment has prevented the central bank from undertaking an aggressive rate action. Its one-week repo, overnight lending and late liquidity window rates continue to remain at 8%, 9.25% and 12.25% respectively. The last major change in the one week repo rate was effected in November 2016.

The central bank has taken some other steps and indirect measures to curtail inflation and support the lira though.

From November 6, it decreased the amount of foreign currency that lenders are required to park with the regulator. This unshackled $1.4 billion of foreign exchange for banks. It also allowed exporters to repay up to $5 billion in forex loans not due until February in lira at promising rates.

Recently, the central bank disallowed lenders from using its aforementioned 9.25% interbank overnight rate facility, thus forcing them towards the 12.25% late liquidity window. This was intended to lift the bowering costs for banks, thus tightening the monetary stance a bit, albeit indirectly.

But given the multi-year high levels of inflation, these measures may not suffice to contain price rise and may also prove to be insufficient to provide a floor to the lira. This also means continued lower returns from bonds.

Though an aggressive stance by the central bank is warranted, its possibility remains low. However, some rate action in its upcoming meeting would be required to boost sentiment towards the Turkish lira failing, in which case a further decline in both the currency and returns on local bonds can be expected.

Russian ETFs Are Underwater, But These 7 Stocks Have Mitigated Their Fall Into Negative Territory

Russian equities have had a difficult year compared to many of their peers. In a year when the MSCI Emerging Markets Index has risen 30% until November 13, the MSCI Russia Index has fallen 1%. It is one of only three MSCI country indices in the emerging markets universe which is in the red for the year, Qatar and Pakistan being the other two.

Of the five ETFs investing in Russian equities and traded on US exchanges, two – the VanEck Vectors Russia ETF (RSX) and the iShares MSCI Russia Capped ETF (ERUS) – are broad-based and non-leveraged.

Between the two, US investors have shown a clear preference for the ERUS as shown in the graph below.

Though the year had begun well for the RSX, its fortunes changed from the beginning of March with its shares outstanding going into a broad decline since. On the other hand, the ERUS has seen increased purchases, though it has mostly come in fits and starts instead of continuous flows.

Investor flows exhibits the same trend, as shown in the graph below.

In YTD 2017 until November 13, the ERUS has seen net inflows of $186 million while the RSX has seen net outflows of $604 million, according to Bloomberg data. Even among ETFs listed outside of the US, the ERUS has attracted the most inflows in the year so far. It is followed by the France-incorporated LYXOR RUSSIA (Dow Jones Russia GDR) UCITS ETF – C ($105 million) and Luxembourg-registered db x-trackers MSCI Russia Capped Index UCITS ETF ($74 million).

However, among the US-listed funds, the RSX still remains the larger of the two with $2 billion in assets compared to $650 million for the ERUS.

Head above water

In terms of performance, unlike the MSCI Russia Index, the two ETFs have been able to keep their head above water with the RSX (4.7%) edging out the ERUS (3.6%) in YTD 2017 until November 13.

There’s not much difference in terms of the number of holdings with both invested in about 30 instruments. Further, the expense ratios are nearly the same as well. However, while the ERUS tracks the MSCI Russia 25/50 Index, the RSX follows the MVIS Russia Index.

Portfolio composition difference which explains performance

Though stocks from the energy sector form the biggest chunk of the portfolios of both funds (40% for RSX and 47% for ERUS), there is marked difference in the rest of the composition.

The two most significant ones are the exposure to financials and information technology sectors. While financials forms a quarter of the portfolio of ERUS, it forms only 15% of the RSX. Meanwhile, tech stocks form half of the weight of financials in RSX while the ERUS is not invested into the sector at all.

In terms of contribution to returns, financials are by far the highest contributing sector to the ERUS with materials being a distant second. Telecom services were the only other sector to contribute positively to the fund in the year so far.

On the other hand, stocks from the information technology sector have led gains for the RSX, followed by those from financials and materials sectors in that order. The difference between the contributions of these three sectors is not as significant as it is in the top three contributing sectors of ERUS. Consumer staples was the only sector which has dragged on the returns of the RSX in YTD 2017.

Stocks which have helped gains

The sponsored American Depository Receipts (ADRs) and the common shares of Sberbank of Russia (SBRCY) from financials have been the top two contributors to the ERUS. PJSC Mining and Metallurgical Company Norilsk Nickel (NILSY) from materials was the third largest contributor.

Though the energy sector overall has been a negative contributor to ERUS, shares of PJSC Tatneft (OAOFY) come in at fourth highest in terms of individual contributors, with the biggest five being completed by PJSC Mobile TeleSystems (MBT).

For the RSX, ADRs of SBRCY have been the highest positive contributors in the year so far. And OAOFY and NILSY find themselves ranked third and fourth respectively.

The information technology sector rounds out the top five list for ERUS, with search-engine provider Yandex N.V. (YNDX) emerging as the second highest contributor to the RSX in YTD 2017 while the Global Depository Receipts (GDRs) of online communication and entertainment services provider Mail.Ru Group Limited (MLRYY) edges out MBT for the fifth spot.

Monetary Policy May See Additional Rate Cuts In These 3 Emerging European Countries


The National Bank of Ukraine has slowed down the pace of rate cuts this year compared to 2016. The reason is visible from the graph below.

The central bank keeps a close eye on inflation as the key factor which determines whether further easing will take place or not. The upward trajectory of inflation in 2017 explains why rate cuts in the country have not been as aggressive this year as they were last year.

The central bank is targeting an inflation rate of 8% plus/minus 2% for this year and 6% plus/minus 2% for 2018. In its quarterly inflation report, last published in July, the National Bank of Ukraine had kept its inflation forecast unchanged at 9.1% for this year and 6% for the next.

Given the relatively high rate of inflation, aggressive rate hikes in the remainder of 2017 can be ruled out. However, if the indicator remains on the expected path in 2018, the central bank may resume slashing its discount rate next year.

Ukraine has been one of the most attractive places for fixed income investors in emerging Europe, along with Russia, this year. A further cut in interest rates would increase profits for investors already invested in the country’s bonds. Investors in local currency-denominated bonds would need to watch out for its movement vis-à-vis the US dollar, though.


Alike Ukraine, inflation has been the main driving factor behind the reduction in the refinancing rate by the National Bank of the Republic of Belarus.

However, unlike Ukraine, inflation in Belarus, which fell to 4.9% in September from 5.3% in August, is already below the central bank’s target of 9% for this year.

Given the fact the central bank aims to gradually reach the inflation rate of 5% by 2020 – a target which has already been met – it opens up the possibility of further rate cuts going into 2018.


Inflation in Russia stood at 3% in September, while core inflation was down to 2.8%. Both numbers were the slowest on record. This sets a stage for further rate reductions in the country. However, the path is not as straightforward as some of its peers.

This is because there is disagreement between the central bank and the government regarding the path of monetary policy traversed until now. While the government thinks that the central bank has been slow in responding to the decline in inflation, the central bank believes that there is a greater than anticipated risk of a rise in prices, thus justifying its cautious stance.

Though another rate cut before the end of the year is quite likely, market participants would need to read closely the stance of the central bank which sees risks to inflation and intends to remain measured in its moves – both in size and scope.

“Arabamız”: The Numbers That Drove Turkey’s Launch of a Homegrown Automobile Manufacturer

“Our car” is what the Turkish word ‘Arabamız’ translates to in English. The country, which is the 14th largest automobile manufacturer in the world, recently announced its first indigenous car whose prototype is expected by 2019 with commercial production targeted by 2021.

Five companies will collaborate to bring the national pride project to fruition. Three of them – Anadolu Group, BMC, and Kıraça Holdings – are directly involved in manufacturing cars for foreign brands including Kia and Isuzu. Among the other two, Turkcell is the nation’s largest mobile operator while Zorlu Holding is a conglomerate and will primarily provide technical support and assistance.

An experienced campaigner

Though Turkey may seem late to the game of car manufacturing, it is an experienced campaigner in the arena as it currently exports cars to Europe, Middle East, and Central Asia. 77% of the production of its automotive industry was exported in 2016 with Germany, France, and the United Kingdom among the top export destinations.

The graph above shows auto production in the country is segregated across the commercial vehicle and passenger car segments, and points to the increasing interest of its export partners in choosing the country as a key overseas manufacturing hub.

Apart from manufacturing, Turkey is also home to research and development centers of global auto majors including Ford, Daimler, and Fiat.

Domestic demand

Development of an indigenous car also makes sense from the perspective of domestic consumption. Monthly sales figures over the past 10 years, as shown by the graph below, show a generally increasing trend.

Electric and hybrid car sales are also posting impressive numbers, with sales up 800% in the first nine months of 2017 to 2,763 compared to 300 in first nine months of 2016. Meanwhile, the yearly sales breakdown shows rising demand for passengers.

The country imports about 70% of its vehicles, thus indicating a massive domestic demand which can be served with homegrown production. Further, fulfillment of some portion of this demand would also help in reducing imports as well as currency outflow.

The car, which has not yet been named, is not the first attempt by Turkey in domestic car production though. In the 1960s, the country had created its first locally made car christened “Devrim” which translates to “revolution.”

However, the car was riddled with issues concerning fuel consumption and many other. In the end, the project never came to fruition. This is the first concrete attempt at making a domestic car again since then.

With the focus now on hybrid and electric cars, it is possible that this new car may herald the auto revolution in Turkey that was originally envisioned six decades ago.